Accounting 9706/31 May/June 2021: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, May/June 2021. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Read Source A1 in the insert.
(a) Prepare the manufacturing account for the year ended 31 December 2020.
…… [8]
(b) Prepare the provision for unrealised profit account for the year ended 31 December 2020.
…… [3]
(c) Explain the treatment of unrealised profit in G Limited’s statement of financial position at
31 December 2020. Your answer should refer to relevant accounting concepts.
…… [5]
(d) Prepare the trading section of the income statement for the year ended 31 December 2020 showing separately the gross profit from each of luxury sofas and standard sofas.
Luxury sofas Standard sofas
$ $
[4]
Additional information
The directors have the opportunity in 2021 of buying in the luxury sofas which would sell at a gross profit margin of 20%. They are considering two options:
Option 1 continue manufacturing luxury sofas without buying in
Option 2 cease production and buy in luxury sofas for resale
(e) Advise the directors which option to choose. Justify your answer and support the answer with calculations.
…… [5]
[Total: 25]
Mark scheme
1(a) 8
Manufacturing account for the year ended 31 December 2020
$ $
Opening inventory of raw materials 66 000
Purchases 292 000
Carriage inwards 7 800 (1)
Closing inventory of raw materials (72 000)
Cost of raw materials consumed 293 800 (1OF)
Direct wages 200 200
Prime cost 494 000 (1OF)
Indirect manufacturing expenses 108 000
Factory rent 48 000 (1)
Depreciation – machinery ($325 000 + $5 000 – $155 000) × 20% 35 000 (1)
685 000
Opening work in progress 42 600 }
Closing work in progress (54 000) }(1)
Cost of goods manufactured 673 600
Add : 25% mark up 168 400 (1OF)
Value of finished goods transferred 842 000 (1OF)
1(b) 3
Provision for unrealised profit
$ $
Balance c/d $150 000 × 25 / 125 30 000 (1) Balance b/d $126 000 × 20 / 120 21 000 (1)
Income statement 9 000 (1OF)
30 000 30 000
1(c) The luxury sofas inventories should be stated at the cost $120 000, i.e. being unrealised profit $30 000 deducted from the 5
transfer value of $150 000 (1). This is in compliance with prudence concept (1) that the value of assets is not overstated (1)
and realisation concept (1) that profit is only realised when goods are sold. (1)
1(d) 4
Luxury sofas Standard sofas
$ $
Revenue 944 000 175 000
Opening inventory 126 000
Transfer value/Purchases 842 000 158 600
Closing inventory (150 000) (16 000)
Cost of sales of luxury sofas 818 000 (1OF) 142 600 (1)
Gross profit 126 000 (1OF) 32 400 (1OF)
1(e) Luxury sofas has a gross profit margin of 30.23% (1OF) ([126 000 + 168 400 – 9 000 (1OF)] / 944 000). 5
Manufacturing luxury sofas has a higher gross profit margin of 30.23% (1) than trading luxury sofas that has a gross profit
margin of 20%. (1)
Ceasing production would incur costs such as redundancy. (1)
G Limited can control the quality if goods are manufactured. (1)
Max 2 mark for calculations.
Max 2 for valid points.
1 mark for decision.
Accept other valid points.
Read Source A2 in the insert.
(a) Prepare the total assets section of the statement of financial position at 31 December 2020, showing the cash and cash equivalents as the balancing figure. Use the space provided to show your workings.
Workings:
[9]
(b) Calculate the working capital cycle (in days).
…… [3]
Additional information
The following accounting ratios for 2019 are also available.
Non-current asset turnover 2.05 times
Working capital cycle 30 days
(c) Compare the performance of D Limited over both years by considering the non-current asset turnover and working capital cycle.
…… [3]
Additional information
The price earnings ratio of D Limited has increased from 2019 to 2020.
(d) Explain two possible reasons for the change in the ratio from 2019 to 2020.
1 ……
2 ……
[6]
(e) State four limitations of ratio analysis.
1 ……
2 ……
3 ……
4 ……
[4]
[Total: 25]
PLEASE TURN OVER
Mark scheme
2(a) 9
Statement of financial position at 31 December 2020 (extract)
$
Non-current assets W1 438 000 (1)
Current assets
Inventory W3 70 080 (3)
Trade receivables W4 95 040 (1)
Cash and cash equivalents (balancing) 9 120 (1OF)
Total current assets W2 174 240 (2)
Total assets 612 240 (1OF)
2(a) W1
$1 051 200 ÷ 2.4
W2
Trade payables ($642 400 × 45) / 365 = $79 200(1)
$79 200 × 2.2 = 174 240(1OF)
W3
Cost of sales $1 051 200 × 60% = $630 720(1)
X + $642 400 – 1.2X = $630 720
X = $58 400(1)
1.2X = $70 080(1)
W4
Trade receivables ($1 051 200 × 33) / 365 = $95 040(1)
2(b) Inventory turnover (in days) 3
[($58 400 + $70 080) ÷ 2 (1OF)] × 365 / $630 720 = 37.18 / 38 days(1OF)
Working capital cycle = 38 days + 33 days – 45 days = 26 days (1OF)
2(c) 2020 has a higher non-current assets turnover than 2019.This suggests that 2020 is more efficient in utilising its non- 3
current assets in generating revenue. (1)
2020 has a shorter working capital cycle than 2019.This suggests that 2020 can generate cash from its net current assets
in shorter time than 2019. (1)
In terms of non-current assets turnover and working capital cycle, the performance in 2020 is better than 2019. (1)
Accept other valid points
2(d) An increase in current share price (1) – investors have confidence (1) as they are expecting a higher profitability in the 6
future (1)
A decrease in the current earnings per share (1) – there is a decrease in current profit (1) due to increased expenses (1)
or – there is an increase in number of ordinary shares (1) as the company
has issued additional ordinary shares. (1)
Max 2 reasons × 3 marks (1 mark for identifying each reason plus up to Max 2 marks for explanation/development.)
Accept other valid points
2(e) Based on historical information (1) 4
Inflation not taken into account (1)
Different accounting policies (1)
Ratios do not explain the causation factors (1)
Based on the business being similar type/size (1)
Max 4
Accept other valid points
Read Source A3 in the insert.
(a) State four benefits of a computerised accounting system to a business.
1 ……
2 ……
3 ……
4 ……
[4]
Additional information
The draft statements of financial position for both businesses at 31 December 2020 are as follows.
Adul and
Basha Carl
$ $
Office equipment 564 000 265 000
Motor vehicles 98 200 65 000
Inventory 46 000 28 000
Trade receivables 83 300 36 000
Cash and cash equivalents 21 200 9 000
Total assets 812 700 403 000
Capital account
Adul 360 000
Basha 360 000
Carl 371 100
Current account
Adul 22 000
Basha (5 600)
736 400 371 100
Trade payables 76 300 31 900
Total equity and liabilities 812 700 403 000
1 Profit for the year ended 31 December 2020 was:
$
Adul and Basha 64 000
Carl 21 160
2 The goodwill for the partnership had been valued at $50 000. The goodwill value for Carl’s business was to be the average profit for the last three years. Carl’s profit had increased by
15% each year for the last three years.
3 All assets and liabilities were valued at their net book value except:
Adul and Basha Carl
$ $
Office equipment 580 000 230 000
Motor vehicles 88 000 62 000
Trade receivables 35 000
4 There was no partnership agreement between Adul and Basha. After the merger, it was agreed that the profit and loss sharing ratio among Adul, Basha and Carl would be 2 : 2 : 1.
5 All the partners agreed that the combined goodwill would not be maintained in the books of account of the new partnership.
6 Two motor vehicles had an equal value in the business of Adul and Basha. Immediately after the merger, Adul would take one of the motor vehicles for his own use.
(b) Calculate the goodwill of Carl’s business.
…… [2]
(c) Explain why the calculation of Carl’s goodwill is based on the profit of the business.
…… [2]
(d) Prepare a statement showing the movement in the capital account for each of Adul, Basha and Carl immediately after the merger.
Adul Basha Carl
$ $ $
Workings:
[6]
(e) Calculate the value of the total assets of the new business immediately after the merger.
Show your workings.
…… [6]
Additional information
Better profitability of the business of Adul and Basha is one of the reasons for Carl’s decision to merge.
(f) Advise Carl whether or not he has made the correct decision to merge with the partnership business. Justify your answer using both financial and non-financial factors.
…… [5]
[Total: 25]
Mark scheme
3(a) Faster (1) 4
More accurate information (1)
Information updated easily (1)
Information easily accessible (1)
Reduce staff cost (1)
Handle complex/voluminous information easily (1)
Facilitate reporting (1)
Space saving (1)
Better security (1)
Max 4
Accept other valid points.
3(b) 2
$
Profit 2020 21 160
Profit 2019 $21 160 / 1.15 18 400 }
Profit 2018 $18 400 / 1.15 16 000 }(1)
55 560
÷3
$18 520 (1)
3(c) Profits over a prolonged period provide interested parties with a reliable base. (1) 2
Factors leading to the better profit include its reputation, loyal customers, reliable suppliers and good location, etc. (1)
Accept other valid points.
3(d) 6
Adul Basha Carl
$ $ $
Capital account 360 000 360 000 371 100
Current account 22 000 ( 5 600)
Increase/decrease in assets value W1 2 900 } 2 900 }(1) (39 000) (1)
384 900 357 300 332 100
Goodwill 25 000 ] 25 000 ](1) 18 520 (1OF)
409 900 382 300 350 620
Motor vehicle taken over (44 000) (1)
Goodwill written off W2 (27 408) (27 408) (13 704) (1OF all)
338 492 354 892 336 916
W1
Adul and Basha ($580 000 + $88 000) – ($564 000 + $98 200) = $5 800 $5 800 × 1 / 2 = $2 900
Carl ($230 000 + $62 000 + $35 000) – ($265 000 + $65 000 + $36 000) = ($39 000)
W2
($50 000 + $18 520 OF) × 2 / 5 = $27 408
($50 000 + $18 520 OF) × 1 / 5 = $13 704
3(e) 6
Statement of financial position after the merger
$
Non-current assets
Office equipment 810 000 (1)
Motor vehicles 106 000 (1)
916 000
Current assets
Inventory 74 000 (1)
Trade receivables 118 300 (1)
Cash and cash equivalents 30 200 (1)
222 500
Total assets 1 138 500 (1OF)
3(f) Financial factors (Max 2) 5
Return on capital employed of Adul and Basha 8.69% (1) ($64 000 / $736 400) is higher than that of
Carl’s 5.7%($21 160 / $371 100) (1)
Adul and Basha partnership has a better profitability than Carl’s business. (1)
Non-financial factors (Max 2)
Pooling of expertise
Synergy effect
Loss and risk are shared
However
Cannot make own decision
Profit has to be shared
May have conflict among partners
2 marks for financial factors and 2 marks for non-financial factors. 1 mark for decision.
Accept other valid points
Read Source A4 in the insert.
(a) State three features of a joint venture.
1 ……
2 ……
3 ……
[3]
(b) Prepare the following accounts:
(i) the joint venture account
…… [7]
(ii) the joint venture with Tan account in Wang’s books
…… [4]
(iii) the joint venture with Wang account in Tan’s books
…… [3]
Additional information
From Tan’s experience of the joint venture in the city festival market, she has found that the goods are well accepted by the city people. She now plans to sell the ornaments in the city through
Wang as a consignee.
(c) Explain two benefits to each of Tan and Wang of selling the ornaments in the city on consignment.
…… [8]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) Joint venture is formed for a specific project or business activity (1) 3
Consists of two or more persons (1)
Joint venture is of temporary nature (1)
Joint venture is dissolved automatically when the project/business activity is finished. (1)
Share profits / losses. (1)
Max 3
Accept other valid points.
4(b)(i) 7
Joint venture account
$ $
Purchases 46 000 (1) Sales 95 400 (1)
Cash register 2 600 (1) Register taken over 2 000 }
Transportation 3 430 } Inventory taken over 3 100 }(1)
Assistants’ wages 8 170 }(1)
Rent of stall 12 000 }
Packaging 4 700 }(1)
Profit shared:
Tan 11 800 (1OF both)
Wang 11 800
100 500 100 500
4(b)(ii) 4
Joint venture with Tan – In Wang’s book
$ $
Cash – rent 12 000 Cash – sales 95 400 (1)
Cash – cash register 2 600 Cash register 2 000 }
Cash – transportation 980 Inventory 3 100 }(1)
Cash – assistants’ wages 5 400
Cash – packaging 4 080
Cash – advertising
Share of profit 11 800 (1OF)
Cash to Tan 63 640 (1OF)
100 500 100 500
4(b)(iii) 3
Joint venture with Wang – In Tan’s book
$ $
Cash – purchases of goods 46 000 } Cash from Wang 63 640 (1OF)
Cash – transportation 2 450 }
Cash – assistants’ wages 2 770 }
Cash – packaging 620 } (1all)
Share of profit 11 800 (1OF)
63 640 63 640
4(c) Benefits to Tan (consignor) 8
• Explore a new market in the city (1) with long term prospect (1)
• Less risk (1) as Wang has the local knowledge in the city (1)
• She takes all the profits (1) after paying commission to Wang (1)
• Less set up costs (1) as she need not establish a branch in the city (1)
Benefits to Wang (consignee)
• He must gain (1) as he receives commission from sales of goods (1)
• He has no risk (1) as he is not responsible for the loss from trading (1)
• He can build a good relationship with Tan (1) and may form a partnership with Tan in the long term (1)
• He is not required to bear any cost (1) as all costs incurred will be reimbursed by Tan. (1)
1 mark for each valid point plus one further mark for development.
Max 2 advantages to each × 2 marks (1 mark for identifying plus 1 mark for development.)
Accept other valid points
Read Source B1 in the insert.
(a) State two benefits of preparing a cash budget.
1 ……
2 ……
[2]
(b) Prepare a production budget (in units) for each of the months July and August.
…… [4]
(c) Prepare a cash budget for each of the months July and August.
Workings:
[11]
Additional information
N Limited wishes to improve the cash position at the end of August and wants to have a minimum ending bank balance of $24 500. To achieve this, one of the directors proposes that a cash discount of 4% be offered to some of the credit customers in August so that they will make an early payment in August.
(d) Calculate the minimum amount of credit sales to be offered the cash discount in order to achieve an ending bank balance of $24 500.
…… [4]
(e) Explain two other methods to improve the cash position at the end of August.
1 ……
2 ……
…… [4]
[Total: 25]
PLEASE TURN OVER
Mark scheme
5(a) Arrange credit if there is cash shortage (1) 2
Arrange investment if there is cash surplus (1)
5(b) 4
July August
Closing inventory 300 200 (1 for both)
Sales 1240 1500 (1 for both)
Opening inventory (240) (300) (1 for both)
Budgeted production in unit 1300 1400 (1 for both)
5(c) 11
July August
$ $
Receipts
Sales of current month 39 680 48 000 $198 400 × 20% / $240 000 × 20%
Sales of previous month 171 200 158 720 $214 000 × 80% / $198 400 × 80%
210 880 (1) 206 720 (1)
Payments
Payment to suppliers 114 660 (1OF) 123 480 (1OF) 1300 × $90 × 98% / 1400 × $90 × 98%
Direct wages 52 000 56 000 (1OF for both) 1300 × $40 / 1400 × $40
Bonus 1 400 (1) ($214 000 – $200 000) × 10%
Fixed overhead
Previous month 24 000 (1) 25 200 (1) $60 000 × 40% / $60 000 × 105% × 40%
Current month 37 800 37 800 (1 for both) $60 000 × 105% × 60%
Machine 40 000 (1)
229 860 282 480
80 600 61 620
Opening balance
Net flow (18 980) (75 760)
Closing balance 61 620 (14 140) (1OF for both)
5(d) 4
$
Cash deficit 14 140 (1OF)
Required balance 24 500 (1)
38 640 (1OF)
$38 640 / 96% = $40 250 (1OF)
5(e) Delay the purchase of machinery to a later month (1) when more funds are available (1) 4
Ask for a loan (1), e.g. bank loan or overdraft (1)
Ask for longer payment period or payments in smaller amounts (1), i.e. instalment/on credit for purchase of
machinery/materials (1)
Improved credit control (1) by asking prompt payments from trade receivables (1)
Issue shares (1) as non-current assets should be financed by long-term funds (1)
Increase selling price (1) if demand permits (1)
Max 2 × 2 marks (1 mark for identifying plus 1 mark for development.)
Accept other valid points
Read Source B2 in the insert.
(a) Calculate for the new machine:
(i) the accounting rate of return (ARR)
…… [5]
(ii) the net present value (NPV)
…… [3]
(iii) the internal rate of return (IRR)
…… [4]
(b) Advise the directors whether or not they should buy the new machine. Justify your answer.
…… [3]
Additional information
The directors are of the view that the NPV method should be used to make decisions on investment.
(c) State three advantages of using the NPV method.
1 ……
2 ……
3 ……
[3]
Additional information
Due to a change in economic conditions, the directors consider that the cost of capital should be 12%.
(d) Explain the effect on the directors’ decision on investment of the change in the cost of capital.
…… [2]
Additional information
The directors also consider that the negative impact from the increase of cost of capital can be offset by increasing the revenue. Additional advertising costing $20 000 incurred in year 1 can help increase the sales revenue in years 2 and 3. Year 2 sales revenue is expected to increase by
$24 000.
(e) Calculate the minimum increase in sales revenue in year 3 to justify the directors deciding to buy the new machine.
…… [5]
[Total: 25]
Mark scheme
6(a)(i) 5
Inflows Outflows Depreciation Profit
$ $ $ $
Year 1 100 000 36 000 55 000 9 000
Year 2 132 000 50 000 55 000 27 000
Year 3 160 000 68 000 55 000 37 000
Year 4 92 000 50 000 55 000 (13 000)
484 000 204 000 220 000 (1) 60 000 (1)
Average profit $60 000 / 4 = $15 000 (1)
Average investment $220 000 / 2 = $110 000 (1)
ARR = $15 000 / $110 000 = 13.64% (1)
6(a)(ii) 3
Inflows Outflows Net NPV
$ $ $ 8% $
Year 0 (220 000) (220 000) 1 (220 000) (1)
Year 1 100 000 36 000 64 000 0.926 59 264 }
Year 2 132 000 50 000 82 000 0.857 70 274 }
Year 3 160 000 68 000 92 000 0.794 73 048 }
Year 4 92 000 50 000 42 000 0.735 30 870 }(1)
13 456 (1OF)
6(a)(iii) NPV at 12% 4
$
Year 0 (220 000)
Year 1 57 152
Year 2 65 354
Year 3 65 504
Year 4 26 712
(5 278) (1)
IRR = 8% + 4% (1) [$13 456 / ($13 456 + $5 278) (1)] = 10.87% (1OF)
6(b) Positive NPV (1) 3
IRR is higher than the cost of capital (1)
ARR is higher than the cost of capital (1)
The machine should be bought (1)
1 mark for decision + Max 2 for comments
6(c) It considers the time value of money (1) 3
It considers all cash inflows and outflows over the investment’s life time (1)
Cashflows are more objective than accounting profits (1)
Accept other valid points.
6(d) The revised NPV is negative $5 728 (1) so the new machine should not be bought. (1) 2
Accept other valid points.
6(e) 5
12% NPV
$ $
Original NPV ( 5 278) (1OF)
Advertisement (20 000) 0.893 (17 860) (1)
Revenue - Year 2 24 000 0.797 19 128 (1)
Revenue - Year 3 5 632 0.712 4010 (1OF)
(1OF) 0
Minimum increase in sales revenue of $5 632 in year 3 will achieve a just positive NPV
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Accounting 9706/31 for May/June 2021 is out of 150 marks, with 3 hours to answer it, across 6 questions.
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