Accounting 9706/32 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 realisation account.
Realisation account
$ $
[8]
(b) State two differences between a realisation account and a revaluation account.
1 ……
2 ……
[2]
(c) Prepare a statement showing the final settlement to or from each of the partners.
Alan Brian
$ $
[8]
(d) Calculate the goodwill arising from acquiring the partnership business by Z Limited.
…… [2]
Additional information
Before acquiring the partnership business, Z Limited had two equal shareholders and a total share capital of $1 000 000. These shareholders are the directors of the company.
A few months after acquiring the partnership business, Z Limited decided to acquire the business of a sole trader. The agreed consideration would be $800 000. The sole trader requested:
1 the consideration should be settled by 640 000 ordinary shares of Z Limited; and
2 a directorship in Z Limited.
(e) Advise the directors whether or not they should accept the request of the sole trader. Justify your answer showing relevant calculations.
[5]
[Total: 25]
Mark scheme
1(a) 8
Realisation account
$ $
Property 300 000 } Z Limited 500 000 (1)
Equipment 71 000 } Capital account Alan 28 000 (1)
Motor vehicles 62 000 } Discount received 600 (1)
Inventory 24 000 } (1) Trade payables 18 000 (1)
Irrecoverable debt 4 400 (1)
Discount allowed 1 100 (1)
Profit on realisation
Alan 50 460 }
Brian 33 640 }(1OF)
546 600 546 600
1(b) 2
Realisation Revaluation
Ownership of assets changed Ownership of assets not changed (1)
Net book value and consideration recorded Increase or decrease in asset value recorded (1)
For takeover/dissolution of partnership/business Change in partnership/business (1)
Only prepared on business dissolution/sale Prepared any number of times (1)
Max 2
1(c) 8
Alan Brian
$ $
Capital account 250 000 200 000 }
Current account 27 000 ( 8 000) }(1)
Profit on realisation 50 460 (1OF) 33 640 (1OF)
Motor vehicle taken over (28 000) (1)
Ordinary shares W1 (265 000) (1) (212 000) (1)
Payable from bank account 34 460 (1OF) 13 640 (1OF)
W1
($500 000–$23 000) × 5 / 9 = $265 000
($500 000–$23 000) × 4 / 9 = $212 000
1(d) 2
Assets taken over $
Property 350 000
Equipment 68 000
Motor vehicle 29 000
Inventory 20 000
Trade payables (18 000)
449 000 (1)
Consideration 500 000
Goodwill 51 000 (1OF)
1(e) Calculations: 5
Shareholding will be reduced from 72.38% (1) (1 000 000 / [1 000 000 + 381 600]) to
49.47% (1) (1 000 000 / [1 000 000 + 381 600 + 640 000])
For:
By issuing shares Z Limited is saved from paying cash
The sole trader can bring in his experience and expertise
Synergy effect leading to better profitability in the future
Against:
The original shareholders will lose the controlling interest
The original shareholders have to share the decision-making power with the new director
There may be conflict with the new director
Max 2 marks for calculations
‘For’ argument – Max 1 mark
‘Against’ argument – Max 1 mark
1 mark for decision
Accept other valid points.
Read Source A2 in the insert.
(a) (i) State how non-current asset turnover is calculated.
…… [1]
(ii) Explain why a company may want to know this ratio.
…… [2]
(b) Calculate the total net book value of non-current assets of Y Limited at 31 December 2019.
…… [1]
Additional information
Y Limited classifies non-current assets into three categories. The accumulated depreciation at
31 December 2019 for each category was:
$
Property 128 000
Plant and equipment 168 800
Furniture and fixtures 101 200
The net book values of the three categories at 31 December 2019 were in the proportion of 5 :3 : 2.
The following information relates to the accounting year ended 31 December 2020.
1 On 1 January 2020, the property was revalued at $360 000.
2 On 1 March 2020, office furniture was purchased at the cost of $25 000.
3 On 1 July 2020, an item of old equipment was part exchanged for a new item. Y Limited paid cash, $34 000, as a part payment for the new item. The old item had an original cost of
$35 000 and was fully depreciated. Its part exchange value was $8000.
4 A full year’s depreciation is charged in the year of purchase and none in the year of sale.
5 Non-current assets are depreciated as follows:
Property Straight-line method over 20 years
Plant and equipment 20% per annum reducing balance method
Furniture and fixtures 20% per annum straight-line method
(c) Prepare the non-current assets schedule to use as a note to the financial statements for the year ended 31 December 2020.
Property Plant and Furniture Total equipment and fixtures
$ $ $ $
Workings:
[14]
Additional information
The directors plan to buy new motor vehicles in 2021.
(d) Explain to the directors why they need to depreciate motor vehicles.
…… [3]
(e) Explain to the directors the impact on the profit of using each of the straight-line and the reducing balance method of depreciation.
…… [4]
[Total: 25]
Mark scheme
2(a)(i) Sales revenue divided by total net book value of non-current assets. (1) 1
2(a)(ii) The ratio measures the efficiency (1) of the business in using the non-current assets to generate sales revenue. (1) 2
2(b) $806 400 / 2.1 = $384 000 (1) 1
2(c) 14
Furniture
Plant and
Property and Total
equipment
fixtures
$ $ $ $
Cost/Valuation
At 1 January 2020 W1 320 000 (1) 284 000 (1) 178 000 (1) 782 000
Revaluation 40 000 (1) 40 000
Additions 42 000 (1) 25 000 (1) 67 000
Disposal (35 000) (1) (35 000)
At 31 December 2020 360 000 291 000 203 000 854 000
Accumulated depreciation
At 1 January 2020 128 000 168 800 101 200 398 000
Revaluation (128 000) (1) (128 000)
Disposal (35 000) (1) (35 000)
Charge for the year W2 30 000 (1) 31 440 (1) 40 600 (1) 102 040
At 31 December 2020 30 000 165 240 141 800 337 040
Net book value at 31 Dec 2020 330 000 125 760 61 200 516 960 (1OF)row
Net book value at 31 Dec 2019 (5:3:2) 192 000 115 200 76 800 384 000 (1)row
2(c) W1
Plant and Furniture
Property
equipment and fixtures
$ $ $
Net book value 5:3:2 192 000 115 200 76 800
Accumulated depreciation 128 000 168 800 101 200
Original cost 320 000 (1) 284 000 (1) 178 000 (1)
W2 $128 000 / $320 000 = 40%, 20 years × 40% = 8 years, $360 000 / (20 – 8) = $30 000
[$291 000 – ($168 800 – $35 000)] × 20% = $31 440
$203 000 × 20% = $40 600
2(d) Motor vehicles are non-current assets. (1) 3
Depreciation recognises the loss of value of non-current asset over its useful life (1)
Matching concept/matching the consumption of the cost of non-current asset with revenue generated by non-current
assets (1)
Prudence concept/value of non-current asset/profit is not overstated. (1)
Requirement of IAS16 (1)
Max 3
Accept other valid points.
2(e) Straight-line – the charge against the profit is constant each year (1) because it assumes that the non-current asset is used 4
up evenly throughout its useful life (1)
Reducing balance – the charge against the profit is higher in early years (the profit is lower)/is lower in later years (the
profit is higher) (1) because it assumes that the non-current asset is used up more in the early years than the later years
(1)
Max 2 for straight line method and max 2 for reducing balance method.
Read Source A3 in the insert.
(a) Explain two disadvantages to a consignor in making sales on a consignment basis.
1 ……
2 ……
[4]
(b) Prepare the consignment account in the books of Tan for the year ended 31 March 2021.
Workings:
[10]
(c) Explain three reasons why Tan sells motors at a lower selling price for the consignment sales.
1 ……
2 ……
3 ……
[6]
Additional information
Tan finds that his products are well received in country B. He plans to set up a company in country B to sell his products.
(d) Advise Tan whether or not he should set up a company in country B to sell his products.
Justify your answer.
…… [5]
[Total: 25]
Mark scheme
3(a) Loss of control/increased risk (1) – e.g. inventory may not be safeguarded resulting in a loss of value (1) 4
Additional cost incurred/profit reduced (1), e.g. commission and freight (1)
2 disadvantages × 2 marks (1 mark for each identification, plus one further mark for development)
Accept other valid points.
3(b) Tan 10
Consignment account
$ $
Goods sent on consignment 200 000 (1) Nadeem – sales W1 232 050 (1)
Bank – Freight 4 600 } Inventory c/d W2 20 888 (4)
Bank – Insurance 1 200 }
Bank – packing 600 }(1)
Nadeem – Import duty 1 800 }
Nadeem – Storage 2 700 }
Nadeem – Transportation 2 200 }
Nadeem – Transportation 2 600 }
Nadeem – Selling expenses 4 400 }(1)
Nadeem – commission 18 564 (1OF)
Income statement
Profit on consignment 14 274 (1OF)
252 938 252 938
3(b) W1 ($650 × 300) + (60 × $650 × 95%) = $232 050
W2
Excluding storage Including storage
$ $
Cost of goods 200 000 Cost of goods 200 000
Freight 4 600 Freight 4 600
Insurance 1 200 Insurance 1 200
Packing 600 Packing 600
Import duty 1 800 Import duty 1 800
Transportation 2 200 Transportation 2 200
Storage 2 700
Total cost 210 400 (1) 213 100 (1)
÷ 400 ÷ 400
Cost per unit 526 (1OF) Cost per unit 532.75 (1OF)
38 × $526 199 88 (1OF) 38 × $532.75 20 245 (1OF)
2 × $450 900 (1) 2 × $450 900 (1)
Inventory 20 888 Inventory 21 145
3(c) Pricing strategy (1) – building market share in Country B (1) 6
Competition in Country B (1) – bench marking with the price of competitors (1)
Market condition/income level in Country B (1) – the consumers will buy the cheaper motor (1)
3 reasons × 2 marks (1 mark for identification, plus one for development)
Accept other valid points.
3(d) For (Max 2) 5
• He can fully control the selling activities (1)
• He can avoid paying commission (1)
• He can expand the market for his products and increase his revenue (1)
Against (Max 2)
• He will incur setup costs (1)
• He is new to the market and does not have sufficient knowledge of the market (1)
• This can be more risky – political risk, economic risk, etc. (1)
‘For’ argument – Max 2 mark
‘Against’ argument – Max 2 mark
1 mark for decision
Accept other valid points.
Read Source A4 in the insert.
(a) State three features of financial statements which show a ‘true and fair view’.
1 ……
2 ……
3 ……
[3]
(b) Explain to the directors the appropriate accounting treatments for information items 1i, 1ii and 2, making reference to the relevant International Accounting Standards (IAS).
Item 1i ……
Item 1ii ……
Item 2 ……
[9]
(c) Prepare the revised statement of financial position at 31 December 2020 using all the available information.
Workings:
[10]
Additional information
A director of G Limited says ‘whether the financial statements show a true and fair view does not really matter to the company’.
(d) Comment on whether or not the director’s statement is correct. Justify your answer.
…… [3]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) • Factually correct (1) 3
• No fraud (1)
• Prepared in accordance with accounting standards and legislation (1)
• Faithfully represent the performance and financial position (1)
• No material errors or omissions (1)
• Free from material misstatement (1)
• Free from bias (1)
Max 3
4(b) Item 1i – IAS 38 Intangible Assets / IAS 36 Impairment of Assets (1), purchased goodwill is recognised in the financial 9
statements (1) and included at its value at 31 December / $24 000. (1)
Item 1ii – IAS 38 Intangible Assets (1), internally generated goodwill should not be recognised in the financial statements
(1), therefore there is no revaluation surplus of $50 000. (1)
Item 2 – IAS 36 Impairment of Assets (1), When the carrying amount exceeds the recoverable amount impairment has
occurred (1), and in this case there is an impairment loss of $3 800 (1)
For each item, 1 mark for correct IAS plus 2 further marks for explanation.
4(c) 10
Revised statement of financial position at 31 December 2020
$ $
Non-current assets
Goodwill W1 24 000 (1)
Property, plant and equipment W2 540 200 (1)
564 200
Current assets
Inventory W3 80 000 (1)
Trade receivables W4 172 800 (2)
Cash and cash equivalents 34 800 287 600
Total assets 851 800
Equity
Ordinary shares of $1 each 500 000
Revaluation reserve 35 000 (1)
Retained earnings W5 120 800 (3OF)
655 800
4(c)
Non-current liabilities
Bank loan (2021–2025) 80 000 }
Current liabilities
Trade payables 96 000
Loan payable 20 000 }(1) 116 000
Total equity and liabilities 851 800
W1 Goodwill $80 000 – $50 000 – $6 000 = $24 000
W2 Property, plant and equipment $544 000 – $3 800 = $540 200
W3 Inventory $88 000 – ($40 000 × 25 / 125) = $80 000
W4 Trade receivables $187 200 / 96% = $195 000 (1), with provision for doubtful debt $7 800 deducted;
($195 000 – $15 000) × 4% = $7 200 $187 200 – $15 000 + ($7 800 – $7 200) = $172 800 (1)
4(c) W5
$
Retained earnings
Balance b/d 153 000
Goodwill impairment ( 6 000) }
Impairment loss ( 3 800) }
Inventory unrealised profit ( 8 000) }
Irrecoverable debt (15 000) }(1)
Provision for doubtful debt overstated 600 (1)
120 800 (1OF)
4(d) A true and fair view enhances the credibility of the financial statements (1) 3
The financial statements can be trusted by users, e.g. investors, banks (1)
If not true and fair then a qualified audit report will be received (1)
Max 2 for comments plus 1 mark for decision
Accept other valid points
Read Source B1 in the insert.
(a) Calculate the overhead absorption rate.
…… [2]
(b) Calculate the budgeted unit cost and the unit selling price of each product.
…… [6]
(c) Calculate the budgeted total profit of D Limited for the coming year.
…… [3]
Additional information
A newly recruited management accountant advises that D Limited should use activity based costing (ABC) to allocate fixed overhead costs to the two products. The management accountant has provided the following information relating to sofas and tables.
Overhead
Activity costs Cost driver Sofas Tables
$
Setups 100 000 Number of setups 600 400
Machine operations 320 000 Machine hours 5 000 3 000
Materials cutting 120 000 Cutting hours 400 200
Inspection 60 000 Inspection hours 500 500
600 000
(d) Calculate the budgeted unit cost and the unit selling price for each product using ABC.
Workings:
[7]
(e) Explain the reason for the change in the budgeted selling price between (b) and (d) for each product.
…… [2]
Additional information
The directors decide to adopt ABC in the coming year.
Due to a higher mark-up on sofas, the directors plan to make a change to the budgeted production volume for each product. They want to shift the direct labour resources to produce more sofas and produce only 3000 tables in the coming year. However, additional $90 000 training costs and
$110 000 for converting the existing machines would be incurred.
(f) Advise the directors whether or not they should make the change. Justify your answer with reference to the financial factors only.
Workings:
[5]
[Total: 25]
Mark scheme
5(a) 2
Sofas 2 000 × $250 / 50 10 000
Tables 5 000 × $160 / $40 20 000
Total labour hours 30 000 (1)
Overhead absorption rate $600 000 / 30 000 = $20 per labour hour (1OF)
5(b) 6
Sofas Tables
$ $
Direct materials 300 190
Direct labour 250 160
Factory overhead 100 (1OF) 80 (1OF)
Total cost 650 (1OF) 430 (1OF)
Mark up 195 86
Selling price 845 (1OF) 516 (1OF)
5(c) 3
$ $
Sofas $195 × 2 000 390 000 (1OF) OR Sales 4 270 000 (1OF)
Tables $86 × 5 000 430 000 (1OF) Cost of sales 3 450 000 (1OF)
Total profit 820 000 (1OF) Total profit 820 000 (1OF)
5(d) 7
Sofas Tables
$ $
Direct materials 300 190
Direct labour 250 160
Factory overhead W1 185 46 (5OF)
Total cost 735 396 (1OF both)
Mark up 220.5 79.2
Selling price 955.5 475.2 (1OF both)
W1
Cost allocated
Sofas Tables
$ $
Setups 60 000 40 000 (1 both) $100 000 × (600 / 1 000); $100 000 × (400 / 1 000)
Machine operations 200 000 120 000 (1 both) $320 000 × (5 000 / 8 000); $320 000 × (3 000 / 8 000)
Materials cutting 80 000 40 000 (1 both) $120 000 × (400 / 600); $120 000 × (200 / 600)
Inspection 30 000 30 000 (1 both) $60 000 × (500 / 1 000)
370 000 230 000
÷ 2 000 ÷ 5 000
Per unit = $185 = $46 (1OF both)
5(e) A higher fixed overhead is charged to sofas under ABC leading to a higher selling price. (1) 2
A lower fixed overhead is charged to tables under ABC leading to a lower selling price. (1)
5(f) 8 000 labour hours (2 000 units × 4) are released to produce 1 600 (8 000 / 5) sofas more 5
$
Additional profit from sofas 1600 × $220.5 352 800 (1OF)
Reduction of profit from tables 2000 × $79.2 (158 400) (1OF)
194 400
Training costs (90 000) }
Machines converting costs (110 000) }(1)
Decrease in profit ( 5 600) (1OF)
Decision. (1)
5(f) Alternative answer
$
Profit on sofas 3600 × $220.5 793 800 (1OF)
Profit on tables 3000 × $79.2 237 600 (1OF)
Training costs (90 000) }
Machines converting costs (110 000) }(1)
Total profit after the change 831 400
Original profit (2000 × $220.5) + (5000 × $79.2) (837 000)
Decrease in profit ( 5 600) (1OF)
Decision. (1)
Read Source B2 in the insert.
(a) State two benefits to a business of preparing budgets.
1 ……
2 ……
[2]
(b) Prepare the trade receivables budget for July.
Workings:
[10]
(c) (i) Comment on W Limited’s existing management of trade receivables.
…… [3]
(ii) Suggest three ways to improve management of trade receivables.
1 ……
2 ……
3 ……
[3]
Additional information
W Limited purchases goods one month before sale. 40% of goods purchased are paid for in the month of purchase to get a discount of 2%. The remaining are paid for in the next month following purchase. A mark-up of 25% is applied on all sales.
(d) Prepare the trade payables budget for July.
Workings:
[7]
[Total: 25]
Mark scheme
6(a) Assist planning/decision making/setting targets (1) 2
Controlling by comparing the actual performance with budgets (1)
Motivating managers/employees (1)
Co-ordinating activities of departments (1)
Managing resources efficiently (1)
Responsibility accounting (1)
Max 2
6(b) 10
July
$
Balance b/d W1 473 000 (4OF)
Sales for the month 280 000 (1)
Collection for the month W2 (273 000) (4OF)
Balance c/d 480 000 (1OF)
W1 – amounts outstanding
$
100% of June sales $300 000 × 100% 300 000 (1)
50% of May sales $250 000 × 50% 125 000 (1)
20% of April sales $240 000 × 20% 48 000 (1)
473 000 (1OF)
W2 – amounts received
$
50% of June sales $300 000 × 50% 150 000 (1)
30% of May sales $250 000 × 30% 75 000 (1)
20% of April sales $240 000 × 20% 48 000 (1)
273 000 (1OF)
6(c)(i) Trade receivables are not well managed. (1) 3
Only 50% of credit customers adhere to the company policy of paying in one month after sale. (1)
Potential liquidity/cash flow problems. (1)
Possibility of increased irrecoverable debts. (1)
Long outstanding debts are not followed up/poor credit control. (1)
Credit reference of customers are not checked thoroughly. (1)
Max 3
Accept other valid points.
6(c)(ii) Use the services of a credit controller. (1) 3
Send monthly statements. (1)
Undertake credit reference check. (1)
Impose interest on late payment. (1)
Stop selling goods to customers with overdue accounts. (1)
Allow cash discount. (1)
Consider cash sales. (1)
Max 3
Accept other valid points.
6(d) 7
July
$
Balance b/d W1 134 400 (2OF)
Purchases W2 256 000 (1)
Bank paid for current month purchases W3 (100 352) (1)
Bank paid for last month purchases W4 (134 400) (1)
Discount received W5 ( 2 048) (1)
Balance c/d 153 600 (1OF)
W1
$280 000 / 125% = $224 000 (1) × 60% = $134 400 (1OF)
W2
$320 000 / 125% = $256 000
W3
$256 000 × 40% × 98% = $100 352
W4
$224 000 × 60% = $134 400
W5
$256 000 × 40% × 2% = $2 048
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