Accounting 9706/22 May/June 2022: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, May/June 2022. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Karen and Lee are in partnership sharing profits and losses in the ratio 2 : 3 respectively.
The following balances were available at 28 February 2022.
Trial balance at 28 February 2022
Debit Credit
$ $
Administrative expenses 6 020
Bank interest charges 180
Bank overdraft 5 910
Capital accounts
Karen 40 000
Lee 50 000
Carriage inwards 3 880
Current accounts, 1 March 2021
Karen 1 220
Lee 1 880
Drawings
Karen 17 500
Lee 19 900
Insurance 7 740
Inventory, 1 March 2021 8 250
Loan from Lee 10 000
Non-current assets
At cost 160 000
Provision for depreciation, 1 March 2021 56 000
Provision for doubtful debts, 1 March 2021 260
Purchases 151 440
Returns 2 200 3 930
Revenue 229 250
Trade payables 14 450
Trade receivables 31 210
Suspense account 820
411 020 411 020
The following information is also available.
1 On 28 February 2022, inventory had been valued at cost, $21 220. This figure included some damaged items which had cost $1320 and had a sales value of $2480. The damaged items could be repaired at a cost of $1300.
2 In January 2022, an error had been made recording returns inwards, $410. This amount had been credited to the returns outwards account.
3 Insurance includes $1410 paid for the three months ended 30 April 2022.
4 The loan from Lee had been arranged on 1 November 2021. It was agreed that Lee should be entitled to interest at 6% per annum on the loan. No entries have been made for interest on the loan.
5 The provision for doubtful debts should be increased to $310.
6 Non-current assets are to be depreciated by 20% per annum using the reducing balance method.
REQUIRED
(a) Prepare the income statement for the year ended 28 February 2022. Use the space provided on the next page for your workings.
Karen and Lee
Income statement for the year ended 28 February 2022
Workings:
[9]
(b) Prepare Lee’s current account for the year ended 28 February 2022.
Lee
Current Account
$ $
[4]
Additional information
The partners have been considering making a more detailed partnership agreement to include the following terms.
1 Interest to be charged on all drawings at 10%.
2 Karen to receive a salary of $8400 per annum.
3 Profits and losses would continue to be shared in the ratio Karen : Lee, 2 : 3 respectively.
REQUIRED
(c) Calculate the increase or decrease in Lee’s current account balance at 28 February 2022 assuming the new agreement had been in use from 1 March 2021.
…… [6]
Additional information
Karen and Lee had also considered operating as a limited company.
REQUIRED
(d) Explain one advantage of operating as a partnership rather than a limited company.
…… [2]
(e) Explain two advantages of operating as a limited company rather than a partnership.
1 ……
2 ……
[4]
Additional information
The partners are concerned about the business’s liquidity position.
Karen believes the problem arises because the business holds too much inventory. She suggests that credit purchases should be reduced for the next three months to ensure inventory levels are lowered.
REQUIRED
(f) Advise Lee whether or not he should accept Karen’s suggestion. Justify your advice.
…… [5]
[Total: 30]
Mark scheme
1(a) Karen and Lee 9
Income statement for the year ended 28 February 2022
$ $
Revenue 229 250
Less returns inwards (2200 + 410) (2 610)
226 640 (1)
Cost of sales
Opening inventory 8 250
Purchases 151 440
Less returns outwards (3930 – 410) (3 520)
156 170
Carriage inwards 3 880 (1)
160 050
Less closing inventory W1 (21 080) (1)
(138 970)
Gross profit 87 670 (1)OF
Less expenses
Administrative expenses 6020
Bank interest charges 180
Insurance W2 6 800 (1)
Loan interest (Lee) W3 200 (1)
Depreciation of non-current assets W4 20 800 (1)
Increase in provision for doubtful debts W5 50 (1)
(34 050)
Profit for year 53 620 (1)
W1 Closing inventory
$
Original valuation 21 220
Less reduction in valuation of damaged items
Cost 1320 less NRV 1180 (2480 – 1300) (140)
21 080
1(a) W2 Insurance
7740 less prepaid 940 (2/3 × 1410) = $6800
W3 Loan interest (Lee)
6% × $10 000 × 1/3 = 200
W4 Depreciation of non-current assets
20% × nbv $104 000 ($160 000 – $56 000) = $20 800
W5 Increase in provision for doubtful debts
$310 – $260 = $50
1(b) Lee 4
Current Account
$ $
Balance b/d 1 880 Loan interest 200 (1)OF
Drawings 19 900 (1) Share of profit 32 172 (1)OF
Balance c/d 10 592
32 372 32 372
Balance b/d 10 592 (1)OF
1(c) The current account balance will be reduced by $4786 (6) 6
Workings
Recalculation of Lee’s current account balance
$
Opening balance (1 880)
Loan interest 200 (1)OF
Drawings (19 900) (1)
Interest on drawings (10% x $19 900) (1 990) (1)
Share of residual profits W1 29 376 (1)OF
Revised current account balance 5 806 (1)OF
The current account balance will be reduced by ($10 592 – $5806 = $4786 (1)
W1 Share of profits
53 620 (OF) + 3740 – 8400 = 48 960
Lee’s share of residual profit: 3/5 × $48 960 = $29 376
1(d) Fewer legal requirements (1) which means it has fewer costs (1) 2
No requirement to publish financial statements (1) which means the partnership can keep its affairs private (1).
No risk of dilution of ownership (1) there are less owners in a partnership (1)
Max 1 advantage (1 mark for the basic point + 1 for development)
Accept other valid responses.
1(e) Shareholders enjoy limited liability for debts In the case of a company being wound up (1), and they would only lose 4
their investment in the company (1).
Limited companies can access larger amounts of finance (1) through the issue of additional shares/debentures (1).
Max 2 advantages (1 mark for the basic point + 1 for development)
Accept other valid responses.
1(f) Reasons for (Max 2) 5
Will reduce cash outflows (1)
Costs may be saved through less expenditure on storage/carriage inwards (1)
Less chance of wastage/obsolescence of inventory (1)
Reasons against (Max 2)
Business could lose valuable trade discounts (1)
Risk of running out of inventory of popular products (stock-outs) (1)
Limited inventory for customers may affect reputation (1)
Advice (1)
Accept other valid responses.
V Limited owns various non-current assets. Non-current assets depreciate due to a number of factors including wear and tear.
REQUIRED
(a) State two reasons, other than wear and tear, why non-current assets depreciate.
1 ……
2 ……
[2]
Additional information
Businesses must apply the consistency concept when accounting for depreciation.
REQUIRED
(b) Describe the consistency concept.
…… [2]
Additional information
The company’s financial year ends on 31 December.
1 Property was purchased on 1 January 2019 at a cost of $850 000. Property is depreciated at
5% per annum on cost.
2 On 1 January 2021 the directors decided to revalue the property at $1 200 000.
REQUIRED
(c) Prepare the journal entry to record the revaluation of the property. A narrative is not required.
Journal
Dr Cr
$ $
[3]
Additional information
1 Furniture and equipment was purchased on 1 January 2019 at a cost of $140 000.
2 Furniture and equipment is depreciated at 10% per annum using the reducing balance method.
3 On 1 September 2021, the directors sold furniture and equipment which had cost $21 000 on
1 January 2019.
4 A full year’s depreciation is charged in the year of purchase but none in the year of disposal.
REQUIRED
(d) Calculate the charge for depreciation of furniture and equipment for the year ended
31 December 2021.
…… [4]
Additional information
1 Motor vehicles were purchased on 1 January 2020 at a cost of $84 000.
2 Motor vehicles are depreciated at 20% per annum using the reducing balance method.
3 On 1 November 2021, a new motor vehicle was purchased at a cost of $44 000. A cheque for $17 000 was paid for the vehicle and the balance was covered by the part-exchange of a vehicle which had cost $40 000 on 1 January 2020.
4 A full year’s depreciation is charged in the year of purchase but none in the year of disposal.
REQUIRED
(e) Prepare the motor vehicle disposal account for the year ended 31 December 2021.
Motor vehicle disposal account
$ $
[4]
[Total: 15]
Mark scheme
2(a) Technological change (1) 2
Depletion (1)
Time factor (1)
Obsolescence (1)
Economic factors (1)
Inadequacy (1)
Max 2
Accept other valid responses.
2(b) Accounting methods are applied in the same way in each accounting period (1) enabling valid comparison from year to year 2
(1)
Accept other valid responses.
Max 2
2(c) 3
Journal
Dr Cr
$ $
Property 350 000 (1)
Provision for depreciation W1 85 000 (1)
Revaluation reserve 435 000 (1)
W1 Provision for depreciation: 2 × 5% × $850 000 = $85 000
2(d) Depreciation charge: $9639 (4) 4
Workings
Provision for depreciation is: Year 1 $14 000; Year 2 (10% × $126 000), i.e. $12 600 = $26 600
Net value at time of sale: $140 000 – $26 600 = $113 400
Net value after sale: 113 400 (1) – 17 010 (1) = $96 390 (1) × 10% = $9639 (1)
Accept alternative presentations
2(e) Motor vehicle disposal account 4
$ $
Motor vehicle 40 000 (1) Depreciation 8 000(1)
Motor vehicle 27 000(1)
Income statement 5 000(1)OF
40 000 40 000
N Limited is a trading company. The statement of financial position at 31 December 2021 is as follows.
$000
Assets
Non-current assets at net book value 1520
Current assets
Inventory 35
Trade receivables 30
Total assets 1585
Equity and liabilities
Equity
Share capital 900
Share premium 180
Retained earnings 202
Total equity 1282
Liabilities
Non-current liabilities
8% Debentures (2026) 250
Current liabilities
Trade payables 42
Bank overdraft 11
53
Total liabilities 303
Total equity and liabilities 1585
The following information is also available.
1 Purchases for the year were $600 000 of which 80% were on credit.
2 Credit sales were 30% of all sales.
3 The company had a gross profit margin of 40%. The company’s gross profit for the year ended 31 December 2021 was $420 000.
4 The company’s profit for the year was $182 000.
5 No interest was charged on the bank overdraft.
REQUIRED
(a) Calculate the following ratios for the year ended 31 December 2021 stating the formula used.
(i) Trade payables turnover (days)
Formula Calculation
[3]
(ii) Trade receivables turnover (days)
Formula Calculation
[3]
(iii) Return on capital employed (to two decimal places)
Formula Calculation
[3]
(iv) Non-current asset turnover (to two decimal places)
Formula Calculation
[2]
(b) Explain the importance of this non-current asset turnover to the directors of N Limited.
…… [2]
(c) Explain one reason why shareholders will be interested in the financial statements of a company.
…… [2]
[Total: 15]
Mark scheme
3(a)(i) Trade payables turnover 3
Formula Calculation
Trade payables × 365/Credit purchases (1) 42000 × 365
= 32 days (1)
480000 (1)
3(a)(ii) Trade receivables turnover 3
Formula Calculation
Trade receivables × 365/Credit sales (1)
Total sales 2.5 × $420 000 = $1 050 000
30000 × 365
= 35 days (1)
315000 (1)
3(a)(iii) Return on capital employed (to two decimal places) 3
Formula Calculation
Profit before interest × 100
Profit before interest = $182 000 + debenture interest
Capital employed (Equity + Debentures) (1) $20 000 = $202 000
202000 (1)
× 100 = 13.19% (1)
1532000
3(a)(iv) 2
Formula Calculation
Net revenue/net book value of non-current 1 050 000 / 1 520 000 = 0.69 times (1)
assets (1)
3(b) The ratio will inform the directors how efficiently assets are being used by the company to generate revenue (1). The low 2
ratio is a cause for concern for the future growth of the business (1) OF
Accept other valid responses
3(c) To assess the security of the investment (1) to decide whether to sell shares or make further investment (1) 2
To assess the profitability of the company (1) to gauge future dividends (1)
To compare results of different companies (1) to decide on investments (1)
Max 1 reason (1 mark for the basic point + 1 for development)
Accept other valid responses
F Limited is a manufacturing company which uses absorption costing at one of its factories. This factory has two production departments and two service departments.
Budgeted costs have already been allocated and apportioned.
REQUIRED
(a) Explain the meaning of each of the following terms:
(i) Allocation
…… [2]
(ii) Apportionment
…… [2]
(b) State one benefit of using absorption costing.
…… [1]
(c) State one limitation of using absorption costing.
…… [1]
Additional information
The budgeted costs for April 2022 before reapportionment of the service departments’ overheads are as follows.
Production departments Service departments
Assembly Finishing Stores Maintenance department department department department
$ $ $ $
Total overhead
275 000 103 200 19 200 26 700 costs
The service department overheads are apportioned to the production departments on the following basis.
Assembly Finishing Stores Maintenance department department department department
Maintenance 60% 30% 10% –
Stores 75% 25% – –
REQUIRED
(d) Calculate the total overheads for each production department by reapportioning the service department overheads.
Production departments Service departments
Assembly Finishing Stores Maintenance department department department department
$ $ $ $
Total overhead
275 000 103 200 19 200 26 700 costs
Subtotal
Total
[3]
Additional information
The following additional monthly budgeted information is available about the production departments.
Labour hours Machine hours
Assembly department 950 1 430
Finishing department 840 380
REQUIRED
(e) Calculate the overhead absorption rate for each department to two decimal places.
(i) Assembly department
…… [2]
(ii) Finishing department
…… [2]
Additional information
In April 2022, production was less than the forecast figure. The Assembly department’s actual overheads were $285 400, actual labour hours were 820 and actual machine hours were 1310.
REQUIRED
(f) Calculate the under-absorption or over-absorption of overheads for April 2022 for the
Assembly department.
…… [3]
Additional information
At another factory the company manufactures two products. This factory uses marginal costing. The following details are available.
Product X Product Z
$ $
Direct materials per unit 6 9
Direct labour per unit 9 9
Fixed costs per unit 5 6
Selling price per unit 24 30
Normal production per month (units) 8000 4000
The company has a major customer who usually orders 5000 units of Product X each month. This order is included in the normal production of 8000 units per month.
In May 2022 the customer has asked for 9000 units of Product X.
If it is not possible to supply this quantity, the customer has informed the directors that they will place their entire order and all future orders with another company.
The directors are considering two options.
Option A
1 Stop manufacture of Product Z and devote all labour hours to the production of Product X.
2 The company will be able to complete all the normal orders for Product X and the increased order from the customer.
3 The workforce for Product Z will require some retraining, costing $3000.
Option B
1 Maintain normal production levels.
2 Refuse the customer’s order.
3 Reduce the selling price of Product X by 5% in order to enable all normal production of this unit to be sold.
REQUIRED
(g) Calculate the profit to be made in May 2022 for each of the options.
(i) Option A
…… [4]
(ii) Option B
…… [3]
(h) Advise the directors which option they should choose. Justify your answer by discussing both financial and non-financial factors.
…… [7]
[Total: 30]
Mark scheme
4(a)(i) Charging overheads/costs to a specific cost centre (1) where those overheads are clearly identified with that cost centre (1) 2
OR
Overheads expenses are directly attributed (1) to a specific cost centre (1)
4(a)(ii) Charging overheads/costs that cannot be clearly identified with a specific cost centre (1) to cost centres on an appropriate 2
basis. (1)
OR
Overhead expenses are shared between different departments (1) by using a suitable basis (1)
4(b) Useful for determining a selling price (1) 1
Avoids separating fixed and variable costs (1)
Accept other valid responses
Max 1
4(c) Not useful for short-term decision-making (1) 1
Not appropriate for monitoring the performance of managers/responsibility accounting (1)
Accept other valid responses
Max 1
4(d) 3
Production departments Service departments
Assembly Finishing Stores Maintenance
department department department department
$ $ $ $
Total overhead costs 275 000 103 200 19 200 26 700
Maintenance 16 020 8 010 2 670 (26 700) (1)
Subtotal 291 020 111 210 21 870 --
Stores 16 403 5 467 (21 870) (1)OF
Total 307 423 116 677 -- (1)OF
4(e)(i) Assembly department: $307 422.5/1430, i.e. $214.98 (1) OF per machine hour (1) 2
4(e)(ii) Finishing department: $116 677.5/840, i.e. $138.90 (1) OF per labour hour (1) 2
4(f) Overheads absorbed: 1310 × $214.98 = $281 623.8 (1) OF 3
Actual overheads $285 400 less absorbed $281 623.80 = $3776.2 (1) OF under-absorbed (1)
4(g)(i) Option A 4
$41 000 (4)
Workings
$
Contribution (12 000 (1) × $9 (1)) 108 000
Fixed costs ($40 000 + $24 000 + $3000) 67 000 (1)
Profit 41 000 (1)OF
Accept alternative approaches.
4(g)(ii) Option B 3
$46 400 (3)
Workings
$
Product X 8000 units × ($22.8 – Variable cost $15, i.e. $7.8) 62 400
Less fixed costs (40 000)
Profit 22 400 (1)
Product Z 4000 units × $12 48 000
Less fixed costs 24 000
24 000 (1)
Total profit 46 400 (1)
Accept alternative approaches.
4(h) Option A (Max 3) 7
Will ensure major customer will continue to order in future (1)
How will customers for Product Z react - will their future orders be lost? (1)
Produces less profit (1)
Can training be implemented in time without loss of production (1)
Option B (Max 3)
Will enable orders of other regular customers to be met (1)
Produces more profit (1)
Will the price cut actually produce the required level of sales of product X now and in the future (1)?
Reaction of competitors (1)
Is there a danger of losing a regular customer (1)
Advice (1)
Accept other valid responses
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