Accounting 9706/31 May/June 2022: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, May/June 2022. 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) State three differences between the financial statements of a not-for-profit organisation and those of a limited company.
1 ……
2 ……
3 ……
[3]
(b) Prepare the café trading account for the year ended 31 December 2021 to find the profit or loss on its trading activity.
…… [4]
(c) Prepare the subscriptions account for the year ended 31 December 2021.
…… [4]
(d) Prepare the income and expenditure account for the year ended 31 December 2021.
…… [6]
Additional information
The club will admit life members from 1 January 2023. A life membership fee of $1 500 will be payable on the date of admission.
(e) Explain to the treasurer how the club should account for the life membership fees in the club’s financial statements.
…… [3]
Additional information
The committee of the club is thinking of closing the café. Vending machines would be installed to provide snacks and drinks for the members.
(f) Advise the committee whether or not the café should be closed. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
1(a) 3
Not-for-profit organisations Limited company
Income and expenditure account Income statement
Surplus / deficit Profit / loss
Accumulated fund Equity
1 mark for each difference up to a maximum of three
Accept other valid answers.
1(b) Café trading account for year ended 31 December 2021 4
$ $
Sales $43 500 × 180% 78 300 (1)OF
Opening inventory 9 500)
Purchases W1 44 200) (1)
Closing inventory (10 200)
Cost of sales 43 500 (1)OF
Gross profit 34 800
Wages 22 000
Profit for the year 12 800 (1)OF
W1 Purchases $42 000 + $13 600 – $11 400 = $44 200
1(c) Subscriptions account 4
$ $
Balance b/d 3 000 } Balance b/d 1 600 }(1) row
Income and Expenditure W1 90 000 (1) Receipts & payments 89 600 (1)OF
Balance c/d 2 200 } Balance c/d 4 000 }(1) row
95 200 95 200
W1 (420+18) × $200 + 24 × $200 × 50% = $90 000
1(d) Income and expenditure account for year ended 31 December 2021 6
$ $
Subscriptions 90 000) (1)OF
Profit from café 12 800) (1)OF
Rental of meeting room $2 100 + $4 600 6 700) (1)
109 500)
Club expenses 94 400
Depreciation of equipment ($78 000 + $14 000) × 15% 13 800 (1)
Annual dinner $16 200 + $4 000 20 200 (1)
128 400)
Deficit / Excess of expenditure over income (18 900) (1)OF
1(e) Accrual / matching concept should be applied. (1). Life membership fee should be spread over a number of years. (1). The 3
number of years to be spread depends on the accounting policy of the club. (1)
Max 3
Accept other valid answers.
1(f) Café wages are saved leading to higher profit from sale of refreshment (1) 5
More space is released for club’s other activities (1)
Can offer snack and drinks 24/7 (1)
Should consider the cost of vending machines (1)
Welcoming atmosphere created by café staff (1)
Food and drinks offered are fresher (1)
Food and drinks are made to special needs, e.g. allergies (1)
Redundancy payment if café staff are fired (1)
Need for comparison between profitability and profit margins on vending machines and café. (1)
1 mark for decision
Accept other valid answers.
Read Source A2 in the insert.
(a) Prepare a revised statement of financial position at 31 December 2021.
Workings:
[14]
(b) Explain the correct accounting treatments of the claim and the legal cost in item 3 with reference to the relevant international accounting standard (IAS).
…… [7]
(c) State what is meant by:
(i) events after the reporting period
…… [2]
(ii) adjusting events
…… [1]
(iii) non-adjusting events.
…… [1]
[Total: 25]
Mark scheme
2(a) Revised statement of financial position at 31 December 2021 14
$ $
Non-current assets
Property, plant and equipment W1 794 500 (3)
Current assets
Inventory W2 76 500 (3)
Trade receivables ($164 000-$12 000) 152 000 (1)
Cash and cash equivalents 86 000 314 500
Total assets 1 109 000
Equity
Ordinary share capital ($1 shares) 600 000
Revaluation reserve 146 000 (1)
Retained earnings W3 153 000 (4) 899 000
Current liabilities
Trade payables 128 000
Other payables W4 82 000 (2) 210 000
Total equity and liabilities 1 109 000
2(a) $
W1
Balance 606 000)
Machine 50 000) (1)
Depreciation $50 000x15% ( 7 500) (1)
Revaluation reserve $350 000-($300 000-$96 000) 146 000) (1)
794 500)
W2
Lower of cost and NRV
Category A 57 000) (1)
Category B ($14 000-$3 000) 11 000) (1)
Category C ($12 000-$2 500-$1 000) 8 500) (1)
76 500)
W3
Retained earnings before adjustments 184 000)
Depreciation of machine ( 7 500) (1)OF
Inventory overstated ($80 000-$76 500) ( 3 500) (1)OF
Irrecoverable debt (12 000) (1)
Provision for legal fee ( 8 000) (1)
153 000)
W4
Other payables before adjustment 24 000)
Machine 50 000) (1)
Provision for legal fee 8 000) (1)
82 000)
2(b) Item 3 7
IAS 37 Provisions, contingent liabilities and contingent assets (1)
The success of the claim is not probable (1) and therefore there is no need to make provision (1). However, it is necessary
to disclose the claim as a note to the financial statements. (1)
Provision for legal cost $8 000 should be made (1) as it is a liability (1) of uncertain timing or amount. (1)
2(c)(i) Events after the reporting period are those events, favourable and unfavourable, occur between the end of the reporting 2
period (1) and the date when the financial statements are authorised for issue. (1)
2(c)(ii) Adjusting events – those that provide evidence of conditions that existed at the end of the reporting period (1) 1
2(c)(iii) Non-adjusting events – those that are indicative of conditions that arose after the reporting period. (1) 1
Read Source A3 in the insert.
(a) Prepare a statement showing the movement of retained earnings for the year ended
31 December 2021.
…… [4]
(b) Calculate, to two decimal places, the following:
(i) price earnings ratio
…… [3]
(ii) dividend yield
…… [2]
(iii) gearing ratio
…… [2]
(iv) income gearing
…… [2]
(v) return on capital employed.
…… [2]
(c) Explain what is meant by a ‘highly geared company’.
…… [2]
Additional information
At 31 December 2020, the market value of one ordinary share was $3.64 and the price earnings ratio was 9.27.
(d) Explain the change in the price earnings ratio with reference to your calculation in (b)(i).
…… [3]
Additional information
On 1 January 2021, E plc had an opportunity to invest $150 000 in a new project. The directors had two options to finance the new project:
Option 1: issue a 9% debenture for $150 000
Option 2: issue 120 000 ordinary shares at a price of $1.25 per share.
The directors chose Option 1 and the new project contributed a pre-interest profit of $70 000 to the
2021 profit.
(e) Assess whether or not the directors of E plc made the correct decision in issuing the debenture to finance the new project. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
3(a) $ 4
At 1 January 2021 204 000)
Profit for the year 198 000) (1)OF
Dividend paid 450 000 × $0.30 (135 000) (1)
Bonus issue ($400000 × 1/8-$44 000) ( 6 000) (1)
General reserve (30 000) (1)
At 31 December 2021 231 000)
3(b)(i) Price earnings ratio 3
Earnings per share $198 000/450 000 $0.44 (1)OF
$4.52/$0.44 (1)OF 10.27 (1)OF
3(b)(ii) Dividend yield 2
($0.3 + $0.25)/$4.52 × 100 (1) 12.17% (1)
3(b)(iii) Gearing ratio 2
$150 000/($711 000 + $150 000) × 100 (1) 17.42% (1)
3(b)(iv) Income gearing 2
Debenture interest $150 000 × 9%=$13 500 (1)
$13 500/($198 000 OF + $13 500) × 100 6.38% (1)OF
3(b)(v) Return on capital employed 2
($198 000 OF + $13 500) (1)OF] / ($711 000 + $150 000) × 100 24.56% (1)OF
3(c) A highly geared company is a company which has a higher proportion of debt (1) compared to its share capital. (1) This 2
indicates that the company has a very high financial risk in terms of default in repayment of debt and high level of interest
expenses. (1)
Max 2
Accept other valid answers.
3(d) The earnings per share for 2020 is $0.39 ($3.64/9.27) (1) 3
There is an increase of 12.82% in earnings per share from $0.39 to $0.44 (1)
The share price has increased (1) by a greater proportion than the earnings (1) as the investors have confidence in
E plc (1)
Max 3
Accept OF answers.
3(e) Profit for the year with the debenture will be lower by the amount of the interest (1) 5
The interest has to be paid whether the company made a profit or not (1)
The company may need to provide a security for the debenture (1)
Issuing debenture will increase gearing (1)
If the shares had been issued the dividends would be at the discretion of the directors (1)
The issue of shares would be a permanent capital whereas debenture would have to be repaid (1)
Issuing ordinary shares dilutes ownership (1)
Max 4
1 mark for decision.
Accept other valid answers.
Read Source A4 in the insert.
(a) Prepare the memorandum joint venture account. Dates are not required.
…… [7]
(b) Prepare the joint venture account with Adam in Mary’s books. Dates are not required.
…… [7]
(c) Explain one benefit to each of Adam and Mary of entering the joint venture.
Benefit to Adam ……
Benefit to Mary ……
[4]
(d) State three differences between a joint venture and a consignment.
1 ……
2 ……
3 ……
[3]
Additional information
Due to the success of the joint venture, Mary suggests to Adam that they form a partnership. They would set up an office and sell the products which would be bought from bankrupt companies.
Adam is a management consultant. He has concerns about forming a partnership with Mary.
(e) Explain two disadvantages to Adam of forming a partnership with Mary.
1 ……
2 ……
[4]
[Total: 25]
PLEASE TURN OVER
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) Memorandum joint venture account 7
$ $
Purchases of shirts 90 000 } Cash sales 21 000 (1)
Carriage 1 250 } Credit sales 129 000 (1)
Insurance 800 }(1)
Storage 2 000 }
Use of office equipment 7 000 }(1)
Packing 1 650 }
Advertising 4 400 }
Salespeople salaries 8 000 }(1)
Discount allowed 1 000 }
Irrecoverable debt 3 000 }(1)
Profit shared:
Adam 15 450
Mary 15 450 (1)OF
150 000 150 000
4(b) Joint venture with Adam account 7
$ $
Other income : hire of storage 2 000 } Cash : sales 21 000 }
Other income : hire of office equipment 7 000 }(1) Trade receivables : sales 129 000 }(1)
Cash : packing 1 650 }
Cash : advertising 4 400 }
Cash : salespeople salaries 8 000 }(1)
Trade receivables : Discount allowed 1 000 }
Trade receivables : irrecoverable debt 3 000 }(1)
Bank : payment to Adam 40 000 (1)
Income statement : profit shared 15 450 (1)OF
Bank : payment to Adam 67 500 (1)OF
150 000 150 000
4(c) Adam 4
He earns an extra profit of $15 450 (1), a return of 17.17% of investing $90 000 within a period of less than 2 months (1)
Mary
Apart from earning profit of $15 450, she also receives a total of $9 000 (1) for hiring her warehouse and office facilities.
She can utilize her resource to earn more income. (1)
1 mark for identification of basic point for each of Adam and Mary and 1 further mark for development.
Accept other valid answers.
4(d) Joint venture Consignment 3
Relationship Temporary partnership Principal and agent
Profit sharing Profit shared between the parties Only principal gets the profit, agent is
only entitled to commission
Ownership of inventory Either party can control the inventory Principal is the sole owner
1 mark for each difference up to a maximum of three
4(e) Long-term commitment (1) which therefore requires a capital outlay (1) 4
Adam is not experienced in trading (1) and may find it difficult to purchase goods from bankrupt sources (1)
He may be distracted from his major business (1) by the demands of dealing with partnership (1)
2 points x 2 marks
Accept other valid answers.
Read Source B1 in the insert.
(a) Prepare a statement to calculate the selling price per unit for each of Product S and Product P.
The statement should also show the total cost per unit for each product.
…… [8]
Additional information
The management accountant suggested that activity based costing should be adopted and provided an analysis of the budgeted annual factory overheads as follows:
Activity Cost Cost driver Expected usage of cost driver
$ Product S Product P
Purchasing materials 120 000 Purchases order 24 8
Machine running 162 000 Machine hours 36 000 18 000
Machine setups 72 000 Number of setups 40 8
Inspecting 111 000 Inspection hours 400 100
Factory overheads 465 000
(b) Explain what is meant by the term ‘activity based costing’.
…… [3]
(c) Prepare a statement to calculate the selling price per unit for each of Product S and Product P by using activity based costing. The statement should also show separately the total cost and total cost per unit for each product.
…… [9]
(d) Advise the directors whether or not they should adopt activity based costing. Support your answer with reference to (a) and (c).
…… [5]
[Total: 25]
Mark scheme
5(a) Product S Product P 8
$ $
Direct materials 8 } 17 }(1) row
Direct labour 60 } 108 }(1) row
Factory overheads W1 10 } 15 }(3) row
Total cost per unit 78 } 140 }(1)OF row
Mark-up 39 } 70 }(1)OF
Selling price 117 } 210 }(1)OF row
W1
Total labour hours 24 000 × 4 + 15 000 × 6 = 186 000
$465 000/186 000 = $2.50 (1) per labour hour
$2.50 × 4 = $10 (1) $2.50 × 6 = $15 (1)
5(b) Activity based costing assigns costs to products based on the activities that consume the resources (1) 3
Activities are used as cost pools and costs are allocated to products using a cost driver (1)
Cost driver is the factor that has a direct cause and effect relationship with the resources consumed. (1)
Max 3
Accept other valid answers.
5(c) Product S Product P 9
$ $
Direct materials 192 000 } 255 000 }
Direct labour 1 440 000 } 1 620 000 }(1)
Factory overheads W1 346 800 118 200 (4) row
Total cost 1 978 800 1 993 200 (1)OF row
Total cost per unit 82.45 132.88 (1)OF row
Mark-up 41.23 66.44 (1)OF row
Selling price 123.68 199.32 (1)OF row
W1
$ $
Purchasing materials 90 000 30 000 (1) row
Machine running 108 000 54 000 (1) row
Machine setups 60 000 12 000 (1) row
Inspecting 88 800 22 200 (1) row
346 800 118 200
$120 000 × (24/32) = $90 000; $120 000x(8/32) = $30 000
$162 000 × (36 000/54 000) = $108 000; $162 000 × (18 000/54 000) = $54 000
$72 000 × (40/48) = $60 000; $72 000x(8/48) = $12 000
$110 000 × (400/500) = $88 800; $110 000 × (100/500) = $22 200
5(d) For ( Max 2) 5
ABC provides more accurate/realistic cost information. Before ABC, overhead per unit for Product P ($15) is higher than
Product S ($10); after ABC, overhead per unit for Product S ($14.45) is higher than Product P ($7.88)(1)
Accurate cost information results in better pricing decision. Before ABC, selling price per unit for Product S and Product P
is $117 and $210 respectively. After ABC, selling price per unit for Product S and Product P is $123.68 and $199.32.
Selling price of Product S increase because it has higher overhead per unit after adopting ABC.(1)
Against (Max 2)
ABC is costly to implement, i.e. it needs specialists and staff require training. (1)
ABC is time consuming (1)
1 mark for decision
Accept other valid answers.
Read Source B2 in the insert.
(a) Calculate the budgeted profit for the budgeted sales of 6 000 units.
…… [2]
Additional information
The actual result for April was as follows:
Production and sales (units) 5 800
$
Selling price per unit 72
Direct materials 35 113
Direct labour 221 760
Factory overhead 70 400
(b) Calculate the following variances:
(i) sales price variance
…… [2]
(ii) sales volume variance (as a measure of change in profit)
…… [3]
(iii) direct material total variance
…… [2]
(iv) direct labour total variance
…… [2]
(v) fixed overhead volume variance
…… [2]
(vi) fixed overhead expenditure variance.
…… [2]
Additional information
The management accountant is going to perform variance analysis. The actual labour hours used in April were 17 600.
(c) Explain the likely causes of:
(i) sales volume variance calculated in (b)(ii)
…… [3]
(ii) direct labour total variance calculated in (b)(iv).
…… [4]
Additional information
By analysing the direct material total variance the direct material usage variance was found to be
$1 275 adverse.
(d) Assess whether or not the company has been successful in controlling the direct material cost price. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
6(a) Sales 420 000 2
Direct materials 36 000
Direct labour 216 000
Fixed overheads 72 000
(324 000) (1)
96 000 (1)OF
6(b)(i) Sales price variance 2
($72-$70) × 5 800 = $11 600 (1) F (1)
6(b)(ii) Sales volume variance 3
Standard profit ($70 – $6 – $36 – $12) = $16 (1)
(6 000 – 5 800) × $16 = $3 200 (1)OF A (1)
6(b)(iii) Direct material total variance 2
(5 800 × $6) – $35 113 = $313 (1) A (1)
6(b)(iv) Direct labour total variance 2
(5 800 × 36) – $221 760 = $12 960 (1) A (1)
6(b)(v) Fixed overhead volume variance 2
Overhead absorption rate $4 ($12/3) per labour hour
(6 000 – 5 800) × 3 hours × $4 = $2 400 (1) A(1)
Alternative answer
$72 000 – (5 800 × $12) = $2 400 (1) A(1)
6(b)(vi) Fixed overhead expenditure variance 2
$72 000 – $70 400 = $1 600 (1) F (1)
6(c)(i) Actual sales of 5800 units are lower than the budgeted sales. (1) 3
Goods are sold at a price higher than the budget, increasing from $70 to $72. This may cause a decrease in demand. (1)
Promotion / advertising is ineffective (1)
Quality of goods are not good as expected (1)
Max 3
Accept other valid answers.
6(c)(ii) Direct labour rate variance 4
(17 600 × $12) – $221 760 = 10 560(A) (1)
$221 760 ÷ 17 600 = $12.6
There has been an increase in pay / hourly rate has increased from $12 to $12.60 (1)
Direct labour efficiency variance
[(5 800 × 3) – 17 600] × $12 = $2 400(A) (1)
200 more labour hours have been deployed due to inefficiency of labour force (1)
Accept other valid answers.
6(d) Direct material total variance is $313 adverse and direct material usage variance is $1 275 adverse, therefore the direct 3
material price variance is $962 favourable (1)OF
The cost price of direct material is cheaper than expected, maybe due to change in supplier (1)
P Limited has been successful in controlling the cost price of direct material (1)
Max 2 for justification
1 mark for decision.
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Accounting 9706/31 for May/June 2022 is out of 150 marks, with 3 hours to answer it, across 6 questions.
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