Accounting 9706/21 May/June 2023: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Fundamentals of Accounting, May/June 2023. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Mima is the owner of a wholesale business, Mima Supplies.
During the year ended 31 December 2022 the business owned the following delivery vehicles.
Date of purchase Cost
$
Vehicle A 1 January 2019 28 000
Vehicle B 1 January 2020 30 000
Vehicle C 1 July 2022 32 000
Delivery vehicles are depreciated at 25% per annum using the straight‑line method on a month‑by‑month basis. No depreciation is provided in the year of sale.
Vehicle A was sold for $5200 on 30 June 2022.
REQUIRED
(a) Calculate the profit or loss on the disposal of Vehicle A.
…… [3]
(b) Calculate the total depreciation charge on delivery vehicles for the year ended
31 December 2022.
…… [3]
Additional information
Mima has also supplied the following information for the year ended 31 December 2022.
1
$
Advertising 6 580
Allowance for irrecoverable debts at 1 January 2022 1 390
Cost of sales 483 900
Furniture and equipment at 1 January 2022
Cost 36 800
Provision for depreciation 18 200
Insurance 7 380
Interest receivable 1 200
Rent of warehouse 33 480
Returns inwards 4 420
Revenue 726 310
Vehicle running costs 8 580
Wages 63 480
2 Advertising includes the cost of a six‑month campaign, $4200, which began on
1 September 2022.
3 The value of inventory at 31 December 2022 was understated by $4940 when calculating the cost of sales of $483 900.
4 Six months’ interest at 10% per annum was received on a bank deposit of $24 000. The deposit was made on 1 March 2022. The next receipt of interest took place on 28 February 2023.
5 The allowance for irrecoverable debts is to be maintained at 5% of trade receivables. At
31 December 2022, trade receivables totalled $31 300.
6 Depreciation is to be provided on furniture and equipment at 15% per annum using the reducing balance method of depreciation.
7 Wages, $1620, were accrued at 31 December 2022.
REQUIRED
(c) Prepare the statement of profit or loss for the year ended 31 December 2022. Use the space provided on the next page to show your workings.
Mima Supplies
Statement of profit or loss for the year ended 31 December 2022
Workings:
[13]
(d) Explain the importance of making an allowance for irrecoverable debts in a business’s financial statements.
…… [2]
Additional information
Mima would like to assess her business’s liquidity position at 31 December 2022.
REQUIRED
(e) Identify two ratios which could be used to assess a business’s liquidity position.
1 ……
2 ……
[2]
Additional information
Mima has noticed that her business’s rate of inventory turnover has decreased since last year.
She is considering two options to increase the rate of inventory turnover.
Option A: reduce inventory levels.
Option B: reduce selling prices by 2% and increase the annual advertising budget by 5%.
REQUIRED
(f) Advise Mima which option she should choose. Justify your choice by considering both options.
…… [7]
[Total: 30]
Mark scheme
1(a) Calculate the profit or loss made on the disposal of Vehicle A. 3
Depreciation to date: 3 × 25% × $28 000 = $21 000
Net book value at time of sale: $28 000 – $21 000 = $7000 (1)
$7000 – proceeds $5200 = $1800 (1) OF Loss (1)
1(b) Calculate the total depreciation charge on delivery vehicles for the year 3
ended 31 December 2022.
$30 000 × 25% = $7500 (1)
$32 000 × 25% × ½ = $4000 (1)
Total $11 500 (1) OF
1(c) Prepare the statement of profit or loss for the year ended 31 December 2022. 13
Mima Supplies
Statement of profit or loss for the year ended 31 December 2022
$ $
Revenue 726 310
Less returns inwards 4 420
721 890 (1)
Cost of sales W1 478 960 (1)
Gross profit 242 930 (1) OF
Interest receivable W2 2 000 (1)
244 930 (1) OF
Less expenses
Advertising W3 5 180 (1)
Insurance 7 380
Rent of warehouse 33 480
Vehicle running costs 8 580
Wages W4 65100 (1)
Increase in allowance for irrecoverable 175 (1)
debts W5
Loss on disposal of motor vehicle 1 800 (1) OF
Depreciation
Motor vehicles 11 500 (1) OF
Furniture and equipment W6 2 790 (1)
135 985 (1) OF
Profit for the year 108 945 (1) OF
W1 Cost of sales: $483 900 – understated inventory $4940 = $478 960(1)
W2 Interest received: 10% × $24 000 × 10/12 = $2000 (1)
W3 Advertising: $6 580 – (1/3 × $4200) = $5180(1)
W4 Wages $63 480 + $1620 = $65 100 (1)
W5 Increase in allowance for irrecoverable debts:
(5% × $31 300, i.e. $1565 – $1390 = $175 (1)
W6 Depreciation of furniture and equipment
($36 800 – $18 200) × 15% = $2790 (1)
1(d) Explain the importance of making an allowance for irrecoverable debts in a 2
business’s financial statements.
To ensure that profits are not overstated (1) and asset values are not overstated
(1) to comply with the prudence concept.
Max 2
Accept other valid responses.
1(e) Identify two ratios which could be used to assess a business’s liquidity. 2
Current ratio (1)
Acid test ratio (1)
1(f) Advise Mima which option she should choose. Justify your choice by 7
considering both options.
Max 3 marks for Option A
Max 3 marks for Option B
Decision supported with a comment (1)
Option A (max 3)
Will improve the ratio (1)
But may result in stock outs (1)
May reduce customer choice (1)
Could result in lost sales and a loss of profits (1)
Option B (max 3)
May improve ratio if demand increases (1)
Profits could decrease because of cost of advertising (1)
Will increase in demand compensate for loss of revenue on each sale (1)
Will advertising campaign be effective? (1)
Accept other valid responses.
Param uses control accounts to verify the accuracy of his business’s sales and purchases ledgers.
He provided the following information for the month ended 30 April 2023 relating to trade receivables.
$
Sales ledger balances, 1 April 2023
Debit 14 890
Credit 610
Contra entries with the purchases ledger 1 850
Credit sales 153 480
Credit customers’ cheques returned 880
Discounts allowed 4 830
Interest charged on overdue accounts 540
Irrecoverable debts written off 1 830
Receipts from credit customers 148 200
Returns inwards 2 790
There were no credit balances in the sales ledger on 30 April 2023.
REQUIRED
(a) Prepare the sales ledger control account for April 2023. Dates are not required.
Sales ledger control account
$ $
[6]
(b) Identify the books of prime entry for each of the following:
(i) discounts allowed
…… [1]
(ii) irrecoverable debts written off.
…… [1]
(c) State three benefits of maintaining control accounts.
1 ……
2 ……
3 ……
[3]
Additional information
The balance of the sales ledger control account at 30 April 2023 did not agree with the total of the individual customer account balances at this date.
The following errors were discovered, some of which affected the sales ledger control account and some of which affected the customer account balances.
1 Returns inwards of $720 had been credited to the account of Rafiq Stores instead of Raif
Stores.
2 A sales invoice for $820 had been omitted from the books of account.
3 The balance of a credit customer’s account, $430, had been brought down as $340.
4 The total of the returns inwards journal had been understated by $470.
5 Interest of $40 charged on an overdue account had been correctly entered in the journal but had been credited to the customer’s account.
REQUIRED
(d) Calculate the revised sales ledger control account balance at 30 April 2023.
…… [4]
[Total: 15]
Mark scheme
2(a) Prepare the sales ledger control account for April 2023. Dates are not 6
required.
Sales ledger control account
$ $
Balance b/d 14 890 Balance b/d 610
Sales (journal) 153 480 (1) }** Returns inwards 2 790 }**
(journal)
Bank/Returned 880 Cash 4 830 }*
cheques book/Discounts
(1)}* allowed*
Bank* 148 200
Journal/Interest 540 (1) Journal/Irrecoverable 1 830 (1)
charges debts
Journal/Contras 1 850 (1)
Balance c/d 9 680
169 790 169 790
Balance b/d 9 680 (1) OF
Notes:
* 1 mark for the three transfers from the cash book (bank, discounts allowed,
returned cheques)
** 1 mark for both sales and returns inwards entries
2(b)(i) Identify the books of prime entry for each of the following: 1
(i) discounts allowed
Cash book (1)
2(b)(ii) Identify the books of prime entry for each of the following: 1
(ii) irrecoverable debts written off.
General journal (1)
2(c) State three benefits of maintaining control accounts. 3
Provides a check on the arithmetical accuracy of the purchases and sales ledgers
(1)
Can help to reduce the chance of fraud (1)
Provides details of total trade payables and total trade receivables / easier to
prepare financial statements (1)
Max 3
Accept other valid responses.
2(d) Calculate the revised sales ledger control account balance at 4
30 April 2023.
$
Control account balance at 30 November 9 680 (1) OF
Add: sales invoice omitted 820 (1)
Less: understated returns inwards (470) (1)
Revised control account balance 10 030 (1) OF
The following extract from J Limited’s statement of financial position at 1 January 2022 is available.
$
Equity
Issued capital: ordinary shares of $0.25 each 600 000
Share premium 175 000
Retained earnings 54 000
Total equity 829 000
Non‑current liabilities
7% Debentures (2028) 200 000
REQUIRED
(a) State two features of revenue reserves which do not apply to capital reserves.
1 ……
2 ……
[2]
Additional information
The directors wished to raise additional finance. On 1 April 2022 the company made a rights issue of 2 ordinary shares for every 3 shares held at a price of $0.35 per share. The issue was fully subscribed.
REQUIRED
(b) Calculate the amount raised by the rights issue of shares.
…… [3]
Additional information
The directors had considered making an issue of debentures rather than a rights issue.
(c) Identify two reasons why the directors of J Limited might prefer to raise additional finance through a rights issue rather than by issuing debentures.
1 ……
2 ……
[2]
Additional information
The directors paid an interim dividend of $0.12 per share on 1 July 2022.
REQUIRED
(d) Calculate the total amount of the interim dividend.
…… [2]
Additional information
The company made a profit of $535 000 for the year ended 31 December 2022.
REQUIRED
(e) Prepare the statement of changes in equity for the year ended 31 December 2022.
J Limited
Statement of changes in equity at 31 December 2022
Share capital Share Retained Total premium earnings
$ $ $ $
[6]
[Total: 15]
Mark scheme
3(a) State two features of revenue reserves which do not apply to capital 2
reserves.
Revenue reserves can be used to finance dividend payments (1)
Revenue reserves arise from the everyday activities of a business (1)
Max 2
Accept other valid responses.
3(b) Calculate the amount raised by the rights issue of shares. 3
There were 2 400 000 shares (1)
So the rights issue is of 1 600 000 shares (1)
Amount raised 1 600 000 × $0.35 = $560 000 (1)
3(c) Identify two reasons why the directors of J Limited might prefer to raise 2
additional finance through a rights issue rather than by issuing debentures.
A share issue is a permanent source of finance/a debenture issue would be a
temporary source of finance (1)
Payment of dividends is discretionary and will not affect the profit of the
company/a debenture issue will lead to finance charges reducing annual profits
(1)
Max 2
Accept other valid responses.
3(d) Calculate the total amount of the interim dividend. 2
4 000 000 (1) × $0.12 = $480 000 (1) OF
3(e) Prepare the statement of changes in equity for the year ended 31 December 6
2022.
J Limited
Statement of changes in equity at 31 December 2022
Share Share Retained Total
capital premium earnings
$ $ $ $
Balances at 1 600 000 175 000 54 000 829 000 (1) for row
January 2022
Rights issue 400 000 160 000 560 000
(1)OF (1)OF
Profit for year 535 000 535 000
(1)
Dividend paid (480 000) (480 000)
(1)
Balances at 31 1 000 000 335 000 109 000 1 444 000 (1) OF for
December 2022 row
D Limited has two production departments and two service departments at one of its factories where absorption costing is used. Some forecast factory overheads have already been allocated and apportioned as follows:
Production departments Service departments
Cutting Assembly Maintenance Canteen
$ $ $ $
Factory overheads 223 480 217 980 45 270 36 260
The following forecast factory overheads are still to be apportioned.
$
Depreciation of machinery 48 000
Power 40 200
Canteen department overheads should be reapportioned on the basis of the number of employees.
Maintenance department overheads should be reapportioned on the basis of the number of machines in production departments.
The following data is available.
Production departments Service departments
Cutting Assembly Maintenance Canteen
Machinery at carrying value $90 000 $66 000 $18 000 $6 000
Number of machines 43 27
Kilowatt hours 1 800 1 500 100 200
Number of employees 27 18 5
Budgeted machine hours 40 000 33 500
Budgeted direct labour hours 23 000 62 500
REQUIRED
(a) Complete the following table to show the apportionment of factory overheads and the reapportionment of service department overheads.
Production departments Service departments
Cutting Assembly Maintenance Canteen
$ $ $ $
Factory overheads 223 480 217 980 45 270 36 260
Depreciation of machinery
Power
Total overheads
Reapportionment
Subtotal
Reapportionment
Total overheads
[5]
(b) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis.
…… [2]
Additional information
The following information is available.
Cutting department Assembly department
Direct labour rate per hour $10.90 $8.20
Machine hours per unit 8 6
Labour hours per unit 3 4
Direct materials cost $6.95 per unit.
Selling prices are set to achieve a profit margin of 25%.
A customer has placed an order for 40 units.
REQUIRED
(c) Calculate the selling price to be quoted for this order of 40 units.
…… [5]
(d) State two causes of under absorption of overheads.
1 ……
2 ……
[2]
Additional information
At the other factory a single product, Product Exe, is currently being made. Marginal costing is used at this factory.
The following information is available.
Selling price per unit $48
Contribution per unit $13
Direct labour 2.5 hours per unit at $10 per hour
Fixed costs $96 000 per annum
Factory capacity 28 000 labour hours per year
Current production level 80% of factory capacity
All units produced are sold.
REQUIRED
(e) Calculate the profit made each year from Product Exe.
…… [4]
Additional information
The directors plan to make a new product, Product Wye, at this factory at the request of an important customer. The following details are available.
1 The factory will be able to operate at full capacity.
2 All units produced will be sold.
3 Product Wye will have a selling price of $64 per unit and a contribution of $8 per unit.
4 Product Wye will require direct labour at $10 per hour for 1.5 hours per unit.
5 The customer requires 10 000 units of Product Wye each year. The customer will only accept this quantity each year.
6 In order to complete the customer’s order, production of Product Exe will be reduced.
7 Some new machinery will be required costing $36 000. Machinery is depreciated by 20% per annum.
8 A loan of $20 000 at 5% per annum interest will be required to finance the purchase of the new machinery.
REQUIRED
(f) Calculate the total profit from both products which will be made in the first year if this plan is put into operation.
…… [5]
(g) Advise the directors whether this plan should be put into operation. Justify your answer by considering both financial and non‑financial factors.
…… [7]
[Total: 30]
Mark scheme
4(a) Complete the following table to show the apportionment of factory 5
overheads and the reapportionment of service department overheads.
Production Service departments
departments
Cutting Assembly Maintenance Canteen
$ $ $ $
Factory 223 480 217 980 45 270 36 260
overheads
Depreciation of 24 000 17 600 4 800 1 600 (1)
machinery
Power 20 100 16 750 1 117 2 233 (1)
Total 267 580 252 330 51 187 40 093
overheads
Reapportionment 21 650 14 434 4 009 (40 093) (1) OF
Subtotal 289 230 266 764 55 196 –
Reapportionment 33 906 21 290 (55 196) (1) OF
Total 323 136 288 054 – (1) OF
overheads
4(b) Calculate, to two decimal places, an overhead absorption rate for each 2
production department, using a suitable basis.
Cutting = 323 136 / 40 000 = $8.08 per machine hour (1)
Assembly = 288 054 / 62500 = $4.61 per labour hour (1)
4(c) Calculate the selling price to be quoted for this order of 40 units. 5
$
Direct materials 40 × $6.95 278.00
Direct labour
Cutting 40 × 3 × $10.90 1 308.00
(1)
Assembly 40 × 4 × $8.20 1 312.00
Overheads
Cutting 40 × 8 × $8.08 2 585.60 (1) OF
Assembly 40 × 4 × $4.61 737.60 (1) OF
Total costs 6 221.20
Profit 1/3 × costs 2073.73 (1) OF
Selling price 8 294.93 (1) OF
4(d) State two causes of under absorption of overheads. 2
Actual overheads exceed budgeted overheads (1)
Actual production is less than planned production (1)
4(e) Calculate the profit made each year from Product Exe. 4
Current labour hours used: 80% × 28 000 = 22 400 (1)
Units produced: 22 400/2.5 = 8960 (1)
Contribution: 8960 × $13 = $116 480 (1)
Profit: $116 480 – Fixed costs $96 000 = $20 480 (1) OF
4(f) Calculate the total profit from both products which will be made in the first 5
year if this plan is put into operation.
Contribution from Product Wye: 10 000 × $8 = $80 000 (1)
Contribution from Product Exe:
Units produced = (28 000 – 15 000)/2.5 = 5200 units (1)
Contribution is 5200 × $13 = $67 600 (1)
Total profit is: total contribution $147 600 – fixed costs ($96 000 + $7200
depreciation + $1000 loan interest, i.e. 104 200 (1)) = $43 400 (1) OF
4(g) Advise the directors whether this plan should be put into operation. Justify 7
your answer by considering both financial and non-financial factors.
Max 2 marks for ‘For’
Max 4 marks for ‘Against’
Decision supported with a comment (1)
For (max 2)
More/double the annual profit (1)
All direct labour required so no risk of losing skilled labour while factory operates
at less than full capacity (1)
If overtime can be used the loss of regular customers might be avoided (1)
Against (max 4)
Can a repeat order from the customer be guaranteed? (1)
Will any customers be lost if their regular orders cannot be fully completed due to
the fall in reduction of the original product? (1)
If the customer does not repeat the order, fixed costs will be increased for the next
few years leading to a long-term fall in profits (1)
Will there be any retraining costs? (1)
Will the company be able to obtain the loan? (1)
Accept other valid responses.
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