Accounting 9706/31 May/June 2023: question paper and mark scheme

Mark scheme

1(a) Calculate the partnership’s profit for the year ended 31 March 2022. 2 $ Interest on capital Alan $300 000 × 4% 12 000 } Betty $240 000 × 4% 9 600 }(1) Residual profit Alan 24 240 Betty 16 160 Profit for the year 62 000 (1) 1(b) Prepare the partners’ capital accounts to show the closing entries. 10 Capital Accounts Alan Betty Alan Betty $ $ $ $ Current account W1 5 640 (1) Balance b/d 300 000 240 000 J Ltd-8% debentures W2 150 000 120 000 (1)row Current account W1 11 240 (1) Profit on realisation J Ltd-Ordinary shares 195 000 195 000 (1)row W3 88 200 58 800 (5)OF Bank 54 440 } Bank 21 840} (1)OF 399 440 320 640 399 440 320 640 W1 Current account Alan ($7 000+$300 000 × 4% + $24 240 – $32 000) = $11 240 (1) Betty ($2 600+$24 0000 × 4% + $16 160 – $34 000) = ($5640) (1) W2 Debentures Alan $12 000 ÷ 8% = $150 000} Betty $9 600 ÷ 8% = $120 000} (1) W3 Profit on realisation $ Assets taken over ($570 000 – $549 000) 21 000 (1) Goodwill ($62 000 × 2) 124 000 (1)OF Trade payables discount 2 000 (1) 147 000 Alan $147 000 × 60% 88 200 (1)OF Betty $147 000 × 40% 58 800 (1)OF 1(c) Calculate the amount paid by J Limited into the partnership bank account. 4 $ Consideration Value of assets taken over 570 000 Goodwill 124 000 694 000 (1)OF 8% debentures 150 00 Alan 0 120 00 Betty 0 (270 000) (1) Ordinary shares (390 000) (1) Balance paid in cash 34 000 (1)OF 1(d) Prepare the partnership bank account to show the closing entries. 4 Bank account $ $ Balance b/d W1 35 600 (2)CF/(1)OF Trade payables 37 000 J Limited 34 000 (1)OF Alan 54 440 }(1)OF Betty 21 840 } 91 440 91 440 W1 $ Capital accounts total 540 000 Current accounts total at 31 March 2022 ($11 240-$5 640) 5 600 545 600 (1)OF Book value of assets taken over (549 000) } Trade payables 39 000 }(1) Cash at bank 35 600 Alternative answer $ Capital accounts total 540 000 Current accounts total at 1 April 2021 ($7000 + $2600) 9 600 Profit for the year 62 000 611 600 (1)OF Book value of assets taken over (549 000) } Trade payables 39 000 } Drawings (66 000) }(1) Cash at bank 35 600 1(e) Advise whether or not J Limited should continue the expansion strategy. Justify your answer. 5 Max 2 marks for ‘should’ comments Max 2 marks for ‘should not’ comments 1 mark for decision supported with a comment. It is only one year’s time, J Limited should take the acquisition as a long-term strategy. (1) Acquiring businesses can bring synergy (1) and elimination of competitors. (1) J Limited pays for the goodwill in the expectation of additional future profit. (1) J Limited was too optimistic in its predictions. (1) Synergy may not succeed because there may be a culture clash between two businesses. (1) Accept other valid responses.

Mark scheme

2(a) State two comparisons which a business may make by using ratios to assess its performance. 2 Trend analysis (1) Inter-company comparison (1) Industry average (1) Max 2 Accept other valid responses. 2(b)(i) Calculate: 2 net assets at 31 December 2022 Non-current assets ($825 000÷1.6) 515 625 (1) Inventory 44 000 Trade receivables 76 400 Trade payables (32 900) Cash at bank 81 000 Debenture (100 000) Net assets 584 125 (1) OF 2(b)(ii) retained earnings at 31 December 2022 2 Equity 584 125 Ordinary share capital (300 000) } Share premium (30 000) } (1) Retained earnings 254 125 (1) OF 2(b)(iii) retained earnings at 1 January 2022. 6 $ Retained earnings at 31 December 2022 254 125 (1) OF Profit for the year W1 (187 500) (3) OF Dividend paid (300 000 × $0.3) 90 000 (1) Retained earnings at 1 January 2022 156 625 (1) OF W1 Market price per share ($0.3 + $0.15) ÷ 4% = $11.25 (1) Earnings per share $11.25 ÷ 18 = $0.625 (1) OF Profit for the year $0.625 × 300 000=$187 500 (1) OF 2(c)(i) Calculate the following at 31 December 2022: 6 working capital cycle (round each component up to the next whole day). Trade receivable turnover W1 34 days (1) Inventory turnover W2 48 days (3) Trade payable turnover W3 (30) days (1) Working capital cycle 52 days (1) OF W1 ($76 400/$825 000) x 365 = 34 days (1) W2 Cost of sales $825 000(1–48%) = $429 000 (1) Opening inventory $429 000 + $44 000 – $405 000 = $68 000 Average inventory ($44 000 + $68 000)/2 = $56 000 (1) Inventory turnover ($56 000/$429 000) × 365 = 48 days (1) OF W3 ($32 900/$405 000) × 365 = 30 days (1) 2(c)(ii) gearing ratio (to two decimal places) 2 Gearing ratio $100 000/($100 000 + $300 000 + $30 000 + $254 125 OF) (1) =14.62% (1) OF 2(d) Advise the directors of Z plc whether or not they should be concerned about the company’s working capital cycle. 5 Justify your answer. Max 2 marks for ‘should be’ comments Max 2 marks for ‘should not be’ comments 1 mark for decision supported with a comment. Should be (max 2) takes longer time to convert its working capital into cash. (1) holding too much inventory (1) not good enough in collecting their receivables / poor credit control (1) paying the payables too early (1) Should not be (max 2) not a material difference (1) may have different policies (1) there may be non-financial factors that impact the financial statements (1) Accept other valid responses.

Mark scheme

3(a) Explain why a manufacturing business may provide for unrealised profit. 2 The unrealised profit is to be deducted from the transfer value to value the inventory at cost (1) which is consistent with the prudence concept. (1) Accept other valid responses. 3(b) Prepare the manufacturing account for the year ended 31 December 2022. 6 Manufacturing account for year ended 31 December 2022 $ Opening raw materials inventory 8 000 Purchases 198 000 Carriage inwards 3 100 (1) Closing raw materials inventory (10 500) Cost of raw materials consumed 198 600 Direct labour 164 000 Prime cost 362 600 (1) Depreciation – factory machinery 9 000 (1) Factory overheads $98 000 + ($74 000 + $6 000) × 50% 138 000 (1) 509 600 Opening work in progress inventory 17 300 } Closing work in progress inventory (16 900) }(1) Cost of goods manufactured 510 000 Factory profit 122 400 (1) OF Transfer value 632 400 3(c) Prepare the statement of profit or loss for the year ended 31 December 2022. 14 Statement of profit or loss for year ended 31 December 2022 $ $ Revenue 984 000 Cost of sales Opening finished goods inventory ($45 000 × 120%) 54 000 (1) Transfer value 632 400 686 400 Closing finished goods inventory W1 (64 480) (2)OF 621 920 Gross profit 362 080 (1) OF Factory profit 122 400 (1)OF Increase in provision for unrealised profit W2 (3 480) (3)OF 118 920 481 000 Administrative expenses W3 244 600 (2) Selling and distribution costs W4 123 800 (3) Profit for the year 112 600 (1) OF 3(c) Mark up for 2022 $122 400 OF/$510 000 = 24% W1 $52 000 × 124% (1OF) = $64 480 (1OF) W2 $ 31 December 2021 inventory $45 000 × 20% 9 000 (1) 31 December 2022 inventory $52 000 × 24% 12 480 (1) OF Increase in provision for unrealised profit 3 480 (1) OF W3 $ Administrative expenses 223 500 Depreciation – office equipment 5 100 (1) Rent ($74 000 + $6 000) × 20% 16 000 (1) 244 600 W4 $ Selling and distribution costs 84 000 Carriage outwards 6 200 (1) Depreciation – delivery van 9 600 (1) Rent ($74 000 + $6 000)×30% 24 000 (1) 123 800 3(d) Explain the importance of a true and fair view opinion in the auditor’s report. 3 The financial statements are credible/reliable (1) The financial statements have complied with the legal requirements and accounting standards (1) The accounting policies adopted by the business are appropriate (1) It means the financial statements are free from material misstatements/errors (1) It means the financial statements faithfully represent the performance and financial position of the business (1) The shareholders have confidence that the directors have performed their duties satisfactorily (1) Max 3 Accept other valid responses.