Accounting 9706/32 May/June 2023: question paper and mark scheme

Mark scheme

1(a) Prepare a statement to show the profit or loss for the year ended 31 December 2022 for the café. 8 Statement of profit or loss for the café for year ended 31 December 2022 $ $ Revenue W1 69 400 (1) Opening inventory 5 900 Purchases W2 29 800 (1) Closing inventory W3 (4 500) (1) Cost of sales 31 200 Gross profit 38 200 Wages W4 14 920 (1) Rent W5 7 200 (1) Heating and lighting W6 3 400 (1) Depreciation of café equipment W7 6 160 (1) 31 680 Profit for the year 6 520 (1) OF W1: $55 000 + $14 400 = 69 400 (1) W2: $31 600 + 14 800-$16 600 = 29 800 (1) W3: $6 400 – $2 200+$300 = 4 500 (1) W4: $14 400 – $2 730+$3 250 = 14 920 (1) W5: $18 000 × 40% = 7200 (1) W6: ($7 500 – $900 + $1 900) × 40% = 3400 (1) W7: ($22 000+$8 800) × 20%= 6160 (1) 1(b) Prepare the club’s income and expenditure account for the year ended 31 December 2022. 9 Income and expenditure account for year ended 31 December 2022 $ $ Subscriptions W1 69 200 (3) OF Life membership W2 5 600 (1) Profit from café 6 520 81 320 Rent W3 10 800 (1) Heating and lighting W4 5 100 (1) Club administrative expenses 40 150 Loss on sale of club equipment W5 2 800 (1) Depreciation of club equipment W6 16 840 (1) 75 690 Surplus for the year 5 630 (1) OF W1: Subscription account $ $ Bal b/d 2 000 Bal b/d 1 200 (1) the row (1)O I&E 69 200 F Bank 68 000 Bal c/d 1 400 Bal c/d 3 400 (1) the row 72 600 72 600 W2: (28×$2 000) × 1/10 = 5 600 (1) W3: $18 000 × 60% =10 800 (1) W4: ($7 500 – $900 + $1 900) × 60% = 5 100 (1) W5: $4 800 – $2 000) = 2800 (1) W6: ($76 000 – $4 800+13 000) × 20% = 16 840 (1) 1(c) Prepare a statement showing the movement in the accumulated fund for the year 2022. 3 $ Accumulated fund at 1 January 2022 W1 136 470 (2) Surplus for the year 5 630 Accumulated fund at 31 December 2022 142 100 (1)OF W1: $ Book value of given balances 87 270 Life member (6 × $2 000 × 8/10) + (10 × $2 000 × 9/10) (27 600) (1) Bank 76 800 Accumulated fund at 1 January 2022 136 470 (1)OF 1(d) Advise the management committee which option they should choose. Justify your answer. 5 Max 4 marks for comments 1 mark for decision supported with a comment Security is required for the long-term loan / not for the personal loan (1) Lower interest rate because of the security in case of long-term loan/ higher interest rate for personal loan (1) Long-term loan takes longer time because of the paper work/ personal loan is quicker to get because of little formalities involved (1) Long-term loan has a fixed term/ Personal loan can be recalled anytime (1) Accept other valid responses.

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2(a) Explain why M Limited made a prior period adjustment in information 2. Support your answer by stating the 4 relevant international accounting standard and the accounting treatment. Depreciation $20 000 ($400 000x5%) on the existing building should have been made for 2021. (1) This is a change in accounting policy. (1) IAS 8 Accounting policies, changes in accounting estimates and errors (1) The prior period error is adjusted against the retained earnings brought forward on 1 January 2022. (1) 2(b) Calculate the profit for the year ended 31 December 2022. 4 $ Increase in retained earnings 34 900 Prior period adjustment W1 20 000 (1) Dividend paid 2021 final W2 48 000 (1) 2022 interim W3 88 800 (1) Profit for the year 191 700 (1) OF W1: $400 000 × 5%= 20 000 (1) W2: (60 000 ÷ 1/10) × $0.08 =48 000 (1) W3: (600 000 + 140 000) × $0.12 =88 800 (1) 2(c) Prepare a statement of cash flows for the year ended 31 December 2022 in accordance with IAS 7. 17 Statement of cash flows for the year ended 31 December 2022 $ Cash flows from operating activities Profit from operations W1 196 100 (3)OF Depreciation ($26 200 + $42 600) 68 800 (1) Gain on disposal of machine ($29 500 – $28 600) (900) (1) Decrease in inventory 3 600 Increase in trade receivables (5 900) Increase in trade payables 5 600 (1) 267 300 Interest paid (4 400) (1)OF Net cash from operating activities 262 900 Cash flows from investing activities Purchase of building W2 (124 000) (1) Sale proceeds of a machine 29 500 (1) Purchase of machine W3 (36 600) (1) Net cash used in investing activities (131 100) (1)OF Cash flows from financing activities Issue of shares W4 120 000 (1) Repayment of bank loan (60 000) (1) Dividend paid (136 800) (1)OF Net cash used in financing activities (76 800) (1)OF Net increase in cash and cash equivalents 55 000 (1) Cash and cash equivalents at the beginning of the year 42 000 Cash and cash equivalents at the end of the year 97 000 (1) 2(c) W1 $191 700 OF+$2 000 (1)+2 400 (1)=$196100 (1)OF ($100 000 × 8% × 3/12)=$2 000 ($40 000 × 8% × 9/12) = $2 400 W2 $77 800 + ($26 200 + $20 000) = $124 000 (1)OF or $26 200 ÷ 5% – $400 000 = $124 000 (1)OF W3 $28 600 +$42 600 – $34 600 = $36 600 (1) W4 Share capital ($140 000 – $60 000) $80 000 Share premium ($60 000 – $20 000) $40 000 $120 000 OR ($140 000 – $60 000) x $1.50 = $120 000 (1)

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3(a) State two reasons why a business may acquire another business. 2 Synergy (1) Growth (1) Elimination of competitors (1) Increase market share (1) Enter into a new market (1) Max 2 Accept other valid responses. 3(b) Prepare the realisation account at 1 January 2023. 4 Realisation account $ $ Assets (taken over by X X Limited Limited) 290 000 (consideration) 420 000 Capital -Alice (take over Vehicle (taken over by Alice) 25 000 (1) vehicle) 23 800 (1) Discount Profit on realisation received 2 200 (1) Alice 78 600 Bob 52 400 (1)OF 446 000 446 000 3(c) Prepare the partners’ capital accounts at 1 January 2023 to close the partnership books of account. 10 Capital account Alice Bob Alice Bob $ $ $ $ X Limited- ordinary shares 160 000 160 000 (1) row Balance b/d 150 000 100 000 (1) row Vehicle 23 800 (1) Current account W1 32 000 16 000 (4) OF Bank 76 800 (1OF) 8 400 (1OF) Profit on realisation 78 600 52 400 (1)OF row 260 600 168 400 260 600 168 400 W1 $ Book value of assets taken over by X Limited 290 000 Book value of vehicle taken over by Alice 25 000 Cash at bank 27 000 Trade payables (44 000) Net assets book value 298 000 (1) Capital accounts total 250 000 Current accounts total 48 000 (1) Alice $48 000 × 2/3 = $32 000 (1)OF Bob $48 000 × 1/3 = $16 000 (1)OF 3(d) Prepare journal entries in the books of X Limited to record the acquisition of the partnership. Narratives are not 4 required. Dr Cr $ $ Premises 186 000 Equipment 32 000 Vehicle 18 000 Inventory 45 000 Trade receivables 71 000 (1) Goodwill W1 68 000 (1) Ordinary shares capital 200 000 Share premium 120 000 (1) Bank / Cash 100 000 (1) W1: $420 000 – $352 000 = 68000 (1) 3(e) Advise Alice whether or not she should set up this new business. Justify your answer. 5 Max 2 marks for ‘For’ comments Max 2 marks for ‘Against’ comments 1 mark for decision supported with a comment For (max 2) She has experience and knowledge in the trade. (1) She now has time to run her own business (1) She can supplement her income from X Limited. (1) She takes all the profit from her own business. (1) Against (max 2) She will be in competition with X Limited. (1) She will have start up costs (1) She must consider whether the cash received is sufficient. (1) She has unlimited liability. (1)