Accounting 9706/23 May/June 2024: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Fundamentals of Accounting, May/June 2024. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
K Limited provided the following extract from the company’s draft statement of profit or loss for the year ended 31 December 2023.
$
Revenue 870 500
Cost of sales (493 000)
Gross profit 377 500
It has now been discovered that adjustments are required for the following:
1 Opening inventory at 1 January 2023 had been understated by $14 000.
2 Sales returns, $8600, had been deducted from purchases.
3 Closing inventory at 31 December 2023 included 40 damaged items costing $30 each. It is estimated that after repairs, costing a total of $420, the items could be sold for $38 each.
(a) Explain the accounting concept which is applied to the valuation of damaged inventory.
…… [2]
(b) Calculate the revised gross profit for the year ended 31 December 2023.
Workings:
[5]
Additional information
1 At 1 January 2023
$
6% Debentures (2024) 300 000
Property at valuation 840 000
Plant and equipment
Cost 160 000
Provision for depreciation 32 000
Retained earnings 132 000
Revaluation reserve 90 000
Share capital: ordinary shares of $0.50 each 900 000
Share premium 55 000
Mark scheme
1(a) Explain the accounting concept which is applied to the valuation of damaged inventory. 2
Prudence concept (1):
Inventory should be valued at the lower of cost and net realisable value (1)
Avoid overstating profit / assets (1).
Max 2 marks
1(b) Calculate the revised gross profit for the year ended 31 December 2023. 5
$346 200 (5) W1
W1
$
Draft gross profit 377 500 (1)
Opening inventory (14 000) (1)
Sales returns (17 200) (1)
Closing inventory (100) (1)
Revised gross profit 346 200 (1)
Alternative approach
$
Revenue 861 900 (1)
Cost of sales W1 515 700 (3)
Revised gross profit 346 200 (1)
W1
$493 000 + $8 600 (1) + $14 000 (1) + $100 (1) = $515 700
1(c) Prepare the statement of profit or loss for the year ended 31 December 2023. Start the statement with the revised 8
figure for gross profit from (b).
K Limited
Statement of profit or loss for the year ended 31 December 2023
$
Gross profit 346 200 (1) OF
Distribution costs (97 900) (1)
Administrative expenses (132 400) (1)
Profit from operations 115 900 (1) OF
Finance costs (18 000) (1)
Profit before tax 97 900 (1) OF
Tax (11 300) (1)
Profit for the year 86 600 (1) OF
Accept alternative treatment of revaluation reserve
1(d) Prepare an extract from the statement of financial position at 31 December 2023 to show the equity and liabilities 8
section only.
Statement of financial position at 31 December 2023 (Extract)
$
Equity and liabilities
Equity
Ordinary share capital ($900 000 + $540 000) 1 440 000 (1)
Share premium ($55 000 + $216 000) 271 000 (1)
Retained earnings W1 143 600 (1)
Total equity 1 854 600 (1) OF
Liabilities
Current liabilities
6% Debentures (2024) 300 000 (1)
Tax 11 300 (1)
Trade and other payables ($38 000 + $9000) 47 000
Total liabilities 358 300 (1)
Total equity and liabilities 2 212 900 (1) OF
W1 Retained earnings: $132 000 – revaluation reserve $30 000 add profit $86 600
less dividends paid $45 000 = $143 600 (1)
Accept alternative treatment of revaluation reserve
1(e) Advise the directors which option they should choose. Justify your choice by discussing both options. 7
Option A (debenture issue) Max 3) Option B (share issue) Max 3)
Allow once only for one mark (Max 1 for each row)
Liability requiring repayment Permanent capital (1) row
May require security No security required (1) row
Allow individual comments for one mark each
May have difficulty raising the finance (1) May not be fully subscribed (1)
No voting rights (1) May lead to dilution of ownership (1)
Fixed interest payable each year (1) Dividend payments are discretionary (1)
Interest payments will reduce profit (1) Dividend payments have no effect on profits
(1)
Advice supported with a comment (1)
Accept other valid responses
During the year ended 31 December 2023 the following payments had been made.
$
Administrative expenses 111 400
Debenture interest 9 000
Distribution costs 97 100
Dividends 45 000
Equipment (purchased 1 April 2023) 20 000
Mark scheme
2(a) State three benefits of maintaining control accounts. 3
Checks arithmetical accuracy (of purchases ledger and sales ledger) (1)
Provides total trade payables and total trade receivables (1) for use in financial statements (1)
Helps prevent fraud (1)
Max 3 marks
Accept other valid responses
2(b) Complete the following statements to correct the accounting records for trade payables. 4
Correction of purchases ledger Correction of total of
control account purchases ledger balances
$ $
Incorrect balance 28 540 Incorrect total 31 790
Purchases journal 3 250 (1) Error of original (990) (1)
error entry
Error of original (990) (1)
entry
Corrected balance 30 800 (1) OF Corrected total 30 800
both
2(c) Complete the following statements to correct the accounting records for trade receivables. 6
Correction of sales ledger Correction of total of sales
control account ledger balances
$ $
Incorrect balance 35 790 Incorrect total 36 410
Sales returns (490) (1) Sales returns (490) (1)
Dishonoured 760 (1) Interest 140 (1)
cheque
Corrected balance 36 060 (1) OF Corrected total 36 060 (1) OF
2(d) Explain why contra entries may be made in control accounts. 2
A contra entry occurs when a business’s credit supplier who is also a credit customer (1) owe each other money and one
balance is set off against the other (1)
Accept other valid responses
Plant and equipment is depreciated by 20% per annum using the straight-line method on a month-by-month basis.
Depreciation should be allocated: administrative expenses 60%; distribution costs 40%.
Mark scheme
3(a) Explain two accounting concepts which are applied when making an allowance for irrecoverable debts. 4
Matching/accruals concept (1) requires the sales revenue for a period to be matched against costs for the same period (1).
Prudence concept (1) requires that current assets / trade receivables and /or profit for the year are not overstated. (1).
Accept other valid responses
3(b) State two factors which should be considered when deciding the percentage that should be used for an allowance 2
for irrecoverable debts.
Past experience of irrecoverable debts (1)
General economic trends (1)
Age of debts (1)
Max 2 marks
Accept other valid responses
3(c) Prepare the allowance for irrecoverable debts account for the years 2022 and 2023. 5
Allowance for irrecoverable debts account
$ $
2022 2022
Dec 31 Statement of (1) Jan 1 Balance b/d (1)
36 728
profit or loss
Balance c/d 692
728 728
2023 2023
Dec 31 Balance c/d 784 Jan 1 Balance b/d 692 (1) OF
Dec 31 Statement of (1) OF
92
profit or loss
784 784
2024
Jan 1 Balance b/d 784 (1) OF
3(d) State the double-entry necessary to record the following transactions: 4
Writing off the account on 5 January 2024
Debit $ Credit $
Irrecoverable debts 3470 (1) T Limited 3470 (1)
The settlement of the amount due on 29 March 2024
Debit $ Credit $
Bank 3470 (1) Irrecoverable debts 3470 (1)
recovered
Distribution costs includes the cost of a five-month advertising campaign, $22 000, which will end on 31 March 2024.
5 Debenture interest is outstanding at 31 December 2023. The debentures had been issued in
2021.
6 Tax for the year ended 31 December 2023 is estimated to be $11 300.
7 On 1 March 2023 property was revalued at $720 000.
8 On 1 May 2023 a rights issue of shares was made. Shareholders were offered three ordinary shares for every five ordinary shares held at 1 January 2023. The shares were issued at a premium of $0.20 per share. The rights issue was fully subscribed.
9 Trade payables totalled $38 000 on 31 December 2023.
(c) Prepare the statement of profit or loss for the year ended 31 December 2023. Start the statement with the revised figure for gross profit from (b). Use the space provided on page 5 to show your workings.
K Limited
Statement of profit or loss for the year ended 31 December 2023
$
Gross profit ……
Workings:
Depreciation of plant and equipment
Distribution costs
Administrative expenses
Finance charges
[8]
(d) Prepare an extract from the statement of financial position at 31 December 2023 to show the equity and liabilities section only.
Statement of financial position at 31 December 2023 (Extract)
$
Equity and liabilities
Workings:
[8]
Additional information
The directors are planning to expand the business in 2024. The expansion will be financed by one of the following options:
Option A: issuing 8% debentures (2030)
Option B: making a general issue of ordinary shares.
(e) Advise the directors which option they should choose. Justify your choice by discussing both options.
…… [7]
[Total: 30]
2 Nadiya maintains control accounts as part of the double-entry system of her business. The purchases ledger and sales ledger contain memorandum accounts only.
(a) State three benefits of maintaining control accounts.
1 ……
2 ……
3 ……
[3]
Additional information
On 31 March 2024 Nadiya found that the closing balance of the control accounts did not agree with the totals of the individual account balances in the purchases and sales ledgers.
$
Purchases ledger control account balance 28 540
Total of trade payables in purchases ledger 31 790
Sales ledger control account balance 35 790
Total of trade receivables in sales ledger 36 410
Nadiya discovered the following errors which accounted for the differences.
1 A credit note issued by Nadiya for $490 had been entirely overlooked.
2 The total of the purchases journal had been understated by $3250.
3 A cheque for $380 received from a credit customer had been dishonoured by the bank.
This had been incorrectly recorded on the debit side of the cash book but had been posted correctly to the ledger account.
4 An error of original entry had occurred when a purchases invoice for $4650 had been recorded as $5640.
5 Interest of $70 charged on an overdue customer’s account had been credited to the customer’s account.
(b) Complete the following statements to correct the accounting records for trade payables.
Correction of purchases ledger control Correction of total of purchases ledger account balances
$ $
Incorrect balance 28 540 Incorrect total 31 790
[4]
(c) Complete the following statements to correct the accounting records for trade receivables.
Correction of sales ledger control Correction of total of sales ledger account balances
$ $
Incorrect balance 35 790 Incorrect total 36 410
[6]
Additional information
Control accounts sometimes contain contra entries.
(d) Explain why contra entries may be made in control accounts.
…… [2]
[Total: 15]
3 Usman began selling goods on credit on 1 January 2021. He maintains an allowance for irrecoverable debts at each financial year end.
(a) Explain two accounting concepts which are applied when making an allowance for irrecoverable debts.
1 ……
2 ……
[4]
(b) State two factors which should be considered when deciding the percentage that should be used for an allowance for irrecoverable debts.
1 ……
2 ……
[2]
Additional information
The following information is available about total trade receivables at the financial years ended
31 December:
$
2021 18 200
2022 17 300
2023 19 600
The allowance for irrecoverable debts has been maintained at 4% each year.
(c) Prepare the allowance for irrecoverable debts account for the years 2022 and 2023.
Allowance for irrecoverable debts account
$ $
[5]
Additional information
On 5 January 2024 it was decided to write off $3470 as irrecoverable, being the balance on the account of a credit customer, T Limited.
However, on 29 March 2024 a cheque was received in full settlement of the amount owed by
T Limited.
(d) State the double-entry necessary to record the following transactions:
Writing off the account on 5 January 2024
The settlement of the amount due on 29 March 2024
[4]
[Total: 15]
4 J Limited is a manufacturing company. Recently the directors decided to change the costing system from marginal costing to absorption costing.
(a) Explain each of the following terms used in absorption costing.
(i) Allocation
…… [2]
(ii) Apportionment
…… [2]
Additional information
The factory has two production departments: preparation and finishing. There are two service departments: stores and canteen.
Some overheads have already been allocated to departments. The following budgeted overheads for the year ended 31 March 2024 have yet to be apportioned.
$
Electricity 63 000
Rent 44 000
The following information is available about the departments.
Production departments Service departments
Preparation Finishing Stores Canteen
Floor area (square metres) 2400 1800 50 150
Issues from stores 600 250 – –
Number of employees 64 40 8 –
Power (kilowatt hours) 32 000 8000 400 1600
(b) Complete the table to show the apportionment of the budgeted overheads for the year ended
31 March 2024.
Production departments Service departments
Total Preparation Finishing Stores Canteen
$ $ $ $ $
Overheads allocated 272 120 184 100 60 800 10 960 16 260
Electricity 63 000
Rent 44 000
Total overheads 379 120
Apportion canteen
Subtotal
Apportion stores
Subtotal
[6]
Additional information
The following budgeted information is available for the two production departments for the year ended 31 March 2024.
Preparation Finishing
Machine hours 17 500 14 200
Labour hours 16 800 20 300
(c) Calculate, to two decimal places, the overhead absorption rate for each production department for the year ended 31 March 2024.
…… [4]
Additional information
For the year ended 31 March 2024, actual hours for the preparation department were:
Machine hours 16 920
Labour hours 16 350
Total actual overheads were the same as budgeted overheads.
(d) Calculate the over absorption or under absorption of overheads for the preparation department for the year ended 31 March 2024.
…… [3]
Additional information
An order has been received from a customer. The following information is available.
Direct materials $800
Direct labour
Preparation department 52 hours at $12.20 per hour
Finishing department 90 hours at $14.50 per hour
Machine hours
Preparation department 140 hours
Finishing department 48 hours
Products are sold so as to achieve a gross margin of 50%.
(e) Calculate the selling price for the order.
…… [6]
Additional information
It has been suggested that the company would benefit if it switched to a just in time (JIT) method of inventory control.
(f) Advise the directors whether or not they should switch to a JIT method of inventory control.
Justify your answer by considering both financial and non-financial factors.
…… [7]
[Total: 30]
Mark scheme
4(a)(i) Explain each of the following terms used in absorption costing. 2
Allocation: overhead expenses are directly (1) attributed to a specific cost centre (1)
4(a)(ii) Explain each of the following terms used in absorption costing. 2
Apportionment: overhead expenses are shared between different departments (1) by using a suitable basis (1)
4(b) Complete the table to show the apportionment of the budgeted overheads for the year ended 31 March 2024. 6
Production departments Service departments
Total Preparation Finishing Stores Canteen
$ $ $ $ $
Overheads allocated 272 120 184 100 60 800 10 960 16 260
Electricity 63 000 48 000 12 000 600 2400 (1) row
Rent 44 000 24 000 18 000 500 1500 (1) row
Total overheads 379 120 256 100 90 800 12 060 20 160
Apportion canteen 11 520 7 200 1440 (20 160) (1) OF row
Subtotal 267 620 98 000 13 500
Apportion stores 9529 3971 (13 500) (1) OF row
Subtotal 277 149 101 971
(1) OF (1) OF
4(c) Calculate, to two decimal places, the overhead absorption rate for each production department for the year ended 4
31 March 2024.
Preparation department
$277149
= $15.84 (1) OF per machine hour (1)
17 500
Finishing department
$101971
= $5.02 (1) OF per labour hour (1)
20 300
4(d) Calculate the over absorption or under absorption of overheads for the preparation department for the year ended 3
31 March 2024.
(17 500 – 16 920) i.e. 580 (1) × $15.84 = $9187.20 (1) OF under absorbed (1)
OR
((16 920 × $15.84) – $277 149 ) (1) = $9136.20 (1) OF under absorbed (1)
4(e) 6
$
Direct materials 800.00
Direct labour
Preparation department 52 × $12,20 634.40
(1) fb
Finishing department 90 × $14.50 1305.00
Overheads
Preparation department 140 × $15.84 2217.60 (1) OF
Finishing department 90 × $5.02 451.80 (1) OF
Total costs 5408.80 (1) OF
Profit 5408.80 (1) OF
Selling price 2 × cost 10 817.60 (1) OF
Calculate the selling price for the order.
$10 817.60 (6) W
Working
4(f) Advice the directors whether or not they should switch to a JIT method of inventory control. Justify your answer 7
by considering both financial and non-financial factors.
For the proposal (max 3)
Improved cash flow as less money tied up in inventory (1)
Reduced storage costs (1)
Less chance of wastage/damaged goods/out of date items (1)
Against the proposal (max 3)
May need new suppliers / over reliance on a supplier (1)
Risk of stock-outs if any delays in delivery (1)
Risk of interruptions to production if delivery delays (1)
Possible loss of trade discounts because of smaller orders (1)
Increase in delivery costs because of increased number of deliveries (1)
Increased costs of receiving / inspection of deliveries (1)
Advice supported with a comment (1)
Accept other valid responses
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