Accounting 9706/32 May/June 2024: question paper and mark scheme

Mark scheme

1(a) State two differences between a receipts and payments account and an income and expenditure account. 4 Receipts and payments account Income and expenditure account Only cash / monetary items are recorded (1) Non-cash items such as depreciation are recorded (1) The balance of the account is either cash at bank or The balance of the account is either surplus or deficit overdraft at the year end / bank (1) for the year / income statement (1) Receipts and payments are recorded regardless of the Revenue and expenses related to the current year year they belong to i.e cash basis of accounting (1) only are recorded i.e. accrual basis of accounting (1) Items of capital nature and revenue nature are Only items of revenue nature are recorded (1) recorded (1) Max 4 Accept other valid responses 1(b) Prepare the café’s statement of profit or loss for the year ended 31 December 2023, showing the value of stolen 10 cash in the expenses section. $ $ 264 00 Sales revenue 0 Opening inventory 11 200 Purchases W1 178 200 (1) Closing inventory (balancing) (13 400) (1) OF 176 00 Cost of sales 0 (1) Gross profit W2 88 000 (1) Cash stolen W3 1 700 (2) Café wages 34 800 Coffee machine written off W4 1 200 (2) Depreciation – café equipment W5 7 500 (1) Café expenses 15 500 60 700 Café profit for the year 27 300 (1) OF W1 $29 800 + $172 000 – $23 600 = $178 200 W2 $264 000 × 50/150 = $88000 W3 $264 000 – ($34 800 + $15 500 + $212 000) (1) = $1 700(1OF) W4 $3 000 – 1 800 (1) = $1 200 (1OF) W5 ($36 000 + $4 500 – $3 000) × 20% = $7 500 1(c) Prepare the Club’s income and expenditure account for the year ended 31 December 2023. 6 Income and expenditure account for the year ended 31 December 2023 $ Subscriptions W1 338 400 (3) Profit from café 27 300 365 700 Club expenses W2 283 700 (1) Club equipment depreciation W3 32 400 (1) Subscription written off 2 400 318 500 Surplus for the year 47 200 (1) OF W1 ($4 000 + $2 400 + $336 000 + $5 600) (1) – ($4 800 + $1 600 + $3 200) (1) = $338 400 (1) OF W2 $5 800 + $3 900 + $274 000 = $283 700 W3 ($335 000 + $25 000 – $144 000) × 15% = $32 400 1(d) Advise the committee members which is the better option. Justify your answer. 5 Option 1 – max (2) The club does not have enough cash to pay the whole amount as it only has a cash balance of $116 600 at 31 December 2023 (1). Loan has to be raised and the club has to pay interest expense (1). It’s a capital expenditure and paid once and for all (1). The annual maintenance is minimal (1). This increases the assets value of the club (1). More reliable as no need for a human presence. (1) Susceptible to breakdowns / hacking (1) Option 2 – max (2) Members may feel safer due to physical presence (1). The club is still subject to the threat at nighttime (1). Paying $30 000 each and every year is a heavy financial burden to the club (1). Option 2’s annual expense of $30 000 is higher compared with Option 1’s $18 000 for the first year and $16 300 for the second year (1). Decision supported by a comment (1) Accept other valid responses.

Mark scheme

2(a)(i) Explain how to correct the following errors made by the accounts clerk. Support your answer with calculations and 6 with reference to the relevant international accounting standards. (i) depreciation on buildings IAS 8 (1) Accounting policies, changes in accounting estimates and errors states that a new accounting policy should be applied retrospectively (1). $1 600 ($80 000 × 2%) (1) depreciation charge for 2022 should be deducted from the opening retained earnings (1) and $1 600 depreciation charge for 2023 should be deducted from profit for the year (1) and non- current assets (1). 1 mark for IAS 4 marks for explanations 1 mark for calculation 2(a)(ii) (ii) valuation of inventory 8 Calculations: A further analysis of each category of inventory is: Commissio Invento Estimated n ry Category Cost selling price 5% NRV value $ $ $ $ $ A 30 500 45 000 2 250 42 750 30 500 (1) B 5 900 6 000 300 5 700 5 700 (1) C 3 800 3 000 150 2 850 2 850 (1) 40 200 54 000 39 050 Difference in inventory value = $14 950 / ($54 000 – $39 050) (1) OF. IAS 2 (1) Inventories states that inventory should be valued at the lower of cost and net realisable value (1). This is in compliance with the prudence concept (1). Net realisable value is the estimated selling price less the estimated costs of completion and the estimated costs necessary to make the sale (1). The valuation would be corrected by considering each individual category (1). The profit for the year will be reduced (1). 4 marks for calculations 1 mark for IAS 3 marks max for explanations 2(b) Prepare the corrected statement of changes in equity for the year ended 31 December 2023. The total column is 5 not required. Share Share Revaluation Retained capital premium reserve earnings $ $ $ $ Balance b/d W1 400 000 32 000 149 400 (1) OF Profit for the year W2 105 450 (2) New issue 60 000 18 000 Bonus issue 40 000 (40 000) (1) Interim dividend paid (60 000) Revaluation of land 35 000 (1) 500 000 10 000 35 000 194 850 W1 $151 000 – $1 600=$149 400 W2 $122 000 – ($1600 + $14950) (1) OF = $105 450 (1) OF 2(c) Prepare the corrected statement of financial position at 31 December 2023. 6 Corrected statement of financial position at 31 December 2023 $ $ Non-current assets ($642000 – $1 600 × 2) 638 800 (1) OF Current assets Inventory 39 050 (1) OF Trade receivables 226 000 Cash and cash equivalents 60 500 Total current assets 325 550 Total assets 964 350 Equity Ordinary shares 500 000 Share premium 10 000 Revaluation reserve 35 000 Retained earnings 194 850 739 850 (1) OF Non-current liabilities 8% debenture 50 000 (1) Current liabilities Trade payables 152 000 Other payables $63 000 – ($42 500 – 2 000) (1) 22 500 (1) OF Total current liabilities 174 500 Total equity and liabilities 964 350

Mark scheme

3(a) Explain three benefits of a merger. 6 Benefits of a merger: Economies of scale / synergy (1) taking advantage of bulk buying discounts / reduction of cost / higher profit (1) Pooling of experience / skill / resources (1) as new owners may bring new experience / skills / resources (1) Diversification of products / services (1) will open up new / different markets (1) Vertical integration / division of work (1) gives better control of production / sales (1) Reduce competition / increase market share (1) to increase sales / profit (1). Max 3 benefits × 2 marks (1 mark for benefit and 1 mark for development) Accept other valid responses 3(b) Complete the following statement to calculate the capital account balance of each partner in the new partnership 10 on 1 January 2023. Ray Steve Tina $ $ $ 186 00 Balance at 31 December 2022 198 000 177 000 0 Goodwill W1 83 000 (1) 83 000 (1) 46 000 (1) Adjustment of assets value 20 000 (1) 20 000 (1) 17 500 (1) (42 400 Goodwill eliminated W2 (84 800) (1) OF (84 800) (1) OF ) (1) OF Capital account at 1 January 2023 216 200 195 200 207 100 (1) OF row W1 Ray and Steve average profit ($97 000 + $74 000 + $78 000)/3 = $83 000; goodwill 2 × $83 000 = $166 000 Ray’s share $166 000 × 50% = $83 000 Steve’s share $166 000 × 50% = $83 000 Tina’s average profit ($19 000 + $22 000 + $28 000)/3=$23 000; goodwill 2 × $23 000 = $46 000 W2 Total goodwill $166 000 + $46 000 = $212 000 Ray $212 000 × 40% = $84 800 Steve $212 000 × 40% = $84 800 Tina $212 000 × 20% = $42 400 3(c) Prepare the statement of financial position of the new partnership on 1 January 2023. 4 Statement of financial position at 1 January 2023 $ $ Non-current assets Land and buildings 410 000 (1) Plant and machinery 99 000 509 000 Current assets Inventory 56 500 (1) Trade receivables 111 000 (1) Cash at bank 30 000 197 500 Total assets 706 500 Capital account Ray 216 200 } Steve 195 200 } Tina 207 100 } 618 500 (1) OF Current liabilities Trade payables 88 000 Total capital and liabilities 706 500 3(d) Discuss whether or not Tina has made the right decision to merge her business with Ray and Steve’s business. 5 Justify your answer. For (Max 2) Tina’s share of profit is $30 000 ($150 000 × 20%) (1). The shared profit exceeds the annual profit when she was in the sole trader business (1). Tina’s business profit is on a declining trend (1). Against (Max 2) She may have conflicts with other partners (1). According to the profit and loss sharing ratio, she is only a minor partner (1) and has little control (1). Decision supported by a comment (1) Accept other valid responses.