Accounting 9706/32 May/June 2025: question paper and mark scheme

Mark scheme

1(a) Prepare the manufacturing account for the year ended 31 December 2024. 8 Manufacturing account for the year ended 31 December 2024 $ $ Opening direct materials inventory 16 600 Purchases 104 000 Carriage inwards $8500 × 90% 7 650 (1) Closing direct materials inventory (17 200) Cost of direct materials consumed 111 050 (1)OF Factory wages 156 200 Prime cost 267 250 (1)OF Factory supervisor's salary 19 000 Factory indirect expenses W1 40 250 (1) Depreciation – works machinery 15 300 (1) 74 550 341 800 Opening work in progress 28 400 370 200 Closing work in progress (20 200) (1) Cost of goods manufactured 350 000 Factory profit 30% W2 105 000 (1)OF Transfer price of manufactured goods 455 000 (1)OF W1 $33 350 + $9 200 × 75% = $40 250 W2 2023 rate of factory profit $9 600/($48 000 – $9 600) = 25% 25% + 5% = 30% 1(b) Prepare the statement of profit or loss for the year ended 31 December 2024. 7 Statement of profit or loss for the year ended 31 December 2024 $ $ Sales revenue 724 000 Opening finished goods inventory 48 000 Purchases 28 000 Carriage inwards $8500 × 10% 850 (1) Transfer price of manufactured goods 455 000 Closing finished goods inventory (45 500) (1)OF Cost of sales 486 350 Gross profit 237 650 Factory profit 105 000 (1)OF Increase in provision for unrealised profit ($10 500 – $9 600) (900) (1)OF 104 100 341 750 Carriage outwards 9 440 Office expenses ($174 800 – $9 200 × 75%) 167 900 (1) Depreciation – office equipment 6 300 (1) 183 640 Profit for the year 158 110 (1)OF 1(c)(i) Explain why unrealised profit occurs in some manufacturing businesses. 2 The value of goods manufactured transferred to the statement of profit or loss includes both the manufacturing cost and the factory profit / is based on a comparison of prices with external suppliers. (1) Value of goods unsold at the year-end includes the factory profit element that has not been realised (1) Accept other valid responses. Max 2 1(c)(ii) Explain why the provision for unrealised profit is accounted for in the statement of financial position. 3 According to IAS2 / inventory should be stated at lower of cost and net realisable value. (1) According to the prudence concept / value of inventory should not be overstated.(1) The inventory of finished goods should be stated at cost / unrealised profit is removed from the inventory.(1) Accept other valid responses. Max 3 1(d) Advise Nadim whether or not he should incorporate his business in view of his only concern. Justify your answer. 5 For (Max 2) The financial statements are more credible (1) if the audit report is with a true and fair view opinion. (1) It is easier to raise finance, for example, obtaining a bank loan or issuing shares (1) Fraud and errors are easier to be detected and prevented by auditor (1) Against (Max 2) Audit fee is costly (1) Need to employ professional accountant to fulfil compliance (1) Audit may not be necessary as Nadim’s business is still small. (1) Decision supported with a comment (1) Accept other valid responses.

Mark scheme

2(a) State the conditions of recognising a provision in the financial statements in accordance with IAS 37. 3 The business has a present obligation because of a past event. (1) It is probable / there is a 50%+ chance that a transfer of resources embodying economic benefits will be required to settle it. (1) A reliable estimate can be made of its amount. (1) 2(b) Prepare a statement to adjust the profit for the year ended 31 December 2024 after considering the information in 14 matters 1 to 5. $ 104 00 Draft profit for the year 0 Irrecoverable debt (7 000) (1) Allowance for irrecoverable debts W1 (460) (3)OF Inventory overstated W2 (2 700) (3)OF Depreciation on Van B overcharged $12000x20% 2 400 (1) Van B service $12000 × 6/12 (6 000) (1) Impairment loss of Van A W3 (2 040) (3)OF Provision for lawsuit (5 200) (1) Adjusted profit for the year 83 000 (1)OF W1 $83 600/95% = $88 000 (1) ($88 000 – $7 000) × 6% (1) – ($88 000 × 5%) = 460 (1)OF W2 NRV ($6 600 – $1 800) = $4 800 (1) 4 800 – $7 500 (1) = ($2 700) (1)OF W3 Cost of Van A $95 000-$50 000=$45 000 Accumulated depreciation $31 960-$10 000=$21 960 Carrying value $45 000-$21 960=$23 040 (1) Recoverable amount $21 000 (1) Impairment loss $23 040-$21 000=$2 040 (1)OF 2(c) Prepare the journal entry to record the impairment loss of delivery Van A. 3 A narrative is not required. Dr Cr $ $ Impairment loss / Statement of profit or loss 2 040 (1)OF Provision for depreciation 2 040 (1)OF Award (1) for correct account names. OR Provision for depreciation 21 960 (1)OF Impairment loss / Statement of profit or loss 2 040 (1)OF Delivery van – at cost / valuation 24 000 (1)OF 2(d) Advise the directors whether or not GT plc should pay the 2024 dividend. Justify your answer. 5 Should not pay (Max 2) To avoid raising loan. (1) Cash / profit is retained. (1) Directors have the discretion to pay dividends. (1) Should pay (Max 2) Shareholders would be satisfied. (1) The outcome of the claim is too remote / contingent liability. (1) Dividend policy should be consistent. (1) Decision supported with a comment (1) Accept other valid responses.

Mark scheme

3(a)(i) State two reasons why a business may have goodwill. 2 • has good reputation / well-known brand / image (1) • has a large number of loyal customers (1) • situated in a good location (1) • good relationship with suppliers (1) • experienced and efficient staff (1) Max 2 Accept other valid responses. 3(a)(ii) State one reason why Chandra has to pay for the goodwill. 1 To reward the existing partners for their efforts. (1) Accept other valid responses. 3(b) State three reasons why a goodwill account is not maintained in the partnership’s books. 3 The goodwill is inherent / not purchased (1) The valuation of goodwill is subjective (1) According to the prudence concept, assets of the business should not be overstated (1) Factors that cause goodwill are difficult to be measured in monetary terms (money measurement) (1) Max 3 Accept other valid responses. 3(c) Calculate the amount payable to Betty on 1 January 2025. 5 $ Capital account 180 000 } Current account 5 500 }(1) Loan 15 000 } Goodwill $90 000 × 50% 45 000 (1) Loss on revaluation 50% × $32 000 W1 (16 000) (2) Amount payable to Betty 229 500 (1)OF W1 Profit/loss on revaluation $ Equipment ($161 000 – $185 000) (24 000) Motor vehicles ($117 000 – $148 000) (31 000) Inventory ($105 000 – $82 000) 23 000 Loss on revaluation (32 000) (1) 50% × $32 000 = $16000 (1)OF 3(d) Calculate the amount of cash introduced by Chandra on 1 January 2025. 6 $ Payment for the share of goodwill $90 000 × 40% 36 000 (1) Capital account W1 150 000 (4) Loan 40 000 Cash introduced by Chandra 226 000 (1)OF W1 $ Capital account of Ahmed Capital account balance at 31 December 2024 250 000 Goodwill shared $90 000 × 50% 45 000 (1) Goodwill eliminated $90 000 × 60% (54 000) (1) Share of revaluation loss $32 000 × 50% (16 000) (1)OF Capital account balance at 1 January 2025 225 000 ($225 000/60%) × 40% 150 000 (1)OF 3(e) Prepare the statement of financial position of the new partnership at 1 January 2025. 8 Statement of financial position at 1 January 2025 $ $ Non-current assets Equipment 161 000 } Motor vehicles 117 000 }(1) 278 000 Current assets Inventory 105 000 } Trade receivables 76 500 }(1) Bank W1 26 800 (4) 208 300 Total assets 486 300 Capital account – Ahmed 225 000 } – Chandra 150 000 }(1)OF 375 000 Loan from Chandra 40 000 (1) Current liabilities Trade payables 71 300 Total equity and liabilities 486 300 W1 $ Balance at 31 December 2024 20 800 Cash from Ahmed 9 500 (1) Cash paid to Betty (229 500) (1)OF Cash from Chandra 226 000 (1)OF Balance at 1 January 2025 26 800 (1)OF