Accounting 9706/22 October/November 2019: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, October/November 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
R Limited provided the following information at 30 June 2018.
An extract from the statement of financial position
$
10% Debenture 75 000
Inventory 45 000
Other receivables (insurance) 1000
Other payables (electricity expenses) 500
An extract from the schedule of non-current assets
Land and buildings Fixtures and fittings Motor vehicles
Details
$ $ $
Cost 350 000 75 000 200 000
Revaluation 100 000 - -
Accumulated depreciation
30 June 2018 - (35 000) (50 000)
Net book value 30 June 2018 450 000 40 000 150 000
The company lost all its accounting records as a result of a computer virus but was able to provide the following summary of its receipts and payments for the year ended 30 June 2019.
$ $
Takings banked 286 000 Purchases 135 000
Insurance 12 000
Motor vehicle expenses 10 000
Wages and salaries 45 000
Electricity expenses 2 700
Motor vehicles 50 000
Debenture interest 3 750
All the receipts and payments were through the bank.
All sales and purchases were on cash basis.
The company’s depreciation policy is as follows:
10% per annum reducing Charged to administrative
Fixtures and fittings balance method expenses
20% per annum reducing
Motor vehicles Charged to distribution costs balance method
Land and buidings No depreciation
The following information is available at 30 June 2019.
1 Inventory was valued at cost $42 000 including damaged inventory costing $5000. This could be repaired at a cost of $450 and sold for $5100.
Mark scheme
1(a) R Limited 17
Income statement for the year ended 30 June 2018
$
Revenue 286 000 (1)
Cost of sales W1 (138 350) (3)
Gross profit 147 650 (1) OF
Administrative expenses W2 (28 300) (5)
Distribution costs W3 (86 000) (4)
Profit from operations 33 350 (1) OF
Finance cost (7500) (1)
Profit for the year 25 850 (1) OF
W1 Cost of sales: $(45 000 + 135 000) = $180 000 (1) – 41 650 (1) = 138 350 (1) OF
W2 Administrative Expenses $
Depreciation on fixture and fittings (40 000 × 10%) 4000 (1)
Insurance (12 000 + (1000 + 500)) 13 500 (1)
Electricity (2700 – (500 + 400)) 1800 (1)
1
Wages and salaries (45 000 × ) 9000 (1)
5
28 300 (1) OF
W3 Distribution costs $
Motor vehicle expenses 10 000 (1)
Depreciation on motor vehicles (150 000 + 50 000 × 20%) 40 000 (1)
4
Wages and salaries (45 000 × ) 36 000 (1)
5
86 000 (1) OF
1(b) • Capital reserves are created as a result of non-trading activities (1) whereas revenue reserves are created as a result of trading 4
activities (1)
• Capital reserves cannot be used to fund dividend payments (1) whereas revenue reserves can be used to fund dividend
payments (1)
• Capital reserves are non-distributable (1) whereas revenue reserves are distributable (1)
Accept other valid points.
Max 4.
1(c) 5
Option 1 (Shares) Option 2 (Debentures)
Payment of dividends is discretionary (1) Debenture interest must be paid (1)
May dilute ownership/control (1) Would not dilute ownership/control (1)
Permanent capital (1) Would increase the non-current liabilities (1)
No security required (1) Security may be required (1)
Dividends do not reduce the profit for the year (1) Payment of interest will reduce the profit for the year (1)
Accept other valid responses.
Max 4
Decision (1)
1(d)(i) Advantages 2
• Will improve overall cash flow (1)
• Reduces the possibility of irrecoverable debts (1)
Disadvantages
• Maybe a reduction in number of customers (1)
• May have to reduce selling price to attract new customers (1)
Accept other valid advantages and disadvantages.
Max 1 advantage and 1 disadvantage.
1(d)(ii) Advantages 2
• May improve the relationships with the suppliers (1)
• May be able to negotiate a better purchase price (1)
Disadvantages
• Overall cash flow will decrease (1)
• Not making use of available credit terms (1)
Accept other valid advantages and disadvantages.
Max 1 advantage and 1 disadvantage
Insurance of $750 for the three months ended 31 July 2019 was outstanding.
Mark scheme
2(a)(i) 25 days (2) 2
Working
(30 000 + 50 000 ) =
40 000
× 365 = 25 days (1) OF
2 600 000
750 000 × 80% = 600 000 (1)
2(a)(ii) 36 days (2) 2
Working
65 000
× 365 = 36 days (1) OF
675 000
750 000 × 90% = $675 000 (1)
2(a)(iii) 25 days (3) 3
Working
31850
× 365 = 25 days (1) OF
465 000
600 000 + 50 000 – 30 000 = 620 000 (1)
620 000 × 75% = 465 000 (1) OF
2(b) Inventory turnover indicates that it is taking longer than the industry average to sell goods (1) resulting in a delay in receipt of 5
payment from customers (1)
Nibali’s customers are taking 6 days over the credit terms to settle their accounts and Nibali is paying his suppliers 5 days early
(1) resulting in cash leaving the business before settlement is received (1)
Conclusion/advice
Overall, Nibali’s efficiency ratios indicate poor liquidity (1)
Accept other valid points.
2(c) Theft (1) 3
Storage costs (1)
Insurance (1)
Obsolescence (1)
Damage (1)
Opportunity cost (1)
Accept other valid points.
Max 3.
Electricity expenses included $600 for the three months ended 31 August 2019.
Mark scheme
3(a) Capital accounts 6
Miguel Bernard Eddy Miguel Bernard Eddy
Goodwill 20 000 12 000 8000 * Balance b/d 100 000 145 000 (1)
Balance c/d 103 040 167 560 82 000 Bank 50 000 (1)
Assets 40 000 (1)
Goodwill 16 000 24 000 (1) *both
Revaluation 7040 10 560 (1)
123 040 179 560 90 000 123 040 179 560 90 000
Balance b/d 103 040 167 560 82 000 (1)
3(b) Miguel, Bernard and Eddy 5
Appropriation Account for the year ended 31 May 2019
4 months 8 months
$ $
Profit 13 000 26 000
Loan interest – 2000 (1)
Profit for the period 13 000 24 000
Salary – Eddy 8000 (1)
Share of profit
Miguel 6500 6400 (1) for both
Bernard 3900 6400 (1) for both
Eddy 2600 3200 (1) for both
13 000 16 000
3(c) Capital accounts 4
Separate capital accounts record the permanent investment of each partner (1) facilitating the calculation of interest on
capital (1)
Current accounts
Separate current accounts record the transactions between the partners and the partnership (1) facilitating the calculation of
interest on drawings (1)
Expenses are split as follows:
Insurance Charged to administrative expenses
Motor vehicle expenses Charged to distribution costs
Wages and salaries Split between distribution costs and administrative expenses in the ratio of 4 : 1
Electricity expenses Charged to administrative expenses
REQUIRED
(a) Prepare the income statement for the year ended 30 June 2019. Use the space on the next page to show your workings.
R Limited
Income statement for the year ended 30 June 2019
$
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Profit from operations
Finance cost
Profit for the year
Workings:
Cost of sales
Administrative expenses
Distribution costs
Finance cost
[17]
(b) State two differences between capital reserves and revenue reserves.
1
2
[4]
Additional information
R Limited is planning to acquire a new building at a cost of $500 000 to expand its business. The directors are considering two options to finance this acquisition.
Option 1: issue of shares
Option 2: issue of a further debenture
REQUIRED
(c) Advise the directors which option should be chosen to raise finance to acquire the building.
Justify your answer.
[5]
(d) State one advantage and one disadvantage to a business:
(i) of making all sales on a cash basis only
Advantage
Disadvantage
[2]
(ii) of making all purchases on a cash basis only.
Advantage
Disadvantage
[2]
[Total: 30]
PLEASE TURN OVER
2 Nibali has provided the following information for the year ended 31 July 2019.
$
Closing inventory 50 000
Opening inventory 30 000
Revenue 750 000
Trade receivables 65 000
Trade payables 31 850
Cash sales are 10% of total revenue.
Cash purchases are 25% of total purchases.
Gross margin is 20%.
Nibali’s standard credit terms with both customers and suppliers are 30 days.
Industry average inventory turnover is 15 days.
REQUIRED
(a) Calculate:
(i) inventory turnover in days
[2]
(ii) trade receivables turnover in days
[2]
(iii) trade payables turnover in days.
[3]
(b) Discuss the liquidity of Nibali’s business based on the available information.
[5]
(c) Identify three drawbacks for a business of holding too much inventory.
1
2
3
[3]
[Total: 15]
3 Miguel and Bernard are in partnership, sharing profits and losses in the ratio 2 : 3 respectively.
The statement of financial position for the business at 31 May 2018 has been provided.
$
Non-current assets 175 000
Current assets
Inventory 60 000
Trade receivables 48 000
108 000
Total assets 283 000
Capital and liabilities
Capital accounts
Miguel 100 000
Bernard 145 000
245 000
Current liabilities
Bank overdraft 12 000
Trade payables 26 000
38 000
Total capital and liabilities 283 000
The partners admitted Eddy to the business on 1 June 2018. The following information is also available.
1 Eddy introduced non-current assets valued at $40 000 and cash of $50 000.
2 The new profit-sharing ratio will be 5 : 3 : 2 for Miguel, Bernard and Eddy respectively.
3 Goodwill was valued at $40 000 and will not be retained in the books of account.
4 Non-current assets at 31 May 2018 were revalued at $210 000.
5 Inventory at 31 May 2018 had a net realisable value of $45 000.
6 A provision for irrecoverable debts of 5% of trade receivables at 31 May 2018 was made.
REQUIRED
(a) Prepare, on the next page, the partners’ capital accounts on 1 June 2018 following the admission of Eddy.
Capital accounts
Miguel Bernard Eddy Miguel Bernard Eddy
$ $ $ $ $ $
11
Workings:
[6]
Additional information
On 1 October 2018 the following changes in the terms of the partnership were agreed by the partners.
1 All the cash introduced by Eddy was converted to a loan at an interest rate of 6% per annum.
2 Eddy would also receive a salary of $12 000 per annum.
3 The profit-sharing ratio was changed to 2 : 2 : 1 for Miguel, Bernard and Eddy respectively.
It was agreed that no adjustment for goodwill was required.
The draft profit for the year ended 31 May 2019, before interest on loan, was $39 000. This had accrued evenly throughout the year.
REQUIRED
(b) Prepare the appropriation account for the year ended 31 May 2019.
[5]
(c) Explain two reasons why a partnership might keep separate current and capital accounts.
1
2
[4]
[Total: 15]
4 Aramis operates a manufacturing business. He has been advised that he should use absorption costing in his factory.
REQUIRED
(a) Explain two drawbacks for a business of using a budgeted overhead absorption rate.
1
2
[4]
Additional information
Aramis’s factory comprises three departments − drilling, finishing and maintenance. The maintenance department costs consist of maintenance engineers’ wages. The manufacturing process is machine intensive. The overheads of the drilling and finishing departments are made up of allocated costs and an apportioned share of the maintenance department.
The following budgeted information for the six months ended 31 March is available.
Drilling Finishing Maintenance
Allocated costs $435 720 $748 900 $208 000
Use of maintenance 38% 62%
Machine hours 27 530 32 270
REQUIRED
(b) (i) Allocate the maintenance department overhead costs to the drilling and finishing departments.
[2]
(ii) Calculate, to two decimal places, a budgeted overhead absorption rate for the drilling and finishing departments.
[2]
Additional information
The following information relates to maintenance engineers’ wages during the six-month period.
Total hours worked 7500
Total basic hours worked 6800
Workers are paid a basic rate of $30 per hour. Overtime is paid at 1.5 times the basic rate.
REQUIRED
(c) Calculate the total actual wages for the maintenance engineers for the six-month period.
[3]
Additional information
In addition to the actual maintenance wages, the following actual information for the six months ended 31 March has been made available.
Drilling Finishing
Total overhead costs $427 360 $713 630
Machine hours 25 110 31 976
REQUIRED
(d) Calculate the over or under-absorption of production overheads for each department for the six-month period.
[8]
Additional information
Aramis’s accountant has suggested that he uses marginal costing. He has provided the following analysis for one product:
$
Direct materials 710
Direct labour Drilling 225
Finishing 85
Overhead absorbed Drilling 115
Finishing 45
Selling and administration costs 280
Half of the selling and administration costs are variable.
Aramis requires that all products achieve a profit margin of at least 15%.
A new customer has approached Aramis and offered to pay him $1300 for his product. The normal selling price for this product is $1750.
REQUIRED
(e) Advise Aramis whether or not he should accept the order. Justify your answer using both financial and non-financial factors.
[7]
(f) State four factors that a business should consider before changing its supplier.
1
2
3
4
[4]
[Total: 30]
Mark scheme
4(a) Estimated figures used may be inaccurate (1) leading to under or over absorption of overheads (1) 4
Over absorption of overheads may lead to prices being set too high (1) which may lead to loss of customers (1)
Under absorption of overheads may lead to prices being set too low (1) which would result in lower profits (1)
Accept other valid points.
Any 2 drawbacks (2 marks each) 1 mark for identifying the drawback and 1 mark or developing.
4(b)(i) 2
Drilling Finishing Total
$ $ $
Allocated costs 435 720 748 900 208 000
Apportioned maintenance costs 79 040 128 960
Total departmental overheads 514 760 (1) 877 860 (1)
Accept either apportioned maintenance costs OR total departmental overheads for marks.
4(b)(ii) 2
Drilling Finishing
Total departmental overheads 514 760 877 860
Budgeted machine hours 27 530 32 270
Budgeted overhead absorption rate $18.70 (1) OF $27.20 (1) OF
4(c) $235 500 (3) 3
Workings
Basic 7500 × $30 = $225 000 (1)
Overtime 700 × $15 = $10 500 (1)
Total wages $235 500 (1) OF
or
Basic 6800 × 30 = $204 000 (1)
Overtime 700 × 45 = $31 500 (1)
Total wages $235 500 (1) OF
4(d) Actual absorption rates and over/under-absorption 8
Drilling Finishing Maintenance
$ $ $
Total overhead costs 427 360 713 630 235 500
Apportioned maintenance 89 490 146 010 (235 500)
(1) (1)
516 850 859 640
Actual machine hours 25 110 31 976
Budgeted overhead absorption rate $18.70 $27.20
Overheads charged to production $469 557 (1) OF $869 747 (1) OF
Under/over recovery of overheads 47 293 (1) OF 10 107 (1) OF
(under) (1) OF (over) (1) OF
4(e) Financial factors (Max 3) 7
Makes a positive contribution (1) ($1300 – (710 + 225 + 85 + 140) = $140 (1)
Does not achieve the required profit margin (1)
Makes a loss of $160 (1)
The allocation of fixed overheads may be inaccurate (1)
Non-financial factors (Max 3)
This is a new customer. Will there be repeat orders? (1)
What will be the reaction of the existing customers? (1)
Does the company have spare capacity/other resources? (1)
Will the quality of the product be affected (1)
Decision (1)
Accept other valid points.
4(f) Quality – will the product quality be the same? (1) 4
Price – is the new supplier likely to offer a lower price? (1)
Credit terms – will the new supplier offer the same credit terms? (1)
Reliability – is the supplier reliable? (1)
Delivery – will the supplier offer delivery? (1)
Accept other valid points.
Max 4.
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Accounting 9706/22 for October/November 2019 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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