Accounting 9706/23 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.
S Limited is a private limited company. The directors have extracted the following information at
30 September 2019.
$ $
6% debentures (2021 – 2022) 68 000
Accrued expenses 2 480
Administrative expenses 63 810
Bank overdraft 12 770
Carriage inwards 3 600
Distribution costs 49 330
Interest paid 8 160
Inventory at 1 October 2018 62 500
Freehold property 220 000
Motor vehicles
Cost 84 600
Provision for depreciation at 1 October 2018 38 760
Office equipment
Cost 68 700
Provision for depreciation at 1 October 2018 32 300
Prepaid expenses 4 400
Purchases 392 340
Retained earnings 69 700
Returns inwards 3 470
Revenue 764 570
Share capital (ordinary shares of $1 each) 50 000
Share premium 15 000
Trade payables 48 730
Trade receivables 86 500
Wages and salaries 54 900
The following information is also available:
1 The value of inventory at 30 September 2019 was $73 100 at cost. The directors now wish to write off $2000 in respect of damaged items.
2 Purchase of new office equipment of $6000 had been posted to distribution costs in error.
3 Motor vehicles are to be depreciated at 20% per annum using the straight-line method. The estimated residual value of the motor vehicles is $20 000. Depreciation is to be charged to distribution costs.
4 Office equipment is to be depreciated at 15% per annum using the reducing balance method.
Depreciation is to be charged to administrative expenses.
5 At 30 September 2019 there was an additional accrual for wages and salaries of $1700.
Wages and salaries are to be charged as 70% to administrative expenses and 30% to distribution costs.
6 Interest paid included debenture interest paid to 30 June 2019.
7 At 30 September 2019 there was an additional prepayment of $4800 for administrative expenses.
8 The directors wish to create a provision for doubtful debts equal to 2% of trade receivables at
30 September 2019 and include it in administrative expenses.
REQUIRED
(a) Prepare the income statement for the year ended 30 September 2019. Use the space on the next page to show your workings.
S Limited
Income statement for the year ended 30 September 2019
$ $
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Profit from operations
Finance costs
Profit for the year
Workings:
Cost of sales
Administrative expenses
Distribution costs
Finance costs
[12]
(b) Prepare the statement of financial position at 30 September 2019. Use the space provided on the next page for your workings.
Workings:
[10]
(c) Explain the term ‘6% debentures (2021 – 2022)’, which appears in S Limited’s financial statements.
[3]
Additional information
Despite having made substantial profit for the year, the directors are concerned that the shareholders have not received any dividends.
They are considering two options:
option 1: paying the shareholders a dividend of $0.50 per share
option 2: making a bonus issue of 1 ordinary share for every 2 shares held.
REQUIRED
(d) Advise the directors on which option they should choose. Justify your answer.
[5]
[Total: 30]
Mark scheme
1(a) S Limited 12
Income statement for the year ended 30 September 2019
$ $
Revenue 764 570
Returns inwards (3 470)
761 100 (1)
Cost of sales W1 387 340 (2)
Gross profit 373 760
Expenses
Administrative W2 106 720 (4)
expenses
Distribution costs W3 73 230 (3) 179 950
Profit from operations 193 810
Finance costs W4 9 180 (1)
Profit for the year 184 630
(1)
OF
Workings:
W1: Cost of sales:
Opening inventory 62 500*
Purchases 392 340* (1)
Carriage inwards 3 600*
458 440
Closing inventory 71 100 (1) 387 340
W2: Administrative expenses $63 810 + $39 620 (1) – $4800 (1) +
$1730 (1) + 6360 (1) = $106 720
Depreciation – Office equipment ($68 700 + $6000 – $32 300) × 15% =
$6360
W3: Distribution costs $49 330 + $16 980 (1) – $6000 (1) +
$12 920 (1) = $73 230
Depreciation – Motor vehicles ($84 600 – $20 000) × 20% = $12 920
W4: Finance costs $8160 + $1020 = $9 180
1(b) S Limited 10
Statement of financial position at 30 September 2019
$ $
Non-current assets
Freehold property 220 000
Office equipment W1 36 040 (2)
Motor vehicles W2 32 920 (2)
288 960
Current assets
Inventory 71 100 (1) OF
Trade receivables W3 84 770 (1)
Other receivables W4 9 200 (1)
165 070
Total Assets 454 030
Equity and liabilities
Share capital 50 000
Share premium 15 000
Retained earnings W5 254 330 (1) OF
319T330
Non-current liabilities
6% Debenture (2021 – 68 000 (1)
2022)
Current liabilities
Bank overdraft 12 770
Trade payables 48 730
Other payables W6 5 200 (1) OF
66 700
Total equity and liabilities 454 030
Workings:
W1 Office equipment $68 700 + $6000 = $74 700 (1) – $6360 –
$32 300 = $38 660 (1) OF= $36 040
W2 Motor vehicles $84 600 (1) – $12 920 – $38 760 =
$51 680 (1) OF = $32 920
W3 Trade receivables $86 500 – $1730 = $84 770 (1)
W4 Other receivables $4400 + $4800 = $9 200 (1)
W5 Retained earnings $69 700 + $184 630 = $254 330 (1)
W6 Other payables $2480 + $1700 + $1020 = $5200 (1)
1(c) S Limited have taken out a long-term loan (1) repayable between 2021 and 3
2022 (1) at an annual interest rate of 6%. (1)
1(d) Option 1 5
Would require an immediate cash outflow (1)
The company already has a bank overdraft (1)
The debenture is due for repayment in the near future (1)
Payment of dividends is discretionary (1)
Accept other valid points.
Option 2
The company will not require a cash outflow (1)
They have sufficient retained earnings to issue bonus shares (1)
They have a share premium account which can be used (1)
Will keep the shareholders happy (1)
Will not dilute voting rights (1)
Accept other valid points.
Max 5 marks for comments
Decision (1)
Moser has provided the following information about his non-current assets for the year ended
30 November 2018.
1 Motor vehicles $
Cost at 1 December 2017 185 000
Accumulated depreciation at 1 December 2017 64 750
Purchased during the year 27 745
2 A motor vehicle was sold during the year for $12 450. It had originally cost $18 500 and had a net book value of $13 875.
3 The motor vehicles depreciation policy is as follows:
Motor vehicles are depreciated at a rate of 25% per annum using the reducing balance method.
A full year’s depreciation is charged in the year of purchase and no depreciation is charged in the year of disposal.
REQUIRED
(a) State how a disposal of a non-current asset would affect the income statement and the statement of financial position. Calculations are not required.
Income statement
Statement of financial position
[3]
(b) Prepare the non-current assets section of Moser’s statement of financial position at
30 November 2018.
Cost Accumulated Net book value depreciation
$ $ $
Workings:
[6]
(c) (i) Explain why the reducing balance method of depreciation is more appropriate than the straight-line method for assets such as computer equipment.
[4]
(ii) Explain why the revaluation method of depreciation is appropriate for assets such as loose tools.
[2]
[Total: 15]
PLEASE TURN OVER
Mark scheme
2(a) Income statement 3
Only a profit or loss on disposal would appear in the income statement (1)
Charge for depreciation would reduce (1)
Max 1
Statement of financial position
Disposal proceeds would increase the bank account / the current assets
total in the statement of financial position. (1)
The asset cost and accumulated depreciation would be eliminated from non-
current assets. (1)
Max 2
2(b) Non-current assets 6
Cost Accumulated Net Book Value
$ depreciation $
$
Motor vehicles 194 245(1) 93 655 (4) 100 590 (1) OF
W1 W2
Workings:
W1: Cost:185 000 + 27 745 – 18 500 = 194 245 (1)
W2: Accumulated depreciation:
Charge for the year: 120 250 + 27 745 (1) – 13 875 (1) = 134 120
Accumulated provision: 64 750 – 4625 (1) + 33 530 (1) OF = 93 655
2(c)(i) Computer equipment tends to fall in value more in the early years. (1) They 4
lose value very quickly due to obsolescence/ technological changes. (1) The
reducing balance method depreciates the assets more in the earlier years
and less in later years (1) which matches the fall in value of computer
equipment (1).
The straight line method of depreciation depreciates assets at the same
amount each year (1) which does not match the rapid loss in value. (1)
Accept other valid points.
Max 4
2(c)(ii) It is not worthwhile keeping individual records of loose tools (1) as they are 2
usually many small value items (1) and are difficult to keep track of. (1) They
are easily broken, damaged or lost and have to be regularly replaced. (1)
Max 2
Maria is a sole trader. Her financial statements for the year ended 31 December 2018 included the following:
$
Revenue 163 000
Gross profit 42 700
Profit for the year 16 500
Inventory 1 January 2018 17 800
Inventory 31 December 2018 19 600
Trade receivables 15 900
Cash and cash equivalents 2 700
Trade payables 10 700
Capital 130 000
REQUIRED
(a) Calculate the following ratios to two decimal places:
(i) gross margin
[1]
(ii) profit margin
[1]
(iii) rate of inventory turnover (in times)
[2]
(iv) current ratio
[1]
(v) liquid (acid test) ratio
[1]
(vi) return on capital employed (ROCE).
[1]
Additional information
Maria’s ratios for 2017 were as follows:
1 Gross margin 23.63%
2 Profit margin 12.05%
3 Rate of inventory turnover 7.36 times
4 Current ratio 3.85 : 1
5 Liquid (acid test) ratio 2.04 : 1
6 ROCE 14.65%
REQUIRED
(b) Suggest possible reasons for the changes in Maria’s business between 2017 and 2018 in respect of:
(i) profitability
[2]
(ii) liquidity.
[2]
(c) Identify two external stakeholders.
Explain why they may be interested in the financial statements of a business.
Stakeholder 1
Interest
Stakeholder 2
Interest
[4]
[Total: 15]
Mark scheme
3(a)(i) Gross margin 42 700 ÷ 163 000 × 100 = 26.20% (1) 1
3(a)(ii) Profit margin 16 500 ÷ 163 000 × 100 = 10.12% (1) 1
3(a)(iii) Rate of inventory turnover 120 300 ÷ 18 700 (1) = 6.43 times (1) OF 2
Workings: 163 000 – 42 700 = 120 300
17 800 + 19 600
= 18 700
2
3(a)(iv) Current ratio 38 200 ÷ 10 700 = 3.57 : 1 (1) 1
Workings: 2018 19 600 + 15 900 + 2 700 = 38 200
3(a)(v) Liquid (acid test) ratio 18 600 ÷ 10 700 = 1.74: 1 (1) 1
3(a)(vi) Return on capital employed (ROCE) 12.69% (1) 1
16 500
Workings: × 100 = 12.69 %
130 000
3(b)(i) Profitability 2
Gross margin in 2018 improves due to either the selling price increased or
cost of sales decreased or both (1)
Reduction the profit margin due to increased expenses (1)
ROCE has deteriorated probably due to reduction in profit for the year or
increase in capital employed or both (1)
Accept other valid points.
Max 2
3(b)(ii) Liquidity 2
The current ratio has reduced which means there are fewer current assets
and / or more current liabilities. (1)
The liquid ratio has reduced due to either increased trade payables or
reduced liquid assets.
Slower rate of inventory turnover due to either increased inventory levels or
reduced sales. (1)
Accept other valid points.
Max 2
3(c) (Potential) investors (1) – to assess return on investment (1) 4
Providers of finance (1) – to assess whether loans / interest will be repaid
(1)
Government (1) – to ensure taxation liabilities will be paid (1)
Suppliers (1) - to assess whether or not to continue to supply and whether
or not they will get paid (1)
Customers (1) – to assess continuity of supply (1)
Trade unions (1) – to assess the wellbeing of members (1)
Accept other valid points.
Max 2 marks for stakeholders, max 2 marks for their interests.
D Limited manufactures a single product. The company has two production departments: machining and finishing. There are two service departments: stores and maintenance.
The accountant has allocated and apportioned total factory overheads to the four departments.
REQUIRED
(a) Explain the difference between allocation and apportionment of overheads.
[4]
Additional information
The directors of D Limited have provided the following information:
Machining Finishing Stores Maintenance
Issues from stores 60% 30% - 10%
Maintenance 75% 25% - –
Budgeted direct labour hours 22 000 52 000 - –
Budgeted machine hours 84 000 12 000 - –
REQUIRED
(b) Re-apportion the service departments’ costs to the production departments.
Machining Finishing Stores Maintenance
$ $ $ $
Total apportioned
177 255 101 150 26 585 33 010 overheads
Re-apportionment of stores
Subtotal
Re-apportionment of maintenance
Total
[4]
(c) Calculate a suitable overhead absorption rate to two decimal places for each production department.
[4]
(d) Explain why a business calculates separate overhead absorption rates for each production department rather than a single rate for the whole factory.
[4]
Additional information
The company accountant has been asked to provide a quotation for a customer who requires
200 units of the company’s product. The directors wish to quote a selling price which will achieve a 25% gross margin.
Budgeted cost per unit of product
Direct material $16.00
Direct labour hours
Machining 10 minutes at $9.60 per hour
Finishing 45 minutes at $10.80 per hour
Machine hours
Machining 90 minutes
Finishing 20 minutes
REQUIRED
(e) Prepare a statement to show the quoted selling price of one unit of the product.
[6]
(f) Calculate the total amount the company would receive if the customer accepted the quoted price and then took a cash discount of 7 ½ %.
[1]
Additional information
Although the business is successful and expanding, the directors feel that the four departments do not always appear to be working well together. The directors are planning to introduce a system of budgetary control which would initially reduce annual profits by 5%.
REQUIRED
(g) Advise the directors whether or not they should proceed with their plans. Justify your answer.
[7]
[Total: 30]
Mark scheme
4(a) Overhead allocation is charging costs to a cost centre (1) those costs which 4
are directly attributable to it. (1)
Overhead apportionment is charging costs to a cost centre which are not
directly attributable (1) to it using a suitable basis (1)
4(b) Machining Finishing Stores Maintenance 4
$ $ $ $
Total apportioned 177 255 101 26 33
overheads 150 585 010
Reapportionment of 15 951 7 975 (26 2 (1) for
stores 585) 659 row
Subtotal 193 206 109 – 35
125 669
Reapportionment of 26 752 8 917 – (35 (1) OF
maintenance 669) for row
Total 219 958 118
042
(1) OF (1) OF
4(c) $219 958 4
Machining = $2.62 (1) OF per machine hour (1) OF
84 000
$118 042
Finishing = $2.27 (1) OF per direct labour hour (1) OF
52 000
4(d) The overhead absorption rate should be chosen to reflect the activity of that 4
department (1).
If the department is machine-intensive then machine hours should be
chosen / If the department is labour intensive then labour hours should be
chosen (1)
This should lead to a more accurate absorption of overheads (1) which in
turn leads to a more accurate cost figure / selling price (1)
Accept other valid points.
Max 4
4(e) $ 6
Direct materials 16.00
10
Direct labour – machining × 9.60 1.60 (1)
60
45
Direct labour – finishing × $10.80 8.10 (1)
60
90
Overheads – machining × $2.62 3.93 (1) OF
60
45
Overheads – finishing × $2.27 1.70 (1) OF
60
31.33
25
Mark-up $31.33 × 10.44 (1) OF
75
Selling price* 41.77 (1) OF
* Must include direct materials for final OF
4(f) $41.77 × 200 = $8354.00 × 92.5% = $7727.45 (1) OF 1
4(g) 1 mark for identification, max 2 marks for development 7
Benefits
Formal budget will inform all departments of the common goal (1) and
therefore improve communication between the departments. (1)
Will provide clear indication of individual managers’ areas of responsibility
(1) and therefore improve co-ordination between departments. (1)
Will motivate managers and employees (1) thus improving company
performance. (1)
Facilitates planning (1) which enables targets to be set (1) and improve
performance by analysing variances. (1)
Drawbacks
Short term costs will increase (1) which would reduce profits though long
term benefits should accrue. (1)
May be problems implementing the control system (1), employees may be
resistant to change. (1)
Causes a straightjacket effect (1) which may prevent innovation (1) and
missed opportunities (1)
May result in demotivation (1) if the budgets are unrealistic (1)
Accept other valid points.
Decision 1 mark
Max 3 marks for identification
Max 3 marks for development
Overall max 6
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Accounting 9706/23 for October/November 2019 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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