Accounting 9706/31 October/November 2019: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, October/November 2019. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
On 1 January 2018 a 12% debenture of $250 000 repayable in 2027 was issued.
Mark scheme
1(a) Possible answers: 2
A not for profit organisation has an accumulated fund instead of capital. (1)
It is represented by the difference between the assets and liabilities. (1)
A surplus of income over expenditure is added to the fund and a deficit is deducted. (1)
Accept other valid points.
Max 2
1(b) $ $ 3
Non-current assets 14 500
Inventory 2 200
Prepayment 300
Subscriptions in arrears 150
17 150 (1)
Bank overdraft 3 600
Payables 2 250
Accrual 1 550
Subscriptions in advance 100
(7 500) (1)
Accumulated fund at 1 April 2018 9 650 (1) OF
1(c) Subscriptions Account 8
2016 2016
April 1 Balance b/d 150 (1) April 1 Balance b/d 100 (1)
2017 2017
March 31 Income and 14 150 (1) OF March 31 Receipts and 13 900 (1)
expenditure a/c (1) payments
March 31 Irrecoverable debt 50 (1)
March 31 Balance c/d 50 March 31 Balance c/d 300
14 350 14 350
April 1 Balance b/d 300 (1) April 1 Balance b/d 50 (1)
1(d) $ 4
Current assets (1)
Subscriptions in arrears 300 (1) OF
Current liabilities (1)
Subscriptions in advance 50 (1) OF
1(e) Possible answers: 4
Seek to increase membership of the club (1) subject to interest from the possible new members. (1)
Increase the subscription. (1) However, this may result in the loss of members. (1)
Offer more services (e.g. cafe) or events (e.g. dance). (1) However, there are costs associated with these and income
should exceed expenditure. (1)
Control costs more efficiently (1) e.g. review the wages of staff or any other suitable example. (1)
Accept other valid points.
Max 2 ways x 2 marks (1 for identifying + 1 for development)
1(f) Possible answers: 4
The proposed accounting treatment is incorrect. (1) The amount received should be credited in full (1) to a life membership
account (1) as a liability in the statement of financial position. (1) Each year a portion of this amount should be credited as
income in the income and expenditure account. (1) This follows the accounting concept of matching. (1)
Accept other valid points.
Max 4
The company made a rights issue of 1 ordinary share for every 4 shares held. The rights issue was fully subscribed raising $225 000 in total.
The following information was available for the year ended 31 December 2018.
$
Profit from operations 382 000
Profit for the year 204 000
Ordinary dividend paid 45 000
Cash and cash equivalents 55 000
At 31 December 2018
1 The total assets were $1 582 000, of which current assets totalled $420 000.
2 The current ratio was 1.75 : 1.
Mark scheme
2(a)(i) Stewardship occurs when the owners (shareholders) do not take part in the day-to-day running of the company and appoint 2
directors to manage the company affairs on their behalf (1). The directors have the duty of care to manage the business
resources to the best of their ability on behalf of the shareholders. (1)
Accept other valid answers.
Max 2
2(a)(ii) Examine the financial statements. (1) 2
Verify the assets of the company. (1)
Issue an audit report to the shareholders. (1)
Accept other valid answers.
Max 2
2(b) Extract from Income Statement for the year ended 31 December 2018 2
$
Profit from operations 65 250
Finance costs 12 000 (1)
Profit before tax 53 250
Tax 14 700
Profit for the year 38 550 (1) OF
2(c) Statement of changes in equity for the year ended 31 December 2018 4
Ordinary shares Share premium General reserve Retained earnings
$ $ $ $
Balance b/f 200 000 20 000 54 000 96 000
Bonus issue 10 000 (10 000) (1)
Ordinary share (6 250)
(1)
dividend paid
Profit for the year 38 550 (1) OF
Balance c/f 210 000 10 000 54 000 128 300 (1) OF for all
2(d) Statement of financial position at 31 December 2018 6
$
Assets
Non-current assets
Land and buildings 425 000
Plant and machinery 25 000
Vehicles 16 000
466 000 (1)
Current assets
Inventory 65 000
Trade receivables 42 000
Cash and cash equivalents 37 000
144 000
Total assets 610 000
Equity and liabilities
Equity
Ordinary shares 210 000 (1) OF
Share premium 10 000 (1) OF
General reserve 54 000
Retained earnings 128 300 (1) OF
402 300
Non-current liabilities
8% Debentures (2025) 150 000 (1)
Current liabilities
Trade payables 35 000
Other payables 22 700 (1)
57 700
Total equity and liabilities 610 000
2(e) Net book value $15 000 4
Resale value $(8000 – 1200) = $6800 (1)
Value in use
Cash flow Discount Net present
Year
$ factor value $
1 4 000 0.909 3 636
2 5 000 0.826 4 130
3 3 000 0.751 2 253
Total 10 019
Therefore, value in use $10 019 is higher than fair value $6800 (1) OF. The recoverable amount is $10 019 (1).
The impairment loss is $(15 000 – 10 019) = $4981 (1) OF.
2(f) Possible answers: 5
The loss on the value of non-current assets is an adjusting event (1) in accordance with IAS10 (1) especially as the amount
is more than 33% of the plant and machinery total value. (1)
The accounts have not yet been authorised for issue or presented to the shareholders (1) as the time is February and the
AGM is on 31 March 2019. (1)
IAS 36 impairment of assets. (1)
Accept other valid points.
Max 5 marks
The market value of one ordinary share was $2.50.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Prepare the equity and liabilities section of the statement of financial position at
31 December 2018. [5]
(b) Calculate the following to two decimal places for the year ended 31 December 2018.
(i) Dividend cover [2]
(ii) Gearing ratio [2]
(iii) Price earnings ratio [3]
(c) Analyse the financial performance of J plc. [8]
Additional information
A group of shareholders have said they will propose at the Annual General Meeting that the directors pay an extra cash dividend of $0.30 per share because of the high profit for the year.
(d) Advise the directors whether or not they should pay the extra cash dividend. Justify your answer by considering other options available to the directors. [5]
[Total: 25]
Question 4
Source A4
X Limited acquired the partnership business of Amy and Beth on 1 January 2018. The statement of financial position of each business at 31 December 2017 was as follows:
Amy and
X Limited
Beth
$ $
Non-current assets 142 000 654 000
Current assets
Inventory 38 000 82 000
Trade receivables 49 000 83 700
Cash and cash equivalents 4 000 98 400
91 000 264 100
Total assets 233 000 918 100
Equity and liabilities
Ordinary shares of $1 each 700 000
Retained earnings 144 500
Capital account
Amy 120 000
Beth 80 000
200 000
Current account
Amy 3 500
Beth (1 500)
2 000
Current liabilities
Trade payables 31 000 73 600
Total equity and liabilities 233 000 918 100
The following information is also available.
1 X Limited took over all the assets and liabilities of the partnership business, except the cash and cash equivalents, at the following values.
$
Non-current assets 148 000
Inventory 41 000
Trade receivables 47 000
Trade payables 30 000
2 The purchase consideration was $240 000. This consisted of an issue of 90 000 ordinary shares divided equally between the partners. Each ordinary share had a market value of
$2.50 at 1 January 2018.
The balance was paid in cash.
3 Amy and Beth share profits and losses in a ratio of 4 : 3.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the profit or loss made by the partners on the sale of their business to X Limited. [4]
(b) Prepare the capital accounts of Amy and Beth to show the closure of their partnership business. [5]
(c) Prepare the statement of financial position of X Limited at 1 January 2018 immediately after the acquisition of the partnership. [9]
(d) State two advantages to a company of purchasing another business. [2]
Additional information
Retained earnings of X Limited at 31 December 2017 and 31 December 2018 were as follows.
31 December 31 December
2017 2018
$ $
Retained earnings − start of the year 81 500 144 500
Profit for the year 168 000 145 000
Dividend paid (105 000) (97 500)
Retained earnings − end of the year 144 500 192 000
(e) Assess whether or not X Limited has made the right decision to acquire the partnership business. Support your answer using relevant calculations. [5]
[Total: 25]
Section B: Cost and Management Accounting
Question 5
Source B1
The directors of P Limited plan to launch a new product which has an expected life of 4 years. A new machine is required for this and the directors are considering buying Machine X.
Details of Machine X are as follows.
Year 0 Year 1 Year 2 Year 3 Year 4
$ $ $ $ $
Cost 400 000
Annual receipts 390 000 420 000 460 000 370 000
Annual payments 280 000 280 000 270 000 250 000
The machine has a useful life of 4 years with no residual value. It will be depreciated using the straight-line method.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the accounting rate of return (ARR) of Machine X. [5]
(b) State two advantages and two disadvantages of using ARR. [4]
Additional information
P Limited’s cost of capital is 10%.
The following are the discount factors for 10%.
Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683
(c) Calculate the net present value (NPV) of Machine X. [5]
Additional information
P Limited requires an internal rate of return (IRR) of 13% on any capital investment.
If a discount factor of 16% is used, Machine X will have a negative NPV of $13 130.
(d) Calculate the IRR of Machine X. [3]
Additional information
A similar machine, Machine Y, is available. It also has a useful life of 4 years. The following information for Machine Y is available.
Initial cost $480 000
NPV $33 200
ARR 25%
IRR 13.5%
(e) Advise the directors of P Limited which machine they should buy. Justify your answer. [5]
Additional information
The directors are also considering buying another machine, Machine Z, at a cost of $110 000.
This will be used to produce another product which has an expected life of 3 years. The annual receipts from the sale of the product will be $100 000. Annual payments will be $45 000. This will remain constant for each of the 3 years. P Limited’s cost of capital remains at 10%.
The directors are confident about the accuracy of their forecast for annual payments. They are not confident about their forecast for annual receipts.
(f) Calculate the annual receipts which give a zero NPV for Machine Z. [3]
[Total: 25]
Question 6
Source B2
Oscar runs a manufacturing business and operates a standard costing system.
The following information relates to the year ended 31 March 2019.
Budgeted Actual
Production (units) 7500 7300
Material usage 6 kilos per unit 42 500 kilos
Material cost $5 per kilo $230 000
Labour usage 4 hours per unit 32 000 hours
Labour cost $8 per hour $236 000
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) State two disadvantages of operating a standard costing system. [2]
(b) Calculate the following variances:
(i) material price [2]
(ii) material usage [2]
(iii) labour rate [2]
(iv) labour efficiency [2]
(v) total labour. [1]
(c) Identify one possible reason for each of the following variances calculated in part (b):
(i) material price variance
(ii) material usage variance
(iii) labour rate variance
(iv) labour efficiency variance.
[4]
(d) Prepare a statement to reconcile for actual production the standard labour and material costs with the actual costs. [8]
Additional information
Oscar has not changed his standard costs for three years.
(e) Advise Oscar whether or not he should change his standard costs. Justify your answer. [2]
[Total: 25]
Mark scheme
3(a) Equity and Liabilities section 5
$
Equity and liabilities
Equity
$0.50 ordinary shares 500 000 (1)
Share premium (200 000 + 125 000) 325 000 (1)
Retained earnings 267 000 (1) OF (Balancing figure)
Total equity 1092 000
Non-current liabilities
12% debentures 250 000
Current liabilities 420 000 240 000 (1)
1.75
Total liabilities 490 000 (1) OF
Total equity and liabilities 1 582 000
3(b)(i) 204 000 7
Dividend cover (1) = 4.53 times (1)
45 000
3(b)(ii) 250 000
Gearing ratio (1) OF × 100 = 18.63% (1) OF
1342000
3(b)(iii) 204 000
Price earnings ratio earnings per share = = 0.204
1000 000
2.50 (1)
PER = = 12.25 (1)OF
0.204 (1)
3(c) Possible answers: 8
J plc has a dividend cover of 4.53 times which compares the amount of profit earned by the ordinary shareholder with the
amount of dividend held. This is reasonable (1) and indicates that the company will be able to continue to pay the current
level of ordinary dividends even if profits fall. (1)
Max 2
The gearing ratio is 18.63% which is the relationship between fixed cost capital and total capital. In this case J plc has low
gearing which means that the company has a low borrowing as a proportion of its total capital and long term finance (1).
J plc is a low risk company (1) with interest having a smaller effect on the amount of profit available for ordinary
shareholders. (1)
Max 2
The price earnings ratio is 12.25 which compares the market price of the shares with the earnings per share. This means
that it takes 12.25 years to recover the market price of the shares with earnings. (1) Buyers of shares are paying 12.25
times the earnings to acquire shares in J plc. (1) This indicates expected future growth. (1)
Max 2
The current ratio is 1.75 : 1 which means that the business is liquid (1) having $1.75 of short term current assets to every $1
of short term current liabilities. (1) The business is therefore able to pay its short term debts with its inventory, trade
receivables and cash and cash equivalents. (1)
Max 2
Accept other valid points.
3(d) Possible answers: 5
Dividend will be $300 000 (1) and the company does not have sufficient cash to pay this (1) without raising additional funds
(1).
In order to satisfy the group of shareholders the directors could issue bonus shares. (1) They have sufficient reserves to do
this (1).
Accept other valid points.
Max 4 for justification + 1 mark for decision
4(a) Original value Realised value Gain / (loss) 4
Assets / Liabilities $ $ $
Non-current assets 142 000 148 000 6 000]
Inventory 38 000 41 000 3 000] (1)
Trade receivables 49 000 47 000 (2 000) ]
Trade payables 31 000 30 000 1 000 (1)
Net assets at fair value 206 000
Goodwill 0 34 000 34 000 (1)
Fair value of business 240 000
Realisation gain 42 000 (1) OF
4(b) Capital account 5
Amy Beth Amy Beth
$ $ $ $
Current account 1 500 * Balance b/d 120 000 80 000
Ordinary shares 112 500 112 500 (1) Current account 3 500 * (1) both
Bank 35 000 (1) OF Realisation gain 24 000 18 000 (1) OF
Bank 16 000 (1) OF
147 500 114 000 147 500 114 000
4(c) X Limited 9
Statement of financial position at 1 January 2018
$
Assets
Non-current assets – tangibles 802 000 (1) (654 000 + 148 000)
Goodwill 34 000 (1) OF
Current assets
Inventory 123 000 (1) (82 000 + 41 000)
Trade receivables 130 700 (1) (83 700 + 47 000)
Cash and cash equivalents 83 400 (1) (98 400 – 15 000* (1))
337 100 *240 000 – 90 000 × 2.5
Total assets 1 173 100
Equity and liabilities
Ordinary shares of $1 each 790 000 (1) (700 000 + 90 000)
Share premium 135 000 (1) (90 000 × (2.5 – 1)
Retained earnings 144 500
1 069 500
Current liabilities
Trade payables 103 600 (1) (73 600 + 30 000)
Total equity and liabilities 1 173 100
4(d) Possible answers: 2
Responses may include:
Economies of scale (1)
Synergy (1)
Broader range of products / service (1)
Increase the market share / eliminate competitor (1)
Acquiring the knowhow / technology / expertise / good location etc., of the acquired company (1)
If the acquired business is a new business to the acquiring company, there is no need to start from the scratch (1)
Accept other valid points.
Max 2
4(e) Possible answers: 5
Profit for the year has decreased by $23 000 or 13.69%. (1) Dividend paid has decreased by $7 500 or 7.14% (1).
Retained earnings have increased by $47 500 (1).
May have struggled to integrate the partnership. (1)
Eliminated a competitor. (1)
Amy / Beth may argue over decisions made by directors. (1)
Accept other valid points.
Max 2 for calculations + 1 for decision + Max 2 for comments
5(a) Year 1 Year 2 Year 3 Year 4 5
$ $ $ $
Annual receipts 390 000 420 000 460 000 370 000
Annual payments 280 000 280 000 270 000 250 000
Depreciation 100 000 100 000 100 000 100 000 (1) for all
Profit 10 000 40 000 90 000 20 000 (1) for all
($10 000 + $40 000 + $90 000 + $20 000)
Average profit = = $40 000 (1)
4
$400 000
Average investment = = $200 000 (1)
2
$40 000
Accounting rate of return = = 20% (1)
$200 000
5(b) Possible answers: 4
Advantages:
easy to calculate (1)
profitability of capital investment can be compared with the business profitability (1)
Disadvantages:
it ignores the time value of money (1)
timing of cash inflows and cash outflows are ignored (1)
items such as depreciation is subjective, i.e. depends on the company’s depreciation policy (1)
Accept other valid advantages and disadvantages.
Max 2 for advantages and Max 2 for disadvantages
5(c) Discount 5
Inflows Outflows Net factor 10% PV
$ $ $ $ $
Year 0 400 000 1 (400 000)
Year 1 390 000 280 000 110 000 0.909 99 990 (1)
Year 2 420 000 280 000 140 000 0.826 115 640 (1)
Year 3 460 000 270 000 190 000 0.751 142 690 (1)
Year 4 370 000 250 000 120 000 0.683 81 960 (1)
NPV 40 280 (1)
5(d) 10% + (16% − 10%) (1) OF × 40 280 3
= 14.52% (1) OF
(40 280 + 13130) (1) OF
5(e) P Limited should purchase Machine X because: 5
It has higher NPV (1) but ARR is lower than Machine Y. (1)
IRR exceeds the required IRR of 13% for both machines but is greater for X. (1)
Initial capital investment is lower. (1)
Accept other valid points.
Max 4 marks for reasons and 1 mark for decision
5(f) $100 000 3
Annual receipts = (1) = $44 248 (1)
2.486
Annual receipts = $44 248 + $45 000 = $89 248 (1) OF
6(a) Possible answers: 2
Not suitable if product is not uniform. (1)
May be difficult to ascertain standard costs. (1)
Costly. (1)
Time consuming. (1)
Max 2
Accept other valid points.
6(b)(i) Material price variance = 230 000 – 212 500 = $17 500 (A) (2) 2
1 mark for amount + 1 mark for direction
6(b)(ii) Material usage variance = (42 500 – 43 800) × 5 = $6 500 (F) (2) 2
1 mark for amount + 1 mark for direction
6(b)(iii) Labour rate variance = 236 000 – 256 000 = $20 000 (F) (2) 2
1 mark for amount + 1 mark for direction
6(b)(iv) Labour efficiency variance = (32 000 – 29 200) × 8 = $22 400 (A) (2) 2
1 mark for amount + 1 mark for direction
6(b)(v) Total labour variance = $2 400 (A) (1) OF 1
6(c)(i) Possible answers: 1
Shortage of material forcing price up (1).
Different supplier (1).
Higher quality material (1).
Higher transportation costs (1).
Accept other valid points.
Max 1
6(c)(ii) Possible answers: 1
Higher quality materials used (1)
More skilled labour force used (1)
More efficient machinery used (1)
Accept other valid points.
Max 1
6(c)(iii) Possible answers: 1
Less skilled labour force used (1)
Labour rate in the market may have fallen (1)
Standard cost may be set too high (1)
Accept other valid points.
Max 1
6(c)(iv) Possible answers: 1
Less skilled labour force used (1)
Poor morale in work force (1)
Work force not motivated (1)
A stoppage may cause idle time (1)
Accept other valid points.
Max 1
6(d) Statement to reconcile standard costs with actual costs 8
$
Standard material cost (7 300 × 6 × 5) 219 000 (1)
Standard labour cost (7 300 × 4 × 8) 233 600 (1)
452 600
Material Price Variance 17 500 (1) OF
Labour Efficiency Variance 22 400 (1) OF 39 900
Material usage variance 6 500 (1) OF
Labour rate variance 20 000 (1) OF (26 500)
13 400
Actual cost 466 000 (1) OF + (1) cf
6(e) Oscar should change. (1) 2
He should update the standard costs because his standards will be more realistic. (1)
or
Variances are not significant, (1) therefore no need to change. (1)
Accept other valid points.
1 mark for decision + 1 mark for justification
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Accounting 9706/31 for October/November 2019 is out of 150 marks, across 6 questions.
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