Accounting 9706/32 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.
The value of each business was: Jack $195 000; Paul $152 000.
Mark scheme
1(a) Cost Accumulated Net book 7
$ depreciation value
$ $
Freehold property 360 000 – 360 000 (1)
Plant and machinery 346 000 (1) W1 182 000 (1) W2 164 000 (1) OF
Motor vehicles 228 000 (1) W3 98 000 (1) W4 130 000 (1) OF
Workings:
W1 386 800 – 43 000 + 2 200
W2 200 500 – 20 700 + 2 200
W3 240 000 – 36 000 + 24 000
W4 147 000 – 59 000 + 10 000
1(b) Z Limited 8
Statement of financial position at 30 June 2019
$
Non-current assets
Freehold property 525 000
Plant and machinery 186 300
Motor vehicles 93 000
804 300 (1)
Current assets
Inventory 75 000 (1)
Trade and other receivables: (86 200 – 18 000 (1) + 25 000 (1)) 93 200
Cash and cash equivalents 116 300
284 500
Total assets 1 088 800
Equity and liabilities
Equity
Ordinary shares of $1 each 500 000
Share premium 50 000
Revaluation reserve 165 000
Retained earnings: (46 000 – 18 000 (1) + 6000 (1) + 25 000 (1)) 59 000
774 000
Non-current liabilities
8% debentures (2021–22) 250 000 (1)
Current liabilities
Trade and other payables 64 800
Total equity and liabilities 1 088 800
1(c) Possible answers: 4
The expected life of the asset (1)
Rate of usage of the asset over its expected useful life (1)
The nature of the asset (1)
The pattern of the revenue / benefit generated by the asset (1) (matching / accruals concept (1))
Max 4
Accept other valid points.
1(d) Current gearing is 24.41% (1) OF 6
Issuing shares will reduce gearing to 12.35% (1) OF
Issuing debentures will increase gearing to 61.76% (1) OF
Debenture interest payable will increase by $80 000 / to $100 000 per annum (1)
Directors should consider that cash will have to be found in the future to repay debentures (1)
Additional debenture interest payments may cause cash flow issues / reduce profit (1)
High gearing will increase risk / may make arranging alternative finance difficult (1)
Payment of dividends is discretionary / debenture interest must be paid (1)
Issue of debentures may require security (1)
Rights issue may not be fully subscribed / will take longer / may dilute existing capital (1)
Accept other valid points.
Max 2 for ratios, Max 3 for comments +1 for decision
Jack’s plant and equipment would be revalued at $128 000.
Mark scheme
2(a)(i) Expenses are understated / will increase by $4000 (1) 3
Inventory is understated / will increase by $1000
Profit on consignment is overstated / will decrease (1) by $3000 (1)
2(a)(ii) Distribution costs are overstated / will decrease by $4000 (1) 3
Profit on consignment is overstated / will decrease by $3000
Profit for the year is understated / will increase (1) by $1000 (1)
2(b) Consignment account 10
$ $
Goods on consignment 50 000 (1) Clarissa (750 × 80) 60 000 (1)
Bank 4 000 (1) Balance c/d (1) 14 000 (1)
Clarissa 2 000 (1)
Clarissa (10% of 60 000) 6 000 (1) OF
Income statement (1) 12 000 (1) OF
74 000 74 000
Balance b/d 14 000 (1) OF
2(c) $32 500 (1) + $14 000 (1) OF = $46 500 (1) OF 3
2(d) Possible answers: 4
Each machine sold may still bring in a profit (1)
Assuming that sales in other countries are maintained, total profit should increase (1)
New consignment could increase total sales due to wider market (1)
As this country is closer then transport costs should be lower / less scope for damage in transit (1)
Liam might be able to negotiate a lower rate of commission (1)
Accept other valid points.
Max 4 for comments
2(e) An agent in a consignment earns commission / bears no risk / has a long-term relationship (1) while a party in a joint 2
venture earns a share of profit / bears most of the risk / has a short-term relationship (1)
3(a) Jack Paul 3
$ $
Net assets 164 000 150 500
Plant and equipment value increased 10 000
Inventory value decreased (7 000) Or if combined
Provision for doubtful debt (590)
174 000 142 910 316 910 (1)
Fair value of business 195 000 152 000 347 000 (1)
Goodwill 21 000 (1) 9 090 (1) = 30 090 (1) OF
3(b) Jack and Paul 10
Statement of financial position at 1 July 2018
$ $
Non-current assets
Plant and equipment (118 000 + 103 700 + 10 000) 231 700 (1)
Current assets
Inventory (36 000 + 47 000 – 7000) 76 000 (1)
Trade receivables (31 500 + 29 500 – 590) 60 410 (1)
Bank W1 22 600 (3) 159 010
Total assets 390 710
Equity and liabilities
Jack (200 000 – (30 090 × 60%) (1) OF) 181 946 (1) OF
Paul (160 000 – (30 090 × 40%) (1) OF) 147 964 (1) OF 329 910
Current liabilities
Trade payables 60 800
Total equity and liabilities 390 710
W1 Jack Paul
$ $
Capital in partnership 200 000 160 000
Value of business taken over by partnership 195 000 152 000
Additional cash contributed 5 000 (1) 8 000 (1)
Cash taken over by partnership 6 200 3 400
11 200 11 400 22 600 (1) OF
3(c) Current account 5
Jack Paul Jack Paul
$ $ $ $
Drawings 34 800 (1) OF 31 200 (1) OF Salaries 24 000 24 000 (1) both
Profit 10 800 (1) 7 200 (1)
34 800 31 200 34 800 31 200
3(d) Return on capital employed for the year ended 30 June 2019. 2
66 000
(181 946 + 147 964 ) (1) OF × 100 = 20.01% (1) OF
3(e) Possible answers: 5
Jack’s profit before the merger was $44 000 compared to salary and residual profit after the merger of $34 800 / decreased
by $9 200 (1)
Jack’s drawings before the merger were $40 000 compared to drawings after the merger of $34 800 / decreased by $5 200
(1)
Paul’s profit before the merger was $20 500 compared to salary and residual profit after the merger of $31 200 / increased
by $10 700 (1)
Paul’s drawings before the merger were $20 000 compared to drawings after the merger of $31 200 / increased by $11 200
(1)
Jack’s ROCE has decreased from 26.83% to 20.01% (1) OF
Paul’s ROCE has increased from 13.62% to 20.01% (1) OF
1 mark for each valid point (max 2 marks for each of Jack and Paul) + 1 for decision (who is better off and who is
not)
Paul’s trade receivables would be reduced by 2% for making allowance for doubtful debts.
All other assets and liabilities would be transferred at the book value.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate the value of total goodwill arising from the terms of the merger. [3]
Additional information
The following were the terms of the partnership.
1 Initial capital contributed by Jack and Paul would be $200 000 and $160 000 respectively, to be settled by net assets transferred and cash.
2 The profit and loss sharing ratio between Jack and Paul will be 3 : 2.
3 Goodwill arising from the merger is to be written off against each partner’s capital account immediately after the merger.
(b) Prepare the statement of financial position for the partnership at 1 July 2018. [10]
Additional information
The partners also agreed to the following terms of the partnership.
1 Partners’ salaries will be $24 000 each.
2 Each partner will take their salary and share of profit as drawings.
The profit for the year ended 30 June 2019, before appropriation, was $66 000.
(c) Prepare the current account for each partner for the year ended 30 June 2019. [5]
(d) Calculate, to two decimal places, the return on capital employed (ROCE) for the year ended
30 June 2019. [2]
(e) Evaluate whether or not Jack and Paul have benefited financially from merging their businesses. Justify your answer. [5]
[Total: 25]
Question 4
Source A4
R Limited does not hold any inventory.
The non-current assets schedule of R Limited for the year ended 31 December 2018 was as follows.
Equipment Motor Total vehicles
$000 $000 $000
Cost
At 1 January 2018 190 220 410
Additions 80 - 80
Disposals - (40) (40)
At 31 December 2018 270 180 450
Accumulated depreciation
At 1 January 2018 47 96 143
Charge for the year 27 21 48
Eliminated on disposals - (17) (17)
At 31 December 2018 74 100 174
Net book value
At 31 December 2018 196 80 276
At 1 January 2018 143 124 267
The statement of changes in equity of R Limited for the year ended 31 December 2018 was as follows.
Ordinary
Share General Retained share capital Total premium reserve earnings
($1 shares)
$000 $000 $000 $000 $000
At 1 January 2018 1000 100 25 150 1275
Issue of shares 120 24 144
Transfer 50 (50) -
Ordinary dividend paid (80) (80)
Profit for the year 135 135
At 31 December 2018 1120 124 75 155 1474
The following information is also available.
1 Finance charges for the year amounted to $16 000. All had been paid by the year-end.
2 Proceeds from the sale of the motor vehicle were $30 000.
3 During the year trade receivables increased by $22 000 and trade payables decreased by
$18 000.
4 The net increase in cash and cash equivalents during the year was three times the amount of the overdraft at the start of the year.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Identify the type of business which keeps no inventory of goods for resale. [1]
(b) Prepare the statement of cash flows for R Limited for the year ended 31 December 2018 in accordance with IAS 7. (Ignore taxation.) [18]
(c) State why the revaluation of a non-current asset is not disclosed in a statement of cash flows. [1]
Additional information
The finance director of R Limited has produced the cash budget for the year ending
31 December 2019. This shows at that date the company will again have an overdraft.
(d) Discuss the possible reasons for this. [5]
[Total: 25]
Section B: Cost and Management Accounting
Question 5
Source B1
Young manufactures two products, Product X and Product Y. The following budgeted information is available.
Product X Product Y
Production units 5 000 5 000
Machine hours 10 000 20 000
Labour hours 5 000 7 500
Direct materials (per unit) $60 $75
Direct labour (per hour) $25 $30
Total production overheads, $180 000, are to be allocated to each product on the basis of machine hours. A 50% mark-up will be added to the production cost of each product to set the selling price.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Calculate for each product the unit production cost and unit selling price. [7]
Additional information
On the advice of the management accountant, Young is considering using activity based costing
(ABC) to allocate the production overheads to both products. The following information is available.
$ Product X Product Y
Machine set up 120 000 20 times 10 times
Materials handling 45 000 10 receipts 5 receipts
Inspection 15 000 150 hours 100 hours
180 000
(b) State what is meant by ‘Activity Based Costing (ABC)’. [1]
(c) Recalculate for each product the unit production cost and the unit selling price using ABC. [7]
(d) (i) Calculate the difference between the unit production overhead charged to Product X and to Product Y using each method. [3]
(ii) Calculate the difference between the unit selling price using the two costing methods for
Product X and Product Y.
[2]
(e) Advise Young whether or not he should change the method of allocating production overhead costs to ABC. Justify your answer. [5]
[Total: 25]
Question 6
Source B2
Abida is a manufacturer of a product which has a seasonal peak demand during certain months. The following budgeted information is available.
June July August September October November
Sales (units) 5000 12 000 18 000 6000 3000 1800
Each unit of production requires 1.5 kilos of direct material at $3 per kilo. There will be a cost increase of 10% in August, and this will be in force for the rest of the year.
The following information is also available.
1 Abida manufactures the product one month before the month of sale.
2 Closing inventory is 20% of the following month’s sale.
3 Purchases of direct material are made one month before production starts. The company only purchases sufficient raw materials each month to meet the following month’s production requirement.
Answer the following questions in the Question Paper. Questions are printed here for reference only.
(a) Prepare for each of the four months June to September:
(i) the production budget in units [5]
(ii) the purchases budget in both kilos and dollars. [5]
Additional information
Abida encourages her managers to prepare their own departmental budgets.
(b) State two advantages and three disadvantages to Abida of continuing to allow the departmental managers to prepare their own budgets. [5]
Additional information
Abida had also prepared an annual budget for a second product she manufactures. The following budgeted information is available for the year for this product.
Per unit
Selling price $10.50
Direct materials at $3.30 per kilo 1.5 kilos
Direct labour at $6.50 per hour 0.5 hours
Fixed costs $27 000 per year.
The actual activity level for the year was 85 000 units. The following actual information is also available.
Per unit
Selling price $10.25
Direct materials at $3.00 per kilo 1.5 kilos
Direct labour at $7.00 per hour 0.6 hours
Fixed costs $28 000 for the year.
(c) State two reasons why flexible budgeting may help a business. [2]
(d) Prepare the flexed budgeted profit statement for the year. Your statement should show clearly the variances between the actual and flexed budgeted figures.
[8]
[Total: 25]
Mark scheme
4(a) Service / tertiary business (1) 1
4(b) R Limited 18
Statement of cash flows for the year ended 31 December 2018
$000 $000
Profit from operations (135 + 16) 151 (1)
Depreciation – equipment 27 (1)
– motor vehicles 21 (1) 48
Profit on disposal (7) (1)
Increase in trade receivables (22) (1)
Decrease in trade payables (18) (1)
Cash from operations 152 (1) OF
Interest paid (16) (1)
Net cash from operating activities 136 (1) OF
Cash flow from investing activities
Purchase of non-current assets (80) (1)
Proceeds of sale of non-current assets 30 (1)
Net cash used in investing activities (50) (1) OF
Cash from financing activities
Proceeds of issue of shares 144 (1)
Dividend paid (80) (1)
Net cash from financing activities 64 (1) OF
Net increase in cash and cash equivalents 150 (1) OF
Cash and cash equivalents 1 Jan 2018 (50) (1) OF
Cash and cash equivalents 31 Dec 2018 100 (1) OF
4(c) Because the revaluation of a non-current asset does not involve any movement of funds (1) 1
4(d) Possible answers: 5
Reduced profit / increased expenses for the year (1)
Decrease in trade payables / paying payables more quickly (1)
Increase in trade receivables / receivables paying more slowly (1)
Purchase of non-current assets (1)
Payment of dividend (1)
Repayment of loans / debentures (1)
Accept other valid points.
Max 5
5(a) 7
Product X Product Y
$ $
Direct materials 300 000 ) 375 000 )
Direct labour 125 000 ) 225 000 )(1) all four
Production overhead 60 000 (1) 120 000 (1)
Total production cost 485 000 720 000
÷ 5 000 ÷ 5 000
Unit production cost 97 (1) OF 144 (1) OF
50% mark-up 48.5 72
Unit selling price 145.5 (1) OF 216 (1) OF
Per Unit
Product X Product Y
$ $
Direct materials 60 ) 75 )
Direct labour 25 ) 45 )(1)
Production overhead 12 (1) 24 (1)
Unit production cost 97 (1) OF 144 (1) OF
50% mark up 48.5 72
Unit selling price 145.5 (1) OF 216 (1) OF
5(b) Activity based costing is a costing method to allocate production overhead to products according to the activities 1
performed / cost drivers. (1)
5(c) 7
Product X Product Y Per unit Product X Product Y
$ $
Direct materials 300 000 375 000 60.0 75.0
Direct labour 125 000 225 000 25.0 45.0
Production overhead 119 000 } 61 000 } W1 23.8 12.2 } W1
Total production cost 544 000 661 000
÷ 5 000 ÷ 5 000
Unit production cost 108.8 (1) OF 132.2 (1) OF 108.8 (1) OF 132.2 (1) OF
50% mark up 54.4 66.1 54.4 66.1
Unit selling price 163.2 (1) OF 198.3 (1) OF 163.2 (1) OF 198.3 (1) OF
W1 Total X Y Per unit X Y
$ $ $ $ $
Machine set up 120 000 80 000 } 40 000 } (1) 16.0 } 8.0 } (1)
Materials handling 45 000 30 000 } 15 000 } (1) 6.0 } 3.0 } (1)
Inspection 15 000 9 000 } 6 000 } (1) 1.8 } 1.2 } (1)
180 000 119 000 61 000 23.8 12.2
5(d)(i) Product X Product Y 3
Per unit $ $
Production overhead
On machine hours 12.0 24.0 (1) OF
On ABC 23.8 12.2 (1) OF
Difference 11.8 (11.8) (1) OF
5(d)(ii) 2
Product X Product Y
Per unit $ $
Original selling price 145.50 216.00
Selling price using ABC 163.20 198.30
Difference 17.70 (1)OF (17.70) (1)OF
5(e) Possible answers: 5
For (Max 2)
More realistic / fair / reliable / relevant (1)
Allows better pricing of the product (1)
Avoids the arbitrary allocation of overheads (1)
Against (Max 2)
Complex / difficult to identify cost drivers (1)
Time consuming (1)
Costly / specialists may be required (1)
Accept other valid points.
Decision (1)
6(a)(i) Production budget in units 5
units workings
Sales 5 000 12 000 18 000 6 000 3 000
June July August Sept October
1. Sales 12 000 18 000 6 000 3 000 (1) row 1 800
2. Add closing inventory (20%)
2 400 3 600 1 200 600 (1) row 360
14 400 21 600 7 200 3 600 2 160
Less opening inventory *1000 (1) 2 400 3 600 1 200 (1) OF for all 3 600
Monthly production (units) 13 400 19 200 3 600 2 400 (1) OF row 1 560
* the opening inventory in June equals the closing inventory in May = June sales 5000 × 20% = 1000
6(a)(ii) Purchases budget 5
June July August Sept
Monthly production (units) 13 400 19 200 3 600 2 400
Monthly requirement (units) 19 200 3 600 2 400 1 560
× 1.5 × 1.5 × 1.5 × 1.5
Monthly purchases (kilos) 28 800 5 400 3 600 2 340 (1) OF row
× $3.00 × $3.00 × $3.30 × $3.30
Monthly purchases ($) 86 400 (1) OF 16 200 (1) OF 11 880 (1) OF 7 722 (1) OF
6(b) Possible advantages and disadvantages: 5
Advantages Max 2
They provide more realistic targets / enable better planning and control (1)
It improves motivation (1)
It improves co-ordination (1)
It enables better communication (1)
Makes the managers accountable for their performance (1)
Disadvantages Max 3
Managers may not have the skills required (1)
The whole budget process could take longer (1)
Managers may set lower targets so that they look good (1)
Managers may build in slack / a buffer so that they don’t overspend (1)
It encourages wasteful spending / they spend up to their limits so they don’t lose future allocations (1)
May result in conflict / competition between departments over the allocation or use of resources (1)
Departmental budgets may have different objectives to the business as a whole (1)
Accept other valid points.
6(c) Possible answers: 2
It allows for changes in activity / more realistic / accurate or reliable (1)
It makes it easier to identify variances. (1)
It provides clearer understanding of what corrective action is required. (1)
It enables better comparisons – like for like. (1)
Accept other valid points.
Max 2
6(d) Units 85 000 85 000 8
Actual Flexed Variance
budget
$ $ $
Sales 871 250 892 500 (1) 21 250 A (1) OF
Direct materials 382 500 420 750 (1) 38 250 F (1) OF
Direct labour 357 000 276 250 (1) 80 750 A (1) OF
Fixed costs 28 000 27 000 1 000 A (1)
Profit 103 750 168 500 64 750 A (1) OF
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Accounting 9706/32 for October/November 2019 is out of 150 marks, across 6 questions.
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