Accounting 9706/22 October/November 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, October/November 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Anjali is a sole trader. She does not maintain a full set of accounting records.
At 1 October 2019 the assets and liabilities of Anjali were as follows:
Cash at bank 4 600 debit
Inventory 14 500
Non-current assets (carrying value) 85 000
Trade payables 9 930
Trade receivables 12 850
During the year ended 30 September 2020 the following transactions were recorded.
General expenses paid 11 480
Payments to trade payables 50 250
Receipts from trade receivables 73 850
Rental income received 9 000
Returns inwards 2 070
Returns outwards 1 290
Anjali made drawings of $600 per month throughout the year.
All receipts and payments were processed through the bank account.
Irrecoverable debts of $2300 were written off.
At 30 September 2020 the assets and liabilities were as follows:
Inventory 18 000
Non-current assets (carrying value) 72 250
Prepaid general expenses 600
Trade payables 11 470
Trade receivables 14 980
REQUIRED
(a) Calculate the bank balance at 30 September 2020.
…… [3]
(b) Prepare the income statement for the year ended 30 September 2020. Use the space on the next page for your workings.
Anjali
Income statement for the year ended 30 September 2020
Workings:
[17]
(c) Calculate the following, to two decimal places, for the year ended 30 September 2020.
(i) Gross margin
…… [1]
(ii) Mark-up
…… [1]
(iii) Profit margin
…… [1]
(d) (i) Explain how a business may increase its gross margin.
…… [2]
(ii) Explain how a business may improve its profit margin.
…… [2]
(e) State one reason why each of the following may be interested in the financial statements of a business.
1 Employees ……
2 Suppliers ……
3 Government ……
[3]
[Total: 30]
Mark scheme
1(a) 4 600 + 73 850 + 9000 = $87 450 (1) 3
11 480 + 50 250 + 7200 = $68 930 (1)
87 450 – 68 930 = $18 520 (1)OF
1(b) Anjali 17
Income Statement for the year ending 30 September 2020.
$ $ $
Revenue W1 80 350 (4)
Returns inwards (2 070) (1)
78 280
Deduct: cost of sales
Opening inventory 14 500 *
Purchases W2 53 080 (3)
Returns outwards (1 290) (1)
51 790
Closing inventory (18 000) *(1 both)
(48 290) (1)OF
Gross profit 29 990 (1)OF
Rental income 9 000 (1)
38 990
General expenses 10 880 (1)
Irrecoverable debts 2 300 (1)
Depreciation 12 750 (1)
(25 930)
Profit for the year 13 060 (1)OF
W1 73 850 + 2070 (1) + (14 980 – 12 850) (1 both) + 2300 (1)
= $80 350 (1)OF
W2 50 250 + 1290 (1) + (11 470 – 9930) (1 both) = $53 080 (1)OF
1(c)(i) Gross margin = 29 990 / 80 350 = 37.32% (1)OF 1
1(c)(ii) Mark-up = 29 990 / 48 290 = 62.10% (1)OF 1
1(c)(iii) Profit margin = 13 060 / 80 350 = 16.25% (1)OF 1
1(d)(i) Reduce the cost of sales (1) by finding less expensive supplies (1). 2
Accept other valid responses
1(d)(ii) Better control of overhead expenses (1) such as reducing irrecoverable 2
debts (1)
Accept other valid responses
1(e) Employees – To be aware of profitability to assess job security and 3
remuneration. (1)
Suppliers– To assess likelihood of being paid amounts owed. (1)
Government – To confirm correct amounts of taxes are being paid. (1)
Accept other valid responses
Khalid runs a business. His non-current assets with a total value of $200 000 consist of a motor vehicle and a machine with a life expectancy of 5 years. He anticipates that the machine will make products at a steady rate during that period.
REQUIRED
(a) State three methods of depreciation which may be used by a business.
1 ……
2 ……
3 ……
[3]
(b) Advise Khalid which method of depreciation he should use for each asset. Justify your advice.
Motor vehicle ……
Machine ……
…… [6]
(c) State which accounting concept Khalid did not apply in each of the following scenarios.
Scenario Concept
Khalid used the business bank account to pay for a deposit for a family holiday. This was treated as a business expense.
A stapler for $10 paid by Khalid out of the business bank account was added to the business office equipment account balance.
Khalid became aware that a customer owing $1500 was bankrupt. He took no action when preparing the financial statements.
[3]
(d) State the purpose of financial statements.
…… [3]
[Total: 15]
Mark scheme
2(a) Reducing balance (1). 3
Straight-line (1).
Revaluation (1).
2(b) Motor vehicle – reducing balance (1). 6
The asset loses value more quickly at the beginning of its life therefore more
depreciation is charged in the early years (1).
More maintenance expenditure is expected in later years so less
depreciation (1).
Max. 3
Machine – straight line (1).
The asset loses value at a steady rate (1).
The same benefit is received over the life so equal depreciation is charged in
accordance with the accruals concept (1) spreading the cost over the useful
economic life (1).
Max. 3
Accept other valid responses
2(c) 3
Scenario Concept
Khalid used the business bank account Business entity (1).
to pay for a deposit for a family holiday.
This was treated as a business
expense.
A stapler for $10 paid by Khalid out of Materiality (1).
the business bank account was added
to the business office equipment
account balance.
Khalid became aware that a trade Prudence / matching/accruals (1).
receivable owing $1500 was bankrupt.
He took no action when preparing the
annual accounts.
2(d) To provide information about the financial performance of the business (1) the 3
financial position of the business (1) and to facilitate decision making/
comparison to previous years / other businesses (1).
Accept other valid responses
Roberto and Sangeeta have been in partnership for many years sharing profits and losses in the ratio 3:2. They decided to dissolve the partnership on 31 August 2020.
Their summarised statement of financial position at that date was as follows:
$
Assets
Non-current assets 160 000
Current assets
Inventory 45 000
Trade receivables 15 000
60 000
Total assets 220 000
Capital and liabilities
Capital accounts
Roberto 110 000
Sangeeta 60 000
170 000
Current accounts
Roberto 25 000
Sangeeta (10 000)
15 000
Total capital and current accounts 185 000
Current liabilities
Trade payables 30 000
Bank overdraft 5 000
35 000
Total capital and liabilities 220 000
The following information is also available.
1 Non-current assets were sold for $175 000.
2 Inventory was sold for $42 000.
3 Trade receivables were settled after allowing a 20% discount.
4 Trade payables were settled after taking a 10% discount.
5 Dissolution expenses of $4000 were paid by cheque.
REQUIRED
(a) Prepare the partnership realisation account.
Partnership realisation account
$ $
[5]
(b) Prepare the partners’ capital accounts on dissolution of the partnership.
Partners’ capital accounts
Roberto Sangeeta Roberto Sangeeta
$ $ $ $
[5]
(c) Prepare the bank account on dissolution of the partnership.
Bank account
$ $
[5]
[Total: 15]
Mark scheme
3(a) Partnership realisation account 5
$ $
Non-current assets 160 000 Trade payables 30 000
Current assets 60 000 Bank – nca 175 000
Bank – t. payables 27 000 (1) inventory 42 000 (1)
– dissolution costs 4 000 (1) t. recs. 12 000
Capital
Roberto 4 800 (1)OF
Sangeeta 3 200 (1)OF
259 000 259 000
3(b) Capital accounts 5
Roberto Sangeeta Roberto Sangeeta
$ $ $ $
Bal. b/d 110 000 60 000 (1)
Current 10 000 (1) Current 25 000 (1)
Bank 139 800 53 200 (1)OF* Realis. 4 800 3 200 (1)OF*
139 800 63 200 139 800 63 200
* OF marks are for both
3(c) Bank account 5
$$
Realisation 175 000
42 000 (1) Bal. b/d 5 000 (1)
12 000 Realisation 27 000
4 000 (1)
Capital R 139 800 (1)OF
Capital S 53 200 (1)OF
229 000 229 000
Kevin runs a small manufacturing business. He is considering which method of inventory valuation he should use.
REQUIRED
(a) State two advantages to a business of using each of the following methods of inventory valuation.
(i) First in first out (FIFO)
1 ……
2 ……
(ii) Last in first out (LIFO)
1 ……
2 ……
(iii) Average cost (AVCO)
1 ……
2 ……
[6]
Additional information
Kevin manufactures a single product and he intends to value his closing inventory at selling price which includes a mark-up on cost.
REQUIRED
(b) Explain why Kevin should not value his inventory at this price.
…… [3]
Additional information
Kevin currently uses marginal costing but is considering changing to absorption costing.
The following budgeted information per unit is available.
$
Selling price 20
Direct material 6
Direct labour 3
Budgeted production 20 000 units per month
Budgeted fixed overheads $100 000 per month.
At 1 January there was no inventory held.
The following actual results are available for January and February.
January February
Sales (units) 15 000 21 000
Production (units) 18 000 18 000
Fixed overheads $100 000 $100 000
REQUIRED
(c) Prepare the income statement for each of the months of January and February using marginal costing.
Kevin
Marginal cost income statement
January February
$ $ $ $
[5]
(d) Prepare the income statement for each of the months of January and February using absorption costing.
Kevin
Absorption cost income statement
January February
$ $ $ $
[6]
(e) Prepare a statement reconciling the marginal cost profit with the absorption cost profit for
January.
…… [3]
(f) Advise Kevin whether or not he should change from marginal costing to absorption costing.
Justify your answer.
…… [7]
[Total: 30]
Mark scheme
4(a)(i) FIFO 2
Simple to calculate (1).
Approved by IAS2 (1)
Inventory valuations are based on the most recent receipts (1)
Max 2
Accept other valid responses.
4(a)(ii) LIFO 2
Simple to calculate (1)
When prices rise profits will fall (1).
May correspond to flow of inventory – ‘top of pile’ (1).
Max 2
Accept other valid responses.
4(a)(iii) AVCO 2
Automatically adjusts for price rises and falls (1).
Approved by IAS2 (1)
Provides an average price for goods issued (1)
Max 2
Accept other valid responses.
4(b) The use of selling price would result in an overstatement of profit / current 3
assets (1) so inventory should be valued at lower of cost and net realisable
value (1) in accordance with the prudence concept (1)
Max 3
Accept other valid responses.
4(c) Kevin 5
Marginal costing income statement
January February
$ $ $ $
Sales 300 000 420 000
(1) both
Opening Inv – 27 000
Cost of prod 162 000 162 000
Closing Inv (27 000) (135 000) - (189 000)
(1)
Contribution 165 000 231 000
(1)OF
both
Fixed costs (100 000) (100 000)
(1) both
Profit 65 000 131 000
(1)OF
both
4(d) Kevin 6
Absorption costing income statement
January February
$ $ $ $
Sales 300 000 420 000
(1) both
Opening Inv - 42 000
Cost of prod 252 000 252 000
Closing Inv (42 000) (210 000) - (294 000)
(1)
90 000 126 000
(1) both
Under absorbed (10 000) (10 000)
(1) (1)
Profit 80 000 116 000
(1)OF
both
4(e) Marginal costing profit $65 000 (1)OF 3
Closing inventory (3000 × $5) $15 000 (1)
Absorption costing profit $80 000 (1)OF
4(f) Marginal costing 7
• Easier to operate (1).
• Aids short-term decision making (1).
• Enables optimum allocation of resources (1).
• Avoids the problems of over/under absorption (1).
Absorption costing
• More complex / may require specialist knowledge (1)
• Gives higher profit when inventory levels increase (1)
• Includes an element of fixed cost in the inventory valuation (1).
• Absorbing overheads into costs aids the setting of prices (1).
• Reviewing under and over absorption may aid control and management
of the business (1).
Accept other valid responses.
1 mark for decision and Max 6 marks for valid points.
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Accounting 9706/22 for October/November 2020 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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