Accounting 9706/31 October/November 2020: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, October/November 2020. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Read Source A1 in the insert.
(a) Calculate the amount of unrealised profit included in inventory on 31 December 2019.
…… [2]
(b) Calculate the rate of factory profit being applied in 2019.
…… [2]
(c) Prepare the income statement for the year ended 31 December 2019.
Workings:
[14]
Additional information
The factory manager has suggested that a rate of factory profit of 50% should be applied every year.
(d) Advise Barry whether or not he should apply a rate of factory profit of 50%. Justify your answer.
…… [5]
(e) Explain where carriage on raw materials is recorded in the financial statements of a manufacturing business.
…… [2]
[Total: 25]
Mark scheme
1(a) 40 000 – 15 000 (1) = 25 000 (1)OF 2
1(b) 25 000 2
(1)OF × 100 = 25% (1)OF
(125 000 − 25 000)
1(c) Barry 14
Income statement for the year ended 31 December 2019
$ $
Revenue 1 550 000
Inventory 1 January 2019 140 000
Production cost at transfer price 1 000 000 W1
1 140 000
Inventory 31 December 2019 125 000 (1)
Cost of sales 1 015 000 (1)OF
Gross profit 535 000 (1)OF
Factory profit 200 000 (1)OF
Decrease in provision for unrealised profit 15 000 (1)
Distribution costs 212 000
Administrative expenses 484 000 (1) 696 000
Profit from operations 54 000 (1)OF
Finance charges 20 000 (1)
Profit for the year 34 000 (1)OF
W1 505 000 (1) + 283 000 (1) + 12 000 (1) + 200 000 (1)OF = 1 000 000 (1)OF
1(d) This suggestion would remove the link with the market price (1) and therefore 5
be subjective (1).
This would increase factory profit (1) but decrease gross profit (1) and leave
overall profit unchanged (1).
Any production bonuses for staff and/or the manager in the factory could be
inflated (1).
A fixed rate would be consistent year on year (1) and would avoid large
fluctuations in the provision for unrealised profit (1) and would simplify the
accounting function (1).
Accept other valid points
Max (4) for comments plus (1) for decision
1(e) In the manufacturing account (1) within cost of raw materials 2
consumed/added to purchase cost of raw materials (1) as it is the additional
cost of purchasing the raw materials (1) Max 2
Read Source A2 in the insert.
(a) Calculate the profit for the year ended 31 December 2019.
…… [3]
(b) Prepare the correct equity and liabilities section of the statement of financial position at
31 December 2019.
Workings:
[16]
Additional information
The financial statements of PL plc also contain a value for goodwill.
(c) Explain the event which has taken place and caused the company to record the value for goodwill.
…… [2]
(d) State two other reasons why goodwill might arise.
1 ……
2 …… [2]
(e) Explain what is meant by the term ‘audit’.
…… [2]
[Total: 25]
Mark scheme
2(a) $ 3
Profit from operations 63 000 (1)
Interest (12 – 3 + 5) 14 000 (1)
Profit for the year 49 000 (1)(OF)
2(b) PL plc 16
Statement of financial position (extract) at 31
December 2019
Equity $
Ordinary share capital 341 000 W1
Share premium 59 000 W2
Revaluation reserve 95 000 (1)
General reserve 30 000 (1)
Retained earnings 75 000 W3
600 000
Non-current liabilities
Bank loans 85 000 (1)
Current liabilities
Trade and other payables 72 000 W4
Bank loan 20 000 (1)
Total equity and liabilities (1) 777 000 (1)(OF)
W1 250 000 + 60 000 (1) + 31 000 = 341 000 (1)(OF)
W2 90 000 (1) – 31 000 = 59 000 (1)(OF)
W3 76 000 + 49 000 (1)(OF)– 20 000 (1) – 30 000 (1) = 75 000 (1)(OF)
W4 67 000 (1) + 5 000 = 72 000 (1)(OF)
2(c) The company has purchased another business as a going concern (1) and 2
paid a purchase consideration higher than the value of the net assets taken
over (1).
2(d) Good reputation of business (1) 2
Good location of premises (1)
Profitability of business (1)
Efficiency of employees (1)
Good customer base (1)
Accept other valid points
Max 2
2(e) An independent check on a business’s accounting records (1) by an 2
independent, qualified person (1) to check for material errors and to check
compliance with accounting standards and relevant legislation (1), resulting in
a report (1) stating whether or not the financial statements give a true and fair
view (1).
Accept other valid points
Max 2
Read Source A3 in the insert.
(a) Prepare the following in Maria’s books of account.
(i) Consignment to Nakula account
…… [5]
(ii) Consignment to Pedro account
…… [4]
(b) Calculate the rate of commission paid to Pedro.
…… [2]
Additional information
By the accounting year end, Pedro had remitted to Maria all the monies due to her from the consignment. However, Nakula had made no remittances of monies to Maria.
(c) Prepare the following in Maria’s books of account.
(i) Nakula account
…… [4]
(ii) Pedro account
…… [4]
(d) Explain how unsold goods held by an agent are valued.
…… [3]
(e) Calculate the number of units held in inventory by Nakula at 31 March 2020.
…… [3]
[Total: 25]
Mark scheme
3(a)(i) Consignment to Nakula account 5
$ $
goods on consignment 6000 * Nakula 4000 (1)
bank (freight) 600 } Bal c/d 4180
Nakula (selling) 400 }(1)both
Nakula (commission) 720 (1)
profit on consignment 460 *(1)both
8180 8180
Bal b/d 4180 (1)OF
3(a)(ii) consignment to Pedro account 4
$ $
goods on consignment 15 000 * Pedro 28 000 (1)
Pedro (freight) 1 600 }
Pedro (selling) 1 200 }(1)both
Pedro (commission) 2 800 (1)(OF)
profit on consignment 7 400 *(1) both
28 000 28 000
3(b) 2800 2
(1)(OF)× 100 = 10% (1)(OF)
28 000
OF relates to numerator only, denominator CF
3(c)(i) Nakula account 4
$ $
Consignment a/c N 4000 (1) Consignment a/c N 400 (1)
Consignment a/c N 720 (1)
Bal c/d 2880
4000 4000
Bal b/d 2880 (1)(OF)
3(c)(ii) Pedro account 4
$ $
consignment a/c P 28 000 (1) consignment a/c P 1 600 }
consignment a/c P 1 200 }(1)
consignment a/c P 2 800 (1)(OF)
bank 22 400 (1)(OF)
28 000 28 000
3(d) At lower of cost (1) plus the relevant portion of the costs of getting the 3
inventory into a position and condition to sell (1) and net realisable value (1)
3(e) 4180 (1of) 3
= 38 units (1)(OF)
110 (1)
Read Source A4 in the insert.
(a) Explain why the use of ratios may be helpful in analysing accounting data.
…… [3]
(b) (i) Calculate, to two decimal places, TC plc’s income gearing ratio.
…… [2]
(ii) State what this ratio tells an investor about the risk of the company.
…… [1]
(iii) Name one other ratio which assesses the relationship between fixed cost capital and total capital.
…… [1]
(c) (i) Calculate, to two decimal places, TC plc’s dividend cover.
…… [2]
(ii) State what this ratio tells an investor about the company’s potential for capital growth.
…… [1]
(d) (i) Calculate, to two decimal places, TC plc’s dividend yield.
…… [2]
(ii) State what this ratio tells an investor in the company who needs income.
…… [1]
(e) Name and calculate the ratio which shows the amount of profit attributable to each ordinary share.
Name ……
Calculation ……
…… [3]
(f) Name and calculate, to two decimal places, the ratio which measures the confidence investors have in the future of the business.
Name ……
Calculation ……
…… [4]
Additional information
Fred is considering investing in TC plc. His brother says that in order to make a decision, Fred does not need to look at the income statement and statement of financial position, but only needs to look at the directors’ report.
(g) Advise Fred whether or not he should follow his brother’s advice. Justify your answer.
…… [5]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) Absolute values may not be useful in isolation. (1) 3
The use of ratios puts values into context. (1)
Ratios may enable trends over time to be monitored. (1)
Ratios enable comparisons with other companies or with industry averages.
(1)
Ratios may help in decision making. (1)
Accept other valid points
Max 3
4(b)(i) 20 000 2
(1) × 100 = 9.30% (1)(OF)
215 000
4(b)(ii) It shows that the company has a good ability to pay the interest out of profits. 1
(1)
4(b)(iii) gearing ratio (1) 1
4(c)(i) 195 000 2
(1) = 2.44 times (1)(OF)
80 000
4(c)(ii) The company is ploughing back the majority of its profits into the business 1
which should increase its profit generating abilities. (1)
4(d)(i) 0.08 2
(1) × 100 = 10.67% (1)(OF)
0.75
4(d)(ii) An investor will get back more than 10% of the amount he would pay now to 1
buy shares each year. (1)
4(e) earnings per share (1) 3
195 000
(1) = $0.195 (1)(OF)
1000 000
4(f) price earnings ratio (1) 4
0.75 (1)
= 3.85 (1)(OF)
0.195 (1of)
4(g) The directors’ report does give a review of performance (1) and details of 5
dividends (1) but Fred would likely want more detail than this (1).
The financial statements deal with historic data (1) and may not be a good
indicator of future performance (1) but the directors’ report also covers likely
future developments of the company (1).
Decision (1)
Max (4) for comments
Accept other valid points.
Read Source B1 in the insert.
(a) Calculate, to two decimal places, the profit or loss per unit of each product.
…… [5]
Additional information
The following additional monthly data is available.
1 Approximately 40% of the floor space in the factory is used in the manufacture of product A and 60% in the manufacture of product B.
2 The machinery used to manufacture product A is set up 300 times a month and the machinery for product B 500 times a month.
3 The number of orders packed for despatch are 700 a month for product A and 420 a month for product B.
4 300 quality inspections take place each month for product A and 700 for product B.
(b) Calculate the amount of overhead allocated or apportioned to each product using the additional monthly data.
…… [8]
(c) Name and explain why one of Bob’s overhead costs cannot be allocated using activity based costing.
…… [3]
(d) Calculate, to two decimal places, the profit or loss per unit of each product which would be earned if overheads were calculated using the additional monthly data.
…… [4]
(e) Advise Bob whether or not he should make any changes to the selling prices. Justify your answer.
…… [5]
[Total: 25]
PLEASE TURN OVER
Mark scheme
5(a) A B 5
$ $
sales 58 000 138 000 (1) both
direct materials 16 000 36 000 }
direct labour 20 000 33 000 } (1) both
overheads 18 098 (1) 43 062 (1)
total profit 3 902 25 938
profit per unit 1.95 8.65 (1)(OF)both
Accept alternative formats
5(b) A B 8
$ $
Rent 16 800 25 200 (1) both
Machine set up costs 3 000 (1) 5 000 (1)
Packaging 3 850 (1) 2 310 (1)
Quality inspections 1 500 (1) 3 500 (1)
25 150 36 010 (1)(OF)both
5(c) Rent cannot be allocated under ABC (1) 3
Max 2 of the following
it is a fixed cost (1)/not affected by the level of production (1)/not subject to
changes in activity level (1)/apportioned on a suitable basis i.e. floor area. (1)
5(d) 4
A B
$ $
old profit 3 902 25 938 *
add old overheads 18 098 43 062 *(1)(OF)both
less new overheads 25 150 36 010 (1)(OF)both
new profit/loss (3150) 32 990 (1)(OF)both
new profit/loss per unit (1.58) 11.00 (1)(OF)both
accept alternative formats
5(e) The changes in allocation of overheads has not changed total profit. (1) 5
Product A now makes a loss per unit. (1)
However it still has a positive contribution. (1)
Most of the increase in the overheads for product A relate to the rent which is
still apportioned rather than allocated and is therefore subjective. (1)
Bob needs to consider what his competitors are charging/what the market can
bear. (1)
If he increased the price of A sales might fall. (1)
If sales of A fell total contribution might decrease. (1)
If sales of A fell the rent being a fixed cost would still have to be paid. (1)
Accept other valid points
Decision (1)
Max (4) for four comments.
Read Source B2 in the insert.
(a) Calculate the total revenue for each year for:
(i) the original plan
…… [1]
(ii) the revised plan.
…… [1]
Additional information
The majority of the running costs of the cruises will be fixed. Variable costs are expected to amount to $30 for each ticket sold.
(b) Calculate the total variable cost for each year for:
(i) the original plan
…… [2]
(ii) the revised plan.
…… [2]
Additional information
1 The cost of employing the historians will add $125 000 per annum to the total fixed costs of running the cruises.
2 The capacity of the boat restricts the total number of tickets which can be sold each year to
10 000.
3 Samir uses a cost of capital of 10% per annum. The discount factors for this rate are as follows.
year 1 0.909 year 2 0.826
(c) Calculate the increase in NPV which would arise if the revised plan was used instead of the original.
…… [8]
(d) Calculate the total number of tickets Samir would have to sell in year 1 under the revised plan so that the increase in revenue equalled the additional fixed costs.
…… [3]
(e) Assess any concerns Samir might have about the revised plan.
…… [2]
(f) Advise Samir whether or not he should implement the revised plan. Justify your answer.
…… [3]
(g) Explain how sensitivity analysis helps in investment appraisal.
…… [3]
[Total: 25]
Mark scheme
6(a)(i) 1
year 1 year 2
$ $
revenue – original 800 000 913 000 (1 both)
6(a) (ii) 1
year 1 year 2
$ $
revenue – revised 1 056 000 1 195 200 (1 both)
6(b)(i) 2
year 1 year 2
$ $
variable cost – original 240 000 (1) 249 000 (1)
6(b)(ii) 2
year 1 year 2
$ $
variable cost – revised 288 000 (1) 298 800 (1)
6(c) 8
incr in incr in incr in net cash discount discounted
revenue var fixed flow factor cash flow
$ costs costs $ $
$ $
y1 256 000 48 000 125 000 83 000 0.909 75 447 (1)(OF)
(1)(OF)
y2 282 200 49 800 125 000 107 400 0.826 88 712 (1)(OF)
(1)(OF) (1)(OF) (1) for (1)(OF)
for both for both both
NPV 164 159 (1)(OF)
6(d) 3
increase in fixed costs $125 000
increased income from existing sales [8 000 × $10] $80 000
$45 000 (1)
new ticket sales [45 000/(100 + 10)] 409.09 (1)(OF)
total ticket sales (8 000 + 410) 8 410 (1)(OF)
6(e) It would increase the risk (1) as it involves a substantial increase in the fixed 2
costs (1) with no guarantee that the extra revenue will happen (1). In year 2
the ticket sales are very close to the maximum (1). What will happen if
someone wants to buy a ticket for a day which is fully booked – will he chose
to book on another day? (1)
Accept other valid points.
Max 2
6(f) It increases an already positive NPV. (1) 3
He could consider other methods of appraisal. (1)
It increases the risk of the plan. (1)
It is based on estimates. (1)
Non-financial factors are not considered. (1)
Accept other valid points
Decision (1)
Max (2) for comments
6(g) It deals with forecast figures (1) to measure the effect on an outcome of a 3
change in a variable cost or income (1). It is useful when a project lasts for a
number of years (1).
Accept other valid points
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