Accounting 9706/33 October/November 2020: question paper and mark scheme

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1(a)(i) $ 4 draft 78 000 sale or return goods 8 000 (1) adj for net realisable value (12 900) (1) [–27 +18.2 – 4.1] import duties 3 500 (1) inventory 76 600 (1)OF 1(a)(ii) $ 2 opening inventory 85 000 purchases 1 317 000 import duties 30 000 (1) closing inventory (76 600) cost of sales 1 355 400 (1)OF 1(b) GH plc 15 Income statement for the year ended 30 June 2020. $ $ Revenue 1980–20 1 960 000 (1) Cost of sales 1 355 400 (1)OF Gross profit 604 600 Other income 6 300 (1) Distribution costs 167 700 W1 Administrative expenses 424 100 W2 591 800 Profit from operations 19 100 Finance charges 49 000 Loss for the year 29 900 (1)OF W1 – distribution $ draft 186 500 import duties (30 000) (1) export duties 7 200 (1) impairment loss 4 000 (1) 167 700 (1)OF 1(b) W2 – administrative $ draft 391 000 provision for doubtful debts 3 000 W3 add back other income 6 300 (1) provision for legal fees 31 000 (1) export duties (7 200) (1) 424 100 (1)OF W3 – provision for doubtful debts $ draft trade receivables (194 + 6) 200 000 less sale or return (20 000) (1) 180 000 at 5% 9 000 (1)OF less opening provision (6 000) 3 000 (1)OF 1(c) With a probability of more than 50% at present this requires a provision (1) which lowers profit and increases current 4 liabilities (1). If the probability was less than 50% it would be a contingent liability (1) which would be recorded by a note to the accounts (1).

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2(a) RX Sports 16 Receipts and payments account for the year ended 31 December 2019 $ $ Balance b/d 1 420 (1) Trade payables 8 600 W4 Subscriptions 14 700 W1 Computer 2 800 W5 Disposal of club 4 700 W2 Rent 5 500 W6 equipment Trade receivables 16 260 W3 Staff costs 9 640 W7 Other costs 1 320 (1) Balance c/d 9 220 37 080 37 080 Balance b/d 9 220(1)OF W1 14 200 + (400 – 200) (1) + (600 – 300) (1) = $14 700 (1)OF W2 (7 200 – 3 100) (1) + 600 = $4 700 (1)OF W3 14 800 + (5 200 – 3 740) (1) = $16 260 (1)OF W4 9 950 + (1 560 – 2 910) (1) = $8 600 (1)OF W5 (1 900 ÷ 0.25) (1) – 4 800 = $2 800 (1)OF W6 6 000 × 11/12 = $5 500 (1) W7 9 800 – 160 = $9 640 (1) 2(b) Only the receipts and payments account contains capital items. (1) 3 Only the income and expenditure account contains non-cash items. (1) Only the income and expenditure account contains items which have been adjusted for prepayments and accruals. (1) Accept other valid points 2(c) Income and expenditure account (1) 1 2(d) Cash flow 5 Making all sales on a cash basis would mean the money is received earlier hence improving cash flow. (1) However, the trade receivables collection period is 93 days (1) which is less than the trade payables payment period of 107 days (1) which means that the cash flow issue should not be a problem (1). It can be assumed that the club has negotiated special terms with suppliers to allow for the payments by instalments which might cease if credit sales were stopped. (1) There has been a considerable increase in the funds of the club during the year and therefore it seems likely that there is no need to make this change in order to improve cash flow. (1)OF Surplus/deficit Allowing members to pay in instalments involves a lot of administration and if this was stopped then cost savings might arise. (1) Members might be put off making purchases and the sales of the club might fall. (1) Given that trade receivables have been falling and inventory has been increasing it is possible that the club is already finding it more difficult to make sales. (1) The profit from these sales makes up more than a quarter of the income of the club and this could be jeopardised. (1) The club is already making a deficit and this could be increased by the change. (1) Accept other valid points Max (2) for cash flow, Max (2) for surplus/deficit plus (1) mark for decision

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3(a) It is a profitable business. (1) 3 The premises are in a good location. (1) There is a strong customer base. (1) The business has a good reputation. (1) The employees are well trained and efficient. (1) Accept other valid points Max 3 3(b) cash (1) 3 shares (1) debentures/loan stock (1) 3(c) The profit sharing ratio is 1:1 (1) and Arthur will have received 50% of the profit on realisation (1). 5 The correct distribution of the purchase consideration depends on whether the partners contributed equally to the business (1) as shown by their capital accounts (1) and whether they withdrew resources equally from the business/taken equal amounts as drawings (1) as shown by their current accounts (1). Decision (1) (1) for Decision plus max (4) for comments 3(d) Depreciation provided had been inadequate (1). 2 The partnership had failed to provide for an impairment loss (1). VC plc had undervalued it during the negotiations for the purchase of the partnership (1). Accept other valid points Max 2 3(e)(i) 300 000 (1) – 261 350 (1) = 38 650 (1)OF 3 3(e)(ii) 261 350 (1) – 209 410 (1) = 51 940 (1)OF 3 3(f) The profit on realisation would be shared equally (1) 2 Arthur and Belinda would gain $25 970 each (1)OF 3(g) The statement of financial position of a limited company does not show an account for each shareholder/owner (1) and 4 therefore the gain has to be recorded in total (1). The statement of financial position of a partnership does show an account for each partner/owner (1) and so each partner can be credited with his/her share of the gain. (1)

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4(a) PM Limited 9 Schedule of non-current assets for the year ended 31 March 2020 Premises Plant and Motor Total machinery vehicles $000 $000 $000 $000 Cost At 1 April 2019 900 405 198 1 503 (1)row Additions 117 76 193 (1)row Disposals (136) (1)row At 31 March 2020 900 430 230 1 560 (1)OF row Depreciation At 1 April 2019 72 184 103 359 (1)row Charge for the year 18 107 46 171 (1)row Eliminated on disposal (81) (1)row At 31 March 2020 90 245 114 449 (1)OF row Net book value 810 185 116 1 111 }(1)OF row At 31 March 2020 } At 1 April 2019 828 221 95 1 144 } 4(b) 10 description $000 section depreciation charge 171 (1) operating activities (1) loss on disposal 29 (1) operating activities (1) profit on disposal 10 (1) operating activities (1) proceeds from sale of 36 (1) investing activities (1) non-current assets cost of purchases of 193 (1) investing activities (1) non-current assets 4(c) The accumulated depreciation on the premises would be cancelled (1) and the remainder of the gain would be added to 2 the cost (1). 4(d) There would be no effect (1) as a revaluation does not involve any movement of funds (1). 2 4(e) Delivery (1) 2 Installation (1) Legal fees (1) Import duties (1) Accept other valid points Max2

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5(a) $ 6 direct material 20 } direct labour 12 }(1) production overhead 18 (1) selling and distribution overhead 10 (1) total unit cost 60 (1)OF mark up 20 (1)OF selling price 80 (1)OF 5(b) Production overheads 12 $ machine set up costs $50 (1) × 350 17 500 (1)OF quality inspection costs $12 (1) × 400 4 800 4(1)OF order processing costs $10 (1) × 770 7 700 7(1)OF 30 000 $ direct material 30 } direct labour 20 }(1) production overhead 30 (1)OF selling and distribution overhead 10 (1)OF total unit cost 90 (1)OF mark up 30 (1)OF selling price 120 (1)OF 5(c) Overheads may not be fully variable which could result in the overhead cost per unit being somewhat overstated. (1) 2 Costs for the same activity may not turn out to be quite the same for two different versions. (1) There is a need for market research to determine the level of demand for the deluxe version. (1) There is a need to establish what competitors are charging for a similar version. (1) Accept other valid points Max 2 5(d) Halving the number of quality inspections would save money (1) – $3 000 for the standard version and $2 400 for the 3 deluxe version (1). The quality of the goods sold could fall with fewer inspections (1) which could result in a loss of reputation (1) or a fall in the number of units sold (1). Decision (1) Accept other valid points (1) for decision plus max (2) for comments 5(e)(i) one of the activities undertaken in the making of a product which results in a cost being incurred (1) 1 5(e)(ii) a (memorandum) account which records the cost of each of these activities (1) 1

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6(a) Advantages 4 May enable costs to be managed better (1) Helps in preparing budgets and forecasts (1) May increase staff motivation if targets are achievable (1) Facilitates variance analysis (1) Disadvantages Calculating the standards is a difficult and time consuming job (1) Maintaining the standard costing system can be expensive and difficult (1) The system will not be applicable if there are one off jobs and irregular processes (1) Setting standards is based on estimates (1) Accept other valid points Max 2 marks for advantages and Max 2 marks for disadvantages. 6(b) 6 master flexed budget budget $ $ revenue 180 000 187 500 (1) direct materials 24 000 25 000 (1) direct labour 36 000 37 500 (1) variable overhead 60 000 62 500 (1) fixed overhead 20 000 20 000 (1) profit 40 000 42 500 (1)OF Marks for both budgets 6(c) 4 $ revenue from master 180 000 (1)OF sales volume variance 7 500 (1) sales price variance (6 250) (1) actual revenue 181 250 (1) 6(d) 4 Variance Revised value($) Sales volume variance (1) 30 000 F (1) Sales price variance (1) 28 000 A (1) 6(e) This reduction would increase total revenue (1). 7 It would increase market share (1). It would reduce contribution per unit from $5 per unit to $3 per unit (1), so it would still make a positive contribution (1). It would reduce total contribution from $60 000 (1) to $42 000 (1) and hence total profit would fall (1). Other methods to increase sales such as advertising could be tried (1). Accept other valid points Max (4) for comments plus (2) for calculations of total contribution plus (1) for decision