Accounting 9706/22 October/November 2021: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, October/November 2021. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
The following balances have been extracted from the books of P Limited at 31 August 2021.
$
5% Debentures (2022–2023) 36 000
Administrative expenses 35 180
Bank 4 770 Credit
Carriage inwards 390
Delivery vehicles
Cost 89 420
Provision for depreciation at 1 September 2020 42 200
Distribution costs 44 320
Dividend paid 3 000
Freehold property at valuation at 31 August 2020 66 000
Interest paid 1 590
Inventory at 1 September 2020 22 880
Purchases 88 900
Revenue 216 600
Retained earnings 24 200
Returns outwards 260
Revaluation reserve 6 000
Share capital (ordinary shares of $0.50 each) 60 000
Share premium 8 500
Trade payables 11 730
Trade receivables 32 480
Wages and salaries 26 100
The freehold property was revalued on 1 September 2020 at $58 000. The revaluation has not yet been recorded in the books of account.
REQUIRED
(a) Prepare the journal entry to record the revaluation of the freehold property on
1 September 2020. A narrative is not required.
…… [3]
Additional information
The following information is also available.
1 Revenue includes goods sent to a credit customer on 23 August 2021 on a sale or return basis. The directors were uncertain whether any of these goods would be returned. The selling price of the goods was $6400, and they had been sold at a gross margin of 25%.
Mark scheme
1(a) 3
Debit Credit
$ $
Revaluation reserve 6 000 (1)
Income statement 2 000 (1)
Freehold property 8 000 (1)
1(b) P Limited 15
Income statement for the year ended 31 August 2021
$
Revenue 210 200 (1)
Cost of sales W1 (88 510) (4)OF
Gross profit 121 690
Administrative expenses (41 860) (1)
Distribution costs W2 (76 730) (7)OF
Profit from operations 3 100
Finance costs (1 890) (1)
Profit for the year 1 210 (1)OF
W1 Cost of sales
22 880 + 88 900 – 23 400 (1) – 260 (1) + 390 (1) = 88 510 (1)OF
W2 Distribution costs
44 320 – 180 (1) + 20 040 (1) + 1 320 (1) + 7 780 (1) + 2 000 (1) + 1 450 (1) = 76 730 (1)OF
1(c) 3
$
Balance at 1 September 2020 24 200
Dividend paid (3 000) (1)
Profit for the year 1 210 (1)OF
Balance at 31 August 2021 22 410 (1)OF
1(d) Offer discount for early settlement (1) 2
Charge interest on overdue accounts (1)
Regular chasing of debts / improve credit control (1)
Encourage cash sales rather than credit sales/discourage credit sales (1)
Debt factoring (1)
Accept other valid responses
1(e) Option 1 (max 3 marks) 7
Permanent capital (1)
Would existing shareholders be prepared to pay the 25% premium? (1)
The shares would have voting rights which could weaken the directors’ position (1)
But dividend payments would be discretionary (1)
Would rights issue be fully subscribed? (1)
Option 2 (max 3 marks)
Company already has $36 000 debentures due for repayment next year (1)
8% interest rate is more expensive than current debentures (1)
Debenture holders do not have voting rights so no likelihood of loss of control (1)
Interest will have to be paid whether the company makes a profit or loss (1)
Will leave the company very heavily reliant on external borrowing (1)
May require security (1)
Accept other valid responses
Decision (1)
Inventory in P Limited’s warehouse at 31 August 2021 was valued at cost, $18 600.
Mark scheme
2(a) Suspense Account
6
$ $
Trial balance difference 8 (1)OF Discount allowed 175 (1)
Motor repairs 27 (1) Sales 220 (1)
Sales ledger control 850 (1) Discount received 490 (1)
885 885
2(b) 3
Error Type of error
1 Transposition (1)
2 Principle (1)
3 Partial omission (1)
2(c) Reduces the possibility of fraud (1) as a result of segregation of duties (1) 4
Identifies total trade payables (1) and so aids the preparation of financial statements (1)
Checks the arithmetical accuracy of the purchases’ ledger (1) the balance on control accounts should equal the total of the
individual balances in the purchases’ ledger (1)
Max 2 benefits x 2 marks
(1 mark for identification, 1 mark for development)
Accept other valid responses
2(d) Credit purchases (1) 2
Returned cheque (1)
Interest charged by supplier (1)
Brought forward balance (1)
Supplier refund (1)
Max 2 marks
Accept other valid responses
3(a) Ordinary share capital 11
Date Details $ Date Details $
2021 2020
Jun 30 Balance c/d 220 000 Jul 1 Balance b/d 150 000
1 Aug Bank 30 000 (1)
2021
Mar 1 Share premium 37 000 (1)
Retained earnings 3 000 (1)
220 000 220 000
Jul 1 Balance b/d 220 000 (1)OF
Share premium
Date Details $ Date Details $
2021 2020
Mar 1 Ordinary share capital 37 000 (1)OF Jul 1 Balance b/d 25 000
Aug 1 Bank 12 000 (1)
37 000 37 000
3(a) Retained Earnings
Date Details $ Date Details $
2020 2020
Dec 1 Bank 7 200 (1) Jul 1 Balance b/d 28 700
2021 2021
Mar 1 Ordinary share capital 3 000 (1)OF Jun 30 Income statement 76 520 (1)
Jun 30 Balance c/d 95 020
105 220 105 220
Jul 1 Balance b/d 95 020 (1)OF
1 mark for all correct dates and labels
3(b) Capital reserves are created from non-trading activities, revenue reserves are created from revenue/trading activities (1). 2
Capital reserves are used to meet capital losses only, not for payment of dividends, revenue reserves may be used to pay
dividends (1).
Revenue reserves are distributable, capital reserves are not distributable (1)
Max 2 marks
Accept other valid responses
3(c) To compensate shareholders (1) in the event of shortage of liquid resources to pay a dividend (1) 2
Increases the issued share capital (1) creating a perception of success (1)
To capitalise revenue reserves (1) to strengthen the statement of financial position (1)
Max 2 marks
Accept other valid responses
Delivery vehicle licences of $540 had been paid for the year ending 31 December 2021.
5 Wages and salaries of $620 were outstanding at 31 August 2021.
6 Wages and salaries are to be charged as follows:
Administrative expenses 25%
Distribution costs 75%
7 On 31 August 2021, a delivery vehicle was sold for $7000. The vehicle had been purchased on 1 September 2018 for $13 000. No entries for the sale had been made in the books of account and the sale proceeds had not yet been received.
8 The freehold property is used only as a distribution warehouse. Its remaining useful life at
1 September 2020 was estimated to be 40 years.
9 Depreciation is to be charged as follows:
Non-current asset Depreciation method
Freehold property Written off over the remaining useful life
Delivery vehicles 20% per annum reducing balance
A full year’s depreciation is charged in the year of purchase, but none in the year of disposal.
REQUIRED
(b) Prepare the income statement for the year ended 31 August 2021. Use the space on the next page for your workings.
P Limited
Income statement for the year ended 31 August 2021
$
Revenue
Cost of sales
Gross profit
Administrative expenses
Distribution costs
Profit from operations
Finance costs
Profit for the year
Workings
Revenue
Cost of sales
Depreciation
Administrative expenses
Distribution costs
Finance costs
[15]
(c) Prepare a statement to show the balance of retained earnings at 31 August 2021 after the preparation of the income statement.
…… [3]
Additional information
The directors wish to reduce the level of trade receivables.
REQUIRED
(d) State two ways in which the level of trade receivables of a business could be reduced.
1 ……
2 ……
[2]
Additional information
The directors have plans to expand the business and they are considering two options.
Option 1: Make a rights issue of 80 000 ordinary shares of $0.50 each at a premium of 25%.
Option 2: Issue 8% debentures (2027–2028) to raise $50 000.
REQUIRED
(e) Advise the directors which option they should choose. Justify your decision.
…… [7]
[Total: 30]
2 Shamal maintains a full set of accounting records. He has extracted a trial balance at
30 September 2021 that does not balance and he has opened a suspense account for the difference.
Shamal has now identified the following six errors. There were no other errors.
1 A payment of $169 for motor repairs had been correctly entered in the cash book but had been debited to the motor repairs account as $196.
2 The purchase of new machinery, $670, had been debited to general expenses.
3 Discount allowed of $175 had been entered correctly in the cash book but had not been posted to the discount allowed account.
4 The sales journal was totalled at $86 961. The total should have been $86 741.
5 A cheque for $425 received from McCann, a credit customer, had been correctly entered in the cash book but had been debited to the sales ledger control account.
6 The total of the discount received column in the cash book, $490, had been entered twice on the correct side of the discount received account.
REQUIRED
(a) Prepare the suspense account at 30 September 2021, clearly identifying the opening balance.
Suspense Account
Details $ Details $
[6]
(b) Complete the table to name the type of error in each of the errors 1, 2 and 3 identified by
Shamal.
Error Type of error
1
2
3
[3]
(c) Explain two benefits to a business of preparing a purchases ledger control account.
1 ……
2 ……
[4]
(d) State two items that would appear on the credit side of a purchases ledger control account.
1 ……
2 ……
[2]
[Total: 15]
3 The following information has been extracted from the financial statements of D Limited at
30 June 2020.
$
Share capital (ordinary shares of $0.50 each) 150 000
Share premium 25 000
Retained earnings 28 700
Transactions during the year ended 30 June 2021.
1 August 2020 Made a rights issue of one ordinary share for every five shares held at
$0.70 per share. The issue was fully subscribed.
1 December 2020 Paid a dividend of $0.02 per share on all shares in issue at that date.
1 March 2021 Made a bonus issue of two ordinary shares for every nine shares held.
Reserves were left in the most flexible form.
30 June 2021 Proposed a final dividend of 2%.
The profit for the year ended 30 June 2021 was $76 520.
REQUIRED
(a) Prepare the following ledger accounts.
Ordinary share capital
Date Details $ Date Details $
Share premium
Date Details $ Date Details $
Retained earnings
Date Details $ Date Details $
[11]
(b) State two differences between capital reserves and revenue reserves.
1 ……
2 ……
[2]
(c) Explain one reason why a company might make a bonus issue of shares.
…… [2]
[Total: 15]
4 Hayden manufactures two products, Aye and Bee. The business operates two production departments, Machining and Finishing, and two service departments, Stores and Maintenance.
REQUIRED
(a) Identify one possible basis of apportionment that a business could use in respect of:
(i) rent and rates
(ii) machinery depreciation
(iii) electricity for machinery.
[3]
Additional information
The following information is available.
Machining Finishing
Number of orders from Stores 3 200 1 800
Maintenance call-outs 160 32
Budgeted direct labour hours 6 200 19 800
Budgeted machine hours 38 600 9 400
REQUIRED
(b) Complete the following table to show the apportionment of budgeted overhead costs for the year ended 30 September 2021.
Production Service departments departments
Total Machining Finishing Stores Maintenance
$ $ $ $ $
Total apportioned overheads 449 800 188 850 172 850 53 325 34 775
Re-apportion Stores
Subtotal
Re-apportion Maintenance
Total overheads cost
[4]
(c) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis.
…… [4]
Additional information
The actual results for the year ended 30 September 2021 were as follows:
Machining Finishing
Factory overheads $265 800 $187 420
Direct labour hours 6 350 19 260
Machine hours 36 940 9 810
REQUIRED
(d) Calculate the over-absorption or under-absorption of overheads for each department for the year ended 30 September 2021.
…… [4]
Additional information
The following information is available for one unit of product Aye.
Direct material $36.20
Direct labour hours
Machining ($8 per hour) 45 minutes
Finishing ($10 per hour) 60 minutes
Machine hours
Machining 20 minutes
Finishing 30 minutes
During September 2021, a customer requested a quotation for supplying 200 units of Aye. Hayden required a 30% gross profit margin on the order.
REQUIRED
(e) Prepare a statement to show the total selling price that Hayden quoted to the customer.
…… [6]
Additional information
Hayden is considering using one factory-wide overhead absorption rate rather than separate departmental overhead absorption rates.
REQUIRED
(f) Advise Hayden whether or not he should use one factory-wide absorption rate. Justify your answer.
…… [5]
(g) Explain two effects that the over-absorption of overheads may have on a business.
1 ……
2 ……
[4]
[Total: 30]
Mark scheme
4(a) (i) Floor space (1) 3
(ii) Net book value/cost of machinery (1)
(iii) Budgeted machine hours/power/Kw hours (1)
Accept other valid responses.
4(b) 4
Production departments Service departments
Total Machining Finishing Stores Maintenance
$ $ $ $ $
Total overheads 449 800 188 850 172 850 53 325 34 775
Re-apportion stores 34 128 19 197 (53 325) (1)
Subtotal 222 978 192 047 - 34 775
Re-apportion Maintenance 28 979 5 796 (34 775) (1)
Total overheads cost 251 957 197 843 –
(1)OF (1)OF
4(c) Machining $251 957 / 38 600 hours = $6.53 (1)OF per machine hour (1) 4
Finishing $197 843 / 19 800 hours = $9.99 (1)OF per labour hour (1)
4(d) 4
Machining Finishing
$ $
Actual 265 800 187 420
Absorbed 36 940 x $6.53 241 218
Absorbed 19 260 x $9.99 192 407
24 582 (1)OF 4 987 (1)OF
Under absorbed (1)OF Over absorbed (1)OF
4(e) 6
$ Alternative $
presentation
Direct material 36.20 7 240.00
Direct labour – Machining 6.00 (1) 1 200.00 (1)
Direct labour – Finishing 10.00 2 000.00
Overheads – Machining ($6.53 × 20 minutes) 2.18 (1)OF 436.00 (1)OF
Overheads – Finishing ($9.99 × 60 minutes) 9.99 (1)OF 1 998.00 (1)OF
Total cost per unit 64.37 (1)OF
Mark-up (30/70) 27.59 (1)OF
91.96 12 874.00 (1)OF
Number of units 200 5 517.43 (1)OF
Quoted price 18 392.00 (1)OF 18 391.43 (1)OF
4(f) For factory-wide (max 2 marks) 5
Easier/less complicated to calculate (1)
Saves time (1)
Therefore, saves money (1)
Against factory-wide (max 2 marks)
Does not differentiate capital intensive production from labour intensive production (1)
Produces less accurate selling prices (1)
Produces less accurate overhead absorption rate (1)
Products may spend differing amounts of time in each department/ Does not reflect accurate departmental usage (1)
Advice (1)
Accept other valid responses
4(g) Selling prices may be too high (1) making products uncompetitive/leading to lower demand (1) 4
Lower demand (1) can lead to lower profits (1)
The value of closing inventory may be overstated (1) causing profit to be overstated (1)
Less expenses are recognised in the income statement (1) resulting in more profit being reported (1).
Max 2 effects (1 mark for stating the effect and 1 mark for development).
Accept other valid responses
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Accounting 9706/22 for October/November 2021 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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