Accounting 9706/31 October/November 2021: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, October/November 2021. 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) State which bookkeeping entry reduced the ability of the company to pay dividends legally in the future.
…… [1]
Additional information
1 On 1 January 2020 the business had a bank overdraft of $42 000. It paid interest of $3000 on the overdraft during the year ended 31 December 2020.
2 Depreciation charges for the year totalled $112 000.
3 During the year ended 31 December 2020 some machinery was disposed of for $47 000. This had originally cost $92 000 and depreciation of $31 000 had been provided on it.
4 Several new delivery vehicles were purchased during the year, at a total cost of $185 000.
New machinery costing $106 000 was also purchased.
5 On 1 April 2020 the company issued a 10% debenture of $200 000. By the year end only six months’ interest had been paid.
6 The working capital of the company, excluding the bank account and accrued interest, increased by $45 000 during the year ended 31 December 2020.
7 The directors planned to expand the factory during 2021, using funds raised by the debenture issue.
(b) Prepare the statement of cash flows for the year ended 31 December 2020 in accordance with IAS 7.
…… [15]
(c) Advise the directors whether or not the performance of the company is satisfactory. Justify your answer.
…… [4]
(d) Discuss the decision to issue the debenture to fund the planned expansion.
…… [5]
[Total: 25]
Mark scheme
1(a) Debiting the bonus issue to retained earnings rather than to share premium (1) 1
1(b) EN plc 15
Statement of cash flows for the year ended 31 December 2020
$000 $000
Profit from operations (10 + 3 + 15) 28 (1)
Depreciation 112 (1)
Loss on disposal of machinery 14 (1)
Increase in working capital (45) (1)
Cash from operations 109
Interest paid (13) (1)
Net cash from operating activities 96 (1)OF
Cash flow from investing activities
Purchase of non-current assets (291) (1)
Proceeds of sale of machinery 47 (1)
Net cash used in investing activities (244) (1)OF
Cash flow from financing activities
Proceeds from rights issue of shares 180 (1)
Proceeds from issue of debentures 200 (1)
Dividends paid (40) (1)
Net cash from financing activities 340 (1)OF
Net increase in cash and cash equivalents 192 (1)OF
Cash and cash equivalents on 31 December 2019 (42)
Cash and cash equivalents on 31 December 2020 150 (1)OF
1(c) The company is profitable/is making a profit. (1) 4
The profit for the year seems quite low. (1)
ROCE using opening capital is (28/440) 6.36%/using closing capital (28/910) 3.08%. (1)OF
Substantial capital receipts were needed to clear the overdraft. (1)
Dividends were considerably higher than profits. (1)
The trend would appear to be towards negative retained earnings leading to no dividends at a future date. (1)
Accept other valid points
Comments Max 3
Decision (1) mark
1(d) The debenture has increased gearing/risk for the company (1) but it still remains low. (1) 5
The debenture must be repaid. (1)
The interest must be paid (1) irrespective of the level of profit/unpaid interest could lead to liquidation. (1)
The high bank balance at the year-end may indicate that the debenture was issued earlier than was necessary. (1)
The interest on the debenture appears to be less than the dividend paid. (1)
May require security/collateral. (1)
Will avoid dilution of ownership. (1)
Accept other valid points
Max 5
Read Source A2 in the insert.
(a) Outline the next steps the company needed to take to implement the computerised accounting system. Your answer should consider the need for both accuracy and security.
…… [8]
Additional information
The company accountant prepared the draft income statement of the company for the year ended 31 December 2020. When the finance director reviewed it he thought that it might contain errors. He identified five areas where he thought an error might have occurred. These were as follows.
1 The staff training had cost $5000. Since the employees of the company usually stay with the company for about ten years, the accountant had decided to charge $500 to expenses for staff training each year for ten years, starting in 2020.
2 An impairment review had considered vehicles with a carrying amount of $72 000. It found that their fair value was $67 000 and their value in use was $65 000. The accountant included an impairment loss on vehicles of $7000 in expenses.
3 An impairment review had considered machinery with a carrying amount of $98 000. It found that its fair value was $81 000 and its value in use was $102 000. The accountant included an impairment loss on machinery of $17 000 in expenses.
4 Water damage had destroyed inventory costing $8000 on 5 January 2021. The accountant took this loss into account when preparing the income statement.
5 The premises had been revalued upwards by $28 000 at the year end. The accountant omitted to record this.
(b) Complete the table showing the effect of the correction of errors on the draft profit for the year.
In the second column enter the amount by which the draft profit for the year would change due to any correction of errors. State whether the correction increases or decreases the profit.
If no correction is needed enter Nil.
In the third column explain why the correction is needed, or why no correction is needed.
$ Explanation
1 Training
2 Vehicles
3 Machinery
4 Inventory
5 Premises
[15]
(c) Explain why the errors, corrected in (b), had not been caused by the computerised accounting system.
…… [2]
[Total: 25]
Mark scheme
2(a) The company had to: select a specific date for the transfer (1) 8
ensure the data on the manual system is up to date (1)
carry out control and verification procedures on the data from the manual system (1)
set up passwords for the new system (1)
ensure that there is adequate virus/firewall protection (1)
physical location of equipment (1)
set up the account names in the new system (1)
enter the opening balances on the new system (1)
run both manual and computerised systems in parallel (1)
organise back up of data for the new system (1)
discontinue the manual system once satisfied with the new system (1)
Accept other valid points
Max 8
2(b) 15
$ explanation
1 training 4 500 staff training should not be capitalised (1) and the full cost should be written off when
decrease (1) incurred (1)
2 vehicles 2 000 the recoverable amount is the higher of value in use and fair value (1) and the impairment
increase (1) loss was only $5 000 (1)
3 machinery 17 000 the recoverable amount is higher than the carrying amount (1) and so there is no
increase (1) impairment loss to account for (1)
4 inventory 8 000 the damage did not relate to a condition at the year end and is a non-adjusting event (1)
increase (1) which only needs to be disclosed in a note if material (1)
5 premises Nil (1) revaluation does not affect profit (1) as it is credited to a revaluation reserve (1)
Accept other valid points.
2(c) Because they arose from errors in data input (1) rather than processing errors (1) 2
Read Source A3 in the insert.
(a) Suggest two ways, other than the profit sharing ratio, in which a partnership could reward the introduction of capital and labour by partners.
1 ……
2 ……
[2]
Additional information
Eunice and Malcolm decided to retire and agreed to sell their business to FD Limited, receiving shares in return.
(b) State three differences between being a partner in a partnership and a shareholder in a limited company.
1 ……
2 ……
3 ……
[6]
Additional information
The partnership was sold on 31 December 2020. The summarised statement of financial position of the partnership on that date was as follows.
$
Non-current assets 88 000
Trade receivables 19 600
Bank 100
107 700
Capital accounts – Eunice 80 000
– Malcolm 15 000
Current accounts – Eunice 10 000
– Malcolm (5 000)
Trade payables 7 700
107 700
FD Limited took over all the assets and liabilities of the partnership including the bank account.
The purchase consideration was $175 000, consisting of 140 000 ordinary shares of $1 each.
These were divided between Eunice and Malcolm on the basis of the balance on each partner’s capital account on dissolution.
(c) Calculate the number of shares received by each partner.
Eunice Malcolm
[6]
Additional information
The profit for the partnership had been $30 000 a year.
FD Limited had a profit for the year of $600 000 in the year ended 31 December 2020. On that date the company had 1 million ordinary shares in issue. It was the policy of the company to have a dividend cover of 3 times.
(d) Advise Malcolm whether or not he made the right decision when agreeing to sell the partnership. Support your answer with calculations.
…… [7]
Additional information
FD Limited took over the non-current assets at a valuation of $130 000. All other assets and liabilities were taken over at their book values.
(e) Prepare the journal entry recording the acquisition of the partnership in the books of FD Limited.
A narrative is not required.
…… [4]
[Total: 25]
Mark scheme
3(a) Interest on capital (1) 2
Partnership salary (1)
3(b) 6
partner shareholder
has joint and several liability (1) enjoys limited liability (1)
receives appropriations of profit (1) receives dividends (1)
death of partner causes legal end of partnership (1) death of shareholder does not affect legal existence of company
(1)
has control of the business (1) has voting rights/ appoints board of directors (1)
Accept other valid points
Any three pairs, Max 6
3(c) Eunice Malcolm 6
$ $
Capital 80 000 15 000 (1) both
Current 10 000 (5 000) (1) both
Profit on realisation 60 000 (1) 15 000 (1)
150 000 25 000 (1)OF both
Number of shares 120 000 20 000 (1)OF both
3(d) FD Limited has been paying a dividend per share of $0.20 (1) per year. If this continues Malcolm will receive $4 000 a year 7
(1)OF as a shareholder. As a partner his share of profit was $6 000 a year (1).
It would therefore appear that his income will be lower (1)OF. However he is no longer providing labour to the partnership
and so is free to work and earn elsewhere (1).
The debit balance on his current account suggests his need for funds was higher than his share of profit (1).
He now has the possibility of capital growth in the value of his shares (1).
He now will have limited liability (1).
He has less control (1).
Accept other valid points.
Comments Max 3
Calculations Max 3
Decision (1)
3(e) Debit Credit 4
$ $
Tangible non-current assets 130 000 (1)
Goodwill 33 000 (1)
Trade receivables 19 600
Bank 100
Trade payables 7 700
Ordinary share capital 140 000 (1)
Share premium 35 000 (1)
Read Source A4 in the insert.
(a) Explain how the trading account of a charity shop is different from that of a business.
…… [4]
Additional information
1 Advertising costs included $7200 for a series of advertisements running from November 2020 to April 2021.
2 On 31 December 2020 deposits paid for wheelchairs ordered but not yet manufactured amounted to $39 400.
3 Accruals at the year end included $450 for administrative expenses.
4 It was decided that the cost of the computer should be written off in equal instalments over five years.
(b) Prepare the income and expenditure account for the year ended 31 December 2020.
…… [7]
(c) Prepare the statement of financial position at 31 December 2020.
…… [8]
(d) Suggest two ways in which X Soc could increase its income.
1 ……
2 ……
[2]
(e) Explain why the accumulated fund of a not for profit organisation may not be equal to the balance on its bank account.
…… [2]
(f) Explain why the financial statements of some not for profit organisations may contain entries for subscriptions.
…… [2]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) There is no value for cost of sales (1) as there have been no purchases (1). 4
No value is ascribed to inventory held in the shop (1) which is prudent (1) and as the goods are donated cost will always be
less than net realisable value (1).
No wages are payable as the society is run by volunteers (1).
Accept other valid points.
Max 4
4(b) X Soc 7
Income and expenditure account for the year ended 31 December 2020
$ $
Grants 80 000 }(1)
Cash donations 96 520 }
Profit from shop 90 600 (1)
267 120
Cost of wheelchairs 173 260 (1)
Administrative expenses 14 670 (1)
Advertising and fundraising 22 440 (1)
Depreciation of computer 1 400 (1) 211 770
Surplus/excess of income over expenditure 55 350 (1)OF
4(c) X Soc 8
Statement of financial position at 31 December 2020
$
Non-current asset
Computer 5 600 (1)
Current assets
Other receivables W1 45 200 (3)
Bank 7 720 (1)
Total assets 58 520
Accumulated fund 55 350 (1)OF
Current liabilities
Other payables W2 3 170 (2)
58 520
W1 shop rent 1 000 (1) + advertising 4 800 (1) + deposits 39 400 (1) = $45 200
W2 administrative expenses 450 (1) + shop operating costs 2 720 (1) = $3 170
4(d) Keep cash in a deposit account to earn interest (1) 2
Open shops in different towns (1)
Undertake fundraising activities (1)
Seek sponsorship (1)
Accept other valid points
Max 2
4(e) The accumulated fund represents total surpluses and deficits (1) but the balance on the bank account represents net cash 2
paid in to the account (1).
Accept other valid points
4(f) These organisations have members (1) who pay a subscription to pay for the facilities that they are using (1). 2
Accept other valid points
Read Source B1 in the insert.
(a) Prepare the purchases budget for direct materials (in dollars) for each of the months February,
March and April 2022.
February March April
$ $ $
[6]
(b) Prepare the cash budget for each of the months March and April 2022.
March April
$ $
[14]
(c) Comment on the suitability of the month of April for the replacement of the machinery.
…… [2]
Additional information
One of the directors has suggested that the company limit production to 140 units every month to avoid having to pay the overtime premium and so reduce costs.
(d) Advise the directors whether or not they should limit production to 140 units a month. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
5(a) February March April 6
$ $ $
Production 5200 5920 6360 (1) row
Closing inventory 1480 1590 1380 (1) row
6680 7510 7740
Opening inventory (1300) (1480) (1590) (1) row
Purchases 5380 (1)OF 6030 (1)OF 6150 (1)OF
5(b) March April 14
$ $
Receipts
Cash sales 7 500 8 000 (1) both
Credit sales 19 500 (1) 22 500 (1)
Sale of machinery 0 2 000 *
27 000 32 500
Payments
Purchases 5 380 6 030 (1)OF both
Labour – basic 11 840 (1) 12 720 (1)
– overtime 80 (1) 190 (1)
Variable overheads 3 700 (1) 3 975 (1)
New machinery 0 13 000 (1)*both
Other costs 3 800 3 800 (1) both
24 800 39 715
Net cash 2 200 (7 215)
Balance b/f 1 700 (1) 3 900
Balance c/f 3 900 (3 315) (1)OF
5(c) April is the busiest month in terms of units of production (1) and therefore the one in which the company is least able to 2
cope with a possible disruption of production (1).
The funds are not available in April to pay for the new machinery without the bank account becoming overdrawn (1). As
there may be a cash surplus in future a short delay could avoid the need to go overdrawn (1).
April may be the only month in which the manufacturer can supply/install the machinery (1).
Accept other valid points
Max 2
5(d) The company could restrict production and still manage the level of sales (1). If production was restricted then the inventory 3
of units of finished goods at the end of April would be 6 rather than 33 (1).
The risk of a shortage of finished goods would be increased as there would be less of a buffer against any problem which
might arise (1). The cost of overtime is very small in relation to the whole of the labour cost and might be considered
immaterial (1).
Overtime payments are only necessary because of the rigid inventory policy (1).
Even when overtime is paid the product still has a positive contribution (1).
Accept other valid points
Comments Max 2
Decision (1)
Read Source B2 in the insert.
(a) Prepare a statement showing the production cost and the selling price of one unit for each size of product.
Small Large
$ $
[6]
Additional information
An analysis of the monthly production overheads showed the following.
Activity $
Machine set ups 10 200
Order processing 12 600
Quality inspections 7 200
Total 30 000
These activities took place as follows.
Small Large
Machine set ups (times) 72 30
Order processing (times) 120 60
Quality inspections (times) 12 12
(b) Prepare a revised statement showing the production cost and the selling price of one unit for each size of product using the activity information. (The basis of apportionment for the selling and administrative costs should be unchanged.)
Small Large
$ $
[8]
Additional information
On 31 January 2021 it was established that 400 units of the small product and 200 units of the large product remained unsold. There was no work in progress.
The profit for January 2021 using absorption costing was calculated at $48 400.
(c) Calculate the profit which would have been earned if selling prices had been amended to account for the levels of activity which took place.
…… [6]
(d) Advise the directors whether or not they should change the basis of allocation of overheads and the selling prices. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
6(a) Small Larg 6
$ $
Direct material 5 20
Direct labour 2 6
7 26 (1) both
Production overheads 5 5 (1) both
Production cost per unit 12 31 (1)OF both
Selling and administrative overheads 4 4 (1) both
Total cost 16 35
Mark-up (50%) 8 17.50 (1)OF both
Selling price per unit 24 52.50 (1)OF both
6(b) Small Large 8
$ $ $ $
Direct material and labour 7 26 *
Production overheads
Machine set ups total 7 200 3 000 (1) both
Order processing total 8 400 4 200 (1) both
Quality inspections total 3 600 3 600 (1) both
19 200 10 800
Per unit 3.84 10.80 (1)OF both
Production cost per unit 10.84 36.80 (1)OF both
Selling and administrative overheads 4 4 (1*) both
Total cost 14.84 40.80
Mark-up (50%) 7.42 20.40 (1)OF both
Selling price per unit 22.26 61.20 (1)OF both
* both costs for both sizes needed for mark
6(c) $ $ 6
Sales revenue
4 600 × 22.26 = 102 396 (1)OF 151 356
+ 800 × 61.20 = 48 960 (1)OF
Cost of production
(54 200 + 36 800) 91 000 (1)
Closing inventory
400 × 10.84 (1)OF + 200 × 36.80(1)OF (11 696)
Cost of sales 79 304
Gross profit 72 052
Selling and administrative 24 000
Profit 48 052 (1)OF
OR
Sales revenue 151 356 (2)
Cost of sales W1 79 304 (3)
Gross profit 72 052
Selling and administrative 24 000
Profit 48 052 (1)OF
W1
4 600 × 10.84 = 49 864 (1)OF
800 × 36.80 = 29 440 (1)OF
79 304 (1)OF
6(d) The value for production cost is more realistic when it takes the level of activity into account (1). However the split of the 5
selling and administrative costs is still arbitrary (1) as is the rate of mark-up (1) which does not take market conditions into
account (1).
As the small product seems to be selling well at $24 there is no reason to drop the price (1). However the price for the large
product could possibly be increased (1).
If the prices of both products were changed as per part (b) then profit would fall. (1)OF
The change in inventory value has only short term significance/is only relevant until the items are sold (1).
The directors should undertake some market research (1) and consider what competitors are charging (1).
It can be costly/time consuming to split overheads by activity (1).
Accept other valid points
Comments Max 4
Decision (1)
Checked your answers against these? Let AI mark the whole paper, on your own working.
Examiners follow the generic marking principles at the front of the scheme, then each question's points: method (M), accuracy (A) and independent (B) marks, error carried forward where the scheme allows it, and positive marking, so you're credited for what you got right.
Check your answers against it
Done this paper? Upload your script and CIE Buddy's AI marker marks it question by question against this exact scheme, puts the ticks on your own working and says what each lost mark needed.
Where can I find the 9706/31 October/November 2021 mark scheme?+
On this page, free: the mark scheme for AS & A Level Accounting 9706/31, October/November 2021 (9706_w21_ms_31), and the question paper (9706_w21_qp_31), to read or download, with each question's marking points written out underneath.
How many marks is 9706/31 out of?+
Accounting 9706/31 for October/November 2021 is out of 150 marks, with 3 hours to answer it, across 6 questions.
Can I get my 9706/31 answers marked?+
Yes. Upload your answers to 9706/31/O/N/21 as a PDF or photos, and CIE Buddy marks every question against this paper's official mark scheme, using Cambridge's marking rules. You get your score, each lost mark explained on your own script, and the topics to revise. It's a guide, not an official Cambridge grade.