Accounting 9706/32 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) Calculate the draft profit for the year based on the trial balance figures.
…… [1]
Additional information
The following took place on 31 December 2020 after the trial balance had been prepared.
1 The bank informed the company that its account was being debited with $120 in relation to a dishonoured cheque from a credit customer, and with $150 and $110 for bank charges and bank interest.
2 A bonus issue of 10 000 ordinary shares of $1 each was made.
3 It was decided to create a general reserve of $14 000.
4 The premises were revalued to $244 000. The fixtures and fittings and motor vehicles were deemed to have a recoverable amount of $22 300 and $9200 respectively.
5 It was decided to provide $5000 for compensation to customers arising from the use of damaged goods sold to them by the company.
6 It was discovered that the trial balance figures included values arising from the supply of goods to a credit customer on a sale or return basis. The customer had not declared an intention to buy the goods by the year end. They were included in sales at a value of $4600 and had an original cost of $2100.
(b) Calculate the corrected profit for the year ended 31 December 2020. Start your calculation with your answer to (a).
…… [5]
(c) Prepare the statement of financial position at 31 December 2020 after taking into account all necessary information. Use the space provided on the next page for your workings.
Workings:
[17]
(d) Explain how your treatment of the bonus issue might have been different if the trial balance had contained a balance of $8000 on a share premium account.
…… [2]
[Total: 25]
Mark scheme
1(a) 96 200 – 32 700 – 19 405 – 4 410 = $39 685 (1) 1
1(b) $ 5
draft profit 39 685
impairment of motor vehicles (925) (1)
bank charges and interest (260) (1)
provision (5 000) (1)
sale or return goods (2 500) (1)
corrected profit 31 000 (1)OF
1(c) LC plc 17
Statement of financial position at 31 December 2020
$
Assets
Non-current assets
Property, plant and equipment (1) W1 275 280 (3)
Current assets
Inventory (6212+2100) 8 312 (1)
Trade and other receivables W2 20 920 (2)
29 232
Total assets 304 512
Equity and liabilities
Equity
Ordinary share capital 110 000 (1)
Revaluation reserve 48 000 (1)
General reserve 14 000 (1)
Retained earnings W3 49 732 (4)
221 732
Non-current liabilities
Bank loan 50 000 (1)
Current liabilities
Trade payables 16 200
Bank 11 580 (1)
Provision 5 000 (1)
32 780
Total equity and liabilities 304 512
W1 244 000 (1) + 22 080 (1) + 9 200 (1) = $275 280
W2 25 400 + 120 (1) – 4 600 (1) = $20 920
W3 54 732 + 31 000 (1of) – (7 000 + 5 000) (1) – (14 000 + 10 000) (1) = $49 732 (1)OF
1(d) If the directors had chosen to keep the reserves in the most flexible form (1) it would have been possible to debit $8000 to 2
the share premium account (1) and only $2000 to the retained earnings account (1).
Max 2
Read Source A2 in the insert.
(a) Calculate the profit from the vending machines for the year ended 30 June 2021.
…… [5]
(b) Calculate for the year ended 30 June 2021:
(i) the value of subscriptions received and banked
…… [3]
(ii) cash takings banked
…… [4]
(iii) club expenses paid by cash.
…… [4]
(c) Prepare the income and expenditure account for the year ended 30 June 2021.
…… [6]
Additional information
It has been suggested to the managing committee that the club starts to rent a third vending machine selling soft drinks.
(d) Advise the committee whether or not to start renting a third vending machine. Justify your answer.
…… [3]
[Total: 25]
Mark scheme
2(a) $ $ 5
Sales 25 160
Inventory at 1 July 2020 210
Purchases (12 600 + 305 – 290) 12 615 (1)
12 825
Inventory at 30 June 2021 245 (1)
Cost of sales 12 580
Gross profit 12 580 (1)OF
Rent of vending machines 6 000 (1)
Profit 6 580 (1)OF
2(b)(i) 20 000 (1) + (400 + 300) (1) = $20 700 (1) OF 3
2(b)(ii) $ 4
Closing bank balance 2 290 }
Opening bank balance (1 420) } (1)
Bank payments 36 460 (1)
Subscriptions banked (20 700) (1)OF
Cash banked 16 630 (1)OF
2(b)(iii) $ 4
Opening cash balance 180 }
Closing cash balance (150) } (1)
Sales 25 160 (1)OF
Cash banked (16 630) (1)OF
Cash expenses 8 560 (1)OF
2(c) AB Club 6
Income and expenditure account for the year ended 30 June 2021
$ $
Subscriptions 20 000 (1)
Profit from vending machines 6 580 (1)OF
26 580
Rent 12 000
Club expenses (5 140 + 8 560) 13 700 (1)OF
Depreciation of equipment 400 (1)
Depreciation of furniture 270 (1) 26 370
Surplus/excess of income over expenditure 210 (1)OF
2(d) Operating a third vending machine means that more drinks will be sold, then sales/profit will increase (1). However, there 3
will be a limit to how many drinks a certain number of members will want – is the demand there? (1) The cost of renting the
vending machine will be a fixed cost which increases expenses/reduces profit. (1) Perhaps a third machine could be used
to sell something different such as snacks. (1)
Accept other valid points.
Decision (1)
Comments Max 2
Read Source A3 in the insert.
(a) (i) Calculate the earnings per share for 2019.
…… [2]
(ii) Explain why the value of earnings per share is the same for 2020 as for 2019.
…… [2]
(b) Calculate, to two decimal places, for 2019 and 2020:
(i) the price earnings ratio
…… [4]
(ii) the dividend yield.
…… [4]
(c) State the date on which the bank loan was received.
…… [1]
(d) Explain the significance of the changes which have taken place between the two years.
…… [7]
(e) (i) Name the two financial statements in which a company would record dividends paid.
1 ……
2 ……
[2]
(ii) State how a company would record a proposed dividend in its financial statements.
…… [1]
Additional information
A company will often mention its dividend policy in its directors’ report.
(f) State two other items which may be contained in a directors’ report.
1 ……
2 ……
[2]
[Total: 25]
Mark scheme
3(a)(i) 280 000 (1) / 2 000 000 = $0.14 (1)OF 2
3(a)(ii) earnings per share is based on profit for the year which is the same in both years despite the change in profit from 2
operations (1) and the number of shares in issue has also not changed (1)
3(b)(i) 1.60 } (1of) 4
2019 = 11.43 (1)OF
0.14 }
2.00 } (1of)
2020 = 14.29 (1)OF
0.14 }
3(b)(ii) 0.075 } (1) 4
2019 × 100 = 4.69% (1)OF
1.60 }
0.075 } (1)
2020 × 100 = 3.75% (1)OF
2.00 }
3(c) 1 April 2020 (1) 1
3(d) The receipt of the loan has increased liquidity/current ratio/quick ratio (1) and it would appear that the new capital is already 7
enabling profit from operations to be increased (1). The loan will cause capital employed to increase and this along with
profit will affect ROCE (1).
The loan increases the risk of the company (1) and causes gearing ratio to rise (1). Loan interest must now be paid/will
reduce profit for the year (1).
Market price of the shares has increased meaning that investor confidence has increased (1) such that demand has
increased (1) in turn causing the price earnings ratio to increase (1).
Increase in the market price has caused the dividend yield to fall (1). A new investor would receive a lower return for the
amount invested (1). The shares would be less attractive to an investor who needed an annual income / they might suit an
investor who was prepared to wait for a capital gain (1).
Max 7
Accept other valid points.
3(e)(i) Statement of changes in equity (1) 2
Statement of cash flows (1)
3(e)(ii) as a note to the accounts (1) 1
3(f) A review of the performance of the company (1) 2
A statement of the principal activities (1)
Future developments in the business (1)
Donations made (1)
Details of directors and their shareholdings (1)
Information about employees and employment policies (1)
Health and safety information (1)
Max 2
Accept other valid points.
Read Source A4 in the insert.
(a) State two costs (other than import duties) which a consignee might pay in relation to a consignment.
1 ……
2 ……
[2]
Additional information
After the account had been prepared, Benny sent a further message saying that he had previously reported in error, and in fact he had sold 120 units for $146 each.
(b) Prepare the consignment account as it would have been prepared if the revised sales information had been available from the start.
…… [8]
Additional information
At the end of the year, and after correcting the sales figures, Benny owed Chin $1292.
(c) Calculate the amount Benny remitted to Chin during the year.
…… [4]
(d) Explain why the loss on consignment turned into a profit when sales had fallen. Support your answer with relevant profit calculations.
…… [7]
(e) Explain how your answer to (b) would have been different if 120 units had been sold and
44 units had been stolen from the warehouse.
…… [2]
(f) Explain how the task of an auditor is affected if inventory is being held by a consignee.
…… [2]
[Total: 25]
PLEASE TURN OVER
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) Accept any valid answers for (1) mark each, for example 2
Advertising
Storage and warehousing
Insurance
Selling costs
Max 2
4(b) Consignment account 8
$ $
Goods on consignment 18 000 } Benny (sales) 17 520 (1)
Bank (freight) 3 000 }(1) Balance c/d W2 8 640 (3)
Benny (import duties) 600 }
Benny (commission) W1 2 628 (2)
Profit on consignment 1 932 (1)OF
26 160 26 160
W1 15% (1) × 17 520 = $2 628 (1)OF
21600
W2 80 (1) × (1) = $8 640 (1)OF
200
4(c) $ 4
Sales 17 520 (1)OF
Commission (2 628) } (1)OF
Import duties (600) }
14 292
Balance (1 292) (1)
Amount remitted 13 000 (1)OF
4(d) Reduction in sales (1) = $2 160 (1)OF despite selling price being higher (1) 7
Reduction in commission (1) = $324 (1)OF
Increase in inventory carried forward (1) = $4 752 (1)OF
Change from loss (984) to profit (1 932) = $2 916 (1)OF (4 752 + 324 – 2 160)
Max 7
Accept other valid points.
4(e) 21600 2
There would be a loss in value of inventory (1) of 44 × = $4 752 (1)OF.
200
The original inventory value for 36 units ($3 888) would have been used (1) and the loss on consignment with revised sales
figures would be $2 820 (1)OF.
Max 2
Accept other valid points.
4(f) It may not be possible due to the location (1) to obtain an independent verification of the existence and value of the 2
inventory (1) and therefore certify that the accounts show a true and fair view (1).
Max 2
Accept other valid points.
Read Source B1 in the insert.
(a) Prepare a statement showing the total budgeted profit or loss made in a month by each product.
Product A Product B
$ $
[5]
Additional information
The directors are considering applying activity based costing (ABC) techniques. They have three objectives.
1 To be more accurate in setting selling prices which will cover all costs.
2 To be able to make decisions on when to make goods and when to buy them in.
3 To know how to allocate resources such as materials or labour when there is a shortage of supply.
(b) Advise the directors whether or not using ABC would help them achieve their objectives.
Justify your answer.
…… [7]
Additional information
Analysis of monthly budgeted production overheads revealed the following:
$
Machine set-up costs 12 000
Quality inspections 7 000
Factory supervisors’ salaries 14 000
Other production overheads 27 000
60 000
The directors decided to allocate or apportion these costs using the following information.
Machine set-up costs Machine set-ups take place 60 times a month for product A and 40 times a month for product B.
Quality inspections Quality inspections take place 18 times a month for each product.
Factory supervisors’ salaries to be absorbed on the basis of direct labour hours
Other production overheads to be split on a per unit basis
(c) State one advantage and one disadvantage to a business of splitting overheads on a per unit basis.
Advantage ……
Disadvantage ……
[2]
(d) Prepare a revised statement showing the total budgeted profit or loss made in a month by each product, using the additional information about production overheads. The allocation of administrative and distribution costs is unchanged.
Product A Product B
$ $
[8]
(e) Advise the directors whether or not they should change the selling prices of the products.
Justify your answer.
…… [3]
[Total: 25]
Mark scheme
5(a) Product A Product B 5
$ $
Direct materials 50 000 36 000 (1) both
Direct labour 20 000 10 000 (1) both
Production overheads 30 000 30 000 }
Administrative and distribution overheads 14 000 14 000 } (1) both
Total cost 114 000 90 000
Sales revenue 124 000 94 000 (1) both
Profit 10 000 4 000 (1)OF both
Accept other presentations
5(b) ABC will help in setting selling prices (1) as it enables a more realistic allocation of costs to a product (1). However, 7
calculating the cost drivers may be expensive/time consuming (1).
ABC will not help in make or buy decisions (1) as it does not provide a split between fixed and variable costs (1). The
decision to buy is normally only made when the purchase price is less than the variable costs of manufacture (1).
ABC will not help in allocating scarce resources (1) as it does not provide the contribution per unit of each product (1) which
is necessary to rank the products in the order which will enable profits to be maximised (1).
Max 7
5(c) Advantage Quick/easy to calculate (1) 2
Disadvantage Unlikely to be realistic (1)
Accept other valid points.
5(d) Product A Product B 8
$ $
Machine set up costs 7 200 4 800 (1) both
Quality inspections 3 500 3 500 (1) both
Factory supervisors’ salaries 10 000 4 000 (1) both
Other production overheads 22 500 4 500 (1) both
43 200 16 800
Direct materials and labour 70 000 46 000 (1)OF both
113 200 62 800
Administrative and distribution overheads 14 000 14 000 (1)OF both
Total cost 127 200 76 800
Sales revenue 124 000 94 000 (1) both
Profit/ (loss) (3 200) 17 200 (1)OF both
Accept other presentations
5(e) The loss apparently made by product A (1) would indicate that its selling price should be increased. This may reduce 3
demand (1). However, the administrative and distribution costs are still being split in an unrealistic manner (1).
The profit being earned by product B (1) would indicate that its selling price should not be changed.
Accept other valid points.
Decision (1)
Comments Max 2
Read Source B2 in the insert.
(a) Explain what is meant by the term ‘net cash inflow’.
…… [2]
Additional information
Kurt uses a cost of capital of 12%. The discount factors for this are as follows:
Year
1 0.893
2 0.797
3 0.712
4 0.636
Kurt is considering two options for the purchase of the machinery to make the new product.
Option 1: The purchase of machinery costing $150 000 which would have no scrap value at the end of year 4. This would result in the manufacture of the new product having a net present value
(NPV) of $60 981.
Option 2: The purchase of machinery costing $290 000 which would have a scrap value at the end of year 4, although as yet this scrap value has not been estimated.
(b) Calculate the scrap value of the machinery at the end of year 4 which would result in Option 2 having an NPV:
(i) of zero
…… [8]
(ii) equal to the NPV of Option 1.
…… [4]
(c) Explain why the payback period is shorter for Option 1 than it is for Option 2 when the net cash flows are the same.
…… [2]
(d) Explain why a shorter payback period is preferable to a longer one.
…… [2]
(e) Explain why a project having a zero NPV is not the same as its having a zero total profit.
…… [2]
Additional information
It was later determined that under Option 2 the machinery could be sold at the end of year 4 for proceeds of $225 000. With this value the accounting rate of return for Option 2 would be lower than the accounting rate of return for Option 1.
(f) Advise Kurt which option he should implement. Justify your answer.
…… [5]
[Total: 25]
Mark scheme
6(a) The excess of total cash inflows over total cash outflows (1) of both revenue and capital receipts and expenditure (1) 2
6(b)(i) $ 8
Year 0 (outlay) (290 000) (1)
Year 1dcf 79 477 (1)
Year 2 dcf 60 572 (1)
Year 3 dcf 44 856 (1)
Year 4 dcf 26 076 (1)
Shortfall in NPV before residual value 79 019 (1)OF
Divided by year 4 discount factor 0.636 (1)
Required scrap value 124 244 (1)OF
6(b)(ii) $ 4
Shortfall in NPV before residual value 79 019 (1)OF
Required NPV 60 981 (1)
140 000
Divided by year 4 discount factor 0.636 (1)
Required scrap value 220 126 (1)OF
6(c) Option 1 has a lower initial outlay (1) which means that the cash flows can cover it sooner (1). 2
6(d) A shorter period carries less risk (1). 2
The longer the period the greater the likelihood that a project will never pay back at all (1).
A shorter period means that funds are available sooner (1).
Max 2
Accept other valid points.
6(e) Amounts are discounted in the calculation of NPV but are not in the calculation of profit (1). 2
The calculation of profit takes into account non-cash items such as depreciation whereas NPV excludes such items (1).
Accept other valid answers.
6(f) ARR would indicate option 1 is better (1). 5
There is a lower investment for option 1 (1) but there are disposal proceeds from option 2 (1).
Payback would indicate option 1 is better (1).
At this value the NPV of option 2 is positive (1) and will be higher than the NPV of option 1 (1).
NPV is usually considered the better measure (1).
Accept other valid points.
Decision (1)
Comments Max 4
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