Accounting 9706/33 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) Prepare the provision for unrealised profit account for the year ended 31 December 2020.
…… [4]
(b) Explain two possible reasons for the change in the balance on the provision for unrealised profit account.
1 ……
2 ……
…… [4]
Additional information
1 The rent included $6300 for the office and $1600 for the distribution area.
2 15% of the carriage inwards related to the purchases of finished goods.
3 Anil provides depreciation as follows.
rate per annum method factory machinery 20% reducing balance office equipment 10% straight-line delivery vehicles 25% reducing balance
Depreciation for the year ended 31 December 2020 is yet to be provided.
(c) Prepare, for the year ended 31 December 2020,
(i) the manufacturing account
…… [8]
(ii) the income statement.
…… [9]
[Total: 25]
Mark scheme
1(a) 4
Provision for unrealised profit accounts
$ $
Balance c/d W1 1800 (2) Balance b/d 1400 (1)
Income statement 400 (1)OF
1800 1800
Balance b/d 1800
W1 9000 (1) × 1/5 (1) = $1800
1(b) The value of manufactured inventory at cost has increased (1) from (8400 – 1400) $7000 to (9000 – 1800) $7200 (1)OF 4
The rate of factory profit has increased (1) from 20% to 25% (1).
1(c)(i) Anil 8
Manufacturing account for the year ended 31 December 2020
$
Opening inventory of raw materials 6 300
Purchases of raw materials 87 000
Carriage inwards 6 800 (1)
100 100
Closing inventory of raw materials 5 800
Cost of raw materials consumed 94 300 (1) (w+f)
Factory labour 46 200
Prime cost 140 500 (1)OF (w+f)
Factory rent 9 200 (1)
Factory depreciation 10 240 (1)
Other factory overheads 40 860
200 800
Opening work in progress 4 400 }
Closing work in progress –4 600 }(1)
Cost of production 200 600
Factory profit 50 150 (1)OF
Transfer value 250 750 (1)OF (w+f)
Read Source A2 in the insert.
(a) Explain why a company might be concerned about its income gearing.
…… [2]
Additional information
It is expected that the statement of financial position on 31 December 2021 will show the following.
$
Non-current assets 290 000
Inventory 73 000
Trade receivables 22 000
Cash and cash equivalents 5 000
390 000
Ordinary share capital ($1 shares) 200 000
Share premium 50 000
Retained earnings 78 000
8% debentures 50 000
Trade payables 12 000
390 000
Further information is available as follows.
1 The debentures were issued in 2017 and are due for repayment in 2031.
2 The profit for the year ending 31 December 2021 is expected to be $36 000. A dividend of
$18 000 will be paid by the end of that year.
3 The directors intend to buy and equip new premises on 1 January 2022 in order to expand the business. This will cost $100 000. It is expected to increase profit from operations in 2022 by 12%.
4 The company could finance this expansion by taking a long-term 10% bank loan on
1 January 2022.
(b) Calculate the maximum value of bank loan which the company could borrow whilst keeping to the policy on income gearing in 2022.
…… [8]
(c) Calculate the balance on the retained earnings account on 31 December 2022 if all the
$100 000 needed is financed by the 10% bank loan. The rate of dividend cover should be maintained at the 2021 level.
…… [6]
(d) Calculate, to two decimal places, on the basis that the full bank loan of $100 000 was taken, the gearing ratio on:
(i) 31 December 2021
…… [1]
(ii) 31 December 2022.
…… [1]
(e) Advise the directors whether or not the company should finance all of the expansion with the bank loan. Justify your answer.
…… [7]
[Total: 25]
Mark scheme
2(a) A high income gearing ratio would represent increased risk (1) that a business would be unable to cover its interest 2
payments (1)
Accept other valid points.
2(b) $ 8
2021 profit for the year 36 000) (1)
debenture interest 4 000) (1)
2021 profit from operations 40 000)
12% increase 4 800) (1)OF
2022 profit from operations 44 800) (1)OF
maximum interest (25%) 11 200) (1)OF
debenture interest (4 000) (1)
bank interest 7 200) (1)OF
maximum loan (x10) 72 000) (1)OF
2(c) $ 6
2022 profit from operations (from b) 44 800) (1)OF
debenture interest (4 000) (1)
bank interest (10 000) (1)
2022 profit for the year 30 800)
add balance b/f 78 000) (1)
dividend (18/36 = 50%) (15 400) (1)OF
closing 2022 retained earnings 93 400) (1)OF
2(d)(i) 50 1
= 13.23% (1)
378
2(d)(ii) 150 1
= 30.40% (1)OF
250 + 93.4 + 150
2(e) Taking out the bank loan would increase gearing (1) but the ratio would remain low (1). The interest would mean that the 7
income gearing target would not be achieved. (1) May need security / collateral (1) and will have to be repaid. (1) There will
be no dilution of ownership. (1)
The directors could consider raising all or part of the funds by means of a share issue (1). Dividends would only need to be
paid if funds were available. (1)
There could be a new issue of debentures (1) which might have a lower interest rate than the bank loan (1).
The directors could consider renting the new premises rather than buying (1).
The inventory level may be rather high and funds could be released if this was reduced (1).
Accept other valid points.
Decision (1) mark
Comments Max (6) marks
Read Source A3 in the insert.
(a) Prepare Aiona’s account in the books of Julia for the year ended 31 December 2020.
…… [5]
Additional information
Julia prepared her draft financial statements, and then discovered that she had in error debited the freight costs for Aiona’s consignment to Henri, and the freight costs for Henri’s consignment to
Aiona.
(b) Prepare the journal entry to correct the error made in recording the freight charges. A narrative is required.
…… [5]
(c) Explain the effect the error had on the value of inventory in Julia’s draft statement of financial position. Support your answer with relevant calculations.
…… [9]
(d) Explain the effect the error had on Julia’s draft profit for the year.
…… [2]
(e) Complete the following table to show which items relating to a consignment appear in which financial statements of a consignee.
Name the section of the financial statement in which they appear.
Item Financial statement Section
[4]
[Total: 25]
Mark scheme
3(a) 5
Aiona account
$ $
Consignment to Aiona 56 000 (1) Consignment to Aiona 3 000 (1)
Consignment to Aiona 8 400 (1)
Bank 30 000 (1)
Balance c/d 14 600 (1)OF
56 000 56 000
Balance b/d 14 600
3(b) 5
Debit Credit
$ $
Consignment to Henri 18 000 (1)
Consignment to Aiona 18 000 (1)
Consignment to Aiona 4 000 (1)
Consignment to Henri 4 000 (1)
Correction of error in posting freight charges to consignment accounts (1)
3(c) Draft total of inventories = 42 600 + 5500 = $48 100 9
Corrected inventory for A = 600 × (50+4+3) (1) = $34 200 (1)OF
Corrected inventory for H = 100 × (50+18+1) (1) = $6900 (1)OF
Corrected total of inventories = $41 100 (1)OF
Corrected total lower (1) by $7000 (1)OF
Effect of error was to overstate inventory (1) as the proportion of freight costs being carried forward to the following year
was too high (1).
Max 9 marks
Accept other valid points
3(d) Draft profit for the year was also overstated (1) by the same amount / because the proportion of freight costs relating to the 2
current year’s sales was too low / because the freight costs were not properly matched with sales. (1)
3(e) 4
Item Financial statement Section
balance owed to consignor statement of financial current liabilities * (1) both
(1) position *
commission earned (1) income statement * other income * (1) both
Read Source A4 in the insert.
(a) State how a recoverable amount is determined.
…… [3]
(b) Calculate the impairment loss arising.
…… [3]
(c) Explain whether the impairment loss was an adjusting or a non-adjusting event in relation to the statement of financial position at 31 December 2020.
…… [2]
(d) Prepare an extract from the statement of financial position at 31 December 2020 to show the non-current assets section.
…… [9]
(e) Calculate the amount of the revaluation reserve created during the year ended 31 December
2020.
…… [3]
(f) Explain how the creation of the revaluation reserve affects the directors’ ability to pay dividends.
…… [2]
Additional information
SW plc is involved in substantial research and development.
One of the directors has suggested that development costs should in future be capitalised.
(g) Advise the directors whether or not development costs should be capitalised. Justify your answer.
…… [3]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) as the higher (1) of the fair value (1) and the value in use (1) 3
4(b) $ 3
cost 26 000
depreciation (26000 × 20% × 6/12) 2 600 (1)
carrying amount 23 400 (1)OF
recoverable amount 22 000
impairment loss 1 400 (1)OF
4(c) An adjusting event (1) as the review gave evidence about a condition which existed at the year end (1) 2
4(d) SW plc 9
Statement of financial position (extract) at 31 December 2020
Non-current assets $
Intangible (1)
Goodwill 17 000 (1)
Tangible
Property, plant and equipment (1) W1 333 245 (6)
350 245
W1
$
Old premises 179 550 (1)OF
180 000 – (90 000 × 2% × 3/12) = 180 000 – 450 (1)
New premises 93 295 (1)
94 000 – (47 000 × 2% × 9/12) = 94 000 – 705 (1)
Fixtures and fittings 38 400 (1)
64 000 – 19 200 – 6400
Vehicle 22 000 (1)
Total 333 245
4(e) $ $ 3
Revalued amount 180 000 (1)
Net book value on 1 January 95 000)
Depreciation for 9 months to (750)
30 September
Net book value on 30 94 250 (1)
September
Revaluation reserve 85 750 (1)OF
4(f) It has no effect (1) as the revaluation is a capital reserve/not distributable (1) 2
4(g) IAS 38 (1) says development costs should only be capitalised if the directors can demonstrate that the result of the 3
development is an asset which can be sold (1). Capitalising development costs would improve profits (1). However,
capitalisation may not be prudent (1) as these costs would normally be written off when incurred. (1)
Decision (1) mark
Comments Max (2) marks
Read Source B1 in the insert.
(a) State two advantages and two disadvantages of operating a system of budgetary control.
Advantages
1 ……
2 ……
Disadvantages
1 ……
2 ……
[4]
Additional information
LP plc provided the following information about its budgeted sales for 2022.
units selling price proportion sold per unit for cash
$
January 1000 92 25%
February 1080 92 25%
March 1240 80 30%
April 1220 80 30%
May 900 92 20%
(b) State the budget (other than the sales budget) in which the following would be recorded.
(i) value of credit sales
…… [1]
(ii) value of total sales
…… [1]
Additional information
1 Half of credit customers pay in the month after sale and receive a cash discount of 5%.
The remainder pay in the second month after sale.
2 Payments to credit suppliers are expected to be as follows.
2022 $
March 55 200
April 59 616
May 59 520
3 Other payments are expected to amount to $30 000 a month.
4 The directors intend to issue 10 000 ordinary shares of $1 each at a premium of $0.20 per share during March 2022.
5 They intend to buy a new non-current asset in March 2022. This will cost $72 000. Half of this will be paid in March, with the balance being paid at the rate of $1000 a month starting in
April 2022.
6 The balance on the bank account on 1 March 2022 is expected to be $8000 overdrawn.
(c) Prepare the cash budget for each of the months March, April and May 2022.
Use the space provided on the next page to show your workings.
Workings:
[16]
Additional information
The company pays its credit suppliers two months after the month of purchase and never receives any cash discount. One of the directors has suggested that the company should pay at least a month earlier and receive the discount.
(d) Advise the directors whether or not the company should pay earlier and receive the discount.
Justify your answer.
…… [3]
[Total: 25]
Mark scheme
5(a) Advantages 4
budgets require co-ordinated planning to take place (1)
budgets define areas of responsibility / set targets (1)
budgets should lead to a better use of resources (1)
budgets can motivate staff (1)
Disadvantages
budgets may be time consuming/expensive to prepare (1)
the data used in budgets are only estimates and may be inaccurate (1)
a desire to achieve the budget’s targets may lead to a sub optimal use of resources (1)
budgets may demotivate staff (1)
Accept other valid points
Max 2 for advantages plus Max 2 for disadvantages
5(b)(i) trade receivables budget (1) 1
5(b)(ii) master budget/budgeted income statement (1) 1
5(c) [16]
March April May
$ $ $
Receipts
Cash sales 29 760 (1) 29 280 (1) 16 560 (1)
TR - one 35 397 (1) 32 984 (1) 32 452 (1)
month
TR - two 34 500 (1) 37 260 (1) 34 720 (1)
months
Issue of 12 000 (1)
shares
Total receipts 111 657 99 524 83 732
Payments
Trade 55 200 59 616 59 520 (1)row
payables
Other costs 30 000 30 000 30 000 (1)row
Purchase of 36 000 1 000 1 000 (1)row
asset
Total 121 200 90 616 90 520
payments
(9 543) 8 908 (6 788)
Balance b/f (8 000) (17 543) (8 635)
Balance c/f (17 543) (1)OF (8 635) (1) OF (15 423) (1)OF
5(d) Discount received would be an income/increase profit (1) 3
Paying sooner could improve relations with suppliers (1)
Funds may not be available to pay sooner/company already operates on an overdraft (1)
Increased overdraft would increase interest payable and reduce profit (1)
Decision (1) mark
Max (1) for advantage, max (1) for disadvantage
Accept other valid points.
Read Source B2 in the insert.
(a) Calculate, by completing the following table, the difference in NPV between purchasing bus A and bus B.
Change in Change in Change in Total Discount Discounted
Year capital receipts repairs change factor cash flow
$ $ $ $ $
Difference in NPV
Workings:
[10]
(b) Calculate the NPV of purchasing bus B.
…… [1]
(c) Calculate, for bus A, the sale proceeds receivable at the end of year 3 at which the NPV for the two buses would be the same.
…… [3]
Additional information
The Accounting Rate of Return (ARR) of purchasing bus A was calculated as 24.56%.
The total net cash flows of years 1 to 3 inclusive for bus B amounted to $74 300.
(d) Calculate the ARR of purchasing bus B.
…… [4]
(e) Advise Jason which bus he should buy. Justify your answer.
…… [6]
(f) State one method of investment appraisal (other than NPV and ARR) which a business could use.
…… [1]
[Total: 25]
Mark scheme
6(a) (i) 10
Year Change in Change in Change in Total Discount Discounted
capital receipts repairs change factor cash flow
$ $ $ $ $
0 41 000 (1) 41 000 1 41 000 }
1 (5600) (1) (2000) (1) (7 600) 0.909 (6 908.4) }
2 (4800) (1) (6500) (1) (11 300) 0.826 (9 333.8) }
3 (28 000) (1) (800) (1) (6000) (1) (34 800) 0.751 (26 134.8) }(1)OF
Difference in NPV (1 377) (1)OF
6(b) (ii) 18 900 – 1377 = $17 523 (1)OF 1
6(c) 28 000 (1) – 1377 } = $26 166 (1)OF 3
0.751 } (1)OF
6(d)
Average profit
( 74 300 − 45 000 ) (1) = $9767 (1)OF 4
3
9.767
ARR = × 100 = 43.41% (1)OF
22 500 (1)
6(e) NPV is higher for bus A (1) 6
ARR is better for bus B (1)
But NPV is considered the better method of appraisal (1)
Initial outlay is lower for bus B (1) which leaves funds available for investment elsewhere (1)
The lower outlay reduces risk (1) and implies that bus B would payback sooner (1)
Decision (1)
Max 5 for comments
Accept other valid points
6(f) Either payback or IRR (1) 1
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Accounting 9706/33 for October/November 2021 is out of 150 marks, with 3 hours to answer it, across 6 questions.
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