Accounting 9706/22 October/November 2022: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Structured Questions, October/November 2022. 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 draft financial statements of H Limited at
30 September 2022.
$
8% bank loan (2028–2029) 28 000
Cash and cash equivalents 2 590
Inventory 48 900
Plant and machinery at net book value 52 000
Property at valuation 65 000
Retained earnings 27 350
Revaluation reserve 23 000
Share capital (ordinary shares of $1 each) 80 000
Share premium 19 400
Trade payables 17 140
Trade receivables 26 400
The directors discovered that the following had not been accounted for.
1 Plant and machinery had been purchased for $16 500. This was settled by the part‑exchange of machinery with a net book value of $11 800 and a bank payment of $4700.
2 No depreciation for the year had been charged. Plant and machinery is depreciated at 10% per annum using the reducing balance method. A full year’s depreciation is charged in the year of purchase and none in the year of disposal.
3 A bonus issue of one ordinary share for every four shares held had been made on 1 June 2022.
The directors had decided to keep the reserves in the most flexible form.
4 An interim dividend of $0.03 per share had been paid on 1 September 2022 on all shares in issue at that date.
5 Property had been revalued downwards by $4000.
6 One half of the 8% bank loan (2028–2029) had been repaid on 30 September 2022.
7 A provision for doubtful debts of 5% was to be made.
REQUIRED
(a) Prepare the journal entry to record the bonus issue of shares. Dates and narrative are not required.
…… [3]
(b) Calculate the net book value of plant and machinery at 30 September 2022.
…… [4]
(c) Calculate the adjusted balance of cash and cash equivalents at 30 September 2022.
…… [4]
(d) Calculate the adjusted balance of retained earnings at 30 September 2022.
…… [5]
(e) Prepare the statement of financial position at 30 September 2022.
H Limited
Statement of Financial Position at 30 September 2022
…… [8]
(f) Explain two differences between capital reserves and revenue reserves.
1 ……
2 ……
[4]
(g) Explain one accounting concept applied when making a provision for doubtful debts.
…… [2]
[Total: 30]
PLEASE TURN OVER
Mark scheme
1(a) Debit Credit 3
$ $
Share premium 19 400 (1)
Retained earnings 600 (1)
(Ordinary) Share capital 20 000 (1)
1(b) $51 030 (4) W1 4
W1
$
Balance b/d 52 000
Addition 16 500 (1)
Disposal (11 800) (1)
56 700
Depreciation for the year (5 670) (1)
Net book value 51 030 (1) OF
1(c) ($19 110) (4) W1 4
W1
$
Balance b/d 2 590
Plant and machinery (4 700) (1)
Dividend (3 000) (1)
Loan repayment (14 000) (1)
Adjusted balance (19 110) (1)
1(d) $16 760 (5) W1 5
W1
$
Balance b/d 27 350
Depreciation (5 670) (1) OF
Bonus issue (600) (1) OF
Dividend (3 000) (1) OF
Provision for doubtful debts (1 320) (1)
Adjusted balance 16 760 (1)
1(e) H Limited 8
Statement of Financial Position at 30 September 2022
$
Non-current assets
Property 61 000
Plant and machinery 51 030
112 030 (1)
Current assets
Inventory 48 900
Trade receivables 25 080 (1) OF
73 980
Total Assets 186 010
Equity and liabilities
Share capital 100 000 (1)
Revaluation reserve 19 000 (1) OF
Retained earnings 16 760 (1) OF
135 760
Non-current liabilities
8% bank loan (2028–2029) 14 000 (1)
Current liabilities
Bank overdraft 19 110 (1) OF
Trade payables 17 140
36 250
Total equity and liabilities 186 010 (1)OF
1(f) Capital reserves are created as a result of non-trading activities (1) whereas revenue reserves are created by transfer from 4
profits / trading activities (1).
Capital reserves cannot be used to pay shareholder dividends (1) whereas revenue reserves can be used to pay
shareholder dividends (1).
Accept other valid responses.
1(g) Conforms with the prudence concept (1) ensuring that a potential loss is recognised when it becomes apparent / ensuring 2
that current assets/profits are not overstated (1)
Accept other valid responses.
Usman has extracted the following information from his books of account in order to update the sales ledger control account for the month of August 2022.
$
Balance brought down at 1 August 2022 34 210
Cheque receipts from credit customers 32 840
Customers’ dishonoured cheques 1 020
Sales journal totals 29 760
Sales returns journal totals 980
Usman has produced a list of all customer account balances at 31 August 2022 totalling $30 477.
He has discovered the following:
1 The total of the sales journal had been overcast by $600.
2 Discounts allowed of $218 had been entered in customers’ accounts but no entries had been made in the control account.
3 A contra for $325 had been correctly entered in both the customer’s account and the supplier’s account.
4 A customer’s overpayment of $65 had been repaid by cheque but no entries had been made in the books of account.
5 A cheque received from Musa for $250 had been posted to the account of Hussein.
6 An irrecoverable debt of $180 had been correctly written off in a customer’s account but had not been entered in the control account.
7 A credit balance of $315 on a customer’s account had been incorrectly entered as a debit balance in the list of customer account balances at 31 August 2022.
REQUIRED
(a) Prepare the updated sales ledger control account for the month of August 2022.
Sales ledger control account
$ $
Balance b/d 34 210
[9]
(b) Prepare an amended total of customer account balances to agree with the sales ledger control account balance in (a).
$
Original total of customer account balances 30 477
[3]
(c) State one limitation of preparing a control account.
…… [1]
(d) Explain why a sales ledger control account would help in the prevention of fraud.
…… [2]
[Total: 15]
PLEASE TURN OVER
Mark scheme
2(a) Sales ledger control account 9
$ $
Balance b/d 34 210 Cash book (Bank) 32 840
(1)
Sales (book) 29 160 Sales returns (book) 980
(1) (1)
Cash book (Bank) 1 020 Cash book (discount allowed) 218
(1) (1)
Cash book (Bank) 65 Purchases ledger control 325
(1) account (contra) (1)
Journal (irrecoverable) 180
(1)
Balance c/d 29 912
64 455 64 455
Balance b/d 29 912
(1) OF
2(b) $ 3
Original total from list of sales ledger balances 30 477
Customer overpayment 65 (1)
Correction of credit balance (630) (1)
Amended total of sales ledger balances 29 912 (1)
2(c) Does not identify all types of error / only proves the arithmetical accuracy of the ledger (1) 1
2(d) Preparation of the sales ledger control account should be carried out by a different member of staff / segregation of 2
duties(1) so collusion between two people would be required for fraud to be present (1)
Accept other valid responses.
N Limited provided the following information for the year ended 31 August 2022.
$
6% debentures (2022) 20 000
Bank overdraft 9 430
Cash in hand 650
Closing inventory 64 800
Finance costs 1 400
Opening inventory 45 600
Operating expenses 96 000
Other payables 4 340
Other receivables 6 080
Purchases 172 000
Revenue 292 000
Trade payables 10 100
Trade receivables 19 800
Cash sales accounted for 20% of revenue.
Cash purchases accounted for 25% of purchases.
REQUIRED
(a) Calculate the following efficiency ratios, showing the formula used.
Ratio Formula Workings
Trade receivables turnover (days)
Answer:
Trade payables turnover (days)
Answer:
[4]
(b) Calculate the following liquidity ratios to two decimal places, showing the formula used.
Ratio Formula Workings
Current ratio
Answer:
Liquid (acid test) ratio
Answer:
[4]
Additional information
The directors have reported a 5% increase in profit for the year ended 31 August 2022 and are satisfied with the results.
REQUIRED
(c) Advise the directors whether or not they are correct to be satisfied. Justify your answer and support it by considering the efficiency ratios and liquidity ratios in (a) and (b).
…… [5]
(d) State two limitations of using accounting ratios to compare the results of two businesses.
1 ……
2 ……
[2]
[Total: 15]
Mark scheme
3(a) 4
Ratio Formula Workings
Trade receivables Trade receivables $292 000 × 80% = $233 600
turnover (days). × 365 (1)
Credit sales
$19 800
× 365 = 31 days (1)
$233 600
Trade payables Trade payables $172 000 × 75% = $129 000
turnover (days) × 365 (1)
Credit purchases
$10 100
× 365 days = 29 days (1)
$129 000
3(b) 4
Ratio Formula Workings
Current ratio Current assets $91 330 / $43 870
(1)
Current liabilities
= 2.08:1 (1)
Liquid (acid test) Current assets exc. inventory $26 530 / $43 870
ratio (1)
Current liabilities
= 0.60:1 (1) OF
3(c) The company may experience cash flow problems (1) as a result of paying suppliers before receiving settlement from 5
customers (1)
The company may struggle to pay its short-term debts (1) Due to the high level of inventory (1)
Decision
Therefore, the directors should not be satisfied with the results due to potential liquidity problems (1)
Accept other valid responses.
3(d) Ratios do not consider non-financial factors (1) 2
Businesses may not be of comparable size (1)
Businesses may use different accounting techniques (1)
Uses historic data (1)
Max 2
Accept other valid responses.
Brady manufactures one product which is sold through agents who receive a 10% commission based on the selling price.
The following budgeted information is available for December 2022.
$
Sales revenue (12 000 units) 78 000
Direct materials 21 600
Direct labour 14 400
Variable production overheads 4 800
Fixed production overheads 9 200
Fixed administrative overheads 6 100
Selling expenses including sales commission 13 200
All selling expenses with the exception of sales commission are fixed.
REQUIRED
(a) Calculate for December 2022:
(i) budgeted total contribution
…… [2]
(ii) budgeted total profit
…… [2]
(iii) break‑even point in units.
…… [2]
(b) State the formula for calculating the margin of safety.
…… [1]
Additional information
Brady has a monthly target profit of $10 800.
REQUIRED
(c) Calculate how many units Brady would have to sell in December 2022 in order to achieve the target profit.
…… [2]
Additional information
Brady is aware that he needs to make changes in order to achieve his monthly target profit and he is proposing the following:
1 Improve the specification of the product and increase the selling price by $0.30 per unit.
2 The new materials will increase the direct material price by $0.40 per unit.
3 Reduce the direct labour rate by 5% per unit.
4 Reduce the sales commission to 8%.
5 Reduce the administrative overheads by $18 000 per annum by making one member of staff redundant.
6 Increase the advertising budget by $2500 per month.
Brady is confident that these measures will produce additional sales of 1000 units each month.
REQUIRED
(d) Prepare a budgeted marginal cost statement for December 2022 if Brady makes the proposed changes.
Brady
Budgeted marginal cost statement for December 2022
Workings:
[10]
(e) Advise Brady whether or not he should make the proposed changes. Justify your advice by discussing the issues that he should consider.
…… [7]
(f) State two advantages of cost–volume–profit analysis.
1 ……
2 ……
[2]
(g) State two limitations of cost–volume–profit analysis.
1 ……
2 ……
[2]
[Total: 30]
Mark scheme
4(a)(i) $29 400 (2) W1 2
W1
$78 000 – ($21 600 + $14 400 + $4800 + $7800 = $48 600) (1) = $29 400 (1)
4(a)(ii) $8700 (2) W1 2
W1
$29 400 – ($9200 + $6100 + $5400 = $20 700) (1) = $8700 (1)
4(a)(iii) 8449 units (2) W1 2
W1
($20 700 / $2.45) (1) OF = 8449 units (1) OF
4(b) Actual sales – Break-even sales (1) 1
Allow other valid responses.
4(c) 12 858 units (2) W1 2
W1
$20 700 (OF) + $10 800 = $31 500 (1) OF / $2.45 (OF) = 12 858 units (1) OF
4(d) Brady 10
Budgeted marginal cost statement for the month of December 2022
$ $
Sales revenue 13 000 × $6.80 88 400 (1)
Variable costs
Direct materials 13 000 × $2.20 28 600 (1)
Direct labour 13 000 × $1.14 14 820 (1)
Production overheads 13 000 × $0.40 5 200 (1)
Selling costs 88 400 (OF) × 8% 7 072 (1) OF (55 692)
Contribution 32 708 (1) OF
Fixed costs
Production overheads 9 200 (1)
Administrative overheads $6100 – $1500 4 600 (1)
Selling costs $5400 + $2500 7 900 (1) 21 700
Profit for the month 11 008 (1) OF
4(d) Alternative presentation
$ $
Sales revenue 6.80 (1)
Variable costs
Direct materials 2.20 (1)
Direct labour 1.14 (1)
Production overheads 0.40 (1)
Selling costs 0.544 (1) OF 4.284
Contribution per unit 2.516
Total contribution X 13 000 32 708 (1) OF
Fixed costs
Production overheads 9 200 (1)
Administrative overheads $6100 – $1 500 4 600 (1)
Selling costs $5400 + $2500 7 900 (1) 21 700
Profit for the month 11 008 (1) OF
4(e) Comments (Max 6 marks) 7
He will exceed his target profit by 1.9% depending on whether his customers are willing to pay the increased price. (1)
Will turnover actually fall as a result if customers are not willing to pay the increased price (1)
Will agents be demotivated as a result of reduced commission rates resulting in a fall in sales (1)
What will be the cost of redundancies and what effect will that have on the company’s profit? (1)
Will the decreased labour rate demotivate workers resulting in reduced production levels and poor quality? (1)
Will overtime be required to meet the additional output, and will workers be prepared to work overtime? (1)
How accurate is his forecast of 1000 additional units? and is the target achievable? (1)
There is no guarantee that by increasing the advertising the increase in sales will be achieved. (1)
Decision (1)
Advise Brady to proceed with these changes provided he is confident he can produce the increase in monthly sales of
1000 units
Accept other valid responses
4(f) • Facilitates short-term decision making (1). 2
• Enables identification of most profitable selling price, cost and volume combination (1).
• Facilitates determination of viable selling price (1).
• Helps control costs to maximise profitability (1).
Max 2 marks
Accept other valid responses.
4(g) • Assumes fixed costs remain constant over relevant range (1). 2
• Assumes variable costs per unit remain constant (1).
• Assumes selling price per unit remains constant (1).
• Only relevant for single product or constant product mix (1).
Max 2 marks
Accept other valid responses.
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Accounting 9706/22 for October/November 2022 is out of 90 marks, with 1 hour 30 minutes to answer it, across 4 questions.
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