Accounting 9706/32 October/November 2022: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 3 Structured Questions, October/November 2022. 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:
(i) the profit on the joint venture
…… [3]
(ii) the amount paid to each party when the joint venture bank account was closed.
Ajlal ……
Daneen ……
[5]
(b) Prepare the joint venture bank account for the month of August 2022.
…… [6]
(c) Discuss whether the decision to share the profit equally was reasonable.
…… [3]
Additional information
Ajlal was considering running another stall at a market in a different location, to assess whether demand might be stronger there.
(d) Advise Ajlal whether or not she should enter into another joint venture, or operate alone whilst employing an assistant to help her run the stall. Justify your answer.
…… [4]
Additional information
Ajlal was considering if a joint venture requires the services of an auditor.
(e) Explain which business entities would require the services of an auditor.
…… [2]
(f) State two points which should be covered in an unqualified audit report.
1 ……
2 ……
[2]
[Total: 25]
Mark scheme
1(a)(i) (3 900 +400) (1) – (800 +1 650 +420) (1) = $1 430 (1)OF 3
1(a)(ii) Ajlal 1 000 + 550 (1) - 400 (1) + 715 (1of) = $1 865 (1)OF 5
Daneen 1 200 + 715 = $1 915 (1)OF
1(b) 6
Joint venture bank account
$ $
Ajlal 1 000 } Joint venture a/c 800 }
Daneen 1 200 }(1) Joint venture a/c 420 }(1)
Joint venture a/c (sales) 3 900 (1) Joint venture a/c 1 100 (1)
Ajlal 1 865 (1)OF
Daneen 1 915 (1)OF
6 100 6 100
1(c) The equal split of profit mirrors the equal split of hours (1) but Ajlal spent additional time making the chocolates (1). 3
Daneen put in more cash at the start ($1200 v $1000) (1) but Ajlal put in more cash in total as she paid for ingredients
($1550 against $1200) (1).
But Ajlal had the added benefit of finding out how well her chocolates would sell (1).
Accept other valid responses.
Max 3
1(d) Operating alone – Ajlal would not have to share the profit (1) but the profit would be lower because of the assistant’s wages 4
(1).
Ajlal would bear all the risk alone (1) and have to find all the capital herself (1). She now has both funds and fittings from
the running of the previous stall (1).
Repeating the joint venture – The risk is shared (1) and additional capital is available to help with set up costs (1). A party to
a joint venture may be more reliable than an employee as they have a stake in the profit (1).
Accept other valid responses
Max 3 for comments Decision 1 mark
1(e) A large limited company requires an audit (1) as it is a statutory requirement (1) but other businesses or organisations may 2
choose to have an audit (1).
Max 2
Accept other valid responses
1(f) Proper books of account have been maintained (1). 2
The financial statements are in accordance with the books of account (1).
The financial statements give a true and fair view / are free from material errors and mis-statements (1).
The financial statements comply with legislation and standards (1).
Max 2
Accept other valid responses
Read Source A2 in the insert.
(a) Prepare the following ledger accounts in the books of Sarah to record the sale of her business and the settlement of the amount due to her.
(i) DB plc account
…… [3]
(ii) Bank account
…… [4]
(iii) Capital account
…… [4]
(b) Prepare the statement of financial position of DB plc immediately after the purchase of
Sarah’s business.
…… [7]
Additional information
A year later the market price of one ordinary share in DB plc had risen to $1.80, but the dividend yield had fallen to 3%. Sarah was able to earn interest of 4% on funds she invested elsewhere.
(c) Advise Sarah whether or not she should sell her shares in DB plc and invest the proceeds to earn interest. Justify your answer.
…… [5]
(d) Explain how stewardship affects a business purchase by a limited company.
…… [2]
[Total: 25]
Mark scheme
2(a)(i) Sarah 3
DB plc
$ $
Realisation 240 000 (1) Bank 30 000 (1)
(purchase Capital (shares) 210 000 (1)
consideration)
240 000 240 000
2(a)(ii) 4
Bank
$ $
Balance b/d 12 000 (1) Loan 20 000 (1)
DB plc 30 000 (1) Capital 22 000 (1)
42 000 42 000
2(a)(iii) 4
Capital
$ $
Bank 22 000 (1) Balance b/d 123 000 (1)
OF
DB plc 210 000 (1) Realisation 109 000 (1)
(shares) (profit) W1
232 000 232 000
W1 (240 – (120 + 17 + 15 – 21))
2(b) DB plc 7
Statement of financial position at 31 October 2021
$
Non-current assets - tangible 925 000 (1)
- intangible (goodwill) 29 000 (1)
954 000
Current assets
Inventory 115 000 (1)
Trade receivables 91 000 (1)
Total current assets 206 000
Total assets 1 160 000
Equity
Ordinary shares of $1 each 550 000 (1)
Share premium 60 000 (1)
Retained earnings 464 000
Total equity 1 074 000
Current liabilities
Trade payables 80 000
Bank 6 000 (1)
Total current liabilities 86 000
Total equity and liabilities 1 160 000
2(c) The dividend on her shares is $8 100 per annum (1). The interest would be $10 800 per annum (1). However, interest rates 5
and/or dividends might change in the future (1).
If Sarah needs short term income then it would be better to sell the shares (1). But selling costs would be incurred if the
shares were sold (1).
As Sarah has a substantial shareholding she may find it difficult to find a buyer for her shares. (1)
The company may be retaining a high proportion of its profit to fund further expansion/more business purchases so
dividends may not increase (1).
However, in the longer term there could be more capital gains as the share price could continue to increase (1).
Accept other valid responses
Max (4) marks for comments Decision (1)
2(d) Stewardship means that directors act as stewards on behalf of owners/shareholders (1) 2
This means that the directors must ensure that the business purchase is in the best interests of the shareholders (1).
Read Source A3 in the insert.
(a) Prepare a summarised version of the draft income statement for the year ended
31 March 2022.
…… [4]
Additional information
The draft financial statements did not take into account the following information items.
1 During the year one of the company’s delivery drivers had caused an accident resulting in repairs to another vehicle costing $7000. Of this, $5000 will be covered by the company’s insurance. No payments have yet been made.
2 Another vehicle is recorded in the books with a book value of $27 000. It is now estimated that it has a value in use of $22 000 and could be sold for $19 000.
3 A credit customer who owed the company $1000 at the year-end was discovered to have gone bankrupt and was not expected to pay any of the debt.
4 A dissatisfied customer was taking legal action and was suing the company for damages of
$10 000. The company had estimated that the customer had a 35% chance of success.
5 Goods with a selling price of $7200 were held by a credit customer on 31 March 2022 on a sale or return basis. These goods were treated in the draft financial statements as having been sold.
6 The premises were revalued on 31 March 2022 from $400 000 to $580 000.
7 The draft financial statements showed a value of $24 000 for an intangible asset which had been bought by the company on 1 April 2021. The directors were of the opinion that this should be amortised (depreciated) over 20 years from the date of purchase.
8 A fire on 4 April 2022 destroyed the company’s entire inventory.
(b) Identify the two items from the information items 1 to 8 which should be disclosed by way of a note to the accounts. Explain the reason for their treatment.
1 Item number ……
Explanation ……
2 Item number ……
Explanation ……
[6]
(c) State what is meant by the term ‘contingent asset’. Illustrate your answer with an example.
…… [2]
(d) Calculate the correct profit for the year. Start your answer with the draft profit from your answer to (a).
…… [7]
(e) Prepare the journal entry to record information item 6 from the list given. A narrative is required.
…… [3]
Additional information
The value of trade receivables in the draft statement of financial position was $81 900.
(f) Calculate the correct value of trade receivables at 31 March 2022.
…… [3]
[Total: 25]
Mark scheme
3(a) PS plc 4
Draft income statement for the year ended 31 March 2022
$
Revenue (cos x 1.6) 558 400 (1)OF
Cost of sales 349 000 (1)
Gross profit 209 400
Expenses (rev x .25) 139 600 (1)OF
Profit from operations 69 800
Finance cost (rev x .03) 16 752 (1)OF
Profit for the year 53 048
3(b) Item 4 (legal action) (1). This is a contingent liability/IAS37 (1). It is less than 50% likely to be paid/only possible not 6
probable (1).
Item 8 (inventory fire) (1). This is a non-adjusting event/IAS10 (1). It does not affect conditions at the date of the statement
of financial position/is material/affects the capacity of the business (1).
3(c) A contingent asset is a potential economic benefit the realisation of which depends on events beyond the control of the 2
business (1).
Example – anticipated damages receivable from a lawsuit (1).
Accept other examples.
3(d) $ 7
Draft profit for the year 53 048
1 uninsured amount (2 000) (1)
2 impairment (5 000) (1)
3 irrecoverable debt (1 000) (1)
5 sale or return (7 200) (1) + 4 500 (1) (2 700)
7 amortization (1 200) (1)
Revised profit for the year 41 148 (1)OF
3(e) 3
Debit Credit
$ $
Premises 180 000 (1)
Revaluation reserve 180 000 (1)
Revaluation of premises on 31 March 2022 (1)
3(f) 3
$
Draft trade receivables 81 900
3 irrecoverable debt (1 000) (1)
5 sale or return (7 200) (1)
Revised trade receivables 73 700 (1)OF
Read Source A4 in the insert.
(a) Prepare the provision for unrealised profit account for each of the years ended
31 December 2020 and 2021.
Workings:
[8]
(b) Complete the following table. Identify which figures connected to factory profit were recorded in AZ Limited’s income statement for the year ended 31 December 2021. State the amounts and their position in the income statement.
Description Amount Position
$
[9]
(c) Name two costs which might be included in a manufacturer’s cost of production but would not be included in prime cost.
1 ……
2 ……
[2]
Additional information
1 The directors use the value of factory profit to set the bonuses for senior factory staff.
2 In 2020 the units could have been bought in for $44, and in 2021 for $41.65.
(d) Discuss whether the rates of factory profit being applied by AZ Limited are suitable.
…… [6]
[Total: 25]
Section B: Cost and Management Accounting
Answer all questions.
Mark scheme
4(a) AZ Limited 8
Provision for unrealised profit account
$ $
Balance c/d W2 7 140 (2) Balance b/d W1 4 000 (2)
Income statement 3 140 (1)OF
7 140 7 140
Income statement 2 040 (1)OF Balance b/d 7 140
Balance c/d W3 5 100 (2)
7 140 7 140
W1 20 000 (1) × 20% = 4 000 (1)OF
W2 35 700 (1) × 20% = 7 140 (1)OF
W3 20 400 (1) × 25% = 5 100 (1)OF
4(b) 9
Description Amount Position
$
Cost of production at transfer price (1) 956 250 (1) Within cost of sales in trading section (1)
Factory profit (1) 191 250 (1) Added to gross profit (1)
Decrease in provision for unrealised profit (1) 2 040 (1)OF Added to gross profit (1)
4(c) Any two factory costs for (1) mark each, e.g. factory rent, factory insurance 2
4(d) The rate of factory profit will not affect the total profit for the year (1). A higher rate of factory profit will increase the staff 6
bonus (1) but will reduce the profit (1). However, staff will want to earn their bonuses and will be motivated to be more
productive (1).
In 2020 the transfer price including factory profit is $50.40 (1) but the buying in price is $44 so the rate of factory profit is not
suitable (1)
In 2021 the transfer price including factory profit is $53.13 (1) but the buying in price is $41.65 so the rate of factory profit is
again not suitable (1)
Cost of manufacture has risen (1) whilst for competitors it has fallen (1) indicating that the factory has become less efficient
(1) and so bonuses are not reasonable (1).
Max 6
Accept other valid responses.
Read Source B1 in the insert.
(a) Prepare the labour wages budget for each of the months June, July and August.
…… [4]
(b) Prepare extracts from the cash budget showing entries relating to sales and labour for each of the months June, July and August.
…… [13]
(c) State two advantages to a business of preparing a cash budget.
1 ……
2 ……
[2]
Additional information
One of the directors has suggested adding a fixed amount of profit per unit when calculating the selling price so that profit is not affected by changes in production cost.
(d) Advise the directors whether or not they should adopt this suggestion. Justify your answer.
…… [4]
(e) Name two budgets which would be affected by the creation of a provision for doubtful debts.
1 ……
2 ……
[2]
[Total: 25]
PLEASE TURN OVER
Mark scheme
5(a) Labour wages budget 4
June July August
Production units 5 500 4 500 4 200
Hours of work 8 250 6 750 6 300
Basic pay $65 000 $71 500 $69 300 (1) for row
Overtime pay $21 000 (1) $3 300 (1) 0
Cost $86 000 $74 800 $69 300 (1)OF for row
OR
June July August
Production units 5 500 4 500 4 200
Hours of work 8 250 6 750 6 300
Basic pay $82 500 $74 250 $69 300 (1) for row
Overtime premium $3 500 (1) $550 (1) 0
Cost $86 000 $74 800 $69 300 (1)OF for row
5(b) Cash budget (extracts) 13
June July August
$ $ $
Receipts
Cash sales 38 500 (1) 31 500 (1) 27 300 (1)
One month 59 375 (1) 73 150 (1) 59 850 (1)
Two months 25 000 (1) 31 250 (1) 38 500 (1)
Payments
Basic pay 65 000 71 500 69 300 (1) for row
Overtime pay (in arrears) 12 000 (1) 21 000 (1) 3 300 (1)
5(c) To identify cash shortages (1) 2
To identify cash surpluses (1)
5(d) This would simplify the setting of the selling price (1). 4
This would avoid the profit per unit falling in months when overtime is payable (1).
When production increases the costs also increase resulting in an increased selling price (1).
This may make customers unwilling to pay (1). Would these prices be comparable to those of competitors? (1)
A slightly lower profit per unit is already more than compensated for by the increase in the volume of sales (1).
Accept other valid responses.
Decision (1) and comments max. 3
5(e) Master budget (1) 2
Budgeted income statement (1)
Budgeted statement of financial position (1)
Max 2
Read Source B2 in the insert.
(a) Explain why ABC is often considered a better costing method than absorption costing.
…… [2]
Additional information
The company manufactures two products. The following information is available for the year.
1 Direct costs
Product A Product B
Production (units) 1500 4500
Direct material per unit 3 kilos at $7.20 per kilo 5 kilos at $4.80 per kilo
Direct labour per unit 2 hours at $10.50 per hour 3 hours at $10.50 per hour
2 Production overheads
Overhead Total cost
$
Machine servicing 13 700 Three machines are used to manufacture product A and eight to manufacture product B. They are all serviced once a month.
Order processing 6 400 Orders processed amount to 27 for product A and 93 for product B.
Quality inspections 11 200 Product A is subject to 34 quality inspections and product B to 126.
3 Rent costs $48 000 a year and is apportioned on the basis of floor area, 30% for product A and 70% for product B.
4 The business applies a mark-up of 50% on total cost when calculating selling price.
(b) Calculate the selling price of one unit for each product.
…… [12]
Additional information
The company’s selling price for product B is $3 higher than that of a competitor. The directors are worried that because of this the company will start to lose sales.
They are considering doubling production of product B whilst maintaining the same percentage mark-up. They believe that because of the increase in production they would be able to negotiate a purchase price for direct material of $4.40 per kilo. There would be an increased requirement for labour and therefore the rate of pay would increase to $11.50 per hour for all factory workers.
The increase in production would cause the following production overheads for product B to become:
$
Machine servicing 27 900
Order processing 8 100
Quality inspections 16 560
Total 52 560
The rent and its apportionment would be unchanged.
(c) Calculate the selling price of one unit of product B which would be charged if its production was doubled in this way.
…… [4]
(d) Advise the directors whether or not they should double production of product B. Justify your answer.
…… [7]
[Total: 25]
Mark scheme
6(a) ABC is considered more accurate/realistic (1) because it accounts for how overheads are allocated based on activities/cost 2
drivers (1).
Accept other valid responses.
6(b) 12
Per unit Product A Product B
$ $
Direct material 21.60 }(1) 24.00 }(1)
Direct labour 21.00 } 31.50 }
Machine servicing 2.49 (1) 2.21 (1)
Order processing 0.96 (1) 1.10 (1)
Quality inspections 1.59 (1) 1.96 (1)
Rent 9.60 (1) 7.47 (1)
57.24 68.24
Mark up 28.62 34.12 (1)OF both
Selling price 85.86 102.36 (1)OF both
6(b) Alternative presentation
In total Product A Product B
$ $
Direct material 32 400 }(1) 108 000 }(1)
Direct labour 31 500 } 141 750 }
Machine servicing 3 736 (1) 9 964 (1)
Order processing 1 440 (1) 4 960 (1)
Quality inspections 2 380 (1) 8 820 (1)
Rent 14 400 (1) 33 600 (1)
85 856 307 094
Mark up 42 928 153 547 (1)OF both
Revenue 128 784 460 641
÷1500/4500
Unit selling price 85.86 102.36 (1)OF both
6(c) 4
Per unit Product B
$
Direct material 22.00 }
Direct labour 34.50 }(1)
Production overheads (52 560/9 000) 5.84 (1)
Rent (33 600/9 000) 3.73 (1of)
66.07
Mark up 33.04
Selling price 99.11 (1of)
6(c) Alternative presentation
In total Product B
$
Direct material 198 000 }
Direct labour 310 500 }(1)
Production overheads 52 560 (1)
Rent 33 600 (1of)
594 660
Mark up 297 330
Revenue 891 990
÷ 9000
Selling price 99.11 (1of)
Note – final OF mark requires inclusion of correct mark up
6(d) The increase in production would decrease unit costs (1) and decrease selling price by very slightly more than the desired 7
$3 (1) which is not a lot in comparison to the existing mark up of $34.12. (1) The directors could just decide to reduce the
rate/amount of mark up (1). The mark up decreases anyway by $1.08 from this policy (1)OF.
The directors cannot be sure the company will be able to sell all the extra units (1). It could be left with a large inventory of
finished goods (1). The strategy is risky (1).
It may not be possible to increase production so substantially without investing in extra machines or renting extra factory
space (1). Additional workers may not be available at short notice (1). Product quality may be negatively affected. (1)
There would be knock-on effects with Product A as well (1). As labour costs would increase for all factory workers, direct
labour for Product A would increase by $2 per unit, resulting in an increase in selling price of $3 per unit (1). So this policy
may merely move the problem from one product to another (1).
Decision (1) and comments max. (6)
Accept other valid responses.
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Accounting 9706/32 for October/November 2022 is out of 150 marks, with 3 hours to answer it, across 6 questions.
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