Accounting 9706/22 October/November 2023: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Fundamentals of Accounting, October/November 2023. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
P Limited sells electronic goods online.
The directors provided the following information.
At At
Balances 31 July 2023 1 August 2022
$ $
8% debenture (2026) 36 000 –
Inventory 43 190 36 800
Other payables: administrative expenses – 960
Other receivables: administrative expenses 160 1 820
Other receivables: distribution costs 1 490 –
Trade payables 25 250 29 610
Bank account extract for the year ended 31 July 2023
$
Payments
To credit suppliers 122 050
Administrative expenses 66 920
Distribution costs 51 730
Receipts
From customers 284 200
The following information is also available.
1 All goods are despatched to customers immediately on receipt of payment.
2 Inventory at 31 July 2023 included damaged items that had cost $3600. One half of these items will be scrapped and have no value. The remaining items will be sold for $900 after repairs costing $420.
3 The 8% debenture (2026) was issued on 1 April 2023.
4 The charge for taxation was estimated to be $10 700.
(a) Prepare the statement of profit or loss for the year ended 31 July 2023. Use the space provided to show your workings.
P Limited
Statement of profit or loss for the year ended 31 July 2023
$
Workings:
Cost of sales
Administrative expenses
Distribution costs
[15]
Additional information
1 Balances at 1 August 2022
$
Share capital (ordinary shares of $0.50 each) 120 000
Share premium 19 000
Retained earnings 23 560
2 On 1 September 2022, a bonus issue of shares was made of one ordinary share for every six shares held. Reserves were maintained in their most flexible form.
3 On 1 January 2023, a final dividend of $0.07 per share was paid on all shares in issue at
1 August 2022.
4 On 31 March 2023, a rights issue of one ordinary share for every four shares held was made at a premium of $0.15 per share. The issue was fully subscribed.
(b) Prepare the statement of changes in equity for the year ended 31 July 2023.
P Limited
Statement of changes in equity for the year ended 31 July 2023
Share Share Retained capital premium earnings Total
$ $ $ $
At 1 August 2022 120 000 19 000 23 560 162 560
[6]
(c) State two examples of revenue reserves of a limited company.
1 ……
2 ……
[2]
(d) Advise the directors whether or not they were correct to make a bonus issue of shares rather than make a new issue of shares. Justify your answer.
…… [7]
[Total: 30]
Mark scheme
1(a) Prepare the statement of profit or loss for the year ended 31 July 2023. 15
P Limited
Statement of profit or loss for the year ended 31 July 2023
$
Revenue 284 200 (1)
Cost of sales W1 (114 420) (4)OF
Gross profit 169 780 (1)OF
Distribution costs (50 240) (1)
Administrative expenses W2 (67 620) (4)OF
Profit from operations 51 920 (1)OF
Finance costs (960) (1)
Profit before taxation 50 960 (1)OF
Taxation (10 700)
Profit for the year 40 260 (1)OF
W1
Opening inventory 36 800 (1)
Purchases 122 050 – 29 610 + 25 250 = 117 690 (1)
Closing inventory 43 190 – 3600 + 900 – 420 = 40 070 (1)
Cost of sales 36 800 + 117 690 – 40 070 = 114 420 (1)OF
W2
66 920 – 960 (1) + 1820 (1) – 160 (1) = 67 620 (1)OF
1(b) Prepare the statement of changes in equity for the year ended 31 July 2023. 6
P Limited
Statement of changes in equity for the year ended 31 July 2023
Share Share Retained
capital premium earnings Total
$ $ $ $
At 1 August 2022 120 000 19 000 23 560 162 560
Bonus issue 20 000 (19 000) (1 000) -
(1)
Final dividend (16 800) (16 800)
(1)
Rights issue 35 000 10 500 45 500
(1) (1)
Profit for the year 40 260 40 260
(1)OF
At 31 July 2023 175 000 10 500 46 020 231 520
(1) OF
1(c) State two examples of revenue reserves of a limited company. 2
Retained earnings (1)
General reserve (1)
Accept other valid responses.
1(d) Advise the directors whether or not they were correct to make a bonus issue of 7
shares rather than make a new issue of shares. Justify your answer.
Bonus issue Max 4 marks
• Will incur no additional costs (1)
• No necessity to source new shareholders (1)
• Will be received favourably by existing shareholders (1)
• Makes use of share premium account (1)
• No cash inflow (1)
New issue of shares Max 4 marks
• Will raise new finance (1)
• May be more costly to source new shareholders (1)
• Very low retained earnings may discourage new shareholders (1)
• May dilute ownership (1)
• A new issue of shares may not be fully subscribed (1)
Advice supported with a comment (1)
Accept other valid responses
Simon formed a parcel delivery business on 1 July 2021.
On 1 July 2021, he purchased a delivery vehicle for $29 000 from his business bank account.
He decided to depreciate delivery vehicles on a monthly basis using the straight‑line method. He estimated that the delivery vehicle would have a useful working life of four years and would have a residual value of $5000.
On 1 November 2022, a new delivery vehicle was purchased at a cost of $44 000. The old delivery vehicle was part exchanged at a value of $16 800. The balance was settled by a bank loan repayable over two years.
He estimated that the new delivery vehicle would have a useful working life of five years and would have a residual value of $8000.
(a) State two factors that cause the value of non‑current assets to depreciate.
1 ……
2 ……
[2]
(b) Prepare the following accounts for the year ended 30 June 2023. Use the space provided to show your workings.
Delivery vehicles at cost
Date Details $ Date Details $
Delivery vehicles provision for depreciation
Date Details $ Date Details $
Workings:
[8]
(c) Calculate the profit or loss on disposal of the delivery vehicle sold on 1 November 2022.
…… [2]
(d) Explain why it may be more appropriate to depreciate motor vehicles using the reducing balance method rather than the straight‑line method.
…… [3]
[Total: 15]
Mark scheme
2(a) State two factors that cause the value of non-current assets to depreciate. 2
Wear and tear (1)
Usage (1)
Technological changes (1)
Obsolescence (1)
Economic factors (1)
Depletion (1)
Max 2
Accept other valid responses
2(b) Prepare the following accounts for the year ended 30 June 2023. 8
Delivery vehicles at cost
Date Details $ Date Details $
2022 2022
1 Jul Balance b/d 29 000 1 Nov Disposal 29 000
(1)
2023
1 Nov Disposal 16 800 30 Jun Balance c/d 44 000
(1)
Bank loan 27 200
(1)
73 000 73 000
2023
1 Jul Balance b/d 44 000
(1)
Delivery vehicles provision for depreciation
Date Details $ Date Details $
2022 2022
1 Nov Disposal 8 000 1 Jul Balance b/d 6 000
(1) (1)
2023 2023
30 Jun Balance c/d 4 800 30 Jun Statement of
profit or loss 6 800
(1)
12 800 12 800
1 Jul Balance b/d 4 800
(1)
2(c) Calculate the profit or loss on disposal of the delivery vehicle sold on 1 2
November 2022.
29 000 – 8000 – 16 800 = $4200 (1) Loss (1)
2(d) Explain why it may be more appropriate to depreciate motor vehicles using the 3
reducing balance method rather than the straight-line method.
The reducing balance method is more appropriate because motor vehicles lose a
disproportionate amount of their value in the early years (1) but require less repair
and maintenance (1) so complies with the matching concept (1) whereas the straight
line method would be unsuitable as it charges the same amount throughout the
lifetime of the asset (1)
Max 3
Accept other valid responses
Malik prepared a sales ledger control account for July 2023. However, the balance of the control account did not agree with the total of customers’ account balances in the sales ledger.
He provided the following information.
$
At 1 July 2023
Sales ledger control account balance 76 250
For the month of July 2023
Contra purchases ledger 420
Sales journal 69 634
Cash book: customer cheques dishonoured 22
Cash book: discounts allowed 892
Journal: irrecoverable debts 410
Cash book: receipts from credit customers 74 118
Sales returns journal 2 090
The following errors were discovered which accounted for the difference.
1 The balance of a sales ledger customer’s account had been undercast by $300.
2 The total of the sales returns journal had been overcast by $580.
3 A journal entry to write off a customer account balance of $95 as irrecoverable had been correctly entered in the general ledger but had been posted to the debit side of the customer’s account.
4 A cheque received from a customer, $320, had been correctly entered in the cash book but had been posted to the debit side of the customer’s account as $230.
5 A further dishonoured cheque from a customer, $215, had not been entered in the cash book but had been correctly entered in the customer’s account.
The list of customer account balances extracted from the sales ledger totalled $69 211.
(a) Prepare the sales ledger control account for the month of July 2023, taking into account the errors discovered. Dates are not required.
Sales ledger control account
Details $ Details $
[9]
(b) Prepare a schedule of the corrected sales ledger account balances.
Increase Decrease Total
$ $ $
Per original list 69 211
Corrected balances
[4]
(c) State two limitations of preparing a control account.
1 ……
2 ……
[2]
[Total: 15]
Mark scheme
3(a) Prepare the sales ledger control account for the month of July 2023, taking into 9
account the errors discovered. Dates are not required.
Sales ledger control account
Details $ Details £
Balance b/d 76 250 (1) Sales returns 1 510 (1)
(journal)
Sales (journal) 69 634 (1) Journal / contra 420 (1)
Bank / Cash book 237 (1) Discount allowed / 892 (1)
Cash book
Bank / Cash book 74 118 (1)
Journal / 410 (1)
irrecoverable debt
Balance c/d 68 771
146 121 146 121
Balance b/d 68 771 (1)OF
3(b) Prepare a schedule of the corrected sales ledger account balances. 4
Increase Decrease Total
$ $ $
Per original list 69 211
Error 1 300 (1)
Error 3 190 (1)
Error 4 550 (1) (440)
Corrected balances 68 771 (1)
3(c) State two limitations of preparing a control account. 2
Only verify the arithmetical accuracy of the ledgers (1)
Does not indicate that individual account balances are correct (1)
Does not identify errors of commission / omission / principle / original entry etc. (1)
Accept other valid responses.
Andreas owns a business manufacturing bicycles. The business operates two production departments, Machining and Assembly, and two service departments, Stores and Maintenance.
The following information is available for one bicycle.
Direct materials $45.60
Direct labour: Machining ($10 per hour) 30 minutes
Direct labour: Assembly ($12 per hour) 105 minutes
Machine hours: Machining 20 minutes
Machine hours: Assembly 15 minutes
Total budgeted overheads for the year ended 31 August 2023 are as follows:
$
Indirect wages 420 000
Factory rent and rates 30 000
Machine overheads 22 000
The following information is also available.
Production departments Service departments
Machining Assembly Stores Maintenance
Floor space (square metres) 4 000 5 600 1 800 600
Number of orders from stores 2 100 1 600 500
Maintenance call outs 210 40
Budgeted direct labour hours 22 200 77 700
Budgeted machine hours 34 300 25 700
Number of indirect employees 4 12 2 2
Machine overheads are apportioned on the basis of machine hours.
(a) Complete the table to show the apportionment of the budgeted overheads for the year ended
31 August 2023.
Production departments Service departments
Total Machining Assembly Stores Maintenance
$ $ $ $ $
Indirect wages 420 000
Factory rent and rates 30 000
Machine overheads 22 000
Total overheads 472 000
Apportion Stores
Subtotal
Apportion Maintenance
Total overhead costs
[6]
(b) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis.
…… [4]
Additional information
The actual results for the year ended 31 August 2023 were as follows:
Machining Assembly
Total overheads $226 952 $267 465
Direct labour hours 28 450 72 580
Machine hours 44 120 15 270
(c) Calculate the over‑absorption or under‑absorption of overheads for each production department.
…… [4]
Additional information
Andreas has been approached by a new customer wishing to make a special order for 120 bicycles with modifications to the customer’s own specification. In order to complete the order, the following would apply for the manufacture of one bicycle.
1 The total material cost would increase by 30%.
2 The direct labour hours in the machinery department would increase by 50% and an additional
15 minutes of direct labour hours would be required in the assembly department.
3 Due to workers in the assembly department already working at full capacity, these workers would have to work overtime to complete the order at a premium of 25% on the usual direct labour rate.
(d) Calculate the direct cost of producing one bicycle for the special order.
…… [4]
Additional information
In order to remain competitive, Andreas wishes to achieve a 30% gross profit margin on all work.
(e) Prepare a statement to show the total selling price that Andreas should quote to the customer in order to achieve a 30% gross profit margin on the order.
…… [5]
Additional information
Having received the quotation from Andreas, the customer has stated that he will commit to a regular monthly order of 100 of the special bicycles if Andreas will offer a 10% discount on the quoted price and allow 2 months’ credit.
Andreas’s business is successful, though managing cash flow is often difficult.
(f) Advise Andreas whether he should accept the terms offered by the customer. Justify your answer.
…… [7]
[Total: 30]
Mark scheme
4(a) Complete the table to show the apportionment of the budgeted overheads for 6
the year ended 31 August 2023.
Production Service departments
departments
Total Machining Assembly Stores Maintenance
$ $ $ $ $
Indirect 420 000 84 000 252 000 42 000 42 000 (1)
wages row
Factory rent 30 000 10 000 14 000 4 500 1 500 (1)
and rates row
Machine 22 000 12 577 9 423 – – (1)
overheads row
Total 472 000 106 577 275 423 46 500 43 500
overheads
Apportion – 23 250 17 714 (46 500) 5 536 (1)OF
Stores row
Subtotal 472 000 129 827 293 137 – 49 036
Apportion – 41 190 7 846 – (49 036) (1)OF
Maintenance row
Total 472 000 171 017 300 983 - -
overhead
costs
(1)OF for both
4(b) Calculate, to two decimal places, an overhead absorption rate for each 4
production department, using a suitable basis.
171017
Machining: = $4.99 (1)OF per machine hour (1)
34 300
300 983
Assembly: = $3.87 (1)OF per labour hour (1)
77 700
4(c) Calculate the over absorption or under absorption of overheads for each 4
production department.
Machining Assembly
$ $
Actual 226 952 267 465
Absorbed: 44 120 × $4.99 220 159
Absorbed: 72 580 × $3.87 280 885
6 793 (1)OF 13 420 (1)OF
UNDER (1)OF OVER (1)OF
4(d) Calculate the direct cost of producing one bicycle for the special order. 4
$
Direct material $45.60 × 1.3 59.28 (1)
Direct labour - Machining $10 × 45 min 7.50 (1)
Direct labour - Assembly $15 × 120 min 30.00 (1)
Total direct cost 96.78 (1)OF
4(e) Prepare a statement to show the total selling price that Andreas should quote 5
to the customer in order to achieve a 30% gross profit margin on the order.
$
Direct cost $96.78 × 120 11 613.60 (1)OF
Machining dept. overheads $4.99 × 20 min × 120 199.60 (1)OF
Assembly dept overheads $3.87 × 120 min × 120 928.80 (1)OF
Total cost 12 742.00
Gross profit X 30/70 5 460.86 (1)
Quoted selling price 18 202.86 (1)
Alternative approaches (unit basis)
Version 1
$
Direct cost 96.78 (1)OF
Machining dept. overheads 1.66 (1)OF
Assembly dept overheads 7.74 (1)OF
Total unit cost 106.18
× 120 units
Total cost 12 741.60
Gross profit 5 460.69 (1)
Quoted selling price 18 202.29 (1)
4(e) Version 2
$
Direct cost 96.78 (1)OF
Machining dept. overheads 1.663 (1)OF
Assembly dept overheads 7.74 (1)OF
Total unit cost 106.183
x 120 units
Total cost 12 741.96
Gross profit 5 460.84 (1)
Quoted selling price 18 202.84 (1)
4(f) Advise Andreas whether he should accept the terms offered by the customer. 7
Justify your answer.
Accept
• New customer may become a major customer over time (1)
• Terms offered will still produce a profit for the business (1)
• Only accept the terms if sufficient credit worthiness checks are completed (1)
Reject
• Two months’ credit terms may compound the cash flow difficulties (1)
• Will existing customers try to negotiate better credit terms (1)
• Are they sure of the continuity of the orders (1)
• The work will not result in the required 30% gross profit margin (1)
Max 6 for comments.
Advice supported with a comment (1)
Accept other valid responses
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Accounting 9706/22 for October/November 2023 is out of 90 marks, with 1 hour 45 minutes to answer it, across 4 questions.
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