Accounting 9706/22 October/November 2024: question paper and mark scheme
Cambridge AS & A Level Accounting (9706), Paper 2 Fundamentals of Accounting, October/November 2024. Read both free below, or download them. Done the paper? Get it marked by AI against this mark scheme.
Ahmed is a sole trader. He does not maintain full accounting records. He provided the following information for the year ended 30 June 2024.
1 Payments and receipts during the year included the following:
$
Carriage outwards 1 040
Cash sales 5 200
Electricity charges paid 1 920
General expenses paid 3 600
Motor expenses paid 4 250
Payments to credit suppliers 61 240
Receipts from credit customers 102 600
Rent paid 16 800
2 All purchases are made on credit.
3 Assets and liabilities included the following:
At 30 June
2023 2024
$ $
8% bank loan – 3 000
Allowance for irrecoverable debts 1 055 ?
Inventory 12 640 ?
Other payables: Rent accrued 600 –
Electricity 130 90
Other receivables: Rent prepaid – 1 800
Trade payables 8 800 6 300
Trade receivables 21 100 18 500
4 Inventory at 30 June 2024 was valued at $15 880. This included damaged items costing $960 that will be sold for $1100 after repairs costing $340.
5 During the year Ahmed took goods costing $420 for his own use.
6 An irrecoverable debt of $300 is to be written off.
7 Ahmed wished to maintain the allowance for irrecoverable debts at the same rate as in the previous year.
8 The 8% bank loan was taken out on 1 April 2024. No interest has yet been paid.
9 Ahmed started the business on 1 July 2022. On that date he purchased a motor vehicle for
$24 000 and fixtures and fittings for $3200. No other non-current assets have been purchased
since that date.
10 Depreciation is to be provided as follows:
Motor vehicle: 20% per annum reducing balance method
Fixtures and fittings: 10% per annum straight-line method.
11 Motor expenses paid included $1140 for motor insurance for the twelve months to
31 August 2024.
(a) Prepare the statement of profit or loss for the year ended 30 June 2024. Use the space provided on page 4 to show your workings.
Ahmed
Statement of profit or loss for the year ended 30 June 2024
Workings:
Revenue
Cost of sales
Rent
Electricity charges
Motor expenses
Depreciation
Other workings
[17]
(b) Explain, with reference to an accounting concept, why adjustments 5, 6 and 11 on page 2 were to be made to the financial statements.
Adjustment
5 Goods for own use Concept
Explanation
6 Irrecoverable debt Concept
Explanation
11 Motor insurance Concept
Explanation
[6]
Additional information
Ahmed has been offered the opportunity to purchase larger premises for $85 000 which would allow him to increase the sales revenue of the business. As he does not have sufficient personal funds to make the purchase, he is considering two options.
Option 1
Apply for a bank loan to cover the whole purchase price. The bank loan would be repayable over ten years and interest would be payable at 8% per annum.
Option 2
Ahmed’s brother has offered to join the business as an equal sharing partner. He would introduce all of the cash required to complete the purchase in exchange for a 50% share of future profits.
(c) Advise Ahmed whether he should go ahead with either of these options. Justify your advice by discussing both financial and non-financial factors.
…… [7]
[Total: 30]
Mark scheme
1(a) Prepare the statement of profit or loss for the year ended 30 June 2024. 17
Ahmed
Statement of profit or loss for the year ended 30 June 2024
$ $
Revenue W1 105 200 (3)OF
Cost of sales
Opening inventory 12 640
Purchases W2 58 740 (1)
Goods for own use (420) (1)
70 960
Closing inventory W3 (15 680) (1) 55 280 (1)OF
Gross profit 49 920 (1)OF
Decrease in allowance for irrecoverable debts W4 145 (1)
50 065
Expenses
General expenses 3 600
Carriage outwards 1 040 (1)
Rent W5 14 400 (1)
Electricity W6 1 880 (1)
Motor expenses W7 4 060 (1)
Irrecoverable debts 300 (1)
Bank interest W8 60 (1)
Depreciation W9 4 160 (1) 29 500
Profit for the year 20 565 (1)OF
1(a)
W1 – Revenue (102 600 – 21 100 + 18 500) (1) + 5 200 (1) = $105 200 (1)OF
W2 – Purchases (61 240 + 6 300 – 8 800) = $58 740 (1)
W3 – Closing inventory 15 880 – (960 – 760) = $15 680 (1)
W4 – Allowance for 18 500 – 300 = 18 200 × 5% = 910 – 1055 = $(145) (1)
irrecoverable debts
W5 – Rent 16 800 – 600 – 1800 = $14 400 (1)
W6 – Electricity 1 920 – 130 + 90 = $1 880 (1)
W7 – Motor expenses 4 250 – 190 = $4 060 (1)
W8 – Bank interest 3 000 × 8% = 240 × 3/12 = $60 (1)
W9 – Depreciation 24 000 – 4 800 = 19 200 × 20% = 3 840 + 3 200 × 10% = $4 160 (1)
1(b) Explain, with reference to an accounting concept, why adjustments were to be made to the financial statements in 6
respect of these items.
Item
5 Goods for own Concept
use Business entity (1)
Explanation
The cost of goods taken by Ahmed for his own use should be charged to his
drawings as they are separate from the business expenditure (1)
6 Irrecoverable Concept
debt Prudence (1)
Explanation
The anticipated loss by writing off the debt as irrecoverable avoids overstating the
profit for the year/trade receivables (1)
11 Motor Concept
insurance Matching / Accruals (1)
Explanation
To match the expenditure of the insurance with the benefits of the same accounting
period (1)
Accept other valid responses.
1(c) Advise Ahmed whether he should go ahead with either of these options. Justify your advice by discussing both 7
financial and non- financial factors.
Option 1 (Bank loan)
• Interest payments would reduce profits for the next ten years. (1)
• Would the bank agree to providing further loan capital? (1)
• Would the new premises result in the necessary increase in turnover? (1)
• Would the bank require security? (1)
Option 2 (Partnership)
• Will provide necessary capital to avoid long-term liability. (1)
• Would have to forgo half of future profits. (1)
• Will Ahmed’s brother add any additional skills/knowledge to the business? (1)
• Will the partnership cause friction between the brothers? (1)
Max 6 for comments
Decision supported with a comment (1)
Accept other valid responses
W Limited provided the following extracts from the financial statements at 31 August 2024.
Statement of profit or loss for the year ended 31 August 2024
$
Sales revenue 720 000
Opening inventory 76 000
Operating expenses 165 000
Finance costs 20 000
Taxation 16 000
Statement of financial position at 31 August 2024
$
Trade receivables 66 000
Share capital 550 000
Retained earnings 95 000
8% debentures (2026) 45 000
Current liabilities 37 000
The following information is also available:
• cash sales were 15% of total sales
• the gross profit margin was 35%
• the rate of inventory turnover (times) was 6.4 times.
(a) Calculate the trade receivables turnover (days) for the year ended 31 August 2024 showing
the formula used.
Formula Calculation
[2]
(b) Explain the difference between gross profit margin and mark-up.
…… [2]
(c) (i) State the formula for the rate of inventory turnover (times).
…… [1]
(ii) Calculate the value of the closing inventory at 31 August 2024.
…… [3]
(d) Calculate, to two decimal places, the return on capital employed for the year ended
31 August 2024 showing the formula used.
Formula Calculation
[4]
Additional information
The directors of W Limited use accounting ratios to compare the company’s progress with other businesses. They are aware that such comparison should only be made with companies in similar business sectors but are also aware that such comparison has limitations.
(e) State three other limitations of accounting ratios.
1 ……
2 ……
3 ……
[3]
[Total: 15]
Mark scheme
2(a) Calculate the trade receivables turnover (days) for the year ended 31 August 2024 showing the formula used. 2
Formula Calculation
Trade receivables $66 000
× 365 (1) × 365 = 40 days (1)
Credit sales $612 000
2(b) Explain the difference between gross profit margin and mark-up. 2
Gross profit margin expresses gross profit relative to revenue (1) whereas mark-up expresses gross profit relative to cost of
sales (1)
Accept other valid responses.
2(c)(i) State the formula for the rate of inventory turnover (times). 1
Cost of sales
(1)
Average inventory
2(c)(ii) Calculate the value of the closing inventory at 31 August 2024. 3
$70 250 (3) W
Working
Cost of sales = $720 000 × 65% = $468 000 (1)
Average inventory = $468 000 / 6.4 = $73 125 (1)
Closing inventory = $76 000 – (($76 000 – 73 125) × 2) = $70 250 (1)
2(d) Calculate, to two decimal places, the return on capital employed for the year ended 4
31 August 2024 showing the formula used.
Formula Calculation
Profit from operations $252 000 – $165 000
× 100 (1) = $87 000 (1)
Capital employed
$550 000 + $95 000 + $45 000
= $690 000 (1)
($87 000 / $690 000) × 100
= 12.61% (1)
2(e) State three other limitations of accounting ratios. 3
• Takes no account of non-financial issues. (1)
• Ignores the effects of inflation. (1)
• Ignores the time value of money (1)
• Focuses on historical data. (1)
• Takes no account of different accounting policies. (1)
• Highlights differences, but not the causes of differences (1)
Max 3 marks
Accept other valid responses.
The draft profit of L plc for the year ended 30 June 2024 was calculated at $58 340. The directors have discovered some errors in the accounting records. The draft profit had been calculated before correcting the following:
1 Closing inventory had been overstated by $2800.
2 Returns outwards of $570 had been debited to the Purchases account.
3 Distribution costs included a payment of $4320 for advertising covering the three years ending 31 March 2027.
(a) Calculate the revised profit for the year ended 30 June 2024.
…… [4]
Additional information
1 The share capital of L plc comprised ordinary shares of $0.50 each.
2 During the year ended 30 June 2024 the following transactions took place.
Date Transaction
31 August 2023 Paid a final dividend of $0.05 per share on all shares in issue at that date.
31 December 2023 Made a bonus issue of one ordinary share for every seven shares held at that date. The directors decided to leave the reserves in the most flexible form.
31 March 2024 Paid an interim dividend of 2% on all shares in issue at that date.
31 March 2024 Made a rights issue of one ordinary share for every four shares held at a premium of $0.20 per share. The rights issue was fully taken up.
30 June 2024 Property was revalued downwards by $8000.
3 The value of ordinary share capital at 30 June 2024 was $200 000.
(b) Calculate the value of ordinary share capital at 1 July 2023.
…… [3]
(c) Complete the statement of changes in equity for the year ended 30 June 2024.
L plc
Statement of changes in equity for the year ended 30 June 2024
Share Share Revaluation Retained capital premium reserve earnings Total
$ $ $ $ $
At 1 July 2023 19 200 6 500 18 400
Final dividend
Bonus issue
Interim dividend
Rights issue
Revaluation
Profit for the year
At 30 June 2024 200 000
[8]
[Total: 15]
Mark scheme
3(a) Calculate the revised profit for the year ended 30 June 2024. 4
$60 640 (4) W
Working
$
Draft profit 58 340
Closing inventory (2 800) (1)
Returns outwards 1 140 (1)
Advertising 3960 (1)
Revised profit 60 640 (1)OF
3(b) Calculate the value of ordinary share capital at 1 July 2023. 3
$140 000 (3) W
Working
Share capital $
Closing balance 200 000
Rights issue (40 000) (1)
Bonus issue (20 000) (1)
Opening balance 140 000 (1)OF
3(c) Complete the statement of changes in equity for the year ended 30 June 2024. 8
Share Share Revaluation Retained
Total
capital premium reserve earnings
$
$ $ $ $
At 1 July 2023 140 000 19 200 6 500 18 400 184 100
(1)OF row
Final dividend (14 000) (14 000)
(1)OF row
Bonus issue 20 000 (19 200) (800) –
(1)OF row
Interim dividend (3 200) (3 200)
(1)OF row
Rights issue 40 000 16 000 56 000
(1)OF row
Revaluation (6 500) (1 500) (8 000)
(1) row
Profit for the year 60 640 60 640
(1)OF row
At 30 June 2024 200 000 16 000 – 59 540 275 540
(1)OF row
Martina produces and sells a single type of product.
The following budgeted information is available for the year ending 30 November 2025.
$
Sales revenue (3500 units) 542 500
Direct materials 87 500
Direct labour 105 000
Production overheads 126 000
Selling overheads 157 500
Profit for the year 66 500
Variable production overheads are budgeted to be $4 per unit.
Selling overheads include 5% sales commission. All remaining selling expenses are fixed.
(a) Calculate:
(i) the budgeted contribution per unit
…… [3]
(ii) the budgeted fixed overheads for the year
…… [3]
(iii) the budgeted margin of safety in units.
…… [2]
Additional information
Martina feels that production and sales could be increased by 20% by improving the quality of the product.
She plans to make the following changes.
1 Purchase new machinery at a cost of $60 000. The machinery will have an estimated useful life of five years and a residual value of $10 000 at the end of its lifetime.
2 Undertake an advertising campaign at a cost of $1250 per month.
3 Reduce the selling price by $6 per unit.
4 Purchase higher quality materials that will increase the direct material cost by $3 per unit.
5 Direct labour hours per unit will reduce by 5%.
6 Use of the new machinery will reduce the unit variable production overhead by 20%.
7 Sales commission will remain at 5%, but commission on all units sold in excess of 3500 will be paid at 10%.
(b) Prepare a marginal cost statement for the year ending 30 November 2025 to show the revised contribution and revised profit for the year if Martina decides to go ahead with the plan.
Martina
Budgeted marginal cost statement for the year ending 30 November 2025
Workings:
[9]
(c) Advise Martina whether or not she should go ahead with the plan. Justify your answer by considering both financial and non-financial factors.
…… [7]
(d) Explain one advantage of cost–volume–profit analysis.
…… [2]
(e) Explain one reason why marginal costing is considered to be more useful for short-term
decision making than absorption costing.
…… [2]
(f) Explain the effect on profit of using marginal costing rather than using absorption costing.
…… [2]
[Total: 30]
Mark scheme
4(a)(i) Calculate: the budgeted contribution per unit. 3
$88.25 (3) W
Working
$96.00 (1) – $7.75 (1) = $88.25 (1)OF
4(a)(ii) Calculate: the budgeted fixed overheads for the year. 3
$242 375 (3) W
Working
$
Selling overheads $157 500 – ($7.75 × 3 500) 130 375 (1)
Production overheads $126 000 – ($4 × 3 500) 112 000 (1)
Budgeted fixed overheads 242 375 (1) OF
Alternative answer if using $2.25 in part (a)
$261 625 (3) W
Working
$
Selling overheads $157 500 – ($2.25 × 3 500) 149 625 (1)
Production overheads $126 000 – ($4 × 3 500) 112 000 (1)
Budgeted fixed overheads 261 625 (1) OF
4(a)(iii) Calculate: the budgeted margin of safety in units. 2
753 (2) W
Working
Units
Breakeven ($242 375 / $88.25) 2 747 (1)
Budgeted production 3 500
Margin of safety 753 (1) OF
Alternative answer if using $2.25 in part (a)
709 (2) W
Working
Units
Breakeven ($261 625 / $93.75) 2 791 (1) OF
Budgeted production 3 500
Margin of safety 709 (1) OF
4(b) Prepare a marginal cost statement for the year ended 30 November 2025 to show the revised contribution and 9
revised profit for the year if Martina decides to go ahead with the plan.
Martina
Budgeted marginal cost statement for the year ending 30 November 2025
Revenue 4 200 × $149 625 800 (1)
Direct materials 4 200 × $28 (117 600) (1)
Direct labour 4 200 × $28.50 (119 700) (1)
Variable production overhead 4 200 × $3.20 (13 440) (1)
Sales commission basic 3 500 × $7.45 (26 075) (1)
Sales commission proposed 700 × $14.90 (10 430) (1)
Contribution 338 555 (1) OF
Fixed costs 267 375 (1) OF
Profit 71 180 (1) OF
4(c) Advise Martina whether or not she should go ahead with the plan. Justify your answer by considering both 7
financial and non-financial factors.
Financial ( Max 3)
• Will increase profits by less than 5%. (1)
• Sales force will have greater incentive to sell with increased commission. (1)
• Will machinery incur maintenance costs not budgeted for? (1)
• Have finance costs been factored into the plan? (1)
• Depreciation and advertising will increase fixed costs, reducing profit (1)
Non-financial (Max 3)
• Will customers remain loyal to the new product design? (1)
• Will the new machinery actually save 5% labour hours? (1)
• Will the workforce accept the effective lower unit wage rate? (1)
• Will the advertising campaign result in the anticipated increased sales? (1)
• How accurate are the estimates? (1)
Decision supported with a comment (1)
Accept other valid responses
4(d) Explain one advantage of cost – volume – profit analysis. 2
It enables a business to know the amount of profit generated at different levels of output (1) and therefore how much to
produce and sell in order to prevent a loss (1)
Accept other valid responses
4(e) Explain one reason why marginal costing is considered to be more useful for short-term decision making than 2
absorption costing.
Marginal costing enables a business to calculate contribution which helps decide whether special orders etc should be
accepted (1) whereas absorption costing treats fixed costs as part of the product cost which makes such decisions
impractical (1)
Accept other valid responses
4(f) Explain the effect on profit of using marginal costing rather than using absorption costing. 2
Using marginal costing will result in higher profits if inventory levels decrease/lower profits if inventory levels increase (1) as
inventory valuation in marginal costing does not consider fixed costs as part of the product cost, unlike absorption costing
(1)
Accept other valid responses
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Accounting 9706/22 for October/November 2024 is out of 90 marks, with 1 hour 45 minutes to answer it, across 4 questions.
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