Accounting 9706/31 October/November 2024: question paper and mark scheme

Mark scheme

1(a) Calculate the profit for the period for both the six months ended 30 June 2023 and the six months ended 31 8 December 2023. Jan – June July – Dec $ $ Gross profit 44 900 (1) 55 210 (1) Less: Depreciation – premises 900 } 1 500 }* – other 1 600 }(1) 1 600 }*(1) Wages and salaries 19 700 – 5 000 14 700 (1) 27 320 – 5 000 – 6 000 16 320 (1) Other operating costs 22 100 23 200 Profit for the period 5 600 (1)OF 12 590 (1)OF 1(b) Prepare appropriation accounts for both the six months ended 30 June 2023 and the six months ended 31 13 December 2023. Jan – June July-Dec $ $ Profit for the period 5 600 12 590 Less interest on capital Angie 2 500 } 3 872 Harry 1 500 4 000 }(1) 3 623 7 495 W1 Less salary Angie 5 000 } 5 000 } Harry 0 5 000 }(1) 6 000 11 000 }(1) Residual loss (3 400) (5 905) Share of loss Angie (1 700) (1)OF (4 429) (1)OF Harry (1 700) (3 400) (1)OF (1 476) (5 905) (1)OF W1 Angie Harry $ $ Original capital 50 000 30 000 Revaluation (150 000 – 80 100) 34 950 (1) 34 950 (1)OF Goodwill added 15 000 15 000 (1) both Goodwill removed (22 500) (7 500) (1) both Revised capital 77 450 72 450 Interest on capital 10% × 6/12 3 872 (1)OF 3 623 (1)OF 1(c) Calculate, to two decimal places, the profit margin of the partnership for the six months ended 31 December 2023. 1 12590/119000 × 100 = 10.58% (1)OF 1(d) Discuss whether Harry should be comparing the profit margin of the company with that of the partnership. 3 As the audit report is qualified the financial statements may well not give a true and fair view (1) and the profit margin he has calculated may not be reliable (1). Because the company is in a different industry it may not be useful to compare the results of the two businesses (1). However a review of the financial statements may help him to identify areas in the partnership where improvements could be made (1). Max 3 Accept other valid responses.

Mark scheme

2(a)(i) Calculate at 31 December 2022: 1 the accumulated depreciation on Machine A 90 000 × 0.1 × 3.5 years = $31 500 (1) 2(a)(ii) Calculate at 31 December 2022: 1 the carrying value of Machine B 151 500 – (90 000 – 31 500) = $93 000 (1)OF 2(a)(iii) Calculate at 31 December 2022: 1 the original cost of Machine B. 93 000 = $120 000 (1)OF 1 − (2.25 × 0.1) 2(b) Prepare the schedule of non-current assets at 31 December 2023. 10 T plc Schedule of non-current assets at 31 December 2023 Property, plant and equipment Plant and Motor machinery vehicles Total $ $ $ Cost At 1 January 2023 W1 210 000 (1)OF 40 000 250 000 Additions 150 000 150 000 Disposals (90 000) (90 000) At 31 December 2023 270 000 (1)OF 40 000 310 000 Depreciation and impairment At 1 January 2023 58 500 (1)OF 14 400 (1) 72 900 Disposals W2 (32 250) (1)OF (32 250) Charge for year W3 26 500 (1)OF 5 120 (1) 31 620 Impairment loss 2 480 (1) 2 480 At 31 December 2023 52 750 22 000 74 750 Carrying amount at 31 December 2023 217 250 18 000 (1)OF 235 250 Carrying amount at 1 January 2023 151 500 25 600 (1) 177 100 W1 90 000 + 120 000 (OF) = 210 000 W2 31 500 OF + 750 = 32 250 W3 750 + (12 000 + 13 750) = 26 500 2(c) Name the efficiency ratio which would be affected by the outcome of the impairment review. 1 non-current asset turnover (1) 2(d) Calculate the net working assets to revenue ratio for 31 December 2023 using year end balances. 2 129 000/322 500 (1) × 100 whole formula = 40% (1)OF 2(e)(i) Assess the effect the change in formula would have on: 2 the net working assets to revenue ratio Because the value of the net working assets has increased during the year, the average value would be lower than the closing value (1). This would cause the ratio to be lower (1). 2(e)(ii) Assess the effect the change in formula would have on: 2 the perceived performance of the company. The lower ratio makes the business look more efficient (1) as the business seems to require fewer net working assets to generate the same amount of revenue (1). 2(f) Advise the directors whether or not they should use average figures when calculating the net working assets to 5 revenue ratio in the future. Justify your answer. For (Max 2) Sales take place throughout the year not just at the year end. (1) Changes arising late on in the year would distort the result less if an average was used. (1) It would give a more adequate comparison of the use of net working assets through the year with sales made through the year. (1) Against (Max 2) Changes in net working assets do not take place evenly over the year. (1) Change in calculation would not have any effect on actual performance. (1) The assessment of performance requires consistency in calculation. (1) Decision supported with a comment (1) Accept other valid responses.

Mark scheme

3(a) Suggest one reason why the rate of factory profit had changed between 2022 and 2023. 2 The rate of factory profit is set so that the transfer price reflects the buy in price/to enable true comparisons with other businesses trading in the same product (1) and the difference between production cost and buy-in price had increased (1). Accept other valid responses. 3(b) Prepare a corrected provision for unrealised profit account for the year ended 31 December 2023. 2 Provision for unrealised profit account $ $ Statement of 500 (1)OF Balance b/d 13 300 profit or loss Balance c/d 12 800 (1) 13 300 13 300 Balance b/d 12 800 3(c)(i) Prepare a corrected statement of profit or loss for the year ended 31 December 2023. 8 $ $ Revenue 681 000 Opening inventory of finished goods (at transfer price) 83 300 Transfer price of manufactured goods W1 337 440 (1) 420 740 Closing inventory of finished goods (at transfer price) (76 800) Cost of sales 343 940 Gross profit 337 060 (1)OF Factory profit W2 56 240 (1)OF Provision for unrealised profit 500 (1)OF Administrative expenses W3 (41 700) (1) Distribution costs W4 (46 300) (1) Profit from operations 305 800 Finance costs W5 (25 100) (1) Profit for the year 280 700 (1)OF W1 (273 200 – 2 000 +10 000) × 120% = 337 440 W2 337 440 × 20/120 = 56 240 W3 51 700 – 10 000 = 41 700 W4 44 200 + (22 000 –19 900) = 46 300 W5 21 600 + 3 500 = 25 100 3(c)(ii) Prepare a corrected statement of financial position at 31 December 2023. 8 $ Non-current assets W1 759 900 (1) Current assets Inventory – raw materials 72 000 (1) – work in progress 11 800 (1) – finished goods at transfer price 76 800 less provision for unrealised profit (12 800) (1)OF 147 800 Trade receivables 101 100 248 900 Total assets 1 008 800 (1)OF Equity Ordinary share capital 500 000 Retained earnings W2 234 300 (1)OF 734 300 Non-current liabilities 7% debentures 200 000 Current liabilities Trade and other payables W3 73 500 (1) Bank overdraft 1 000 74 500 Total equity and liabilities 1 008 800 (1)OF W1 762 000 – (22 000 – 19 900) = 759 900 (1) W2 (182 760 – 229 160) (1) + 280 700 (1)OF = 234 300 W3 70 000 + 3 500 (1) = 73 500 3(d) Advise the directors whether or not the balance on the retained earnings account is too low as a result of paying 5 excessive dividends. Justify your answer. The balance on the account is less than the profit for the year for 2023 (1). This may not necessarily be because of dividends (1) as the company might have made losses in earlier years / had accumulated losses brought forward (1). Alternatively, the company might have used retained earnings to fund a bonus issue of shares (1). It may indicate that profits are being ploughed back into the business and funding expansion (1). It also provides a buffer against any future year when performance is poorer (1). Shareholders will have expectations of a reasonable rate of return (1) and the dividend policy of the company could be compared with that of similar businesses (1). Accept other valid points Max (4) Accept other valid responses. Decision supported with a comment (1)