Accounting 9706/33 October/November 2024: question paper and mark scheme

Mark scheme

1(a) Explain why the partners were not sure of the value of the goodwill. 2 Because it is inherent/non-purchased goodwill (1) and there is no universally accepted, objective formula for calculation / no cash value is available (1). 1(b) State which partner would prefer the value given to the goodwill to be as low as possible. Give a reason for your 2 answer. Partner Andy (1) Reason: Because the higher the value given to goodwill the more his capital account balance will decrease/ the lower the value given to goodwill the less his capital account balance will decrease (1) 1(c) Calculate the profit on realisation made by the partnership. 4 Total net assets = $221 500 + $291 300 = $512 800 Profit = $620 000 – ($512 800 (1) – $49 900 (1) ) – $3 000 (1) = $154 100 (1)OF 1(d) Discuss how Betty’s decision to agree to Andy’s suggestion to change the partnership agreement impacted Betty. 6 Support your answer with calculations. As the profit-sharing ratio had changed, Betty would have had a net increase in her capital from the value of goodwill (1) of [(100 000 × 50%) – (100 000 × 20%)] = $30 000 (1). As the partnership had been operating for 30 years it is likely that some of the assets have increased in value, and that should have been adjusted for as well as the goodwill (1). Betty’s share of the profit on realisation is only (154 100 × 20%) = $30 820 (1)OF. If the profit sharing ratio had not changed her share would have been (154 100 × 50%) = $77 050 (1)OF. Therefore the amount she will finally receive will be less by $46 230 (1)OF which more than outweighs the additional $30 000. Therefore, she is financially worse off than if the partnership had been sold at the end of September rather than continuing for the extra three months (1). However, the strategy gave the partners the opportunity to see if they could continue with the partnership themselves (1). An alternative strategy could have been to admit another partner (1) or to take on an assistant/manager (1). Max 3 for comments Max 3 for calculations Accept other valid responses. 1(e) Prepare the journal entry in the books of AD plc to record the acquisition of the partnership. A narrative is 6 required. Debit Credit $ $ Goodwill 65 400 (1) Premises 510 000 } Fixtures 18 000 } Inventory 42 200 } Trade payables 15 600 }(1) Bank 200 000 (1) Ordinary share capital 300 000 (1) Share premium 120 000 (1) Being the acquisition of partnership business of Andy and Betty on 31 December 2023 (1) 1(f) Advise Betty whether she should keep her shares in AD plc or sell them. Justify your answer. 5 Keep (max 2) She would hopefully get a steady income from dividends to replace the share of profit from the partnership (1). There is a chance of a profit on sale if she keeps them for some time (1). There would be commission involved in selling them (1). Sell (max 2) Since it is a plc there should be a ready market for the shares (1). She might want a good sum of money to fund a comfortable retirement (1). She might want to invest the funds in another business (1). She might be concerned that dividends/share price might decrease (1). Decision supported with a comment (1) Accept other valid responses.

Mark scheme

2(a) Explain why the figure for coloured jackets in the receipts and payments account is different from the figure in the 3 income and expenditure account. The cost in the receipts and payments account is based on cash paid (1) whereas in the income and expenditure account it is based on change in valuations (1). The jackets will have been subject to wear and tear during the year, and this has been provided for (1). Max 3 Accept other valid responses. 2(b) Explain why the income from grants and donations is different in the receipts and payments account from the 3 income and expenditure account. Not all grants and donations are released to income in the year in which they are received (1). Some are released to income over a period of years (1) in accordance with the accruals / matching concept (1) 2(c) Prepare the income and expenditure account for the year ended 31 December 2023. 5 C Society Income and Expenditure account for the year ended 31 December 2023 Income $ $ Subscriptions 3 020 (1) (3 200 + 120 – 300) Grants and donations 5 000 8 020 Expenditure Refreshments 500 } Rent 3 900 } Refuse bags 100 }(1) Depreciation of minibus 2 100 (1) (16 200 – 14 100) Depreciation of jackets 190 Minibus expenses 3 520 (1) 10 310 (3 580 – 260 + 200) Deficit 2 290 (1)OF 2(d) Complete the following table by calculating the following values for inclusion in the statement of financial position 4 at 31 December 2023. State the section of the statement where each would be shown. $ Section of statement of financial position Coloured jackets 1 150 (1) Non-current assets (1) Deferred income 1 800 (1) Current / non-current liabilities (1) 2(e) Advise the managing committee whether or not they should start to include the value of the inventory of 5 refreshments and refuse bags in the financial statements. Justify your answer. Include (max 2) The first time this is done it will reduce the expenses / increase the current assets (1). If the amounts vary considerably from year to year it will even out the changes in the expenses (1). Don’t include (max 2) The values may well not be material (1). It will take some effort and is unlikely to come to an exact value (1). Unless the values change considerably from year to year the reduction in expenses will be a one-off (1). Decision supported with a comment (1) Accept other valid responses. 2(f) Discuss how this suggestion from the pharmaceutical company may impact C Society. 5 Nine jackets are worth $540 which is more than the cash donation (1). Since nine per year is more than currently go missing, then old jackets can be replaced (1). Some old jackets could be sold to raise funds (1). If the new jackets bear a logo they may be less likely to go missing (1). If they don’t accept the jackets they may lose the cash donation anyway (1). As the bank balance is falling quickly the more urgent need may be for the cash (1). If only four or five jackets go missing, the replacement cost is a maximum of $300 which is less than the cash donation foregone (1). Members may not want to be wearing what amounts to advertising of a business (1). Other people may mistake society members for employees of the business (1). If the pharmaceutical company has a bad reputation for pollution the society may not want to display an obvious association (1). Donations from other sources might be reduced (1). It might be better to have the society’s name on the jackets (1). If the society is a registered charity there may be legal restrictions on its ability to be involved in advertising (1). Max 5 Accept other valid responses

Mark scheme

3(a) Calculate a revised value for the profit from operations for the year ended 31 December 2023. 9 $ Original profit from operations 76 000 1 inventory (5 000) (1) 2 disposal proceeds (26 000) (1) 2 profit on disposal W1 6 000 (2) OF 2 overstated depreciation W2 2 000 (1) 3 impairment loss (3 000) (1) 4 allowance for irrecoverable debts (1 000) (1) 6 irrecoverable debt (4 000) (1) Revised profit from operations 45 000 (1)OF W1 accumulated depreciation = 32 000 × 0.15 × 30/12 = 12 000 net book value at disposal = 32 000 – 12 000 = 20 000 (1) profit on disposal = 26 000 – 20 000 = $6 000 (1)OF W2 32 000 × 0.15 × 5/12 = $2 000 (1) 3(b) Prepare the revised statement of cash flows for the year ended 31 December 2023 in accordance with IAS 7. 10 CD plc Statement of cash flows for the year ended 31 December 2023 $ $ Profit from operations 45 000 (1)OF Depreciation (19 000 – 2 000) 17 000 (1) Impairment loss 3 000 (1) Profit on disposal (6 000) (1)OF Increase in inventory (8 000 – 5 000) (3 000) (1) Decrease in trade receivables (2 000 – 4 000 – 1 000) 3 000 (1) Increase in trade payables 7 000 Cash from operations 66 000 Tax paid (15 000) Net cash from operating activities 51 000 (1)OF Cash flow from investing activities Proceeds of sale of machinery 26 000 Purchase of fixtures and fittings (39 000) Net cash used in investing activities (13 000) (1) Cash flow from financing activities Loan received 20 000 Dividends paid (28 000) Net cash used in financing activities (8 000) (1) Net increase in cash and cash equivalents 30 000 Cash and cash equivalents on 31 December 2022 (22 000) } Cash and cash equivalents on 31 December 2023 8 000 }(1)OF 3(c) Explain how an event can be determined to be adjusting or non-adjusting. 2 An adjusting event is one which provides evidence of conditions existing at the end of the reporting period (1) A non-adjusting event is one which is indicative of conditions arising after the reporting period (1). 3(d) Explain what is meant by the term ‘recoverable amount’. 2 The recoverable amount is the higher (1) of the value in use and the fair value less costs to sell (1). 3(e) State two reasons why the company should continue undertaking impairment reviews. 2 They should stop the company’s assets from being overstated. (1) The company’s audit report may otherwise be qualified / The financial statements may otherwise not show a true and fair view. (1) IAS 36 applies to all assets except those covered under other standards. (1) Accept other valid responses. Max (2)