Accounting 9706/32 October/November 2025: question paper and mark scheme

Mark scheme

1(a) Suggest one reason why QW plc might want to purchase the partnership. 1 Economies of scale / synergy (1) Greater geographical coverage (1) Increased market share / more customers / more sales (1) Diversification of markets (1) Elimination of competitors (1) Max 1 Accept other valid responses. 1(b) Prepare the realisation account if option 1 is adopted. 5 Realisation account $ $ Non-current assets 51 500 * Trade payables 7 900 *(1) all three Current assets 20 900 * Capital – Omira (motor vehicle) 12 200 }** Bank (legal fees) 3 100 } Capital – Peter (motor vehicle) 5 200 }**(1) Bank (redundancy pay) 20 000 }(1) QW plc – purchase 200 000 (1) consideration Capital – Omira (profit) 77 880 }* Capital – Peter (profit) 51 920 }*(1)OF 225 300 225 300 1(c) Calculate the amount of cash payable to or receivable from each partner if option 1 is adopted. 6 Omira Peter $ $ Capital account 35 000 25 000 (1) both Current account (2 900) 6 000 (1) both Realisation (profit) 77 880 51 920 (1)OF both Realisation (vehicles) (12 200) (5 200) (1) both QW plc (Shares) (50 000) (50 000) (1) both Cash 47 780 27 720 (1)OF both 1(d) Prepare the bank account of the partnership showing the entries to close the business if option 1 is adopted. 3 Bank account $ $ QW plc 100 000 (1) Balance b/d 1 400 Legal fees 3 100 } Redundancy pay 20 000 }(1) Capital – Omira 47 780 }* Capital – Peter 27 720 }*(1)OF 100 000 100 000 1(e) Assess both options put forward by QW plc for the acquisition, recommending the better option for the partners. 5 Your answer should cover both financial and non-financial factors. Financial (Max 3) The purchase consideration / realisation profit is higher for option 1 (1). The salaries on offer under option 1 would be attractive as they are very generous (1). Partners might prefer to own shares as they might increase in value over time (1). Partners might prefer to be in receipt of dividends as these might increase (1). Partners might prefer to receive debenture interest as it is fixed / payable whether profits are made or not (1). Non-financial (Max 3) Staff being made redundant may adversely affect the partners’ reputation (1). Training new staff could be stressful (1). Option 1 provides voting rights (1). Partners may be hoping for a quiet retirement / do not want to work for an extra year (1). Decision supported with a reason (1) Accept other valid responses. 1(f) Discuss this statement made by the director. Support your answer by referring to the relevant international 5 accounting standard (IAS). Provisions are covered in IAS 37 (1). A provision needs to be made if there is a greater than 50% likelihood (probable) of an obligation requiring settlement (1). The provision would be included in the financial statements of the company (1). If the likelihood is less than 50% (possible) it is a contingent liability (1) and it needs to be shown as a note to the financial statements (1). No action is needed if the likelihood is remote (1). The directors need to make an assessment of how likely it is that the staff will be made redundant (1). The directors might decide that the redundancy payment would not be material in relation to the size of the company and therefore not make the provision (1). Max 5 (1 mark for IAS and 4 marks for discussion) Accept other valid responses

Mark scheme

2(a)(i) Calculate the following for Company AZ to two decimal places. 1 dividend per share dividend per share $18 000/300 000 = $0.06 (1) 2(a)(ii) Calculate the following for Company AZ to two decimal places. 1 Dividend cover dividend cover $80 000/$18 000 = 4.44 times (1) 2(b) Describe the type of investor who might prefer to invest in Company AZ rather than Company BY after considering 4 these ratios. Give a reason for your answer. Description (max 2) A long-term investor (1) who is prepared to wait to receive a capital gain (1) and accepts lower dividends now / expects increased dividends in the future (1). Reason Company AZ pays out a lower proportion of profit in the form of dividends / ploughs back a higher proportion of profit into the business / presents less risk (1) which may result in its expansion (1). Accept other valid responses. Answers on OF basis 2(c) Explain how the investor’s decision might be different if Company AZ was paying interest of 12% per annum on a 4 long-term loan of $440 000 while Company BY had interest cover of 9 times. Support your answer with relevant calculations. (80 000 + 52 800) (1) Interest cover for Company AZ = = 2.52 times (1)OF 52 800 This suggests that Company AZ is much more highly geared than Company BY (1) and therefore an investment in Company AZ is much riskier (1) and the company is more likely to go into liquidation if profit falls (1). Max 2 for calculation and Max 2 for comments 2(d) Suggest two investment ratios a prospective investor might consider, other than dividend per share and dividend 2 cover. earnings per share (1) price/earnings (1) dividend yield (1) Max 2 2(e) Advise the directors whether or not they should adopt ratio analysis to assess performance. Justify your answer. 5 Adopt (Max 2) Identify trends over time (1) Identify problem areas (1) Aids decision making by stakeholders e.g. investors (1) Comparison with other businesses (1) Don’t adopt (Max 2) Based on historic data (1) Not necessarily comparable with other companies / companies may use different accounting policies (1) Doesn’t take into account non-financial factors (1) Doesn’t take into account external factors (1) Doesn’t explain cause or reason (1) Decision supported with a comment (1) Accept other valid responses 2(f) Discuss whether the external auditors of a company would be interested in the ratios of a business. 4 The auditors may not be interested (1) as the ratios do not make up part of the financial statements (1) and the auditors do not have to give an opinion on them (1). The auditors may be interested (1) to identify areas of concern where their attention should be directed (1). Accept other valid responses. Max 4 2(g) State two differences between external and internal auditors. 4 External auditors Internal auditors Appointed by the shareholders (1) Appointed by the company / directors (1) Paid a fee / independent / hired (1) Paid a salary / employee (1) Should be professionally qualified (1) May not be professionally qualified (1) Usually perform one annual audit (1) Usually audit throughout the year (1) Give an opinion / audit report on the financial Review business practices and internal control statements (1) measures and make recommendations (1) Max 4

Mark scheme

3(a) State one reason why a business should treat some research and development costs as revenue expenditure. 1 Because there is no expectation that the expenditure will benefit future years (1) To comply with IAS 38 (1) To avoid profits/assets being overstated (1) For prudence (1) Accept other valid responses Max 1 3(b) Name two items, other than research and development expenditure, which might be included in a statement of 2 financial position as an intangible asset. Patent (1) Trademark / Logos / Brands (1) Licence (1) Goodwill (1) Copyright (1) Accept other valid responses Max 2 3(c) Prepare the statement of cash flows for the year ended 31 December 2024 in accordance with IAS 7. Include in 22 your answer a value for the amortisation (depreciation) of intangible assets. AP plc Statement of cash flows for the year ended 31 December 2024 $ $ Profit from operations W1 178 000 (1) Depreciation W2 36 000 (3) Amortisation (depreciation) of intangible assets W3 9 000 (2) Loss on disposal 10 000 (1) Profit on disposal (2 000) (1) Increase in inventory (8 000) } Increase in trade receivables (3 000) } Decrease in trade payables (8 000) } (1) Cash from operations 212 000 Interest paid W4 (5 000) (1) Tax paid (21 000) (1) Net cash from operating activities 186 000 (1)OF 3(c) $ $ Cash flow from investing activities Purchases of machinery (103 000) } Purchases of motor vehicles W5 (29 000) }(1) Expenditure on research and development (90 000) (1) Proceeds of sale of machinery 13 000 }* Proceeds of sale of motor vehicles (7 + 2) 9 000 }*(1) Net cash used in investing activities (200 000) (1)OF Cash flow from financing activities Loan received 25 000 }** Share issue 125 000 }**(1) Dividends paid W6 (145 000) (2) Net cash from financing activities 5 000 (1)OF Net increase / (decrease) in cash and cash equivalents (9 000) (1) Cash and cash equivalents at 31 December 2023 15 000 }*** Cash and cash equivalents at 31 December 2024 6 000 } ***(1) W1 156 000 + 15 000 + 7000 = 178 000 (1) W2 Premises (308 000 – 304 000) = 4000 Machinery (96 000 + 103 000 – 23 000 – 157 000) = 19 000 4000 (1) + 19 000 (1) + 13 000 (1) = 36 000 W3 58 000 + 90 000 (1) – 139 000 = 9000 (1) W4 7000 + (4000 – 6000) = 5000 (1) W5 (63 000 + 13 000 + 7000 – 54 000) = 29 000 (1) W6 (102 000 – 93 000) (1) + (156 000 – 20 000) (1) = 145 000