Cambridge A Level Accounting 9706 — 2019 Oct/Nov Paper 2 · Variant 1

1 AB Limited is a wholesaler of household goods. The following information has been extracted from the books of account at 31 December 2018. $ 6% debenture (2023–25) 80 000 Administrative expenses 111 700 Buildings Cost 80 000 Provision for depreciation at 1 January 2018 28 800 Land at cost 65 000 Motor vehicles Cost 46 000 Provision for depreciation at 1 January 2018 9 200 Warehouse fixtures and fittings Cost 12 900 Provision for depreciation at 1 January 2018 8 900 Carriage inwards 1 200 Cash and cash equivalents (credit balance) 5 300 Distribution costs 184 800 Finance costs 2 200 Inventory at 1 January 2018 56 500 Ordinary share dividend paid 1 700 Purchases 310 600 Retained earnings 19 100 Returns inwards 8 300 Revenue 670 400 Share capital ordinary shares of $1 each 80 000 Share premium 35 000 Trade and other payables 36 600 Trade and other receivables 92 400 Additional information 1 Inventory at 31 December 2018 was valued at $62 000. 2 Trade and other receivables include prepaid insurance of $2000. 3 An irrecoverable debt of $400 should be written off to administrative expenses. 4 The directors wish to create a provision for doubtful debts of 5% of trade receivables. This should be charged to administrative expenses. 5 The debenture was issued on 1 March 2018. No interest has yet been paid. 6 The buildings owned by the company are used 75% as warehouse space and 25% as office space. 7 All of the company’s motor vehicles are used only for deliveries. 8 The company’s depreciation policy is as follows: Buildings 2% per annum straight-line method Motor vehicles 20% per annum straight-line method Warehouse fixtures and fittings 10% per annum reducing balance method. REQUIRED (a) Prepare the income statement for the year ended 31 December 2018. AB Limited Income Statement for the year ended 31 December 2018 $ Revenue Cost of sales Gross profit for the year Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings: [10] (b) Prepare the statement of financial position at 31 December 2018. Use the space provided on the next page for your workings. AB Limited Statement of financial position at 31 December 2018 Workings: [9] Additional information The directors of AB Limited wish to raise an additional $100 000 capital for expansion. They are considering either a rights issue of ordinary shares or an issue of a further debenture. REQUIRED (c) Advise the directors which option they should choose. Give reasons for your answer. [5] (d) Identify two internal stakeholders with an interest in the financial statements of a limited company. 1 2 [2] Additional information The directors of AB Limited use ratio analysis to assess the performance of the business. REQUIRED (e) Name two ratios that a business may use to assess: (i) profitability 1 2 [2] (ii) liquidity. 1 2 [2] [Total: 30]

Mark scheme: 1(a) AB Limited Income statement for the year ended 31 December 2018 $ Revenue W1 662 100 (1) Cost of sales W2 (306 300) (2) Gross profit for the year 355 800 Administrative expenses W3 (117 000) (3) Distribution costs W4 (195 600) (3) Profit from operations 43 200 Finance costs (2 200 + 4 000 ) (6 200) (1) Profit for the year 37 000 Workings W1 Revenue 670 400 – 8 300 = 662 100 (1) W2 Cost of sales 56 500 + 310 600 + 12 00 (1) – 62 000 = 306 300 (1) OF W3 Administrative expenses Per balances 111 700 Buildings depreciation (80 000 × 2% × 25%) 400 (1) Provision for doubtful debts ((92 400 – 400 – 2 000) × 5%) 4 500 (1) Irrecoverable debt written off 400 (1) 117 000 W4 Distribution costs Per balances 184 800 Buildings depreciation (80 000 × 2% × 75%) 1 200 (1) Warehouse F & F depreciation ((12 900 – 8 900) × 10%) 400 (1) Motor vehicles depreciation (46 000 × 20%) 9 200 (1) 195 600 10 Question Answer Marks 1(b) AB Limited Statement of financial position at 31 December 2018 $ Non-current assets Land 65 000 Buildings (80 000 – 28 800 – 1 600) 49 600 (1) Motor vehicles (46 000 – 9 200 – 9 200) 27 600 (1) Warehouse fixtures and fittings (12 900 – 8 900 – 400) 3 600 (1) 145 800 Current assets Inventory 62 000 Trade and other receivables (92 400 – 400 – 4 500) 87 500 (1) 149 500 Total assets 295 300 Equity and liabilities Share capital and reserves Share capital ($1 ordinary shares) 80 000 Share premium 35 000 Retained earnings (19 100 + 37 000 (1)OF – 1 700 (1)) 54 400 169 400 Non-current liabilities 6% debentures 80 000 (1) Current liabilities Trade and other payables (36 600 + 4 000) 40 600 (1) Cash and cash equivalents 5 300 (1) 45 900 Total equity and liabilities 295 300 9 Question Answer Marks 1(c) Rights issue (max 2) Payment of dividends is discretionary (1) Permanent capital (1) Will rights issue be fully subscribed (1) Debenture (max 2) Would increase (non-current) liabilities (1) Debenture interest must be paid (1) Security maybe required (1) Advice (1) Accept other valid points. 5 1(d) Shareholders (1) Directors/employees (1) Accept other valid points. 2 1(e)(i) Gross margin (1) Profit margin (1) Return on capital employed (1) Expenses to revenue ratio (1) Max 2 2 Question Answer Marks 1(e)(ii) Current ratio (1) Liquid (acid test) ratio (1) 2

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2 Jacques is a sole trader. On 31 January 2019, the balance on the bank statement was $1875 debit. This did not agree with Jacques’s cash book balance of $4327 credit. The following transactions were included only on the bank statement. 1 A payment for wages of $850. 2 A transfer of $3500 from Smith, a credit customer. The following transactions were included only in the cash book. 1 A cheque payment to a supplier for $340. 2 A receipt of $560 from a customer. The following errors have also been identified. 1 A direct debit payment for insurance of $180 had been incorrectly recorded on the bank statement as $108. 2 A standing order for electricity of $175 had been incorrectly recorded in the cash book as $275. 3 Bank interest paid of $75 had been recorded as interest received in the cash book. REQUIRED (a) Prepare the updated cash book at 31January 2019. Dates are not required. [5] (b) Prepare the bank reconciliation statement at 31 January 2019. [4] (c) State two reasons why a business would prepare a bank reconciliation statement. 1 2 [2] Additional information Jacques calculated a draft profit for the year ended 31 January 2019 of $10 340. He has identified the following. 1 An item of inventory had been included at cost, $800. It was found to be damaged. It could be sold for $900 if repairs costing $150 were carried out. 2 On 25 January 2019 Jacques had sent goods to a customer on a sale or return basis. These had been invoiced to the customer at $2800. Jacques marks up his goods at 40%. The customer had not decided whether to keep the goods.

Mark scheme: 2(a) Cash book $ $ Smith 3 500 (1) Balance b/d 4 327 Standing order error 100 (1) Wages 850 (1) Balance c/d 1 727 Interest error 150 (1) 5 327 5 327 Balance b/d * 1 727 (1) OF 5 2(b) Bank reconciliation Balance per bank statement (1 875) Add uncleared lodgements 560 (1) Less unpresented cheques (340) (1) Less direct debit correction (72) (1) Balance per cash book * (1 727) (1) OF (*) 1 mark if figure is correct/same amount as cash book from (a) 4 Question Answer Marks 2(c) To identify errors in the cash book (1) To identify errors on the bank statement (1) To identify uncleared lodgements (1) To identify unpresented cheques (1) To verify accuracy of accounting records (1) To update the cash book with transactions only on the bank statement (1) To identify out of date cheques (1) Accept other valid points. Max 2 2 2(d) Adjusted profit for the year Draft profit 10 340 Damaged inventory (800 − (900 − 150)) (50) (1) Goods on sale or return (2800-2000) (800) (1) Accrued rental (1 200) (1) Revised profit 8 290 (1) OF 4

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3 On 4 February 2019 Jacques received an invoice for $3600 relating to rental of storage space for three months ending 31 March 2019. REQUIRED (d) Prepare a statement to show the revised profit for the year ended 31 January 2019, after adjusting for items 1, 2 and 3. [4] [Total: 15] 3 Adam, Bilal and Chan operate a partnership providing secretarial services. The partners have no formal partnership agreement. The following balances are extracted from the trial balance at 31 December 2018. Debit Credit $ $ Fees revenue received 152 000 Business operating costs 76 000 Capital accounts Adam 30 000 Bilal 20 000 Chan 10 000 Current accounts Adam 36 000 Bilal 4 000 Chan 12 000 Trade receivables 27 000 Loan account: Bilal 80 000 Motor vehicles at net book value 96 000 REQUIRED (a) Calculate the profit for the year ended 31 December 2018 before appropriation. [1] (b) Calculate the share of profit appropriated to Bilal for the year ended 31 December 2018. [1] Additional information On 1 January 2019, Bilal decided to retire from the partnership. The partners agreed the following. 1 Bilal was to retain one motor vehicle. The net book value of the motor vehicle was $36 000 but it was agreed to transfer it to Bilal at a value of $30 000. 2 The remaining motor vehicles were to be revalued upwards by 5%. 3 An irrecoverable debt of $2000 was to be written off and a provision for doubtful debts of 4% was to be made.

Mark scheme: 3(a) $152 000 – $76 000 – $4 000 = $72 000 (1) 1 3(b) = 72000 $24000 3 (1) OF 1 Question Answer Marks 3(c) $ $ Motor vehicles 6 000 ** Motor vehicles 3 000 ** (1) for both Irrecoverable debt 2 000 (1) Capital account – Adam 2 000 # Provision for doubtful debts 1 000 (1) Capital account – Bilal 2 000 # (1) for all three Capital account – Chan 2 000 # 9 000 9 000 4 3(d) $ Capital account 20 000 Current account (4 000) Motor vehicle (30 000) (1) Profit for the year 24 000 Loan account 80 000 Interest on loan 4 000 Loss on revaluation (2 000) Goodwill 8 000 (1) 100 000 Loan account (45 000) Due to Bilal from bank account 55 000 (1) CF 3 3(e) To reward partners for their fixed investment in the business (1) To encourage further capital investment in the business (1) Accept other valid points. 2 3(f) To discourage large amounts of drawings by the partners (1) To penalise partners who make excessive drawings (1) Accept other valid points. 2 Question Answer Marks 3(g) The amount of salary payable to partners (1) Rate of interest on partners’ loans (1) Management responsibilities of partners (1) Any limits on partners’ drawings (1) Amount of partners’ capital (1) Accept other valid points. Max 2 2

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4 D Limited is a large company and operates from several sites. It uses different systems of costing for its different sites. REQUIRED (a) State three advantages to a business of using a system of absorption costing. 1 2 3 [3] Additional information At one of its sites the company specialises in printing brochures and leaflets for local organisations. At this site it uses a system of absorption costing. There are two production departments: Assembly and Printing and two service departments: Technical support and Personnel. The following information is available. Production departments Service departments Technical Assembly Printing Personnel support Floor area (square metres) 90 70 15 5 Power (kilowatt-hours) 120 320 40 20 Replacement cost of machinery and equipment ($) 105 000 30 000 12 000 3 000 Number of employees 20 15 5 Technical support hours 400 60 The following budgeted overhead costs for August 2019 are still to be apportioned. $ Electricity 20 500 Insurance of machinery 7 500 Insurance of buildings 11 880 REQUIRED (b) Complete the following table to show the apportionment of budgeted overhead costs for August 2019. Apportionment of overheads Production departments Service departments Technical Total Assembly Printing support Personnel $ $ $ $ $ Overheads already apportioned 40 210 17 530 11 360 5020 6300 Electricity Insurance of machinery Insurance of buildings Total overheads apportioned Reapportionment of personnel overheads Reapportionment of technical support overheads [7] Additional information The following budgeted information is also available for August 2019. Assembly Printing Direct labour hours 3200 2000 Direct machine hours 1400 5500 REQUIRED (c) Calculate an overhead absorption rate for each production department using an appropriate basis. [4] Additional information The company received an order for a set of brochures to be produced in August 2019. It was budgeted that this order would require the following: Direct material and labour cost $1330 Direct labour hours Assembly department 12.5 hours Printing department 7.2 hours Machine hours Assembly department 5.5 hours Printing department 6.0 hours The company requires a profit margin of 25% on all orders.

Mark scheme: 4(a) Enables selling prices to be set, because all costs are included in the pricing of a product. (1) Supports long-term planning, because this depends on revenue. It must cover not just direct costs but overhead costs as well. (1) Absorption costing conforms to the accruals concept, because the total cost of unsold inventory is charged to the period in which it is sold. (1) Accept other valid points. Max 3 3 Question Answer Marks 4(b) Production debts Service departments Total Assembly Printing Technical support Personnel $ $ $ $ $ Overheads already apportioned 40 210 17 530 11 360 5 020 6 300 Electricity 20 500 4 920 13 120 1 640 820 (1) Insurance of machinery 7 500 5 250 1 500 600 150 (1) Insurance of buildings 11 880 5 940 4 620 990 330 (1) 80 090 33 640 30 600 8 250 7 600 Personnel 3 800 2 850 950 (7 600) (1) OF 37 440 33 450 9 200 0 Technical support 8 000 1 200 (9 200) (1) OF 45 440 34 650 0 (1) OF (1) OF 7 4(c) Assembly 45440 3200 OF $14.20 (1) OF per labour hour (1) Printing 34650 5500 OF $6.30 (1) OF per machine hour (1) 4 Question Answer Marks 4(d) $ Direct costs 1 330.00 Overheads Assembly dept 12.5 × $14.20 177.50 (1) OF Overheads Printing dept 6 × $6.30 37.80 (1) OF Total cost 1 545.30 (1) OF Profit 1 3 of cost 515.10 (1) OF 4 4(e) $ Assembly department 1.5 hours less than forecast: Under-absorbed (1) 1.5 × $14.20 (OF) 21.30 (1) OF Printing department 2 hours more than forecast Over-absorbed (1) 2 × $6.30 (OF) (12.60) (1) OF Overheads under-absorbed 8.70 (1) OF 5 Question Answer Marks 4(f) Financial – Max 2 All models make a positive contribution. (1) If any model was discontinued fixed costs would be reallocated to the remaining models. (1) Method of allocating fixed costs may be inappropriate. (1) Non-financial – Max 4 Discontinuing any model may result in loss of customers/sales. (1) Would the workforce be fully employed on the remaining models? (1) Would employees need training to produce alternative models? (1) Possible redundancies. (1) Demotivated workforce. (1) Adverse publicity. (1) Accept other valid points. Overall Max 6 for justification + 1 for recommendation. 7

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5 Bilal agreed to leave $45 000 in the partnership as a loan at 8% per annum interest. The remaining balance due to Bilal was to be paid from the partnership bank account. REQUIRED (c) Prepare the revaluation account at 1 January 2019. [4] (d) Prepare a statement showing the amount to be paid to Bilal from the partnership bank account on his retirement. [3] Additional information Adam and Chan are to continue in partnership after Bilal’s retirement and plan to draw up a formal partnership agreement to include the following: profit-sharing ratio rate of interest on capital rate of interest on drawings. REQUIRED (e) State two reasons why partners may agree to provide interest on capital. 1 2 [2] (f) State two reasons why partners may agree to charge interest on drawings. 1 2 [2] (g) State two further terms that may appear in a partnership agreement. 1 2 [2] [Total: 15]

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