Cambridge A Level Accounting 9706 — 2020 Feb/March Paper 2 · Variant 2

1 The following information is available for S Limited for the year ended 31 December 2019. Balances at 1 January 2019 $ Inventory 122 000 Administrative expenses accrued 3 875 Amounts paid during the year ended 31 December 2019 Distribution costs 84 475 Administrative expenses 298 875 Purchases 435 000 Amounts received during the year ended 31 December 2019 Revenue 998 400 Balances at 31 December 2019 Inventory 134 200 Administrative expenses prepaid 7 500 6% debenture (2024) 100 000 The following information is also available. 1 Inventory at 31 December 2019 included some damaged goods which had cost $5000. These goods can only be sold for $3000 after repairs costing $700 have been carried out. 2 The 6% debenture (2024) was issued on 1 September 2019. REQUIRED (a) Prepare the income statement for the year ended 31 December 2019. S Limited Income statement for the year ended 31 December 2019 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... Workings: [10] Additional information The following additional balances were also available at 1 January 2019. $ Ordinary shares of $1 each 100 000 Share premium 20 000 Retained earnings 126 230 1 An interim dividend of $0.08 per share was paid on 30 June 2019.

Mark scheme: Question Answer Marks 1(a) S Limited 10 Income Statement for the year ended 31 December 2019 Revenue 998 400 Cost of sales Opening inventory 122 000 Purchases 435 000 557 000 Closing inventory W1 (131 500) (2) (425 500) (1)OF Gross profit 572 900 (1)OF Deduct Administrative expenses W2 287 500 (3) Distribution costs 84 475 (371 975) Profit from operations 200 925 (1)OF Finance costs (2 000) (1) Profit for the year 198 925 (1)OF W1 134 200 – 2 700 (1) = 131 500 (1)OF W2 298 875 – 3 875 (1) – 7 500 (1) = 287 500 (1)OF 1(b) Using capital reserves before revenue reserves (1) to facilitate future payments of 2 dividends (1). Accept other valid responses. 1(c) Ordinary Share Capital 4 2019 Jan 1 Balance b/d 100 000 (1) Oct 31 Share premium 20 000 (1) Oct 31 Retained Earns. 5 000 (1) Dec 31 Balance c/d 125 000 125 000 125 000 2020 Jan 1 Balance b/d 125 000 (1)OF 1(d) S Limited 5 Statement of changes in equity for the year ended 31 December 2019 Share Share Retained Total Capital Premium Earnings $ $ $ $ Jan 1 100 000 20 000 126 230 246 230 Dividend (8 000) (1) (8 000) Bonus 25 000 (20 000) (1) (5 000) (1) Profit 198 925 (1)OF 198 925 Dec 31 125 000 – 312 155 437 155 (1)OF 1(e) 9 Debenture (Max 4) Rights issue (Max 4) Loan capital – repayable (1) Permanent capital – not repayable (1) Interest of $3000 payable annually (1) Dividend payments discretionary (1) No voting rights for dividend holders (1) Shareholders have voting rights (1) Increases external borrowings (1) Increases equity holding (1) Security required (1) No security required (1) Decision (1) Justification (Max 8) Accept other valid responses.

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2 A bonus issue of one ordinary share for every four shares held was made on 31 October 2019. Reserves were maintained in their most flexible form.

Mark scheme: 2(a)(i) Wear and tear (1) 3 Usage (1) Obsolescence (1) Passage of time (1) Depletion (1) Economic factors (1) Technological changes (1) Accept other valid responses. Max 3 2(a)(ii) Accruals/matching concept (1). The cost of the asset is matched with the income 4 generated over the lifetime of the asset (1). Prudence concept (1). To avoid overstating profits / non-current assets (1). 2(b)(i) Motor vehicles – Provision for depreciation account 6 2019 2019 Dec 31 Disposal 17 500 (1) Jan 1 Bal b/d 105 000 (1) Dec 31 Bal c/d 113 125 Dec 31 I/S 25 625 (3) W1 130 625 130 625 2020 Jan 1 Bal b/d 113 125 (1 of) W1: 12 500 (1) +13 125 (1) = 25 625 (1)OF 2(b)(ii) Disposal account 2 Dec 31 Cost 40 000 ** Dec 31 Prov for Dep 17 500 ** Dec 31 Bank 16 500 ** (1) Dec 31 I/S 6 000 (1) 40 000 40 000 ** 1 mark for all three entries.

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3 A final dividend of $0.09 per ordinary share was proposed on 31 December 2019. REQUIRED (b) Explain what is meant by ‘Reserves were maintained in their most flexible form’. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... [2] (c) Prepare the ordinary share capital account for the year ended 31 December 2019. Ordinary share capital account $ $ [4] (d) Prepare the statement of changes in equity for the year ended 31 December 2019. S Limited Statement of changes in equity for the year ended 31 December 2019 Share Retained Share capital premium earnings Total $ $ $ $ [5] Additional information The directors are planning to acquire more machinery in the following year and require a further investment of $50 000. They are considering two options: option 1: issue an additional 6% debenture for $50 000 option 2: make a rights issue of one ordinary share for every five shares held at a premium of $1 per share. REQUIRED (e) Advise the directors on which option they should choose. Justify your answer. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... [9] [Total: 30] 2 Depreciation is provided for by a business when accounting for non-current assets. (a) (i) State three possible causes of depreciation. 1 ........................................................................................................................................ 2 ........................................................................................................................................ 3 ........................................................................................................................................ [3] (ii) Explain two accounting concepts which are applied when providing for depreciation. 1 Concept ..................................................... Explanation ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... 2 Concept ..................................................... Explanation ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [4] The directors of K Limited prepare financial statements to 31 December. They have provided the following information. Balances at 1 January 2019 $ Motor vehicles cost 180 000 Motor vehicles provision for depreciation 105 000 During the year ended 31 December 2019 1 A new motor vehicle was acquired for $50 000. 2 A motor vehicle which had cost $40 000 and been depreciated by $17 500 was sold for $16 500. The company policy is to depreciate motor vehicles at 25% per annum using the reducing balance method. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal. REQUIRED (b) Prepare for the year ended 31 December 2019: (i) motor vehicles provision for depreciation account Motor vehicles provision for depreciation account $ $ [6] (ii) disposal account Disposal account $ $ [2] [Total: 15] 3 Eden runs a small business and has provided the following information for the year ended 31 December 2019. $ Trade receivables at 1 January 2019 45 000 Contra sales ledger to purchases ledger 780 Discounts allowed 1 025 Discounts received 695 Interest charged on a customer’s overdue account 65 Irrecoverable debt 945 Receipts from trade receivables 128 600 Returns inwards 2 500 Returns outwards 1 800 Total sales 190 000 20% of total sales are cash sales; the remainder are credit sales. REQUIRED (a) Explain three advantages to a business of preparing control accounts. 1 ................................................................................................................................................ ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... 2 ................................................................................................................................................ ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... 3 ................................................................................................................................................ ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... [6] (b) Prepare the sales ledger control account for the year ended 31 December 2019. Sales ledger control account $ $ [9] [Total: 15]

Mark scheme: 3(a) They provide a check on the arithmetical accuracy of the balances on the sales and 6 purchases ledger/helps in locating errors (1). The balance on the control account should equal the total of the individual balances (1). Prevents fraud (1). Division of duties – different person working on the control account to the sales and purchases ledger (1). Helps in preparation of financial statements (1). Speedier as total entered in trial balance rather than individual balances (1). Max 6 Accept other valid responses. 3(b) Sales ledger control account 9 2019 2019 Jan 1 Balance b/d 45 000 (1) Dec 12 Ret. Inwards 2 500 (1) Dec 31 Sales 152 000 (1) Irrec. Debts 945 (1) Interest 65 (1) Bank 128 600 (1) Disc. Allowed 1 025 (1) Contra 780 (1) Balance c/d 63 215 197 065 197 065 Jan 1 Balance b/d 63 215 (1)OF

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4 Cuthbert runs a manufacturing business which has two production departments and one service department. The business allocates and apportions overhead expenditure between production and service departments. REQUIRED (a) Explain one difference between overhead allocation and overhead apportionment. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... [2] (b) State what is meant by: (i) a production department ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [1] (ii) a service department ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... [1] Additional information The following budgeted information has been provided. $ Rent 18 000 Heating and lighting 12 500 Depreciation 11 200 Employee overheads 8 300 50 000 Production Production Service department 1 department 2 department Area (Square metres) 4 500 3 000 1 500 Electricity used (Kilowatt hours) 60 000 30 000 10 000 Non-current assets at net book value ($) 75 000 45 000 Number of employees 45 25 13 Direct labour hours 4 000 1 200 Machine hours 1 500 2 000 Service department costs are re-apportioned on the basis of electricity used. REQUIRED (c) Complete the table to apportion the budgeted overheads to each department. Re-apportion the service department costs to the two production departments. Production Production Service Overhead department 1 department 2 department Total $ $ $ $ Rent Heating and lighting Depreciation Employee overheads Service department re-apportionment [8] (d) Calculate the overhead absorption rate for both production departments using an appropriate basis. Give your answers to two decimal places. Production department 1 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... Production department 2 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... [4] (e) Explain the reason for the re-apportionment of the service department costs. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... [2] (f) State three limitations of using absorption costing. 1 ................................................................................................................................................ ................................................................................................................................................... 2 ................................................................................................................................................ ................................................................................................................................................... 3 ................................................................................................................................................ ................................................................................................................................................... [3]

Mark scheme: 4(a) Overhead allocation is used when the whole expense is directly related to one 2 department (1). Overhead apportionment is used when the overhead is related to more than one department (1). 4(b)(i) A production department is one which is directly involved in manufacturing the 1 products (1). 4(b)(ii) A service department is one which is not directly involved in manufacturing the 1 products but provides support to other departments (1). 4(c) 8 Overhead Production Production Service Total Centre 1 Centre 2 Centre Rent 9 000 6 000 3 000 18 000 (1) row Heating and 7 500 3 750 1 250 12 500 (1) lighting row Depreciation 7 000 4 200 11 200 (1) row Employee 4 500 2 500 1 300 8 300 (1) Overheads row 28 000 16 450 5 550 50 000 Service centre 3 700 (1)OF 1 850 (1)OF (5 550) re-apportionment 31 700 18 300 (1)OF (1)OF 4(d) 31700 4 Prod.1 = $7.93 (1)OF per direct labour hour (1) 4 000 18 300 Prod. 2 = $9.15 (1)OF per machine hour (1) 2 000 4(e) Service centres incur overhead costs and these costs are charged to the product by 2 transferring to the production centres on an appropriate basis (1). To ensure that all costs are recovered in the sale of products (1). Accept other valid responses. 4(f) Not used for short-term decision making (1). 3 Cannot calculate break-even point (1). Can be subjective (1). Accept other valid responses. 4(g) Direct costs ($2800 + $3200) 6 000.00 (1) 4 Overheads Dept 1 ($7.93 × 80) 634.40 (1)OF Overheads Dept 2 ($9.15 × 100) 915.00 (1)OF Total cost 7 549.40 Price to quote $7 549.40 ( OF) × 100/65: $11 614.46 (1)OF 4(h) Accept the order (1). 5 There is both a positive contribution (1) and profit / lower profit margin (1) Is there spare capacity? (1) Would acceptance of the order restrict other orders that would be more profitable? (1) Consider whether customer is likely to make more orders (1) and at which price (1). Consider effect on other customers learning of reduced price (1). 1 for decision and max. 4 for discussion.

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