Cambridge A Level Accounting 9706 — 2020 Oct/Nov Paper 2 · Variant 3

1 The directors of G Limited have provided a trial balance at 30 September 2020. Debit Credit $ $ Administrative expenses 117 528 Bank 10 316 Distribution costs 60 263 Inventory at 1 October 2019 86 228 Ordinary share capital ($1 shares) 200 000 Property plant and equipment Cost 300 000 Provision for depreciation at 1 October 2019 82 500 Provision for doubtful debts at 1 October 2019 1 528 Purchases 237 851 Retained earnings 34 572 Revenue 498 430 Share premium 20 000 Trade payables 26 124 Trade receivables 71 600 873 470 873 470 The following information is also available. 1 Property plant and equipment Cost Accumulated Depreciation Allocation of depreciation method depreciation $ $ Land 120 000 Nil – Nil Other than 180 000 82 500 15% per annum 2/3 land straight-line administrative expenses 1/3 distribution costs Total 300 000 82 500 There were no acquisitions or disposals during the year. 2 Inventory at 30 September 2020 cost $91 368 and had a net realisable value of $126 435. 3 The directors wish to maintain a provision for doubtful debts at 3% of trade receivables. All expenses relating to doubtful debts are charged to administrative expenses. 4 At 30 September 2020 $ Administrative expenses accrued 3850 Bank interest accrued 250 Distribution costs prepaid 1460 REQUIRED (a) Prepare the income statement for the year ended 30 September 2020. G Limited Income statement for the year ended 30 September 2020 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... Workings: [12] (b) Prepare the statement of financial position at 30 September 2020. G Limited Statement of financial position at 30 September 2020 ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... Workings: [7] (c) State two differences between ordinary shares and preference shares. 1 ................................................................................................................................................ ................................................................................................................................................... 2 ................................................................................................................................................ ................................................................................................................................................... [2] (d) (i) Define a ‘capital reserve’. ........................................................................................................................................... ..................................................................................................................................... [1] (ii) State one use of a capital reserve. ........................................................................................................................................... ..................................................................................................................................... [1] Additional information The directors are planning a major expansion. They wish to raise $100 000. The directors are considering three options: Option 1: Issue 6% debentures (2029) of $100 000. Option 2: Make a rights issue of one ordinary share for every two ordinary shares held at $1 each. Option 3: Make a new issue of 100 000 ordinary shares at a premium of $0.10 per share. REQUIRED (e) Advise the directors which option they should take. Justify your answer. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [7] [Total: 30] PLEASE TURN OVER

Mark scheme: Question Answer Marks 1(a) G Limited 12 Income statement for the year ended 30 September 2020 $ Revenue 498 430 Cost of sales (232 711) (1) Gross profit 265 719 (1)OF Administrative expenses W1 (139 998) (4) Distribution costs W2 (67 803) (3) Profit from operations 57 918 (1)OF Finance costs (250) (1) Profit for the year 57 668 (1)OF W1 117 528 + 18 000 (1) + 620 (1) + 3850 (1) = 139 998 (1)OF W2 60 263 + 9000 (1) – 1460 (1) = 67 803 (1)OF 1(b) G Limited 7 Statement of financial position at 30 September 2020 Assets $ Non-current assets Property, plant and equipment 190 500 (1)OF Current assets Inventories 91 368 Trade and other receivables W1 70 912 (2) 162 280 Total assets 352 780 Equity and liabilities Equity Share capital 200 000 Share premium 20 000 Retained earnings 92 240 (1)OF Total equity 312 240 Current liabilities Trade and other payables W2 30 224 (2) Bank overdraft 10 316 Total liabilities 40 540 Total equity and liabilities 352 780 (1)OF both W1 (71 600 – 2148) = 69 452 (1) + 1460 (1) = 70 912 W2 26 124 (1) + 4100 (1) = 30 224 1(c) Ordinary shares provide variable dividends whereas preference shares pay 2 fixed dividends (1). Holders of preference shares receive dividend payments before those made to holders of ordinary shares (1). Ordinary shares usually have voting rights whereas preference shares do not (1). Max. 2 Accept other valid responses. 1(d)(i) Capital reserves are created from capital profits and not trading profits (1). 1 1(d)(ii) Used for special purposes (e.g. bonus share issue) (1) 1 1(e) Issue debenture (Max 2) 7 Has to be repaid (1) Will result in interest being paid which will reduce profits (1) Will have no effect on control (1) May require security (1) Rights issue (Max 2) Permanent capital (1) Will not dilute ownership (1). Will current investors be willing to invest further funds (1) Dividends are discretionary (1) New share issue (Max 2) Permanent capital (1) Will raise $110 000 (1) Company will have an additional $10 000 working capital available (1). Dividends are discretionary (1) Decision (1). Accept other valid responses.

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2 Simone operates a double entry system of book-keeping. REQUIRED (a) Explain why a trial balance may be arithmetically correct even though errors have been identified. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [2] Additional information Simone extracted a trial balance before preparing the financial statements for the year ended 30 June 2020. The totals of the trial balance did not agree. The following errors were discovered. 1 A total of $5600 from the sales returns journal had been credited to the purchases returns account. 2 A motor vehicle costing $15 000, acquired on 1 March 2020, had been posted to the motor expenses account. Simone does not own any other vehicles. 3 Discount received of $750 had not been posted to the discount received account. 4 A payment of $300 for insurance had been entered correctly in the cash book. No other entry had been made. REQUIRED (b) Prepare the journal entries to correct the errors. Narratives are not required. Simone General journal Dr Cr $ $ [4] Additional information Simone’s policy is to depreciate motor vehicles at 25% using the straight-line method on a monthly basis. She prepared a draft income statement that showed a profit for the year of $47 835 before the correction of errors. REQUIRED (c) Calculate the revised profit for the year after the correction of errors. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [6] (d) State three uses of the general journal other than the correction of errors. 1 ................................................................................................................................................ ................................................................................................................................................... 2 ................................................................................................................................................ ................................................................................................................................................... 3 ................................................................................................................................................ ................................................................................................................................................... [3] [Total: 15] PLEASE TURN OVER

Mark scheme: 2(a) Some errors (e.g. omission, commission, principle, original entry, reversal, 2 compensating) will not show in the trial balance (1) as a result the trial balance will still balance despite errors being present (1). 2(b) $ $ 4 Purchases returns 5 600 Sales returns 5 600 Suspense 11 200 (1) Motor vehicles – cost 15 000 Motor expenses 15 000 (1) Suspense 750 Discount received 750 (1) Insurance 300 Suspense 300 (1) 2(c) + - $ 6 Draft profit for the year 47 835 Sales returns 11 200 (1) Motor vehicle 15 000 (1) Depreciation 1 250 (1) Discount received 750 (1) Insurance 300 (1) 15 750 12 750 3 000 Revised profit for the year 50 835 (1)OF 2(d) To record: 3 opening or closing entries (1) the purchase or sale of a non-current asset (1) non-cash drawings (1) depreciation (1) provision for doubtful debts (1) non-cash capital contributions (1) transfer of profit or loss to capital account (1) Max 3 marks Accept other valid responses

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3 Giles, a sole trader, provided the following information for the year ended 31 March 2020. 1 Closing inventory was valued at $40 250 which was 15% higher than the opening inventory. 2 Rate of inventory turnover was 8 times. 3 Gross margin was 30%. 4 All sales and purchases were made on credit. 5 Trade receivables at 31 March 2020 were $38 000 before accounting for an irrecoverable debt of $2000 and an allowance for doubtful debts which is maintained at 3.5% of trade receivables. 6 Trade payables at 31 March 2020 were $22 000. REQUIRED (a) Calculate the sales for the year ended 31 March 2020. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [4] (b) Calculate the trade receivables turnover (days). ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [4] (c) Calculate the trade payables turnover (days). ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [4] (d) Explain the effect on the liquidity of Giles’s business of your answers to (b) and (c). ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [3] [Total: 15]

Mark scheme: 3(a) Inventory turnover = Cost of sales / Average inventory 4 Average inventory = 37 625 (1) Cost of sales = 8 × 37 625 = 301 000 (1)OF Sales = 301 000 / 70 × 100 (1) = $430 000 (1)OF 3(b) Trade receivables turnover = Trade receivables / credit sales × 365 4 Trade receivables = 38 000 – 2000 = 36 000 (1) – 1260 = 34 740 (1) Trade receivables turnover = 34 740 / 430 000 X 365 (1)OF = 30 days (1)OF 3(c) Trade payables turnover = Trade payables / credit purchases × 365 4 Credit purchases = 301 000 + (40 250 – 35 000) (1) = $306 250 (1)OF Trade payables turnover = 22 000 / 306 250 × 365 (1)OF = 27 days (1)OF 3(d) The receivables turnover period is greater than the payables turnover 3 period (1)OF. This results in them paying suppliers before receiving settlement from customers (1). This will have an adverse effect on liquidity (1) Accept other valid responses

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4 Connie manufactures three products: A, B and C. She has provided the following budgeted information for one unit of each product for the year ending 31 December 2021. Product A Product B Product C $ $ $ Selling price 15.00 20.00 25.00 Direct Materials 5.00 5.50 6.00 Direct Labour 4.00 5.00 7.50 Variable Overheads 2.50 3.50 2.50 Total fixed costs for the year are expected to be $100 000. Forecast annual demand for each product is 12 000 units. REQUIRED (a) Explain what is meant by contribution. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [3] (b) Calculate the budgeted unit contribution for each product. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [3] (c) Calculate the budgeted total profit for the year ending 31 December 2021 if the demand is fully met. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [3] Additional Information Connie has now discovered that her landlord may limit the use of the premises resulting in a total of only 78 000 machine hours being available. The number of machine hours to make each product are: Product A 2 Product B 4 Product C 4 Fixed costs will remain unchanged. REQUIRED (d) (i) Prepare the optimum production plan for the year ending 31 December 2021 based on the available machine hours. ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ..................................................................................................................................... [5] (ii) Calculate the budgeted total profit for the year ending 31 December 2021 based on the optimum production plan. ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ........................................................................................................................................... ..................................................................................................................................... [3] Additional information If Connie pays her landlord $65 000 she will be able to have unlimited machine hours. REQUIRED (e) Advise Connie whether or not she should pay her landlord $65 000. Justify your advice. ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ................................................................................................................................................... ............................................................................................................................................. [7]

Mark scheme: 4(a) Contribution is the amount remaining after all variable costs have been 3 subtracted from revenue (1). This amount is available to service the fixed costs (1). The amount remaining after this is the profit (1). Accept other valid responses. 4(b) A B C 3 Selling Price 15.00 20.00 25.00 Variable costs (11.50) (14.00) (16.00) Contribution 3.50 (1) 6.00 (1) 9.00 (1) 4(c) A 12 000 × 3.50 = 42 000 3 B 12 000 × 6.00 = 72 000 C 12 000 × 9.00 = 108 000 Contribution 222 000 (1)OF Fixed costs (100 000) (1) Profit 122 000 (1)OF 4(d)(i) Contribution per machine hour: 5 A B C 3.50/2 6.00/4 9.00/4 1.75 1.50 2.25 (1)OF Ranking 2 3 1 (1)OF Hours required 24 000 48 000 48 000 Optimum Production Plan Hours available 78 000 C 12 000 (1)OF (48 000) A 12 000 (1)OF (24 000) B 1 500 (1)OF (6 000) 4(d)(ii) C 12 000 × 9.00 108 000 3 A 12 000 × 3.50 42 000 B 1 500 × 6.00 9 000 159 000 (1)OF Fixed costs (100 000) (1) Profit 59 000 (1)OF 4(e) Reduction in profit 122 000 – 59 000 = 63 000 (1) OF 7 On a financial basis Connie will be worse off by $2000 (1). Consider loss of goodwill of customers (1). Would customers who normally buy non-available products go elsewhere even for those available? (1). Would Connie be able to resume full production in the future if she reduced output now? (1). Are there staffing implications? (1). Decision (1). Max. 6 for comments. Accept other valid responses. 4(f)(i) Those costs which vary in direct proportion to production (1). 1 4(f)(ii) Those costs which are partially fixed and partially variable (1). 1 4(f)(iii) Those costs which remain the same at all levels of production (1). 1 4(g) Costs can be split into fixed and variable costs (1). 3 Fixed costs are unchanged at all levels of production (1). Variable cost is constant per unit at all levels of production (1). All production is sold (1) Selling price remains constant (1) Sales mix should be constant (1) Accept other valid responses.

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