Types of business entity — Paper 2 · A Level Accounting 9706

2 Amit and Binu are in partnership sharing profits and losses in the ratio 3 : 2 respectively. The partnership statement of financial position at 30 June 2016 is as follows: $ $ Non-current assets Premises 40 000 Machinery 32 000 Motor vehicles 18 000 90 000 Current assets Inventory 18 600 Trade receivables 13 100 31 700 Total assets 121 700 Capital accounts Amit 30 000 Binu 20 000 50 000 Current accounts Amit 33 200 Binu 18 400 51 600 101 600 Current liabilities Trade payables 9 800 Bank overdraft 10 300 20 100 Total capital and liabilities 121 700 The partners agreed to dissolve the partnership on 30 June 2016. This resulted in the following: 1 Trade receivables realised $12 600. 2 Trade payables were settled in full for $9800. 3 Inventory was sold for $15 000. 4 The machinery was sold for $35 000. 5 Amit agreed to take over the premises at an agreed valuation of $30 000. 6 Binu agreed to take over one of the motor vehicles at an agreed valuation of $6500. The remaining motor vehicle was sold for $12 000. 7 The costs of dissolution were $6300. REQUIRED (a) Prepare the realisation account on the dissolution of the partnership. Realisation account [6] (b) Prepare a statement to show how much Binu will receive when the partnership bank account is closed. [4] (c) State two reasons why a partnership may be dissolved. 1 2 [2] (d) Explain what would happen if the dissolution of the partnership resulted in a debit balance on a partner’s capital account. [3] [Total 15] Question 3 is on the next page.

15 marks

Mark scheme: 2(a) Realisation account 6 $ $ Premises 40 000 Trade payables 9 800 Machinery 32 000 Bank (trade receivables) ** 12 600 Motor vehicles 18 000 Bank (inventory) ** 15 000 Inventory 18 600 Bank (machinery) ** 35 000 (1**) Trade receivables 13 100 Amit (premises) 30 000 (1) Bank (trade 9 800 (1) Binu (motor vehicle) 6 500 (1) payables) Dissolution 6 300 Bank (motor vehicles) 12 000 (1) expenses Capital account – Amit # 10 140 Capital account – Binu # 6 760 (1#) 137 800 137 800 2(b) $ 4 Capital account balance 20 000 Current account balance 18 400 38 400 (1) Motor vehicle 6 500 (1) Realisation deficit 6 760 (1) 13 260 Payable to Binu 25 140 (1) 2(c) Disagreements between partners 2 Death or retirement of a partner Bankruptcy Max 2 2(d) This means that the partner owes money to the partnership (1) 3 The partner must use his personal funds to repay the partnership bank account (1) in order that funds owing to other partners may be repaid (1) Total: 15

This question in 9706/21 May/June 2017

1 B Limited is a private limited company trading as a wholesaler of garden equipment. The draft trial balance at 30 June 2016 has been extracted from the books of account and is shown below. Debit Credit $ $ Bank loan 26 400 Bank 14 040 Cash 650 Directors’ remuneration 53 200 Fixtures and fittings Cost 18 110 Provision for depreciation at 1 July 2015 5 310 Land and buildings Cost 135 000 Provision for depreciation at 1 July 2015 21 840 Motor vehicles Cost 41 600 Provision for depreciation at 1 July 2015 19 200 Interest paid 5 920 Inventory at 1 July 2015 62 400 Office costs 18 330 Property costs 21 940 Purchases 268 200 Retained earnings 30 570 Revenue 563 800 Selling and distribution costs 36 120 Share capital (ordinary shares of $1 each) 60 000 Trade payables 39 810 Trade receivables 71 000 Wages and salaries 48 500 780 970 780 970 Additional information 1 The value of inventory at 30 June 2016 was $70 300 at cost. 2 Land and buildings at 30 June 2016 were as follows: $ Land 70 000 Buildings 65 000 3 Depreciation is to be provided as follows: Asset Annual Rate Method Charge to Fixtures and fittings 15% Reducing balance Office costs Buildings 2% Straight-line Property costs Motor vehicles 25% Reducing balance Selling and distribution costs 4 Wages and salaries are to be charged as follows: Selling and distribution costs 60% Office costs 40% 5 B Limited took out a 5% debenture (repayable between 2021 and 2025) for $50 000 on 30 June 2016 and repaid the bank loan in full. Neither of these transactions has yet been recorded in the books of account. 6 A prepayment of $1240 is to be accounted for on property costs at 30 June 2016. 7 An accrual of $2680 is to be accounted for on selling and distribution costs at 30 June 2016. 8 The directors require a provision for doubtful debts to be created representing 2% of trade receivables at 30 June 2016, to be charged to office costs. REQUIRED (a) Prepare the income statement for the year ended 30 June 2016. Use the space on the next page for your workings. B Limited Income Statement for the year ended 30 June 2016 $ $ Revenue Cost of sales Opening inventory Purchases Closing inventory Gross profit Deduct: expenses Directors’ remuneration Office costs Property costs Selling and distribution costs Profit from operations Finance costs Profit for the year Use this space for your workings. [17] (b) Prepare an extract showing the current assets section of the statement of financial position at 30 June 2016. B Limited Extract from Statement of Financial Position at 30 June 2016 [5] (c) Explain why a company should provide for depreciation on its non-current assets. [4] (d) Explain two differences between ordinary shares and preference shares. 1 2 [4] [Total: 30]

30 marks

Mark scheme: 1(a) $ $ Revenue 563 800 Cost of sales Opening inventory 62 400 Purchases 268 200 330 600 Closing inventory 70 300 260 300 (1) Gross profit 303 500 (1)OF Deduct: expenses Directors remuneration 53 200 (1) Office costs W1 41 070 (4) Property costs W2 22 000 (3) Selling and distribution costs W3 73 500 (4) 189 770 Profit from operations 113 730 (1)OF Finance costs 5 920 (1) Profit for the year 107 810 1OF Workings W1 Office costs $18 330 + $1920 (1) + $19 400 (1) + $1420 (1) = $41 070 (1)OF W2 Property costs $21 940 + $1300 (1) – $1240 (1) = $22 000 (1)OF W3 Selling and distribution costs $36 120 + $5600 (1) + $29 100 (1) + $2680 (1) = $73 500 (1)OF Depreciation Buildings $65 000 × 2% = $1300 Depreciation Fixtures & Fittings ($18 110 – $5310) × 15% = $1920 Depreciation Motor vehicles ($41 600 – $19 200) × 25% = $5600 17 Question Answer Marks 1(b) $ Current assets Inventory 70 300 Trade and other receivables W1 70 820 (2) Cash and cash equivalents W2 10 210 (2) Total 151 330 Workings W1 Trade and other receivables $71 000 – $1420 (1) + $1240 (1) = $70 820 W2 Cash and cash equivalents $14 040 + $26 400 (1) – $50 000 (1) + $650 = $10 210 Award 1 mark for presentation / labels 5 1(c) Allowing for depreciation: To comply with the matching / accruals concept (1) Accounts for that part of the asset used up in the accounting period (1) The value of assets falls due to wear and tear, obsolescence, technological change, etc. (1) Avoids overstating the net assets / non-current assets of the business (1) Ensures that the statement of financial position shows a true and fair view (1) Max 4 4 1(d) Differences: Ordinary shares carry voting rights (1), preference shares do not carry voting rights (1) Ordinary shareholders receive a variable dividend (1), preference shareholders receive a fixed rate of dividend (1) Ordinary share dividends are discretionary (1), preference share dividend is mandatory if sufficient profits are available (1) Preference shareholders receive dividend before (1) ordinary shareholders (1) In the event of liquidation preference shareholders are repaid their capital before (1) ordinary shareholders (1) Max 4 4

This question in 9706/22 May/June 2017

3 Amit, Wang and Susi have been trading in partnership for several years and prepare their financial statements annually to 31 March. They have never had a partnership agreement. REQUIRED (a) State four provisions which would apply in the absence of a partnership agreement. 1 2 3 4 [4] Question 3(b) is on the next page. Additional information The statement of financial position for the partnership at 31 March 2016 was as follows: Amit, Wang and Susi Statement of Financial Position at 31 March 2016 $ Assets Non-current assets Freehold premises 109 000 Fixtures and fittings 64 900 173 900 Current assets Trade receivables 14 500 Bank account 5 600 20 100 Total assets 194 000 Capital and liabilities Capital accounts Amit 40 000 Wang 40 000 Susi 40 000 120 000 Current accounts Amit 27 600 Wang 18 500 Susi 22 200 68 300 Current liabilities Trade payables 5 100 Other payables 600 5 700 Total capital and liabilities 194 000 On 1 April 2016 Amit retired from the partnership and the following was agreed: 1 Goodwill was valued at $42 000. A goodwill account is not to be maintained in the books of account. 2 Assets were revalued at the following amounts: $ Freehold premises 120 000 Fixtures and fittings 62 200 Trade receivables 13 700 3 Amit received $15 000 from the partnership bank account. The remaining balance owed to him was left as an interest-free loan to the partnership to be repaid by 31 March 2021.

4 marks

Mark scheme: 3(a) Share profits and losses equally (1) Partners are not entitled to salaries (1) Partners are not charged interest on their drawings (1) Entitled to contribute equally to the capital of the partnership (1) Partners are not entitled to interest on the capital they have contributed (1) Partners are entitled to interest at 5% per annum on loans they make to the partnership (1) Max 4 4 3(b) Amit Wang Susi Amit Wang Susi $ $ $ $ $ $ Goodwill 21 000 21 000 Balance b/d 40 000 40 000 40 000 Loan 69 100 (1)OF Goodwill 14 000 14 000 14 000 (1)* Bank 15 000 (1) Current 27 600 (1) Balance c/d 35 500 35 500 Revaluation 2 500 2 500 2 500 (1) row (1) 84 100 56 500 56 500 84 100 56 500 56 500 Balance b/d 35 500 35 500 (1) OF row * Goodwill – 1 mark for both debit and credit entries 6 3(c) Depends on the agreement on the initial loan Current loan is free of interest May need additional capital Partnership has insufficient liquid assets at present May have to take loan / overdraft which will be charged interest Interest would reduce the future profit May require security for loan 1 mark for decision and 4 marks for justification. 5

This question in 9706/22 May/June 2017

REQUIRED (b) Prepare the partners’ capital accounts to record the retirement of Amit from the partnership. Amit, Wang and Susi Capital accounts [6] Additional information Amit has recently advised the partners that he is having financial difficulties. He has asked Wang and Susi for the payment of the balance on his loan account as soon as possible. REQUIRED (c) Advise Wang and Susi whether or not they should agree to Amit’s request. Justify your answer. [5] [Total: 15]

11 marks

Mark scheme: 4(a) $ $ Sales revenue 203 000 Variable costs Direct materials 48 140 Direct labour 38 860 Production overheads 23 200 Selling expenses 20 300 130 500 (1) Contribution 72 500 (1)OF Fixed costs Production overheads 20 450 Administration overheads 32 250 Selling expenses 15 600 68 300 (1) Profit for the quarter 4 200 (1)OF 4 4(b) Contribution per unit: 72 500 / 58 000 = $1.25 (1)OF Breakeven point: 68 300 / 1.25 = 54 640 units (1)OF 2 4(c)(i) Proposal A $ Variable costs 130 500 – (58 000 × $0.10) – (203 000 × 2%) 120 640 (1)OF Variable costs per unit 120 640 / 58 000 2.08 (1)OF Contribution per unit 3.50 – 2.08 1.42 Fixed costs 68 300 – 12 000 56 300 (1)OF 4 4(c)(ii) Proposal B $ Variable costs 130 500 + (58 000 × $0.15) + (58 000 × 0.35 × 10%) (1) 141 230 (1)OF Variable costs per unit 141 230 / 58 000 2.435 (1)OF Contribution per unit 3.85 – 2.435 1.415 Fixed costs 68 300 + 5000 (1) – 12 000 61 300 (1)OF To achieve profit (61 300 + 20 000) / 1.415 57 456 units (1)OF 6 Question Answer Marks 4(d) Proposal A Benefits (Max 2) • Breakeven point reduces from 54 640 units to 53 733 units • Reduced cash outflows on direct materials and administrative expenses Proposal A Drawbacks (Max 2) • Reduced sales commission may result in fewer agency sales • Reduced administrative backup may hinder growth • Less expensive direct material may affect quality • Redundancy will incur costs / demotivate staff / result in bad image Proposal B Benefits (Max 2) • Opportunity to market new improved product • More expensive direct material may enhance quality • Opportunity to raise awareness with advertising spend • Sales commission retained at current level Proposal B Drawbacks (Max 2) • Breakeven point increases from 54 640 units to 57 456 units • Reduced administrative backup may hinder growth • Increased cash outflow of direct materials and advertising • Will sufficient sales be made to reach breakeven point? • Redundancy will incur costs / demotivate staff / result in bad image 1 mark for recommendation. Overall max 7 marks for benefits and drawbacks 8 Question Answer Marks 4(e) Advantages: • Facilitates longer term planning • Promotes co-ordination between departments • Enables monitoring and control • Can act as motivation for employees • Helps the allocation and use of resources • May provide a framework for delegation / responsibility accounting • Aids decision making Disadvantages: • Can discourage innovation • May de-motivate staff if set too challenging • May prevent progress if set too undemanding • Can be a time consuming and costly operation • May require specialist staff • May cause conflict between departments regarding the allocation of resources 1 mark for each valid point 6

This question in 9706/22 May/June 2017

1 Ramadhin, Statham and Trueman formed a partnership on 1 January 2016. The draft profit for the year ended 31 December 2016 before appropriation was $232 000, but did not account for the following: 1 A non-current asset costing $20 000 was purchased on 1 July 2016. No depreciation has been charged on this asset. The partnership’s policy is to charge depreciation at 20% using the reducing balance method on all assets. A full year’s depreciation is charged in the year of purchase and none in the year of disposal. 2 Some inventory which had been valued at a cost of $15 000 had been damaged. The mark-up on inventory is 100%. The damaged inventory could only be sold for 20% of the normal selling price. REQUIRED (a) Calculate the adjusted profit for the year ended 31 December 2016 before appropriation. [4] Additional information On 1 January 2016 Ramadhin, Statham and Trueman had introduced capital of $600 000 in their agreed profit and loss sharing ratio of 3 : 2 : 1 respectively. The other terms of the partnership agreement were as follows: 1 Interest of 6% per annum is to be paid on the opening capital account balances. 2 Each partner is to take drawings of $10 000 per annum. Interest is to be charged on total annual drawings at 4% per annum. 3 Trueman is to receive a salary of $1000 per month. REQUIRED (b) Prepare the partnership appropriation account for the year ended 31 December 2016. [6] (c) Explain why partners may value goodwill and revalue the assets when one partner retires. [3] Additional information Trueman received an offer of employment which would provide him with a gross annual income of $50 000. He decided to accept the offer and leave the partnership on 31 December 2016. At that date goodwill was valued at $12 000. It was also agreed that the partnership assets should be revalued at $7500 less than their net book values. Trueman agreed to leave 40% of the balance due to him as a loan to the partnership at an interest rate of 10% per annum. The remainder was paid to him from the business bank account. REQUIRED (d) Prepare a statement showing the amount that Trueman received on leaving the partnership. [8] (e) Assess whether or not Trueman was correct in his decision to leave the partnership. Justify your answer by discussing the financial and non-financial factors involved. [5] Additional information Trueman asks Ramadhin and Statham for an early repayment of his loan to the partnership. REQUIRED (f) Advise the partners whether or not they should make an early repayment. Justify your answer. [4] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Adjusted net profit: 232 000–4000 (1) –9000 (3) =219 000 4 Workings: 15 000×2=30 000 (1) ×20%=6000 (1) OF 15 000–6000=9000 (1) OF 1(b) Adjusted Net Profit 219 000 6 Add Interest on drawings Ramadhin 400 Statham 400 Trueman 400 1 200 (1) 220 200 Less Interest on capital Ramadhin 18 000 Statham 12 000 Trueman 6 000 (36 000) (1) Salary Trueman (12 000) (1) 172 200 Share of profit Ramadhin 86 100 (1) OF Statham 57 400 (1) OF Trueman 28 700 (1) OF 172 200 1(c) Fair value of assets may be greater than book value. (1) 3 Partners are rewarded for their efforts in building up the business. (1) It is only fair that the retiring partner is compensated in this way. (1) 1(d) Capital 100 000 8 Goodwill to Trueman 2 000 (1) Revaluation loss (1 250) (1) Current account 36 300 * (5) 137 050 × 60% 82 230 (1)OF *28 700 (1) OF + 6000 (1) OF + 12 000 (1) OF – 400 (1) OF – 10 000 (1) 1(e) Decision. (1) 5 Financial (Maximum 3) Trueman would receive more / less income. (1)OF Interest will be earned on the loan. (1) The decision may be affected by the interest rate which could be obtained externally on the capital invested. (1) Non-financial (Maximum 3) Level of risk. (1) Degree of responsibility / decision making. (1) Security of employment. (1) 1 mark for decision plus maximum 4 marks for justification 1(f) Decision. (1) 4 Partnership may not have funds available. (1) It may be able to take a loan to repay at a lower interest thereby increasing the profit of the remaining partners. (1) Taking a loan will increase the risk to the business. (1) Loan may require a security. (1) 1 mark for decision plus maximum 3 marks for justification Total: 30

This question in 9706/23 May/June 2017

2 The following is an extract from the statement of financial position of WX Limited at 1 March 2016: Equity $ Ordinary share capital ($0.50 each) 150 000 Share premium account 60 000 Retained earnings 40 000 The following additional information is available: 1 On 30 April 2016, the non-current assets were revalued from their net book value of $175 000 to $225 000. 2 On 30 June 2016, a bonus issue was made on the basis of three ordinary shares for every ten held. Reserves were kept in the most distributable form. 3 On 30 September 2016, a rights issue was offered on the basis of one ordinary share for every eight held. The ordinary shares were offered at a price of $0.80 per share and the issue was fully subscribed. 4 On 31 December 2016, the company paid a dividend of $0.04 on all shares in issue at that date. 5 Profit for the year ended 28 February 2017 was $50 500. REQUIRED (a) Prepare a statement of changes in equity for the year ended 28 February 2017 (A total column is not required.) WX Limited Statement of Changes in Equity for the year ended 28 February 2017 Share Share Retained Revaluation capital premium earnings reserve $ $ $ $ Use this space for your workings. [11] (b) State three advantages and one disadvantage to a limited company of making a bonus issue of shares. Advantages 1 2 3 Disadvantage 1 [4] [Total: 15]

15 marks

Mark scheme: 2(a) WX Limited 11 Statement of Changes in equity for the year ended 28 February 2017 Share Share Retained Revaluation capital premium earnings reserve $ $ $ $ Balance b/d 150 000 60 000 40 000 – Revaluation 50 000 (1) Bonus issue 45 000 (45 000) (1) (1)OF Rights issue 24 375 14 625 (1)OF (1)OF Dividends paid (17 550) (1)OF Profit for the year 50 500 (1) Balance c/d 219 375 29 625 72 950 50 000 (1)OF Workings: Bonus issue: 150 000/0.5=300 000 (1) / 10×3=90 000×$0.50=45 000 Rights issue: 300 000+90 000=390 000 (1)OF 8=48 750 48 750×$0.50=24 375 48 750×$0.30=14 625 Dividends 300 000+90 000+48 750=438 750 (1)OF ×$0.04=17 550 2(b) Advantages (Maximum 3) 4 Can be issued instead of paying dividends and so cash flow is not reduced. (1) Keeps existing shareholders satisfied as there is no dilution of ownership. (1) Retains cash in the business for reinvestment. (1) Gives a positive sign to potential shareholders. (1) Enables company to release its capital reserves. (1) Disadvantage No cash raised from selling the shares. (1 mark for a valid point up to a maximum of 4 marks) Total: 15

This question in 9706/23 May/June 2017

1 F Limited is a large retail company. On 1 February 2016, the company invited applications for 50 000 ordinary shares of $1 each at an issue price of $1.20. The following terms applied: Payable on application $0.50 Payable on allotment $0.70 Applications were received for 65 000 shares. All monies received in respect of the share issue were posted to the bank account and a share issue holding account until the shares were allotted. At the time of allotment, transfers were made to the share capital account and the share premium account and monies were returned to the unsuccessful applicants. REQUIRED (a) Prepare the following ledger accounts to show all transactions relating to the share issue. Dates are not required. Share issue holding account $ $ Bank account $ $ Share capital account $ $ Share premium account $ $ [10] Question 1(b) is on the next page. Additional information F Limited’s year end is 30 June. The following balances have been extracted from the books of account at 30 June 2016: $ Ordinary share capital ($1 each) 400 000 Share premium account 40 000 8% debentures (2020–2022) 280 000 Bank loan (repayable 2021) 100 000 The following information is also available: 1 The balance of retained earnings at 1 July 2015 was $210 000.

10 marks

Mark scheme: 1(a) Share issue holding account $ $ Bank 7 500 (1) Bank 32 500 (1) Share capital 50 000 (1) Bank 35 000 (1) Share premium 10 000 (1) 67 500 67 500 Bank account $ $ Share issue holding account 32 500 (1) Share issue holding account 7500 (1) Share issue holding account 35 000 (1) Share capital account $ $ Share issue holding account 50 000 (1) Share premium account $ $ Share issue holding account 10 000 (1) 10 Question Answer Marks 1(b) F Limited Statement of Changes in Equity for the year ended 30 June 2016 Ordinary shares $000 Share premium $000 Revaluation reserve $000 Retained earnings $000 Total $000 At 1 July 2015 350 (1) 30 (1) 210 590 (1) Share issue 50 10 (1) 60 Final dividend paid (7) (1OF) (7) Interim dividend paid (12) (1OF) (12) Revaluation 30 (1) 30 Profit for the year 65 65 At 30 June 2016 400 40 30 256 726 (1OF) 8 1(c) Debentures are long-term loans (1) on which interest must be paid, whether the company makes a profit or loss. (1) Debenture holders receive a fixed rate of dividend. (1) (Max 1) Ordinary shares are permanent capital (1) on which dividends may or may not be paid at the discretion of the directors. (1) Dividends are variable. (1) (Max 1) Overall max 2 2 1(d) The directors must consider the feasibility of the rights issue, bearing in mind that there has just been a share issue at $1.20 that was oversubscribed. (1) The debt of the business will increase in relation to the equity if debentures are issued. (1) This will increase the perceived risk as debenture interest will have to be paid each year. (1) A risky business will send a negative signal to suppliers.. (1) Rights issue is made to existing shareholders. If they are confident about the future they will take up all the shares. (1) However, if they have any doubt rights issue will not be fully taken up. (1) If the directors can prove that the return on the investment will exceed the rate of interest, existing shareholders can benefit from this investment. (1) Max 3 marks for reasons + 1 mark for justified decision. Accept other valid points. 4 1(e) Revenue expenditure is money spent: on the day-to-day running expenses of the business; (1) on resources that will generally be used up within one year. (1) 2 Question Answer Marks 1(f) $ Building costs 28 000 Wages to own employees to construct new loading area 4 000 (1) Materials for new loading area 2 400 (1) Legal fees 2 200 (1) 36 600 (1)OF 4

This question in 9706/23 Oct/Nov 2017

REQUIRED (b) Prepare the statement of changes in equity for F Limited for the year ended 30 June 2016. F Limited Statement of Changes in Equity for the year ended 30 June 2016 Ordinary Share Revaluation Retained shares premium reserve earnings Total $000 $000 $000 $000 $000 [8] Additional information The directors of F Limited wish to purchase a new retail store for $400 000. They are considering two different ways to raise the finance for this investment. 1 Issue a further $400 000 8% debentures (2026–2028). 2 Make a rights issue of 320 000 ordinary shares of $1 each at a price of $1.25. REQUIRED (c) Explain one difference between debentures and ordinary shares. [2] (d) Advise the directors which method of raising the finance you would recommend. Give reasons for your answer. [4]

14 marks

This question in 9706/23 Oct/Nov 2017

2 The following is an extract from the statement of financial position of X Limited at 31 December 2016. $ Equity Share capital ($1 ordinary shares) 400 000 Share premium 20 000 Retained earnings 190 000 Total equity 610 000 Non-current liabilities 8% debentures (201920) 80 000 Current liabilities Trade and other payables 20 000 Cash and cash equivalents 60 000 80 000 Total liabilities 160 000 Total equity and liabilities 770 000 During the year ended 31 December 2017 the following transactions took place. 1 January 2017 Issue of 80 000 ordinary shares at $1.25 each. 30 June 2017 Rights issue of 3 ordinary shares for every 8 shares held on this date at an issue price of $1.30. This was fully subscribed. 30 September 2017 Bonus issue of 1 ordinary share for every 6 shares held on this date. REQUIRED (a) Prepare journal entries to record each of these transactions in the books of account. Dates and narratives are not required. Debit Credit $ $ [6] (b) Prepare a statement to show the effect that the transactions had on the total equity. [3] (c) State three uses of a share premium account. 1 2 3 [3] (d) State three reasons why a company may make a bonus issue of shares. 1 2 3 [3] [Total: 15]

15 marks

Mark scheme: 2(a) Debit $ Credit $ Bank 100 000 Share capital 80 000 (1) Share premium 20 000 (1) Bank 234 000 Share capital 180 000 (1) Share premium 54 000 (1) Share premium 94 000 (1) Retained earnings 16 000 (1) Share capital 110 000 6 2(b) $ Brought forward 610 000 Share issue 100 000 (1) Rights issue 234 000 (1) 944 000 (1)OF 3 2(c) Issue of bonus shares Pay premium on the redemption of debentures Write off company formation expenses Write off expenses of a share issue or debenture issue 1 mark for each valid use (max 3 marks) 3 Question Answer Marks 2(d) To release reserves to shareholder with no impact on cash flow. To liquidate capital reserves that cannot be used to pay dividends. To match long-term assets with long-term capital. To give positive signal to potential investors 1 mark for each valid reason (max 3 marks) 3

This question in 9706/22 Feb/March 2018

1 Ashir, Bo and Chan are in partnership. The partnership agreement includes the following terms: 1 Profits and losses are shared in the ratio of the partners’ capital accounts. 2 Interest on capital is 6% per annum. 3 Interest on drawings is 5% calculated on each partner’s total annual drawings. 4 Partners’ loan interest is 12% per annum. 5 Chan receives a salary of $1000 per month. The following information is available at 31 December 2016: $ Capital accounts Ashir 40 000 Bo 30 000 Chan 10 000 Current accounts Ashir 12 300 Bo 8 200 Chan 2 600 debit Drawings Ashir 15 400 Bo 12 200 Chan 16 400 Fixtures and fittings Cost 32 400 Provision for depreciation 21 400 Motor vehicles Cost 80 000 Provision for depreciation 48 000 Loan account  Ashir 10 000 Gross profit 171 620 Operating expenses 54 960 Staff wages 32 500 Additional information 1 Operating expenses include a payment of $600 for insurance covering the 12-month period to 31 August 2017. 2 Staff wages owing at 31 December 2016 were $860. 3 Depreciation is to be charged as follows: Fixtures and fittings 10% per annum using the reducing balance method Motor vehicles 20% per annum using the straight-line method REQUIRED (a) Prepare the income statement for the partnership for the year ended 31 December 2016. Start with the given gross profit of $171 620. [5] (b) Prepare the profit and loss appropriation account for the partnership for the year ended 31 December 2016. [5] (c) Prepare the partners’ current accounts for the year ended 31 December 2016 on the next page. [7] $ Chan $ Bo $ Ashir DetailAccounts $Current Chan $ Bo $ Ashir Detail Additional information On 1 January 2017, Chan decided that he wished to retire with immediate effect. The partners agreed that as part of his settlement, he could keep one of the motor vehicles at the net book value of $18 000. At that date it was agreed that the total value of goodwill was $124 000. REQUIRED (d) Prepare a statement to calculate the bank settlement due to, or from, Chan on his retirement. [4] Additional information Following Chan’s retirement, Ashir and Bo are considering converting their business to a limited company to continue the business. REQUIRED (e) State two advantages to a partnership of converting to a limited company. 1 2 [2] Additional information Ashir’s brother Bilal, a sole trader with three employees, has been running his business for four years. Turnover has doubled over the past year and the business is gradually becoming very profitable. Bilal does not maintain a full set of accounting records, but his friend has recommended that he should. REQUIRED (f) Advise Bilal whether or not he should maintain a full set of accounting records. Give reasons for your answer. [5] (g) State two reasons for maintaining a sales ledger control account. 1 2 [2] [Total: 30]

30 marks

Mark scheme: 1(a) Ashir, Bo and Chan Income statement for the year ended 31 December 2016 $ $ $ Gross profit 171 620 Operating expenses 54 560 (1) Staff Wages 33 360 (1) Loan interest 1 200 (1) Depreciation – Fixtures and fittings 1 100 Depreciation – motor vehicles 16 000 17 100 (1) 106 220 Profit for the year 65 400 (1) OF 5 1(b) Ashir, Bo and Chan Profit and loss appropriation account for the year ended 31 December 2016 $ $ Profit for the year 65 400 (1) OF Interest on drawings Ashir 770 Bo 610 Chan 820 2 200 (1 for all) Interest on capital Ashir (2 400) Bo (1 800) Chan (600) (4 800) (1 for all) Salary Chan (12 000) (1) Attributable profit 50 800 Divisible Ashir 25 400 Bo 19 050 Chan 6 350 50 800 (1 OF for all) 5 Question Answer Marks 1(c) Detail Ashir $ Bo $ Chan $ Detail Ashir $ Bo $ Chan $ Balance b/f 2 600 Balance b/f 12 300 8 200 Interest on drawings (1OF for line) 770 610 820 Interest on capital (1OF for line) 2 400 1 800 600 Drawings (1 for line) 15 400 12 200 16 400 Loan interest 1 200 (1) Balance c/d 25 130 16 240 Salary Profit for the year (1OF for line) 25 400 19 050 12 000 (1) 6 350 Balance c/d 870 41 300 29 050 19 820 41 300 29 050 19 820 Balance b/d (1OF for line) 870 Balance b/d 25 130 16 240 7 1(d) $ Capital account 10 000 Current account (870) (1)OF Motor vehicle (18 000) (1) Goodwill 15 500 (1) Due to Chan (correct label only) 6 630 (1)OF 4 1(e) Separate entity Limited liability for owners Ability to raise finance 1 mark for each advantage – maximum 2 marks Question Answer Marks 1(f) Advice Yes he should maintain a full set of accounting records (1) Reasons Advantages (Max 2) Business is growing fast Enables closer monitoring of performance Enables Bilal to control the business performance Enable Bilal to maximise opportunities Disadvantages (Max 2) More time consuming Need to employ specialist staff 1 mark for advice, maximum 2 marks for advantages and max 2 marks for disadvantages 5 1(g) Minimises possibility of bad debts Independent check on arithmetic accuracy Reduces possibility of fraud Provides instant record of total trade receivables Facilitates preparation of financial statements 1 mark for each benefit – maximum 2 marks 2

This question in 9706/21 May/June 2018

1 Cherie and Harry are in partnership. REQUIRED (a) Explain three disadvantages of operating as a partnership rather than being in business as a sole trader. 1 2 3 [6] Additional information The following information was available for the partnership on 30 June 2017. $ Bank overdraft 1 680 Capital accounts Cherie 42 000 Harry 28 000 Current accounts balances at 1 July 2016 Cherie 1 470 credit Harry 2 430 debit Drawings Cherie 18 300 Harry 16 820 Gross profit for the year 40 960 Inventory at 30 June 2017 25 540 Loan Account Cherie 8 000 Non-current assets Cost 64 000 Provision for depreciation 22 000 Operating expenses 28 390 Trade payables 1 170 The following information is also available. 1 Operating expenses included a payment for rent, $3450, for three months ended 31 August 2017.

6 marks

Mark scheme: 1(a) Responses could include: Profits will be shared in the partnership (1), whereas sole traders would be entitled to all the profits (1). Decision making may take longer as both partners will need to agree (1), whereas sole traders can make instant decisions (1). There is the risk of disagreement/conflict between partners (1), whereas sole traders would make decisions on their own (1). Each partner’s actions are binding on all partners (1), whereas a sole trader has to account to no other parties for his actions (1) Control of the business by each partner maybe difficult (1) whereas the sole trader retains control over the business (1). 1 mark for identification + 1 mark for development. Max 3 advantages. 6 1(b) Cherie and Harry Income statement for the year ended 30 June 2017 $ $ Gross profit Less inventory adjustment 40 960 (1) (380) Revised gross profit 40 580 Less Operating expenses W1 26 090 (1) Depreciation W2 8 400 (1) Loan interest W3 640 (1) (35 130) Profit for the year 5 450 (1) OF W1 Operating expenses: $28 390 – prepayment (2/3 × $3450) = $26 090 W2 Depreciation: 20% × ($64 000 – $22 000) = $8400 W3 Loan interest: 8% × $8000 = $640 Marks are for figures and position. 5 Question Answer Marks 1(c) Cherie and Harry Appropriation Account for the year ended 30 June 2017 $ $ Profit for the year 5 450 Add interest on drawings Cherie 310 (1) for both Harry 240 550 6 000 Less interest on capital W1 Cherie (4 200) (1) for both Harry (2 800) (7 000) (1 000) Share of loss W2 Cherie (600) (2)OF / (1)OF for both Harry (400) (1 000) W1 Interest on capitals: Cherie 10% × $42 000 = $4200 Harry 10% × $28 000 = $2800 W2 Shares of residual loss: ratio is Cherie: Harry $42 000 : $28 000, i.e. 3 : 2 Cherie 5 3 × $1 000 = £600 Harry 5 2 × $1 000 = $400 4 Question Answer Marks 1(d) Current Accounts Cherie Harry Cherie Harry $ $ $ $ Balance b/d 2 430 Balance b/d 1 470 Drawings 18 300 16 820 (1) Interest on loan 640 (1)OF Interest on drawings 310 240 (1)OF Interest on capital 4 200 2 800 (1)OF Residual loss 600 400 (1)OF Balances c/d 12 900 17 090 19 210 19 890 19 210 19 890 Balances b/d 12 900 17 090 (1)OF 6 1(e) Non-current asset turnover The non-current asset turnover ratio has improved from being weaker than the industry average to being better than the industry average and/or has also improved on the previous year (1). The partnership may have purchased new and improved non-current assets and/or are using existing non-current assets more efficiently. (1) Trade payables turnover The partnership is now paying suppliers faster than in the previous year and/or quicker than the industry average (1) Whilst this may have been good for the supplier liquid funds that could have been used for other purposes are being used unnecessarily. (1) Accept other valid responses. Max 2 marks for each ratio. 4 Question Answer Marks 1(f) Responses could include: Advertising campaign May raise public perception (1) May increase sales of the business (1) Would incur costs (1) Reducing inventory levels Would lead to an increase in the rate of inventory turnover (1) Would reduce the risk of obsolete/damaged inventory (1) Would reduce customer choice/danger of not being able to fulfil orders (1) Award up to 2 marks for justification on each course of action and 1 mark for a decision. Accept other valid responses. 5

This question in 9706/22 May/June 2018

1 Carlos and Erika have been in partnership for several years and prepare their financial statements to 31 July. At 1 August 2016 the following information related to non-current assets was available. $ Plant and machinery Cost 65 000 Provision for depreciation 5 000 Motor vehicles Cost 18 000 Provision for depreciation 3 600 During the year ended 31 July 2017 the following took place. 1 On 1 November 2016, the partnership purchased a new machine for $7500. 2 On 1 December 2016 a machine was sold for $6800. The machine had been purchased for $10 000 on 1 May 2015. 3 On 1 February 2017 a new motor vehicle was purchased for $14 000. 4 The accounting policies in respect of depreciation are: Plant and machinery is depreciated using the straight-line method at 10% per annum. Motor vehicles are depreciated using the reducing balance method at 20% per annum. A full year’s depreciation is charged in the year of purchase and none in the year of disposal. 5 No adjustments have yet been made for depreciation or disposal of the machine. The profit for the year ended 31 July 2017 before any adjustments was $37 490. REQUIRED (a) Calculate the revised profit before appropriation for the year ended 31 July 2017. Workings: [5] Additional information The terms of the partnership agreement are as follows: 1 Annual partnership salaries: Carlos $10 000 and Erika $15 000. 2 Interest on capital: 3% per annum. 3 No interest is to be paid on drawings up to $20 000. Interest at a rate of 6% is to be charged on any drawings in excess of $20 000. 4 Profits and losses are to be shared in the ratio of the capital invested. The following information is also available at 31 July 2017. $ Capital account: Carlos 84 000 Erika 28 000 Drawings: Carlos 15 000 Erika 25 000 REQUIRED (b) Prepare the partnership appropriation account for the year ended 31 July 2017. Carlos and Erika Appropriation account for the year ended 31 July 2017 [4] Additional information On 31 July 2016 the balances on the partners’ current accounts were: $ Carlos 1 300 credit Erika 250 debit REQUIRED (c) Prepare the current accounts for the year ended 31 July 2017. Carlos and Erika Current accounts Carlos Erika Carlos Erika $ $ $ $ [5] Additional information The following information is also available: 31 July 2017 31 July 2016 $ $ Credit sales 385 000 327 500 Credit purchases 172 000 153 000 Inventory 6 535 10 800 Bank overdraft 16 100 1 200 Other receivables 34 126 Other payables 586 248 Trade receivables collection period 46 days 31 days Trade payables payment period 36 days 39 days REQUIRED (d) Calculate the following at 31 July 2017: (i) Trade receivables [2] (ii) Trade payables [2] (e) Assess the working capital position of the partnership at 31 July 2017. [4] (f) Advise the partners of three ways in which they could improve the cash position of the business. 1 2 3 [3] Additional information Carlos and Erika are considering converting the partnership into a limited company. REQUIRED (g) Advise the partners whether or not they should take this course of action. Justify your answer. [5] [Total: 30]

30 marks

Mark scheme: 1(a) $ $ Profit for year before adjustments 37 490 Less: Depreciation – Plant and machinery W1 6 250 (1) – Motor vehicles W2 5 680 (1) Loss on sale W3 1 200 (1) 13 130 Revised profit before appropriation 24 360 (2)CF(1)OF W1: Depreciation plant and machinery = 65 000 +7500 – 10 000 ×10% = 6250 W2: depreciation motor vehicles = 18 000 – 3600 = (14 400 + 14 000) × 20% = 5680 W3: Loss on sale (10 000 – 2000) = 8000 – 6800 = 1200 5 Question Answer Marks 1(b) Carlos and Erika Appropriation account for the year ended 31 July 2018 Revised profit for the year 24 360 Add: Interest on drawings Carlos – Erika 300 300 (1) Less: Interest on capital Carlos (2 520) Erika (840) (3 360) (1) Less: Salary Carlos (10 000) Erika (15 000) (25 000) (1) Loss (3 700) Share of loss Carlos (2 775) } Erika (925) }(1)OF (3 700) Revised profit must be candidate’s own figure from 1(a) to be awarded OF share of loss mark. 4 Question Answer Marks 1(c) Carlos and Erika Current accounts $ $ $ $ Carlos Erika Carlos Erika Balance b/d 250 Balance b/d 1 300 Drawings 15 000 25 000 * Interest on capital 2 520 840 (1)OF Interest on drawings – 300 (1)OF Salaries 10 000 15 000 * (1) Share of loss 2 775 925 (1)OF Balance c/d 3 955 10 635 17 775 26 475 17 775 26 475 Balance b/d 3 955 10 635 (1)OF * Drawings/salaries both must be correct for 1 mark. 5 1(d)(i) ( 46 365 × $385 000) (1) = $48 521 (1) 4 1(d)(ii) ( 36 365 × $172 000) (1) = $16 964 (1) Question Answer Marks 1(e) Positive working capital. (1) The trade receivables collection period has deteriorated from 31 days to 46 days which could increase the possibility of bad debts. (1) The trade payables payment period has decreased by 3 days suggesting that creditors are being paid faster than they need to be or less credit has been extended by suppliers. (1) Cash flow problems may result. (1) The above may have led to the increased bank overdraft and associated bank interest. (1) There may be less effective credit control in place/may not be carrying out adequate credit referencing checks on new customers. (1) Max 4 marks 4 1(f) The partners could reduce their salaries. (1) The partners could reduce their drawings. (1) Additional capital could be introduced by the existing partners. (1) A new partner, or partners, could be admitted to the partnership. (1) A loan could be negotiated. (1) The partnership could dispose of surplus/unused non-current assets. (1) Max 3 marks Accept other valid points 3 Question Answer Marks 1(g) Remaining as a partnership Disadvantages: The partners usually have unlimited liability Profits need to be shared with other partners There is the possibility of disputes between the partners Decisions made by one partner are legally binding on the others Partnership will need to be dissolved if partner dies 1 mark per valid point Max 2 marks Becoming a limited company Disadvantages: Potential loss of control as additional shareholders invest There will be costs associated with setting up the company More detailed financial information Available for public scrutiny 1 mark per valid point Max 2 marks 1 for decision Accept other valid points 5

This question in 9706/23 May/June 2018

3 Aisha, Bilal and Cao have been in partnership for many years sharing profits and losses in the ratio 2 : 2 : 1. Bilal decided to retire from the partnership at 31 January 2018. Their statement of financial position at 31 January 2018 before any adjustments was as follows: Aisha, Bilal and Cao Statement of financial position at 31 January 2018 $ $ Assets Non-current assets Premises 85 000 Motor vehicles 32 000 Fixtures and fittings 7 500 124 500 Current assets Inventory 16 200 Trade and other receivables 4 800 21 000 Total assets 145 500 Capital and liabilities Capital accounts Aisha 48 000 Bilal 48 000 Cao 24 000 120 000 Current accounts Aisha 8 400 Bilal (1 200) Cao 6 400 13 600 Current liabilities Trade and other payables 5 600 Bank overdraft 6 300 11 900 Total capital and liabilities 145 500 The following information is available. 1 The partners agreed that the value of goodwill at that date was $85 000. 2 It was also agreed that certain assets should be revalued to the following amounts. $ Premises 114 000 Inventory 15 000 3 As part of the final settlement, Bilal was entitled to retain one of the motor vehicles at its net book value of $11 400. 4 It was agreed that of the final settlement due to Bilal, $20 000 would be paid immediately by cheque and the balance would remain in the business as a loan. REQUIRED (a) Prepare a statement to calculate the profit or loss on revaluation at 31 January 2018. [3] (b) Prepare Bilal’s capital account on his retirement from the partnership. [6] (c) Identify three ways, other than using bank finance, in which a partnership could raise funds to purchase a non-current asset. 1 2 3 [3] (d) State three items that may be included in the appropriation account before the division of residual profit. 1 2 3 [3] [Total: 15]

15 marks

Mark scheme: 3(a) $ Premises Surplus 29 000 (1) Inventory Deficit (1 200) (1) Profit on revaluation 27 800 (1) 3 3(b) $ $ Current account 1 200 (1) Balance b/d 48 000 Bank 20 000 (1) Goodwill 34 000 (1) Motor vehicle 11 400 (1) Profit on revaluation 11 120 (1) OF Loan account 60 520 (1) OF 93 120 93 120 6 3(c) Partners increase capital (1) Partners reduce/not taking drawings/salaries (1) Partners introduce a loan (1) New partner introduced (1) Sale of surplus non-current asset (1) Loan from family members (1) Accept other valid responses. Max 3 marks 3 Question Answer Marks 3(d) Interest on capital (1) Interest on drawings (1) Partners’ salaries (1) 3

This question in 9706/21 Oct/Nov 2018

1 From time to time M Limited issues shares. REQUIRED (a) State the double entry required to record a rights issue of shares at a premium. [3] Additional information The directors of M Limited have a policy of not paying interim dividends. The statement of changes in equity of the company for the year ended 31 December 2016 was as follows. M Limited Statement of changes in equity for the year ended 31 December 2016 Ordinary Share General Retained Total share premium reserve earnings capital 2016 $ $ $ $ $ Jan 1 Balance 400 000 150 000 – 120 000 670 000 Feb 10 ? 100 000 (100 000) – Jun 25 Dividend (60 000) (60 000) Dec 31 Transfer 50 000 (50 000) – Dec 31 Profit for the year 90 000 90 000 Dec 31 Balance 500 000 50 000 50 000 100 000 700 000 REQUIRED (b) (i) State which event was recorded by the entry on 10 February 2016. [1] (ii) Explain why the entry made on 10 February 2016 was made to the share premium account rather than the retained earnings account. [2] (iii) State which dividend was recorded by the entry on 25 June 2016. [1] (iv) State why the directors decided to create a general reserve. [1] (v) Explain why a long-term bank loan received by the company on 1 July 2016 was not recorded in the statement of changes in equity. [2] Additional information 1 Balances at 1 January 2017 included the following. $ Buildings cost 400 000 provision for depreciation 38 000 Equipment cost 256 000 provision for depreciation 61 000 Motor vehicles cost 188 000 provision for depreciation 81 000

10 marks

Mark scheme: Question Answer Marks 1(a) Debit bank/application (1) 3 Credit ordinary share capital (1) Credit share premium (1) 1(b)(i) bonus issue of (ordinary) shares (1) 1 1(b)(ii) because the share premium account is a capital reserve with limited 2 uses (1) so that reserves are kept in their most flexible form (1) to maximise the future dividends which could be paid (1) Max 2 1(b)(iii) final dividend of the previous year paid (1) 1 1(b)(iv) to retain profits for reinvestment in the business (1) 1 1(b)(v) because the loan is a non-current liability/loan capital (1) 2 and does not affect equity (1) 1(c) Property, plant and equipment $ $ 6 Buildings at valuation 650 000 (1) Equipment – cost 256 000 + 37 000 293 000 provision for dep 61 000 + 29 300 90 300 202 700 (1) Motor vehicles – cost 188 000 – 10 000 178 000 (1) prov for dep 81 000 – 2 000 (1) + 19 800 (1) 98 800 79 200 931 900 (1)OF 1(d) M Limited 10 Statement of financial position at 31 December 2017 $ Assets Non-current assets Property, plant and equipment 931 900 (1) OF Current assets 290 300 (1) Total assets 1 222 200 Equity and liabilities Equity Ordinary share capital 500 000 } Share premium 50 000 } (1) General reserve 50 000 } Revaluation reserve 288 000 (1) Retained earnings 137 900 (4) OF 1 025 900 Non-current liabilities 10% bank loan (2025) 100 000 (1) Current liabilities 96 300 (1) Total equity and liabilities 1 222 200 Retained earnings 100 000 + 163 000 – 66 000 (1) − 10 000 (1) − 49100 (1) OF = 137 900 (1) OF 1(e) Reasons for: 4 Profit would increase in the short term. The capital base / asset base of the company would rise in the short term. Reasons against: The change would not be in accordance with the accounting concept of consistency. The change would not be prudent / against prudence concept. Assets/profit could be overstated. Lower depreciation charges would mean higher losses on disposal. The change would not help profit in the long term. Accept other valid points. Max (3) for comments plus (1) for decision

This question in 9706/23 Oct/Nov 2018

2 Mira, Sasha and Peta have been trading as a partnership. They share profits and losses in the ratio of 2 : 2 : 1 respectively. The partnership ceased trading on 31 January 2019. REQUIRED (a) State four reasons why a partnership may be dissolved. 1 2 3 4 [4] Additional information The following information is available on dissolution of partnership. 1 Mira, Sasha and Peta Statement of financial position at 31 January 2019 $ Assets Non-current assets Fixtures and fittings 45 200 Motor vehicles 22 000 67 200 Current assets Inventory 20 600 Trade receivables 42 800 63 400 Total assets 130 600 Capital and liabilities Capital accounts Mira 45 500 Sasha 42 800 Peta 14 000 102 300 Current liabilities Trade payables 26 400 Bank overdraft 1 900 28 300 Total capital and liabilities 130 600 2 Sasha took a motor vehicle at an agreed valuation of $4500. The remaining non-current assets were sold for $64 300.

4 marks

Mark scheme: 2(a) Death / ill health / retirement of a partner (any one) (1) A partner has been declared bankrupt (1) Disagreement between partners (1) Insufficient level of profits / incurring losses (1) Insufficient levels of cash reserves (1) Partnership has achieved its purpose (1) Accept other valid points. Max 4 marks 4 Question Answer Marks 2(b) Mira, Sasha and Peta Realisation account $ $ Fixtures and fittings 45 200 (1) Capital account - Sasha 4 500 (1) Motor vehicles 22 000 Trade payables 26 400 (1) Inventory 20 600 Bank – non-current assets 64 300 Trade receivables 42 800 Bank – inventory 19 800 Bank – trade payables 26 000 Bank – trade receivables 40 500 Bank – Dissolution costs 3 700 (1) Capital account Mira 2 5 1 920 (1) OF Sasha 2 5 1 920 Peta 1 5 960 160 300 160 300 5 Question Answer Marks 2(c) Mira, Sasha and Peta Capital accounts Details Mira Sasha Peta Details Mira Sasha Peta $ $ $ $ $ $ Realisation account 4 500 (1) Balance b/d 45 500 42 800 14 000 Realisation account 1 920 1 920 960 (1) OF Bank 43 580 36 380 13 040 45 500 42 800 14 000 45 500 42 800 14 000 2 2(d) Mira, Sasha and Peta Bank account $ $ Realisation account 64 300 Balance b/d 1 900 (1) Realisation account 19 800 Realisation account 26 000 Realisation account 40 500 Realisation account 3 700 Capital account Mira 43 580 Sasha 36 380 (1) OF Peta 13 040 124 600 124 600 2 Question Answer Marks 2(e) Credit control was not up-to-date. (1) There were uncorrected errors in the receivables ledger overstating certain accounts. (1) Becoming aware that the partnership was ceasing, certain receivables avoided paying. (1) Customer bankrupt (1) May have been some irrecoverable debts (1) Offered cash discount (1) Accept other valid points. Max 2 2

This question in 9706/22 Feb/March 2019

REQUIRED (b) Prepare the partnership realisation account. [5] (c) Prepare, on the next page, the partners’ capital accounts on dissolution. [2] $ Peta $ Sasha $ Mira Details Peta and accounts Sasha $ Capital PetaMira, $ Sasha $ Mira Details

7 marks

This question in 9706/22 Feb/March 2019

1 Lee, a sole trader, provided the following information from his books of account on 30 April 2019. $ Bank overdraft 11 240 Capital 50 000 Carriage inwards 670 Drawings 24 060 Inventory at 1 May 2018 12 500 3% Loan 20 000 Loan interest 50 Motor vehicles Cost 32 000 Provision for depreciation 8 000 Office equipment Cost 4 600 Provision for depreciation 2 400 Other operating costs 61 990 Provision for doubtful debts at 1 May 2018 2 850 Purchases 97 370 Revenue 165 000 Trade receivables 47 890 Trade payables 21 640 The following information is also available. 1 An invoice from a supplier dated 28 April 2019 for goods costing $940 had not been recorded in the books of account. These goods were unsold at the year-end. 2 Inventory was counted at 30 April 2019 and was valued at cost, $21 340. 3 Revenue included goods sold in April 2019 to a credit customer for $3200 on a sale or return basis. These goods were invoiced with a mark-up of 60% and were returned by customer on 5 May 2019. 4 During the year, Lee took goods with a cost of $250 for his own use. 5 The 3% loan was taken out on 1 August 2018 and is repayable in 5 annual instalments starting on 1 August 2019. 6 A debt of $690 was considered to be irrecoverable and was to be written off. 7 The provision for doubtful debts was to be maintained at 5% of the trade receivables. 8 A computer for office use bought on credit on 1 July 2018 costing $1200 had been debited to the purchases account. 9 Depreciation is to be provided as follows: Motor vehicles 25% per annum using the reducing balance method Office equipment 10% per annum using the straight-line method A full year’s depreciation is charged in the year of purchase. REQUIRED (a) Prepare Lee’s income statement for the year ended 30 April 2019. Use the space on the next page for your workings. Workings: [13] (b) Prepare the following as they would appear in Lee’s statement of financial position at 30 April 2019. (i) Current assets [4] (ii) Current liabilities [4] (c) State two benefits and two drawbacks of operating as a sole trader. Benefit 1 Benefit 2 Drawback 1 Drawback 2 [4] Additional information Lee’s friend Marvin has offered to contribute $50 000 to repay Lee’s business loan and to provide additional working capital. Marvin has suggested two options. Option 1: Form a limited company Lee would issue 125 000 ordinary shares of $1 each. Marvin would subscribe for 50 000 of these shares. Lee and Marvin will become directors of the company and will be paid an annual salary. They plan to declare dividends of 6% per annum. Option 2: Form a partnership Marvin would introduce capital of $50 000 on which he would receive annual interest of 6%. He would require a 30% share of the future profits for the year. REQUIRED (d) Advise Lee which option he should choose. Justify your answer. [5] [Total: 30]

30 marks

Mark scheme: 1(a) Lee Income statement for the year ended 30 April 2019 $ $ Revenue 161 800 (1) Opening inventory 12 500 Purchases 97 110 (1) 109 610 Less: Goods for own use 250 (1) 109 360 Add: Carriage inwards 670 (1) 110 030 Less Closing inventory 23 340 (1) Cost of sales 86 690 (1)OF Gross profit 75 110 (1)OF Decrease in provision for doubtful debts 650 (1) 75 760 Other operating expenses 61 990 Loan interest 450 (1) Irrecoverable debts 690 (1) Depreciation: motor vehicles 6 000 (1) office equipment 580 (1) Profit for the year 6050 (1)OF 13 1(b)(i) Current assets Inventory 23 340 (1) OF Trade receivables 44 000 (1) Less: Provision for doubtful debts (2 200) (1) 41 800 6 140 (1) OF 4 Question Answer Marks 1(b)(ii) Current liabilities Trade payables (21 640 + 940) 22 580 (1) 3% Loan 4 000 (1) Bank overdraft 11 240 (1) Other payables 400 (1) 38 220 4 1(c) Benefits: (Max 2) Entitled to all profits (1) Quicker decision making (1) Full control of business operations (1) Drawbacks: (Max 2) Unlimited liability / no separate legal entity (1) All the risk / responsibilities (1) Limited opportunities for new ideas (1) Accept other valid points. 4 Question Answer Marks 1(d) Decision (1) Limited company (Max 2) There would be a potential dividend cost of $7500 Payment of dividends is discretionary Lee retains control of the business as he is the majority shareholder Partnership (Max 2) Marvin’s interest on capital will cost a fixed $3000 per annum Marvin is entitled to 30% of future profits but will also have to bear 30% of future losses The partnership will have unlimited liability 5

This question in 9706/22 May/June 2019

3 Financial statements provide information to enable users to evaluate the financial performance of a business. (a) State three reasons why it might be difficult to compare financial ratios between businesses in the same industry. 1 2 3 [3] X Limited is a wholesaler of sports goods. The directors of the company have provided the following information for the year ended 30 April 2019. $ Revenue 742 630 Cost of sales (459 991) 1 For the year ended 30 April 2019 the rate of inventory turnover was 7.5 times. The value of inventory at 1 May 2018 was $57 682. 2 At 30 April 2019 the trade receivables turnover was 35 days and the trade payables turnover was 32 days. 3 All sales are made on credit. Credit purchases amounted to 80% of the value of cost of sales. REQUIRED (b) Calculate at 30 April 2019: (i) closing inventory [3] (ii) trade receivables [1] (iii) trade payables. [2] Additional information X Limited has an operating expenses to revenue ratio of 30%. Distribution costs are twice as much as administrative expenses. Finance costs are 5% of the profit for the year. REQUIRED (c) Prepare the income statement for X Limited for the year ended 30 April 2019. [3] Additional information On 1 October 2018 X Limited paid a dividend of $25 000 on the basis of $0.08 per ordinary share of $1 each. On 1 February 2019 X Limited made a rights issue of 1 ordinary share for every 5 held at a premium of $0.50. This was the first time that X Limited had issued new shares. The rights issue was fully subscribed. REQUIRED (d) Calculate the proceeds received by X Limited from the rights issue. [3] [Total: 15]

15 marks

Mark scheme: 3(a) Companies may use different accounting policies (1) Historical cost is used to prepare accounts therefore may be misleading (1) There may be different year-ends/seasonal factors (1) There may be non-monetary factors to consider (1) Relative size of each business (1) The effect of window dressing (1) Accept any other valid responses Max 3 marks 3 3(b)(i) Average inventory = $459991 7.5 = $61 332 (1) Average inventory × 2 = $122 664 (1)OF Closing inventory = $122 664 – $57 682 = $64 982 (1)OF 3 3(b)(ii) ( ) 35 $742630 365 × = $71 211 (1) 1 3(b)(iii) ( ) 32 $367993 * 365 × = $32 262 (1) OF * Credit purchases = $459 991 × 80% = $367 993 (1) 2 Question Answer Marks 3(c) X Limited Income Statement for the year ended 30 April 2019 $ Revenue 742 630 Cost of sales (459 991) Gross profit 282 639 Distribution costs (148 526) (1) Administrative expenses (74 263) (1) Profit from operations 59 850 Finance costs (2 850) (1) Profit for the year 57 000 3 3(d) $312 500 (1) / 5 = 62 500 shares (1) × $1.50 = $93 750 (1)OF 3

This question in 9706/22 May/June 2019

2 Obtain an 8% bank loan to raise $300 000. REQUIRED (d) Advise the directors which option they should choose. Justify your answer. [5] (e) Explain two differences between a bonus issue of shares and a rights issue of shares. 1 2 [4] [Total: 30] 2 John, Kathy and Liz have been in partnership sharing profits and losses in the ratio 4 : 3 : 3. They have agreed to dissolve the partnership. REQUIRED (a) State three reasons why a partnership may be dissolved. 1 2 3 [3] Additional information At the time of the dissolution the partnership’s statement of financial position was as follows: Statement of financial position at 31 March 2018 $ $ Assets Non-current assets at net book value Motor vehicles 29 400 Furniture and equipment 15 600 45 000 Current assets Inventory 14 920 Trade receivables 11 540 26 460 Total assets 71 460 Capital and liabilities Capital accounts John 28 000 Kathy 21 000 Liz 19 000 68 000 Current accounts John (2 200) Kathy 1 400 Liz (1 800) (2 600) Current liabilities Bank overdraft 6 060 Total capital and liabilities 71 460 The following information is also available. 1 At dissolution John took over the furniture and equipment at an agreed valuation of $9500 and the inventory at a valuation of $11 000. 2 Liz took over a motor vehicle at an agreed valuation of $16 600; the other motor vehicle was sold for $8450.

12 marks

Mark scheme: 2(a) Death / ill health / retirement of a partner (1) A partner has been declared bankrupt (1) Disagreement between partners (1) Insufficient level of profits (1) Insufficient levels of cash reserves (1) Partnership has achieved its purpose (1) Accept other valid points. Max 3 marks 3 Question Answer Marks 2(b) Realisation account $ $ Motor vehicles 29 400 Capital: John Furniture and equipment 15 600 (1) Furniture and equipment 9 500 (1) Inventory 14 920 Inventory 11 000 Trade receivables 11 540 Capital: Liz Bank: dissolution costs 2 350 (1) Motor vehicle 16 600 (1) Bank: Motor vehicle 8 450 (1) Trade receivables (W1) 10 260 (1) Realisation loss: John 7 200 (1) OF Kathy 5 400 Liz 5 400 73 810 73 810 7 Question Answer Marks 2(b) Alternative presentation: Realisation account $ $ Assets to be realised 71 460 (1) Capital: John – assets 20 500 (1) Bank: dissolution costs 2 350 (1) Capital: Liz – motor vehicle 16 600 (1) Bank – motor vehicle 8 450 (1) Bank – trade receivables (W1) 10 260 (1) Realisation loss John 7 200 (1) OF Kathy 5 400 Liz 5 400 73 810 73 810 W1 Receipts from trade receivables: 95% × ($11 540 − $740) = $10 260 2(c) Amounts due to/from John John $ Capital balance 28 000 (1) Current account balance (2 200) (1) Assets taken over (20 500) (1) Realisation loss (7 200) (1) OF Amounts due from John (1 900) (1) OF 5

This question in 9706/23 May/June 2019

4 Cost of dissolution, $2350, was paid from the bank account. REQUIRED (b) Prepare the partnership realisation account. [7] (c) Calculate the amount to be paid to, or to be received from, John on dissolution. [5] [Total: 15] PLEASE TURN OVER

12 marks

Mark scheme: 4(a) Payment to employee is based on the number of completed units they produce (1) 1 4(b) Production overheads include all factory indirect costs (1) that cannot be traced directly to a unit of production (1) 2 4(c)(i) $ Advertising 24 000 Sales team salaries 51 000 Fixed selling expenses 75 000 (1) 1 4(c)(ii) Variable selling expenses $720 000 × 3.5% $25 200 (1) 1 4(c)(iii) $ Sales 720 000 Less: Direct labour 270 000 Material C 48 000 Material D 90 000 Variable selling expenses 25 200 Contribution 286 800 (1) OF 1 Question Answer Marks 4(c)(iv) $ Sales 720 000 Less: Direct labour 270 000 Material C 48 000 Material D 90 000 Fixed production overheads 30 000 Fixed selling expenses 75 000 Variable selling expenses 25 200 Profit 181 800 (1) Alternative $ Contribution 286 800 Fixed selling expenses 75 000 Fixed production overheads 30 000 181 800 1 Question Answer Marks 4(d) Additional order for 15 000 pots: Budgeted capacity – current capacity = 70 000 – 60 000 = 10 000 spare capacity. (1) Order – spare capacity = 15 000 – 10 000 = 5000 additional capacity (1) required to meet the order. These will incur extra costs. Forecast incremental profit statement Exclude variable selling expenses and fixed costs as they are not relevant to the order. Sales $ $ 120 000 (1) Less variable costs Direct labour 10 000 × $4.50 (1) 45 000 5 000 × $5.25 (1) 26 250 71 250 (1) Material C 10 000 × $0.80 (1) 8 000 5 000 × $0.84 (1) 4 200 12 200 (1) Material D 10 000 × $1.50 (1) 15 000 5 000 × $1.53 (1) 7 650 22 650 (1) 106 100 Profit 13 900 (1) OF 13 Question Answer Marks 4(e) Accept / Reject (1) Financial (Max 2) Will provide increase in sales revenue. The order provides positive contribution/profit OF so is worthwhile. Will there be an increase in the fixed cost? Would it be less expensive to pay the existing workforce a premium for the additional units? Non-financial (Max 2) What effect will the lower price have on other customers who are paying $12? Will the temporary labour be available immediately/ existing workforce be willing to work overtime? Will the product quality remain the same if temporary labour is used / do they have the necessary skills for hand painted pots? Will the morale of the existing workforce go down if temporary labour is employed? 1 mark for decision Accept other valid points. 5 Question Answer Marks 4(f) Benefits (Max 2) Aids short-term decision making. Identifies break-even point/margin of safety/project profit. Accept other valid points. Limitations (Max 3) It assumes that total fixed costs are constant. It assumes variable costs per unit are the same. It assumes the selling price per unit remains the same. It assumes sales and production levels are the same. It assumes product mix remains constant. It ignores uncertainty in estimates of fixed costs and variable costs. Some costs are difficult to classify as fixed or variable. Accept other valid points. 5

This question in 9706/23 May/June 2019

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.

6 marks

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

This question in 9706/21 Oct/Nov 2019

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]

13 marks

This question in 9706/21 Oct/Nov 2019

1 S Limited is a private limited company. The directors have extracted the following information at 30 September 2019. $ $ 6% debentures (2021 – 2022) 68 000 Accrued expenses 2 480 Administrative expenses 63 810 Bank overdraft 12 770 Carriage inwards 3 600 Distribution costs 49 330 Interest paid 8 160 Inventory at 1 October 2018 62 500 Freehold property 220 000 Motor vehicles Cost 84 600 Provision for depreciation at 1 October 2018 38 760 Office equipment Cost 68 700 Provision for depreciation at 1 October 2018 32 300 Prepaid expenses 4 400 Purchases 392 340 Retained earnings 69 700 Returns inwards 3 470 Revenue 764 570 Share capital (ordinary shares of $1 each) 50 000 Share premium 15 000 Trade payables 48 730 Trade receivables 86 500 Wages and salaries 54 900 The following information is also available: 1 The value of inventory at 30 September 2019 was $73 100 at cost. The directors now wish to write off $2000 in respect of damaged items. 2 Purchase of new office equipment of $6000 had been posted to distribution costs in error. 3 Motor vehicles are to be depreciated at 20% per annum using the straight-line method. The estimated residual value of the motor vehicles is $20 000. Depreciation is to be charged to distribution costs. 4 Office equipment is to be depreciated at 15% per annum using the reducing balance method. Depreciation is to be charged to administrative expenses. 5 At 30 September 2019 there was an additional accrual for wages and salaries of $1700. Wages and salaries are to be charged as 70% to administrative expenses and 30% to distribution costs. 6 Interest paid included debenture interest paid to 30 June 2019. 7 At 30 September 2019 there was an additional prepayment of $4800 for administrative expenses. 8 The directors wish to create a provision for doubtful debts equal to 2% of trade receivables at 30 September 2019 and include it in administrative expenses. REQUIRED (a) Prepare the income statement for the year ended 30 September 2019. Use the space on the next page to show your workings. S Limited Income statement for the year ended 30 September 2019 $ $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings: Cost of sales Administrative expenses Distribution costs Finance costs [12] (b) Prepare the statement of financial position at 30 September 2019. Use the space provided on the next page for your workings. Workings: [10] (c) Explain the term ‘6% debentures (2021 – 2022)’, which appears in S Limited’s financial statements. [3] Additional information Despite having made substantial profit for the year, the directors are concerned that the shareholders have not received any dividends. They are considering two options: option 1: paying the shareholders a dividend of $0.50 per share option 2: making a bonus issue of 1 ordinary share for every 2 shares held. REQUIRED (d) Advise the directors on which option they should choose. Justify your answer. [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) S Limited 12 Income statement for the year ended 30 September 2019 $ $ Revenue 764 570 Returns inwards (3 470) 761 100 (1) Cost of sales W1 387 340 (2) Gross profit 373 760 Expenses Administrative W2 106 720 (4) expenses Distribution costs W3 73 230 (3) 179 950 Profit from operations 193 810 Finance costs W4 9 180 (1) Profit for the year 184 630 (1) OF Workings: W1: Cost of sales: Opening inventory 62 500* Purchases 392 340* (1) Carriage inwards 3 600* 458 440 Closing inventory 71 100 (1) 387 340 W2: Administrative expenses $63 810 + $39 620 (1) – $4800 (1) + $1730 (1) + 6360 (1) = $106 720 Depreciation – Office equipment ($68 700 + $6000 – $32 300) × 15% = $6360 W3: Distribution costs $49 330 + $16 980 (1) – $6000 (1) + $12 920 (1) = $73 230 Depreciation – Motor vehicles ($84 600 – $20 000) × 20% = $12 920 W4: Finance costs $8160 + $1020 = $9 180 1(b) S Limited 10 Statement of financial position at 30 September 2019 $ $ Non-current assets Freehold property 220 000 Office equipment W1 36 040 (2) Motor vehicles W2 32 920 (2) 288 960 Current assets Inventory 71 100 (1) OF Trade receivables W3 84 770 (1) Other receivables W4 9 200 (1) 165 070 Total Assets 454 030 Equity and liabilities Share capital 50 000 Share premium 15 000 Retained earnings W5 254 330 (1) OF 319T330 Non-current liabilities 6% Debenture (2021 – 68 000 (1) 2022) Current liabilities Bank overdraft 12 770 Trade payables 48 730 Other payables W6 5 200 (1) OF 66 700 Total equity and liabilities 454 030 Workings: W1 Office equipment $68 700 + $6000 = $74 700 (1) – $6360 – $32 300 = $38 660 (1) OF= $36 040 W2 Motor vehicles $84 600 (1) – $12 920 – $38 760 = $51 680 (1) OF = $32 920 W3 Trade receivables $86 500 – $1730 = $84 770 (1) W4 Other receivables $4400 + $4800 = $9 200 (1) W5 Retained earnings $69 700 + $184 630 = $254 330 (1) W6 Other payables $2480 + $1700 + $1020 = $5200 (1) 1(c) S Limited have taken out a long-term loan (1) repayable between 2021 and 3 2022 (1) at an annual interest rate of 6%. (1) 1(d) Option 1 5 Would require an immediate cash outflow (1) The company already has a bank overdraft (1) The debenture is due for repayment in the near future (1) Payment of dividends is discretionary (1) Accept other valid points. Option 2 The company will not require a cash outflow (1) They have sufficient retained earnings to issue bonus shares (1) They have a share premium account which can be used (1) Will keep the shareholders happy (1) Will not dilute voting rights (1) Accept other valid points. Max 5 marks for comments Decision (1)

This question in 9706/23 Oct/Nov 2019

1 Hamza and Noor are in partnership. They own a service business. The following information has been extracted from the partnership’s books of account for the year ended 31 December 2019. $ Administrative expenses 18 270 Equipment at 1 January 2019 Cost 11 000 Provision for depreciation 3 300 Loan account (Hamza) 10 000 Motor vehicle at 1 January 2019 Cost 20 000 Provision for depreciation 7 200 Revenue 45 400 Wages of assistant 15 540 The following information is also available. 1 Administrative expenses include $1800 insurance for the three months ended 29 February 2020. 2 The assistant works a 5-day week and is paid a weekly wage of $350. At 31 December 2019 three days’ wages were due but unpaid. 3 Hamza’s loan was provided on 1 April 2019. He is entitled to interest of 8% per annum. Loan interest has not yet been paid to Hamza. 4 The depreciation policy is: Equipment 15% per annum straight-line method Motor vehicle 20% per annum reducing balance method A full year’s depreciation is charged in the year of purchase but none in the year of disposal. 5 An item of equipment was sold for $480 on 3 August 2019. This equipment had been purchased on 1 January 2017 for $2000. REQUIRED (a) State how profits and losses are shared in a partnership where there is no agreement. … … [1] (b) Explain two reasons why you would recommend partners to have a written agreement, other than stating a ratio for sharing profits and losses. 1 … … … … 2 … … … … [4] (c) Prepare the income statement for the year ended 31 December 2019. Hamza and Noor Income Statement for the year ended 31 December 2019 … … … … … … … … … … … … … … … … … … … Workings: [11] Additional information Hamza and Noor have an agreement about sharing profits and losses. Their agreement is as follows. 1 Noor is to be given a salary of $11 000.

16 marks

Mark scheme: 1(a) Profits and losses should be shared equally (1) among partners 1 1(b) Avoidance of disputes (1). The deed usually states management responsibilities (1) and also agreed limits on drawings and agreed amounts of fixed capital (1). Ensure partners are properly rewarded (or penalised) for their contributions (1). The deed may include rewards for partners who have undertaken more management responsibilities/provided more capital/and penalised partners whose drawings have been the most (1) Max 2 reasons (2 marks per reason, 1 mark for identifying + 1 mark for developing) Accept other valid responses 4 1(c) Hamza and Noor Income statement for year ended 31 December 2019 $ $ Revenue 45 400 Less: Administrative expenses W1 17 070 (2)OF Wages of assistant W2 15 750 (2)OF Interest on loan from Hamza 600 (1) Loss on disposal of equipment W3 920 (2)OF Depreciation Equipment W4 1 350 (2)OF Motor vehicle 2 560 (1) (38 250) Profit for year 7 150 (1)OF W1 Administrative expenses $18 270 – $1 200 (1) = $17 070 (1)OF W2 Wages of assistant $15 540 + $210 (1) = $15 750 (1)OF W3 Loss on disposal of equipment $2000 – $600 = $1 400 (1) – $480 = $920 (1)OF $1 400 – 480 = loss $920 W4 Depreciation of equipment 15% × ($11 000 – 2 000) (1) = $1 350 (1)OF 11 Question Answer Marks 1(d) Appropriation account for the year ended 31 December 2019 $ $ Profit for the year 7 150 Add interest on drawings Hamza : 10% × $2 900 290 (1) 7 440 Less: salary (Noor) 11 000 (1) (3 560) Shares of residual loss Hamza ( 3 5 × $3 560) 2 136 (1)OF Noor ( 2 5 × $3 560) 1 424 (1)OF (3 560) 4 1(e) Calculation of Hamza’s current account balance $ Opening balance (dr) (1 290) Add loan interest 600 (1)OF Less interest on drawings (290) (1)OF Less drawings (16 900) (1) Less share of residual loss (2 136) (1)OF Closing balance (20 016) (1)OF Note: OF for closing balance only awarded if negative opening balance taken into account. 5 Question Answer Marks 1(f) Advice (1) Option 1 (maximum 2 marks) Potential benefits • Permanent source of finance/no security required (1) • May bring new ideas/skills (1) • Shared management responsibilities (1) Potential drawbacks • May not be possible to find a suitable partner (1) • Risk of disagreements (1) • Profits will have to be shared (1) Option 2 (maximum 2 marks) Potential benefits • Profits still shared by the two partners (1) • Fixed interest rate will aid planning (1) Potential drawbacks • Interest charges will reduce profits (1) • May not be able to obtain bank loan (1) • Have too little collateral to offer for size of loan (1) Accept over valid responses 5

This question in 9706/21 May/June 2020

2 Partners are allowed to have drawings of $14 000 per annum. Interest of 10% is charged on any drawings in excess of this amount.

0 marks

Mark scheme: 2(a) (i) Trade payables turnover (in days) Trade payables/Credit purchases × 365 (1) ( ) × = 10 400 365 32 days 120120 1 (ii) Trade receivables turnover (in days) Trade receivables/Credit sales × 365 (1) ( ) × =   ×     9300 365 35 days 2 145500 3 1 (iii) Current ratio Current assets : current liabilities (1) 28 100:18 400 = 1.53:1 (1) 2(b) • She is paying trade payables more quickly than before (1) – by 2 days (1)OF • Trade receivables are paying more slowly than before (1) – by 3 days (1)OF • Trade payables used to be paid more slowly than trade receivables paid Ayesha; now the position is reversed (1) – there was a favourable gap of 2 days, now the gap is adverse by 3 days (1) • The current ratio has weakened so that the business will it more difficult than before to meet its immediate obligations (1) • A bank loan is due for repayment within the next twelve months. The business may find it difficult to meet the repayment date (1). If this obligation cannot be met the business is at risk of assets being seized (1) Max 7 Accept other valid points. 7 Question Answer Marks 2(c) Same type of ownership (1) Same trade (1) Similar size (1) Same business cycle (1) Max 2 marks Accept other valid responses 2

This question in 9706/21 May/June 2020

3 Xu and Zoe have been in partnership for a number of years. They decided to dissolve their partnership on 1 October 2019. REQUIRED (a) State three reasons why a partnership might be dissolved. 1 … … 2 … … 3 … … [3] Additional information The partners did not have a formal agreement on sharing of profits and losses. At the date of the dissolution the partnership’s statement of financial position was as follows. Statement of financial position at 1 October 2019 Assets $ $ Non-current assets at net book value Motor vehicle 19 400 Furniture and equipment 11 900 31 300 Current assets Inventory 7 480 Trade receivables 11 200 18 680 Total assets 49 980 Capital and liabilities Capital accounts Xu 18 000 Zoe 22 000 40 000 Current accounts Xu (2 480) Zoe 430 (2 050) Total capital and current accounts 37 950 Loan account: Xu 4 300 Current liabilities Trade payables 5 400 Bank overdraft 2 330 7 730 Total capital and liabilities 49 980 The following information is also available. 1 Xu took the motor vehicle at an agreed value of $15 100. 2 The account of a credit customer, $800, had to be written off as irrecoverable. The accounts of remaining trade receivables were settled in full less a 5% cash discount. 3 Other assets were sold for cash. $ Furniture and equipment 7300 Inventory 6530

3 marks

Mark scheme: 3(a) Reasons for dissolving a partnership 3 Business is making a loss (1) Partners cannot agree (1) A partner has died/retired (1) The objectives of the partnership have been achieved (1) Legal reasons such as insanity of partner (1) Max 3 Accept other valid responses Que Ma stio Answer rks n 3(b) Realisation account 7 $ $ Motor vehicles 19 400 Discount received 270 (1) Furniture and equipment 11 900 Capital Xu, motor 15 100 (1) vehicle (1) Inventory 7 480 Bank, trade receivables 9 880 (1) (W1) Trade receivables 11 200 Bank, furniture and 7 300 equipment (1) Bank, dissolution 620 (1) Bank, inventory 6 530 expenses Realisation loss: Xu 5 760 (1)OF 00 000 Zoe 5 760 50 600 50 600 Alternative answer showing different treatment of trade payables Realisation account $ $ Motor vehicles 19 400 Furniture and equipment 11 900 Capital Xu, motor 15 100 (1) vehicle (1) Inventory 7 480 Bank, trade receivables 9 880 (1) (W1) Trade receivables 11 200 Bank, furniture and 7 300 equipment (1) Bank, dissolution 620 (1) Bank, inventory 6 530 expenses Bank: Trade payables 5 130 * Trade payables 5 400 *(1) Realisation loss: Xu 5 760 (1)OF 00 000 Zoe 5 760 55 730 55 730 In the alternative version there is one mark for both entries relating to trade payables. W1: (11200 – 800) × 0.95 Que Ma stio Answer rks n 3(c) 5 $ Capital account balance 18 000 (1) Current account balance (2 480) Loan account 4 300 (1) Motor vehicle taken over (15 100) (1) Loss on realisation (5 760) (1)OF Amount due from Xu (1 040) (1)OF Que Ma stio Answer rks n

This question in 9706/22 May/June 2020

1 The directors of K Limited are preparing the financial statements for the year ended 31 October 2019. The following information is available. 1 Expense payments made during the year ended 31 October 2019. $ Administrative expenses 8 490 Directors’ fees 41 200 Distribution costs 16 500 Finance costs 800 Staff wages and salaries 140 790 2 Distribution costs include a payment of $7200 for a six-month advertising campaign which will end on 31 March 2020. 3 Directors’ fees are allocated between distribution costs and administrative expenses in the ratio 1 : 4. 4 Staff wages and salaries are allocated between distribution costs and administrative expenses in the ratio 3 : 2. 5 Non-current assets At 1 November 2018 Depreciation policy Allocation Provision for Cost depreciation $ $ 20% per annum 100% to distribution Motor vehicles 160 000 32 600 using reducing costs balance method 80% to 15% per annum administrative Furniture and 45 000 5 500 using straight-line expenses equipment method 20% to distribution costs 6 In 2017 the company had issued 8% debentures (2025) for $20 000. Half of these were repaid on 1 August 2019. Debenture interest was paid up to 30 April 2019. REQUIRED (a) Complete the income statement for the year ended 31 October 2019. Use the space on the next page for your workings. K Limited Income statement for the year ended 31 October 2019 $ Revenue 542 370 Cost of sales 259 240 Gross profit 283 130 Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings: Administrative expenses Distribution costs Finance costs [11] Additional information At 1 November 2018 the equity section of the company’s statement of financial position was as follows. $ Ordinary shares of $0.50 each 90 000 Share premium 36 000 Retained earnings 65 600 On 30 June 2019 the company paid a dividend of $0.10 per ordinary share. At 31 October 2019 the company made a bonus issue of two ordinary shares for every three ordinary shares held. Reserves were maintained in their most flexible form. REQUIRED (b) Prepare the statement of changes in equity for the year ended 31 October 2019. K Limited Statement of changes in equity for the year ended 31 October 2019 Share Share Retained capital premium earnings Total $ $ $ $ Workings: Additional information K Limited was formed several years ago by the partners in a business. REQUIRED (c) State three advantages to the shareholders of trading as a limited company. 1 … … … 2 … … … 3 … … … [3] Additional information The directors of a rival company, Q plc, are concerned about their company’s performance. The following information about Q plc is available. Year ended 31 October Industry averages for 2017 2018 2019 2019 Non-current asset turnover 7 times 6 times 5 times 4 times Return on capital employed (%) 23 20 16 18 REQUIRED (d) Assess the performance of Q plc based on these ratios. … … … … … … … … … … … … [4] Additional information Q plc’s liabilities include 8% debentures of $50 000. A director has suggested repaying the debentures to improve the company’s return on capital employed. REQUIRED (e) Advise the director whether or not the company should go ahead with this suggestion. Justify your answer. … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) K Limited 11 Income statement for the year ended 31 October 2019 $ Revenue 542 370 Cost of sales (259 240) Gross profit 283 130 Administrative expenses (W1) (103 166) (3)OF Distribution costs (W2) (130 044) (5)OF Profit from operations 49 920 Finance costs (W3) (1 400) (2) OF Profit for the year 8 520 (1) OF Workings: W1: Administrative expenses $ Payment 8 490 Directors’ fees (4/5 × $41 200) 32 960 (1) Staff wages and salaries (2/5 × $140 790) 56 316 (1) Furniture and equipment depreciation 5 400 (1) 80% × ($45 000 × 15%) Total 103 166 W2: Distribution costs: $ Payment 16 500 Advertising prepayment (5/6 × $7 200) (6 000) (1) Directors’ fees (1/5 × $41 200) 8 240 (1) Staff wages and salaries (3/5 × $140 790) 84 474 (1) Motor vehicle depreciation (20% × $117 400) 25 480 (1) Furniture and equipment depreciation 1 350 (1) 20% × ($45 000 × 15%) Total 130 044 W3: Finance costs $ Payment 800 Interest for 3 months ($20 000 × ¼ × 8%) 400 (1) Interest for final 3 months ($10 000 × ¼ × 8%) 200 (1) Total 1 400 1(b) Statement of changes in equity for the year ended 31 October 2019 7 Details Share Share Retained Total capital premium Earnings $ $ $ $ Balances, 1 November 2018 90 000 36 000 65 600 191 600 (1) for row Dividends paid (18 000) (1) (18 000) Bonus issue (W1) 60 000 (1) (36 000) (1) (24 000) (1) Profit for year 48 520 48 520 (1)OF Balances 31 October 2019 150 000 72 120 222 120 (1)OF for row W1 Bonus issue Number of shares: 90 000 × 2 = 180 000 Bonus issue = 2/3 × 180 000 = 120 000 shares Value of bonus issue = 120 000 × $0.50 = $60 000 1(c) • Limited liability for the debts of the business (1) 3 • Shareholders enjoy a separate legal identity from the company (1) • Shareholders can easily transfer ownership. (1) Max 3 Accept other valid responses 1(d) General: the ratios show the company’s performance has deteriorated over 4 the three-year period (1) Non-current assets to turnover ratio: has remained better than the industry average (1) indicating a more efficient use of non-current assets than other similar businesses/a larger turnover than other similar businesses (1). Return on capital employed: has been worse than the industry average for the last year (1), indicating a less efficient use of capital employed than other similar businesses/a poorer profit than other similar businesses (1). Max 4 Accept other valid responses. 1(e) 5 The company will no longer pay interest on debentures which will increase profits (1) The capital employed will be reduced because debentures no longer included (1) The return on capital employed will increase (1) Will the company have sufficient liquid funds to repay the debentures? (1) Will other forms of borrowing be required to make the repayment possible? (1) Advice (1) comments Max 4 Accept other valid responses.

This question in 9706/23 May/June 2020

3 M Limited was formed five years ago. On 1 January 2019 the company’s statement of financial position included the following details. $000 Equity Share capital – ordinary shares of $0.25 each 1200 Share premium 480 Retained earnings 295 1975 On 1 July 2019 shareholders were paid a dividend of $0.05 per share. REQUIRED (a) Calculate the total dividend paid. … … … … [2] Additional information On 1 September 2019 the directors made a rights issue of two ordinary shares for every three shares held at a price of $0.40 per share. The issue was fully subscribed. REQUIRED (b) Describe one way in which a shareholder can benefit from taking up a rights issue. … … … … [2] (c) Calculate the amount raised by the rights issue. … … … … [2] Additional information The company made a profit for the year ended 31 December 2019 of $324 000. REQUIRED (d) Prepare the statement of changes in equity for the year ended 31 December 2019. M Limited Statement of changes in equity for the year ended 31 December 2019 Share Share Retained Total capital premium earnings $000 $000 $000 $000 [5] (e) Describe two factors directors should take into account when deciding on a dividend to be paid to the shareholders. 1 … … … … 2 … … … … [4] [Total: 15]

15 marks

Mark scheme: 3(a) Dividend paid 2 Number of shares: 1 200 000 × 4 = 4 800 000 (1) Dividend: 4 800 000 (OF) × $0.05 = $240 000 (1) 3(b) • Opportunity to purchase additional shares at a favourable price (1) as 2 issue price is usually below market price (1) • Can maintain same degree of control (1) in the company as shareholder will own same proportion of issued capital (1) One benefit 1 mark + 1 mark for development Accept other valid responses. 3(c) Shares issued 2/3 × 4 800 000 (OF) = 3 200 000 shares (1)OF 2 Amount raised: 3 200 000 × $0.40 = $1 280 000 (1)OF 3(d) 5 M Limited Statement of changes in equity for the year ended 31 December 2019 Share Share Retained Total capital Premium earnings $000 $000 $000 $000 Balances, 1 1 200 480 295 1 975 (1) row January 2019 Profit for year 324 324 (1) row Dividends paid (240) (240) (1)OF row Rights issue 800 480 1 280 (1)OF row Balances, 31 2 000 960 379 3 339 (1)OF row December 2019 3(e) • The amount of profit available/revenue reserves (1) must be sufficient to 4 finance the dividends (1) • The amount of liquid funds will be sufficient (1) to cover the dividend payment/avoid liquidity problems (1) • That shareholders will expect/feel entitled to a dividend (1) as a reward for their investment (1) Max 2 factors x 2 marks (1 mark + 1 mark for development) Accept other valid responses.

This question in 9706/21 Oct/Nov 2020

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

30 marks

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.

This question in 9706/23 Oct/Nov 2020

1 Faraz, Javed and Leah were in partnership. Their agreement included the following terms: 1 Interest on drawings to be charged at 5% on total drawings for the year. 2 Interest at 12% per annum to be provided on fixed capitals. 3 Javed to receive a salary of $9000 per annum. 4 Remaining profits and losses to be shared in the ratio Faraz, Javed and Leah, 4 : 3 : 3 respectively. The following information was available for the year ended 31 December 2020. Faraz Javed Leah $ $ $ Balances at 1 January 2020 Capital accounts 80 000 60 000 50 000 Current accounts 3 400 credit 2 900 debit 1 700 debit For the year ended 31 December 2020 Drawings 22 400 17 200 20 200 The profit for the year ended 31 December 2020, before appropriation, was $31 500. REQUIRED (a) State two reasons why partnership agreements sometimes include a provision to charge interest on drawings. 1 … … 2 … … [2] (b) Prepare the appropriation account for the year ended 31 December 2020. Faraz, Javed and Leah Appropriation account for the year ended 31 December 2020 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5] (c) Prepare Javed’s current account for the year ended 31 December 2020. Javed Current account $ $ [6] Additional information On 1 January 2021, Javed retired from the partnership. It was agreed that on this date: 1 Javed would keep some equipment for personal use. The equipment had a net book value of $15 400 and was to be transferred to Javed at a value of $13 000.

13 marks

Mark scheme: Question Answer Marks 1(a) To deter partners from making excessive drawings (1) 2 To reward partners who withdraw the least (1) Max 2 Accept other valid responses 1(b) Faraz, Javed and Leah 5 Appropriation account for the year ended 31 December 2020 $ $ Profit for the year 31 500 Add interest on drawings Faraz 1 120 Javed 860 (1) Leah 1 010 2 990 34 490 Less interest on capitals Faraz 9 600 Javed 7 200 (1) Leah 6 000 (22 800) 11 690 Less salary (Javed) 9 000 (1) Residual profit 2 690 (1)OF Less shares of residual profit Faraz 107} Javed 807 (1)OF Leah 807 2 690 1(c) Javed 6 Current account $ $ Balance b/d 2 900 Interest on capital 7 200 (1) Drawings 17 200 (1) Salary 9 000 (1) Interest on drawings 860 (1) Share of profit 807 (1)OF Balance c/d 3 953 20 960 20 960 Balance b/d 3 953 (1)OF 1(d) Goodwill is an intangible asset which represents the reputation of the business (1) 2 built up by the partnership/value of net assets compared to value of business as a whole (1) Max 2 Accept other valid responses. 1(e) Valuing goodwill when a partner retires ensures the retiring partner receives a fair 2 share of the extra value the business has acquired (1) through the efforts of that partner (1). Max 2 Accept other valid responses. 1(f) 6 $ Capital account balance 60 000 Current account balance (3 953) (1)OF Equipment transfer (13 000) (1) Share of revaluation surplus W1 6 480 (2) Share of goodwill 15 000 (1) Amount due to Javed 64 527 (1)OF W1 Share of revaluation surplus: 3/10 × ($24 000 –(15 400–13 000)) =3/10 × $21 600 (1) = $6 480 (1)OF 1(g) Loan 7 For (Max 2) Will be a temporary source of finance (1) Two remaining partners will share profits between themselves (1) Can budget to cover finance repayments and interest (1) Decision-making may be quicker as only two partners to agree (1) Against (Max 2) Annual repayments and interest charges may cause liquidity problems (1) Profits will be reduced for each by interest charges (1) May not be able to secure a bank loan (1) Must be repaid. (1) Bank may require collateral (1) Overall Max 3 New partner For: (Max 2) New partner may provide new skills/ideas which will improve performance (1) Capital is a permanent source of finance so no effect on liquidity (1) Profits unaffected by new partner as no annual interest charges (1) Against: (Max 2) May be difficult to find a new partner (1) A third partner may slow decision-making (1) Profits will now be shared by three partners (1) New partner may not get on well with original partners leading to disputes (1) Overall Max 3 Advice (1) Accept other valid responses.

This question in 9706/22 Feb/March 2021

1 N Limited is a trading business. Sales are made on the credit basis only. The following information was available at 31 December 2020. Debit Credit $000 $000 8% Debentures (2025) 250 Administrative expenses 171 Cash and cash equivalents 14 Cost of sales 466 Debenture interest 8 Distribution costs 63 Dividends paid 80 Inventory at 31 December 2020 33 Issued capital: Ordinary shares of $0.25 each at 31 December 2020 500 Non-current assets Cost 1140 Provision for depreciation at 1 January 2020 140 Retained earnings at 1 January 2020 129 Revenue 923 Share premium at 31 December 2020 70 Trade payables 42 Trade receivables 79 2054 2054 The following information is also available at 31 December 2020. 1 Administrative expenses included insurance of $16 000 for four months ended 31 January 2021. 2 Depreciation should be provided on non-current assets at 25% per annum using the reducing balance method. Depreciation charges should be allocated 20% to distribution costs and 80% to administrative expenses. 3 The account of a credit customer, $3000, should be written off to administrative expenses as an irrecoverable debt. 4 Debenture interest was outstanding for the second half of the year. The directors had issued additional debentures of $50 000 on 1 October 2020. REQUIRED (a) Prepare the company’s income statement for the year ended 31 December 2020. N Limited Income statement for the year ended 31 December 2020 $000 Workings: Distribution costs Administrative expenses Finance costs [10] Additional information On 1 July 2020 the directors had decided to make a rights issue of two ordinary shares for every three shares held at a price of $0.30 per share. The rights issue was fully subscribed. REQUIRED (b) Explain two reasons why a company may make a rights issue of shares rather than an issue of debentures. 1 … … … … 2 … … … … [4] (c) Calculate the amount raised by the rights issue. … … … … … … [4] (d) Prepare a statement of changes in equity for the year ended 31 December 2020. N Limited Statement of changes in equity for the year ended 31 December 2020 Ordinary share Share Retained Total capital premium earnings $000 $000 $000 $000 Balance at 1 January 2020 [5] Additional information The directors are concerned about the company’s credit control and wish to improve the company’s liquidity position. They are considering a proposal to offer a 5% cash discount to customers for settlement within 30 days on all invoices of more than $2000. REQUIRED (e) Identify two ratios which can be used to assess the liquidity of a business. 1 … 2 … [2] (f) Advise the directors whether or not they should go ahead with this proposal. Justify your answer. … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: 1(a) N Limited Income statement for the year ended 31 December 2020 $000 Revenue 923 Cost of sales (466) Gross profit 457 (1) Administrative expenses W1 (370) (4)OF Distribution costs W2 (113) (2)OF Loss from operations (26) (1)OF Finance costs (17) (1) Loss for the year (43) (1)OF Workings W1 171 + 200 (1) – 4 (1) + 3 (1) = $370 (1)OF W2 63 + 50 (1) = $113 (1)OF Question Answer Marks 1(b) Sample responses 1 mark Rights issue is a permanent source of capital (1) 2 marks Rights issue is a permanent source of capital (1) whereas debentures are a liability that must be repaid at a future date (1) 3 marks Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas debentures are a liability that must be repaid at a future date (1) 4 marks Rights issue is a permanent source of capital (1) on which dividends are paid (1) whereas debentures are a liability that must be repaid at a future date (1) with interest which will reduce profits (1) Accept other valid responses. 4 1(c) $240 000 (4) Working Rights issue 2 000 000 shares (1) × 2/5 (1) = 800 000 shares (1OF) × $0.30 = $240 000 (1)OF 4 Question Answer Marks 1(d) N Limited Statement of changes in equity for the year ended 31 December 2020 Ordinary share capital Share premium Retained earnings Total $000 $000 $000 $000 Balance at 1 January 2020 300 30 129 459 (1) for both Rights issue of shares 200 40 240 (1)OF for both Loss for year (43) (1)OF (43) Dividend paid (80) (1) (80) Balance at 31 December 2020 500 70 6 576 (1) OF for row & column 5 1(e) Current ratio (1) Liquid (acid test) ratio (1) 2 Question Answer Marks 1(f) For proposal (Max 2) • May improve cash flows/liquidity/as customer may pay more quickly (1) • May encourage larger orders (1) • May make irrecoverable debts less likely (1) Against proposal (Max 2) • Will reduce profits by the amount of discounts allowed (1), (and company is already making a loss) (1) • Will also reduce cash receipts (1) • Possible loss of customers who do not qualify for cash discount (1) Advice (1) Accept other valid responses. 5

This question in 9706/22 May/June 2021

3 Cherry, Winston and Yupar were in partnership sharing profits and losses in the ratio 3 : 5 : 2. The partners decided to dissolve their partnership on 1 December 2020. On this date the partnership’s statement of financial position was as follows. Assets $ $ Non-current assets at net book value Premises 97 000 Furniture and equipment 22 000 119 000 Current assets Inventory 17 400 Total assets 136 400 Capital and liabilities Capital accounts Cherry 18 300 Winston 54 900 Yupar 26 700 99 900 Current accounts Cherry (5 740) Winston 2 290 Yupar 820 (2 630) Non-current liability Loan from Yupar 18 000 Current liabilities Trade payables 14 800 Bank overdraft 6 330 21 130 Total capital and liabilities 136 400 The following information is also available. 1 Winston took over the equipment at a valuation of $7200. 2 Premises and furniture were sold for $61 100 and a cheque for this amount was received. 3 Inventory was sold at a loss of $5200. A cheque was received for the amount. 4 Trade payables were settled in full by cheque after deducting a 5% cash discount. 5 The expenses of dissolution were paid by cheque, $2140. 6 The amounts owed by, or to, the partners were settled by cheque. REQUIRED (a) Prepare the realisation account to show the profit or loss made on the dissolution of the partnership. Realisation account $ $ [7] (b) Prepare, on the next page, the capital accounts of the partners recording the dissolution and final settlement of the amounts owed to, or by, each partner. [5] $ Yupar $ Winston $ Cherry accounts Capital $ Yupar $ Winston $ Cherry Additional information The partners had decided to dissolve their partnership because of disagreements on important decisions. REQUIRED (c) State three other reasons why a partnership might be dissolved. 1 … … 2 … … 3 … … [3] [Total: 15]

15 marks

Mark scheme: 3(a) Realisation account $ $ Assets to be realised Capital Winston 7 200 (1) Premises 97 000 Bank 61 100 (1) Furniture and equipment 22 000 (1) Bank 12 200 (1) Inventory 17 400 Discounts received 740 (1) Bank 2 140 (1) Realisation loss: Cherry 17 190 Winston 28 650 (1)of Yupar 11 460 138 540 138 540 7 Question Answer Marks 3(a) Alternative answer Realisation account $ $ Assets to be realised Capital Winston 7 200 (1) Premises 97 000 Bank 61 100 (1) Furniture and equipment 22 000 (1) Bank 12 200 (1) Inventory 17 400 Bank: trade payables 14 060 Trade payables 14 800 (1*) row Bank 2 140 (1) Realisation loss: Cherry 17 190 Winston 28 650 (1)OF Yupar 11 460 152 600 152 600 Question Answer Marks 3(b) Capital accounts Cherry Winston Yupar Cherry Winston Yupar $ $ $ $ $ $ Realisation a/c 7 200 Balances b/d 18 300 54 900 26 700 Current account 5 740 Current accounts 2 290 820 (1) row Realisation (loss) 17 190 28 650 11 460 (1)OF row Loan 18 000 (1) Bank 21 340 34 060 (1)OF both Bank 4 630 (1)OF 22 930 57 190 45 520 22 930 57 190 45 520 5 3(c) Partnership is making a loss (1) Retirement of a partner (1) Death of a partner (1) Objectives of business achieved (1) Bankruptcy of a partner (1) Accept other valid responses Max 3 3

This question in 9706/23 May/June 2021

2 Equipment sold during the year had a valuation of $140. REQUIRED (c) Prepare the income statement for the year ended 30 June 2021. Eleni Income statement for the year ended 30 June 2021 … … … … … … … … … … … … … … … … … … … … Workings: [12] (d) Prepare an extract from the statement of financial position at 30 June 2021 to show the capital and liabilities section only. Eleni Statement of financial position at 30 June 2021 Capital and liabilities … … … … … … … … … [5] Additional information Eleni is concerned that she is not earning enough profit. She is considering increasing her prices by 5%. REQUIRED (e) Advise Eleni whether or not she should increase her prices by 5%. Justify your answer. … … … … … … … … … … … [5] (f) State three factors that a business should consider when making a provision for doubtful debts. 1 … 2 … 3 … [3] [Total: 30] PLEASE TURN OVER 2 The following balances have been extracted from the books of account of G Limited at 1 October 2020. Account $ 6% debentures (2022–23) 50 000 Retained earnings 34 500 Revaluation reserve 28 000 During the year ended 30 September 2021 the following took place. Date Transaction 1 November 2020 Made a rights issue of one ordinary share of $1 each for every ten shares held at a premium of 20%. The issue was fully subscribed. 1 March 2021 Paid a dividend of $0.05 per share on all shares in issue at that date. 1 May 2021 Made a bonus issue of one ordinary share of $1 each for every four shares held. The directors decided to leave the reserves in the most flexible form. 30 September 2021 Revalued property downwards by $35 000. The profit for the year ended 30 September 2021 was $96 000. REQUIRED (a) Prepare the statement of changes in equity for the year ended 30 September 2021. G Limited Statement of changes in equity for the year ended 30 September 2021 Share Share Revaluation Retained capital premium reserve earnings Total $ $ $ $ $ At 1 October 2020 28 000 34 500 At 30 September 2021 440 000 4 600 Workings: [8] Additional information The directors of G Limited wish to raise $500 000 additional capital for expansion. They have identified two options to raise the full amount. Option 1: Issue ordinary shares of $1 each. Option 2: Issue 8% preference shares. REQUIRED (b) Advise the directors which option they should choose. Justify your answer. … … … … … … … … … … … … … [5] Additional information The finance director has suggested that the company could issue further debentures. REQUIRED (c) State two characteristics of a debenture. 1 … … 2 … … [2] [Total: 15] PLEASE TURN OVER

40 marks

Mark scheme: 2(a) G Limited Statement of changes in equity for the year ended 30 September 2021 Share capital $ Share premium $ Revaluation reserve $ Retained earnings $ Total $ At 1 October 2020 320 000 (1) 86 200 (1) 28 000 34 500 468 700 Rights issue 32 000 6 400 38 400 (1 for both) Dividend paid (17 600) (1) OF (17 600) Bonus issue 88 000 (88 000) – (1 for both) Revaluation (28 000) (7 000) (35 000) (1 for both) Profit for the year 96 000 (1) 96 000 At 30 September 2021 440 000 4 600 - 105 900 550 500 (1 OF for row) Accept alternative approach to adjusting revaluation reserve (against profit for the year). 8 Question Answer Marks 2(b) Option 1 (max 2 marks) The new share issue would dilute current shareholders’ investment (1) The shares would have voting rights which may leave the current owners vulnerable to loss of control (1) But dividend payments would be discretionary (1) Option 2 (max 2 marks) 8% dividend rate is more expensive than current borrowings (1) The shares do not have voting rights so no likelihood of loss of control (1) Dividends have to be paid whether the company makes a profit or loss (1) Accept other valid responses Decision (1) 5 2(c) Fixed interest rate (1) Repayable on a specific future date (1) Secured against assets (1) Long term (1) Accept other valid responses Max 2 marks 2

This question in 9706/21 Oct/Nov 2021

2 Abbie, Ben and Cain have been in partnership for many years sharing profits and losses in the ratio 3 : 2 : 1. The partnership’s draft statement of financial position at 30 June 2021 is shown below. Abbie, Ben and Cain Statement of financial position at 30 June 2021 $ Non-current assets Property 65 000 Motor vehicles 52 000 117 000 Current assets Inventory 18 200 Trade receivables 13 700 Bank 800 32 700 Total assets 149 700 Capital and liabilities Capital accounts Abbie 60 000 Ben 40 000 Cain 20 000 120 000 Current accounts Abbie 18 520 Ben (3 250) Cain 6 230 21 500 Current liabilities Trade payables 8 200 Total capital and liabilities 149 700 Ben retired from the partnership on 30 June 2021 and the following was agreed. 1 Ben should retain one of the motor vehicles at the net book value $14 500. 2 The remaining motor vehicles should be revalued at $33 000. 3 Property should be revalued at $77 000. 4 Inventory should be revalued at $17 000. 5 The value of goodwill was $39 000 and it was not to be retained in the books of account. Any amounts due to Ben were to be transferred to a short-term loan to be repaid from the partnership bank account within one month. Abbie and Cain decided to continue in partnership sharing profits and losses in the ratio 3 : 2. Cain agreed to pay sufficient funds into the partnership bank account so that the partners’ capital account balances reflected the new profit-sharing ratio. REQUIRED (a) State one reason why a partnership may revalue assets on the retirement of a partner. … … [1] (b) Prepare the revaluation account at 30 June 2021. Revaluation Account $ $ [3] (c) Prepare the partners’ capital accounts at 30 June 2021 on the next page. [6] $ Cain $ Ben $ Abbie Accounts $Capital Cain $ Ben $ Abbie Additional information Ben has indicated that he may be willing to leave $10 000 as an interest-free loan, but he requires any other amount due to be paid within one month. In order to maintain sufficient working capital, Abbie and Cain are considering two options to finance the settlement due to Ben. Option 1: Request an overdraft facility from the bank. Option 2: Ask Ben to consider leaving the whole amount due as a 5% loan repayable over ten years in equal annual instalments. REQUIRED (d) Advise Abbie and Cain which option they should choose to finance the amount due to Ben. … … … … … … … … … … [5] [Total: 15]

15 marks

Mark scheme: 2(a) To make sure the retiring partner gets a fair share of the up-to-date value of the net assets (1) Accept other valid responses. 1 2(b) Revaluation Account $ $ Motor vehicles 4 500 (1) both Property 12 000 (1) Inventory 1 200 Capital accounts Abbie Ben Cain 3 150 2 100 1 050 (1) 12 000 12 000 Alternative presentation acceptable. 3 Question Answer Marks 2(c) Capital Accounts Abbie $ Ben $ Cain $ Abbie $ Ben $ Cain $ Motor vehicle Current account 14 500 3 250 (1) both Balance b/d 60 000 40 000 20 000 Loan account 37 350 (1) OF Revaluation 3 150 2 100 1 050 (1) OF row Goodwill ** 23 400 15 600 Goodwill ** (1) for both 19 500 13 000 6 500 Balance c/d 59 250 39 500 Bank 27 550 (1) OF 82 650 55 100 55 100 82 650 55 100 55 100 Balance b/d (1) OF for all 59 250 39 500 6 Question Answer Marks 2(d) Option 1 (max 2 marks) The main purpose of an overdraft is to secure temporary working capital (1) As the settlement is a longer-term commitment, the bank may not agree to the overdraft (1) Even with the additional capital introduced by Cain, the partnership is still short of liquid working capital (1) Is the partnership sufficiently profitable to repay the overdraft? (1) Option 2 (max 2 marks) Would Ben agree to leave the full balance owing in addition to the $10 000 he has already agreed to ? (1) The 5% interest rate is likely to be substantially less expensive than the overdraft interest rate (1) Advice (1) Accept other valid responses 5

This question in 9706/23 Oct/Nov 2021

3 Bipin, Feroz and Neeru have been in partnership for many years sharing profits and losses in the ratio 3 : 1 : 2 respectively. Feroz decided to retire from the partnership with effect from 1 January 2022. On this date the statement of financial position was available. Statement of financial position $ $ Assets Non-current assets at net book value 132 000 Current assets Inventory 17 560 Trade receivables 10 540 Cash at bank 18 490 46 590 Total assets 178 590 Capital and liabilities Capital accounts Bipin 72 000 Feroz 44 300 Neeru 57 000 173 300 Current accounts Bipin 4 240 Feroz (1 980) Neeru (2 750) (490) Total capital 172 810 Current liabilities Trade payables 5 780 Total capital and liabilities 178 590 The following information is also available. 1 Non-current assets were revalued at $155 000 and inventory was revalued at $13 160. 2 Goodwill was valued at $39 000. It was agreed that a goodwill account was not to be maintained in the books of the partnership. 3 Bipin and Neeru agreed to remain in partnership sharing profits and losses equally. 4 On his retirement, Feroz agreed to take a non-current asset at its valuation of $15 000. He agreed to leave the remaining amount due to him as a loan to the partnership. REQUIRED (a) Prepare, on the next page, the partners’ capital accounts to record the retirement of Feroz. [7] Additional information Bipin and Neeru have agreed the following for the new partnership. 1 They will no longer use current accounts. Each partner’s current account balance is to be transferred to the partner’s capital account. 2 The opening balances of their capital accounts are to reflect their new profit and loss sharing ratio. Neeru was to introduce or withdraw funds in order to achieve this. REQUIRED (b) Calculate the amount Neeru should introduce or withdraw. … … … … … … … … [4] (c) Explain one reason for valuing goodwill when a partner retires. … … … … [2] (d) State two reasons why it is usual not to maintain a goodwill account in the books of a partnership. 1 … … 2 … … [2] [Total: 15]

15 marks

Mark scheme: 3(a) Capital accounts Bipin Feroz Neeru Bipin Feroz Neeru $ $ $ $ $ $ Goodwill adjustment 19 500 19 500} Balances b/d 72 000 44 300 57 000 Current a/c 1 980 (1) Revaluation W1 9 300 3 100 6 200 (1) Non- current asset 15 000 (1) Loan 36 920 (2)CF (1)OF Goodwill adjustment 19 500 6 500 13 000} (1) Balances c/d 81 300 56 700 100 800 53 900 76 200 100 800 53 900 76 200 Balance b/d 81 300 56 700 (1)OF W1 Revaluation surplus: Non-current assets + $23 000 – Inventory $4400 = $18 600 shared: Bipin $9300, Feroz $3100, Neeru $6200 (1) 3(b) Bipin Neeru $ $ Capital account balances 81 300 56 700 (1)OF Current account balances 4 240 (2 750) (1) 85 540 53 950 Neeru to introduce (1)OF 31 590 (1)OF 4 Question Answer Marks 3(c) It will ensure retiring partner is rewarded (1) for his/her contribution to the success of the business (1). 2 3(d) The value of goodwill is subjective (1) To apply the going concern concept (1) Value may fluctuate (1) Max 2 Accept other valid responses. 2

This question in 9706/22 Feb/March 2022

3 Maria and Rio have been in partnership for a number of years. They are considering admitting a new partner. REQUIRED (a) State three disadvantages to the existing partners when a new partner is admitted. 1 … … 2 … … 3 … … [3] Additional information The partnership year end is 31 December. For the period 1 January to 30 September 2021, Maria and Rio did not have a partnership agreement. The following information is available for the year ended 31 December 2021. The balances on the partners’ accounts on 1 January 2021 were: $ Capital accounts Maria 52 000 Rio 38 000 Loan account: Rio 6 000 On 1 October 2021 they admitted Sarah as a partner. Sarah introduced capital of $45 000 from her personal savings. The partners agreed to make no adjustments for goodwill or the revaluation of the partnership assets. From 1 October 2021 a formal partnership agreement was prepared as follows: 1 Rio to be given interest on his loan at 8% per annum. 2 Interest to be given at 6% per annum on fixed capitals. 3 Rio to be given a partnership salary of $15 000 per annum. 4 Profits to be shared in the ratio Maria : Rio : Sarah, 2 : 1 : 2 respectively. During the year ended 31 December 2021, the partnership made a profit of $82 500 before taking into account interest on Rio’s loan. It was assumed that the profit before interest on Rio’s loan had accrued evenly throughout the year. REQUIRED (b) Prepare the appropriation account for the year ended 31 December 2021. Maria, Rio and Sarah Appropriation account for the year ended 31 December 2021 Maria and Rio Maria, Rio and Sarah 1 Jan–30 Sept 1 Oct–31 Dec $ $ … … … … … … … … … … … … … … … … … [7] Additional information Before Sarah had been admitted as a partner, she had been earning a salary of $18 000 per annum. She had also received interest of 8% per annum on her personal savings. REQUIRED (c) Compare Sarah’s income as a partner with the total income she would have otherwise received in the three months ended 31 December 2021. Support your answer with calculations. … … … … … … … … … … [5] [Total: 15] PLEASE TURN OVER

15 marks

Mark scheme: 3(a) Profits will be shared with the new partner (1) Decision-making could take longer (1) There is the risk of disagreements (1) Accept other valid responses. 3 Question Answer Marks 3(b) Maria, Rio and Sarah Appropriation account for the year ended 31 December 2021 Maria and Rio Maria, Rio and Sarah 1 Jan–30 Sept 1 Oct–31 Dec $ $ Profit before interest 61 875 (1) both 20 625 Less interest on Rio’s loan at 5% per annum/8% per annum (225) (1) (120) (1) Profits for appropriation 61 650 20 505 Appropriations final 3 months: Interest on capitals Maria: 6% x ¼ x $52 000 (780) (1) Rio: 6% x ¼ x $38 000 (570) Sarah: 6% x ¼ x $45 000 (675) Salary for Rio: ¼ x $15 000 (3 750) (1) Divisible profit 14 730 Shares of remaining profits Maria 30 825 (1)OF (5 892) (1)OF Rio 30 825 (2 946) Sarah (5 892) 7 3(c) In employment: Salary $4500 (1) + interest $900 (8%  ¼  $45 000) (1) = $5400 As a partner: $675 (1) OF + residual profit $5892 (1)OF = $6567 Increase in income $1167 (1)OF 5

This question in 9706/21 May/June 2022

3 Profits and losses would continue to be shared in the ratio Karen : Lee, 2 : 3 respectively. REQUIRED (c) Calculate the increase or decrease in Lee’s current account balance at 28 February 2022 assuming the new agreement had been in use from 1 March 2021. … … … … … … … … … … … … [6] Additional information Karen and Lee had also considered operating as a limited company. REQUIRED (d) Explain one advantage of operating as a partnership rather than a limited company. … … … … [2] (e) Explain two advantages of operating as a limited company rather than a partnership. 1 … … … … 2 … … … … [4] Additional information The partners are concerned about the business’s liquidity position. Karen believes the problem arises because the business holds too much inventory. She suggests that credit purchases should be reduced for the next three months to ensure inventory levels are lowered. REQUIRED (f) Advise Lee whether or not he should accept Karen’s suggestion. Justify your advice. … … … … … … … … … … … … … … … [5] [Total: 30] 2 V Limited owns various non-current assets. Non-current assets depreciate due to a number of factors including wear and tear. REQUIRED (a) State two reasons, other than wear and tear, why non-current assets depreciate. 1 … 2 … [2] Additional information Businesses must apply the consistency concept when accounting for depreciation. REQUIRED (b) Describe the consistency concept. … … … … [2] Additional information The company’s financial year ends on 31 December. 1 Property was purchased on 1 January 2019 at a cost of $850 000. Property is depreciated at 5% per annum on cost. 2 On 1 January 2021 the directors decided to revalue the property at $1 200 000. REQUIRED (c) Prepare the journal entry to record the revaluation of the property. A narrative is not required. Journal Dr Cr $ $ [3] Additional information 1 Furniture and equipment was purchased on 1 January 2019 at a cost of $140 000. 2 Furniture and equipment is depreciated at 10% per annum using the reducing balance method. 3 On 1 September 2021, the directors sold furniture and equipment which had cost $21 000 on 1 January 2019.

24 marks

Mark scheme: 3(a)(i) Trade payables turnover Formula Calculation Trade payables  365/Credit purchases (1) 42000 365 480000  (1) = 32 days (1) 3 3(a)(ii) Trade receivables turnover Formula Calculation Trade receivables  365/Credit sales (1) Total sales 2.5  $420 000 = $1 050 000 30000 365 315000  (1) = 35 days (1) 3 Question Answer Marks 3(a)(iii) Return on capital employed (to two decimal places) Formula Calculation Profit before interest 100 Capital employed (Equity + Debentures)  (1) Profit before interest = $182 000 + debenture interest $20 000 = $202 000 202000 1532000 (1)  100 = 13.19% (1) 3 3(a)(iv) Formula Calculation Net revenue/net book value of non-current assets (1) 1 050 000 / 1 520 000 = 0.69 times (1) 2 3(b) The ratio will inform the directors how efficiently assets are being used by the company to generate revenue (1). The low ratio is a cause for concern for the future growth of the business (1) OF Accept other valid responses 2 3(c)  To assess the security of the investment (1) to decide whether to sell shares or make further investment (1)  To assess the profitability of the company (1) to gauge future dividends (1)  To compare results of different companies (1) to decide on investments (1) Max 1 reason (1 mark for the basic point + 1 for development) Accept other valid responses 2

This question in 9706/22 May/June 2022

1 K Limited’s financial year ended on 31 December 2021. The company’s income statement for the year ended on that date has already been prepared. The following information was available at the year‑end. $ 8% Debentures (2022) 120 000 Bank overdraft 4 700 Dividends paid 96 000 Inventory 49 400 Non‑current assets at cost 960 000 Non‑current assets provision for depreciation 170 000 Ordinary share capital: shares of $0.25 each at 31 December 2021 480 000 Other payables 2 700 Other receivables 1 400 Profit for the year 99 400 Retained earnings at 1 January 2021 133 000 Share premium at 31 December 2021 90 000 Trade payables 25 900 Trade receivables 18 900 On 1 July 2021, the directors had made a rights issue of one ordinary share for every two ordinary shares in issue. The rights issue was made at $0.35 per share and was fully subscribed. REQUIRED (a) Calculate the profit from operations for the year ended 31 December 2021. … … … … … [2] (b) Calculate the amount raised by the rights issue on 1 July 2021. … … … … … [3] (c) Prepare a statement of changes in equity for the year ended 31 December 2021. K Limited Statement of changes in equity for the year ended 31 December 2021 Share capital Share Retained Total premium earnings $ $ $ $ Balances at 1 January 2021 [7] (d) Prepare the statement of financial position at 31 December 2021. K Limited Statement of financial position at 31 December 2021 $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [7] (e) Explain the meaning of each of the following terms. (i) Revenue reserve … … … … [2] (ii) Capital reserve … … … … [2] Additional information The directors of K Limited will require additional finance in 2022 to cover the cost of opening a new branch of the business. They are considering two options. Option 1: Make a further rights issue of shares. Option 2: Make an issue of 8% debentures. REQUIRED (f) Advise the directors which option they should choose. Justify your answer by discussing both options. … … … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: 1(a) 2 1(b) Number of shares at 31 December: 4  480 000 = 1 920 000 (1) Shares issued 1 July: 1/3  1 920 000 = 640 000 (1) Amount raised: 640 000  $0.35 = $224 000 (1) OF 3 1(c) K Limited Statement of changes in equity for the year ended 31 December 2021 Share capital Share premium Retained earnings Total $ $ $ $ Balances at 1 January 2021 320 000 (1)OF 26 000 (1)OF 133 000 479 000 Rights issue 160 000 (1) 64 000 (1)OF 224 000 Profit for year 99 400 (1) 99 400 Dividends paid (96 000) (1) (96 000) Balances at 31 December 2021 480 000 90 000 136 400 706 400 (1)OF 7 Question Answer Marks 1(d) K Limited Statement of financial position at 31 December 2021 Assets $ Non-current assets 790 000 (1) Current assets Inventory 49 400 Trade and other receivables 20 300 69 700 (1) Total assets* 859 700 Equity and liabilities Equity Share capital 480 000 Share premium 90 000 Retained earnings 136 400 Total equity 706 400 (1) OF Liabilities Current liabilities 8% Debentures (2022) 120 000 (1) Trade and other payables 28 600 (1) Bank overdraft 4 700 (1) Total liabilities 153 300 Total equity and liabilities* 859 700 (1) *For labelling each statement total 7 1(e)(i) Revenue reserve: profits arising from trading activities (1) retained in the business (1). Accept other valid responses. 2 Question Answer Marks 1(e)(ii) Capital reserve: profits arising from non-trading activities (1) which are not available for distribution to shareholders in the form of dividends (1) Accept other valid responses. 2 1(f) Rights issue (Max 3) Permanent source of capital / does not have to be repaid / increases capital (1) Dividend payments are optional (1) No security required (1) Will it be successful (rights issues made in previous year) (1) Debenture issue (Max 3) Temporary source of finance / must be repaid / will increase liabilities (1) Security may be required (1) Interest charges will reduce profits / interest must be paid (1) Will not dilute ownership (1) Decision (1) Accept other valid responses 7

This question in 9706/23 May/June 2022

3 The directors of H Limited provided the following details from the statement of financial position at 30 September 2021. $ Equity and reserves Share capital (ordinary shares of $0.50 each) 200 000 Share premium 50 000 Retained earnings 120 000 During the year ended 30 September 2022, the following transactions took place. Date Transaction 1 1 November 2021 Paid a final dividend of $0.06 per ordinary share. 2 1 January 2022 Made a rights issue of two ordinary shares for every five shares held at a price of $0.60. The issue was fully subscribed. 3 1 July 2022 Paid an interim dividend of $0.02 per ordinary share. 4 31 August 2022 Made a bonus issue of one ordinary share for every four shares held. The directors decided to leave the reserves in the most flexible form. REQUIRED (a) Prepare journal entries to record transactions 1 – 4. Dates and narratives are not required. Workings: Journal Item Account Debit Credit $ $ 1 2 3 4 [10] (b) State three reasons why a company may make a bonus issue of shares. 1 … … 2 … … 3 … … [3] (c) State two features of preference shares. 1 … … 2 … … [2] [Total: 15]

15 marks

Mark scheme: 3(a) Journal 10 Account Debit Credit $ $ 1 Dividends paid 24 000 (1) Bank 24 000 (1) 2 Bank 96 000 (1) Share capital 80 000 (1) Share premium 16 000 (1) 3 Dividends paid 11 200 (1) Bank 11 200 (1) 4 Share premium 66 000 (1) Retained earnings 4 000 (1) Share capital 70 000 (1) 3(b) Enables the company to liquidate capital reserves that cannot be used to pay dividends. (1) 3 Enables the company to match long-term assets with long-term capital. (1) Issued in place of cash/dividends when need to preserve cash (1) It is less expensive than a rights issue or a new share issue. (1) Max 3 marks Accept other valid responses. 3(c) Shareholders have no voting rights. (1) 2 Shareholders receive priority in dividend payment over ordinary shareholders. (1) Shareholders receive a fixed rate of dividend. (1) Max 2 marks Accept other valid responses.

This question in 9706/21 Oct/Nov 2022

1 The following balances have been extracted from the draft financial statements of H Limited at 30 September 2022. $ 8% bank loan (2028–2029) 28 000 Cash and cash equivalents 2 590 Inventory 48 900 Plant and machinery at net book value 52 000 Property at valuation 65 000 Retained earnings 27 350 Revaluation reserve 23 000 Share capital (ordinary shares of $1 each) 80 000 Share premium 19 400 Trade payables 17 140 Trade receivables 26 400 The directors discovered that the following had not been accounted for. 1 Plant and machinery had been purchased for $16 500. This was settled by the part‑exchange of machinery with a net book value of $11 800 and a bank payment of $4700. 2 No depreciation for the year had been charged. Plant and machinery is depreciated at 10% per annum using the reducing balance method. A full year’s depreciation is charged in the year of purchase and none in the year of disposal. 3 A bonus issue of one ordinary share for every four shares held had been made on 1 June 2022. The directors had decided to keep the reserves in the most flexible form. 4 An interim dividend of $0.03 per share had been paid on 1 September 2022 on all shares in issue at that date. 5 Property had been revalued downwards by $4000. 6 One half of the 8% bank loan (2028–2029) had been repaid on 30 September 2022. 7 A provision for doubtful debts of 5% was to be made. REQUIRED (a) Prepare the journal entry to record the bonus issue of shares. Dates and narrative are not required. … … … … … … [3] (b) Calculate the net book value of plant and machinery at 30 September 2022. … … … … … … … … [4] (c) Calculate the adjusted balance of cash and cash equivalents at 30 September 2022. … … … … … … … … [4] (d) Calculate the adjusted balance of retained earnings at 30 September 2022. … … … … … … … … … … [5] (e) Prepare the statement of financial position at 30 September 2022. H Limited Statement of Financial Position at 30 September 2022 … … … … … … … … … … … … … … … … … … … … … … … … … [8] (f) Explain two differences between capital reserves and revenue reserves. 1 … … … … 2 … … … … [4] (g) Explain one accounting concept applied when making a provision for doubtful debts. … … … … [2] [Total: 30] PLEASE TURN OVER

30 marks

Mark scheme: Question Answer Marks 1(a) Debit Credit 3 $ $ Share premium 19 400 (1) Retained earnings 600 (1) (Ordinary) Share capital 20 000 (1) 1(b) $51 030 (4) W1 4 W1 $ Balance b/d 52 000 Addition 16 500 (1) Disposal (11 800) (1) 56 700 Depreciation for the year (5 670) (1) Net book value 51 030 (1) OF 1(c) ($19 110) (4) W1 4 W1 $ Balance b/d 2 590 Plant and machinery (4 700) (1) Dividend (3 000) (1) Loan repayment (14 000) (1) Adjusted balance (19 110) (1) 1(d) $16 760 (5) W1 5 W1 $ Balance b/d 27 350 Depreciation (5 670) (1) OF Bonus issue (600) (1) OF Dividend (3 000) (1) OF Provision for doubtful debts (1 320) (1) Adjusted balance 16 760 (1) 1(e) H Limited 8 Statement of Financial Position at 30 September 2022 $ Non-current assets Property 61 000 Plant and machinery 51 030 112 030 (1) Current assets Inventory 48 900 Trade receivables 25 080 (1) OF 73 980 Total Assets 186 010 Equity and liabilities Share capital 100 000 (1) Revaluation reserve 19 000 (1) OF Retained earnings 16 760 (1) OF 135 760 Non-current liabilities 8% bank loan (2028–2029) 14 000 (1) Current liabilities Bank overdraft 19 110 (1) OF Trade payables 17 140 36 250 Total equity and liabilities 186 010 (1)OF 1(f) Capital reserves are created as a result of non-trading activities (1) whereas revenue reserves are created by transfer from 4 profits / trading activities (1). Capital reserves cannot be used to pay shareholder dividends (1) whereas revenue reserves can be used to pay shareholder dividends (1). Accept other valid responses. 1(g) Conforms with the prudence concept (1) ensuring that a potential loss is recognised when it becomes apparent / ensuring 2 that current assets/profits are not overstated (1) Accept other valid responses.

This question in 9706/22 Oct/Nov 2022

2 Darius and Ewan are in partnership sharing profits and losses in the ratio 5 : 3. The following balances were extracted from the partnership books of account at 31 July 2022. $ Bank overdraft 12 700 Capital accounts Darius 94 300 Ewan 68 300 Fixtures and fittings 44 000 Inventory 36 200 Property at valuation 127 000 Bank loan (2025) 24 000 Trade payables 14 200 Trade receivables 6 300 On 1 August 2022, the partners agreed to admit Karim into the partnership on the following terms. 1 Karim was to introduce total capital of $48 000. This consisted of fixtures and fittings valued at $9500 with the balance to be introduced into the partnership bank account. 2 Future profits and losses were to be shared between Darius, Ewan and Karim in the ratio 5 : 3 : 2. 3 Goodwill was to be valued at $36 800. Goodwill was not to be retained in the books of account. 4 Property was to be revalued to $135 000. 5 Obsolete inventory of $2000 was to be written off. REQUIRED (a) Prepare, on page 9, the partners’ capital accounts on 1 August 2022 following the admission of Karim. [5] (b) Prepare the partnership statement of financial position at 1 August 2022 following the admission of Karim. Use the space provided on page 11 for your workings. Darius, Ewan and Karim Statement of financial position at 1 August 2022 … … … … … … … … … … … … … … … … … … … … … … Workings: [6] Additional information Partners may allow interest on capital and charge interest on drawings. REQUIRED (c) State one advantage of allowing interest on capital to a: partner … … partnership … … [2] (d) Explain one reason why a partnership may charge interest on drawings. … … … … [2] [Total: 15]

15 marks

Mark scheme: 2(a) Capital accounts 5 Darius Ewan Karim Darius Ewan Karim $ $ $ $ $ $ Goodwill ** 18 400 11 040 7 360 Balances b/d 94 300 68 300 Balances c/d 102 650 73 310 40 640 Fixtures and fittings 9 500 (1) Bank 38 500 (1) Goodwill ** 23 000 13 800 (1)** Revaluation 3 750 2 250 (1) 121 050 84 350 48 000 121 050 84 350 48 000 Balances b/d 102 650 73 310 40 640 (1) OF ** 1 mark is for both Dr and Cr entries 2(b) Darius, Ewan and Karim 6 Statement of financial position at 1 August 2022 $ Non-current assets Property 135 000 Fixtures and fittings 53 500 188 500 (1) Current assets Inventory 34 200 (1) Trade and other receivables 6 300 Bank 25 800 (1) 66 300 Total Assets 254 800 Capital and liabilities Capital accounts Darius 102 650 Ewan 73 310 Karim 40 640 216 600 (1) OF Non-current liabilities Bank loan (2025) 24 000 (1) Current liabilities Trade and other payables 14 200 Total liabilities 38 200 Total capital and liabilities 254 800 (1) OF 2(c) Partners: to reward the partners for their investment (1). 2 Partnership: to encourage further investment in the partnership (1). Accept other valid responses. 2(d) To discourage partners from taking excess drawings from the partnership (1) which will avoid future cash flow problems (1). 2 Accept other valid responses.

This question in 9706/23 Oct/Nov 2022

3 R Limited is a retail company. REQUIRED (a) Explain the meaning of 8% debentures (2025–2026). … … … … [3] Additional information The directors of R Limited provided the following information at 1 October 2021. $000 Building at valuation 120 Retained earnings 315 Revaluation reserve 40 Share capital (ordinary shares of $0.50 each) 1 200 Share premium 145 The following transactions took place during the year ended 30 September 2022. 31 December 2021 Paid a final dividend of $0.06 per share. 31 March 2022 Made a rights issue of one ordinary share for every four shares held at a price of $0.65. The issue was fully subscribed. 31 July 2022 Made a bonus issue of one ordinary share for every six shares held. The directors decided to leave the reserves in the most flexible form. 31 August 2022 Paid an interim dividend of $0.04 per share. 30 September 2022 The building, which had originally cost $80 000, was revalued to $115 000. The profit for the year ended 30 September 2022 was $87 000. REQUIRED (b) Prepare the statement of changes in equity for the year ended 30 September 2022. R Limited Statement of changes in equity for the year ended 30 September 2022 Share Share Revaluation Retained capital premium reserve earnings Total $000 $000 $000 $000 $000 At 1 October 2021 1 200 145 40 315 1 700 At 30 September 2022 Workings: [10] (c) Explain why dividends proposed at the end of a financial year are not shown in a company’s statement of financial position. … … … … [2] [Total: 15]

15 marks

Mark scheme: 3(a) A long-term loan to a company (1) repayable between 2025 and 2026 (1) at a fixed interest rate of 8% per annum (1). 3 3(b) R Limited 10 Statement of changes in equity for the year ended 30 September 2022 Share Share Revaluation Retained capital premium reserve earnings Total $000 $000 $000 $000 $000 At 1 October 2021 1 200 145 40 315 1 700 Final dividend / (144) (144) dividend (paid) (1) Rights issue 300 90 390 (1) (1) Bonus issue 250 (235) (15) - (1) (1) (1) Interim dividend / (140) (140) dividend (paid) (1) OF Revaluation (5) (5) (1) Profit for the year 87 87 (1) At 30 September 2022 1 750 - 35 103 1 888 (1) OF for row 3(c) A proposed dividend should be shown as a note to the accounts but should not be shown as a liability (1) as at the reporting 2 date it has not been approved by the shareholders and as such there is no certainty that it will be paid (1) Accept other valid responses.

This question in 9706/23 Oct/Nov 2022

1 J Limited’s financial year ended on 30 September 2022. The following balances were available on this date. $ 8% Debentures (2025) 100 000 Administrative expenses 28 000 Distribution costs 57 000 Dividends paid 21 000 Finance costs 4 000 Inventory at 1 October 2021 54 000 Issued share capital: shares of $0.50 each at 420 000 1 October 2021 Non-current assets at 1 October 2021 Cost 1 300 000 Provision for depreciation 260 000 Purchases 460 000 Retained earnings at 1 October 2021 125 000 Revenue 869 000 Share premium at 1 October 2021 210 000 Trade receivables 83 000 The following additional information is available. 1 Inventory at 30 September 2022 was valued at $57 000. 2 The balance of the account of a credit customer, $3000, should be written off as irrecoverable and charged to administrative expenses. 3 The directors have agreed to create an allowance for irrecoverable debts of 5% of trade receivables. The allowance should be charged to administrative expenses. 4 Debenture interest for the second half of the year is outstanding. 5 Non-current assets should be depreciated at 20% per annum using the straight-line method. Depreciation should be allocated as follows: Administrative expenses 60% Distribution costs 40% REQUIRED (a) Prepare the statement of profit or loss for the year ended 30 September 2022. Use the space provided to show your workings. J Limited Statement of profit or loss for the year ended 30 September 2022 $ … … … … … … … … … … … Workings: Administrative expenses Distribution costs [11] Additional information The directors found that the following transaction had not been recorded in the books of account: On 30 September 2022 the directors had made a bonus issue of 2 ordinary shares for every 3 shares held. The directors had decided to maintain reserves in their most flexible form. REQUIRED (b) Calculate the balance of retained earnings at 30 September 2022 following the bonus issue. … … … … … … … … [6] (c) State one reason why the directors of a company might decide to make a bonus issue. … … [1] (d) Explain one reason why trade payables and potential lenders might approve of a company making a bonus issue. … … … … [2] (e) Identify three points the directors should consider when deciding whether to pay a dividend. 1 … … 2 … … 3 … … [3] Additional information The directors of J Limited wish to improve the company’s liquidity. They will choose one of the following options. Option 1: allow trade receivables a cash discount of 5% for payment within 20 days. Option 2: make all purchases on credit from a different supplier who is prepared to offer a trade discount. REQUIRED (f) Advise the directors which option they should choose. Justify your choice by discussing both options. … … … … … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 30 September 2022. 11 J Limited Statement of profit or loss for the year ended 30 September 2022 $ Revenue 869 000 Cost of sales (457 000) (1) Gross profit 412 000 (1)OF Administrative expenses W1 (191 000) (4) Distribution costs W2 (161 000) (2) Profit from operations 60 000 (1)OF Finance costs (8 000) (1) Profit for the year 52 000 (1)OF W1 Administrative expenses $191 000 (4) Working $ Trial balance 28 000 Depreciation of NCA 156 000 (1) Irrecoverable debts 3 000 (1) Allowance for irrecoverable debts 4 000 (1) 191 000 (1)OF 1(a) W2 Distribution costs $161 000 (2) Working $ Trial balance 57 000 Depreciation of NCA 104 000 (1) 161 000 (1)OF 1(b) Calculate the balance of retained earnings at 30 September 2022 following 6 the bonus issue. $86 000 (6) Working W1 Bonus issue: $70 000 (3) Working $ Share issue 280 000 (1) Share premium (210 000) (1) Retained earnings (70 000) (1)OF $ Opening balance 125 000 Profit for the year 52 000 (1)OF Dividends paid (21 000) (1) Bonus issue W1 (70 000) (3) Closing balance 86 000 (1)OF 1(c) State one reason why the directors of a company might decide to make a 1 bonus issue. To reward/satisfy shareholders (1) Insufficient liquid funds to pay a dividend (1) To utilise the capital reserves of the company (1) Max 1 1(d) Explain one reason why trade payables and potential lenders might approve 2 of a company making a bonus issue. A bonus issue is a non-cash item (1) so therefore will have no effect on the repayment of liabilities (1). 1(e) Identify three points the directors should consider when deciding whether to 3 pay a dividend. The amount of profits/retained earnings available for distribution (1) Liquid funds available to pay dividends (1) Shareholders’ expectations/previous dividend payments (1) Accept other valid responses. 1(f) Advise the directors which option they should choose. Justify your choice 7 by discussing both options. Option 1 (Max 3) Will encourage earlier payment by credit customers which will improve liquidity (1) Reduce risk of irrecoverable debts/the need for an allowance for irrecoverable debts (1) Could result in increased sales which could improve cash flow (1) Amounts received from credit customers will be less/Negative effect of cash discount on cash flow (1) Customers my not be encouraged to pay within 20 days (1) Option 2 (Max 3) Will reduce overall payments for purchases which will improve liquidity (1) Positive impact on profits (1) Will payment terms be favourable (1) Will supplier prove reliable (1) Will quality be maintained (1) Decision supported by a comment (1) Accept other valid responses.

This question in 9706/22 May/June 2023

1 Laila, a retailer, did not maintain a full set of accounting records for her business. She has provided the following information for the year ended 30 September 2023. Balances at 1 October 2022 $ Inventory 12 030 Non-current assets at carrying value 22 180 Other payables: light and heat 210 Other receivables: insurance 480 Trade payables 3 840 Trade receivables 4 540 Summary of bank account for the year ended 30 September 2023 $ $ Receipts: trade receivables 55 390 Balance b/d 1 220 Sale of non-current assets 860 Payments: trade payables 46 280 Balance c/d 1 170 Insurance 2 560 Light and heat 3 510 Drawings 3 850 57 420 57 420 Balance b/d 1 170 The following information is also available at 30 September 2023. 1 Laila has started to prepare her financial statements for the year ended 30 September 2023. The following figures are available to transfer to the statement of profit or loss with no adjustment. $ Insurance 2 720 Light and heat 3 880 Loss on disposal of non-current asset 120 2 All sales are made at a mark-up of 25%. 3 All sales and purchases are made on credit. 4 The balance of trade receivables at 30 September 2023 was $3650. 5 There were no additions to non-current assets during the year. 6 All non-current assets are to be depreciated at 10% per annum using the reducing balance method. 7 Laila was unable to physically count the inventory at 30 September 2023. The inventory was valued at $14 400 on 4 October 2023. 8 Between 1 October 2023 and 4 October 2023, Sales were $3400 and Purchases were $1850. (a) Calculate the value of closing inventory at 30 September 2023. … … … [3] (b) Prepare the statement of profit or loss for the year ended 30 September 2023. Use the space provided on page 4 to show your workings. Laila Statement of profit or loss for the year ended 30 September 2023 … … … … … … … … … … … … … … … Workings: [8] (c) Prepare the statement of financial position at 30 September 2023. Workings: Equity at 1 October 2022 Other receivables Trade payables Other payables Laila Statement of financial position at 30 September 2023 … … … … … … … … … … … … … … … … … … … … … … … … … … [12] Additional information Laila wishes to expand the business and is considering forming a partnership with her friend. (d) State four provisions of the Partnership Act 1890 that would apply in the absence of a partnership agreement. 1 … … 2 … … 3 … … 4 … … [4] (e) State three possible disadvantages to a business of maintaining a full set of accounting records. 1 … … 2 … … 3 … … [3] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Calculate the value of closing inventory at 30 September 2023. 3 $15 270 (3) W1 W1 14 400 + 2 720 (1) – 1 850 (1) = $15 270 (1)OF 1(b) Prepare the statement of profit or loss for the year ended 30 September 2023. 8 Laila Statement of profit or loss for the year ended 30 September 2023 $ $ Revenue W1 54 500 (2) Cost of sales Opening inventory 12 030 Purchases 46 840 (1)OF Closing inventory (15 270) (1)OF 43 600 (1) Gross profit 10 900 (1)OF Insurance 2 720 Light and heat 3 880 Loss on disposal 120 Depreciation 2 120 8 840 (1) Profit for the year 2 060 (1)OF Workings W1 55 390 – 4 540 (1) + 3 650 (1) = 54 500 1(c) Prepare the statement of financial position at 30 September 2023. 12 Laila Statement of financial position at 31 September 2023 $ $ Non-current assets 19 080 (1) Current assets Inventory 15 270 (1)OF Trade receivables 3 650 (1) Other receivables 320 (1) 19 240 Total assets 38 320 (1)OF Equity Opening balance 33 960 (1) Profit for the year 2 060 (1)OF Drawings (3 850) (1) Total equity 32 170 Current liabilities Bank 1 170 (1) Trade payables 4 400 (1) 1(c) Other payables 580 (1) 6 150 Total equity and liabilities 38 320 (1)OF 1(d) State four provisions of the Partnership Act 1890 that would apply in the absence of a partnership agreement. 4 • Profits and losses are shared equally. (1) • No interest is charged on drawings. (1) • No interest is allowed on capital. (1) • Interest of 5% is allowed on partners’ loans. (1) Accept other valid responses. 1(e) State three possible disadvantages to a business of maintaining a full set of accounting records. 3 • The business owner may lack the experience or skills to maintain a full set of accounting records (1) • The owner may have to employ someone to maintain the records (1) • There may be an increase in costs resulting in a decrease in profits (1) Accept other valid responses.

This question in 9706/21 Oct/Nov 2023

4 On 31 March 2023, a rights issue of one ordinary share for every four shares held was made at a premium of $0.15 per share. The issue was fully subscribed. (b) Prepare the statement of changes in equity for the year ended 31 July 2023. P Limited Statement of changes in equity for the year ended 31 July 2023 Share Share Retained capital premium earnings Total $ $ $ $ At 1 August 2022 120 000 19 000 23 560 162 560 [6] (c) State two examples of revenue reserves of a limited company. 1 … 2 … [2] (d) Advise the directors whether or not they were correct to make a bonus issue of shares rather than make a new issue of shares. Justify your answer. … … … … … … … … … … … … … … … … … … [7] [Total: 30] 2 Simon formed a parcel delivery business on 1 July 2021. On 1 July 2021, he purchased a delivery vehicle for $29 000 from his business bank account. He decided to depreciate delivery vehicles on a monthly basis using the straight‑line method. He estimated that the delivery vehicle would have a useful working life of four years and would have a residual value of $5000. On 1 November 2022, a new delivery vehicle was purchased at a cost of $44 000. The old delivery vehicle was part exchanged at a value of $16 800. The balance was settled by a bank loan repayable over two years. He estimated that the new delivery vehicle would have a useful working life of five years and would have a residual value of $8000. (a) State two factors that cause the value of non‑current assets to depreciate. 1 … 2 … [2]

17 marks

Mark scheme: 4(a) Complete the table to show the apportionment of the budgeted overheads for 6 the year ended 31 August 2023. Production Service departments departments Total Machining Assembly Stores Maintenance $ $ $ $ $ Indirect 420 000 84 000 252 000 42 000 42 000 (1) wages row Factory rent 30 000 10 000 14 000 4 500 1 500 (1) and rates row Machine 22 000 12 577 9 423 – – (1) overheads row Total 472 000 106 577 275 423 46 500 43 500 overheads Apportion – 23 250 17 714 (46 500) 5 536 (1)OF Stores row Subtotal 472 000 129 827 293 137 – 49 036 Apportion – 41 190 7 846 – (49 036) (1)OF Maintenance row Total 472 000 171 017 300 983 - - overhead costs (1)OF for both 4(b) Calculate, to two decimal places, an overhead absorption rate for each 4 production department, using a suitable basis. 171017 Machining: = $4.99 (1)OF per machine hour (1) 34300 300983 Assembly: = $3.87 (1)OF per labour hour (1) 77700 4(c) Calculate the over absorption or under absorption of overheads for each 4 production department. Machining Assembly $ $ Actual 226 952 267 465 Absorbed: 44 120  $4.99 220 159 Absorbed: 72 580  $3.87 280 885 6 793 (1)OF 13 420 (1)OF UNDER (1)OF OVER (1)OF 4(d) Calculate the direct cost of producing one bicycle for the special order. 4 $ Direct material $45.60  1.3 59.28 (1) Direct labour - Machining $10  45 min 7.50 (1) Direct labour - Assembly $15  120 min 30.00 (1) Total direct cost 96.78 (1)OF 4(e) Prepare a statement to show the total selling price that Andreas should quote 5 to the customer in order to achieve a 30% gross profit margin on the order. $ Direct cost $96.78  120 11 613.60 (1)OF Machining dept. overheads $4.99  20 min  120 199.60 (1)OF Assembly dept overheads $3.87  120 min  120 928.80 (1)OF Total cost 12 742.00 Gross profit X 30/70 5 460.86 (1) Quoted selling price 18 202.86 (1) Alternative approaches (unit basis) Version 1 $ Direct cost 96.78 (1)OF Machining dept. overheads 1.66 (1)OF Assembly dept overheads 7.74 (1)OF Total unit cost 106.18  120 units Total cost 12 741.60 Gross profit 5 460.69 (1) Quoted selling price 18 202.29 (1) 4(e) Version 2 $ Direct cost 96.78 (1)OF Machining dept. overheads 1.663 (1)OF Assembly dept overheads 7.74 (1)OF Total unit cost 106.183 x 120 units Total cost 12 741.96 Gross profit 5 460.84 (1) Quoted selling price 18 202.84 (1) 4(f) Advise Andreas whether he should accept the terms offered by the customer. 7 Justify your answer. Accept • New customer may become a major customer over time (1) • Terms offered will still produce a profit for the business (1) • Only accept the terms if sufficient credit worthiness checks are completed (1) Reject • Two months’ credit terms may compound the cash flow difficulties (1) • Will existing customers try to negotiate better credit terms (1) • Are they sure of the continuity of the orders (1) • The work will not result in the required 30% gross profit margin (1) Max 6 for comments. Advice supported with a comment (1) Accept other valid responses

This question in 9706/22 Oct/Nov 2023

3 The draft profit of L plc for the year ended 30 June 2024 was calculated at $58 340. The directors have discovered some errors in the accounting records. The draft profit had been calculated before correcting the following: 1 Closing inventory had been overstated by $2800. 2 Returns outwards of $570 had been debited to the Purchases account. 3 Distribution costs included a payment of $4320 for advertising covering the three years ending 31 March 2027. (a) Calculate the revised profit for the year ended 30 June 2024. … … … … … … … … [4] Additional information 1 The share capital of L plc comprised ordinary shares of $0.50 each. 2 During the year ended 30 June 2024 the following transactions took place. Date Transaction 31 August 2023 Paid a final dividend of $0.05 per share on all shares in issue at that date. 31 December 2023 Made a bonus issue of one ordinary share for every seven shares held at that date. The directors decided to leave the reserves in the most flexible form. 31 March 2024 Paid an interim dividend of 2% on all shares in issue at that date. 31 March 2024 Made a rights issue of one ordinary share for every four shares held at a premium of $0.20 per share. The rights issue was fully taken up. 30 June 2024 Property was revalued downwards by $8000. 3 The value of ordinary share capital at 30 June 2024 was $200 000. (b) Calculate the value of ordinary share capital at 1 July 2023. … … … … [3] (c) Complete the statement of changes in equity for the year ended 30 June 2024. L plc Statement of changes in equity for the year ended 30 June 2024 Share Share Revaluation Retained capital premium reserve earnings Total $ $ $ $ $ At 1 July 2023 19 200 6 500 18 400 Final dividend Bonus issue Interim dividend Rights issue Revaluation Profit for the year At 30 June 2024 200 000 [8] [Total: 15]

15 marks

Mark scheme: 3(a) Calculate the revised profit for the year ended 30 June 2024. 4 $60 640 (4) W Working $ Draft profit 58 340 Closing inventory (2 800) (1) Returns outwards 1 140 (1) Advertising 3960 (1) Revised profit 60 640 (1)OF 3(b) Calculate the value of ordinary share capital at 1 July 2023. 3 $140 000 (3) W Working Share capital $ Closing balance 200 000 Rights issue (40 000) (1) Bonus issue (20 000) (1) Opening balance 140 000 (1)OF 3(c) Complete the statement of changes in equity for the year ended 30 June 2024. 8 Share Share Revaluation Retained Total capital premium reserve earnings $ $ $ $ $ At 1 July 2023 140 000 19 200 6 500 18 400 184 100 (1)OF row Final dividend (14 000) (14 000) (1)OF row Bonus issue 20 000 (19 200) (800) – (1)OF row Interim dividend (3 200) (3 200) (1)OF row Rights issue 40 000 16 000 56 000 (1)OF row Revaluation (6 500) (1 500) (8 000) (1) row Profit for the year 60 640 60 640 (1)OF row At 30 June 2024 200 000 16 000 – 59 540 275 540 (1)OF row

This question in 9706/22 Oct/Nov 2024

2 Ben and George converted their partnership into a limited company, M Limited. (a) Explain two benefits of trading as a limited company rather than as a partnership. 1 … … … … 2 … … … … [4] Additional information The following information was extracted from the books of M Limited at 31 December 2024. 1 January 2024 31 December 2024 $ $ Share capital: ordinary shares of $2 each ? 1 600 000 Share premium 320 000 400 000 Retained earnings ? 243 000 General reserve – 50 000 8% Debenture (2029) 120 000 120 000 10% Bank loan – 50 000 Taxation charge 16 000 22 000 On 31 March 2024, the directors had paid an interim dividend of $0.05 per share on all ordinary shares held at this date. On 30 June 2024, the directors had issued 200 000 ordinary shares at a premium of $0.40 per share. On 1 October 2024, the bank loan was taken out by M Limited. For the year ended 31 December 2024, the profit for the year was $285 000. (b) Calculate the amount received from the issue of shares on 30 June 2024. … … [1] (c) Calculate the total of the interim dividend paid on 31 March 2024. … … [2] (d) Calculate the profit from operations for the year ended 31 December 2024. … … … … … … … [4] (e) Prepare the retained earnings account for the year ended 31 December 2024. Retained earnings account Date Details $ Date Details $ [4] [Total: 15]

15 marks

Mark scheme: 2(a) Explain two benefits of trading as a limited company rather than as a 4 partnership. • Shareholders have benefit of limited liability for the debts of the company (1) which means their personal assets are not at risk. (1). • A limited company can have access to more finance (1) and will find it easier to borrow from banks (1). • Limited company has separate legal identity (1) so can sue and be sued in its own name. (1) • Tax efficiency (1) greater flexibility for limited companies and often tax rates are lower. (1) • Professional status (1) seen as more stable and credible so may attract more customers than a partnership. (1) Max 2 benefits  2 marks each ( 1 mark for identifying the benefit plus 1 mark for developing it) Accept other valid responses. 2(b) Calculate the amount received from the issue of shares on 30 June 2024. 1 200 000  $2.40 = $480 000 (1) 2(c) Calculate the total of the interim dividend paid on 31 March 2024. 2 $0.05  600 000 (1) = $30 000 (1) OF 2(d) Calculate the profit from operations for the year ended 31 December 2024. 4 $ Profit for the year 285 000 Add: taxation 22 000 (1) debenture interest (8%  $120 000) 9 600 (1) loan interest (10%  ¼  $50 000) 1 250 (1) Profit from operations 317 850 (1) CF 2(e) Prepare the retained earnings account for the year ended 31 December 2024. 4 Retained earnings account 2024 $ 2024 $ March Bank 30 000 (1) OF Jan Balance 38 000 (1) OF 31 (interim 1 b/d dividend) Dec 31 General 50 000 (1) Dec 31 Statement 285 000 (1) reserve of profit or loss 31 Balance 243 000 c/d 323 000 323 000 2025 243 000 Jan 1 Balance b/d

This question in 9706/21 May/June 2025

2 Ben and George converted their partnership into a limited company, M Limited. (a) Explain two benefits of trading as a limited company rather than as a partnership. 1 … … … … 2 … … … … [4] Additional information The following information was extracted from the books of M Limited at 31 December 2024. 1 January 2024 31 December 2024 $ $ Share capital: ordinary shares of $2 each ? 1 600 000 Share premium 320 000 400 000 Retained earnings ? 243 000 General reserve – 50 000 8% Debenture (2029) 120 000 120 000 10% Bank loan – 50 000 Taxation charge 16 000 22 000 On 31 March 2024, the directors had paid an interim dividend of $0.05 per share on all ordinary shares held at this date. On 30 June 2024, the directors had issued 200 000 ordinary shares at a premium of $0.40 per share. On 1 October 2024, the bank loan was taken out by M Limited. For the year ended 31 December 2024, the profit for the year was $285 000. (b) Calculate the amount received from the issue of shares on 30 June 2024. … … [1] (c) Calculate the total of the interim dividend paid on 31 March 2024. … … [2] (d) Calculate the profit from operations for the year ended 31 December 2024. … … … … … … … [4] (e) Prepare the retained earnings account for the year ended 31 December 2024. Retained earnings account Date Details $ Date Details $ [4] [Total: 15]

15 marks

Mark scheme: 2(a) Explain two benefits of trading as a limited company rather than as a 4 partnership. • Shareholders have benefit of limited liability for the debts of the company (1) which means their personal assets are not at risk. (1). • A limited company can have access to more finance (1) and will find it easier to borrow from banks (1). • Limited company has separate legal identity (1) so can sue and be sued in its own name. (1) • Tax efficiency (1) greater flexibility for limited companies and often tax rates are lower. (1) • Professional status (1) seen as more stable and credible so may attract more customers than a partnership. (1) Max 2 benefits  2 marks each ( 1 mark for identifying the benefit plus 1 mark for developing it) Accept other valid responses. 2(b) Calculate the amount received from the issue of shares on 30 June 2024. 1 200 000  $2.40 = $480 000 (1) 2(c) Calculate the total of the interim dividend paid on 31 March 2024. 2 $0.05  600 000 (1) = $30 000 (1) OF 2(d) Calculate the profit from operations for the year ended 31 December 2024. 4 $ Profit for the year 285 000 Add: taxation 22 000 (1) debenture interest (8%  $120 000) 9 600 (1) loan interest (10%  ¼  $50 000) 1 250 (1) Profit from operations 317 850 (1) CF 2(e) Prepare the retained earnings account for the year ended 31 December 2024. 4 Retained earnings account 2024 $ 2024 $ March Bank 30 000 (1) OF Jan Balance 38 000 (1) OF 31 (interim 1 b/d dividend) Dec 31 General 50 000 (1) Dec 31 Statement 285 000 (1) reserve of profit or loss 31 Balance 243 000 c/d 323 000 323 000 2025 243 000 Jan 1 Balance b/d

This question in 9706/23 May/June 2025