The accounting system — Paper 2 · A Level Accounting 9706

1 Razia, a sole trader, started her business on 1 July 2015 selling ladies’ clothing. Razia did not keep proper books of account, but was able to provide the following information. Summary of bank account for the year ended 30 June 2016 $ $ Capital introduced 36 340 Payments to trade payables 80 690 Cash banked 78 780 Shop rental 25 200 Balance c/d 4 330 Shop fixtures and fittings 3 600 Purchase of motor vehicle 5 800 Motor expenses 3 140 Light and heat 1 020 119 450 119 450 Additional information 1 Total revenue for the year was $92 600. All sales were made for cash. 2 Razia kept no record of her cash drawings. 3 The following expenses were paid from cash takings before the money was banked: $ General expenses 950 Assistants’ wages 2870 4 Cash in hand at 30 June 2016 was $1250. REQUIRED (a) Prepare the cash account, showing clearly the value of Razia’s drawings for the year. [4] Additional information 1 All sales made a gross margin of 40%. 2 During the year, Razia had taken goods, $640 at cost price, for her own use. 3 Inventory at 30 June 2016 had been counted and was valued at cost price $31 900. Razia was aware that some goods had been stolen during the year. 4 Razia owed $8940 to trade suppliers at 30 June 2016. REQUIRED (b) Calculate the value of inventory stolen during the year ended 30 June 2016 at cost price. [4] Additional information 1 At 30 June 2016, the following expenses were accrued: $ Assistants’ wages 120 Light and heat 150 2 Non-current assets should be depreciated as follows: Shop fixtures and fittings at 15% per annum using the reducing balance method Motor vehicle using the straight-line method over five years. The estimated residual value of the motor vehicle after five years is $400. 3 The annual charge for shop rental is $21 600. REQUIRED (c) Prepare the income statement for the year ended 30 June 2016. [8] (d) Calculate, to two decimal places, the following ratios at 30 June 2016. State the formula used in each case. (i) Current ratio Formula Calculation [2] (ii) Liquid (acid test) ratio Formula Calculation [2] (e) (i) Name two other ratios a business could calculate to explain its liquidity position. 1 2 [2] (ii) State two limitations of using ratio analysis. 1 2 [2] Additional information Razia’s brother has suggested that Razia should increase the mark-up on her goods. REQUIRED (f) Advise Razia whether or not she should increase the mark-up on her goods. Justify your answer by discussing advantages and disadvantages of doing this. [6] [Total: 30] Question 2 is on the next page.

30 marks

Mark scheme: 1(a) Cash account $ $ Sales 92 600 General expenses 950 Assistants’ wages 2 870 (1) Bank 78 780 (1) Balance c/d 1 250 Drawings (balance) 8 750 (1) 92 600 92 600 Balance b/d 1 250 (1) 4 1(b) Calculation of value of inventory stolen. $92600 × 60% = $55 560 cost of sales $80 690 – $640 (1) + $8940 (1) = $88 990 purchases $88 990 – $55 560 = $33 430 (1) theoretical closing inventory 33 430 – $31 900 (actual closing inventory) = $1530 (1) value of stock stolen Accept other alternative approaches. 4 Question Answer Marks 1(c) Razia Income statement for the year ended 30 June 2016 $ $ $ Revenue 92 600 Cost of sales Purchases 88 990 Closing inventory 31 900 55 560 Stolen inventory 1 530 (33 430) Gross profit (must be labeled) 37 040 (1CF) Less expenses Assistants’ wages W1 2 990 (1) Shop rental 21 600 (1) Motor expenses 3 140 Light and heat W2 1 170 (1) General expenses 950 Depreciation – motor vehicles W3 1 080 (1) Depreciation – Shop fixtures and fittings W4 540 (1) Stolen inventory 1 530 (1) 33 000 Profit for the year (must be labeled) 4 040 (1of) Workings W1 Assistants’ wages $2870 + $120 = $2990 (1) W2 Light and heat $1020 + $150 = $1170 (1) W3 Depreciation MV ($5800 – $400) / 5 = $1080 (1) W4 Depreciation Shop F & F $3600 × 15% = $540 (1) 8 Question Answer Marks 1(d) For each part, (1) mark for formula, (1)of mark for correct calculation 1(d)(i) Current assets Current liabilities 31900 1250 3600 2.71:1 8940 4330 270 + + = + + 2 1(d)(ii) Current assets excluding inventory Current liabilities 1250 3600 0.36 :1 8940 4330 270 + = + + 2 1(e)(i) Inventory turnover Trade payables turnover Trade receivables turnover Working capital ratio Gearing 1 mark for a valid point up to a max of 2 2 1(e)(ii) Uses historical data Only uses financial data Does not explain the cause of any changes Cannot predict Any other valid point 1 mark for a valid point up to a max of 2 2 Question Answer Marks 1(f) For increasing mark-up • Reduce bank overdraft • Increase (gross) profit • Improve liquidity • May enable to increase drawings Against increasing mark-up • Lose customers • May not be able to sell • Hard to decide the products this may be applied to • Competitors may enter/ need to consider competitors’ price 1 mark for decision and 5 for justification 6 Total: 30

This question in 9706/22 Feb/March 2017

2 Sturgess has provided the following information: 1 The provision for doubtful debts at 1 August 2015 was $1940. 2 Trade receivables at 31 July 2016 were $48 500. 3 A customer owing $2100 has been declared bankrupt. This amount is to be written off. 4 A customer owing $900 did not pay within the agreed credit terms. There are concerns about the recovery of this debt. 5 The business policy is to make a 5% provision for doubtful debts on remaining trade receivables. REQUIRED (a) (i) State one reason why a business may make a provision for doubtful debts. [1] (ii) State one accounting concept applied while making the provision for doubtful debts. [1] (iii) Prepare the provision for doubtful debts account for the year ended 31 July 2016. [5] (b) Explain how a provision for doubtful debts is treated in: (i) the statement of financial position (ii) the income statement [3] Additional information 1 Accrued telephone expenses at 1 August 2015 were $275. 2 Prepaid telephone expenses at 1 August 2015 were $380.

10 marks

Mark scheme: 2(a)(i) To avoid trade receivables being overstated in the statement of financial position. 1 2(a)(ii) Prudence / matching 1 2(a)(iii) Provision for doubtful debts $ $ Balance b/d 1 940 Balance c/d 3 175 Income statement * 1 235 (4) 3 175 3 175 Balance b/d 3 175 (1) (*) General provision: 48 500 – 2100 (1) – 900 (1) = 45 500 OF × 5% = $2275 Income statement: 2275 + 900 (1) = 3175 – 1940 (1) = $1235 5 2(b)(i) The new provision is deducted from trade receivables under current assets in the statement of financial position (1) 1 2(b)(ii) An increase in provision for doubtful debts is shown as an expense (1) A decrease in provision for doubtful debts is shown as additional income after the gross profit (1). 2 2(c) Telephone expenses account $ $ Balance b/d 380 Balance b/d 275 (1)* Bank 4 750 Income statement 4 670 (1)OF Balance c/d 560 (1) Balance c/d 745 (1) 5 690 5 690 Balance b/d 745 * Balance b/d 560 (1)*Both (*) Both balance b/d figures: Accrued: 840 × 2 / 3 (1) = $560 Prepaid: 2980 × 3 / 12 = $745 5 Total: 15

This question in 9706/22 Feb/March 2017

3 The total amounts paid for telephone expenses during the year were $4750. This included a rental charge of $2980 covering the period from 1 November 2015 to 31 October 2016.

0 marks

Mark scheme: 3(a) 1 3(b) $ Machine purchased (62 850 × 20% × 4/12) 4 190 (1) Machine sold (46 350 × 20% × 8 / 12) 6 180 (1) Other machines (74 000 – 46 350 × 20%) 5 530 (1) Total depreciation charge 15 900 3 3(c) King Extract from Statement of Financial Position at 31 March 2016 Cost Accumulated Depreciation Net Book Value $ $ $ Land and buildings 272 500 (1) 22 400 (1) 250 100 Plant and machinery 109 650 (2) 28 870 (3) 80 780 382 150 51 270 330 880 (1) Workings: Cost land and buildings: 252 000 + 20 500 (1) = 272 500 Depreciation land and buildings: 21 000 + 1400 (1) = 22 400 Cost plant and machinery: 123 000 + 62 850 (1) – 76 200 (1) = 109 650 Depreciation plant and machinery: 49 000 + 15 900 (1) – 6180 (1) – 29 850 (1) = 28 870 8 3(d) Wear and tear Obsolescence Changes in technology Changes in fashion tastes and trends Depletion of resources Passage of time Economic reasons 1 mark for a valid point up to a max of 3 3 Total: 15

This question in 9706/22 Feb/March 2017

4 Telephone call charges of $840 were paid on 12 September 2016 covering the period from 1 June 2016 to 31 August 2016. REQUIRED (c) Prepare the telephone expenses account for the year ended 31 July 2016. [5] [Total: 15] 3 King provided the following information for non-current assets at 1 April 2015. $ Property plant and machinery Land and buildings – cost 252 000 Plant and machinery – cost 123 000 Accumulated depreciation Buildings 21 000 Plant and machinery 49 000 During the year ended 31 March 2016, the following took place: 1 Land was revalued to $202 500. It had originally cost $182 000. 2 A machine was sold on 30 November 2015. It had a net book value on 1 April 2015 of $46 350 and an original cost of $76 200. 3 A machine was purchased on 1 December 2015 at a cost of $62 850. The depreciation policy for non-current assets is as follows: Buildings 2% per annum using the straight-line method Plant and machinery 20% per annum using the reducing balance method Depreciation is charged on a month-by-month basis. REQUIRED (a) Calculate the total depreciation charge for buildings for the year ended 31 March 2016. [1] (b) Calculate the total depreciation charge for plant and machinery for the year ended 31 March 2016. [3] (c) Prepare an extract from the statement of financial position at 31 March 2016 for non-current assets. King Extract from Statement of Financial Position at 31 March 2016 Accumulated Cost / Valuation Depreciation Net Book Value $ $ $ Workings: [8]

17 marks

Mark scheme: 4(a) A cost unit is a unit of production (1) whereas a cost centre is part of a business to which costs can be attributed / allocated to (1) 2 4(b) Production cost centre is directly involved in producing the goods e.g machining, assembly (1) Service cost centre provides a service for the production cost centres / not involved in the production of goods (1) 2 4(c) The amount each unit of production makes towards covering the fixed costs (1) and providing a profit. (1) Or The difference between sales revenue and variable costs (1) contributing toward making a profit (or towards the fixed costs)(1) 2 Question Answer Marks 4(d) Workings January February $ $ Sales 3600 × $12 43 200 5400 × $12 64 800 Opening inventory – – 900 × $5 4 500 Variable costs 4500 × $5 22 500 4500 × $5 22 500 Closing inventory 900 × $5 4500 0 × $5 0 Marginal costing profit statement January February $ $ $ $ Sales 43 200 64 800 (1) row Opening inventory – 4 500 (1) Variable prod cost 22 500 22 500 (1) row Closing inventory (4 500) (0) (1) Cost of sales (18 000) (27 000) (1 of) row Contribution 25 200 37 800 Fixed costs (9 800) (9 800) (1) row Profit 15 400 28 000 (1 of) row Total profit 43 400 7 4(e) Fixed production overhead costs 9000 = $2 per unit (1) Production units 4500 1 Question Answer Marks 4(f) Workings: January February $ $ Sales 3600 × $12 43 200 5400 × $12 64 800 Opening inventory – – 900 × $7 6 300 Variable costs 4500 × $5 22 500 4500 × $5 22 500 Fixed prod overheads 4500 × $2 9 000 4500 × $2 9 000 Full production cost: VC $5 FPO $2 $7 Closing inventory 900 × $7 6 300 – Absorption costing profit statement January February $ $ $ $ Sales 43 200 64 800 (1) row Opening inventory – 6 300 (1) op and cls inventory Variable prod cost 22 500 22 500 (1) row Fixed prod cost 9 000 9 000 (1) row Closing inventory (6 300) – Cost of sales (25 200) (37 800) (1of) row 18 000 27 000 Fixed admin costs (800) (800) (1) row Profit 17 200 26 200 (1of) row Total profit 43 400 (1) 8 Question Answer Marks 4(g) January ($) February ($) Profit per marginal costing statement (from part (d)) 15 400 28 000 Add difference in closing inventory 1 800 Less difference in opening inventory 1 800 Profit per absorption costing statement (from part (f)) 17 200 26 200 3 4(h) Marginal costing will help in short term decision making. Marginal costing is easy to operate. But relies upon costs being split into fixed and variable Absorption costing helps set prices Absorption costing is used in long-run rather than short-run. Absorption costing is more acceptable / realistic for financial statements. 1 mark for decision and 4 for justification 5 Total: 30

This question in 9706/22 Feb/March 2017

3 Meena did not keep full accounting records. She was advised to keep her books of account using the double entry system. REQUIRED (a) State three benefits a business gains from maintaining a system of double entry book-keeping. 1 2 3 [3] Additional information Meena now uses the double entry system of book-keeping. At the end of January the total of the balances in the sales ledger was $34 524. However, the balance on the sales ledger control account was $33 205. On investigation she found the following errors: 1 The sales journal had been undercast by $1649. 2 A cheque received had been correctly entered in the cash book as $650 but was entered in the sales ledger as $560. 3 An irrecoverable debt, $420, had been written off in the sales ledger but not entered in the control account. 4 A credit note issued for $160 had been completely omitted from the books of account. REQUIRED (b) Prepare a reconciliation between the sales ledger control account and the sales ledger balances at 31 January. Sales ledger control account Description Add ($) Less ($) Total ($) Opening balance 33 205 Sales ledger balances Description Add ($) Less ($) Total ($) Opening balance 34 524 [6] (c) State three reasons why there might be a credit balance on a customer’s account in the sales ledger. 1 2 3 [3] Additional information Meena is considering charging interest on the full account balances of her customers who do not pay promptly. REQUIRED (d) Advise Meena whether or not she should take this course of action. Justify your answer. [3] [Total: 15]

15 marks

Mark scheme: 3(a) It enables checking transactions through the use of a trial balance and control 3 accounts. It enables the production of the income statement and statement of financial position to be compiled more easily. It shows the amount due to individual customers and suppliers thus avoiding overpayment. Helps guard against errors / fraud. (1 mark) × 3 points 3(b) Sales ledger control account 6 Description Add ($) Less ($) Total ($) Opening balance 33 205 Error in sales journal 1 649 (1) Irrecoverable debt omitted 420 (1) Credit omitted 160 (1) Totals 1 649 580 1 069 Corrected balance 34 274 Sales ledger balances Description Add ($) Less ($) Total ($) Opening balance 34 524 Less error in cheque entry 90 (1) Less credit omitted 160 (1) Total 250 (250) Corrected balance 34 274 (1) both 3(c) A customer has overpaid in error 3 A credit has been given and the customer has not taken A contra has been put through but the customer has ignored it. A customer has paid in advance Not taking a discount There is a deposit on goods. Customer paid for the goods before returning them. Customer overpaid and invoice (1 mark) × 3 points 3(d) May improve trade receivables collection period. 3 Improve cash flows Meena may lose customers May need tighter credit control which may increase cost Decision (1 mark) Justification (2 marks) Total: 15

This question in 9706/21 May/June 2017

1 Huan owns a business selling electrical goods. He was unable to count his inventory at his year end of 31 March 2016. He counted his entire inventory on 6 April 2016, and valued it at cost, $57 760. The following information is available: 1 Huan marks up the cost price of all goods by 25% to calculate the selling price. 2 Purchases of inventory between 1 April 2016 and 6 April 2016 amounted to $6100. 3 Sales between 1 April 2016 and 6 April 2016 amounted to $9600. 4 Goods with a selling price of $2100 had been sent to a customer on a sale or return basis on 30 March 2016. The goods had not been sold at 31 March 2016 and had not been included when the inventory was counted. 5 On 4 April 2016, a customer returned goods sold to him on 26 March 2016. The goods had a selling price of $650. REQUIRED (a) Prepare a statement to show Huan the value of inventory to include in the financial statements at 31 March 2016. [5] Question 1(b) is on the next page. Additional information The following trial balance has been extracted from the books of account at 31 March 2016: Debit Credit $ $ 6% Bank loan (repayable 2019) 12 000 Advertising expenses 3 480 Bank account 4 260 Capital account 145 190 Carriage outwards 810 Discount allowed 1 250 Drawings 32 700 Fixtures and fittings – cost 68 100 Fixtures and fittings – provision for depreciation 26 500 Insurance 1 090 Interest paid 950 Inventory at 1 April 2015 56 800 Motor expenses 6 460 Motor vehicles – cost 49 600 Motor vehicles – provision for depreciation 18 800 Property rental 11 050 Provision for doubtful debts at 1 April 2015 580 Purchases 239 470 Returns outwards 410 Revenue 294 200 Other operating expenses 4 690 Trade payables 21 660 Trade receivables 34 920 Wages 12 230 523 600 523 600 The following information is also available: 1 Interest on the bank loan had been paid up to 31 December 2015.

5 marks

Mark scheme: 1(a) $ Inventory at 6 April 2016 57 760 Purchases (6 100) (1) Sales (9600 × 4 / 5) 7 680 (1) Sale or return (2100 × 4 / 5) 1 680 (1) Customer returns (650 × 4 / 5) (520) (1) Inventory at 31 March 2016 60 500 (1OF) 5 Question Answer Marks 1(b) Huan Income statement for the year ended 31 March 2016 $ $ Revenue 294 200 Cost of sales Opening inventory 56 800 Purchases 239 470 Returns outwards (410) (1) 295 860 Closing inventory (60 500) (1OF) 235 360 Gross profit 58 840 (1OF) Profit on disposal of motor vehicle (W1) 470 (2CF/1OF) 59 310 Deduct expenses Carriage outwards 810 Discount allowed 1 250 Insurance 1 090 Motor expenses 6 460 Other operating expenses 4 690 Wages 12 230 Advertising expenses (3480 – 200) 3 280 (1) Interest payable (950 + 180) 1 130 (1) Property rental (11 050 – 3250) 7 800 (1) Depreciation motor vehicles (49 600 × 25%) 12 400 (1) Depreciation fixtures and fittings 41 600 × 15%) 6 240 (1) Irrecoverable debt written off 420 (1) Increase in provision for doubtful debts (W2) 110 (1) 57 910 Profit for the year 1 400 (1OF) W1 Accumulated depreciation = (18 720 × 25%) + 4680 × 12 9 NBV = 10 530 Profit = 11 000 – 10 530 = 470 W2 (34 920 – 420) × 2% – 580 = 110 increase 13 Question Answer Marks 1(c) Benefits: (maximum 3 marks) Provides a total for trade receivables. (1) Helps in the preparation of the financial statements. (1) Helps deter/prevent/reduce fraud as it is maintained by different person. (1) Verifies the arithmetical accuracy / identifies errors in the sales ledger. (1) Can be reconciled with the sales ledger balances to improve accuracy. (1) Limitation: (maximum 1 mark) Doesn’t identify errors of commission/omission/compensating/original entry. (1) 4 1(d)(i) operating expenses to revenue (to two decimal places) (57 910 – 1130) (1OF) / 294 200) × 100 = 19.30% (1) OF 4 1(d)(ii) inventory turnover (days) (56 800 + 60 500) / 2) (1 OF) / 235 360) × 365 = 91 days (1OF) 1(e)(i) Carla may have better control on operating expenses. Carla may have lower wages as she does the work herself, so takes higher drawings. Carla may have less depreciation as she does not need delivery vehicles. Allow other valid responses. Maximum 2 marks (1 for stating and 1 for developing) 4 1(e)(ii) Carla has a faster turnover of finished goods because all her products are sold on the day they are made. Any inventory (e.g. flour) is perishable. Maximum 2 marks (1 for stating and 1 for developing)

This question in 9706/21 Oct/Nov 2017

4 Property rental included a payment of $5850 covering the period 1 December 2015 to 31 August 2016.

0 marks

Mark scheme: 4(a) Method of costing that you apply to the production of a number of identical items. (1) The cost per unit is found by dividing the total batch cost by the number of units in the batch. (1) 2 Question Answer Marks 4(b) Assembly $ Machining $ Stores $ Canteen $ Allocated overheads 36 000 50 000 6 250 2 500 Re-apportionment of canteen 1 625 625 250 (2 500) (1) row Subtotal 37 625 50 625 6 500 – Re-apportionment of stores 2 600 3 900 (6 500) – (1of) row Total 40 225 54 525 – – (1of) both 3 4(c) Assembly Machining $40225 6000 = $6.70 (1of) per labour hr (1) $54525 5500 = $9.91(1of) per machine hr (1) 4 4(d) $ Direct materials 48 000.00 Direct labour – assembly (500 hrs × $12) 6 000.00 } (1) Direct labour – machining (300 hrs × $8) 2 400.00 } both Production overheads (assembly 500 hrs × $6.70) 3 350.00 (1of) Production overheads (machining 500 hrs × $9.91) 4 955.00 (1of) 64 705.00 Selling and administration costs costs 7 000.00 (1) Total cost 71 705.00 (1of) Cost per unit $71 705 1000 = $71.71(1of) 6 Question Answer Marks 4(e) $ $71.71 × 75 units = 5 378.25 (1of) Profit 8 067.38 (1of) Total selling price 13 445.63 (1of) 3 4(f) Anna would still make a profit on the order. (1) The order will help ensure the workforce is kept busy. (1) May lead to further orders from Sally. (1) However, Anna’s other customers may also start demanding discount, (1) which would reduce Anna’s overall profit. (1) Reaction of competitors who may lower their prices. (1) Could lose order if discount not given. (1) 1 mark for decision and 4 marks for justification. 5 4(g) $ Selling price 12 – variable costs (5) = contribution 7 (1) $21000 $7 (1of) = 3000 units (1of) 3 Question Answer Marks 4(h) Non-financial reasons (Max 2) If Anna doesn’t fulfil the existing orders, the customers will not be happy / loss of reputation. (1) Could have a knock-on effect for other orders of other products. (1) Can workforce be used elsewhere if they don’t make these orders / lay off workers. (1) Morale of employees in existing factory. Financial reasons (Max 2) The orders provide a positive contribution towards fixed costs. (1) At present current level of demand is below break-even point - factory operates at a loss. (1) Demand may increase in the future and make the new factory profitable. (1) How accurate is the financial data. (1) Will closing the factory result in redundancy costs. (1) 1 mark for advice and overall max 3 marks for reasons. 4

This question in 9706/21 Oct/Nov 2017

5 Advertising expenses included a charge of $200 relating to advertising planned for September 2016.

0 marks

This question in 9706/21 Oct/Nov 2017

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

2 The following information has been extracted from the books of account of FA Limited at 1 January 2016. $ Motor vehicles at cost 124 000 Motor vehicles provision for depreciation 54 250 The following information is also available. 1 All the company’s motor vehicles had been purchased on 1 January 2014. 2 On 1 July 2016, a new motor vehicle was purchased for $48 000. The cost was settled by a cheque payment of $28 000, the balance by the part exchange of an old motor vehicle. The vehicle that was part-exchanged had cost $36 000. 3 The company policy is to depreciate motor vehicles at 25% per annum using the reducing balance method. A full year’s depreciation is charged in the year of purchase, but none in the year of sale. REQUIRED (a) Prepare the following ledger accounts for the year ended 31 December 2016. (Dates are not required.) Motor vehicles at cost $ $ Motor vehicles provision for depreciation $ $ Disposal of non-current assets $ $ Workings [6] (b) Analyse the effect on the profit for the year ended 31 December 2016 if FA Limited had always used the straight-line method of depreciation at 20% per annum. Show your workings. [5] (c) Explain two accounting concepts that apply to making the annual charge for depreciation. 1 2 [4] [Total: 15] PLEASE TURN OVER

15 marks

Mark scheme: 2(a) $ $ Balance b/d 124 000 Disposal 36 000 Bank 28 000 Balance c/d 136 000 Disposal 20 000 (1) 172 000 172 000 Balance b/d 136 000 (1)OF Motor vehicles provision for depreciation $ $ Disposal 15 750 Balance c/d 54 250 Balance c/d 62 875 Income statement W1 24 375 (1) OF 78 625 78 625 Balance b/d 62 875 (1) OF Disposal of non-current assets $ $ Motor vehicle at cost 36 000 Motor vehicle at cost 20 000 Motor vehicle provision for depreciation 15 750 (1) Income statement 250 (1) OF 36 000 36 000 W1: 136 000 – (54 250 – 15 750) × 25% = $24 375 6 Question Answer Marks 2(b) Depreciation for the year ended 31 December 2015 would be $27 200 using the straight-line method, but $24 375 using the reducing balance method (1). The loss on sale of the motor vehicle would be $1 600 (36 000 – 20 000 – 14 400) using the straight-line method, compared to $250 using the reducing balance method (1of). Using straight line depreciation 27 200 + loss 1600 = $28 800 (1) Using reducing balance method 24 375 + loss 250 = $24 625 (1) Profit for the year would be reduced by $4 175 ($28 800 – 24 625) if using the straight-line method (1of). 5 2(c) Accruals / matching concept (1). The cost of using the asset should be matched to the time period of income earned by the asset (1). Prudence (1). Spreading the cost of an asset over its useful life avoids overstating annual profits / value of assets (1). Consistency (1). Enables valid comparison. (1) Max 4 4

This question in 9706/21 May/June 2018

1 Francesco is a sole trader who runs a small bicycle distribution business. He does not keep full accounting records. REQUIRED (a) State two benefits to a sole trader of keeping full accounting records. [2] (b) Explain the accounting treatment at the year-end in the income statement and statement of financial position of: Prepayments Accruals [4] Additional information Francesco provided the following information for the year ended 30 April 2017. $ Opening inventory 16 250 Total sales 82 500 Total purchases 62 750 Mark-up is 25%. The normal rate of inventory turnover is 5 times. However, it was discovered at the year-end that some inventory had been stolen. No insurance claim has yet been made for this loss. REQUIRED (c) Prepare an extract from the income statement to show gross profit for the year ended 30 April 2017. Show clearly the value of inventory stolen. Workings: [5] Additional information The following information has also been provided. 1 at 1 May at 30 April 2016 2017 $ $ Trade receivables 6 875 8 250 Trade payables 5 200 6 350 Expenses prepaid 625 775 Expenses owing 350 425

11 marks

Mark scheme: 1(a) Enables the preparation of financial statements (1) Enables the monitoring of performance (1) Improves accuracy and reduces errors (1) Reduces fraud (1) Accept other valid responses. Max 2 marks 2 1(b) Prepayments: Deducted from expenses (1) and shown as a current asset (1) OR Added to income (1) and shown as a current liability (1) Accruals: Added to expenses (1) and shown as a current liability (1) OR Deducted from income (1) and shown as a current asset (1) Max 2 for each. 4 Question Answer Marks 1(c) $ $ Total sales 82 500 Cost of sales Opening inventory 16 250 Total purchases 62 750 Stolen inventory (W1) (2 850) (1) Closing inventory (W2) W( (10 150) (2) 66 000 (1) Gross profit 16 500 (1) OF (W1) 66 000 + 10 150 – 62 750 – 16 250 = 2 850 (1) (W2) 66 000 / 5 × 2 – 16 250 = 10 150 (1) Use of formula (1) 5 1(d) Bank account $ $ Receipts from credit customers (W1) 81 125 (2) Bal b/d 28 325 (1) OF Rent 15 700 (1) Payments to credit suppliers (W2) 61 600 (2) Balance c/d 3 025 Expenses 9 925 (1) 99 850 99 850 Balance b/d 3 025 (1) (W1) 6 875 + 82 500 (1) – 8 250 = 81 125 (1) (W2) 5 200 + 62 750 (1) – 6 350 = 61 600 (1) *Labels and values needed 8 1(e) 9925 + (625 − 775) (1) (–350 + 425) (1) = 9850 2 Question Answer Marks 1(f) Current ratio has worsened (by 1.4: 1) Current ratio was too high and suggested wasted resources Current ratio now is too low and would not have to get much worse before liabilities could not be paid Acid test ratio has worsened (by 0.6: 1) Acid test ratio is now below 1: 1 and so cannot pay debts without relying on using inventory. Inventory is a problem as it may be difficult to convert into cash 1 mark for identification and 1 mark for development Max 2 for current ratio and Max 2 for acid test ratio 4 1(g) The supplier may have difficulty receiving payments from Marco (1) based on his liquidity position (1) The supplier would have an increased risk of irrecoverable debts, (1) which would reduce profits (1) The supplier would need strict credit control procedures (1) which increases costs (1) The supplier could consider supplying on a cash only basis (1) or on a prepayment basis (1) Marco could become a regular customer (1) Advice (1) Max 4 marks 5

This question in 9706/21 Oct/Nov 2018

2 A business depreciates its non-current assets. REQUIRED (a) Explain why a business should comply with the following concepts when accounting for non-current assets. Prudence Accruals (matching) [4] Additional information T Limited prepares accounts to 30 June. The following balances are available at 30 June 2017: $ Plant and machinery at cost 174 300 Provision for depreciation 48 700 On 1 July 2017 the company disposed of a machine which had a net book value of $20 000. The machine had been purchased on 1 July 2015. On 1 October 2017 a new machine was purchased for $68 600 paid by cheque. The company depreciates plant and machinery at 20% using the reducing balance method calculated on a month-by-month basis. No depreciation is charged in the year of disposal. REQUIRED (b) Prepare the provision for depreciation on plant and machinery account for the year ended 30 June 2018. Dates are required. Provision for depreciation on plant and machinery $ $ Workings: [8] Additional information Rather than paying immediately, the company had the option to pay in full for the new machine 15 months from the date of purchase. REQUIRED (c) Explain the impact on the financial statements for the year ended 30 June 2018 of paying for the new machine 15 months from the date of purchase. [3] [Total: 15] PLEASE TURN OVER

15 marks

Mark scheme: 2(a) Prudence non-current assets would be overstated (1), the profit would be overstated (1) Accruals (matching) the cost of using a non-current asset should be matched (1) against the benefits that the asset produces (1) 4 2(b) T Limited Provision for depreciation on plant and machinery $ $ 2017 2017 July 1 Disposal 11 250 (1) Jul 1 Balance b/d 48 700 (1) 2018 2018 Jun 30 Balance c/d 68 860 Jun 30 Income statement 31 410 (5) W1 80 110 80 110 2018 Jul 1 Balance b/d 68 860 (1) OF Workings W1: $ Cost 174 300 Depreciation 48 400 125 600 Disposal 20 000 105 600 (1) × 20% = 21 120 (1) OF Oct 1 2017 – Jun 30 2018 $68 600 × 20% × 9 12 (1) = 10 290 (1) OF $21 120 + $10 290 = 31 410 (1) OF 8 Question Answer Marks 2(c) Bank would have increased by $68 600 (1), current liabilities would have increased by the same amount. (1) There would be no change in the value of depreciation/non-current assets (1) 3

This question in 9706/21 Oct/Nov 2018

4 DH Limited manufactures a single product. The following information is available for one unit of that product: $ Selling price 20 Direct material 8 Direct labour 5 Variable overhead 3 Fixed overhead 2 Budgeted production is 200 000 units per annum. REQUIRED (a) Calculate the annual break-even point in units. [2] (b) Calculate the total budgeted annual contribution and total budgeted annual profit. [2] Additional information The directors are considering reducing the selling price of the product by 10%. The new selling price would be lower than that of competitors. The directors are confident that as a result of this, sales volume would increase by 50%. In order to produce the budgeted units, the company’s labour force is currently working at 80% capacity. Workers will be paid an overtime premium of 25% for all production over 100% capacity. The additional production would enable the company to qualify for 12.5% discount on all direct materials. The revised production would result in the fixed overhead cost per unit reducing by 30% for all units produced. REQUIRED (c) Calculate the total budgeted annual profit if the directors proceed with their plans. [8] (d) Calculate the revised break-even point in units if the directors proceed with their plans. [2] (e) Calculate the margin of safety in units and as a percentage if the directors proceed with their plans. [2] (f) Advise the directors whether or not they should proceed with their plans to reduce the selling price. Give reasons for your answer. [5] Additional information The company has used the same direct material supplier for many years, but the directors have now been informed that there will possibly be a shortfall of available material in the next six months. They have sourced an alternative material from a new supplier at the same price. REQUIRED (g) State three issues the directors should consider before changing a supplier. 1 2 3 [3]

24 marks

Mark scheme: 4(a) = $400 000 Contribution (20 – 8 – 5 – 3) = $4.00 (1) Breakeven point = 400000 4 = 100 000 units (1) OF 2 4(b) $ Contribution (200 000 × 4) = 800 000 (1) OF Fixed costs 400 000 Profit 400 000 (1) OF 2 4(c) $ $ Sales 300 000 × 18 5 400 000 (1) Direct materials 300 000 × 7 2 100 000 (1) Direct labour 250 000 × 5 1 250 000 (1) Direct labour 50 000 × 6.25 312 500 (1) Variable overheads 300 000 × 3 900 000 (1) Total variable costs 4 562 500 Contribution 837 500 (1) OF Fixed overheads 300 000 × 1.40 420 000 (1) Budgeted profit 417 500 (1) OF 8 Question Answer Marks 4(d) Contribution 837 500 300 000 = 2.79 Break-even point = 420000 2.79 (1) = 150 538 units (1) OF (Accept a range of units) 2 4(e) 300 000 – 150 538 (1) OF = 149 462 units       000 300 462 149 × 100 = 49.82% (1) OF 2 4(f) Positive (max 3) Margin of safety is high at 49.82% (1) Budgeted profit shows an increase of $17 500 (1) Will increase market share (1) Factory will be working at 100% capacity (1) Negative (max 3) How reliable are the directors’ estimates? (1) Will competitors reduce their price affecting the estimated sales growth? (1) Will employees be willing to work the overtime? (1) Will quality suffer because of working overtime? (1) Overall max (4) for comments Decision (1) 5 Question Answer Marks 4(g) Will new supplier offer the same quantity discount? (1) How certain is the possibility of the shortfall? (1) Will the quality of the material from the new supplier be acceptable? (1) How reliable will the new supplier be? (1) How long will new supplier maintain the same price? (1) Will the new supplier offer the same credit terms? (1) Accept other valid responses. Max 3 marks 3 4(h)(i) Allocation. Charging overheads/costs to a specific cost centre (1) where those overheads are clearly identified with that cost centre. (1) 2 4(h)(ii) Apportionment. Charging overheads/costs that cannot be clearly identified with a specific cost centre (1), to cost centres on an appropriate basis. (1) 2 4(h)(iii) Absorption. Where the total of allocated and apportioned overheads/costs (1) is charged to units of production. (1) 2

This question in 9706/21 Oct/Nov 2018

2 The total value of purchases invoices received was $79 300. Of these, $12 100 had not been paid by the year end.

0 marks

Mark scheme: 2(a) Jack Kelly Liam Jack Kelly Liam $ $ $ $ $ $ Goodwill 10 500 26 250 15 750 (1) Balance b/d 33 000 71 000 Bank 19 500 37 250 (1)OF Revaluation 6 000 15 000 (1) Balance c/d 24 000 60 000 36 000 Goodwill 15 000 37 500 (1) Bank 51 750 (1)OF 54 000 123 500 51 750 54 000 123 500 51 750 Balance b/d 24 000 60 000 36 000 (1) NOTES: All marks are for a correct row 6 2(b) The difference between the value of a business as a whole and the separate value of the net tangible assets (1). OR The (intangible) value of reputation/customer base/location, etc. (1) 1 2(c) The adjustment will ensure that the original partners benefit, because it is their efforts which have created the goodwill. 1 mark for clarifying that the original partners benefit; 1 mark for explaining why they should benefit. 2 2(d) The value is just a matter of opinion / subjective (1) so it is difficult to value (1) The value could be subject to sudden change (1) for example if a problem arose which caused damage to the partnership’s reputation (1). 1 mark for giving one reason and 1 mark for development 2 Question Answer Marks 2(e) Return on capital employed 30 June 2019 $ 60 000 120 000 $ × 100 50% (1) 30 June 2018 $48000 $104000 W1 × 100 46.15% (1)OF W1 Profit for the year ended 30 June 2018 ($60 000 × 4 / 5) = $48 000 (1) Advice. The return on capital employed will improve (by 3.85%) (1)OF 4

This question in 9706/22 Oct/Nov 2018

3 Finn knew that he had sometimes taken a cash discount but had kept no record of the amounts involved. REQUIRED (c) Prepare a total trade payables account for the year ended 31 December 2017 to show the total discount Finn had taken. Total trade payables account $ $ [4] Additional information 1 Finn paid wages of $1200 in cash each month. He also took cash drawings of $500 every month. 2 Other operating expenses were all paid in cash. 3 Cash in hand was $100 at the year end. REQUIRED (d) Prepare a cash account for the year ended 31 December 2017 to show the amount paid for other operating expenses. Cash account $ $ [4] Additional information 1 The loan carried an interest rate of 10%. The loan had been received on 1 July 2017 and no interest had been paid by the year end. 2 The fixtures and fittings were expected to last for 10 years and have no scrap value. They are to be depreciated using the straight-line method. The policy is to provide for a full year’s depreciation in the year of purchase. 3 At the year end other operating expenses, $1000, were accrued.

8 marks

Mark scheme: 3(a)(i) Improves the perception of the company size (1) by increasing the issued share capital of the company (1) To capitalise non-distributable reserves (1) but overall, total equity will remain the same (1) To reward the company’s investors (1) when profits are not sufficient to pay dividends (1) Can be used to keep existing shareholders happy (1) and may be attractive to potential investors (1) 1 mark per valid point + 1 for development to max of 4 4 3(a)(ii) To write off expenses relating to: company formation the issue of debentures the issue of shares redemption of debentures 1 mark per valid point to max of 3 3 Question Answer Marks 3(b) S Limited Statement of changes in equity for the year ended 31 December 2017 Ordinary share capital $ Share premium $ General reserve $ Retained earnings $ Total $ Brought forward at 1 January 2017 1 250 000 – 130 000 65 000 1 445 000 Profit for the year 255 000 (2) / (1)* 255 000 Dividend – final 2016 – interim 2017 (125 000) (1) (46 875) (1) (125 000) (46 875) Issue of ordinary shares 312 500 (1) 593 750 (1) 906 250 Balance at 31 December 2017 1 562 500 593 750 130 000 148 125 2 434 375 * $268 500 (1) / $255 000 (2) 6 3(c) Debit Non-current asset (1) Credit Revaluation reserve (1) 2

This question in 9706/22 Oct/Nov 2018

1 Ahmed and Raji are in partnership as retailers but have not maintained full accounting records. They have been advised to use a double entry system of book-keeping. REQUIRED (a) State three advantages to business owners of using the double entry system of book-keeping. 1 2 3 [3] Additional information The following information is available for the partnership: 1 Assets and liabilities 30 April 2019 1 May 2018 $ $ Equipment at net book value 17 600 20 500 Motor vehicles at net book value (Cost $25 000 at 1 May 2018) ? 16 500 Inventory 5 470 6 750 Trade receivables 3 790 3 260 Trade payables 4 560 4 390 Wages owing 2 300 1 500 Rent paid in advance 1 600 950 Cash and bank balances 6 470 credit 5 430 debit 2 The summary of the partnership bank receipts and payments for the year ended 30 April 2019 was as follows. $ Receipts From credit customers 57 900 Payments To credit suppliers 25 800 New motor vehicle 6 800 Partners’ drawings 16 700 Wages 10 700 Rent 7 500 General expenses 2 300 All purchases and sales were made on credit. 3 The partners wish to create a provision for doubtful debts of 5% of trade receivables. 4 Depreciation on the motor vehicles is charged at 20% using the straight-line method. Depreciation is charged on a monthly basis. 5 On 1 November 2018 a motor vehicle which had cost $7000 on 1 May 2016 was part-exchanged for a new motor vehicle. The amount of the part-exchange was $3300. The balance of the purchase cost of the new vehicle, $6800, was paid by cheque. 6 There were no additions or disposals of equipment during the year. REQUIRED (b) Calculate: (i) the profit or loss on the disposal of the motor vehicle [3] (ii) the total depreciation charge for motor vehicles for the year ended 30 April 2019. [4] (c) Prepare the income statement for the partnership for the year ended 30 April 2019. [9] (d) Explain why a business may create a provision for doubtful debts. [4] Additional information When the partners started the business they each invested $25 000 and agreed to share profits and losses equally. The partners are concerned that the business has low profit and a high bank overdraft. Ahmed’s brother is prepared to invest $25 000 into the business. He has suggested two options to Ahmed and Raji. Option 1: To loan this amount to the partnership and receive an annual interest of 10%. Option 2: To invest the full amount and become an equal partner. Through his business contacts he feels that he will be able to improve the total revenue. REQUIRED (e) Advise the partners which option, if either, they should accept. Justify your answer. [7] [Total: 30] PLEASE TURN OVER

30 marks

Mark scheme: 1(a) It will have up-to-date information of assets and liabilities / and will inform decision making (1) The business can more easily chase trade receivables and keep up to date with trade payables (1) The preparation of the financial statements is easier and more accurate / reducing the possibility of errors (1) Accept other valid points. 3 1(b)(i) $ $7000 − 2800 4200 (1) Depreciation for 6 months (700) (1) Net book value on disposal 3500 Part-exchange 3300 Loss on disposal (200) (1) 3 1(b)(ii) Total depreciation charge for motor vehicles for the year ended 30 April 2019 $ Depreciation on vehicles disposed 700 (1) OF New vehicle 10 100 × 10% 1010 (1) Remaining vehicles 18 000 × 20% 3600 (1) Charge for the year 5310 (1) OF 4 Question Answer Marks 1(c) Income statement for the year ended 30 April 2019 $ $ Revenue W1 58 430 (1) Inventory on 1 May 2018 6 750 Purchases W2 25 970 32 720 Inventory on 30 April 2019 5 470 27 250 (1) Gross profit 31 180 Wages W3 11 500 (1) Rent W4 6 850 (1) General expenses 2 300 Provision for doubtful debts 190 (1) Loss on sale of motor vehicle 200 (1) OF Depreciation on motor vehicles 5 310 (1) OF Depreciation on equipment W5 2 900 (1) 29 250 Profit for the year 1 930 (1) OF Workings: W1 Revenue 57 900 + 3790 − 3260 = 58 430 W2 Purchases 25 800 + 4560 − 4390 = 25 970 W3 Wages 10 700 + 2300 − 1500 = 11 500 W4 Rent 7500 − 1600 + 950 = 6850 W5 Depreciation equipment 20 500 − 17 600 = 2900 9 1(d) Application of concept of prudence (1) Application of matching concept (1) Profit may be overstated in the event of irrecoverable debts (1) Trade receivables / current assets may be overstated (1) Accept other valid points. 4 Question Answer Marks 1(e) Loan Max 3 Annual interest will reduce / eliminate profit (1) Does he want any security? (1) Will he want capital repaid? (1) However, it will clear the overdraft in the short-term. (1) Accept other valid points. Becoming a partner Max 3 Will bring in expertise / new ideas (1) May generate additional gross profit (1) May be able to reduce wages which is the main expense (1) There may be conflict between the three partners (1) Possibly less profit for Ahmed and Raji (1) Accept other valid points. 1 for Advice 7

This question in 9706/21 May/June 2019

2 Sofia has provided the following information relating to her trade receivables at 31 December 2018: Analysis of trade receivables 0-60 days 61-90 days Over 90 days Percentage of total trade receivables 68% 20% 12% 1 At 31 December 2018 total trade receivables were $54 500. 2 Dixie, who had been declared bankrupt, owed $1500. This debt was 110 days old at 31 December 2018 and was to be written off. 3 Sofia’s policy is to make a provision for doubtful debts as follows: 5% for debts aged between 61 and 90 days old 7.5% for debts aged over 90 days old. The balance on the provision for doubtful debts at 1 January 2018 was $1100. REQUIRED (a) State the journal entry to write off an irrecoverable debt. [2] (b) Calculate the amount of provision for doubtful debts at 31 December 2018. [4] (c) Prepare the provision for doubtful debts account for the year ended 31 December 2018. Dates are required. [2] (d) Explain one accounting concept which is applied when making a provision for doubtful debts. [2] Additional information Sofia is considering changing the basis of the provision for doubtful debts to a general provision of 2.5% on all trade receivables. She has calculated her profit for the year ended 31 December 2018 as $4300 after writing off Dixie’s debt but before making any adjustment for the provision for doubtful debts. REQUIRED (e) Describe how this change will affect Sofia’s profit. Support your answer with relevant calculations. [5] [Total: 15]

15 marks

Mark scheme: 2(a) Dr Irrecoverable debts (1) Cr Dixie (1) 2 2(b) $10 900 × 5% = $545 (1) $5 040 × 7.5% = $378 (1) $923 (2/1)OF 4 Question Answer Marks 2(c) Provision for doubtful debts account 2018 $ 2018 $ Dec 31 Income statement 177 (1) OF Jan 1 Balance b/d 1100 Balance c/d 923 1100 1100 2019 Jan 1 Balance b/d 923 (1) OF 2 2(d) Prudence (1) Profit/current assets/trade receivables should not be overstated (1) OR Matching / accruals (1) Revenue of an accounting period is matched against the costs of the same period (1) 2 2(e) Sofia’s profit would now be $4075 (4) a decrease of $402. (1) Workings Using the existing policy the profit would be $4477 (1) due to a decrease in the provision for doubtful debts (1) OF Under proposed change, the closing balance on the provision for doubtful debts account would be $1325 (1). 5

This question in 9706/22 May/June 2019

4 Jessie is a manufacturer and uses a single raw material to make her product. The following table shows inventory transactions for the month of March 2019. Per kilo Date Kilos $ March 1 Opening balance 1500 1.90 3 Receipts 3500 1.92 10 Receipts 2000 1.95 17 Receipts 1500 2.00 Jessie uses the First In First Out (FIFO) method to value her inventory. The following issues to production took place. Date Kilos March 5 3000 23 4500 REQUIRED (a) Calculate the following in dollars: (i) the value of issues to production on 5 March [2] (ii) the value of issues to production on 23 March [3] (iii) the value of closing inventory at 31 March. [1] (b) State two advantages to a business of using the FIFO method of inventory valuation. 1 2 [2] Additional information The business has two production cost centres: machining and assembly, and one service cost centre: stores. The following budgeted information is available for the year ending 31 December 2019. Budgeted overheads $ Basis of apportionment Depreciation 9 760 Non-current asset at cost Heat and light 13 850 Kilowatt hours Machinery maintenance 6 500 Machine hours The following budgeted information is also available. Service Production cost centres cost centre Machining Assembly Stores Kilowatt hours 4 200 2 100 700 Non-current assets at cost ($) 91 000 28 000 21 000 Stores requisitions 375 125 Direct labour hours 2 700 6 300 Machine hours 13 400 3 350 REQUIRED (c) Complete the following table to show the apportionment of budgeted overhead costs for the year ending 31 December 2019. Service cost Production cost centres Total centre $ Machining Assembly Stores $ $ $ Depreciation Heat and light Machinery maintenance Total overheads apportioned Re-apportionment of stores Total overheads cost [6] (d) Calculate, to two decimal places, an overhead absorption rate for each production cost centre, using a suitable basis. [4] Question 4 (e) is on the next page.

18 marks

Mark scheme: 4(a) Workings: Date Kilos Per kilo $ Issues $ Total $ March 1 Opening balance 1500 1.90 3 Receipts 3500 1.92 5 Issues 3000 1500 × 1.90 1500 × 1.92 2850 2880 5730 10 Receipts 2000 1.95 17 Receipts 1500 2.00 23 Issues 4500 2000 × 1.92 2000 × 1.95 500 × 2.00 3840 3900 1000 8740 31 Closing balance 1000 × 2.00 2000 4(a)(i) 2850 (1) + 2880 (1) = 5730 2 4(a)(ii) 3840 (1) + 3900 (1) + 1000 (1) = 8740 3 4(a)(iii) 2000 (1) 1 Question Answer Marks 4(b) Easy to calculate (1) Inventory value is closer to current market value (1) An accepted method of valuing inventory for the financial statements (1) Max 2 marks Accept other valid points. 2 4(c) Total $ Production cost centres Service cost centre Machining $ Assembly $ Stores $ Depreciation 9 760 6 344 1 952 1 464 (1) row Heat and Light 13 850 8 310 4 155 1 385 (1) row Machinery maintenance 6 500 5 200 1 300 - (1) row Total overheads apportioned 19 854 7 407 2 849 Re-apportionment of stores 2 137 712 (2 849) (1) row Total overhead cost 21 991 (1) OF 8 119 (1) OF 6 Question Answer Marks 4(d) Machining Overhead cost $21 991 Machine hours 13 400 = $1.64 (1) OF per machine hour (1) Assembly Overhead cost $8 119 Labour hours 6 300 = $1.29 (1) OF per direct labour hour (1) 4 4(e) $ Direct materials (3 kilos × $2.00 ) 6.00 (1) Direct labour (2.5 hours × $4) 10.00 (1) Overheads (machining 1.5 hours × $ 1.64) 2.46 (1) OF Overheads (assembly 2 hours × $1.29 ) 2.58 (1) OF Cost per unit 21.04 × 200 units Total cost 4 208 (1) OF Mark-up/profit (25%) 1 052 (1) OF Total selling price 5 260 (1) OF OR $ Direct materials 1 200 (1) Direct labour 2 000 (1) Overheads 492 (1) OF Overheads 516 (1) OF Total cost 4 208 (1) OF Mark-up/profit (25%) 1 052 (1) OF Total selling price 5 260 (1) OF 7 Question Answer Marks 4(f) The offer still provides a positive contribution/generates profit (1) This will result in increased overall profits for the business (1) albeit the offer price will not achieve the usual mark up of 25% (1) The order will make use of existing spare capacity (1) which could be used to manufacture goods with a better mark-up (1) Is this a one-off order or will the customer expect future orders at the same price (1). Other customers could also want to buy at a reduced price (1) , and it could cause ill feeling with other customers (1) Decision (1) (1 mark) × any 4 points – Max 4 for comments 5

This question in 9706/22 May/June 2019

3 The balance of one credit customer who owed $740 was written off as irrecoverable. The remaining trade receivables settled their accounts in full less a cash discount of 5%.

0 marks

Mark scheme: 3(a) Provides an arithmetical check on the accuracy of the ledgers (1), as the balances on each control account should agree with the total of balances in each ledger. (1) Helps prevent fraud (1) as the work of those employees working on each ledger is independently checked by another employee. (1) Provides a figure for total trade receivables and total trade payables (1) aiding preparation of financial statements. (1) Any two benefits, 2 marks each 4 3(b)(i) Purchases ledger control account $ $ Contra error 485 (1) Balance b/d 18 981 Balance c/d 18 617 Purchase returns error 54 (1) Interest error 67 (1) 19 102 19 102 Balance b/d 18 617 (1) OF 4 3(b)(ii) Sales ledger control account $ $ Balance b/d 12 385 Cash sales error 480 (1) Balance c/d 11 905 12 385 12 385 Balance b/d 11 905 (1) OF 2 Question Answer Marks 3(c)(i) Purchases ledger accounts $ Original total 18 496 Purchases returns error 54 (1) Interest charged on overdue account 67 (1) 18 617 (1) OF Final balances c/d must be the same amount in the purchases ledger control account and the purchases ledger balances. 3 3(c)(ii) Sales ledger accounts $ Original total 11 117 Dishonoured cheque 788 (1) 11 905 (1) OF Final balances c/d must be the same amount in the sales ledger control account and the sales ledger balances. 2

This question in 9706/23 May/June 2019

1 Tariq owns a retail business but does not maintain full accounting records. All goods are purchased on credit, but all sales are on a cash basis. Tariq provided the following information for the year ended 30 September 2019. $ Trade payables 1 October 2018 4 980 30 September 2019 7 220 Payments to trade payables 70 300 Discounts received 940 REQUIRED (a) Calculate credit purchases for the year ended 30 September 2019. … … … … … … [4] Additional information Assets and other liabilities 30 September 1 October 2019 2018 $ $ Furniture and equipment at valuation 28 300 26 800 Inventory 8 080 7 410 Other receivables: rent prepaid – 990 Cash at bank 1 960 3 360 Cash in hand 410 820 Bank loan 15 000 12 000 Other payables: rent accrued 1 040 Summary of information taken from bank statements $ Receipts Cash takings banked 112 400 Additional bank loan 3 000 Payments Trade payables 70 300 Rent of premises 14 930 New furniture 5 200 Accountant’s fees 640 Loan interest 580 Drawings 25 150 Tariq took goods for personal use valued at cost $390 during the year. REQUIRED (b) Calculate the depreciation of furniture and equipment for the year ended 30 September 2019. … … … … … … [3] Additional information Tariq took some cash from the cash box as drawings during the year. However, no record was made of the amounts withdrawn. The following information is also available about cash. $ Cash sales 133 200 Wages of assistant 18 800 REQUIRED (c) Calculate Tariq’s cash drawings for the year ended 30 September 2019. … … … … … … … … … [5] (d) Prepare the income statement for the year ended 30 September 2019. Tariq Income statement for the year ended 30 September 2019 … … … … … … … … … … … … … … … … … … [9] Workings: (e) Explain the accounting concepts of: (i) business entity … … … … [2] (ii) substance over form. … … … … [2] Additional information Tariq has become concerned about his business’s liquidity. He is considering two options. Option 1: reduce the inventory levels Option 2: delay payments to suppliers REQUIRED (f) Advise Tariq which of these actions he should take. Justify your advice. … … … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: 1(a) Credit purchases 4 Trade payables $ $ Payments 70 300 Opening balance 4 980 (1) {(1) Discounts received 940 Purchases 73 480 (1)OF Closing balance 7 220 (1) 00 000 78 460 78 460 Accept alternative presentations 1(b) Depreciation of furniture and equipment 3 $ Opening valuation 26 800 New furniture 5 200 (1) 32 000 Less closing valuation 28 300 (1) Depreciation 3 700 (1) OF 1(c) Drawings 5 Cash account $ $ Opening balance 820 (1)* Cash banked 112 400 (1) Cash sales 133 200 (1) Wages of assistant 18 800 (1) Drawings 2 410 (1)OF 000 000 Closing balance 410 * 134 020 134 020 *Both Accept alternative presentations Que Ma stio Answer rks n 1(d) 9 Tariq Income statement for the year ended 30 September 2019 $ $ Revenue 133 200 Less Opening inventory 7 410 Purchases [$73 480 (of) – $390 73 090 (1)] 80 500 Closing inventory 8 080 Cost of sales 72 420 Gross profit 60 780 (1) Discounts received 940 (1) 61 720 Rent W1 16 960 (2)OF Depreciation of furniture and equipment 3 700 (1)OF Accountant's fees 640 (1) Loan interest 580 Wages of assistant 18 800 (1) 40 680 Profit for year 21 040 (1)OF W1 Rent Payment $14 930 + $990 (1) + $1 040 (1) = 16 960 1(e) Business entity: a business has its existence separate from its owners (1) only 2 (i) transactions that affect the business should be recorded in the accounting records (1) Max 2 1(e) Substance over form: financial statements must give a complete and accurate picture of 2 (ii) events (1) so economic impact is taken into account and legal form is disregarded (1) Max 2 Que Ma stio Answer rks n 1(f) Advice (1) 5 Reducing inventory: Would achieve improvement in liquidity (1) Would reduce storage costs (1) Would reduce chance that items become out of date and are wasted (1) But negative impact if inventories run out and demand not met (1) Delaying payments to suppliers: Would achieve improvement in liquidity (1) Might cause the loss of cash discounts/negative impact on profits (1) But negative impact if credit terms not met leading to loss of suppliers/credit terms/interest charges (1) Award up to 2 marks for each course of action (overall maximum 4 marks) plus 1 mark for advice Que Ma stio Answer rks n

This question in 9706/22 May/June 2020

2 Daniel, a retailer, receives rent from a tenant. The balance on the rent receivable account on 1 January 2019 was $700. This represented rent received in advance at the beginning of the year. During the year ended 31 December 2019 Daniel received total rent of $4800 covering the 12-month period beginning 1 March 2019. REQUIRED (a) Prepare the rent receivable account for the year ended 31 December 2019. Rent receivable account $ $ [4] (b) State in which section of the income statement for the year ended 31 December 2019 Daniel’s rent receivable should appear. … [1] (c) State in which section of the statement of financial position at 31 December 2019 the balance of the rent receivable account should appear. … [1] Additional information Daniel had created a provision for doubtful debts of $672 on 31 December 2018. At this date trade receivables appeared on the statement on financial position with a net value of $16 128. At 31 December 2019 Daniel decided to maintain the provision for doubtful debts at the same rate as in the previous year. Total trade receivables at 31 December 2019 were $15 300 before making any adjustment for provision for doubtful debts. REQUIRED (d) Calculate the increase or decrease in the provision for doubtful debts at 31 December 2019. … … … … … … [5] (e) State two accounting concepts which are applied when creating a provision for doubtful debts. 1 … 2 … [2] (f) State two factors that a business could consider when setting a rate for provision for doubtful debts. 1 … … 2 … … [2] [Total: 15]

15 marks

Mark scheme: 2(a) Rent receivable account 4 $ $ Income statement 4700 (1) Balance b/d 700 (1) Balance c/d 800 Bank 4800 (1) 5500 5500 Balance b/d 800 (1) 2(b) Rent receivable appears in the profit and loss section of the income 1 statement/it follow immediately after gross profit (1) 2(c) Closing balance will appear in the current liabilities section (1). 1 2(d) Calculation of change in the provision for doubtful debts. 5 Rate used: 672/($16 128 + 672, i.e. $16 800)(1) = 4% (1) $ Old provision 672 New provision = 4%(OF) × $15 300 612 (1) OF Change in provision 60 (1) OF decrease (1) OF 2(e) Accounting concepts and provisions for doubtful debts 2 Accruals concept (1) Prudence concept (1) 2(f) The business’s past experience of irrecoverable debts (1) 2 The usual rate applied for businesses of this type (1) Analysis of the existing debts and how long they have been outstanding/based on ageing schedule of trade receivables (1) Max 2 Accept other valid responses

This question in 9706/23 May/June 2020

1 Ismail opened a retail business on 1 January 2019 with the following assets and liabilities. $ Bank 7 500 Debit Non-current assets 18 500 Bank loan (repayable 2022) 4 200 Ismail prepared a draft income statement for the year ended 31 December 2019. However, this contained errors. Draft income statement for the year ended 31 December 2019 $ $ Revenue 274 500 Cost of sales (182 360) 92 140 Add discounts received 820 Gross profit 92 960 Add bank loan 4 200 97 160 Less expenses Carriage inwards 1 020 Drawings 18 740 General expenses 22 280 Insurance 1 730 Rent 20 250 Loan interest 210 (64 230) Profit for the year 32 930 The following had not been accounted for. 1 Ismail had taken goods for his own use. These goods cost $420 and had a selling price of $630. 2 Carriage inwards included capital expenditure of $400 on non-current assets which had been paid on 18 January 2019. 3 Depreciation on all non-current assets is to be provided at 20% per annum on cost. A full year’s depreciation is charged in the year of purchase. 4 The amount shown for insurance included $720 for the six-month period ending 30 April 2020. 5 At 31 December 2019 trade receivables totalled $14 800. A customer who owed $600 had been declared bankrupt. Ismail decided to write off this account. He also decided to create a provision for doubtful debts of 5% of trade receivables at the year end. 6 Interest on the bank loan is charged at 10% per annum. REQUIRED (a) Prepare the corrected income statement for the year ended 31 December 2019. Ismail Income statement for the year ended 31 December 2019 … … … … … … … … … … … … … … … … … Workings: [15] (b) Calculate the balance on Ismail’s capital account at 31 December 2019. … … … … … … … … [4] Additional information Ismail would like to expand his business. He will need additional finance of $25 000. He is considering two options to raise this amount: option 1: apply for a bank loan option 2: form a partnership with Seema, a friend. Seema would expect profits and losses to be shared equally. REQUIRED (c) Advise Ismail which of these options he should choose. Justify your answer. … … … … … … … … … … … … … … … [7] Additional information Ismail sees benefits in keeping a full set of accounting records. REQUIRED (d) State four benefits to a business of keeping a full set of accounting records. 1 … … 2 … … 3 … … 4 … … [4] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Ismail 15 Income statement for the year ended 31 December 2019 $ $ Revenue 274 500 Cost of sales W1 (182 560) (3) OF Gross profit 91 940 (1)OF Add discounts received 820 (1) 92 760 Less expenses General expenses 22 280 Insurance W2 1 250 (2) OF Rent 20 250 Depreciation W3 3 780 (2) OF Irrecoverable debt 600 (1) Provision for doubtful debts W4 710 (2) OF Loan interest W5 420 (2)CF/(1)OF (49 290) Profit for the year 43 470 (1)OF W1 Cost of sales $ As per draft statement 182 360 Less goods for own use (420) (1) Add carriage inwards 620 (1) 182 560 (1)OF W2 Insurance $ As per draft statement 1 730 Less prepayment (2/3 x $720) (480) (1) 1 250 (1)OF W3 Depreciation of non-current assets $ At 1 January 2019 18 500 Add capital expenditure 400 18 900 (1) Depreciation: 20% × $18 900 = 3780 (1)OF W4 Provision for doubtful debts 5% × ($14 800 – 600, i.e. $14 200 (1)) = 710 (1)OF W5 Loan interest 4200 × 10% = 420 (2)CF 210 (1)OF 1(b) $ 4 Capital 1 January 2019 (W1) 21 800 (1) Add profit for year 43 470 (1)OF Deduct drawings ($18 740 + $420) (19 160) (1) 46 110 (1)OF W1 Opening capital: Assets $26 000 – liability $4200 = $21 800 1(c) Option1: Bank loan 7 Max 4 Reasons for: • Temporary source of finance (1) • No effect on control of business (1) • Profits will not have to be shared (1) Reasons against: • May not be eligible for bank loan (1) • Security required for loan (1) • Interest charges will reduce profits (1) Option 2: Partnership with Seema Max 4 Reasons for: • Permanent source of capital (1) • Partner might bring new skills/expertise (1) • Sharing of workload (1) • Security for finance will not be required (1) Reasons against • Profits will have to be shared equally/so Ismail may receive less than now (1) • May not get on well/possibility of disputes (1) • Decision-making may be slower/more difficult (1) • Existence of business could be threatened if partner wishes to leave/retire/dies (1) Overall Max 6 marks for justification. Advice (1) Accept other valid responses. 1(d) Benefits of keeping a full set of accounting records 4 • giving access to more detailed information (1) • easier to assess business performance (1), • possible to prepare comprehensive financial statements (1) • more effective decision making (1) • provides support for bank loan applications (1) • provides evidence to support tax assessments (1) • possibility of improved credit control (1) • allows comparisons with previous years/other businesses (1) Max 4 Accept other valid responses.

This question in 9706/21 Oct/Nov 2020

1 Anjali is a sole trader. She does not maintain a full set of accounting records. At 1 October 2019 the assets and liabilities of Anjali were as follows: Cash at bank 4 600 debit Inventory 14 500 Non-current assets (carrying value) 85 000 Trade payables 9 930 Trade receivables 12 850 During the year ended 30 September 2020 the following transactions were recorded. General expenses paid 11 480 Payments to trade payables 50 250 Receipts from trade receivables 73 850 Rental income received 9 000 Returns inwards 2 070 Returns outwards 1 290 Anjali made drawings of $600 per month throughout the year. All receipts and payments were processed through the bank account. Irrecoverable debts of $2300 were written off. At 30 September 2020 the assets and liabilities were as follows: Inventory 18 000 Non-current assets (carrying value) 72 250 Prepaid general expenses 600 Trade payables 11 470 Trade receivables 14 980 REQUIRED (a) Calculate the bank balance at 30 September 2020. … … … … … … [3] (b) Prepare the income statement for the year ended 30 September 2020. Use the space on the next page for your workings. Anjali Income statement for the year ended 30 September 2020 … … … … … … … … … … … … … … … … … … … … … … … … … Workings: [17] (c) Calculate the following, to two decimal places, for the year ended 30 September 2020. (i) Gross margin … … [1] (ii) Mark-up … … [1] (iii) Profit margin … … [1] (d) (i) Explain how a business may increase its gross margin. … … … … [2] (ii) Explain how a business may improve its profit margin. … … … … [2] (e) State one reason why each of the following may be interested in the financial statements of a business. 1 Employees … … 2 Suppliers … … 3 Government … … [3] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) 4 600 + 73 850 + 9000 = $87 450 (1) 3 11 480 + 50 250 + 7200 = $68 930 (1) 87 450 – 68 930 = $18 520 (1)OF 1(b) Anjali 17 Income Statement for the year ending 30 September 2020. $ $ $ Revenue W1 80 350 (4) Returns inwards (2 070) (1) 78 280 Deduct: cost of sales Opening inventory 14 500 * Purchases W2 53 080 (3) Returns outwards (1 290) (1) 51 790 Closing inventory (18 000) *(1 both) (48 290) (1)OF Gross profit 29 990 (1)OF Rental income 9 000 (1) 38 990 General expenses 10 880 (1) Irrecoverable debts 2 300 (1) Depreciation 12 750 (1) (25 930) Profit for the year 13 060 (1)OF W1 73 850 + 2070 (1) + (14 980 – 12 850) (1 both) + 2300 (1) = $80 350 (1)OF W2 50 250 + 1290 (1) + (11 470 – 9930) (1 both) = $53 080 (1)OF 1(c)(i) Gross margin = 29 990 / 80 350 = 37.32% (1)OF 1 1(c)(ii) Mark-up = 29 990 / 48 290 = 62.10% (1)OF 1 1(c)(iii) Profit margin = 13 060 / 80 350 = 16.25% (1)OF 1 1(d)(i) Reduce the cost of sales (1) by finding less expensive supplies (1). 2 Accept other valid responses 1(d)(ii) Better control of overhead expenses (1) such as reducing irrecoverable 2 debts (1) Accept other valid responses 1(e) Employees – To be aware of profitability to assess job security and 3 remuneration. (1) Suppliers– To assess likelihood of being paid amounts owed. (1) Government – To confirm correct amounts of taxes are being paid. (1) Accept other valid responses

This question in 9706/22 Oct/Nov 2020

2 Khalid runs a business. His non-current assets with a total value of $200 000 consist of a motor vehicle and a machine with a life expectancy of 5 years. He anticipates that the machine will make products at a steady rate during that period. REQUIRED (a) State three methods of depreciation which may be used by a business. 1 … 2 … 3 … [3] (b) Advise Khalid which method of depreciation he should use for each asset. Justify your advice. Motor vehicle … … … … … Machine … … … … … [6] (c) State which accounting concept Khalid did not apply in each of the following scenarios. Scenario Concept Khalid used the business bank account to pay for a deposit for a family holiday. This was treated as a business expense. A stapler for $10 paid by Khalid out of the business bank account was added to the business office equipment account balance. Khalid became aware that a customer owing $1500 was bankrupt. He took no action when preparing the financial statements. [3] (d) State the purpose of financial statements. … … … … … … [3] [Total: 15]

15 marks

Mark scheme: 2(a) Reducing balance (1). 3 Straight-line (1). Revaluation (1). 2(b) Motor vehicle – reducing balance (1). 6 The asset loses value more quickly at the beginning of its life therefore more depreciation is charged in the early years (1). More maintenance expenditure is expected in later years so less depreciation (1). Max. 3 Machine – straight line (1). The asset loses value at a steady rate (1). The same benefit is received over the life so equal depreciation is charged in accordance with the accruals concept (1) spreading the cost over the useful economic life (1). Max. 3 Accept other valid responses 2(c) 3 Scenario Concept Khalid used the business bank account Business entity (1). to pay for a deposit for a family holiday. This was treated as a business expense. A stapler for $10 paid by Khalid out of Materiality (1). the business bank account was added to the business office equipment account balance. Khalid became aware that a trade Prudence / matching/accruals (1). receivable owing $1500 was bankrupt. He took no action when preparing the annual accounts. 2(d) To provide information about the financial performance of the business (1) the 3 financial position of the business (1) and to facilitate decision making/ comparison to previous years / other businesses (1). Accept other valid responses

This question in 9706/22 Oct/Nov 2020

4 Kevin runs a small manufacturing business. He is considering which method of inventory valuation he should use. REQUIRED (a) State two advantages to a business of using each of the following methods of inventory valuation. (i) First in first out (FIFO) 1 … … 2 … … (ii) Last in first out (LIFO) 1 … … 2 … … (iii) Average cost (AVCO) 1 … … 2 … … [6] Additional information Kevin manufactures a single product and he intends to value his closing inventory at selling price which includes a mark-up on cost. REQUIRED (b) Explain why Kevin should not value his inventory at this price. … … … … … … … … [3] Additional information Kevin currently uses marginal costing but is considering changing to absorption costing. The following budgeted information per unit is available. $ Selling price 20 Direct material 6 Direct labour 3 Budgeted production 20 000 units per month Budgeted fixed overheads $100 000 per month. At 1 January there was no inventory held. The following actual results are available for January and February. January February Sales (units) 15 000 21 000 Production (units) 18 000 18 000 Fixed overheads $100 000 $100 000 REQUIRED (c) Prepare the income statement for each of the months of January and February using marginal costing. Kevin Marginal cost income statement January February $ $ $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5]

14 marks

Mark scheme: 4(a)(i) FIFO 2 Simple to calculate (1). Approved by IAS2 (1) Inventory valuations are based on the most recent receipts (1) Max 2 Accept other valid responses. 4(a)(ii) LIFO 2 Simple to calculate (1) When prices rise profits will fall (1). May correspond to flow of inventory – ‘top of pile’ (1). Max 2 Accept other valid responses. 4(a)(iii) AVCO 2 Automatically adjusts for price rises and falls (1). Approved by IAS2 (1) Provides an average price for goods issued (1) Max 2 Accept other valid responses. 4(b) The use of selling price would result in an overstatement of profit / current 3 assets (1) so inventory should be valued at lower of cost and net realisable value (1) in accordance with the prudence concept (1) Max 3 Accept other valid responses. 4(c) Kevin 5 Marginal costing income statement January February $ $ $ $ Sales 300 000 420 000 (1) both Opening Inv – 27 000 Cost of prod 162 000 162 000 Closing Inv (27 000) (135 000) - (189 000) (1) Contribution 165 000 231 000 (1)OF both Fixed costs (100 000) (100 000) (1) both Profit 65 000 131 000 (1)OF both 4(d) Kevin 6 Absorption costing income statement January February $ $ $ $ Sales 300 000 420 000 (1) both Opening Inv - 42 000 Cost of prod 252 000 252 000 Closing Inv (42 000) (210 000) - (294 000) (1) 90 000 126 000 (1) both Under absorbed (10 000) (10 000) (1) (1) Profit 80 000 116 000 (1)OF both 4(e) Marginal costing profit $65 000 (1)OF 3 Closing inventory (3000 × $5) $15 000 (1) Absorption costing profit $80 000 (1)OF 4(f) Marginal costing 7 • Easier to operate (1). • Aids short-term decision making (1). • Enables optimum allocation of resources (1). • Avoids the problems of over/under absorption (1). Absorption costing • More complex / may require specialist knowledge (1) • Gives higher profit when inventory levels increase (1) • Includes an element of fixed cost in the inventory valuation (1). • Absorbing overheads into costs aids the setting of prices (1). • Reviewing under and over absorption may aid control and management of the business (1). Accept other valid responses. 1 mark for decision and Max 6 marks for valid points.

This question in 9706/22 Oct/Nov 2020

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

15 marks

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

This question in 9706/23 Oct/Nov 2020

1 Suyin owns a small retail business. She has not maintained full accounting records. REQUIRED (a) State two reasons why the owner of a small business may decide not to maintain full accounting records. 1 … … 2 … … [2] Additional information Suyin has been informed that the accounting concepts of matching and prudence must be followed when preparing financial statements. REQUIRED (b) Explain how these accounting concepts are applied when a business prepares financial statements. Matching … … … … Prudence … … … … [4] Additional information Suyin has provided the following information. 1 On 1 August 2019 the business’s assets and liabilities included: $ Fittings and equipment at valuation 18 500 Inventory 11 440 Other payables: shop rent 510 Other receivables: insurance 290 Trade payables 3 970

6 marks

Mark scheme: 1(a) May not have the skills/time to prepare full accounting records (1) Maybe content with the information provided by her current accounting records (1) Maybe cannot afford the services of a bookkeeper/accountant or accounting software (1) Maybe business too small to warrant full accounting records (1) Max 2 Accept other valid responses. 1(b) Matching requires costs and revenues to be matched for a financial period (1) irrespective of amounts received or paid (1). Prudence requires losses to be realised as soon as they are anticipated (1) to avoid profits and assets being overstated/losses and liabilities being understated (1). 4 1(c) $ Closing balance of trade payables 4 560 (1) Less opening balance of trade payables (3 970) 590 Add payments to trade payables 46 800 discounts received 1 200 (1) purchases returns 1 280 (1) Credit purchases 49 870 Add cash purchases 1 320 (1) Total purchases 51 190 (1)OF 5 Question Answer Marks 1(c) Alternative presentation Purchases ledger control account $ $ Bank 46 800 Balance b/d 3 970 Discounts received 1 200 (1) Purchases 49 870 (3)OF Purchases returns 1 280 (1) Balance c/d 4 560 53 840 53 840 Balance b/d 4 560 Total purchases = credit purchases $49 870 (3)OF + cash purchases $1 320 (1) = $51 190 (1) OF Question Answer Marks 1(d) Suyin Income statement for the year ended 31 July 2020 $ $ Revenue 96 000 Less: Opening inventory 11 440 Purchases 51 190 Purchases returns (1 280) (1) 61 350 Carriage inwards 610 (1) 61 960 Closing inventory (18 720) Cost of sales 43 240 Gross profit 52 760 (1)OF Add discounts received 1 200 (1)OF Profit on disposal of equipment 60 (1) 54 020 Less expenses Shop rent 3 070 (1) General expenses 16 810 10 Question Answer Marks 1(d) Insurance 3 240 (1) Wages 15 430 Depreciation of fittings and equipment W1 2 150 (2)OF 40 700 Profit for the year 13 320 (1)OF W1 $18 500 – $490 (1) – $15 860 = $2 150 (1)OF 1(e) Gross profit [Revenue ($96 000 (OF) × 110%) × 60%] 63 360 (1)OF Existing expenses (OF) (40 700) Increase in rent (6 140) (1)OF Interest on bank loan (8% × $16 000) (1 280) (1) Profit per annum 15 240 (1)OF Accept alternative presentations. 4 Question Answer Marks 1(f) Profits will increase (by $1920) (1)OF The increase in profit is quite small (1)OF Will request for bank loan be granted? (1) Will the forecasts prove to be accurate? (1) Does Suyin have the collateral to provide security for a bank loan? (1) Will liquidity be seriously affected by the loan repayments? (1) Increase footfall in busier location (1) Will there be any unforeseen costs (1) Advice (1) Accept other valid responses. 5

This question in 9706/21 May/June 2021

3 Cash account for the year ended 31 July 2020. $ $ Balance b/d 420 Bank 79 480 Cash sales 96 000 Wages 15 430 Purchases 1 320 Balance c/d 190 96 420 96 420 Balance b/d 190

0 marks

Mark scheme: 3(a) To bring the share capital more in line with the current net asset value (1) of the company by making permanent some part of revenue and capital reserves (1). To provide some reward for shareholders (1) where cash may be limited to pay dividends to shareholders (1). To avoid dividend announcements seeming excessively large (1) when based on a situation where issued shares is only a relatively small part of equity (1). Max 4 marks Accept other valid responses. 3(b) Number of bonus shares is (1 800 000 – 1 200 000) × 4 (1) = 2 400 000 (1)OF 2 3(c) Journal Dr Cr $000 $000 Share premium 220 (1) Retained earnings 380 (1) Issued share capital 600 (1) Being bonus issue made (1) 4 3(d) The profits available for distribution (1) The cash available to pay dividends (1) Shareholders’ expectations (1) Max 3 Accept other valid responses. 3 3(e) 1 800 000 × 4 shares = 7 200 000 shares (1) × $0.01 = $72 000 (1)OF 2

This question in 9706/21 May/June 2021

4 During the year ended 31 July 2020 Goods had been returned to suppliers, $1280. All sales were made on a cash basis.

0 marks

Mark scheme: 4(a)(i) Direct costs are those which can be identified with a product unit (1). 1 4(a)(ii) Stepped costs are fixed up to a certain level (1) at which point they will increase (1). 2 4(b) Margin of safety in units: Maximum/budgeted output in units – break-even point in units (1) 1 4(c) A limiting factor is anything that limits the activity of a business (1), such as a shortage of a resource. (1) 2 4(d) Fixed costs $112 000 + Target profit $40 000 = $152 000 (1) Contribution $48 – ($18 + $25.50) = $4.50 (1) = 33 778 units (1)OF 3 4(e) Budgeted Marginal cost statement for December 2021 $ Revenue 30 000 × $48 1 440 000 (1) Less: Direct materials 30 000 × 4.5 m × $4 (540 000) (1) Direct labour 30 000 × 3 × $8.50 (765 000) (1) Contribution 135 000 (1)OF Fixed costs (112 000) Profit for the month 23 000 (1)OF Accept alternative presentation. 5 Question Answer Marks 4(f) Proposal A $ Revenue 1 539 000 (1) Less: Direct materials W1 (522 450) (2) Direct labour W2 (849 150) (2) Contribution 167 400 Fixed costs W3 (113 750) (3) Profit for the month 53 650 (1)OF W1 27 000 × $19.35 (1) = $522 450 (1)OF W2 27 000 × $31.45 (1) = $849 150 (1)OF W3 $112 000 + $500 (1) + $1 250 (1) = $113 750 (1)OF Accept alternative presentation. 9 Question Answer Marks 4(g) Proposal A Max 3 marks For: More profit achieved than Proposal B (1)OF also exceeds target per month (1)OF More factory capacity is unused perhaps providing an opportunity for other profitable uses (1) Increase in labour rate may motivate workforce (1) Against Will loan requested be accepted? (1) Will workforce have the right skills to operate new machinery (1) Will training be required? (1) Proposal B Max 3 marks For: More profit (1)OF than current situation $26 500 (1)OF Profit exceeds target per month (1)OF Against: Less profit than Proposal A (1) Reduction in labour requirements (76 000 hours per month from 90 000 hours) and no increase in rate per labour hour could lead to loss of morale (1) redundancy payments (1) Are forecast sales accurate? (1) Advice (1) Accept other valid responses 7

This question in 9706/21 May/June 2021

1 Adam owns a retail business. He is aware that he must follow certain accounting concepts when preparing his business’s financial statements. REQUIRED (a) Explain how each of the following concepts is applied when preparing a business’s financial statements. (i) Consistency … … … … … [2] (ii) Realisation … … … … … [2] (iii) Materiality … … … … … [2] Additional information Adam has completed the trading section of the income statement. However, some errors had been made. Income statement for the year ended 31 December 2020 $ $ Revenue 186 500 Less returns outwards (3 180) 183 320 Opening inventory 14 830 Purchases 93 710 Less returns inwards (2 940) Add carriage inwards 730 106 330 Less closing inventory (12 670) Cost of sales 93 660 Gross profit 89 660 The following information is also available. 1 No record had been made of goods taken for own use by Adam, $580.

6 marks

Mark scheme: 1(a)(i) Consistency – requires policies to be used in the same way each accounting period (1) so that valid comparisons can be made of figures (1) Illustration (1) Max (2) Accept other valid responses 2 1(a)(ii) Realisation: revenue should only be recognised when goods are invoiced or money received (1) to ensure that reported profits are based on certainty (1) Illustration (1) Max (2) Accept other valid responses 2 1(a)(iii) Materiality: financial statements only record information which is significant (1). Something is material only if its exclusion would be misleading (1) Illustration (1) Max (2) Accept other valid responses 2 Question Answer Marks 1(b) $ $ Revenue 186 500 Returns inwards (2 940) (1) 183 560 Opening inventory 14 830 Purchases 93 710 Drawings (580) (1) Carriage inwards 730 Returns outwards (3 180) (1) 105 510 Closing inventory W1 (12 474) (3) Cost of sales 93 036 Corrected gross profit 90 524 (1)OF W1 $12 670 – $16 (1) – $180 (1) = $12 474 (1) Accept alternative approaches 7 Question Answer Marks 1(c) Income statement for the year ended 31 December 2020 $ $ Gross profit 90 524 Add: Discounts received 1 580 (1) Decrease in provision for doubtful debts (W1) 40 (1) Rent receivable (W2) 7 240 (1) 8 860 99 384 Less: marketing expenses (W3) 5 650 (1) Office expenses 2 950 Repairs and maintenance (W4) 1 590 (1) Loss on sale of motor vehicle (W5) 1 550 (1) Wages and salaries 31 280 Depreciation Furniture and equipment (W6) 2 646 (2) Premises (W7) 3 200 (1) (48 866) Profit for year 50 518 (1)OF 10 Question Answer Marks 1(c) Workings W1 Provision for doubtful debts: original $530 less new provision (5% × $9 800, i.e. $490); decrease $40 (1) W2 Rent receivable: TB $6 640 + amount due 1 $1800, i.e. $600 3   ×     ; $7 240 (1) W3 Marketing expenses: $4 850 + accrual 2 $2000, i.e. $800 5   ×     ; $5 650 (1) W4 Repairs and maintenance: $1 970 – £380 capital expenditure; $1 590 (1) W5 Loss on sale of motor vehicle: nbv $2 900 less proceeds $1 350; $1 550 (1) W6 Depreciation of furniture and equipment: TB cost $18 220 + capital expenditure $380, i.e. $18 600 (1) less provision for depreciation $5 370, i.e. nbv $13 230 × 20% = $2 646 (1) W7 Depreciation of premises: $160 000 × 2% = $3 200 (1) 1(d) Proposal 1 (Max 3) For: Possible reduction in storage costs (1) Reduces the risk of goods becoming unsaleable as they become dated (1) Against: Reduced range of goods available to customers could lead to lost sales (1) Could risk items selling out leading to lost sales (1) Proposal 2 (Max 3) For: Increased profits if business remains competitive (1) Higher price may be perceived as better quality (1) Against: Increased profits could be offset by reduction in sales (1) Higher price could deter existing customers (1) Advice (1) Accept other valid responses 7

This question in 9706/23 May/June 2021

4 A payment of $2000 for a five-month advertising campaign which began on 1 November 2020 was outstanding.

0 marks

Mark scheme: 4(a) ( ) ( ) ( ) ( ) 9600 9600 889 36 25.20 10.80 = = − 1 1 OF 1 1 OF 4(b)(i) 1 200 – 889 = 311 units (1)OF 1 4(b)(ii) 311 × $36 = $11 196 (1)OF 1 4(c) Sales and production levels are the same. (1) Total fixed costs are constant. (1) Variable costs per unit are the same. (1) Selling price per unit remains the same. (1) Product mix remains constant. (1) Costs can be easily classified as fixed or variable. (1) Accept other valid responses Max 3 3 4(d)(i) Ratio is 10.80 100 30% 36  × =     (1)OF 1 4(d)(ii) $ Contribution per unit 10 .80 × qty 1 120 Total contribution 12 096 (1)OF Fixed cost 9 600 Profit 2 496 (1)OF 2 Question Answer Marks 4(e)(i) Option A Inhouse Buy $ $ $ Selling price 36 36 Direct materials 10 .50 Direct labour 14 .50 Other variable costs 2 .30 Total variable costs 27 .30 (1) 27 .70 (1) Contribution per unit 8 .70 8 .30 Qty x 900 250 Total contribution 7 830 (1)OF Fixed costs 9 600 (1) Profit/(loss) (1 770) (1)OF 2 075 (1)OF Profit (1 770) + 2 075 = 305 (1)OF Accept alternative approaches 7 Question Answer Marks 4(e)(ii) Option B $ Contribution per unit 10 .80 Qty × 1 100 Total contribution 11 880 (1) Fixed costs 11 200 (1) Profit 680 (1)OF Alternative $ $ Sales 39 600 Direct materials 9 240 Direct labour 15 950 Other variable overheads 2 530 27 720 (1) Fixed costs 11 200 (1) 38 920 Profit 680 (1)OF Accept alternative approaches 3 Question Answer Marks 4(f) Option A (Max 2) For Against Produces a profit (1)OF Will supplier be reliable? (1) Keeps production closer to current levels so more likely that regular orders will be satisfied. (1) Will quality be maintained? (1) Option B (Max 2) For Against Produces a larger profit than option A (1)OF Production will be below current monthly output so some staff could be idle (1) Quality likely to be maintained as production remains in-house (1) Some regular customers may be lost because production below normal output (1) Advice (1) Accept other valid responses 5 4(g) Demotivated workforce (1) Unexpected opportunities ignored (1) Resources used inefficiently (1) Accept other valid responses 3

This question in 9706/23 May/June 2021

1 Eleni owns a business selling computers. She does not maintain full accounting records. The following information is available. At 30 June At 1 July 2021 2020 $ $ Equipment at valuation 3250 3460 Inventory 1940 2210 Trade receivables 5650 7200 Provision for doubtful debts ? 360 Other receivables: rent prepaid 1080 500 Trade payables 2120 1440 Other payables: wages 110 190 Bank 1420 Credit 860 Credit Cash in hand – 150 Bank loan – 1350 A summary of receipts and payments made through the bank for the year ended 30 June 2021 was as follows: Receipts $ Receipts from credit customers 58 960 Cash sales banked 3 980 Sale of equipment 180 Payments $ Payments to credit suppliers 39 750 Purchase of equipment 610 General expenses 940 Rent 6 860 Bank loan repayments 1 390 Bank charges 50 Cash withdrawn 14 080 All cash sales are banked. REQUIRED (a) Calculate total revenue for the year ended 30 June 2021. … … … … … … [2] Additional information Of the cash withdrawn from the bank, Eleni took $450 each month for drawings and paid total wages of $7620 for the year. The remaining cash from the cash till was used to pay for general expenses. REQUIRED (b) Prepare the cash account to calculate the amount paid in cash for general expenses. Cash account $ $ [3] Additional information The following information is also available. 1 Eleni wishes to write off an irrecoverable debt of $50 at 30 June 2021. She wishes to maintain the provision for doubtful debts at the same percentage as the previous year.

5 marks

Mark scheme: 1(a) $ $ Receipts from credit customers 58 960 Trade receivables c/f 5 650 Trade receivables b/f (7 200) 57 410 (1) Cash sales 3 980 3 980 (1) Total revenue 61 390 2 1(b) Cash account $ $ Balance b/d 150 Wages 7 620 (1) Bank 14 080 Drawings 5 400 (1) General expenses 1 210 (1) OF 14 230 14 230 3 Question Answer Marks 1(c) Eleni Income statement for the year ended 30 June 2021 $ $ Revenue 61 390 (1) OF Opening inventory 2 210 Purchases 40 430 (1) Closing inventory (1 940) 40 700 Gross profit 20 690 (1) OF Profit on disposal 40 (1) Decrease in provision for doubtful debts 80 (1) 20 810 General expenses 2 150 (1) OF Rent 6 280 (1) Bank interest and charges 90 (1) Wages 7 540 (1) Irrecoverable debt 50 (1) Depreciation 680 (1) 16 790 Profit for the year 4 020 (1) OF 12 Question Answer Marks 1(d) Eleni Statement of financial position at 30 June 2021 Capital and liabilities $ Capital Balance brought forward 9 320 (1) Profit for the year 4 020 13 340 Drawings (5 400) (1) 7 940 Liabilities Trade payables 2 120 (1) Other payables 110 Bank overdraft 1 420 (1) 3 650 Total capital and liabilities 11 590 (1) OF 5 1(e) For (Max 2) Will increase profits if demand is maintained (1) May give a perception of better quality (1) Increased profit would cover drawings (1) Against (Max 2) May result in a loss of customers resulting in decrease in profits (1) Need to consider competitor prices/reaction (1) If goods not sold would increase inventory (1) Decision (1) Accept other valid responses 5 Question Answer Marks 1(f) • Past experience (1) • Specific knowledge (1) • Amount of trade receivables (1) • State of the economy (1) • How long debt outstanding (1) Max 3 Accept other valid responses 3

This question in 9706/21 Oct/Nov 2021

6 A credit customer owing $2360 from 12 April 2021 has been declared bankrupt and the debt is to be written off to administrative expenses.

0 marks

This question in 9706/23 Oct/Nov 2021

1 Rafiq owns a retail business. When the business was opened a few years ago, Rafiq maintained only minimal accounting records. REQUIRED (a) State two reasons why the owner of a business might maintain minimal accounting records. 1 … … 2 … … [2] (b) Identify four benefits of maintaining full accounting records. 1 … 2 … 3 … 4 … [4] Additional information More recently Rafiq has been able to provide more detailed financial information. 1 On 1 January 2021, the business’s assets and liabilities were as follows: $ Cash in hand 840 Bank overdraft 1 390 Furniture and fittings at valuation 22 710 Trade payables 11 870 Inventory 14 430 Rent prepaid 1 250

6 marks

Mark scheme: 1(a) Lack of expertise (1) Content with information that minimal records provide (1) Less time-consuming (1) Less costly (1) Max 2 Accept other valid responses. 1(b) Access to full information about assets, liabilities, capital, expenses and revenues (1) More informed decision making (1) Can provide detailed information to support loan application (1) Easier to prepare financial statements/more reliable and accurate information about profits and losses (1) Opportunity for more control over business activities (1) Possibility of fraud reduced (1) Better able to meet government requirements for information (e.g. tax returns) (1) Enables analysis of performance (1) Max 4 Accept other valid responses. 4 Question Answer Marks 1(c) $ Bank 93 100} (1) Discounts received 4 900} 98 000 Less decrease in balances (2 640) (1) 95 360 (1)OF Alternative method: Total Trade Payables account $ $ Balance c/d 9 230} (1) both Balance b/d 11 870} Bank 93 100 (1)both Purchases 95 360 (1)OF Discounts received 4 900 107 230 107 230 Balance b/d 9 230 } 1 mark for both opening balances b/d 3 Question Answer Marks 1(d) Rafiq Income statement for the year ended 31 December 2021 $ $ Revenue W1 157 600 (3) Opening inventory 14 430} Purchases 95 360 OF Less goods own use (480) (1) 109 310 Closing inventory (11 920) } (1) both Cost of sales 97 390 Gross profit 60 210 (1)OF Add: discounts received 4 900 (1)OF Profit on disposal of furniture and fittings 530 (1) 65 640 Less: expenses Wages 21 540 (1) Rent W2 14 560 (1) General expenses 5 940 Depreciation of furniture and fittings W3 4 740 (3) 46 780 Profit for the year 18 860 (1)OF 14 Question Answer Marks 1(d) W1 Revenue $ Banked 132 200 Outstanding bankings 1 200 (1) Wages 21 540 (1)all 3 items Drawings 2 580 Increase in cash 80 157 600 (1)OF W2 Rent: paid $14 750 + opening prepaid $1250 – closing prepaid $1440 = $14 560 (1) W3 Depreciation of furniture and fittings $ Opening valuation 22 710 Additions 8 000 (1)both Installation costs 380 31 090 Disposal (2 950) (1) 28 140 Closing valuation (23 400) 4 740 (1)OF Question Answer Marks 1(e) Partner (Overall Max 3) For: (Max 2) May bring fresh ideas/particular business skills (1) Will ease Rafiq’s workload (1) Permanent source of capital (1) Shared responsibility (1) Against: (Max 2) Will have to share profits (1) May result in disagreements (1) Control of business has to be shared slowing decision-making (1) Loan (Overall Max 3) For: (Max 2) Rafiq remains in sole control of the business (1) Profits are not shared (1) Against: (Max 2) Loan interest will reduce profits (1) Liquidity will be affected by loan repayments and interest payments (1) Will business be eligible for a loan/can Rafiq offer security for loan? (1) Temporary source of finance (1) Decision (1) Accept other valid responses. 7

This question in 9706/22 Feb/March 2022

2 The following summary of receipts and payments for the year ended 31 December 2021 has been prepared from the business’s bank statements. Receipts $ $ Cash sales banked 132 200 Disposal of furniture and fittings 3 480 Total receipts 135 680 Payments Drawings 18 390 Trade payables 93 100 Rent 14 750 Additional furniture and fittings 8 000 Installation costs for new fittings 380 General expenses 5 940 Total payments 140 560

0 marks

Mark scheme: 2(a) Number of shares 900 000 × $0.05 = $45 000 (1) 1 2(b) The amount of retained earnings / distributable reserves available for distribution (1) The amount of cash available (1) Other commitments affecting the amount of retained profit/cash (1) Shareholder expectations (1) Max 2 Accept other valid responses. 2 2(c) Journal Dr Cr $ $ Share premium 122 000 (1) Retained earnings 178 000 (1) Issued share capital 300 000 (1) 3 2(d) Retained earnings at 28 February 2022 $ Balance b/d 342 000 Less interim dividend (45 000) (1)OF Less bonus issue (178 000) (1)OF Add: profit for the year 114 000 (1) Less: final dividend W1 (105 000) (2)OF Balance at 28 February 2022 128 000 (1)OF W1 Final dividend: 1 500 000 (1) × $0.07 = $105 000 (1) OF 6 Question Answer Marks 2(e) Avoid dilution of ownership (1) Less expensive / faster to process (1) More likely to be successful / fully subscribed as shares may be issued at a favourable price (1) To increase equity share capital (1) Max 3 Accept other valid responses. 3

This question in 9706/22 Feb/March 2022

5 A cash discount of 5% was received when Rafiq settled debts with trade payables during the year ended 31 December 2021.

0 marks

This question in 9706/22 Feb/March 2022

6 At 31 December 2021 trade payables totalled $9230. REQUIRED (c) Calculate the total purchases for the year ended 31 December 2021. … … … … … … … … [3] Additional information During the year ended 31 December 2021: 1 Some cash takings were not banked but were used to pay wages, $21 540, and drawings, $2580. 2 Rafiq took goods costing $480 for private use. 3 Furniture and fittings with a value of $2950 were sold. At 31 December 2021: 1 Cash takings of $1200 had not yet been banked. 2 The balance of cash in hand was $920. 3 Inventory was valued at $11 920. 4 Furniture and fittings were valued at $23 400. 5 Rent of $1440 was prepaid. REQUIRED (d) Prepare the income statement for the year ended 31 December 2021. Workings: Rafiq Income statement for the year ended 31 December 2021 … … … … … … … … … … … … … … … … … … … … … … … [14]

17 marks

This question in 9706/22 Feb/March 2022

1 Khin is a retailer. The following balances have been extracted from his books of account at 31 January 2022. $ Advertising 4 900 Carriage inwards 2 140 Carriage outwards 1 730 Furniture and equipment at cost 18 900 Furniture and equipment provision for depreciation at 1 February 2021 7 300 General expenses 13 450 Inventory at 1 February 2021 12 310 Irrecoverable debts 670 Loss on disposal of delivery vehicle 1 350 Premises at cost 360 000 Premises provision for depreciation at 1 February 2021 21 600 Provision for doubtful debts at 1 February 2021 840 Purchases 118 220 Rent receivable 7 000 Revenue 197 300 Trade receivables 15 580 Wages and salaries 34 640 The following information is also available at 31 January 2022. 1 Closing inventory was valued at $13 480. 2 No record had been made of goods taken for own use by Khin, $910. 3 An irrecoverable debt of $380 is to be written off. 4 The provision for doubtful debts is to be maintained at 5% of trade receivables. 5 Advertising includes a payment of $3250 for a campaign which will last from 1 December 2021 to 30 April 2022. 6 Rent receivable is $500 per month. 7 Wages, $1440, are outstanding. 8 Khin sold his business’s only delivery vehicle in January 2022 resulting in the loss of $1350 shown in the balances at 31 January 2022. 9 The business’s depreciation policy is as follows: i Premises to be depreciated by 2% per annum using the straight-line method. ii Furniture and equipment to be depreciated by 15% using the reducing balance method. REQUIRED (a) Prepare the income statement for the year ended 31 January 2022. Use the space provided on page 4 for your workings. Khin Income statement for the year ended 31 January 2022 … … … … … … … … … … … … … … … … … … … … … … … … Workings: [15] Additional information There was no opening balance on the rent receivable account at 1 February 2021. REQUIRED (b) Prepare the rent receivable account for the year ended 31 January 2022. Rent receivable account $ $ [2] (c) Prepare a journal entry to record the adjustment to the provision for doubtful debts account at 31 January 2022. A narrative is not required. Journal Dr Cr $ $ [2] Additional information Khin intends to purchase a new delivery vehicle. He is not sure whether the delivery vehicle should be depreciated using the straight-line method or reducing balance method of depreciation. REQUIRED (d) Explain the reason for recording depreciation in a business’s income statement. … … … … … [2] (e) State one benefit of using each of the following methods of depreciation. (i) Straight-line … … [1] (ii) Reducing balance … … [1] Additional information Khin is concerned about a decline in the business’s profitability. He is considering two options. Option 1: decrease the amount spent on advertising whilst also reducing the selling price by a small amount. Option 2: purchase goods from cheaper suppliers. REQUIRED (f) Advise Khin which option he should choose. Justify your advice by discussing both options. … … … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: 1(a) Khin Income statement for the year ended 31 January 2022 $ $ Revenue 197 300 Less: cost of sales Opening inventory 12 310 Purchases (less goods own use $910) 117 310 (1) Carriage inwards 2 140 (1) 131 760 Closing inventory (13 480) (118 280) (1)OF Gross profit 79 020 (1)OF Add income Decrease in provision for doubtful debts W1 80 (1) Rent received W2 6 000 (1) 6 080 85 100 15 Question Answer Marks 1(a) $ $ Less expenses Advertising W3 2 950 (1) Carriage outwards 1 730 (1) General expenses 13 450 (1) Loss on disposal of delivery vehicle 1 350 (1) Irrecoverable debts ($670 + $380) 1 050 (1) Wages and salaries ($34 640 + $1440) 36 080 (1) Depreciation Premises (2% x $360 000) 7 200 (1) Furniture and equipment (15% x $11 600) 1 740 (1) (65 550) Profit for the year 19 550 (1) W1 Decrease in provision for doubtful debts: $840 – [5%  ($15 580 – $380) i.e. $760] = $80 (1) W2 Rent received: $500  12 = $6000 (1) W3 Advertising: $4900 – (3/5  $3250, i.e. $1950) = $2950 (1) Question Answer Marks 1(b) Rent receivable account $ $ Income statement 6 000 (1) Bank 7 000 Balance c/d 1 000 7 000 7 000 Balance b/d 1 000 (1)OF 2 1(c) Journal Dr Cr $ $ Provision for doubtful debts 80 (1)OF Income statement 80 (1)OF 2 1(d) To apply the matching concept so that profits are based on matching costs and revenues for an accounting period (1) irrespective of actual receipts and payments (1). Accept other valid responses. 2 1(e)(i) Straightforward to apply/calculate/understand (1) May correspond to actual usage of non-current asset (1) Max 1 Accept other valid responses. 1 Question Answer Marks 1(e)(ii) Produces an even annual charge when repairs and maintenance are taken into account (1) May correspond to actual usage of non-current assets (1) Max. 1 Accept other valid responses. 1 1(f) Option 1 (Max. 3) Will reduce costs and increase profits (1) May reduce demand if advertising has been successful (1) Reducing selling price may stimulate demand and therefore increase turnover and profits (1) Profits will be reduced if demand is unaffected (1) Option 2 (Max. 3) Will increase profits as costs are reduced (1) May reduce demand and profits if goods are of poorer quality (1) Will cheaper suppliers offer same credit terms/trade discounts/free carriage (1) Will new suppliers prove to be reliable (1) Advice (1) Accept other valid responses. 7

This question in 9706/21 May/June 2022

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. 4 A full year’s depreciation is charged in the year of purchase but none in the year of disposal. REQUIRED (d) Calculate the charge for depreciation of furniture and equipment for the year ended 31 December 2021. … … … … [4] Additional information 1 Motor vehicles were purchased on 1 January 2020 at a cost of $84 000. 2 Motor vehicles are depreciated at 20% per annum using the reducing balance method. 3 On 1 November 2021, a new motor vehicle was purchased at a cost of $44 000. A cheque for $17 000 was paid for the vehicle and the balance was covered by the part-exchange of a vehicle which had cost $40 000 on 1 January 2020. 4 A full year’s depreciation is charged in the year of purchase but none in the year of disposal. REQUIRED (e) Prepare the motor vehicle disposal account for the year ended 31 December 2021. Motor vehicle disposal account $ $ [4] [Total: 15]

15 marks

Mark scheme: 2(a) Technological change (1) Depletion (1) Time factor (1) Obsolescence (1) Economic factors (1) Inadequacy (1) Max 2 Accept other valid responses. Question Answer Marks 2(b) Accounting methods are applied in the same way in each accounting period (1) enabling valid comparison from year to year (1) Accept other valid responses. Max 2 2 2(c) Journal Dr $ Cr $ Property 350 000 (1) Provision for depreciation W1 85 000 (1) Revaluation reserve 435 000 (1) W1 Provision for depreciation: 2  5%  $850 000 = $85 000 3 2(d) Depreciation charge: $9639 (4) Workings Provision for depreciation is: Year 1 $14 000; Year 2 (10%  $126 000), i.e. $12 600 = $26 600 Net value at time of sale: $140 000 – $26 600 = $113 400 Net value after sale: 113 400 (1) – 17 010 (1) = $96 390 (1)  10% = $9639 (1) Accept alternative presentations 4 Question Answer Marks 2(e) Motor vehicle disposal account $ $ Motor vehicle 40 000 (1) Depreciation 8 000(1) Motor vehicle 27 000(1) Income statement 5 000(1)OF 40 000 40 000 4

This question in 9706/22 May/June 2022

2 Rakesh prepared his business’s end of year financial statements on 30 September 2021. REQUIRED (a) Define the following accounting concepts. Give one example of each. (i) Matching Definition … … Example … … [2] (ii) Going concern Definition … … Example … … [2] (iii) Materiality Definition … … Example … … [2] Additional information On 30 September 2021, Rakesh decided to write off an irrecoverable debt of $730 from the account of JD Supplies. REQUIRED (b) Prepare the journal entry in Rakesh’s books of account to record the write off of the irrecoverable debt. A narrative is not required. Journal Dr Cr $ $ [2] Additional information Rakesh receives rent from a tenant. The following details are available for the year ended 30 September 2021. 1 At 1 October 2020, the tenant owed rent $1200. 2 During the year ended 30 September 2021, the tenant paid rent of $9000 by bank transfer.

8 marks

Mark scheme: 2(a)(i) Matching concept: Definition: cost and revenues for the period are matched irrespective of actual receipts and payments. (1) Example: an accrual must be made for an expense incurred in the period but not paid for. (1) Accept other valid examples. 2 2(a)(ii) Going concern concept: Definition: the assumption that a business will continue trading for the foreseeable future (1) Example: Non-current assets are valued at net book value rather than market value. (1) Accept other valid examples. 2 Question Answer Marks 2(a)(iii) Materiality concept: Definition: information is material if its omission or misstatement could influence the decisions of users of financial statements (1). Example: classifying a low value non-current asset as revenue expenditure (1) Accept other valid examples. 2 2(b) Journal Debit $ Credit $ Irrecoverable debts 730 (1) JD Supplies 730 (1) 2 2(c) Rent receivable account $ $ Balance b/d 1 200 (1) Bank 9 000 (1) Income statement 6 675 (1) OF Balance c/d 1 125 9 000 9 000 Balance b/d 1 125 (1) 4 2(d) Provision for depreciation of equipment account $ $ Balance c/d 11 712 Balance b/d 8 640 (1) Income statement 3 072 (1) 11 712 11 712 Balance b/d 11 712 (1) OF 3

This question in 9706/23 May/June 2022

3 At 30 September 2021, rent of $1125 had been received in advance. REQUIRED (c) Prepare the rent receivable account in Rakesh’s books of account. Rent receivable account $ $ [4] Additional information The business owns equipment which cost $24 000 when it was purchased on 1 October 2018. The policy is to provide depreciation at 20% per annum using the reducing balance method. REQUIRED (d) Prepare the provision for depreciation of equipment account for the year ended 30 September 2021. Provision for depreciation of equipment account $ $ [3] [Total: 15] 3 Nibras purchases and sells goods for cash and on credit. Control accounts are used to check the accuracy of the business’s purchases and sales ledgers. The following information is available for January 2022. 1 Purchases ledger account balances at 1 January 2022 were: $ Amounts owed to suppliers 23 490 Amount overpaid to one supplier 320 2 Totals from the books of prime entry were as follows: $ Cash book Cash purchases 18 540 Payments to trade payables 202 950 Discounts received 4 920 Purchases journal 212 480 Returns outwards journal 3 770 General journal Contras to sales ledger 810 3 There were no overpaid accounts in the purchases ledger at the end of the month. REQUIRED (a) Prepare the purchases ledger control account for January 2022. Purchases ledger control account $ $ [5] Additional information On 31 January 2022 the following information was available concerning trade receivables. $ Balance of the sales ledger control account 25 310 Total of balances in the sales ledger 23 980 The following errors were discovered. When corrected, the total of balances in the sales ledger agreed with the balance of the sales ledger control account. 1 An irrecoverable debt of $540 had been recorded as $450 in both the general ledger and the customer’s sales ledger account. 2 The total of the returns inwards journal, $1390, had been omitted from the sales ledger control account. 3 The balance of a customer’s account had been understated by $120.

12 marks

Mark scheme: 3(a) Purchases ledger control account $ $ Balance b/d 320 (1) both Balance b/d 23 490 Returns outwards 3 770 (1) both Purchases 212 480 Bank 202 950 (1) both Discounts received 4 920 Contras 810 (1) Balance c/d 23 200 235 970 235 970 Balance b/d 23 200 (1)OF 5 3(b)(i) $ Incorrect total 25 310 Less irrecoverable debt (90) (1) Less returns in (1 390) (1) 23 830 (1)OF 3 3(b)(ii) $ Incorrect total 23 980 Less irrecoverable debt (90) (1) Add understated balance 120 (1) Less credit note error (180) (1) 23 830 (1)OF 4 Question Answer Marks 3(c) Commission (1) Omission (1) Original entry (1) Compensating error (1) Max 3 3

This question in 9706/23 May/June 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

1 Reece, a sole trader, does not maintain a full set of accounting records. He has provided the following information for the year ended 30 June 2022. 30 June 2022 1 July 2021 $ $ Cash 110 240 Electricity accrued 380 420 Inventory 21 400 23 600 Machinery Cost ? 18 480 Accumulated depreciation ? 9 685 Rent paid in advance 1 100 950 Trade payables 8 520 6 285 Trade receivables 20 620 23 580 Bank account summary Receipts $ Payments $ Balance b/d 1 860 Credit suppliers 80 140 Credit customers 149 810 Rent 12 250 Cash sales banked 7 170 Wages 36 240 Sale of machinery 4 000 Electricity 3 680 General expenses 18 590 New machinery 9 200 Balance c/d 2 740 162 840 162 840 The following information is also available. 1 Total cash sales for the year were $15 280. 2 Reece had also paid cash for wages during the year but had not recorded this. 3 Reece took $450 per month drawings before the cash sales were banked. He had also taken goods for his own use with a selling price of $350 after a mark-up of 25%. 4 During the year, machinery that had cost $6000 on 1 July 2019 was sold. 5 Machinery is to be depreciated at 15% per annum using the reducing balance method. A full year’s depreciation is charged in the year of purchase, but none in the year of disposal. REQUIRED (a) Calculate the total credit sales for the year ended 30 June 2022. … … … … … [2] (b) Calculate the total credit purchases for the year ended 30 June 2022. … … … … [1] (c) Calculate the total cash paid for wages during the year ended 30 June 2022. … … … … … [3] (d) Calculate the depreciation charge for the year ended 30 June 2022. … … … … … … [3] Additional information Inventory at 30 June 2022 included damaged goods which had cost $1800, but needed repairs costing $350. The goods could then be sold for 30% less than the normal selling price of $2250. REQUIRED (e) Prepare the income statement for the year ended 30 June 2022. Reece Income statement for the year ended 30 June 2022 … … … … … … … … … … … … … … … … … Workings: (f) State two causes of depreciation of non-current assets. 1 … 2 … [2] (g) Explain, with reference to an accounting concept in each case, why: (i) a business should make a provision for depreciation of non-current assets Accounting concept … Explanation … … … [2] (ii) a business should make an adjustment for damaged inventory. Accounting concept … Explanation … … … [2] Additional information Reece has been thinking of maintaining a full set of accounting records. REQUIRED (h) Advise Reece whether or not he should maintain a full set of accounting records. Justify your answer. … … … … … … … … … … … … … … … … [5] [Total: 30] PLEASE TURN OVER

30 marks

Mark scheme: Question Answer Marks 1(a) $146 850 (2) W1 2 W1 $149 810 + +(20 620 – 23 580) (1) = $146 850 (1) OF 1(b) $80 140 + $8 520 – $6 285 = $82 375 (1) 1 1(c) $2840 (3) W1 3 W1 ($240 + $15 280) (1) – ($5 400 – $7170 – $110) (1) = $2840 (1) OF 1(d) $2049 (3) W1 3 W1 Cost: $18 480 + 9200 – $6000 = $21 680 (1) Acc Dep’n: $9685 – $1665 = $8 020 (1) Carrying value $13 660 Depreciation charge (15%) $2 049 (1) OF 1(e) Reece 10 Income statement for the year ended 30 June 2022 $ $ Revenue 162 130 (1) OF Cost of sales Opening inventory 23 600 Purchases 82 375 (1) OF Goods taken for own use (280) (1) 105 695 Closing inventory (20 825) (1) 84 870 Gross profit 77 260 (1) OF Wages 39 080 (1) OF Rent 12 100 (1) Electricity 3 640 (1) General expenses 18 590 Depreciation 2 049 Loss on disposal 335 (1) 75 794 Profit for the year 1 466 (1) OF 1(f) Wear and tear (1). 2 Obsolescence (1). Technological change (1). Usage (1). Max 2 marks Accept other valid responses. 1(g)(i) Matching concept (1) 2 To match the costs of usage of the non-current asset with the revenue earned in the same year(1) 1(g)(ii) Prudence concept (1) 2 To ensure that inventory / current assets / profit are not overstated (1) 1(h) Would enable Reece to monitor and control all income and expenditure (1) which in turn should avoid the occurrence of 5 irrecoverable debts (1). However. Reece may not have the necessary skills/time to maintain a full set of accounting records (1) and this may involve additional expenditure and reduced profitability in having to employ skilled services (1) Advice (1) Accept other valid responses.

This question in 9706/23 Oct/Nov 2022

2 Advertising includes the cost of a six‑month campaign, $4200, which began on 1 September 2022.

0 marks

Mark scheme: 2(a) Prepare the sales ledger control account for April 2023. Dates are not 6 required. Sales ledger control account $ $ Balance b/d 14 890 Balance b/d 610 Sales (journal) 153 480 (1) }** Returns inwards 2 790 }** (journal) Bank/Returned 880 Cash 4 830 }* cheques book/Discounts (1)}* allowed* Bank* 148 200 Journal/Interest 540 (1) Journal/Irrecoverable 1 830 (1) charges debts Journal/Contras 1 850 (1) Balance c/d 9 680 169 790 169 790 Balance b/d 9 680 (1) OF Notes: * 1 mark for the three transfers from the cash book (bank, discounts allowed, returned cheques) ** 1 mark for both sales and returns inwards entries 2(b)(i) Identify the books of prime entry for each of the following: 1 (i) discounts allowed Cash book (1) 2(b)(ii) Identify the books of prime entry for each of the following: 1 (ii) irrecoverable debts written off. General journal (1) 2(c) State three benefits of maintaining control accounts. 3 Provides a check on the arithmetical accuracy of the purchases and sales ledgers (1) Can help to reduce the chance of fraud (1) Provides details of total trade payables and total trade receivables / easier to prepare financial statements (1) Max 3 Accept other valid responses. 2(d) Calculate the revised sales ledger control account balance at 4 30 April 2023. $ Control account balance at 30 November 9 680 (1) OF Add: sales invoice omitted 820 (1) Less: understated returns inwards (470) (1) Revised control account balance 10 030 (1) OF

This question in 9706/21 May/June 2023

4 Six months’ interest at 10% per annum was received on a bank deposit of $24 000. The deposit was made on 1 March 2022. The next receipt of interest took place on 28 February 2023.

0 marks

Mark scheme: 4(a) Complete the following table to show the apportionment of factory 5 overheads and the reapportionment of service department overheads. Production Service departments departments Cutting Assembly Maintenance Canteen $ $ $ $ Factory 223 480 217 980 45 270 36 260 overheads Depreciation of 24 000 17 600 4 800 1 600 (1) machinery Power 20 100 16 750 1 117 2 233 (1) Total 267 580 252 330 51 187 40 093 overheads Reapportionment 21 650 14 434 4 009 (40 093) (1) OF Subtotal 289 230 266 764 55 196 – Reapportionment 33 906 21 290 (55 196) (1) OF Total 323 136 288 054 – (1) OF overheads 4(b) Calculate, to two decimal places, an overhead absorption rate for each 2 production department, using a suitable basis. Cutting = 323 136 / 40 000 = $8.08 per machine hour (1) Assembly = 288 054 / 62500 = $4.61 per labour hour (1) 4(c) Calculate the selling price to be quoted for this order of 40 units. 5 $ Direct materials 40  $6.95 278.00 Direct labour Cutting 40  3  $10.90 1 308.00 (1) Assembly 40  4  $8.20 1 312.00 Overheads Cutting 40  8  $8.08 2 585.60 (1) OF Assembly 40  4  $4.61 737.60 (1) OF Total costs 6 221.20 Profit 1/3  costs 2073.73 (1) OF Selling price 8 294.93 (1) OF 4(d) State two causes of under absorption of overheads. 2 Actual overheads exceed budgeted overheads (1) Actual production is less than planned production (1) 4(e) Calculate the profit made each year from Product Exe. 4 Current labour hours used: 80%  28 000 = 22 400 (1) Units produced: 22 400/2.5 = 8960 (1) Contribution: 8960  $13 = $116 480 (1) Profit: $116 480 – Fixed costs $96 000 = $20 480 (1) OF 4(f) Calculate the total profit from both products which will be made in the first 5 year if this plan is put into operation. Contribution from Product Wye: 10 000  $8 = $80 000 (1) Contribution from Product Exe: Units produced = (28 000 – 15 000)/2.5 = 5200 units (1) Contribution is 5200  $13 = $67 600 (1) Total profit is: total contribution $147 600 – fixed costs ($96 000 + $7200 depreciation + $1000 loan interest, i.e. 104 200 (1)) = $43 400 (1) OF 4(g) Advise the directors whether this plan should be put into operation. Justify 7 your answer by considering both financial and non-financial factors. Max 2 marks for ‘For’ Max 4 marks for ‘Against’ Decision supported with a comment (1) For (max 2) More/double the annual profit (1) All direct labour required so no risk of losing skilled labour while factory operates at less than full capacity (1) If overtime can be used the loss of regular customers might be avoided (1) Against (max 4) Can a repeat order from the customer be guaranteed? (1) Will any customers be lost if their regular orders cannot be fully completed due to the fall in reduction of the original product? (1) If the customer does not repeat the order, fixed costs will be increased for the next few years leading to a long-term fall in profits (1) Will there be any retraining costs? (1) Will the company be able to obtain the loan? (1) Accept other valid responses.

This question in 9706/21 May/June 2023

5 The allowance for irrecoverable debts is to be maintained at 5% of trade receivables. At 31 December 2022, trade receivables totalled $31 300.

0 marks

This question in 9706/21 May/June 2023

REQUIRED (c) Prepare the statement of profit or loss for the year ended 31 December 2022. Use the space provided on the next page to show your workings. Mima Supplies Statement of profit or loss for the year ended 31 December 2022 … … … … … … … … … … … … … … … … … … … … … … Workings: [13] (d) Explain the importance of making an allowance for irrecoverable debts in a business’s financial statements. … … … … … [2] Additional information Mima would like to assess her business’s liquidity position at 31 December 2022. REQUIRED (e) Identify two ratios which could be used to assess a business’s liquidity position. 1 … 2 … [2] Additional information Mima has noticed that her business’s rate of inventory turnover has decreased since last year. She is considering two options to increase the rate of inventory turnover. Option A: reduce inventory levels. Option B: reduce selling prices by 2% and increase the annual advertising budget by 5%. REQUIRED (f) Advise Mima which option she should choose. Justify your choice by considering both options. … … … … … … … … … … … … … … … [7] [Total: 30] 2 Param uses control accounts to verify the accuracy of his business’s sales and purchases ledgers. He provided the following information for the month ended 30 April 2023 relating to trade receivables. $ Sales ledger balances, 1 April 2023 Debit 14 890 Credit 610 Contra entries with the purchases ledger 1 850 Credit sales 153 480 Credit customers’ cheques returned 880 Discounts allowed 4 830 Interest charged on overdue accounts 540 Irrecoverable debts written off 1 830 Receipts from credit customers 148 200 Returns inwards 2 790 There were no credit balances in the sales ledger on 30 April 2023. REQUIRED (a) Prepare the sales ledger control account for April 2023. Dates are not required. Sales ledger control account $ $ [6] (b) Identify the books of prime entry for each of the following: (i) discounts allowed … [1] (ii) irrecoverable debts written off. … [1] (c) State three benefits of maintaining control accounts. 1 … … 2 … … 3 … … [3] Additional information The balance of the sales ledger control account at 30 April 2023 did not agree with the total of the individual customer account balances at this date. The following errors were discovered, some of which affected the sales ledger control account and some of which affected the customer account balances. 1 Returns inwards of $720 had been credited to the account of Rafiq Stores instead of Raif Stores. 2 A sales invoice for $820 had been omitted from the books of account. 3 The balance of a credit customer’s account, $430, had been brought down as $340. 4 The total of the returns inwards journal had been understated by $470. 5 Interest of $40 charged on an overdue account had been correctly entered in the journal but had been credited to the customer’s account. REQUIRED (d) Calculate the revised sales ledger control account balance at 30 April 2023. … … … … … … … … [4] [Total: 15] 3 The following extract from J Limited’s statement of financial position at 1 January 2022 is available. $ Equity Issued capital: ordinary shares of $0.25 each 600 000 Share premium 175 000 Retained earnings 54 000 Total equity 829 000 Non‑current liabilities 7% Debentures (2028) 200 000 REQUIRED (a) State two features of revenue reserves which do not apply to capital reserves. 1 … … … 2 … … … [2] Additional information The directors wished to raise additional finance. On 1 April 2022 the company made a rights issue of 2 ordinary shares for every 3 shares held at a price of $0.35 per share. The issue was fully subscribed. REQUIRED (b) Calculate the amount raised by the rights issue of shares. … … … … … … [3] Additional information The directors had considered making an issue of debentures rather than a rights issue. (c) Identify two reasons why the directors of J Limited might prefer to raise additional finance through a rights issue rather than by issuing debentures. 1 … … 2 … … [2] Additional information The directors paid an interim dividend of $0.12 per share on 1 July 2022. REQUIRED (d) Calculate the total amount of the interim dividend. … … … … [2] Additional information The company made a profit of $535 000 for the year ended 31 December 2022. REQUIRED (e) Prepare the statement of changes in equity for the year ended 31 December 2022. J Limited Statement of changes in equity at 31 December 2022 Share capital Share Retained Total premium earnings $ $ $ $ [6] [Total: 15] 4 D Limited has two production departments and two service departments at one of its factories where absorption costing is used. Some forecast factory overheads have already been allocated and apportioned as follows: Production departments Service departments Cutting Assembly Maintenance Canteen $ $ $ $ Factory overheads 223 480 217 980 45 270 36 260 The following forecast factory overheads are still to be apportioned. $ Depreciation of machinery 48 000 Power 40 200 Canteen department overheads should be reapportioned on the basis of the number of employees. Maintenance department overheads should be reapportioned on the basis of the number of machines in production departments. The following data is available. Production departments Service departments Cutting Assembly Maintenance Canteen Machinery at carrying value $90 000 $66 000 $18 000 $6 000 Number of machines 43 27 Kilowatt hours 1 800 1 500 100 200 Number of employees 27 18 5 Budgeted machine hours 40 000 33 500 Budgeted direct labour hours 23 000 62 500 REQUIRED (a) Complete the following table to show the apportionment of factory overheads and the reapportionment of service department overheads. Production departments Service departments Cutting Assembly Maintenance Canteen $ $ $ $ Factory overheads 223 480 217 980 45 270 36 260 Depreciation of machinery Power Total overheads Reapportionment Subtotal Reapportionment Total overheads [5] (b) Calculate, to two decimal places, an overhead absorption rate for each production department, using a suitable basis. … … … … … … [2] Additional information The following information is available. Cutting department Assembly department Direct labour rate per hour $10.90 $8.20 Machine hours per unit 8 6 Labour hours per unit 3 4 Direct materials cost $6.95 per unit. Selling prices are set to achieve a profit margin of 25%. A customer has placed an order for 40 units. REQUIRED (c) Calculate the selling price to be quoted for this order of 40 units. … … … … … … … … … … … … [5] (d) State two causes of under absorption of overheads. 1 … … 2 … … [2] Additional information At the other factory a single product, Product Exe, is currently being made. Marginal costing is used at this factory. The following information is available. Selling price per unit $48 Contribution per unit $13 Direct labour 2.5 hours per unit at $10 per hour Fixed costs $96 000 per annum Factory capacity 28 000 labour hours per year Current production level 80% of factory capacity All units produced are sold. REQUIRED (e) Calculate the profit made each year from Product Exe. … … … … … … [4] Additional information The directors plan to make a new product, Product Wye, at this factory at the request of an important customer. The following details are available. 1 The factory will be able to operate at full capacity. 2 All units produced will be sold. 3 Product Wye will have a selling price of $64 per unit and a contribution of $8 per unit. 4 Product Wye will require direct labour at $10 per hour for 1.5 hours per unit. 5 The customer requires 10 000 units of Product Wye each year. The customer will only accept this quantity each year. 6 In order to complete the customer’s order, production of Product Exe will be reduced. 7 Some new machinery will be required costing $36 000. Machinery is depreciated by 20% per annum.

72 marks

This question in 9706/21 May/June 2023

3 Khaled opened his business on 1 January 2021 with a capital of $41 000. He did not maintain a full set of accounting records. Khaled wishes to know his profit or loss for the year ended 31 December 2021. He has provided the following information. 1 Assets and liabilities at 31 December 2021 $ Bank overdraft 3 470 Bank loan 8 500 Inventory 18 450 Non-current assets (carrying value) 27 500 Trade payables 9 940 Trade receivables 7 230 2 Non-current assets include a motor vehicle. This vehicle had been privately owned by Khaled but during 2021 it was transferred to the business at a valuation of $9000. 3 During 2021 Khaled’s drawings were $14 870. REQUIRED (a) Calculate the business’s profit or loss for the year ended 31 December 2021. … … … … … … … … … … … … … [7] Additional information During 2022 Khaled kept more detailed records but could not provide a figure for revenue. The following information is available at 31 December 2022. $ Inventory at 31 December 2022 16 250 Purchases 148 300 Khaled’s policy is to mark-up all goods by 50%. REQUIRED (b) Calculate revenue for the year ended 31 December 2022. … … … … … … … [4] (c) State two advantages to a business of maintaining a full set of accounting records. 1 … … 2 … … [2] (d) State two disadvantages to a business of maintaining a full set of accounting records. 1 … … 2 … … [2] [Total: 15]

15 marks

Mark scheme: 3(a) Calculate the business’s profit or loss for the year ended 31 December 2021. 7 Loss $3 860 (7) Workings Closing capital $ $ Assets Non-current assets 27 500 Inventory 18 450 Trade receivables 7 230 53 180 (1) Liabilities Bank loan 8 500 Trade payables 9 940 Bank overdraft 3 470 21 910 (1) 31 270 (1)OF Profit/loss calculation $ Opening capital 41 000 Capital introduced 9 000 (1) 50 000 Less: drawings (14 870) (1) 35 130 Closing capital 31 270 (1)OF Loss for year 3 860 (1)OF 3(b) Calculate revenue for the year ended 31 December 2022. 4 $225 750 (4) Workings Cost of sales $ Opening inventory 18 450 Purchases 148 300 166 750 (1) Closing inventory (16 250) Cost of sales 150 500 (1) OF Revenue: $150 500 (OF)  1.5 (1) = $225 750 (1)OF 3(c) State two advantages to a business of maintaining a full set of accounting 2 records. Financial information will be more reliable/accurate (1) Will provide more comprehensive information to inform decision making (1) Facilitates preparation of the financial statements (1) Max 2 Accept other valid responses. 3(d) State two disadvantages to a business of maintaining a full set of accounting 2 records. May not have time/skills to maintain full accounting records (1) Possible cost of employing bookkeeper (1) Possible additional expenditure on equipment/accounting software etc. (1) Max 2 Accept other valid responses.

This question in 9706/22 May/June 2023

1 Hamza owns a retail business with a financial year end of 31 December. On 31 December 2022 inventory was valued at $15 330. However, this figure included 30 damaged items which had a cost price of $32 each. Of the damaged items, 23 will be scrapped with no value. The remaining 7 items will require repairs costing a total of $126 before being sold at the normal price of $48 each. REQUIRED (a) Explain, with reference to an accounting concept, how damaged inventory should be valued. … … … … [2] (b) Calculate the corrected valuation of inventory at 31 December 2022. … … … … … … [4] Additional information The following information has been extracted from the books of account at 31 December 2022. Dr Cr $ $ Administrative expenses 14 380 Carriage inwards 1 720 Carriage outwards 3 860 Discounts 840 620 Furniture and equipment Cost 36 000 Provision for depreciation 11 800 Inventory at 1 January 2022 16 780 Insurance 4 320 Purchases 182 770 Rent payable 17 000 Returns 5 460 4 810 Revenue 299 490 Trade receivables 18 460 Wages 37 330 At 31 December 2022: 1 No record had been made of goods taken by the owner for his own use, cost $550.

6 marks

Mark scheme: Question Answer Marks 1(a) Explain, with reference to an accounting concept, how damaged 2 inventory should be valued. Inventory should be valued at the lower of cost or net realisable value (1) in accordance with the prudence concept (1) 1(b) Calculate the corrected valuation of inventory at 31 December 2022. 4 $ Original value 15 330 Damage (960) (1) Sales 336 (1) Repairs (126) (1) 210 14 580 (1) OF 1(c) Prepare the statement of profit or loss for the year ended 31 December 15 2022. Hamza Statement of profit or loss for the year ended 31 December 2022 $ $ Revenue 299 490 Less sales returns (5 460) 294 030 (1) Less cost of sales Opening inventory 16 780 Purchases 182 770 Less goods own use (550) (1) Less purchases returns (4 810) (1) Add carriage inwards 1 720 (1) 195 910 Less closing inventory (14 580) (1) OF 181 330 Gross profit 112 700 (1) OF Add discounts received 620 (1) 113 320 Less discounts allowed 840 (1) Administrative expenses 14 380 Insurance 4 320 (1) Wages 37 330 Carriage outwards 3 860 Rent payable W1 20 400 (1) Irrecoverable debt written off 760 (1) Allowance for irrecoverable 885 (1) debts W2 Depreciation of furniture and 6 550 (2) equipment W3 (89 325) Profit for the year 23 995 (1) OF W1 Rent: $17 000 + (2/3  $5100) = $20 400 (1) W2 Allowance for irrecoverable debts: 5%  ($18 460 – $760) = $885 (1) W3 Depreciation: Addition $650 + Original ($20%  $29 500) $5900 (1) = $6550 (1) 1(d) State the double entry required to record goods withdrawn by an 2 owner for personal use. Debit: drawings (1) Credit: purchases (1) 1(e) Advise Hamza which option he should choose. Justify your answer by 7 considering both financial and non-financial factors. Max 3 marks for Option A Max 3 marks for Option B Decision supported by a comment (1) Option A (max 3) Cost of sales will be reduced leading to improved gross profit (1) But: Can larger orders be stored? / cost of storing large orders (1) Will goods deteriorate while stored? (1) Will new supplier’s goods be of the same quality? (1) Will supplier be reliable? (1) Option B (max 3) Will increase gross profit only if demand is maintained (1) But: Advertising costs will reduce net profit (1) Will advertising be effective? (1) Increase in selling price may reduce demand (1) Accept other valid responses.

This question in 9706/23 May/June 2023

3 An allowance for irrecoverable debts of 5% is to be created based on the amount outstanding from credit customers.

0 marks

Mark scheme: 3(a) Prepare an extract from the statement of financial position immediately 5 before the bonus issue showing the equity section. Equity $ Ordinary shares of $0.50 each W1 600 000 (2) OF Share premium W2 240 000 (1) OF Retained earnings W3 280 000 (1) OF Total equity 1 120 000 (1) W1 Bonus issue was 2/5  $1 000 000 = $400 000 (1) original capital was $600 000 (1) OF W2 Share premium: 60%  $400 000 = $240 000 (1) OF W3 Retained earnings: (40%  $400 000) + $120 000 = $280 000 (1) OF 3(b) Calculate the change in the amount of dividend received by Hassan 5 comparing the dividend at 31 March 2022 with the dividend at 31 March 2021. 2021 Dividend: 20%  $3600 (1) = $720 (1) 2022 Dividend: 12 000 shares (1)  $0.05 = $600 (1) Decrease of $120 (1) OF 3(c) State two differences between capital reserves and revenue reserves. 2 Capital reserves arise from non-trading activities; revenue reserves arise from trading activities (1) Capital reserves cannot be used to finance cash dividends; revenue reserves can be used to finance cash dividends (1) Max 2 Accept other valid responses. 3(d) State three reasons why the directors of a company might reduce the 3 total dividends payable. Fall in profits (1) Lack of liquid funds to pay dividends (1) Liquid funds required for other commitments (1) Max 3 Accept other valid responses.

This question in 9706/23 May/June 2023

4 Rent of $5100 is paid at the end of every three months. Rent for the three months ending 31 January 2023 is accrued.

0 marks

Mark scheme: 4(a) Define: 3 marginal cost contribution break-even point marginal cost: the costs incurred when producing one additional unit (1) contribution: difference between selling price and variable costs which helps cover fixed costs (1) break-even point: the level of output at which neither a profit nor loss is made (1) Accept other valid responses. 4(b)(i) Calculate the break-even point: 2 in units Break-even point = $36 900/18 (1) = 2050 units (1) 4(b)(ii) Calculate the break-even point: 1 in sales value. Break-even point = 2050  $52 = $106 600 (1) OF 4(c) Calculate the increase in the monthly margin of safety in units 7 assuming all production is sold. Current margin of safety is: 2500 – 2050 units = 450 units (1) New factory capacity: 2500  115% = 2875 units (1) New contribution = $18 + $1 = $19 (1) New fixed costs per month = $36 900 + $1200 + $400 = $38 500 (1) New break-even point = $38 500/19 = 2027 units (1) OF New margin of safety = 2875 – 2027 units = 848 units (1) OF Margin of safety increases by 398 units (1) OF 4(d)(i) Calculate the profit per month to be made under each option. 1 Option A Production is 85%  18 000 = 15 300 units Total contribution is 15 300  8 = $122 400 Profit is $122 400 less FC $52 000 = $70 400 (1) 4(d)(ii) Calculate the profit per month to be made under each option. 5 Option B $ Contribution Existing contribution: 13 800  $8 110 400 (1) New customer contribution: 4200  $5.50 (1) 23 100 (1) OF 133 500 Less fixed costs 53 000 (1) Profit 80 500 (1) OF 4(e) Advise the directors which option they should choose. Justify your 7 answer by considering both financial and non-financial factors. Max 3 marks for Option A Max 4 marks for Option B Overall max 6 marks in total for comments Decision supported by a comment (1) Option A (max 3) For: regular customers receive their usual order (1) no change in fixed costs (1) Against: less profit ($10 100) (1) OF Option B (max 4) For: may be long-term increase in profits if new customer makes regular order (1) operates at full capacity (1) Against: regular customers may switch to alternative supplier (1) regular customers may expect to pay the same price as new customer (1) fixed costs are increased in the long-term even if new customer only makes one order (1) Accept other valid responses. 4(f) Explain two advantages to a business of using absorption costing. 4 Absorption costing is useful for setting selling prices (1) as the cost of a unit includes an element of fixed costs (1). Inventories are valued on total costs (1) so the data is acceptable for preparing financial statements (1). Absorption costing conforms to the matching concept (1) because it enables costs to be compared with revenues for a financial period (1) Absorption costing avoids the separation of fixed costs and variables costs (1) which can lead to incorrect data when using marginal costing (1) Max 2 advantages (each advantage 1 mark for identifying and 1 mark for development) Accept other valid responses.

This question in 9706/23 May/June 2023

5 The policy is to depreciate furniture and equipment by 20% per annum using the straight‑line method on a month‑by‑month basis. However, the furniture and equipment account includes equipment purchased during the year that cost $6500 and on which depreciation of $650 has not yet been charged. REQUIRED (c) Prepare the statement of profit or loss for the year ended 31 D provided on page 5 for your workings. Hamza Statement of profit or loss for the year ended 31 … … … … … … … … … … … … … … … … … … … … … Workings: [15] (d) State the double entry required to record goods withdrawn by an owner for personal use. Debit: … Credit: … [2] Additional information Hamza is concerned that the performance of the business has declined in recent months. He is considering two options to increase the gross profit of the business. Option A: Purchase goods from a different supplier who is prepared to offer a large trade discount. Hamza would need to order in bulk, but less frequently than now. Option B: Increase selling prices and increase monthly expenditure on advertising. REQUIRED (e) Advise Hamza which option he should choose. Justify your answer by considering both financial and non‑financial factors. … … … … … … … … … … … … … … [7] [Total: 30] 2 Veda owns a retail business. Her accountant advised her to prepare a trial balance. REQUIRED (a) State two benefits of preparing a trial balance. 1 … … 2 … … [2] Additional information On 31 March 2023 Veda prepared a trial balance but the totals did not agree. The debit column totalled $84 050 and the credit column totalled $83 350. The difference was posted to a suspense account. The following errors were identified and corrected after which the trial balance totals agreed. 1 A payment of $740 to Opal Stores was recorded in the account of Opal Wholesale. 2 Sales returns of $340 from Kali had been correctly recorded in the sales returns journal, but $430 had been posted to the debit side of Kali’s account. 3 The discount columns in the cash book had not been posted to the general ledger. Discounts allowed totalled $530 and discounts received totalled $370. 4 A cheque for $560 received from W Limited had been dishonoured. The dishonoured cheque was entered correctly in the cash book but had been posted as $650 to the customer’s account. REQUIRED (b) Prepare journal entries to correct each of the errors. Dates and narratives are not required. Journal Dr Cr Account $ $ [7] (c) Prepare the suspense account at 31 March 2023. Dates are not required. Suspense account $ $ [4] (d) Define the term ‘error of principle’. … … … … [2] [Total: 15] 3 On 1 January 2022 the directors of J Limited made a bonus issue of two ordinary shares for every three ordinary shares held. The following is an extract from the company’s statement of financial position immediately after the bonus issue. Equity $ Ordinary shares of $0.50 each 1 000 000 Retained earnings 120 000 Total equity 1 120 000 The directors financed the issue 60% from the share premium account and the remainder from retained earnings. REQUIRED (a) Prepare an extract from the statement of financial position immediately before the bonus issue, showing the equity section. Equity $ Ordinary shares of $0.50 each Share premium Retained earnings Total equity Workings: [5] Additional information J Limited’s financial year ends on 31 March. On 31 March 2021 the directors paid an annual ordinary share dividend of 20%. However, on 31 March 2022 the directors decided that the annual ordinary share dividend would amount to $0.05 per share. Hassan is a shareholder in the company. He owned 7200 shares before the bonus issue on 1 January 2022. REQUIRED (b) Calculate the change in the amount of dividend received by Hassan, comparing the dividend at 31 March 2022 with the dividend at 31 March 2021. … … … … … [5] (c) State two differences between capital reserves and revenue reserves. 1 … … 2 … … [2] (d) State three reasons why the directors of a company might reduce the total dividends payable. 1 … … 2 … … 3 … … [3] [Total: 15] 4 V Limited is a manufacturing company which uses marginal costing. REQUIRED (a) Define: marginal cost … … contribution … … break‑even point. … … [3] Additional information The following information is available for a single type of product made at one of the company’s factories. Per unit $ Selling price 52 Direct materials 16 Direct labour 18 Fixed costs per month are $36 900. Maximum output per month is 2500 units. The factory operates at full capacity. REQUIRED (b) Calculate the break‑even point: (i) in units … … … … [2] (ii) in sales value. … … [1] Additional information The directors plan to increase factory capacity to meet increased demand. The following details are available. 1 Factory capacity will be increased by 15%. 2 Additional machinery will be required at a cost of $72 000. 3 Machinery is depreciated at 20% per annum on cost. 4 The directors will apply for a bank loan of $60 000 at 8% per annum interest to finance the cost of the additional machinery. 5 Direct materials will cost less per unit as a result of buying in greater bulk. Suppliers currently give a 20% trade discount but will give a 25% trade discount in future.

60 marks

This question in 9706/23 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

1 Haroon and Rakesh are in partnership. They provide cleaning services for local businesses. They started their business on 1 January 2023 when the partners introduced the following assets. Haroon Rakesh $ $ Cash at bank 4 000 2 000 Furniture and equipment 14 000 Motor vehicle 16 000 The partners have not maintained full accounting records. However, they provided the following information for the year ended 31 December 2023. 1 Bank statements included the following receipts. $ Cash takings 9 410 Receipts from credit customers 60 230 2 Amounts received from credit customers were after deducting cash discounts of 5%. 3 At 31 December 2023, credit customers owed $5580. 4 Before banking cash takings, the partners withdrew the following amounts each month for personal use. $ Haroon 1200 Rakesh 750 5 The business does not keep any cash in hand. (a) Calculate the total revenue for the year ended 31 December 2023. … … … … … … … … [3] Additional information 1 Bank statements recorded the following payments for the year ended 31 December 2023. $ Cleaning materials 11 420 Rent of premises 8 960 Electricity charges 3 450 Accountant’s fees 3 800 Staff wages 29 870 Vehicle running costs 1 480

3 marks

Mark scheme: 1(a) Calculate the total revenue for the year ended 31 December 2023. $101 790 (3) W1 W1 $ Cash takings 9 410 Add drawings 23 400 32 810 (1) Credit sales ($60 230  100/95) 63 400 (1) Credit customers at year-end 5 580 101 790 (1) 3 Question Answer Marks 1(b) Prepare the statement of profit or loss for the year ended 31 December 2023. Haroon and Rakesh Statement of profit or loss for the year ended 31 December 2023 $ $ Revenue 101 790 (1)OF Less expenses Discounts allowed 3 170 (1) Cleaning materials ($11 420 – $290) 11 130 (1) Rent of premises [$8960 – (2/3  $2460)] 7 320 (1) Electricity charges ($3450 + $430) 3 880 (1) Loss on vehicle disposal W1 2 700 (1) Depreciation Furniture and equipment W2 2 800 (1) Motor vehicles W3 3 100 (1) Accountant’s fees 3 800} (1) Staff wages 29 870} Vehicle running costs 1 480} (69 250) Profit for the year 32 540 (1)OF 10 Question Answer Marks 1(b) W1: Loss on disposal: carrying value at time of disposal $14 400 less proceeds $11 700 = $2700 (1) W2: Depreciation of furniture and equipment 20%  $14 000 = $2800 (1) W3: Depreciation of motor vehicles: vehicle 1 $1600 + vehicle 2 $1500 = $3100 (1) 1(c) Prepare an extract from the statement of financial position at 31 December 2023 to show the current assets section only. Current assets $ Inventory (cleaning materials) 290 (1) Trade receivables 5 580 }(1) Other receivables 1 640 Cash at bank 27 930 (1) 35 440 (1)OF 4 Question Answer Marks 1(d) Calculate the balance on Rakesh’s capital account at 31 December 2023. $33 626 (6) W1 W1 $ Opening capital 16 000 (1) Less drawings (9 000) (1) Motor vehicle 15 000 (1) Interest on capital 2 350 (1) Share of profits 9 276 (1) Closing capital 33 626 (1)OF 6 Question Answer Marks 1(e) Advise the partners whether or not they should maintain a full accounting system using an accounting software package. Justify your answer. Advantages (Max 3) Will provide detailed information to support management of business (1) Facilitates production of documents (invoices, statements etc) (1) Will provide information required to support bank loan / tax assessment (1) Will save accountant’s fees (1) Speed of processing data (1) Improved accuracy (1) Disadvantages (Max 3) Internal / external threats (hacking etc) (1) Cost of computer equipment and software (1) Possible training costs (1) Inconvenience of changing systems (1) Staff resistance (1) Advice supported by a comment (1) Accept other valid responses. 7

This question in 9706/21 May/June 2024

1 Zahid owns a small retail business. He has not maintained a full set of accounting records. Zahid supplied the following information for the year ended 31 December 2023. 1 All sales were made on a cash basis. Cash sales totalled $195 000. 2 All goods were sold with a mark-up of 50%. (a) Calculate the gross profit of the business for the year ended 31 December 2023. … … … … … [1] Additional information The following information is also available. 1 Inventory and trade payables At 1 January 2023 At 31 December 2023 $ $ Inventory 16 400 22 460 Trade payables 13 500 15 600 2 All purchases were made on credit. Trade suppliers were paid $134 240 after deducting cash discounts totalling $560. 3 Zahid took goods for his own use during the year. However, no record was made of the value of these goods. (b) Calculate for the year ended 31 December 2023: (i) purchases … … … … … … [3] (ii) the value of goods taken for own use by Zahid. … … … … … … … … [4] Additional information The following information is available for Zahid’s business. 1 Non-current assets Non-current assets had the following values. $ 1 January 2023 194 000 31 December 2023 188 000 During the year ended 31 December 2023, a non-current asset was sold for $5600, resulting in a profit on disposal of $2400. Additional non-current assets were purchased for $9200.

8 marks

Mark scheme: Question Answer Marks 1(a) Calculate the gross profit of the business for the year ended 31 1 December 2023. $65 000 (1) 1(b)(i) Calculate for the year ended 31 December 2023: 3 Purchases $136 900 (3) W1 W1 $ $ Bank 134 240 (1)fb Balance b/d 13 500 * Discounts 560 Purchases 136 900 (1) OF Balance c/d 15 600 * 150 400 150 400 *(1) for correct use of both balances Alternative version $ 15 600 (1)fb (13 500) 134 240 (1)fb 560 136 900 (1) OF 1(b)(ii) Calculate for the year ended 31 December 2023: 4 The value of goods taken for own use by Zahid. $840 (4) W $ $ Opening inventory 16 400 * Purchases 136 900 (1) OF Less goods own use (840) (1) OF 152 460 Closing inventory (22 460) * 130 000 (1) OF *(1) for both inventories Alternative version $ 16 400 * 136 900 (1) OF (22 460) *(1) both (130 000) (1)OF 840 (1)OF 1(c) Prepare an extract from the statement of profit or loss for the year ended 12 31 December 2023, starting with the gross profit calculated in (a). Zahid Statement of profit or loss for the year ended 31 December 2023 (Extract) $ $ Gross profit 65 000 (1) OF Add: income Profit on disposal 2400 (1) Rent receivable 4480 (1) Discounts 560 (1) 7440 received 72 440 Less: expenses Depreciation W1 12 000 (3) Advertising 7060 (1) General expenses 7910 (1) Insurance 4450 (1) Wages 12 870 (1) (44 290) Profit for the year 28 150 (1) OF W1 $194 000 - $3200 (1) + $9200 (1) - $188 000 = $12 000 (1) 1(d) Explain, with reference to an accounting concept, why Zahid made 3 adjustments to his income and expenses when preparing the statement of profit or loss. Matching/accruals (1) To match expenses incurred to the revenue generated (1) in the same accounting period (1) regardless of whether paid or not (1). Accept other valid responses Award 1 mark for concept plus up to 2 marks for explanation 1(e) Advise Zahid which option he should choose. Justify your answer by 7 considering both the advantages and the disadvantages of each option. Award 1 mark for identification of each advantage or a disadvantage and a further 1 mark for valid development of the point Max 3 marks for identification and max 3 marks for valid linked development of the points Partnership option Limited company option Advantages Advantages  More capital available (1)  Limited liability for debts of the business (1)  More expertise / new skills (1)  Separate legal identity (1)  Possibly better decision making  Access to more finance (1) (1) Disadvantages Disadvantages  Possibility of disagreements (1)  More complicated / expensive to set up (1)  Unlimited liability (1)  Mandatory financial statements (1)  Possible slower decision  May be subject to external audit making (1) (1) Advice supported with a comment (1) Accept other valid responses

This question in 9706/22 May/June 2024

2 Income from rent receivable At 1 January 2023 Bank receipts during the At 31 December 2023 year owing to Zahid’s business $280 $5360 received in advance $600

0 marks

Mark scheme: 2(a) Calculate the corrected balance of retained earnings at 31 December 5 2023. Revised retained earnings $ Draft balance 242 400 (1) Add: inventory undervalued 3600 (1) Add: depreciation 12 000 (1) Less: returns error (2200) (1) Corrected balance 255 800 (1) 2(b) Prepare the statement of financial position at 31 December 2023. 10 J Limited Statement of financial position at 31 December 2023 $ Assets Non-current assets Property at valuation 1 060 000 Furniture and equipment 192 000 1 252 000 (1) Current assets Inventory 87 600 (1) Trade and other receivables 38 100 (1) Cash and cash equivalents 28 900 154 600 Total assets 1 406 600 (1) OF Equity and liabilities Equity Issued share capital 750 000 Share premium 220 000 Revaluation reserve 70 000 Retained earnings 255 800 (1) OF Total equity 1 295 800 (1) OF Current liabilities 8% Debentures 90 000 (1) Trade and other payables 20 800 (1) Total liabilities 110 800 (1) OF Total equity and liabilities 1 406 600 (1) OF

This question in 9706/22 May/June 2024

4 Distribution costs includes the cost of a five-month advertising campaign, $22 000, which will end on 31 March 2024.

0 marks

Mark scheme: 4(a)(i) Explain each of the following terms used in absorption costing. Allocation: overhead expenses are directly (1) attributed to a specific cost centre (1) 2 4(a)(ii) Explain each of the following terms used in absorption costing. Apportionment: overhead expenses are shared between different departments (1) by using a suitable basis (1) 2 4(b) Complete the table to show the apportionment of the budgeted overheads for the year ended 31 March 2024. Production departments Service departments Total Preparation Finishing Stores Canteen $ $ $ $ $ Overheads allocated 272 120 184 100 60 800 10 960 16 260 Electricity 63 000 48 000 12 000 600 2400 (1) row Rent 44 000 24 000 18 000 500 1500 (1) row Total overheads 379 120 256 100 90 800 12 060 20 160 Apportion canteen 11 520 7 200 1440 (20 160) (1) OF row Subtotal 267 620 98 000 13 500 Apportion stores 9529 3971 (13 500) (1) OF row Subtotal 277 149 (1) OF 101 971 (1) OF 6 Question Answer Marks 4(c) Calculate, to two decimal places, the overhead absorption rate for each production department for the year ended 31 March 2024. Preparation department $277149 17500 = $15.84 (1) OF per machine hour (1) Finishing department $101971 20300 = $5.02 (1) OF per labour hour (1) 4 4(d) Calculate the over absorption or under absorption of overheads for the preparation department for the year ended 31 March 2024. (17 500 – 16 920) i.e. 580 (1)  $15.84 = $9187.20 (1) OF under absorbed (1) OR ((16 920  $15.84) – $277 149 ) (1) = $9136.20 (1) OF under absorbed (1) 3 Question Answer Marks 4(e) $ Direct materials 800.00 Direct labour Preparation department 52  $12,20 634.40 (1) fb Finishing department 90  $14.50 1305.00 Overheads Preparation department 140  $15.84 2217.60 (1) OF Finishing department 90  $5.02 451.80 (1) OF Total costs 5408.80 (1) OF Profit 5408.80 (1) OF Selling price 2  cost 10 817.60 (1) OF Calculate the selling price for the order. $10 817.60 (6) W Working 6 Question Answer Marks 4(f) Advice the directors whether or not they should switch to a JIT method of inventory control. Justify your answer by considering both financial and non-financial factors. For the proposal (max 3)  Improved cash flow as less money tied up in inventory (1)  Reduced storage costs (1)  Less chance of wastage/damaged goods/out of date items (1) Against the proposal (max 3)  May need new suppliers / over reliance on a supplier (1)  Risk of stock-outs if any delays in delivery (1)  Risk of interruptions to production if delivery delays (1)  Possible loss of trade discounts because of smaller orders (1)  Increase in delivery costs because of increased number of deliveries (1)  Increased costs of receiving / inspection of deliveries (1) Advice supported with a comment (1) Accept other valid responses 7

This question in 9706/23 May/June 2024

5 Debenture interest is outstanding at 31 December 2023. The debentures had been issued in 2021.

0 marks

This question in 9706/23 May/June 2024

3 Clarissa started her business on 1 July 2022, and she is preparing her financial statements for the year ended 30 June 2024. She depreciates her motor vehicles at 25% per annum using the straight-line method. Depreciation is charged on a monthly basis. She purchased a motor vehicle on 1 July 2022 costing $24 000. She estimated that the motor vehicle would have a useful life of four years with no residual value. On 30 September 2023 she purchased a new motor vehicle costing $70 000. The old motor vehicle was part-exchanged at a value of $14 800. The balance was settled with an interest-free loan repayable in equal monthly instalments over two years. The first loan instalment was due to be paid on 31 October 2023. She estimated that the new motor vehicle would have a useful life of four years with a residual value of $16 000. (a) Prepare each account for the year ended 30 June 2024. Motor vehicle at cost account Date Details $ Date Details $ Motor vehicle provision for depreciation account Date Details $ Date Details $ [8] (b) (i) Calculate the outstanding balance on the interest-free loan at 30 June 2024. … … [1] (ii) State how the interest-free loan would be shown in the statement of financial position at 30 June 2024. … … [1] Additional information Clarissa has been advised that she should consider charging depreciation on the reducing balance method rather than the straight-line method. (c) Advise Clarissa whether or not she should change her method of charging depreciation. Justify your advice by discussing both methods. … … … … … … … … … … … … … … [5] [Total: 15]

15 marks

Mark scheme: 3(a) Prepare each account for the year ended 30 June 2024. 8 Motor vehicles at cost account Date Details $ Date Details $ 2023 Balance b/d 24 000 2023 Disposal 24 000 1 July (1) 30 Sept (1) 2023 Disposal 14 800 2024 Balance c/d 70 000 30 Sept (1) 30 June Loan account 55 200 (1) 94 000 94 000 2024 Balance b/d 70 000 1 July (1)OF Motor vehicles provision for depreciation account Date Details $ Date Details $ 2023 Disposal 7 500 2023 Balance b/d 6 000 30 Sept (1) 1 July 2024 Balance c/d 10 125 2024 Statement of 11 625 30 June 30 June profit or loss (1) 17 625 17 625 70 000 2024 Balance b/d 10 125 1 July (1)OF 3(b)(i) Calculate the outstanding balance on the interest-free loan at 30 June 1 2024. $55 200 – (9  2 300) = $34 500 (1) 3(b)(ii) State how the interest-free loan will be shown in the statement of 1 financial position at 30 June 2024. $ Non-current liabilities 6 900 (1) Current liabilities 27 600 3(c) Advise Clarissa whether or not she should change her method of 5 charging depreciation. Justify your advice by discussing both methods. Straight line method (Max 2) • Easier to calculate (1) • Difficult to accurately predict estimated useful life (1) • Difficult to predict residual value (1) Reducing balance method (Max 2) • More realistic (1) • Recognises vehicle loses more value in the early years (1) • Recognises increased maintenance costs as vehicle ages (1) • Results in more realistic profit calculations (1) Advice supported with a comment (1) Accept other valid responses.

This question in 9706/21 Oct/Nov 2024

1 Ahmed is a sole trader. He does not maintain full accounting records. He provided the following information for the year ended 30 June 2024. 1 Payments and receipts during the year included the following: $ Carriage outwards 1 040 Cash sales 5 200 Electricity charges paid 1 920 General expenses paid 3 600 Motor expenses paid 4 250 Payments to credit suppliers 61 240 Receipts from credit customers 102 600 Rent paid 16 800 2 All purchases are made on credit. 3 Assets and liabilities included the following: At 30 June 2023 2024 $ $ 8% bank loan – 3 000 Allowance for irrecoverable debts 1 055 ? Inventory 12 640 ? Other payables: Rent accrued 600 – Electricity 130 90 Other receivables: Rent prepaid – 1 800 Trade payables 8 800 6 300 Trade receivables 21 100 18 500 4 Inventory at 30 June 2024 was valued at $15 880. This included damaged items costing $960 that will be sold for $1100 after repairs costing $340. 5 During the year Ahmed took goods costing $420 for his own use. 6 An irrecoverable debt of $300 is to be written off. 7 Ahmed wished to maintain the allowance for irrecoverable debts at the same rate as in the previous year. 8 The 8% bank loan was taken out on 1 April 2024. No interest has yet been paid. 9 Ahmed started the business on 1 July 2022. On that date he purchased a motor vehicle for $24 000 and fixtures and fittings for $3200. No other non-current assets have been purchased since that date. 10 Depreciation is to be provided as follows: Motor vehicle: 20% per annum reducing balance method Fixtures and fittings: 10% per annum straight-line method. 11 Motor expenses paid included $1140 for motor insurance for the twelve months to 31 August 2024. (a) Prepare the statement of profit or loss for the year ended 30 June 2024. Use the space provided on page 4 to show your workings. Ahmed Statement of profit or loss for the year ended 30 June 2024 … … … … … … … … … … … … … … … … … … … … … … … … … Workings: Revenue Cost of sales Rent Electricity charges Motor expenses Depreciation Other workings [17] (b) Explain, with reference to an accounting concept, why adjustments 5, 6 and 11 on page 2 were to be made to the financial statements. Adjustment 5 Goods for own use Concept … Explanation … … … … … 6 Irrecoverable debt Concept … Explanation … … … … … 11 Motor insurance Concept … Explanation … … … … … [6] Additional information Ahmed has been offered the opportunity to purchase larger premises for $85 000 which would allow him to increase the sales revenue of the business. As he does not have sufficient personal funds to make the purchase, he is considering two options. Option 1 Apply for a bank loan to cover the whole purchase price. The bank loan would be repayable over ten years and interest would be payable at 8% per annum. Option 2 Ahmed’s brother has offered to join the business as an equal sharing partner. He would introduce all of the cash required to complete the purchase in exchange for a 50% share of future profits. (c) Advise Ahmed whether he should go ahead with either of these options. Justify your advice by discussing both financial and non-financial factors. … … … … … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 30 June 2024. 17 Ahmed Statement of profit or loss for the year ended 30 June 2024 $ $ Revenue W1 105 200 (3)OF Cost of sales Opening inventory 12 640 Purchases W2 58 740 (1) Goods for own use (420) (1) 70 960 Closing inventory W3 (15 680) (1) 55 280 (1)OF Gross profit 49 920 (1)OF Decrease in allowance for irrecoverable debts W4 145 (1) 50 065 Expenses General expenses 3 600 Carriage outwards 1 040 (1) Rent W5 14 400 (1) Electricity W6 1 880 (1) Motor expenses W7 4 060 (1) Irrecoverable debts 300 (1) Bank interest W8 60 (1) Depreciation W9 4 160 (1) 29 500 Profit for the year 20 565 (1)OF 1(a) W1 – Revenue (102 600 – 21 100 + 18 500) (1) + 5 200 (1) = $105 200 (1)OF W2 – Purchases (61 240 + 6 300 – 8 800) = $58 740 (1) W3 – Closing inventory 15 880 – (960 – 760) = $15 680 (1) W4 – Allowance for 18 500 – 300 = 18 200  5% = 910 – 1055 = $(145) (1) irrecoverable debts W5 – Rent 16 800 – 600 – 1800 = $14 400 (1) W6 – Electricity 1 920 – 130 + 90 = $1 880 (1) W7 – Motor expenses 4 250 – 190 = $4 060 (1) W8 – Bank interest 3 000  8% = 240  3/12 = $60 (1) W9 – Depreciation 24 000 – 4 800 = 19 200  20% = 3 840 + 3 200  10% = $4 160 (1) 1(b) Explain, with reference to an accounting concept, why adjustments were to be made to the financial statements in 6 respect of these items. Item 5 Goods for own Concept use Business entity (1) Explanation The cost of goods taken by Ahmed for his own use should be charged to his drawings as they are separate from the business expenditure (1) 6 Irrecoverable Concept debt Prudence (1) Explanation The anticipated loss by writing off the debt as irrecoverable avoids overstating the profit for the year/trade receivables (1) 11 Motor Concept insurance Matching / Accruals (1) Explanation To match the expenditure of the insurance with the benefits of the same accounting period (1) Accept other valid responses. 1(c) Advise Ahmed whether he should go ahead with either of these options. Justify your advice by discussing both 7 financial and non- financial factors. Option 1 (Bank loan) • Interest payments would reduce profits for the next ten years. (1) • Would the bank agree to providing further loan capital? (1) • Would the new premises result in the necessary increase in turnover? (1) • Would the bank require security? (1) Option 2 (Partnership) • Will provide necessary capital to avoid long-term liability. (1) • Would have to forgo half of future profits. (1) • Will Ahmed’s brother add any additional skills/knowledge to the business? (1) • Will the partnership cause friction between the brothers? (1) Max 6 for comments Decision supported with a comment (1) Accept other valid responses

This question in 9706/22 Oct/Nov 2024

2 Sara is entitled to a salary of $12 000 per annum. (b) Prepare the appropriation account for the year ended 31 December 2024. Appropriation account for the year ended 31 December 2024 … … … … … … … … … … … … … … [3] (c) Prepare the current account of Viraj for the year ended 31 December 2024. Dates are not required. Viraj Current account $ $ [4] Additional information On 31 December 2024, the balance of Sara’s current account was $15 070 debit. (d) Prepare an extract from the statement of financial position at 31 December 2024 showing the capital and liabilities section only. Statement of financial position at 31 December 2024 Capital and liabilities … … … … … … … … … … … … … … … … … … … … [4] (e) Explain, with reference to an accounting concept, the correct treatment of: (i) goods taken for own use by the owner of a business Concept: … Explanation: … … … [2] (ii) irrecoverable debts. Concept: … Explanation: … … … [2] Additional information The partners are concerned about the liquidity of the business. The current credit terms are 30 days for both credit suppliers and credit customers. They have noticed that some credit customers are delaying the settlement of their invoices, whilst credit suppliers are always paid within 30 days. They are considering two options: Option A: introducing a 5% cash discount for all credit customers’ invoices settled within 25 days. Option B: paying credit suppliers within 35 days. (f) Advise the partners which option they should choose. Justify your answer by discussing both options. … … … … … … … … … … … … … … … … … … … … [7] [Total: 30] 2 Moe runs a trading business and maintains control accounts as a part of the double entry. The following information is available for the month of November 2024. $ Balance of sales ledger control account at 1 November 2024 18 320 Contra entry with purchases ledger control account 139 Credit sales 41 735 Discounts allowed 3 071 Interest charged on overdue accounts 84 Irrecoverable debt written off 478 Receipts from credit customers 39 202 Sales returns 883 (a) Prepare the sales ledger control account for November 2024. Dates are not required. Sales ledger control account $ $ [5] Additional information On 31 December 2024, the following information was available. $ Total of balances in the sales ledger 22 350 Sales ledger control account balance 23 964 The following errors were discovered, which accounted for the difference. 1 The balance of a credit customer’s ledger account had been overstated by $189. 2 The total of the sales returns journal, $210, had been posted to the debit side of the control account as $120.

27 marks

Mark scheme: 2(a) Prepare the sales ledger control account for November 2024. Dates are not 5 required. Sales ledger control account $ $ Balance b/d 18 320 Purchases ledger 139 (1) all control/Contra Sales 41 735 (1) Sales returns 883 Interest 84 (1) Irrecoverable 478 (received) debts Bank 39 202 (1) both Discounts allowed 3 071 Balance c/d 16 366 60 139 60 139 Balance b/d 16 366 (1) OF 2(b)(i) Calculate the corrected figure for: 3 the total of balances in the sales ledger Corrected total of balances in sales ledger $ Original total 22 350 Less overstated balance (189) (1) Add dishonoured cheque 640 (1) Corrected total 22 801 (1)OF 2(b)(ii) Calculate the corrected figure for: 5 The sales ledger control account balance $ original sales ledger control 23 964 account balance Less sales returns (330) (1) Less discounts allowed (283) (1) Add dishonoured cheque 640 (1) Less irrecoverable debt (1 190) (1) Corrected balance 22 801 (1) 2(c) State two benefits of preparing control accounts. 2 Check the arithmetical accuracy of the double entry OR ledger accounts (1) Helps to locate errors or indicates errors (1) Helps to prevent/reduce fraud (1) Provides easily accessible information for management (1) Provides information for entry in financial statements OR finds totals for trade receivables OR finds totals for trade payables (1) Improves internal control (1) Max 2 Accept other valid responses

This question in 9706/22 Feb/March 2025

3 Marketing expenses include the cost of an advertising campaign, $8800, which runs from 1 September 2024 to 30 April 2026.

0 marks

Mark scheme: 3(a) Calculate the revenue for the year ended 31 December 2024. 4 $ Purchases 82 980 Returns outwards (1 050) (1) Increase in inventory (2 730) (1) Cost of sales 79 200 (1) Revenue: Cost of sales $79 200 OF  1⅔ = 132 000 (1) OF or ($79 200 OF/ 60)  100 = 132 000 (1) OF 3(b) Calculate the amount owed by credit customers at 31 December 2024. 4 $ Opening balance of trade receivables 11 880 Credit sales (75%  $132 000) – see 3(a) 99 000 (1) OF 110 880 Receipts (96 900) (1) Discounts allowed (1/19  $96 900  20%) (1 020) (1) Closing balance of trade receivables 12 960 (1) OF 3(c) Identify two ways, other than allowing a cash discount, in which credit control 2 can be improved. Charge interest on overdue accounts (1) Set credit limits in individual cases (1) Send statements/reminders (1) Stopping supplies until overdue amounts have been paid (1) Ask for a deposit/payment up front (1) Accept other valid responses Max 2 3(d) State two benefits of improving credit control. 2 May improve liquidity (1) Reduced risk of irrecoverable debts (1) Accept other valid responses 3(e) State three ways in which the security of data can be ensured within a 3 computerised accounting system. Install anti-virus packages (1) Use ‘strong’ passwords (1) Restricted access to data (1) Use encrypted USB drives (1) Introduce policy restricting employee’s access to other websites (1) Train staff how to notice suspicious activity (1) Automatic lockdown or logging out (1) Saving/backing up of work (1) Accept other valid responses Max 3

This question in 9706/22 May/June 2025

2 Samira owns a business called SJB Supplies. She prepares a bank reconciliation statement for her business at the end of each month. On 31 January 2025, the balance in the business cash book (bank columns) was $324 debit. On the same date, the balance as per the bank statement was $160 debit. (a) Explain why a positive balance is shown as a debit balance in a cash book and an overdrawn balance is also shown as a debit balance on a bank statement. … … … … … … [2] Additional information A comparison of the cash book and bank statement has revealed the following: 1 The bank statement included bank charges of $83 which had not yet been recorded in the cash book. 2 A cheque for $140, received from Ella, a trade receivable, had been recorded in the cash column in the cash book. 3 Cash paid into the bank amounting to $230 had been correctly recorded on the bank statement but had been entered in the cash book (bank column) as $200. 4 A dishonoured cheque for $328, received from P Limited, had been entered on the wrong side of the cash book as $238. 5 A direct debit of $214, for insurance, had been omitted from the cash book. 6 The bank had entered a cheque payment for $138, drawn by SJK Supplies, into Samira’s business account in error. 7 There were unpresented cheques totalling $533. 8 Lodgements not yet credited by the bank totalled $186. (b) Prepare an updated cash book at 31 January 2025. Dates are not required. Cash book (bank columns) Details $ Details $ Balance b/d 324 [7] (c) Prepare a bank reconciliation statement at 31 January 2025. Bank Reconciliation Statement at 31 January 2025 $ Balance as per bank statement (160) [4] (d) State two features of a direct debit. 1 … 2 … [2] [Total: 15]

15 marks

Mark scheme: 2(a) Explain why a positive balance is shown as a debit balance in a cash book and 2 an overdrawn balance is also shown as a debit balance on a bank statement. A positive balance in a cash book/for the business is an asset/owned by the business (1); an overdrawn balance from the bank’s point of view is also an asset (1). OR Business has money/savings/cash in their bank account (1) and if the balance is overdrawn then the business owes money to the bank. (1) 2(b) Prepare an updated cash book at 31 January 2025. Dates are not required. 7 Cash book (bank columns) $ $ Balance b/d 324 Bank charges 83 (1) Ella 140 (1) P Limited 238 (1) Cash 30 (1) P Limited 328 (1) Balance c/d 369 Insurance 214 (1) 863 863 Balance b/d 369 (1) OF 2(c) Prepare a bank reconciliation statement at 31 January 2025. 4 Bank Reconciliation Statement at 31 January 2025 $ Balance as per bank statement (160) Bank error 138 (1) (22) Unpresented cheques (533) (1) Lodgements not yet credited 186 (1) Balance as per (updated) cash book (369) (1) OF 2(d) State two features of a direct debit. 2 The bank is authorised by the payee/payee controls the amount (1) Regular/monthly payment from an account/used for recurring payments (1) Automatically deducted from the individual’s bank account/paid directly by bank/does not require constant approval by account holder (1) The amount paid varies/not fixed amount (1) Max 2 Accept other valid responses

This question in 9706/22 Oct/Nov 2025

(b) Prepare each partner’s current account for the year ended 31 December 2024. Dates are not required. Current accounts Details Fazal Naseem Details Fazal Naseem $ $ $ $ Workings: [5] (c) Prepare the equity and liabilities section of the partnership’s statement of financial position at 31 December 2024. Fazal and Naseem Statement of financial position at 31 December 2024 Equity and liabilities … … … … … … … … … … … … … … … … … [5] Additional information The partners wish to improve the performance of their business. They are considering two options. Option A: Change to a new supplier of goods for resale. The new supplier is prepared to offer a large trade discount if orders are made in bulk. It is expected that this will increase the gross profit margin to 70% with revenue remaining unchanged on current levels. Option B: Move their premises to a more central location. The rent of the new premises will be 15% more than the current annual payment. The partners believe they can increase demand by 17.5%. (d) Calculate the effect on annual profits of each option. (i) Option A … … … … … … [2] (ii) Option B … … … … … … [2] (e) Advise the partners which option they should choose. Justify your choice by discussing both the advantages and disadvantages of each option. … … … … … … … … … … … … … … … … … … … … [7] [Total: 30] 2 A trainee accountant recently produced the financial statements for a business for the year ended 31 December 2024. However, the following errors were discovered. Error 1 A motor vehicle purchased on 1 January 2023 for $24 000 should have been depreciated by 20% using the reducing balance method. However, the trainee accountant had decided to change the depreciation method to 20% using the straight‑line method as it was easier to calculate. 2 The owner of the business had taken goods, with a sales price of $840, for own use. This had not been recorded in the books of account. 3 Non‑current assets included some equipment with a carrying value of $6200 which will be used in the business for the foreseeable future. However, the equipment had been written down to show its current resale value of $3600. 4 At the end of the financial year, a customer had placed an order for goods with a selling price of $660. The order had been recorded as a sale in the books of account. The business sells all goods with a mark‑up of 20%. The draft profit for the year ended 31 December 2024 was $36 960. (a) Complete the table to identify and describe the accounting concept which has been ignored in each of the errors. Accounting concept Error Description ignored 1 2 3 4 [8] Additional information The owner of the business wishes to correct the errors that the trainee accountant has made. (b) Calculate the revised profit for the year ended 31 December 2024. $ Draft profit 36 960 … … … … … … … … … [6] Additional information The business has a highly skilled workforce, and the owner is of the opinion that this asset should be reflected in the statement of financial position. (c) State which accounting concept should be applied when deciding whether or not to record this asset in the statement of financial position. … [1] [Total: 15]

36 marks

This question in 9706/23 Oct/Nov 2025