Accounting for non-current assets — Paper 2 · A Level Accounting 9706

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

30 marks

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

This question in 9706/22 May/June 2017

2 Huan’s depreciation policy is as follows: Motor vehicles are to be depreciated at 25% per annum using the straight-line method. Depreciation is to be charged on a month-by-month basis. Fixtures and fittings are to be depreciated at 15% per annum using the reducing balance method.

0 marks

Mark scheme: 2(a) accounts to be debited accounts to be credited Asset disposal (1) Asset at cost (1) Asset provision for depreciation (1) Asset disposal (1) Bank or cash (1) Asset disposal (1) 6 2(b) Provision for depreciation Asset disposal 6 409 (3) Balance b/d 43 750 Balance c/d 55 179 Income statement 17 838 (3) 61 588 61 588 Balance b/d 55 179 (1)OF Workings: Disposal: 19 500 × 20% × 3 / 12 975 (1) 18 525 × 20% 3 705 (1) 14 820 × 20% × 7 / 12 1 729 (1) 6 409 Income statement: 81 250 – 14 820 × 20% 13 286 (1) 28 230 × 20% × 6 / 12 2 823 (1) 14 820 × 20% × 7 / 12 1 729 (1) 17 838 7 Question Answer Marks 2(c) Transaction 1: Profit would decrease by $2823 (1) due to the depreciation cost. Transaction 2: Profit would increase by $1509 (1) due to the profit on disposal of the asset. Alternative: The overall effect on profit for the year would be a decrease of $1314 (2). 2

This question in 9706/21 Oct/Nov 2017

3 Huan sold a motor vehicle for $11 000 on 31 March 2016. The vehicle had cost $18 720 on 1 July 2014. No entries for this sale had been made in the books of account.

0 marks

Mark scheme: 3(a)(i) Ordinary shareholders have voting rights at general meetings, whereas cumulative preference shareholders do not. (1) The cumulative preference dividend is a fixed amount, whereas the ordinary dividend is set annually and can vary depending on profits. (1) Unpaid ordinary dividends do not accumulate, whereas cumulative preference dividends Do. (1) If the company is liquidated, cumulative preference shareholders would be paid ahead of ordinary shareholders. (1) Max 2 2 3(a)(ii) Subscribers pay for shares in a rights issue, but not with a bonus issue. (1) The company’s net assets are increased as a result of a rights issue, but unchanged with a bonus issue. (1) Shareholders may or may not exercise their rights, but will automatically receive their bonus shares. (1) 3 Question Answer Marks 3(b) Date Name of account to be debited Amount $ Name of account to be credited Amount $ 2015 June 1 Bank 100 000 Ordinary share capital 100 000 (1) Bank 15 000 Share premium 15 000 (1) Sept 30 Bank 30 000 Share premium 30 000 (1) 2016 Oct 1 Bank 25 000 Ordinary share capital 25 000 (1) Oct 1 Bank 4 750 Share premium 4 750 (2) *25 000 × ($1.40 × 85% = $1.19) – 25 000 = 4750 6 3(c) Shareholders demand would result in a payment of $60 000 (1) Retained earnings are only $45 000 (1) Maximum dividend payable equals 45 000 / 125 000 = $0.36 (1) There is sufficient cash in the bank ($90 000) to pay the dividend, (1) but insufficient retained earnings. (1) Fewer funds for possible future development. (1) Share premium account could be used to issue bonus. (1) Max 4 Accept other valid answers. 4

This question in 9706/21 Oct/Nov 2017

3 K Limited has been trading for many years and prepares financial statements annually to 30 April. It had the following balances at 1 May 2016: $ $ Plant and equipment at cost 84 695 provision for depreciation 32 855 On 1 February 2017, the company bought new equipment, $12 785, and the cost of installing this equipment was $1595. On 31 December 2016 the company sold a motor vehicle which had cost $14 850 on 1 August 2015. The proceeds of $8900 were paid by cheque. The company’s depreciation policy is as follows: Plant and equipment 20% on cost per annum Motor vehicles 25% reducing balance per annum Depreciation is charged on a month-by-month basis. REQUIRED (a) (i) Calculate the depreciation charge for plant and equipment for the year ended 30 April 2017. Workings must be shown. [2] (ii) Prepare the motor vehicle disposal account for the year ended 30 April 2017. Workings must be shown. [4] (b) Explain two accounting concepts which are being applied when depreciation is provided. 1 2 [4] Additional information K Limited is considering purchasing additional plant and equipment costing $30 000. This could be financed by one of the following: Bank loan Issue of ordinary shares REQUIRED (c) Advise the directors which method of finance they should choose. Justify your answer. [5] [Total: 15]

15 marks

Mark scheme: 3(a)(i) 84 695 × 20% = $16 939 (1) 2 New equipment 12 785 + 1595 = 14 380 × 20% × 3 / 12 = 719 Total depreciation = 16 939 + 719(1) = $17 658 3(a)(ii) K Limited 4 Motor vehicle disposal account $ $ 2016 2016 Dec Motor Dec Provision for depreciation 31 vehicles cost 14 850 31 of motor vehicles 4 795 (1) (1) Bank 8 900 (1) Apr 30 Income statement 1 155 (1of) 14 850 14 850 Workings Motor vehicle sold $ Bought Aug 1 2014 cost 14 850 Depreciation April 30 25% × 9 / 12 (2 784) 2015 Book value 12 066 Depreciation Dec 31 2015 25% × 8 / 12 (2 011) Book value 10 055 3(b) Matching (1) – cost of non-current asset matched with the revenue earned (1) 4 Prudence (1) – to ensure that profit/carrying value of non-current assets is not overstated. (1) Consistency (1) – to enable valid comparison (1) Max 4 marks 3(c) Bank loan 5 The lender would need to be convinced that the company can meet the interest and repayment obligations. (1) Bank loan must be repaid. (1) The loan may need to be secured (1) on the plant and equipment purchased. Loan interest will be charged (1) to the Income Statement reducing profits. A loan will increase the gearing of the company. (1) Takes less time to issue. (1) Share issue The company has flexibility as to the level of dividends payable on the shares. (1) Share capital does not need to be repaid. (1) There may be loss of control. (1) Issue of more shares may dilute the share price. (1) Share issue is an expensive (1) process. Issuing ordinary shares will not increase the gearing. (1) Takes more time to issue. (1) No interest has to be paid. (1) (1 for decision, and max 4 for justification).

This question in 9706/22 Oct/Nov 2017

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

2 Non-current assets are to be depreciated at 20% per annum using the reducing balance method.

0 marks

Mark scheme: 2(a) M Limited Statement of changes in equity for the year ended 31 August 2017 Ordinary share capital $ Share premium $ Revaluation reserve $ Retained earnings $ Balance at 1 September 2016 200 000 80 000 40 000 37 500 Rights issue 80 000 (1) 48 000 (1) Interim dividend paid (44 800)(1)OF for row Revaluation (40 000) (1) (8 000) (1) Profit for the year 22 500 (1) Balance at 31 August 2017 280 000 128 000 – 7 200 6 Question Answer Marks 2(b) Responses could include: To retain reserves in the most distributable or flexible form (1) Revenue reserves are needed to fund the payment of dividends (1) 2 2(c)(i) Quicker and cheaper than a new share issue (1) More likely to be fully subscribed than a new share issue (1) Results in a cash inflow (1) Does not have to be repaid (1) Would avoid any dilution of ownership (1) Max 2 Accept other valid points. 2 2(c)(ii) Can lead to a fall in the share price (1) Accept other valid points. 1 2(d) Long-term bank loan Interest on loan is fixed (1) whereas dividends are discretionary (1) Ownership remains the same therefore (1) No loss of control to existing shareholders (1) Funds received quicker (1) than a share issue (1) Repayments are fixed (1) enabling future planning (1) 1 mark for identification + 1 mark for development Accept other valid responses 4

This question in 9706/22 May/June 2018

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

30 marks

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

This question in 9706/23 May/June 2018

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

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 3 Aisha, Bilal and Cao have been in partnership for many years sharing profits and losses in the ratio 2 : 2 : 1. Bilal decided to retire from the partnership at 31 January 2018. Their statement of financial position at 31 January 2018 before any adjustments was as follows: Aisha, Bilal and Cao Statement of financial position at 31 January 2018 $ $ Assets Non-current assets Premises 85 000 Motor vehicles 32 000 Fixtures and fittings 7 500 124 500 Current assets Inventory 16 200 Trade and other receivables 4 800 21 000 Total assets 145 500 Capital and liabilities Capital accounts Aisha 48 000 Bilal 48 000 Cao 24 000 120 000 Current accounts Aisha 8 400 Bilal (1 200) Cao 6 400 13 600 Current liabilities Trade and other payables 5 600 Bank overdraft 6 300 11 900 Total capital and liabilities 145 500 The following information is available. 1 The partners agreed that the value of goodwill at that date was $85 000. 2 It was also agreed that certain assets should be revalued to the following amounts. $ Premises 114 000 Inventory 15 000 3 As part of the final settlement, Bilal was entitled to retain one of the motor vehicles at its net book value of $11 400. 4 It was agreed that of the final settlement due to Bilal, $20 000 would be paid immediately by cheque and the balance would remain in the business as a loan.

3 marks

This question in 9706/21 Oct/Nov 2018

5 The company’s profit from operations for the year was $268 500. REQUIRED (b) Prepare the statement of changes in equity for the year ended 31 December 2017. S Limited Statement of changes in equity for the year ended 31 December 2017 Ordinary Share General Retained Total share premium reserve earnings capital $ $ $ $ $ Brought forward 1 250 000 – 130 000 65 000 1 445 000 at 1 January 2017 Workings: [6] (c) State the journal entry required to record a revaluation increase in the value of a non-current asset. [2] [Total: 15] 4 G Limited produces a single product and uses break-even analysis. REQUIRED (a) State what is meant by the term ‘break-even point’. [1] (b) State three uses of marginal costing. 1 2 3 [3] Additional information The company’s factory is operating at full capacity and produces 5000 units a year. All units produced are sold. Its break-even point has been calculated as 2400 units. Budgeted information for current production is as follows. Per unit direct materials 4 kilos at $6 per kilo direct labour 8 hours at $10 per hour variable overheads $12 per unit $ Annual revenue 1 000 000 Total annual fixed costs 201 600 Profit for the year 218 400 The company has the opportunity to buy some land so that the factory could be extended. The directors believe the company could sell 8000 units a year if the selling price was reduced. If the factory was extended and production increased, the directors estimate the following changes would take place. The selling price would be reduced by $5 per unit. The price of direct materials would fall to $5.80 per kilo. The direct labour rate would rise to $10.80 per hour. Total fixed costs would increase by 50%.

12 marks

This question in 9706/22 Oct/Nov 2018

2 During the year ended 31 December 2017 the following took place: new equipment costing $37 000 was bought a motor vehicle with an original cost of $10 000, bought during 2016, was sold.

0 marks

Mark scheme: 2(a) Realisation account 6 $ $ Land and Discount buildings 150 000 } received 1 500 (1) Motor vehicles Bank – Land and (1 and 2) 40 000 } buildings 200 000 } Machinery Bank – 60 000 } (1) Machinery 55 150 } Inventory 35 000 } Bank – Inventory 33 750 } (1) Angela’s capital Discount allowed 4 500 (1) – Motor vehicle 1 20 000 } Beena’s capital Dissolution costs 2 300 (1) – Motor vehicle 2 13 000 } Profit on realisation – Angela 15 800 } Profit on } (1) realisation – OF Beena 11 850 Profit on } realisation – Cai 3 950 323 400 323 400 2(a) Alternative presentation Realisation account $ $ Land and 150 000 Bank – Land 200 000 buildings and buildings Motor vehicles 40 000 Angela’s 20 000 (1 and 2) capital – (1) Motor vehicle 1 (1) Beena’s capital 13 000 Motor vehicle 2 Machinery 60 000 Bank- 55 150 Machinery Inventory 35 000 Bank-Inventory 33 750 Trade receivables 45 000 Bank- 40 500 (1) for Trade both receivables entries Bank-Trade 25 000 Trade payables 26 500 (1) for payables both entries Dissolution costs 2 300 (1) Profit on 15 800 realisation – Angela Profit on 11 850 realisation – (1) OF Beena Profit on 3 950 realisation – Cai 388 900 388 900 2(b) $ 3 Capital account 75 000 Current account 4 000 (1) OF Profit on realisation 11 850 Motor vehicle (13 000) Loan account 100 000 (1) Total 177 850 (1) OF 2(c) Amount of capital contributed by each partner. (1) 2 Profit share for each partner. (1) Duties of each partner. (1) Interest on capital. (1) Interest on drawings. (1) Partners’ salaries (1) Drawings limitations (1) Max 2 marks 2(d) Partners may want separate capital accounts to: 4 Show the permanent investment (1) Show the impact of any changes in capital (1) (e.g. goodwill, capital introduced, revaluations) Facilitate the calculation of interest on capital (1) Partners may want separate current accounts to: Show the ongoing transactions between the partners and the partnership (1) Show the amount of drawings compared with the share of profit (1) Facilitate the calculation of interest on drawings (1) Max 2 for capital account and Max 2 for current account.

This question in 9706/23 Oct/Nov 2018

3 The company’s depreciation policy is as follows: buildings at a rate of 2% per annum using the straight-line method equipment at a rate of 10% per annum using the straight-line method motor vehicles at a rate of 20% per annum using the reducing balance method. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal.

0 marks

Mark scheme: 3(a) the gross margin looks at gross profit in relation to revenue (1) 2 whereas mark-up looks at gross profit in relation to cost of sales. (1) 3(b)(i) purchases / cost of sales / carriage inwards (1) 1 3(b)(ii) any two correct answers for (1) mark each e.g. rent, insurance 2 3(c)(i) 18500 (1) 3 × 100 = 20% (1) OF 92500 (1) 3(c)(ii) 14800 2 (1) OF × 100 = 16% (1) OF 92500 3(c)(iii) 3700 2 (1) OF × 100 = 4% (1) OF 92500 3(d) the gross margin less the expenses ratio equals the profit margin 1 3(e) increase in selling price combined with constant purchase price (1) 2 decrease in purchase price with no change in selling price (1) change in product mix (1) Max 2

This question in 9706/23 Oct/Nov 2018

REQUIRED (c) Calculate the net book value of non-current assets which will appear in the statement of financial position at 31 December 2017. [6] Additional information The following information is also available. $ At 1 January 2017 10% Bank loan (2025) 100 000 During the year ended 31 December 2017 Dividend paid 66 000 Profit for the year before charging depreciation and loan interest 163 000 There was no change to issued share capital At 31 December 2017 Current assets 290 300 Current liabilities (including accrued loan interest) 96 300 REQUIRED (d) Prepare the statement of financial position at 31 December 2017. Use the space on the next page for your workings.

6 marks

Mark scheme: 4(a)(i) Total Per unit 4 $000 $ Sales (20 000 units) 2 900 145 (1) Direct materials 500 25 Direct labour 300 15 Production overheads (20 000 × $5) 100 5 (1) Selling overheads (20 000 × $10) 200 10 (1) 1 100 55 Contribution 1 800 90 (1) OF 4(a)(ii) (680 000 − 100 000) (1) + (898 000 − 200 000) (1) 5 = 14 200 units (1) OF 90 (1) OF 20 000 – 14 200 = 5800 (1)OF 4(a)(iii)  5800  1   × 100 = 29% (1)OF  20 000  4(b)(i) $ $ 6 Sales (25 000 × $145 × 0.85) 3 081 250 (1) Direct materials (25 000 × $25 × 0.95) 593 750 (1) Direct labour (25 000 × $15) 375 000 (1) Variable production overheads (25 000 × $5) 125 000 (1) Variable selling overheads (25 000 × $10) 250 000 (1) 1 343 750 Revised contribution 1 737 500 (1) OF Alternative presentation $ $ $ Contribution 90.00 (1) OF Reduction in selling price (21.75) (1) Saving on direct materials 1.25 (1) Revised contribution 69.50 (1) OF × 25 000 (1) 1 737 500 (1) OF 4(b)(ii) Contribution 1 737 500 2 Production overheads 580 000 Selling overheads (698 000 + 250 000) 948 000 1 528 000 (1) Profit for the year 209 500 (1) OF 4(c) Financial (max 4) 7 If the company did not adopt the sales manager’s proposal it would achieve the following profits over three years: $ 522 000 + 322 000 + 220 000 = 1 064 000 (1) If the sales manager’s proposal were to be accepted the following profits would be earned over three years; 209 500 + 459 500 + 459 500 = 1 128 500 (1) OF Comparison of the two profit figures (1) OF How reliable are the directors’ estimates of costs and revenues (1) Non-financial (Max 4) Availability of labour – would the current labour force be able to absorb the additional work or will additional staff need to be recruited and trained? (1) Machinery – would additional machinery be required to absorb a 25% increase in production? (1) Space – would the company have sufficient space available? (1) Competitors – would they respond and reduce their price? (1) Advertising – will sales target be reached in years 2 and 3? (1) Will the direct material quality suffer with the cost reduction (1) Overall max (6) for comments plus (1) for recommendation 4(d) Selling price is constant and will not change as volumes change (1) 3 The sales mix remains constant in a multi-product company (1) The number of units produced equals the number of units sold (1) Costs are linear (1) Costs can be accurately divided into fixed and variable elements (1) Max 3 4(e) Ease of calculation. CVP is based upon a standard set of formulas that work 2 for all of the analysis techniques (1) Useful for making short term decisions e.g. make or buy, use of limiting resources, spare capacity (1) Calculation of breakeven point (1) Max 2

This question in 9706/23 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 Moser has provided the following information about his non-current assets for the year ended 30 November 2018. 1 Motor vehicles $ Cost at 1 December 2017 185 000 Accumulated depreciation at 1 December 2017 64 750 Purchased during the year 27 745 2 A motor vehicle was sold during the year for $12 450. It had originally cost $18 500 and had a net book value of $13 875. 3 The motor vehicles depreciation policy is as follows: Motor vehicles are depreciated at a rate of 25% per annum using the reducing balance method. A full year’s depreciation is charged in the year of purchase and no depreciation is charged in the year of disposal. REQUIRED (a) State how a disposal of a non-current asset would affect the income statement and the statement of financial position. Calculations are not required. Income statement Statement of financial position [3] (b) Prepare the non-current assets section of Moser’s statement of financial position at 30 November 2018. Cost Accumulated Net book value depreciation $ $ $ Workings: [6] (c) (i) Explain why the reducing balance method of depreciation is more appropriate than the straight-line method for assets such as computer equipment. [4] (ii) Explain why the revaluation method of depreciation is appropriate for assets such as loose tools. [2] [Total: 15] PLEASE TURN OVER

15 marks

Mark scheme: 2(a) Income statement 3 Only a profit or loss on disposal would appear in the income statement (1) Charge for depreciation would reduce (1) Max 1 Statement of financial position Disposal proceeds would increase the bank account / the current assets total in the statement of financial position. (1) The asset cost and accumulated depreciation would be eliminated from non- current assets. (1) Max 2 2(b) Non-current assets 6 Cost Accumulated Net Book Value $ depreciation $ $ Motor vehicles 194 245(1) 93 655 (4) 100 590 (1) OF W1 W2 Workings: W1: Cost:185 000 + 27 745 – 18 500 = 194 245 (1) W2: Accumulated depreciation: Charge for the year: 120 250 + 27 745 (1) – 13 875 (1) = 134 120 Accumulated provision: 64 750 – 4625 (1) + 33 530 (1) OF = 93 655 2(c)(i) Computer equipment tends to fall in value more in the early years. (1) They 4 lose value very quickly due to obsolescence/ technological changes. (1) The reducing balance method depreciates the assets more in the earlier years and less in later years (1) which matches the fall in value of computer equipment (1). The straight line method of depreciation depreciates assets at the same amount each year (1) which does not match the rapid loss in value. (1) Accept other valid points. Max 4 2(c)(ii) It is not worthwhile keeping individual records of loose tools (1) as they are 2 usually many small value items (1) and are difficult to keep track of. (1) They are easily broken, damaged or lost and have to be regularly replaced. (1) Max 2

This question in 9706/23 Oct/Nov 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 Q Limited is a small wholesale business. It uses the reducing balance method of depreciation to depreciate delivery vehicles. REQUIRED (a) Explain one advantage and one disadvantage to a business of using the reducing balance method of depreciation. Advantage … … … … … Disadvantage … … … … … [4] Additional information Delivery vehicle A was purchased on 1 January 2018 for $36 000. Delivery vehicle B was purchased on 1 April 2018 for $40 000. Depreciation of 20% per annum has been provided annually using the reducing balance method. A full year’s depreciation is charged in the year of acquisition and none in the year of disposal. The business’s financial year end is 31 December. REQUIRED (b) Calculate the balance of the delivery vehicles provision for depreciation account at 31 December 2019. … … … … … … … … [4] Additional information On 1 February 2020 delivery vehicle C was purchased at a cost of $38 000. Delivery vehicle B was sold in part-exchange for delivery vehicle C. A cheque for $30 000 was paid on that date in full settlement of the amount remaining after part-exchange. REQUIRED (c) Prepare the delivery vehicles cost account. Delivery vehicles cost account $ $ [5] Additional information Delivery vehicles are depreciated because they are subject to wear and tear. REQUIRED (d) State two reasons, other than wear and tear, for depreciating non-current assets. 1 … … 2 … … [2] [Total: 15] PLEASE TURN OVER

15 marks

Mark scheme: 2(a) Advantage (Max 1 advantage) 4 Provides a more realistic charge against profits (1) as some assets lose more value in their first years (1)/as the asset reduces in value so the depreciation charge reduces (1). 1 + 1 mark for development Accept other valid responses. Disadvantage ( Max 1 disadvantage) Is more complicated to calculate (1) as the charge changes each year because it is based on the decreasing net book value at the beginning of each year (1) rather than the more straightforward equal charge per year when using the straight-line method (1). 1 + 1 mark for development Accept other valid responses. Que Ma stio Answer rks n 2(b) Balance of provision for depreciation account at 31 December 2019 4 Vehicle A Vehicle B Depreciation charge 7 200 ($40 000 × 20%) 8 000 (1) for 2018 ($36 000 × 20%) (1) Depreciation charge 5 760 ($32 000 × 20%) 6 400 (1) for 2019 ($28 800 × 20%) 12 960 14 400 Balance is $27 360 (1)OF 2(c) Delivery vehicles cost account 5 $ $ 2018 2020 Jan 1 Bank: delivery 36 000 * Feb 1 Disposal Delivery 40 000 (1) vehicle A vehicle B April 1 Bank: delivery 2020 vehicle B 40 000 *(1) Dec Balance c/d 74 000 31 2020 Bank: delivery Feb 1 vehicle C 30 000 (1) Disposal 8 000 (1) 000 000 114 000 114 000 2021 (1) Jan 1 Balance b/d 74 000 *Both 2(d) Obsolescence/technological change (1) 2 Lapse of time (1) Inadequacy (1) Depletion (1) Max 2 Accept other valid responses

This question in 9706/22 May/June 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

2 Myra owns a delivery business. The following information is available about her business’s delivery vehicles. Vehicle Date of purchase Cost $ A 1 August 2017 30 000 B 1 February 2018 36 000 C 1 June 2019 39 000 Vehicles are depreciated using the straight-line method at 20% per annum. Depreciation is charged on a month-by-month basis. The business’s financial year end is 31 December. REQUIRED (a) Calculate the balance on the provision for depreciation of vehicles account at 31 December 2019. … … … … … … … … … … … [4] Additional information On 1 March 2020, Vehicle A was sold in part exchange for Vehicle D. Vehicle D cost $42 000 of which $29 200 was paid by cheque. REQUIRED (b) Prepare the vehicle disposal account. Vehicle disposal account $ $ [5] (c) Prepare the provision for depreciation of vehicles account for the year ended 31 December 2020. Provision for depreciation of vehicles account $ $ [3] Additional information Businesses may use the revaluation method of depreciation for some of their non-current assets. REQUIRED (d) Explain one reason why some businesses may use the revaluation method of depreciation. … … … … [2] (e) State how an annual depreciation charge is calculated using the revaluation method. … … … … [1] [Total: 15]

15 marks

Mark scheme: Question Answer Marks 2(a) 4 $ A 2 years 5 months, i.e. 29/12 × 20% × $30 000 14 500 (1) B 1 year 11 months, i.e. 23/12 × 20% × $36 000 13 800 (1) C 7/12 × 20% × $39 000 4 550 (1) Total provision for depreciation 32 850 (1)OF 2(b) Vehicle disposal account 5 $ $ Delivery 30 000 (1) Provision for 15 500 (2)OF vehicle A cost depreciation vehicle A W1 Delivery vehicle cost 12 800 (1) Income statement 1 700 (1)OF 30 000 30 000 W1 14 500 (1) + (30 000 × 20% × 2/12) = 15 500 (1)OF 2(c) Provision for depreciation of vehicles account 3 $ $ Disposal 15 500 (1)OF Balance b/d 32 850 Balance c/d 40 350 Income statement (W1) 23 000 (1) 55 850 55 850 Balance b/d 40 350 (1)OF W1 Depreciation charge for 2020: Cost of assets A B C $1 000 + $75 000 × 20% i.e. $15 000 plus 10 months depreciation of Vehicle D (i.e. 10/12 × $42 000, i.e. $7 000 = $23 000 2(d) The revaluation method is used when a non-current asset consists of many items 2 each of small value (1) making it impractical to calculate a depreciation charge on each item (1). Max 2 Accept other valid responses. 2(e) The depreciation charge is calculated by comparing the closing valuation of the 1 non-current asset with the opening valuation (1).

This question in 9706/22 Feb/March 2021

5 Depreciation should be provided on non-current assets as follows: Furniture and equipment at 20% per annum using the reducing balance method Premises at 2% per annum using the straight-line method No depreciation is charged on non-current assets in the year of sale.

0 marks

This question in 9706/23 May/June 2021

1 The following balances have been extracted from the books of P Limited at 31 August 2021. $ 5% Debentures (2022–2023) 36 000 Administrative expenses 35 180 Bank 4 770 Credit Carriage inwards 390 Delivery vehicles Cost 89 420 Provision for depreciation at 1 September 2020 42 200 Distribution costs 44 320 Dividend paid 3 000 Freehold property at valuation at 31 August 2020 66 000 Interest paid 1 590 Inventory at 1 September 2020 22 880 Purchases 88 900 Revenue 216 600 Retained earnings 24 200 Returns outwards 260 Revaluation reserve 6 000 Share capital (ordinary shares of $0.50 each) 60 000 Share premium 8 500 Trade payables 11 730 Trade receivables 32 480 Wages and salaries 26 100 The freehold property was revalued on 1 September 2020 at $58 000. The revaluation has not yet been recorded in the books of account. REQUIRED (a) Prepare the journal entry to record the revaluation of the freehold property on 1 September 2020. A narrative is not required. … … … … … … [3] Additional information The following information is also available. 1 Revenue includes goods sent to a credit customer on 23 August 2021 on a sale or return basis. The directors were uncertain whether any of these goods would be returned. The selling price of the goods was $6400, and they had been sold at a gross margin of 25%.

3 marks

Mark scheme: 1(a) Debit $ Credit $ Revaluation reserve 6 000 (1) Income statement 2 000 (1) Freehold property 8 000 (1) 3 1(b) P Limited Income statement for the year ended 31 August 2021 $ Revenue 210 200 (1) Cost of sales W1 (88 510) (4)OF Gross profit 121 690 Administrative expenses (41 860) (1) Distribution costs W2 (76 730) (7)OF Profit from operations 3 100 Finance costs (1 890) (1) Profit for the year 1 210 (1)OF W1 Cost of sales 22 880 + 88 900 – 23 400 (1) – 260 (1) + 390 (1) = 88 510 (1)OF W2 Distribution costs 44 320 – 180 (1) + 20 040 (1) + 1 320 (1) + 7 780 (1) + 2 000 (1) + 1 450 (1) = 76 730 (1)OF 15 Question Answer Marks 1(c) $ Balance at 1 September 2020 24 200 Dividend paid (3 000) (1) Profit for the year 1 210 (1)OF Balance at 31 August 2021 22 410 (1)OF 3 1(d) Offer discount for early settlement (1) Charge interest on overdue accounts (1) Regular chasing of debts / improve credit control (1) Encourage cash sales rather than credit sales/discourage credit sales (1) Debt factoring (1) Accept other valid responses 2 1(e) Option 1 (max 3 marks) Permanent capital (1) Would existing shareholders be prepared to pay the 25% premium? (1) The shares would have voting rights which could weaken the directors’ position (1) But dividend payments would be discretionary (1) Would rights issue be fully subscribed? (1) Option 2 (max 3 marks) Company already has $36 000 debentures due for repayment next year (1) 8% interest rate is more expensive than current debentures (1) Debenture holders do not have voting rights so no likelihood of loss of control (1) Interest will have to be paid whether the company makes a profit or loss (1) Will leave the company very heavily reliant on external borrowing (1) May require security (1) Accept other valid responses Decision (1) 7

This question in 9706/22 Oct/Nov 2021

7 On 31 August 2021, a delivery vehicle was sold for $7000. The vehicle had been purchased on 1 September 2018 for $13 000. No entries for the sale had been made in the books of account and the sale proceeds had not yet been received.

0 marks

This question in 9706/22 Oct/Nov 2021

8 The freehold property is used only as a distribution warehouse. Its remaining useful life at 1 September 2020 was estimated to be 40 years.

0 marks

This question in 9706/22 Oct/Nov 2021

3 Petra owns a small manufacturing business. Her depreciation policy is as follows: Non-current asset Depreciation policy Plant and machinery 20% per annum reducing balance method A full year’s depreciation is charged in the year of purchase but none in the year of sale. The following information in respect of plant and machinery has been extracted from the books of account for the year ended 31 July 2021. Date Details 1 August 2020 Cost, $26 800; Provision for Depreciation, $12 200. 1 January 2021 Purchased new machinery, cost $4200. This was settled by a cheque payment of $2450 and part exchange of machinery that had originally cost $2500 in September 2018. 31 July 2021 Machinery with an original cost of $850 and a net book value of $60 was scrapped with no proceeds. REQUIRED (a) Prepare the provision for depreciation account for plant and machinery for the year ended 31 July 2021. Provision for Depreciation – Plant and Machinery Date Details $ Date Details $ 2020 Aug 1 Balance b/d 12 200 [5] Workings: (b) Prepare the disposal account for the year ended 31 July 2021. Disposal Account Date Details $ Date Details $ [7] (c) Discuss the reasons why a business may choose to depreciate plant and machinery using the reducing balance method. … … … … … … … … [3] [Total: 15]

15 marks

Mark scheme: 3(a) Provision for Depreciation – Plant and Machinery Date Details $ Date Details $ 2021 Jan 1 Disposal 900 (1) 2020 Aug 1 Balance b/d 12 200 July 31 Disposal 790 (1) July 31 Income statement W1 3 428 (1) Balance c/d 13 938 15 628 15 628 Aug 1 Balance b/d 13 938 (1) OF W1 26 800 – 12 200 + 4 200 – 1 600 – 60 = 17 140 × 20% = $3 428 (1) 1 mark for all correct dates and labels. Question Answer Marks 3(b) Disposal Account Date Details $ Date Details $ 2021 Jan 1 Plant and Machinery – Cost 2 500 (1) 2021 Jan 1 Plant and Machinery – Provision for Depreciation 900 (1) OF July 31 Plant & Machinery – Cost 850 (1) Plant and Machinery – Cost 1 750 (1) July 31 Income statement 90 (1) OF July 31 Plant and Machinery – Provision for Depreciation 790 (1) OF 3 440 3 440 1 mark for all correct dates and labels 7 3(c) Depreciation is charged to comply with the matching/accruals concept (1). As machinery is likely to be more productive in its early years, the reducing balance method initially charges higher depreciation in those years (1). This ensures that the value of plant and machinery is more realistic and represents a true and fair view (1) Accept any other appropriate responses Max 3 3

This question in 9706/23 Oct/Nov 2021

5 Depreciation is to be charged as follows: Motor vehicles for office staff $26 400 Delivery vehicles $32 800

0 marks

This question in 9706/23 Oct/Nov 2021

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

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]

8 marks

Mark scheme: 4(a)(i) Charging overheads/costs to a specific cost centre (1) where those overheads are clearly identified with that cost centre (1) OR Overheads expenses are directly attributed (1) to a specific cost centre (1) 2 4(a)(ii) Charging overheads/costs that cannot be clearly identified with a specific cost centre (1) to cost centres on an appropriate basis. (1) OR Overhead expenses are shared between different departments (1) by using a suitable basis (1) 2 4(b)  Useful for determining a selling price (1)  Avoids separating fixed and variable costs (1) Accept other valid responses Max 1 1 4(c) Not useful for short-term decision-making (1) Not appropriate for monitoring the performance of managers/responsibility accounting (1) Accept other valid responses Max 1 1 Question Answer Marks 4(d) Production departments Service departments Assembly department Finishing department Stores department Maintenance department $ $ $ $ Total overhead costs 275 000 103 200 19 200 26 700 Maintenance 16 020 8 010 2 670 (26 700) (1) Subtotal 291 020 111 210 21 870 -- Stores 16 403 5 467 (21 870) (1)OF Total 307 423 116 677 -- (1)OF 3 4(e)(i) Assembly department: $307 422.5/1430, i.e. $214.98 (1) OF per machine hour (1) 2 4(e)(ii) Finishing department: $116 677.5/840, i.e. $138.90 (1) OF per labour hour (1) 2 4(f) Overheads absorbed: 1310  $214.98 = $281 623.8 (1) OF Actual overheads $285 400 less absorbed $281 623.80 = $3776.2 (1) OF under-absorbed (1) 3 Question Answer Marks 4(g)(i) Option A $41 000 (4) Workings $ Contribution (12 000 (1)  $9 (1)) 108 000 Fixed costs ($40 000 + $24 000 + $3000) 67 000 (1) Profit 41 000 (1)OF Accept alternative approaches. 4 Question Answer Marks 4(g)(ii) Option B $46 400 (3) Workings $ Product X 8000 units  ($22.8 – Variable cost $15, i.e. $7.8) 62 400 Less fixed costs (40 000) Profit 22 400 (1) Product Z 4000 units  $12 48 000 Less fixed costs 24 000 24 000 (1) Total profit 46 400 (1) Accept alternative approaches. 3 Question Answer Marks 4(h) Option A (Max 3)  Will ensure major customer will continue to order in future (1)  How will customers for Product Z react - will their future orders be lost? (1)  Produces less profit (1)  Can training be implemented in time without loss of production (1) Option B (Max 3)  Will enable orders of other regular customers to be met (1)  Produces more profit (1)  Will the price cut actually produce the required level of sales of product X now and in the future (1)?  Reaction of competitors (1)  Is there a danger of losing a regular customer (1) Advice (1) Accept other valid responses 7

This question in 9706/22 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

2 Bharti owns a small business. The following information was extracted from her accounting records. Balances at 1 July 2021 $ Delivery vehicles cost 52 000 provision for depreciation 14 000 Extract from asset register Cost Date of purchase Vehicle $ 1 July 2019 DV1 18 000 1 July 2020 DV2 34 000 On 1 October 2021, Bharti purchased a new delivery vehicle (DV3) costing $26 000. She paid $14 500 by cheque and the balance was settled by part-exchange of the old delivery vehicle, DV1. Bharti depreciates delivery vehicles using the straight-line method on a month-by-month basis. The estimated useful life of all delivery vehicles is five years with no residual value. REQUIRED (a) Prepare the following ledger accounts for the year ended 30 June 2022. Delivery Vehicles – Cost Date Details $ Date Details $ Delivery Vehicles – Provision for depreciation Date Details $ Date Details $ Disposal account Date Details $ Date Details $ Workings: [9] (b) State one reason why non-current assets are depreciated, with reference to an appropriate accounting concept. … … … [2] (c) Explain one difference between capital expenditure and revenue expenditure. … … … … [2] (d) State one example of a: (i) capital receipt … [1] (ii) revenue receipt … [1] [Total: 15]

15 marks

Mark scheme: 2(a) Delivery Vehicles – Cost 9 Date Details $ Date Details $ 2021 2021 Jul 1 Balance b/d 52 000 Oct 1 Disposal account 18 000 Oct 1 Bank 14 500 2022 (1) Jun 30 Balance c/d 60 000 Disposal account 11 500 (1) 78 000 78 000 2022 60 000 Jul 1 Balance b/d (1)OF Delivery Vehicles – Provision for Depreciation Date Details $ Date Details $ 2021 2021 Oct 1 Disposal account 8 100 Jul 1 Balance b/d 14 000 (1) 2022 2022 Jun 30 Balance c/d 17 500 30 Jun Income statement 11 600 (1) 25 600 25 600 Jul 1 Balance b/d 17 500 (1)OF 2(a) Disposal Account Date Details Date Details $ 2021 2021 Oct 1 Delivery vehicles - cost 18 000 Oct 1 Delivery vehicles - cost 11 500 (1) Income statement 1 600 Delivery vehicles – provision 8 100 (1)OF for depreciation (1)OF 19 600 19 600 2(b) To match the expense of depreciation with the revenue generated during that accounting period (1) in accordance with the 2 matching concept (1). Accept other valid responses. 2(c) Capital expenditure is expenditure on non-current assets (1) whereas revenue expenditure is day-to-day running costs (1) 2 Or Capital expenditure appears on the statement of financial position (1) whereas revenue expenditure appears on the income statement (1) 2(d)(i) Capital introduced / Cash introduced / Sale proceeds from disposal of non-current asset / Receipt of loan finance 1 Accept other valid responses. 2(d)(ii) Rents received / Interest received / Commission received / Sales of goods / Fees received / Discounts received 1 Accept other valid responses.

This question in 9706/21 Oct/Nov 2022

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

30 marks

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

This question in 9706/22 Oct/Nov 2022

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 Jakoub owns a restaurant. The business’s financial year end is 31 December. The business owns many small items of kitchen equipment. The following information is available. 1 On 1 January 2022 kitchen equipment was valued at $3450. 2 Additional kitchen equipment was purchased for cash, $1680, during the year ended 31 December 2022. 3 On 31 December 2022 kitchen equipment was valued at $3950. REQUIRED (a) Prepare the kitchen equipment account for the year ended 31 December 2022. Kitchen equipment $ $ [4] (b) State two reasons why the reducing balance method of depreciation might be chosen by a business for depreciating non-current assets. 1 … … 2 … … [2] Additional information On 1 January 2022, a new delivery vehicle was purchased in part exchange for the business’s old delivery vehicle. A payment of $22 500 was made. The old delivery vehicle had originally cost $24 000 when it was purchased on 1 January 2020. The old delivery vehicle was part exchanged at net book value. Delivery vehicles are depreciated by 25% per annum using the reducing balance method of depreciation. REQUIRED (c) Prepare a journal entry to record the charge for depreciation of vehicles for the year ended 31 December 2022. A narrative is not required. Journal Dr Cr $ $ Workings: [5] (d) Define each of the following terms: (i) capital expenditure … … [1] (ii) capital receipts. … … [1] Additional information Jakoub is preparing his business’s financial statements for the year ended 31 December 2022. The following additional information is available. Payments $ Purchase of new ovens 5 600 Installation costs for new ovens 400 Repairs to electrical equipment 2 600 Maintenance of computer equipment 300 Extension to restaurant 85 000 Decoration of restaurant extension 3 200 Receipts $ Bank loan 25 000 Additional capital provided by Jakoub 40 000 Proceeds from the disposal of unwanted furniture 2 800 REQUIRED (e) Calculate the total amount for each of the following: (i) capital expenditure … … [1] (ii) capital receipts. … … [1] [Total: 15]

15 marks

Mark scheme: Question Answer Marks 2(a) Prepare the kitchen equipment account for the year ended 31 December 4 2022. Kitchen equipment 2022 $ 2022 $ Jan 1 Balance 3 450 (1) Dec Statement of 1 180 (1)OF b/d 31 profit or loss / Depreciation Dec Cash 1 680 (1) Dec Balance c/d 3 950 31 31 5 130 5 130 2023 Jan 1 Balance 3 950 (1) b/d 2(b) State two reasons why the reducing balance method of depreciation might 2 be chosen by a business for depreciating non-current assets. • Takes account of the fact that some non-current assets lose most value in earlier years (1) • May equalise the charge against profits each year when maintenance costs are taken into account (1) • Matches depreciation to earlier years when non-current asset provides most benefit to business (1) Max 2 Accept other valid responses. 2(c) Prepare a journal entry to record the charge for depreciation of vehicles for 5 the year ended 31 December 2022. A narrative is not required. Journal Dr Cr $ $ Statement of profit or loss 9 000 (1) OF Provision for depreciation 9 000 (1) OF Workings Net book value of original delivery vehicle: ($24 000 – $10 500) = $13 500 (1) Cost of new delivery vehicle: $22 500 + $13 500 = $36 000 (1) Depreciation on new delivery vehicle: 25%  $36 000 = $9 000 (1)OF 2(d)(i) Define each of the following terms: 1 capital expenditure. A payment to purchase a non-current asset for example purchase of property (1) 2(d)(ii) Define each of the following terms: 1 capital receipts. Receipt from non-recurring activities for example sale of property (1) 2(e)(i) Calculate the total amount for each of the following: 1 capital expenditure. $94 200 (1) 2(e)(ii) Calculate the total amount for each of the following: 1 capital receipts. $67 800 (1)

This question in 9706/22 Feb/March 2023

1 Mima is the owner of a wholesale business, Mima Supplies. During the year ended 31 December 2022 the business owned the following delivery vehicles. Date of purchase Cost $ Vehicle A 1 January 2019 28 000 Vehicle B 1 January 2020 30 000 Vehicle C 1 July 2022 32 000 Delivery vehicles are depreciated at 25% per annum using the straight‑line method on a month‑by‑month basis. No depreciation is provided in the year of sale. Vehicle A was sold for $5200 on 30 June 2022. REQUIRED (a) Calculate the profit or loss on the disposal of Vehicle A. … … … … … … [3] (b) Calculate the total depreciation charge on delivery vehicles for the year ended 31 December 2022. … … … … … … [3] Additional information Mima has also supplied the following information for the year ended 31 December 2022. 1 $ Advertising 6 580 Allowance for irrecoverable debts at 1 January 2022 1 390 Cost of sales 483 900 Furniture and equipment at 1 January 2022 Cost 36 800 Provision for depreciation 18 200 Insurance 7 380 Interest receivable 1 200 Rent of warehouse 33 480 Returns inwards 4 420 Revenue 726 310 Vehicle running costs 8 580 Wages 63 480

6 marks

Mark scheme: Question Answer Marks 1(a) Calculate the profit or loss made on the disposal of Vehicle A. 3 Depreciation to date: 3  25%  $28 000 = $21 000 Net book value at time of sale: $28 000 – $21 000 = $7000 (1) $7000 – proceeds $5200 = $1800 (1) OF Loss (1) 1(b) Calculate the total depreciation charge on delivery vehicles for the year 3 ended 31 December 2022. $30 000  25% = $7500 (1) $32 000  25%  ½ = $4000 (1) Total $11 500 (1) OF 1(c) Prepare the statement of profit or loss for the year ended 31 December 2022. 13 Mima Supplies Statement of profit or loss for the year ended 31 December 2022 $ $ Revenue 726 310 Less returns inwards 4 420 721 890 (1) Cost of sales W1 478 960 (1) Gross profit 242 930 (1) OF Interest receivable W2 2 000 (1) 244 930 (1) OF Less expenses Advertising W3 5 180 (1) Insurance 7 380 Rent of warehouse 33 480 Vehicle running costs 8 580 Wages W4 65100 (1) Increase in allowance for irrecoverable 175 (1) debts W5 Loss on disposal of motor vehicle 1 800 (1) OF Depreciation Motor vehicles 11 500 (1) OF Furniture and equipment W6 2 790 (1) 135 985 (1) OF Profit for the year 108 945 (1) OF W1 Cost of sales: $483 900 – understated inventory $4940 = $478 960(1) W2 Interest received: 10%  $24 000  10/12 = $2000 (1) W3 Advertising: $6 580 – (1/3  $4200) = $5180(1) W4 Wages $63 480 + $1620 = $65 100 (1) W5 Increase in allowance for irrecoverable debts: (5%  $31 300, i.e. $1565 – $1390 = $175 (1) W6 Depreciation of furniture and equipment ($36 800 – $18 200)  15% = $2790 (1) 1(d) Explain the importance of making an allowance for irrecoverable debts in a 2 business’s financial statements. To ensure that profits are not overstated (1) and asset values are not overstated (1) to comply with the prudence concept. Max 2 Accept other valid responses. 1(e) Identify two ratios which could be used to assess a business’s liquidity. 2 Current ratio (1) Acid test ratio (1) 1(f) Advise Mima which option she should choose. Justify your choice by 7 considering both options. Max 3 marks for Option A Max 3 marks for Option B Decision supported with a comment (1) Option A (max 3) Will improve the ratio (1) But may result in stock outs (1) May reduce customer choice (1) Could result in lost sales and a loss of profits (1) Option B (max 3) May improve ratio if demand increases (1) Profits could decrease because of cost of advertising (1) Will increase in demand compensate for loss of revenue on each sale (1) Will advertising campaign be effective? (1) Accept other valid responses.

This question in 9706/21 May/June 2023

6 Depreciation is to be provided on furniture and equipment at 15% per annum using the reducing balance method of depreciation.

0 marks

This question in 9706/21 May/June 2023

6 Machinery will need some alterations which will cost $54 000. Non-current assets are depreciated by 25% per annum.

0 marks

This question in 9706/22 May/June 2023

2 Zainab uses the straight-line method of depreciation for business vehicles. The non-current assets of the business include two vehicles. Vehicle Cost Date of purchase $ 1 26 000 1 January 2021 2 28 200 1 September 2022 Vehicles are depreciated by 20% per annum. Depreciation is calculated on a month-by-month basis in the year of purchase. No depreciation is provided in the year of disposal. The financial year ends on 31 December. (a) Prepare the journal entry to record the depreciation charge for the year ended 31 December 2022. A narrative is not required. Journal Dr Cr $ $ [3] (b) Prepare the provision for depreciation – vehicles account for the year ended 31 December 2022. Provision for depreciation – vehicles $ $ [3] Additional information On 15 February 2023 Vehicle 1 was disposed of at a profit of $4200 and the proceeds were paid into the business’s bank account. (c) Prepare the vehicle disposal account. Vehicle disposal $ $ [4] (d) State one reason why it may be better to use the reducing balance method of depreciation for vehicles. … … [1] (e) Explain two accounting concepts which apply to depreciation. 1 … … … … 2 … … … … [4] [Total: 15]

15 marks

Mark scheme: 2(a) Prepare the journal entry to record the depreciation charge for the year 3 ended 31 December 2022. A narrative is not required. Journal Date Account Dr Cr $ $ 2022 Dec 31 Depreciation account/Statement of 7 080 (2) profit or loss W Provision for depreciation – 7 080 (1) OF vehicles W Vehicle 1: 20%  $26 000 = $5200 (1) Vehicle 2 (20%  $28 200  1/3) = $1880 (1) 2(b) Prepare the provision for depreciation – vehicles account for the year 3 ended 31 December 2022. Provision for depreciation-vehicles Date Details $ Date Details $ 2022 2022 Dec 31 Balance c/d 12 280 Jan 1 Balance b/d 5 200 (1) Dec 31 Depreciation / 7080 Statement of (1) OF profit or loss 12 280 12 280 2023 Balance b/d 12 280 Jan1 (1) OF 2(c) Prepare the vehicle disposal account. 4 Vehicle disposal Date Details $ Date Details $ 2023 2023 Feb 15 Vehicles cost 26 000 Feb 15 Provision for 10 400 (1) depreciation – (1) vehicles Dec 31 Statement of 4 200 Bank 19 800 profit or loss (1) (1) OF 30 200 30 200 2(d) State one reason why it may be better to use the reducing balance 1 method of depreciation for vehicles. Annual charge more closely reflects the loss in value of the motor vehicle (1) OR The earning power of motor vehicles diminishes over time (1) Accept other valid responses. 2(e) Explain two accounting concepts which apply to depreciation. 4 Matching / Accruals concept (1) which ensures that the costs of the asset are matched with the benefits received in the same accounting period. (1) Consistency concept (1) which requires the same method of depreciation is used in each accounting period and for each class of asset. (1) Prudence concept (1) which ensures that profits are not overstated, or losses should be provided for as soon as they are recognised (1) Max 4

This question in 9706/22 Feb/March 2024

2 On 1 July 2023, the partners disposed of their motor vehicle for cash, $11 700, which was banked immediately. On this date Rakesh transferred his privately owned motor vehicle, valued at $15 000, into the partnership.

0 marks

Mark scheme: 2(a) State two benefits of preparing a trial balance. Provides a check on the arithmetical accuracy of the double-entry records (1) Provides details to be used in the preparation of financial statements (1) Accept other valid responses. 2 Question Answer Marks 2(b) Prepare journal entries to correct the errors. Narratives are not required. Journal Debit $ Credit $ Aryan Stores 80 (1) Bank 80 (1) JK Limited 110 (1) K Limited 110 (1) Drawings 520 (1) Purchases 520 (1) Discounts allowed 320 (1) Purchases returns 320 (1) *Each mark is for the correct label and amount. 8 2(c) State what is meant by an error of principle. Support your answer with one example. Where a transaction is posted with the correct amount and to the correct side of an account but in the wrong class of account (1) Example (1) 2 Question Answer Marks 2(d) Explain, with reference to an accounting concept, why Sana needs to make an adjustment for goods taken for own use. Business entity (1) The business and the owner are separate entities (1) Information can only be entered into the accounts if it has a direct impact on the business (1) 3

This question in 9706/21 May/June 2024

3 Non-current assets are to be depreciated by 20% per annum using the straight-line method. Depreciation is provided on a month-by-month basis and is applied in the year of acquisition and the year of disposal.

0 marks

Mark scheme: 3(a) Complete the statement of changes in equity for the year ended 31 March 2024 J Limited Statement of changes in equity for the year ended 31 March 2024 Share capital $ Share premium $ Revaluation reserve $ Retained earnings $ Total $ Balances, 1 April 2023 600 000 200 000 45 000 98 000 943 000 (1*)OF row Rights issue 400 000 (1)OF 160 000 (1)OF 560 000 Dividend (80 000) (80 000) (1)OF Revaluation (45 000) (1) (15 000) (1) (60 000) Profit for year 37 000 37 000 (1) Balances 31 March 2024 1 000 000 360 000 40 000 1 400 000 (1*)OF row Marking guidance: Accept answer where profit for the year has been adjusted for the revaluation reserve deficit rather than the retained earnings. 8 3(b) Explain two reasons why investors may prefer to invest in debentures rather than in ordinary shares. Debentures receive a fixed rate of interest each year (1) whether or not profits are made by the company / dividend payments are discretionary (1). Debentures are a less risky form of investment (1) as they are usually secured against specific assets (1) Accept other valid responses. 4 Question Answer Marks 3(c) State three uses of a share premium account. Issue bonus shares to shareholders (1) Write off company formation expenses (1) Write off expenses of share issues (1) To pay the premium on the redemption of debentures. (1) Max 3 3

This question in 9706/21 May/June 2024

5 Some additional machinery will be purchased at a cost of $120 000. Machinery is depreciated by 20% per annum, using the straight-line method.

0 marks

This question in 9706/22 May/June 2024

3 Plant and equipment is depreciated by 20% per annum using the straight-line method on a month-by-month basis. Depreciation should be allocated: administrative expenses 60%; distribution costs 40%.

0 marks

Mark scheme: 3(a) Explain two accounting concepts which are applied when making an allowance for irrecoverable debts. Matching/accruals concept (1) requires the sales revenue for a period to be matched against costs for the same period (1). Prudence concept (1) requires that current assets / trade receivables and /or profit for the year are not overstated. (1). Accept other valid responses 3(b) State two factors which should be considered when deciding the percentage that should be used for an allowance for irrecoverable debts. Past experience of irrecoverable debts (1) General economic trends (1) Age of debts (1) Max 2 marks Accept other valid responses 2 Question Answer Marks 3(c) Prepare the allowance for irrecoverable debts account for the years 2022 and 2023. Allowance for irrecoverable debts account $ $ 2022 2022 Dec 31 Statement of profit or loss 36 (1) Jan 1 Balance b/d 728 (1) Balance c/d 692 728 728 2023 2023 Dec 31 Balance c/d 784 Jan 1 Balance b/d 692 (1) OF Dec 31 Statement of profit or loss 92 (1) OF 784 784 2024 Jan 1 Balance b/d 784 (1) OF 5 Question Answer Marks 3(d) State the double-entry necessary to record the following transactions: Writing off the account on 5 January 2024 Debit $ Credit $ Irrecoverable debts 3470 (1) T Limited 3470 (1) The settlement of the amount due on 29 March 2024 Debit $ Credit $ Bank 3470 (1) Irrecoverable debts recovered 3470 (1) 4

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 The company accountant of J plc had prepared draft financial statements for the year ended 30 June 2024. The following balances remained in the books of account. $ 6% bank loan (2024) 11 000 Bank 1 980 Inventory 83 900 Other payables 3 150 Other receivables 5 320 Plant and equipment Cost 137 000 Provision for depreciation 66 940 Property Cost 60 000 Provision for depreciation 8 160 Retained earnings 122 300 Share capital (ordinary shares of $1 each) 70 000 Share premium 4 280 Taxation 13 600 Trade payables 21 450 Trade receivables 32 680 The draft statement of profit or loss showed a profit for the year of $83 250. It has since been discovered no account had been taken of the following errors and omissions. 1 Closing inventory had been understated by $2 000. 2 Administrative expenses included an interim dividend of 3% that had been paid on 1 April 2024. 3 An amount of $1 250 prepaid on distribution costs had been treated as an accrual. 4 The 6% bank loan (2024) had been repaid on 30 June 2024. 5 The property was purchased on 1 July 2021 and had been correctly depreciated for each of the two years ended 30 June 2023 using the straight-line method at 2% per annum. However, the depreciation charge on the property for the year ended 30 June 2024 had been incorrectly calculated using the reducing balance method at 10% per annum. 6 The taxation liability at 30 June 2024 had been over estimated by $3 000. (a) Calculate the corrected carrying value of Property at 30 June 2024. … … … … [2] (b) Calculate the revised profit for the year ended 30 June 2024. … … … … … … … … … … … … Workings: [7] (c) Prepare the statement of financial position at 30 June 2024. Use the space provided on page 5 to show your workings. J plc Statement of financial position at 30 June 2024 … … … … … … … … … … … … … … … … … … … … … … … … … Workings: [10] Additional information The directors of J plc are aware that one factor causing the value of plant and equipment to depreciate is wear and tear. (d) State two other factors that may cause the value of plant and equipment to depreciate. 1 … … 2 … … [2] (e) State the formula for each of the following ratios. Ratio Formula Profit margin Return on capital employed [2] Additional information Having calculated both these ratios, the directors are pleased that both achieve the company’s targets. They are wishing to expand and are planning to acquire additional plant and equipment with an estimated cost of $80 000. They are considering two financing options but are also concerned as to the effect that these will have on the ratios. Option 1 Request a five-year bank loan to purchase the equipment outright. Option 2 Take out a three-year lease agreement for the equipment. (f) Advise the directors which option they should choose. Justify your advice by considering both financial and non-financial factors. … … … … … … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Calculate the corrected carrying value of Property at 30 June 2024. 2 $56 400 (2) Workings $60 000 – $3 600 (1) = $56 400 (1) OF 1(b) Calculate the revised profit for the year ended 30 June 2024. 7 $97 410 (7) Workings $ Draft profit 83 250 (1) Closing inventory 2 000 (1) Interim dividend 2 100 (1) Distribution costs 2 500 (1) Property depreciation 4 560 (1) Taxation 3 000 (1) Revised profit for the year 97 410 (1)OF 1(c) Prepare the statement of financial position at 30 June 2024. 10 J plc Statement of financial position at 30 June 2024 $ Assets Non-current assets Property, plant and equipment 126 460 (1) 126 460 Current assets Inventory 85 900 (1) Trade and other receivables 39 250 (1) 125 150 Total assets 251 610 (1) OF Equity and liabilities Equity Share capital 70 000 Share premium 4 280 Retained earnings 134 360 (1) OF Total equity 208 640 (1) Liabilities Current liabilities Bank overdraft 9 020 (1) Trade and other payables 23 350 (1) Taxation 10 600 (1) Total liabilities 42 970 Total equity and liabilities 251 610 (1) OF 1(d) State two other factors that may cause the value of plant and equipment 2 to depreciate. • obsolescence (1) • usage (1) • time factor (1) • technological change (1) Max 2 marks Accept other valid responses 1(e) State the formula for each of the following ratios. 2 Ratio Formula Profit margin Profit for the year  100 (1) Revenue Return on capital employed Profit from operations  100 (1) Capital employed 1(f) Advise the directors which option they should choose. Justify your 7 advice by considering both financial and non-financial factors. Option 1 Bank loan • The company would have ownership of the asset (1) • Would the bank be prepared to approve such a large loan? (1) • Would the bank wish to take security for the loan (1) • Interest payments would reduce profits (1) • Depreciation would reduce profits (1) • Likely to have a negative effect on the return on capital employed (1) • May have a negative effect on profit margin unless significant increase in revenue (1) Option 2 Lease • The company would not own the asset (1) • Would not be obliged to retain the asset at the end of the agreement if not suitable (1) • Lease payments would reduce profits (1) • Less vulnerable to business downturn (1) • Less likely to have a negative effect on return on capital employed (1) • May have a negative effect on profit margin unless significant increase in revenue (1) Max 6 for comments Decision supported with a comment (1) Accept other valid responses

This question in 9706/23 Oct/Nov 2024

1 H Limited’s financial year ended on 31 December 2024. On that date, the following information was available. Non-current assets included the following: Cost at Provision for Depreciation Allocation 1 January depreciation at policy 2024 1 January 2024 Motor vehicles $80 000 $28 400 20% per annum 75% Distribution using the reducing costs balance method 25% Administrative expenses Furniture and $45 000 $16 200 15% per annum 100% Administrative equipment using the expenses straight-line method On 1 July 2024, equipment, which cost $8000 when purchased on 1 January 2022, was sold for $3900. Depreciation is provided on furniture and equipment on a month-by-month basis in the year of disposal. (a) Calculate the depreciation charge for 2024 on the following non-current assets. (i) Motor vehicles … … [1] (ii) Furniture and equipment … … … … [2] (b) Calculate the profit or loss on the disposal of equipment. … … … … [2] Additional information The books of account also included the following balances on 31 December 2024. $ 10% Debenture (2026) 80 000 Administrative expenses 11 560 Carriage outwards 2 700 Cost of sales 288 400 Debenture interest 4 000 Directors’ remuneration 56 000 Distribution costs 9 800 Dividends paid 22 500 Office wages 37 150 Marketing expenses 24 240 Property at valuation at 1 January 2024 970 000 Rental income 7 200 Revenue 570 000 Sales staff wages and salaries 62 300 Additional information at 31 December 2024 1 Part of the premises has been rented out since 1 May 2024. The rental income is $2400 for every three months payable in advance.

5 marks

Mark scheme: Question Answer Marks 1(a)(i) Calculate the depreciation charge for 2024 on the following non-current 1 assets. Motor vehicles 20%  ($80 000 – $28 400) = $10 320 (1) 1(a)(ii) Calculate the depreciation charge for 2024 on the following non-current 2 assets. Furniture and equipment (15%  $37 000 = $5 550) (1) + (15%  ½  $8 000 = $600) = $6 150 (1) 1(b) Calculate the profit or loss on the disposal of the equipment. 2 Carrying amount at time of disposal: $8 000 – $3 000 = $5 000 (1) Loss on disposal: $5 000 – $3 900 = $1 100 loss (1) OF 1(c) Prepare the statement of profit or loss for the year ended 31 December 2024. 12 H Limited Statement of profit or loss for the year ended 31 December 2024 $ Revenue 570 000 Cost of sales (288 400) Gross profit 281 600 Distribution costs W1 (102 140) (4) OF Administrative expenses W2 (115 790) (5) OF Profit from operations 63 670 Income / rent received / rent income W3 6 400 (1) Finance costs (6 000) (1) Profit before taxation 64 070 Taxation (4 200) Profit for the year 59 870 (1) OF W1 Distribution costs: $ As given 9 800 Carriage outwards 2 700 Marketing costs ($24 240 – (4/5  $8800))_ 17 200 (1) Sales staff wages and salaries ($62 300 + bonus $2400) 64 700 (1) Depreciation motor vehicles (75%  $10 320) 7 740 (1) 102 140 (1) OF 1(c) W2 Administrative expenses: $ As given 11 560 Directors’ remuneration 56 000 Office wages $37 150 + $1 250 38 400 (1) Depreciation motor vehicles (25%  $10 320) 2 580 (1) Depreciation furniture and equipment – see 1(a)(ii) 6 150 (1) OF Loss on disposal of furniture and equipment – see 1(b) 1 100 (1) OF 115 790 (1) OF W3 Rental income: $800 per month  8 months = $6 400 (1) 1(d) Prepare the statement of changes in equity for the year ended 31 December 6 2024. H Limited Statement of changes in equity for the year ended 31 December 2024 Share Share Revaluation Retained Total Capital Premium Reserve Earnings $ $ $ $ $ Balances at 525 000 40 000 95 000 112 700 772 700 1 January (1)fb 2024 Share 200 000 80 000 280 000 issue W1 (1)fb Dividends (22 500) (22 500) paid (1) Revaluatio (95 000) (55 000) (150 000) n of (1)fb property Profit for 59 870 59 870 the year (1)OF Balances at 725 000 120 000 – 95 070 940 070 (1) OF 31 column December 2024 W1 Share capital: 400 000  $0.50 = $200 000; Share premium 400 000  $0.20 = $80 000 1(e) Advise the directors which option they should choose. Justify your answer by 7 discussing both the advantages and disadvantages of each option. Option A = rights issue = max 4 For Will be a permanent source of finance (1) Will not affect profits (1) Dividend payments are discretionary (1) Against Will the rights issue be successful because they had recently made a share issue? (1) Could affect control of the company (1) Expensive to organise (1) Option B = debentures = max 4 For No impact on control of company as no voting rights (1) No impact on profit distribution as no change in control (1) Temporary source of finance / repayable / liability (1) Against They have to finance the redemption of the existing debenture (1) Debenture interest will reduce profits (1) Debenture interest will have to be paid each year (1) (Max 6) Accept other valid responses Decision supported by a comment (1)

This question in 9706/22 May/June 2025

3 J Limited’s non-current assets are as follows: Cost Date of purchase $ Property (freehold) 840 000 1 January 2021 Machinery Machine 1 45 000 1 January 2022 Machine 2 54 000 1 April 2024 Motor vehicles 36 000 1 January 2023 The company’s financial year ends on 31 December. Depreciation policy is as follows: Property 5% per annum using the straight-line method Machinery 20% per annum using the straight-line method. Depreciation is provided on a month-by-month basis in the year of purchase and the year of disposal. Motor vehicles 25% per annum using the reducing balance method (a) Calculate the balance of the provision for depreciation accounts at 31 December 2024 for each of the following categories of non-current assets. (i) Machinery … … … … [2] (ii) Motor vehicles … … … … [2] Additional information On 1 January 2025, it was decided to revalue the freehold property to $925 000. (b) Prepare a journal entry to record the revaluation of the freehold property. A narrative is not required. Journal Date Account Dr Cr $ $ [4] Additional information On 1 January 2025, Machine 1 was disposed of for $20 400 received by cheque. (c) Prepare the disposal account. Disposal account Details $ Details $ [4] Additional information A director had suggested that in future it would be easier if the straight-line method of depreciation was used for all non-current assets. However, the company’s accountant disagrees and says this suggestion should not be implemented. (d) Explain, with reference to one accounting concept, why the suggestion should not be implemented. Concept: … Explanation: … … … … … [3] [Total: 15]

15 marks

Mark scheme: 3(a)(i) Calculate the balance of the provision for depreciation accounts at 31 2 December 2024 for each of the following categories of non-current assets. Machinery Machine 1: 20%  $45 000  3 = $27 000 Machine 2: 20%  $54 000  ¾ = $8 100 (1) Balance of provision account: $35 100 (1) 3(a)(ii) Calculate the balance of the provision for depreciation accounts at 31 2 December 2024 for each of the following categories of non-current assets. Motor vehicles Year 2023: 36 000  25% = $9 000 Year 2024: 27 000  25% = $6 750 (1) Balance of provision account: $15 750 (1) 3(b) Prepare a journal entry to record the revaluation of the freehold property. A 4 narrative is not required. Journal Date Account Dr Cr $ $ 2025 Jan 1 (Freehold) Property (cost) 85 000 (1) Provision for depreciation (of 168 000 (1) property) (1) W1 Revaluation (reserve) 253 000 (1) W1: Depreciation of property: 4  5%  $840 000 = $168 000 3(c) Prepare the disposal account. 4 Disposal Details $ Details $ Machinery cost 45 000 (1) Machinery provision 27 000 (1) OF for depreciation Statement of profit or 2 400 (1) OF Bank 20 400 (1) loss 47 400 47 400 3(d) Explain, with reference to one accounting concept, why the suggestion should 3 not be implemented. Consistency concept (1): requires the same policy/methods/principle/techniques to be used from year to year (1) to ensure that results are capable of valid comparison (1). Accept other valid responses.

This question in 9706/22 Oct/Nov 2025