Preparation of financial statements — Paper 2 · A Level Accounting 9706

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

30 marks

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

This question in 9706/22 Feb/March 2017

1 The directors of AB Limited provide the following financial information: Income Statement (extract) for the year ended 30 April 2016 $ Revenue 300 000 Purchases (80% on credit) 250 000 Expenses 27 000 All sales earned a uniform gross margin of 20%. Statement of Financial Position at 30 April 2016 $ Non-current assets 160 000 Current assets Inventory 38 000 Trade receivables 35 000 Cash and cash equivalents 45 000 118 000 Total assets 278 000 Equity and liabilities Equity Ordinary share capital of $1 each 170 000 Share premium 5 000 Retained earnings 25 000 200 000 Current liabilities Trade payables 27 000 Other payables 51 000 78 000 Total equity and liabilities 278 000 REQUIRED (a) Prepare the income statement for AB Limited for the year ended 30 April 2016 in as much detail as possible. [4] (b) Suggest two reasons why the balance on a retained earnings account may be lower than the profit for the year. 1 2 [2] (c) Calculate the following ratios. (i) Rate of inventory turnover (to two decimal places) [2] (ii) Liquid (acid test) ratio (to two decimal places) [2] (iii) Trade payables turnover (days) [2] Additional information The following information is available for XY Limited, a competitor of AB Limited. Rate of inventory turnover 8.75 times Liquid (acid test) ratio 0.85 : 1 Trade payables turnover (days) 42 days REQUIRED (d) Discuss the performance of AB Limited by comparing the ratios calculated in part (c) with those of XY Limited. Rate of inventory turnover Liquid (acid test) ratio Trade payables turnover (days) [6] Additional information CD Limited has been asked by both AB Limited and XY Limited to become their supplier. The directors of CD Limited only wish to supply to one of the two companies. REQUIRED (e) Advise the directors of CD Limited which company they should supply. Give reasons for your answer. [4] Question 1(f) is on the next page. Additional information The financial statements of AB Limited for the year ended 30 April 2017 showed a draft profit for the year of $71 000. A review of the books of account revealed the following errors: 1 A sales invoice for $234 had been recorded as $324. 2 Returns outwards account had been overcast by $100. 3 Inventory of $1200 had been omitted from closing inventory. REQUIRED (f) Calculate the revised profit for the year ended 30 April 2017. [4] (g) Explain the difference between a capital reserve and a revenue reserve. [4] [Total: 30] Question 2 is on the next page.

30 marks

Mark scheme: Question Answer Marks 1(a) $ $ 4 Revenue 300 000 Opening inventory (bal. figure) 28 000 (1) OF Purchases 250 000 Closing inventory (38 000) Cost of sales 240 000 (1) OF Gross profit 60 000 (1) Expenses 27 000 Profit for the year 33 000 (1) OF 1(b) Previous loss brought forward (1) 2 Payment of dividends (1) Bonus issue of shares (1) Max 2 1(c)(i) Inventory turnover 2 240 000 / 33 000 (1)OF = 7.27 times (1)OF 1(c)(ii) Liquid (acid test) ratio 2 80 000 / 78 000 (1) = 1.03 : 1 (1) 1(c)(iii) Trade payables turnover (days) 2 (27 000 / 200 000) × 365 (1) = 50 days (1) 1(d) Rate of inventory turnover (days) – Better for XY Limited and worse for AB Limited 6 (1) The goods being sold by AB Limited are less popular or slower selling than those of XY Limited; or XY Limited may have offered sales promotions. (1) Liquid (acid test) ratio – Better for AB Limited and worse for XY (1) AB Limited have sufficient current assets to cover its short term debts; Or For every $1 of current liabilities AB Limited has enough liquid assets (1). Trade payables payment – Slower for AB Limited and faster for XY Limited (1) AB Limited’s suppliers may have poor credit control. They may not be offering AB Limited incentives to pay early, unlike XY Limited. (1) (2 marks) for each ratio 1 mark for basic point and 1 for development. 1(e) AB Limited: More liquidity, lower inventory turnover but has ability to pay trade 4 payables. XY Limited: Higher rate of inventory turnover, faster payment period 1 mark for decision and 3 for reasons. Accept other valid points. 1(f) $ 4 Original profit 71 000 Error 1 (90) (1) Error 2 (100) (1) Error 3 1 200 (1) Revised gross profit 72 010 (1)OF 1(g) A revenue reserve is profit retained by the directors and is the property of the 4 ordinary shareholders. Source of capital reserve is from issuing capital, that is, share premium. Revenue reserves can be used to pay cash dividends from retained profits. Capital reserves help protect creditors. Capital reserves cannot be used to pay cash dividends but can be used for bonus shares. (2 marks) × 2 points – 1 mark for basic point and 1 for development Total: 30

This question in 9706/21 May/June 2017

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

30 marks

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

This question in 9706/22 May/June 2017

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

30 marks

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

This question in 9706/23 May/June 2017

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

15 marks

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

This question in 9706/23 May/June 2017

REQUIRED (b) Prepare an income statement for Huan for the year ended 31 March 2016. Huan Income statement for the year ended 31 March 2016 [13] Additional information All of Huan’s sales and purchases are made on a credit basis. He feels that his accounting records could be improved by preparation of control accounts. REQUIRED (c) State three benefits and one limitation of preparing a sales ledger control account. Benefits 1 2 3 Limitation 1 [4]

17 marks

This question in 9706/21 Oct/Nov 2017

1 Ross, a sole trader, owns a business selling computer equipment. He prepared the following income statement for the year ended 31 March 2017, which contained errors. Ross Income Statement for the year ended 31 March 2017 $ $ Revenue 96 520 Add: Returns outwards 440 96 960 Cost of sales Inventory at 31 March 2017 23 400 Purchases 38 950 Carriage outwards 1 090 63 440 Inventory at 1 April 2016 (21 640) 41 800 Gross profit 55 160 Less expenses: Property rental paid 16 240 Returns inwards 1 240 Drawings 8 600 Heating and lighting 1 940 Travel expenses 2 060 General expenses 6 690 Shop fittings – accumulated depreciation at 31 March 2017 3 320 40 090 Profit for the year 15 070 Additional information The following notes also need to be taken into account when correcting the income statement. 1 Revenue includes goods sent on a sale or return basis to a customer who has not yet accepted the goods. The goods cost $2500 and had been invoiced for $4000. 2 Depreciation on shop fittings for the year ended 31 March 2017, $1490, had been entered in the books of account. 3 A prepayment of $1160 for property rental paid at 31 March 2017 had been incorrectly entered in the books of account as an accrual. 4 A customer owing Ross $1250 has been declared bankrupt. This debt should have been written off in these accounts, but no entry has yet been made. REQUIRED (a) Prepare the corrected income statement for the year ended 31 March 2017. Ross Income Statement for the year ended 31 March 2017 [13] Additional information Ross provided the following information about his assets and liabilities at 31 March 2017: $ Accruals 1 960 Bank loan 8 580 Bank overdraft 2 610 Capital at 1 April 2016 10 950 Shop fittings – cost at 31 March 2017 11 930 Prepayments 2 080 Trade payables 6 440 Trade receivables 12 870 No adjustment had been made to any of these balances in respect of errors discovered in the income statement or notes 1 to 4 on page 2. Ross introduced capital of $3000 into the business bank account on 31 March 2017. No entries for this have yet been made in the books of account. One half of the bank loan is repayable in the year ending 31 March 2018. The remainder is due for repayment after that date. REQUIRED (b) Prepare the statement of financial position at 31 March 2017 taking account of all relevant information and information from part (a). Ross Statement of Financial Position at 31 March 2017 [13] Additional information At present Ross does not make any provision for doubtful debts. REQUIRED (c) Advise Ross whether or not he should create a provision for doubtful debts. Justify your answer. [4] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1 Ross 13 Income Statement for the year ended 31 March 2017 $ $ Revenue 92 520 (1) Returns inwards (1 240) (1) 91 280 Cost of sales Opening inventory 21 640 (1) Purchases 38 950 Returns outwards (440) (1) 60 150 Closing inventory W1 (25 900) (2) 34 250 Gross profit (must be labelled) 57 030 (1of) Deduct: expenses Carriage outwards 1 090 (1) Property rental W2 13 920 (2) Heating and lighting 1 940 Travel expenses 2 060 General expenses 6 690 Irrecoverable debt written off 1 250 (1) Depreciation 1 490 (1) 28 440 Profit for the year (must be labelled) 28 590 (1of) W1 (23 400 (1) + 2500 (1)) W2 (16 240 (1) – 2320 (1)) 1(b) Ross 13 Statement of Financial position at 31 March 2017 $ Non-current assets Shop fittings – cost 11 930 provision for depreciation 3 320 (1) 8 610 (1of) Current assets Inventory 25 900 (1of) Trade receivables 11 620 (2of) Prepayments 3 240 (1) Bank 390 (1) 41 150 Total assets 49 760 Capital account Balance brought forward 10 950 (1) Capital introduced 3 000 (1) Profit for the year 28 590 (1of) 42 540 Deduct: drawings 8 600 (1) 33 940 Non-current liabilities Bank loan 4 290 (1) Current liabilities Trade payables 6 440 Accruals 800 (1) Bank loan 4 290 49 760 Workings Trade receivables 12 870 (1) – 1250 = 11 620 (1)OF 1(c) Application of prudence concept (1) 4 Trade receivables/Current assets/profit may be overstated (1) Application of matching/accruals concept (1) Matches the cost of the provision against the relevant year (1) (1 mark for advice + max 3 for justification).

This question in 9706/22 Oct/Nov 2017

2 On 30 November 2015 a final ordinary share dividend of 2% was paid on all shares in issue at that date.

0 marks

Mark scheme: 2(a) Rowsell Income Statement for the year ended 31 May 2017 $ $ Revenue (W1) 181 062 (1)OF Cost of sales Opening inventory 19 600 Purchases (W2) 147 585 (2) Closing inventory (16 300) (1) 150 885 Gross profit 30 177 (1)OF Profit on disposal (W3) 795 (1) 30 972 Less expenses: Rent (W4) 18 000 (1) Telephone (W5) 3 310 (2)OF Depreciation (W6) 3 805 (2)OF 25 115 Profit for the year 5 857 (1)OF Workings (W1) 150 885 × 120% = 181 062 (1) OF (W2) 144 715 + 17 220 (1) – 14 350 (1) = 147 585 (W3) 10 175 – 9380 (1) = 795 (W4) 19 500 – 1500 (1) = 18 000 (W5) 2750 + (840 / 3 × 2 (1)) = 3310 (1) OF (W6) 24 600 – 9380 (1) = 15 220 × 25% = 3805 (1) OF 12 2(b) Assists with the preparation of the trial balance. Assists with the preparation of the financial statements. Reduces the risk of errors. Reduces the risk of fraud. Improves the accuracy of accounting records. Balances on individual accounts are available throughout the year. 1 mark for a valid point up to a maximum of 3. 3

This question in 9706/23 Oct/Nov 2017

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

14 marks

This question in 9706/23 Oct/Nov 2017

4 A sales invoice for $1520 dated 30 June 2017 was omitted from the sales journal. REQUIRED (b) Prepare the amended sales ledger control account at 30 June 2017. Delph Amended sales ledger control account $ $ Balance b/d 21 555 [5] Additional information At 30 June 2017 there was a debit balance on the purchases ledger account of $384. REQUIRED (c) Prepare the purchases ledger control account for the year ended 30 June 2017. Delph Purchases ledger control account $ $ [5] Additional information Delph has also provided the following information. At 1 July 2016 $ Capital introduced 10 500 Loan from the bank (repayable 2021) 3 000 During the year ended 30 June 2017 Bank payments Motor vehicle 13 560 Loan 500 Drawings 12 625 At 30 June 2017 Inventory 3 700 Debit Cash in hand 360 Debit Rent 650 Debit Bank 856 Credit Wages 1 890 Credit The motor vehicle is to be depreciated at 25% using the reducing balance method. REQUIRED (d) Prepare the statement of financial position at 30 June 2017. Delph Statement of financial position at 30 June 2017 [9]

19 marks

Mark scheme: 4(a)(i) apportionment (1) 1 4(a)(ii) direct materials are allocated (1) because they are directly attributable to production units (1) 2 4(b)(i) factory rent – by floor area (1) 1 Question Answer Marks 4(b)(ii) depreciation of factory machinery – by cost or NBV of factory machinery (1) Machine hours (1) 1 4(c)(i) $34 (1) 1 4(c)(ii) $63 (1) 1 4(d)(i) $63 000 (1) + $15 000 (1) + $30 000 (1) = ($108 000 / 1000) × 25% = $27.00 (1) OF 4 4(d)(ii) $84 000 (1) + $18 000 (1) + $36 000 (1) = ($138 000 / 1200) × 25% = $28.75 (1) OF 4 4(e) Financial (max 3) The budgeted profit per unit is higher for scooters (1) as is the selling price (1) and it would appear that taking up the suggestion would increase profit (1). There might be staff retraining costs to be paid. (1) Would it be necessary to make staff redundant involving redundancy costs? (1) Non financial (max 3) Is there demand for the extra scooters? (1) If Department B is working at less than full capacity production of scooters could be increased without affecting Department A. (1) Machinery used in making bicycles might not be suitable for producing scooters. (1) Do staff have the necessary skills (1) It might only be possible to make say 400 extra scooters by using the resources freed from the 500 bicycles. (1) May lead to customer dissatisfaction (1) Decision (1) 7 4(f) OAR = 74 000 (1) / 2000 (1) = $37 per direct labour hour (1)OF 3 Question Answer Marks 4(g) $ overheads absorbed 2100 (1) × $37 (1)OF 77 700 actual 76 200 (1) 1 500 (1)OF over absorbed (1)OF 5

This question in 9706/22 Feb/March 2018

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

30 marks

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

This question in 9706/21 May/June 2018

4 Cherie is to receive interest at 8% per annum on her loan to the partnership. No entries have been made to record the interest for the year ended 30 June 2017. The balance of her loan account has remained unchanged throughout the year. REQUIRED (b) Prepare the income statement for the year ended 30 June 2017. Start the statement with gross profit for the year of $40 960. [5] Additional information 1 Interest on drawings has been calculated as follows: $ Cherie 310 Harry 240 2 The partners are to receive interest on their fixed capital account balances at 10% per annum. 3 Residual profits and losses are to be shared in proportion to their capital account balances. REQUIRED (c) Prepare the appropriation account for the year ended 30 June 2017. [4] (d) Prepare the partners’ current accounts for the year ended 30 June 2017. Current Accounts Cherie Harry Cherie Harry $ $ $ $ [6] Additional information Cherie and Harry are concerned about some aspects of the business’s efficiency and provide the following information. Ratio Year ended Year ended Industry 30 June 2017 30 June 2016 Average Non-current asset turnover 1.68 times 1.11 times 1.34 times Trade payables turnover 28 days 33 days 31 days REQUIRED (e) Analyse the efficiency of the business using these ratios. [4]

19 marks

Mark scheme: 4(a) Total $ Accommodation $ Leisure $ Conferences $ Support $ Labour cost 345 000 194 000 86 000 60 000 5000 Food & materials 81 000 42 000 11 000 26 000 2000 Rent and rates 86 000 53 750 8600 21 500 2150 (1) row Light and heat 48 000 22 400 12 800 9600 3200 (1) row Advertising 40 000 24 000 6000 10 000 – (1) row Equipment depreciation 60 000 10 000 45 000 5000 – (1) row Office costs 150 000 90 000 22 500 37 500 – (1) row Total apportioned overheads 810 000 436 150 191 900 169 600 12 350 (1)OF row Reapportionment of Support 7410 1852 3088 (12 350)(1)OF row Total 443 560 193 752 172 688 – (1)OF row 8 4(b) Accommodation $ Leisure $ Conferences $ Total overheads 443 560 193 752 172 688 Budgeted guest days 12 000 3 000 5 000 Overhead absorption rate per guest day $36.96 $64.58 $34.54 (1) OF (1) OF (1) OF 3 4(c) Accommodation $ Leisure $ Conferences $ Actual costs 522 000 215 000 196 000 Absorbed Accommodation (36.96 × 13 200) 487 872 Leisure (64.58 × 3 600) 232 488 Conferences (34.54 × 5 800) 200 332 Under/over absorbed 34 128 (1)OF Under (1)OF 17 488 (1)OF Over (1)OF 4 332 (1)OF Over (1)OF 6 Question Answer Marks 4(d) $ Accommodation 4 × 36.96 147.84 (1)OF Leisure 1 × 64.58 64.58 Conferences 3 × 34.54 103.62 316.04 X5 (1) 1 580.20 Profit 2 370.30 (1)OF Price to quote 3 950.50 (1)OF Alternative presentation $ Accommodation 5 × 4 × 36.96 739.20 Leisure 5 × 1 × 64.58 322.90 Conferences 5 × 3 × 34.54 518.10 Total costs 1 580.20 (2)OF Profit 2 370.30 (1)OF Price to quote 3 950.50 (1)OF 4 4(e) Responses could include: Price will still be lower than competitor (1)OF which will result in increased profits (1)OF Increased accommodation prices may reduce the demand for Leisure and Conferences (1) and may affect overall occupancy rates (1) May affect the reputation of the hotel and leisure complex (1) resulting in lost customers (1) Decision (1) plus 1 mark for identification plus 1 mark for development 5 Question Answer Marks 4(f) Enables planning for the future (1) Encourages co-ordination/communication (1) Provides a framework for responsibility accounting (1) Enables variance analysis ensuring control (1) Encourages motivation of employees (1) Max 2 marks Accept other valid points. 2 4(g) Based on estimates (1) Unrealistic budgets may de-motivate employees (1) May discourage innovation (1) Max 2 marks Accept other valid points. 2

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 Warren is a sole trader. He started trading on 1 February 2016. During the year ended 31 January 2017 he did not keep detailed accounting records but he has provided the following information: $ Revenue 248 758 Carriage inwards 12 371 Carriage outwards 5 873 Returns inwards 6 250 Returns outwards 11 875 Goods taken for own use 2 246 Inventory at 31 January 2017 27 450 Warren applies a 50% mark-up on cost. REQUIRED (a) Prepare the trading section of the income statement for the year ended 31 January 2017. [6] (b) Explain two advantages of maintaining control accounts. 1 2 [4] Additional information Whilst preparing his accounts, Warren discovered the following: 1 Goods costing Warren $2400 had been sent to a customer on a sale or return basis on 29 January 2017. The goods had been invoiced with the usual mark-up, but the customer had not yet decided to keep them. 2 Trade receivables were shown as $49 532, but irrecoverable debts of $572 had not been written off and a provision for irrecoverable debts of 5% was required. REQUIRED (c) Explain how these transactions would affect the financial statements for the year ended 31 January 2017. [5] [Total: 15]

15 marks

Mark scheme: 2(a) Trading section of Income Statement for year ended 31 January 2016 $ $ Revenue 248 758 Less: Returns inwards (6 250) 242 508 (1) Purchases (bal fig) 190 872 (1)OF Add: Carriage inwards 12 371 (1) 203 243 Less: Returns outwards (11 875) 191 368 Less: Goods for own use (2 246) (1) 189 122 Less: Closing inventory (27 450) (1) Cost of sales 161 672 Gross profit 80 836 (1)OF 6 2(b) Control accounts help to reduce fraud (1) as a result of segregation of duties (1). Control accounts check the arithmetical accuracy of the ledgers/help in locating errors (1) but not all errors are identified (1). Control accounts can provide total trade receivables/trade payables amounts quickly (1) assisting in the preparation of financial statements (1). 1 mark for identification and 1 mark for development for each advantage Max 2 marks 4 Question Answer Marks 2(c) Revenue decreases by $3600 (1) Inventory increases by $2400 (1) Profit decreases by $1200 (1) + $572 (1) + $2448 (1) = $4220 Trade receivables decrease by $3600 (1) + $572 (1) + $2448 (1) = $6620 Max 5 marks 5

This question in 9706/23 May/June 2018

3 David, a sole trader, has prepared a trial balance at 31 December 2017 which did not balance. He entered the difference in a suspense account. REQUIRED (a) State two other uses of a suspense account. 1 2 [2] (b) State four types of error that will not be revealed by the trial balance. 1 2 3 4 [4] Additional information On checking the financial records, David discovered the following errors. 1 The credit balance on the bank current account of $1650 had been entered in the trial balance as a debit balance. 2 The total of the purchases returns journal of $960 had been debited to the returns inwards account. 3 A prepayment of $450 for telephone charges at 1 January 2017 had not been brought down as an opening balance. 4 The balance on sales ledger control account at 31 December 2017 of $13 625 had been carried down as $13 652. REQUIRED (c) Prepare the suspense account at 31 December 2017 clearly showing the opening balance on the account. Suspense account $ $ [6] REQUIRED (d) State three benefits to a business of preparing annual financial statements. 1 2 3 [3] [Total: 15]

15 marks

Mark scheme: 3(a) The bookkeeper does not know where to post an entry. (1) In order to prepare draft financial statements. (1) 2 3(b) Error of omission Error of commission Error of principle Compensating error Error of original entry Error of reversal 1 mark for each type of error – Max 4 marks 4 3(c) Suspense account $ $ Bank 3 300 (1) Opening balance 4 797 (1)OF Purchases returns 960 (1) Telephone 450 (1) Returns inwards 960 (1) Sales ledger control account 27 (1) 5 247 5 247 6 Question Answer Marks 3(d) Helps future planning/targets/goals (1) Decision making (1) Able to assess performance/comparisons (1) Valuation of assets, liabilities and capital (1) For tax purposes (1) To present to bank for additional finance (1) Accept other valid points. Max 3 marks 3 $3.60 × 45% = $1.62 (1) × 2000 units = $3240 × 4 weeks = $12 960 (1)

This question in 9706/23 May/June 2018

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

11 marks

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

This question in 9706/21 Oct/Nov 2018

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

15 marks

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

This question in 9706/21 Oct/Nov 2018

REQUIRED (e) Prepare the income statement for the year ended 31 December 2017. [9] (f) Advise Finn whether or not he should employ a book-keeper at a cost of $500 a month. Justify your answer. [4] (g) State two reasons why a trader might maintain a provision for doubtful debts. 1 2 [2] [Total: 30] PLEASE TURN OVER 2 Jack and Kelly are in partnership. They share profits and losses in the ratio of 2 : 5 respectively. The partners decided to admit Liam as a partner with effect from 1 July 2018. The partnership’s statement of financial position immediately prior to Liam’s admission was as follows. Jack and Kelly Summarised statement of financial position at 30 June 2018 $ Assets Non-current assets 91 400 Current assets 21 700 Total assets 113 100 Capital and liabilities Capital accounts Jack 33 000 Kelly 71 000 Current liabilities 9 100 Total capital and liabilities 113 100 The partners do not maintain separate current accounts. The following was agreed. 1 Assets were revalued upwards by $21 000. 2 Goodwill was valued at $52 500. No goodwill account was to be maintained in the partnership’s books of account. 3 In the future profits and losses would be shared in the ratio Jack : Kelly : Liam, 2 : 5 : 3 respectively. 4 The balances of the partners’ capital accounts immediately after Liam’s admission should total $120 000 and be in the same ratio as the profit sharing ratio. Each partner would either pay funds into, or withdraw funds from, the business bank account in order to achieve this requirement. REQUIRED (a) Prepare the partners’ capital accounts to record Liam’s admission as a partner on the next page. [6] $ Liam $ Kelly $ Jack Accounts Capital $ Partners’ Liam $ Kelly $ Jack (b) State what is meant by the term ‘goodwill’. [1] (c) Explain why a partnership may make an adjustment for goodwill when they admit a new partner. [2] (d) Explain why partners may agree not to maintain a goodwill account in the books of the partnership on the admission of a new partner. [2] Additional information The partners forecast that profit for the year ending 30 June 2019 will be $60 000. This is an increase of 25% on the current year’s profit. The partners believe that Liam’s admission will result in an improved return on capital employed. REQUIRED (e) Advise the partners whether or not they are correct in believing that Liam’s admission will result in an improved return on capital employed in the year ending 30 June 2019. Support your answer with calculations. [4] [Total: 15] 3 Part of the equity of a limited company consists of ordinary shares. REQUIRED (a) (i) Explain two reasons why a company may make a bonus share issue. 1 2 [4] (ii) State three uses of the share premium account, other than the issue of bonus shares. 1 2 3 [3] Additional information On 1 January 2017 the issued share capital of S Limited consists of ordinary shares of $0.40 each. The following information is available for the year ended 31 December 2017: 1 On 1 April 2017 the company issued a 6% debenture of $300 000. 2 On 1 May 2017 the company paid a final dividend of $0.04 per ordinary share. 3 On 1 October 2017 the company made a rights issue of 1 ordinary share for every 4 held. The shares were offered at a 20% discount on the market price of $1.45. The rights issue was fully subscribed. 4 On 15 October 2017 the company paid an interim dividend of $0.015 per share to the shareholders who were on the share register at 1 August 2017.

37 marks

Mark scheme: 4(a) The point where the business is making neither a profit nor a loss (1) 1 4(b) Make or buy decisions (1) Limited resources (1) Special orders (1) Production scheduling (1) Product / departmental closure (1) Accept other valid responses. Max (3) 3 4(c)(i) bulk buying / economies of scale / supplier price reduction Max (1) 1 4(c)(ii) overtime rates / increase basic wage rates 1 4(d) Fixed costs are only fixed over a given range of activity (1) As this business is expanding its capacity, some fixed costs may increase (1) Such as: • Rates – larger floor area used (1) • Supervisors’ salaries – increase in staff numbers (so more supervisors required) (1) • Depreciation – additional machinery required (1) • Maintenance – increased operations (therefore more servicing required) (1) Max (1) for developed examples. Overall max (3) 3 Question Answer Marks 4(e)(i) $ Revenue ($195 × 8 000) 1 560 000 (1) Direct materials ($23.20 × 8 000) 185 600 (1) Direct labour ($86.40 × 8 000) 691 200 (1) Variable overheads ($12 × 8 000) 96 000 (1) Total contribution ($73.40 × 8 000) 587 200 Fixed costs 302 400 (1) Profit for the year 284 800 (1)OF 6 4(e)(ii) Profit per unit = 8000 800 284 = $35.60 (1)OF 1 4(e)(iii) Based on (e)(i) = 37.64 % (2) / (1)OF 2 4(f) 302400 37.64  %  1(OF) = $803 400 (1) OF / $195 = 4 120 units (1)OF Alternative presentation 302400 73.40  (1OF) = 4 120 units (1) OF × $195 = $803 400 (1OF) 3 Question Answer Marks 4(g) Shareholders’ investment has become riskier (1) because of the increased external borrowing (1). Loan interest has to be paid (1) whether profit is earned or not (1), but overall profit should increase (1). Repayment of the external borrowing may result in future cash flow problems (1) Accept other valid responses. 4 4(h) Positive Market share should increase (1) overall profit may increase (1). Expansion may encourage further shareholder investment (1) Negative As a result of reducing the selling price and increased costs, the profit per unit will fall (1) and the breakeven point will increase (1) The directors should consider how certain the company are that all of the increased production will be sold (1) how reliable the directors other estimates are (1) and whether suitable labour and other resources will be available (1). They must also ensure that funds will be available to repay the loan. (1) Max (4) for comments 1 mark for decision. 5

This question in 9706/22 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

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

10 marks

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

This question in 9706/23 Oct/Nov 2018

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 The following balances were extracted from the books of K Limited at 30 September 2018. Debit Credit $000 $000 8% Debentures (2022-2024) 75 Administrative expenses 42 Cash and cash equivalents 11 Cost of sales 587 Debenture interest 3 Distribution costs 46 Dividends paid 60 Equipment cost 90 provision for depreciation at 1 October 2017 30 Land and buildings cost 980 provision for depreciation at 1 October 2017 135 Inventory at 30 September 2018 19 Issued share capital: ordinary shares of $0.50 each 450 Retained earnings at 1 October 2017 106 Revenue 936 Share premium 90 Trade payables 35 Trade receivables 41 The following information is also available. 1 Administrative expenses includes a payment, $9000, for insurance for the three months ended 30 November 2018. 2 Carriage inwards of $3000 had been included in distribution costs. 3 Land and buildings includes land at a cost of $260 000. 4 The company’s depreciation policy is as follows: 20% per annum using the reducing Equipment Charged to distribution costs balance method 2½% per annum using the Buildings Charged to administrative expenses straight-line method Land No depreciation REQUIRED (a) Prepare the income statement for the year ended 30 September 2018. K Limited Income statement for the year ended 30 September 2018 $000 Workings: [10] Additional information During the year ended 30 September 2018 the directors had made a rights issue of 1 ordinary share for every 2 shares held at a price of $0.70 per share. The issue was fully subscribed and had been recorded in the books of account. REQUIRED (b) Prepare the statement of changes in equity for the year ended 30 September 2018. Share Share Retained Total capital premium earnings $000 $000 $000 $000 Workings: [6] Additional information The directors wish to raise additional finance. They are considering making either a further rights issue of ordinary shares or issue another debenture. REQUIRED (c) Advise the directors which option they should choose. Justify your answer. [5] Additional information The directors have provided the following information: Year ended Year ended Industry 30 September 30 September average for 2018 2017 both years Trade payables turnover 29 days 35 days 34 days Trade receivables turnover 39 days 31 days 32 days REQUIRED (d) Analyse the effect that the changes in each of these ratios had on the company’s liquidity using all the available information. [3] (e) State three ways in which a business could reduce trade receivables turnover. 1 2 3 [3] (f) State three drawbacks of increasing trade payables turnover. 1 2 3 [3] [Total: 30] Question 2 is on the next page.

30 marks

Mark scheme: 1(a) K Limited Income statement for the year ended 30 September 2018 $000 Revenue 936 Cost of sales W1 (590) (1) Gross profit 346 (1) OF Administrative expenses (W3) (54) (2) OF Distribution costs (W2) (55) (2) OF Profit from operations 237 (1) OF Finance costs (W4) (1*) (6) (1) Profit for year 231 (1) OF (1*) for recording debenture interest as ‘finance costs)’ W1 Cost of sales = As per trial balance $587 000 + Carriage inwards $3000 = $590 000 W2 Distribution costs $000 As per trial balance 46 Less carriage inwards (3) (1) Depreciation 12 (1) 55 W3 Administration expenses $000 As per trial balance 42 Less insurance prepaid   ×     2 9 3 (6) (1) Depreciation × − 1 2 % (980 260) 2 18 (1) 54 W4 Finance costs: ( ) × 8% 75 = 6 10 Question Answer Marks 1(b) Statement of changes in equity for the year ended 30 September 2018 Share capital Share premium Retained earnings Total $000 $000 $000 $000 Balance, 1 October 2017 (W1) 300 30 106 436 (1) Rights issue (W1) 150 (1) 60 (1) 210 Dividends paid (60) (1) (60) Profit for the year 231 (1) OF 231 Balance, 30 September 2018 450 90 277 817 (1) OF W1 Rights issue and opening balances Rights issue: 1 for 2 leading to share capital 450: so issue was 1 3 × 450 = 150 Share premium: 20 cents on each 50 cents share = 2 5 × 150 = 60 Opening share capital: 450 – 150 = 300 Opening share premium: 90 – 60 = 30 6 Question Answer Marks 1(c) Rights issue (Max 2) Rights issue does not dilute ownership. (1) Rights issue is attractive to shareholders. (1) Rights issue may be less expensive than debentures. (1) However, there has been a recent rights issue. Shareholders may not want another one. (1) May result in a fall in the share price. (1) Payment of dividends is discretionary. (1) Debentures (Max 2) Debentures increase debt. (1) Lender may require security. (1) Regular payment of interest and capital. (1) Debentures need to be repaid. (1) However, debentures do not affect ownership. (1) No voting rights to debenture holders. (1) Accept other valid points. 1 mark for decision + Max 4 marks for justification 5 1(d) Effect on liquidity Both changes will have an adverse effect on liquidity (1) Suppliers accounts are now being settled more quickly than customers pay their accounts. (1) Both ratios are now worse than industry average. (1) Accept other valid points. Max 3 marks 3 Question Answer Marks 1(e) Put in place measures to more closely monitor trade receivable accounts (frequent reminders; issuing of statements of account). (1) Refuse credit terms to late payers. (1) Offer cash discounts to encourage prompt payment. (1) Charge interest on overdue accounts (1) Ask for cash with order / increase cash sales (1) Accept other valid points. Max 3 marks 3 1(f) Delaying payments to suppliers may mean the loss of cash discounts which would have an impact on profits. (1) Cause some suppliers to refuse credit terms which would have an adverse effect on liquidity. (1) Force the business to find alternative suppliers who are unable to supply goods on the same quality. (1) May create a bad relationship with suppliers. (1) May incur interest charges (1) Accept other valid points. Max 3 marks 3

This question in 9706/22 Feb/March 2019

3 Noor, a sole trader, was preparing her business’s financial statements for the year ended 31 December 2018. The following information is available. At 1 January 2018 $ General expenses prepaid 480 During the year ended 31 December 2018 $ General expenses paid 12 400 Insurance premiums paid 6 480 Rent received 5 460 At 31 December 2018 1 General expenses, $1210, were due but unpaid. 2 Insurance premiums paid included $630 covering the six months ended 31 January 2019. 3 Rent receivable of $1200 for the three months ended 28 February 2019 had not yet been received. 4 Inventory had been valued at a cost of $11 400. However, it included several damaged items which had a selling price of $840. All goods are sold with a mark-up of 50%. The damaged items could be sold but would require repairs costing $360. REQUIRED (a) Calculate the amount to be recorded in the income statement for the year ended 31 December 2018 for each of the following items. (i) General expenses [3] (ii) Insurance [1] (iii) Rent receivable [1] (iv) Closing inventory [3] Additional information Noor’s policy is to maintain a provision for doubtful debts at 5% of trade receivables at the end of the financial year. REQUIRED (b) State two accounting concepts which are applied when recording a provision for doubtful debts. 1 2 [2] Additional information At 31 December 2017 Noor’s trade receivables were $34 200 after deducting the provision for doubtful debts. At 31 December 2018 total trade receivables were $37 200. This total included the accounts of the following two credit customers. $ MN Limited 680 S Wells 360 Noor decided to write off these two accounts. She will maintain her provision for doubtful debts at 5% of trade receivables. REQUIRED (c) Calculate the increase or decrease in the provision for doubtful debts at 31 December 2018. [5] [Total: 15]

15 marks

Mark scheme: 3(a)(i) General expenses $ Opening balance prepaid 480 (1) Payment 12 400 Closing balance due 1 210 (1) 14 090 (1) OF 3 3(a)(ii) Insurance $ Premiums paid 6 480 Less prepayment 1 6 × $630 (105) 6 375 (1) 1 3(a)(iii) Rent receivable $ Rent received 5 460 Add amount due 1 3 × $1200 400 5 860 (1) 1 3(a)(iv) Closing inventory at 31 December 2018 $ Valuation at cost 11 400 Valuation of damaged products Cost $840 × 2 3 = 560 (1) NRV $840 – $360 = 480 (1) Reduction in value (80) Closing valuation 11 320 (1) OF 3 3(b) Accounting concepts: accruals (matching) (1); prudence (1) 2 Question Answer Marks 3(c) The original provision for doubtful debts was: 5 95 × $34 200 = $1800 (1) The new provision for doubtful debts will be: $ Total balances of trade receivables at 31 December 2018 37 200 Less irrecoverable debts ($680 + $360) 1 040 Net 36 160 (1) New provision for doubtful debts (5% × $36 160) 1 808 (1) OF Entry in income statement will be for an increase (1) OF $8 (1) OF 5

This question in 9706/22 Feb/March 2019

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

3 K Limited prepares annual accounts to 30 September. For the year ended 30 September 2018, the directors have calculated profit from operations of $44 500. On 31 January 2018 they redeemed a 6% debenture of $100 000 together with accrued interest to that date. REQUIRED (a) Calculate the profit for the year ended 30 September 2018. [2] Additional information The directors have provided the following extract from the statement of financial position at 1 October 2017. Equity $ Ordinary shares of $0.25 each 500 000 Share premium 175 000 Retained earnings 540 000 1 215 000 The following information is also available: 1 On 31 December 2017, a rights issue of ordinary shares was made at a premium of $0.15 per share on the basis of 2 ordinary shares for every 5 held on that date. The issue was fully subscribed. 2 On 31 March 2018, a bonus issue was made on the basis of 3 ordinary shares for every 5 held on that date. Reserves were maintained in the most flexible form. 3 On 30 June 2018, an interim dividend of $0.05 per share was paid on all shares in issue on that date. 4 On 30 September 2018, buildings were revalued at $1 200 000. The original cost of the buildings was $1 000 000 and had been depreciated by $150 000. REQUIRED (b) Prepare the statement of changes in equity for the year ended 30 September 2018. Ordinary Share Revaluation Retained shares premium reserve earnings $ $ $ $ At 1 October 2017 500 000 175 000 – 540 000 Workings: [11] (c) State one difference between a capital reserve and a revenue reserve. [2] [Total: 15]

15 marks

Mark scheme: 3(a) $44 500 – $2000 (1) = $42 500 (1) OF 2 3(b) Statement of Changes in Equity for the year ended 30 September 2018 Ordinary shares Share premium Revaluation reserve Retained earnings $ $ $ $ At 1 October 2017 500 000 175 000 540 000 Profit for the year 42 500 (1) OF Rights issue W1 200 000 } 120 000 } (3) Bonus issue W2 420 000 (1) (295 000) (1) (125 000) (1) Dividends paid W3 (224 000) (2) Revaluation of buildings 350 000 (1) At 30 September 2018 1 120 000 0 350 000 233 500 (1) OF 11 Question Answer Marks 3(b) W1 Rights issue: 500 000 × 4 = 2 5 000 000 2 × (1) = 800 000 (1) OF 800 000 × 0.25 = 200 000 } (1) OF both 800 000 × 0.15 = 120 000 } W2 Bonus issue: 2 000 000 + 800 000 = 2 800 000 3 5 000 800 2 × = 1 680 000 (1) OF 1 680 000 × 0.25 = 420 000 (1) OF W3 Dividends paid: 2 000 000 + 800 000 + 1 680 000 = 4 480 000 4 480 000 × 0.05 = 224 000 (1) OF 3(c) Capital reserves: Non distributable Cannot be used to pay dividends Created via changes in capital structure / non-trading activities Max 1 Accept other valid points. Revenue reserves: Distributable Can be used to pay dividends Created via trading activities Max 1 Accept other valid points. 2

This question in 9706/21 May/June 2019

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

30 marks

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

This question in 9706/22 May/June 2019

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

15 marks

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

This question in 9706/22 May/June 2019

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

15 marks

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

This question in 9706/22 May/June 2019

1 D Limited is a retailer of sports equipment. The following balances have been extracted from the books of account at 31 December 2018. Debit Credit $000 $000 8% Debentures (2021–23) 250 10% Bank loan 60 Administrative expenses 608 Bank overdraft 11 Carriage inwards 8 Carriage outwards 22 Distribution costs 937 Dividends paid 35 Land and buildings at 1 January 2018 Cost 2 100 Provision for depreciation 360 Fixtures and fittings at 1 January 2018 Cost 840 Provision for depreciation 320 Motor vehicles at 1 January 2018 Cost 202 Provision for depreciation 106 Interest paid 29 Inventory at 1 January 2018 620 Property costs 239 Purchases 2 502 Retained earnings 898 Returns outwards 12 Revenue 5 120 Share capital – ordinary shares of $0.50 each 1 200 Share premium 60 Trade payables 385 Trade receivables 640 The following information is also available. 1 Revenue included goods that had been sold to a customer on a sale or return basis on 28 December 2018. The selling price of the goods was $40 000 and they were sold at a mark-up of 25%. The directors were unsure whether or not the goods would be returned. 2 Inventory on D Limited’s premises at 31 December 2018 had been counted and valued at a cost of $585 000. 3 Included in distribution costs is $24 000 in respect of delivery van licenses for the year ended 31 March 2019. 4 The breakdown of land and buildings cost at 1 January 2018 was: $ Land 1 200 000 Buildings 900 000 2 100 000 The buildings were revalued on 2 January 2018 at $1 050 000. This has not yet been recorded in the books of account. 5 At 31 December 2018, administration wages and salaries accrued totalled $15 000. 6 The directors wish to create a provision for doubtful debts of 3%. This is to be included in administrative expenses. 7 Depreciation is to be charged as follows: Asset Annual rate Method Charge to Fixtures and fittings 15% Reducing balance Administrative expenses Buildings 2% Straight-line Property costs Motor vehicles 25% Reducing balance 75% Distribution costs 25% Administrative expenses 8 A full year’s interest has been paid on debentures and bank loan. REQUIRED (a) Prepare the income statement for the year ended 31 December 2018. Use the space on the next page for your workings. D Limited Income statement for the year ended 31 December 2018 $000 Revenue Cost of sales Gross profit Administrative expenses Distribution costs Property costs Profit from operations Finance costs Profit for the year Workings Revenue Cost of sales Administrative expenses Distribution costs Property costs Depreciation [13] (b) Prepare an extract showing the current assets section only of the statement of financial position at 31 December 2018. D Limited Extract from the statement of financial position at 31 December 2018 Current assets [3] (c) Prepare a statement for the directors to show the total value of equity at 31 December 2018. [5] Additional information The directors wish to raise additional finance for expansion. They are considering two options. 1 Issue 5% preference shares of $1 each to raise $300 000.

21 marks

Mark scheme: 1(a) D Limited Income statement for the year ended 31 December 2018 $000 Revenue 5080 (1) Cost of sales (2501) (3) Gross profit 2579 Administrative expenses (725) (4) Distribution costs (971) (3) Property costs (260) (1) Profit from operations 623 Finance costs (29) Profit for the year 594 (1) Workings Revenue 5120 – 40 = 5080 (1) Cost of sales 620 + 8 (1) + 2502 – 12 (1) – 617 (1) = $2501 Administrative expenses 608 + 78 (1) + 6 (1) + 18 (1) + 15 (1) = 725 Distribution costs 937 + 22 (1) – 6 (1) + 18 (1) = 971 Property costs 239 + 21 = 260 (1) Depreciation Buildings: 1050 × 2% = 21 (Property costs) Fixtures and fittings: 520 × 15% = 78 (Administration expenses) Motor vehicles: 96 × 25% = 24 (Distribution costs $18, Administrative expenses $6) 13 Question Answer Marks 1(b) D Limited Extract from the statement of financial position at 31 December 2018 Current assets $000 Inventory 617 (1) OF Trade receivables (600 – 18) 582 (1) Other receivables 6 (1) 1205 3 1(c) $000 Share capital – ordinary shares of $0.50 each 1200 (1) for both Share premium 60 Revaluation reserve (1050 – 540) 510 (1) Retained earnings ((898 + 594) (1) OF – 35 (1) 1457 3227 (1) OF 5 Question Answer Marks 1(d) Preference shares (Max 2 marks) Permanent capital (1) Incurs annual finance costs of $15 000 (1) Issuing will cost will be more time consuming/costly (1) Bank loan (Max 2 marks) Has to be repaid (1) Incurs annual finance costs of $24 000 (1) Bank may/may not be willing to advance the loan at lower interest rate than the current loan (1) May require security (1) Advice (1) Accept other valid points. 5 1(e) Bonus shares are not paid for, (1) Rights issue are paid for (1) Bonus shares do not change the net assets, (1) Rights issue increases net assets (1) Bonus shares are issued to all shareholders, (1) Shareholders have a choice whether to take up rights issue. (1) Bonus shares are issued at par value, (1) Rights issue may be made at a discount to market value/at a premium (1) Bonus shares do not give additional capital/equity, (1) Rights issue gives additional capital/equity (1) 2 marks × max 2 points of difference 4

This question in 9706/23 May/June 2019

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

12 marks

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

This question in 9706/23 May/June 2019

1 AB Limited is a wholesaler of household goods. The following information has been extracted from the books of account at 31 December 2018. $ 6% debenture (2023–25) 80 000 Administrative expenses 111 700 Buildings Cost 80 000 Provision for depreciation at 1 January 2018 28 800 Land at cost 65 000 Motor vehicles Cost 46 000 Provision for depreciation at 1 January 2018 9 200 Warehouse fixtures and fittings Cost 12 900 Provision for depreciation at 1 January 2018 8 900 Carriage inwards 1 200 Cash and cash equivalents (credit balance) 5 300 Distribution costs 184 800 Finance costs 2 200 Inventory at 1 January 2018 56 500 Ordinary share dividend paid 1 700 Purchases 310 600 Retained earnings 19 100 Returns inwards 8 300 Revenue 670 400 Share capital ordinary shares of $1 each 80 000 Share premium 35 000 Trade and other payables 36 600 Trade and other receivables 92 400 Additional information 1 Inventory at 31 December 2018 was valued at $62 000. 2 Trade and other receivables include prepaid insurance of $2000. 3 An irrecoverable debt of $400 should be written off to administrative expenses. 4 The directors wish to create a provision for doubtful debts of 5% of trade receivables. This should be charged to administrative expenses. 5 The debenture was issued on 1 March 2018. No interest has yet been paid. 6 The buildings owned by the company are used 75% as warehouse space and 25% as office space. 7 All of the company’s motor vehicles are used only for deliveries. 8 The company’s depreciation policy is as follows: Buildings 2% per annum straight-line method Motor vehicles 20% per annum straight-line method Warehouse fixtures and fittings 10% per annum reducing balance method. REQUIRED (a) Prepare the income statement for the year ended 31 December 2018. AB Limited Income Statement for the year ended 31 December 2018 $ Revenue Cost of sales Gross profit for the year Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings: [10] (b) Prepare the statement of financial position at 31 December 2018. Use the space provided on the next page for your workings. AB Limited Statement of financial position at 31 December 2018 Workings: [9] Additional information The directors of AB Limited wish to raise an additional $100 000 capital for expansion. They are considering either a rights issue of ordinary shares or an issue of a further debenture. REQUIRED (c) Advise the directors which option they should choose. Give reasons for your answer. [5] (d) Identify two internal stakeholders with an interest in the financial statements of a limited company. 1 2 [2] Additional information The directors of AB Limited use ratio analysis to assess the performance of the business. REQUIRED (e) Name two ratios that a business may use to assess: (i) profitability 1 2 [2] (ii) liquidity. 1 2 [2] [Total: 30]

30 marks

Mark scheme: 1(a) AB Limited Income statement for the year ended 31 December 2018 $ Revenue W1 662 100 (1) Cost of sales W2 (306 300) (2) Gross profit for the year 355 800 Administrative expenses W3 (117 000) (3) Distribution costs W4 (195 600) (3) Profit from operations 43 200 Finance costs (2 200 + 4 000 ) (6 200) (1) Profit for the year 37 000 Workings W1 Revenue 670 400 – 8 300 = 662 100 (1) W2 Cost of sales 56 500 + 310 600 + 12 00 (1) – 62 000 = 306 300 (1) OF W3 Administrative expenses Per balances 111 700 Buildings depreciation (80 000 × 2% × 25%) 400 (1) Provision for doubtful debts ((92 400 – 400 – 2 000) × 5%) 4 500 (1) Irrecoverable debt written off 400 (1) 117 000 W4 Distribution costs Per balances 184 800 Buildings depreciation (80 000 × 2% × 75%) 1 200 (1) Warehouse F & F depreciation ((12 900 – 8 900) × 10%) 400 (1) Motor vehicles depreciation (46 000 × 20%) 9 200 (1) 195 600 10 Question Answer Marks 1(b) AB Limited Statement of financial position at 31 December 2018 $ Non-current assets Land 65 000 Buildings (80 000 – 28 800 – 1 600) 49 600 (1) Motor vehicles (46 000 – 9 200 – 9 200) 27 600 (1) Warehouse fixtures and fittings (12 900 – 8 900 – 400) 3 600 (1) 145 800 Current assets Inventory 62 000 Trade and other receivables (92 400 – 400 – 4 500) 87 500 (1) 149 500 Total assets 295 300 Equity and liabilities Share capital and reserves Share capital ($1 ordinary shares) 80 000 Share premium 35 000 Retained earnings (19 100 + 37 000 (1)OF – 1 700 (1)) 54 400 169 400 Non-current liabilities 6% debentures 80 000 (1) Current liabilities Trade and other payables (36 600 + 4 000) 40 600 (1) Cash and cash equivalents 5 300 (1) 45 900 Total equity and liabilities 295 300 9 Question Answer Marks 1(c) Rights issue (max 2) Payment of dividends is discretionary (1) Permanent capital (1) Will rights issue be fully subscribed (1) Debenture (max 2) Would increase (non-current) liabilities (1) Debenture interest must be paid (1) Security maybe required (1) Advice (1) Accept other valid points. 5 1(d) Shareholders (1) Directors/employees (1) Accept other valid points. 2 1(e)(i) Gross margin (1) Profit margin (1) Return on capital employed (1) Expenses to revenue ratio (1) Max 2 2 Question Answer Marks 1(e)(ii) Current ratio (1) Liquid (acid test) ratio (1) 2

This question in 9706/21 Oct/Nov 2019

3 On 4 February 2019 Jacques received an invoice for $3600 relating to rental of storage space for three months ending 31 March 2019. REQUIRED (d) Prepare a statement to show the revised profit for the year ended 31 January 2019, after adjusting for items 1, 2 and 3. [4] [Total: 15] 3 Adam, Bilal and Chan operate a partnership providing secretarial services. The partners have no formal partnership agreement. The following balances are extracted from the trial balance at 31 December 2018. Debit Credit $ $ Fees revenue received 152 000 Business operating costs 76 000 Capital accounts Adam 30 000 Bilal 20 000 Chan 10 000 Current accounts Adam 36 000 Bilal 4 000 Chan 12 000 Trade receivables 27 000 Loan account: Bilal 80 000 Motor vehicles at net book value 96 000 REQUIRED (a) Calculate the profit for the year ended 31 December 2018 before appropriation. [1] (b) Calculate the share of profit appropriated to Bilal for the year ended 31 December 2018. [1] Additional information On 1 January 2019, Bilal decided to retire from the partnership. The partners agreed the following. 1 Bilal was to retain one motor vehicle. The net book value of the motor vehicle was $36 000 but it was agreed to transfer it to Bilal at a value of $30 000. 2 The remaining motor vehicles were to be revalued upwards by 5%. 3 An irrecoverable debt of $2000 was to be written off and a provision for doubtful debts of 4% was to be made.

6 marks

Mark scheme: 3(a) $152 000 – $76 000 – $4 000 = $72 000 (1) 1 3(b) = 72000 $24000 3 (1) OF 1 Question Answer Marks 3(c) $ $ Motor vehicles 6 000 ** Motor vehicles 3 000 ** (1) for both Irrecoverable debt 2 000 (1) Capital account – Adam 2 000 # Provision for doubtful debts 1 000 (1) Capital account – Bilal 2 000 # (1) for all three Capital account – Chan 2 000 # 9 000 9 000 4 3(d) $ Capital account 20 000 Current account (4 000) Motor vehicle (30 000) (1) Profit for the year 24 000 Loan account 80 000 Interest on loan 4 000 Loss on revaluation (2 000) Goodwill 8 000 (1) 100 000 Loan account (45 000) Due to Bilal from bank account 55 000 (1) CF 3 3(e) To reward partners for their fixed investment in the business (1) To encourage further capital investment in the business (1) Accept other valid points. 2 3(f) To discourage large amounts of drawings by the partners (1) To penalise partners who make excessive drawings (1) Accept other valid points. 2 Question Answer Marks 3(g) The amount of salary payable to partners (1) Rate of interest on partners’ loans (1) Management responsibilities of partners (1) Any limits on partners’ drawings (1) Amount of partners’ capital (1) Accept other valid points. Max 2 2

This question in 9706/21 Oct/Nov 2019

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

30 marks

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

This question in 9706/23 Oct/Nov 2019

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

10 marks

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

This question in 9706/22 Feb/March 2020

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

16 marks

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

This question in 9706/21 May/June 2020

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

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

30 marks

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

This question in 9706/23 May/June 2020

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

15 marks

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

This question in 9706/23 May/June 2020

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

30 marks

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

This question in 9706/21 Oct/Nov 2020

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

15 marks

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

This question in 9706/21 Oct/Nov 2020

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

30 marks

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

This question in 9706/22 Oct/Nov 2020

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

15 marks

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

This question in 9706/22 Oct/Nov 2020

3 Roberto and Sangeeta have been in partnership for many years sharing profits and losses in the ratio 3:2. They decided to dissolve the partnership on 31 August 2020. Their summarised statement of financial position at that date was as follows: $ Assets Non-current assets 160 000 Current assets Inventory 45 000 Trade receivables 15 000 60 000 Total assets 220 000 Capital and liabilities Capital accounts Roberto 110 000 Sangeeta 60 000 170 000 Current accounts Roberto 25 000 Sangeeta (10 000) 15 000 Total capital and current accounts 185 000 Current liabilities Trade payables 30 000 Bank overdraft 5 000 35 000 Total capital and liabilities 220 000 The following information is also available. 1 Non-current assets were sold for $175 000. 2 Inventory was sold for $42 000. 3 Trade receivables were settled after allowing a 20% discount. 4 Trade payables were settled after taking a 10% discount. 5 Dissolution expenses of $4000 were paid by cheque. REQUIRED (a) Prepare the partnership realisation account. Partnership realisation account $ $ [5] (b) Prepare the partners’ capital accounts on dissolution of the partnership. Partners’ capital accounts Roberto Sangeeta Roberto Sangeeta $ $ $ $ [5] (c) Prepare the bank account on dissolution of the partnership. Bank account $ $ [5] [Total: 15]

15 marks

Mark scheme: 3(a) Partnership realisation account 5 $ $ Non-current assets 160 000 Trade payables 30 000 Current assets 60 000 Bank – nca 175 000 Bank – t. payables 27 000 (1) inventory 42 000 (1) – dissolution costs 4 000 (1) t. recs. 12 000 Capital Roberto 4 800 (1)OF Sangeeta 3 200 (1)OF 259 000 259 000 3(b) Capital accounts 5 Roberto Sangeeta Roberto Sangeeta $ $ $ $ Bal. b/d 110 000 60 000 (1) Current 10 000 (1) Current 25 000 (1) Bank 139 800 53 200 (1)OF* Realis. 4 800 3 200 (1)OF* 139 800 63 200 139 800 63 200 * OF marks are for both 3(c) Bank account 5 $ $ Realisation 175 000 42 000 (1) Bal. b/d 5 000 (1) 12 000 Realisation 27 000 4 000 (1) Capital R 139 800 (1)OF Capital S 53 200 (1)OF 229 000 229 000

This question in 9706/22 Oct/Nov 2020

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

30 marks

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

This question in 9706/23 Oct/Nov 2020

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

15 marks

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

This question in 9706/23 Oct/Nov 2020

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

13 marks

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

This question in 9706/22 Feb/March 2021

5 At 31 July 2020 Suppliers were owed $4560. Inventory was valued at $18720. Fittings and equipment was valued at $15 860. REQUIRED (c) Calculate total purchases for the year ended 31 July 2020. … … … … … … … … … … … … [5] (d) Prepare the income statement for the year ended 31 July 2020. Workings: Suyin Income statement for the year ended 31 July 2020 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [10] Additional information Suyin has the opportunity to move her business to a busier location. The following information is available. 1 The rent of the new shop premises will be three times the current annual charge. 2 Annual sales could be increased by 10% on the figure for the year ended 31 July 2020. 3 She intends to achieve a gross margin of 60%. 4 She will need to apply for a bank loan of $16 000 at 8% per annum interest to cover the costs of changing location. The loan will be repayable over a two-year period. 5 Discounts received will no longer be available.

15 marks

This question in 9706/21 May/June 2021

6 All other expenses will remain unchanged and there will be no sources of additional income. REQUIRED (e) Calculate how much profit per annum will be made if Suyin moves her business to the new location. $ Revised gross profit Revised profit for the year [4] (f) Advise Suyin whether or not she should change her business’s location. Justify your answer considering both financial and non-financial factors. … … … … … … … … … … … … … [5] [Total: 30] 2 Karis and Lara are in partnership. (a) State two reasons why partners may each have a separate capital account and current account. 1 … … 2 … … [2] Additional information Karis and Lara share profits and losses in the ratio 3:2 respectively. They decided to admit Megan as a partner on 1 February 2021. On that date the statement of financial position was as follows. Assets $ $ Non-current assets at net book value Motor vehicles 43 500 Furniture and equipment 16 200 59 700 Current assets Trade receivables 18 410 Total assets 78 110 Capital and liabilities Capital accounts Karis 35 700 Lara 24 500 60 200 Current accounts Karis 3 110 Lara (540) 2 570 Current liabilities Trade payables 11 230 Bank overdraft 4 110 15 340 Total capital and liabilities 78 110 The partners agreed the following on Megan’s admission. 1 Current accounts would no longer be used. 2 Karis took over a motor vehicle for private use with a net book value of $18 400 at an agreed value of $15 000. 3 Goodwill was valued at $48 000. No goodwill account was to be maintained in the partnership’s books of account. 4 Profits and losses are to be shared in the ratio Karis : Lara : Megan 7 : 5 : 3 respectively. 5 Megan introduced a motor vehicle valued at $23 000 as part of her capital contribution. After making the adjustments, it was agreed that Megan should pay sufficient cash into the business bank account to make her total capital equal to that of Lara. REQUIRED (b) Prepare, on the next page, the capital accounts of the partners to record the admission of Megan as a partner. [8] $ Megan $ Lara $ Karis accounts Capital $ Megan $ Lara $ Karis Additional information In the new partnership agreement Lara is to receive a salary of $12 000 per annum. Megan is hoping to achieve a 25% return on her capital employed (ROCE). REQUIRED (c) Calculate the minimum profit the partnership must make in order for Megan to achieve this ROCE. … … … … … … [3] (d) State two possible disadvantages to existing partners of admitting a new partner. 1 … … 2 … … [2] [Total: 15] 3 C Limited’s statement of financial position at 31 December 2020 is shown with comparative figures at 31 December 2019. At 31 December 2020 2019 $000 $000 Assets Non-current assets 2621 2217 Current assets Inventory 61 47 Trade and other receivables 29 38 Cash and cash equivalents 2 31 92 116 Total assets 2713 2333 Equity and liabilities Equity Ordinary shares 1800 1200 Share premium - 220 Retained earnings 401 624 Revaluation reserve 300 - Total equity 2501 2044 Non-current liabilities 8% Debentures (2025) 160 250 Current liabilities Trade and other payables 52 39 Total equity and liabilities 2713 2333 The following information is also available. 1 The company’s issued capital consists of ordinary shares of $0.25 each. 2 On 1 January 2020 the directors revalued the property upwards by $300 000. 3 There were no purchases or disposals of non-current assets during the year. 4 On 1 July 2020 the directors made a bonus issue of ordinary shares. 5 There were no other changes in share capital during the year. REQUIRED (a) Explain two reasons for making a bonus issue of shares. 1 … … … 2 … … … [4] (b) Calculate the number of bonus shares issued on 1 July 2020. … … … … [2] (c) Prepare the journal entry recording the bonus issue on 1 July 2020. A narrative is required. Journal Dr Cr $000 $000 [4] (d) Identify three factors that directors of a company should consider when deciding on the amount of a proposed dividend. 1 … 2 … 3 … [3] Additional information The directors of C Limited wish to propose a dividend of $0.01 per share on all shares in issue at

37 marks

This question in 9706/21 May/June 2021

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

30 marks

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

This question in 9706/22 May/June 2021

3 Jason prepared the following statement of financial position which contained errors. Statement of financial position at 31 December 2020 $ $ Non-current assets Cost 65 000 Provision for depreciation 31 000 34 000 Current assets Inventory 17 390 Trade receivables 14 800 Other payables 700 Bank overdraft 490 33 380 67 380 Capital Opening balance 56 950 Profit for the year 11 270 Drawings (18 450) 49 770 Non-current liabilities Bank loan (repayable March 2021) 4 900 Current liabilities Provision for doubtful debts 480 Other receivables 490 Trade payables 11 360 12 330 67 000 In addition to some items being recorded in the incorrect sections of the statement of financial position, the following errors have also been discovered. 1 Closing inventory had been overvalued by $510. 2 The balance of the rent receivable account, debit $220, had been included in other payables in the statement of financial position. 3 Depreciation at 20% per annum had been charged using the straight-line method instead of the reducing balance method at 20% per annum. 4 The balance of the drawings account had been understated by $580. REQUIRED (a) Calculate the revised profit for the year ended 31 December 2020. … … … … … … … … … … … … … … … … [5] (b) Prepare the corrected statement of financial position at 31 December 2020. Corrected statement of financial position at 31 December 2020 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [7] (c) Identify three types of error which do not affect the balancing of the trial balance. 1 … 2 … 3 … [3] [Total: 15]

15 marks

Mark scheme: 3(a) $14 360 (5) Workings $ Draft profit for the year 11 270 Less: overvalued inventory (510) (1) Add: decrease in provision for depreciation (W) 3 600 (3)OF Revised profit for the year 14 360 (1) W Incorrect charge for the year 20% × $65 000 = $13 000 Provision at beginning of year ($31 000 – $13 000) = $18 000 Net book value at beginning of year ($65 000 – $18 000) = $47 000 Correct depreciation charge for the year ($47 000 × 20%) i.e. $9 400 Decrease in depreciation charge: $13 000 (1) – $9 400 (1) = $3 600 (1)OF Question Answer Marks 3(b) Corrected statement of financial position at 31 December 2020 $ $ Non-current assets Cost 65 000 Provision for depreciation 27 400 37 600 (1)OF Current assets Inventory 16 880 (1) Trade receivables 14 320 (1) Other receivables 710 (1) 31 910 Total assets 69 510 Capital Opening balance 56 950 Profit for year 14 360 Drawings (19 030) (1) 52 280 7 Question Answer Marks 3(b) Current liabilities Bank loan (2021) 4 900 Other payables 480 (1) Trade payables 11 360 Bank overdraft 490 17 230 (1) Total capital and liabilities 69 510 3(c) Errors of: • commission (1) • principle (1) • omission (1) • complete reversal (1) • compensating (1) • original entry (1) Max 3 3

This question in 9706/22 May/June 2021

2 Closing inventory included 14 damaged items which cost $30 each. Six of these items cannot be sold and are to be regarded as waste. The remaining items could be sold for $35 each but will incur total repairs cost of $56. REQUIRED (b) Calculate a revised figure for gross profit for the year ended 31 December 2020. … … … … … … … … … … … … … … … … [7] Additional information The following balances were extracted from the books of account of Adam’s business on 31 December 2020. $ Discounts 1 580 credit Furniture and equipment cost 18 220 provision for depreciation (at 1 January 2020) 5 370 Marketing expenses 4 850 Motor vehicle cost 16 800 provision for depreciation (at 1 January 2020) 13 900 Office expenses 2 950 Premises cost 160 000 provision for depreciation (at 1 January 2020) 9 600 Provision for doubtful debts (at 1 January 2020) 530 Rent receivable 6 640 Repairs and maintenance 1 970 Trade receivables 9 800 Wages and salaries 31 280 The following information is also available. 1 Repairs and maintenance included a payment of $380 for installation of new equipment on 1 January 2020. 2 The provision for doubtful debts should be maintained at 5% of trade receivables.

7 marks

Mark scheme: 2(a) Check for fraud / deter fraud / make fraud more difficult (1) as the work of the ledger clerk is checked by another member of staff (1) Provides quick access to totals for trade receivables/trade payables (1) to facilitate preparation of financial statements (1) Accept other valid responses 4 2(b) Sales ledger control account $ $ Balance b/d 17 820 Bank 16 230 (1) Sales 18 440 (1) Discounts allowed 430 Balance c/d 170 Purchases ledger control a/c (Contra) 890 (1) Sales returns 310 (1) Balance c/d 18 570 36 430 36 430 Balance b/d 18 570 (1)OF Balance b/d 170 (1) 6 2(c)(i) Correction of purchases ledger balances Details $ Incorrect total 12 860 Add interest on overdue account (error 3) 260 (1) Corrected balance 13 120 (1)OF 2 Question Answer Marks 2(c)(ii) Correction of purchases ledger control account balance Details $ Incorrect balance 12 980 Less discounts received (error 1) (110) (1) Add purchases returns (error 2) 250 (1) Corrected total 13 120 (1)OF 3

This question in 9706/23 May/June 2021

6 No record had been made of the sale of the only motor vehicle on 1 December 2020 for $1350. REQUIRED (c) Prepare the income statement for the year ended 31 December 2020. Start the statement with your gross profit figure in part (b). Income statement for the year ended 31 December 2020 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [10] Additional information Adam would like to improve his business’s profitability. He has been considering the following proposals. Proposal 1: Reducing inventory levels Proposal 2: Increasing mark-up by 5% on the current level REQUIRED (d) Advise Adam which proposal he should choose. Justify your answer by considering both proposals. … … … … … … … … … … … … … [7] [Total: 30]

17 marks

This question in 9706/23 May/June 2021

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

40 marks

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

This question in 9706/21 Oct/Nov 2021

9 Depreciation is to be charged as follows: Non-current asset Depreciation method Freehold property Written off over the remaining useful life Delivery vehicles 20% per annum reducing balance A full year’s depreciation is charged in the year of purchase, but none in the year of disposal. REQUIRED (b) Prepare the income statement for the year ended 31 August 2021. Use the space on the next page for your workings. P Limited Income statement for the year ended 31 August 2021 $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings Revenue Cost of sales Depreciation Administrative expenses Distribution costs Finance costs [15]

15 marks

This question in 9706/22 Oct/Nov 2021

8 The directors wish to make a provision for doubtful debts as follows: Debts 61–90 days 2.5% Debts over 90 days 10% The movement in the provision is to be charged to administrative expenses. REQUIRED (b) Calculate the balance of the provision for doubtful debts at 30 June 2021. … … … … … … [4] (c) Prepare the income statement for the year ended 30 June 2021. Use the space on the next page for your workings. T Limited Income Statement for the year ended 30 June 2021 $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings Administrative expenses Distribution costs Finance costs Other workings [11]

15 marks

This question in 9706/23 Oct/Nov 2021

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

17 marks

This question in 9706/22 Feb/March 2022

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

30 marks

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

This question in 9706/21 May/June 2022

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

15 marks

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

This question in 9706/21 May/June 2022

1 Karen and Lee are in partnership sharing profits and losses in the ratio 2 : 3 respectively. The following balances were available at 28 February 2022. Trial balance at 28 February 2022 Debit Credit $ $ Administrative expenses 6 020 Bank interest charges 180 Bank overdraft 5 910 Capital accounts Karen 40 000 Lee 50 000 Carriage inwards 3 880 Current accounts, 1 March 2021 Karen 1 220 Lee 1 880 Drawings Karen 17 500 Lee 19 900 Insurance 7 740 Inventory, 1 March 2021 8 250 Loan from Lee 10 000 Non-current assets At cost 160 000 Provision for depreciation, 1 March 2021 56 000 Provision for doubtful debts, 1 March 2021 260 Purchases 151 440 Returns 2 200 3 930 Revenue 229 250 Trade payables 14 450 Trade receivables 31 210 Suspense account 820 411 020 411 020 The following information is also available. 1 On 28 February 2022, inventory had been valued at cost, $21 220. This figure included some damaged items which had cost $1320 and had a sales value of $2480. The damaged items could be repaired at a cost of $1300. 2 In January 2022, an error had been made recording returns inwards, $410. This amount had been credited to the returns outwards account. 3 Insurance includes $1410 paid for the three months ended 30 April 2022. 4 The loan from Lee had been arranged on 1 November 2021. It was agreed that Lee should be entitled to interest at 6% per annum on the loan. No entries have been made for interest on the loan. 5 The provision for doubtful debts should be increased to $310. 6 Non-current assets are to be depreciated by 20% per annum using the reducing balance method. REQUIRED (a) Prepare the income statement for the year ended 28 February 2022. Use the space provided on the next page for your workings. Karen and Lee Income statement for the year ended 28 February 2022 … … … … … … … … … … … … … … … … … … … … … Workings: [9] (b) Prepare Lee’s current account for the year ended 28 February 2022. Lee Current Account $ $ [4] Additional information The partners have been considering making a more detailed partnership agreement to include the following terms. 1 Interest to be charged on all drawings at 10%.

13 marks

Mark scheme: 1(a) Karen and Lee Income statement for the year ended 28 February 2022 $ $ Revenue 229 250 Less returns inwards (2200 + 410) (2 610) 226 640 (1) Cost of sales Opening inventory 8 250 Purchases 151 440 Less returns outwards (3930 – 410) (3 520) 156 170 Carriage inwards 3 880 (1) 160 050 Less closing inventory W1 (21 080) (1) (138 970) Gross profit 87 670 (1)OF Less expenses Administrative expenses 6020 Bank interest charges 180 Insurance W2 6 800 (1) Loan interest (Lee) W3 200 (1) Depreciation of non-current assets W4 20 800 (1) Increase in provision for doubtful debts W5 50 (1) (34 050) Profit for year 53 620 (1) W1 Closing inventory $ Original valuation 21 220 Less reduction in valuation of damaged items Cost 1320 less NRV 1180 (2480 – 1300) (140) 21 080 9 Question Answer Marks 1(a) W2 Insurance 7740 less prepaid 940 (2/3  1410) = $6800 W3 Loan interest (Lee) 6%  $10 000  1/3 = 200 W4 Depreciation of non-current assets 20%  nbv $104 000 ($160 000 – $56 000) = $20 800 W5 Increase in provision for doubtful debts $310 – $260 = $50 1(b) Lee Current Account $ $ Balance b/d 1 880 Loan interest 200 (1)OF Drawings 19 900 (1) Share of profit 32 172 (1)OF Balance c/d 10 592 32 372 32 372 Balance b/d 10 592 (1)OF 4 Question Answer Marks 1(c) The current account balance will be reduced by $4786 (6) Workings Recalculation of Lee’s current account balance $ Opening balance (1 880) Loan interest 200 (1)OF Drawings (19 900) (1) Interest on drawings (10% x $19 900) (1 990) (1) Share of residual profits W1 29 376 (1)OF Revised current account balance 5 806 (1)OF The current account balance will be reduced by ($10 592 – $5806 = $4786 (1) W1 Share of profits 53 620 (OF) + 3740 – 8400 = 48 960 Lee’s share of residual profit: 3/5  $48 960 = $29 376 6 1(d)  Fewer legal requirements (1) which means it has fewer costs (1)  No requirement to publish financial statements (1) which means the partnership can keep its affairs private (1).  No risk of dilution of ownership (1) there are less owners in a partnership (1) Max 1 advantage (1 mark for the basic point + 1 for development) Accept other valid responses. 2 Question Answer Marks 1(e)  Shareholders enjoy limited liability for debts In the case of a company being wound up (1), and they would only lose their investment in the company (1).  Limited companies can access larger amounts of finance (1) through the issue of additional shares/debentures (1). Max 2 advantages (1 mark for the basic point + 1 for development) Accept other valid responses. 4 1(f) Reasons for (Max 2)  Will reduce cash outflows (1)  Costs may be saved through less expenditure on storage/carriage inwards (1)  Less chance of wastage/obsolescence of inventory (1) Reasons against (Max 2)  Business could lose valuable trade discounts (1)  Risk of running out of inventory of popular products (stock-outs) (1)  Limited inventory for customers may affect reputation (1) Advice (1) Accept other valid responses. 5

This question in 9706/22 May/June 2022

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

24 marks

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

This question in 9706/22 May/June 2022

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

30 marks

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

This question in 9706/23 May/June 2022

1 The directors of Y Limited have provided the following balances at 30 June 2022. $ 6% debentures (2025–2026) 60 000 Administrative expenses 89 540 Bank overdraft 1 440 Carriage inwards 4 310 Delivery vehicles – valuation 74 000 Distribution costs 72 910 Dividends paid 6 400 Finance costs 1 800 Inventory at 1 July 2021 105 600 Office equipment – cost 54 600 Office equipment – provision for depreciation 22 300 Provision for doubtful debts 3 540 Purchases 338 200 Retained earnings 16 920 Returns inwards 7 550 Revenue 615 300 Share capital (ordinary shares of $1 each) 80 000 Trade payables 48 650 Trade receivables 93 240 The following information is also available. 1 Inventory at 30 June 2022 was valued at $126 800. 2 Inventory at 30 June 2022 included damaged goods costing $3200 that could be sold for $3950 after repairs costing $910. 3 The delivery vehicles have an estimated value at 30 June 2022 of $62 000. 4 Office equipment is to be depreciated at 10% per annum using the reducing balance method. 5 Administrative expenses included $1800 office rent for the three months ending 31 August 2022. 6 Distribution costs of $850 were owing at 30 June 2022. 7 The 6% debentures (2025–2026) were issued in 2017. 8 An irrecoverable debt of $490 is to be written off to administrative expenses. 9 The provision for doubtful debts is to be maintained at 4% of trade receivables. 10 There is no interest charged on the bank overdraft. REQUIRED (a) Prepare the income statement for the year ended 30 June 2022. Y Limited Income Statement for the year ended 30 June 2022 $ Revenue Cost of sales Gross profit Administrative expenses Distribution costs Profit from operations Finance costs Profit for the year Workings: Cost of sales Administrative expenses Distribution costs [15] (b) Prepare the statement of financial position at 30 June 2022. Y Limited Statement of Financial Position at 30 June 2022 … … … … … … … … … … … … … … … … … … … … … … … … … [10] Additional information The directors of Y Limited wish to repay the 6% debentures (2025–2026) early. They are considering making a rights issue of one ordinary share for every two shares held at a premium of 50%. REQUIRED (c) Advise the directors whether or not they should make a rights issue of ordinary shares to repay the debentures. Justify your answer. … … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Y Limited 15 Income statement for the year ended 30 June 2022 $ Revenue 607 750 (1) Cost of sales W1 321 470 (3) Gross profit 286 280 (1) OF Administrative expenses W2 92 230 (5) Distribution costs W3 85 760 (3) Profit from operations 108 290 Finance costs 3 600 (1) Profit for the year 104 690 (1) OF Workings: W1: Cost of sales: Opening inventory 105 600 (1) Purchases 338 200 all Carriage inwards 4 310 three 448 110 Closing inventory 126 640 (1) 321 470 (1) OF W2: Administrative expenses $89 540 – 1200 (1) + $490 (1) + $170 (1) + $3230 (1) = $92 230 (1) OF W3: Distribution costs $72 910 + $850 (1) + $12 000 (1) = $85 760 (1) OF 1(b) Y Limited 10 Statement of financial position at 30 June 2022 $ Non-current assets Delivery vehicles 62 000 Office equipment 29 070 91 070 (1) Current assets Inventory 126 640 Trade and other receivables W1 90 240 (2) 216 880 Total Assets* 307 950 Equity and liabilities Share capital 80 000 Retained earnings W2 115 210 (2) OF 195 210 Non-current liabilities 6% Debenture (2025–2026) 60 000 (1) Current liabilities Bank overdraft 1 440 (1) Trade and other payables W3 51 300 (2) 52 740 Total equity and liabilities* 307 950 (1) *for labelling each statement total Workings W1 Trade and other receivables: $89 040 (1) + $1200 (1) = $90 240 W2 Retained earnings: [$16 920 + $104 690 (OF)] = $121 610 (1) OF – $6400 (1) = $115 210 W3 Trade and other payables: $48 650 (1) + ($850 + $1800) $2650 (1) = $51 300 1(c) Justification (max 4 marks) 5 • The rights issue would raise the $60 000 required to repay the debentures. (1) • Would rights issue be fully subscribed? (1) • Payment of dividends on ordinary shares is discretionary (1) • Would avoid the payment of interest. (1) • Repayment would increase profit for the year by $3600 (1) • But if finance required in the future would interest be more than 6%? (1) • But debenture is not repayable for another 3 years. (1) Decision (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 Darius and Ewan are in partnership sharing profits and losses in the ratio 5 : 3. The following balances were extracted from the partnership books of account at 31 July 2022. $ Bank overdraft 12 700 Capital accounts Darius 94 300 Ewan 68 300 Fixtures and fittings 44 000 Inventory 36 200 Property at valuation 127 000 Bank loan (2025) 24 000 Trade payables 14 200 Trade receivables 6 300 On 1 August 2022, the partners agreed to admit Karim into the partnership on the following terms. 1 Karim was to introduce total capital of $48 000. This consisted of fixtures and fittings valued at $9500 with the balance to be introduced into the partnership bank account. 2 Future profits and losses were to be shared between Darius, Ewan and Karim in the ratio 5 : 3 : 2. 3 Goodwill was to be valued at $36 800. Goodwill was not to be retained in the books of account. 4 Property was to be revalued to $135 000. 5 Obsolete inventory of $2000 was to be written off. REQUIRED (a) Prepare, on page 9, the partners’ capital accounts on 1 August 2022 following the admission of Karim. [5] (b) Prepare the partnership statement of financial position at 1 August 2022 following the admission of Karim. Use the space provided on page 11 for your workings. Darius, Ewan and Karim Statement of financial position at 1 August 2022 … … … … … … … … … … … … … … … … … … … … … … Workings: [6] Additional information Partners may allow interest on capital and charge interest on drawings. REQUIRED (c) State one advantage of allowing interest on capital to a: partner … … partnership … … [2] (d) Explain one reason why a partnership may charge interest on drawings. … … … … [2] [Total: 15]

15 marks

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

This question in 9706/23 Oct/Nov 2022

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

15 marks

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

This question in 9706/23 Oct/Nov 2022

1 Nibras and Raif are in partnership. They own a car hire business. The following balances were available at 31 December 2022. Debit Credit $ $ Allowance for irrecoverable debts 380 Cash at bank 7 370 Capital accounts Nibras 180 000 Raif 120 000 Current accounts Nibras 5 950 Raif 4 760 Drawings Nibras 19 200 Raif 12 140 Insurance 15 400 Interest on loan from Raif 750 Loan from Raif 9 000 Motor vehicle expenses 12 420 Motor vehicles Cost 144 000 Provision for depreciation 1 January 2022 33 200 Premises Cost 220 000 Provision for depreciation 1 January 2022 44 000 Rent receivable 6 050 Repairs and maintenance 8 270 Revenue from car hire 88 300 Trade receivables 21 730 Wages and salaries 18 460 Totals 485 690 485 690 The following additional information is available. 1 Interest at 10% per annum on the loan from Raif is accrued for the last two months of the year. 2 Insurance payments covered the period 1 January 2022 to 28 February 2023. Monthly insurance costs have remained unchanged during this period. 3 The partners have agreed that the allowance for irrecoverable debts is no longer required. 4 Rent receivable by the partnership is $550 per month. Part of the premises have been rented for the full year. 5 Motor vehicles are to be depreciated at 25% per annum using the reducing balance method. 6 Premises are to be depreciated by 2% per annum using the straight-line method. REQUIRED (a) Prepare the statement of profit or loss for the year ended 3 on page 4 to show your workings. Nibras and Raif Statement of profit or loss for the year ended … … … … … … … … … … … … … … … … … … … … … Workings: [9] Additional information Nibras and Raif agreed the following terms for the appropriation of profits and losses. 1 Interest on capital to be 10% per annum.

9 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 31 December 2022. 9 Nibras and Raif Statement of profit or loss for the year ended 31 December 2022 $ $ Revenue 88 300 (1) Add income: Allowance for irrecoverable debts 380 (1) Rent receivable 6 600 (1) 6 980 95 280 Less expenses: Insurance 13 200 (1) Interest on loan (Raif) 900 (1) Motor vehicle expenses 12 420 Repairs and maintenance 8 270 Wages and salaries 18 460 Depreciation: Motor vehicles 27 700 (1) Premises 4 400 (1) 85 350 (1) Profit for the year 9 930 (1) OF 1(b) Prepare the appropriation account for the year ended 31 December 2022. 3 Appropriation account for the year ended 31 December 2022 $ $ Profit for the year 9 930 Less: interest on capitals Nibras (18 000) } (1) for both Raif (12 000) } (30 000) (20 070) Less: salary (6 000) (1) (Nibras) (26 070) Shares of residual loss Nibras (15 642) } (1) OF for both Raif (10 428) } (26 070) 1(c) Calculate by how much Nibras’ current account balance at 31 December 8 2022 would have been different if there had been no partnership agreement during the year ended 31 December 2022. With agreement $ $ Opening balance 5 950 *(1) OF Salary 6 000 (1) OF both * Share of loss 15 642 (1) OF Interest on 18 000 capital Drawings 19 200 (1) Closing balance 16 792 * both 40 792 40 792 Without agreement $ $ Opening balance 5 950 * (1) OF Share of profit 5 190 (1) both * (50%) Drawings 19 200 (1) Closing balance 19 960 * both 25 150 25 150 Result: The current account balance would decrease by ($19 960 – $16 792) = $3 168 (1) OF 1(d) State one reason for including interest on drawings in a partnership 1 agreement. Interest on drawings will deter a partner from making excessive drawings (1). 1(e) State the double entry for recording interest on drawings. 2 Debit: partners’ current accounts (1) Credit: appropriation account (1) 1(f) Advise the partners which option they should choose. Justify your answer 7 by discussing both options. Option 1 (max 3) • Will be a permanent source of capital (1) • Will not affect the profit before appropriation (1) • Nibras may expect greater rewards/more control (1) Option 2 (max 3) • Temporary source of finance so no longer-term adverse implications (1) • Interest charges will reduce profits (1) • Will the partnership be able to obtain a bank loan? (1) Decision supported by a comment (1) Accept other valid responses.

This question in 9706/22 Feb/March 2023

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

72 marks

This question in 9706/21 May/June 2023

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

30 marks

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

This question in 9706/22 May/June 2023

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

15 marks

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

This question in 9706/22 May/June 2023

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

60 marks

This question in 9706/23 May/June 2023

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

30 marks

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

This question in 9706/21 Oct/Nov 2023

2 Q Limited has been in business for a number of years. One of the directors is unsure of the difference between a capital reserve and a revenue reserve. (a) Explain one difference between a capital reserve and a revenue reserve. … … … … [2] Additional information The directors of Q Limited provided the following information for the year ended 30 June 2023. Balances at 1 July 2022 $ Share capital: ordinary shares of $0.50 each 30 000 Share premium 4 500 Revaluation reserve 6 000 Retained earnings 50 240 Total equity 90 740 8% debenture (2024) 40 000 At 1 July 2022, land, original cost $80 000, had a valuation of $86 000. No other non-current assets had been revalued. The following transactions took place during the year ended 30 June 2023. Date 1 August 2022 Made a bonus issue of one ordinary share for every six shares held. The directors maintained the reserves in the most flexible form. 1 October 2022 Paid a final dividend of $0.04 per share on all shares in issue at that date. 1 January 2023 Made a rights issue of two ordinary shares for every seven shares held at a price of $0.65 per share. The issue was fully subscribed. 1 April 2023 Paid an interim dividend of $0.02 per share on all shares in issue at that date. 30 June 2023 Land was revalued at $75 000. The draft profit for the year ended 30 June 2023 was $43 600. (b) Prepare the statement of changes in equity for the year ended 30 June 2023. Q Limited Statement of changes in equity for the year ended 30 June 2023 Share Share Revaluation Retained capital premium reserve earnings Total $ $ $ $ $ At 1 July 2022 [8] Additional information The directors of Q Limited have plans to expand the business at a total cost of $54 000 and are considering two options to raise finance. Option 1: Make a rights issue of four ordinary shares for every five shares held at a price of $0.75 per share. Option 2: Issue a 10% debenture (2026–2027) of $54 000. (c) Advise the directors which option, if either, they should choose. Justify your decision. … … … … … … … … … … … … … … … [5] [Total: 15]

15 marks

Mark scheme: 2(a) Explain one difference between a capital reserve and a revenue reserve. 2 Capital reserves are created as a result of non-trading activities (1) whereas revenue reserves are created by transfer from profits (1) OR Capital reserves are not distributable to shareholders by dividend payment (1) whereas revenue reserves are available to distributable to shareholders (1). Max 2 Accept other valid responses 2(b) Prepare the statement of changes in equity for the year ended 30 June 2023. 8 Q Limited Statement of changes in equity for the year ended 30 June 2023 Share Share Revaluation Retained capital premium reserve earnings Total $ $ $ $ $ At 1 July 2022 30 000 4 500 6 000 50 240 90 740 (1) Bonus issue 5 000 (4 500) (500) – (1) Final dividend (2 800) (2 800) (1) Rights issue 10 000 3 000 13 000 (1) Interim (1 800) (1 800) (1) dividend Revaluation (6 000) (5 000) (11 000) (1) Profit for the 43 600 43 600 (1) year At 30 June 45 000 3 000 – 83 740 131 740 (1)OF 2023 2(c) Advise the directors which option, if either, they should choose. Justify your decision. 5 Option 1 – rights issue • Rights issue is a permanent source of capital (1) • Dividend payment is discretionary (1) • Will issue be fully subscribed? (1) Option 2 – 10% debenture • Debenture will have to be repaid (1) • Interest must be paid whether profits or losses (1) • Security may be required (1) • Current debenture of $60 000 due for repayment next year (1) Accept other valid responses. Max 4 for comments. Advice supported with a comment (1)

This question in 9706/21 Oct/Nov 2023

3 Yasmine has a retail business. She extracted a trial balance at 30 June 2023, the totals of which did not agree. (a) State two types of error that will be revealed by a trial balance. 1 … 2 … [2] (b) Explain the meaning of each of the following types of error. (i) Error of original entry … … [1] (ii) Error of principle … … [1] (iii) Error of commission … … [1] Additional information The difference in the trial balance was posted to a suspense account to enable the financial statements to be produced. Yasmine discovered the following errors, correction of which would clear the difference. 1 The sales journal total had been overstated by $300. 2 The total of the purchases returns journal, $2450, had not been posted to the general ledger. 3 Discounts allowed, $1660, had been posted to the credit of the discounts received account. 4 The balance of the carriage inwards account at 30 June 2023, $3570, had been brought down as $3750. (c) Prepare the suspense account to show the correction of the errors, clearly identifying the difference that was present in the trial balance before the errors were corrected. Suspense account $ $ [5] Additional information Before discovering the errors, Yasmine had prepared a draft statement of profit or loss showing a profit for the year of $36 165. The suspense account balance was not included in the profit calculation. (d) Calculate the revised profit for the year after correction of the errors. Increase Decrease $ $ $ Draft profit for the year 36 165 Error 1 Error 2 Error 3 Error 4 Revised profit for the year [5] [Total: 15]

15 marks

Mark scheme: 3(a) State two types of error that will be revealed by a trial balance. 2 Transposition error (1) Arithmetic error (1) Partial omission error (1) Unequal posting error (1) Max 2 3(b)(i) Explain the meaning of each of the following types of error. 1 Error of original entry An incorrect figure is used when a transaction is first entered in the accounting records (1) 3(b)(ii) Error of principle 1 A transaction is entered in an incorrect class of account (1) 3(b)(iii) Error of commission 1 A transaction is entered in an incorrect account of the same class of account (1) 3(c) Prepare the suspense account to show the correction of the errors, clearly identifying the opening balance that 5 was present in the trial balance before the errors were corrected. Suspense account $ $ Balance b/d 990 (1)OF Sales 300 (1) Carriage inwards 180 (1) Discounts allowed 1 660 (1) Purchase returns 2 450 (1) Discounts received 1 660 3 620 3 620 3(d) Calculate the revised profit for the year after correction of the errors. 5 Increase Decrease $ $ $ Draft profit for the year 36 165 Error 1 300 (1) Error 2 2 450 (1) Error 3 3 320 (1) Error 4 180 (1) Revised profit for the year 35 175 (1)

This question in 9706/21 Oct/Nov 2023

1 P Limited sells electronic goods online. The directors provided the following information. At At Balances 31 July 2023 1 August 2022 $ $ 8% debenture (2026) 36 000 – Inventory 43 190 36 800 Other payables: administrative expenses – 960 Other receivables: administrative expenses 160 1 820 Other receivables: distribution costs 1 490 – Trade payables 25 250 29 610 Bank account extract for the year ended 31 July 2023 $ Payments To credit suppliers 122 050 Administrative expenses 66 920 Distribution costs 51 730 Receipts From customers 284 200 The following information is also available. 1 All goods are despatched to customers immediately on receipt of payment. 2 Inventory at 31 July 2023 included damaged items that had cost $3600. One half of these items will be scrapped and have no value. The remaining items will be sold for $900 after repairs costing $420. 3 The 8% debenture (2026) was issued on 1 April 2023. 4 The charge for taxation was estimated to be $10 700. (a) Prepare the statement of profit or loss for the year ended 31 July 2023. Use the space provided to show your workings. P Limited Statement of profit or loss for the year ended 31 July 2023 $ Workings: Cost of sales Administrative expenses Distribution costs [15] Additional information 1 Balances at 1 August 2022 $ Share capital (ordinary shares of $0.50 each) 120 000 Share premium 19 000 Retained earnings 23 560

15 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 31 July 2023. 15 P Limited Statement of profit or loss for the year ended 31 July 2023 $ Revenue 284 200 (1) Cost of sales W1 (114 420) (4)OF Gross profit 169 780 (1)OF Distribution costs (50 240) (1) Administrative expenses W2 (67 620) (4)OF Profit from operations 51 920 (1)OF Finance costs (960) (1) Profit before taxation 50 960 (1)OF Taxation (10 700) Profit for the year 40 260 (1)OF W1 Opening inventory 36 800 (1) Purchases 122 050 – 29 610 + 25 250 = 117 690 (1) Closing inventory 43 190 – 3600 + 900 – 420 = 40 070 (1) Cost of sales 36 800 + 117 690 – 40 070 = 114 420 (1)OF W2 66 920 – 960 (1) + 1820 (1) – 160 (1) = 67 620 (1)OF 1(b) Prepare the statement of changes in equity for the year ended 31 July 2023. 6 P Limited Statement of changes in equity for the year ended 31 July 2023 Share Share Retained capital premium earnings Total $ $ $ $ At 1 August 2022 120 000 19 000 23 560 162 560 Bonus issue 20 000 (19 000) (1 000) - (1) Final dividend (16 800) (16 800) (1) Rights issue 35 000 10 500 45 500 (1) (1) Profit for the year 40 260 40 260 (1)OF At 31 July 2023 175 000 10 500 46 020 231 520 (1) OF 1(c) State two examples of revenue reserves of a limited company. 2 Retained earnings (1) General reserve (1) Accept other valid responses. 1(d) Advise the directors whether or not they were correct to make a bonus issue of 7 shares rather than make a new issue of shares. Justify your answer. Bonus issue Max 4 marks • Will incur no additional costs (1) • No necessity to source new shareholders (1) • Will be received favourably by existing shareholders (1) • Makes use of share premium account (1) • No cash inflow (1) New issue of shares Max 4 marks • Will raise new finance (1) • May be more costly to source new shareholders (1) • Very low retained earnings may discourage new shareholders (1) • May dilute ownership (1) • A new issue of shares may not be fully subscribed (1) Advice supported with a comment (1) Accept other valid responses

This question in 9706/22 Oct/Nov 2023

3 On 1 January 2023, a final dividend of $0.07 per share was paid on all shares in issue at 1 August 2022.

0 marks

Mark scheme: 3(a) Prepare the sales ledger control account for the month of July 2023, taking into 9 account the errors discovered. Dates are not required. Sales ledger control account Details $ Details £ Balance b/d 76 250 (1) Sales returns 1 510 (1) (journal) Sales (journal) 69 634 (1) Journal / contra 420 (1) Bank / Cash book 237 (1) Discount allowed / 892 (1) Cash book Bank / Cash book 74 118 (1) Journal / 410 (1) irrecoverable debt Balance c/d 68 771 146 121 146 121 Balance b/d 68 771 (1)OF 3(b) Prepare a schedule of the corrected sales ledger account balances. 4 Increase Decrease Total $ $ $ Per original list 69 211 Error 1 300 (1) Error 3 190 (1) Error 4 550 (1) (440) Corrected balances 68 771 (1) 3(c) State two limitations of preparing a control account. 2 Only verify the arithmetical accuracy of the ledgers (1) Does not indicate that individual account balances are correct (1) Does not identify errors of commission / omission / principle / original entry etc. (1) Accept other valid responses. Question Answer Marks

This question in 9706/22 Oct/Nov 2023

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

17 marks

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

This question in 9706/22 Oct/Nov 2023

1 B Limited provided the following information for the year ended 30 September 2023. $ 8% debenture (2025) 60 000 Administrative expenses 161 100 Allowance for irrecoverable debts at 1 October 2022 3 820 Cash and cash equivalents 4 680 Distribution costs 84 650 Dividend paid 4 000 Finance costs 3 950 Inventory 74 000 Other payables 1 860 Other receivables 940 Property plant and equipment at 1 October 2022 Cost / valuation 408 400 Accumulated depreciation 110 650 Retained earnings at 1 October 2022 45 850 Revaluation reserve at 1 October 2022 10 000 Share capital (ordinary shares of $1 each) at 1 October 2022 200 000 Share premium at 1 October 2022 14 000 Trade payables 57 150 Trade receivables 82 680 The revaluation reserve relates to land only. The gross profit for the year ended 30 September 2023 was $321 070. The following information is also available. Property plant and equipment at 1 October 2022 Cost / Accumulated Depreciation Allocation of valuation depreciation method depreciation $ $ Land 95 000 Nil – Nil Buildings 215 000 53 750 5% per annum 60% administrative straight line expenses Equipment 98 400 56 900 20% per annum 40% distribution reducing balance costs Total 408 400 110 650 There were no acquisitions or disposals of non-current assets during the year. The following have not yet been accounted for: On 30 September 2023 1 Land was revalued at $80 000. 2 A bonus issue of one ordinary share for every ten shares held was made. At 30 September 2023 1 Irrecoverable debts of $1480 were to be written off. 2 The directors proposed to maintain the allowance for irrecoverable debts at 5% of trade receivables. 3 Depreciation was to be charged for the year ended 30 September 2023. 4 Administrative expenses of $2480 were owing. 5 Distribution costs of $750 were prepaid. 6 Debenture interest for five months was owing. 7 The charge for taxation was estimated to be $12 500. (a) Prepare an extract from the statement of profit or loss for the year ended 30 September 2023 commencing with the gross profit for the year. B Limited Statement of profit or loss for the year ended 30 September 2023 $ Gross profit for the year Distribution costs Administrative expenses Profit from operations Finance costs Profit before taxation Taxation Profit for the year Workings: Distribution costs Administrative expenses [10] (b) Prepare the statement of financial position at 30 September 2023. Use the space provided on page 7 to show your workings. B Limited Statement of financial position at 30 September 2023 … … … … … … … … … … … … … … … … … … … … … … Workings: Non-current assets Trade and other receivables Retained earnings Trade and other payables [15] Additional information The directors wish to raise additional finance and they are considering two options. Option 1: make a rights issue of one ordinary share for every four shares held at a premium of $0.10 per share. Option 2: issue a further 8% debenture (2028) to raise $50 000. (c) Advise the directors which option they should choose. Justify your answer. … … … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare an extract from the statement of profit or loss for the year ended 10 30 September 2023 commencing with the gross profit for the year. B Limited Statement of profit or loss for the year ended 30 September 2023 $ Gross profit 321 070 Distribution costs W1 (91 520) (3)OF Administrative expenses W2 (176 730) (5)OF Profit from operations 52 820 Finance costs (5 950) (1) Profit before taxation 46 870 Taxation (12 500) Profit for the year 34 370 (1)OF W1 Distribution costs 84 650 + 7620 (1) – 750 (1) = $91 520 (1)OF W2 Administrative expenses 161 100 + 1480 (1) + 240 (1) + 11 430 (1) + 2480 (1) = $176 730 (1)OF 1(b) Prepare the statement of financial position at 30 September 2023. 15 B Limited Statement of financial position at 30 September 2023 $ Assets Non-current assets 263 700 (1) Current assets Inventory 74 000 (1) Trade receivables W1 77 140 (1) Other receivables W2 1 690 (1) Cash and cash equivalents 4 680 (1) 157 510 Total assets 421 210 (1)OF Equity and liabilities Equity Share capital 220 000 Retained earnings W3 65 220 (4)OF Total equity 285 220 Non-current liabilities 8% debentures (2025) 60 000 (1) Current liabilities Trade payables 57 150 (1) Other payables W4 6 340 (1) Taxation 12 500 (1) 75 990 Total liabilities 135 990 Total equity and liabilities 421 210 (1)OF W1 Trade receivables. 82 680 – 1480 – 4060 = $77 140 (1) W2 Other receivables 940 + 750 = $1690 (1) W3 Retained earnings. 45 850 + 34 370 (OF) – 4000 (1) – 6000 (1) – 5000 (1) = $65 220 (1)OF W4 Other payables 1860 + 2480 + 2000 = $6340 (1) 1(c) Advise the directors which option they should choose. Justify your 5 answer. Option 1 – rights issue • Rights issue is a permanent source of capital (1) • Dividend payment is discretionary (1) • Will issue be fully subscribed? (1) • Will raise $60 500 cash (1) Option 2 – 10% debenture • Debenture will have to be repaid (1) • Interest must be paid whether profits or losses (1) • Interest payments will reduce profits (1) • Security may be required (1) Accept other valid responses. Max 4 Advice supported with a comment

This question in 9706/23 Oct/Nov 2023

3 The directors of J Limited provided the following information at 1 September 2022. $ Share capital (ordinary shares of $0.50 each) 60 000 Share premium 21 800 Retained earnings 32 600 Total equity 114 400 During the year ended 31 August 2023 the following transactions took place. 1 December 2022 Made a rights issue of one ordinary share for every five shares held at a premium of $0.20. The issue was fully subscribed. 1 January 2023 Paid a final dividend of 4% on all shares in issue at 1 September 2022. 1 April 2023 Made a bonus issue of three ordinary shares for every eight shares held at that date. The directors wish to leave reserves in the most flexible form. 1 June 2023 Paid an interim dividend of $0.02 per ordinary share on all shares in issue at that date. Profit for the year ended 31 August 2023 was $16 500. (a) Prepare the following ledger accounts to record the transactions. Dates are not required. Share capital Details $ Details $ Balance b/d 60 000 Share premium Details $ Details $ Balance b/d 21 800 Retained earnings Details $ Details $ Balance b/d 32 600 [9] Additional information J Limited currently operates a manual system of bookkeeping and the directors are now considering introducing a computerised accounting system. (b) State three disadvantages of introducing a computerised accounting system. 1 … … 2 … … 3 … … [3] (c) State three ways in which the security of data in a computerised accounting system can be assured. 1 … … 2 … … 3 … … [3] [Total: 15]

15 marks

Mark scheme: 3(a) Prepare the following ledger accounts to record the transactions. Dates 9 are not required. Share capital Details $ Details $ Balance c/d 99 000 Balance b/d 60 000 Bank 12 000 (1) Share premium 26 600 (1) Retained earnings 400 (1) 99 000 99 000 Balance b/d 99 000 (1)OF Share premium Details $ Details $ Share capital 26 600 Balance b/d 21 800 Bank 4 800 (1) 26 600 26 600 Retained earnings Details $ Details $ Bank 2 400 (1) Balance b/d 32 600 Share capital 400 Statement of profit or 16 500 (1) loss Bank 3 960 (1) Balance c/d 42 340 49 100 49 100 Balance b/d 42 340 (1)OF 3(b) State three disadvantages of introducing a computerised accounting 3 system. Installing a computerised accounting system can be expensive (1) May involve extra expense in staff training (1) Data may be vulnerable to hacking (1) Data may be vulnerable to viruses (1) Max 3 Accept other valid responses 3(c) State three ways in which the security of data in a computerised 3 accounting system can be assured. Strong unique password protection (1) Virus protection software (1) Data encryption (1) VPN (1) Max 3 Accept other valid responses

This question in 9706/23 Oct/Nov 2023

1 The following trial balance was extracted from the books of V Limited at 31 December 2023. $ $ 8% debentures (2029) 240 000 Administrative expenses 17 200 Bank loan 32 000 Bank loan interest 2 600 Carriage inwards 4 500 Carriage outwards 8 700 Cash and cash equivalents 8 200 Distribution costs 30 700 Dividends paid 37 500 Furniture and equipment at carrying value, 1 January 2023 956 000 Inventory at 1 January 2023 47 800 Property at valuation 980 000 Purchases 522 000 Rental income 13 300 Retained earnings 174 000 Returns 5 100 Revenue 997 100 Share capital: 4 000 000 ordinary shares of $0.25 each 1 000 000 Share premium 215 000 Trade payables 57 800 Trade receivables 47 900 Wages: office staff 49 300 Wages: sales staff 38 300 2 742 500 2 742 500 The following information is also available. 1 At 31 December 2023 inventory was valued at $49 500. 2 Distribution costs include a prepayment of $6000. 3 At 31 December 2023, rental income of $3000 had been received in advance. 4 Provision should be made for depreciation of furniture and equipment at 20% per annum using the reducing balance method. Depreciation charges should be allocated: 60% administrative expenses; 40% distribution costs. 5 At 31 December 2023, office wages of $5800 were due but unpaid. 6 The debentures had been issued on 1 October 2023. The first interest payment is due on 31 March 2024. 7 Tax for the year ended 31 December 2023 is estimated to be $27 900. (a) Prepare the statement of profit or loss for the year ended 31 December 2023. Use the space provided on page 4 to show your workings. V Limited Statement of profit or loss for the year ended 31 December 2023 $ Revenue Cost of sales Gross profit Other income Distribution costs Administrative expenses Profit from operations Finance costs Profit before tax Tax Profit for the year Workings: Cost of sales Distribution costs Administrative expenses Finance costs [14] Additional information During the year ended 31 December 2023 the following transactions had been recorded in the books of account. 1 September A rights issue had been made of one ordinary share for every three ordinary shares currently held. The issue was made at a premium of $0.05 per share. The rights issue was fully subscribed. 31 December Property had been revalued and the value reduced by $60 000. (b) Complete the statement of changes in equity for the year ended 31 December 2023 on page 5. [7] $ Total 000 $ Retainedearnings 174 2023 December $ 000 - 31 reserve 60 Revaluation ended year the 000 $for premium 215 equity Share in 000changes $of Sharecapital 000 Statement 1 2023 2023 December January 1 31 Balances, Balances, (c) State two factors that directors should take into account when declaring a dividend. 1 … 2 … [2] Additional information The directors wish to improve the company’s performance. They are considering two options. Option A: Delaying payments to credit suppliers by an extra eight days. Option B: Switching to a new supplier who is prepared to offer a trade discount if large orders are made. (d) Advise the directors which option they should choose. Justify your choice by considering the effect on both profitability and liquidity. … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 31 December 14 2023. V Limited Statement of profit or loss for the year ended 31 December 2023 $ Revenue 997 100 Cost of sales W1 (519 700) (3) Gross profit 477 400 (1) OF Other income 10 300 (1) Distribution costs W2 (148 180) (4) Administrative expenses W3 (187 020) (3) Profit from operations 152 500 Finance costs W4 (7 400) (1) Profit before tax 145 100 Tax (27 900) Profit for the year 117 200 (1) OF W1 Cost of sales $ $ Opening inventory 47 800 } Purchases 522 000 Less returns (5 100) Add carriage inwards 4 500 521 400 (1) 569 200 Less closing inventory (49 500) }(1) both inventories 519 700 (1) OF 1(a) W2 Distribution costs $ Distribution costs 30 700 Distribution costs prepaid (6 000) (1) Carriage outwards 8 700 (1 )both Wages sales staff 38 300 Depreciation of furniture and equipment 76 480 (1) (20%  956 000)  40% 148 180 (1) OF W3 Administrative expenses $ Administrative expenses TB 17 200 Wages office staff ($49 300 + $5800) 55 100 (1) Depreciation of furniture and equipment 114 720 (1) (20%  956 000)  60% 187 020 (1) OF W4 Finance costs $ Bank loan interest 2 600 Debenture interest (8% x $240 000 x ¼ ) 4 800 7 400 (1) 1(b) Complete the statement of changes in equity for the year ended 7 31 December 2023. Share Share Revaluation Retained Total capital premium reserve earnings $ $ $ $ $ Balances, 1 750 000 165 000 60 000 174 000 1 149 000 January (1) Row 2023 Rights issue 250 000 50 000 300 000 (1) (1) Revaluation (60 000) (60 000) of property (1) Dividends (37 500) (37 500) paid (1) Profit for the 117 200 117 200 year (1) OF Balances, 1 000 000 215 000 – 253 700 1 468 700 31 (1)OF Row December 2023 1(c) State two factors that directors should take into account when declaring 2 a dividend. Availability of sufficient cash (1) The available balance of retained earnings (1) Current year’s profit (1) Shareholders expectations (1) Max 2 Accept other valid responses 1(d) Advise the directors which option they should choose. Justify your 7 choice by considering the effect on both profitability and liquidity. Profitability Liquidity Option A May worsen relationship with The delay in paying suppliers some suppliers resulting in will improve cash flows (1) less advantageous prices (1) Some suppliers may withdraw credit terms worsening cash flow position (1) Option B Will improve profitability as Will improve cash flows as cost of sales reduced (1) cost of purchase reduced (1) Possible reduction in quality (1) Will supplier prove reliable (delivery times, etc.) resulting in delays and possible loss of customers (1) Advice: either option supported by arguments (1) Accept other valid responses

This question in 9706/22 Feb/March 2024

(b) Prepare the statement of profit or loss for the year ended 31 December 2023. Haroon and Rakesh Statement of profit or loss for the year ended 31 December 2023 … … … … … … … … … … … … … … … … … … … Workings: [10] (c) Prepare an extract from the statement of financial position at 31 December 2023 to show the current assets section only. $ Current assets … … … … … … Workings: [4]

14 marks

This question in 9706/21 May/June 2024

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

8 marks

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

This question in 9706/22 May/June 2024

1 K Limited provided the following extract from the company’s draft statement of profit or loss for the year ended 31 December 2023. $ Revenue 870 500 Cost of sales (493 000) Gross profit 377 500 It has now been discovered that adjustments are required for the following: 1 Opening inventory at 1 January 2023 had been understated by $14 000. 2 Sales returns, $8600, had been deducted from purchases. 3 Closing inventory at 31 December 2023 included 40 damaged items costing $30 each. It is estimated that after repairs, costing a total of $420, the items could be sold for $38 each. (a) Explain the accounting concept which is applied to the valuation of damaged inventory. … … … … [2] (b) Calculate the revised gross profit for the year ended 31 December 2023. … … … … … … … Workings: [5] Additional information 1 At 1 January 2023 $ 6% Debentures (2024) 300 000 Property at valuation 840 000 Plant and equipment Cost 160 000 Provision for depreciation 32 000 Retained earnings 132 000 Revaluation reserve 90 000 Share capital: ordinary shares of $0.50 each 900 000 Share premium 55 000

7 marks

Mark scheme: 1(a) Explain the accounting concept which is applied to the valuation of damaged inventory. Prudence concept (1): Inventory should be valued at the lower of cost and net realisable value (1) Avoid overstating profit / assets (1). Max 2 marks Question Answer Marks 1(b) Calculate the revised gross profit for the year ended 31 December 2023. $346 200 (5) W1 W1 $ Draft gross profit 377 500 (1) Opening inventory (14 000) (1) Sales returns (17 200) (1) Closing inventory (100) (1) Revised gross profit 346 200 (1) Alternative approach $ Revenue 861 900 (1) Cost of sales W1 515 700 (3) Revised gross profit 346 200 (1) W1 $493 000 + $8 600 (1) + $14 000 (1) + $100 (1) = $515 700 5 Question Answer Marks 1(c) Prepare the statement of profit or loss for the year ended 31 December 2023. Start the statement with the revised figure for gross profit from (b). K Limited Statement of profit or loss for the year ended 31 December 2023 $ Gross profit 346 200 (1) OF Distribution costs (97 900) (1) Administrative expenses (132 400) (1) Profit from operations 115 900 (1) OF Finance costs (18 000) (1) Profit before tax 97 900 (1) OF Tax (11 300) (1) Profit for the year 86 600 (1) OF Accept alternative treatment of revaluation reserve 8 Question Answer Marks 1(d) Prepare an extract from the statement of financial position at 31 December 2023 to show the equity and liabilities section only. Statement of financial position at 31 December 2023 (Extract) $ Equity and liabilities Equity Ordinary share capital ($900 000 + $540 000) 1 440 000 (1) Share premium ($55 000 + $216 000) 271 000 (1) Retained earnings W1 143 600 (1) Total equity 1 854 600 (1) OF Liabilities Current liabilities 6% Debentures (2024) 300 000 (1) Tax 11 300 (1) Trade and other payables ($38 000 + $9000) 47 000 Total liabilities 358 300 (1) Total equity and liabilities 2 212 900 (1) OF W1 Retained earnings: $132 000 – revaluation reserve $30 000 add profit $86 600 less dividends paid $45 000 = $143 600 (1) Accept alternative treatment of revaluation reserve 8 Question Answer Marks 1(e) Advise the directors which option they should choose. Justify your choice by discussing both options. Option A (debenture issue) Max 3) Option B (share issue) Max 3) Allow once only for one mark (Max 1 for each row) Liability requiring repayment Permanent capital (1) row May require security No security required (1) row Allow individual comments for one mark each May have difficulty raising the finance (1) May not be fully subscribed (1) No voting rights (1) May lead to dilution of ownership (1) Fixed interest payable each year (1) Dividend payments are discretionary (1) Interest payments will reduce profit (1) Dividend payments have no effect on profits (1) Advice supported with a comment (1) Accept other valid responses 7

This question in 9706/23 May/June 2024

2 During the year ended 31 December 2023 the following payments had been made. $ Administrative expenses 111 400 Debenture interest 9 000 Distribution costs 97 100 Dividends 45 000 Equipment (purchased 1 April 2023) 20 000

0 marks

Mark scheme: 2(a) State three benefits of maintaining control accounts. Checks arithmetical accuracy (of purchases ledger and sales ledger) (1) Provides total trade payables and total trade receivables (1) for use in financial statements (1) Helps prevent fraud (1) Max 3 marks Accept other valid responses 2(b) Complete the following statements to correct the accounting records for trade payables. Correction of purchases ledger control account Correction of total of purchases ledger balances $ $ Incorrect balance 28 540 Incorrect total 31 790 Purchases journal error 3 250 (1) Error of original entry (990) (1) Error of original entry (990) (1) Corrected balance 30 800 (1) OF both Corrected total 30 800 4 Question Answer Marks 2(c) Complete the following statements to correct the accounting records for trade receivables. Correction of sales ledger control account Correction of total of sales ledger balances $ $ Incorrect balance 35 790 Incorrect total 36 410 Sales returns (490) (1) Sales returns (490) (1) Dishonoured cheque 760 (1) Interest 140 (1) Corrected balance 36 060 (1) OF Corrected total 36 060 (1) OF 6 2(d) Explain why contra entries may be made in control accounts. A contra entry occurs when a business’s credit supplier who is also a credit customer (1) owe each other money and one balance is set off against the other (1) Accept other valid responses 2

This question in 9706/23 May/June 2024

(c) Prepare the statement of profit or loss for the year ended 31 December 2023. Start the statement with the revised figure for gross profit from (b). Use the space provided on page 5 to show your workings. K Limited Statement of profit or loss for the year ended 31 December 2023 $ Gross profit … … … … … … … … … … … … … … … … … … … … … Workings: Depreciation of plant and equipment Distribution costs Administrative expenses Finance charges [8]

8 marks

This question in 9706/23 May/June 2024

1 The financial year end of T Limited was 30 June 2024. On that date the following balances were extracted from the books of account. Debit Credit $ $ 8% Bank loan (2024) 54 000 Administrative expenses 131 310 Bank overdraft 12 380 Cash 240 Carriage inwards 820 Distribution costs 114 870 Finance costs 5 180 Fixtures and fittings Cost 16 200 Provision for depreciation at 1 July 2023 9 560 Inventory at 1 July 2023 93 400 Land and buildings Cost 165 000 Provision for depreciation at 1 July 2023 6 300 Motor vehicles Cost 82 000 Provision for depreciation at 1 July 2023 34 590 Purchases 293 780 Retained earnings 38 450 Revenue 705 100 Share capital 80 000 Trade payables 32 160 Trade receivables 69 740 The following information is also available. 1 On 15 June 2024, goods were delivered and invoiced to a credit customer on a sale or return basis. The goods had a selling price of $12 000 including a mark-up of 25%. On 30 June 2024, inventory was counted and valued at cost, $86 400. On the same date, the customer informed T Limited that he had not yet decided whether to keep the goods. 2 Distribution costs include a charge of $3120 for motor insurance for the year ending 30 November 2024. 3 An irrecoverable debt of $540 is to be written off to administrative expenses. 4 The directors have decided to create an allowance for irrecoverable debts of 5% of trade receivables to be charged to administrative expenses. 5 Administrative expenses, $680, are outstanding at 30 June 2024. 6 On 30 June 2024, T Limited took out a 5% debenture (2028–2029) of $45 000. On the same date the company repaid one half of the 8% bank loan (2024) together with the three months’ interest outstanding at 30 June 2024. None of these transactions have yet been recorded in the books of account. 7 Land and buildings included land at cost, $60 000. Land is not depreciated. 8 Depreciation is to be provided as follows: Non-current asset Annual rate Method Charge to Fixtures and fittings 10% Reducing balance Administrative expenses Land and buildings 2% Straight-line Distribution costs Motor vehicles 20% Reducing balance Distribution costs 9 Taxation for the year is estimated to be $26 000. (a) Prepare the statement of profit or loss for the year ended 30 June 2024. Use the space provided on page 5 to show your workings. T Limited Statement of profit or loss for the year ended 30 June 2024 $ Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before Taxation Taxation Profit for the year Workings: Cost of sales Allowance for irrecoverable debts Depreciation Distribution costs Administrative expenses Finance costs [15] (b) Calculate the balance of cash and cash equivalents at 30 June 2024. … … … … … [4] (c) Prepare an extract from the statement of financial position at 30 June 2024 to show the equity and liabilities section only. T Limited Statement of financial position at 30 June 2024 $ Equity Total equity Liabilities Non-current liabilities Current liabilities Total liabilities Total equity and liabilities Workings: [6] (d) Assess the directors’ decision on 30 June 2024 to take out the 5% debenture (2028–2029). Justify your assessment by considering both advantages and disadvantages of the decision to the company. … … … … … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 30 June 2024. 15 T Limited Statement of profit or loss for the year ended 30 June 2024 $ Revenue W1 693 100 (1) Cost of sales W2 (292 000) (3)OF Gross profit 401 100 Distribution costs W3 (125 152) (4)OF Administrative expenses W4 (136 054) (5)OF Profit from operations 139 894 Finance costs W5 (6 260) (1) Profit before Taxation 133 634 Taxation (26 000) Profit for the year 107 634 (1)OF W1 – Revenue $705 100 – $12 000 = $693 100 (1) W2 – Cost of sales $93 400 + 293 780 + $820 (1) – ($86 400 + $9 600) (1) = $292 000 (1)OF W3 – Distribution $114 870 – $1 300 (1) + $2 100 (1) + $9 482 costs (1) = $125 152 (1)OF W4 – Administrative $131 310 + $2 860 (1) + $680 (1) + $664 (1) + expenses $540 (1) = $136 054 (1)OF W5 – Finance costs $5 180 + $1 080 = $6 260 (1) 1(b) Calculate the balance of cash and cash equivalents at 30 June 2024. 4 ($240 – $12 380) (1) + $45 000 (1) – $28 080 (1) = $4 780 (1 )OF 1(c) Prepare an extract from the statement of financial position at 30 June 6 2024 to show the equity and liabilities section only. T Limited Statement of financial position at 30 June 2024 $ Equity Share capital 80 000 Retained earnings W1 146 084 (1) OF Total equity 226 084 Liabilities Non-current liabilities 5% Debentures (2028-2029) 45 000 (1) Current liabilities Trade and other payables W2 32 840 (1) Taxation 26 000 8% bank loan (2024) 27 000 (1) Total liabilities 130 840 (1) OF Total equity and liabilities 356 924 (1) OF W1: $38 450 + 107 634 = 146 084 (1) OF W2: $32 160 + 680 = 32 840 (1) 1(d) Assess the directors’ decision on 30 June 2024 to take out the 5% 5 debenture (2028-2029). Justify your assessment by considering both advantages and disadvantages of the decision to the company. Advantages (Max 2 marks) • Removed the negative cash balance (1) • Repaid one half of the 8% bank loan that was due for repayment with the next six months (1) • Beneficial interest rate compared to the bank loan (1) Disadvantages (Max 2 marks) • Tied the company into a further five years of debt (1) • Weakened the immediate capital structure of the company (1) • May cause longer-term cash flow problems to meet repayment terms (1) • Security is required (1) Decision supported with a comment (1) Accept other valid responses

This question in 9706/21 Oct/Nov 2024

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

30 marks

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

This question in 9706/22 Oct/Nov 2024

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

15 marks

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

This question in 9706/22 Oct/Nov 2024

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 Sara and Viraj are in partnership and own a wholesale business. At 1 January 2024, the partners had the following balances. Sara Viraj $ $ Capital 80 000 112 000 Current account 1 840 debit 2 730 credit During the year ended 31 December 2024, the following drawings had been recorded. $ Sara 22 960 Viraj 18 930 The following balances were also available at 31 December 2024. $ Bank overdraft 4 970 Non‑current assets at carrying amount 150 700 Inventory 18 400 Other payables 410 Other receivables 300 Trade payables 16 300 Trade receivables 19 980 The draft profit for the year ended 31 December 2024 was $9400 before accounting for the following: 1 Wages, $850, were owing. 2 A credit customer, owing $1200, had gone out of business. The partners believe that 20% of the amount outstanding will be recovered, and the remaining 80% is to be written off. 3 The partners have decided to create an allowance for irrecoverable debts of 5% of trade receivables. 4 Viraj had taken goods for own use valued at cost, $550. 5 Viraj had provided a loan to the partnership on 1 May 2024 of $7200 at 8% interest per annum. The loan is repayable in full at the end of five years. Interest on the loan had not been accounted for. 6 Closing inventory had been understated by $3000. 7 Sara had introduced into the business a motor vehicle, valued at $20 400, on 1 September 2024. Motor vehicles are depreciated by 20% per annum using the straight‑line method on a month‑by‑month basis. (a) Calculate the revised profit for the year ended 31 December 2024. … … … … … … … … … … … … … … … … … [8] Additional information The partners share profits and losses in the ratio Sara : Viraj, 2 : 1, after providing for the following: 1 Interest is charged on each partner’s drawings at 5% on the total of drawings for the year in excess of $10 000.

8 marks

Mark scheme: Question Answer Marks 1(a) Calculate the revised profit for the year ended 31 December 2024. 8 $ Draft profit 9 400 Less wages owing (850) (1) Less irrecoverable debt (80%  $1 200) (960) (1) Less allowance for irrecoverable debts (5%  ($19 980 – (951) (1) $960) Add goods taken for own use 550 (1) Less interest on loan (8%  2/3  $7 200) (384) (1) Add inventory 3 000 (1) Less depreciation of motor vehicle (1/3  20%  $20 400) (1 360) (1) Revised profit for the year 8 445 (1) OF 1(b) Prepare the appropriation account for the year ended 31 December 2024. 3 Sara and Viraj Appropriation account for the year ended 31 December 2024 $ $ Profit for the year 8 445 Add interest on drawings Sara (5%  $12 960) 648 (1) Viraj (5%  $8 930 + 550) 474 1 122 9 567 Less salary Sara (12 000) (1) Residual loss (2 433) Shares of residual loss Sara (1 622) (1) OF Viraj (811) (2 433) 1(c) Prepare the current account of Viraj for the year ended 31 December 2024. Dates 4 are not required. Viraj Current account $ $ Drawings 19 480 (1) Balance b/d 2 730 Interest on 474 Loan interest 384 (1)OF drawings (1)OF Residual loss 811 Balance c/d 17 651 20 765 20 765 Balance b/d 17 651 (1)OF 1(d) Prepare an extract from the statement of financial position at 31 December 2024 4 showing the capital and liabilities section only. Statement of financial position at 31 December 2024 $ $ $ Capital and liabilities Sara Viraj Capital accounts 100 400 112 000 212 400 (1) Current accounts (15 070) (17 651) (32 721) Total 179 679 Non-current liabilities Loan (Viraj) 7 200 (1) Current liabilities Trade payables 16 300 (1) Other payables 1 260 ($410 + 850) Bank overdraft 4 970 22 530 Total capital and liabilities 209 409 (1)OF 1(e)(i) Explain, with reference to an accounting concept, the correct treatment of: 2 (i) goods taken for own use by the owner of a business Concept: business entity concept (1) Explanation: only transactions affecting the business are recorded in the business’s books of account (1). The business and owner are two separate (legal) entities (1) Max 1 mark for explanation Accept other valid responses. 1(e)(ii) Explain, with reference to an accounting concept, the correct treatment of: 2 (ii) irrecoverable debts Concept: prudence concept (1) Explanation: profits and assets OR trade receivables should not be overstated (1) losses should be accounted for as soon as they are recognised (1) Max 1 mark for explanation Accept other valid responses. 1(f) Advise the partners which option they should choose. Justify your answer by 7 discussing both options. Option A (max 3) For The early settlement will improve the cash flow position/liquidity (1) May reduce possibility of irrecoverable debts (1) Might attract new customers so increasing revenue/sales (1) Trade receivables turnover will improve (1) Against Will reduce the amount of cash received (1) Expenses will increase due to higher discount allowed (1) Will reduce the amount of profit (1) Customers may not be encouraged to pay within 25 days (1) Customers may switch to other suppliers offering better terms so reduces revenue (1) Option B (max 3) For Improve the cash flow position/liquidity (1) Against It may damage the reputation of the business (1) It may result in the loss of cash discounts (1) It may cause a loss of suppliers/refuse credit terms (due to the extended settlement terms) (1) Suppliers may charge interest on late payment (1) Decision supported with a comment (1) Accept other valid responses

This question in 9706/22 Feb/March 2025

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

27 marks

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

This question in 9706/22 Feb/March 2025

1 Bilal provided the following information for his service business for the year ended 31 December 2024. 1 Receipts and payments for the year ended 31 December 2024 included: $ Receipts Cash fees 78 440 Fees from credit clients 34 290 Rent received 4 950 Payments Advertising campaign 4 500 Electricity charges 3 610 General expenses 880 Motor vehicle running costs 1 320 Wages and salaries 31 600 2 On 1 January 2024, trade receivables were $15 800, and on 31 December 2024, trade receivables were $11 600. 3 On 1 January 2024, the allowance for irrecoverable debts was $632. On 31 December 2024, Bilal decided to increase the allowance for irrecoverable debts by 1%. 4 On 1 January 2024, electricity charges of $270 were outstanding. On 31 December 2024, electricity charges of $490 were prepaid. 5 On 1 May 2024, part of the business premises was rented out at $1650 for every three months receivable in advance. 6 On 1 November 2024, the advertising campaign commenced. It will end on 31 January 2026. 7 During the year ended 31 December 2024, a motor vehicle, cost $21 000, was sold for $9100. It had been depreciated for three years at 20% per annum using the reducing balance method. No depreciation is provided in the year of sale. 8 Non-current assets at 31 December 2024 were: Date of Cost Depreciation method purchase $ Business premises 1 January 2021 120 000 2% per annum straight-line Motor vehicle 1 January 2024 26 000 20% per annum reducing balance Furniture and 1 January 2021 22 000 10% per annum straight-line equipment (a) Prepare the statement of profit or loss for the year ended 31 December 2024. Use the space provided on page 4 to show your workings. Bilal Statement of profit or loss for the year ended 31 December 2024 … … … … … … … … … … … … … … … … … … … … … … … … … Workings: Revenue Allowance for irrecoverable debts Electricity charges Rent received Advertising campaign Profit or loss on disposal of motor vehicle Depreciation [14] Additional information At 31 December 2024, the cash at bank balance was $8950. (b) Prepare an extract from the statement of financial position at 31 December 2024, showing the assets section only. Statement of financial position (extract) at 31 December 2024 Assets … … … … … … … … … … … … … … … Workings: [7] (c) Explain, with reference to an accounting concept, why Bilal: (i) maintains an allowance for irrecoverable debts concept … explanation … … … [2] (ii) always uses the same method of depreciation for each class of non-current asset. concept … explanation … … … [2] Additional information Bilal hopes to expand his business and to move to larger premises. He is considering the following options. Option A: Renting out the whole of the current business premises and taking out a lease on new premises. Option B: Selling the current business premises and using the proceeds to partly finance the purchase of new premises. He is aware that he will also need a bank loan to finance the balance of the purchase price of the new premises. (d) Advise Bilal which option he should choose. Justify your choice by discussing both options. … … … … … … … … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 31 December 2024. 14 Bilal Statement of profit or loss for the year ended 31 December 2024 $ $ Revenue W1 108 530 (1) Add other income Rent receivable W2 4 400 (1) Decrease in allowance for irrecoverable 52 (3) OF debts W3 4 452 112 982 Less expenses Depreciation of non-current assets W4 9 800 (3) Loss on disposal of motor vehicle W5 1 652 (2) OF Advertising campaign W6 600 (1) Electricity charges W7 2 850 (2) General expenses 880 Motor vehicle running costs 1 320 Wages and salaries 31 600 48 702 Profit for the year 64 280 (1) OF Workings: W1 Cash fees $78 440 + credit fees ($34 290 – $4 200) = $108 530 (1) W2 Rent receivable: $550  8 = $4 400 (1) W3 Original allowance: $632/$15 800% = 4% (1) New allowance: 5%  11 600 = $580 (1) Decrease in allowance: $632 – $580 = $52 (1) OF W4 Business premises: 2%  $120 000 = $2 400 (1) Motor vehicle: 20%  $26 000 = $5 200 (1) Furniture and equipment: $22 000  10% = $2 200 (1) 1(a) W5 Carrying value at time of sale: End of 2021: $21 000  80% = $16 800 End of 2022: $16 800  80% = $13 440 End of 2023: $13 440  80% = $10 752 Loss on disposal: $10 752 (1) – $9 100 = $1 652 (1) OF W6 $4 500  2/15 = $600 (1) W7 $3 610 – $270 (1) – $490 (1)= $2 850 1(b) Prepare an extract from the statement of financial position at 31 December 7 2024 showing the assets section only. Statement of financial position (extract) at 31 December 2024 $ Assets Non-current assets Business premises ($120 000 – $9 600) 110 400 (1) Motor vehicle ($26 000 – 5 200) 20 800 Furniture and equipment ($22 000 – 8 800) 13 200 (1) 144 400 (1) Current assets Trade receivables ($11 600 – $580) 11 020 (1) Other receivables W1 4 390 (2)OF Cash at bank 8 950 24 360 Total assets 168 760 (1)OF W1 Advertising campaign $3 900 (1) + electricity charges $490(1) = $4 390 1(c)(i) Explain, with reference to an accounting concept, why Bilal: 2 maintains an allowance for irrecoverable debts. Prudence concept (1) Avoid overstating profit for the year / trade receivables (1) OR Matching/Accruals concept (1) Costs and revenues are matched to the same accounting period. (1) Accept other valid responses. 1(c)(ii) Explain, with reference to an accounting concept, why Bilal: 2 always uses the same method of depreciation for each class of non-current asset. Consistency concept (1) Enables results to be compared from year to year (1) Accept other valid responses. 1(d) Advise Bilal which option he should choose. Justify your choice by 5 discussing both options. Option A (max 2) • Retains ownership of potentially valuable non-current asset (1) • Rent received will help finance cost of lease of new premises (1) • Less permanent arrangement, offering future flexibility (1) Option B (max 2) • Will gain a potentially more valuable non-current asset (1) • Will lose current rental income (1) • Will incur costs in selling current premises and purchasing new premises (1) • Will incur interest costs on bank loan (1) Decision supported with a comment (1) Accept other valid responses

This question in 9706/21 May/June 2025

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

15 marks

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

This question in 9706/21 May/June 2025

(c) Prepare the statement of profit or loss for the year ended 31 December 2024. H Limited Statement of profit or loss for the year ended 31 December 2024. … … … … … … … … … … … … Workings: Distribution costs Administrative expenses Rental income [12] Additional information 1 During the year ended 31 December 2024, an issue of 400 000 ordinary shares of $0.50 each was made at a premium of $0.20 per share. The issue was fully subscribed. 2 At 31 December 2024, the directors decided to revalue property at $820 000. (d) Prepare the statement of changes in equity for the year ended 31 December 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 95 000 112 700 1 January 2024 Share issue Dividends paid Revaluation of property Profit for the year Balances at 725 000 120 000 31 December 2024 [6] Additional information There are plans to expand the business which will require additional finance. The directors are considering two options. Option A: Make a rights issue of 150 000 ordinary shares of $0.50 each at a premium of $0.20 per share. Option B: Issue an 8% debenture (2027) for $105 000. (e) Advise the directors which option they should choose. Justify your answer by discussing both the advantages and disadvantages of each option. … … … … … … … … … … … … … … … … … [7] [Total: 30] 2 Virat prepared the trial balance at 28 February 2025, the end of his financial year. However, the totals did not agree. Control accounts are not maintained by the business. A check of the entries in the books of account revealed the following errors. 1 A sales invoice, $80, had been debited to the account of Rafiq instead of Raif. 2 A credit note, $170, received from P Limited had been correctly recorded in the book of prime entry but had not been posted to the personal account. 3 No record has been made of goods taken by Virat for personal use, valued at cost, $330. 4 The total of the discount received column in the cash book, $97, had been debited to the discounts allowed account as $79. 5 No entries had been made to record the receipt of $370 from Abdul, a credit customer. The balance of his account had been written off in 2024. (a) Prepare journal entries to correct the errors. Narratives are not required. Journal Error Dr Cr $ $ 1 2 3 4 5 [8] Additional information Before the errors were corrected, a draft statement of profit or loss for the year ended

33 marks

This question in 9706/22 May/June 2025

28 February 2025 had been prepared, showing a draft profit for the year of $37 320. (b) Calculate a revised figure for profit for the year ended 28 February 2025. $ Draft profit for the year 37 320 [5] (c) Explain why an error of principle would have no effect on the agreement of trial balance totals. … … … … [2] [Total: 15] 3 Zak has not maintained full accounting records for his retail business. He has provided the following details for the year ended 31 December 2024. $ Purchases 82 980 Returns outwards 1 050 Inventory levels increased by $2730 during the year ended 31 December 2024. Zak’s policy is to sell all goods to achieve a gross profit margin of 40%. (a) Calculate the revenue for the year ended 31 December 2024. … … … … … … … … [4] Additional information Zak is not certain how much the business is owed by its credit customers at 31 December 2024. The following information is available. 1 At 1 January 2024, credit customers owed $11 880. 2 Credit sales are 75% of total sales. 3 Bank statements show that $96 900 was received from credit customers during the year ended 31 December 2024. 4 Some credit customers were given a 5% cash discount for prompt payment. Zak estimates that 20% of all receipts from credit customers were made after deducting the cash discount. (b) Calculate the amount owed by credit customers at 31 December 2024. … … … … … … … … [4] Additional information Zak would like to improve the credit control of his business. (c) Identify two ways, other than allowing a cash discount, in which credit control can be improved. 1 … … 2 … … [2]

17 marks

This question in 9706/22 May/June 2025

1 Bilal provided the following information for his service business for the year ended 31 December 2024. 1 Receipts and payments for the year ended 31 December 2024 included: $ Receipts Cash fees 78 440 Fees from credit clients 34 290 Rent received 4 950 Payments Advertising campaign 4 500 Electricity charges 3 610 General expenses 880 Motor vehicle running costs 1 320 Wages and salaries 31 600 2 On 1 January 2024, trade receivables were $15 800, and on 31 December 2024, trade receivables were $11 600. 3 On 1 January 2024, the allowance for irrecoverable debts was $632. On 31 December 2024, Bilal decided to increase the allowance for irrecoverable debts by 1%. 4 On 1 January 2024, electricity charges of $270 were outstanding. On 31 December 2024, electricity charges of $490 were prepaid. 5 On 1 May 2024, part of the business premises was rented out at $1650 for every three months receivable in advance. 6 On 1 November 2024, the advertising campaign commenced. It will end on 31 January 2026. 7 During the year ended 31 December 2024, a motor vehicle, cost $21 000, was sold for $9100. It had been depreciated for three years at 20% per annum using the reducing balance method. No depreciation is provided in the year of sale. 8 Non-current assets at 31 December 2024 were: Date of Cost Depreciation method purchase $ Business premises 1 January 2021 120 000 2% per annum straight-line Motor vehicle 1 January 2024 26 000 20% per annum reducing balance Furniture and 1 January 2021 22 000 10% per annum straight-line equipment (a) Prepare the statement of profit or loss for the year ended 31 December 2024. Use the space provided on page 4 to show your workings. Bilal Statement of profit or loss for the year ended 31 December 2024 … … … … … … … … … … … … … … … … … … … … … … … … … Workings: Revenue Allowance for irrecoverable debts Electricity charges Rent received Advertising campaign Profit or loss on disposal of motor vehicle Depreciation [14] Additional information At 31 December 2024, the cash at bank balance was $8950. (b) Prepare an extract from the statement of financial position at 31 December 2024, showing the assets section only. Statement of financial position (extract) at 31 December 2024 Assets … … … … … … … … … … … … … … … Workings: [7] (c) Explain, with reference to an accounting concept, why Bilal: (i) maintains an allowance for irrecoverable debts concept … explanation … … … [2] (ii) always uses the same method of depreciation for each class of non-current asset. concept … explanation … … … [2] Additional information Bilal hopes to expand his business and to move to larger premises. He is considering the following options. Option A: Renting out the whole of the current business premises and taking out a lease on new premises. Option B: Selling the current business premises and using the proceeds to partly finance the purchase of new premises. He is aware that he will also need a bank loan to finance the balance of the purchase price of the new premises. (d) Advise Bilal which option he should choose. Justify your choice by discussing both options. … … … … … … … … … … … … … … … … … … … … … [5] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare the statement of profit or loss for the year ended 31 December 2024. 14 Bilal Statement of profit or loss for the year ended 31 December 2024 $ $ Revenue W1 108 530 (1) Add other income Rent receivable W2 4 400 (1) Decrease in allowance for irrecoverable 52 (3) OF debts W3 4 452 112 982 Less expenses Depreciation of non-current assets W4 9 800 (3) Loss on disposal of motor vehicle W5 1 652 (2) OF Advertising campaign W6 600 (1) Electricity charges W7 2 850 (2) General expenses 880 Motor vehicle running costs 1 320 Wages and salaries 31 600 48 702 Profit for the year 64 280 (1) OF Workings: W1 Cash fees $78 440 + credit fees ($34 290 – $4 200) = $108 530 (1) W2 Rent receivable: $550  8 = $4 400 (1) W3 Original allowance: $632/$15 800% = 4% (1) New allowance: 5%  11 600 = $580 (1) Decrease in allowance: $632 – $580 = $52 (1) OF W4 Business premises: 2%  $120 000 = $2 400 (1) Motor vehicle: 20%  $26 000 = $5 200 (1) Furniture and equipment: $22 000  10% = $2 200 (1) 1(a) W5 Carrying value at time of sale: End of 2021: $21 000  80% = $16 800 End of 2022: $16 800  80% = $13 440 End of 2023: $13 440  80% = $10 752 Loss on disposal: $10 752 (1) – $9 100 = $1 652 (1) OF W6 $4 500  2/15 = $600 (1) W7 $3 610 – $270 (1) – $490 (1)= $2 850 1(b) Prepare an extract from the statement of financial position at 31 December 7 2024 showing the assets section only. Statement of financial position (extract) at 31 December 2024 $ Assets Non-current assets Business premises ($120 000 – $9 600) 110 400 (1) Motor vehicle ($26 000 – 5 200) 20 800 Furniture and equipment ($22 000 – 8 800) 13 200 (1) 144 400 (1) Current assets Trade receivables ($11 600 – $580) 11 020 (1) Other receivables W1 4 390 (2)OF Cash at bank 8 950 24 360 Total assets 168 760 (1)OF W1 Advertising campaign $3 900 (1) + electricity charges $490(1) = $4 390 1(c)(i) Explain, with reference to an accounting concept, why Bilal: 2 maintains an allowance for irrecoverable debts. Prudence concept (1) Avoid overstating profit for the year / trade receivables (1) OR Matching/Accruals concept (1) Costs and revenues are matched to the same accounting period. (1) Accept other valid responses. 1(c)(ii) Explain, with reference to an accounting concept, why Bilal: 2 always uses the same method of depreciation for each class of non-current asset. Consistency concept (1) Enables results to be compared from year to year (1) Accept other valid responses. 1(d) Advise Bilal which option he should choose. Justify your choice by 5 discussing both options. Option A (max 2) • Retains ownership of potentially valuable non-current asset (1) • Rent received will help finance cost of lease of new premises (1) • Less permanent arrangement, offering future flexibility (1) Option B (max 2) • Will gain a potentially more valuable non-current asset (1) • Will lose current rental income (1) • Will incur costs in selling current premises and purchasing new premises (1) • Will incur interest costs on bank loan (1) Decision supported with a comment (1) Accept other valid responses

This question in 9706/23 May/June 2025

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

15 marks

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

This question in 9706/23 May/June 2025

1 The following balances were extracted from the books of T plc after the preparation of the statement of profit or loss for the year ended 31 December 2024. $ 8% debentures (2025) 150 000 Bank overdraft 17 800 Furniture and equipment at carrying value 442 000 Inventory 57 300 Property at valuation 785 400 Trade and other payables 28 700 Trade and other receivables 33 400 Retained earnings include a draft profit figure of $104 800. However, it has been discovered that some errors had been made when preparing the statement of profit or loss. 1 The closing inventory had been overstated by $4500. 2 Distribution costs included the total cost of a 9-month advertising campaign for $32 400, which will end on 31 May 2025. 3 Furniture and equipment had been depreciated by 15% per annum using the reducing balance method instead of 20% per annum using the reducing balance method. 4 Debenture interest is payable every half year. No adjustment had been made for the payment due on 28 February 2025. 5 No provision had been made for taxation of $14 800. (a) Calculate the revised profit for the year ended 31 December 2024. $ Draft profit 104 800 … … … … … … … … … … … Workings: [7] Additional information 1 On 1 August 2024, the directors had made a bonus issue of two ordinary shares for every three ordinary shares held at that date. The company policy is to maintain reserves in their most flexible form. Ordinary shares have a face value of $0.50 each.

7 marks

Mark scheme: Question Answer Marks 1(a) Calculate the revised profit for the year ended 31 December 2024. 7 $ Draft profit 104 800 Less overstated inventory (4 500) (1) Add prepaid advertising W1 18 000 (1) Less depreciation of furniture and equipment W2 (26 000) (2) OF Less debenture interest W3 (4 000) (1) Less taxation on profits (14 800) (1) Correct profit for the year 73 500 (1) OF W1: prepaid advertising 5/9  $32 400 = $18 000 W2: depreciation Furniture and equipment carrying value before depreciation: $442000  100 = $520 000 (1) 85 Correction of depreciation charge $520 000  5% = $26 000 (1) OF W3 Debenture interest: 2/3  8%  $150 000  1/2 = $4 000 (1) 1(b) Complete the statement of changes in equity for the year ended 31 December 7 2024. T plc Statement of changes in equity for the year ended 31 December 2024 Share Share Revaluation Retained Total capital premium reserve earnings $ $ $ $ $ At 1 540 000 120 000 80 000 330 800 1 070 800 January (1) 2024 W1 Bonus issue 360 000} (120 000)} (1) (240 000) – (1) Dividend (54 000) (54 000) (paid) W2 (1) Profit (for 73 500 73 500 the year) (1) OF Property (80 000) } (25 400) } (105 400) revalued/ (1) revaluation At 31 900 000 – – 84 900 984 900 December 2024 (1)OF Col. W1 Opening share capital: 900 000  3/5 = 540 000 (1) W2 Dividend paid: 900 000  2 = 1 800 000 shares  $0.03 = $54 000 (1) 1(c) Prepare the statement of financial position at 31 December 2024. 9 T plc Statement of financial position at 31 December 2024 Assets $ Non-current assets Property 680 000 Furniture and equipment at carrying value 416 000 (1) 1 096 000 (1)OF Current assets Inventory 52 800 (1) Trade and other receivables 51 400 (1) 104 200 Total assets 1 200 200 }* Equity Share capital 900 000 Retained earnings 84 900 Total equity 984 900 (1) OF Current liabilities Debentures 150 000 (1) Trade and other payables 32 700 (1) Taxation 14 800 (1) Bank overdraft 17 800 Total liabilities 215 300 Total equity and liabilities 1 200 200 (1)}* (1)}* both totals should be the same 1(d) Advise the directors which option they should choose. Justify your choice by 7 considering the advantages and disadvantages of both options. Option A (max 4) For Will be a permanent source of finance/no repayment (1) Will not affect profits (1) Dividend payments are discretionary/variable (1) Net assets are increased (1) Against Will the issue be successful/fully subscribed (1) Will affect control of the company/voting rights (1) Shareholders may expect dividends (1) Cost and time involved in issuing prospectus/advertising etc. (1) Option B (max 4) For No impact on control of company as no voting rights/decision making (1) No impact on profit distribution as no change in control (1) Temporary source of finance/repayable (1) Have until 2030 to repay/can budget/plan for repayment (1) Against They have to finance the redemption of the existing debenture/already have a debenture (1) Debenture interest will reduce profits (1) Debenture interest will have to be paid each year/finance costs increase (1) Liabilities/gearing increase (1) Loan/need to repay (1) May require security (1) It may be difficult to obtain another debenture (1) Accept other valid responses Max 6 for comments on both options Decision supported by a comment (1)

This question in 9706/21 Oct/Nov 2025

3 At 31 December 2024, the directors decided to revalue the property to $680 000. (b) Complete the statement of changes in equity for the year ended 31 December 2024. T plc Statement of changes in equity for the year ended 31 December 2024 Share Share Revaluation Retained Total capital premium reserve earnings $ $ $ $ $ At 1 January 2024 120 000 80 000 330 800 At 31 December 2024 900 000 Workings: [7] (c) Prepare the statement of financial position at 31 December 2024. T plc Statement of financial position at 31 December 2024 … … … … … … … … … … … … … … … … … … … … … … … … … … [9] Additional information The directors are considering two options of financing the redemption of debentures in 2025: option A: make a new issue of 250 000 ordinary shares of $0.50 each at a premium of $0.10 per share option B: make an issue of 8% debentures (2030). (d) Advise the directors which option they should choose. Justify your choice by considering the advantages and disadvantages of both options. … … … … … … … … … … … … … … … … … [7] [Total: 30] 2 Reza owns a large retail business. As the business has many credit customers and credit suppliers, she was advised to maintain purchases ledger and sales ledger control accounts. (a) Explain two benefits of maintaining control accounts. 1 … … … … … … 2 … … … … … … [4] Additional information Reza decides to maintain control accounts as a part of the double entry system. On 1 January 2025, the balance of the purchases ledger control agreed with the total of balances in the purchases ledger of $23 420. The following is a summary of transactions for January 2025. $ Payments to credit suppliers 21 470 Discounts received 283 Refund from a credit supplier resulting from an overpayment 45 Contra with sales ledger 236 Interest charged by a credit supplier on an overdue account 33 Purchases journal 22 711 Purchases returns journal 280 (b) Prepare the purchases ledger control account for January 2025. Purchases ledger control account Details $ Details $ [6] Additional information On 31 January 2025, the total of the balances in the sales ledger was $17 180. However, the balance on the sales ledger control account was different. The following errors have been discovered which account for this difference. 1 The balance of the sales ledger control account had been miscalculated. The total of the debit entries was $82 490, and the total of the credit entries was $65 550. 2 The total of the discounts allowed column in the cash book had been undercast by $90. 3 A credit note issued to a credit customer for $120 had been correctly entered in the book of prime entry but had been debited to the account of the customer as $210. (c) Calculate an amended figure for each of the following: (i) sales ledger total of balances … … … … … [2] (ii) sales ledger control account balance. … … … … … [3] [Total: 15] 3 The directors of N Limited use ratios to review the performance of the company. The following details are available for the previous two years. Year ended Year ended 31 December 31 December 2024 2023 Revenue ? $560 000 Purchases $343 000 $370 000 Cost of sales $345 000 ? Gross profit margin 40% 35% Inventory at 1 January $38 000 ? (a) Calculate the opening inventory at 1 January 2023. … … … … … [3] (b) Calculate the revenue for the year ended 31 December 2024. … … … … [2] (c) Calculate the closing inventory at 31 December 2024. … … … … … … [1] (d) Calculate the inventory turnover (days) for each of the years ended 31 December 2023 and 2024. Year ended 31 December 2023 Year ended 31 December 2024 [5] Additional information The directors wish to improve the inventory turnover (days) ratio. One director has suggested reducing inventory levels. (e) Identify two possible drawbacks which could result from this suggestion. 1 … … 2 … … [2] (f) Identify two ways in which the inventory turnover (days) ratio could be improved other than by reducing inventory levels. [2] [Total: 15]

53 marks

Mark scheme: 3(a) Calculate the opening inventory at 1 January 2023. 3 Cost of sales = 65%  $560 000 = $364 000 (1) Cost of sales $364 000 – (purchases $370 000 – closing inventory $38 000, i.e. $332 000 (1)) = $32 000 (1) 3(b) Calculate the revenue for the year ended 31 December 2024. 2 Revenue = Cost of sales $345 000(1)  100/60 = $575 000 (1) 3(c) Calculate the closing inventory at 31 December 2024. 1 Closing inventory 2024 = (opening inventory $38 000 + purchases $343 000) – cost of sales $345 000 = $36 000 (1) 3(d) Calculate the inventory turnover (days) for each of the years ended 31 December 5 2023 and 2024. Year ended 31 Average inventory = ($38 000 + $32 000)/2 (1) OR $35 000(1) December 2023 $35000  365 = 36 days (1) 364000 (1) Year ended 31 Average inventory = ($36 000 + $38 000)/2 (1) OR $37 000(1) December 2024 $37000  365 = 40 days (1) $345000 3(e) Identify two possible drawbacks which could result from this suggestion. 2 Risk of ‘stock-outs’/can’t meet demand(1) Loss of trade discount from supplier (because of smaller orders) (1) Increased delivery costs/administrative costs (1) Suppliers may not deliver on time/suppliers may strike(1) Max 2 Accept other valid responses 3(f) Identify two ways in which the inventory turnover (days) ratio could be improved 2 other than by reducing inventory levels. Changing product range to items more in demand (1) Reducing selling prices/offer discounts (1) Advertise/promotion to attract more sales (1) Max 2 Accept other valid responses

This question in 9706/21 Oct/Nov 2025

1 R Limited is a retail business. The following draft statement of profit or loss was prepared for the year ended 31 December 2024. $ Revenue 543 280 Cost of sales (292 400) Gross profit 250 880 Distribution costs (47 560) Administrative expenses (61 300) Profit from operations 142 020 Finance costs (18 540) Profit before taxation 123 480 Taxation (18 900) Profit for the year 104 580 It has been discovered that some errors were made when preparing this draft statement. 1 Revenue includes the value of some goods sent on sale or return basis, with a selling price of $4200. The mark-up on these goods is 50%. The customer has not yet decided whether to keep these goods. 2 Sales returns of $1600 were omitted from the statement of profit or loss. 3 Purchases returns of $740 were treated as sales returns when preparing the statement of profit or loss. 4 Distribution costs include the total cost of a marketing campaign of $14 000. The marketing campaign commenced on 1 May 2024 and will end on 31 August 2025. 5 The company’s policy is to depreciate furniture and equipment at 10% per annum, using the reducing balance method. The furniture and equipment was purchased for $36 000 on 1 January 2023. Depreciation for the year ended 31 December 2023 had been correctly calculated. Depreciation on furniture and equipment for the year ended 31 December 2024 was incorrectly calculated, using the reducing balance method, at 15% per annum. Depreciation is divided equally between distribution costs and administrative expenses. 6 Staff wages and salaries of $27 000 had been incorrectly divided between distribution costs and administrative expenses in the ratio 2 : 1. The correct ratio is distribution costs : administrative expenses, 3 : 2. 7 Finance costs included a full year’s interest on a bank loan of $25 000 at 8% per annum. The bank loan had been received on 1 May 2024 and the correct interest rate is 6% per annum. 8 Taxation has been overstated by 5%. (a) Prepare, on page 5, a revised statement of profit or loss for the year ended 31 December 2024. Workings: Revenue Cost of sales Depreciation Distribution costs Administrative expenses Finance costs R Limited Revised statement of profit or loss for the year ended 31 December 2024 $ Revenue Cost of sales Gross profit Distribution costs Administrative expenses Profit from operations Finance costs Profit before taxation Taxation Profit for the year [15] Additional information The company’s share capital at 31 December 2024 was $700 000, consisting of ordinary shares of $2 each. During the year ended 31 December 2024, the following transactions took place: 2024 Transaction 1 April Paid a final dividend of $0.10 per share on all shares in issue at that date. 1 August Made a rights issue of two ordinary shares for every five ordinary shares held at that date at a premium of $0.50 per share. The rights issue was fully subscribed. 1 October Paid an interim dividend of 4% on all shares in issue at that date. 30 November Made a transfer to a general reserve of $50 000. (b) Complete the statement of changes in equity for the year ended 31 December 2024. R Limited Statement of changes in equity for the year ended 31 December 2024 Share Share General Retained Total capital premium reserve earnings $ $ $ $ $ At 1 January 2024 65 000 28 000 105 000 At 31 December 2024 700 000 Workings: [8] Additional information Currently all goods for resale are supplied in bulk by a local wholesaler who is only prepared to make one monthly delivery. The directors are currently concerned about the company’s cashflow and are considering two options. Option A: Reducing inventory levels by reducing the size of the monthly order with the current supplier. Option B: Switching to an alternative supplier who is prepared to make weekly deliveries and who is prepared to offer improved credit terms. (c) Advise the directors which option they should choose. Justify your advice by discussing both financial and non-financial factors of each option. … … … … … … … … … … … … … … … [7] [Total: 30]

30 marks

Mark scheme: Question Answer Marks 1(a) Prepare a revised statement of profit or loss for the year ended 31 December 15 2024. R Limited Revised statement of profit or loss for the year ended 31 December 2024 $ Revenue W1 538 220 (3) OF Cost of sales W2 (288 860) (2) OF Gross profit 249 360 Distribution costs W3 (37 950) (4) OF Administrative expenses W4 (62 290) (3) OF Profit from operations 149 120 Finance costs W5 (17 540) (1) Profit before taxation 131 580 Taxation (18 000) (1) Profit for the year 113 580 (1) OF W1 $543 280 – goods at cost $4 200 (1) – sales returns $1600 (1) + purchases returns $740 = $538 220 (1) OF W2 $292 400 – $2 800 (1) – purchases returns $740 = $288 860 (1) OF W3 Correct depreciation of furniture and equipment: 10%  ($36 000 less first year depreciation $3 600) = $3 240 Incorrect depreciation 15%  $32 400 = $4 860 Adjustment required: $1 620 1(a) $ Draft distribution cost 47 560 Less prepaid marketing (7 000) (1) (14 000  8/16) Less overstated depreciation (810) (1) (2 430–3 240) Less wages and salaries (1 800) (1) (–18 000 + 16 200) correction Revised cost 37 950 (1) OF Marketing prepaid $14 000  ½ = $7 000 Wages and salaries wrong allocation 2/3  $27 000 = $18 000; correct allocation 3/5  $27 000 = $16 200 error overstated $1 800 W4 $ Draft admin expense 61 300 Less overstated depreciation (810) (1) (2 430 – 3 240) Add wages and salaries 1 800 (1) (–9 000 + 10 800) correction Revised expense 62 290 (1) OF Wages and salaries wrong allocation 1/3  $27 000 = $9 000 correct allocation 2/5  $27 000 = $10 800 error understated $1 800 W5 Loan interest charged was $2000 loan interest should have been 6%  2/3  $25 000 = $1 000 Correct finance costs $18 540 – $1 000 = $17 540 (1) 1(b) Complete the statement of changes in equity for the year ended 31 December 8 2024. R Limited Statement of changes in equity at 31 December 2024 Share Share General Retained Total capital premium reserve earnings $ $ $ $ $ At 1 January 500 000 65 000 28 000 105 000 698 000 2024 (1) Final (25 000) (1)OF (25 000) dividends (paid) W1 Rights issue 200 000 50 000 250 000 W2 (1) (1) Interim (28 000) (1) (28 000) dividend (paid)W3 Transfer to 50 000 } (50 000) }(1) – general reserve Profit for the 113 580 (1) OF 113 580 year At 31 700 000 115 000 78 000 115 580 1 008 580 December (1) OF 2024 column W1: Final Dividend = 250 000 shares  $0.10 = $25 000 W2: Rights issue = 2/7  $700 000 = $200 000 Share premium = 100 000  $0.50 = $50 000 W3 Interim Dividend =4%  $700 000 = $28 000 1(c) Advise the directors which option they should choose. Justify your advice by 7 discussing both financial and non-financial factors of each option. Option A (Max 4) For Reducing inventory will reduce storage costs (1) (Reduced order size may have a (temporary)) positive impact on cashflow/reduce cash outflow (in the short term) (1) Less cash tied up in inventory (1) Against May lose (trade) discounts/be charged higher price (1) reducing profits (1) and would have a negative effect on liquidity (1) Reduced inventory levels may have a negative effect on customer demand/sales/customers switch to competitors (1) (May cause ‘stock-outs’) reducing revenue, profits and liquidity (1) Option B (Max 4) For Improved credit terms will improve liquidity (1) Regular deliveries may reduce risk of inventory wastage (1) Regular deliveries may result in less storage costs (1) Less likely to run out of inventory/easier to predict amount needed/react more quickly (1) Against Regular deliveries may increase (administration/carriage) cost (1) Reduced inventory levels may have a negative effect on customer demand/sales/customers switch to competitors (1) Will supplier prove reliable/be on time (1) Provide goods of same quality 1) Accept other valid responses Decision supported with a comment (1)

This question in 9706/22 Oct/Nov 2025

1 Fazal and Naseem are in partnership. They own a retail business. The following information is available for the year ended 31 December 2024. Debit Credit $ $ Allowance for irrecoverable debts 310 Capital accounts Fazal 65 000 Naseem 55 000 Cash at bank 3 180 Cost of sales 36 790 Current accounts Fazal 1 480 Naseem 2 610 Drawings Fazal 11 700 Naseem 14 300 General expenses 3 310 Inventory at 31 December 2024 17 900 Loan from Fazal 8 000 Non‑current assets cost 139 000 provision for depreciation 31 000 Profit on disposal of a non‑current asset 320 Rent 9 800 Revenue 98 110 Staff wages 25 830 Trade payables 7 380 Trade receivables 10 800 270 910 270 910 Additional information at 31 December 2024: 1 The account of a credit customer owing $320 is to be written off as irrecoverable. 2 The allowance for irrecoverable debts is to be maintained at 2.5% of trade receivables. 3 No entries have been made for 8% interest per annum on Fazal’s loan. The loan from Fazal was made on 1 October 2024 and is repayable in 2028. 4 Rent is charged at $2100 for three months and is payable in advance. Rent has been paid until 28 February 2025. 5 Staff wages of $810 are owing. 6 Non‑current assets are to be depreciated at 20% per annum using the straight‑line method. (a) Prepare the statement of profit or loss for the year ended 31 December 2024. Use the space provided on page 4 to show your workings. Fazal and Naseem Statement of profit or loss for the year ended 31 December 2024 … … … … … … … … … … … … … … … … … … … … Workings: [9] Additional information The partners share profits and losses equally after providing for: 1 interest on drawings of 5% per annum

9 marks

This question in 9706/23 Oct/Nov 2025

3 On 1 April 2024, the following balances appeared in the books of P plc. $ Issued share capital: ordinary shares of $1 each ? Share premium 60 000 Revaluation reserve 55 000 Retained earnings 300 200 During the year ended 31 March 2025, the following occurred: 1 May 2024 Made a bonus issue of one ordinary share for every two ordinary shares held at this date. It was decided that reserves should be left in their most flexible form. 1 June 2024 Property was revalued downwards by $72 000. 1 September 2024 Paid a final dividend of 7.5% on all shares in issue at this date. 1 January 2025 Made a new issue of 120 000 ordinary shares at a premium of $0.20 per share. 31 March 2025 The profit for the year ended on this date was $125 400. The share capital at 31 March 2025 was 840 000 ordinary shares of $1 each. (a) Calculate the number of issued ordinary shares at 1 April 2024. … … … … … … [2] (b) Prepare the following ledger accounts to record the transactions during the year ended 31 March 2025. Share premium account Date Details $ Date Details $ Retained earnings account Date Details $ Date Details $ [10] (c) State three factors that directors should consider when deciding the amount to be paid as a final dividend. 1 … … 2 … … 3 … … [3] [Total: 15]

15 marks

This question in 9706/23 Oct/Nov 2025