Analysis and communication of accounting information — 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

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

15 marks

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

This question in 9706/21 May/June 2017

2 Wiggins has provided the following summary financial information for the year ended 30 April 2017: $ Bank overdraft 19 000 Cash in hand 1 725 Inventory at 1 May 2016 ? Inventory at 30 April 2017 152 000 Purchases 860 000 Revenue 1 042 500 Trade receivables 31 275 Additional information 1 40% of sales are on a cash basis. All remaining sales are on a credit basis. 2 All purchases are on credit. 3 The gross margin on all sales was 20%. 4 The trade payables turnover (days) for the year ended 30 April 2017 was 54.75 days (to two decimal places). REQUIRED (a) State two limitations of using ratio analysis to analyse the performance of a business. 1 2 [2] (b) Calculate the current ratio to two decimal places. [4] (c) Calculate the liquid (acid test) ratio to two decimal places. [1] (d) Calculate the rate of inventory turnover (times). [4] Additional information Wiggins wishes to expand his business by taking a bank loan of $30 000 repayable over five years. REQUIRED (e) Advise Wiggins whether or not he should take the loan. Justify your answer. [4] [Total: 15]

15 marks

Mark scheme: 2(a) Uses historical information. (1) Does not take seasonality into account (1) May use subjective data (1) Based on purely quantitative information (1) Does not explain the cause (1) Does not take inflation into account (1) 1 mark for each valid point to a mx of 2 marks 2 2(b) Current assets: 152 000 + 31 275 + 1725 / 129 000* + 19 000 = 185 000 (1) Current liabilities: (54.75 / 365 × 860 000 = 129 000) (1) + $19 000 = 148 000 (1)OF Current ratio: 185 000 / 148 000 = 1.25:1 (1)OF 4 2(c) (185 000 – 152 000) / 148 000 = 0.22 : 1 (1)OF 1 2(d) Opening inventory: 1042 500 x 80% = 834 000 (1) – 860 000 +152 000 = 126 000 (1)OF Average inventory: (126 000 + 152 000) / 2 = 139 000 (1)OF Rate on inventory turnover: 6 (times) (1)OF 4 Question Answer Marks 2(e) Wiggins cannot pay debts from short term assets without relying on inventory because the liquid (acid test) ratio is significantly below 1 : 1 (0.22 : 1) (1) For (Max 2) A long term loan will allow Wiggins to plan repayments over five years (1) Enables Wiggins to repay the bank overdraft (1) Loan is cheaper than bank overdraft (1) Against (Max 2) Wiggins already has a bank overdraft of $19 000 (1) Wiggins may be charged a higher interest rate on loan (1) Bank loan will increase its gearing ratio (1) Bank may require security for a loan (1) 1 mark decision Overall max 3 marks justification 4

This question in 9706/22 May/June 2017

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

11 marks

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

This question in 9706/22 May/June 2017

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

30 marks

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

This question in 9706/23 May/June 2017

3 Stapleton provided the following information for the year ended 30 April 2016: $ Opening inventory 25 200 Gross profit 37 150 Additional information 1 All goods were sold to achieve a 20% gross margin. 2 Cash sales were $18 575. All other sales were on a credit basis. 3 All purchases were on a credit basis. 4 Trade receivables at 30 April 2016 were $16 500. 5 Trade payables at 30 April 2016 were $9500. 6 Inventory turnover was 5 times per annum. REQUIRED (a) Calculate the trade receivables turnover (days). State the formula used. Formula Calculation [4] (b) Calculate closing inventory. [4] (c) Calculate the trade payables turnover (days). State the formula used. Formula Calculation [4] (d) State three uses of ratio analysis to a trader. 1 2 3 [3] [Total: 15]

15 marks

Mark scheme: 3(a) Trade receivables / credit sales × 365 (1) 4 16 500/167 175×365=37 days (1)OF Credit sales: 37 150×100/20=185 750 (1) –18 575=167 175 (1)OF 3(b) Cost of goods sold: 37 150×80/20 (1) =148 600 (1)OF 4 Cost of goods sold / average inventory 148 600/(25 200 + closing inventory)/2 (1)OF =5 Closing inventory: 148 600/5×2–25 200=34 240 (1)OF 3(c) Trade payables / credit purchases × 365 (1) 4 Credit purchases = 148 600+(34 240–25 200)=157 640 (1)OF (9500/157 640) (1)OF ×365=22 days (1)OF 3(d) Shows trend / previous years. (1) 3 Helps to compare with competitors. (1) Help to compare with industry averages. (1) Set targets for the next period. (1) (1 mark for a valid point up to 3 marks maximum) Total: 15

This question in 9706/23 May/June 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

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

15 marks

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

This question in 9706/22 Oct/Nov 2017

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

14 marks

This question in 9706/23 Oct/Nov 2017

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

15 marks

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

This question in 9706/21 May/June 2018

3 Anna has obtained the following data at 31 December 2016 in respect of Ravi, a possible new customer. $ Trade receivables 20 640 Cash and cash equivalents 4 840 debit Inventory 38 100 Trade payables 28 760 Other figures obtained are: Sales for the year 331 750 Inventory at 1 January 2016 46 200 Ravi has a mark-up of 25%. REQUIRED (a) Calculate the following ratios for Ravi’s business to two decimal places: (i) Current ratio [2] (ii) Liquid (acid test) ratio [2] (iii) Rate of inventory turnover [3] Additional information Anna has also obtained the following data in respect of Yuan, another possible customer. Current ratio 3.82 : 1 Liquid (acid test) ratio 1.63 : 1 Rate of inventory turnover 6.69 times per year Anna’s main concern when choosing the customer is that they should pay her promptly. REQUIRED (b) Advise Anna which customer she should choose. Justify your answer. [5] (c) State three limitations to a business of using ratio analysis. 1 2 3 [3] [Total: 15]

15 marks

Mark scheme: 3(a)(i) Current ratio 63 580 / 28 760 (1) = 2.21 : 1 (1) 2 3(a)(ii) Liquid (Acid) test ratio 5 480 / 28 760 (1) = 0.89 : 1 (1) 2 3(a)(iii) Rate of inventory turnover 265 400 / 42 150 = 6.30 times per year (1) OF Workings: 331 750 / 100 × 80 (1) = 265 400 (1) 3 Question Answer Marks 3(b) Yuan has the higher current ratio (1) and liquid (acid) test ratio (1) Ravi has a negative liquid (acid) test ratio (1) therefore he would be less able to pay promptly (1) as he has more of his current assets tied up in inventory (1) She would need to consider that Yuan has more assets lying idle and so he may not be as efficient. (1) She should try to discover more about their long term assets and liabilities (1) Decision (1) mark Justification Max 4 marks 5 3(c) Historic Window dressing Different accounting policies Different year end Different sizes 1 mark for each point to a max of 3 Accept other valid points 3

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

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

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 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 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

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

3 Maria is a sole trader. Her financial statements for the year ended 31 December 2018 included the following: $ Revenue 163 000 Gross profit 42 700 Profit for the year 16 500 Inventory 1 January 2018 17 800 Inventory 31 December 2018 19 600 Trade receivables 15 900 Cash and cash equivalents 2 700 Trade payables 10 700 Capital 130 000 REQUIRED (a) Calculate the following ratios to two decimal places: (i) gross margin [1] (ii) profit margin [1] (iii) rate of inventory turnover (in times) [2] (iv) current ratio [1] (v) liquid (acid test) ratio [1] (vi) return on capital employed (ROCE). [1] Additional information Maria’s ratios for 2017 were as follows: 1 Gross margin 23.63% 2 Profit margin 12.05% 3 Rate of inventory turnover 7.36 times 4 Current ratio 3.85 : 1 5 Liquid (acid test) ratio 2.04 : 1 6 ROCE 14.65% REQUIRED (b) Suggest possible reasons for the changes in Maria’s business between 2017 and 2018 in respect of: (i) profitability [2] (ii) liquidity. [2] (c) Identify two external stakeholders. Explain why they may be interested in the financial statements of a business. Stakeholder 1 Interest Stakeholder 2 Interest [4] [Total: 15]

15 marks

Mark scheme: 3(a)(i) Gross margin 42 700 ÷ 163 000 × 100 = 26.20% (1) 1 3(a)(ii) Profit margin 16 500 ÷ 163 000 × 100 = 10.12% (1) 1 3(a)(iii) Rate of inventory turnover 120 300 ÷ 18 700 (1) = 6.43 times (1) OF 2 Workings: 163 000 – 42 700 = 120 300 17800 + 19600 = 18700 2 3(a)(iv) Current ratio 38 200 ÷ 10 700 = 3.57 : 1 (1) 1 Workings: 2018 19 600 + 15 900 + 2 700 = 38 200 3(a)(v) Liquid (acid test) ratio 18 600 ÷ 10 700 = 1.74: 1 (1) 1 3(a)(vi) Return on capital employed (ROCE) 12.69% (1) 1 16500 Workings: × 100 = 12.69 % 130000 3(b)(i) Profitability 2 Gross margin in 2018 improves due to either the selling price increased or cost of sales decreased or both (1) Reduction the profit margin due to increased expenses (1) ROCE has deteriorated probably due to reduction in profit for the year or increase in capital employed or both (1) Accept other valid points. Max 2 3(b)(ii) Liquidity 2 The current ratio has reduced which means there are fewer current assets and / or more current liabilities. (1) The liquid ratio has reduced due to either increased trade payables or reduced liquid assets. Slower rate of inventory turnover due to either increased inventory levels or reduced sales. (1) Accept other valid points. Max 2 3(c) (Potential) investors (1) – to assess return on investment (1) 4 Providers of finance (1) – to assess whether loans / interest will be repaid (1) Government (1) – to ensure taxation liabilities will be paid (1) Suppliers (1) - to assess whether or not to continue to supply and whether or not they will get paid (1) Customers (1) – to assess continuity of supply (1) Trade unions (1) – to assess the wellbeing of members (1) Accept other valid points. Max 2 marks for stakeholders, max 2 marks for their interests.

This question in 9706/23 Oct/Nov 2019

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

30 marks

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

This question in 9706/22 May/June 2020

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

30 marks

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

This question in 9706/21 Oct/Nov 2020

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

30 marks

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

This question in 9706/22 Oct/Nov 2020

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

15 marks

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

This question in 9706/23 Oct/Nov 2020

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

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

1 The following information has been extracted from the accounting records of T Limited at 30 June 2021. 1 Inventory at 1 July 2020 was valued at $46 800. 2 Inventory at 30 June 2021 was valued at $54 200. 3 The rate of inventory turnover was 8.8 times. 4 The gross profit margin was 45%. REQUIRED (a) Calculate for the year ended 30 June 2021: (i) cost of sales … … … … … … … [2] (ii) revenue. … … … … … … … [2] Additional information The following balances were extracted from the books of account at 30 June 2021. $ 8% debentures (2026–2027) 96 000 Administrative expenses 55 900 Directors’ remuneration 62 400 Distribution costs 59 200 Finance costs 6 350 Wages and salaries 88 300 Trade receivables 110 360 Provision for doubtful debts at 1 July 2020 1 235 The following information is also available. 1 The 8% debentures (2026–2027) were taken out on 1 November 2020. Interest was paid every three months in arrears, starting on 1 February 2021.

4 marks

Mark scheme: 1(a)(i) $444 400 (2) OF Workings Average inventory = ($46 800 + $54 200) / 2 = $50 500 (1) Cost of sales = $50 500 (OF) × 8.8 (1) = $444 400 1(a)(ii) $808 000 (2) OF Workings $444 400 (OF) × 100/55 (1) = $808 000 (1) OF 2 1(b) $1485 (4) OF Workings Net trade receivables $108 000 (1) 61–90 days $108 000 (OF) × 15% = $16 200 × 2.5% = $405 (1) OF Over 90 days $108 000 (OF) × 10% = $10 800 × 10% = $1080 (1) OF Balance $1485 (1) OF Alternatively (b) rate of provision = (15% × 2.5%) + (10% × 10%) = 1.375% Provision = 1.375% × (110 360 – 2360) = $1485 4 Question Answer Marks 1(c) T Limited Income statement for the year ended 30 June 2021 $ Revenue 808 000 Cost of sales (444 400) Gross profit 363 600 (1) OF Administrative expenses W1 (159 340) (6) OF Distribution costs W2 (184 070) (2) OF Profit from operations 20 190 Finance costs (7 630) (1) Profit for the year 12 560 (1) OF W1 Administrative expenses $ Balance 55 900 Directors’ remuneration 46 800 (1) Depreciation 26 400 (1) Wages and salaries 27 630 (1) Irrecoverable debt 2 360 (1) Increase in Prov for DD 250 (1) OF 159 340 (1) OF W2 Distribution costs $ Balance 59 200 Directors’ remuneration 27 600 (1) Depreciation 32 800 Wages and salaries 64 470 184 070 (1) OF 11 Question Answer Marks 1(d) T Limited Statement of Changes in Equity for the year ended 30 June 2021 Share capital $ Share premium $ Revaluation reserve $ Retained earnings $ Total $ At 1 July 2020 440 000 – 7 500 86 320 533 820 Revaluation (7 500) (2 500) (10 000) (1) for row Rights issue 220 000 82 500 302 500 (1) for row Bonus issue 66 000 (66 000) – (1) for row Final dividend (18 150) (18 150) (1) for row Profit for the year 12 560 12 560 (1) OF for row At 30 June 2021 726 000 16 500 - 78 230 820 730 (1) OF for row 6 1(e)(i) Revenue / Net book value of non-current assets (1) 1 1(e)(ii) How efficiently the business is utilising non-current assets to generate revenue (1) Accept other valid responses. 1 1(f) Based on historic data (1) Non-financial factors not included (1) Ignores inflation (1) Different accounting policies (1) Different year-ends (1) Different size of business (1) Max 3 marks Accept other valid responses. 3

This question in 9706/23 Oct/Nov 2021

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

15 marks

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

This question in 9706/23 Oct/Nov 2021

7 Aged analysis of net trade receivables at 30 June 2021: 0–60 61–90 Over 90 days days days Percentage of total net trade receivables 75% 15% 10%

0 marks

This question in 9706/23 Oct/Nov 2021

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

30 marks

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

This question in 9706/21 May/June 2022

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

15 marks

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

This question in 9706/21 May/June 2022

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

24 marks

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

This question in 9706/22 May/June 2022

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

30 marks

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

This question in 9706/23 May/June 2022

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

3 N Limited provided the following information for the year ended 31 August 2022. $ 6% debentures (2022) 20 000 Bank overdraft 9 430 Cash in hand 650 Closing inventory 64 800 Finance costs 1 400 Opening inventory 45 600 Operating expenses 96 000 Other payables 4 340 Other receivables 6 080 Purchases 172 000 Revenue 292 000 Trade payables 10 100 Trade receivables 19 800 Cash sales accounted for 20% of revenue. Cash purchases accounted for 25% of purchases. REQUIRED (a) Calculate the following efficiency ratios, showing the formula used. Ratio Formula Workings Trade receivables turnover (days) Answer: Trade payables turnover (days) Answer: [4] (b) Calculate the following liquidity ratios to two decimal places, showing the formula used. Ratio Formula Workings Current ratio Answer: Liquid (acid test) ratio Answer: [4] Additional information The directors have reported a 5% increase in profit for the year ended 31 August 2022 and are satisfied with the results. REQUIRED (c) Advise the directors whether or not they are correct to be satisfied. Justify your answer and support it by considering the efficiency ratios and liquidity ratios in (a) and (b). … … … … … … … … … … … … … … [5] (d) State two limitations of using accounting ratios to compare the results of two businesses. 1 … … 2 … … [2] [Total: 15]

15 marks

Mark scheme: 3(a) 4 Ratio Formula Workings Trade receivables Trade receivables $292 000  80% = $233 600  365 (1) turnover (days). Credit sales $19 800  365 = 31 days (1) $233 600 Trade payables Trade payables $172 000  75% = $129 000  365 (1) turnover (days) Credit purchases $10 100  365 days = 29 days (1) $129 000 3(b) 4 Ratio Formula Workings Current ratio Current assets $91 330 / $43 870 (1) Current liabilities = 2.08:1 (1) Liquid (acid test) Current assets exc. inventory $26 530 / $43 870 (1) ratio Current liabilities = 0.60:1 (1) OF 3(c) The company may experience cash flow problems (1) as a result of paying suppliers before receiving settlement from 5 customers (1) The company may struggle to pay its short-term debts (1) Due to the high level of inventory (1) Decision Therefore, the directors should not be satisfied with the results due to potential liquidity problems (1) Accept other valid responses. 3(d) Ratios do not consider non-financial factors (1) 2 Businesses may not be of comparable size (1) Businesses may use different accounting techniques (1) Uses historic data (1) Max 2 Accept other valid responses.

This question in 9706/22 Oct/Nov 2022

3 Remaining profits and losses to be shared in the ratio Nibras:Raif, 3:2. REQUIRED (b) Prepare the appropriation account for the year ended 31 December 2022. Nibras and Raif Appropriation account for the year ended 31 December 2022 … … … … … … … … … … … … … [3] Additional information The partners would like to know what difference it would have made if they had operated without a partnership agreement during the year ended 31 December 2022. REQUIRED (c) Calculate by how much Nibras’ current account balance at 31 December 2022 would have been different if there had been no partnership agreement during the year ended 31 December 2022. … … … … … … … … … … … … … … … … … … … … [8] Additional information The partners had considered charging interest on drawings as part of their agreement. REQUIRED (d) State one reason for including interest on drawings in a partnership agreement. … … [1] (e) State the double entry for recording interest on drawings. Debit … Credit … [2] Additional information Nibras and Raif would like to expand their business but they require additional finance. They have considered two options: Option 1: Nibras to introduce additional capital by selling some personal investments Option 2: Arrange a bank loan REQUIRED (f) Advise the partners which option they should choose. Justify your answer by discussing both options. … … … … … … … … … … … … … … … [7] [Total: 30] 2 Jakoub owns a restaurant. The business’s financial year end is 31 December. The business owns many small items of kitchen equipment. The following information is available. 1 On 1 January 2022 kitchen equipment was valued at $3450. 2 Additional kitchen equipment was purchased for cash, $1680, during the year ended 31 December 2022. 3 On 31 December 2022 kitchen equipment was valued at $3950. REQUIRED (a) Prepare the kitchen equipment account for the year ended 31 December 2022. Kitchen equipment $ $ [4] (b) State two reasons why the reducing balance method of depreciation might be chosen by a business for depreciating non-current assets. 1 … … 2 … … [2] Additional information On 1 January 2022, a new delivery vehicle was purchased in part exchange for the business’s old delivery vehicle. A payment of $22 500 was made. The old delivery vehicle had originally cost $24 000 when it was purchased on 1 January 2020. The old delivery vehicle was part exchanged at net book value. Delivery vehicles are depreciated by 25% per annum using the reducing balance method of depreciation. REQUIRED (c) Prepare a journal entry to record the charge for depreciation of vehicles for the year ended 31 December 2022. A narrative is not required. Journal Dr Cr $ $ Workings: [5] (d) Define each of the following terms: (i) capital expenditure … … [1] (ii) capital receipts. … … [1] Additional information Jakoub is preparing his business’s financial statements for the year ended 31 December 2022. The following additional information is available. Payments $ Purchase of new ovens 5 600 Installation costs for new ovens 400 Repairs to electrical equipment 2 600 Maintenance of computer equipment 300 Extension to restaurant 85 000 Decoration of restaurant extension 3 200 Receipts $ Bank loan 25 000 Additional capital provided by Jakoub 40 000 Proceeds from the disposal of unwanted furniture 2 800 REQUIRED (e) Calculate the total amount for each of the following: (i) capital expenditure … … [1] (ii) capital receipts. … … [1] [Total: 15] 3 Haniya wished to compare some ratios for her business. The following information is available for the year ended 30 November 2021. Acid test ratio 0.8:1 Trade receivables turnover (days) 34 days Trade payables turnover (days) 36 days The following extract was taken from the statement of financial position at 30 November 2022. $ Current assets Inventory 11 500 Trade receivables 9 600 Cash at bank 6 250 27 350 Current liabilities Bank loan 10 000 Other payables 1 720 Trade payables 6 580 18 300 For the year ended 30 November 2022 credit sales totalled $94 800 and credit purchases totalled $88 300. REQUIRED (a) Calculate each of the following ratios for the year ended 30 November 2022. (i) Acid test ratio (to two decimal places) … … … [2] (ii) Trade receivables turnover (days) … … … [2] (iii) Trade payables turnover (days) … … … [2] (b) Explain the importance of the acid test ratio to a business. … … [2] (c) Identify two ways in which the owner of a business could improve the acid test ratio. 1 … … 2 … … [2] (d) Discuss the changes that have occurred in the trade receivables turnover (days) ratio and the trade payables turnover (days) ratio for Haniya’s business during the year ended 30 November 2022. … … … … … … … … [5] [Total: 15]

51 marks

Mark scheme: 3(a)(i) Calculate each of the following ratios for the year ended 30 November 2022. 2 Acid test ratio (to two decimal places) Current assets less inventory $15 850 = (1) = 0.87:1 (1) Current liabilities $18 300 3(a)(ii) Calculate each of the following ratios for the year ended 30 November 2022. 2 Trade receivables turnover (days) Trade receivables  365 $9 600 = (1)  365 = 37 days (1) Credit Sales $94 800 3(a)(iii) Calculate each of the following ratios for the year ended 30 November 2022. 2 Trade payables turnover (days) Trade payables  365 $6 580 = (1)  365 = 28 days (1) Credit purchases $88 300 3(b) Explain the importance of the acid test ratio to a business. 2 The acid test ratio indicates its ability to pay its short-term debts (1) without selling its inventory (1). Max 2 Accept other valid responses. 3(c) Identify two ways in which the owner of a business could improve the acid 2 test ratio. Reducing cash drawings (1) Borrowing more long-term (1) Investing more capital (1) Sale of non-current assets (1) Reduce inventory holding (1) Max 2 Accept other valid responses. 3(d) Discuss the changes that have occurred in the trade receivables turnover 5 ratio and the trade payables turnover ratio for Haniya’s business during the year ended 30 November 2022 The trade receivables ratio has worsened (1) reducing liquidity. There could be less control over credit customers leading to irrecoverable debts (1) The trade payables ratio has improved (1) reducing liquidity. This may attract more discounts received improving profits (1) The business may experience cash flow problems as a result of paying suppliers before receiving settlement from customers (1) Max 5 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

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 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

2 Alex owns a business selling computer equipment. He provided the following information for the year ended 31 July 2023. 1 Opening inventory at 1 August 2022 was $19 100. 2 Gross profit for the year ended 31 July 2023 was $56 380. 3 Cash sales were $36 870. All other sales were made on credit. 4 All sales were made to achieve a gross margin of 25%. 5 All purchases were made on credit. 6 Inventory turnover was 8 times per annum. 7 Trade receivables at 31 July 2023 were $23 150. 8 Trade payables at 31 July 2023 were $17 370. (a) Calculate the trade receivables turnover (days) for the year ended 31 July 2023. State the formula used. Formula … … Calculation … … … … … [3] (b) (i) State the formula used to calculate the rate of inventory turnover (times). … … [1] (ii) Calculate the closing inventory at 31 July 2023. … … … … … [3] (c) Calculate the trade payables turnover (days) for the year ended 31 July 2023. State the formula used. Formula … … Calculation … … … … … [3] Additional information Alex understands that by comparing his business’s financial results with those of various other businesses he will learn how successful his own business is. (d) Advise Alex whether his understanding is correct. Justify your answer. … … … … … … … … … … … … … … [5] [Total: 15]

15 marks

Mark scheme: 2(a) Calculate the trade receivables turnover (days) for the year ended 31 3 July 2023. State the formula used. Formula Trade receivables  365 (1) Credit sales Calculation 23150  365 = 45 days (1)OF 188650 (1) 2(b)(i) State the formula used to calculate the rate of inventory turnover 1 (times). Cost of sales (1) Average inventory 2(b)(ii) Calculate the closing inventory at 31 July 2023. 3 Cost of sales = 56 380  75/25 = 169 140 (1) 8 = ((169 140/8)  2) = 42 285 (1) Closing inventory = 42 285 – 19 100 = $23 185 (1)OF 2(c) Calculate the trade payables turnover (days) for the year ended 31 July 3 2023. State the formula used. Formula Trade payables  365 (1) Credit purchases Calculation Purchases = 169 140 + 23 185 – 19 100 = 173 225 17370  365 = 37 days (1)OF 173225 (1) 2(d) Advise Alex whether his understanding is correct. Justify your answer. 5 Different businesses may use different accounting methods (1) which will invalidate the comparison (1). Also, financial statements only take account of monetary data (1), ignoring non-financial matters such as staff morale, location of the business etc (1). Valid comparison is only useful if related to businesses of similar size in the same business sector (1) Max 4 for comments Advice supported by a comment (1) 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

3 Expenses At 1 January 2023 Bank payments during At 31 December 2023 the year Advertising prepaid $490 $5 960 accrued $610 General expenses accrued $570 $8 480 – Insurance prepaid $330 $4 510 prepaid $390 Wages – $12 400 accrued $470 (c) Prepare an extract from the statement of profit or loss for the year ended 31 December 2023, starting with the gross profit calculated in (a). Workings: Zahid Statement of profit or loss for the year ended 31 December 2023 (extract) $ Gross profit … … … … … … … … … … … … … … … [12] (d) Explain, with reference to an accounting concept, why Zahid made adjustments to his income and expenses when preparing the statement of profit or loss. … … … … … … [3] Additional information Zahid plans to expand his business. This would mean he would no longer operate as a sole trader. He is considering the following options. Option A: form a partnership with Talha who currently owns a similar business. Option B: form a limited liability company with himself and Talha as shareholders and directors. (e) Advise Zahid which option he should choose. Justify your answer by considering both the advantages and the disadvantages of each option. … … … … … … … … … … … … … … … … … … [7] [Total: 30] 2 J Limited’s financial year ended on 31 December 2023. At this date the following balances remained in the books of account from which the statement of financial position is to be prepared. $ 8% Debentures (2024) 90 000 Cash and cash equivalents (debit balance) 28 900 Furniture and equipment at carrying value 180 000 Inventory 84 000 Issued share capital: shares of $0.50 each 750 000 Property at valuation 1 060 000 Retained earnings 242 400 Revaluation reserve 70 000 Share premium 220 000 Trade and other payables 19 700 Trade and other receivables 39 200 The following errors have been discovered in the information shown. 1 Inventory at 31 December 2023 had been undervalued by $3600. 2 Furniture and equipment had been depreciated by 25% instead of 20%, using the reducing balance method of depreciation. 3 Sales returns of $1100 had been recorded in the books of prime entry as purchases returns. The error affected the general ledger and the personal accounts of credit customers and credit suppliers. (a) Calculate the corrected balance of retained earnings at 31 December 2023. … … … … … … … … [5] (b) Prepare the statement of financial position at 31 December 2023. J Limited Statement of financial position at 31 December 2023 … … … … … … … … … … … … … … … … … … … … … … … … … [10] [Total: 15] 3 Suki uses ratios to assess her business’s efficiency. The following information is available. 1 For the year ended 31 December 2023: $ Purchases 323 000 Revenue 482 500 2 At 31 December 2023: $ Trade payables 33 600 Trade receivables 34 100 All goods are purchased on credit. 80% of sales are on credit. (a) Calculate the following ratios, stating the formula used. (i) Trade payables turnover (days) Formula Calculation [2] (ii) Trade receivables turnover (days) Formula Calculation [2] Additional information At 31 December 2022 the following ratios were calculated. Trade payables turnover (days) 32 days Trade receivables turnover (days) 36 days (b) Discuss the performance of Suki’s business, comparing the results for 2023 with those for 2022. … … … … … … … … … … [6] Additional information Inventories were valued as follows: $ 1 January 2023 36 700 31 December 2023 42 100 (c) Calculate, to two decimal places, the rate of inventory turnover, stating the formula used. Formula Calculation [3] (d) Explain the importance of the rate of inventory turnover to a business. … … … … [2] [Total: 15]

52 marks

Mark scheme: 3(a)(i) Calculate the following ratios stating the formula used. 2 (i) Trade payables turnover (days) Formula Calculation Trade payables  365 (1) $33 600  365 = 38 days (1) Credit purchases $323 000 3(a)(ii) Calculate the following ratios stating the formula used. 2 (ii) Trade receivables turnover (days) Formula Calculation Trade receivables  365 (1) $34 100  365 = 33 days (1) Credit sales $386 000 3(b) Discuss the performance of Suki’s business comparing the results for 6 2023 with those for 2022. Suki has longer trade payables days which means that he retains his money for longer (1) this may result in a deterioration in relationships with suppliers/refusal of credit terms (1) and may also result in the possibility of losing potential cash discounts (1). Suki has a shorter trade receivables period meaning that money is flowing into the business quicker (1) demonstrating improved efficiency / credit control (1). This could result in a reduction in irrecoverable debts (1) Credit customers now pay more quickly than payments are made to credit suppliers (1). This will improve the cash flow position of the business (1) Accept other valid responses. Max 6 3(c) Calculate, to two decimal places, the rate of inventory turnover, stating 3 the formula used. Formula Calculation Cost of sales (1) $36 700 + 323 000 - $42 100 = $317 600 Average inventory $39 400 (1) = 8.06 times (1) 3(d) Explain the importance of the rate of inventory turnover to a business. 2 Award 1 mark for identification and 1 mark for valid linked development The importance of the inventory turnover to a business is that it is a measure of how well the business manages the inventory (1) indicating how frequently inventory is turned into sales (1). If the rate is low it enables the business to make decisions as to changes in the cost or selling price of products.(1) Max 2 marks Accept other valid responses.

This question in 9706/22 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

2 W Limited provided the following extracts from the financial statements at 31 August 2024. Statement of profit or loss for the year ended 31 August 2024 $ Sales revenue 720 000 Opening inventory 76 000 Operating expenses 165 000 Finance costs 20 000 Taxation 16 000 Statement of financial position at 31 August 2024 $ Trade receivables 66 000 Share capital 550 000 Retained earnings 95 000 8% debentures (2026) 45 000 Current liabilities 37 000 The following information is also available: • cash sales were 15% of total sales • the gross profit margin was 35% • the rate of inventory turnover (times) was 6.4 times. (a) Calculate the trade receivables turnover (days) for the year ended 31 August 2024 showing the formula used. Formula Calculation [2] (b) Explain the difference between gross profit margin and mark-up. … … … … [2] (c) (i) State the formula for the rate of inventory turnover (times). … … [1] (ii) Calculate the value of the closing inventory at 31 August 2024. … … … … … [3] (d) Calculate, to two decimal places, the return on capital employed for the year ended 31 August 2024 showing the formula used. Formula Calculation [4] Additional information The directors of W Limited use accounting ratios to compare the company’s progress with other businesses. They are aware that such comparison should only be made with companies in similar business sectors but are also aware that such comparison has limitations. (e) State three other limitations of accounting ratios. 1 … … … 2 … … … 3 … … … [3] [Total: 15]

15 marks

Mark scheme: 2(a) Calculate the trade receivables turnover (days) for the year ended 31 August 2024 showing the formula used. 2 Formula Calculation Trade receivables $66 000  365 (1)  365 = 40 days (1) Credit sales $612 000 2(b) Explain the difference between gross profit margin and mark-up. 2 Gross profit margin expresses gross profit relative to revenue (1) whereas mark-up expresses gross profit relative to cost of sales (1) Accept other valid responses. 2(c)(i) State the formula for the rate of inventory turnover (times). 1 Cost of sales (1) Average inventory 2(c)(ii) Calculate the value of the closing inventory at 31 August 2024. 3 $70 250 (3) W Working Cost of sales = $720 000  65% = $468 000 (1) Average inventory = $468 000 / 6.4 = $73 125 (1) Closing inventory = $76 000 – (($76 000 – 73 125)  2) = $70 250 (1) 2(d) Calculate, to two decimal places, the return on capital employed for the year ended 4 31 August 2024 showing the formula used. Formula Calculation Profit from operations $252 000 – $165 000  100 (1) = $87 000 (1) Capital employed $550 000 + $95 000 + $45 000 = $690 000 (1) ($87 000 / $690 000)  100 = 12.61% (1) 2(e) State three other limitations of accounting ratios. 3 • Takes no account of non-financial issues. (1) • Ignores the effects of inflation. (1) • Ignores the time value of money (1) • Focuses on historical data. (1) • Takes no account of different accounting policies. (1) • Highlights differences, but not the causes of differences (1) Max 3 marks Accept other valid responses.

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

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

3 Khaled, the owner of a retail business, provided the following information. For the years ended 31 December 2024 2023 Gross profit margin 48% 45% Profit margin 12% 13% (a) State the formula for calculating each of the following ratios. Gross profit margin Profit margin [2] (b) Suggest two reasons which could explain the increase in the gross profit margin comparing 2024 with 2023. 1 … … 2 … … [2] (c) Suggest two reasons which could explain the decrease in profit margin comparing 2024 with 2023, despite the increase in the gross profit margin. 1 … … 2 … … [2] Additional information Khaled has compared the recent liquidity ratios for his business with ratios for businesses of a similar size and trading in the same goods. Khaled’s business Ratio for similar For the years ended 31 December businesses 2024 2023 Current ratio 1.60 : 1 1.45 : 1 1.85 : 1 Acid test ratio 0.62 : 1 0.75 : 1 0.50 : 1 Khaled is pleased with the results of this comparison. (d) Explain with reasons whether or not you agree with Khaled’s view of his business’s liquidity position. Justify your answer by commenting on both ratios. … … … … … … … … … … … … … … … [5] Additional information Khaled is aware that size of business and trading in similar goods are not the only factors to be considered in making comparisons with similar businesses. (e) Explain two other reasons why Khaled may find it difficult to make valid comparisons with similar businesses. 1 … … … … 2 … … … … [4] [Total: 15]

15 marks

Mark scheme: 3(a) State the formula for calculating each of the following ratios. 2 Gross profit Gross profit  100 (1) margin Revenue Profit margin Profit for the year (after interest)  100 Revenue Or (1) Profit for the year  100 Revenue 3(b) Suggest two reasons which could explain the increase in the gross profit 2 margin comparing 2024 with 2023. Selling prices were increased (1) Cost of sales was reduced (1) 3(c) Suggest two reasons which could explain the decrease in profit margin 2 comparing 2024 with 2023 despite the increase in the gross profit margin. Other income was reduced (1) Reduced efficiency controlling expenses (1) 3(d) Explain with reasons whether or not you agree with Khaled’s view of his 5 business’s liquidity position. Justify your answer by commenting on both ratios. Agree (max 2) • Despite being less than averages for similar businesses, the current ratio has improved meaning that it will be easier to pay short-term debts (1) • Despite the decline in the acid test ratio liquid assets are being used more efficiently and it is now operating at nearer the average for this type of business (1) Disagree (max 2) • The current ratio remains below the average for similar businesses indicating that it may continue to have difficulty paying short-term debts (1) • The acid test ratio remains above the average for similar businesses indicating that liquid resources are not being used efficiently (1) Max 4 Accept other valid responses. Decision supported with a comment (1) 3(e) Explain two other reasons why Khaled may find it difficult to make valid 4 comparisons with similar businesses. • Financial reports for other businesses may not be immediately available or unavailable (1) and circumstances could change considerably during this delay (1). • Businesses may have used different accounting methods/policies/classifications (1) so that comparisons cannot be made on a ‘like-for-like’ basis (1). • Businesses may have quite different asset structures (1) making comparisons of certain ratios invalid (1). • Businesses may have used window dressing/income smoothing (1) which would give those businesses an overly favourable impression (1). Max 4 Accept other valid responses

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

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

3 Khaled, the owner of a retail business, provided the following information. For the years ended 31 December 2024 2023 Gross profit margin 48% 45% Profit margin 12% 13% (a) State the formula for calculating each of the following ratios. Gross profit margin Profit margin [2] (b) Suggest two reasons which could explain the increase in the gross profit margin comparing 2024 with 2023. 1 … … 2 … … [2] (c) Suggest two reasons which could explain the decrease in profit margin comparing 2024 with 2023, despite the increase in the gross profit margin. 1 … … 2 … … [2] Additional information Khaled has compared the recent liquidity ratios for his business with ratios for businesses of a similar size and trading in the same goods. Khaled’s business Ratio for similar For the years ended 31 December businesses 2024 2023 Current ratio 1.60 : 1 1.45 : 1 1.85 : 1 Acid test ratio 0.62 : 1 0.75 : 1 0.50 : 1 Khaled is pleased with the results of this comparison. (d) Explain with reasons whether or not you agree with Khaled’s view of his business’s liquidity position. Justify your answer by commenting on both ratios. … … … … … … … … … … … … … … … [5] Additional information Khaled is aware that size of business and trading in similar goods are not the only factors to be considered in making comparisons with similar businesses. (e) Explain two other reasons why Khaled may find it difficult to make valid comparisons with similar businesses. 1 … … … … 2 … … … … [4] [Total: 15]

15 marks

Mark scheme: 3(a) State the formula for calculating each of the following ratios. 2 Gross profit Gross profit  100 (1) margin Revenue Profit margin Profit for the year (after interest)  100 Revenue Or (1) Profit for the year  100 Revenue 3(b) Suggest two reasons which could explain the increase in the gross profit 2 margin comparing 2024 with 2023. Selling prices were increased (1) Cost of sales was reduced (1) 3(c) Suggest two reasons which could explain the decrease in profit margin 2 comparing 2024 with 2023 despite the increase in the gross profit margin. Other income was reduced (1) Reduced efficiency controlling expenses (1) 3(d) Explain with reasons whether or not you agree with Khaled’s view of his 5 business’s liquidity position. Justify your answer by commenting on both ratios. Agree (max 2) • Despite being less than averages for similar businesses, the current ratio has improved meaning that it will be easier to pay short-term debts (1) • Despite the decline in the acid test ratio liquid assets are being used more efficiently and it is now operating at nearer the average for this type of business (1) Disagree (max 2) • The current ratio remains below the average for similar businesses indicating that it may continue to have difficulty paying short-term debts (1) • The acid test ratio remains above the average for similar businesses indicating that liquid resources are not being used efficiently (1) Max 4 Accept other valid responses. Decision supported with a comment (1) 3(e) Explain two other reasons why Khaled may find it difficult to make valid 4 comparisons with similar businesses. • Financial reports for other businesses may not be immediately available or unavailable (1) and circumstances could change considerably during this delay (1). • Businesses may have used different accounting methods/policies/classifications (1) so that comparisons cannot be made on a ‘like-for-like’ basis (1). • Businesses may have quite different asset structures (1) making comparisons of certain ratios invalid (1). • Businesses may have used window dressing/income smoothing (1) which would give those businesses an overly favourable impression (1). Max 4 Accept other valid responses

This question in 9706/23 May/June 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

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