Analysis and communication of accounting information — Paper 2 · A Level Accounting 9706

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

24 marks

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

This question in 9706/21 Oct/Nov 2018

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

30 marks

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

This question in 9706/23 May/June 2020

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

30 marks

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

This question in 9706/23 Oct/Nov 2020

3 Goodwill was valued at $50 000. A goodwill account was not to be maintained in the partnership’s books. REQUIRED (d) Explain the meaning of goodwill. … … … … … [2] (e) Explain why a valuation of goodwill could be made when a partner retires. … … … … … … [2] (f) Prepare a statement to show the amount due to Javed on his retirement from the partnership. … … … … … … … … … … … [6] Additional information Faraz and Leah continued in partnership sharing profits and losses equally. They discussed how best to finance the amount due to Javed on his retirement from the partnership. They are considering two options. Option 1: Take out a bank loan to cover the amount due. Option 2: Admit a new partner whose capital contribution would cover the amount due. REQUIRED (g) Advise the partners which option they should choose. Justify your answer by discussing both options. … … … … … … … … … … … … … … … [7] [Total: 30] 2 Myra owns a delivery business. The following information is available about her business’s delivery vehicles. Vehicle Date of purchase Cost $ A 1 August 2017 30 000 B 1 February 2018 36 000 C 1 June 2019 39 000 Vehicles are depreciated using the straight-line method at 20% per annum. Depreciation is charged on a month-by-month basis. The business’s financial year end is 31 December. REQUIRED (a) Calculate the balance on the provision for depreciation of vehicles account at 31 December 2019. … … … … … … … … … … … [4] Additional information On 1 March 2020, Vehicle A was sold in part exchange for Vehicle D. Vehicle D cost $42 000 of which $29 200 was paid by cheque. REQUIRED (b) Prepare the vehicle disposal account. Vehicle disposal account $ $ [5] (c) Prepare the provision for depreciation of vehicles account for the year ended 31 December 2020. Provision for depreciation of vehicles account $ $ [3] Additional information Businesses may use the revaluation method of depreciation for some of their non-current assets. REQUIRED (d) Explain one reason why some businesses may use the revaluation method of depreciation. … … … … [2] (e) State how an annual depreciation charge is calculated using the revaluation method. … … … … [1] [Total: 15] 3 The directors of B Limited have provided the following information. Statement of financial position at 31 December 2020 Assets $ Non-current assets 656 000 Current assets Inventory 34 000 Trade receivables 31 000 65 000 Total assets 721 000 Equity and liabilities Equity Issued share capital 500 000 Share premium 67 000 Retained earnings 68 000 Total equity 635 000 Non-current liabilities 8% Debenture (2025) 50 000 50 000 Current liabilities Trade payables 19 000 Cash and cash equivalents 17 000 36 000 Total liabilities 86 000 Total equity and liabilities 721 000 1 The company’s revenue for the year ended 31 December 2020 was $540 000 of which 60% was on credit. 2 The company’s profit for the year was $80 000. REQUIRED (a) Calculate the following ratios at 31 December 2020. (i) Current ratio (to two decimal places) … … … … [1] (ii) Trade receivables turnover (days) … … … … [1] (iii) Return on capital employed (to two decimal places) … … … … [2] Additional information The following ratios are available for 2019 along with comparative ratios for 2018. At 31 December At 31 December 2019 2018 Current ratio 2.20 : 1 2.10 : 1 Trade receivables turnover 37 days 38 days Return on capital employed 15.57% 14.32% REQUIRED (b) Compare the company’s position at 31 December 2020 with that of the previous two years in regard to the following ratios: (i) Current ratio … … … … … … [2] (ii) Trade receivables turnover (days) … … … … … … [2] (iii) Return on capital employed … … … … … … [2] (c) State two ways in which a company could improve its current ratio. 1 … … 2 … … [2] Additional information Companies compare their financial performance with that of different businesses. REQUIRED (d) State three limitations of comparing the financial performance of different businesses. 1 … … 2 … … 3 … … [3] [Total: 15]

47 marks

Mark scheme: 3(a)(i) Current ratio 65:36 = 1.81:1 (1) 1 3(a)(ii) Trade receivables turnover = 31 × 365/324 = 35 days (1) 1 3(a)(iii) Profit before interest 80 + 4 = 84 (1) / 685 = 12.26% (1)OF 2 3(b)(i) The company’s current ratio having slightly improved has now worsened sharply 2 (1). This could mean that it will have difficulty in meeting its obligations in the short to medium term (1). Max 2 Accept other valid responses. 3(b)(ii) The company’s position has improved over the three years (1). Credit customers 2 are paying more quickly than before which will have a beneficial effect on the company’s liquidity position (1). Max 2 Accept other valid responses. 3(b)(iii) The company’s position having slightly improved has now worsened sharply (1). 2 The company is not using its resources effectively (1). Max 2 Accept other valid responses. 3(c) Reduce dividend payments (1) 2 Increase long-term borrowing/issue debentures (1) Issue shares (1) Selling off surplus non-current assets (1) Max 2 Accept other valid responses. 3(d) Businesses may use different accounting policies (1) 3 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) Maybe a different business structure/different objectives (1) Max 3 Accept any other valid responses

This question in 9706/22 Feb/March 2021

6 Increase the advertising budget by $2500 per month. Brady is confident that these measures will produce additional sales of 1000 units each month. REQUIRED (d) Prepare a budgeted marginal cost statement for December 2022 if Brady makes the proposed changes. Brady Budgeted marginal cost statement for December 2022 … … … … … … … … … … … … … … … … Workings: [10] (e) Advise Brady whether or not he should make the proposed changes. Justify your advice by discussing the issues that he should consider. … … … … … … … … … … … … … … … … … … [7] (f) State two advantages of cost–volume–profit analysis. 1 … … 2 … … [2]

19 marks

This question in 9706/22 Oct/Nov 2022

REQUIRED (f) Calculate the profit to be made on each option in the first month of production. (i) Option A … … … … … … [3] (ii) Option B … … … … … … … … … … … … [6] (g) Advise the directors which option they should choose. Justify your answer by considering both financial and non-financial factors. … … … … … … … … … … … … … … … … … … … [7] [Total: 30]

16 marks

This question in 9706/22 May/June 2023

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

15 marks

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

This question in 9706/21 Oct/Nov 2023

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

17 marks

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

This question in 9706/22 Oct/Nov 2023

6 An additional $20 000 per month will be spent on advertising. (e) Calculate the monthly profit to be made from Option A. … … … … … … … … [6] (f) Prepare a monthly marginal costing statement for Option B. … … … … … … … … … … … … [7] (g) Advise the directors whether or not they should go ahead with either of these options. Justify your choice by discussing both financial and non-financial factors. … … … … … … … … … … … … … … … … … … … … … … … … [7] [Total: 30]

20 marks

This question in 9706/22 May/June 2024

(b) Prepare a marginal cost statement for the year ending 30 November 2025 to show the revised contribution and revised profit for the year if Martina decides to go ahead with the plan. Martina Budgeted marginal cost statement for the year ending 30 November 2025 … … … … … … … … … … … … … … Workings: [9] (c) Advise Martina whether or not she should go ahead with the plan. Justify your answer by considering both financial and non-financial factors. … … … … … … … … … … … … … … … … … … … … … … … … … … [7]

16 marks

This question in 9706/22 Oct/Nov 2024

(d) Calculate the total monthly profit to be made if Option A is chosen. … … … … … … … … … … … … [6] (e) Prepare a marginal costing statement to show the total monthly profit to be made if Option B is chosen. … … … … … … … … … … … … … … [7] (f) Advise the directors which option they should choose. Justify your choice by discussing both financial and non-financial factors. … … … … … … … … … … … … … … … … … … … … … … [7] [Total: 30]

20 marks

This question in 9706/22 Oct/Nov 2025