Irrecoverable debts and allowance for irrecoverable debts — Paper 2 · IGCSE Accounting (9-1) 0985

4 Nadia is a trader. Her financial year ends on 31 March. She extracted a trial balance at 31 March 2020. The debit and credit totals did not agree. The difference was entered into a suspense account. After Nadia prepared draft financial statements, she discovered the following errors. 1 The purchases account was overcast by $110. 2 $13 for discount allowed in February 2020 had been credited to the discount allowed account as $15. 3 A payment for insurance, $220, was correctly recorded in the cash book, but was recorded as $202 in the insurance account. 4 Commission received, $65, had been debited to the account for commission payable. The entry to the cash book had been correctly made. 5 Cash drawings, $85, were correctly entered in the cash book but were credited to the drawings account. 6 The cost of a vehicle repair, $190, had been debited to the motor vehicles account. 7 A payment of $100 to Robert had been posted to the account of Roberta. REQUIRED (a) Prepare the suspense account. Include the original difference on the trial balance as a balancing figure. Nadia Suspense account Date Details $ Date Details $ ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. ………. ……….. [7] (b) Identify the type of error made in (i) Error 6 … [1] (ii) Error 7 … [1] (c) Complete the following statement to show the effect on the profit for the year of correcting errors 2–7. If there is no effect on profit write ‘nil’ in the ‘no effect’ column. Calculate the corrected profit for the year. Ignore depreciation of non-current assets. The first correction has been completed as an example. Nadia Statement of corrected profit for the year ended 31 March 2020 $ Draft profit for the year before corrections 6720 No Increase Decrease Effect in profit in profit $ $ Error 1 110 Error 2 … … … Error 3 … … … Error 4 … … … Error 5 … … … Error 6 … … … Error 7 … … … Corrected profit for the year [7] At 31 March 2020 Nadia’s trade receivables owed $14 500. After the preparation of the draft financial statements for the year ended 31 March 2020, Nadia discovered the following. 1 $300 owed by DD Supplies should have been written off as irrecoverable. 2 A provision of doubtful debts of 2% of trade receivables should have been created. REQUIRED (d) Prepare journal entries to record 1 and 2 above. Narratives are not required. Nadia Journal Date Details Debit Credit $ $ ……….. …………………………………………… … ……………… ……………… ……….. …………………………………………… … ……………… ……………… ……….. …………………………………………… … ……………… ……………… ……….. …………………………………………… … ……………… ……………… ……….. …………………………………………… … ……………… ……………… ………… …………………………………………… … ……………… ……………… [4] [Total: 20]

20 marks

Mark scheme: 4(a) Nadia Suspense account 2020 $ 2020 $ Mar 31 Purchases 110 (1) Mar 31 Difference on trial balance 24 (1)OF Commission payable 65 (1) Discount allowed 28 (1) Insurance 18 (1) Commission receivable 65 (1) Drawings 170 (1) 240 240 7 4(b)(i) Error of principle (1) 1 Question Answer Marks 4(b)(ii) Error of commission (1) 1 4(c) Nadia Statement of corrected profit for the year ended 31 March 2020 Profit for the year before corrections Error 1 Error 2 Error 3 Error 4 Error 5 Error 6 Error 7 Corrected profit for the year No effect nil (1) nil (1) Increase in profit $ 110 130 (1) ___ 240 Decrease in profit $ 28 (1) 18 (1) 190 (1) ___ 236 $ 6720 4(1)(OF) 6724 7 4(d) Nadia Journal Date Details Debit $ Credit $ 2020 March 31 Irrecoverable debts DD Supplies 300 (1) 300 (1) March 31 Income statement Provision for doubtful debts 284 (1) 284 (1) 4

This question in 0985/22 May/June 2020

3 JP Limited’s financial year ended on 30 September 2020. The following balances were available at that date. $ 7% debentures (2026) 20 000 Administrative expenses 44 000 Carriage inwards 1 500 Distribution costs 38 000 Debenture interest paid 700 Inventory at 1 October 2019 66 000 Non-current assets at book value at 1 October 2019 610 000 Provision for doubtful debts 1 000 Purchases 263 000 Revenue 529 500 Trade receivables 80 500 Additional information 1 Inventory at 30 September 2020 was valued at $59 000. 2 Interest on the 7% debentures (2026) had been paid up to 31 March 2020. 3 Administrative expenses included rates of $1200 for the six months ending 31 March 2021. 4 Distribution costs of $800 were outstanding at 30 September 2020. 5 Non-current assets should be depreciated by 10% per annum using the reducing balance method. 6 Irrecoverable debts of $500 are to be written off. 7 The directors wish to maintain the provision for doubtful debts at 2% of trade receivables. REQUIRED (a) Calculate the cost of sales for the year ended 30 September 2020. … … … … … … … [2] (b) Calculate the increase or decrease in the provision for doubtful debts at 30 September 2020. … … … … … … [2] (c) Prepare the income statement for the year ended 30 S JP Limited Income Statement for the year ended 30 S …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … (d) Complete the table by placing a tick (✓) in the correct column to indicate the effect on the equity of JP Limited of each of the following. The first one has been completed as an example. Increase Decrease No effect Issue additional debentures ✓ Issue additional ordinary shares Payment of ordinary share dividend Proposal of ordinary share dividend Transfer from retained earnings to general reserve [4] [Total: 20]

20 marks

Mark scheme: 3(a) $ Opening inventory 66 000 Purchases 263 000 Carriage inwards 1 500 330 500 (1) Less Closing inventory 59 000 Cost of sales 271 500 (1) OF 2 3(b) $ Provision at 30 September 2020 ((80 500 – 500) x 2%) 1 600 (1) Less Provision at 1 October 2019 1 000 Increase in provision for doubtful debts 600 (1) OF 2 3(c) JP Limited Income Statement for the year ended 30 September 2020 $ $ Revenue 529 500 Less Cost of sales 271 500 (1) OF Gross profit 258 000 (1) OF Less expenses Administrative expenses (44 000(1) - 1200(1)) 42 800 Distribution costs (38 000(1) + 800(1)) 38 800 Irrecoverable debts 500 (1) Provision for doubtful debts 600 (1) OF Depreciation – non-current assets 61 000 (1) 143 700 Profit from operations 114 300 Debenture interest (700(1) + 700 (1)) 1 400 Profit for the year 112 900 (1) OF 12 Question Answer Marks 3(d) Increase Decrease No effect Issue of additional debentures  Issue of additional ordinary shares  (1) Payment of ordinary share dividend  (1) Proposal of ordinary share dividend  (1) Transfer from retained earnings to general reserve  (1) 4

This question in 0985/22 Oct/Nov 2020

2 Tej is a trader who sells goods on credit. His year end is 28 February. Tej provided the following information. $ At 1 March 2020 Trade receivables 6250 Other receivables (rent prepaid) 300 For the year ended 28 February 2021 Rent charge for the year 3900 Cheque payments for rent 30 June 2020 1950 30 November 2020 2100 At 28 February 2021 Trade receivables 7000 The provision for doubtful debts was 4% of trade receivables at 1 March 2020 and 6% of trade receivables at 28 February 2021. REQUIRED (a) Prepare the rent payable account for the year ended 28 February 2021. Balance the account and bring down the balance on 1 March 2021. Tej Rent payable account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (b) Prepare the provision for doubtful debts account for the year ended 28 February 2021. Balance the account and bring down the balance on 1 March 2021. Tej Provision for doubtful debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] (c) Name the accounting principle applied when the income statement is adjusted for rent prepaid. … [1] (d) (i) Explain how the realisation principle is applied to the recording of Tej’s credit sales. … … … … [2] (ii) Explain how the prudence principle is applied to the maintenance of Tej’s provision for doubtful debts. … … … … [2] Tej sells to a small number of customers. He has good working relationships with them and they sometimes recommend him to potential customers. Tej is concerned that his customers are taking a long time to pay him. He is considering charging interest on overdue accounts. REQUIRED (e) Advise Tej whether or not he should charge interest on overdue accounts. Justify your answer. … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 2(a) Tej Rent payable account Date 2020 Mar 1 Jun 30 Nov 30 2021 Mar 1 Details Balance b/d (1) Bank (1) Bank (1) Balance b/d (1)OF $ 300 1950 2100 4350 450 Date 2021 Feb 28 Details Income Statement (1) Balance c/d $ 3 900 450 4 350 + (1) dates 6 2(b) Tej Provision for doubtful debts account Date 2021 Feb 28 Details Balance c/d (7 000 × 6%) (1) $ 420 420 Date 2020 Mar 1 2021 Feb 28 Mar 1 Details Balance b/d (6 250 × 4%) (1) Income statement (1)OF Balance b/d (1)OF $ 250 170 420 420 4 Question Answer Marks 2(c) Matching (1) 1 Accept ‘Accruals’ 2(d)(i) Revenue is regarded as being earned (1) when title to the goods is passed (1) The profit on sales is not recognised until it is earned (1) Profit is recognised when earned not when payment is received (1) Profit is earned when the sale is completed/legal title passes (1) No profit is recognised when goods are ordered (1) Accept other valid points. Max (2) 2 2(d)(ii) To ensure that profits/trade receivables are not overstated (1) To ensure that trade receivables are shown at a realistic amount in the statement of financial position (1) Profits and assets are reduced when the provision for doubtful debts is increased/profits and assets are increased when the provision is reduced (1) Accept other valid points Max (2) 2 Question Answer Marks 2(e) Advantages Will encourage customers to pay earlier (1) May increase liquidity/cash flow (1) May reduce administration time/costs (1) Or other relevant advantages Max (2) Disadvantages Good relationships with customers will be damaged (1) May lose customers/sales may reduce (1) May incur extra costs to attract customers/advertising/marketing (1) Or other relevant disadvantages Max (2) Recommendation (1) 5

This question in 0985/22 May/June 2021

3 On 31 July 2021 the following information was provided by KA Limited, a manufacturer of garden tools. $ Inventory 1 August 2020 Raw materials 5 820 Work in progress 1 750 Finished goods 12 360 Purchases Raw materials 34 200 Finished goods 3 900 Carriage on purchases Raw materials 410 Finished goods 80 Direct wages 67 200 Indirect factory wages 24 000 Factory machinery at cost 47 000 Provision for depreciation of factory machinery 11 000 Factory general overheads 16 400 Rates 5 300 Inventory 31 July 2021 Raw materials 6 030 Work in progress 2 780 Finished goods 10 340 Revenue 223 000 Additional information 1 On 31 July 2021 rates, $500, were prepaid. Rates are to be apportioned 75% factory, 25% office. 2 On 31 July 2021 factory general overheads, $230, were accrued. 3 Factory machinery is to be depreciated at 20% per annum using the reducing balance method. REQUIRED (a) Prepare the manufacturing account of KA Limited for the year ended 31 July 2021. KA Limited Manufacturing Account for the year end ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … ………………………………………………………… … (b) Prepare the income statement (trading section) of KA Limited for the year ended 31 July 2021. KA Limited Income Statement (Trading section) for the year ended 31 July 2021 $ $ ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … ………………………………………………………… … …………… … …………… … [4] DH Limited, a customer of KA Limited, has been declared bankrupt. A debt of $350 was owing to KA Limited. This is to be written off. REQUIRED (c) Prepare the journal entry to record the irrecoverable debt. A narrative is not required. KA Limited Journal Details Debit Credit $ $ … … … … … … … … … [2] KA Limited maintains a provision for doubtful debts. REQUIRED (d) Explain how maintaining a provision for doubtful debts is an application of each of the following accounting principles. (i) Matching … … … … [2] (ii) Prudence … … … … [2] [Total: 20]

20 marks

Mark scheme: 3(a) KA Limited Manufacturing Account for the year ended 31 July 2021 $ $ Cost of material consumed Opening inventory raw material 5 820 Purchases raw material 34 200 Carriage inwards 410 (1) 40 430 Closing inventory raw material 6 030 34 400 (1) Direct wages 67 200 (1) Prime cost 101 600 (1) OF Factory overheads Indirect factory wages 24 000 Factory general overheads (16 400 + 230) 16 630 (1) Rates (5300 – 500) × 75% 3 600 (1) Depreciation of factory machinery (36 000 × 20%) 7 200 (1) 51 430 153 030 (1) OF Add opening work in progress 1 750 * 154 780 Less closing work in progress 2 780 (1)* for both WIP Cost of production 152 000 (1) OF 10 Question Answer Marks 3(b) KA Limited Income Statement (Trading section) for the year ended 31 July 2021 $ $ Revenue 223 000 Less Cost of sales Opening inventory finished goods 12 360 * Cost of production 152 000 (1) OF Purchases of finished goods 3 900 } Carriage inwards 80 } (1) 168 340 Less Closing inventory finished goods 10 340 (1) * both 158 000 Gross profit 65 000 (1) OF 4 3(c) KA Limited Journal Details Debit $ Credit $ Irrecoverable debts 350 (1) DH Limited 350 (1) 2 3(d)(i) The amount of sales for which the business is unlikely to be paid (1) is regarded as an expense of the year in which those sales are made (1) 2 3(d)(ii) The profit for the year is not overstated (1) and the amount of trade receivables is shown at a realistic level in the statement of financial position (1) 2

This question in 0985/22 Oct/Nov 2021

4 PG a trader sells electrical components. She has provided the following information for the year ended 31 July 2022. $ Sales journal for the year ended 31 July 2022 360 000 Sales returns journal for the year ended 31 July 2022 13 300 Trade receivables at 1 August 2021 28 500 Provision for doubtful debts at 1 August 2021 1 140 Cash book extract of totals for the year ended 31 July 2022 Discount Cash Bank Bank Allowed $ $ $ $ Trade receivables 6 500 335 100 Trade receivables 4 000 (dishonoured cheques) Sales 17 000 Additional information 1 $900 of trade receivables were written off as irrecoverable debts on 31 July 2022. There were no other irrecoverable debts during the year. 2 The provision for doubtful debts is to be set at 4% of trade receivables at 31 July 2022. REQUIRED (a) Prepare the following ledger accounts for the year ended 31 July 2022. Where appropriate show the balance brought down on 1 August 2022. PG Sales account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … Sales returns account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … Trade receivables account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … Irrecoverable debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … Provision for doubtful debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [13] (b) Prepare a relevant extract from PG’s statement of financial position at 31 July 2022. PG Extract from statement of financial position at 31 July 2022 … … … … … [2] (c) List three ways in which PG could reduce the possibility of irrecoverable debts. … … … [3] (d) State two factors PG should consider when setting the provision for doubtful debts. … … … [2] [Total: 20]

20 marks

Mark scheme: 4(a) PG 13 Sales account Date Details $ Date Details $ 2022 2022 Jul 31 Income statement 377 000 (1) OF Jul 31 Trade receivables 360 000 (1) ___ ___ Cash 17 000 (1) 377 000 377 000 Sales returns account Date Details $ Date Details $ 2022 2022 Jul 31 Trade receivables 13 300 (1) Jul 31 Income statement 13 300 13 300 13 300 Trade receivables account Date Details $ Date Details $ 2021 2022 Aug 1 Balance b/d 28 500 Jul 31 Sales returns 13 300* 2022 Bank 335 100* Jul 31 Sales 360 000 (1) Discount allowed 6 500* Bank 4 000 (1) Irrecoverable debts 900* ___ ___ Balance c/d 36 700 392 500 392 500 Aug 1 Balance b/d 36 700 (1) OF *1 mark for 2 correct items and 2 marks for 4 correct items 4(a) Irrecoverable debts account Date Details $ Date Details $ 2022 2022 Jul 31 Trade receivables 900 Jul 31 Income statement 900 (1) 900 900 Provision for doubtful debts account Date Details $ Date Details $ 2022 2021 Jul 31 Balance c/d 1 468 Aug 1 Balance b/d 1 140 (1) 2022 ____ Jul 31 Income statement 328 (1) 1 468 1 468 Aug 1 Balance b/d 1 468 (1) OF 4(b) PG 2 Extract from statement of financial position at 31 July 2022 Current assets** $ Trade receivables 36 700 (1) OF less provision for doubtful debts 1 468 OF 35 232 OF **(1) **For heading + OF total 4(c) Obtain (credit) references (1) 3 Set credit limit (1) Sell for cash only / reduce credit sales (1) Issue invoices / statements of account promptly (1) Follow up with phone calls / emails etc (1) Improve or introduce credit control / hire a credit controller (1) Charge interest on late payment (1) Refuse further supplies until outstanding balance is paid (1) Increase level of cash discount (1) Last resort take legal action (1) Accept other valid points Max 3 4(d) Experience of late / non-payment (1) 2 Specific knowledge of customers credit record / credit rating (1) Length of time debts outstanding / ageing schedule / trade receivables turnover (1) State of the local economy (1) Accept other valid points Max 2

This question in 0985/22 Oct/Nov 2022

2 Stalla is a sole trader who sells on credit. She maintains a provision for doubtful debts at 4% of trade receivables. Stalla’s trade receivables were: $ At 31 December 2021 75 000 At 31 December 2022 77 000 REQUIRED (a) (i) Prepare Stalla’s provision for doubtful debts account for the year ended 31 December 2022. Balance the account at 31 December 2022 and bring down the balance at 1 January 2023. Stalla Provision for doubtful debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [3] (ii) State two reasons why Stalla maintains a provision for doubtful debts. 1 … … 2 … … [2] Stalla charges depreciation at 25% per annum, using the reducing balance method. She charges a full year’s depreciation in the year a vehicle is purchased and none in the year it is sold. On 31 December 2022, Stalla sold a vehicle for $9500. The vehicle had cost $16 000 on 1 September 2020. REQUIRED (b) Calculate the gain or loss on disposal of the vehicle. … … … … … … … [4] The balances on Stalla’s ledger accounts at 1 January 2022 included the following. $ Motor vehicles 48 000 Provision for depreciation on motor vehicles 21 000 (c) (i) Prepare Stalla’s motor vehicles account for the year ended 31 December 2022. Balance the account at 31 December 2022 and bring down the balance at 1 January 2023. Stalla Motor vehicles account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [2] (ii) Prepare Stalla’s provision for depreciation on motor vehicles account for the year ended 31 December 2022. Balance the account at 31 December 2022 and bring down the balance at 1 January 2023. Stalla Provision for depreciation on motor vehicles account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5] Stalla had an extension to her retail premises built during 2023. The extension will be used as an office. REQUIRED (d) Place a tick (3) in the correct box below to indicate whether each cost is capital expenditure or revenue expenditure. Capital Revenue expenditure expenditure Legal fees for obtaining permission to build the extension Building costs for the extension Insurance for the office Painting the office extension Office calendar for 2023 Purchase of office equipment Installation of office equipment Stationery for office [4] [Total: 20]

20 marks

Mark scheme: 2(a)(i) Stalla Provision for doubtful debts account Date Details $ Date Details $ 2022 2022 Dec 31 Balance c/d 3 080 Jan 1 Balance b/d (1) 3 000 2022 Dec 31 Income statement (1)OF 80 3 080 3 080 2023 Jan 1 Balance b/d (1) 3 080 3 Question Answer Marks 2(a)(ii) Not all trade receivables will pay the amount they owe/ to anticipate irrecoverable debts (1) To apply the principle of prudence/ to ensure the profit is not overstated/ to ensure the trade receivables are not overstated (1) To apply the principle of matching / to ensure that the sales for which payment is not likely to be received are regarded as an expense of the year in which the sales were made (1) Max (2) 2 2(b) $ $ Proceeds 9 500 Cost 16 000 (1) Less provision for depreciation 7 000 (1) 9 000 Profit on disposal (1) 500 (1)OF 4 2(c)(i) Stalla Motor Vehicles account Date Details $ Date Details $ 2022 2022 Jan 1 Balance b/d 48 000 Dec 31 Disposal (1) 16 000 Balance c/d 32 000 48 000 48 000 2023 Jan 1 Balance b/d (1) 32 000 2 Question Answer Marks 2(c)(ii) Stalla Provision for depreciation of Motor Vehicles account Date Details $ Date Details $ 2022 2022 Dec 31 Disposal (1)OF 7 000 Jan 1 Balance b/d (1) 21 000 Balance c/d 18 500 Dec 31 Income statement (2)CF (1)OF 4 500 25 500 25 500 2023 Jan 1 Balance b/d (1)OF 18 500 5 2(d) Capital expenditure Revenue expenditure Legal fees for obtaining permission to build the extension  (1) Building costs for the extension  Insurance for the office  (1) Painting the office extension  Office calendar for 2023  (1) Purchase of office equipment  Installation of office equipment  (1) Stationery for office  4

This question in 0985/21 May/June 2023

1 Addo is a trader who only sells on credit. His trade receivables at 1 April 2024 were as follows: $ Nuru 920 Mahia 1145 Ava 1378 Rachel 215 3658 During April 2024, the following transactions took place: April 2 Sold goods to Ava, list price $150, less 6% trade discount 9 Received telephone transfer from Ava, $689 12 Sold goods to Nuru, $165 13 Received cheque, $627, from Mahia, in full settlement of an invoice for $660 19 Received $760 from Nuru by electronic transfer. Nuru had deducted 5% cash discount 20 Nuru returned goods $30 21 Sold goods to Mahia, list price $480, trade discount 5%, cash discount 5% if invoice paid within 30 days 30 Rachel has become bankrupt and Addo decides to write off the amount owing from her, as irrecoverable REQUIRED (a) Prepare the sales journal for April 2024. Total the sales journal and indicate the ledger account to which the total would be posted. Addo Sales journal Date Details $ $ … … … … … … … … … … … … … … … … … … … … [3] (b) Prepare the journal entry to write off the amount owing by Rachel. A narrative is required. Addo Journal Date Details $ $ … … … … … … … … … … … … … … … … … … … … [3] (c) Calculate: (i) the total amount of money which Addo received from trade receivables during April 2024. … … … … [1] (ii) the total amount of cash discount which Addo allowed in April 2024. … … … … [2] (d) Prepare Addo’s sales ledger control account for April 2024. Addo Sales ledger control account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] Addo is considering changing his credit terms. He would introduce more credit checks on new customers and would increase cash discount to 7½% for payment within 30 days. REQUIRED (e) Advise Addo whether or not he should make these changes to his credit terms. Justify your answer by providing two advantages and two disadvantages of changing his credit terms. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 1(a) Addo Sales journal Date Details $ 2024 Apr 2 12 21 30 Ava (150 – 9) Nuru Mahia (480 – 24) Transfer to sales account 141 165 456 ___ 762 (1) (1) (1)OF 3 1(b) Addo Journal Date Details Debit $ Credit $ 2024 April 30 Irrecoverable debts (1) Rachel (1) Amount due from Rachel written off as irrecoverable (1) 215 215 3 1(c)(i) Total amount received = $689 +$627 + $760 = $2 076 (1) 1 1(c)(ii) Total cash discount = $40(1) + $33 = $73 (1)OF 2 Question Answer Marks 1(d) Addo Sales ledger control account Date 2024 April 1 30 May 1 Details Balance b/d Sales (1)OF Balance b/d (1)OF $ 3 658 762 ____ 4 420 2 026 Date 2024 April 30 Details Sales returns (1) Bank (1)OF Discount allowed (1)OF Irrecoverable debts (1) Balance c/d $ 30 2 076 73 215 2 026 4 420 6 1(e) Advantages Increased cash discount may encourage new customers/existing customers to buy more/increase sales (1) More customers may pay early because of extra discount/improve liquidity (1) Irrecoverable debts may be reduced (1) Increased credit check indicates ability to pay (1) Accept other valid points Max (2) Disadvantages More credit checks would take more time/cost more money (1) Less money coming in from sales (1) No guarantee that customers will pay early (1) Less profit on each sale/profit for the year will be reduced/expenses increased if give cash discount (1) No guarantee that there will not be any irrecoverable debts (1) Accept other valid points Max (2) Recommendation (1) 5

This question in 0985/21 May/June 2024

2 Ben runs a small business but does not maintain a full set of accounting records. He has provided the following information: 31 March 2024 1 April 2023 $ $ Premises at cost 140 000 140 000 Machinery at cost 106 000 92 000 Accumulated depreciation on machinery 36 000 10 000 Inventory 42 000 24 600 Trade receivables 43 400 39 600 Trade payables 19 700 24 750 Bank 13 000 debit 3 200 credit Other receivables 1 200 1 650 REQUIRED: (a) Calculate Ben’s opening and closing capital. Workings Answer $ Capital at 1 April 2023 Capital at 31 March 2024 [2] During the year ended 31 March 2024, Ben withdrew goods for his own use, $620. He also deposited an additional $10 000 cash into the business bank account from his personal funds. REQUIRED: (b) Calculate the profit for the year using the table below. Include your opening and closing capitals from 2(a) and indicate whether the amounts of Ben’s transactions shown should be added or deducted from the opening capital. Added to opening Deducted from Total capital opening capital $ $ $ Capital at 1 April 2023 Capital introduced Profit for the year Drawings Total adjustments Capital at 31 March 2024 [4] In addition, Ben was able to provide details of transactions received and paid. $ Receipts from credit customers 452 000 Cash sales 21 000 Payments to credit suppliers 224 700 REQUIRED: (c) (i) Calculate Ben’s credit purchases for the year ended 31 March 2024. … … … … … … … … [3] (ii) Calculate Ben’s total sales for the year ended 31 March 2024. … … … … … … … … [3] As his business is growing, Ben is considering maintaining a full set of accounting records. To allow him to do this, he believes he would need to employ an experienced book-keeper at a salary of $18 000. REQUIRED: (d) Advise Ben whether he should employ a book-keeper. Justify your answer with two advantages and two disadvantages of employing a book-keeper. … … … … … … … … … … … … … … [5] Ben has reviewed the age and level of his trade receivables and believes he should provide for possible doubtful debts. REQUIRED: (e) (i) Which accounting principle would he be applying by creating a provision for doubtful debts? … … [1] (ii) Complete the table by placing a tick (✓) to show what effect creating a provision for doubtful debts would have on Ben’s profit for the year, trade receivables and cash at bank. Profit for the year Trade receivables Cash at bank Increase Decrease No effect [2] [Total: 20]

20 marks

Mark scheme: 2(a) 2 Workings Answer $ 140 000 + 92 000 – 10 000 + 24 600 Capital at 1 April 2023 259 900 (1) +39 600 – 24 750 –3 200 +1 650 140 000 +106 000 – 36 000+ 42 000 + Capital at 31 March 2024 289 900 (1) 43 400 –19 700 +13 000 +1 200 2(b) 4 Added to Deducted from Total opening opening capital capital $ $ $ Capital at 1 April 2023 259 900 Capital Introduced 10 000 (1) Profit for the year 20 620 (1) OF Drawings 620(1) Total adjustments 30 620 620 30 000 Capital at 31 March 2024 289 900(1)OF* * For both opening and closing capital figures 2(c)(i) Either 3 $ Payments to credit suppliers 224 700 Add closing trade payables 19 700 * 244 400 Less opening trade payables (24 750) *(1) both opening & closing figures 219 650 Less drawings (620) (1) 219 030 (1)OF Or Balance b/d 24 750 * Bank 224 700 Drawings 620 (1) Balance c/d 19 700 *(1) Purchases 219 030 (1)OF 244 400 244 400 2(c)(ii) Either 3 $ Payments received from credit customers 452 000 Add closing trade receivables 43 400 495 400 Less opening trade receivables (39 600) *(1) both opening & closing figures Total credit sales 455 800 Cash Sales 21 000 (1) Total sales for the year 476 800 (1) OF Or Balance b/d 39 600 * Bank 452 000 Sales 476 800 (1)OF Cash sales 21 000 (1) Balance c/d 43 400 *(1) 516 400 516 400 2(d) Advantages (2) 5 Preparation of financial statements would be quicker / easier Better control over business activities / able to track transactions / income and expenses Chances of fraud reduced / errors may be reduced Comparison with previous years / aids decision making Information required by a bank/investor readily available Allow Ben time to concentrate on other business activities Accept other valid points Disadvantages (2) Salary of book-keeper to pay Profit may not be adequate to cover the cost of employing the book-keeper. Additional costs on top of salary paid. Problems of recruiting suitable / trained candidate Accept other valid points Recommendation (1) 2(e)(i) Prudence 1 Or Matching / accruals 2(e)(ii) 2 Profit for the year Trade receivables Cash at bank Increase Decrease   (1) for both No effect  (1)

This question in 0985/22 Oct/Nov 2024

3 Jasmine owns a consulting business. At 1 April 2024, Jasmine’s ledger accounts included the following balances. $ Motor vehicles 16 000 Provision for depreciation of motor vehicles 7 000 Trade receivables 12 220 Provision for doubtful debts 366 Rent (prepaid) 900 Rates (unpaid) 270 During the year ended 31 March 2025, Jasmine’s bank payments included the following amounts. $ Motor vehicles 18 000 Rent and rates 14 960 Additional Information 1 Depreciation is to be provided at 25% per annum using the reducing balance method. A full year’s depreciation is to be charged on vehicles purchased during the year. 2 Trade receivables at 31 March 2025 were $11 800. An amount of $300 is still to be written off as irrecoverable. 3 The provision for doubtful debts is to be maintained at 3% of net trade receivables. 4 At 31 March 2025, prepaid rent was $925 and unpaid rates were $185. REQUIRED (a) Prepare the provision for depreciation of motor vehicles account for the year ended 31 March 2025. Balance the account and bring down the balance at 1 April 2025. Jasmine Provision for depreciation of motor vehicles account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] (b) Prepare the provision for doubtful debts account for the year ended 31 March 2025. Balance the account and bring down the balance at 1 April 2025. Jasmine Provision for doubtful debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [4] (c) Prepare the rent and rates account for the year ended 31 March 2025. Balance the account and bring down the balances at 1 April 2025. Jasmine Rent and rates account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] At 31 March 2025, Jasmine had a bank overdraft of $2620. REQUIRED (d) Prepare the current assets section of Jasmine’s statement of financial position at 31 March 2025. … … … … … … … … … [3] (e) State: (i) how the principle of consistency is applied when charging depreciation. … … [1] (ii) one way Jasmine may reduce the possibility of irrecoverable debts. … … [1] (iii) which accounting principle Jasmine is applying by making an adjustment for rent prepaid. … … [1] [Total: 20]

20 marks

Mark scheme: 3(a) Jasmine 4 Provision for depreciation of motor vehicles account Date Details $ Date Details $ 2025 2024 Apr 1 Balance b/d (1) 7 000 2025 Mar 31 Balance c/d 13 750 Mar 31 Income statement * (2)CF or (1)** 6 750 13 750 13 750 2025 Apr 1 Balance b/d (1)OF 13 750 * (16 000 – 7 000 + 18 000 =) 27 000  25% = 6 750 **2250 or 4500 = 1 must be a credit entry with IS label 3(b) Jasmine 4 Provision for doubtful debts account Date Details $ Date Details $ 2025 2024 Mar 31 Income statement (1)OF 21 Apr 1 Balance b/d (1) 366 Balance c/d 345 366 366 2025 Apr 1 Balance b/d* (2)CF or (1) 345 * (11 800 – 300 =) 11 500  3% = 345 3(c) Jasmine 6 Rent and Rates account Date Details $ Date Details $ 2024 2024 Apr 1 Balance b/d (1) 900 Apr 1 Balance b/d (1) 270 2025 2025 Mar 31 Bank (1) 14 960 Mar 31 Income statement (1)OF 14 850 Balance c/d 185 Balance c/d 925 16 045 16 045 Apr 1 Balance b/d (1) 925 Apr 1 Balance b/d (1) 185 3(d) Jasmine 3 Statement of Financial Position as at 31 March 2025 Current Assets $ Trade receivables (11 800 – 300) 11 500 Less Provision for doubtful debts 345 OF 11 155 (1)OF Other receivables 925 (1) 12 080 (1)OF 3(e)(i) Depreciation is charged using the same method each year. (1) 1 3(e)(ii) Obtaining credit references / Establishing credit limits (1) 1 Sending invoices and statements promptly (1) Improve credit control / monitoring/investigating/chasing overdue accounts (1) Refusing to supply customers until outstanding amounts have been paid (1) Taking legal action (1) Max (1) 3(e)(iii) Matching / accruals (1) 1

This question in 0985/22 May/June 2025

4 AY Limited has provided the following performance data for the last two years of trading. Ratio Year 1 Year 2 ended ended 31 March 2024 31 March 2025 Return on capital employed (ROCE) 10.67% 10.05% Gross margin 22% 23.5% Profit margin 11.5% 11.0% Rate of inventory turnover 9.46 times 11.45 times Trade payables turnover 34 days 30 days Trade receivables turnover 32 days 36 days Liquid (acid test) ratio 1.42:1 0.95:1 All sales and purchases are on credit and are subject to a 30‑day credit period. REQUIRED (a) Complete the following table by indicating whether the ratio has improved or deteriorated at the end of year 2, and give two reasons which may have caused the change. The Return on capital employed (ROCE) has been completed as an example. Ratio Improved or Possible reasons for the change deteriorated Return on capital Introduction of additional capital or loans. Deteriorated employed Profit for the year has decreased. (ROCE) Gross margin Profit margin Rate of inventory turnover (times) Liquid (acid test) ratio [10] The directors at AY Limited were concerned that the trade receivables turnover rate had deteriorated and so increased the provision for doubtful debts from 2% to 3% for the year ended 31 March 2025. The trade receivables balances were as follows: $ 31 March 2024 346 000 31 March 2025 399 000 REQUIRED (b) Write up the provision for doubtful debts account in AY Limited’s ledger for the year ended 31 March 2025. Balance the account and bring down the balance at 1 April 2025. AY Limited Provision for doubtful debts account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [3] (c) (i) Explain what is meant by ‘a provision for doubtful debts’. … … [1] (ii) Name the accounting principle being applied when creating a provision for doubtful debts. … [1] The directors of AY Limited have been considering buying a new piece of equipment costing $75 000. A machinery supplier has approached them, offering a 15% discount on this equipment if they make an immediate purchase. The supplier has indicated that the purchase would need to be on a cash basis. AY Limited’s accountant has suggested that they may be able to finance the purchase of the equipment by delaying payments to their trade payables. REQUIRED (d) Advise the directors of AY Limited whether or not delaying payments to their trade payables would be a good way to secure the purchase of the equipment. Justify your answer by providing points for and against delaying payments to their trade payables. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 4(a) 10 Ratio Improved or Deteriorated Possible reasons for the change Return on Capital Deteriorated Introduction of additional capital/loans Employed (ROCE) Profit for the year decreased. Gross margin Improved } Sold goods at higher prices (1) Bought goods at cheaper prices (1) Improved rate of trade discount received (1) Max 2 Profit margin Deteriorated }(1) both Increased expenses (1) Other income decreased (1) Percentage of expenses to revenue increased (1) Decreased sales volume / revenue (1) Max 2 Rate of inventory Improved } Increased demand (1) turnover (times) Less goods purchased / lower closing inventory (1) Reduced selling prices leading to higher sales (1) Max 2 Liquid (acid test) Deteriorated } (1) both Increased trade payables / current liabilities (1) ratio Decreased trade receivables / bank /cash (1) Max 2 4(a) Ratio Improved or Deteriorated Possible reasons for the change Return on Capital Employed (ROCE) Gross margin Deteriorated Sold goods at lower prices (1) Bought goods at higher prices (1) Lower rate of trade discount received (1) Max 2 Profit margin Improved Decreased expenses (1) Other income increased (1) Percentage of expenses to revenue decreased (1) Increased sales volume / revenue (1) Max 2 Rate of inventory Deteriorated Decreased demand (1) turnover (times) More goods purchased / higher closing inventory (1) Increased selling prices leading to lower sales (1) Max 2 Liquid (acid test) Improved Decreased trade payables / current liabilities (1) ratio Increased trade receivables / bank /cash (1) Max 2 Please note that the ‘Own Figure Rule’ applies to this question. 4(b) 3 A Limited Provision for doubtful debts account Date Details $ Date Details $ 2024 April 1 Balance b/d 6 920 (1) 2025 2025 March 31 Balance c/d 11 970 March 31 Income statement 5 050 (1)OF 11 970 11 970 2025 April 1 Balance b/d 11 970 (1) 4(c)(i) It is an estimate of the amount which a business will lose in a financial year because of irrecoverable debts. (1) 1 4(c)(ii) Prudence (1) 1 OR Matching (1) 4(d) In favour of delaying payment to trade payables (Max 3) 5 Able to purchase the equipment at a cheaper price (1) No finance costs (1) No need to source other methods of finance (1) No security required (1) Against delaying payment to trade payables (Max 3) Damage supplier relations / not supply goods (1) Increased interest payments (1) Loss of any cash discounts (1) May not be sufficient cash available to pay for the equipment (1) Other sources of finance available (1) Accept other valid responses Recommendation (1)

This question in 0985/22 Oct/Nov 2025