Cambridge Assessment International Education

Cambridge International Advanced Subsidiary and Advanced Level



ACCOUNTING 9706/21
Paper 2 Structured Questions October/November 2019
1 hour 30 minutes
Candidates answer on the Question Paper.
No Additional Materials are required.

READ THESE INSTRUCTIONS FIRST

Write your centre number, candidate number and name on all the work you hand in.
Write in dark blue or black pen.
You may use an HB pencil for rough working.
Do not use staples, paper clips, glue or correction fluid.
DO NOT WRITE IN ANY BARCODES.

Answer all questions.

All accounting statements are to be presented in good style.
International accounting terms and formats should be used as appropriate.
Workings must be shown.
You may use a calculator.

At the end of the examination, fasten all your work securely together.
The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 20 printed pages.

IIB19 11_9706_21/11RP
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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

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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.

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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]

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(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

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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]

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(d) Identify two internal stakeholders with an interest in the financial statements of a limited
company.

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

2 [2]

(ii) liquidity.

2 [2]

[Total: 30]

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2 Jacques is a sole trader.

On 31 January 2019, the balance on the bank statement was $1875 debit. This did not agree with
Jacques’s cash book balance of $4327 credit.

The following transactions were included only on the bank statement.

1 A payment for wages of $850.

2 A transfer of $3500 from Smith, a credit customer.

The following transactions were included only in the cash book.

1 A cheque payment to a supplier for $340.

2 A receipt of $560 from a customer.

The following errors have also been identified.

1 A direct debit payment for insurance of $180 had been incorrectly recorded on the bank
statement as $108.

2 A standing order for electricity of $175 had been incorrectly recorded in the cash book as
$275.

3 Bank interest paid of $75 had been recorded as interest received in the cash book.

REQUIRED

(a) Prepare the updated cash book at 31January 2019. Dates are not required.

[5]

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(b) Prepare the bank reconciliation statement at 31 January 2019.

[4]

(c) State two reasons why a business would prepare a bank reconciliation statement.

[2]

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Additional information

Jacques calculated a draft profit for the year ended 31 January 2019 of $10 340. He has identified
the following.

1 An item of inventory had been included at cost, $800. It was found to be damaged. It could
be sold for $900 if repairs costing $150 were carried out.

2 On 25 January 2019 Jacques had sent goods to a customer on a sale or return basis. These
had been invoiced to the customer at $2800. Jacques marks up his goods at 40%. The
customer had not decided whether to keep the goods.

3 On 4 February 2019 Jacques received an invoice for $3600 relating to rental of storage
space for three months ending 31 March 2019.

REQUIRED

(d) Prepare a statement to show the revised profit for the year ended 31 January 2019, after
adjusting for items 1, 2 and 3.

[4]

[Total: 15]

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3 Adam, Bilal and Chan operate a partnership providing secretarial services. The partners have no
formal partnership agreement.

The following balances are extracted from the trial balance at 31 December 2018.

Debit Credit
$ $
Fees revenue received 152 000
Business operating costs 76 000
Capital accounts
Adam 30 000
Bilal 20 000
Chan 10 000
Current accounts
Adam 36 000
Bilal 4 000
Chan 12 000
Trade receivables 27 000
Loan account: Bilal 80 000
Motor vehicles at net book value 96 000

REQUIRED

(a) Calculate the profit for the year ended 31 December 2018 before appropriation.

[1]

(b) Calculate the share of profit appropriated to Bilal for the year ended 31 December 2018.

[1]

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Additional information

On 1 January 2019, Bilal decided to retire from the partnership. The partners agreed the
following.

1 Bilal was to retain one motor vehicle. The net book value of the motor vehicle was $36 000
but it was agreed to transfer it to Bilal at a value of $30 000.

2 The remaining motor vehicles were to be revalued upwards by 5%.

3 An irrecoverable debt of $2000 was to be written off and a provision for doubtful debts of 4%
was to be made.

4 Goodwill was to be valued at $24 000.

5 Bilal agreed to leave $45 000 in the partnership as a loan at 8% per annum interest. The
remaining balance due to Bilal was to be paid from the partnership bank account.

REQUIRED

(c) Prepare the revaluation account at 1 January 2019.

[4]

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(d) Prepare a statement showing the amount to be paid to Bilal from the partnership bank
account on his retirement.

[3]

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Additional information

Adam and Chan are to continue in partnership after Bilal’s retirement and plan to draw up a
formal partnership agreement to include the following:

profit-sharing ratio

rate of interest on capital

rate of interest on drawings.

REQUIRED

(e) State two reasons why partners may agree to provide interest on capital.

[2]

(f) State two reasons why partners may agree to charge interest on drawings.

[2]

(g) State two further terms that may appear in a partnership agreement.

[2]

[Total: 15]

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PLEASE TURN OVER

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4 D Limited is a large company and operates from several sites. It uses different systems of costing
for its different sites.

REQUIRED

(a) State three advantages to a business of using a system of absorption costing.

[3]

Additional information

At one of its sites the company specialises in printing brochures and leaflets for local
organisations. At this site it uses a system of absorption costing.

There are two production departments: Assembly and Printing and two service departments:
Technical support and Personnel.

The following information is available.

Production departments Service departments

Technical
Assembly Printing Personnel
support
Floor area (square metres) 90 70 15 5
Power (kilowatt-hours) 120 320 40 20
Replacement cost of machinery
and equipment ($) 105 000 30 000 12 000 3 000
Number of employees 20 15 5
Technical support hours 400 60

The following budgeted overhead costs for August 2019 are still to be apportioned.

$
Electricity 20 500
Insurance of machinery 7 500
Insurance of buildings 11 880

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REQUIRED

(b) Complete the following table to show the apportionment of budgeted overhead costs for
August 2019.

Apportionment of overheads

Production departments Service departments

Technical
Total Assembly Printing support Personnel
$ $ $ $ $

Overheads already apportioned 40 210 17 530 11 360 5020 6300

Electricity

Insurance of machinery

Insurance of buildings

Total overheads apportioned

Reapportionment of personnel
overheads

Reapportionment of technical
support overheads

[7]

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Additional information

The following budgeted information is also available for August 2019.

Assembly Printing
Direct labour hours 3200 2000
Direct machine hours 1400 5500

REQUIRED

(c) Calculate an overhead absorption rate for each production department using an
appropriate basis.

[4]

Additional information

The company received an order for a set of brochures to be produced in August 2019. It was
budgeted that this order would require the following:

Direct material and labour cost $1330

Direct labour hours
Assembly department 12.5 hours
Printing department 7.2 hours
Machine hours
Assembly department 5.5 hours
Printing department 6.0 hours

The company requires a profit margin of 25% on all orders.

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REQUIRED

(d) Calculate the budgeted profit on this order.

[4]

Additional information

The actual time taken in each production department for this order was as follows:

Assembly department Printing department

Direct labour hours 11 6.5
Machine hours 6 8

REQUIRED

(e) Calculate the total over or under-absorption of overheads for this order. Clearly show in
your workings over-absorption or under-absorption of overheads in each department.

[5]

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Additional information

At a second site, D Limited manufactures garden chairs and uses a system of marginal costing.
There are three models: basic, super and deluxe. Total budgeted fixed costs per annum are
$234 000. Budgeted direct labour hours are 156 000 per annum. Fixed overhead costs are
absorbed on the basis of direct labour hours.
The following forecast figures are available for September 2018.

Basic Super Deluxe

Contribution per chair $3 $9 $12
Direct labour hours per chair 3 4.5 5.5

A director has suggested that production of the model which provides the least profit should be
discontinued and resources switched to the production of the other models.

REQUIRED

(f) Recommend whether or not production of the model which provides the least profit should
be discontinued. Justify your answer using both financial and non-financial factors.

[7]
[Total: 30]
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Cambridge Assessment International Education is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of the University of
Cambridge Local Examinations Syndicate (UCLES), which itself is a department of the University of Cambridge.

© UCLES 2019 9706/21/O/N/19