9706/22 MARK SCHEME June 2023

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 W1 (457 000) (1)
Gross profit 412 000 (1)OF
Administrative expenses W2 (191 000) (2)
OF
Distribution costs W3 (161 000) (4)OF
Profit from operations 60 000 (1)OF
Finance costs W4 (8 000) (1)
Profit for the year 52 000 (1)OF

W1 Cost of sales: Opening inventory 54000 + Purchases $460000 – Closing inventory

57000 = 457000 (1)

W2 Administrative expenses
$
Trial balance 28000
Depreciation of NCA 156000 (1)
60% x (1300 x 20%)

Irrecoverable debt 3000 (1)

Allowance for irrecoverable 4000 (1)
debts (80 x 5%)
191000 (1)OF

W3 Distribution
costs
$
Trial balance 57000
Depreciation of NCA 104000 (1)
40% x (1300 x 20%)

161000 (1)OF

W4 Finance costs: 100 000x 8% = 8000 (1)

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Question Answer Marks

1(b) Calculate the balance of retained earnings at 30 September 2022 following the 6
bonus issue.

$
Opening balance 125 000
Profit for the year 52 000 (1)OF
Dividends paid (21 000) (1)
Bonus issue W1 (70 000) (3)OF
Closing balance 86 000 (1)OF

W1 Bonus issue:

$
Share issue 280 000 (1)
Share premium (210 000) (1)
Retained earnings (70 000) (1)OF

1(c) State one reason why the directors of a company might decide to make a bonus 1
issue.

To reward shareholders without causing a cash outflow (1)

To rebalance the capital and reserves of the company (1)

Max 1
Accept other valid responses.

1(d) Explain one reason why trade payables and potential lenders might approve of a 2
company making a bonus issue.

A bonus issue reduces retained earnings (1) which could otherwise be used to finance
cash dividends to be paid reducing a company’s liquidity (1) which in turn could reduce
the company’s ability to pay trade payables or repay loans (1).

Max 2
Accept other valid responses.

1(e) Identify three points the directors should consider when deciding whether to pay 3
a dividend.

Profits available for distribution (1)

Liquid funds available to pay dividends (1)
The need to reward shareholders (1)

Accept other valid responses.

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Question Answer Marks

1(f) Advise the directors which option they should choose. Justify your choice by 7
discussing both options.

Max 3 marks for Option 1

Max 3 marks for Option 2
Decision (1)

Option 1 (Max 3)
Will encourage earlier payment by credit customers (1)
Reduce risk of irrecoverable debts (1)
Could result in increased sales if payment terms are better than those of competitors
(1)
Amounts received from credit customers will be less (1)
Negative effect on profits of cash discount (1)

Option 2 (Max 3)
Will reduce overall payments for purchases (1)
Positive impact on profits (1)
Will supplier prove reliable (1)
Will quality of inventory be maintained (1)
Will payment terms be favourable? (1)

Decision (1)
Accept other valid responses.

2(a) State three reasons why it is important to a business to prepare bank 3

reconciliation statements at regular intervals.

To identify errors in the cash book (1)

To identify errors in the bank statement (1)
To identify entries omitted from the cash book (1)
To help reduce the chance of fraud (1)
Max 3
Accept other valid responses.

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Question Answer Marks

2(b) Prepare the cash book to show the updated balance at 31 March 2022. Dates are 6
not required.

Cash book (bank columns)

$ $

Interest 450 (1) Balance b/d 3 060

received

Balance c/d 3 809 Water charges 442 (1)

Bank charges 85 (1)

Peter 90 (1)

Jamia 582 (1)

4 259 4 259

Balance b/d 3 809 (1)OF

2(c ) Prepare a bank reconciliation statement to show the bank statement balance at 4
31 March 2022.

Rudra
Bank reconciliation statement at 31 March 2022
$ $

Balance as per updated cash book (3809) (1)OF

Unpresented cheques: TK Stores 482

RH Supplies 1043

1525 (1)

Outstanding bankings (893) (1)

Balance as per bank statement (3177) (1)OF

2(d)(i) Define each of the following terms: 1

Unpresented cheque: a cheque payment recorded in the cash book but not yet
presented to the bank for payment (1)

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Question Answer Marks

2(d) Define each of the following terms: 1

Dishonoured cheque: a cheque which a bank refused to pay (1)

3(a) Calculate the business’s profit or loss for the year ended 31 December 2021. 7

Closing capital

$ $
Assets
Non-current assets 27 500
Inventory 18 450
Trade receivables 7 230
53 180 (1)
Liabilities
Bank loan 8 500
Trade payables 9 940
Bank overdraft 3 470
21 910 (1)
31 270 (1)OF

Profit/loss calculation
$
Closing capital 31 270
Less additional capital 9 000 (1)
22 270
Add drawings 14 870 (1)
37 140
Less opening capital 41 000 (1)
Loss for year 3 860 (1)OF

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Question Answer Marks

3(b) Calculate revenue for the year ended 31 December 2022. 4

Cost of sales

Opening inventory 18 450

Purchases 148 300

(1)
166 750

Closing inventory 16 250

150 500 (1)

Revenue: 1.5 (1) x 150 500 = $225 750 (1)OF

3(c) State two advantages to a business of maintaining a full set of accounting 2

records.

Financial information will be more reliable/accurate (1)

Will provide more comprehensive information to inform decision making/examples of
(1)
Better decision making is likely to improve business performance (1)
Will save accountant’s fees (1)

Max 2
Accept other valid responses.

3(d) State two disadvantages to a business of maintaining a full set of accounting 2

records.

May not have time/skills to maintain full accounting records (1)

Possible cost of employing bookkeeper (1)
Possible additional capital expenditure on equipment/accounting software (1)
The owner may not need additional information about the business (1)

Max 2
Accept other valid responses.

4(a)(i) Define each of the following terms: 1

cost centre: a department/activity/location to which costs can be directly attributed (1)

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Question Answer Marks

4(a)(ii) Define each of the following terms: 1

allocation of overheads: where overheads can be directly attributed to a cost centre.

(1)

4(a)(iii) Define each of the following terms: 1

apportionment of overheads: where it is necessary to divide costs between cost

centres on some rational basis (1)

4(b) Reapportion the service department’s overheads to the production departments. 2

Cutting Finishing Service

department department department

$ $ $

Factory overheads 273 820 189 240 31 350

Reapportionment 18 750 12 600 (31 350) (1)

Total overheads 292 570 201 840 - (1)OF

4(c)(i) Calculate an appropriate overhead absorption rate, correct to two decimal 1

places, for each production department:

Cutting department

$292 570 = $16.34 per machine hour (1) OF

17 900

4(c)(ii) Calculate an appropriate overhead absorption rate, correct to two decimal 1

places, for each production department:

Finishing department.

$201 840 = $27.20 per labour hour (1)OF

7 420

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Question Answer Marks

4(d)(i) Calculate the under- or over-absorption of factory overheads for each production 3
department for the year ended 31 August 2022.

Cutting department

$312 600 – (17 200 x $16.34)

$312 500 - $281 048 (1) OF
= $31 552 (1) OF under (1) absorbed

4(d)(ii) Calculate the under- or over-absorption of factory overheads for each production 3
department for the year ended 31 August 2022.

Finishing department

(7210 x $27.20) - $196 112

$193 400 - $196 112
= $2 712 (1) OF over (1) absorbed

4(e) Calculate the profit for one month. 1

10500 x $20 = $210 000 - $56 000 = $154 000 (1)

4(f) (i) Calculate the profit to be made on each option in the first month of production. 3

Option A

Selling price: 60 x 95% = $57 per unit

Contribution $17 per unit (1)

Total contribution: (10 500 x 125%) x $17 = $223 125 (1)

Profit = $223 125 – Fixed costs $57 100 = $166 025 (1)

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Question Answer Marks

4(f) (ii) Calculate the profit to be made on each option in the first month of production. 6

Option B

Revenue: 15 400 x $58 893 200 (1)

Direct materials 15 400 x $24.20 (372 680) (1)

Direct labour

Normal working: 14 000 x $18 (252 000) (1)

Overtime: 1 400 x $27 (37 800) (1)

Contribution 230 720

Fixed costs W1 (57 275) (1)

Profit for month 173 445 (1)OF

W1 New fixed costs: $56 000 + $1125 (depreciation) + $150 (interest) = $57 275

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Question Answer Marks

4(g) Advise the directors which option they should choose. Justify your answer by 7
considering both financial and non-financial factors.

Max 4 marks for Option 1

Max 4 marks for Option 2
Overall Max 6
Decision supported by a comment (1)

Option A (Max 4)
For
More profitable than current situation.(1)
Shorter-term increase in fixed costs so less impact on profits in the long run. (1)

Against
Less profitable than option B. (1)
Will current trend in declining demand continue? (1)
Under production could lead to loss of skilled labour (1)
Will forecasts be reliable for both options? (1)
Will advertising campaign be effective for Option A? (1)

Option B (Max 4)
For
More profitable than current situation and option A.(1)
Full production should ensure no long-term loss of skilled labour (1)

Against
Longer-term increase in fixed costs so more impact on profits in the long run (1)
Will forecasts be reliable for both options? (1)
Are employees prepared to work in overtime in Option B? (1)

Accept other valid responses.

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