Cambridge International AS & A Level

ACCOUNTING 9706/32
Paper 3 Structured Questions October/November 2022

INSERT 3 hours

INFORMATION
*1184573046-I*

● This insert contains all of the required information and questions. The questions are provided in the
insert for reference only.
● You may annotate this insert and use the blank spaces for planning. Do not write your answers on the
insert.

This document has 12 pages. Any blank pages are indicated.

DC (LK) 302484/4
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Section A: Financial Accounting

Question 1

Source A1

Ajlal’s hobby was making chocolates. She was considering giving up her employment to run a business
selling her own chocolates.

She decided to sell them from a market stall for a month to assess the level of demand and entered
into a joint venture with Daneen. They agreed to split the profit equally, as they planned to spend an
equal number of hours running the stall.

They started running the stall on 1 August 2022. They opened a joint venture bank account. Ajlal paid
in $1000 and Daneen paid in $1200.

On that date they paid rent for the stall of $800, and purchased fittings for the stall costing $420, paying
both amounts from the joint venture bank account.

During the month the cost of ingredients amounted to $1650. Ajlal paid $550 of this from her own funds
and the remainder was paid from the joint venture bank account.

By the end of the month sales had totalled $3900. All receipts were paid into the joint venture bank
account.

On 31 August 2022 the joint venture finished. Ajlal took over the fittings at a value of $400. The profit
on the joint venture was calculated and the bank account was closed.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Calculate:

(i) the profit on the joint venture [3]

(ii) the amount paid to each party when the joint venture bank account was closed. [5]

(b) Prepare the joint venture bank account for the month of August 2022. [6]

(c) Discuss whether the decision to share the profit equally was reasonable. [3]

Additional information

Ajlal was considering running another stall at a market in a different location, to assess whether
demand might be stronger there.

(d) Advise Ajlal whether or not she should enter into another joint venture, or operate alone whilst
employing an assistant to help her run the stall. Justify your answer. [4]

Additional information

Ajlal was considering if a joint venture requires the services of an auditor.

(e) Explain which business entities would require the services of an auditor. [2]

(f) State two points which should be covered in an unqualified audit report. [2]

[Total: 25]
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Question 2

Source A2

Sarah was a sole trader who agreed to sell her business to DB plc on 31 October 2021.

Their summarised statements of financial position immediately prior to the sale of Sarah’s business
showed the following:

Sarah DB plc
$ $
Non-current assets at net book value 120 000 722 000
Current assets
Inventory 17 000 101 000
Trade receivables 15 000 76 000
Bank 12 000 24 000
Total current assets 44 000 201 000
Total assets 164 000 923 000

Capital 123 000

Ordinary shares of $1 each 400 000
Retained earnings 464 000
123 000 864 000
Current liabilities
Trade payables 21 000 59 000
Short-term bank loan 20 000
Total current liabilities 41 000 59 000
Total capital and liabilities 164 000 923 000

The terms of the sale of the business were as follows:

1 The purchase consideration was $240 000. This was settled with $30 000 in cash and 150 000
ordinary shares of $1 each in DB plc.

2 DB plc took over all the assets and liabilities of Sarah’s business except for the loan and the
bank account.

3 Non-current assets were taken over at a value of $203 000 and inventory at a value of
$14 000.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the following ledger accounts in the books of Sarah to record the sale of her business
and the settlement of the amount due to her.

(i) DB plc account [3]

(ii) Bank account [4]

(iii) Capital account [4]

(b) Prepare the statement of financial position of DB plc immediately after the purchase of
Sarah’s business. [7]

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Additional information

A year later the market price of one ordinary share in DB plc had risen to $1.80, but the dividend
yield had fallen to 3%. Sarah was able to earn interest of 4% on funds she invested elsewhere.

(c) Advise Sarah whether or not she should sell her shares in DB plc and invest the proceeds to
earn interest. Justify your answer. [5]

(d) Explain how stewardship affects a business purchase by a limited company. [2]

[Total: 25]

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Question 3

Source A3

The accountant of PS plc prepared draft financial statements for the year ended 31 March 2022. The
following information was based on these draft statements.

Purchases $361 000

Purchases returns $8 560
Inventory at 1 April 2021 $68 210
Inventory at 31 March 2022 $71 650
Mark-up 60%
Operating expenses to revenue ratio 25%
Expenses to revenue ratio (includes finance costs) 28%

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare a summarised version of the draft income statement for the year ended
31 March 2022. [4]

Additional information

The draft financial statements did not take into account the following information items.

1 During the year one of the company’s delivery drivers had caused an accident resulting in
repairs to another vehicle costing $7000. Of this, $5000 will be covered by the company’s
insurance. No payments have yet been made.

2 Another vehicle is recorded in the books with a book value of $27 000. It is now estimated that
it has a value in use of $22 000 and could be sold for $19 000.

3 A credit customer who owed the company $1000 at the year-end was discovered to have
gone bankrupt and was not expected to pay any of the debt.

4 A dissatisfied customer was taking legal action and was suing the company for damages of
$10 000. The company had estimated that the customer had a 35% chance of success.

5 Goods with a selling price of $7200 were held by a credit customer on 31 March 2022 on a
sale or return basis. These goods were treated in the draft financial statements as having
been sold.

6 The premises were revalued on 31 March 2022 from $400 000 to $580 000.

7 The draft financial statements showed a value of $24 000 for an intangible asset which had
been bought by the company on 1 April 2021. The directors were of the opinion that this
should be amortised (depreciated) over 20 years from the date of purchase.

8 A fire on 4 April 2022 destroyed the company’s entire inventory.

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(b) Identify the two items from the information items 1 to 8 which should be disclosed by way of
a note to the accounts. Explain the reason for their treatment. [6]

(c) State what is meant by the term ‘contingent asset’. Illustrate your answer with an example. [2]

(d) Calculate the correct profit for the year. Start your answer with the draft profit from your
answer to (a). [7]

(e) Prepare the journal entry to record information item 6 from the list given. A narrative is
required. [3]

Additional information

The value of trade receivables in the draft statement of financial position was $81 900.

(f) Calculate the correct value of trade receivables at 31 March 2022. [3]

[Total: 25]

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Question 4

Source A4

AZ Limited is a manufacturing business which adds factory profit to its cost of production. It
manufactures and sells one product. It provided the following information.

Year ended Cost of Annual Units in Rate of factory

31 December production production inventory at profit
(before factory (units) year-end
profit)
$
2019 600 000 15 000 500 20%
2020 714 000 17 000 850 20%
2021 765 000 18 000 480 25%

No units remained in the inventory for more than two months.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the provision for unrealised profit account for each of the years ended
31 December 2020 and 2021. [8]

(b) Complete the table (on the question paper). Identify which figures connected to factory
profit were recorded in AZ Limited’s income statement for the year ended 31 December 2021.
State the amounts and their position in the income statement. [9]

(c) Name two costs which might be included in a manufacturer’s cost of production but would
not be included in prime cost. [2]

Additional information

1 The directors use the value of factory profit to set the bonuses for senior factory staff.

2 In 2020 the units could have been bought in for $44, and in 2021 for $41.65.

(d) Discuss whether the rates of factory profit being applied by AZ Limited are suitable. [6]

[Total: 25]

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Section B: Cost and Management Accounting

Question 5

Source B1

DY Limited manufactures and sells one product. Each unit is sold in the month in which it is
manufactured. Its budgeted information for the period from April to August is as follows:

Production Unit selling price Basic wage hourly rate

units $ $
April 4000 25 10
May 5000 25 10
June 5500 28 10
July 4500 28 11
August 4200 26 11

Each unit takes 1 hour and 30 minutes of direct labour to complete.

Basic wages are paid in the month when they are earned, and overtime payments are paid one month
in arrears. Overtime is payable on any hours above 6500 worked in the month. The overtime premium
is 20%.

One quarter of sales are made for cash. Half of sales are paid in the month after sale and receive a
cash discount of 5%. The remaining quarter is paid two months after sale.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Prepare the labour wages budget for each of the months June, July and August. [4]

(b) Prepare extracts from the cash budget showing entries relating to sales and labour for each
of the months June, July and August. [13]

(c) State two advantages to a business of preparing a cash budget. [2]

Additional information

One of the directors has suggested adding a fixed amount of profit per unit when calculating the
selling price so that profit is not affected by changes in production cost.

(d) Advise the directors whether or not they should adopt this suggestion. Justify your answer.
[4]

(e) Name two budgets which would be affected by the creation of a provision for doubtful debts.
[2]

[Total: 25]

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Question 6

Source B2

GH Limited is a manufacturing business which uses activity based costing (ABC).

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Explain why ABC is often considered a better costing method than absorption costing. [2]

Additional information

The company manufactures two products. The following information is available for the year.

1 Direct costs
Product A Product B
Production (units) 1500 4500
Direct material per unit 3 kilos at $7.20 per kilo 5 kilos at $4.80 per kilo
Direct labour per unit 2 hours at $10.50 per hour 3 hours at $10.50 per hour

2 Production overheads

Overhead Total cost

$
Machine servicing 13 700 Three machines are used to manufacture product A and
eight to manufacture product B. They are all serviced
once a month.

Order processing 6 400 Orders processed amount to 27 for product A and 93 for
product B.

Quality inspections 11 200 Product A is subject to 34 quality inspections and

product B to 126.

3 Rent costs $48 000 a year and is apportioned on the basis of floor area, 30% for product A
and 70% for product B.

4 The business applies a mark-up of 50% on total cost when calculating selling price.

(b) Calculate the selling price of one unit for each product. [12]

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Additional information

The company’s selling price for product B is $3 higher than that of a competitor. The directors are
worried that because of this the company will start to lose sales.

They are considering doubling production of product B whilst maintaining the same percentage
mark-up. They believe that because of the increase in production they would be able to negotiate
a purchase price for direct material of $4.40 per kilo. There would be an increased requirement for
labour and therefore the rate of pay would increase to $11.50 per hour for all factory workers.

The increase in production would cause the following production overheads for product B to
become:

$
Machine servicing 27 900
Order processing 8 100
Quality inspections 16 560
Total 52 560

The rent and its apportionment would be unchanged.

(c) Calculate the selling price of one unit of product B which would be charged if its production
was doubled in this way. [4]

(d) Advise the directors whether or not they should double production of product B. Justify your
answer. [7]

[Total: 25]

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