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Accounting Paper 2 Exam

29 May 2013
MARK SCHEME

STUDENT'S NAME:

Time allowed: 2 hours

For this paper you must have:

a calculator
..'•*

Instructions

Use black ink or ball-point pen.

Answer all questions.
You must answer the questions in the spaces provided. Do not write outside the box around each page.
Extra paper Fs available if required.
All workings must be shown and clearly labelled; otherwise marks for method maybe lost.
Make and state any necessary assumptions.
Do all rough work in this book. Cross through any work you do not want to be marked.
Electronic dictionaries may not be used.

Information

> The marks for questions are shown in brackets.

> The maximum mark for this paper is 100.
Six of these marks will be awarded for:
Using good English
Organising information clearly
Using specialist vocabulary where appropriate.

For Examiners Use

Question FTotal marks available (First Marker ISecond Marker
1 14
2 29
3 31
4 26
Total
percentage

Grade

^€^P l^j C^A^S

Question 1 Total for this question: 14 marks

Mary is a sole trader. She employs a bookkeeper to maintain her cash book and sales and
purchases ledger accounts. She pays the bookkeeper £9000 a year.

Mary also pays an accountant £800 a year to prepare her financial statements.

Mary is considering purchasing an accounting software package for £1200. She would then
maintain her accounting records and prepare the financial statement herself.

1 (a) Explain three advantages to Mary if she purchases the accounting software.

1 mark per advantage identified + 0 -2 for development.

Reason Development

Cost savings (1) Mary could save the cost of the bookkeeper and accountant
Or (1) £9800/£9000/£8600/£800 (ie referring to figures) (1) per
Reducing expenses (1) year. The investment pays for itself in the first year (1). The
savings made could be used elsewhere in the business (1).

More information (1) She may be able to get more information such as income
statements (trading and profit and loss accounts) whenever
she wants (1) and not just at the end (1).

mprove management (1) The accounting software may provide better and quicker
information (1) enabling her to make better decisions (1).
She could use 'what if facility to see what would happen
if a change is made (1).

ncreased involvement with Mary's increased involvement in the preparation of the

he accounts (1) accounts may increase her focus on this side of the business
(1), eg focus on cash position (1) or credit control (1). This
could reduce the chance of fraud by book keeper or
accountant (1). This could improve her skills (1).

ncreased privacy (1) She is no longer using a book keeper or accountant (1) so
there will be increased security of financial information (1).

Max 6 marks
v

1 (b) Explain three disadvantages to Mary if she purchases the accounting software.

1 mark per disadvantage identified + 0 -2 for development.

Reason Development

Lack of expertise (1)
Mary may not have the expertise (1) to use the software
effectively and therefore may make errors (1) this could lead
to problems in running her business (1) for example not
recording credit sales correctly (1). The financial statements
may be incorrect (1). She will not get advice from the
accountant/book keeper (1), plus 1 mark for example.

Time (1) Mary may not have the time to enter data, also she may be
Extra work for Mary (1) losing sales and customers (1) during the time she is taking to
maintain her accounts (1).

Cost (1) She may need to be trained (1) which will be an added cost
and the change-over to a new system may involve both
running simultaneously (1). Software updates and replacing
equipment (1) could incur added costs.

Redundancy (1) She will have to make the bookkeeper redundant (1) and this
may involve costs (1).

Software failing/virus There could be a software failure or virus and this could lead
hacking/power cut (1) to a loss of data (1) this could lead to additional costs or
possible losses for the business (1).

Health and safety (1) Mary may suffer eye or back strain from using the computer

Max 6 marks

1 (c) Advise Mary whether she should purchase the accounting software.

Advice 1 mark + justification 1 mark

2 marks
Question 2 Total for this question: 29 marks

David Ashby intends to set up a business as a sole trader on 1 August 2012. He

needs to rent premises, buy non-current (fixed) assets and inventory (stock), so
he will not begin trading until 1 September 2012.

He has asked his bank manager for a bank loan £12 000 and an overdraft facility of
£5000. The bank manager has asked David to prepare a cash budget before giving
final approval for the loan overdraft facility.

David is able to provide the following information.

He will invest £10 000 from his personal savings and will deposit this amount
in the business bank account on 1 August 2012.

The bank loan of £12 000, if granted, would be received on 1 August 2012. The
loan is repayable in equal monthly instalments over 2 years commencing
on 1 September 2012. Annual interest of £480 will be paid monthly from
September 2012.

During August, David plans to:

purchase non-current (fixed) assets costing £12 500; he estimates that

the depreciation on these will be £250 per month;
pay rent on the business premises; the annual rent is £16 000 and he will
pay this quarterly in advance.

David's forecast for the first three months of trading is:

September October November

£ £ £
Sales 18000 19000 24000
Purchases 8160 7630 8900
Operating expenses 1 025 1 145 2160

David expects that 20% of his sales will be on a cash basis, and the remaining 80%
will be received in the following month.

He has agreed to pay his suppliers one month in advance.

The operating expenses will be paid one month in arrears.

David will not take drawings in August and September. From October, he will
take drawings of 5% of that month's sales total.
1

2 (a) Prepare a cash budget for each of the three months August to October, assuming the bank
loan is approved. (A space for workings has been provided).

David Ash by
Cash budget for the three months ending 31 October 2012
August September October
£ £ £
Receipts
Capital introduced 10000 [1]
Bank loan 12000 [1]
Cash sales 3 600 [1] 3800 [1]
Credit sales 14400 [2]

22000 3600 18200

Payments
Purchases 8160 [1] 7 630 [1] 8 900 [1]
Purchase of non-current

(fixed) assets 12 500 [1]

Rent 4000 [1]
Operating expenses 1 025 [1]
Loan repayments 500 [1] 500 [1]
Interest 40 [1] 40 [1]
Drawings 950 [1]
24660 8170 11 415

Net cash flow (2 660) (4 570) 6785

Opening balance (2 660) (7 230)
Closing balance (2660) [1 OF] (7230) [10F] (445) [1 OF]

20 marks
2 (b) Advise David whether the bank manager will grant the overdraft facility. Base your advice
on the cash budget prepared in 2 (a).

Describing the cash flows (1) Increasing sales will lead to improve cash flows in the future
(1)+1 mark for using figures (for cash flows on sales).
Describing closing balances of own cash budget (1) = 1 mark for using figures.
Comparing (1) closing balances with the requested overdraft facility of £5000.
Statement that the overdraft is: sufficienV not sufficienV needed/ not needed (1) = 1 mark for
quantifying the differences or stating the amount required.

Comments on the features of the cash budget which may be taken into account:
• a one-off payment of £12 500 for non-current assets reduces the cash flows (1).
• these are the opening months of the business and may not be typical (1).
the budget is based on forecast figures which may not be reliable (1).
Max 6 Marks
Advice 1 mark
eg - the bank manager will/will not grant the overdraft (1).
Overall max 7 marks
Quality of written communication
For using good English, spelling, punctuation and grammar.
Up to 2 marks
Question 3 Total for this question: 31 marks

Rods and Reels Ltd owns and operates a number of fishing shops. The trainee accountant
has prepared a draft profit and loss account for the year ended 31 December 2012. She is
unsure of the treatment of the following.

(1) Reeves & Neylan Chartered Accountants audit the accounts and give tax advice. The
fees for the year ended 31 December 2012 are estimated to be £6000. This has not
been included in the draft accounts.

(2) Rods and Reels Ltd has recently received fishing rods on a sale or return basis. The
directors have not decided whether these fishing rods will be purchased. The total
cost price of the rods is £12 000. The fishing rods have been included in the year end
stock-take and valued at the cost price.

(3) Part of one shop is rented out to a boat repair business. Rods and Reels Ltd is owed
rent of £3000 at 31 December 2012. This has not been included in the draft final
accounts.

(4) Rods and Reels Ltd purchased new fixtures and fittings costing £27 500 during the
year. These have been included in fixed assets and have been depreciated at a rate
of 10% per annum using the straight-line method. The suppliers charged £750 for
delivery of the fixtures and fittings and this has been added to carriage inwards.

(5) Included in the closing stock were fishing bags at a cost price of £4000. They would
normally sell for £8000. However, they have been damaged and can only be sold for
£3000.
3 (a) Complete the table below. For each item, state a relevant accounting concept and the
effect any adjustment would have on the net profit.
The first item has been completed for you.

Item Effect on Profit Concept

(1) Audit and [6000] Accruals

tax fees

(2) Fishing rods [12 000] [1] Realisation / prudence [1]

on sale or
return

(3) Rent 3000 [1] Accruals / Matching [1]

(4) Fixtures and 750* [1] Cost [1]

fittings
[75]* [2]
(5) Stock [1000] [2] Prudence [1]

* If the following answers are shown, award the relevant marks:

675 (3)
(675) (2)
825 (2)
(825) (2)
11 marks
 Below is the capital and reserves section of the balance sheet of Rods and Reels Ltd at 1
January 2012.

Capital and reserves £

Ordinary shares of £1 each fully paid 100000
Profit and loss account 118860
218860

The company paid an interim dividend of 10p per ordinary share on 15 July 2012.
The Directors proposed a rights issue of ordinary shares on the basis of one new share for
every 2 shares held at a price of £1.50 per share. The rights issue took place on 1
November 2012 and was fully subscribed.

The company paid a final ordinary dividend of 20p per share. All ordinary shareholders at
30 November 2012 received the dividend.

The Directors estimate that a provision of £26 000 should be made for corporation tax.

3 (b) Calculate the retained profit for the year ended 31 December 2012.
£
Net Profit 93940
Less Taxation 26000 (1)
67940
Interim dividend 10000 (3 OF) 100 000 (1) x 10p (1)
Final dividend 30000 (3 OF) 150 000 (1)x 20p(1)
Retained profit for the year 27940 (1 OF)
If final dividend £20 000 award 2 marks
S^marks

3 (c) Prepare the capital and reserves section of the balance sheet at 31 December 2012.
Capital and reserves* (Equity) £

Ordinary shares of £1 each fully paid 150 000 (3) W1

(Share capital)
Share premium account 25000 (3) W2
Profit and loss account 146 800 (3) 27 940 (10F)+118 860(1)
(Retained earnings)
321 800 (10F)
W1 100 000 (1) + 50 000 (10F) + 1 for adding to ordinary shares
W2 50 000 (1 OF) x 50p (1)+1 for showing as share premium
If final dividend £20 000 in (b) profit and loss account (retained earnings) = £156 800 for 3
marks.
10 marks
Quality of presentation 2 marks
*1 mark for labelling
1 mark for correct order: Ordinary shares; share premium; profit and loss account (retained
earnings)
Overall 12 marks
Question 4 Total for this question: 26 marks

Steven, Luke and Ashley are in partnership sharing profits and losses in the ratio 2:2:1
respectively.

Profits for the year ended 30 November 2012 were £78 000 and accrued evenly
throughout the year.

Interest on capital is to be calculated at 4% per annum.

Interest on drawings is to be charged at 2% per annum. Partners' drawings were

£18 500, £19 000 and £11 000 respectively.

The summarised balance sheet at 30 November 2011 was as follows.

Balance sheet at 30 November 2011

£ £
Non-current (fixed) assets 350 000
Net current assets 42000
392 000
Financed by
Capital accounts
Steve n 175000
Luke 98000
Ashley 75000 348 000

Current accounts:
Steve n 30000
Luke 25000
Ashley (11 000) 44000
392 000

From 1 June 2012, the partners had agreed the following changes.

(1) Steven, Luke and Ashley to share the profits in the ratio 3:2:1 respectively.

(2) Ashley to receive an annual salary of £6406

(3) Interest on the capital and interest on the drawings to remain unchanged
throughout the year.
 3 (a) Prepare the partners' current accounts for the year ended 30 November 2012.

Steven | Luke | Ashley Steven | Luke | Ashley

Bal b/d 11 000l[1] Bal b/d 300001 25000 [1 for both]
Drawings 18500 19000 11 000 [1] Salary 3203 [1]W2
for line
Interest 370 380 220 [1] Interest 7000 3920 3000 [1] for line
on drawings for line on W3
W1 capital
Bal c/d 45801 32324 Profit 13010 13010 6505 (10) W4
share
pre *
Profit 14661 9774 4887 W4
share
post*
Bal c/d 4625
646711 51 7041 22220 646711 51 7041 22220
Bal b/d 46251 [10F] 45 8011 32 324 (1 for both)

[ Profits could be as a single figure for each partner (S £27 671; L £22 784; A £11 392)
|W1
|£18 500 x 2% = £370 + £19 000 x 2% = £380 + £11 000 x 2% = £220 (1)
|W2
|£6406x 72= £3203(1)
|W3
|£175 000 x 4% = £7000 + £98 000 x 4% = 3920 + 75 000 x 4% = £3000 (1).
|W4
[Net profit £78 000 + interest on drawings £970 (1) - interest on capital £13 920 (1) = remaining
[ profit £65 050(1 OF)

From 1 December to 31 May: £65 050 / 2 = £32 525

From 1 June to 30 November: £32 525 - salary of £3203 (1) = £29 322

Steven (£32 5255 x 2/5) = £13 010 (1) + (£29 322 x 3/6) = £14 661 (1)
Luke (£32 5255 x 2/5) = £13 010 (1) + (£29 322 x 2/6) = £9774 (1)
Ashley (£32 5255 x 1/5) = £6505 (1) + (£29 322 x 1/6) = £4887 (1)
18 marks
Quality of presentation:
2 marks if every entry has a 'reasonable' narrative (accept abbreviations etc),
1 mark if at least 4 have a reasonable narrative (this can be applied even to a vertical
presentation)
0 if less than 4 narratives
2 marks

Max mark 20
Markers' notes
Balances must be brought down to achieve marks; if a candidates own figures for balance brought
down are all credits (or debits) they can still achieve 2 marks for balances brought down.

If an item is shown on the wrong side in the current accounts (eg drawings credited rather than
debited) no mark(s) for that item; the exception is the profit shares where the maximum marks will
be 9 overall if profit is debited rather than credited.

Reversals: marks can be allocated to the workings but the items within the current accounts will
lose marks.

Current accounts shown as a vertical list: treat as workings and mark items correctly added or
subtracted - or if workings given allocate marks within those workings.

Accept separate current accounts for each partner.

Where the candidate provides an appropriation account.

Profit and Loss Appropriation Account for the Year ended 30 November 2012

1st half year 2"° half year

£ £ £ £
Profit (net profit) 39000 39000
Interest on
drawings
s 185 185
L 190 190
A 110 110
485 485(1) | For both 485 figure
39485 39485

Interest on capital
s 3500 3500
L 1 960 1 960
A 1 500 1 500
f6 9601 (1) [ For both 6960 figures
32525 32 52511 (OF) for subtotals
nd
Salary r32031(1) I Must be 2"° half year
Remaining Profit
s 13010[10F] 14 661 [1 OF] OFs must be in the correct
ratio
L 13010[10F] 9774[10F]
A 6505nOF1 4887MOF1
32^25 29 3221
 <

<

Profit and Loss Appropriation Account for the year ended 30 November 2012

£ £ £ £
Profit (net profit) 78000
Interest on
drawings
s 370
L 380
A 220

77030
Interest on
capital
s 7000
L 3920
A 3000
n392oirn
65 050[1] OF
1st half year 2na half year
Salary rs 2031 rn Must be 2nd
half year
Remaining profit
s 13 010 [10F] 14661 [1 OF] OFs must be
in the correct
13 010 [10F] 9 774 [1 OF]
ratio
A 6 505 non 4887MOF1
32 5251 29 3221
[4 (b) Explain the purpose of a partnership capital account.

[A partner's capital account tends to be a fixed account (1) which includes the initial investment into
the business by each partner (1). This account would then only change with either the introduction
of extra capital (1) or due to a change in the structure of the partnership such as a new partner
joining (1) an existing partner retiring (1) or the partnership being dissolved (1). These changes
could include adjustments for revaluation of non-current (fixed) assets (1), goodwill (1) and
realisation profiVloss on a dissolution (1).
Used as a means of calculating interest on capital (1).
Max 3 marks

4 (c) Explain the purpose of a partnership current account.

A current account is a fluctuating account (1) which is used to record the allocation of profit to the
partners from the appropriation account (1). These allocations can include partners'
salaries/interest on capital/profit shares/interest on drawings (1). It is then used by the partners for
drawings (1).
Max 3 marks