Cambridge International Examinations

Cambridge International Advanced Subsidiary and Advanced Level



ACCOUNTING 9706/21
Paper 2 Structured Questions May/June 2018
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 19 printed pages and 1 blank page.

IB18 06_9706_21/6RP
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1 Ashir, Bo and Chan are in partnership. The partnership agreement includes the following terms:

1 Profits and losses are shared in the ratio of the partners’ capital accounts.

2 Interest on capital is 6% per annum.

3 Interest on drawings is 5% calculated on each partner’s total annual drawings.

4 Partners’ loan interest is 12% per annum.

5 Chan receives a salary of $1000 per month.

The following information is available at 31 December 2016:

$
Capital accounts
Ashir 40 000
Bo 30 000
Chan 10 000
Current accounts
Ashir 12 300
Bo 8 200
Chan 2 600 debit
Drawings
Ashir 15 400
Bo 12 200
Chan 16 400
Fixtures and fittings
Cost 32 400
Provision for depreciation 21 400
Motor vehicles
Cost 80 000
Provision for depreciation 48 000
Loan account  Ashir 10 000
Gross profit 171 620
Operating expenses 54 960
Staff wages 32 500

Additional information

1 Operating expenses include a payment of $600 for insurance covering the 12-month period
to 31 August 2017.

2 Staff wages owing at 31 December 2016 were $860.

3 Depreciation is to be charged as follows:

Fixtures and fittings 10% per annum using the reducing balance method
Motor vehicles 20% per annum using the straight-line method

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REQUIRED

(a) Prepare the income statement for the partnership for the year ended 31 December 2016.
Start with the given gross profit of $171 620.

[5]

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(b) Prepare the profit and loss appropriation account for the partnership for the year ended
31 December 2016.

[5]

(c) Prepare the partners’ current accounts for the year ended 31 December 2016 on the next
page. [7]

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 Current Accounts

© UCLES 2018
Ashir Bo Chan Ashir Bo Chan
Detail Detail
$ $ $ $ $ $
5

9706/21/M/J/18
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Additional information
On 1 January 2017, Chan decided that he wished to retire with immediate effect. The partners
agreed that as part of his settlement, he could keep one of the motor vehicles at the net book
value of $18 000.

At that date it was agreed that the total value of goodwill was $124 000.

REQUIRED

(d) Prepare a statement to calculate the bank settlement due to, or from, Chan on his retirement.

[4]

Additional information

Following Chan’s retirement, Ashir and Bo are considering converting their business to a limited
company to continue the business.

REQUIRED

(e) State two advantages to a partnership of converting to a limited company.

[2]

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Additional information

Ashir’s brother Bilal, a sole trader with three employees, has been running his business for four
years. Turnover has doubled over the past year and the business is gradually becoming very
profitable.

Bilal does not maintain a full set of accounting records, but his friend has recommended that he
should.

REQUIRED

(f) Advise Bilal whether or not he should maintain a full set of accounting records. Give reasons
for your answer.

[5]

(g) State two reasons for maintaining a sales ledger control account.

[2]

[Total: 30]

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 1 January 2016 - 31 December 2016
8

2 The following information has been extracted from the books of account of FA Limited at
1 January 2016.

$
Motor vehicles at cost 124 000
Motor vehicles provision for depreciation 54 250

The following information is also available.

1 All the company’s motor vehicles had been purchased on 1 January 2014.

2 On 1 July 2016, a new motor vehicle was purchased for $48 000. The cost was settled by a
cheque payment of $28 000, the balance by the part exchange of an old motor vehicle.

The vehicle that was part-exchanged had cost $36 000.

3 The company policy is to depreciate motor vehicles at 25% per annum using the reducing
balance method.

A full year’s depreciation is charged in the year of purchase, but none in the year of sale.

REQUIRED

(a) Prepare the following ledger accounts for the year ended 31 December 2016. (Dates are not
required.)

Motor vehicles at cost

$ $

Balance b/d 124,000 Disposal 36,000

Bank 28,000 Balance c/d 136,000

Disposal 20,000

172,000 172,000

Balance b/d 136,000

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Motor vehicles provision for depreciation

$ $

Disposal (W1) 15,750 Balance b/d 54,250

Balance c/d 62,875 Income Statement (W2) 24,375

78,625 78,625

Balance b/d 62,875

Disposal of non-current assets

$ $

Motor Vehicles at Cost 36,000 Provision for Depreciation 15,750

Motor Vehicles at Cost 20,000

Income Statement 250

36,000 36,000

Workings
W1 : Prov for Dep for disposed vehicle

1 January 2014 $36,000 Dep : $9,000 + $6,750 = $15,750

($9,000)
Dep : 25%
$27,000
31 December 2014 (NBV)

Dep : 25% $6,750

31 December 2015 (NBV) $20,250

W2 : Depreciation Expenses for the year

$136,000 - ($54,250 - $15,750) = $97,500 x 25% = $24,375

[6]

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(b) Analyse the effect on the profit for the year ended 31 December 2016 if FA Limited had
always used the straight-line method of depreciation at 20% per annum. Show your
workings.

Depreciation for the year ended 31 December 2016 would be $27,200 ($136,000 x 20%)

but $24,375 if reducing balance method is used.

The loss on disposal of the motor vehicle $1,600 ($36,000 - $20,000 - $14,400 [$36,000 x 20% x 2 years])

as compared to $250 loss if reducing balance method is used.

Using straight line method depreciation : $27,200 + loss $1,600 = $28,800

Using reducing balane mehod : $24,375 +loss $250 = $24,625

Profit for the yer will reduce by $4,175 ($28,800 - $24,625) if straight line method is used.

[5]

(c) Explain two accounting concepts that apply to making the annual charge for depreciation.

1 Accruals/matching concept. The cost of using the asset should be matched to the time period of

income earned by the asset.

2 Prudence concept. Spreading the cost of the asset over its useful life to avoid overstating profits

and assets.

[4]

Consistency. Enables appropriate and valid comparison. [Total: 15]

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PLEASE TURN OVER

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3 Anna has obtained the following data at 31 December 2016 in respect of Ravi, a possible new
customer.

$
Trade receivables 20 640
Cash and cash equivalents 4 840 debit
Inventory 38 100
Trade payables 28 760

Other figures obtained are:

Sales for the year 331 750

Inventory at 1 January 2016 46 200

Ravi has a mark-up of 25%.

REQUIRED

(a) Calculate the following ratios for Ravi’s business to two decimal places:

(i) Current ratio

[2]

(ii) Liquid (acid test) ratio

[2]

(iii) Rate of inventory turnover

[3]

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Additional information

Anna has also obtained the following data in respect of Yuan, another possible customer.

Current ratio 3.82 : 1

Liquid (acid test) ratio 1.63 : 1
Rate of inventory turnover 6.69 times per year

Anna’s main concern when choosing the customer is that they should pay her promptly.

REQUIRED

(b) Advise Anna which customer she should choose. Justify your answer.

[5]

(c) State three limitations to a business of using ratio analysis.

[3]

[Total: 15]

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4 Zinan is a manufacturer and makes a single product. He currently uses marginal costing.

The following budgeted information is available for two years.

Year 1 Year 2
$ $
Direct labour 38 500 45 500
Direct material 24 750 29 250
Factory costs 13 750 15 250

Units Units
Sales 10 000 11 000
Production 11 000 13 000

The following information is also available.

1 Of the factory costs, $5500 are fixed for each year and the remainder are variable.

2 Variable cost per unit is not expected to change.

3 Fixed selling costs are $3500 for Year 1. These are expected to increase by 2% for Year 2.

4 Variable selling costs are expected to be 5% of the sales revenue for each year.

5 The selling price is $18 per unit.

6 There was no opening inventory in Year 1.

REQUIRED

(a) Calculate the budgeted variable cost of production per unit.

$

Direct Labour 38,500

Direct Materials 24,750

Variable Factory Costs ($13,750 - $5,500) 8,250

71,500

$71,500 / 11,000 units = $6.50 per unit

[2]

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(b) Calculate the total budgeted contribution for each year.

Year 1 Year 2

$ $

Revenue (10,000u x $18) 180,000 (11,0000u x $18) 198,000

Variable Prod Costs (10,000u x $6.50) (65,000) (11,000u x $6.50) (71,500)

Variable Sell Costs (180,000 x 5%) (9,000) ($198,000 x 5%) ($9,900)

Contribution 106,000 116,600

[6]

(c) Calculate the budgeted production cost per unit for each year.
Year 1 Year 2

$ $

Direct Labour 38,500 45,500

Direct Materials 24,750 29,250

Factory Costs 13,750 15,250

77,000 90,000

Units 11,000 13,000

Production Cost per unit ($) 7 6.92

[2]

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Additional information

Zinan is considering using absorption costing.

REQUIRED

(d) State two limitations of absorption costing.

1 It is more time consuming to calculate the overhead absorption rate and adjust

for over / under absorption.

2 It is more complicated to calculate and managers may need training.

[2]

(e) Calculate the total budgeted profit for each of the two years using absorption costing.
Year 1 Year 2

$ $ $ $

Revenue (10,000u x $18) 180,000 (11,0000u x $18) 198,000

Opening Inventory - (1,000units x $7)

7,000

Purchases (11,000units x $7) 77,000 (13,000u x $6.92)

89,960

Closing Inventory (1,000units x $7) (7,000) (3,000u x $6.92) (20,760)

Production Cost (70,000) (76,200)

Selling Costs : Variable ($180,000 x 5%) ($198,000 x 5%) (9,900)

(9,000)
($3,500 x 102%) (3,570)
: Fixed (3,500)

Profit 97,500 108,330

[7]

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(f) Explain why profit calculated using absorption costing would be different to profit calculated
using marginal costing.

[3]

Year 1 Year 2
(e)
$ $

Revenue 198,000
180,000

Production Cost
(1,000units x $7) (7,000)
(10,000 u x $7) (70,000)
(10,000u x $6.92) (69,200)

Selling Costs : Variable (9,000) (9,900)

(3,570)
Fixed (3,500)

97,500 108,330
Profit

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Additional information

During actual production of a large order for 3000 units, Zinan discovers that the customer has
ceased trading. If he cannot find another customer for these units he will have to decrease
production for Year 1 and reduce staff.

To prevent this from happening, Zinan is proposing to attract new customers for the 3000 units
with a marketing campaign.

The following information is available in respect of only the 3000 units.

1 The budgeted selling price would be reduced by 7.5%.

2 Advertising costs would be $1000.

3 There would be additional direct labour costs of $0.15 per unit.

REQUIRED

(g) Prepare a statement to calculate the effect on profit for Year 1 if the proposal is accepted.

[3]

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(h) Advise Zinan whether or not he should go ahead with the marketing campaign. Justify your
answer using both financial and non-financial factors.

[5]

[Total: 30]

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© UCLES 2018 9706/21/M/J/18