Cambridge International Examinations

Cambridge International Advanced Subsidiary and Advanced Level



ACCOUNTING 9706/22
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 16 printed pages.

IB18 06_9706_22/3RP
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1 Cherie and Harry are in partnership.

REQUIRED

(a) Explain three disadvantages of operating as a partnership rather than being in business as
a sole trader.

[6]

Additional information

The following information was available for the partnership on 30 June 2017.

$
Bank overdraft 1 680
Capital accounts
Cherie 42 000
Harry 28 000
Current accounts balances at 1 July 2016
Cherie 1 470 credit
Harry 2 430 debit
Drawings
Cherie 18 300
Harry 16 820
Gross profit for the year 40 960
Inventory at 30 June 2017 25 540
Loan Account
Cherie 8 000
Non-current assets
Cost 64 000
Provision for depreciation 22 000
Operating expenses 28 390
Trade payables 1 170

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The following information is also available.

1 Operating expenses included a payment for rent, $3450, for three months ended
31 August 2017.

2 Non-current assets are to be depreciated at 20% per annum using the reducing balance
method.

3 Inventory at 30 June 2017 was overvalued by $380.

4 Cherie is to receive interest at 8% per annum on her loan to the partnership. No entries have
been made to record the interest for the year ended 30 June 2017. The balance of her loan
account has remained unchanged throughout the year.

REQUIRED

(b) Prepare the income statement for the year ended 30 June 2017. Start the statement with
gross profit for the year of $40 960.

[5]

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Additional information

1 Interest on drawings has been calculated as follows:

$
Cherie 310
Harry 240

2 The partners are to receive interest on their fixed capital account balances at 10% per
annum.

3 Residual profits and losses are to be shared in proportion to their capital account
balances.

REQUIRED

(c) Prepare the appropriation account for the year ended 30 June 2017.

[4]

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(d) Prepare the partners’ current accounts for the year ended 30 June 2017.
Current Accounts
Cherie Harry Cherie Harry
$ $ $ $

[6]

Additional information

Cherie and Harry are concerned about some aspects of the business’s efficiency and provide the
following information.

Ratio Year ended Year ended Industry

30 June 2017 30 June 2016 Average
Non-current asset turnover 1.68 times 1.11 times 1.34 times
Trade payables turnover 28 days 33 days 31 days

REQUIRED

(e) Analyse the efficiency of the business using these ratios.

[4]

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Additional information

The partners are also concerned that the rate of inventory turnover has fallen below the industry
average. Cherie has suggested that this could be improved by reducing inventory levels. Harry
disagreed and suggested instead that an advertising campaign should be organised.

REQUIRED

(f) Advise which course of action the partners should take in order to improve the rate of
inventory turnover. Justify your advice by discussing both of the suggested options.

[5]

[Total: 30]

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2 M Limited has provided the following extract from the statement of financial position at
31 August 2016.
$
Equity
Capital and reserves
Ordinary shares of $0.25 each 200 000
Share premium 80 000
Revaluation reserve 40 000
Retained earnings 37 500
357 500

The following information is available.

1 On 1 January 2017 a rights issue was made on the basis of two ordinary shares for every
five ordinary shares held at a price of $0.40 per share. The rights issue was fully subscribed.

2 On 30 June 2017 an interim dividend of $0.04 per share was paid on all shares in issue at
that date.

3 At 31 August 2017 non-current assets were re-valued downwards by $48 000.

4 Profit for the year ended 31 August 2017 was $22 500.

REQUIRED

(a) Prepare the statement of changes in equity for the year ended 31 August 2017. A total
column is not required.

[6]

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(b) State two reasons why capital reserves may be used before revenue reserves to fund a
bonus issue of shares for a limited company.

[2]

(c) (i) State two benefits to a limited company of making a rights issue.

[2]

(ii) State one limitation to a limited company of making a rights issue.

[1]

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Additional information

Directors of M Limited are considering obtaining a long-term bank loan to raise additional capital.

REQUIRED

(d) Explain two advantages to the company of this course of action.

[4]

[Total: 15]

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1 August 2016 - 31 July 2017
3 Butler operates a small business.

He has provided the following information for non-current assets at 31 July 2016.

$
Plant and machinery
Cost 195 000
Provision for depreciation 68 250

During the year ended 31 July 2017, the following transactions took place.

1 A machine was sold for $25 000. There was a loss on disposal of $3000. The machine had
been purchased on 28 May 2016. 1 August 2015 - 31 July 2016

2 A machine was purchased by cheque at a cost of $37 500. The following costs were also
incurred for the new machine:

$
Annual insurance 2825
Installation expenses 4500

Plant and machinery is depreciated using the reducing balance method at a rate of 20% per
annum.

A full year’s depreciation is charged in the year of purchase. No depreciation is charged in the
year of disposal.

REQUIRED

(a) Prepare the following ledger accounts for the year ended 31 July 2017. Dates are not
required.
(i) Plant and machinery at cost

$ $

Balance b/d 195,000 Disposal 35,000

Bank 42,000 Balance c/d 202,000

237,000 237,000

Balance b/d 202,000

[3]

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(ii) Provision for depreciation on plant and machinery

$ $

Disposal 7,000 Balance b/d 68,250

Balance c/d 89,400 Income Statement 28,150

[$202,000 - ($68,250 - $7,000] x 20% = $28,150

96,400 96,400

Balance b/d 89,400

[3]

REQUIRED

(b) Explain why a business may use reducing balance method of depreciation for plant and
machinery.

Plant and Machinery often loses more value in the earlier years of its life due to usage

and maintenance costs may be higher in the later years.

[3]

Additional information

Butler also purchases loose tools for use in the business.

(c) Explain two accounting treatments for loose tools.

1 The revaluation method should be used if the cost is significant.

2
If the cost of the item is not material, then it is written off as expenses.

[4]

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(d) Explain one fundamental accounting concept relating to depreciation.

Accruals/matching : to match the cost with the income earned by the asset.

Prudence : Not to overstate the value of non-current assets or profit.

Consistency: Using the same depreciation method each year to assist in comparisons.
[2]

[Total: 15]

Disposal a/c

Cost 35,000 Provision for Depreciation 7,000

Bank 25,000
NBV = 28,000

Loss on Disposal 3,000

$28,000 x 20% = $7,000

80%

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4 SP Limited owns a hotel and a leisure centre.

The business is split into three working divisions: Accommodation, Leisure and Conferences.
The business also has one service centre: Support.
Labour, food and materials are allocated direct to the relevant division. The remaining overheads
cannot be directly allocated.
The following budgeted information for the year ended 31 March 2018 is available:
$
Rent and rates 86 000
Light and heat 48 000
Advertising 40 000
Equipment depreciation 60 000
Office costs 150 000
The following cost centre information is available.
Accommodation Leisure Conferences Support
Floor space (m2) 25 000 4 000 10 000 1 000
Equipment value ($) 10 000 45 000 5 000 –
Number of employees 23 5 5 2
Kilowatt hours 7 000 4 000 3 000 1 000
Budgeted guest days 12 000 3 000 5 000 –

Advertising and office costs are apportioned on the basis of budgeted guest days.

REQUIRED

(a) Apportion the budgeted overheads to the four divisions using a suitable basis for each.
Re-apportion the support costs to the three working divisions on the basis of guest days.

Total Accommodation Leisure Conferences Support

$ $ $ $ $
Labour cost 345 000 194 000 86 000 60 000 5 000
Food and
81 000 42 000 11 000 26 000 2 000
materials
Rent and rates 86 000 53,750 8,600 21,500 2,150

Light and heat 48 000 22,400 12,800 9,600 3,200

Advertising 40 000 24,000 6,000 10,000 -

Equipment
60 000 10,000 45,000 5,000 -
depreciation
Office costs 150 000 90,000 22,500 37,500 -
Total apportioned 12,350
810,000 436,150 191,900 169,600
overheads
Reapportionment
7,410 1,852 3,088 (12,350)
of Support
Total 443,560 193,752 172,688 -

[8]

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(b) Calculate an overhead absorption rate to two decimal places, for each of the three working
divisions based on budgeted guest days.

Accommodation Leisure Conferences

$ $ $

Total Overheads 443,560 193,752 172,688

Budgeted Guest Days 12,000 3,000 5,000

Overhead absorption rate per $36.96 $64.58 $34.54

guest day

[3]

Additional information
The actual results for the year ended 31 March 2018 were as follows:

Total cost ($) Guest days

Accommodation 522 000 13 200
Leisure 215 000 3 600
Conferences 196 000 5 800

REQUIRED

(c) Calculate the under-absorption or over-absorption of overheads for each division.

Accommodation Leisure Conferences

$ $ $
Actual Costs 522,000 215,000 196,000

Absorbed

Accomodation ($36.96 x 13,200) 487,872

Leisure ($64.58 x 3,600) 232,488

Conferences ($34.54 x 5,800) 200,332

Under / Over absorbed 34,128 under 17,488 over 4,332 over [6]

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Additional information

The company’s policy is to charge customers a price to achieve a profit margin of 60%.

A business customer wishes to register five employees for a three day conference to include four
days’ accommodation, one day’s leisure and three days' conference facilities for each employee.

REQUIRED

(d) Prepare a statement to calculate the price to be quoted to the customer. $

Accomodation (4 days x $36.96) 147.84

Leisure (1 days x $64.58) 64.58

Conferences (3 x $34.54) 103.62

316.04

x 5 employees 1,580.20

Profit 2,370.30

Price to Quote 3,950.50

[4]

Additional information

The directors have been informed that a competitor has quoted a price $600 more for the same
conference. They are considering revising their own pricing policy to increase accommodation
prices by 20%.

REQUIRED

(e) Advise the directors whether or not they should increase their accommodation prices. Give
reasons for your answer.
Increase Prices

Price will still be lower than the competitors and this will result in profits

Not Increasing Prices

May lose customer as the increase may affect the reputation

Increase in accomodation prices may reduce teh demand for leisure and conference and

thus may affect overall occupancy rate.

Advice : Increase the price as the price is still lower than the competitor by a huge margin.

[5]

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Additional information

A company has recently employed a new assistant accountant with only limited knowledge of
budgetary control procedures.

REQUIRED

(f) State two benefits to a company of operating a system of budgetary control.

Enables planning for the future
1

Encourages co-ordination/communication
2

Provides a framework for responsibility accounting

[2]
Encourages variance analysis ensuring control, Encourages motivation of employees
(g) State two limitations to a company of operating a system of budgetary control.

1 Based on estimates

Unrealistic budgets may demotivate employees

2

May discourage innovation

[2]

[Total: 30]

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© UCLES 2018 9706/22/M/J/18