Cambridge International AS & A Level

* 3 6 3 1 2 6 5 2 3 8 *

ACCOUNTING 9706/22
Paper 2 Structured Questions May/June 2021

1 hour 30 minutes

You must answer on the question paper.

No additional materials are needed.

INSTRUCTIONS
● Answer all questions.
● Use a black or dark blue pen.
● Write your name, centre number and candidate number in the boxes at the top of the page.
● Write your answer to each question in the space provided.
● Do not use an erasable pen or correction fluid.
● Do not write on any bar codes.
● You may use an HB pencil for any rough working.
● You may use a calculator.
● You should present all accounting statements in good style.
● International accounting terms and formats should be used as appropriate.
● You should show your workings.

INFORMATION
● The total mark for this paper is 90.
● The number of marks for each question or part question is shown in brackets [ ].

This document has 20 pages.

DC (DH) 201942/3
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1 N Limited is a trading business. Sales are made on the credit basis only.

The following information was available at 31 December 2020.

Debit Credit
$000 $000
8% Debentures (2025) 250
Administrative expenses 171
Cash and cash equivalents 14
Cost of sales 466
Debenture interest 8
Distribution costs 63
Dividends paid 80
Inventory at 31 December 2020 33
Issued capital:
Ordinary shares of $0.25 each at 31 December 2020 500
Non-current assets
Cost 1140
Provision for depreciation at 1 January 2020 140
Retained earnings at 1 January 2020 129
Revenue 923
Share premium at 31 December 2020 70
Trade payables 42
Trade receivables 79
2054 2054

The following information is also available at 31 December 2020.

1 Administrative expenses included insurance of $16 000 for four months ended
31 January 2021.

2 Depreciation should be provided on non-current assets at 25% per annum using the reducing
balance method. Depreciation charges should be allocated 20% to distribution costs and 80%
to administrative expenses.

3 The account of a credit customer, $3000, should be written off to administrative expenses as
an irrecoverable debt.

4 Debenture interest was outstanding for the second half of the year. The directors had issued
additional debentures of $50 000 on 1 October 2020.

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REQUIRED

(a) Prepare the company’s income statement for the year ended 31 December 2020.

N Limited
Income statement for the year ended 31 December 2020

$000

Workings:

Distribution costs

Administrative expenses

Finance costs

[10]

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Additional information

On 1 July 2020 the directors had decided to make a rights issue of two ordinary shares for every
three shares held at a price of $0.30 per share. The rights issue was fully subscribed.

REQUIRED

(b) Explain two reasons why a company may make a rights issue of shares rather than an issue
of debentures.

1 ................................................................................................................................................

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2 ................................................................................................................................................

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[4]

(c) Calculate the amount raised by the rights issue.

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(d) Prepare a statement of changes in equity for the year ended 31 December 2020.

N Limited
Statement of changes in equity
for the year ended 31 December 2020

Ordinary share Share Retained Total

capital premium earnings
$000 $000 $000 $000
Balance at
1 January 2020

[5]

Additional information

The directors are concerned about the company’s credit control and wish to improve the company’s
liquidity position. They are considering a proposal to offer a 5% cash discount to customers for
settlement within 30 days on all invoices of more than $2000.

REQUIRED

(e) Identify two ratios which can be used to assess the liquidity of a business.

1 ................................................................................................................................................

2 ................................................................................................................................................
[2]

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(f) Advise the directors whether or not they should go ahead with this proposal. Justify your
answer.

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[Total: 30]

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2 Zak owns a wholesale business. He makes sales on credit.

REQUIRED

(a) Explain why it may be important for a business to maintain a provision for doubtful debts.

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Additional information

Zak has prepared an aged schedule of trade receivables at 31 December 2020.

Amount Estimated
Period outstanding
$ irrecoverable debts
Less than 1 month 34 200 1%
Between 1 month and 3 months 6 680 5%
Between 4 and 6 months 2 130 10%

In addition, two accounts had been outstanding for over 6 months.

$
P Limited 340
Q Limited 510

Zak’s policy is to write off as irrecoverable any amounts outstanding for more than 6 months.
Zak updates the provision for doubtful debts at each financial year end based on the estimated
percentage of irrecoverable debts.

REQUIRED

(b) Prepare a journal entry to write off the irrecoverable debts. A narrative is not required.

Journal

Dr Cr
$ $

[2]

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(c) State two ways in which the risk of irrecoverable debts may be reduced.

1 ................................................................................................................................................

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[2]

Additional information

At 1 January 2020 the business had a provision for doubtful debts of $980.

REQUIRED

(d) Calculate the adjustment required to the provision for doubtful debts at 31 December 2020.

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(e) Prepare the provision for doubtful debts account for the year ended 31 December 2020.

Provision for doubtful debts account

$ $

[3]

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(f) State two factors that should be taken into account when setting a provision for doubtful
debts.

1 ................................................................................................................................................

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2 ................................................................................................................................................

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[2]

[Total: 15]

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3 Jason prepared the following statement of financial position which contained errors.

Statement of financial position at 31 December 2020

$ $
Non-current assets
Cost 65 000
Provision for depreciation 31 000
34 000
Current assets
Inventory 17 390
Trade receivables 14 800
Other payables 700
Bank overdraft 490
33 380
67 380
Capital
Opening balance 56 950
Profit for the year 11 270
Drawings (18 450)
49 770
Non-current liabilities
Bank loan (repayable March 2021) 4 900

Current liabilities
Provision for doubtful debts 480
Other receivables 490
Trade payables 11 360
12 330
67 000

In addition to some items being recorded in the incorrect sections of the statement of financial
position, the following errors have also been discovered.

1 Closing inventory had been overvalued by $510.

2 The balance of the rent receivable account, debit $220, had been included in other payables
in the statement of financial position.

3 Depreciation at 20% per annum had been charged using the straight-line method instead of
the reducing balance method at 20% per annum.

4 The balance of the drawings account had been understated by $580.

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REQUIRED

(a) Calculate the revised profit for the year ended 31 December 2020.

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(b) Prepare the corrected statement of financial position at 31 December 2020.

Corrected statement of financial position at 31 December 2020

$ $

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[7]

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(c) Identify three types of error which do not affect the balancing of the trial balance.

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[3]

[Total: 15]

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4 T Limited manufactures goods at two factories: Factory A and Factory B.

Factory A

Factory A has two production departments, Assembly and Finishing; and two service departments,
Administration and Canteen.

Absorption costing is used at this factory.

Budgeted overheads for February 2021 have already been apportioned.

The basis for reapportioning the service department overheads is as follows:

Production departments Service departments

Assembly Finishing Administration Canteen
Canteen 50% 40% 10% -
Administration 75% 25% - -

REQUIRED

(a) Prepare a statement showing the reapportionment of service department overheads for
February 2021.

Production departments Service departments

Assembly Finishing Administration Canteen
$ $ $ $

Overheads 83 500 70 100 28 300 15 400

Reapportionment of
canteen
Subtotal

Reapportionment of
administration
Total overheads

[4]

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Additional information

Assembly Finishing
Direct labour hours per month 1700 1400
Machine hours per month 2800 900
Direct labour rate per hour $8.40 $8.20

REQUIRED

(b) Calculate the overhead absorption rate for each production department to two decimal
places.

Assembly department

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Finishing department

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[4]

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Additional information

The company received an order from a customer. The following details are available:

Direct materials $1880

Direct labour:
Assembly department 11.5 hours
Finishing department 6.1 hours
Machine hours:
Assembly department 5.7 hours
Finishing department 2.4 hours

The company’s policy is to achieve a profit of 40% on selling price.

REQUIRED

(c) Prepare a statement to show the total selling price that T Limited will quote to the customer.

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(d) State two possible causes of under absorption of overheads.

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2 ................................................................................................................................................

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[2]

(e) State what is meant by

(i) allocation of overheads

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(ii) apportionment of overheads

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Additional information

Factory B

T Limited manufactures a single product in Factory B.

Marginal costing is used at this factory.

The following information is available for December 2020 when production was 9000 units which
included 1000 units produced using overtime.

$
Direct materials 72 000
Direct labour 74 000
Other variable costs 22 500
Fixed costs 65 000
Total costs 233 500

Direct labour overtime is paid at 1.25 times the normal rate.

All production was sold at $30 per unit.

The directors have been considering changing the supplier of materials. The following information
is available.

1 An overseas supplier is prepared to become the company’s sole supplier of materials at $5.50
per unit including delivery costs.

2 The supplier can only provide sufficient materials for the company to make 7600 units per
month.

3 The directors do not expect any other costs or the unit selling price to change. All production
will be sold.

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REQUIRED

(f) Calculate the maximum profit per month that can be made if materials were obtained from the
overseas supplier and production limited to 7600 units.

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(g) Advise the directors whether or not they should change the supplier. Justify your advice by
considering both financial and non-financial factors.

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[Total: 30]

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reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the
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To avoid the issue of disclosure of answer-related information to candidates, all copyright acknowledgements are reproduced online in the Cambridge
Assessment International Education Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download
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Cambridge Assessment International Education is part of the Cambridge Assessment Group. Cambridge Assessment is the brand name of the University of
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© UCLES 2021 9706/22/M/J/21