UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

General Certificate of Education Advanced Level

ACCOUNTING 9706/04
Paper 4 Problem Solving For Examination from 2010
SPECIMEN MARK SCHEME
2 hours

MAXIMUM MARK: 120

This document consists of 10 printed pages.

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General Points

1. The mark scheme is a positive one. Marks are to be awarded for what is correct. Marks are not to
be deducted for what is wrong.

2. The mark scheme cannot provide for all possible variations in candidates’ answers.

If a candidate’s answer satisfies the requirements of a question and general accepted accounting
practice, it will be acceptable for the full range of allocated marks.

3. OWN FIGURE RULE. A candidate may not be penalised twice for the same error. A wrong figure
will be penalised at its first appearance in an answer. If it is required at a later stage in the
answer, it will not be penalised a second time.

The ‘own figure’ rule will only apply to balance brought down on an account if the balance is
shown correctly as a debit balance or a credit balance as the case may be.

An item in an account or a financial statement may be shown to be acceptable under the ‘own
figure’ rule, but will not qualify for a mark unless a mark is allocated to it in the mark scheme.

4. Where normal accounting practice requires an item to be described as a ‘Cost of Sales’, ‘Gross
Profit’, ‘Net Profit’ or in some other appropriate way, an allocated mark should be awarded only
when the nature of the item has been recognised by appropriate wording.

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1 (a)
Capital accounts
Amal Ushi Amal Ushi
$ $ $ $
Debentures 25 000 (1) Balance b/d 60 000 40 000 (1)
(see note 2)
Ordinary 87 000 58,000 (1) Current 2 000 1 350 (1)
shares (60/40) accounts
(Note 3)
Bank 6 675 (1) Loan account 20 000 (1)
Goodwill 14 000 14 000 (1)
Gain on 9 325 9 325 (1)
revaluation
(Note 1)
Bank 6 675 (1)
112 000 64 675 112 000 64 675

Bank account
$ $
Balance b/d 9 650 (1) Paid: Ushi (see 6 675
above)
Received: Amal 6 675 Balance c/d 38 650
(see above)
Received from (1)
Djamel (note 3) 29 000
45 325 45 325

[11]

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(b) Statement of Financial Position (Balance Sheet) at 1 November 2009 immediately on

acquisition of the partnership business of Amal and Ushi

$ $
Non-current assets at cost
Intangible (Goodwill) (note 1) 28 000 (3)
Tangible 85 000
113 000

Current assets
Inventory 31 000
Trade receivables 37 650
Cash and cash equivalents 38 650 (2)
107 300

Current liabilities
Trade payables (21 300) 86 000
199 000

Non-current liabilities
8% debentures (note 2) 25 000 (2) (see note)
174 000

Share capital and reserves

Ordinary shares of $1 fully paid 120 000 (2) (see note 3)
Share premium account 54 000 (1)
174 000
[10]

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Note 1. Calculation of Goodwill

Per partnership Agreed

Balance Sheet takeover value
$ $ $
Non-current assets 60 000 + 25 000 85 000
Inventory 34 000 - 3 000 31 000
Trade receivables 41 000 - 3 350 36 750
Cash and cash equivalents 9 650 9 650
144 650 + 18 650 163 300
Less Trade Payables (21 300)
142 000 (1)
Purchase consideration 170 000 (1)
Goodwill 28 000 (1)

Note 2. 8% debentures:

Interest paid to Amal as a partner. 10% of $20 000 = $2 000 (1)

8% debentures to yield $2 000 p.a.: $2 000 X 10 = $25 000 (1)
8

Note 3. Issue of ordinary shares.

$
Purchase consideration 170 000
8% debentures 25 000 (1)
100 000 Ordinary shares 145 000 (valued at $1.45 per share)
20 000 Shares issued to Dix at $1.45 29 000 (1)
120 000 shares 174 000 (including $54 000 premium)

(c) (i) A capital instrument is a document (1)

which is evidence of the provision of long term capital to a company. (1)

The capital instruments in A & U Ltd’s Balance Sheet are ordinary shares (1)
and debentures. (1) [max 3]

(ii) A bonus issue is an issue of shares made by transferring the reserves of a company to
Share Capital account. (1)

Share certificates equal to the amount of the reserves so capitalised are issued free to
the existing shareholders pro rata to the shares already held by them. (1)

The net assets of the company are not increased by a bonus issue, and there is no
cashflow. (1)

A & U Ltd could use the share premium account to make a bonus issue of shares,
possibly on the basis of five new shares for every 12 already held. (1) [max 3]

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(iii) A rights issue is an invitation to existing shareholders of a company to subscribe for

additional shares in the company. (1)

The issue is usually on more favourable terms than the shares can be obtained on the
open market. (1)

The net assets of the company are increased by the cash subscribed for the shares. (1)

A & U Ltd could increase its capital by a rights issue because, as a private company, it
may not invite the public to buy its shares. (1)

Even if A & U Ltd were a public company, it might prefer to raise additional capital by a
rights issue to ensure that the existing shareholders retain control. (1) [max 4]

(iv) A provision is any amount set aside out of profits (1)

to provide for the diminution in value of assets (1)
or provide for any known liability (1)
the amount of which cannot be ascertained with substantial accuracy (1)

A reserve is any amount set aside out of a profit other than as a provision to strengthen
the financing of a company (1) [max 3]

(v) A revenue reserve is created by debiting the Profit and Loss Appropriation Account and
credited to an appropriate Reserve account (1)

Such reserves are revenue reserves as they are created from trading profits (1)

A capital reserve is created by the requirements of the Companies Act, as in the case of
the Share Premium account in A & U Ltd (1)

A premium on the issue of shares must be credited to this account. Such reserves are
capital reserves. (1)

As are any reserves created by revaluing fixed assets (1) [max 3]

(vi) Bonus shares (2/1/0)

Paying dividends (2/1/0)
(other uses may be acceptable) [max 3]

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2 (a) (i) Interest cover 50 = 25 times (1)

2

(ii) Dividend cover 28 = 2.33 times (1)

12

(iii) Earnings per share (36 000 − 8 000) = $0.175 (1)

16 0000

(iv) Price earnings ratio 1.80 = 10.29 (1)

17.5

(v) Dividend yield $0.075 × 1 × 100 = 4.16% (1)

8

(vi) 28 000 × 100 = 9.72% (1)

(1.8 x16 0000)

(vii) Gearing 25 + 80 × 100 = 26.45% (1)

372 ÷ 25
Alternatively 25 + 80 × 100 = 35.96%
292

(viii) Fixed asset turnover 375 = 3 times (1)

125
[8]

(b) (i) Interest cover measures the ability of a company to cover for the cost of its long term
borrowing out of profit. (1)

It is of interest to lenders to the company of long term loans (1)

(ii) Dividend cover reflects the directors’ dividend policy (1)

and the potential ability of a company to maintain its dividends in the future (1)

(iii) Earnings per share expresses the profit available for distribution to ordinary shareholders
as the amount of such profit per ordinary share. (1)

This information is required by the Companies Act 1985 to be disclosed by a company in

its annual financial statements. (1)

(iv) The price earnings ratio relates the market price of a share to the earnings per share. (1)

It indicates how many years’ profits (if maintained at the current level) an investor is
prepared to pay for in the price of his share. (1)

Many investors regard this ratio as a useful and easily comprehensible guide. (1)

(v) Dividend yield expresses the dividend as a percentage of the market price of the share.
(1)

This is a more realistic measure for the investor than the return on the nominal value of
the share. (1)

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(vi) Different companies have different dividend policies which makes it difficult to compare
them on the basis of dividends paid. (1)

Earnings yield makes comparisons easier and more meaningful. (1)

(vii) Debenture holders are entitled to interest on their debentures, and preference
shareholders are entitled to dividends, in priority to the rights of ordinary shareholders to
receive dividends. (1)

The rights of ordinary shareholders are at risk if the company’s profits are insufficient to
meet the prior rights of fixed cost capital (i.e. debentures and preference shares). (1)

The gearing ratio measures the degree of the ordinary shareholders’ risk. (1)

It is also of interest to existing and potential lenders to the company (1)

(viii) Fixed asset turnover measures how efficiently the fixed assets of the company are being
used to generate revenue. (1)

The higher the rate, the greater the efficiency. (1)

At least 1 point per ratio [max 18]

(c)
Statement of Financial Position (Balance Sheet) as at 31 October 2009
$000 $000
(1) (1) (1) (1)
Non-current assets (125-81+30-20+18) 72
Current assets
Inventory (94-12) (1) 82
Trade receivables (133 + 14) (1) 147
Bank (141 + 40) (1) 181
410

Current liabilities
Trade payables (96 + 9) (1) 105 355
377

Non-current liabilities
8% Debentures 2008 - 2012 25 (1)
352

Capital and reserves

Ordinary shares of $1 (160 – 20) (1) 140
Preference shares of $1 (80 + 20) (1) 100
Share Premium account (40 – 4) (1) 36
General reserve (75 – 10) (1) 65
Profit and Loss account (17 – 6) (1) 11
352
[14]

[Total: 40]

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3 (a)
Flexed budget for 18 000 units $ $
Sales ($30 x 18 000) 540 000 (1)
Direct materials ($6 x 18 000) 108 000 (1)
Direct labour (1.2 x 18 000 x $11) 237 600 (1)
Fixed overheads 70 000 (1) 415 600
Profit 124 400 (1)

Actual price and rates

Direct material per kilo $119 408 = $6.80 (1)

17 560
Direct labour per hour $233 450 = $10.15 (1)
23 000

Actual profit from 18 000 units

Sales 504 000 (1)
Direct materials 119 408 (1)
Direct labour 233 450 (1)
Fixed overheads 70 000 (1) 422 858
Profit 81 142 (1)
[12]

(b)
Profit expected from 10 000 units $ $
Sales 300 000 (1)
Direct materials 60 000 (1)
Direct labour 132 000 (1)
Fixed overheads 70 000 (1) 262 000
Profit 38 000 (1)

Direct material cost per unit $60 000 (1) = $6

10 000 (1)
Direct labour hours per unit $132 000 (1) = 1.2 hours
$11x10 000 (1)

Statement to reconcile budgeted profit to actual profit

$
Budgeted profit 38 000
Variances
Adverse Favourable
$ $
Sales volume $(124 400 – 38 000) 86 400 (1)
Sales price $(540 000 – 504 000) 36 000 (1)
Direct materials
Usage (18 000 – 17 560 )$6 2 640 (1)
Price $(6 – 6.80) 17 560 14 048 (1)
Direct labour
Efficiency (21 600 – 23 000)$11 15 400 (1)
Rate $(11 – 10.15) 23 000 19 550 (1)
65 448 108 590 43 142
Actual profit 81 142 (1)
[16]

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(c) Report format:

To … (1) From … (1) Subject matter (1) [2]

The sales volume variance is favourable (1)

but the sales price variance is adverse. (1)

This suggests that the increased volume of sales has been achieved by a reduction in price
charged to customers. (1)

The materials usage is favourable (1)

and the price variance is adverse. (1)

This suggests that the materials purchased may have been of better quality than those
budgeted for. (1)

The labour efficiency variance is adverse (1)

while the rate variance is favourable. (1)

This suggests that a less skilled labour was employed than budgeted for. (1)

The labour efficiency variance may often be expected to be favourable (1)

if better quality materials are used (1)
because of a reduction in spoilt production and less time wasted. (1)

This is not the case in this instance presumably because of the lower grade of labour. (1)

To a maximum of 10 marks [max 12]

[Total: 40]

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