Cambridge Assessment International Education

Cambridge International Advanced Subsidiary and Advanced Level



ACCOUNTING 9706/21
Paper 2 Structured Questions May/June 2019
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.

IB19 06_9706_21/6RP
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1 Ahmed and Raji are in partnership as retailers but have not maintained full accounting records.
They have been advised to use a double entry system of book-keeping.

REQUIRED

(a) State three advantages to business owners of using the double entry system of
book-keeping.

[3]

Additional information

The following information is available for the partnership:

1 Assets and liabilities

30 April 2019 1 May 2018
$ $
Equipment at net book value 17 600 20 500
Motor vehicles at net book value
(Cost $25 000 at 1 May 2018) ? 16 500
Inventory 5 470 6 750
Trade receivables 3 790 3 260
Trade payables 4 560 4 390
Wages owing 2 300 1 500
Rent paid in advance 1 600 950
Cash and bank balances 6 470 credit 5 430 debit

2 The summary of the partnership bank receipts and payments for the year ended 30 April 2019
was as follows.
$
Receipts
From credit customers 57 900

Payments
To credit suppliers 25 800
New motor vehicle 6 800
Partners’ drawings 16 700
Wages 10 700
Rent 7 500
General expenses 2 300

All purchases and sales were made on credit.

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3 The partners wish to create a provision for doubtful debts of 5% of trade receivables.

4 Depreciation on the motor vehicles is charged at 20% using the straight-line method.
Depreciation is charged on a monthly basis.

5 On 1 November 2018 a motor vehicle which had cost $7000 on 1 May 2016 was
part-exchanged for a new motor vehicle. The amount of the part-exchange was $3300. The
balance of the purchase cost of the new vehicle, $6800, was paid by cheque.

6 There were no additions or disposals of equipment during the year.

REQUIRED

(b) Calculate:

(i) the profit or loss on the disposal of the motor vehicle

Disposal 7000 Accumalted depreciation 3500

Disposal 3300

Income statement 200

[3]

(ii) the total depreciation charge for motor vehicles for the year ended 30 April 2019.

700 + 1010 + 3600 = 5310

[4]

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(c) Prepare the income statement for the partnership for the year ended 30 April 2019.

Revenue 58430

Less: COGS

Opening Inventory 6750

Purchases 25970

- Closing Inventory (5470) (27250)

Gross Profit 31180

Less: Expenses

General Expenses 2300

Wages 11500

Rent 6850

loss on disposal 200

Depreciation 5310

Dep 2900

provison for doubtful debts 190 (29250)

1930

[9]

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(d) Explain why a business may create a provision for doubtful debts.

[4]

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Additional information

When the partners started the business they each invested $25 000 and agreed to share profits
and losses equally.
The partners are concerned that the business has low profit and a high bank overdraft. Ahmed’s
brother is prepared to invest $25 000 into the business.
He has suggested two options to Ahmed and Raji.
Option 1: To loan this amount to the partnership and receive an annual interest of 10%.
Option 2: To invest the full amount and become an equal partner. Through his business
contacts he feels that he will be able to improve the total revenue.

REQUIRED

(e) Advise the partners which option, if either, they should accept. Justify your answer.

[7]

[Total: 30]

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2 Lawrence provided the following information at 30 November 2018.

$
Purchases ledger control account balance 16 970
Sales ledger control account balance 42 350

These did not agree with the list of balances taken from the purchases ledger and sales ledger
respectively. The following items were discovered:

1 A discount received of $280 had been omitted from the books.

2 A credit note for a sales returns of $230 had been treated as a sales invoice and entered in
the sales journal.

3 An irrecoverable debt of $190 had been written off in the sales ledger. No entry had been
made in the control account.

4 A contra entry for $1070 had been debited twice in the purchases ledger control account.

5 A payment of $120 to a credit supplier had not been recorded.

6 Discount allowed of $70 had been posted to the debit side of both the sales ledger control
account and the purchases ledger control account.

7 Lawrence owes Kalim $380 and Kalim owes Lawrence $1590. They have agreed to set off
the balance, on Lawrence’s account in Kalim’s sales ledger.

8 A customer’s dishonoured cheque had been entered in the cash book as $1560 instead of
$1650.

REQUIRED

(a) (i) Prepare the corrected purchases ledger control account at 30 November 2018.

$ $

Discount Received 280 Balance b/d 16 970

discount allowed 70

Bank 120 1070

contra

Contra 380

balance c/d 17330

[4]

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(ii) Prepare the corrected sales ledger control account at 30 November 2018.

$ $

Balance b/d 42 350

Sales Returns 460

90 Irrecoverable debts 190

dishoured cheque

Discount Allowed 140

contra 380

balance c/d 41 270

[5]

(b) Explain what is meant by the term ‘error of commission’.

[2]

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(c) Explain the effect on a business of not updating:

(i) customers’ accounts in the sales ledger

[2]

(ii) suppliers’ accounts in the purchases ledger.

[2]

[Total: 15]

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3 K Limited prepares annual accounts to 30 September. For the year ended 30 September 2018,
the directors have calculated profit from operations of $44 500. On 31 January 2018 they
redeemed a 6% debenture of $100 000 together with accrued interest to that date.

REQUIRED

(a) Calculate the profit for the year ended 30 September 2018.

42,500

[2]

Additional information

The directors have provided the following extract from the statement of financial position at
1 October 2017.

Equity $
Ordinary shares of $0.25 each 500 000
Share premium 175 000
Retained earnings 540 000
1 215 000

The following information is also available:

1 On 31 December 2017, a rights issue of ordinary shares was made at a premium of

$0.15 per share on the basis of 2 ordinary shares for every 5 held on that date. The issue
was fully subscribed.

2 On 31 March 2018, a bonus issue was made on the basis of 3 ordinary shares for every
5 held on that date. Reserves were maintained in the most flexible form.

3 On 30 June 2018, an interim dividend of $0.05 per share was paid on all shares in issue on
that date.

4 On 30 September 2018, buildings were revalued at $1 200 000. The original cost of the
buildings was $1 000 000 and had been depreciated by $150 000.

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REQUIRED

(b) Prepare the statement of changes in equity for the year ended 30 September 2018.

Ordinary Share Revaluation Retained

shares premium reserve earnings
$ $ $ $

At 1 October 2017 500 000 175 000 – 540 000

Rights issue 200000 120,000

Profit for the year 42500

Bonus Issue 420,000 295,000 125000

Interim Dividend (224000)

Revaluation 350,000

Workings:

[11]

(c) State one difference between a capital reserve and a revenue reserve.

[2]

[Total: 15]

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4 Ravi manufactures two products, Exe and Wye. Each product has allocated fixed costs. The
following chart shows budgeted information for Exe.

90
Sales
revenue
80

70
Total costs

60

50
$000
40

30
Variable
costs
20

10

0 10 20 30 40 50 60
Units (in thousands)

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REQUIRED

(a) Identify the following values in dollars from the chart:

(i) Break-even point

[1]

(ii) Allocated fixed costs

[1]

(iii) Margin of safety

[1]

(iv) Profit

[1]

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Additional information

The following budgeted information is available for Wye:

Sales (units) 105 000

$
Sales revenue 315 000
Direct labour 0.5 hours × $4 per hour 210 000
Direct materials 0.25 kilos × $2 per kilo 52 500
Allocated fixed costs 34 500

Ravi is concerned that the budgeted profit for Wye is not very high. He believes the following
changes could increase the profit but will have no effect on sales volume.

1 Increase the selling price per unit by 5%.

2 Use skilled labour which will increase the cost per hour by 5%.

3 Use better quality material which will increase the cost per kilo by 2%.

4 Increase the advertising cost by $6000.

5 Offer the sales team a bonus of 2% of the sales revenue earned from all sales above 80 000
units.

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REQUIRED

(b) Calculate, for product Wye only, the effect of these changes on the budgeted total profit for
105 000 units.

[10]

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(c) Calculate, for product Wye only, the effect of these changes on the budgeted break-even
point in dollars.

[5]

(d) Calculate, for product Wye only, the effect of these changes on the budgeted margin of
safety in units.

[2]

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(e) Recommend whether or not Ravi should proceed with these changes. Justify your answer.

[5]

(f) State four advantages to a business of planning for the future.

[4]

[Total: 30]

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