Cambridge International Examinations

Cambridge International Advanced Subsidiary and Advanced Level

9706/32

ACCOUNTING
Paper 3 Structured Questions

May/June 2016
3 hours

No Additional Materials are required.

*8310821492*

READ THESE INSTRUCTIONS FIRST

An answer booklet is provided inside this question paper. You should follow the instructions on the front
cover of the answer booklet. If you need additional answer paper ask the invigilator for a continuation
booklet.
Answer all questions.
All accounting statements are to be presented in good style.
International accounting terms and formats should be used as appropriate.
Workings should be shown.
You may use a calculator.
The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 11 printed pages, 1 blank page and 1 insert.

IB16 06_9706_32/5RP
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Section A: Financial Accounting
1

The Seagulls Boating Club is a small not for profit organisation which generates income from
members subscriptions and a caf.
REQUIRED
(a) State two differences between the financial statements of a not for profit organisation and
those of a limited company.
[2]
Additional information
The following information is available for the caf for the year ended 31 March 2016.
1

The caf takings were $25 750 and $8850 was paid to suppliers.

An assistant received monthly wages of $600. On 31 March 2016, the assistant also
received a bonus of 10% of the annual caf takings.

The following balances were available:

Caf inventory
Caf trade payables

1 April 2015
$
3875
2831

31 March 2016
$
3423
2952

REQUIRED
(b) Prepare the caf trading account for the year ended 31 March 2016.

[5]

Additional information
The club has 310 members who pay an annual subscription of $80.
The following information was available for members subscriptions.

Subscriptions in advance
Subscriptions in arrears

1 April 2015
Number of members
4
9

31 March 2016
Number of members
3
12

REQUIRED
(c) Prepare the subscriptions account for the year ended 31 March 2016.

[4]

Additional information
The following information is also available for the year ended 31 March 2016.
1

General expenses of $2500 were incurred which included a paid insurance invoice for the
period from 1 March 2016 to 31 May 2016 for $180.

Fixtures and fittings were acquired on 1 April 2013 at a cost of $16 000 and are depreciated
at 25% using the reducing balance method.

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REQUIRED
(d) Prepare the income and expenditure account for the year ended 31 March 2016.

[5]

Additional information
The treasurer currently maintains the records using a manual book-keeping system and is now
considering transferring the records to a computerised accounting system.
REQUIRED
(e) Recommend to the treasurer whether or not he should introduce a computerised accounting
system. Justify your answer analysing both benefits and limitations to the club.
[9]
[Total: 25]

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2

Kempes Limited is a company which manufactures a single product. Finished goods are
transferred from the factory at production cost plus 15%. Unsold goods are stored in the
warehouse.
Selected balances extracted from the trial balance for the year ended 30 September 2015 were
as follows:
Revenue
Purchases of raw materials
Carriage inwards
Factory production wages
Factory supervisory wages
Administrative wages
General expenses
Depreciation:
Factory plant and machinery
Office fixtures and fittings

$
1 845 000
794 750
4 250
382 500
64 000
115 000
78 000
55 000
37 500

Additional information
1

At 30 September 2015, there were accrued general expenses of $5000 and prepaid general
expenses of $3000.
65% of the general expenses relate to the factory.

Details of inventories were as follows.

1 October 2014
$
Raw materials
110 000
Work in progress
17 500
Finished goods at transfer price
19 550

30 September 2015
$
125 000
14 000
21 505

REQUIRED
(a) Prepare the manufacturing account for the year ended 30 September 2015.

[9]

(b) Prepare the income statement for the year ended 30 September 2015.

[6]

(c) Explain why a business might create a provision for unrealised profit.

[3]

Additional information
The budgeted closing inventory value of finished goods at transfer price at 31 October 2015 was
$18 400.
REQUIRED
(d) Analyse the effect on the budgeted profit for the month of October 2015 due to the changes
in the provision for unrealised profit.
[2]

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Additional information
The price at which the product could be bought from an outside supplier is expected to increase.
It is now proposed to transfer finished goods at production cost plus 20%.
REQUIRED
(e) Advise the directors whether or not the mark-up should be increased. Justify your answer.
[5]
[Total: 25]

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3

Anjali and Bailey trade as partners. They share profits and losses in the ratio 3 : 2.
At 30 April 2016 the statement of financial position of the partnership was as follows:
$
Assets
Non-current assets
Premises
Machinery
Vehicles

115 000
40 000
78 000
233 000

Current assets
Inventory
Trade receivables

15 000
4 000
19 000
252 000

Total assets
Capital and liabilities
Capital
Anjali
Bailey

130 000
110 000
240 000

Current liabilities
Trade payables
Cash and cash equivalents

7 500
4 500
12 000
252 000

Total capital and liabilities

The partners agreed to form a limited company, XY Limited, to take over their business.
Additional information
The following information relates to the partnership.
1

Two vehicles were taken over by the partners at the following valuations.

$
Anjali
Bailey
2

15 000
12 500

The remaining assets were transferred to XY Limited at the following agreed values.
Premises
Machinery
The remaining vehicles
Inventory

$
170 000
30 000
35 000
9 000

Cash collected from trade receivables was $3900.

Trade payables accepted $7100 in full settlement of amounts due to them.

Costs involved in dissolving the partnership were $3800.

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6

The purchase consideration for the partnership of Anjali and Bailey was $255 000. This was
made as follows:
60 000 7% preference shares of $1 each distributed in profit-sharing ratios.
The balance as ordinary shares of $1 at a premium of $0.25 per share distributed to the
partners in proportion to their capital account balances at 30 April 2016.

Anjali and Bailey agreed to pay into the business bank account sufficient money to cover any
deficit on their capital accounts after the shares had been issued.

REQUIRED
(a) (i) Prepare the realisation account for Anjali and Bailey.

[7]

(ii) Prepare the capital accounts of Anjali and Bailey on the realisation of the partnership. [7]
(iii) Calculate the total amount of share premium payable to Anjali and Bailey.

[2]

(b) Assess the effect for Anjali and Bailey if the ordinary shares have been distributed in the
profit sharing ratio rather than in proportion to their capital balances.
[4]
(c) Explain whether or not Anjali and Bailey made the correct decision to form a limited
company. Justify your answer.
[5]
[Total: 25]

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4

The directors of Corim plc are using accounting ratios to analyse the performance of the company.
REQUIRED
(a) Explain two benefits of using accounting ratios.
Additional information
All sales and purchases of Corim plc are on credit.
The following are the income statement and statement of financial position for Corim plc.
Income Statement
for the year ended 31 December 2015
$
843 000
(425 800)
417 200
(321 000)
96 200
(66 000)
30 200

Revenue
Cost of sales
Gross profit
Operating expenses
Profit from operations
Finance costs
Profit for the year
Statement of Financial Position
at 31 December 2015

$
Assets
Non-current assets
Plant and equipment
Current assets
Inventory
Trade receivables
Cash and cash equivalents
Total assets

884 000
88 800
132 400
14 800
236 000
1 120 000

Equity and liabilities

Equity
Ordinary share capital (of $2 each)
Retained earnings
Total equity

400 000
77 000
477 000

Non-current liabilities
12% loan

550 000

Current liabilities
Trade payables

93 000

Total equity and liabilities

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Additional information
1

Inventory at 1 January 2015 was $76 000.

The market price of one ordinary share at 31 December 2015 was $2.60.

REQUIRED
(b) Calculate the following ratios for Corim plc:
(i) return on capital employed
(ii) gearing
(iii) income gearing
(iv) working capital cycle (in days)
(v) price earnings.
Calculation should be to two decimal places where appropriate.

[14]

Additional information
Takie plc is the major competitor of Corim plc. Takie plcs capital employed was $1 025 000 at
31 December 2015 including a 8% loan of $100 000.
Some of its comparative ratios are:
Return on capital employed
Gearing
Income gearing

9.32%
9.76%
8.38%

REQUIRED
(c) Compare each companys gearing and income gearing ratios.

[4]

Additional information
Chen has surplus fund and is considering whether or not to invest in the shares of either
Takie plc or Corim plc.
REQUIRED
(d) Identify which company Chen should invest in. Justify your answer.

[3]
[Total: 25]

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Section B: Cost and Management Accounting
5

Explorer Limited produces two products, Y and Z, and has always used absorption costing to
allocate overheads to each product. The directors are now considering adopting activity based
costing (ABC).
REQUIRED
(a) Compare how overheads are apportioned using absorption costing and ABC.

[4]

Additional information
The budgeted data for the two products for the year ending 31 December 2017 is as follows:
Raw materials used (kilo)
Direct labour hours
Unit selling price
Annual production and sale

Y
2
0.75
$19
2500

Z
3
1
$25
4000

The cost of raw materials is $2.50 per kilo and the labour force are paid $8 per hour.
Annual overheads are as follows:
Machine maintenance overheads
Purchasing overheads
Selling and distribution overheads

$
8 500
17 000
18 750

REQUIRED
(b) Calculate the cost per unit for each product using absorption costing.

[7]

Additional information
Number of production runs
Number of purchase orders
Number of sales deliveries

Y
20
55
85

Z
16
65
160

REQUIRED
(c) Calculate the cost per unit for each product using ABC.

[7]

(d) (i) Compare the total profit per product using absorption costing and ABC.

[4]

(ii) Comment on the results.

[1]

(e) Advise the directors whether or not ABC should be adopted. Justify your answer.

[2]
[Total: 25]

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6

Khalid owns a business making blankets. He currently uses a standard costing system.
REQUIRED
(a) Explain the term standard costing.

[2]

Additional information
For the year ending 31 August 2015 Khalid budgeted to sell 2700 blankets at $40 each.
Each blanket requires 1.5 metres of material at $10 per metre and 30 minutes of labour. All of his
workforce are employed full time and paid $14 per hour.
For the year ended 31 August 2015 his actual sales were 2700 blankets. He used 4320 metres of
material at a cost of $34 560 and 2025 hours of labour were required at a cost of $24 300.
REQUIRED
(b) Calculate the following variances for the year ended 31 August 2015:
(i) the material price and material usage variances
(ii) the labour rate and labour efficiency variances.

[8]

(c) Prepare a statement reconciling the budgeted costs with the actual costs for the year ended
31 August 2015.
[4]
(d) Discuss possible reasons why Khalids actual costs are different to the budgeted costs.

[6]

Additional information
In an attempt to control costs, Khalid is considering to:
1

Stop the quality assurance checks usually made during the production process.

Find a cheaper supplier for materials to make the blankets.

Keep the selling price at $40 per blanket.

REQUIRED
(e) Recommend to Khalid which option or options he should choose. Justify your anwer.

[5]

[Total: 25]

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