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Cambridge International AS & A Level

* 9 1 1 8 5 1 5 0 1 9 *

ACCOUNTING 9706/21
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. Any blank pages are indicated.

DC (DH) 201941/3
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1 Suyin owns a small retail business. She has not maintained full accounting records.

REQUIRED

(a) State two reasons why the owner of a small business may decide not to maintain full
accounting records.

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

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

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[2]

Additional information

Suyin has been informed that the accounting concepts of matching and prudence must be followed
when preparing financial statements.

REQUIRED

(b) Explain how these accounting concepts are applied when a business prepares financial
statements.

Matching

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Prudence

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Additional information

Suyin has provided the following information.

1 On 1 August 2019 the business’s assets and liabilities included:

$
Fittings and equipment at valuation 18 500
Inventory 11 440
Other payables: shop rent 510
Other receivables: insurance 290
Trade payables 3 970

2 Summary of bank statements for the year ended 31 July 2020.

$
Receipts
Cash sales banked 79 480
Proceeds from the sale of equipment (net book value $490) 550

Payments
Drawings 24 070
Shop rent 3 580
General expenses 16 810
Carriage inwards 610
Insurance 2 950
Trade payables (after deducting 2.5% cash discounts) 46 800

3 Cash account for the year ended 31 July 2020.

$ $
Balance b/d 420 Bank 79 480
Cash sales 96 000 Wages 15 430
Purchases 1 320
Balance c/d 190
96 420 96 420
Balance b/d 190

4 During the year ended 31 July 2020

Goods had been returned to suppliers, $1280.

All sales were made on a cash basis.

5 At 31 July 2020

Suppliers were owed $4560.

Inventory was valued at $18720.
Fittings and equipment was valued at $15 860.

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REQUIRED

(c) Calculate total purchases for the year ended 31 July 2020.

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(d) Prepare the income statement for the year ended 31 July 2020.

Workings:

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Suyin
Income statement for the year ended 31 July 2020
$ $

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[10]

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Additional information

Suyin has the opportunity to move her business to a busier location. The following information is
available.

1 The rent of the new shop premises will be three times the current annual charge.

2 Annual sales could be increased by 10% on the figure for the year ended 31 July 2020.

3 She intends to achieve a gross margin of 60%.

4 She will need to apply for a bank loan of $16 000 at 8% per annum interest to cover the costs
of changing location. The loan will be repayable over a two-year period.

5 Discounts received will no longer be available.

6 All other expenses will remain unchanged and there will be no sources of additional income.

REQUIRED

(e) Calculate how much profit per annum will be made if Suyin moves her business to the new
location.

$
Revised gross profit

Revised profit for the year

[4]

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(f) Advise Suyin whether or not she should change her business’s location. Justify your answer
considering both financial and non-financial factors.

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[Total: 30]

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2 Karis and Lara are in partnership.

(a) State two reasons why partners may each have a separate capital account and current
account.

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

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

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[2]

Additional information

Karis and Lara share profits and losses in the ratio 3:2 respectively.

They decided to admit Megan as a partner on 1 February 2021.

On that date the statement of financial position was as follows.

Assets $ $
Non-current assets at net book value
Motor vehicles 43 500
Furniture and equipment 16 200
59 700
Current assets
Trade receivables 18 410
Total assets 78 110

Capital and liabilities

Capital accounts
Karis 35 700
Lara 24 500
60 200
Current accounts
Karis 3 110
Lara (540)
2 570
Current liabilities
Trade payables 11 230
Bank overdraft 4 110
15 340
Total capital and liabilities 78 110

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The partners agreed the following on Megan’s admission.

1 Current accounts would no longer be used.

2 Karis took over a motor vehicle for private use with a net book value of $18 400 at an agreed
value of $15 000.

3 Goodwill was valued at $48 000. No goodwill account was to be maintained in the partnership’s
books of account.

4 Profits and losses are to be shared in the ratio Karis : Lara : Megan 7 : 5 : 3 respectively.

5 Megan introduced a motor vehicle valued at $23 000 as part of her capital contribution.

After making the adjustments, it was agreed that Megan should pay sufficient cash into the
business bank account to make her total capital equal to that of Lara.

REQUIRED

(b) Prepare, on the next page, the capital accounts of the partners to record the admission of
Megan as a partner.

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 Capital accounts

Karis Lara Megan Karis Lara Megan

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$ $ $ $ $ $
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Additional information

In the new partnership agreement Lara is to receive a salary of $12 000 per annum.

Megan is hoping to achieve a 25% return on her capital employed (ROCE).

REQUIRED

(c) Calculate the minimum profit the partnership must make in order for Megan to achieve this
ROCE.

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(d) State two possible disadvantages to existing partners of admitting a new partner.

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[Total: 15]

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3 C Limited’s statement of financial position at 31 December 2020 is shown with comparative figures
at 31 December 2019.

At 31 December
2020 2019
$000 $000
Assets
Non-current assets 2621 2217
Current assets
Inventory 61 47
Trade and other receivables 29 38
Cash and cash equivalents 2 31
92 116
Total assets 2713 2333

Equity and liabilities

Equity
Ordinary shares 1800 1200
Share premium - 220
Retained earnings 401 624
Revaluation reserve 300 -
Total equity 2501 2044
Non-current liabilities
8% Debentures (2025) 160 250
Current liabilities
Trade and other payables 52 39
Total equity and liabilities 2713 2333

The following information is also available.

1 The company’s issued capital consists of ordinary shares of $0.25 each.

2 On 1 January 2020 the directors revalued the property upwards by $300 000.

3 There were no purchases or disposals of non-current assets during the year.

4 On 1 July 2020 the directors made a bonus issue of ordinary shares.

5 There were no other changes in share capital during the year.

REQUIRED

(a) Explain two reasons for making a bonus issue of shares.

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(b) Calculate the number of bonus shares issued on 1 July 2020.

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(c) Prepare the journal entry recording the bonus issue on 1 July 2020. A narrative is required.

Journal

Dr Cr

$000 $000

[4]

(d) Identify three factors that directors of a company should consider when deciding on the
amount of a proposed dividend.

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

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

3 ................................................................................................................................................
[3]

Additional information

The directors of C Limited wish to propose a dividend of $0.01 per share on all shares in issue at
31 December 2020.

REQUIRED

(e) Calculate the amount of the proposed dividend.

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4 P Limited is a manufacturing business.

REQUIRED

(a) Define the following terms:

(i) Direct costs

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(ii) Stepped costs

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(b) State the formula for finding the margin of safety in units.

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(c) Explain the term ‘limiting factor’ when using marginal costing.

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Additional information

P Limited manufactures a single product. The factory has the capacity to make 40 000 units per
month. All production is sold.

The following budgeted information is available for December 2021.

Sales 30 000 units at $48 per unit

Direct materials per unit 4.5 m at $4 per metre
Direct labour per unit 3 hours at $8.50 per labour hour
Fixed costs $112 000

The company has a target profit of $40 000 per month.

REQUIRED

(d) Calculate the number of units to be sold for the company to achieve its target profit for
December 2021.

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(e) Prepare a budgeted marginal cost statement for December 2021.

Budgeted marginal cost statement for December 2021

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Additional information

The directors have been told that demand for their product is likely to fall in future months. They
are considering two proposals: Proposal A and Proposal B.

Proposal A

Produce a superior version of the product.

Sales 27 000 units per month at $57 per unit.

Direct materials The same quantity of material per unit as currently used,
but the price per metre would increase by 7.5%.
Direct labour The rate would increase to $9.25 per hour and each unit
would take 3.4 hours to make.
Additional fixed Extra machinery costing $75 000 will be required.
costs Machinery is depreciated at 20% per annum using the
straight-line method.

A loan would be required to finance the full cost of the

machinery. Interest rates are currently 8% per annum.

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REQUIRED

(f) Calculate the monthly profit to be made from proposal A.

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Additional information

Proposal B

The directors are also considering a proposal to produce a simpler version of the product with a
selling price of $37 per unit. This proposal would require 76 000 labour hours per month. They
estimate that 38 000 units per month could be sold.

This will produce a monthly profit of $49 500.

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REQUIRED

(g) Advise the directors which proposal they should choose. Justify your choice by considering
both financial and non-financial factors.

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[Total: 30]

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