Cambridge Assessment International Education

Cambridge International Advanced Subsidiary and Advanced Level

ACCOUNTING 9706/31
Paper 3 Structured Questions October/November 2019
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 This Insert contains all of the required information and questions. The questions are provided in the Insert for
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 Anything you write in this Insert will not be marked.
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 The businesses described in this Insert are entirely fictitious.
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This document consists of 10 printed pages and 2 blank pages.

IB19 11_9706_31/6RP
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Section A: Financial Accounting

Question 1
Source A1

A Social Club had the following assets and liabilities at 1 April 2018.
$
Non-current assets 14 500
Bank overdraft 3 600
Trade payables 2 250
Accrued electricity expenses 1 550
Prepaid insurance 300
Inventory 2 200
Subscriptions in arrears 150
Subscriptions in advance 100

Answer the following questions in the Question Paper.

Questions are printed here for reference only.

(a) Explain what is meant by the term ‘accumulated fund’.

(b) Calculate the accumulated fund at 1 April 2018.

Additional information

The annual subscription has been unchanged for the past few
years. During the year ended
31 March 2019, a total of $13 900 was received from 278
members who paid their annual subscription in full. One
member, who owed the club for the previous year’s
subscription, was unable to pay and this amount was written off.

At 31 March 2019, six members had not paid their annual

subscription and one member had paid the following year’s
subscription in advance.

(c) Prepare the subscriptions account for the year ended 31

March 2019.

(d) Prepare an extract from the statement of financial position

at 31 March 2019 to show how the balances on the
subscriptions account are recorded.

Additional information

The annual surplus of income over expenditure has fallen

steadily in recent years.

The treasurer is considering introducing a life membership

scheme to improve this. He believes that the total life
membership should be recorded in full as income in the income
and expenditure account when it is received.

(e) Discuss two ways other than a life membership scheme by

which the club could increase the future annual surplus.
© UCLES 2019 9706/31/INSERT/O/N/19
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ustify your answer by reference to any relevant accounting

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© UCLES 2019 9706/31/INSERT/O/N/19 [Turn over
Question 2

Source A2

A new director of R Limited has raised some concerns about their role in the company. He has also
questioned the role of the company’s auditors.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) (i) Explain what is meant by the term ‘stewardship’. [2]

(ii) State two duties of the auditor of a limited company. [2]

Additional information

The directors of R Limited have provided the following information at 31 December 2018.

$
Ordinary shares of $1 each 200 000
Share premium 20 000
8% Debenture (2025) 150 000
General reserve 54 000
Retained earnings at 1 January 2018 96 000
Debenture interest paid 4 000
Interim dividend paid 6 250
Land and buildings
cost 450 000
accumulated depreciation 25 000
Plant and machinery
cost 40 000
accumulated depreciation 15 000
Vehicles
cost 24 000
accumulated depreciation 8 000
Inventory at 31 December 2018 65 000
Trade receivables 42 000
Cash and cash equivalents 37 000
Trade payables 35 000
Profit from operations 65 250

The 8% debenture (2025) was issued on 1 January 2017.

A bonus issue of shares of 1 ordinary share for every 20 shares held was made on
31 December 2018. This had not yet been recorded in the books of account. The directors wish
to keep the reserves in their most flexible form.

A provision for tax of $14 700 is to be made.

The directors have proposed a final dividend of $0.15 per share on all shares in issue at the year
end.

(b) Prepare an extract from the income statement for the year ended 31 December 2018, to
show the profit for the year, starting with the profit from operations. [2]
(c) Prepare the statement of changes in equity for the year ended 31 December 2018. A total
column is not required. [4]

(d) Prepare the statement of financial position at 31 December 2018. [6]

Additional information

In February 2019 it was discovered that plant and machinery with a net book value of $15 000
had become obsolete. It could be sold for $8000 with a selling cost of $1200.

The cash flows from the machinery’s continued use showed:

future cash flows 10% discount factor

year 1 $4000 0.909
year 2 $5000 0.826
year 3 $3000 0.751

(e) Calculate the impairment loss. [4]

Additional information

The financial statements will be presented to the shareholders for their approval at the annual
general meeting on 31 March 2019. The directors have decided that it is too late to include the
impairment loss in the financial statements.

(f) Discuss the decision of the directors making reference to any relevant International
Accounting Standards (IAS). [5]

[Total: 25]
 5

Question 3
Source A3

J plc commenced trading on 1 January 2016.

On that date there was a share issue of 800 000 ordinary shares with a nominal value of $0.50 each,
at an issue price of $0.75.

During the year ended 31 December 2018 the following took place.

1 On 1 January 2018 a 12% debenture of $250 000 repayable in 2027 was issued.
2 The company made a rights issue of 1 ordinary share for every 4 shares held. The rights issue
was fully subscribed raising $225 000 in total.

The following information was available for the year ended 31 December 2018.
$
Profit from operations 382 000
Profit for the year 204 000
Ordinary dividend paid 45 000
Cash and cash equivalents 55 000

At 31 December 2018

1 The total assets were $1 582 000, of which current assets totalled $420 000.
2 The current ratio was 1.75 : 1.
3 The market value of one ordinary share was $2.50.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Prepare the equity and liabilities section of the statement of financial position at
31 December 2018. [5]

(b) Calculate the following to two decimal places for the year ended 31 December 2018.

(i) Dividend cover [2]

(ii) Gearing ratio [2]

(iii) Price earnings ratio [3]

(c) Analyse the financial performance of J plc. [8]

Additional information

A group of shareholders have said they will propose at the Annual General Meeting that the
directors pay an extra cash dividend of $0.30 per share because of the high profit for the year.

(d) Advise the directors whether or not they should pay the extra cash dividend. Justify your
answer by considering other options available to the directors. [5]

[Total: 25]

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Question 4

Source A4

X Limited acquired the partnership business of Amy and Beth on 1 January 2018. The statement of
financial position of each business at 31 December 2017 was as follows:

Amy and
X Limited
Beth
$ $
Non-current assets 142 654
000 000
Current assets
Inventory 38 000 82 000
Trade receivables 49 000 83 700
Cash and cash equivalents 4 000 98 400
91 000 264 100

Total assets 233 000 918 100

Equity and liabilities

Ordinary shares of $1 each 700 000
Retained earnings 144 500
Capital account
Amy 120 000
Beth 80 000
200 000
Current account
Amy 3 500
Beth (1 500)
2 000
Current liabilities
Trade payables 31 000 73 600

Total equity and liabilities 233 000 918 100

The following information is also available.

1 X Limited took over all the assets and liabilities of the partnership business, except the cash
and cash equivalents, at the following values.
$
Non-current assets 148 000
Inventory 41 000
Trade receivables 47 000
Trade payables 30 000

2 The purchase consideration was $240 000. This consisted of an issue of 90 000 ordinary
shares divided equally between the partners. Each ordinary share had a market value of
$2.50 at 1 January 2018.

The balance was paid in cash.

3 Amy and Beth share profits and losses in a ratio of 4 : 3.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Calculate the profit or loss made by the partners on the sale of their business to X Limited. [4]

(b) Prepare the capital accounts of Amy and Beth to show the closure of their partnership
business. [5]

(c) Prepare the statement of financial position of X Limited at 1 January 2018 immediately after
the acquisition of the partnership. [9]

(d) State two advantages to a company of purchasing another business. [2]

Additional information

Retained earnings of X Limited at 31 December 2017 and 31 December 2018 were as follows.

31 December 31 December
2017 2018
$ $
Retained earnings  start of the year 81 500 144 500
Profit for the year 168 000 145 000
Dividend paid (105 000) (97 500)
Retained earnings  end of the year 144 500 192 000

(e) Assess whether or not X Limited has made the right decision to acquire the partnership
business. Support your answer using relevant calculations. [5]

[Total: 25]
 Section B: Cost and Management Accounting

Question 5

Source B1

The directors of P Limited plan to launch a new product which has an expected life of 4 years. A new
machine is required for this and the directors are considering buying Machine X.

Details of Machine X are as follows.

Year 0 Year 1 Year 2 Year 3 Year 4

$ $ $ $ $
Cost 400 000
Annual receipts 390 000 420 000 460 000 370 000
Annual payments 280 000 280 000 270 000 250 000

The machine has a useful life of 4 years with no residual value. It will be depreciated using the
straight-line method.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Calculate the accounting rate of return (ARR) of Machine X. [5]

(b) State two advantages and two disadvantages of using ARR. [4]

Additional information

P Limited’s cost of capital is 10%.

The following are the discount factors for 10%.

Year 1 0.909
Year 2 0.826
Year 3 0.751
Year 4 0.683

(c) Calculate the net present value (NPV) of Machine X. [5]

Additional information

P Limited requires an internal rate of return (IRR) of 13% on any capital investment.

If a discount factor of 16% is used, Machine X will have a negative NPV of $13 130.

(d) Calculate the IRR of Machine X. [3]

Additional information

A similar machine, Machine Y, is available. It also has a useful life of 4 years. The following
information for Machine Y is available.

Initial cost $480 000

NPV $33 200
ARR 25%
IRR 13.5%

(e) Advise the directors of P Limited which machine they should buy. Justify your answer. [5]

Additional information

The directors are also considering buying another machine, Machine Z, at a cost of $110 000.
This will be used to produce another product which has an expected life of 3 years. The annual
receipts from the sale of the product will be $100 000. Annual payments will be $45 000. This will
remain constant for each of the 3 years. P Limited’s cost of capital remains at 10%.

The directors are confident about the accuracy of their forecast for annual payments. They are
not confident about their forecast for annual receipts.

(f) Calculate the annual receipts which give a zero NPV for Machine Z. [3]

[Total: 25]
Question 6

Source B2

Oscar runs a manufacturing business and operates a standard costing system.

The following information relates to the year ended 31 March 2019.

Budgeted Actual
Production (units) 7500 7300
Material usage 6 kilos per unit 42 500 kilos
Material cost $5 per kilo $230 000
Labour usage 4 hours per unit 32 000 hours
Labour cost $8 per hour $236 000

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) State two disadvantages of operating a standard costing system. [2]

(b) Calculate the following variances:

(i) material price [2]

(ii) material usage [2]

(iii) labour rate [2]

(iv) labour efficiency [2]

(v) total labour. [1]

(c) Identify one possible reason for each of the following variances calculated in part (b):

(i) material price variance

(ii) material usage variance

(iii) labour rate variance

(iv) labour efficiency variance.

[4]

(d) Prepare a statement to reconcile for actual production the standard labour and material costs
with the actual costs. [8]

Additional information

Oscar has not changed his standard costs for three years.

(e) Advise Oscar whether or not he should change his standard costs. Justify your answer.
[2]

[Total: 25]
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