CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

Exam-style questions and sample answers have been written by the authors. In examinations, the way marks are awarded may
be different.

Coursebook answers
Most of the answers are in ‘outline’ form indicating the appropriate points and skills that learners need
to include in their answers. They provide the necessary guidance to allow learners to develop and extend
the points for a fuller answer that contains the relevant skills. In many instances, there may be other valid
approaches to answering the question.

Chapter 18
Accounting in context
Mahendra’s clothing company
Learners’ answers may include:
• Operating as a sole trader can be hard work and stressful because:
• Responsibility for all decisions rests with the sole trader and, if the business fails, it may well be the
sole trader’s fault and any employees will lose their jobs.
• Sole traders have unlimited liability, which means that if the business fails, they may lose personal
possessions like their home if the assets of the business are insufficient to cover debts and losses.
• Sole traders may work long hours and may feel that they cannot take time off ill or go on holiday
as there will be no-one to run the business.
• Sole traders may have certain skills but are unlikely to be good at everything – how do they cover
the areas where they lack the expertise?
• If sole traders wish to expand, they may find it more difficult to raise finance than other (larger)
types of organisation.
• The benefits of forming a partnership might include:
• The partners may cover a wider range of skills and knowledge.
• Partnerships may be able to raise more finance – indeed, there may be partners who wish to invest
large amounts of money into a business without, necessarily, wanting to be actively involved in the
day-to-day running of that business.
• The partners can share the workload, which makes taking time off more possible.
• The partners can discuss ideas and this may lead to better decision making.
• The partnership may enable access to wider markets – each partner may have contacts that would
not have been available to the other partners.
• There may be cost savings as duplicated activities and expenditure can be eliminated.
• Some of the disadvantages of forming a partnership might include:
• Sole traders have complete control over decision making whereas partners will have to agree on
things. If they have different views on how the business is run, this can lead to conflict.
• The rules about how the partnership will operate and the roles/responsibilities of each partner
need to be agreed – this can be time-consuming and difficult.
• There needs to be complete trust between the partners. Ordinary partnerships still involve
unlimited liability and if, say, one partner runs off with all of the money (leaving debts and losses
behind them), the remaining partners will almost certainly have to make up the deficit – which can
cost them their personal possessions.

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

Activities
Activity 18.1
a Sasha, Fatima and Roop appropriation account
$ $
Profit for the year 14 000
Add: Interest on drawings:
Sasha (8% × 14 000) 1 120
Fatima (8% × 10 000) 800
Roop (8% × 18 000) 1 440 3 360
17 360
Less: Appropriation of profit
Interest on capital:
Sasha (5% × 100 000) 5 000
Fatima (5% × 25 000) 1 250
Roop (5% × 65 000) 3 250 (9 500)
7 860
Salaries: Sasha 9 000
Fatima 13 000 (22 000)
Loss for distribution (14 140)
Loss share (50:30:20):
Sasha (50% × 14 140) 7 070
Fatima (30% × 14 140) 4 242
Roop (20% × 14 140) 2 828 14 140
  
–   

b Current accounts
Sasha Fatima Roop Sasha Fatima Roop
$ $ $ $ $ $
Opening balance b/d 1 500 Opening balance b/d 12 500 4 800
Drawings 14 000 10 000 18 000 Interest on capital 5 000 1 250 3 250
Interest on drawings 1 120    800 1 440 Salaries 9 000 13 000
Loss share 7 070 4 242 2 828
Closing balance c/d 4 310 Closing balance c/d 2 292 14 218
26 500 16 542 22 268 26 500 16 542 22 268
Closing balance b/d 2 292 14 218 Closing balance b/d 4 310

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
2 © Cambridge University Press 2021
 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

c Capital section of the statement of financial position

$
Capital and liabilities: Sasha Fatima Roop
Capital accounts: 100 000 25 000 65 000 190 000
Current accounts:   4 310 (2 292) (14 218) (12 200)
Current liabilities:
Trade payables ?
Total capital and liabilities 177 800

Activity 18.2
a Statement of profit or loss for Saami and Tulu for the year ended 31 March 2020
$ $ $
Revenue 226 983
Less: Cost of sales
Opening inventory 24 017
Purchases 127 601
151 618
Less: Closing inventory (23 592) (128 026)
Gross profit 98 957
Less: Expenses
Depreciation (motor vehicles 5 754, office equipment 2 648) 8 402
Interest on loan 1 960
Motor expenses (12 828 – 210) 12 618
Office expenses (19 710 + 545) 20 255
Wages and salaries 41 670
Total expenses (84 905)
Profit for the year 14 052
b Add: Interest on drawings:
Saami (8% × 19 500) 1 560
Tulu (8% × 23 100) 1 848   3 408
17 460
Less: Appropriation of profit
Interest on capital:
Saami (10% × 47 400) 4 740
Tulu (10% × 31 800) 3 180   (7 920)
  9 540
Salaries: Saami 18 000 (18 000)
Profit available for distribution   (8 460)
Profit share:
1
Saami ∙3 × 8 460∙ (2 820)
2
Tulu ∙ × 8 460∙
3
(5 640)   8 460
  
–   

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

c Current accounts
Saami Tulu Saami Tulu
$ $ $ $
Opening balance b/d Opening balance b/d 7 175 22 970
Interest on drawings 1 560 1 848 Interest on capital 4 740 3 180
Drawings 19 500 23 100 Interest on loan 1 960
Loss share 2 820 5 640 Salaries 18 000
Closing balance c/d 6 035 Closing balance c/d 2 478
29 915 30 588 29 915 30 588
Closing balance b/d 2 478 Closing balance b/d 6 035

d Statement of financial position for Saami and Tulu at 31 March 2020

Cost Accumulated Net book
depreciation value
$ $ $
Non-current assets:
Motor vehicles 27 400 13 974 13 426
Office equipment 13 240 7 944   5 296
40 640 21 918 18 722
Current assets:
Inventory 23 592
Trade receivables 36 815
Bank 40 172
Other receivables    210 100 789
Total assets 119 511

Capital and liabilities:

Saami Tulu
Capital accounts 47 400 31 800 79 200
Current accounts 6 035 (2 478)   3 557
82 757
Non-current liabilities:
Loan – Tulu 28 000
Current liabilities:
Trade payables 8 209
Other payables    545   8 754
Total capital and liabilities 119 511

Exam-style questions
1 B Interest on drawings reduces the partner’s current account and so is a debit. The partnership made
a loss so the profit share is actually a loss share, which again is a debit as it reduces the current
account balance. ii and iii are credits as they increase the current account balance.
2 D Moore gets interest on capital (6% × 80 000) = 4 800. Connery gets 1 200 leaving 30 000.
Moore also gets a quarter of the remaining profit of 30 000 = 7 500. So, 7 500 + 4 800 = $12 300.

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

3 C Dalton gets a salary of 12 000 plus 40% of the remaining 27 000 = 10 800, giving a total of $22 800.
4 a i Sven and Steve
$ $
Profit for the year 75 000
Add: Interest on drawings:
Sven (10% × 16 000) 1 600
Steve (10% × 23 000) 2 300 3 900
78 900
Less: Appropriation of profit
Interest on capital:
Sven (6% × 60 000) 3 600
Steve (6% × 40 000) 2 400 (6 000)
72 900
Salaries:
Sven 20 000 (20 000)
Profit available for distribution 52 900
Profit share (25:75):
Sven (25% × 52 900) (13 225)
Steve (75% × 52 900) (39 675) (52 900)
  
–   

ii Current accounts
Sven Steve Sven Steve
$ $ $ $
Drawings 16 000 23 000 Opening balance b/d 11 000 16 000
Interest on drawings 1 600 2 300 Interest on capital 3 600 2 400
Closing balance c/d 30 225 32 775 Salaries 20 000
Profit share 13 225 39 675
47 825 58 075 47 825 58 075
Closing balance b/d 30 225 32 775

iii Capital section of the statement of financial position

$ $
Capital and liabilities:
Sven Steve
Capital accounts 60 000 40 000 100 000
Current accounts 30 225 32 775 63 000
163 000
Current liabilities:
Trade payables ?
Total capital and liabilities ?  

b Sven may do most of the day-to-day work in operating the partnership and wishes to be rewarded
for that work.

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 CAMBRIDGE INTERNATIONAL AS & A LEVEL ACCOUNTING: TEACHER'S RESOURCE

Profit shares are also ‘loss shares’ – if Sven opts for a larger profit share and the business makes a
loss, he will have a greater responsibility for making good those losses by losing more of his capital
stake in the business.
c Benefits from being in a partnership include:
• Raising finance – Sven and Steve were able to raise more finance than a sole trader might
have done. They may have had more (joint) savings or other resources that they could bring to
the partnership.
• Skills and expertise – the partners may have had a wider range of skills and expertise together
than they would have had as individuals.
• Coverage for illnesses or holidays – if one of the partners is ill or goes on holiday, the other
partner is able to run the business.
• Problems can be discussed – which may lead to better decisions being made than might have
been the case had they been facing the problems alone.

Cambridge International AS & A Level Accounting – Hopkins, Malpas, Randall & Seagrove
6 © Cambridge University Press 2021