Cambridge International Examinations

Cambridge International Advanced Subsidiary and Advanced Level

ACCOUNTING 9706/32
Paper 3 Structured Questions October/November 2017
3 hours
No Additional Materials are required.


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 9 printed pages, 3 blank pages and 1 Insert.

IB17 11_9706_32/4RP
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Section A: Financial Accounting

1 The GT Boating Club is a not-for-profit organisation which collects funds by subscriptions paid
annually.

At 1 January 2016 the following assets and liabilities were held by the club:

$
Boathouse 240 000
Fixtures and fittings
Cost 15 000
Accumulated depreciation 10 000
Trade payables 1 750
Total inventory 1 100
Bank 6 150 debit
Insurance paid in advance 1 100
Electricity owing 450
Subscriptions in arrears 600
Subscriptions in advance 400

Additional information

1 The club runs a restaurant for the exclusive use of members and their guests. During the
year ended 31 December 2016 the revenue of the restaurant was $45 000.

2 The opening restaurant inventory was 75% of the total club inventory. The closing restaurant
inventory had doubled at 31 December 2016.

3 During the year ended 31 December 2016 the club paid $28 350 for restaurant purchases.

All the club’s trade payables at 1 January 2016 related to the restaurant suppliers. This had
risen by 20% at 31 December 2016.

4 The club paid insurance for the year of $4800 and electricity of $2000. Half of these costs are
charged to the restaurant.
At 31 December 2016 the club still owed $950 for insurance.

REQUIRED

(a) Prepare a statement to calculate the restaurant profit for the year ended 31 December 2016.
The statement should also clearly show the gross profit. [10]

Additional information

Another local boating club runs a similar restaurant. Its latest accounts showed that the
restaurant had achieved a gross margin of 45%.

REQUIRED

(b) (i) Calculate the difference between the gross margins of both restaurants. [2]

(ii) Discuss three actions which the club could take to improve the gross margin. [6]

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Additional information

The club is now considering the introduction of a life membership subscription.

The annual subscription is $100 and the proposed life subscription would be $1000.

Gurmukh, a retired gentleman, is considering joining the club and seeks your advice on whether
or not he should pay an annual subscription or the life membership.

REQUIRED

(c) Explain the accounting treatment of the life subscriptions. [2]

(d) Advise Gurmukh whether or not he should become a life member. Justify your advice. [5]

[Total: 25]

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2 FS plc’s statement of financial position on 1 January 2016 showed the following:

$000
Ordinary share capital (shares of $1 each) 1000
Share premium 300
General reserve 100
Retained earnings 220

During the year ended 31 December 2016 the following took place:

1 On 30 June 2016, an interim dividend of $55 000 was paid.

2 On 1 October 2016, an issue of 700 000 ordinary shares was made at $1.80 per share. All
the funds raised from this share issue were used to buy a second factory on 7 January 2017.

3 On 1 November 2016, a bonus issue of shares was made with 3 new shares being issued for
every 10 held. Reserves were maintained in their most flexible form.

4 For the year ended 31 December 2016, the company made a profit from operations of
$288 000. Finance charges of $52 000 had been paid. The directors provided $41 000 for the
tax liability for the year.

5 At 31 December 2016, $40 000 was transferred to general reserve and a final dividend of
$75 000 was proposed.

REQUIRED

(a) Prepare the statement of changes in equity for the year ended 31 December 2016 (a total
column is not required). [12]

(b) Explain how the proposed final dividend should be treated in the financial statements for the
year ended 31 December 2016. [2]

(c) Explain the treatment in the financial statements for the year ended 31 December 2016 of
the purchase of the second factory on 7 January 2017. [3]

Additional information

A shareholder at the Annual General Meeting said that the purchase of the new factory would
cause non-current asset turnover to fall, with an adverse effect on shareholder confidence.

REQUIRED

(d) Advise the directors whether or not they should be concerned about the shareholder’s
comment. Justify your answer. [5]

(e) State how an upward revaluation of an existing non-current asset is recorded in the financial
statements of a company. [3]

[Total: 25]

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3 LS Limited has completed its first year of trading. The company has four directors, of whom two
are not shareholders. The auditors are currently carrying out the end of year audit.

REQUIRED

(a) (i) Explain the term ‘stewardship’. [2]

(ii) Explain how directors carry out their role of stewardship within a limited company. [2]

(iii) Explain the purpose of an end of year audit. [2]

Additional information

The draft financial statements for the year showed the following:

$
Sales 182 000
Sales returns 8 000
Purchases 154 000
Purchases returns 12 000

All sales were at a mark-up of 150%.

During the audit the auditors discovered that included in the sales records was a sales invoice for
$6000 which had been prepared for a customer but not yet been sent. The customer had
received the inventory on a sale or return basis, but had yet to decide whether or not to keep the
inventory.

REQUIRED

(b) (i) Calculate what should have been the value of the closing inventory. [5]

(ii) Calculate the gross profit for the year. [1]

Additional information

During the year the warehouse manager had been absent from work for a long period of time.
There had been little control over the movement of inventory. Staff had valued the inventory
actually in the warehouse at the end of the year at $24 000.

REQUIRED

(c) Calculate the percentage change in gross profit if the inventory valuation from the warehouse
had been used. [3]

(d) Discuss three possible reasons for the difference between the warehouse inventory
valuation and the calculated value of inventory. [6]

(e) Discuss whether the directors should use the warehouse inventory valuation or the amount
from the accounting records as the inventory figure in the financial statements. Justify your
answer. [4]

[Total: 25]

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4 Summarised financial information for E Limited for the year ended 31 August 2016 is as follows:

Summarised Income Statement

$000
Revenue 8 800
Cost of sales 5 045
Gross profit 3 755
Expenses 2 175
Profit from operations 1 580
Finance costs 235
Profit for the year 1 345

Summarised Statement of Financial Position

Assets $000
Non-current assets 4 815
Current assets 3 210
Total assets 8 025

3 000 000 ordinary shares of $0.50 each 1 500

Share premium 500
Retained earnings 2 540
4 540

Non-current liabilities – 8% debentures repayable 2020 2 935

Current liabilities – trade payables 550
8 025

Additional information

1 The market value of one ordinary share at 31 August 2016 was $1.55.

2 Dividends paid for the year ended 31 August 2016 were $325 000.

REQUIRED

(a) Calculate the following ratios to two decimal places:

(i) income gearing

(ii) gearing

(iii) dividend cover

(iv) price earnings [5]

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Additional information

The directors of E Limited had expansion plans and on 1 September 2016 raised $2 000 000 by
issuing 10% debentures repayable in 2026. The profit from operations for the year ended
31 August 2017 was $1 600 000 and the market price of one ordinary share on that date was
$1.30. Dividends paid for the year were $275 000.

REQUIRED

(b) (i) Prepare an extract from the income statement for the year ended 31 August 2017,
starting with the profit from operations. [2]

(ii) Prepare the equity and non-current liabilities section of statement of financial position at
31 August 2017. [2]

(c) (i) Calculate the same ratios as in part (a) at 31 August 2017 to two decimal places. [4]

(ii) Assess the effect of the new debenture issue on these ratios. [8]

(d) Discuss two disadvantages to the company of the issue of the debentures. [4]

[Total: 25]

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Section B: Cost and Management Accounting

5 Wong Ho owns a small factory. A machine has started to break down regularly and needs to be
replaced.

A replacement machine is expected to cost $55 000. It is expected to last 5 years and will be
depreciated using the straight-line method of depreciation. At the end of the period the machine
will be scrapped with no residual value.

The following information is available for the replacement machine:

1 The selling price for each unit produced by the machine is expected to be $40 for years
1 and 2.
This is expected to increase by 25% for year 3.
There is no expected change for year 4.
However, the selling price is expected to increase by a further 10% for year 5.

2 The cost of production for each unit produced is expected to be $20 for years 1 and 2. This
will increase by 25% for year 3 and then remain unchanged.

3 The present value for the net cash flows for the years 1 to 5 have been calculated as follows:

Year Discount factor 14% Present value $

1 0.877 3 683.40
2 0.769 6 536.50
3 0.675 9 483.75
4 0.592 14 977.60
5 0.519 21 019.50

REQUIRED

(a) Distinguish between the payback method of investment appraisal and the net present value
method. [4]

(b) Calculate the expected net present value for the replacement machine. [1]

(c) (i) Calculate the annual net cash flows for years 1 to 5 for the replacement machine. [5]

(ii) Calculate the payback period for the replacement machine. [2]

(iii) Calculate the number of units for each year that Wong Ho expects to produce with the
replacement machine. [8]

(d) Recommend whether or not Wong Ho should purchase the replacement machine. Justify
your answer. [5]

[Total: 25]

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6 J Limited sells a single product at a mark-up of 25%. The following information is available:

1 Sales revenue:

$
2017
November 150 000
December 180 000

2018
January 200 000
February 210 000
March 225 000
April 240 000

2 All sales are on credit and customers have a credit period of 2 months.

3 All purchases are on credit and suppliers are paid in the month following purchases.

4 Inventory level at the end of each month will be maintained at 25% of the sales volume in the
following month.

5 Monthly operating costs are expected to be $18 000, which includes $3000 depreciation.

6 Balance at bank at 1 January 2018 is expected to be $4500.

REQUIRED

(a) Prepare the cash budget for each of the three months from January to March 2018. [9]

(b) Prepare a budgeted income statement for the three-month period ending 31 March 2018. [3]

(c) Prepare a reconciliation of the profit from operations for the three-month period ending
31 March 2018 to the net cash at 31 March 2018. [8]

Additional information

The directors are considering investing $60 000 in a new computer system to improve inventory
control. According to the payment terms, 50% is payable in March 2018 and the remaining
50% in the following month.

REQUIRED

(d) Advise the directors whether or not they should purchase the new computer. Justify your
answer. [5]

[Total: 25]

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© UCLES 2017 9706/32/O/N/17