2026 Cambridge IAS-Level Accounting (9706) Practice Paper with Answers

According to IAS 2 and the concept of prudence, inventory must be valued at the lower of cost and net realisable value. Anticipated future price recoveries cannot be anticipated before they are realised, ensuring assets and profits are not overstated.

[1 mark] D is correct as prudence requires recording expected losses immediately and valuing inventory at the lower of cost and net realisable value.

Year 2022 depreciation: \(20\% \times \$60\,000 = \$12\,000\)
Carrying amount at 31 December 2022: \(\$60\,000 - \$12\,000 = \$48\,000\)

Year 2023 depreciation: \(20\% \times \$48\,000 = \$9\,600\)
Carrying amount at 31 December 2023: \(\$48\,000 - \$9\,600 = \$38\,400\)

Year 2024 depreciation: $0 (policy of no depreciation in year of disposal).
Carrying amount at disposal: $38 400.

Loss on disposal = Carrying amount \( - \) Sale proceeds = \(\$38\,400 - \$28\,500 = \$9\,900\) loss.

[1 mark] C is correct. Carrying amount at disposal is $38 400; sale proceeds of $28 500 result in a loss on disposal of $9 900.

The cash book must be updated for items that appear on the bank statement but not yet in the cash book (items 1 and 2):

Initial cash book balance: \(-\$4\,200\) (overdraft)
Less bank charges: \(-\$150\)
Less standing order: \(-\$320\)
Updated cash book balance = \(-\$4\,200 - \$150 - \$320 = -\$4\,670\) ($4 670 overdrawn).

Note: Uncredited lodgements ($1 850) and unpresented cheques ($2 400) are bank reconciliation items, not cash book adjustments.

[1 mark] B is correct. Adjusting the overdrawn balance of $4 200 for bank charges ($150) and standing order ($320) yields $4 670 overdrawn.

First calculate total credit purchases:
\(\text{Purchases} = \text{Payments} + \text{Closing payables} - \text{Opening payables}\)
\(\text{Purchases} = \$112\,000 + \$16\,200 - \$14\,500 = \$113\,700\)

Purchases available for resale = \(\text{Total purchases} - \text{Goods drawings} = \$113\,700 - \$3\,500 = \$110\,200\)

\(\text{Cost of sales} = \text{Opening inventory} + \text{Purchases available for resale} - \text{Closing inventory}\)
\(\text{Cost of sales} = \$18\,000 + \$110\,200 - \$22\,000 = \$106\,200\)

[1 mark] B is correct. Credit purchases $113 700 less drawings $3 500 = $110 200. Cost of sales = $18 000 + $110 200 - $22 000 = $106 200.

1. Profit for the year: $95 000
2. Add interest on drawings: \(\$800 + \$600 = \$1\,400\)
Total available for appropriation: \(\$95\,000 + \$1\,400 = \$96\,400\)

3. Less interest on capital:
Faye: \(5\% \times \$80\,000 = \$4\,000\)
George: \(5\% \times \$50\,000 = \$2\,500\)
Total interest on capital: \(\$6\,500\)

4. Less George's salary: \(\$12\,000\)

Residual profit = \(\$96\,400 - \$6\,500 - \$12\,000 = \$77\,900\)

Faye's share of residual profit = \(\frac{3}{5} \times \$77\,900 = \$46\,740\).

[1 mark] C is correct. Total residual profit is $77 900 ($95 000 + $1 400 - $6 500 - $12 000), of which Faye's 3/5 share is $46 740.

Initial position:
Ordinary share capital: \(400\,000 \times \$0.50 = \$200\,000\)
Share premium: $60 000

1. Rights issue (1 for 4):
New shares issued = \(400\,000 / 4 = 100\,000\) shares.
Nominal value added to share capital = \(100\,000 \times \$0.50 = \$50\,000\).
Premium added to share premium = \(100\,000 \times (\$0.80 - \$0.50) = \$30\,000\).
Balances after rights issue:
Ordinary share capital = \(\$200\,000 + \$50\,000 = \$250\,000\) (500 000 shares)
Share premium = \(\$60\,000 + \$30\,000 = \$90\,000\)

2. Bonus issue (1 for 5 on 500 000 shares):
Bonus shares issued = \(500\,000 / 5 = 100\,000\) shares.
Nominal value = \(100\,000 \times \$0.50 = \$50\,000\).
To maximise revenue reserves, the bonus issue is fully funded from the share premium account.

Final balances:
Ordinary share capital = \(\$250\,000 + \$50\,000 = \$300\,000\)
Share premium = \(\$90\,000 - \$50\,000 = \$40\,000\)

[1 mark] B is correct. Share capital rises from $200 000 by $50 000 (rights) and $50 000 (bonus) to $300 000. Share premium rises by $30 000 to $90 000 and is reduced by $50 000 for the bonus issue to $40 000.

Let current assets = 220, inventory = 140, liquid assets (receivables + cash) = 80, and current liabilities = 100.
- In D (selling inventory on credit at a profit, e.g., cost $20 sold for $30): Trade receivables increases by $30 while inventory falls by $20. Total current assets increase by $10 (giving current ratio \(230/100 = 2.3 : 1\)). Liquid assets increase by $30 (giving acid test ratio \(110/100 = 1.1 : 1\)). Both ratios increase.
- In A, purchasing inventory for cash leaves current ratio unchanged and decreases acid test ratio.
- In B, purchasing inventory on credit decreases both ratios.
- In C, paying payables increases the current ratio (since \(>1\)) but decreases the acid test ratio (since \(<1\)).

[1 mark] D is correct. Selling inventory at a profit on credit increases trade receivables by more than the inventory cost, increasing total current assets and liquid assets while liabilities remain constant.

1. Adjusted trade receivables at year end = \(\$78\,000 - \$1\,800 = \$76\,200\).
2. Closing allowance required = \(5\% \times \$76\,200 = \$3\,810\).
3. Increase in allowance = \(\$3\,810 - \$3\,400 = \$410\) (Debit).
4. Irrecoverable debt written off = $1 800 (Debit).
5. Irrecoverable debt recovered = $1 200 (Credit).

Net charge to statement of profit or loss = \(\text{Debits} - \text{Credit} = (\$1\,800 + \$410) - \$1\,200 = \$1\,010\) debit.

[1 mark] B is correct. Irrecoverable debt expense $1 800 + allowance increase $410 - debt recovered $1 200 = $1 010 net debit.

Profit can be calculated using the accounting equation for closing net assets:

$$\text{Closing net assets} = \text{Opening net assets} + \text{Capital introduced} + \text{Profit} - \text{Total drawings}$$

$$\text{Total drawings} = (\$1\,200 \times 12) + \$2\,400 = \$14\,400 + \$2\,400 = \$16\,800$$

$$\$61\,500 = \$48\,000 + \$10\,000 + \text{Profit} - \$16\,800$$

$$\$61\,500 = \$41\,200 + \text{Profit}$$

$$\text{Profit} = \$61\,500 - \$41\,200 = \$20\,300$$

[1] B – $20 300
[0] Other options: A omits goods drawings ($17 900); C treats capital introduced as a deduction ($27 900); D omits capital introduced ($30 300).

Step 1: Calculate depreciation for each year prior to disposal.

- Year ended 31 Dec 2022 depreciation: $20\% \times $80\,000 = $16\,000$
- Carrying amount at 31 Dec 2022: $$80\,000 - \$16\,000 = \$64\,000\$
- Year ended 31 Dec 2023 depreciation: \$20\% \times \$64\,000 = \$12\,800\$
- Carrying amount at 31 Dec 2023: $$64\,000 - $12\,800 = $51\,200$
- Year ended 31 Dec 2024 depreciation: $$0\$ (none in year of disposal)

Step 2: Calculate profit or loss on disposal.

$$\text{Loss on disposal} = \text{Carrying amount} - \text{Disposal proceeds} = \$51\,200 - \$45\,000 = \$6\,200 \text{ loss}$$

[1] C – $6 200 loss
[0] Other options: A charges depreciation in the year of disposal ($51 200 - 10 240 = $40 960; loss $3 800 profit/loss); B misinterprets A as profit; D treats the difference as a profit.

1. Bonus issue:
- Number of bonus shares: $\frac{400\,000}{4} = 100\,000$ shares
- Nominal value of bonus issue: $100\,000 \times $0.50 = $50\,000$
- Share premium reduces by $$50\,000\$ to $$10\,000$ ($$60\,000 - \$50\,000\$)
- Ordinary share capital becomes: $$200\,000 + $50\,000 = $250\,000$ ($500\,000$ shares)

2. Rights issue:
- Number of rights shares: $\frac{500\,000}{5} = 100\,000$ shares
- Nominal value added to share capital: $100\,000 \times $0.50 = $50\,000$
- Total ordinary share capital: $$250\,000 + \$50\,000 = \$300\,000\$
- Premium per share: $$0.80 - $0.50 = $0.30$
- Premium received: $100\,000 \times $0.30 = $30\,000$
- Total share premium: $$10\,000 + $30\,000 = $40\,000$

[1] B – Share capital $300 000, Share premium $40 000
[0] Other options: A omits rights issue nominal addition to share capital; C fails to deduct bonus issue from share premium; D confuses nominal and premium allocations.

Step 1: Calculate the updated cash book balance:
$$\text{Draft cash book balance} = -\$3\,450$$
$$\text{Less bank charges} = -\$180$$
$$\text{Add direct credit} = +\$620$$
$$\text{Updated cash book balance} = -\$3\,450 - \$180 + \$620 = -\$3\,010 \text{ (overdrawn)}$$

Step 2: Reconcile to bank statement balance ($X$):
$$\text{Bank statement balance } (X) + \text{Outstanding deposits} - \text{Unpresented cheques} = \text{Updated cash book balance}$$
$$X + \$850 - \$1\,400 = -\$3\,010$$
$$X - \$550 = -\$3\,010$$
$$X = -\$3\,010 + \$550 = -\$2\,460 \text{ (overdrawn)}$$

[1] A – $2 460 overdrawn
[0] Other options: B is the updated cash book balance ($3 010 overdrawn); C reverses the timing differences ($3 560 overdrawn); D misapplies direct credit and timing differences.

The formula for the acid test ratio is:

$$\text{Acid test ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$

$$\text{Quick assets} = \text{Trade receivables} + \text{Cash and cash equivalents} = \$52\,000 + \$8\,000 = \$60\,000$$

$$\text{Current liabilities} = \text{Trade payables} + \text{Bank overdraft} = \$35\,000 + \$5\,000 = \$40\,000$$

$$\text{Acid test ratio} = \frac{\$60\,000}{\$40\,000} = 1.50 : 1$$

[1] A – 1.50 : 1
[0] Other options: B omits the bank overdraft from current liabilities ($60 000 / $35 000 = 1.71 : 1); C is the current ratio ($100 000 / $40 000 = 2.50 : 1); D is the current ratio omitting bank overdraft ($100 000 / $35 000 = 2.86 : 1).

Working capital = Current Assets - Current Liabilities.

- Option A: Paying trade payables reduces cash (CA) and trade payables (CL) by equal amounts; working capital remains unchanged.
- Option B: Buying inventory on credit increases inventory (CA) and trade payables (CL) by equal amounts; working capital remains unchanged.
- Option C: Selling inventory costing $$8\,000\$ for $$10\,000$ on credit reduces inventory by $$8\,000\$ and increases trade receivables by $$10\,000$, resulting in a net increase in current assets of $$2\,000\$, which increases working capital by $$2\,000$.
- Option D: Receiving cash from trade receivables increases cash (CA) and decreases trade receivables (CA) by equal amounts; working capital remains unchanged.

[1] C – Selling inventory costing $8 000 for $10 000 on credit
[0] Other options: A, B, and D have zero net effect on working capital.

Step 1: Calculate interest on drawings (income to partnership):
- Ethan: $4\% \times $15\,000 = $600$
- Fiona: $4\% \times $10\,000 = $400$
- Total interest on drawings = $$1\,000\$

Step 2: Calculate interest on capital:
- Ethan: \$5\% \times \$60\,000 = \$3\,000\$
- Fiona: \$5\% \times \$40\,000 = \$2\,000\$
- Total interest on capital = $$5\,000$

Step 3: Calculate residual profit:
$$\text{Residual profit} = \$68\,000 + \$1\,000 - \$12\,000 \text{ (salary)} - \$5\,000 \text{ (interest on capital)} = \$52\,000$$

Step 4: Calculate Fiona's share ($2/5$ of residual profit):
$$\text{Fiona's share} = \frac{2}{5} \times \$52\,000 = \$20\,800$$

[1] C – $20 800
[0] Other options: A subtracts interest on drawings instead of adding ($20 000); B ignores interest on drawings ($20 400); D is Ethan's share of residual profit ($31 200).

The concept of materiality states that items of insignificant value or short lifespan that do not influence the economic decisions of users need not be capitalised as non-current assets and depreciated; they can be treated immediately as revenue expenditure.

B is correct [1 mark].
A is incorrect: Consistency requires using the same accounting methods over time.
C is incorrect: Realisation relates to recognising revenue when goods/services are delivered.
D is incorrect: Prudence requires not overstating assets/income or understating liabilities/expenses.

To calculate credit purchases, reconstruct the purchases ledger control account:

$$\begin{aligned}
\text{Credit purchases} &= \text{Trade payables c/d} + \text{Payments} + \text{Discounts received} + \text{Returns outwards} - \text{Trade payables b/d} \\
&= \$16\,800 + \$94\,500 + \$1\,900 + \$2\,300 - \$14\,200 \\
&= \$101\,300
\end{aligned}$$

Total purchases include both credit purchases and cash purchases:

$$\begin{aligned}
\text{Total purchases} &= \text{Credit purchases} + \text{Cash purchases} \\
&= \$101\,300 + \$6\,400 \\
&= \$107\,700
\end{aligned}$$

C is correct [1 mark].

A is incorrect ($98 700: omitted cash purchases and deducted discounts/returns).
B is incorrect ($101 300: calculated credit purchases only, omitted cash purchases).
D is incorrect ($111 900: added cash purchases but incorrectly added opening payables).

Calculate the carrying amount at disposal:

Cost at 1 January 2023: $48 000
Depreciation for 2023 (20% of $48 000): $9 600
Carrying amount at 31 December 2023: $38 400

Depreciation for 2024 (20% of $38 400): $7 680
Carrying amount at 31 December 2024: $30 720

Depreciation for 2025: $0 (policy is no depreciation in year of disposal)
Carrying amount at date of disposal: $30 720

$$\begin{aligned}
\text{Loss on disposal} &= \text{Disposal proceeds} - \text{Carrying amount} \\
&= \$26\,500 - \$30\,720 \\
&= -\$4\,220 \text{ (Loss of } \$4\,220\text{)}
\end{aligned}$$

C is correct [1 mark].

A is incorrect ($1 924 profit: charged 2025 depreciation before calculating disposal).
B is incorrect ($2 300 loss: applied straight-line depreciation instead of reducing balance).
D is incorrect ($4 220 profit: calculated difference correctly but inverted profit/loss status).

Step 1: Determine initial number of shares:
$$\text{Number of shares} = \frac{\$200\,000}{\$0.50} = 400\,000 \text{ shares}$$

Step 2: Account for the rights issue:
$$\text{Rights issue shares} = \frac{400\,000}{4} = 100\,000 \text{ shares}$$
$$\text{Premium per share} = \$0.80 - \$0.50 = \$0.30$$
$$\text{Share premium generated} = 100\,000 \times \$0.30 = \$30\,000$$
$$\text{Share premium balance before bonus issue} = \$60\,000 + \$30\,000 = \$90\,000$$
$$\text{Total shares after rights issue} = 400\,000 + 100\,000 = 500\,000 \text{ shares}$$

Step 3: Account for the bonus issue:
$$\text{Bonus shares issued} = \frac{500\,000}{5} = 100\,000 \text{ shares}$$
$$\text{Nominal value of bonus issue} = 100\,000 \times \$0.50 = \$50\,000$$

To preserve distributable reserves (retained earnings), the bonus issue is financed from share premium:
$$\text{Closing share premium balance} = \$90\,000 - \$50\,000 = \$40\,000$$

B is correct [1 mark].

A is incorrect ($10 000: calculated bonus issue using full rights issue price rather than nominal value).
C is incorrect ($50 000: calculated bonus issue on shares before the rights issue: $90 000 - 80 000 * 0.50 = $50 000).
D is incorrect ($90 000: assumed bonus issue was financed from retained earnings).

Adjust the draft debit balance of the sales ledger control account:

$$\begin{array}{lr}
\text{Draft balance} & \$58\,400 \\
\text{1. Sales journal undercast (\$760 - \$670)} & +\$90 \\
\text{2. Irrecoverable debt written off omitted} & -\$450 \\
\text{3. Contra wrongly debited (correct by crediting double: } 2 \times \$820\text{)} & -\$1\,640 \\
\text{4. Discounts allowed omitted} & -\$310 \\
\hline
\text{Corrected balance} & \mathbf{\$56\,090} \\
\hline
\end{array}$$

A is correct [1 mark].

B is incorrect ($56 910: deducted the contra entry once rather than doubling to reverse the debit entry).
C is incorrect ($57 730: omitted the contra correction completely).
D is incorrect ($59 370: added errors instead of deducting them).

Step 1: Calculate cost of sales:
$$\text{Cost of sales} = \text{Revenue} \times (100\% - \text{Gross profit margin}) = \$500\,000 \times (1 - 0.27) = \$365\,000$$

Step 2: Calculate average inventory using the inventory turnover formula:
$$\text{Inventory turnover (days)} = \frac{\text{Average inventory}}{\text{Cost of sales}} \times 365$$
$$40 = \frac{\text{Average inventory}}{\$365\,000} \times 365$$
$$\text{Average inventory} = \frac{40 \times \$365\,000}{365} = \$40\,000$$

Step 3: Calculate closing inventory:
$$\text{Average inventory} = \frac{\text{Opening inventory} + \text{Closing inventory}}{2}$$
$$\$40\,000 = \frac{\$36\,000 + \text{Closing inventory}}{2}$$
$$\text{Closing inventory} = (2 \times \$40\,000) - \$36\,000 = \$44\,000$$

B is correct [1 mark].

A is incorrect ($40 000: stopped at average inventory without calculating closing inventory).
C is incorrect ($48 000: calculated turnover using revenue instead of cost of sales).
D is incorrect ($73 000: incorrect formula application).

1. Accounting concept: The business entity concept states that a business is treated as completely separate from its owner. Personal expenditures are drawings and must not be treated as business expenses.
2. Profit for the year: By recording drawings as a business travel expense, total expenses are overstated, making profit for the year understated by $1 500.
3. Closing owner's capital: $\text{Closing capital} = \text{Opening capital} + \text{Profit for the year} - \text{Drawings}$. Profit is reduced by $1 500, but drawings are also understated by $1 500. These two offsetting errors cancel each other out, leaving closing owner's capital with no net effect.

A is correct [1 mark].

B is incorrect (closing capital is unchanged because the reduction in profit cancels the omission of drawings).
C is incorrect (wrong concept and profit is understated, not overstated).
D is incorrect (wrong concept, profit is understated and closing capital has no net effect).

1. Position on 1 May: \(100\text{ units} \times \$12 = \$1\,200\).
2. After purchases on 8 May: \(100 + 200 = 300\text{ units}\); Total value = \(\$1\,200 + (200 \times \$15) = \$4\,200\).
Weighted average cost per unit = \(\frac{\$4\,200}{300} = \$14.00\).
3. Issues on 14 May: \(180\text{ units} \times \$14.00 = \$2\,520\).
Balance remaining: \(300 - 180 = 120\text{ units}\) at \(\$14.00 = \$1\,680\).
4. After purchases on 22 May: \(120 + 180 = 300\text{ units}\); Total value = \(\$1\,680 + (180 \times \$18) = \$1\,680 + \$3\,240 = \$4\,920\).
New weighted average cost per unit = \(\frac{\$4\,920}{300} = \$16.40\).
5. Issues on 28 May: \(140\text{ units} \times \$16.40 = \$2\,296\).
6. Closing inventory on 31 May: \(300 - 140 = 160\text{ units}\) at \(\$16.40 = \$2\,624\).

[1] B is correct. [0] A is periodic AVCO ($2 480); C is FIFO ($2 880); D is an arithmetic error.

Let \(V\) be the variable cost per unit and \(F\) be the base fixed cost.

At 4 000 units:
\[F + 4\,000V = 34\,000\]

At 9 000 units, fixed costs have increased by \(\$4\,000\):
\[(F + 4\,000) + 9\,000V = 62\,000\]
\[F + 9\,000V = 58\,000\]

Subtracting the first equation from the second:
\[(F + 9\,000V) - (F + 4\,000V) = 58\,000 - 34\,000\]
\[5\,000V = 24\,000\]
\[V = \frac{24\,000}{5\,000} = \$4.80\]

[1] A is correct. [0] B ignores the stepped fixed cost (($62 000 - $34 000) / 5 000 = $5.60); C and D are incorrect applications of the high-low method.

1. Reapportion Maintenance overhead to Machining:
\[\text{Share of Maintenance overhead} = \$60\,000 \times \frac{3}{5} = \$36\,000\]
2. Total overhead for Machining department:
\[\$180\,000 + \$36\,000 = \$216\,000\]
3. Machining overhead absorption rate:
\[\text{OAR} = \frac{\$216\,000}{25\,000\text{ machine hours}} = \$8.64\text{ per machine hour}\]

[1] C is correct. [0] A is without reapportionment ($180 000 / 25 000 = $7.20); B reapportions 2/5 instead of 3/5 ($204 000 / 25 000 = $8.16); D reapportions total service overhead to machining ($240 000 / 25 000 = $9.60).

1. Calculate the predetermined overhead absorption rate (OAR):
\[\text{OAR} = \frac{\text{Budgeted overhead}}{\text{Budgeted direct labour hours}} = \frac{\$360\,000}{45\,000} = \$8.00\text{ per hour}\]
2. Calculate the overhead absorbed into production:
\[\text{Overhead absorbed} = 48\,000\text{ actual hours} \times \$8.00 = \$384\,000\]
3. Compare overhead absorbed with actual overhead incurred:
\[\text{Overhead absorbed (\$384 000)} - \text{Actual overhead (\$375 000)} = +\$9\,000\]
Because absorbed overhead is greater than actual overhead, overhead was over-absorbed by \(\$9\,000\).

[1] A is correct. [0] B misidentifies over-absorbed as under-absorbed; C is the expenditure variance ($375 000 - $360 000); D is the volume difference at standard rate without subtracting expenditure difference.

1. Change in inventory level:
\[\text{Closing inventory} - \text{Opening inventory} = (15\,000 - 12\,000) - 0 = 3\,000\text{ units}\]
2. Fixed production overhead retained in closing inventory:
\[3\,000\text{ units} \times \$7.50 = \$22\,500\]
3. Under absorption costing, fixed production overhead in inventory is carried forward to the next period rather than expensed immediately in the current year:
\[\text{Absorption costing profit} = \text{Marginal costing profit} + \text{Fixed overhead in closing inventory}\]
\[\text{Absorption costing profit} = \$88\,000 + \$22\,500 = \$110\,500\]

[1] C is correct. [0] A incorrectly subtracts the inventory difference ($88 000 - $22 500 = $65 500); B fails to adjust for inventory; D adds fixed selling and administration expenses.

1. Calculate the new selling price:
\[\text{New selling price} = \$60 \times (1 - 0.10) = \$54\]
2. Calculate the new contribution per unit:
\[\text{Contribution per unit} = \$54 - \$34 = \$20\]
3. Calculate the new total fixed costs:
\[\text{New fixed costs} = \$150\,000 + \$30\,000 = \$180\,000\]
4. Calculate the required sales volume to achieve target profit:
\[\text{Required sales (units)} = \frac{\text{Fixed costs} + \text{Target profit}}{\text{Contribution per unit}} = \frac{\$180\,000 + \$60\,000}{\$20} = \frac{\$240\,000}{\$20} = 12\,000\text{ units}\]

[1] C is correct. [0] A calculates break-even units only ($180 000 / $20 = 9 000); B uses original fixed costs with target profit (($150 000 + $60 000) / $20 = 10 500); D is an arithmetic error.

1. Contribution per unit:
- Product X: \(\$40 - (\$12 + \$16) = \$12\)
- Product Y: \(\$55 - (\$15 + \$24) = \$16\)
- Product Z: \(\$36 - (\$10 + \$12) = \$14\)

2. Direct labour hours required per unit (at \(\$8\) per hour):
- Product X: \(\frac{\$16}{\$8} = 2\text{ hours}\)
- Product Y: \(\frac{\$24}{\$8} = 3\text{ hours}\)
- Product Z: \(\frac{\$12}{\$8} = 1.5\text{ hours}\)

3. Contribution per direct labour hour (limiting factor):
- Product X: \(\frac{\$12}{2\text{ hours}} = \$6.00\text{ per hour} - Product Y: \)\frac{$16}{3\text{ hours}} = $5.33\text{ per hour}
- Product Z: \(\frac{$14}{1.5\text{ hours}} = $9.33\text{ per hour}

4. Priority ranking (highest to lowest contribution per labour hour):
1st: Product Z ($9.33)
2nd: Product X ($6.00)
3rd: Product Y ($5.33)

Therefore, the order of priority is Z, X, Y.

[1] A is correct. [0] B ranks by unit contribution without considering the limiting factor (Y, Z, X); C and D are incorrect rankings.

1. Calculate prime cost:
\[\text{Prime cost} = \$2\,400 + \$1\,200 = \$3\,600\]
2. Calculate production overhead:
\[80\text{ hours} \times \$20 = \$1\,600\]
3. Calculate total production cost:
\[\text{Total production cost} = \$3\,600 + \$1\,600 = \$5\,200\]
4. Calculate non-production overhead:
\[20\% \times \$5\,200 = \$1\,040\]
5. Calculate total cost:
\[\text{Total cost} = \$5\,200 + \$1\,040 = \$6\,240\]
6. Calculate selling price with a \(25\%\) profit margin on selling price:
\[\text{Selling price} = \frac{\text{Total cost}}{1 - 0.25} = \frac{\$6\,240}{0.75} = \$8\,320\]

[1] B is correct. [0] A applies a 25% mark-up on total cost ($6 240 * 1.25 = $7 800); C excludes non-production overhead ($5 200 / 0.75 = $6 933); D is an arithmetic error.

### 1. Calculation of Credit Sales

$$\begin{array}{lr}
\hline
\textbf{Trade Receivables Account / Credit Sales Reconstruction} & \$ \\
\hline
\text{Bank receipts from credit customers} & 96\,400 \\
\text{Discounts allowed} & 2\,150 \\
\text{Irrecoverable debts written off} & 1\,600 \\
\text{Returns inwards} & 3\,400 \\
\text{Closing trade receivables (31 December 2025)} & 18\,250 \\
\hline
& 121\,800 \\
\text{Less: Opening trade receivables (1 January 2025)} & (14\,800) \\
\hline
\textbf{Credit Sales} & \mathbf{106\,800} \\
\hline
\end{array}$$

---

### 2. Calculation of Cash Sales

$$\begin{array}{lr}
\hline
\textbf{Cash Account / Cash Sales Reconstruction} & \$ \\
\hline
\text{Cash banked} & 32\,500 \\
\text{General business expenses paid from till} & 4\,800 \\
\text{Cash drawings } (12 \times \$600) & 7\,200 \\
\text{Closing cash in hand (31 December 2025)} & 620 \\
\hline
& 45\,120 \\
\text{Less: Opening cash in hand (1 January 2025)} & (450) \\
\hline
\textbf{Cash Sales} & \mathbf{44\,670} \\
\hline
\end{array}$$

---

### 3. Calculation of Total Revenue

$$\begin{array}{lr}
\hline
& \$ \\
\hline
\text{Credit sales} & 106\,800 \\
\text{Cash sales} & 44\,670 \\
\hline
\textbf{Total Revenue} & \mathbf{151\,470} \\
\hline
\end{array}$$

Credit Sales Calculation (3 marks):
- $$96\,400 + \$2\,150 + \$1\,600 + \$3\,400\$ [1 mark for all 4 items correctly credited/added]
- \$+ \$18\,250 - \$14\,800\$ [1 mark for correct adjustment of opening and closing receivables]
- \$= \$106\,800\$ [1 mark]

**Cash Sales Calculation (3 marks):**
- Cash drawings: \$12 \times \$600 = \$7\,200\$ [1 mark]
- $$32\,500 + $4\,800 + \text{Drawings (OF)} + $620 - $450$ [1 mark]
- $= $44\,670$ [1 mark]

**Total Revenue (1 mark):**
- $$106\,800 \text{ (OF)} + $44\,670 \text{ (OF)} = $151\,470$ [1 mark (OF)]

Calculation of Cash Stolen:

$$\begin{array}{lrr}
\textbf{Cash Summary / Account} & \$ & \$ \\
\text{Opening cash in hand (1 January 2025)} & & 850 \\
\text{Add: Cash sales} & & 48\,200 \\
\hline
\text{Total cash available} & & 49\,050 \\
\text{Less accounted cash payments and closing balance:} & & \\
\quad \text{Banked} & 39\,600 & \\
\quad \text{General expenses} & 3\,150 & \\
\quad \text{Drawings} & 4\,500 & \\
\quad \text{Closing cash in hand (31 December 2025)} & 620 & (47\,870) \\
\hline
\textbf{Cash stolen} & & \mathbf{1\,180} \\
\hline
\end{array}$$

$$\text{Cash stolen} = \$49\,050 - \$47\,870 = \$1\,180$$

Marking Scheme (3 marks total):

* (1 mark) for calculating total cash inflows / available cash: $850 + $48 200 = $49 050.
* **(1 mark)** for identifying and summing all accounted outflows and closing balance: $39 600 + $3 150 + $4 500 + $620 = $47 870.
* (1 mark) for correct final stolen cash amount: $1 180 (Allow Own Figure [OF] if only one mathematical error occurs in prior additions).

Note: Presentation in either running calculation or T-account format is fully acceptable.

Workings:

1. Depreciation calculation:
- Year ended 31 December 2021: \(\$24\,000 \times 20\% = \$4\,800\)
- Carrying amount at 31 December 2021: \(\$24\,000 - \$4\,800 = \$19\,200\)
- Year ended 31 December 2022: \(\$19\,200 \times 20\% = \$3\,840\)
- Carrying amount at 31 December 2022: \(\$19\,200 - \$3\,840 = \$15\,360\)
- Year ended 31 December 2023: \(\$15\,360 \times 20\% = \$3\,072\)
- Carrying amount at 31 December 2023: \(\$15\,360 - \$3\,072 = \$12\,288\)
- Year ended 31 December 2024 (year of disposal): $0

- **Total Accumulated Depreciation** = \(\$4\,800 + \$3\,840 + \$3\,072 = \$11\,712\)

2. **Carrying amount at date of disposal:**
\(\text{Carrying amount} = \$24\,000 - \$11\,712 = \$12\,288\)

3. Profit / Loss on disposal:
\(\text{Disposal proceeds} - \text{Carrying amount} = \$10\,500 - \$12\,288 = -\$1\,788\)

Result: Loss on disposal of $1 788

[1 mark] for calculating total accumulated depreciation of $11 712 (or year-by-year carrying amount down to $12 288)
[1 mark] for method: Disposal proceeds ($10 500) less carrying amount ($12 288)
[1 mark] for correct final figure $1 788 AND stating that it is a **Loss**

*Note: Award full 3 marks for correct answer with clear indication of loss. Accept $(1 788) or -$1 788 if labelled as loss.*

### Workings

1. Revenue:
$$\text{Cash sales banked} = \$184\,000$$
$$\text{Cash sales used for drawings} = \$6\,200$$
$$\text{Credit sales} = \$95\,800$$
$$\text{Total Revenue} = 184\,000 + 6\,200 + 95\,800 = \$286\,000$$

2. Purchases & Cost of Sales:
$$\text{Credit purchases} = \$162\,500$$
$$\text{Cash purchases} = \$14\,300$$
$$\text{Less: Goods taken for personal use (drawings)} = (\$3\,800)$$
$$\text{Adjusted Purchases} = 162\,500 + 14\,300 - 3\,800 = \$173\,000$$
$$\text{Cost of Sales} = 28\,400 + 173\,000 - 31\,600 = \$169\,800$$
$$\text{Gross Profit} = 286\,000 - 169\,800 = \$116\,200$$

3. Other Income:
$$\text{Discount received} = \$2\,150$$
$$\text{Commission received} = 4\,600 - 500 = \$4\,100$$
$$\text{Total Other Income} = 2\,150 + 4\,100 = \$6\,250$$

4. Operating Expenses:
- Rent: $24\,000 - $2\,000 = $22\,000
- **Staff wages:** $41\,500 + $1\,850 = $43\,350
- General expenses: $13\,720
- **Carriage outwards:** $3\,400
- Irrecoverable debts written off: $1\,200
- **Allowance for irrecoverable debts adjustment:**
- Remaining trade receivables = $35\,200 - $1\,200 = $34\,000
- Required allowance = $34\,000 \times 5\% = $1\,700
- Increase in allowance = $1\,700 - $1\,300 = $400
- **Depreciation of fixtures and equipment:**
- Existing assets: $80\,000 \times 15\% = $12\,000
- Addition (6 months): $12\,000 \times 15\% \times \frac{6}{12} = $900
- Total depreciation = $12\,000 + $900 = $12\,900

$$\text{Total Expenses} = 22\,000 + 43\,350 + 13\,720 + 3\,400 + 1\,200 + 400 + 12\,900 = \$96\,970$$

5. Profit for the year:
$$\text{Profit for the year} = 116\,200 + 6\,250 - 96\,970 = \$25\,480$$

---

### Tariq
### Statement of Profit or Loss for the year ended 30 June 2025

$$\begin{array}{lrr}
\hline
& \$ & \$ \\
\hline
\textbf{Revenue} & & 286\,000 \\
\textbf{Cost of sales} & & \\
\text{Opening inventory} & 28\,400 & \\
\text{Purchases } (162\,500 + 14\,300 - 3\,800) & 173\,000 & \\
\hline
& 201\,400 & \\
\text{Less: Closing inventory} & (31\,600) & (169\,800) \\
\hline
\textbf{Gross profit} & & 116\,200 \\
\textbf{Other income} & & \\
\text{Discount received} & 2\,150 & \\
\text{Commission received } (4\,600 - 500) & 4\,100 & 6\,250 \\
\hline
& & 122\,450 \\
\textbf{Expenses} & & \\
\text{Rent } (24\,000 - 2\,000) & 22\,000 & \\
\text{Staff wages } (41\,500 + 1\,850) & 43\,350 & \\
\text{General expenses} & 13\,720 & \\
\text{Carriage outwards} & 3\,400 & \\
\text{Irrecoverable debts} & 1\,200 & \\
\text{Increase in allowance for irrecoverable debts } (1\,700 - 1\,300) & 400 & \\
\text{Depreciation of fixtures and equipment } (12\,000 + 900) & 12\,900 & (96\,970) \\
\hline
\textbf{Profit for the year} & & \mathbf{25\,480} \\
\hline
\end{array}$$

Award marks as follows:
- **Revenue ($286 000)** [1 mark]: Full calculation ($184 000 + $6 200 + $95 800).
- **Purchases ($173 000)** [1 mark]: Correctly including cash/credit purchases and deducting $3 800 drawings of goods.
- **Cost of sales ($169 800)** [1 mark]: Opening inventory + Purchases - Closing inventory.
- **Gross profit ($116 200)** [1 mark OF]: (Revenue - Cost of sales).
- **Other income ($6 250)** [1 mark]: Discount received ($2 150) and adjusted commission ($4 100).
- **Rent expense ($22 000)** [1 mark]: ($24 000 - $2 000).
- **Staff wages ($43 350)** [1 mark]: ($41 500 + $1 850).
- **General expenses & Carriage outwards ($13 720 & $3 400)** [1 mark]: Both correct.
- **Irrecoverable debts written off ($1 200)** [1 mark].
- **Increase in allowance for irrecoverable debts ($400)** [1 mark]: 5% of ($35 200 - $1 200) = $1 700; $1 700 - $1 300 = $400.
- **Depreciation of fixtures and equipment ($12 900)** [1 mark]: $12 000 + $900.
- Profit for the year ($25 480) [1 mark OF]: Correctly derived from all components.

### Evaluation of introducing a computerised accounting system:

#### Advantages:
* Accuracy and reduction of errors: Calculations are automated, which eliminates arithmetic errors and ensures the trial balance always balances.
* Speed and efficiency: Invoices, credit notes, and ledger updates are processed much faster than manual/single-entry records, saving administrative time.
* Automatic report generation: Financial statements (Statement of Profit or Loss, Statement of Financial Position) and aged receivables/payables reports can be produced instantly for timely management decisions.
* Better credit control and inventory tracking: Customer balances and overdue amounts can be monitored automatically, reducing irrecoverable debts.
* Audit trail and completeness: Double-entry is strictly enforced, reducing the risk of missing or unrecorded transactions that occur under incomplete records.

#### Disadvantages:
* Financial cost: Initial outlay for hardware and software licences, plus ongoing subscription, maintenance, and upgrade costs.
* Training requirements: Tariq and/or staff will need training to operate the system, which can cause initial disruption and loss of productive time.
* Security and data loss risks: Risk of data corruption, system crashes, malware, or cyber-attacks requiring regular secure backups and password controls.
* Garbage in, garbage out (GIGO): If incorrect source data is entered (errors of principle, omission, commission), the system will still process inaccurate reports.

#### Recommendation:
* A clear recommendation must be given (e.g., Tariq should introduce the system because the volume of wholesale transactions and need for timely credit control outweigh the initial setup costs and learning curve).

Marks allocation:
* Advantages: (Max 2 marks) — 1 mark for each valid point explained in context.
* Disadvantages: (Max 2 marks) — 1 mark for each valid point explained in context.
* Recommendation: (1 mark) — Clear, justified decision based on the points discussed.

(Total: 5 marks)

Cost of sales can be calculated from revenue and mark-up percentage:

\[ \text{Mark-up} = \frac{\text{Gross Profit}}{\text{Cost of Sales}} = 25\% \]

\[ \text{Revenue} = \text{Cost of Sales} \times (1 + 0.25) = 1.25 \times \text{Cost of Sales} \]

\[ \text{Cost of Sales} = \frac{\$360\,000}{1.25} = \$288\,000 \]

[1 mark] for setting up the correct calculation method: \(\frac{\$360\,000}{1.25}\) or \(\$360\,000 \times \frac{100}{125}\).
[0.5 marks] for the final correct answer: $288 000.

Cost of sales formula:

\[ \text{Cost of Sales} = \text{Opening Inventory} + \text{Purchases} + \text{Carriage Inwards} - \text{Closing Inventory} \]

Rearranging for purchases:

\[ \text{Purchases} = \text{Cost of Sales} + \text{Closing Inventory} - \text{Opening Inventory} - \text{Carriage Inwards} \]

\[ \text{Purchases} = \$280\,000 + \$42\,000 - \$34\,000 - \$3\,500 = \$284\,500 \]

[1 mark] for correct rearrangement/application: \(\$280\,000 + \$42\,000 - \$34\,000 - \$3\,500\).
[0.5 marks] for the final correct answer: $284 500.

1. Formula:
$$\text{Acid test ratio} = \frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$$
*(or $\frac{\text{Trade receivables} + \text{Cash and cash equivalents}}{\text{Current liabilities}}$)*

2. Calculation:
$$\text{Current assets excluding inventory} = \$41\,400 + \$6\,600 = \$48\,000$$
$$\text{Current liabilities} = \$36\,000 + \$4\,000 = \$40\,000$$
$$\text{Acid test ratio} = \frac{\$48\,000}{\$40\,000} = 1.20 : 1 \text{ (or } 1.2 : 1\text{)}$$

• 1 mark for stating the correct formula: $\frac{\text{Current assets} - \text{Inventory}}{\text{Current liabilities}}$ (or $\frac{\text{Liquid assets}}{\text{Current liabilities}}$ / $\frac{\text{Trade receivables} + \text{Cash and cash equivalents}}{\text{Current liabilities}}$).
• 1 mark for correct calculation showing the ratio formatted as $1.20 : 1$ or $1.2 : 1$ (accept $1.20$ or $1.2$).

Advantages of adopting a Just-In-Time (JIT) system:
- Reduced holding and storage costs: Carrying less inventory lowers warehouse rent, insurance, storage, and security costs.
- Improved liquidity and working capital: Less capital is tied up in unsold inventory, releasing cash to improve the acid test ratio and settle liabilities.
- Reduced risk of obsolescence: In computer hardware, technology changes rapidly. Holding minimal stock avoids having obsolete or outdated components that must be written down or sold at a loss.
- Increased efficiency: Inventory turnover will improve, eliminating slow-moving lines.

Disadvantages of adopting a Just-In-Time (JIT) system:
- Vulnerability to supply disruptions: Any delivery delay or transport disruption from suppliers may lead to stockouts and unfulfilled customer orders, damaging reputation and losing sales.
- Loss of economies of scale: Dev will place smaller, more frequent orders and may lose out on bulk purchase discounts.
- Increased ordering and carriage costs: Ordering more frequently increases administrative workload and unit transportation/carriage inward costs.
- High reliance on supplier reliability: Dev must ensure suppliers are capable of delivering high-quality goods consistently on short notice.

Recommendation / Conclusion:
Dev should adopt JIT if he has established strong relationships with dependable local suppliers who guarantee prompt deliveries with short lead times, as the rapid obsolescence of computer hardware makes holding high inventory risky. / Alternatively, Dev should not adopt full JIT immediately if supplier lead times are uncertain, but instead streamline existing inventory levels gradually.

Max 2 marks for Advantages (1 mark per valid point explained):
- Lower inventory holding/storage/insurance costs (1)
- Improves working capital / releases cash / improves acid test ratio (1)
- Less risk of inventory obsolescence/damage (especially for computer hardware) (1)
- Increases rate of inventory turnover (1)

Max 2 marks for Disadvantages (1 mark per valid point explained):
- Risk of stockouts/lost sales if supplier fails to deliver on time (1)
- Loss of bulk purchase / trade discounts due to smaller order sizes (1)
- Increased ordering and delivery/carriage inward costs (1)
- Heavy reliance on supplier reliability and quality control (1)

1 mark for Recommendation/Decision:
- Clear, justified advice to Dev on whether to adopt JIT based on the evaluation provided (1).

Statement of Corrected / Revised Profit for the year ended 31 December 2025

$$\begin{array}{lrr}
\text{Draft profit for the year} & & 84\,500 \[4pt]
\textbf{Add:} & & \[2pt]
\text{Prepaid insurance } (\$4\,800 \times \frac{4}{12}) & 1\,600 & \[2pt]
\text{Debenture interest overcharged } (\$3\,000 - [\$50\,000 \times 6\% \times \frac{6}{12}]) & 1\,500 & 3\,100 \[4pt]
\hline
& & 87\,600 \[4pt]
\textbf{Less:} & & \[2pt]
\text{Inventory write-down } (\text{Cost } \$3\,600 - \text{NRV } [\$3\,200 - \$800]) & (1\,200) & \[2pt]
\text{Irrecoverable debt written off} & (2\,100) & \[2pt]
\text{Increase in allowance for irrecoverable debts (W1)} & (400) & (3\,700) \[4pt]
\hline
\textbf{Revised profit for the year} & & \mathbf{83\,900} \[2pt]
\hline
\hline
\end{array}$$

Workings:

W1: Allowance for irrecoverable debts
- Adjusted trade receivables = $46 100 - $2 100 = $44 000
- Required allowance = 5% × $44 000 = $2 200
- Existing allowance = $1 800
- Increase in allowance (expense) = $2 200 - $1 800 = $400

[1 mark] for inventory write-down of $1 200 deducted (Cost $3 600 - NRV $2 400).
[1 mark] for insurance prepayment of $1 600 added ($4 800 × 4/12).
[1 mark] for total receivables adjustment deducted of $2 500 (irrecoverable debt $2 100 + increase in allowance $400).
[1 mark] for debenture interest reduction of $1 500 added and correct final revised profit of $83 900 (must show correct addition/subtraction treatment).

Workings:

1. Number of existing ordinary shares = $300 000 / $0.50 = 600 000 shares

2. Interim dividend paid = 600 000 shares * $0.03 = $18 000

3. Bonus issue:
- New shares issued = 600 000 / 4 = 150 000 shares
- Total nominal value of bonus issue = 150 000 * $0.50 = $75 000
- Funded from Share Premium (maximum available) = $45 000
- Balance funded from Retained Earnings = $75 000 - $45 000 = $30 000

4. Calculation of Retained Earnings at 31 December 2025:

Opening balance (1 January 2025): $118 000
Add: Profit for the year: $64 500
Less: Interim dividend paid: ($18 000)
Less: Bonus issue of shares: ($30 000)
Less: Transfer to general reserve: ($15 000)

Closing balance as at 31 December 2025 = $118 000 + $64 500 - $18 000 - $30 000 - $15 000 = $119 500

[1] for correct dividend ($18 000) and transfer to general reserve ($15 000) deductions.
[1] for correct amount of bonus issue charged to retained earnings ($30 000) [W: 150 000 * $0.50 = $75 000 - $45 000 share premium].
[1] for final correct retained earnings balance of $119 500 (or Own Figure if arithmetic error only).

Workings:

1. Non-Current Assets:
- Land and buildings: $$300\,000\$ (Revaluation surplus = $$300\,000 - $240\,000 = $60\,000$)
- Plant and machinery: $$115\,000\$
- Total non-current assets = $$300\,000 + $115\,000 = $415\,000$

2. **Trade Receivables:**
- Adjusted trade receivables = $$38\,400 - \$2\,400 = \$36\,000\$
- Allowance for irrecoverable debts = \$5\% \times \$36\,000 = \$1\,800\$
- Net trade receivables = $$36\,000 - $1\,800 = $34\,200$

3. Current Assets:
- Inventory: $$42\,600\$
- Trade receivables: $$34\,200$
- Bank: $$16\,200\$
- Total current assets = $$42\,600 + $34\,200 + $16\,200 = $93\,000$
- Total assets = $$415\,000 + \$93\,000 = \$508\,000\$

4. **Ordinary Share Capital & Bonus Issue:**
- Number of existing shares = \$\frac{\$160\,000}{\$0.50} = 320\,000\text{ shares}\$
- Bonus shares issued = \$\frac{320\,000}{4} = 80\,000\text{ shares}\$
- Value of bonus issue = \$80\,000 \times \$0.50 = \$40\,000\$
- Share capital after bonus issue = $$160\,000 + $40\,000 = $200\,000$
- Funded by Share premium = $$30\,000\$ (leaving balance of $$0$)
- Remainder funded from Retained earnings = $$40\,000 - \$30\,000 = \$10\,000\$

5. Accrued Debenture Interest:
- Accrued interest = $$80\,000 \times 6\% \times \frac{6}{12} = $2\,400$

6. **General Reserve:**
- Balance = $$25\,000 + \$10\,000 = \$35\,000\$

7. **Retained Earnings:**
- Draft balance: $$112\,200$
- Less: Irrecoverable debt: $($2\,400)$
- Less: Allowance for irrecoverable debts: $($1\,800)$
- Less: Accrued debenture interest: $($2\,400)$
- Less: Bonus issue: $($10\,000)$
- Less: Transfer to general reserve: $($10\,000)$
- Final Retained earnings = $$85\,600\$

8. Current Liabilities:
- Trade payables: $$45\,000$
- Other payables (accrued interest): $$2\,400\$
- Total current liabilities = $$47\,400$

---

### Lomond Ltd
Statement of Financial Position as at 31 December 2025

$$\begin{array}{lrr}
\textbf{Assets} & \$ & \$ \\
\textbf{Non-current assets} & & \\
\text{Land and buildings} & 300\,000 & \\
\text{Plant and machinery} & 115\,000 & 415\,000 \\
\textbf{Current assets} & & \\
\text{Inventory} & 42\,600 & \\
\text{Trade receivables (\$36 000 - \$1 800)} & 34\,200 & \\
\text{Bank} & 16\,200 & 93\,000 \\
\hline
\textbf{Total assets} & & \mathbf{508\,000} \\
\hline\hline
\\
\textbf{Equity and liabilities} & & \\
\textbf{Equity} & & \\
\text{Ordinary share capital (\$0.50 each)} & & 200\,000 \\
\text{Revaluation reserve} & & 60\,000 \\
\text{General reserve} & & 35\,000 \\
\text{Retained earnings} & & 85\,600 \\
\hline
\textbf{Total equity} & & 380\,600 \\
\\
\textbf{Non-current liabilities} & & \\
\text{6\% Debentures (repayable 2032)} & & 80\,000 \\
\\
\textbf{Current liabilities} & & \\
\text{Trade payables} & 45\,000 & \\
\text{Other payables (accrued interest)} & 2\,400 & 47\,400 \\
\hline
\textbf{Total equity and liabilities} & & \mathbf{508\,000} \\
\hline\hline
\end{array}$$

Mark Allocation (Total: 8 marks):

* [1 mark] Non-current assets total of $$415\,000\$ (Land & buildings $$300\,000$ + Plant & machinery $$115\,000\$).
* [1 mark] Inventory ($$42\,600$) and Bank ($$16\,200\$) correctly placed in current assets.
* **[1 mark]** Net Trade receivables of $$34\,200$ (or working showing $$38\,400 - \$2\,400 - \$1\,800\$).
* **[1 mark]** Ordinary share capital of $$200\,000$ (showing addition of $$40\,000\$ bonus issue).
* [1 mark] Capital reserves: Revaluation reserve of $$60\,000$ and Share premium showing $$0\$ / nil / omitted after bonus issue.
* **[1 mark]** General reserve of $$35\,000$ ($$25\,000 + \$10\,000\$).
* **[1 mark]** Retained earnings of $$85\,600$ (award (OF) if calculated accurately from adjustments: $$112\,200 - \$2\,400 - \$1\,800 - \$2\,400 - \$10\,000 - \$10\,000\$).
* **[1 mark]** 6% Debentures ($$80\,000$) under Non-current liabilities AND Current liabilities total of $$47\,400\$ (Trade payables $$45\,000$ + Accrued interest $$2\,400$).

Note: Accept Own Figure (OF) for subtotals and totals if arithmetic is correct.

Calderwood Ltd

Overhead Analysis Sheet for the year ending 31 December 2026

$$\begin{array}{|l|l|r|r|r|r|r|}
\hline
\textbf{Overhead} & \textbf{Basis of Apportionment} & \textbf{Total (\$)} & \textbf{Machining (\$)} & \textbf{Finishing (\$)} & \textbf{Stores (\$)} & \textbf{Maint. (\$)} \\
\hline
\text{Indirect labour} & \text{Allocated (given)} & 48\,000 & 18\,400 & 14\,200 & 8\,600 & 6\,800 \\
\text{Rent \& insurance} & \text{Floor area } (4:3:2:1) & 50\,000 & 20\,000 & 15\,000 & 10\,000 & 5\,000 \\
\text{Machinery depr.} & \text{Carrying amount } (12:5:1:2) & 40\,000 & 24\,000 & 10\,000 & 2\,000 & 4\,000 \\
\text{Canteen \& welfare} & \text{No. of employees } (5:3:1:1) & 20\,000 & 10\,000 & 6\,000 & 2\,000 & 2\,000 \\
\hline
\textbf{Total} & & \mathbf{158\,000} & \mathbf{72\,400} & \mathbf{45\,200} & \mathbf{22\,600} & \mathbf{17\,800} \\
\text{Reapportion Stores} & \text{Material requisitions } (60\%:40\%) & - & 13\,560 & 9\,040 & (22\,600) & - \\
\text{Reapportion Maint.} & \text{Maintenance hours } (7:3) & - & 12\,460 & 5\,340 & - & (17\,800) \\
\hline
\textbf{Total Overheads} & & \mathbf{158\,000} & \mathbf{98\,420} & \mathbf{59\,580} & \mathbf{0} & \mathbf{0} \\
\hline
\end{array}$$

Workings:
1. Rent & insurance: Total = $50 000. Floor area total = 10 000 sq metres ($4 : 3 : 2 : 1$).
- Machining: $\frac{4\,000}{10\,000} \times $50\,000 = $20\,000$
- Finishing: $\frac{3\,000}{10\,000} \times $50\,000 = $15\,000$
- Stores: $\frac{2\,000}{10\,000} \times $50\,000 = $10\,000$
- Maintenance: $\frac{1\,000}{10\,000} \times $50\,000 = $5\,000$
2. Machinery depreciation: Total = $40 000. Carrying amount total = $200 000 ($12 : 5 : 1 : 2$).
- Machining: $\frac{120}{200} \times $40\,000 = $24\,000$
- Finishing: $\frac{50}{200} \times $40\,000 = $10\,000$
- Stores: $\frac{10}{200} \times $40\,000 = $2\,000$
- Maintenance: $\frac{20}{200} \times $40\,000 = $4\,000$
3. Canteen and welfare: Total = $20 000. Employees total = 50 ($5 : 3 : 1 : 1$).
- Machining: $\frac{25}{50} \times $20\,000 = $10\,000$
- Finishing: $\frac{15}{50} \times $20\,000 = $6\,000$
- Stores: $\frac{5}{50} \times $20\,000 = $2\,000$
- Maintenance: $\frac{5}{50} \times $20\,000 = $2\,000$
4. Reapportionment of Stores ($22 600):
- Machining: $60\% \times $22\,600 = $13\,560$
- Finishing: $40\% \times $22\,600 = $9\,040$
5. Reapportionment of Maintenance ($17 800):
- Machining: $\frac{700}{1\,000} \times $17\,800 = $12\,460$
- Finishing: $\frac{300}{1\,000} \times $17\,800 = $5\,340$

[1] Rent and insurance row correctly apportioned using floor area basis.
[1] Machinery depreciation row correctly apportioned using carrying amount basis.
[1] Staff canteen and welfare row correctly apportioned using number of employees basis.
[1] Subtotals correctly calculated before reapportionment (Machining $72 400, Finishing $45 200, Stores $22 600, Maintenance $17 800) (OF).
[1] Stores overhead correctly reapportioned 60:40 to Machining ($13 560) and Finishing ($9 040) (OF).
[1] Maintenance overhead correctly reapportioned 70:30 to Machining ($12 460) and Finishing ($5 340) (OF).
[1] Final totals correctly calculated for Machining ($98 420) and Finishing ($59 580), with service departments zeroed out (OF).

### Workings and Basis Selection

1. Machining Department
- Basis of absorption: Machine hours (as the department is machine-intensive: 44 000 machine hours compared to 14 000 direct labour hours).
- Overhead Absorption Rate (OAR):
$$\text{OAR} = \frac{\text{Budgeted Overheads}}{\text{Budgeted Machine Hours}} = \frac{\$184\,800}{44\,000\text{ machine hours}} = \$4.20\text{ per machine hour}$$

2. Assembly Department
- Basis of absorption: Direct labour hours (as the department is labour-intensive: 35 000 direct labour hours compared to 5 000 machine hours).
- Overhead Absorption Rate (OAR):
$$\text{OAR} = \frac{\text{Budgeted Overheads}}{\text{Budgeted Direct Labour Hours}} = \frac{\$115\,500}{35\,000\text{ direct labour hours}} = \$3.30\text{ per direct labour hour}$$

Machining Department:
- Stating Machine hours as the basis [1]
- Rate of **$4.20 per machine hour** [1]

**Assembly Department:**
- Stating **Direct labour hours** as the basis [1]
- Rate of **$3.30 per direct labour hour** [1]

Note: Allow Own Figure (OF) for rate calculations if an incorrect basis is chosen, provided calculation is accurate.

Overhead absorption is calculated using a predetermined overhead absorption rate (OAR):

$$\text{Predetermined OAR} = \frac{\text{Budgeted Overheads}}{\text{Budgeted Activity Level}}$$

$$\text{Absorbed Overheads} = \text{Actual Activity Level} \times \text{Predetermined OAR}$$

Under-absorption occurs when absorbed overheads are less than actual overhead expenditure incurred. This arises due to:
1. Expenditure difference: Actual overhead expenditure was greater than budgeted overhead expenditure.
2. Volume/Activity difference: Actual activity (e.g. direct labour hours, machine hours, or units of output) was lower than budgeted activity.

1 mark for each valid reason stated (maximum of 2 marks):
- Actual overhead expenditure was higher than budgeted overhead expenditure (1)
- Actual activity level / volume of production / labour hours / machine hours was lower than budgeted (1)

Note: Accept alternative valid phrasing such as 'unanticipated increase in indirect costs' or 'production shutdown / machine breakdown causing lower hours worked'.

### Cost and Selling Price Calculation for Order #TX-408 (250 units)

1. Direct Costs (Prime Cost):
- Direct Materials:
- Alloy steel (\(160\text{ kg} \times \$7.50\)) = $1 200
- Specialised components = $420
- Total Direct Materials = $1 620
- Direct Labour:
- Machining (\(35\text{ hours} \times \$14.00\)) = $490
- Assembly (\(60\text{ hours} \times \$11.50\)) = $690
- Total Direct Labour = $1 180

$$\text{Prime Cost} = \$1 620 + \$1 180 = \$2 800$$

2. Production Overheads Absorbed:
- Machining department (\(80\text{ machine hours} \times \$18.50\)) = $1 480
- Assembly department (\(60\text{ direct labour hours} \times \$12.00\)) = $720

$$\text{Total Production Cost} = \text{Prime Cost} (\$2 800) + \text{Production Overheads} (\$1 480 + \$720) = \$5 000$$

**3. Administration Overheads:**
- Administration overheads (\(10\% \times \$5 000\)) = $500

$$\text{Total Cost} = \$5 000 + \$500 = \$5 500$$

**4. Selling Price:**
- Target profit margin = 20% on selling price, meaning total cost represents \(100\% - 20\% = 80\%\) of selling price.

$$\text{Total Quoted Selling Price} = \frac{\$5 500}{0.80} = \$6 875$$

$$\text{Selling Price Per Unit} = \frac{\$6 875}{250\text{ units}} = \$27.50$$

Mark Allocation (6 marks total):
- 1 mark (A1): Prime cost calculation ($2 800) [combining direct materials of $1 620 and direct labour of $1 180].
- **1 mark (M1):** Machining overhead absorbed (\(80\text{ machine hours} \times \$18.50 = \$1 480\)).
- **1 mark (M1):** Assembly overhead absorbed (\(60\text{ DL hours} \times \$12.00 = \$720\)).
- **1 mark (M1):** Administration overheads (\(10\% \times \text{Production Cost of } \$5 000 = \$500\)) and resulting total cost of $5 500.
- 1 mark (A1 OF): Total quoted selling price (\(\frac{\$5 500}{0.80} = \$6 875\)). *Note: Accept $5 500 + 25% mark-up = $6 875.* Do NOT award if candidate calculates 20% mark-up on cost ($5 500 \times 1.20 = $6 600) unless applied as OF method with clear error penalty.
- 1 mark (A1 OF): Selling price per unit (\(\frac{\$6 875}{250} = \$27.50\)).

Financial Considerations:
- Variable cost per unit = Total absorption cost - Fixed overhead per unit = \( \$78 - \$22 = \$56 \).
- Contribution per unit = Special selling price - Variable cost = \( \$68 - \$56 = \$12 \).
- Total incremental profit/contribution = \( 250 \text{ units} \times \$12 = \$3\,000 \).
- Because fixed costs are already covered by existing normal production and spare capacity is available, accepting the order increases total business profit by $3 000.

Non-Financial / Qualitative Considerations:
- Advantages:
1. Utilises idle production capacity and maintains workforce productivity during quiet periods.
2. Establishes a business relationship with the boutique hotel, potentially leading to profitable future orders or word-of-mouth commercial referrals.
- Disadvantages:
1. Existing regular customers who pay $110 may become dissatisfied and demand price reductions if they find out about the discounted rate of $68.
2. The hotel may expect similar discounted prices for future orders rather than paying full price.
3. Selling at a substantial discount could potentially harm the brand image of premium bespoke craftsmanship.

Evaluation / Recommendation:
Harun should accept the special order because it generates an additional $3 000 contribution towards profit from idle capacity without displacing regular customer orders. However, he should ensure that the contract specifies that this is a one-time promotional arrangement to avoid establishing an ongoing low-price precedent.

1 mark per valid point for advantages (max 2 marks)
1 mark per valid point for disadvantages (max 2 marks)
1 mark for a justified conclusion / recommendation

Advantages (Max 2):
- Incremental financial gain / positive contribution: selling price ($68) exceeds variable cost ($56) by $12 per chair, contributing $3 000 to profit (1)
- Utilises existing spare machine/labour capacity without displacing normal production (1)
- Potential for future full-price orders / marketing exposure through the hotel (1)

Disadvantages (Max 2):
- Regular customers paying $110 might find out and feel aggrieved / demand discounts (1)
- Risk that the hotel will expect the same low price on repeat orders (1)
- Possible erosion of brand prestige / perception of quality (1)

Recommendation / Decision (1):
- Clear decision supported by the evaluation provided (1)

Any two valid advantages:
- Closing inventory is valued at the most recent purchase prices, presenting a more realistic/up-to-date valuation on the statement of financial position.
- Reflects the normal physical flow of goods (oldest stock used first to avoid deterioration/obsolescence).
- It is a logical and easy-to-understand inventory valuation system.
- It is acceptable under international accounting standards (IAS 2).
- No inventory value fluctuations within individual batches during periods of price stability.

Award 1 mark for each valid distinct advantage stated, up to a maximum of 2 marks.

Acceptable points include:
- Inventory on the statement of financial position is valued at the most recent / realistic cost (1)
- Matches the normal physical movement of goods (1)
- Simple / easy to understand and apply (1)
- Permitted by IAS 2 (1)

Do not credit vague answers such as 'increases profit' without appropriate qualification.

Advantages of JIT:
• Reduction in holding/carrying costs: Lower expenditure on storage, warehouse rental, heating, insurance, and security because raw materials arrive only when needed for production.
• Improved liquidity / working capital: Less capital is tied up in raw material inventory, freeing up cash for other operational needs.
• Reduced risk of wastage/damage: Less chance of timber and components deteriorating, being damaged, or becoming obsolete while in storage.

Disadvantages of JIT:
• High reliance on supplier reliability: Any failure or delay by suppliers in delivering raw materials on schedule will bring manufacturing to an immediate standstill.
• Loss of bulk purchase discounts: Placing smaller, more frequent orders prevents the business from negotiating quantity discounts, potentially increasing unit purchase costs.
• Inability to meet unexpected surges in demand: Without buffer inventory, the business cannot rapidly satisfy sudden increases in customer orders.
• Increased order processing and transport costs: Frequent small deliveries lead to higher administration and freight costs.

Award 1 mark for each valid, explained advantage (max 2 marks).
Award 1 mark for each valid, explained disadvantage (max 2 marks).

Advantages (max 2 marks):
• Reduction in storage / holding costs (e.g. rent, security, insurance) (1)
• Reduction in working capital tied up in inventory / improved liquidity (1)
• Reduced risk of damage / deterioration / obsolescence of raw materials (1)
• Warehouse space freed up for production / other revenue-generating activities (1)

Disadvantages (max 2 marks):
• Production delays / stoppages if suppliers fail to deliver on time (1)
• Loss of bulk purchasing / quantity discounts on materials (1)
• Increased ordering and delivery / carriage costs due to frequent deliveries (1)
• Inability to respond quickly to sudden / unexpected increases in customer demand (1)

Note: Do not credit simple 1-word lists (e.g. 'cheaper'); a brief explanation or context must be provided.