MetadataPastPaper.sampleTitle

Capital expenditure comprises costs incurred to acquire non-current assets or to bring them into their intended working condition. This includes the purchase price of the van ($18,000) and the cost of painting the company name/logo ($800) because it is a one-off setup cost. Insurance ($1,200) and fuel ($100) are recurring operational costs, which are classed as revenue expenditure. \(\text{Total Capital Expenditure} = \$18,000 + \$800 = \$18,800\).

1 mark for the correct option (B).

Under the materiality concept, trivial or low-value items such as office stationery do not need to be capitalised as non-current assets and depreciated over their useful lives. Writing them off immediately as an expense saves administrative time and does not distort the financial statements.

1 mark for the correct option (C).

The cost of production is calculated by adding factory overheads to the prime cost and adjusting for the change in work-in-progress inventory: \(\text{Cost of Production} = \text{Prime Cost} + \text{Factory Overheads} + \text{Opening WIP} - \text{Closing WIP}\). Substituting the values: \(\text{Cost of Production} = \$120,000 + \$45,000 + \$8,500 - \$9,200 = \$164,300\).

1 mark for the correct option (B).

The Sales Ledger Control Account represents trade receivables. Irrecoverable debts written off reduce the amount owed by trade receivables, so they are recorded on the credit side. Cash sales do not affect the control account; credit sales and interest charged on overdue accounts increase the balance and are recorded on the debit side.

1 mark for the correct option (C).

An error of principle occurs when an entry is made in the wrong class of account (in this case, recording capital expenditure as revenue expenditure), violating the principles of accounting.

1 mark for the correct option (C).

Depreciation for Year 1 (2021): \(20\% \times \$20,000 = \$4,000\). Carrying value at 31 December 2021: \(\$20,000 - \$4,000 = \$16,000\). Depreciation for Year 2 (2022): \(20\% \times \$16,000 = \$3,200\). Carrying value at 31 December 2022: \(\$16,000 - \$3,200 = \$12,800\).

1 mark for the correct option (B).

The rent expense for the year is calculated by adjusting the paid amount for opening prepaid and closing accrued rent: \(\text{Rent Expense} = \text{Rent Paid} + \text{Opening Prepaid} + \text{Closing Accrued}\). Substituting the values: \(\text{Rent Expense} = \$9,600 + \$800 + \$1,100 = \$11,500\).

1 mark for the correct option (D).

Profit for the year is calculated as: \(\text{Profit for the Year} = \text{Gross Profit} + \text{Other Income} - \text{Expenses}\). Where other income is \(\text{Discount Received} + \text{Rent Received} = \$800 + \$2,400 = \$3,200\), and expenses are \(\text{Discount Allowed} + \text{Operating Expenses} = \$1,500 + \$18,000 = \$19,500\). Thus: \(\text{Profit for the Year} = \$45,000 + \$3,200 - \$19,500 = \$28,700\).

1 mark for the correct option (C).

Capital expenditure includes costs incurred to acquire and prepare a non-current asset for its intended use. Here, the capitalised costs are the purchase cost of the machine ($12,000), the delivery and installation costs ($1,500), and the pre-use testing costs ($450). Therefore, total capital expenditure = \( \$12,000 + \$1,500 + \$450 = \$13,950 \). The one-year maintenance contract ($300) is a revenue expenditure because it relates to the daily, ongoing operation of the asset.

1 mark for the correct option C.

The charge to the Income Statement represents the total expense incurred during the financial year. This is calculated as: rent paid during the year ($9,600) + opening prepaid rent ($1,200) + closing accrued rent ($800) = \( \$9,600 + \$1,200 + \$800 = \$11,600 \).

1 mark for the correct option D.

1. Bought office equipment on credit from Office Supplies Ltd:
- Account to be debited: Office equipment (or Equipment / Non-current assets)
- Account to be credited: Office Supplies Ltd (or Office Supplies)

2. Paid wages by bank transfer:
- Account to be debited: Wages (or Wages expense)
- Account to be credited: Bank

3. The owner withdrew cash from the bank for personal use:
- Account to be debited: Drawings
- Account to be credited: Bank

4. Sold goods on credit to J. Taylor:
- Account to be debited: J. Taylor
- Account to be credited: Sales (or Revenue)

5. Returned goods to a credit supplier, G. Smith:
- Account to be debited: G. Smith
- Account to be credited: Purchases returns (or Returns outwards)

Award 1 mark for each transaction with both the debit and credit accounts correct.

1. Debit: Office equipment (or Equipment) AND Credit: Office Supplies Ltd (1 mark)
2. Debit: Wages (or Wages expense) AND Credit: Bank (1 mark)
3. Debit: Drawings AND Credit: Bank (1 mark)
4. Debit: J. Taylor AND Credit: Sales (or Revenue) (1 mark)
5. Debit: G. Smith AND Credit: Purchases returns (or Returns outwards) (1 mark)

Maximum marks: 5

1. Bought office equipment on credit from Office Supplies Ltd:
- Account to be debited: Office equipment (or Equipment / Non-current assets)
- Account to be credited: Office Supplies Ltd

2. Paid wages by bank transfer:
- Account to be debited: Wages (or Wages expense)
- Account to be credited: Bank

3. The owner withdrew cash from the bank for personal use:
- Account to be debited: Drawings
- Account to be credited: Bank

4. Sold goods on credit to J. Taylor:
- Account to be debited: J. Taylor
- Account to be credited: Sales (or Revenue)

5. Returned goods to a credit supplier, G. Smith:
- Account to be debited: G. Smith
- Account to be credited: Purchases returns (or Returns outwards)

Award 1 mark for each transaction with both the debit and credit accounts correct.

1. Debit: Office equipment (or Equipment) AND Credit: Office Supplies Ltd (1 mark)
2. Debit: Wages (or Wages expense) AND Credit: Bank (1 mark)
3. Debit: Drawings AND Credit: Bank (1 mark)
4. Debit: J. Taylor AND Credit: Sales (or Revenue) (1 mark)
5. Debit: G. Smith AND Credit: Purchases returns (or Returns outwards) (1/2 mark for each account if split, but typically 1 mark for both correct)

Maximum marks: 5

(i) A sales invoice is issued by the seller to a customer when goods are sold on credit. (ii) A purchase invoice is received by the buyer from a supplier when goods are purchased on credit. (iii) A debit note is sent by a buyer to request a credit note from a supplier for returned goods. (iv) A credit note is issued by a seller to a customer to confirm a reduction in the amount owed due to returned goods. (v) A petty cash voucher is prepared to record and approve small cash payments from the petty cash float.

Award 1 mark for each correct source document up to a maximum of 5 marks. (i) Sales invoice [1 mark] (Accept: Invoice) (ii) Purchase invoice [1 mark] (Accept: Invoice / Invoice received) (iii) Debit note [1 mark] (Reject: Credit note) (iv) Credit note [1 mark] (Reject: Debit note) (v) Petty cash voucher [1 mark] (Accept: Petty cash receipt)

The correct completed table is shown below:

TransactionDebit sideCredit sideNo entryCredit sales for the month✓Returns inwards✓Interest charged to customers on overdue accounts✓Cash purchases✓Contra entry with purchases ledger✓
Explanations:

• Credit sales: Increases the amount owed by credit customers (trade receivables), so it is debited to the Trade Receivables Ledger Control Account.
• Returns inwards: Decreases the amount owed by credit customers, so it is credited to the Trade Receivables Ledger Control Account.
• Interest charged to customers on overdue accounts: Increases the customer's outstanding balance, so it is debited to the Trade Receivables Ledger Control Account.
• Cash purchases: Affects only cash and purchases accounts; it does not involve credit customers, hence no entry is made in the Trade Receivables Ledger Control Account.
• Contra entry with purchases ledger: Reduces the balance on both the trade receivables and trade payables accounts, so it is credited to the Trade Receivables Ledger Control Account.

Award 1 mark for each correctly ticked row as follows:
- Credit sales for the month: Debit side (1)
- Returns inwards: Credit side (1)
- Interest charged to customers on overdue accounts: Debit side (1)
- Cash purchases: No entry (1)
- Contra entry with purchases ledger: Credit side (1)

**(a) Day Books**

**Sales Day Book**

| Date (2024) | Customer | Invoice No. | List Price (£) | Trade Discount (£) | Net Amount (£) |
|---|---|---|---|---|---|
| March 3 | G. Harrison | S101 | 800 | 120 | 680 |
| March 12 | H. Martin | S102 | 1,200 | 240 | 960 |
| March 25 | G. Harrison | S103 | 500 | 75 | 425 |
| **March 31** | **Total Transfer to Sales Account** | | | | **2,065** |

*Calculations:*
- March 3: \(800 \times 15\% = 120\); Net: \(800 - 120 = 680\)
- March 12: \(1,200 \times 20\% = 240\); Net: \(1,200 - 240 = 960\)
- March 25: \(500 \times 15\% = 75\); Net: \(500 - 75 = 425\)
- Total Credit Sales: \(680 + 960 + 425 = 2,065\)

**Sales Returns Day Book**

| Date (2024) | Customer | Credit Note No. | List Price (£) | Trade Discount (£) | Net Amount (£) |
|---|---|---|---|---|---|
| March 18 | G. Harrison | CR51 | 100 | 15 | 85 |
| **March 31** | **Total Transfer to Sales Returns Account** | | | | **85** |

*Calculations:*
- March 18: Goods returned were from the March 3 purchase, so the trade discount rate is 15%. \(100 \times 15\% = 15\); Net: \(100 - 15 = 85\)

***

**(b) Ledger Account**

**G. Harrison Account**

| Date (2024) | Details | Amount (£) | Date (2024) | Details | Amount (£) |
|---|---|---|---|---|---|
| March 1 | Balance b/d | 150 | March 18 | Sales returns | 85 |
| March 3 | Sales | 680 | March 20 | Bank | 200 |
| March 25 | Sales | 425 | March 31 | Balance c/d | 970 |
| | | **1,255** | | | **1,255** |
| April 1 | Balance b/d | 970 | | | |

***

**(c) Difference between trade discount and cash discount**

- **Trade Discount**
- **Purpose**: Given to trade customers or to encourage bulk orders and buying in large quantities.
- **Recording**: Deducted directly on the invoice; it is not recorded anywhere in the ledger accounts or nominal double-entry system.

- **Cash Discount (Discount Allowed)**
- **Purpose**: Offered to credit customers to encourage prompt payment within a specified time period.
- **Recording**: Recorded in the double-entry accounting system. It is recorded in the cash book (discount column), debited to the Discount Allowed Account, and credited to the customer's individual account.

**(a) Day Books (6 marks)**
- **1 mark**: Sales Day Book net entries for 3 March (£680) and 12 March (£960)
- **1 mark**: Sales Day Book net entry for 25 March (£425)
- **1 mark**: Correct total transfer to Sales Account (£2,065)
- **2 marks**: Sales Returns Day Book net entry for 18 March (£85) (1 mark for correct trade discount of 15% and 1 mark for the correct net amount)
- **1 mark**: Correct total transfer to Sales Returns Account (£85)

**(b) G. Harrison Account (5 marks)**
- **1 mark**: 1 March balance b/d on debit side (£150)
- **1 mark**: Debit entries for Sales on 3 March and 25 March matching SDB net amounts
- **1 mark**: Credit entries for Sales Returns (£85) and Bank (£200)
- **2 marks**: Balance c/d (£970) on credit side and correct balance b/d (£970) on debit side on 1 April (1 mark for calculating correct balance and 1 mark for correct placement and dates)

**(c) Explanation (4 marks)**
- **1 mark**: Trade discount purpose (bulk buying/trade customer relations)
- **1 mark**: Trade discount recording (deducted from invoice, no ledger entry)
- **1 mark**: Cash discount purpose (quick/prompt settlement)
- **1 mark**: Cash discount recording (entered in cash book and ledger accounts)

**(a) Journal Entries**

| Date | Details | Debit (\( \text{£} \)) | Credit (\( \text{£} \)) |
| :--- | :--- | :---: | :---: |
| 1 | Office Equipment | 1,500 | |
| | General Expenses | | 1,500 |
| | *Correction of error of principle* | | |
| 2 | Suspense | 180 | |
| | J. Watson | | 180 |
| | *Correction of overstatement of debit entry* | | |
| 3 | Suspense | 350 | |
| | Sales | | 350 |
| | *Correction of undercast in Sales account* | | |
| 4 | Suspense | 600 | |
| | S. Green | | 600 |
| | *Correction of omitted entry in debtor's ledger* | | |

**(b) Suspense Account**

| Date | Details | \( \text{£} \) | Date | Details | \( \text{£} \) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 31 Dec | J. Watson | 180 | 31 Dec | Difference on Trial Balance (bal. fig.) | 1,130 |
| 31 Dec | Sales | 350 | | | |
| 31 Dec | S. Green | 600 | | | |
| | | **1,130** | | | **1,130** |

**(c) Evaluation of Control Accounts**

* **Advantages:**
* Control accounts provide an independent check on the arithmetical accuracy of the sales and purchase ledgers.
* They help to identify and locate errors quickly by isolating them to a specific ledger, preventing time-consuming checks across all personal accounts.
* They act as a deterrent to fraud because they are usually prepared by someone other than the ledger clerks.

* **Limitations:**
* They cannot detect errors of omission, commission, principle, or original entry because the same incorrect amounts will be entered in both the books of prime entry and the ledger accounts.
* If a transaction is completely omitted, both the ledger accounts and the control accounts will agree, meaning the error remains undetected.

* **Conclusion:**
* Overall, control accounts are highly valuable for ensuring ledger integrity, but they must be supported by other reconciliation and verification procedures (such as bank reconciliations and independent audits) to ensure all accounting errors are caught.

**(a) Journal Entries (8 marks)**
* **Error 1:** 1 mark for Debit Office Equipment, 1 mark for Credit General Expenses (2 marks)
* **Error 2:** 1 mark for Debit Suspense, 1 mark for Credit J. Watson (2 marks)
* **Error 3:** 1 mark for Debit Suspense, 1 mark for Credit Sales (2 marks)
* **Error 4:** 1 mark for Debit Suspense, 1 mark for Credit S. Green (2 marks)

**(b) Suspense Account (3 marks)**
* 1 mark for posting correct details and values to the debit side (Watson £180, Sales £350, Green £600).
* 1 mark for identifying and inserting the correct balancing figure of £1,130 as the Credit Opening Balance.
* 1 mark for overall format accuracy including equal totals and correct dates/headings.

**(c) Evaluation of Control Accounts (4 marks)**
* Max 2 marks for benefits of control accounts (e.g., checks accuracy, locates ledger errors, internal check against fraud).
* Max 2 marks for limitations of control accounts (e.g., cannot detect errors of omission/principle/commission, reliant on correct source documents).
* 1 mark for a balanced conclusion summarizing their overall utility despite limitations.

**(a) Rent Expense Account**

$$
\begin{array}{lrc|lrc}
\textbf{Dr} & \textbf{Rent Expense Account} & & & & \textbf{Cr} \\
\hline
\textbf{Date} & \textbf{Details} & \textbf{\$} & \textbf{Date} & \textbf{Details} & \textbf{\$} \\
2023 & & & 2023 & & \\
\text{Jan 1} & \text{Balance b/d (prepayment)} & 800 & \text{Dec 31} & \text{Income Statement} & 7,800 \\
\text{Apr 3} & \text{Bank} & 3,200 & & & \\
\text{Oct 5} & \text{Bank} & 3,200 & & & \\
\text{Dec 31} & \text{Balance c/d (accrual)} & 600 & & & \\
\hline
& & \mathbf{7,800} & & & \mathbf{7,800} \\
\hline
& & & 2024 & & \\
& & & \text{Jan 1} & \text{Balance b/d (accrual)} & 600 \\
\end{array}
$$

*(Note: Accrued expense is a liability at the year-end, which is carried down as a credit balance on 1 January 2024).*

**(b) Commission Receivable Account**

$$
\begin{array}{lrc|lrc}
\textbf{Dr} & \textbf{Commission Receivable Account} & & & & \textbf{Cr} \\
\hline
\textbf{Date} & \textbf{Details} & \textbf{\$} & \textbf{Date} & \textbf{Details} & \textbf{\$} \\
2023 & & & 2023 & & \\
\text{Jan 1} & \text{Balance b/d (accrual)} & 150 & \text{Dec 31} & \text{Bank} & 1,450 \\
\text{Dec 31} & \text{Balance c/d (advance)} & 200 & & & \\
\text{Dec 31} & \text{Income Statement} & 1,100 & & & \\
\hline
& & \mathbf{1,450} & & & \mathbf{1,450} \\
\hline
& & & 2024 & & \\
& & & \text{Jan 1} & \text{Balance b/d (advance)} & 200 \\
\end{array}
$$

*(Note: Commission received in advance is a liability, which is carried down as a credit balance on 1 January 2024).*

**(c) Computerised Security Measures**

* **Measure 1: Password Protection & User Access Rights**
* **Explanation:** Setting strong passwords and restricting access levels (e.g., read-only access for some staff, full access only for the owner/accountant) ensures that unauthorized personnel cannot view, alter, or delete sensitive financial records.

* **Measure 2: Regular Data Backups (Cloud or External Hard Drive)**
* **Explanation:** Performing frequent backups ensures that if the main computer system suffers a hardware failure, fire, or ransomware attack, Amina can restore the accounting records to the latest state without significant data loss.

**(a) Rent Expense Account [Total: 7 marks]**
* 1 mark for correct \(\$800\) opening balance on Dr side with correct date and detail.
* 1 mark for 3 April Bank payment of \(\$3,200\) on Dr side.
* 1 mark for 5 October Bank payment of \(\$3,200\) on Dr side.
* 1 mark for \(\$600\) closing balance c/d on Dr side.
* 2 marks (1 for calculation, 1 for details) for transferring \(\$7,800\) to the Income Statement on the Cr side.
* 1 mark for bringing down the \(\$600\) balance b/d on 1 Jan 2024 on the Cr side.

**(b) Commission Receivable Account [Total: 4 marks]**
* 1 mark for correct \(\$150\) opening balance on Dr side with correct date and detail.
* 1 mark for \(\$1,450\) Bank receipt on Cr side.
* 1 mark for \(\$200\) balance c/d on Dr side and corresponding \(\$200\) balance b/d on Cr side on 1 Jan 2024.
* 1 mark for \(\$1,100\) transfer to Income Statement on Dr side.

**(c) Security Measures [Total: 4 marks]**
* **Measure 1:** 1 mark for identifying a valid measure (e.g., password protection / access control) + 1 mark for a clear explanation of how it protects the data.
* **Measure 2:** 1 mark for identifying a second valid measure (e.g., regular cloud/external backups, firewalls/anti-virus software) + 1 mark for a clear explanation of how it protects the data.

**(a)**
1. Purchase of a new engine: **Capital Expenditure** (1)
2. Annual road tax: **Revenue Expenditure** (1)
3. Replacement of worn tires: **Revenue Expenditure** (1)
4. Extension to the garage: **Capital Expenditure** (1)

**(b)**
- Depreciation for year ended 31 December 2021: \( £24,000 \times 20\% = £4,800 \) (1)
- Depreciation for year ended 31 December 2022: \( (£24,000 - £4,800) \times 20\% = £19,200 \times 20\% = £3,840 \) (1)
- Total Accumulated Depreciation up to disposal: \( £4,800 + £3,840 = £8,640 \) (or Net Book Value at disposal = \( £15,360 \)) (1)
- Loss on disposal: \( £15,360 - £13,500 = £1,860 \) (1)

**(c)**

**Disposal of Motor Vehicles Account**

| Date | Details | £ | Date | Details | £ |
| :--- | :--- | :--- | :--- | :--- | :--- |
| **2023** | | | **2023** | | |
| 30 Jun | Motor Vehicles (Cost) | 24,000 (1) | 30 Jun | Provision for Depreciation | 8,640 (1) |
| | | | 30 Jun | Cash/Bank | 13,500 (1) |
| | | | 31 Dec | Income Statement (Loss) | 1,860 (1) |
| | | **24,000** | | | **24,000** |

**(d)**
- **Definition**: Capital expenditure is expenditure on purchasing, improving or extending non-current assets, which provides long-term benefits to the business for more than one year (1).
- **SFP Effect**: Non-current assets (and total assets) in the Statement of Financial Position will be understated (1).
- **Income Statement Effect**: Profit for the year will be understated as expenses are overstated (1).

**Part (a) [Total: 4 marks]**
- 1 mark for each correct classification.

**Part (b) [Total: 4 marks]**
- 1 mark for calculating 2021 depreciation (\( £4,800 \)).
- 1 mark for calculating 2022 depreciation (\( £3,840 \)).
- 1 mark for calculating correct accumulated depreciation of \( £8,640 \) or Net Book Value of \( £15,360 \).
- 1 mark for the correct final loss on disposal of \( £1,860 \) (accept profit/loss calculation consistency based on candidate's previous values).

**Part (c) [Total: 4 marks]**
- 1 mark for debiting the disposal account with motor vehicle cost (\( £24,000 \)) with correct date/detail.
- 1 mark for crediting the disposal account with provision for depreciation (\( £8,640 \)) with correct date/detail.
- 1 mark for crediting the disposal account with proceeds (\( £13,500 \)) with correct date/detail.
- 1 mark for crediting the disposal account with loss transferred to the Income Statement (\( £1,860 \)) with correct date/detail.

**Part (d) [Total: 3 marks]**
- 1 mark for a correct definition of capital expenditure (must mention non-current assets or long-term benefits).
- 1 mark for identifying that assets in the SFP are understated.
- 1 mark for identifying that profit in the Income Statement is understated / expenses are overstated.

### Part (a) Three-Column Cash Book

**Samir - Three-Column Cash Book for May 2023**

| Date (2023) | Details | LF | Discount Allowed (£) | Cash (£) | Bank (£) | Date (2023) | Details | LF | Discount Received (£) | Cash (£) | Bank (£) |
|---|---|---|---|---|---|---|---|---|---|---|---|
| 1 May | Balance b/d | | | 250 | | 1 May | Balance b/d | | | | 420 |
| 12 May | J. Patel | | 20 | | 380 | 4 May | Rent | | | | 300 |
| 18 May | Sales | | | 650 | | 22 May | K. Khan | | 10 | | 190 |
| 28 May | Bank | C | | 150 | | 28 May | Cash | C | | | 150 |
| 31 May | Balance c/d | | | | 680 | 31 May | Wages | | | 280 | |
| | | | | | | 31 May | Balance c/d | | | 770 | |
| **Total** | | | **20** | **1,050** | **1,060** | **Total** | | | **10** | **1,050** | **1,060** |
| 1 Jun | Balance b/d | | | 770 | | 1 Jun | Balance b/d | | | | 680 |

**Workings & Notes:**
1. **May 12 (J. Patel):** Debt of £400 less 5% discount. \( 400 \times 5\% = £20 \) discount allowed. Cheque received = \( 400 - 20 = £380 \).
2. **May 22 (K. Khan):** Debt of £200 less 5% discount. \( 200 \times 5\% = £10 \) discount received. Cheque paid = \( 200 - 10 = £190 \).
3. **May 28 (Contra):** Debit Cash column £150 with detail 'Bank', and Credit Bank column £150 with detail 'Cash'.

---

### Part (b) Discussion on Imprest Petty Cash System

**Arguments for introducing the imprest petty cash system:**
- **Internal Control:** Under the imprest system, the petty cashier is advanced a fixed float (e.g., £100). At the end of the period, they are refunded exactly the amount spent, supported by petty cash vouchers. This limits the potential for unauthorized use of funds.
- **Clutter reduction:** Removing minor payments (stationery, tea, stamps) from the main cash book saves space and keeps the main books of original entry neat and structured.
- **Delegation of duties:** It allows a junior employee or clerk to gain bookkeeping experience by managing the petty cash, freeing up Samir's valuable time to focus on strategic tasks.

**Arguments against / drawbacks of the system:**
- **Administration costs:** Implementing this requires additional business documentation (petty cash vouchers, receipts) and administrative effort to reconcile the petty cash tin regularly.
- **Risk of errors:** If the junior staff member is not well-trained, errors may occur in recording transactions, which will still require Samir's time to investigate and correct.

**Conclusion/Evaluation:**
Samir should introduce the imprest petty cash system. The benefits of improved internal security and cleaner record-keeping far outweigh the minor administrative efforts of managing a small petty cash float.

### Part (a) Marking Scheme (Total: 9 marks)
- **1 mark** for entering correct opening balances on May 1 (Debit Cash £250, Credit Bank £420).
- **1 mark** for May 4 Rent (Bank Credit £300).
- **1 mark** for May 12 J. Patel receipt (Bank Debit £380 and Discount Allowed £20).
- **1 mark** for May 18 Sales (Cash Debit £650).
- **1 mark** for May 22 K. Khan payment (Bank Credit £190 and Discount Received £10).
- **2 marks** for May 28 Contra entry (1 mark for Debit Cash £150 with details 'Bank' and LF 'C'; 1 mark for Credit Bank £150 with details 'Cash' and LF 'C').
- **1 mark** for May 31 Wages (Cash Credit £280).
- **1 mark** for correct balancing and bringing down balances on June 1 (Cash Dr £770, Bank Cr £680). Both balances must be on the correct side to score this mark.

### Part (b) Marking Scheme (Total: 6 marks)
- **1-2 marks:** Identifies basic advantages/disadvantages of using an imprest petty cash system (e.g., prevents theft, reduces cash book volume).
- **3-4 marks:** Provides a detailed explanation of the imprest mechanism, describing how it maintains a constant float and how vouchers enhance internal control, contrasting it with the current practice of taking cash directly from the main till.
- **5-6 marks:** Gives a balanced discussion weighing the benefits (delegation, control) against drawbacks (extra paperwork, training needs) and provides a clear recommendation appropriate to Samir's small business.

**(a) Farah Fabrics - Manufacturing Account for the year ended 31 October 2023**

\(\begin{array}{lrr}
\text{Cost of Raw Materials Consumed:} & & \\
\text{Opening inventory of raw materials} & \$18,400 & \\
\text{Add: Purchases of raw materials} & 112,500 & \\
\text{Add: Carriage inwards} & 4,300 & \\
\hline
& 135,200 & \\
\text{Less: Closing inventory of raw materials} & (19,600) & \\
\hline
\text{Cost of raw materials consumed} & & \$115,600 \\
\text{Direct factory wages } (\$68,200 + \$1,800 \text{ accrued}) & & 70,000 \\
\text{Royalties} & & 6,000 \\
\hline
\textbf{PRIME COST} & & \textbf{191,600} \\
\text{Factory Overheads:} & & \\
\text{Factory supervisor's salary} & 24,000 & \\
\text{Indirect factory wages} & 15,800 & \\
\text{Rent and rates } (75\% \times \$20,000) & 15,000 & \\
\text{Insurance } (80\% \times (\$8,400 - \$600)) & 6,240 & \\
\text{Depreciation of factory machinery } (15\% \times (\$120,000 - \$48,000)) & 10,800 & \\
\hline
\text{Total Factory Overheads} & & 71,840 \\
\hline
\text{Total Manufacturing Cost} & & 263,440 \\
\text{Add: Opening inventory of work in progress} & & 14,200 \\
\hline
& & 277,640 \\
\text{Less: Closing inventory of work in progress} & & (15,500) \\
\hline
\textbf{COST OF PRODUCTION} & & \textbf{262,140} \\
\hline
\end{array}\)

***

**(b) Farah Fabrics - Statement of Profit or Loss (Trading Account Extract) for the year ended 31 October 2023**

\(\begin{array}{lrr}
\text{Revenue (Sales)} & & \$385,000 \\
\text{Less: Cost of Sales} & & \\
\text{Opening inventory of finished goods} & \$22,500 & \\
\text{Add: Cost of production} & 262,140 & \\
\hline
& 284,640 & \\
\text{Less: Closing inventory of finished goods} & (24,800) & \\
\hline
\text{Cost of Sales} & & (259,840) \\
\hline
\textbf{GROSS PROFIT} & & \textbf{125,160} \\
\hline
\end{array}\)

***

**(c) Conceptual Evaluation**
- **Definition**: The Accruals (Matching) concept states that revenue and expenses should be matched to the period in which they are incurred or earned, regardless of when the cash is actually paid or received.
- **Direct Wages**: Farah correctly accrued $1,800 of direct wages. Since this labor was utilized during the current financial year to produce the goods, the expense must be recognized now to ensure the Prime Cost and Cost of Production are not understated.
- **Insurance Prepayment**: The prepaid insurance of $600 represents an expense paid for the next financial period. Excluding this from the current year's overheads prevents the current cost of production from being overstated.
- **Conclusion / Evaluation**: Farah’s application of this concept is highly beneficial and correct. Without it, the Cost of Production and the resulting Gross Profit would be distorted and inaccurate. It ensures that the financial statements show a true and fair view, allowing Farah to make reliable decisions regarding selling prices and cost control.

**(a) Manufacturing Account [Total: 14 marks]**
- Opening inventory + purchases + carriage inwards - closing inventory raw materials = $115,600 (1 mark)
- Direct factory wages adjusted to $70,000 (1 mark for adjustment, 1 mark for correct placement as direct cost)
- Royalties included as direct cost (1 mark)
- Prime Cost total of $191,600 (1 mark OF - own figure)
- Factory supervisor's salary ($24,000) and indirect factory wages ($15,800) included in overheads (1 mark both)
- Rent and rates allocation of $15,000 (1 mark)
- Insurance calculation: ($8,400 - $600) = $7,800 (1 mark)
- Insurance allocation: 80% of $7,800 = $6,240 (1 mark)
- Depreciation of machinery calculation: 15% x ($120,000 - $48,000) = $10,800 (1 mark)
- Total factory overheads sum of $71,840 (1 mark OF)
- Opening and Closing WIP correctly added and subtracted (1 mark)
- Cost of Production final total of $262,140 (1 mark OF)
- General presentation and correct layout of the Manufacturing Account (1 mark)

**(b) Trading Account Extract [Total: 6 marks]**
- Revenue of $385,000 (1 mark)
- Opening finished goods inventory of $22,500 (1 mark)
- Cost of production transferred correctly from part a ($262,140) (1 mark OF)
- Closing finished goods inventory of $24,800 (1 mark)
- Cost of sales correctly calculated as $259,840 (1 mark OF)
- Gross Profit correctly calculated as $125,160 (1 mark OF)

**(c) Evaluation [Total: 5 marks]**
- 1 mark: Clear definition of the accruals/matching concept (matching expenses to the period they relate to, not when cash changes hands).
- 1 mark: Explaining that the direct wages accrual ensures that all costs incurred in production during the current period are included, avoiding understatement of prime cost.
- 1 mark: Explaining that the prepaid insurance deduction ensures next period's expense is excluded, avoiding overstatement of overheads.
- 1 mark: Linking the adjustment to the accuracy of both the Cost of Production and Gross Profit.
- 1 mark: Making a clear final evaluative statement/conclusion supporting the decision to apply the concept.

**(a) Amelia - Income Statement for the year ended 31 December 2023**

* **Revenue**: $185 000
* **Cost of Sales**:
* Opening inventory: $14 200
* Purchases: $98 400
* Less: Closing inventory: ($16 500)
* **Cost of Sales**: $96 100
* **Gross Profit**: $88 900

* **Expenses**:
* Wages and salaries ($24 500 + $1 250): $25 750
* Rent and rates ($9 600 - $800): $8 800
* General expenses: $3 200
* Irrecoverable debt: $400
* Depreciation - Motor vehicles (20% * ($42 000 - $16 800)): $5 040
* Depreciation - Office equipment (10% * $15 000): $1 500
* **Total expenses**: $44 690
* **Profit for the year**: $44 210

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**(b) Amelia - Statement of Financial Position (Extract) at 31 December 2023**

* **Non-Current Assets**:
* Motor vehicles: Cost $42 000 | Accumulated Depreciation ($16 800 + $5 040) = $21 840 | Carrying Value $20 160
* Office equipment: Cost $15 000 | Accumulated Depreciation ($4 500 + $1 500) = $6 000 | Carrying Value $9 000
* **Total Non-Current Assets**: Cost $57 000 | Accumulated Depreciation $27 840 | Carrying Value $29 160

* **Current Assets**:
* Inventory: $16 500
* Trade receivables ($18 900 - $400): $18 500
* Other receivables (Prepayment): $800
* Bank: $4 650
* **Total Current Assets**: $40 450

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**(c) Evaluation of change in depreciation method**

* **Consistency Concept**: This concept requires that accounting policies and methods (such as depreciation methods) should be applied consistently from one financial period to another. This allows users of financial statements to make meaningful comparisons over time. Changing the method without a valid reason violates this concept.
* **Nature of Motor Vehicles**: Motor vehicles typically lose more value in their early years of service due to rapid wear, obsolescence, and immediate loss of market value. The reducing balance method reflects this pattern of consumption of economic benefits better than the straight-line method.
* **Matching / Accruals Concept**: Motor vehicle maintenance and repair costs usually rise as the vehicle gets older. Under the reducing balance method, depreciation is higher in the early years and lower in the later years. This combines with the rising maintenance costs to provide a relatively stable and fairer total expense (depreciation + repairs) in the income statement over the asset's useful life.
* **Conclusion/Advice**: Amelia should not change the depreciation method for motor vehicles to the straight-line method, as the reducing balance method remains the most appropriate and conceptually sound method for this type of non-current asset.

**(a) Income Statement (11 marks)**
* 1 mark for calculating Cost of Sales correctly: $14 200 + $98 400 - $16 500 = $96 100 (1)
* 1 mark for Gross Profit: $88 900 (1)
* 1 mark for Wages and salaries adjusted for accrual: $25 750 (1)
* 1 mark for Rent and rates adjusted for prepayment: $8 800 (1)
* 1 mark for General expenses: $3 200 (1)
* 1 mark for Irrecoverable debt written off: $400 (1)
* 2 marks for Motor vehicles depreciation: calculation shown [($42 000 - $16 800) * 20%] (1) and correct charge $5 040 (1)
* 1 mark for Office equipment depreciation: $1 500 (1)
* 1 mark for correct total expenses summation: $44 690 (1)
* 1 mark for Profit for the year: $44 210 (1)

**(b) Statement of Financial Position (8 marks)**
* 2 marks for Motor vehicles: correct Accumulated Depreciation $21 840 (1) and correct Carrying value $20 160 (1)
* 2 marks for Office equipment: correct Accumulated Depreciation $6 000 (1) and correct Carrying value $9 000 (1)
* 1 mark for Closing Inventory: $16 500 (1)
* 1 mark for Trade receivables net of write-off: $18 500 (1)
* 1 mark for Other receivables (Prepayment): $800 (1)
* 1 mark for Bank balance: $4 650 (1)

**(c) Evaluation / Discussion (6 marks)**
* 1 mark for explaining the Consistency Concept (accounting methods must be applied consistently from year to year) (1)
* 1 mark for stating that changing methods without a valid reason reduces comparability (1)
* 1 mark for explaining that motor vehicles lose more value early in their life (1)
* 1 mark for stating that the reducing balance method is more appropriate to match this pattern of consumption of benefits (1)
* 1 mark for mentioning the effect of rising maintenance costs balancing out falling depreciation over time (1)
* 1 mark for clear advice to Amelia recommending she does not change the method (1)