2025 Cambridge IAL Accounting (9706) Practice Paper with Answers

1. Original ordinary shares = 100,000. 2. Bonus issue of 1-for-5: \(100,000 \times 1/5 = 20,000\) shares. 3. Nominal value of bonus shares: \(20,000 \times \$0.50 = \$10,000\). This reduces the share premium account from $30,000 to $20,000. 4. Total shares after bonus issue: \(100,000 + 20,000 = 120,000\) shares. 5. Rights issue of 1-for-4: \(120,000 \times 1/4 = 30,000\) shares. 6. Premium on rights issue: \(\$0.80 - \$0.50 = \$0.30\) per share. 7. Increase in share premium: \(30,000 \times \$0.30 = \$9,000\). 8. Final share premium balance: \(\$20,000 + \$9,000 = \$29,000\).

1 mark for the correct answer of A. Award 1 mark for correct calculation of the final share premium balance.

1. Calculate annual depreciation: \(\$120,000 / 4 = \$30,000\) per year. 2. Calculate cash flows (Profit + Depreciation): Year 1: \(\$40,000\); Year 2: \(\$50,000\); Year 3: \(\$45,000\); Year 4: \(\$30,000\). 3. Apply discount factors: Year 1: \(\$40,000 \times 0.909 = \$36,360\); Year 2: \(\$50,000 \times 0.826 = \$41,300\); Year 3: \(\$45,000 \times 0.751 = \$33,795\); Year 4: \(\$30,000 \times 0.683 = \$20,490\). 4. Total present value of inflows: \(\$131,945\). 5. NPV: \(\$131,945 - \$120,000 = \$11,945\).

1 mark for the correct answer of A. Award 1 mark for calculating correct net cash flows and discounting them to find the correct NPV.

1. Required closing inventory: \(10\% \times 20,000 = 2,000\) units. 2. Required finished production: \(Sales + Closing\,Inventory - Opening\,Inventory = 20,000 + 2,000 - 1,100 = 20,900\) units. 3. Since 5% of units started are defective, the finished units represent 95% of total started units. 4. Units to start: \(20,900 / 0.95 = 22,000\) units.

1 mark for the correct answer of A. Award 1 mark for correct identification of finished units needed and adjustment for the rejection rate.

Using the subscription account logic: Subscription Income = Receipts ($42,000) + Opening Advance ($800) - Opening Arrears ($1,400) - Closing Advance ($1,100) + Closing Arrears ($1,900). Total = \(\$42,000 + \$800 - \$1,400 - \$1,100 + \$1,900 = \$42,200\).

1 mark for the correct answer of A. Award 1 mark for applying correct adjustments for opening and closing arrears and advances.

1. Credit sales = \(\$456,250 \times 80\% = \$365,000\). 2. Average trade receivables = \((\$38,000 + \$42,000) / 2 = \$40,000\). 3. Trade receivables collection period = \((\$40,000 / \$365,000) \times 365 = 40\) days.

1 mark for the correct answer of A. Award 1 mark for correctly extracting credit sales and using average receivables to find the collection period.

1. Error 1 correction: repairs expense must be recorded (-$1,200) and depreciation on the capitalized repair must be reversed (+$180, i.e., \(15\% \times \$1,200\)). Net effect: -$1,020. 2. Error 2 correction: reduce closing inventory (-$3,400). 3. Error 3 correction: record omitted accrual (-$450). Total corrections: \(-\$1,020 - \$3,400 - \$450 = -\$4,870\). Corrected profit: \(\$84,500 - \$4,870 = \$79,630\).

1 mark for the correct answer of A. Award 1 mark for correct calculations of all three adjustments on the draft profit.

1. Predetermined OAR = \(\$180,000 / 45,000\) hours = \(\$4.00\) per direct labor hour. 2. Overheads absorbed = \(47,500\) hours \(\times \$4.00 = \$190,000\). 3. Actual overheads incurred = \(\$195,000\). 4. Under-absorbed overheads = \(\$195,000 - \$190,000 = \$5,000\).

1 mark for the correct answer of A. Award 1 mark for calculating the OAR, total absorbed overheads, and the under-absorption amount.

Capital reserves are reserves that cannot be distributed as dividends. These include Share premium ($50,000) and Revaluation reserve ($40,000). Total capital reserves = \(\$50,000 + \$40,000 = \$90,000\). Retained earnings and General reserve are revenue reserves.

1 mark for the correct answer of A. Award 1 mark for identifying and adding together only the capital reserves.

First, calculate the impact of the bonus issue:
1. Existing number of shares = \(4,000,000\) shares.
2. Bonus issue = \(4,000,000 / 5 = 800,000\) shares.
3. Nominal value of bonus shares = \(800,000 \times \$0.50 = \$400,000\).
4. This is funded by the share premium account, reducing its balance from \(\$600,000\) to \(\$200,000\) (\(\$600,000 - \$400,000\)).

Second, calculate the impact of the rights issue:
1. Total shares after the bonus issue = \(4,000,000 + 800,000 = 4,800,000\) shares.
2. Rights shares issued = \(4,800,000 / 4 = 1,200,000\) shares.
3. Premium per share in rights issue = \(\$0.80 - \$0.50 = \$0.30\).
4. Premium generated = \(1,200,000 \times \$0.30 = \$360,000\).

Finally, final share premium balance = \(\$200,000\) (remaining from bonus issue) + \(\$360,000\) (from rights issue) = \(\$560,000\).

1 mark for the correct answer. Award 0 marks for incorrect options. Verify that the candidate correctly adjusted for the reduction from the bonus issue and the subsequent increase from the rights issue.

Draft Profit: \(\$85,400\)
- Overvalued closing inventory: reduces profit by \(\$3,200\).
- Rent prepayment error: The expense was incorrectly increased by \(\$400\) (accrual) instead of being reduced by \(\$400\) (prepayment). The total correction reduces the expense by \(\$800\) (\(\$400 + \$400\)), which increases profit by \(\$800\).
- Bad debt write-off: reduces profit by \(\$1,200\).
- Decrease in provision for doubtful debts: increases profit by \(\$350\).

Corrected Profit = \(\$85,400 - \$3,200 + \$800 - \$1,200 + \$350 = \$82,150\).

1 mark for the correct calculation. Deduct marks for incorrect treatment of prepayments/accruals or inventory valuation.

1. Calculate Purchases: \(\$41,200\) (Payments) + \(\$4,900\) (Closing Trade Payables) - \(\$3,800\) (Opening Trade Payables) = \(\$42,300\).
2. Calculate Cost of Sales: \(\$6,400\) (Opening Inventory) + \(\$42,300\) (Purchases) - \(\$7,100\) (Closing Inventory) = \(\$41,600\).
3. Calculate Bar Gross Profit: \(\$65,000\) (Sales) - \(\$41,600\) (Cost of Sales) = \(\$23,400\).
4. Calculate Bar Staff Wages Expense: \(\$5,800\) (Wages Paid) + \(\$650\) (Closing Accrual) - \(\$400\) (Opening Accrual) = \(\$6,050\).
5. Calculate Bar Net Profit: \(\$23,400\) (Gross Profit) - \(\$6,050\) (Wages Expense) = \(\$17,350\).

1 mark for the correct option. Distractors represent failures to adjust for trade payables or wages accruals.

Calculate the Present Value (PV) of cash flows:
- Year 1: \(\$40,000 \times 0.909 = \$36,360\)
- Year 2: \(\$45,000 \times 0.826 = \$37,170\)
- Year 3: \(\$35,000 \times 0.751 = \$26,285\)
- Year 4 (including \(\$20,000\) scrap value): \((\$30,000 + \$20,000) \times 0.683 = \$50,000 \times 0.683 = \$34,150\)
Total PV of cash inflows = \(\$36,360 + \$37,170 + \$26,285 + \$34,150 = \$133,965\).
NPV = Total PV of inflows - Initial Cost = \(\$133,965 - \$120,000 = \$13,965\).

1 mark for the correct option. Common error is ignoring the scrap value entirely (yielding NPV of \(\$305\)) or failing to discount it.

1. January Production Budget (units):
- Budgeted Sales: \(12,000\)
- Add: Closing Inventory (20% of Feb sales: \(14,000 \times 0.20\)) = \(2,800\)
- Less: Opening Inventory = \((2,400)\)
- Jan Production = \(12,400\) units.

2. February Production Budget (units) (required to find Jan closing raw materials):
- Budgeted Sales: \(14,000\)
- Add: Closing Inventory (20% of Mar sales: \(15,000 \times 0.20\)) = \(3,000\)
- Less: Opening Inventory (Jan Closing) = \((2,800)\)
- Feb Production = \(14,200\) units.

3. Raw Materials Requirements (kg):
- Jan production requirements: \(12,400 \times 3\) kg = \(37,200\) kg
- Feb production requirements: \(14,200 \times 3\) kg = \(42,600\) kg

4. January Purchase Budget (kg):
- Jan production requirements: \(37,200\) kg
- Add: Closing inventory (10% of Feb requirements: \(42,600 \times 0.10\)) = \(4,260\) kg
- Less: Opening inventory = \((3,800)\) kg
- Jan Budgeted Purchases = \(37,200 + 4,260 - 3,800 = 37,660\) kg.

1 mark for the correct answer. Distractors are included for omitting either the opening or closing raw material inventory, or omitting finished goods adjustments.

Total equity is calculated as the sum of all components of equity.
- Opening equity (1 April 2021) = \(\$800,000 + \$150,000 + \$340,000 = \$1,290,000\).
- Bonus issue: This is an internal transfer between equity components (reduces share premium and retained earnings, increases ordinary share capital). No impact on total equity.
- Dividend paid: Total shares after bonus issue are \(800,000 \times 1.25 = 1,000,000\) shares. Interim dividend = \(1,000,000 \times \$0.05 = \$50,000\). This is paid out of the company, reducing total equity.
- Profit for the year: Increases equity by \(\$185,000\).
- Transfer to general reserve: This is an internal transfer within equity (retained earnings to general reserve). No impact on total equity.

Total Equity on 31 March 2022 = \(\$1,290,000 - \$50,000 + \$185,000 = \$1,425,000\).

1 mark for the correct answer. Credit for recognizing that bonus issues and general reserve transfers do not change the total equity balance.

Return on Capital Employed (ROCE) is calculated as:
\(ROCE = \frac{\text{Profit from Operations}}{\text{Capital Employed}} \times 100\)

1. Profit from operations = \(\$120,000\) (also known as EBIT, before finance costs and tax).
2. Capital Employed = Total Assets - Current Liabilities = \(\$950,000 - \$150,000 = \$800,000\).

\(ROCE = \frac{\$120,000}{\$800,000} \times 100 = 15.0\%\).

1 mark for the correct option. Distractor A uses profit after interest and tax (\(10.0\%\)), C uses profit after interest but before tax (\(13.1\%\)), and B uses total assets instead of capital employed (\(12.6\%\)).

1. Revenue = \(\$600,000\)
2. Gross margin = 30%, which means Cost of Sales is 70% of revenue.
3. Cost of Sales = \(\$600,000 \times 0.70 = \$420,000\).
4. Rate of inventory turnover = \(\frac{\text{Cost of Sales}}{\text{Average Inventory}}\).
5. Therefore: \(8 = \frac{\$420,000}{\text{Average Inventory}} \implies \text{Average Inventory} = \frac{\$420,000}{8} = \$52,500\).

1 mark for the correct answer. Distractors: D uses revenue instead of cost of sales; B uses gross profit; A uses profit for the year.

1. **Nominal value of preference shares redeemed**: \( \$100,000 \)
2. **Premium on redemption**: \( 10\% \text{ of } \$100,000 = \$10,000 \)
3. **Proceeds of fresh issue of ordinary shares**:
* Nominal value: \( 60,000 \text{ shares} \times \$1 = \$60,000 \)
* Premium on new issue: \( 60,000 \text{ shares} \times \$0.25 = \$15,000 \) (goes to share premium account)
4. **Transfer to Capital Redemption Reserve (CRR)**:
* Formula: \( \text{Nominal value of redeemed shares} - \text{Nominal value of fresh issue} \)
* Calculation: \( \$100,000 - \$60,000 = \$40,000 \). This is transferred out of Retained Earnings.
5. **Premium on redemption funding**:
* The premium on redemption of \( \$10,000 \) must be written off against Retained Earnings.
6. **Total reduction in Retained Earnings**:
* \( \$40,000 \text{ (CRR transfer)} + \$10,000 \text{ (premium on redemption)} = \$50,000 \)
7. **Remaining balance on Retained Earnings**:
* \( \$150,000 - \$50,000 = \$100,000 \)

Award 1 mark for the correct answer (B).

Alternative calculations breakdown:
* If transfer to CRR is correctly calculated as \( \$40,000 \) and premium on redemption as \( \$10,000 \), total reduction is \( \$50,000 \), leaving \( \$100,000 \) (Correct: B).
* If premium on redemption is ignored, remaining balance is \( \$110,000 \) (Incorrect: C).
* If CRR transfer is incorrectly calculated without deducting the fresh issue, transfer is \( \$100,000 \), leaving \( \$40,000 \) or \( \$90,000 \) after premium (Incorrect: A).

1. **Closing inventory overvaluation**: Closing inventory was valued at selling price (\( \$12,000 \)) instead of cost (\( \$9,000 \)). Profit must be reduced by the unrealised profit of \( \$12,000 - \$9,000 = \$3,000 \).
2. **Goods on sale-or-return error**:
* The sales revenue of \( \$4,000 \) must be reversed, which reduces profit by \( \$4,000 \).
* The goods must be included in closing inventory at cost. Since mark-up is 25%: \( \text{Cost} \times 1.25 = \$4,000 \implies \text{Cost} = \$3,200 \). This increases closing inventory and profit by \( \$3,200 \).
* Net effect of sale-or-return adjustment on profit = \( -\$4,000 + \$3,200 = -\$800 \).
3. **Corrected profit** = \( \$84,500 - \$3,000 \text{ (inventory error)} - \$800 \text{ (sale-or-return adjustment)} = \$80,700 \).

Award 1 mark for the correct answer (C).

* If margin is used instead of mark-up (Cost = \( \$3,000 \)), profit is \( \$80,500 \) (Incorrect: B).
* If only the sales reversal is recorded without adding inventory back, profit is \( \$77,500 \) (Incorrect: A).
* If the first adjustment is omitted, profit is \( \$83,700 \) (Incorrect: D).

Using a Subscriptions T-account:

**Debit side**:
* Opening Arrears (1 Jan 2023): \( \$800 \)
* Income and Expenditure Account (balancing figure): \( X \)
* Closing Advance (31 Dec 2023): \( \$500 \)
* Total Debits = \( \$1,300 + X \)

**Credit side**:
* Opening Advance (1 Jan 2023): \( \$1,200 \)
* Bank Receipts: \( \$18,400 \)
* Irrecoverable Subscriptions: \( \$200 \)
* Closing Arrears (31 Dec 2023): \( \$1,100 \)
* Total Credits = \( \$1,200 + \$18,400 + \$200 + \$1,100 = \$20,900 \)

**Solving for X**:
* \( \$1,300 + X = \$20,900 \)
* \( X = \$19,600 \)

Award 1 mark for the correct answer (C).

* If the irrecoverable subscription write-off is incorrectly debited or omitted, the balance is \( \$19,200 \) or \( \$19,400 \) (Incorrect: A or B).
* If opening and closing balances are reversed, the result is \( \$17,600 \) (Incorrect).

Let us calculate the present values (PV):

* **Year 0**: Outflow of machine cost (\( \$80,000 \)) + working capital (\( \$15,000 \)) = \( -\$95,000 \times 1.000 = -\$95,000 \) PV
* **Year 1**: Operating inflow \( \$30,000 \times 0.909 = \$27,270 \) PV
* **Year 2**: Operating inflow \( \$30,000 \times 0.826 = \$24,780 \) PV
* **Year 3**: Operating inflow \( \$30,000 \times 0.751 = \$22,530 \) PV
* **Year 4**: Operating inflow (\( \$30,000 \)) + Scrap value (\( \$10,000 \)) + Working Capital Recovery (\( \$15,000 \)) = \( \$55,000 \times 0.683 = \$37,565 \) PV

Total PV of inflows = \( \$27,270 + \$24,780 + \$22,530 + \$37,565 = \$112,145 \)
NPV = \( \$112,145 - \$95,000 = \$17,145 \)

Award 1 mark for the correct answer (C).

* If working capital is ignored completely: NPV = \( \$101,900 - \$80,000 = \$21,900 \) (Incorrect: D).
* If working capital outflow in Year 0 is recorded but recovery in Year 4 is omitted: NPV = \( \$17,145 - (\$15,000 \times 0.683) = \$6,900 \) (Incorrect: A).
* If scrap value is ignored: NPV = \( \$105,315 - \$95,000 = \$10,315 \) (Incorrect: B).

1. **Budgeted Production (units)**:
* Sales next month: \( 12,000 \text{ units} \)
* Add: Budgeted closing inventory of finished goods (10% of 14,000 units): \( 1,400 \text{ units} \)
* Less: Opening inventory of finished goods: \( -1,500 \text{ units} \)
* Production required: \( 12,000 + 1,400 - 1,500 = 11,900 \text{ units} \)

2. **Raw Material X Requirements (kg)**:
* Required for production: \( 11,900 \text{ units} \times 3 \text{ kg} = 35,700 \text{ kg} \)
* Add: Budgeted closing inventory of raw materials: \( 8,000 \text{ kg} \)
* Less: Opening inventory of raw materials: \( -7,000 \text{ kg} \)
* Purchases required: \( 35,700 + 8,000 - 7,000 = 36,700 \text{ kg} \)

Award 1 mark for the correct answer (B).

* If finished goods opening and closing inventories are reversed, production is 12,100 units, leading to purchases of 37,300 kg (Incorrect: D).
* If finished goods adjustments are completely ignored, production is 12,000 units, leading to purchases of 37,000 kg (Incorrect: C).
* If raw material inventories are reversed, purchases are 34,700 kg (Incorrect: A).

1. **Initial shares**: \( \$300,000 / \$0.50 = 600,000 \text{ shares} \).
2. **Bonus issue (1-for-3)**:
* Number of bonus shares = \( 600,000 / 3 = 200,000 \text{ shares} \).
* Nominal value = \( 200,000 \times \$0.50 = \$100,000 \).
* This reduces Share Premium by \( \$100,000 \) (leaving \( \$20,000 \)) and increases Ordinary Share Capital by \( \$100,000 \) (raising it to \( \$40,000 \) or \( \$400,000 \)).
* Total shares now = \( 800,000 \text{ shares} \).
3. **Rights issue (1-for-4)**:
* Number of rights shares = \( 800,000 / 4 = 200,000 \text{ shares} \).
* Nominal value = \( 200,000 \times \$0.50 = \$100,000 \).
* Premium per share = \( \$1.20 - \$0.50 = \$0.70 \).
* Total premium received = \( 200,000 \times \$0.70 = \$140,000 \).
* New Ordinary Share Capital = \( \$400,000 + \$100,000 = \$500,000 \).
* New Share Premium = \( \$20,000 + \$140,000 = \$160,000 \).

Award 1 mark for the correct answer (D).

* Option A represents the position after the bonus issue but before the rights issue.
* Option B and C reflect incorrect additions/omissions of either the bonus issue or rights issue premium.

1. **Interest cover ratio**:
* Formula: \( \text{Profit from operations} / \text{Finance costs} \)
* Calculation: \( \$180,000 / \$30,000 = 6.00 \text{ times} \)
2. **Gearing ratio**:
* Formula: \( \text{Non-current liabilities} / (\text{Equity} + \text{Non-current liabilities}) \)
* Equity = Ordinary share capital (\( \$500,000 \)) + Retained earnings (\( \$150,000 \)) = \( \$650,000 \)
* Non-current liabilities (Debentures) = \( \$300,000 \)
* Total capital employed = \( \$650,000 + \$300,000 = \$950,000 \)
* Gearing ratio = \( \$300,000 / \$950,000 \times 100\% = 31.58\% \)

Award 1 mark for the correct answer (C).

* If profit after finance costs and tax is used for interest cover: \( (\$180,000 - \$30,000 - \$40,000) / \$30,000 = 3.67 \text{ times} \) (Incorrect: A and B).
* If gearing is calculated as Debt / Equity: \( \$300,000 / \$650,000 = 46.15\% \) (Incorrect: B and D).

1. **Cash conversion cycle formula**: \( \text{Inventory days} + \text{Receivables days} - \text{Payables days} \)
2. **Year 1**: \( 50 + 42 - 35 = 57 \text{ days} \)
3. **Year 2**: \( 55 + 48 - 30 = 73 \text{ days} \)
4. **Net change**: \( 73 - 57 = 16 \text{ days increase} \)

Alternatively, calculate the sum of changes:
* Inventory days increase: \( +5 \text{ days} \) (negative cash effect)
* Receivables days increase: \( +6 \text{ days} \) (negative cash effect)
* Payables days decrease: \( -5 \text{ days} \) (paying faster means cash leaves earlier, equivalent to adding \( +5 \text{ days} \) to the cycle)
* Total change = \( +5 + 6 + 5 = +16 \text{ days (increase)} \).

Award 1 mark for the correct answer (C).

* If paying payables faster is incorrectly treated as reducing the cash conversion cycle: \( +5 + 6 - 5 = +6 \text{ days} \) (Incorrect: A).
* Other common calculation errors lead to B or D.

1. **Initial shares in issue:**
$$\text{Shares} = \frac{\$200,000}{\$0.50} = 400,000\text{ shares}$$

2. **Bonus Issue (1 March 2023):**
$$\text{Bonus shares} = 400,000 \times \frac{1}{4} = 100,000\text{ shares}$$
$$\text{Nominal value} = 100,000 \times \$0.50 = \$50,000$$
This is funded from the share premium account.
$$\text{Remaining share premium} = \$60,000 - \$50,000 = \$10,000$$
$$\text{Total shares in issue after bonus issue} = 400,000 + 100,000 = 500,000\text{ shares}$$

3. **Rights Issue (1 September 2023):**
$$\text{Rights shares} = 500,000 \times \frac{1}{5} = 100,000\text{ shares}$$
$$\text{Premium per share} = \$0.80 - \$0.50 = \$0.30$$
$$\text{Premium raised} = 100,000 \times \$0.30 = \$30,000$$

4. **Final share premium balance:**
$$\text{Balance} = \$10,000 + \$30,000 = \$40,000$$

1 mark for the correct answer of $40,000 (C).

First, calculate the cash flows and present values for each year:

* **Year 0:**
$$\text{Investment} + \text{Working Capital} = -\$120,000 - \$15,000 = -\$135,000$$
$$\text{PV} = -\$135,000 \times 1.000 = -\$135,000$$

* **Year 1:**
$$\text{PV} = \$40,000 \times 0.909 = \$36,360$$

* **Year 2:**
$$\text{PV} = \$50,000 \times 0.826 = \$41,300$$

* **Year 3:**
$$\text{PV} = \$45,000 \times 0.751 = \$33,795$$

* **Year 4:**
$$\text{Total cash flow} = \$30,000 \text{ (operating)} + \$20,000 \text{ (scrap)} + \$15,000 \text{ (working capital recovery)} = \$65,000$$
$$\text{PV} = \$65,000 \times 0.683 = \$44,395$$

* **Net Present Value (NPV):**
$$\text{NPV} = -\$135,000 + \$36,360 + \$41,300 + \$33,795 + \$44,395 = \$20,850$$

1 mark for the correct option of $20,850 (C).

1. **October Production Budget (Units):**
$$\text{Sales} = 6,000 \text{ units}$$
$$\text{Target Closing Inventory (20\% of Nov sales)} = 7,200 \times 0.20 = 1,440 \text{ units}$$
$$\text{Less: Opening Inventory} = -1,100 \text{ units}$$
$$\text{October Production} = 6,000 + 1,440 - 1,100 = 6,340 \text{ units}$$

2. **November Production Budget (Units):**
$$\text{Sales} = 7,200 \text{ units}$$
$$\text{Target Closing Inventory (20\% of Dec sales)} = 8,000 \times 0.20 = 1,600 \text{ units}$$
$$\text{Less: Opening Inventory (Oct Closing)} = -1,440 \text{ units}$$
$$\text{November Production} = 7,200 + 1,600 - 1,440 = 7,360 \text{ units}$$

3. **Raw Material Production Requirements (kg):**
$$\text{October Requirement} = 6,340 \text{ units} \times 3\text{ kg} = 19,020\text{ kg}$$
$$\text{November Requirement} = 7,360 \text{ units} \times 3\text{ kg} = 22,080\text{ kg}$$

4. **October Raw Material Purchases (kg):**
$$\text{October Production Requirement} = 19,020\text{ kg}$$
$$\text{Add: Target Closing RM Inventory (10\% of Nov requirement)} = 22,080 \times 0.10 = 2,208\text{ kg}$$
$$\text{Less: Opening RM Inventory (10\% of Oct requirement)} = -1,902\text{ kg}$$
$$\text{October RM Purchases} = 19,020 + 2,208 - 1,902 = 19,326\text{ kg}$$

1 mark for the correct option of 19,326 kg (B).

The remaining arrears from 1 January 2023 to be written off = $$1,200 - $600 = $600$.

We can prepare the Subscriptions Account to find the balancing figure for Income & Expenditure:

$$\begin{array}{lr|lr}
\text{Debit} & \$ & \text{Credit} & \\
\hline
\text{Balance b/f (Arrears)} & 1,200 & \text{Balance b/f (Advance)} & 800 \\
\text{Income & Expenditure (bal. figure)} & 25,100 & \text{Bank (Receipts)} & 24,500 \\
\text{Balance c/f (Advance)} & 1,100 & \text{Irrecoverable written off} & 600 \\
& & \text{Balance c/f (Arrears)} & 1,500 \\
\hline
\text{Total} & 27,400 & \text{Total} & 27,400 \\
\end{array}$$

Therefore, the subscriptions income to be credited to the income and expenditure account is $25,100.

1 mark for the correct option of $25,100 (C).

Under IAS 33, a bonus issue is treated as if it occurred at the beginning of the earliest period reported.

1. **Bonus fraction:**
$$\text{Bonus fraction} = \frac{1 + 4}{4} = 1.25$$

2. **Weighted average number of shares (WANOS) calculation:**
* **1 January to 30 September (9 months):**
$$\text{Shares} = 2,000,000 \times 1.25 \times \frac{9}{12} = 1,875,000\text{ shares}$$

* **1 October to 31 December (3 months):**
$$\text{Shares after new issue} = (2,000,000 \times 1.25) + 500,000 = 3,000,000\text{ shares}$$
$$\text{Weighted shares} = 3,000,000 \times \frac{3}{12} = 750,000\text{ shares}$$

* **Total WANOS:**
$$\text{WANOS} = 1,875,000 + 750,000 = 2,625,000\text{ shares}$$

3. **Earnings per share (EPS):**
$$\text{EPS} = \frac{\$525,000}{2,625,000} = \$0.20\text{ or } 20.0\text{ cents}$$

1 mark for the correct option of 20.0 cents (B).

1. **Correction of Rent Error:**
Rent prepaid was treated as accrued rent.
* Current treatment overstated expense by $1,200.
* Correct treatment should reduce expense by $1,200.
* Total adjustment to Rent expense is a decrease of $2,400, which increases profit by $2,400.

2. **Correction of Equipment Error:**
* Equipment capitalized instead of repair expense: increases profit by $5,000.
* Depreciation on equipment for 6 months (1 January 2024 to 30 June 2024):
$$\text{Depreciation} = \$5,000 \times 20\% \times \frac{6}{12} = \$500$$
This additional expense decreases profit by $500.
* Net effect of equipment correction: $5,000 - $500 = +$4,500.

3. **Corrected Profit:**
$$\text{Corrected Profit} = \$84,600 + \$2,400 + \$4,500 = \$91,500$$

1 mark for the correct option of $91,500 (C).

**a) Calculation of Adjusted Profit for the year ended 31 December 2023**

| Item / Adjustment | Workings | Impact on Profit ($) | Adjusted Profit ($) |
| :--- | :--- | :---: | :---: |
| **Draft Profit** | Given | | **42,000** |
| 1. Inventory write-down | Cost: $2,500 vs NRV: $2,100 - $400 = $1,700. Write-down = $2,500 - $1,700 = $800 | (800) | |
| 2. Correction of Sales | Subtract proceeds incorrectly credited to Sales | (4,500) | |
| 3. Loss on Disposal | NBV: $10,000 - $4,000 = $6,000. Loss: $6,000 - $4,500 = $1,500 | (1,500) | |
| 4. Depreciation Expense | Remaining Equipment NBV: ($80k - $10k) - ($32k - $4k) = $42,000. Depreciation: 20% of $42,000 = $8,400 | (8,400) | |
| 5. Irrecoverable debt | Bad debt write-off | (500) | |
| 6. Increase in Provision | New Trade Receivables: $24,500 - $500 = $24,000. New provision: 5% of $24,000 = $1,200. Increase: $1,200 - $950 = $250 | (250) | |
| 7. Prepaid Rent | Rent paid: $6,000 for 6 months. Prepayment (Jan - Apr 2024 = 4 months): $6,000 \times \frac{4}{6} = $4,000 | 4,000 | |
| 8. Drawings of Goods | Credit Purchases / Cost of Sales (increases profit) | 1,200 | |
| **Adjusted Profit** | | | **31,750** |

---

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

**Non-Current Assets**
- Equipment at cost: $70,000 ($80,000 - $10,000)
- Less: Accumulated Depreciation: ($36,400) ($32,000 - $4,000 + $8,400)
- **Net Book Value: $33,600**

**Current Assets**
- Inventory ($18,400 - $800): $17,600
- Trade receivables: $24,000
- Less: Provision for doubtful debts: ($1,200)
- Net Trade Receivables: $22,800
- Prepaid rent: $4,000
- Bank balance: $3,600
- **Total Current Assets: $48,000**

**Capital Section**
- Opening Capital: $75,000
- Add: Adjusted Profit: $31,750
- Less: Drawings ($15,000 + $1,200): ($16,200)
- **Closing Capital: $90,550**

---

**c) Explanation of Capital and Revenue Expenditure**

- **Capital Expenditure** is spending on purchasing or improving non-current assets, which provides long-term benefits to the business (lasting more than one accounting period). This is capitalized and shown in the Statement of Financial Position (e.g., purchase of Equipment costing $80,000 / $10,000).
- **Revenue Expenditure** is spending on the day-to-day operating expenses of running the business, which provides short-term benefits (consumed within one accounting period). This is expensed in the Income Statement (e.g., rent, repairs to damaged goods, or electricity).

**Part (a) [Total: 14 marks]**
- Draft profit: $42,000 [No marks]
- Inventory write-down of $800: (1) mark for calculating NRV of $1,700, (1) mark for correct adjustment of $800 (decrease).
- Correction of sales: (2) marks for subtracting sale proceeds of $4,500.
- Loss on disposal of $1,500: (1) mark for calculating NBV of disposed equipment ($6,000), (1) mark for loss of $1,500 (decrease).
- Depreciation charge of $8,400: (1) mark for calculating remaining NBV ($42,000), (1) mark for depreciation of $8,400 (decrease).
- Irrecoverable debt write-off: (1) mark for $500 (decrease).
- Increase in provision of $250: (1) mark for new provision of $1,200, (1) mark for the increase of $250 (decrease).
- Prepaid rent of $4,000: (2) marks for calculating the prepaid amount of $4,000 (increase).
- Drawings of goods of $1,200: (2) marks for adding back drawings of goods to profit (increase).

**Part (b) [Total: 11 marks]**
- Equipment Cost ($70,000) and Accumulated Depreciation ($36,400): (1) mark for correct cost, (1) mark for correct depreciation, (1) mark for NBV ($33,600) [3 marks total for NCA].
- Inventory: (1) mark for $17,600.
- Trade Receivables & Provision: (1) mark for $24,000, (1) mark for subtracting $1,200 to show net of $22,800.
- Prepaid Rent: (1) mark for $4,000.
- Bank Balance: (1) mark for $3,600.
- Capital Section: (1) mark for opening capital ($75,000), (1) mark for adding adjusted profit (O/F), (1) mark for subtracting total drawings ($16,200) [3 marks total for Capital].

**Part (c) [Total: 5 marks]**
- Definition of Capital Expenditure (long-term benefits, capitalized as asset on SFP) [1 mark].
- Definition of Revenue Expenditure (short-term benefits, expensed on Income Statement) [1 mark].
- Clear distinction in accounting treatment (SFP vs. Income Statement) [1 mark].
- Example of Capital Expenditure from scenario (Equipment) [1 mark].
- Example of Revenue Expenditure from scenario (Rent / Repair Costs) [1 mark].

**Part (a)**

1. Calculate the number of existing shares at 1 January 2022:
\(\text{Existing shares} = \frac{\$400,000}{\$0.50} = 800,000 \text{ shares}\)

2. Calculate the number of rights shares issued:
\(\text{Rights shares} = 800,000 \times \frac{1}{4} = 200,000 \text{ shares}\)

3. Calculate total cash funds raised:
\(\text{Cash raised} = 200,000 \text{ shares} \times \$0.75 = \$150,000\)

Of this amount:
* Ordinary share capital increase: \(200,000 \times \$0.50 = \$100,000\)
* Share premium increase: \(200,000 \times \$0.25 = \$50,000\)

**Part (b)**

Two reasons why a company might make a bonus issue instead of a rights issue:
1. To reward existing shareholders without requiring them to pay cash.
2. To capitalise reserves (such as share premium) and convert them into permanent capital, improving the appearance of the balance sheet.
3. To increase the liquidity/marketability of the company\'s shares by increasing the number of shares in circulation, which often reduces the market price per share to a more accessible level.
4. Unlike a rights issue, a bonus issue does not raise new capital, making it ideal if the company does not need extra cash but wants to appease shareholders when cash reserves are low.

**Part (c)**

1. **Bonus Issue calculation (1 July 2022):**
* Number of shares held before the bonus issue: \(800,000 + 200,000 = 1,000,000 \text{ shares}\).
* Number of bonus shares: \(1,000,000 \times \frac{1}{5} = 200,000 \text{ shares}\).
* Nominal value of bonus shares: \(200,000 \times \$0.50 = \$100,000\).
* To maintain reserves in their most flexible form, the company uses the non-distributable share premium reserve first, keeping retained earnings untouched.
* Share premium balance is \(\$120,000 + \$50,000 = \$170,000\), which is sufficient to cover the \(\$100,000\) bonus issue.

2. **Interim Dividend calculation (1 October 2022):**
* Number of shares held: \(1,000,000 + 200,000 = 1,200,000 \text{ shares}\).
* Interim dividend paid: \(1,200,000 \times \$0.04 = \$48,000\).

**Statement of Changes in Equity for the year ended 31 December 2022:**

| Details | Ordinary Share Capital ($0.50) | Share Premium | Revaluation Reserve | General Reserve | Retained Earnings | Total Equity |
|---|---|---|---|---|---|---|
| **Balances at 1 January 2022** | \(\$400,000\) | \(\$120,000\) | \(\$50,000\) | \(\$0\) | \(\$185,000\) | \(\$755,000\) |
| **Rights issue** | \(\$100,000\) | \(\$50,000\) | — | — | — | \(\$150,000\) |
| **Bonus issue** | \(\$100,000\) | \((\$100,000\)) | — | — | — | \(\$0\) |
| **Profit for the year** | — | — | — | — | \(\$95,000\) | \(\$95,000\) |
| **Dividends paid** | — | — | — | — | \((\$48,000\)) | \((\$48,000\)) |
| **Transfer to General Reserve** | — | — | — | \(\$20,000\) | \((\$20,000\)) | \(\$0\) |
| **Balances at 31 December 2022** | **\(\$600,000\)** | **\(\$70,000\)** | **\(\$50,000\)** | **\(\$20,000\)** | **\(\$212,000\)** | **\(\$952,000\)** |

**Part (a) [Total: 2 marks]**
* \(200,000 \text{ shares}\) calculated (1 mark)
* Total cash raised of \(\$150,000\) (1 mark)

**Part (b) [Total: 2 marks]**
* Any two valid reasons (1 mark each).
* Accept: Rewards shareholders without cash drain; Capitalises reserves; Increases share affordability/liquidity.
* Reject: "To raise cash" / "To pay a dividend".

**Part (c) [Total: 11 marks]**
* Opening balances all correct (1 mark)
* Rights Issue: Share Capital \(+\$100,000\) (1 mark) and Share Premium \(+\$50,000\) (1 mark)
* Bonus Issue: Share Capital \(+\$100,000\) (1 mark) and Share Premium \(-\$100,000\) (1 mark) [Accept alternative reserves only if stated, but award 0 marks for Share Premium if Retained Earnings was used, as it violates the "most flexible form" instruction]
* Profit for the year: Retained Earnings \(+\$95,000\) (1 mark)
* Dividends paid: Retained Earnings \(-\$48,000\) (1 mark for calculation and deduction)
* Transfer to General Reserve: \(+\$20,000\) to General Reserve and \(-\$20,000\) to Retained Earnings (1 mark)
* Closing balances (accuracy marks for columns):
* Share Capital \(\$600,000\) AND Share Premium \(\$70,000\) (1 mark)
* General Reserve \(\$20,000\) AND Retained Earnings \(\$212,000\) (1 mark)
* Total column correct throughout including final total of \(\$952,000\) (1 mark)

(a) Calculations:
(i) Gross profit margin = \\frac{\\text{Gross Profit}}{\\text{Revenue}} \\times 100 = \\frac{\$120,000}{\$320,000} \\times 100 = 37.50\\%
(ii) Profit margin = \\frac{\\text{Profit for the year}}{\\text{Revenue}} \\times 100 = \\frac{\$48,000}{\$320,000} \\times 100 = 15.00\\%
(iii) Average Inventory = \\frac{\$18,000 + \$22,000}{2} = \$20,000
Inventory turnover (days) = \frac{\text{Average Inventory}}{\text{Cost of Sales}} \times 365 = \frac{\$20,000}{\$200,000} \times 365 = 36.50\text{ days}
(iv) Trade receivables turnover (days) = \frac{\text{Trade Receivables}}{\text{Revenue}} \times 365 = \frac{\$36,000}{\$320,000} \\times 365 = 41.06\\text{ days}

(b) Inventory turnover days increased from 32 days to 36.50 days (which represents a slower turnover of stock). Possible reasons include:
- Slower sales or decrease in demand for goods.
- Over-purchasing of stock by management.
- Inefficient inventory control leading to slow-moving or obsolete stock being held.

(c) Difference and evaluation:
- Current ratio = \\frac{\\text{Current Assets}}{\\text{Current Liabilities}}
- Liquid ratio = \\frac{\\text{Current Assets} - \\text{Inventory}}{\\text{Current Liabilities}}
- Inventory is excluded from the liquid ratio because it is the least liquid of all current assets and may take time to sell.
- Therefore, the liquid ratio is a better and more realistic measure of immediate short-term liquidity.

(a) [10 marks]
(i) Gross profit margin: Formula/Working (1) Answer: 37.50% (1)
(ii) Profit margin: Working (1) Answer: 15.00% (1)
(iii) Average inventory of $20,000 (1) Working: \\frac{20,000}{200,000} \\times 365 (1) Answer: 36.50 days (1)
(iv) Working: \\frac{36,000}{320,000} \\times 365 (2) Answer: 41.06 days (1) [Accept 41.1 days]

(b) [2 marks]
1 mark for each valid reason stated up to a maximum of 2 marks.
- Decrease in demand/sales (1)
- Accumulation of obsolete/slow-moving stock (1)
- Inefficient stock management / over-purchasing (1)

(c) [3 marks]
- Current ratio includes inventory while liquid ratio excludes inventory (1)
- Inventory is considered the least liquid asset / cannot be quickly converted into cash (1)
- Liquid ratio is a better measure of short-term liquidity as it shows the ability to meet short-term debts immediately from liquid resources (1)

### Part (a) Overhead Analysis Sheet

| Cost Item | Basis | Machining ($) | Assembly ($) | Maintenance ($) | Canteen ($) | Total ($) |
| :--- | :--- | :---: | :---: | :---: | :---: | :---: |
| Indirect materials | Allocated | 12,000 | 8,000 | 4,000 | 2,000 | 26,000 |
| Indirect labor | Allocated | 18,000 | 21,000 | 5,000 | 3,000 | 47,000 |
| Rent and rates | Floor area (4:3:2:1) | 9,600 | 7,200 | 4,800 | 2,400 | 24,000 |
| Light and heat | Floor area (4:3:2:1) | 10,400 | 7,800 | 5,200 | 2,600 | 26,000 |
| Depreciation | Book value (308:17:10:0) | 30,800 | 1,700 | 1,000 | Nil | 33,500 |
| **Total** | | **80,800** | **45,700** | **20,000** | **10,000** | **156,500** |

**Workings for Apportionments:**
- Rent and rates (Ratio 4:3:2:1, Total 10 parts):
- Machining: \( \frac{4,000}{10,000} \times \$24,000 = \$9,600 \)
- Assembly: \( \frac{3,000}{10,000} \times \$24,000 = \$7,200 \)
- Maintenance: \( \frac{2,000}{10,000} \times \$24,000 = \$4,800 \)
- Canteen: \( \frac{1,000}{10,000} \times \$24,000 = \$2,400 \)

- Light and heat (Ratio 4:3:2:1, Total 10 parts):
- Machining: \( 40\% \times \$26,000 = \$10,400 \)
- Assembly: \( 30\% \times \$26,000 = \$7,800 \)
- Maintenance: \( 20\% \times \$26,000 = \$5,200 \)
- Canteen: \( 10\% \times \$26,000 = \$2,600 \)

- Depreciation of machinery (Ratio 308:17:10, Total 335 parts):
- Machining: \( \frac{308,000}{335,000} \times \$33,500 = \$30,800 \)
- Assembly: \( \frac{17,000}{335,000} \times \$33,500 = \$1,700 \)
- Maintenance: \( \frac{10,000}{335,000} \times \$33,500 = \$1,000 \)
- Canteen: $0

---

### Part (b) Reapportionment (Step-Down Method)

1. **Maintenance Department Reapportionment (Basis: Machine hours - Machining: 16,000; Assembly: 2,000; Canteen: 2,000. Total = 20,000 hours):**
- Total Maintenance overheads = $20,000.
- Machining: \( \frac{16,000}{20,000} \times \$20,000 = \$16,000 \)
- Assembly: \( \frac{2,000}{20,000} \times \$20,000 = \$2,000 \)
- Canteen: \( \frac{2,000}{20,000} \times \$20,000 = \$2,000 \)

2. **Canteen Department Reapportionment:**
- Updated Canteen total overheads = $10,000 (allocated/apportioned) + $2,000 (from Maintenance) = $12,000.
- Basis: Number of employees in production departments (Machining: 30; Assembly: 20. Total = 50 employees).
- Machining: \( \frac{30}{50} \times \$12,000 = \$7,200 \)
- Assembly: \( \frac{20}{50} \times \$12,000 = \$4,800 \)

**Summary of final production department overheads:**
- **Machining:** \( \$80,800 + \$16,000 + \$7,200 = \$104,000 \)
- **Assembly:** \( \$45,700 + \$2,000 + \$4,800 = \$52,500 \)

---

### Part (c) Overhead Absorption Rates (OAR)

(i) **Machining department OAR (based on Machine hours):**
\( \text{OAR} = \frac{\text{Total Budgeted Overheads}}{\text{Total Budgeted Machine Hours}} = \frac{\$104,000}{16,000\text{ hours}} = \$6.50\text{ per machine hour} \)

(ii) **Assembly department OAR (based on Direct labor hours):**
\( \text{OAR} = \frac{\text{Total Budgeted Overheads}}{\text{Total Budgeted Direct Labor Hours}} = \frac{\$52,500}{21,000\text{ hours}} = \$2.50\text{ per direct labor hour} \)

---

### Part (d) Selling Price of Job 405

| Cost Component | Calculation | Amount ($) |
| :--- | :--- | :---: |
| **Direct Materials** | Given | 450.00 |
| **Direct Labor** | | |
| - Machining | \( 5\text{ hours} \times \$12 \) | 60.00 |
| - Assembly | \( 12\text{ hours} \times \$10 \) | 120.00 |
| **Prime Cost** | | **630.00** |
| **Overheads Absorbed** | | |
| - Machining | \( 8\text{ machine hours} \times \$6.50 \) | 52.00 |
| - Assembly | \( 12\text{ labor hours} \times \$2.50 \) | 30.00 |
| **Total Cost** | | **712.00** |
| **Profit Markup** | \( 25\% \times \$712.00 \) | 178.00 |
| **Selling Price** | | **890.00** |

---

### Part (e) Apportionment vs Reapportionment

- **Overhead Apportionment:** This is the process of sharing common overhead costs (such as factory rent, electricity, and heating) among all departments (both production and service departments) on a logical and equitable basis (e.g., floor area, number of employees). This is done because these costs cannot be directly allocated to a single department.
- **Overhead Reapportionment:** This is the process of transferring the accumulated overhead costs of service departments (e.g., Maintenance, Canteen) to the production departments. Since service departments do not directly manufacture products, their costs must be shared by the production departments where products are actually processed, enabling those costs to be fully absorbed into the unit cost of the products.

**Part (a) [10 marks]**
- Allocated overheads (Indirect materials + Indirect labor): [1] mark for Machining and Assembly, [1] mark for Maintenance and Canteen.
- Rent & Rates apportionment: [2] marks (correctly distributed to all 4 departments based on Floor Area; [1] if there is one calculation error).
- Light & Heat apportionment: [2] marks (correctly distributed based on Floor Area; [1] if there is one calculation error).
- Depreciation apportionment: [2] marks (correctly distributed based on Book Value of machinery; [1] if there is one calculation error).
- Total row: [2] marks (all four department totals correct; [1] if two totals are correct).

**Part (b) [6 marks]**
- Maintenance reapportionment: [3] marks ([1] for correct total of $20,000, [1] for apportioning to Machining ($16,000), [1] for apportioning to Assembly ($2,000) and Canteen ($2,000)).
- Canteen reapportionment: [3] marks ([1] for correct updated total of $12,000, [1] for apportioning to Machining ($7,200), [1] for apportioning to Assembly ($4,800)).

**Part (c) [4 marks]**
- Machining OAR: [2] marks ([1] for working/formula, [1] for final answer of $6.50 per machine hour).
- Assembly OAR: [2] marks ([1] for working/formula, [1] for final answer of $2.50 per direct labor hour).

**Part (d) [6 marks]**
- Prime cost: [2] marks ([1] for direct materials $450, [1] for total direct labor $180).
- Overheads absorbed: [2] marks ([1] for Machining overhead $52, [1] for Assembly overhead $30).
- Total cost & Selling price: [2] marks ([1] for total cost $712, [1] for final selling price $890 (accept OF from previous parts)).

**Part (e) [4 marks]**
- Overhead Apportionment: [2] marks (for explaining the sharing of common factory expenses among all departments using a logical basis).
- Overhead Reapportionment: [2] marks (for explaining the transfer of service department overheads to production departments because only production departments process products).

### **(a) Bar Trading Account for the year ended 31 December 2023**

$$
\begin{array}{lrr}
\hline
\textbf{Highfield Tennis Club - Bar Trading Account} & & \\
\textbf{For the year ended 31 December 2023} & \mathbf{\$} & \mathbf{\$} \\
\hline
\text{Revenue (Bar sales)} & & 14,200 \\
\text{Less: Cost of Sales} & & \\
\text{Opening inventory} & 3,400 & \\
\text{Purchases (W1)} & 8,650 & \\
\hline
& 12,050 & \\
\text{Less: Closing inventory} & (2,900) & \\
\hline
\text{Cost of sales} & & (9,150) \\
\hline
\textbf{Gross Profit} & & \mathbf{5,050} \\
\text{Less: Bar Expenses} & & \\
\text{Wages (W2)} & 2,132 & \\
\text{Rent (W3)} & 1,150 & \\
\text{Bar expenses (direct)} & 1,150 & \\
\hline
\text{Total Bar Expenses} & & (4,432) \\
\hline
\textbf{Bar Profit / Net Bar Income} & & \mathbf{618} \\
\hline
\end{array}
$$

**Workings:**
* **(W1) Bar Purchases:**
$$\text{Payments to suppliers} \ (\$8,400) - \text{Opening payables} \ (\$1,850) + \text{Closing payables} \ (\$2,100) = \$8,650$$
* **(W2) Bar Wages:**
$$\text{Wages paid} \ (\$5,200) - \text{Opening accrued} \ (\$350) + \text{Closing accrued} \ (\$480) = \$5,330 \text{ total wages expense}$$
$$\text{Bar portion (40\%)} = 40\% \times \$5,330 = \$2,132$$
* **(W3) Bar Rent:**
$$\text{Rent paid} \ (\$4,800) + \text{Opening prepaid} \ (\$600) - \text{Closing prepaid} \ (\$800) = \$4,600 \text{ total rent expense}$$
$$\text{Bar portion (25\%)} = 25\% \times \$4,600 = \$1,150$$

---

### **(b) Subscriptions Account for the year ended 31 December 2023**

$$
\begin{array}{lr|lr}
\hline
\textbf{Dr} & \textbf{Subscriptions Account} & & \textbf{Cr} \\
\hline
\textbf{Date} & \mathbf{\$} & \textbf{Date} & \mathbf{\$} \\
\text{2023 Jan 1 Balance b/d (Arrears)} & 900 & \text{2023 Jan 1 Balance b/d (Advance)} & 400 \\
\text{2023 Dec 31 Income \& Expenditure} & 19,050 & \text{2023 Dec 31 Bank} & 18,800 \\
\text{2023 Dec 31 Balance c/d (Advance)} & 650 & \text{2023 Dec 31 Irrecoverable Subscriptions} & 200 \\
& & \text{2023 Dec 31 Balance c/d (Arrears)} & 1,200 \\
\hline
& \mathbf{20,600} & & \mathbf{20,600} \\
\hline
\text{2024 Jan 1 Balance b/d (Arrears)} & 1,200 & \text{2024 Jan 1 Balance b/d (Advance)} & 650 \\
\end{array}
$$

*(Note: If the $200 write-off is adjusted directly without recording the double entry in the subscriptions account, the balancing figure to the Income & Expenditure Account is $18,850, and there is no separate irrecoverable subscriptions expense in part (c).)*

---

### **(c) Income and Expenditure Account for the year ended 31 December 2023**

$$
\begin{array}{lrr}
\hline
\textbf{Highfield Tennis Club - Income and Expenditure Account} & & \\
\textbf{For the year ended 31 December 2023} & \mathbf{\$} & \mathbf{\$} \\
\hline
\textbf{Income} & & \\
\text{Subscriptions (O/F from (b))} & & 19,050 \\
\text{Bar profit (O/F from (a))} & & 618 \\
\text{Competition profit (\$2,100 - \$1,400)} & & 700 \\
\hline
\text{Total Income} & & \mathbf{20,368} \\
\hline
\textbf{Expenditure} & & \\
\text{General wages (60\% \times \$5,330)} & 3,198 & \\
\text{General rent (75\% \times \$4,600)} & 3,450 & \\
\text{General administrative expenses} & 2,650 & \\
\text{Depreciation of equipment (15\% \times \$40,000) (W4)} & 6,000 & \\
\text{Irrecoverable subscriptions} & 200 & \\
\hline
\text{Total Expenditure} & & (15,498) \\
\hline
\textbf{Surplus of Income over Expenditure} & & \mathbf{4,870} \\
\hline
\end{array}
$$

**Working:**
* **(W4) Depreciation:** $15\% \times \text{Closing Cost of Equipment} \ ($32,000 + $8,000) = 15\% \times $40,000 = $6,000$

*(Note: If subscriptions of $18,850 were used from part (b), the Irrecoverable Subscriptions of $200 is omitted from Expenditure. Total Income becomes $19,968, Total Expenditure becomes $15,298, and the Surplus remains $4,870.)*

---

### **(d) Life Membership Scheme**

**(i) Concept and Accounting Treatment:**
* **Operation:** Members pay a single lump-sum fee, which covers their club membership for life. [1]
* **Accounting Treatment:** The lump-sum received is credited to a non-current liability account (usually named 'Life Membership Fund'). It is then transferred systematically to the Income and Expenditure Account as income over the estimated average active life of the member. [1]

**(ii) Advantages and Disadvantages:**
* **Advantages (any two, 0.5 marks each - Max 1):**
1. Provides a large immediate cash injection for capital expenditure (e.g., premises improvement).
2. Secures long-term commitment and loyalty from the member.
3. Reduces annual administrative work/costs of collecting fees from these members.
* **Disadvantages (any two, 0.5 marks each - Max 1):**
1. Reduces regular annual cash inflows from subscription fees in future years.
2. Risk of inflation eroding the real value of the original lump-sum relative to rising operational costs.
3. If members live or stay active longer than estimated, the club continues providing services with no corresponding ongoing revenue.

### **Marking Scheme**

#### **(a) Bar Trading Account [Total: 8 marks]**
* Revenue ($14,200): (No separate mark, but must be present)
* Purchases calculation: **$8,650** [2] (1 mark for working showing $8,400 - $1,850 + $2,100; 1 mark for correct figure)
* Gross profit: **$5,050** [1] (O/F if purchases are wrong but math is correct)
* Wages calculation: **$2,132** [2] (1 mark for total wages of $5,330; 1 mark for allocating 40%)
* Rent calculation: **$1,150** [1] (for $4,600 \times 25%)
* Bar expenses: **$1,150** (No mark, must be present)
* Net Bar Profit: **$618** [1] (O/F based on calculated expenses and gross profit)

#### **(b) Subscriptions Account [Total: 5 marks]**
* Opening balances: **$900** on Debit and **$400** on Credit [1]
* Bank Receipts: **$18,800** on Credit [1]
* Closing balances: **$650** on Debit and **$1,200** on Credit [1]
* Irrecoverable subscriptions: **$200** on Credit [1]
* Income and Expenditure: **$19,050** on Debit [1]
*(Note: Accept alternative calculation statement format for full marks. If the candidate nets the irrecoverable amount, accept $18,850 [1] as own figure from workings.)*

#### **(c) Income and Expenditure Account [Total: 8 marks]**
* Subscriptions income: **$19,050** (or **$18,850**) [1] (O/F from (b))
* Competition profit: **$700** [1] (for $2,100 - $1,400)
* General wages: **$3,198** [2] (1 mark for working of $5,330 \times 60%, 1 mark for correct figure)
* General rent: **$3,450** [1] (for $4,600 \times 75%)
* Depreciation of equipment: **$6,000** [2] (1 mark for using cost of $40,000, 1 mark for correct depreciation)
* Irrecoverable subscriptions: **$200** (No mark if net subscriptions used, otherwise 1 mark or included in wages/other areas. Let's award **$4,870** surplus [1] O/F)

#### **(d)(i) Life Membership Operation & Treatment [Total: 2 marks]**
* **1 mark** for stating it involves a lump-sum payment providing membership for life.
* **1 mark** for explaining the transfer from the Life Membership Fund (liability) to the Income and Expenditure Account over the estimated active life of the member.

#### **(d)(ii) Advantages and Disadvantages [Total: 2 marks]**
* **1 mark** for any two valid advantages (0.5 marks each).
* **1 mark** for any two valid disadvantages (0.5 marks each).

**Part a) Statement of Changes in Equity for Vandermeer plc for the year ended 31 December 2023**

| Details | Ordinary Shares ($0.50) ($) | Share Premium ($) | Revaluation Reserve ($) | General Reserve ($) | Retained Earnings ($) | Total ($) |
|---|---|---|---|---|---|---|
| Balances at 1 Jan 2023 | 600,000 | 120,000 | 80,000 | 50,000 | 190,000 | 1,040,000 |
| Rights Issue (W1) | 150,000 | 75,000 | - | - | - | 225,000 |
| Bonus Issue (W2) | 75,000 | (75,000) | - | - | - | 0 |
| Revaluation of property | - | - | 45,000 | - | - | 45,000 |
| Dividends paid (W3) | - | - | - | - | (82,500) | (82,500) |
| Profit for the year | - | - | - | - | 165,000 | 165,000 |
| Transfer to General Reserve | - | - | - | 20,000 | (20,000) | 0 |
| **Balances at 31 Dec 2023** | **825,000** | **120,000** | **125,000** | **70,000** | **252,500** | **1,392,500** |

**Workings:**
- **W1: Rights Issue (1 March 2023)**
Existing shares = \(\$600,000 / \$0.50 = 1,200,000\) shares.
Rights shares = \(1,200,000 / 4 = 300,000\) shares.
Ordinary Share Capital increase = \(300,000 \times \$0.50 = \$150,000\).
Share Premium increase = \(300,000 \times (\$0.75 - \$0.50) = \$75,000\).
Total funds raised = \(300,000 \times \$0.75 = \$225,000\).

- **W2: Bonus Issue (1 June 2023)**
Shares in issue before bonus = \(1,200,000 + 300,000 = 1,500,000\) shares.
Bonus shares = \(1,500,000 / 10 = 150,000\) shares.
Nominal value of bonus shares = \(150,000 \times \$0.50 = \$75,000\).
Funded from Share Premium = \(\$75,000\).

- **W3: Dividends paid**
Shares in issue after bonus = \(1,500,000 + 150,000 = 1,650,000\) shares.
Interim Dividend (1 August) = \(1,650,000 \times \$0.02 = \$33,000\).
Final Dividend (15 December) = \(1,650,000 \times \$0.03 = \$49,500\).
Total dividends = \(\$33,000 + \$49,500 = \$82,500\).

***

**Part b) Ratios at 31 December 2023**
- **(i) Dividend yield**
Total dividend per share = \(\$0.02 + \$0.03 = \$0.05\).
Market price per share = \(\$1.20\).
\(\text{Dividend yield} = \frac{\text{Dividend per share}}{\text{Market price per share}} \times 100\)
\(\text{Dividend yield} = \frac{\$0.05}{\$1.20} \times 100 = 4.17\%\)

- **(ii) Price earnings (P/E) ratio**
Earnings per share (EPS) = \(\frac{\text{Profit for the year}}{\text{Number of shares at year end}} = \frac{\$165,000}{1,650,000} = \$0.10\) (or 10 cents).
\(\text{P/E Ratio} = \frac{\text{Market price per share}}{\text{Earnings per share}}\)
\(\text{P/E Ratio} = \frac{\$1.20}{\$0.10} = 12\text{ times}\)

- **(iii) Dividend cover**
\(\text{Dividend cover} = \frac{\text{Earnings per share}}{\text{Dividend per share}} = \frac{\$0.10}{\$0.05} = 2\text{ times}\)
*(Alternatively: \(\frac{\text{Profit for the year}}{\text{Total dividends}} = \frac{\$165,000}{\$82,500} = 2\text{ times}\))*

***

**Part c) Capital vs Revenue Reserves**
- **Capital reserves** represent non-distributable reserves that cannot be used to pay cash dividends. They usually arise from non-trading transactions (e.g. Share premium or Revaluation reserve). (1 mark)
- **Revenue reserves** are distributable reserves created out of earned trading profits. They can be used to pay cash dividends (e.g. Retained earnings or General reserve). (1 mark)
- **Examples from Vandermeer plc**: Capital reserves: Share Premium / Revaluation Reserve. Revenue reserves: Retained Earnings / General Reserve. (1 mark for both examples)

***

**Part d) Evaluation of Shareholder Satisfaction**
- **Profitability and Earnings**: The company made a solid profit of \(\$165,000\), resulting in an EPS of \(\$0.10\) on the expanded share base. This shows good performance.
- **Dividend Cover**: A dividend cover of 2 times indicates that the dividend is safe, sustainable, and well-covered by earnings, with 50% of profits retained for future reinvestment.
- **Dividend Yield**: A dividend yield of 4.17% is reasonable and competitive, providing steady cash returns to investors in addition to capital growth.
- **Capital Transactions**: The rights issue was offered at \(\$0.75\) per share, which is significantly lower than the year-end market price of \(\$1.20\). Existing shareholders who participated have made an immediate paper profit. The bonus issue was free and increased their shareholding without cash outlay.
- **Overall Conclusion**: Shareholders are highly likely to be satisfied with both financial performance and the management decisions regarding reserves and capital restructuring.

**Part a) [Total: 12 marks]**
- Opening balances: 1 mark for all correct.
- Rights issue: 1 mark for Ordinary Shares (+$150,000) and 1 mark for Share Premium (+$75,000).
- Bonus issue: 1 mark for Ordinary Shares (+$75,000) and 1 mark for Share Premium (-$75,000).
- Property Revaluation: 1 mark for Revaluation Reserve (+$45,000).
- Dividends paid: 1 mark for calculations (interim $33,000 and final $49,500) and 1 mark for Retained Earnings (-$82,500).
- Profit for the year: 1 mark for Retained Earnings (+$165,000).
- General Reserve Transfer: 1 mark for Retained Earnings (-$20,000) and General Reserve (+$20,000).
- Final Balances: 2 marks for all correct column totals (or 1 mark if there is a maximum of 2 arithmetical errors).

**Part b) [Total: 6 marks]**
- **(i)** 1 mark for DPS of $0.05. 1 mark for final yield of 4.17%. [2]
- **(ii)** 1 mark for EPS of $0.10. 1 mark for P/E ratio of 12 times. [2]
- **(iii)** 1 mark for formula/substitution. 1 mark for 2 times. [2]

**Part c) [Total: 3 marks]**
- 1 mark for explaining Capital reserves (non-distributable).
- 1 mark for explaining Revenue reserves (distributable).
- 1 mark for identifying one of each correctly from Vandermeer's statement (e.g. Share premium vs Retained earnings).

**Part d) [Total: 4 marks]**
- 1 mark per valid evaluative point, up to 4 marks.
- *Points to look for:*
- Satisfactory profit / robust EPS of $0.10.
- Yield of 4.17% is attractive compared to alternative market investments.
- Dividend cover of 2.00 times suggests prudent management retaining cash for growth.
- Rights issue offered a bargain entry point ($0.75 vs $1.20 market price) / Bonus issue rewarded loyalty.
- Clear final conclusion based on balance of factors.

**(a) Statement of Cash Flows for Veloce Limited for the year ended 31 December 2023**

| Cash flows from operating activities | $ | $ |
| :--- | :--- | :--- |
| Profit before tax \((182,000 - 12,000)\) | | 170,000 |
| Adjustments for: | | |
| Depreciation | | 65,000 |
| Finance costs | | 12,000 |
| Loss on disposal of PPE (Note 1) | | 7,000 |
| **Operating profit before working capital changes** | | **254,000** |
| Increase in inventories \((118,000 - 92,000)\) | (26,000) | |
| Increase in trade receivables \((98,000 - 74,000)\) | (24,000) | |
| Increase in trade payables \((79,000 - 61,000)\) | 18,000 | (32,000) |
| **Cash generated from operations** | | **222,000** |
| Interest paid (Note 2) | | (13,000) |
| Tax paid (Note 3) | | (19,000) |
| **Net cash from operating activities** | | **190,000** |
| | | |
| **Cash flows from investing activities** | | |
| Proceeds from sale of PPE | 28,000 | |
| Purchase of PPE (Note 4) | (180,000) | |
| **Net cash used in investing activities** | | **(152,000)** |
| | | |
| **Cash flows from financing activities** | | |
| Proceeds from issue of ordinary shares (Note 5) | 70,000 | |
| Repayment of bank loan \((150,000 - 100,000)\) | (50,000) | |
| Dividends paid (Note 6) | (91,000) | |
| **Net cash used in financing activities** | | **(71,000)** |
| | | |
| **Net decrease in cash and cash equivalents** | | **(33,000)** |
| Cash and cash equivalents at start of year | | 45,000 |
| **Cash and cash equivalents at end of year** | | **12,000** |

**Working Notes:**
* **Note 1: Loss on disposal**
Carrying amount of disposal = \(80,000 - 45,000 = 35,000\)
Loss on disposal = \(35,000 - 28,000 = 7,000\)
* **Note 2: Interest paid**
\(\text{Opening balance} + \text{Expense} - \text{Closing balance} = 3,000 + 12,000 - 2,000 = 13,000\)
* **Note 3: Tax paid**
\(\text{Opening balance} + \text{Expense} - \text{Closing balance} = 22,000 + 25,000 - 28,000 = 19,000\)
* **Note 4: Purchase of PPE**
\(\text{Opening carrying amount} - \text{Disposals (carrying amount)} - \text{Depreciation} + \text{Purchases} = \text{Closing carrying amount}\)
\(480,000 - 35,000 - 65,000 + \text{Purchases} = 560,000\)
\(380,000 + \text{Purchases} = 560,000 \implies \text{Purchases} = 180,000\)
* **Note 5: Share issue proceeds**
\(\text{Increase in Share Capital} + \text{Increase in Share Premium} = (350,000 - 300,000) + (70,000 - 50,000) = 50,000 + 20,000 = 70,000\)
* **Note 6: Dividends paid**
\(\text{Opening Retained Earnings} + \text{Profit for the year} - \text{Dividends paid} = \text{Closing Retained Earnings}\)
\(105,000 + 145,000 - \text{Dividends paid} = 159,000\)
\(250,000 - \text{Dividends paid} = 159,000 \implies \text{Dividends paid} = 91,000\)

***

**(b) Reasons for profit making but cash decreasing (any 3):**
1. **Increase in working capital**: Cash tied up in high inventory levels (+$26,000) and higher trade receivables (+$24,000).
2. **Capital expenditure**: Significant cash outflow on purchasing non-current assets ($180,000).
3. **Financing outflows**: Cash used to repay long-term debt ($50,000) and paying significant dividends ($91,000) which exceeds the net cash contribution of the share issue.
4. **Non-cash transactions**: High profit includes non-cash items (such as depreciation of $65,000 and loss on disposal of $7,000) which are adjusted but demonstrate that profit is not equivalent to cash flow.

***

**(c) Evaluation of Financing Options**

**Calculations:**
* **Current Equity (2023)** = \(350,000 + 70,000 + 159,000 = 579,000\)
* **Current Debt (2023)** = \(100,000\)
* **Current Gearing Ratio** = \(\frac{\text{Debt}}{\text{Debt} + \text{Equity}} \times 100\% = \frac{100,000}{100,000 + 579,000} \times 100\% = 14.73\%\)
* **Current Interest Cover** = \(\frac{\text{Operating Profit}}{\text{Finance Costs}} = \frac{182,000}{12,000} = 15.17\text{ times}\)

**Option 1: Rights Issue ($180,000)**
* New Equity = \(579,000 + 180,000 = 759,000\)
* Gearing after rights issue = \(\frac{100,000}{100,000 + 759,000} \times 100\% = 11.64\%\)
* **Analysis**: Gearing decreases from 14.73% to 11.64%, reducing financial risk. There is no obligation to pay fixed dividends/interest, preserving future cash flows. However, issuing shares may dilute the earnings per share (EPS) and control if existing shareholders do not fully take up their rights.

**Option 2: 6% Bank Loan ($180,000)**
* New Debt = \(100,000 + 180,000 = 280,000\)
* Gearing after bank loan = \(\frac{280,000}{280,000 + 579,000} \times 100\% = 32.60\%\)
* Additional Interest Expense = \(180,000 \times 6\% = 10,800\)
* New Total Interest = \(12,000 + 10,800 = 22,800\)
* Projected Interest Cover (at current profit level) = \(\frac{182,000}{22,800} = 7.98\text{ times}\)
* **Analysis**: Gearing increases significantly to 32.60%, and interest cover falls from 15.17 to 7.98 times. This represents a higher financial risk. However, interest is tax-deductible (unlike dividends), and debt does not dilute control. The company successfully paid down $50,000 of its loan in 2023, showing debt servicing capacity.

**Conclusion / Recommendation:**
* Given that the current cash balance is extremely low ($12,000), taking on more fixed interest obligations (Option 2) could trigger a liquidity crisis if cash flows from operations fluctuate. Option 1 (Rights Issue) is recommended as it improves liquidity, reduces gearing, and provides the necessary $180,000 without imposing fixed cash outflow commitments.

**Part (a) [14 marks in total]**
* **Profit before tax**: Start with $170,000 [1]
* **Depreciation**: Add back $65,000 [1]
* **Finance costs**: Add back $12,000 [1]
* **Loss on disposal**: Calculated as carrying value $35,000 less proceeds $28,000 = $7,000. Add back $7,000 [2] (1 mark for calculation, 1 mark for treatment)
* **Working capital changes**: Inventory increase (26,000) [1], Receivables increase (24,000) [1], Payables increase 18,000 [1]
* **Interest paid**: Calculated as $13,000 [1]
* **Tax paid**: Calculated as $19,000 [1]
* **Investing activities**: Sale proceeds $28,000 [1], Purchase of PPE calculated as $180,000 and treated as outflow [1]
* **Financing activities**: Share issue proceeds $70,000 [1] (both capital and premium), loan repayment ($50,000) [1], dividends paid calculated as $91,000 [1]
* **Reconciliation**: Shows net decrease of ($33,000) matching opening and closing cash balances [1]

**Part (b) [3 marks in total]**
* 1 mark for each valid reason explained up to a maximum of [3]. Acceptable points include: expansion/capital expenditure, increases in working capital (inventory/debtors), loan repayment, dividend payments exceeding cash generated.

**Part (c) [8 marks in total]**
* **Gearing Calculations**: Correct calculations of gearing before/after both options [2]
* **Interest Cover**: Calculation of current and/or projected interest cover [1]
* **Option 1 Evaluation**: Discussion of merits/demerits of rights issue (gearing reduction, cash flow flexibility, EPS dilution) [2]
* **Option 2 Evaluation**: Discussion of merits/demerits of bank loan (higher gearing risk, interest cover fall, tax deductibility, servicing obligation) [2]
* **Recommendation**: Clear recommendation based on the evaluation and current poor liquidity status [1]

### (a) Accounting Rate of Return (ARR)

1. **Calculate Total Operating Cash Inflows:**
\(\text{Total Operating Cash Inflows} = \$95,000 + \$115,000 + \$125,000 + \$85,000 = \$420,000\)

2. **Calculate Total Depreciation:**
\(\text{Total Depreciation} = \text{Initial Cost} - \text{Scrap Value} = \$300,000 - \$60,000 = \$240,000\)

3. **Calculate Total Accounting Profit:**
\(\text{Total Profit} = \text{Total Cash Inflows} - \text{Total Depreciation} = \$420,000 - \$240,000 = \$180,000\)

4. **Calculate Average Annual Profit:**
\(\text{Average Annual Profit} = \frac{\$180,000}{4 \text{ years}} = \$45,000\)

5. **Calculate Average Investment:**
\(\text{Average Investment} = \frac{\text{Initial Cost} + \text{Scrap Value}}{2} = \frac{\$300,000 + \$60,000}{2} = \$180,000\)

6. **Calculate ARR:**
\(\text{ARR} = \left( \frac{\$45,000}{\$180,000} \right) \times 100\% = 25.00\%\)

---

### (b) Net Present Value (NPV) at 10%

| Year | Cash Flow ($) | Discount Factor (10%) | Present Value ($) |
|---|---|---|---|
| 0 | (300,000) | 1.000 | (300,000) |
| 1 | 95,000 | 0.909 | 86,355 |
| 2 | 115,000 | 0.826 | 94,990 |
| 3 | 125,000 | 0.751 | 93,875 |
| 4 | 145,000* | 0.683 | 99,035 |
| **NPV** | | | **+74,255** |

*\*Note: Year 4 cash flow includes operating cash inflow of $85,000 + residual value of $60,000 = $145,000.*

---

### (c) Internal Rate of Return (IRR)

First, calculate the NPV at 24% to find a negative/lower benchmark:

| Year | Cash Flow ($) | Discount Factor (24%) | Present Value ($) |
|---|---|---|---|
| 0 | (300,000) | 1.000 | (300,000) |
| 1 | 95,000 | 0.806 | 76,570 |
| 2 | 115,000 | 0.650 | 74,750 |
| 3 | 125,000 | 0.524 | 65,500 |
| 4 | 145,000 | 0.423 | 61,335 |
| **NPV** | | | **-21,845** |

Using the IRR interpolation formula:
\(IRR = L + \left( \frac{NPV_L}{NPV_L - NPV_H} \right) \times (H - L)\)
Where:
* \(L = 10\%\)
* \(H = 24\%\)
* \(NPV_L = +74,255\)
* \(NPV_H = -21,845\)

\(IRR = 10\% + \left( \frac{74,255}{74,255 - (-21,845)} \right) \times (24\% - 10\%)\)
\(IRR = 10\% + \left( \frac{74,255}{96,100} \right) \times 14\%\)
\(IRR = 10\% + (0.77268 \times 14\%)\)
\(IRR = 10\% + 10.82\% = 20.82\%\) (Accept 20.8%)

---

### (d) Discussion

**Financial factors:**
* The NPV is positive (+$74,255), indicating the project exceeds the required cost of capital of 10% and will increase shareholder wealth.
* The IRR of 20.82% is significantly higher than the company's cost of capital (10%), providing a substantial margin of safety against unexpected increases in financing costs.
* The ARR is 25.00%, which can be compared against the target hurdle rate of the business.

**Non-financial factors:**
* **Training and Skills:** Employees may require training to operate the new automated packaging line, which might cause temporary productivity decreases or added training costs.
* **Redundancies:** Automation might lead to staff redundancies, potentially harming employee morale and the company's reputation.
* **Reliability & Maintenance:** If the machine breaks down, it could halt the entire packaging process, creating bottlenecks. Maintenance support availability should be evaluated.
* **Conclusion:** Based on the strong financial indicators (positive NPV and high IRR), Veloce Limited should proceed with the investment, provided they manage the transition risks associated with automation.

**(a) ARR [6 marks]**
* Total operating cash inflows ($420,000) or Total Depreciation ($240,000) [1]
* Total profit ($180,000) [1]
* Average annual profit ($45,000) [1]
* Average investment formula and calculation ($180,000) [2]
* Final ARR (25.00%) [1] (Allow OF if consistent error made in profit/investment)

**(b) NPV at 10% [8 marks]**
* Year 0 Outflow of $300,000 [1]
* Year 1-3 PV calculations correct [1] each (3 marks total)
* Year 4 cash flow of $145,000 (incorporating scrap) [1]
* Year 4 PV calculation correct ($99,035) [1]
* Sum of PVs ($374,255) [1]
* Final positive NPV of $74,255 [1] (Allow OF if based on minor arithmetic error)

**(c) IRR [5 marks]**
* Year 1-4 PV calculations at 24% correct [1]
* NPV at 24% calculated as -$21,845 [1]
* Correct IRR formula setup [1]
* Correct interpolation calculation [1]
* Final IRR of 20.82% (or 20.8%) [1] (Allow OF based on part b NPV)

**(d) Discussion [6 marks]**
* Analysis of financial results (Positive NPV, IRR > Cost of capital) [2]
* Discussion of non-financial aspects (training, redundancies, reliability) [2]
* Balanced argument / Evaluation of risks [1]
* Clear, justified recommendation [1]

(a)(i) Option A Cash Budget (Oct - Dec)
• Receipts:
- October: \( \$140,000 \text{ (September Debtors)} + (8,000 \times \$50 \times 60\%) = \$140,000 + \$240,000 = \$380,000 \)
- November: \( (8,000 \times \$50 \times 40\%) + (10,000 \times \$50 \times 60\%) = \$160,000 + \$300,000 = \$460,000 \)
- December: \( (10,000 \times \$50 \times 40\%) + (12,000 \times \$50 \times 60\%) = \$200,000 + \$360,000 = \$560,000 \)

• Payments:
- Direct Materials: Oct \( 8,000 \times \$15 = \$120,000 \); Nov \( 10,000 \times \$15 = \$150,000 \); Dec \( 12,000 \times \$15 = \$180,000 \)
- Direct Labour: Oct \( 8,000 \times \$12 = \$96,000 \); Nov \( 10,000 \times \$12 = \$120,000 \); Dec \( 12,000 \times \$12 = \$144,000 \)
- Variable Overheads: Oct \( \$35,000 \text{ (Sept O/S)} \); Nov \( 8,000 \times \$5 = \$40,000 \); Dec \( 10,000 \times \$5 = \$50,000 \)
- Fixed Overheads (Cash): Oct \( \$40,000 - \$10,000 \text{ (Depreciation)} = \$30,000 \); Nov \( \$30,000 \); Dec \( \$30,000 \)

• Summary Option A:
- Total Payments: Oct \( \$281,000 \); Nov \( \$340,000 \); Dec \( \$404,000 \)
- Net Cash Flow: Oct \( \$99,000 \); Nov \( \$120,000 \); Dec \( \$156,000 \)
- Bank Balance: Opening Oct \( \$15,000 \); Closing Oct \( \$114,000 \); Closing Nov \( \$234,000 \); Closing Dec \( \$390,000 \)


(a)(ii) Option B Cash Budget (Oct - Dec)
• Receipts: Same as Option A (Oct: \( \$380,000 \); Nov: \( \$460,000 \); Dec: \( \$560,000 \))

• Payments:
- Direct Materials: Oct \( 8,000 \times \$13 = \$104,000 \); Nov \( 10,000 \times \$13 = \$130,000 \); Dec \( 12,000 \times \$13 = \$156,000 \)
- Direct Labour: Oct \( 8,000 \times \$4 = \$32,000 \); Nov \( 10,000 \times \$4 = \$40,000 \); Dec \( 12,000 \times \$4 = \$48,000 \)
- Variable Overheads: Oct \( \$35,000 \text{ (Sept O/S)} \); Nov \( 8,000 \times \$7 = \$56,000 \); Dec \( 10,000 \times \$7 = \$70,000 \)
- Fixed Overheads (Cash): Oct \( \$30,000 \); Nov \( \$30,000 \); Dec \( \$30,000 \)
- Lease Cost: Oct \( \$25,000 \); Nov \( \$25,000 \); Dec \( \$25,000 \)

• Summary Option B:
- Total Payments: Oct \( \$226,000 \); Nov \( \$281,000 \); Dec \( \$329,000 \)
- Net Cash Flow: Oct \( \$154,000 \); Nov \( \$179,000 \); Dec \( \$231,000 \)
- Bank Balance: Opening Oct \( \$15,000 \); Closing Oct \( \$169,000 \); Closing Nov \( \$348,000 \); Closing Dec \( \$579,000 \)


(b) Financial Comparison
• Option A: Total Net Cash Flow = \( \$375,000 \) (\( \$99,000 + \$120,000 + \$156,000 \)), Closing Balance = \( \$390,000 \).
• Option B: Total Net Cash Flow = \( \$564,000 \) (\( \$154,000 + \$179,000 + \$231,000 \)), Closing Balance = \( \$579,000 \).
• Decision: Option B is financially preferable because it generates \( \$189,000 \) more in net cash flow and leaves a higher closing cash balance.


(c) Non-Financial Factors
1. Employee Relations & Redundancy: Option B significantly cuts direct labour costs. This suggests a shift toward automation, which may lead to worker redundancies, trade union resistance, low morale, or retraining requirements.
2. Lease Commitments vs. Flexibilty: The lease option assumes the equipment can be leased for exactly three months. If there is a minimum long-term lease commitment, Vanguard plc might face continuing lease costs after December when demand falls.
3. Operational Risk & Training: Staff may lack familiarity with the new automated machinery. This could lead to setup delays, maintenance downtime, or high initial calibration errors despite the expected drop in materials waste.

(a)(i) Option A Cash Budget [8 Marks]
• Receipts (all correct): 1 Mark
• Direct materials payments (all correct): 1 Mark
• Direct labour payments (all correct): 1 Mark
• Variable overheads (October \( \$35,000 \)): 1 Mark
• Variable overheads (Nov \( \$40,000 \) & Dec \( \$50,000 \)): 1 Mark
• Fixed overheads cash payments (\( \$30,000 \) per month, excluding depreciation): 1 Mark
• Net cash flows correct: 1 Mark
• Correct closing balances (Oct \( \$114,000 \), Nov \( \$234,000 \), Dec \( \$390,000 \)): 1 Mark

(a)(ii) Option B Cash Budget [8 Marks]
• Receipts (all correct / OF): 1 Mark
• Direct materials payments (all correct): 1 Mark
• Direct labour payments (all correct): 1 Mark
• Variable overheads (October \( \$35,000 \)): 1 Mark
• Variable overheads (Nov \( \$56,000 \) & Dec \( \$70,000 \)): 1 Mark
• Fixed overheads & Lease payments (\( \$30,000 \) and \( \$25,000 \) correct): 1 Mark
• Net cash flows correct: 1 Mark
• Correct closing balances (Oct \( \$169,000 \), Nov \( \$348,000 \), Dec \( \$579,000 \)): 1 Mark

(b) Comparison & Decision [3 Marks]
• Correct calculation of total Net Cash Flows (A: \( \$375,000 \), B: \( \$564,000 \)): 1 Mark
• Correct closing balances stated: 1 Mark
• Clear financial decision matching findings (Option B is preferable): 1 Mark

(c) Non-Financial Factors [6 Marks]
• Up to 2 Marks for each non-financial factor discussed (1 Mark for identifying, 1 Mark for explaining context/implication). Max 3 factors.
• Acceptable points include: employee redundancies/morale, retraining costs/disruption, machine breakdown risks, lessor reliability, minimum lease period terms, product quality differences.