2024 Cambridge IAS-Level Accounting (9706) Practice Paper with Answers

First, calculate the current number of shares: $400,000 / $0.50 = 800,000 shares. The bonus issue is 1 for 4, so 200,000 new shares are issued (800,000 / 4). The nominal value of these new shares is $100,000 (200,000 shares * $0.50). To keep the reserves in the most flexible (distributable) form, the company must use the non-distributable Share premium account first. The full $100,000 is taken from the Share premium account, leaving a balance of $20,000 ($120,000 - $100,000). Retained earnings remains unchanged at $350,000.

1 mark for the correct combination of Share premium and Retained earnings balances.

Calculate the predetermined overhead absorption rate (OAR): $240,000 / 48,000 hours = $5.00 per hour. Calculate the overheads absorbed: 51,000 actual hours * $5.00 = $255,000. Compare absorbed overheads to actual overheads incurred: $255,000 (absorbed) - $258,000 (actual) = $3,000 under-absorbed.

1 mark for the correct value and classification of under-absorption.

None of the three errors affect the sales ledger control account itself (since the control account gets its totals from the day books, which were correctly completed). Thus, the correct total of individual customer accounts must equal the control account balance of $48,500. Let the original total of individual balances be X. Adjusting X for the errors: 1. Add $540 (to correct the under-posting of the invoice: $820 - $280). 2. Subtract $350 (unposted credit note). 3. Subtract $120 (unposted discount allowed). Therefore, X + 540 - 350 - 120 = 48,500. X + 70 = 48,500. X = 48,430.

1 mark for the correct calculation of the original individual customer ledger total.

Adjustments to draft profit: 1. Irrecoverable debt write-off: decreases profit by $2,000. 2. Provision for doubtful debts adjustment: Remaining trade receivables are $66,000 ($68,000 - $2,000). The required provision is 5% * $66,000 = $3,300. Since the opening provision was $3,100, the provision must be increased by $200, which decreases profit by $200. 3. Rent prepayment: The rent paid of $12,000 covers 6 months, so rent is $2,000 per month. The prepaid portion is for 3 months (January to March 2023) = $6,000. Removing this prepayment from expenses increases profit by $6,000. Corrected profit = $94,200 - $2,000 - $200 + $6,000 = $98,000.

1 mark for the correct corrected profit after adjusting for bad debts, provision increase, and prepayment.

1. Purchasing a non-current asset on credit does not involve goods for resale, so it is recorded in the General journal. 2. Returning goods to a credit supplier is recorded in the Purchases returns journal. 3. Receiving a cheque with a cash discount involves cash/bank movement and discount details, which is recorded in the Cash book.

1 mark for the correct identification of all three books of prime entry.

1. Depreciate property for 3 years (2019, 2020, 2021): Annual depreciation is $500,000 / 50 = $10,000. Accumulated depreciation is $30,000. 2. Carrying amount on 1 Jan 2022 is $470,000 ($500,000 - $30,000). 3. Revaluation reserve on 1 Jan 2022 = $564,000 - $470,000 = $94,000. 4. Remaining useful life is 47 years (50 - 3). 5. Depreciation charge for 2022 = $564,000 / 47 = $12,000. 6. Carrying amount on 31 Dec 2022 = $564,000 - $12,000 = $552,000.

1 mark for the correct carrying amount and revaluation reserve balance.

1. Contribution per unit = $25 - $15 = $10. 2. Break-even point in units = $120,000 / $10 = 12,000 units. 3. Since the margin of safety is 20% of budgeted sales, the break-even sales must represent 80% (100% - 20%) of the budgeted sales. 4. Budgeted sales in units = 12,000 / 0.80 = 15,000 units. 5. Budgeted sales revenue = 15,000 units * $25 = $375,000.

1 mark for the correct calculation of budgeted sales revenue.

1. Credit goodwill to old partners in the old profit-sharing ratio (3:2): X's share = $30,000 * 3/5 = $18,000. 2. Debit goodwill to all partners in the new profit-sharing ratio (5:3:2) to write it off: X's share = $30,000 * 5/10 = $15,000. 3. Net adjustment to X's capital = +$18,000 - $15,000 = +$3,000. 4. New balance on X's capital account = $60,000 + $3,000 = $63,000.

1 mark for the correct capital account balance of X after adjusting for goodwill.

1. Calculate the initial number of ordinary shares:
$200,000 / $0.50 = 400,000 shares.

2. Calculate the bonus issue:
Bonus shares issued = 400,000 * 1/4 = 100,000 shares.
Value of bonus shares = 100,000 * $0.50 nominal value = $50,000.
As the bonus issue is financed from the share premium, the share premium balance decreases by $50,000:
$80,000 - $50,000 = $30,000.
Total shares now = 400,000 + 100,000 = 500,000 shares.

3. Calculate the rights issue:
Rights shares issued = 500,000 * 1/5 = 100,000 shares.
Issue price = $0.80 per share, which is a premium of $0.30 over the nominal value of $0.50.
Premium raised = 100,000 * $0.30 = $30,000.

4. Calculate final share premium balance:
$30,000 (after bonus issue) + $30,000 (from rights issue) = $60,000.

1 mark for the correct option B.
- Reject: A (only applying bonus reduction, missing rights premium), C (forgetting bonus reduction), D (calculating rights premium on full price of $0.80).

1. Calculate the predetermined overhead absorption rate (OAR):
OAR = Budgeted Overheads / Budgeted Hours = $120,000 / 15,000 hours = $8 per direct labor hour.

2. Calculate the absorbed overheads:
Absorbed Overheads = Actual Hours * OAR = 15,600 hours * $8 = $124,800.

3. Determine under or over-absorption:
Under/Over-absorbed = Absorbed Overheads - Actual Overheads = $124,800 - $128,500 = -$3,700 (Under-absorbed by $3,700).

1 mark for correct option B.
- Reject: A (over-absorbed by same amount), C (difference in hours multiplied by OAR), D (difference between actual and budgeted overheads).

1. Adjust individual customer accounts (sales ledger):
Original Sales Ledger Balance = $45,200
Error 2: The credit note was entered as $510 instead of $150 in the customer's personal account. This means customer balances were reduced by $360 ($510 - $150) too much. To correct this, add back $360.
Corrected Sales Ledger Balance = $45,200 + $360 = $45,560.
Note: Errors 1 and 3 did not affect individual customer accounts.

2. Reconcile with Sales Ledger Control Account (SLCA):
Let the original SLCA balance be \(C\).
Error 1: Sales journal undercast by $800. This requires a debit adjustment of +$800 to the SLCA.
Error 3: Bad debt written off of $350 not recorded in SLCA. This requires a credit adjustment of -$350 to the SLCA.
Corrected SLCA Balance = \(C + \$800 - \$350 = C + \$450\).

3. Equate corrected balances:
\(C + \$450 = \$45,560\)
\(C = \$45,110\).

1 mark for correct option C.
- Reject: other options due to incorrect addition/subtraction of credit note errors or journal undervaluations.

1. Draft profit = $84,300
2. Adjust closing inventory: Undervaluation of closing inventory understates profit. Add $3,200.
3. Adjust insurance prepayment: A prepayment of $1,500 was recorded as $150. This means expenses are overcharged by $1,350 ($1,500 - $150), so profit is understated. Add $1,350.
4. Adjust capital expenditure charged to revenue: Repairs expense was overcharged by $8,000, but depreciation of 20% * $8,000 = $1,600 must be charged. Net increase to profit is +$8,000 - $1,600 = +$6,400.

Corrected Profit = $84,300 + $3,200 + $1,350 + $6,400 = $95,250.

1 mark for correct option C.
- Reject: A (omitting asset cost addition), B (subtracting insurance prepayment correction), D (omitting depreciation charge).

The purchases ledger control account is maintained in the general ledger and is updated using the totals from the books of prime entry (such as the purchases journal and cash book). Since individual supplier accounts in the purchases ledger are updated from the source documents themselves, comparing the control account balance with the sum of the purchases ledger balances provides an independent check on the accuracy of the purchases ledger.

1 mark for correct option D.
- Reject: A (compiled from journals, not individual invoices), B (it contains total balance, not individual accounts), C (concerns credit purchases, not cash purchases).

1. Calculate depreciation for Year 1 (2021):
$60,000 * 20% = $12,000.
Net Book Value at 31 Dec 2021 = $60,000 - $12,000 = $48,000.

2. Calculate depreciation for Year 2 (2022):
$48,000 * 20% = $9,600.
Net Book Value at 31 Dec 2022 = $48,000 - $9,600 = $38,400.

3. Calculate loss on disposal:
Carrying value at disposal = $38,400.
Disposal proceeds = $35,000.
Loss on disposal = Carrying value - Proceeds = $38,400 - $35,000 = $3,400.

1 mark for correct option B.
- Reject: A (if straight-line method is used), C (if three years of depreciation are charged), D (if only one year of depreciation is charged).

1. Contribution per unit = $25 - $15 = $10.
2. Break-even sales in units = Fixed costs / Contribution per unit = $45,000 / $10 = 4,500 units.
3. Required sales in units to achieve target profit = (Fixed costs + Target profit) / Contribution per unit = ($45,000 + $15,000) / $10 = 6,000 units.
4. Margin of safety in units = Required sales units - Break-even sales units = 6,000 - 4,500 = 1,500 units.

1 mark for correct option A.
- Reject: B (incorrect calculation), C (break-even point in units), D (total target sales in units).

1. Calculate interest on drawings (add to net profit):
- X: 10% * $10,000 = $1,000
- Y: 10% * $15,000 = $1,500
Total Interest on Drawings = $2,500

2. Calculate interest on capital (deduct from net profit):
- X: 5% * $80,000 = $4,000
- Y: 5% * $60,000 = $3,000
Total Interest on Capital = $7,000

3. Calculate residual profit:
Net profit = $54,500
+ Total Interest on Drawings = +$2,500
- Total Interest on Capital = -$7,000
- Total Salaries = -$20,000 ($12,000 + $8,000)
Residual Profit = $54,500 + $2,500 - $7,000 - $20,000 = $30,000.

4. Calculate Y's share of residual profit:
Y's share = 2/5 * $30,000 = $12,000.

1 mark for correct option C.
- Reject: A (if interest on drawings is subtracted instead of added), B (if interest on drawings is omitted entirely), D (if calculating X's share of residual profit).

According to IAS 10, proposed final dividends are not recognized as a liability or deducted from retained earnings in the financial statements of the current year. Bonus shares are funded first from capital reserves (share premium) to the extent possible. Therefore, the retained earnings portion used for the bonus issue is \(\$30,000 - \$20,000 = \$10,000\). Calculation: Opening Retained Earnings (\(\$120,000\)) + Profit for the year (\(\$85,000\)) - Transfer to General Reserve (\(\$15,000\)) - Interim dividend paid (\(\$10,000\)) - Bonus shares funded from retained earnings (\(\$10,000\)) = \(\$170,000\).

1 mark for the correct calculation of retained earnings balance. Reject proposed final dividend treatment of subtraction.

1. Calculate Predetermined Overhead Absorption Rate (OAR) = Budgeted Overheads / Budgeted Direct Labour Hours = \(\$240,000 / 40,000 = \$6.00\) per hour. 2. Calculate Absorbed Overheads = Actual Hours worked * OAR = \(41,500 * \$6.00 = \$249,000\). 3. Compare with Actual Overheads = Absorbed Overheads (\(\$249,000\)) - Actual Overheads (\(\$258,000\)) = \(-\$9,000\) (under-absorbed because actual overheads exceeded absorbed overheads by \(\$9,000\)).

1 mark for the correct absorption variance of \(\$9,000\) under-absorbed.

First, update the cash book balance: Draft balance \(\$8,500\) (debit) - Bank charges \(\$150\) - Dishonoured cheque \(\$600\) = Updated cash book balance of \(\$7,750\) (debit). Next, reconcile to the bank statement: Bank statement balance (X) + Uncredited deposits (\(\$1,800\)) - Unpresented cheques (\(\$1,200\)) = Updated cash book balance (\(\$7,750\)). Therefore, \(X + \$600 = \$7,750\), leading to \(X = \$7,150\) (credit balance).

1 mark for the correct bank statement balance of \(\$7,150\) credit.

Draft gross profit is \(\$94,000\). 1. Correcting the overvaluation of closing inventory reduces closing inventory, which increases cost of sales and decreases gross profit by \(\$4,200\). 2. Correcting the exclusion of purchased goods in transit (which are owned by the business) increases closing inventory, which decreases cost of sales and increases gross profit by \(\$1,800\). Corrected Gross Profit = \(\$94,000 - \$4,200 + \$1,800 = \$91,600\).

1 mark for the correct calculation of corrected gross profit.

1. Calculate current number of shares: \(\$300,000 / \$0.50 = 600,000\) shares. 2. Calculate rights shares issued: \(600,000 / 5 = 120,000\) shares. 3. Calculate premium per share: \(\$1.20 - \$0.50 = \$0.70\). 4. Calculate total rights share premium: \(120,000 * \$0.70 = \$84,000\). 5. New Share Premium balance = Opening Share Premium (\(\$80,000\)) + Rights Share Premium (\(\$84,000\)) = \(\$164,000\).

1 mark for the correct calculation of the ending share premium balance.

First, reapportion Maintenance costs (\(\$40,000\)): Machining: \(60\% * \$40,000 = \$24,000\); Assembly: \(30\% * \$40,000 = \$12,000\); Canteen: \(10\% * \$40,000 = \$4,000\). Next, calculate total Canteen costs before its reapportionment: \(\$20,000 + \$4,000 = \$24,000\). Finally, reapportion Canteen costs (\(\$24,000\)): Machining: \(50\% * \$24,000 = \$12,000\); Assembly: \(50\% * \$24,000 = \$12,000\). Total overheads for Machining = \(\$150,000\) (allocated) + \(\$24,000\) (from Maintenance) + \(\$12,000\) (from Canteen) = \(\$186,000\).

1 mark for correct calculation of total Machining overheads of \(\$186,000\).

1. Net book value (NBV) on 1 January 2023: Cost: \(\$80,000\); Depreciation for 2021: \(\$16,000\) (NBV: \(\$64,000\)); Depreciation for 2022: \(\$12,800\) (NBV: \(\$51,200\)). 2. Revaluation on 1 January 2023: Revalued carrying amount is \(\$55,000\) (the \(\$3,800\) surplus goes to the revaluation reserve). 3. Depreciation for 2023 up to 30 June (6 months): \(\$55,000 * 20\% * 6 / 12 = \$5,500\). 4. Carrying amount at disposal: \(\$55,000 - \$5,500 = \$49,500\). 5. Profit on disposal: Sale proceeds (\(\$52,000\)) - Carrying amount (\(\$49,500\)) = \(\$2,500\) profit.

1 mark for the correct profit on disposal of \(\$2,500\).

1. Calculate new variable cost per unit: \(\$20 * 0.90 = \$18\). 2. Calculate new contribution per unit: \(\$30 - \$18 = \$12\). 3. Calculate new annual fixed costs: \(\$80,000 * 1.20 = \$96,000\). 4. Calculate new break-even point: \(\$96,000 / \$12 = 8,000\) units.

1 mark for the correct calculation of the new break-even point of 8,000 units.

1. **Initial position:**
- Share Capital = $400,000 (which is \(400,000 / 0.50 = 800,000\) shares)
- Share Premium = $150,000

2. **Bonus Issue (1 for 4):**
- Shares issued = \(800,000 \times \frac{1}{4} = 200,000\) shares
- Nominal value = \(200,000 \times \$0.50 = \$100,000\)
- Bonus issue funded from Share Premium:
- New Share Capital = $400,000 + $100,000 = $500,000 (1,000,000 shares)
- New Share Premium = $150,000 - $100,000 = $50,000

3. **Rights Issue (1 for 5):**
- Shares issued = \(1,000,000 \times \frac{1}{5} = 200,000\) shares
- Issued at $0.80 (Nominal value $0.50 + Premium $0.30)
- Increase in Share Capital = \(200,000 \times \$0.50 = \$100,000\)
- Increase in Share Premium = \(200,000 \times \$0.30 = \$60,000\)

4. **Final balances:**
- Share Capital = $500,000 + $100,000 = $600,000
- Share Premium = $50,000 + $60,000 = $110,000

Award 1 mark for the correct answer A.
- Award 0 marks for incorrect options B, C, or D.

1. **Machining Department:**
- Budgeted Overhead Absorption Rate (OAR) = \(\frac{\$240,000}{40,000\text{ hours}} = \$6.00\) per machine hour.
- Overheads absorbed = \(41,500\text{ hours} \times \$6.00 = \$249,000\).
- Actual overheads = $252,000.
- Overheads under-absorbed = \(\$252,000 - \$249,000 = \$3,000\) under-absorbed.

2. **Assembly Department:**
- Budgeted OAR = \(\frac{\$180,000}{30,000\text{ hours}} = \$6.00\) per labour hour.
- Overheads absorbed = \(29,200\text{ hours} \times \$6.00 = \$175,200\).
- Actual overheads = $172,000.
- Overheads over-absorbed = \(\$175,200 - \$172,000 = \$3,200\) over-absorbed.

3. **Total for the business:**
- Net effect = \(\$3,200\text{ (over-absorbed)} - \$3,000\text{ (under-absorbed)} = \$200\) over-absorbed.

Award 1 mark for the correct answer A.
- Award 0 marks for incorrect options B, C, or D.

1. **Adjust the Bank Ledger Account:**
- Draft balance: $8,450 (Debit)
- Less Bank charges: -$120
- Add Credit transfer: +$450
- Less Dishonoured cheque: -$380
- Adjusted bank ledger balance = \(8,450 - 120 + 450 - 380 = \$8,400\) (Debit)

2. **Reconcile to Bank Statement Balance:**
Let \(B\) be the bank statement credit balance:
\(B + \text{Outstanding lodgements} - \text{Unpresented cheques} = \text{Adjusted bank ledger balance}\)
\(B + 2,400 - 1,850 = 8,400\)
\(B + 550 = 8,400\)
\(B = \$7,850\) (Credit)

Award 1 mark for the correct answer B.
- Award 0 marks for incorrect options A, C, or D.

Draft Profit: $64,200

1. **Sales/Purchases returns error:**
- Correcting entry requires debiting Sales Returns (reducing profit by $1,200) and debiting Purchases Returns (to cancel the incorrect credit, which reduces cost of sales reduction, thus reducing profit by $1,200). Net profit decrease = -$2,400.

2. **Doubtful debt provision adjustment:**
- Required provision: \(5\% \times \$40,000 = \$2,000\).
- Current provision: $1,500.
- Increase in provision (expense) = -$500.

3. **Closing inventory overvaluation:**
- Correction reduces closing inventory, which increases cost of sales and reduces profit = -$1,800.

4. **Rental income received in advance:**
- Must be removed from 2023 income = -$900.

**Corrected Profit:**
\(\$64,200 - \$2,400 - \$500 - \$1,800 - \$900 = \$58,600\).

Award 1 mark for the correct answer A.
- Award 0 marks for incorrect options B, C, or D.

1. **Error 1:** Since $560 was recorded in the sales journal, this incorrect amount is posted to both the control account (via the sales journal total) and the customer's personal account. It does NOT cause a difference between the two records.
2. **Error 2:** This is recorded in the control account (via the cash book totals) but omitted from the personal account. This causes a difference.
3. **Error 3:** This is recorded in the control account but omitted from the personal account. This causes a difference.
4. **Error 4:** Different amounts are posted to the control account ($310) and the personal account ($130). This causes a difference.

Therefore, errors 2, 3, and 4 cause a difference.

Award 1 mark for the correct answer D.
- Award 0 marks for incorrect options A, B, or C.

1. **Depreciation Year 2021 (Year 1):**
- Depreciation = \(20\% \times \$80,000 = \$16,000\)
- NBV at 31 Dec 2021 = \(\$80,000 - \$16,000 = \$64,000\)

2. **Depreciation Year 2022 (Year 2):**
- Depreciation = \(20\% \times \$64,000 = \$12,800\)
- NBV at 31 Dec 2022 = \(\$64,000 - \$12,800 = \$51,200\)

3. **Depreciation Year 2023 (Year of Disposal):**
- No depreciation is charged in the year of disposal.
- NBV at date of disposal = $51,200

4. **Profit or Loss on Disposal:**
- Disposal Proceeds = $48,000
- Loss on Disposal = \(\$51,200 - \$48,000 = \$3,200\) loss.

Award 1 mark for the correct answer A.
- Award 0 marks for incorrect options B, C, or D.

**(a) Statement of Profit or Loss for the year ended 30 June 2023**

$$
\begin{array}{lrr}
& \$ & \$ \\
\text{Revenue} & & 1,280,000 \\
\text{Cost of Sales} & & \\
\text{Opening Inventory} & 95,000 & \\
\text{Purchases} & 740,000 & \\
\text{Less: Closing Inventory (W1)} & (103,800) & (731,200) \\
\hline
\text{Gross Profit} & & 548,800 \\
\text{Expenses} & & \\
\text{Distribution costs (W4)} & 150,100 & \\
\text{Administrative expenses (W5)} & 173,100 & (323,200) \\
\hline
\text{Profit from operations} & & 225,600 \\
\text{Finance costs (W6)} & & (9,000) \\
\hline
\text{Profit before tax} & & 216,600 \\
\text{Taxation} & & (24,000) \\
\hline
\text{Profit for the year} & & \mathbf{192,600} \\
\hline
\end{array}
$$

**Workings:**
- **W1: Closing Inventory**
Draft cost: $108,000
Less cost of damaged items: $(8,000)
Add Net Realisable Value of damaged items ($5,000 - $1,200): $3,800
Adjusted Closing Inventory = $108,000 - $8,000 + $3,800 = $103,800
- **W2: Property Depreciation**
$600,000 \times 2\% = $12,000
- Distribution share (40%): $4,800
- Administrative share (60%): $7,200
- **W3: Equipment Depreciation**
Carrying Value = $240,000 - $96,000 = $144,000
Depreciation = $144,000 \times 20\% = $28,800 (charged to Distribution)
- **W4: Distribution Costs**
Draft cost: $112,000
Add Property Depreciation: $4,800
Add Equipment Depreciation: $28,800
Add Accrued: $4,500
Total = $150,100
- **W5: Administrative Expenses**
Draft cost: $168,000
Add Property Depreciation: $7,200
Less Prepaid: $(3,100)
Add Increase in doubtful debt provision (W7): $1,000
Total = $173,100
- **W6: Finance Costs (Debenture Interest)**
$150,000 \times 6\% = $9,000
- **W7: Provision for Doubtful Debts**
Required provision = $88,000 \times 5\% = $4,400
Existing provision = $3,400
Increase in provision = $4,400 - $3,400 = $1,000

***

**(b) Statement of Changes in Equity for the year ended 30 June 2023**

$$
\begin{array}{lcccc}
& \text{Ordinary Share} & \text{Share} & \text{Retained} & \\
& \text{Capital (\$)} & \text{Premium (\$)} & \text{Earnings (\$)} & \text{Total (\$)} \\
\hline
\text{Balance at 1 July 2022} & 400,000 & 80,000 & 142,000 & 622,000 \\
\text{Profit for the year} & - & - & 192,600 & 192,600 \\
\text{Dividends paid (W8)} & - & - & (16,000) & (16,000) \\
\hline
\text{Balance at 30 June 2023} & \mathbf{400,000} & \mathbf{80,000} & \mathbf{318,600} & \mathbf{798,600} \\
\hline
\end{array}
$$

**Workings:**
- **W8: Dividends paid**
Number of ordinary shares = $400,000 / $0.50 = 800,000 shares
Interim dividend = 800,000 shares \times $0.02 = $16,000

***

**(c) Financing Evaluation**

**Option 1: 8% Non-Cumulative Preference Shares**
- **Advantages:**
- Non-cumulative nature means if the company has a poor trading year, they are not legally obligated to pay the dividend, reducing financial distress risk.
- Avoids the creation of a liability that must be repaid (no redemption date mentioned, unlike a bank loan).
- Does not increase gearing in the same way debt does, preserving future borrowing capacity.
- **Disadvantages:**
- Higher rate of return (8%) compared to the bank loan (7%).
- Dividends are paid out of post-tax profits and are not tax-deductible, making them more expensive in real terms.

**Option 2: 7% Bank Loan**
- **Advantages:**
- Lower nominal cost (7%) than the preference shares (8%).
- Loan interest is tax-deductible, which reduces the effective cost of debt further to: \text{Interest rate} \times (1 - \text{tax rate}).
- Ordinary shareholders retain full control without sharing profit options beyond fixed interest.
- **Disadvantages:**
- Must pay interest annually regardless of performance/profits, which increases liquidity risk.
- The loan principal must eventually be repaid, requiring cash outflows.
- The bank may demand security (collateral) over non-current assets, restricting future operations or refinancing.

**Recommendation:**
- If Veloce Limited has stable cash flows and can easily cover the interest payment, Option 2 (Bank Loan) is recommended due to its lower cost and tax benefits.
- However, if the expansion is high-risk with volatile cash flows, Option 1 (Preference Shares) is safer as dividend payments can be deferred.

**(a) Statement of Profit or Loss [14 marks]**
- Revenue: $1,280,000 (1 mark)
- Opening Inventory: $95,000 & Purchases: $740,000 (1 mark for both)
- Closing Inventory: $103,800 (1 mark for write-down of $4,200, 1 mark for final inventory value)
- Cost of sales: $731,200 (1 mark) & Gross profit: $548,800 (1 mark OF)
- Property depreciation: $12,000 (1 mark for total working, split correctly)
- Equipment depreciation: $28,800 (1 mark)
- Distribution costs total: $150,100 (1 mark OF - including accrued $4,500)
- Administrative expenses total: $173,100 (1 mark OF - including prepaid $3,100 and bad debt increase of $1,000 (1 mark))
- Finance costs: $9,000 (1 mark)
- Profit before tax: $216,600 (1 mark OF)
- Profit for the year: $192,600 (1 mark OF - after tax of $24,000)

**(b) Statement of Changes in Equity [6 marks]**
- Columns and opening balances correct: (1 mark)
- Share capital & Share premium ending balances: (1 mark for both)
- Profit for the year added: $192,600 (1 mark OF)
- Dividend paid calculated: $16,000 (1 mark for working of 800,000 shares, 1 mark for subtraction)
- Retained earnings ending balance: $318,600 (1 mark OF)

**(c) Financing Evaluation & Recommendation [10 marks]**
- Up to 4 marks for discussion of Option 1 (preference shares) - advantages/disadvantages.
- Up to 4 marks for discussion of Option 2 (bank loan) - advantages/disadvantages (must mention tax deductibility of interest for full marks).
- Up to 2 marks for a clear, justified recommendation that links to the risk/reward profiles of the options.

**a) Sales Ledger Control Account for the month ended 31 December 2023**

| Date (2023) | Details | Amount ($) | Date (2023) | Details | Amount ($) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 31 Dec | Balance b/d | 44,830 | 31 Dec | Sales Day Book overcast | 650 |
| 31 Dec | Sales Returns correction ($910 - $190) | 720 | 31 Dec | Discount allowed | 120 |
| | | | 31 Dec | Irrecoverable debt | 280 |
| | | | 31 Dec | Balance c/d | 44,500 |
| | **Total** | **45,550** | | **Total** | **45,550** |
| 1 Jan 2024 | Balance b/d | 44,500 | | | |

*Workings for Sales Returns:*
Returns were recorded as \( \$910 \) instead of \( \$190 \) in the sales returns day book. This resulted in too much credit in the control account by \( \$720 \). To correct this, the control account must be debited by \( \$720 \).

**b) Statement to Reconcile the List of Sales Ledger Balances at 31 December 2023**

| Details | Amount ($) |
| :--- | :--- |
| Original total of list of balances | 44,230 |
| **Add:** Correction of posting error (J. Miller: \( \$340 \times 2 \)) | 680 |
| | **44,910** |
| **Less:** Contra entry omitted from customer's account | (410) |
| **Corrected total of list of balances** | **44,500** |

*Workings for J. Miller:*
Posting a debit sale of \( \$340 \) to the credit side of his account means his balance was understated by \( \$680 \) (to cancel the credit of \( \$340 \) and make it a debit of \( \$340 \)).

**c) Reasons for maintaining control accounts (any two):**
1. **Locating Errors:** It acts as an independent check on the accuracy of the postings in the ledger. If the balances do not agree, it isolates the location of errors to either the control account or the subsidiary ledgers.
2. **Prevention and Deterrence of Fraud:** Segregation of duties is achieved if different personnel maintain the control accounts and the individual ledgers, reducing the opportunity for collusion and unauthorized adjustments.
3. **Management Information / Speed of Financial Statements:** It provides the total of trade receivables instantly for the preparation of the trial balance and balance sheet without having to list and sum hundreds of individual customer balances.

**Part (a) [7 Marks]**
- Opening balance \( \$44,830 \) (debit side) [1 mark]
- Sales returns correction: Debit of \( \$720 \) (1 mark for direction, 1 mark for calculating \( \$720 \)) [2 marks]
- Overcast sales day book: Credit of \( \$650 \) [1 mark]
- Discount allowed omitted: Credit of \( \$120 \) [1 mark]
- Irrecoverable debt omitted: Credit of \( \$280 \) [1 mark]
- Corrected balance carried down \( \$44,500 \) [1 mark]

**Part (b) [5 Marks]**
- Starting with original total of \( \$44,230 \) [1 mark]
- Adding J. Miller's correction of \( \$680 \) (1 mark for adding, 1 mark for double amount) [2 marks]
- Less contra entry of \( \$410 \) (1 mark for subtracting) [1 mark]
- Reconciled final total of \( \$44,500 \) [1 mark]

**Part (c) [3 Marks]**
- 1 mark for identifying a valid reason, up to 2 marks for explanation (max 3 marks).
- *Acceptable points:* Internal check/accuracy verification, fraud prevention/control, faster preparation of final accounts/trial balance.

(a) Statement of Corrected Profit for the year ended 31 December 2022:

Draft Profit: \(\$24,500\)
Add:
- Rent prepaid omitted: \(\$450\)
- Equipment purchase removed from purchases: \(\$3,000\)
- Decrease in provision for doubtful debts (Workings 1): \(\$200\)
- Drawings of goods (removed from purchases): \(\$800\)
Subtotal additions: \(\$4,450\)

Less:
- Depreciation on equipment (Workings 2): \((\$300)\)
- Bad debt written off: \((\$600)\)
Subtotal deductions: \((\$900)\)

Corrected Profit: \(\$24,500 + \$4,450 - \$900 = \$27,950\)

Workings:
1. Provision for doubtful debts:
Adjusted trade receivables = \(\$12,600 - \$600 = \$12,000\)
New provision = \(5\% \times \$12,000 = \$600\)
Decrease in provision = Existing provision \(\$800\) - New provision \(\$600 = \$200\) (increase to profit)

2. Depreciation on equipment:
Cost = \(\$3,000\)
Depreciation rate = \(20\%\) per annum
Ownership period = 6 months (1 July 2022 to 31 December 2022)
Depreciation charge = \(\$3,000 \times 20\% \times \frac{6}{12} = \$300\)

(b) Provision for Doubtful Debts Account:

Debit side:
- 31 Dec 2022: Income Statement \(\$200\)
- 31 Dec 2022: Balance c/d \(\$600\)
- Total: \(\$800\)

Credit side:
- 1 Jan 2022: Balance b/d \(\$800\)
- Total: \(\$800\)

- 1 Jan 2023: Balance b/d \(\$600\) (Credit side)

(c) Capital expenditure is money spent on purchasing, improving, or extending non-current assets, which provides long-term benefits to the business (greater than one year). Example: The purchase of equipment costing \(\$3,000\).

Revenue expenditure is money spent on the day-to-day running of the business or maintenance of assets, the benefits of which are consumed within the current accounting period. Example: Rent paid.

(a) Statement of Corrected Profit (Max 8 marks):
- Draft profit starting figure \(\$24,500\) (No mark)
- Add Rent prepaid: \(\$450\) [1 mark]
- Add Equipment purchase capitalizing error: \(\$3,000\) [1 mark]
- Less Depreciation on equipment: \(\$300\) [1 method mark for calculation, 1 accuracy mark for subtraction - 2 marks total]
- Less Bad debt written off: \(\$600\) [1 mark]
- Add Decrease in provision: \(\$200\) [1 method mark for calculating \(\$600\) ending provision, 1 accuracy mark for adding the decrease of \(\$200\) - 2 marks total]
- Add Drawings of goods: \(\$800\) [1 mark]

(b) Provision for Doubtful Debts Account (Max 4 marks):
- Credit Balance b/d on 1 Jan 2022: \(\$800\) [1 mark]
- Debit Income Statement (decrease transfer): \(\$200\) [1 mark]
- Debit Balance c/d on 31 Dec 2022: \(\$600\) [1 mark]
- Credit Balance b/d on 1 Jan 2023: \(\$600\) [1 mark]

(c) Distinctions and Examples (Max 3 marks):
- 1 mark: Definition of Capital Expenditure (long-term benefits/acquiring non-current assets).
- 1 mark: Definition of Revenue Expenditure (short-term benefits/day-to-day operations).
- 1 mark: Correct example of each from the text (Equipment = Capital; Rent = Revenue).

**(a) Overhead Analysis Sheet (Apportionment)**

- **Factory Rent** ($48,000) apportioned by **Floor Area** (ratio 4,000 : 2,000 : 1,200 : 800)
- Machining: \( \frac{4,000}{8,000} \times \$48,000 = \$24,000 \)
- Assembly: \( \frac{2,000}{8,000} \times \$48,000 = \$12,000 \)
- Maintenance: \( \frac{1,200}{8,000} \times \$48,000 = \$7,200 \)
- Canteen: \( \frac{800}{8,000} \times \$48,000 = \$4,800 \)

- **Machinery Depreciation** ($36,000) apportioned by **Book Value of Machinery** (ratio 120,000 : 30,000 : 20,000 : 10,000)
- Machining: \( \frac{120,000}{180,000} \times \$36,000 = \$24,000 \)
- Assembly: \( \frac{30,000}{180,000} \times \$36,000 = \$6,000 \)
- Maintenance: \( \frac{20,000}{180,000} \times \$36,000 = \$4,000 \)
- Canteen: \( \frac{10,000}{180,000} \times \$36,000 = \$2,000 \)

- **Heating and Lighting** ($12,000) apportioned by **Floor Area** (ratio 4,000 : 2,000 : 1,200 : 800)
- Machining: \( \frac{4,000}{8,000} \times \$12,000 = \$6,000 \)
- Assembly: \( \frac{2,000}{8,000} \times \$12,000 = \$3,000 \)
- Maintenance: \( \frac{1,200}{8,000} \times \$12,000 = \$1,800 \)
- Canteen: \( \frac{800}{8,000} \times \$12,000 = \$1,200 \)

- **Indirect Labour** ($24,000) apportioned by **Number of Employees** (ratio 12 : 24 : 4 : 10)
- Machining: \( \frac{12}{50} \times \$24,000 = \$5,760 \)
- Assembly: \( \frac{24}{50} \times \$24,000 = \$11,520 \)
- Maintenance: \( \frac{4}{50} \times \$24,000 = \$1,920 \)
- Canteen: \( \frac{10}{50} \times \$24,000 = \$4,800 \)

**Apportionment Summary Table:**
| Overhead | Basis | Machining ($) | Assembly ($) | Maintenance ($) | Canteen ($) |
| :--- | :--- | :---: | :---: | :---: | :---: |
| Rent | Floor Area | 24,000 | 12,000 | 7,200 | 4,800 |
| Depreciation | Book Value | 24,000 | 6,000 | 4,000 | 2,000 |
| Heating & Light | Floor Area | 6,000 | 3,000 | 1,800 | 1,200 |
| Indirect Labour | Employees | 5,760 | 11,520 | 1,920 | 4,800 |
| **Total** | | **59,760** | **32,520** | **14,920** | **12,800** |

---

**(b) Reallocation (Step-Down Method)**

1. **Reallocate Canteen Overheads ($12,800):**
- Allocated based on the number of employees in the departments served (Machining: 12, Assembly: 24, Maintenance: 4. Total = 40 employees).
- Machining: \( \frac{12}{40} \times \$12,800 = \$3,840 \)
- Assembly: \( \frac{24}{40} \times \$12,800 = \$7,680 \)
- Maintenance: \( \frac{4}{40} \times \$12,800 = \$1,280 \)

2. **Reallocate Maintenance Overheads (Total = $14,920 + $1,280 = $16,200):**
- Allocated based on hours requested: Machining (60%) and Assembly (40%).
- Machining: \( 60\% \times \$16,200 = \$9,720 \)
- Assembly: \( 40\% \times \$16,200 = \$6,480 \)

**Reallocation Table:**
| Department | Machining ($) | Assembly ($) | Maintenance ($) | Canteen ($) |
| :--- | :---: | :---: | :---: | :---: |
| Total Apportioned | 59,760 | 32,520 | 14,920 | 12,800 |
| Reallocate Canteen | 3,840 | 7,680 | 1,280 | (12,800) |
| Subtotal | 63,600 | 40,200 | 16,200 | 0 |
| Reallocate Maintenance| 9,720 | 6,480 | (16,200) | 0 |
| **Grand Total** | **73,320** | **46,680** | **0** | **0** |

---

**(c) Overhead Absorption Rates (OAR)**

- (i) **Machining OAR** (using budgeted machine hours: 12,220 hours):
\( \text{OAR} = \frac{\$73,320}{12,220\text{ hours}} = \$6.00\text{ per machine hour} \)

- (ii) **Assembly OAR** (using budgeted direct labour hours: 15,560 hours):
\( \text{OAR} = \frac{\$46,680}{15,560\text{ hours}} = \$3.00\text{ per direct labour hour} \)

---

**(d) Selling Price of Job 101**

- **Direct Materials**: $450.00
- **Direct Labour**:
- Machining: \( 5\text{ hours} \times \$12 = \$60.00 \)
- Assembly: \( 12\text{ hours} \times \$10 = \$120.00 \)
- **Prime Cost** = \( 450.00 + 60.00 + 120.00 = \$630.00 \)
- **Overheads Absorbed**:
- Machining (machine hours): \( 10\text{ machine hours} \times \$6.00 = \$60.00 \)
- Assembly (labour hours): \( 12\text{ labour hours} \times \$3.00 = \$36.00 \)
- **Total Cost of Job 101** = \( \$630.00 + \$60.00 + \$36.00 = \$726.00 \)
- **Profit Markup** (25%): \( 25\% \times \$726.00 = \$181.50 \)
- **Recommended Selling Price** = \( \$726.00 + \$181.50 = \$907.50 \)

---

**(e) Under- or Over-absorption in Machining**

- Overheads absorbed = \( \text{Actual machine hours worked} \times \text{OAR} \)
- Overheads absorbed = \( 12,100\text{ hours} \times \$6.00 = \$72,600 \)
- Actual overheads incurred = $74,500
- Difference = \( \$74,500 - \$72,600 = \$1,900 \)
- Since the actual overheads incurred are higher than the overheads absorbed, the overheads are **under-absorbed** by $1,900.

---

**(f) Advantages of FIFO over AVCO**

- Inventory is valued at the most recent purchase prices, which gives a more realistic value of closing inventory on the Statement of Financial Position.
- It assumes a logical physical flow of inventory where older stock is used or sold first, which reduces the risk of stock deterioration or obsolescence.

**(a) Overhead Analysis Sheet [8 marks]**
- Rent basis (Floor Area) and correct apportionment (1 mark for both Machining/Assembly and 1 mark for Maintenance/Canteen).
- Depreciation basis (Book Value) and correct apportionment (1 mark for Machining/Assembly and 1 mark for Maintenance/Canteen).
- Heating & Lighting basis (Floor Area) and correct apportionment (1 mark total).
- Indirect Labour basis (Employees) and correct apportionment (1 mark for Machining/Assembly and 1 mark for Maintenance/Canteen).
- Correct totals for all four columns (1 mark overall).

**(b) Reallocation [6 marks]**
- Reallocation of Canteen to Machining and Assembly (1 mark) and Maintenance (1 mark).
- Correct subtotal of Maintenance ($16,200) (1 mark).
- Reallocation of Maintenance to Machining and Assembly in 60:40 ratio (2 marks).
- Correct final totals: Machining ($73,320) and Assembly ($46,680) (1 mark).

**(c) OAR Calculations [4 marks]**
- Machining OAR calculation (formula/process) (1 mark) and final rate of $6.00 (1 mark).
- Assembly OAR calculation (formula/process) (1 mark) and final rate of $3.00 (1 mark).

**(d) Job 101 Cost & Price [6 marks]**
- Calculation of Prime Cost ($630) (1 mark for direct labour addition and 1 mark for total prime cost).
- Overheads absorbed in Machining ($60) and Assembly ($36) (2 marks).
- Total Cost calculation ($726) (1 mark).
- Selling Price calculation with markup ($907.50) (1 mark).

**(e) Under- or Over-absorption [4 marks]**
- Calculation of overheads absorbed ($72,600) (1 mark).
- Comparison with actual overheads (1 mark).
- Calculation of the variance ($1,900) (1 mark).
- Identification of "under-absorption" (1 mark).

**(f) FIFO Advantages [2 marks]**
- 1 mark for each valid advantage stated (maximum 2 marks).