2025 Cambridge IAS-Level Accounting (9706) Practice Paper with Answers

First, calculate the rights issue: Number of shares before rights issue = 800,000 shares. Number of rights shares issued = \(800,000 \times \frac{1}{4} = 200,000\) shares. Rights issue price = $0.80 per share (nominal value $0.50, premium $0.30 per share). Premium generated = \(200,000 \times $0.30 = $60,000\). Share premium balance after rights issue = \($120,000 + $60,000 = $180,000\). Second, calculate the bonus issue: Total number of shares before bonus issue = \(800,000 + 200,000 = 1,000,000\) shares. Number of bonus shares issued = \(1,000,000 \times \frac{1}{10} = 100,000\) shares. Nominal value of bonus shares = \(100,000 \times $0.50 = $50,000\). Since the share premium account is used to fund the bonus issue, the share premium account is reduced by $50,000. Final balance on the share premium account = \($180,000 - $50,000 = $130,000\).

1 mark for the correct answer C. Method: Calculate rights issue premium of $60,000 to get a temporary balance of $180,000, then subtract nominal value of bonus shares ($50,000 based on 1,000,000 shares post-rights issue) to arrive at the final balance of $130,000.

1. Calculate new variable cost per unit: \($15 \times 1.10 = $16.50\). 2. Calculate new contribution per unit: \($25 - $16.50 = $8.50\). 3. Calculate new total fixed costs: \($80,000 + $10,500 = $90,500\). 4. Calculate total required contribution to meet target profit: \(\text{Fixed Costs} + \text{Target Profit} = $90,500 + $20,000 = $110,500\). 5. Calculate required sales in units: \(\frac{$110,500}{$8.50} = 13,000\) units.

1 mark for the correct answer C. Correct calculation steps: new contribution of $8.50, new fixed costs of $90,500, plus target profit of $20,000 gives total contribution needed of $110,500, divided by $8.50 per unit = 13,000 units.

First, adjust the cash book balance: Unadjusted cash book balance = -$1,450 (credit balance represents an overdraft). Less: Bank charges = -$75. Less: Dishonoured cheque = -$420. Adjusted cash book balance = \(-$1,450 - $75 - $420 = -$1,945\) (overdraft). Second, perform bank reconciliation to find bank statement balance (B): \(\text{Adjusted Cash Book Balance} = \text{Bank Statement Balance} + \text{Lodgements not yet credited} - \text{Unpresented cheques}\) which gives \(-$1,945 = B + $650 - $980\), leading to \(-$1,945 = B - $330\), and \(B = -$1,945 + $330 = -$1,615\) (which is a bank statement overdraft of $1,615).

1 mark for correct answer B. Correct adjustments to the cash book lead to an adjusted balance of $1,945 overdraft. Factoring in unpresented cheques of $980 and outstanding lodgements of $650 results in a bank statement overdraft of $1,615.

To find the corrected Sales Ledger Control Account balance: Original balance = $48,600 (debit); Add: Omitted sales invoice (debit to control account) = +$650; Add: Cash refund to customer (debit to control account) = +$320; Less: Sales discount allowed not posted (credit to control account) = -$440. Corrected balance = \($48,600 + $650 + $320 - $440 = $49,130\). Note: Error 2 only affects the individual customer's ledger account and not the Sales Ledger Control Account.

1 mark for correct answer C. Correctly identify that the omitted sales invoice (+650), the omitted refund (+320), and the unposted discount allowed (-440) affect the control account, while the posting error to the customer's account does not affect the control account.

1. Depreciation for Year 2021 (full year): \(20\% \times $80,000 = $16,000\). NBV at 31 Dec 2021 = \($80,000 - $16,000 = $64,000\). 2. Depreciation for Year 2022 (full year): \(20\% \times $64,000 = $12,800\). NBV at 31 Dec 2022 = \($64,000 - $12,800 = $51,200\). 3. Depreciation for Year 2023 (9 months to 30 September): \(20\% \times $51,200 \times \frac{9}{12} = $7,680\). NBV on date of disposal = \($51,200 - $7,680 = $43,520\). 4. Profit or Loss on disposal = \(\text{Sale Proceeds} - \text{NBV} = $38,000 - $43,520 = -$5,520\) (Loss of $5,520).

1 mark for correct answer C. Correct calculation steps: NBV after 2 years is $51,200; pro-rata depreciation for year 3 is $7,680, giving net book value of $43,520. Difference between proceeds of $38,000 and NBV of $43,520 is a loss of $5,520.

Adjustments to draft profit: Draft profit: $145,000. Adjustment 1: Damaged goods cost is $3,500. Net Realisable Value (NRV) = \($4,000 - $800 = $3,200\). Since NRV is lower than cost, inventory must be written down by \($3,500 - $3,200 = $300\). This reduces profit by $300. Adjustment 2: Balance to write off = \(70\% \times $1,800 = $1,260\). This reduces profit by $1,260. Adjustment 3: Prepaid insurance from 2022 belongs to 2023 expenses. Omitted, so insurance expense must increase by $1,200, which reduces profit by $1,200. Corrected profit = \($145,000 - $300 - $1,260 - $1,200 = $142,240\).

1 mark for correct answer B. Must apply IAS 2 (lower of cost and NRV) to reduce profit by $300, write off 70% of the bad debt ($1,260), and include the prior-year prepayments as an expense (-$1,200).

1. New selling price = \($50 \times 0.90 = $45\) per unit. 2. New variable cost = $30 per unit (unchanged). 3. New contribution per unit = \($45 - $30 = $15\). 4. New fixed costs = \($150,000 \times 1.10 = $165,000\). 5. New break-even point in units = \(\frac{$165,000}{$15} = 11,000\) units. 6. New margin of safety = Current sales - New break-even point = \(12,000 - 11,000 = 1,000\) units.

1 mark for correct answer A. Method: Calculate new contribution of $15, new fixed costs of $165,000, new break-even point of 11,000 units, and subtract from current sales of 12,000 units to find the margin of safety of 1,000 units.

When no goodwill account is maintained: 1. Credit goodwill to the old partners in their old profit-sharing ratio (3:2): A's share = \(\frac{3}{5} \times $30,000 = $18,000\) (credit); B's share = \(\frac{2}{5} \times $30,000 = $12,000\) (credit). 2. Debit goodwill to all partners (including the new partner) in their new profit-sharing ratio (5:3:2): A's share = \(\frac{5}{10} \times $30,000 = $15,000\) (debit); B's share = \(\frac{3}{10} \times $30,000 = $9,000\) (debit); C's share = \(\frac{2}{10} \times $30,000 = $6,000\) (debit). 3. Calculate A's final capital balance: \(\text{A's capital} = $60,000\text{ (original)} + $18,000\text{ (credit)} - $15,000\text{ (debit)} = $63,000\).

1 mark for correct answer C. Method: Share of goodwill credited to A is $18,000, and share debited is $15,000, resulting in a net credit of $3,000. This is added to A's opening capital of $60,000 to get $63,000.

First, calculate the bonus issue: Number of bonus shares = 500,000 / 5 = 100,000 shares. Nominal value of bonus shares = 100,000 * $0.50 = $50,000. Funding the bonus issue reduces the share premium account to $80,000 - $50,000 = $30,000. Total ordinary shares after the bonus issue = 500,000 + 100,000 = 600,000 shares. Next, calculate the rights issue: Number of rights shares = 600,000 / 4 = 150,000 shares. Premium on each rights share = $0.80 - $0.50 = $0.30. Total premium from the rights issue = 150,000 * $0.30 = $45,000. Final balance of share premium account = $30,000 + $45,000 = $75,000.

Award 1 mark for the correct final share premium balance of $75,000. Deduct 0 marks for incorrect distractors.

First, calculate contribution per labour hour: Product X: $12 / 3 hours = $4 per hour. Product Y: $15 / 5 hours = $3 per hour. Since Product X has the higher contribution per hour, it must be produced first to satisfy its maximum demand. Labour hours required for 3,000 units of Product X = 3,000 * 3 hours = 9,000 hours. Remaining labour hours = 12,000 - 9,000 = 3,000 hours. Units of Product Y produced with remaining hours = 3,000 hours / 5 hours = 600 units. Total contribution = (3,000 * $12) + (600 * $15) = $36,000 + $9,000 = $45,000.

Award 1 mark for identifying the correct optimal production mix and corresponding total contribution.

First, update the cash book balance: Draft cash book balance of $8,400 (debit) - Bank charges of $150 - Dishonoured cheque of $650 = Corrected cash book balance of $7,600 (debit). Next, perform the bank reconciliation: Balance per Bank Statement + Deposits in transit - Unpresented cheques = Corrected Cash Book balance. Let B be the bank statement balance: B + $1,200 - $1,800 = $7,600. B - $600 = $7,600. Therefore, B = $8,200 credit (positive balance).

Award 1 mark for the correct bank statement balance of $8,200 credit.

This is an error of original entry because the transaction was entered at an incorrect value in the book of prime entry (the sales journal) and then posted to both ledger accounts at that same incorrect value. Because the debit entry (H. Wright's account) and the credit entry (Sales account) are equal, the trial balance will still agree.

Award 1 mark for correctly identifying the type of error as 'error of original entry' and that the trial balance will agree.

Year 2021 depreciation = 20% * $40,000 = $8,000. Carrying value at 31 Dec 2021 = $32,000. Year 2022 depreciation = 20% * $32,000 = $6,400. Carrying value at 31 Dec 2022 = $25,600. Year 2023 depreciation (6 months) = 20% * $25,600 * 6/12 = $2,560. Carrying value at 30 June 2023 = $25,600 - $2,560 = $23,040. Loss on disposal = Carrying value of $23,040 - Sale proceeds of $22,000 = $1,040 loss.

Award 1 mark for the correct calculation of the loss on disposal of $1,040.

Draft profit = $64,800. Less bad debt write-off = -$1,800. Adjusted trade receivables = $98,000 - $1,800 = $96,200. New provision for doubtful debts = 5% * $96,200 = $4,810. Increase in provision = New provision ($4,810) - Old provision ($4,200) = $610 increase (deducted from profit as an expense). Less electricity accrual = -$450. Less prepaid rent received = -$900. Corrected profit = $64,800 - $1,800 - $610 - $450 - $900 = $61,040.

Award 1 mark for the correct calculation of corrected profit after all adjustments ($61,040).

Contribution per unit = $35 - $21 = $14. Break-even point (units) = Fixed costs / Contribution per unit = $56,000 / $14 = 4,000 units. Target sales (units) to achieve target profit = (Fixed costs + Target profit) / Contribution per unit = ($56,000 + $28,000) / $14 = $84,000 / $14 = 6,000 units. The excess units above break-even = 6,000 units - 4,000 units = 2,000 units. Alternatively, excess units can be calculated directly as: Target Profit / Contribution per unit = $28,000 / $14 = 2,000 units.

Award 1 mark for the correct answer of 2,000 units.

Both the 6,000-unit and 8,000-unit output levels are above the step threshold of 5,000 units, which means that the total fixed costs are identical at both levels. Thus, the change in total cost between 6,000 and 8,000 units is entirely due to variable costs. Change in total cost = $76,000 - $66,000 = $10,000. Change in output units = 8,000 - 6,000 = 2,000 units. Variable cost per unit = $10,000 / 2,000 units = $5.00.

Award 1 mark for the correct calculation of the variable cost per unit ($5.00).

1. Calculate the initial number of shares: \( \$400,000 / \$0.50 = 800,000 \) shares.
2. Calculate the rights shares: \( 800,000 / 4 = 200,000 \) shares. This increases the total shares in issue to \( 800,000 + 200,000 = 1,000,000 \) shares.
3. Calculate the bonus shares: \( 1,000,000 / 10 = 100,000 \) shares. This increases the total shares in issue to \( 1,000,000 + 100,000 = 1,100,000 \) shares. The bonus issue is funded entirely from the share premium account, so it does not affect retained earnings.
4. Calculate the dividend paid on 15 December 2023: \( 1,100,000 \text{ shares} \times \$0.05 = \$55,000 \).
5. Calculate the retained earnings balance at 31 December 2023: \( \$250,000 \text{ (opening balance)} + \$115,000 \text{ (profit for the year)} - \$55,000 \text{ (dividend)} = \$310,000 \).

1 mark for the correct answer: C.
0 marks for any other option.

1. Calculate the new variable cost per unit: \( \$20 \times 1.10 = \$22 \).
2. Calculate the new contribution per unit: \( \$40 \text{ (selling price)} - \$22 \text{ (new variable cost)} = \$18 \).
3. Calculate the new fixed costs: \( \$120,000 + \$24,000 = \$144,000 \).
4. Calculate the required total contribution to meet the target profit: \( \$144,000 \text{ (fixed costs)} + \$36,000 \text{ (target profit)} = \$180,000 \).
5. Calculate the required unit sales: \( \$180,000 / \$18 = 10,000 \) units.

1 mark for the correct answer: C.
0 marks for any other option.

Only errors affecting the general ledger accounts require adjustments in the sales ledger control account:
- Error 1: This is an error in the list of balances (subsidiary ledger extraction) and does not affect the general ledger control account.
- Error 2: The sales journal undercast means the debit posting to the control account was too low by \( \$1,200 \). This must be added to the control account.
- Error 3: The discount allowed of \( \$150 \) was omitted from the general ledger, so we must credit (subtract) this from the control account.
- Error 4: The irrecoverable debt of \( \$400 \) was not recorded in the control account, so we must credit (subtract) this from the control account.
- Corrected Balance = \( \$48,200 + \$1,200 - \$150 - \$400 = \$48,850 \).

1 mark for the correct answer: D.
0 marks for any other option.

1. Determine correct Capital Expenditure:
- Cost of vehicle: \( \$22,000 \)
- Delivery charge: \( \$500 \)
- Painting logo: \( \$1,500 \)
- Total correct capital cost = \( \$24,000 \).

2. Determine correct Revenue Expenditure:
- Road tax: \( \$400 \)
- Insurance: \( \$600 \)
- Total revenue expenses = \( \$1,000 \).

3. Compare total recorded expenses with correct expenses:
- Recorded expenses: Depreciation on the entire capitalized amount of \( \$25,000 \times 20\% = \$5,000 \).
- Correct expenses: Depreciation on \( \$24,000 \times 20\% = \$4,800 \) plus revenue expenses of \( \$1,000 \) = \( \$5,800 \).

4. Profit effect: Expenses were recorded as \( \$5,000 \) instead of the correct \( \$5,800 \). Therefore, expenses are understated by \( \$800 \), which means the profit for the year is overstated by \( \$800 \).

1 mark for the correct answer: B.
0 marks for any other option.

1. Carrying amount on 1 January 2022 before revaluation:
- Cost = \( \$80,000 \)
- Accumulated Depreciation (2020 and 2021) = \( \$80,000 \times 10\% \times 2 = \$16,000 \)
- Carrying amount before revaluation = \( \$80,000 - \$16,000 = \$64,000 \).

2. Carrying amount after revaluation on 1 January 2022 = \( \$90,000 \).

3. Depreciation for 2022: \( \$90,000 / 6 \text{ years} = \$15,000 \).

4. Depreciation for 2023 (6 months up to 30 June): \( \$15,000 \times 6 / 12 = \$7,500 \).

5. Carrying amount at disposal (30 June 2023) = \( \$90,000 - \$15,000 - \$7,500 = \$67,500 \).

6. Profit or Loss on Disposal = Disposal proceeds - Carrying amount = \( \$65,000 - \$67,500 = \$2,500 \text{ loss} \).

1 mark for the correct answer: C.
0 marks for any other option.

1. Categorize reserves:
- Capital Reserves: Share Premium + Revaluation Reserve.
- Revenue Reserves: Retained Earnings.

2. Revaluation of Land:
- The revaluation surplus of \( \$150,000 - \$120,000 = \$30,000 \) is credited to the Revaluation Reserve, increasing it to \( \$60,000 + \$30,000 = \$90,000 \).

3. Bonus Issue (1-for-5):
- Shares in issue: 500,000 shares.
- Bonus shares = \( 500,000 / 5 = 100,000 \) shares with a nominal value of \( \$100,000 \).
- To keep reserves in their most flexible form, the company uses capital reserves first:
- Utilize all of Share Premium: \( \$80,000 \) (reducing Share Premium to \( \$0 \)).
- Utilize the remaining balance from Revaluation Reserve: \( \$20,000 \) (reducing Revaluation Reserve to \( \$90,000 - \$20,000 = \$70,000 \)).
- Total Capital Reserves = \( \$0 \text{ (Share Premium)} + \$70,000 \text{ (Revaluation Reserve)} = \$70,000 \).

4. Revenue Reserves (Retained Earnings):
- Retained earnings = \( \$140,000 \text{ (opening)} + \$95,000 \text{ (profit)} - \$25,000 \text{ (dividend)} = \$210,000 \).

1 mark for the correct answer: C.
0 marks for any other option.

1. Calculate Contribution per unit:
- X: \( \$50 - \$30 = \$20 \)
- Y: \( \$60 - \$36 = \$24 \)
- Z: \( \$80 - \$44 = \$36 \)

2. Calculate Contribution per machine hour (limiting factor):
- X: \( \$20 / 2 \text{ hours} = \$10 \text{ per hour} \)
- Y: \( \$24 / 3 \text{ hours} = \$8 \text{ per hour} \)
- Z: \( \$36 / 4 \text{ hours} = \$9 \text{ per hour} \)

3. Determine priority order based on contribution per hour:
- 1st: Product X (\( \$10/\text{hour} \))
- 2nd: Product Z (\( \$9/\text{hour} \))
- 3rd: Product Y (\( \$8/\text{hour} \))

4. Allocate machine hours (Total 3,800 hours available):
- Produce Product X to maximum demand (1,000 units): uses \( 1,000 \times 2 = 2,000 \text{ hours} \). Contribution = \( 1,000 \times \$20 = \$20,000 \). Remaining hours = \( 3,800 - 2,000 = 1,800 \text{ hours} \).
- Produce Product Z with remaining hours: maximum demand is 500 units (requires 2,000 hours), but only 1,800 hours are left. We can produce \( 1,800 / 4 = 450 \) units. Contribution = \( 450 \times \$36 = \$16,200 \). Remaining hours = 0.
- Product Y: 0 units produced.

5. Total Contribution: \( \$20,000 + \$16,200 = \$36,200 \).

1 mark for the correct answer: B.
0 marks for any other option.

1. Share the revaluation surplus between old partners in old profit-sharing ratio (3:2):
- A: \( \$20,000 \times 3/5 = +\$12,000 \)
- B: \( \$20,000 \times 2/5 = +\$8,000 \)

2. Adjust for Goodwill (which is not retained in the books):
- Credit old partners in old ratio (3:2):
- A: \( \$40,000 \times 3/5 = +\$24,000 \)
- Debit all partners in new ratio (5:3:2):
- A: \( \$40,000 \times 5/10 = -\$20,000 \)
- Net Goodwill adjustment for A = \( +\$24,000 - \$20,000 = +\$4,000 \).

3. Calculate final capital balance for A:
- Opening Balance: \( \$80,000 \)
- Add: Share of revaluation: \( +\$12,000 \)
- Add: Net Goodwill adjustment: \( +\$4,000 \)
- Final Capital Balance: \( \$80,000 + \$12,000 + \$4,000 = \$96,000 \).

1 mark for the correct answer: A.
0 marks for any other option.

To find the number of units required to achieve a target profit, we use the formula: \( (\text{Fixed Costs} + \text{Target Profit}) / \text{Contribution per unit} \). Contribution per unit = \( \text{Selling Price} - \text{Variable Cost} = \\$30 - \\$18 = \\$12 \). Total contribution required = \( \\$45,000 + \\$15,000 = \\$60,000 \). Required units = \( \\$60,000 / \\$12 = 5,000 \) units.

1 mark for the correct answer. Method: Contribution per unit calculation = 0.5 marks, Target units calculation = 0.5 marks.

Retained earnings is adjusted by adding the profit for the year and deducting any dividends paid during the year and any transfers to other reserves. Proposed dividends are not recognized as a liability or deducted from retained earnings at the year-end under IAS 10. Retained Earnings = \( \\$120,000 \text{ (opening)} + \\$45,000 \text{ (profit)} - \\$10,000 \text{ (interim dividend paid)} - \\$8,000 \text{ (transfer to general reserve)} = \\$147,000 \).

1 mark for the correct answer. Method: Exclusion of proposed dividend = 0.5 marks, adjustment of paid dividend and reserves = 0.5 marks.

The corrected cash book balance only includes adjustments for items that have occurred but are not yet recorded in the cash book. Unpresented cheques are reconciling items for the bank reconciliation statement and do not affect the cash book balance. Corrected Cash Book Balance = \( \\$4,500 \text{ (debit)} - \\$120 \text{ (bank charges)} - \\$850 \text{ (dishonoured cheque)} = \\$3,530 \) debit.

1 mark for the correct answer. Method: recognition of bank charges and dishonoured cheques as cash book adjustments = 0.5 marks, exclusion of unpresented cheques = 0.5 marks.

Let credit sales be S. The equation for the sales ledger control account is: Opening Balance + Credit Sales - Receipts - Discounts Allowed - Contra - Irrecoverable Debts - Credit Notes = Closing Balance. \( \\$12,400 + S - \\$48,200 - \\$1,500 - \\$800 - \\$600 - \\$1,200 = \\$15,300 \). This simplifies to \( \\$12,400 + S - \\$52,300 = \\$15,300 \), so \( S - \\$39,900 = \\$15,300 \), which gives \( S = \\$55,200 \).

1 mark for the correct answer. Method: identifying credit sales as a missing figure with correct debit/credit entries = 1 mark.

Depreciation for 2021: \( 20\\% \times \\$20,000 = \\$4,000 \), resulting in a net book value (NBV) of \( \\$16,000 \). Depreciation for 2022: \( 20\\% \times \\$16,000 = \\$3,200 \), resulting in an NBV of \( \\$12,800 \). No depreciation is charged in 2023 (the year of disposal). Disposal Loss = NBV - Sale Proceeds = \( \\$12,800 - \\$11,500 = \\$1,300 \) loss.

1 mark for the correct answer. Method: reducing balance depreciation calculation for 2 years = 0.5 marks, applying year of disposal policy = 0.5 marks.

Using the high-low method: Change in units = \( 12,000 - 8,000 = 4,000 \) units. Change in total cost = \( \\$98,000 - \\$74,000 = \\$24,000 \). Variable cost per unit = \( \\$24,000 / 4,000 = \\$6.00 \). Total fixed costs = \( \text{Total cost} - (\text{Variable cost per unit} \times \text{Output}) = \\$74,000 - (\\$6.00 \times 8,000) = \\$26,000 \).

1 mark for the correct answer. Method: variable cost per unit calculation = 0.5 marks, total fixed cost calculation = 0.5 marks.

### **Part a) Differences between a Bonus Issue and a Rights Issue**

1. **Cash Inflow / Source of Funding**:
* **Rights Issue**: Raises new capital for the company because shareholders pay cash to buy the new shares.
* **Bonus Issue**: Does not raise any cash for the company; it is a "paper transaction" where existing reserves (e.g. share premium, general reserve) are capitalised into share capital.

2. **Cost to Shareholders**:
* **Rights Issue**: Offered to existing shareholders at a cost (usually at a discount to the current market value but above nominal value).
* **Bonus Issue**: Issued to existing shareholders completely free of charge.

3. **Impact on Total Equity**:
* **Rights Issue**: Increases the overall net assets and total equity of the company.
* **Bonus Issue**: Total equity remains unchanged, as it only involves transferring balances from one equity account (reserves) to another (share capital).

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### **Part b) Statement of Changes in Equity for Zelo PLC for the year ended 31 December 2023**

#### **Workings for Transactions:**

* **Opening shares**: \( \frac{\$400,000}{\$0.50} = 800,000 \) ordinary shares.
* **1 March 2023 (Bonus Issue)**:
* Bonus ratio: 1 for every 5.
* Shares issued: \( 800,000 / 5 = 160,000 \) shares.
* Nominal value: \( 160,000 \times \$0.50 = \$80,000 \).
* To keep reserves in their most flexible form, use the non-distributable Share Premium reserve first. Since the share premium balance is $120,000, we fully deduct $80,000 from the Share Premium account.
* **1 June 2023 (Rights Issue)**:
* Existing shares: \( 800,000 + 160,000 = 960,000 \) shares.
* Rights ratio: 1 for every 4.
* Shares issued: \( 960,000 / 4 = 240,000 \) shares.
* Issue price: $0.80 per share.
* Nominal value of issue: \( 240,000 \times \$0.50 = \$120,000 \) (added to Ordinary Shares).
* Premium on issue: \( 240,000 \times (\$0.80 - \$0.50) = 240,000 \times \$0.30 = \$72,000 \) (added to Share Premium).
* Total cash received: \( 240,000 \times \$0.80 = \$192,000 \).
* **1 September 2023 (Interim Dividend)**:
* Existing shares: \( 960,000 + 240,000 = 1,200,000 \) shares.
* Dividend paid: \( 1,200,000 \times \$0.05 = \$60,000 \) (deducted from Retained Earnings).
* **31 December 2023 (Profit for the Year)**:
* Profit before interest: $145,000.
* Interest on 8% non-current loan: \( \$100,000 \times 8\% = \$8,000 \).
* Net profit for the year: \( \$145,000 - \$8,000 = \$137,000 \).

#### **Statement of Changes in Equity table:**

| Details | Ordinary Shares ($) | Share Premium ($) | General Reserve ($) | Retained Earnings ($) | Total ($) |
| :--- | :---: | :---: | :---: | :---: | :---: |
| **Balances at 1 January 2023** | 400,000 | 120,000 | 50,000 | 185,000 | 755,000 |
| Bonus Issue (1 for 5) | 80,000 | (80,000) | - | - | - |
| Rights Issue (1 for 4) | 120,000 | 72,000 | - | - | 192,000 |
| Interim Dividend Paid | - | - | - | (60,000) | (60,000) |
| Transfer to General Reserve | - | - | 20,000 | (20,000) | - |
| Profit for the Year | - | - | - | 137,000 | 137,000 |
| **Balances at 31 December 2023** | **600,000** | **112,000** | **70,000** | **242,000** | **1,024,000** |

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### **Part c) Equity and Liabilities Section of the Statement of Financial Position as at 31 December 2023**

| | $ | $ |
| :--- | :--- | :--- |
| **Equity** | | |
| Ordinary shares (nominal value $0.50 each) | | 600,000 |
| Share premium | | 112,000 |
| General reserve | | 70,000 |
| Retained earnings | | 242,000 |
| **Total Equity** | | **1,024,000** |
| | | |
| **Non-Current Liabilities** | | |
| 8% Non-current loan | | 100,000 |
| | | |
| **Current Liabilities** | | |
| Trade and other payables | 45,000 | |
| Accrued loan interest | 8,000 | |
| **Total Current Liabilities** | | **53,000** |
| **Total Equity and Liabilities** | | **1,177,000** |

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### **Part d) Evaluation of Financing Options**

* **Option 1: 10% Non-current debentures**
* *Advantages*: Does not dilute ownership control of existing shareholders; the cost of debt is fixed ($30,000 per year), leaving remaining profits for shareholders.
* *Disadvantages*: Annual interest of $30,000 must be paid regardless of profit levels, which increases financial distress risk; increases the company's gearing ratio significantly (higher financial risk).
* **Option 2: Rights Issue of Ordinary Shares**
* *Advantages*: Equity is permanent capital and does not require mandatory repayment; dividends are discretionary (no mandatory fixed annual cash outflow); lowers or maintains a lower gearing ratio (reducing financial risk).
* *Disadvantages*: Dilutes earnings per share if profits do not grow proportionally; may dilute control if existing shareholders do not take up their rights and sell them to outsiders.

* **Recommendation**: (Any clear recommendation is acceptable if supported by arguments).
* *Example*: The directors should choose **Option 2 (Rights Issue)**. Although it may dilute EPS slightly in the short term, it avoids adding $30,000 in fixed annual interest charges to a business already carrying a loan, keeping the financial structure safer.

### **Marking Scheme**

**Part a) Differences [Max 4 marks]**
* **1 mark** per difference correctly explained (up to **2 marks** per difference).
* Difference 1: Cash flow impact (Rights issue increases cash; Bonus issue is a non-cash reserves transfer) (1) plus explanation of reserves used (1).
* Difference 2: Price paid by shareholder (Rights issue has a subscription price; Bonus shares are free of charge) (1) plus explanation of impact on share value (1).

**Part b) Statement of Changes in Equity [Total 12 marks]**
* Opening balances correctly presented: **[1] mark**
* Bonus issue:
* Ordinary shares row (+$80,000): **[1] mark**
* Share premium row (-$80,000): **[1] mark**
* Rights issue:
* Ordinary shares row (+$120,000): **[1] mark**
* Share premium row (+$72,000): **[1] mark**
* Total column (+$192,000): **[1] mark**
* Interim dividend paid:
* Retained earnings row (-$60,000): **[1] mark**
* Total column (-$60,000): **[1] mark**
* Transfer to General Reserve:
* Retained earnings (-$20,000) and General reserve (+$20,000): **[1] mark**
* Profit for the year:
* Retained earnings row (+$137,000) (Award mark if $137,000 is shown, representing profit $145,000 - interest $8,000): **[1] mark (for calculation)** + **[1] mark (for row placement)**
* Total column closing balance ($1,024,000): **[1] mark (Own Figure - OF)**

**Part c) Statement of Financial Position [Total 10 marks]**
* **Equity Section [5 marks total]**:
* Ordinary shares $600,000, Share premium $112,000, General reserve $70,000, Retained earnings $242,000 (All 4 correct from Part b): **[4] marks (1 mark each)**
* Total Equity correctly summed ($1,024,000): **[1] mark (OF)**
* **Non-Current Liabilities [1 mark total]**:
* 8% Non-current loan ($100,000): **[1] mark**
* **Current Liabilities [3 marks total]**:
* Trade and other payables ($45,000): **[1] mark**
* Accrued loan interest ($8,000) (calculated as \( \$100,000 \times 8\% \)): **[2] marks (1 mark for working, 1 mark for accuracy)**
* **Total Equity and Liabilities [1 mark total]**:
* Summing to $1,177,000 correctly: **[1] mark (OF)**

**Part d) Evaluation [Total 4 marks]**
* **1 mark** for arguing the pros/cons of Option 1 (debentures and interest/gearing).
* **1 mark** for arguing the pros/cons of Option 2 (equity and dilution of control/dividend flexibility).
* **1 mark** for comparing the gearing impact of both options.
* **1 mark** for making a logical, supported recommendation.

(a) Journal Entries:
1.
Debit: Insurance $450
Debit: Suspense $90
Credit: Motor expenses $540

2.
Debit: J. Patel $820
Credit: Sales / Revenue $820

3.
Debit: Equipment $1,200
Credit: Purchases $1,200

4.
Debit: Discount Allowed $75
Debit: Discount Received $75
Credit: Suspense $150

5.
Debit: Suspense $300
Credit: Sales / Revenue $300

(b) Suspense Account:
Debit side:
- Motor expenses / Insurance correction: $90
- Sales / Revenue (undercast): $300
- Total: $390

Credit side:
- Difference on trial balance (opening balance): $240
- Discount correction: $150
- Total: $390

(c) Corrected Profit Statement:
Draft Profit: $42,600
Add:
- Credit sales omitted (Error 2): +$820
- Purchases correction (Error 3): +$1,200
- Sales undercast (Error 5): +$300
- Reduction in motor expenses (Error 1): +$540
Less:
- Insurance expense (Error 1): -$450
- Discount allowed (Error 4): -$75
- Reduction in discount received (Error 4): -$75
Corrected Profit: $44,860

(a) Journal Entries [8 marks]:
- Error 1: Debit Insurance $450 & Credit Motor Expenses $540 [1 mark], Debit Suspense $90 [1 mark]
- Error 2: Debit J. Patel $820 & Credit Revenue $820 [1 mark]
- Error 3: Debit Equipment $1,200 & Credit Purchases $1,200 [1 mark]
- Error 4: Debit Discount Allowed $75 [1 mark], Debit Discount Received $75 [1 mark], Credit Suspense $150 [1 mark]
- Error 5: Debit Suspense $300 & Credit Revenue $300 [1 mark]

(b) Suspense Account [4 marks]:
- Credit: Difference on trial balance $240 [1 mark]
- Debit: Motor expenses / Insurance correction $90 [1 mark]
- Credit: Discount correction $150 [1 mark]
- Debit: Revenue/Sales undercast $300 [1 mark]

(c) Corrected Profit [3 marks]:
- Corrected profit figure of $44,860 [1 mark]
- Correct adjustments for Error 1 and Error 4 [1 mark]
- Correct adjustments for Error 2, 3 and 5 [1 mark]

(a) Calculations:

Credit Sales:
Receipts from Trade Receivables: $84,500
Add: Closing Trade Receivables: $9,100
Less: Opening Trade Receivables: ($8,400)
= Credit Sales: $85,200

Credit Purchases:
Payments to Trade Payables: $54,300
Add: Closing Trade Payables: $5,800
Less: Opening Trade Payables: ($6,200)
= Credit Purchases: $53,900

(b) Sanjay - Income Statement for the year ended 31 December 2022

Revenue:
Cash Sales: $12,300
Credit Sales: $85,200
Total Revenue: $97,500

Less: Cost of Sales:
Opening Inventory: $14,500
Credit Purchases: $53,900
Less: Goods taken for drawings: ($1,800)
Adjusted Purchases: $52,100
Goods available for sale: $66,600
Less: Closing Inventory: ($16,200)
Cost of Sales: ($50,400)
Gross Profit: $47,100

Expenses:
Rent ($7,600 + $1,200 + $400): $9,200
General expenses: $9,200
Depreciation of Equipment ($24,000 - $21,600): $2,400
Total Expenses: ($20,800)
Profit for the year: $26,300

(c) Three advantages of maintaining full double-entry accounting records:
1. Enables the preparation of a trial balance to check the arithmetical accuracy of the records.
2. Minimises the possibility of errors and facilitates easier detection of fraud.
3. Provides reliable and accurate financial data required to prepare final accounts and assess performance.
4. Easier to secure financial assistance (loans) from banks and obtain credit from suppliers.

(a) Total 4 marks:
- 1 mark for correct credit sales working, 1 mark for final credit sales figure of $85,200.
- 1 mark for correct credit purchases working, 1 mark for final credit purchases figure of $53,900.

(b) Total 8 marks:
- 1 mark for Total Revenue ($97,500) (comprising cash and credit sales).
- 1 mark for Opening Inventory ($14,500).
- 1 mark for showing Purchases ($53,900) and 1 mark for adjusting for goods drawings ($1,800).
- 1 mark for Closing Inventory ($16,200).
- 1 mark for Rent expense calculation ($9,200).
- 1 mark for Depreciation of equipment ($2,400).
- 1 mark for Profit for the year ($26,300) (subject to own figure (O/F) rule).

(c) Total 3 marks:
- 1 mark per valid advantage stated, up to a maximum of 3 marks.

**(a) Limiting Factor Explanation**
* A limiting factor (or key factor) is any factor of production or demand that limits the activity of an organization because its availability is insufficient to meet maximum capacity or market demand. (2 marks)
* Other examples: Direct labor hours, machine hours, sales demand, cash/liquidity, factory space. (Any two, 1 mark each = 2 marks)

**(b) (i) Contribution per unit**
* \text{Contribution per unit} = \text{Selling Price} - \text{Variable Costs}
* **Alpha**: $40 - ($12 + $10 + $4) = $40 - $26 = $14 (1 mark)
* **Beta**: $60 - ($24 + $15 + $6) = $60 - $45 = $15 (1 mark)
* **Gamma**: $80 - ($20 + $25 + $5) = $80 - $50 = $30 (1 mark)

**(b) (ii) Contribution per kg of material & Ranking**
* Material usage per unit:
* **Alpha**: $12 / $4 = 3 kg (0.5 marks)
* **Beta**: $24 / $4 = 6 kg (0.5 marks)
* **Gamma**: $20 / $4 = 5 kg (0.5 marks)
* Contribution per kg:
* **Alpha**: $14 / 3 \text{ kg} = $4.67 per kg (0.5 marks)
* **Beta**: $15 / 6 \text{ kg} = $2.50 per kg (0.5 marks)
* **Gamma**: $30 / 5 \text{ kg} = $6.00 per kg (0.5 marks)
* **Ranking**:
1. **Gamma** (Rank 1) (0.5 marks)
2. **Alpha** (Rank 2) (0.5 marks)
3. **Beta** (Rank 3) (0.5 marks)

**(b) (iii) Optimum Production Plan and Profit Calculation**
* Total material available = 11,500 kg
* **1st priority: Gamma**
* Units: 800 units * 5 kg = 4,000 kg used. (Remaining: 7,500 kg) (1 mark)
* **2nd priority: Alpha**
* Units: 1,500 units * 3 kg = 4,500 kg used. (Remaining: 3,000 kg) (1 mark)
* **3rd priority: Beta**
* Available material: 3,000 kg.
* Units: 3,000 kg / 6 kg = 500 units. (1 mark)

* **Profit Calculation:**
* Contribution from Gamma: 800 * $30 = $24,000
* Contribution from Alpha: 1,500 * $14 = $21,000
* Contribution from Beta: 500 * $15 = $7,500
* **Total Contribution**: $52,500 (1 mark)
* Less: **Fixed Costs**: ($22,000)
* **Maximum Profit**: $30,500 (1 mark)

**(c) Special Order Evaluation**
* Selling price of special order = $48.00 per unit (1 mark)
* Material cost per unit for special order = 6 kg * $5.50 = $33.00 (1 mark)
* Other variable costs per unit = Labor ($15) + Variable Overheads ($6) = $21.00 (1 mark)
* Total variable cost per unit for special order = $33.00 + $21.00 = $54.00 (1 mark)
* Contribution per unit on special order = $48.00 - $54.00 = -$6.00 per unit (1 mark)
* Total loss from special order = 300 units * -$6.00 = -$1,800.
* **Decision**: Reject the special order as it yields a negative contribution of $6 per unit, which reduces overall profit by $1,800. (1 mark)

**(d) Evaluation of Marginal Costing vs Absorption Costing**
* **Arguments for Marginal Costing in Decision Making:**
* Focuses on contribution (selling price minus variable cost), which is highly relevant for short-term decisions such as make-or-buy, special pricing, or optimal resource allocation under a limiting factor (as seen in part b). (1 mark)
* Avoids arbitrary allocation of fixed overheads to units, preventing misleading unit profitability analysis. (1 mark)
* Profits are not influenced by changes in inventory levels (no over/under-absorption of overheads). (1 mark)
* **Arguments for Absorption Costing / Limitations of Marginal Costing:**
* In the long term, all fixed overheads must be recovered to survive; marginal costing could lead to underpricing if relied on permanently. (1 mark)
* IAS 2 requires inventory to be valued using absorption costing (including systematic allocation of fixed production overheads) for financial statements. (1 mark)
* Separating semi-variable costs into fixed and variable portions can be difficult and subjective. (1 mark)
* **Conclusion/Recommendation:**
* For short-term decision-making and operational control, marginal costing is superior because it clearly shows the contribution of products. However, absorption costing must be used for year-end reporting to comply with accounting standards, and for long-term strategic pricing. (2 marks)

**(a)**
* Max 2 marks for explanation of "limiting factor" (e.g., resource in short supply restricting production/sales).
* Max 2 marks for listing two other limiting factors (1 mark per valid example, e.g., labor hours, machine hours, sales demand).

**(b)(i)**
* 1 mark for correct calculation of Alpha's contribution ($14).
* 1 mark for correct calculation of Beta's contribution ($15).
* 1 mark for correct calculation of Gamma's contribution ($30).

**(b)(ii)**
* 1.5 marks for correct calculation of material weights per product (0.5 marks each: Alpha = 3kg, Beta = 6kg, Gamma = 5kg).
* 1.5 marks for contribution per kg calculations (0.5 marks each: Alpha = $4.67, Beta = $2.50, Gamma = $6.00).
* 1 mark for correct ranking (Gamma, Alpha, Beta) (all correct needed for 1 mark, or 0.5 for partly correct ranking based on their figures).

**(b)(iii)**
* 1 mark for allocating 4,000 kg to Gamma (producing 800 units).
* 1 mark for allocating 4,500 kg to Alpha (producing 1,500 units).
* 1 mark for allocating remaining 3,000 kg to Beta (producing 500 units).
* 1 mark for calculating total contribution of $52,500 (or correct OF based on plan units).
* 1 mark for calculating net profit of $30,500 (Total contribution - $22,000 fixed overheads).

**(c)**
* 1 mark for identifying special selling price ($48).
* 1 mark for calculating new material cost per unit (6 kg x $5.50 = $33).
* 1 mark for other variable costs per unit ($21).
* 1 mark for calculating new total variable cost per unit ($54).
* 1 mark for calculating negative contribution (-$6 per unit or -$1,800 total).
* 1 mark for correct decision to reject with explanation based on the negative contribution.

**(d)**
* Max 3 marks for advantages/points supporting marginal costing.
* Max 3 marks for advantages/points supporting absorption costing (or limitations of marginal costing).
* Max 2 marks for a balanced, reasoned recommendation/conclusion.