Cambridge IGCSE · Thinka-original Practice Paper

2023 Cambridge IGCSE Accounting (0452) Practice Paper with Answers

Thinka Jun 2023 (V1) Cambridge International A Level-Style Mock — Accounting (0452)

100 marks105 mins2023

An original Thinka practice paper modelled on the structure and difficulty of the Jun 2023 (V1) Cambridge International A Level Accounting (0452) paper. Not affiliated with or reproduced from Cambridge.

Section Question 1: Bookkeeping and Cash Management

Answer all parts of the question. Prepare petty cash records, supplier ledger accounts, and evaluate cash management policy changes.

4 Question · 20 marks

Question 1 · Ledger Account & Prime Entry

7 marks

Zayd is a trader who maintains double-entry records. He buys goods on credit from Fatima, a supplier. On 1 May 2023, Zayd owed Fatima $450.

The following transactions took place during May 2023:
- May 4: Purchased goods on credit from Fatima, list price $600, less a 10% trade discount.
- May 12: Returned damaged goods to Fatima, list price $100 (purchased on 4 May).
- May 28: Paid Fatima by bank transfer to settle the balance owing on 1 May 2023, after deducting a 2% cash discount.
- May 31: Bought goods from Fatima on credit, $350.

Prepare the account of Fatima in the purchases ledger of Zayd for the month of May 2023. Balance the account and bring down the balance on 1 June 2023.

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Worked solution

Here is the ledger account:

**Fatima Account (in Zayd's Purchases Ledger)**

$$\begin{array}{llr|lllr} \text{Date} & \text{Details} & \text{Amount (\$)} & \text{Date} & \text{Details} & & \text{Amount (\$)} \\ \hline \text{2023} & & & \text{2023} & & & \\ \text{May 12} & \text{Purchases returns} & 90 & \text{May 1} & \text{Balance b/d} & & 450 \\ \text{May 28} & \text{Bank} & 441 & \text{May 4} & \text{Purchases} & (600 - 10\%) & 540 \\ \text{May 28} & \text{Discount received} & 9 & \text{May 31} & \text{Purchases} & & 350 \\ \text{May 31} & \text{Balance c/d} & 800 & & & & \\ \hline & & 1340 & & & & 1340 \\ \hline & & & \text{June 1} & \text{Balance b/d} & & 800 \\ \end{array}$$

**Calculations:**
1. **May 4 Purchases:** List price of $600 less 10% trade discount: $600 - (10\% \times 600) = 540$.
2. **May 12 Purchases Returns:** List price of $100 less 10% trade discount: $100 - (10\% \times 100) = 90$.
3. **May 28 Payment & Discount:** Zayd paid the balance owing on 1 May ($450) with a 2% cash discount.
- Cash discount = $450 \times 2\% = 9$
- Bank payment = $450 - 9 = 441$

Marking scheme

1 mark for May 1 Balance b/d on credit side ($450).
1 mark for May 4 Purchases ($540) on credit side.
1 mark for May 12 Purchases returns ($90) on debit side.
1 mark for May 28 Bank payment ($441) on debit side.
1 mark for May 28 Discount received ($9) on debit side.
1 mark for May 31 Purchases ($350) on credit side.
1 mark for correct balancing and carrying down/bringing down balance ($800) on 1 June 2023.

[Total: 7 marks]

Question 2 · Ledger Account & Prime Entry

7 marks

Helena maintains a petty cash book with a starting imprest of $150. On 1 June 2023, the petty cash float was restored to $150. During June, the following petty cash transactions occurred:
- June 3: Paid taxi fare $18
- June 10: Paid office cleaner $45
- June 18: Purchased office stationery $22
- June 25: Paid cash to a credit supplier, J. Gomez $30

(a) Calculate:
(i) The balance of petty cash at 30 June 2023. (1 mark)
(ii) The amount of cash required to restore the imprest on 1 July 2023. (1 mark)

(b) Helena is considering increasing the imprest amount to $250. Evaluate this proposal by providing:
(i) One business reason in favour of increasing the imprest. (2 marks)
(ii) One business reason against increasing the imprest. (2 marks)

(c) State which ledger account is debited with the total of the stationery column of the petty cash book at the end of the month. (1 mark)

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Worked solution

(a)
(i) Total payments during June = $18 + 45 + 22 + 30 = 115$. Petty cash balance at 30 June = $150 - 115 = 35$.
(ii) The amount needed to restore the imprest on 1 July 2023 is equal to the total payments made, which is $115$.

(b)
(i) One reason in favour: The business may have experienced rising costs (inflation) or an increased volume of small cash transactions. Increasing the float to $250 ensures that the petty cashier does not run out of cash before the end of the month, avoiding the need for emergency top-ups.
(ii) One reason against: Keeping a larger cash float on hand increases the risk of theft, fraud, or misuse of funds. It also ties up more capital as idle cash that could otherwise be used elsewhere or earn bank interest.

(c) The Stationery account (in the general ledger) is debited with the total of the stationery column of the petty cash book at the end of the month.

Marking scheme

(a) (i) 1 mark for calculating the balance of $35.
(a) (ii) 1 mark for calculating the restore amount of $115.

(b) (i) 1 mark for identifying a valid reason in favour (e.g., higher volume of transactions / avoiding frequent top-ups) + 1 mark for developing/explaining how this benefits the business.
(b) (ii) 1 mark for identifying a valid reason against (e.g., risk of theft / idle funds) + 1 mark for explaining the negative consequence.

(c) 1 mark for stating the Stationery account (in the general ledger).

[Total: 7 marks]

Question 3 · Short Answer & Advice

3 marks

Haris, a sole trader, currently operates a petty cash book with an imprest float of $100. Over the last month, his assistant ran out of petty cash twice, delaying minor business purchases. Haris is considering increasing the imprest float to $250. Advise Haris whether he should increase the float. Justify your answer with one point in favor of the increase and one point against.

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Worked solution

Advice:
- Recommend increasing the float but suggest a smaller increase (e.g., $150-$200) to balance convenience and security.

Point in favor:
- Prevents disruption to daily transactions/purchases.
- Saves administrative time because the float does not need to be restored as frequently.

Point against:
- Increased risk of theft, loss, or misappropriation of cash.
- Ties up working capital as idle cash that earns no interest and could be better used elsewhere.

Marking scheme

1 mark for a reasonable advice/recommendation.
1 mark for one valid point in favor of increasing the float.
1 mark for one valid point against increasing the float.

Question 4 · Short Answer

3 marks

On 1 October 2023, Delilah purchased goods on credit from a supplier, Silas, list price $800, subject to a 15% trade discount. On 5 October 2023, Delilah returned some of these goods, which had a list price of $120, to Silas. State the amount to be recorded in Delilah's purchases returns journal, and name the account to be debited and the account to be credited in Delilah's ledger to record this return.

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Worked solution

1. Calculation of the purchases returns value:
List price of returned goods = $120
Less: 15% trade discount = $120 \times 15\% = $18
Net value of returns = $120 - $18 = $102
(Trade discount is always deducted before recording transactions in the books of prime entry and ledgers.)

2. Ledger accounts entry:
- Debit: Silas (or Trade Payables) to reduce the liability to the creditor by $102.
- Credit: Purchases returns (or Returns outwards) account to record the reduction in purchases cost by $102.

Marking scheme

1 mark for calculating the correct net value of $102.
1 mark for stating Debit: Silas / Trade Payables / Purchases Ledger account.
1 mark for stating Credit: Purchases returns / Returns outwards.

Section Question 2: Non-Current Assets and Debt Provisions

Answer all parts of the question. Update provision accounts, calculate gains or losses on disposal of non-current assets, and distinguish capital and revenue expenditures.

5 Question · 20 marks

Question 1 · Ledger Account & Provision

4 marks

Zain, a trader, prepares his financial statements on 31 December each year. On 1 January 2022, the balance on his Provision for Depreciation of Motor Vehicles Account was $15,000. On 30 June 2022, he disposed of a motor vehicle which had cost $10,000 on 1 January 2019. Motor vehicles are depreciated at 20% per annum using the straight-line method, calculated on a monthly basis for ownership. The total cost of motor vehicles on 1 January 2022 was $60,000. No new vehicles were purchased during the year. Calculate: (i) The accumulated depreciation on the disposed motor vehicle at the date of disposal. (ii) The total depreciation charge for motor vehicles to be transferred to the Income Statement for the year ended 31 December 2022.

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Worked solution

Step (i): Accumulated depreciation on the disposed vehicle. Date of purchase is 1 January 2019 and date of disposal is 30 June 2022. The period of ownership is 3 years and 6 months (3.5 years). Annual depreciation is calculated as: $ \$10,000 \times 20\% = \$2,000 $ per annum. Total accumulated depreciation is: $ \$2,000 \times 3.5\text{ years} = \$7,000 $. Step (ii): Depreciation charge for the year ended 31 December 2022. First, calculate depreciation on remaining motor vehicles held for the full year: Cost of remaining vehicles is $ \$60,000 - \$10,000 = \$50,000 $. Depreciation on remaining vehicles is $ \$50,000 \times 20\% = \$10,000 $. Next, calculate depreciation on the disposed vehicle for the 6 months of ownership in 2022: $ \$10,000 \times 20\% \times \frac{6}{12} = \$1,000 $. Therefore, total depreciation charge for 2022 is $ \$10,000 + \$1,000 = \$11,000 $.

Marking scheme

Part (i): 2 marks total. 1 mark for calculating the annual depreciation of $2,000 or the correct period of ownership (3.5 years). 1 mark for the correct final accumulated depreciation of $7,000. Part (ii): 2 marks total. 1 mark for calculating the depreciation of the remaining vehicles ($10,000) or the partial-year depreciation of the disposed vehicle ($1,000). 1 mark for the correct total depreciation of $11,000.

Question 2 · Ledger Account & Provision

4 marks

On 1 January 2022, a trader's Provision for Doubtful Debts had a balance of $1,400. On 31 December 2022, the trade receivables balance before any adjustments was $45,000. On this date, it was decided to write off an irrecoverable debt of $1,500 from a customer who has gone bankrupt. The trader maintains a provision for doubtful debts at 4% of trade receivables. Calculate: (i) The balance on the Provision for Doubtful Debts Account to be carried down to 1 January 2023. (ii) The net amount to be debited or credited to the Income Statement for the year ended 31 December 2022 in respect of the provision (state both the amount and whether it is a debit/expense or credit/income).

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Worked solution

Step (i): Calculate the balance to be carried down. Trade receivables must first be adjusted for the irrecoverable debt written off: $ \$45,000 - \$1,500 = \$43,500 $. The provision required (balance carried down) is: $ \$43,500 \times 4\% = \$1,740 $. Step (ii): Calculate the amount transferred to the Income Statement. Opening balance on 1 January 2022 was $1,400. Closing balance required on 31 December 2022 is $1,740. This represents an increase in the provision of: $ \$1,740 - \$1,400 = \$340 $. An increase in the provision for doubtful debts is an expense, so it must be debited to the Income Statement.

Marking scheme

Part (i): 2 marks total. 1 mark for adjusting trade receivables to $43,500. 1 mark for the correct closing provision of $1,740. Part (ii): 2 marks total. 1 mark for calculating the difference of $340. 1 mark for correctly stating that it is a debit or expense.

Question 3 · Ledger Account & Provision

4 marks

A business purchased a new delivery van for $15,000. The bookkeeper correctly capitalized the purchase price of the van, but incorrectly recorded the delivery charge of $600 and sign-writing (branding) costs of $400 as revenue expenditure in the repairs and maintenance account. Motor vehicles are depreciated at 20% per annum using the straight-line method. Calculate the overall effect of this error on the profit for the year ended 31 December 2022 (state the amount of the difference and whether the profit was understated or overstated).

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Worked solution

1. Correct Treatment: Capital expenditure (total cost of the van) should be: $ \$15,000 + \$600 + \$400 = \$16,000 $. Correct depreciation charge is: $ \$16,000 \times 20\% = \$3,200 $. No revenue expenditure should be charged to the Income Statement for repairs. Total expense should be $3,200. 2. Incorrect Treatment: Capital expenditure recorded was $15,000. Incorrect depreciation charge recorded was: $ \$15,000 \times 20\% = \$3,000 $. Incorrect revenue expenditure charged to repairs was: $ \$600 + \$400 = \$1,000 $. Total expense recorded was: $ \$3,000 \text{ (depreciation)} + \$1,000 \text{ (repairs)} = \$4,000 $. 3. Effect on Profit: Expenses were recorded as $4,000 instead of $3,200, which is an overstatement of expenses by: $ \$4,000 - \$3,200 = \$800 $. Because expenses were overstated, the profit for the year was understated by $800.

Marking scheme

Total: 4 marks. 1 mark for calculating the correct cost of the van as $16,000 or the correct depreciation of $3,200. 1 mark for identifying the incorrect expense of $1,000 charged to the income statement. 1 mark for calculating the difference of $800. 1 mark for correctly identifying that profit was 'understated'.

Question 4 · Calculation & Classification Table

4 marks

Orion Trading completed the following transactions during the year ended 31 December 2023:

1. Paid $8,400 for the installation of a new security system in the warehouse.
2. Paid $1,250 for repairs to the warehouse roof following a storm.
3. Paid $350 for carriage inwards on delivery of a new machine.
4. Paid $1,800 for the annual fire insurance premium for the warehouse.

Classify each transaction as either Capital Expenditure or Revenue Expenditure.

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Worked solution

1. **Installation of a new security system ($8,400)**: Capital Expenditure. This is a one-off cost to acquire or improve a non-current asset which provides long-term benefit.
2. **Repairs to the warehouse roof ($1,250)**: Revenue Expenditure. This is a cost incurred in the day-to-day maintenance of a non-current asset to keep it in working condition.
3. **Carriage inwards on delivery of a new machine ($350)**: Capital Expenditure. This is an additional cost incurred to bring a non-current asset into its working location and condition.
4. **Annual fire insurance premium ($1,800)**: Revenue Expenditure. This is a recurring running cost of the business.

Marking scheme

1 mark for each correct classification:
- Item 1: Capital Expenditure (1 mark)
- Item 2: Revenue Expenditure (1 mark)
- Item 3: Capital Expenditure (1 mark)
- Item 4: Revenue Expenditure (1 mark)

Question 5 · Calculation & Classification Table

4 marks

On 1 January 2021, Jamil purchased a machine for $15,000. He depreciates machinery at 20% per annum using the reducing balance method. A full year's depreciation is charged in the year of purchase, but no depreciation is charged in the year of disposal.

On 1 July 2023, Jamil sold the machine for $9,000 cash.

Calculate the gain or loss on the disposal of the machine. Show your workings.

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Worked solution

Step 1: Calculate depreciation for the year ended 31 December 2021:
$ \text{Depreciation} = \$15,000 \times 20\% = \$3,000 $
$ \text{Net Book Value (NBV) at 31 December 2021} = \$15,000 - \$3,000 = \$12,000 $

Step 2: Calculate depreciation for the year ended 31 December 2022:
$ \text{Depreciation} = \$12,000 \times 20\% = \$2,400 $
$ \text{Net Book Value (NBV) at 31 December 2022} = \$12,000 - \$2,400 = \$9,600 $

Step 3: Calculate depreciation for the year of disposal (2023):
According to Jamil's policy, no depreciation is charged in the year of disposal. Thus, the Net Book Value at the date of disposal is the same as on 31 December 2022:
$ \text{Net Book Value at disposal} = \$9,600 $

Step 4: Calculate the gain or loss on disposal:
$ \text{Loss on disposal} = \text{Net Book Value} - \text{Disposal Proceeds} $
$ \text{Loss on disposal} = \$9,600 - \$9,000 = \$600 $

Marking scheme

- 1 mark for correct depreciation in Year 1 of $3,000 (or NBV of $12,000)
- 1 mark for correct depreciation in Year 2 of $2,400
- 1 mark for calculating correct Net Book Value at disposal of $9,600
- 1 mark for final correct calculation of Loss on disposal of $600 (Accept loss on disposal, reject gain)

Section Question 3: Trial Balance and Correction of Errors

Answer all parts of the question. Journalize corrections, prepare a suspense account, and recalculate closing capital after adjustments.

3 Question · 20 marks

Question 1 · Journal/Correction Table

10 marks

Yasmin, a sole trader, prepared a trial balance on 31 December 2023 which did not balance. The difference was placed in a suspense account. Later, the following errors were discovered:

1. A purchase of office equipment costing $800 was debited to the office expenses account.
2. A payment of $240 received from a credit customer, Tariq, was recorded correctly in the cash book, but posted to Tariq's ledger account as $420.
3. A cash sale of $150 had been completely omitted from the books.
4. The purchases journal was undercast by $100.

Required:
(a) Prepare the journal entries to correct errors 1 to 4. (Narratives are not required.) [4 marks]
(b) Prepare Yasmin's suspense account, showing the corrections and the original opening balance as a balancing figure. [3 marks]
(c) Recalculate Yasmin's profit for the year, which was originally calculated as $12,400 before these errors were corrected. [3 marks]

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Worked solution

**(a) Journal Entries to correct the errors:**

1. **Office Equipment Account** - Debit $800
**Office Expenses Account** - Credit $800
*(To correct error of principle: equipment debited as expense)*

2. **Tariq Account** - Debit $180
**Suspense Account** - Credit $180
*(To correct over-credited amount of $420 - $240 = $180)*

3. **Cash Account** - Debit $150
**Sales Account** - Credit $150
*(To record omitted cash sale)*

4. **Purchases Account** - Debit $100
**Suspense Account** - Credit $100
*(To correct undercast of purchases journal)*

**(b) Suspense Account:**

| Date (2023) | Details | Debit ($) | Credit ($) |
|---|---|---|---|
| Dec 31 | Balance b/d (balancing figure) | 280 | |
| Dec 31 | Tariq | | 180 |
| Dec 31 | Purchases | | 100 |
| | **Total** | **280** | **280** |

**(c) Recalculation of Profit for the Year:**

* Original Draft Profit: $12,400
* Add: Error 1 (Correction of Office Expenses decrease): +$800
* Add: Error 3 (Omitted Sales increase): +$150
* Less: Error 4 (Purchases increase): -$100

**Corrected Profit for the Year:**
$12,400 + 800 + 150 - 100 = 13,250$

Marking scheme

**Part (a) Journal Entries [4 marks]:**
* Error 1: 1 mark for Dr Office Equipment $800 and Cr Office Expenses $800.
* Error 2: 1 mark for Dr Tariq $180 and Cr Suspense $180.
* Error 3: 1 mark for Dr Cash $150 and Cr Sales $150.
* Error 4: 1 mark for Dr Purchases $100 and Cr Suspense $100.

**Part (b) Suspense Account [3 marks]:**
* 1 mark for posting credit to Tariq $180.
* 1 mark for posting credit to Purchases $100.
* 1 mark for calculating the correct opening balance b/d of $280 on the debit side.

**Part (c) Corrected Profit Recalculation [3 marks]:**
* 1 mark for adding $800 (Office Expenses correction).
* 1 mark for adding $150 (Sales correction) and subtracting $100 (Purchases correction).
* 1 mark for the final corrected profit of $13,250.

Question 2 · structured_question

5 marks

An inexperienced bookkeeper prepared a trial balance for a business which did not agree. The difference was entered in a suspense account. Subsequently, the following errors were discovered: 1. The purchase of equipment costing $800 was correctly entered in the cash book but had not been posted to the equipment account. 2. A credit sales invoice for $450 sent to J. Brown was correctly entered in the sales journal but was posted to J. Brown's debit account as $540. Prepare the Suspense Account to correct these errors, clearly showing the opening balance (difference on trial balance) required to close the account.

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Worked solution

To correct the errors: 1. Equipment account needs to be debited with $800. Therefore, credit Suspense account with $800. 2. J. Brown's account was debited with $540 instead of $450 (an overstatement of $90). To correct this, J. Brown's account must be credited with $90. Therefore, debit Suspense account with $90. This results in the following Suspense Account: Debit side: Difference on trial balance (Opening balance) $710, J. Brown $90 (Total $800). Credit side: Equipment $800 (Total $800).

Marking scheme

1 mark for debiting J. Brown $90. 1 mark for crediting Equipment $800. 1 mark for calculating correct opening balance of $710. 1 mark for placing opening balance on the debit side. 1 mark for balancing the account with equal totals of $800.

Question 3 · structured_question

5 marks

The draft financial statements of Sarah, a sole trader, showed a profit for the year of $14,200. The following errors were later discovered: 1. A payment for rent of $600 had been correctly entered in the cash book but had not been posted to the rent account. 2. The purchase of a motor vehicle for $5,000 had been debited to the motor repairs account. 3. No adjustment had been made for wages accrued at the year-end of $350. Calculate the corrected profit for the year. Show your calculations.

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Worked solution

Calculation: Draft profit: $14,200. Less: Rent omitted: $(600). Add: Motor vehicle capitalised: $5,000. Less: Accrued wages: $(350). Corrected profit: $ 14200 - 600 + 5000 - 350 = 18250 $.

Marking scheme

1 mark for starting profit of $14,200. 1 mark for subtracting $600 rent. 1 mark for adding $5,000 motor vehicle. 1 mark for subtracting $350 wages accrued. 1 mark for final correct figure of $18,250.

Section Question 4: Manufacturing Organizations

Answer all parts of the question. Prepare a manufacturing account and the trading section of an income statement, and evaluate facility conversion.

3 Question · 20 marks

Question 1 · subjective

10 marks

Zeta Manufacturers provided the following information for the year ended 30 April 2023:

$$\begin{array}{|l|r|}
\hline
\text{Inventory at 1 May 2022:} &
\\ \quad \text{Raw materials} & \$18,400
\\ \quad \text{Work in progress} & \$11,200
\\ \quad \text{Finished goods} & \$24,500
\\ \text{Inventory at 30 April 2023:} &
\\ \quad \text{Raw materials} & \$16,900
\\ \quad \text{Work in progress} & \$12,800
\\ \quad \text{Finished goods} & \$26,100
\\ \text{Purchases of raw materials} & \$115,300
\\ \text{Carriage inwards on raw materials} & \$2,700
\\ \text{Direct factory wages} & \$84,600
\\ \text{Factory supervisor's salary} & \$24,000
\\ \text{Factory power and heating} & \$18,500
\\ \text{Depreciation of factory machinery} & \$15,200
\\ \text{Revenue (sales)} & \$340,000
\\ \hline
\end{array}$$

**Additional information:**
At 30 April 2023, direct factory wages of $2,400 were accrued and factory power of $1,100 was prepaid.

**(a)** Prepare the Manufacturing Account of Zeta Manufacturers for the year ended 30 April 2023, showing clearly the cost of raw materials consumed, prime cost, and cost of production. (6 marks)

**(b)** Prepare the Trading Account section of the Income Statement of Zeta Manufacturers for the year ended 30 April 2023 to calculate the gross profit. (3 marks)

**(c)** State one reason why a manufacturer might purchase finished goods from another supplier rather than making them themselves. (1 mark)

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Worked solution

**(a) Zeta Manufacturers - Manufacturing Account for the year ended 30 April 2023**

$$\begin{array}{lrr}
\text{Opening inventory of raw materials} & & 18,400 \\
\text{Add: Purchases of raw materials} & 115,300 & \\
\text{Add: Carriage inwards on raw materials} & 2,700 & 118,000 \\
\hline
& & 136,400 \\
\text{Less: Closing inventory of raw materials} & & (16,900) \\
\hline
\text{Cost of raw materials consumed} & & 119,500 \\
\text{Direct factory wages } (84,600 + 2,400) & & 87,000 \\
\hline
\text{\textbf{Prime Cost}} & & \textbf{206,500} \\
\text{Factory Overheads:} & & \\
\quad \text{Factory supervisor's salary} & 24,000 & \\
\quad \text{Factory power and heating } (18,500 - 1,100) & 17,400 & \\
\quad \text{Depreciation of factory machinery} & 15,200 & 56,600 \\
\hline
& & 263,100 \\
\text{Add: Opening work in progress} & & 11,200 \\
\hline
& & 274,300 \\
\text{Less: Closing work in progress} & & (12,800) \\
\hline
\text{\textbf{Cost of Production}} & & \textbf{261,500} \\
\hline
\end{array}$$

**(b) Zeta Manufacturers - Trading Account section of the Income Statement for the year ended 30 April 2023**

$$\begin{array}{lrr}
& \$ & \$ \\
\text{Revenue (sales)} & & 340,000 \\
\text{Less: Cost of Sales} & & \\
\quad \text{Opening inventory of finished goods} & 24,500 & \\
\quad \text{Add: Cost of production} & 261,500 & \\
\hline
& 286,000 & \\
\quad \text{Less: Closing inventory of finished goods} & (26,100) & (259,900) \\
\hline
\text{\textbf{Gross Profit}} & & \textbf{80,100} \\
\hline
\end{array}$$

**(c) Reasons to purchase finished goods from another supplier:**
* The manufacturer's production capacity is fully utilized and they cannot meet demand.
* It is cheaper to purchase the finished goods from another supplier who benefits from economies of scale.
* The business does not possess the specialized machinery or skilled labor required to make a specific product.
* Temporary closure or breakdown of production facilities.

Marking scheme

**(a) Manufacturing Account [Total: 6 marks]**
* **1 mark** for calculation of Cost of raw materials consumed ($119,500) (including carriage inwards and raw material inventories).
* **1 mark** for adjusted Direct factory wages ($87,000).
* **1 mark** for Prime Cost ($206,500) (Own Figure (OF) based on raw materials consumed + direct wages).
* **1 mark** for total factory overheads ($56,600) (must show correct adjustment of prepaid power).
* **1 mark** for correct adjustment of both opening and closing Work in Progress.
* **1 mark** for Cost of Production ($261,500) (OF).

**(b) Trading Account [Total: 3 marks]**
* **1 mark** for importing the correct Cost of Production (OF from part a).
* **1 mark** for calculation of Cost of Sales ($259,900) (OF based on opening and closing finished goods inventories).
* **1 mark** for calculation of Gross Profit ($80,100) (OF).

**(c) Reason [Total: 1 mark]**
* **1 mark** for identifying any valid reason (e.g., cheaper to buy than make, capacity limits, lack of specialist skills/equipment, temporary machinery breakdowns).

Question 2 · Trading Account & Advice

5 marks

The following information was extracted from the accounting records of H & T Manufacturers for the year ended 31 October 2023:Account DetailValue ($)Revenue160,000Cost of production98,400Purchases of finished goods11,500Opening inventory of finished goods12,800Closing inventory of finished goods14,100

Required

(a) Prepare the trading account section of the Income Statement for H & T Manufacturers for the year ended 31 October 2023 to show the cost of sales and gross profit. [4]

(b) H & T Manufacturers is considering outsourcing all its manufacturing to an external supplier to focus purely on retailing. State one disadvantage of this proposal. [1]

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Worked solution

(a) H & T Manufacturers
Trading Account (section of Income Statement) for the year ended 31 October 2023

Detail$$Revenue160,000Cost of salesOpening inventory of finished goods12,800Add: Cost of production98,400Add: Purchases of finished goods11,500Total cost of finished goods available122,700Less: Closing inventory of finished goods(14,100)(108,600)Gross profit51,400

(b) Disadvantages of outsourcing include:
- Loss of control over product quality.
- Potential delay in deliveries if the supplier faces production issues.
- Redundancy costs of factory staff.
- Factory equipment might have to be sold at a loss.
- Dependence on the supplier's pricing and stability.

Marking scheme

(a) [4 Marks]
- Opening inventory + Cost of production + Purchases of finished goods: $12,800 + 98,400 + 11,500$ [1 mark]
- Deduct Closing inventory of finished goods: $14,100$ [1 mark]
- Cost of sales correctly calculated as $108,600$ [1 mark]
- Gross Profit correctly calculated as $51,400$ [1 mark]

(b) [1 Mark]
Award [1] mark for any valid disadvantage of outsourcing:
- Loss of quality control
- Loss of control over delivery timelines / schedules
- Redundancy costs of factory staff
- Loss of unique product design or patent advantages
- Supplier may increase prices unexpectedly in the future

Question 3 · Trading Account & Advice

5 marks

The following information was extracted from the accounting records of Lincolns for the year ended 30 June 2023:Account DetailValue ($)Revenue285,000Cost of production178,000Purchases of finished goods16,200Carriage on purchases of finished goods1,100Opening inventory of finished goods24,500Closing inventory of finished goods21,400

Required

(a) Prepare the trading account section of the Income Statement for Lincolns for the year ended 30 June 2023 to show the cost of sales and gross profit. [4]

(b) Lincolns is considering converting an idle section of the factory into an additional warehouse to store more raw materials. State one benefit of this proposal. [1]

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Worked solution

(a) Lincolns
Trading Account (section of Income Statement) for the year ended 30 June 2023

Detail$$Revenue285,000Cost of salesOpening inventory of finished goods24,500Add: Cost of production178,000Add: Purchases of finished goods16,200Add: Carriage on purchases of finished goods1,100Total cost of finished goods available219,800Less: Closing inventory of finished goods(21,400)(198,400)Gross profit86,600

(b) Benefits of additional warehouse space:
- Allows bulk buying of raw materials to take advantage of trade discounts.
- Prevents production delays due to stockouts of raw materials.
- Allows holding safety stock to meet sudden increases in customer demand.

Marking scheme

(a) [4 Marks]
- Opening inventory + Cost of production: $24,500 + 178,000$ [1 mark]
- Purchases of finished goods + Carriage on purchases: $16,200 + 1,100$ [1 mark]
- Deduct Closing inventory of finished goods: $21,400$ [1 mark]
- Gross Profit correctly calculated as $86,600$ [1 mark]

(b) [1 Mark]
Award [1] mark for any valid benefit of converting factory space to store more raw materials:
- Bulk purchasing discounts / lower unit cost of raw materials
- Uninterrupted production flow / avoids raw material stockouts
- Enables swift response to sudden increases in product demand

Section Question 5: Limited Company Accounts and Ratios

Answer all parts of the question. Calculate retained earnings and liquidity ratios, prepare a statement of financial position, and advise on funding expansion.

5 Question · 20 marks

Question 1 · Calculation & Financial Statement

5.5 marks

On 1 January 2023, Vanguard Ltd had a retained earnings balance of $18,500 and a general reserve of $12,000. During the year ended 31 December 2023, the company made a profit of $42,000. The directors paid an interim dividend of $5,000 and proposed a final dividend of $10,000. On 31 December 2023, they decided to transfer $6,500 to the general reserve. Calculate the balance of retained earnings to be shown in the Statement of Changes in Equity of Vanguard Ltd on 31 December 2023.

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Worked solution

The calculation of the retained earnings balance on 31 December 2023 is as follows: Opening Retained Earnings of $$18,500$ + Profit for the year of $$42,000$ - Interim dividend paid of $$5,000$ - Transfer to General Reserve of $$6,500$ = $$49,000$. Note: The proposed final dividend of $$10,000$ is not recorded in the financial statements for the year ended 31 December 2023 because it was not approved or paid during the financial year; it is only disclosed in the notes to the financial statements.

Marking scheme

1 mark for identifying the correct opening retained earnings of $$18,500$. 1 mark for adding the profit for the year of $$42,000$. 1 mark for deducting the interim dividend paid of $$5,000$. 1.5 marks for correctly ignoring/omitting the proposed final dividend of $$10,000$. 1 mark for deducting the transfer to general reserve of $$6,500$. Total: 5.5 marks.

Question 2 · Calculation & Financial Statement

5.5 marks

The following information is available for Apex Ltd on 31 December 2023: Inventory $15,000, Trade Receivables $12,000, Bank $3,000, Trade Payables $16,000, Other Payables $4,000. Calculate (i) the Current Ratio and (ii) the Liquid (Acid Test) Ratio. State whether the liquidity position of the company is satisfactory and explain your answer.

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Worked solution

(i) Current Ratio = Current Assets / Current Liabilities = $(\$15,000 + \$12,000 + \$3,000) / (\$16,000 + \$4,000)$ = $\$30,000 / \$20,000$ = 1.50:1. (ii) Liquid (Acid Test) Ratio = $(\text{Current Assets} - \text{Inventory}) / \text{Current Liabilities}$ = $(\$12,000 + \$3,000) / \$20,000$ = $\$15,000 / \$20,000$ = 0.75:1. Analysis: The liquidity position is unsatisfactory. Although the current ratio of 1.50:1 meets the general standard, the liquid (acid test) ratio of 0.75:1 is below the ideal benchmark of 1:1. This shows that the company relies heavily on selling its inventory to pay its short-term debts and could face difficulties paying current liabilities immediately.

Marking scheme

Current Ratio: 2 marks (1 mark for working showing current assets of $\$30,000$ and current liabilities of $\$20,000$, 1 mark for final ratio of 1.50:1). Liquid Ratio: 2 marks (1 mark for working excluding inventory of $\$15,000$, 1 mark for final ratio of 0.75:1). Analysis: 1.5 marks (0.5 marks for stating the position is unsatisfactory, 1 mark for explaining that the liquid ratio is below the 1:1 benchmark or that they depend too much on selling inventory to meet short-term liabilities). Total: 5.5 marks.

Question 3 · Calculation

3 marks

Zephyr Ltd provided the following information on 31 December 2022:

- Retained earnings on 1 January 2022: $45,000
- Profit for the year ended 31 December 2022: $32,000
- Ordinary share dividend paid during the year: $9,000
- Transfer to general reserve: $5,000

Calculate the retained earnings balance to be shown in the Statement of Changes in Equity on 31 December 2022.

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Worked solution

Retained earnings on 31 December 2022 is calculated as follows:

$ \text{Opening Retained Earnings} + \text{Profit for the year} - \text{Ordinary dividend paid} - \text{Transfer to general reserve} $

$ = \$45,000 + \$32,000 - \$9,000 - \$5,000 = \$63,000 $

Marking scheme

1 mark for adding profit for the year ($32,000).
1 mark for deducting dividend paid ($9,000) and transfer to general reserve ($5,000).
1 mark for correct final balance ($63,000).

Question 4 · Calculation

3 marks

Clarinet Ltd provided the following details from its statement of financial position as of 30 April 2023:

- Inventory: $14,000
- Trade receivables: $16,000
- Cash at bank: $2,000
- Trade payables: $11,000
- Bank overdraft: $1,000

Calculate the liquid (acid test) ratio. Show your workings and express your answer in the form of a ratio (e.g., x:1).

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Worked solution

Liquid (acid test) ratio formula:

$ \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} $

$ \text{Liquid Assets} = \text{Trade receivables} + \text{Cash at bank} = \$16,000 + \$2,000 = \$18,000 $

$ \text{Current Liabilities} = \text{Trade payables} + \text{Bank overdraft} = \$11,000 + \$1,000 = \$12,000 $

$ \text{Liquid Ratio} = \frac{\$18,000}{\$12,000} = 1.5:1 $

Marking scheme

1 mark for identifying correct liquid assets ($18,000).
1 mark for identifying correct current liabilities ($12,000).
1 mark for correct final ratio format (1.5:1).

Question 5 · Analysis

3 marks

The directors of Apex Ltd are planning to raise $100,000 to fund an expansion of their factory. They are considering two options:

Option A: Issuing 5% debentures (long-term loan)
Option B: Issuing additional ordinary shares

Advise the directors on which option they should choose. State one advantage and one disadvantage of choosing debentures (Option A) to support your advice.

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Worked solution

An analysis of Option A (Debentures):
- **Advantage**: The interest rate is fixed (5%), which can be cheaper than equity if profits are high, and debenture holders have no voting rights, so existing ownership/control is not diluted.
- **Disadvantage**: Interest must be paid every year even if the company makes a loss, and the debentures must be repaid at a future date, increasing financial risk (gearing).

**Recommendation**: If the company has stable cash flows and low existing debt, debentures are recommended to keep control. If cash flows are volatile, issuing shares is safer.

Marking scheme

1 mark for stating one valid advantage of debentures (e.g., fixed rate, no dilution of control).
1 mark for stating one valid disadvantage of debentures (e.g., compulsory interest payment, repayment obligation/higher financial risk).
1 mark for providing a clear, reasoned recommendation/advice based on the analysis.

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