2023 Cambridge IGCSE Accounting (0452) Practice Paper with Answers

The completed ledger account in Tariq's books is as follows:

Debit (Dr) SideCredit (Cr) SideDateDetails$DateDetails$20232023May 12Purchases returns45May 1Balance b/d340May 28Bank330May 8Purchases180May 28Discount received10May 31Balance c/d135Total520Total520June 1Balance b/d135
Workings:
1. May 8 Credit Purchases: List price $200 less 10% trade discount = $200 - $20 = $180.
2. May 12 Purchases Returns: List price $50 less 10% trade discount = $50 - $5 = $45.

Award marks as follows:
- May 1 Balance b/d ($340 on Cr side): 1 mark
- May 8 Purchases ($180 on Cr side): 1 mark
- May 12 Purchases returns ($45 on Dr side): 1 mark
- May 28 Bank ($330 on Dr side): 1 mark
- May 28 Discount received ($10 on Dr side): 1 mark
- Balance c/d ($135 on Dr side): 1 mark
- Balance b/d ($135 on Cr side) on June 1: 1 mark (must have correct date)

Part (a) Petty Cash Book Extract:
Total Received ($)DateDetailsTotal Paid ($)352023 June 1Balance b/d115June 1BankJune 3Taxi fare (Travel)18June 5Stationery (Office expenses)245June 6Photocopying / Cash receiptJune 7Balance c/d113155Total155113June 8Balance b/d
Workings:
- June 1 restoration amount = Imprest ($150) - Balance in hand ($35) = $115.
- Balance c/d = Total Received ($155) - Total Paid ($42) = $113.

Part (b) Policy Analysis:
- Advantage: Less cash is kept on the business premises, reducing the risk of theft, fraud, or loss.
- Disadvantages:
1. The petty cashier will have to restore the imprest more frequently, increasing administrative work.
2. It limits the ability to pay for slightly larger small-value business expenses out of petty cash.

Part (a): 4 marks total
- 1 mark for calculating and entering the correct bank restoration amount ($115 on June 1).
- 1 mark for entering payments correctly ($18 and $24).
- 1 mark for entering the photocopying receipt ($5 on June 6).
- 1 mark for the correct balance c/d ($113) and balance b/d ($113) on June 8.

Part (b): 3 marks total
- 1 mark for a valid advantage (e.g., lower risk of theft/loss, improves security of cash assets).
- 2 marks for two valid disadvantages (1 mark per point: e.g., higher frequency of replenishment, inability to handle slightly larger minor items).

Alisha should continue using the imprest system for the following reasons:

1. **Control of Cash/Reduced Risk of Loss:** Under the imprest system, a maximum limit (the imprest amount) is set on the petty cash box. This limits the business's exposure to risk. If cash is drawn unchecked, there is a higher risk of theft or misuse.
2. **Accountability and Verification:** Before the chief cashier restores the imprest, the petty cashier must submit vouchers and receipts for all payments made. This ensures all small disbursements are verified and approved, preventing unauthorized spending.

Award marks as follows:
- 1 mark for each valid reason identified (maximum of 2 marks).
- 1 mark for development/explanation of any one reason.

**Acceptable points include:**
- Limits the cash balance held in the office / reduces the risk of loss through theft or fraud (1) + explanation: keeping a fixed petty cash float ensures only a minor amount is at risk (1).
- Requires the petty cashier to produce vouchers/receipts for verification before reimbursement is granted (1) + explanation: this provides a regular check on the accuracy and legitimacy of expenses (1).
- Helps in budgeting and monitoring small cash expenditures (1).

Kenzo should transition to online bank transfers because it increases payment efficiency and security.

**Advantage:** Payments are transferred instantly to the supplier's account, which enhances supplier relationships and ensures prompt payment discounts can be secured without postal delays.

**Disadvantage:** There is a risk of human error where Kenzo might enter an incorrect bank account number or sort code, potentially transferring money to the wrong recipient, which is difficult or impossible to recover.

Award marks as follows:
- 1 mark for a clear recommendation (to make the change or not) (1).
- 1 mark for one valid advantage of online bank transfers (1).
- 1 mark for one valid disadvantage of online bank transfers (1).

**Acceptable Advantages:**
- Immediate/faster processing of payments compared to writing and posting cheques.
- Saves administrative costs (no cheques to print, no postage costs/envelopes).
- Reduced risk of payment getting lost or delayed in the mail.

**Acceptable Disadvantages:**
- Risk of entering incorrect bank details (errors of inputting details).
- Cybersecurity risks (e.g., hacking, online phishing scams, or unauthorized access).
- Dependence on internet access and bank server availability.

Cost of delivery equipment = $24 000. Depreciation for the year ended 31 December 2021: 20% of $24 000 = $4 800. Net Book Value at 1 January 2022: $24 000 - $4 800 = $19 200. Depreciation for the year ended 31 December 2022: 20% of $19 200 = $3 840. Net Book Value at 1 January 2023 (disposal value): $19 200 - $3 840 = $15 360. Disposal proceeds = $14 500. Loss on disposal = $15 360 (Net Book Value) - $14 500 (Proceeds) = $860.

1 mark for calculating depreciation for 2021 ($4 800) or NBV ($19 200). 1 mark for calculating depreciation for 2022 ($3 840) or NBV ($15 360). 1 mark for comparing the correct NBV of $15 360 with the proceeds of $14 500. 1 mark for final correct loss of $860 (including the term 'loss').

1. Provision for doubtful debts at 31 December 2022: 5% of $18 000 = $900. 2. Provision for doubtful debts at 31 December 2023: 5% of $15 500 = $775. 3. Change in provision: $900 - $775 = $125 decrease. Since the provision decreased, this represents a credit (income / reduction in provision) to the income statement.

1 mark for calculating the 2022 provision of $900. 1 mark for calculating the 2023 provision of $775. 1 mark for calculating the net change of $125. 1 mark for correctly stating that it is a credit / reduction in provision / income in the income statement.

1. Purchase price of the warehouse is a capital expenditure as it is the cost of acquiring a non-current asset. 2. Legal fees are capital expenditure because they are directly attributable cost incurred to bring the non-current asset into ownership. 3. Fire insurance premium is revenue expenditure as it is an ongoing daily operating expense of the business. 4. Installing a security alarm is capital expenditure as it is a capital improvement adding long-term value and utility to the warehouse.

1 mark for classifying purchase price as Capital expenditure. 1 mark for classifying legal fees as Capital expenditure. 1 mark for classifying fire insurance as Revenue expenditure. 1 mark for classifying security alarm installation as Capital expenditure.

1. Year 1 (2021) depreciation: $24 000 * 20% = $4800. Net Book Value (NBV) at 31 December 2021 = $24 000 - $4800 = $19 200. 2. Year 2 (2022) depreciation: $19 200 * 20% = $3840. Net Book Value (NBV) at 31 December 2022 = $19 200 - $3840 = $15 360. 3. Year 3 (2023) depreciation: Since no depreciation is charged in the year of disposal, the depreciation for 2023 is $0, and NBV at disposal remains $15 360. 4. Gain or loss on disposal: Disposal Proceeds ($14 500) - NBV ($15 360) = -$860 (Loss of $860).

Award marks as follows: 1 mark for Year 1 depreciation calculation ($4800). 1 mark for Year 2 depreciation calculation ($3840). 1 mark for calculating correct Net Book Value at disposal ($15 360). 1 mark for final correct loss of $860 (with correct label 'loss').

1. Architect's fees for designing the warehouse extension: This is a cost directly associated with bringing a non-current asset into its working condition, so it is Capital Expenditure. 2. Concrete and bricks used for building the extension walls: These represent materials for constructing a non-current asset, so they are Capital Expenditure. 3. Property insurance premium paid on the extension for the first year: Insurance is a recurring operating expense, so it is Revenue Expenditure. 4. Repairs to the roof of the old warehouse building: Repairs and maintenance to existing assets to maintain their condition represent Revenue Expenditure.

Award 1 mark for each correct classification: Architect's fees - Capital expenditure (1 mark); Concrete and bricks - Capital expenditure (1 mark); Property insurance - Revenue expenditure (1 mark); Roof repairs - Revenue expenditure (1 mark).

To correct each error, we analyze the double-entry effect:

1. **Credit sales to Mary of $350 debited to sales and credited to Mary's account:**
- Incorrect entry: Debit Sales $350, Credit Mary $350.
- Correct entry should be: Debit Mary $350, Credit Sales $350.
- Correction required: Debit Mary $700, Credit Sales $700.

2. **Drawings from bank of $1800 debited to the cash account:**
- Cash was debited instead of drawings. Bank credit was recorded correctly.
- Correction required: Debit Drawings $1800, Credit Cash $1800.

3. **Sales invoice of $240 recorded as $204 in Tara's account and the sales journal:**
- Both accounts are understated by $(\(240 - 204\)) = $36.
- Correction required: Debit Tara $36, Credit Sales $36.

4. **Carriage inwards of $85 not recorded in the carriage inwards account:**
- Only the debit entry was omitted. A suspense account is used to complete the correction.
- Correction required: Debit Carriage inwards $85, Credit Suspense $85.

5. **Insurance account overcast by $150:**
- Insurance (expense account with a debit balance) was overstated. We need to credit insurance to reduce it and debit suspense to balance.
- Correction required: Debit Suspense $150, Credit Insurance $150.

Award marks as follows:

| Error | Debit Account | Debit $ | Credit Account | Credit $ | Marks |
| :--- | :--- | :--- | :--- | :--- | :--- |
| **1** | Mary | 700 | Sales | 700 | **(1)** for Dr, **(1)** for Cr |
| **2** | Drawings | 1800 | Cash | 1800 | **(1)** for Dr, **(1)** for Cr |
| **3** | Tara | 36 | Sales | 36 | **(1)** for Dr, **(1)** for Cr |
| **4** | Carriage inwards | 85 | Suspense | 85 | **(1)** for Dr, **(1)** for Cr |
| **5** | Suspense | 150 | Insurance | 150 | **(1)** for Dr, **(1)** for Cr |

[Total: 10 marks]

Tariq - Suspense Account. Debit side: 31 May Returns outwards $150. Credit side: 31 May J. Hill $90, 31 May Difference on trial balance (balancing figure) $60. Total: Debit side $150, Credit side $150.

Debit Returns outwards $150 (1 mark); Credit J. Hill $90 (1 mark); Credit Difference on trial balance $60 (1 mark); Match debit and credit totals at $150 (1 mark); Correct dates and narratives (1 mark).

Sonia - Statement of corrected profit for the year ended 30 June 2023. Draft profit: $12 400. Less: Discount allowed omitted ($120), Wages accrued ($310), Capital introduced credited to sales ($2 000). Corrected profit: $9 970.

Draft profit starting point of $12 400 (1 mark); Correctly identifying no effect of insurance correction (1 mark); Deduct discount allowed $120 (1 mark); Deduct wages accrued $310 (1 mark); Deduct sales overstatement $2 000 (1 mark).

### Kofi
**Manufacturing Account for the year ended 31 October 2023**

| | $ | $ |
| :--- | :---: | :---: |
| **Cost of raw materials consumed** | | |
| Opening inventory of raw materials | 12 400 | |
| Purchases of raw materials | 94 500 | |
| Carriage inwards | 3 200 | |
| | **110 100** | |
| Less: Closing inventory of raw materials | (11 100) | |
| | | 99 000 |
| Direct wages (Factory operatives) | | 64 800 |
| **Prime cost** | | **163 800** |
| | | |
| **Factory overheads** | | |
| Salary of factory supervisor | 31 000 | |
| Factory power and electricity \( (14\,600 - 1\,200) \) | 13 400 | |
| General factory expenses | 9 100 | |
| Depreciation of factory machinery \( (110\,000 - 44\,000) \times 15\% \) | 9 900 | |
| | | 63 400 |
| | | **227 200** |
| Add: Opening work in progress | | 18 900 |
| | | **246 100** |
| Less: Closing work in progress | | (17 500) |
| **Cost of production** | | **228 600** |

- **Cost of raw materials consumed**: $99 000 **(1)** [Calculated as \( 12\,400 + 94\,500 + 3\,200 - 11\,100 \)]
- **Direct wages**: $64 800 **(1)**
- **Prime cost**: $163 800 **(1) [OF]**
- **Salary of factory supervisor**: $31 000 **(1)**
- **Factory power and electricity**: $13 400 **(1)** [Calculated as \( 14\,600 - 1\,200 \)]
- **General factory expenses**: $9 100 **(1)**
- **Depreciation of factory machinery**: $9 900 **(1)** [Calculated as \( (110\,000 - 44\,000) \times 15\% \)]
- **Total factory overheads**: $63 400 **(1) [OF]**
- **WIP Adjustments**: **(1)** for correct treatment of opening WIP (added) and closing WIP (subtracted)
- **Cost of production**: $228 600 **(1) [OF]**

1. Calculate Cost of Sales: Cost of Sales = Opening inventory of finished guitars ($22,400) + Cost of production ($180,000) + Purchases of finished guitars ($35,000) - Closing inventory of finished guitars ($24,800) = $212,600. 2. Calculate Gross Profit: Mark-up is 60% on cost of sales, so Gross Profit = $212,600 * 0.60 = $127,560. 3. Calculate Revenue: Revenue = Cost of Sales + Gross Profit = $212,600 + $127,560 = $340,160.

Revenue: $340,160 (1 mark); Opening inventory and Cost of production correctly recorded (1 mark); Purchases of finished guitars: $35,000 correctly recorded (1 mark); Less Closing inventory of finished guitars: $24,800 correctly recorded (1 mark); Gross profit: $127,560 (1 mark). Total: 5 marks.

Arguments for: Long-term labor cost savings (no wages for replaced workers), increased speed/output, and reduced product defects. Arguments against: High initial purchasing and installation costs, redundant workers can demotivate remaining staff, and potential production stoppages during maintenance. Recommendation: Clara should proceed if the long-term savings outweigh the initial cash outlay.

Arguments for: Max 2 marks (1 mark per valid point); Arguments against: Max 2 marks (1 mark per valid point); Recommendation: 1 mark (must provide a clear, justified decision based on the points). Total: 5 marks.

(a) Retained earnings calculation:
\(\text{Retained earnings at 1 July 2022} = 18400\)
\(\text{Add: Profit for the year} = 36200\)
\(\text{Less: Transfer to general reserve} = (5000)\)
\(\text{Less: Dividends paid} = (15000)\)
\(\text{Retained earnings at 30 June 2023} = 34600\)

(b) Liquid (acid test) ratio calculation:
\(\text{Liquid assets} = \text{Trade receivables} - \text{Provision for doubtful debts} + \text{Cash in hand}\)
\(\text{Liquid assets} = 14100 - 420 + 500 = 13680 + 500 = 14180\)

\(\text{Current liabilities} = \text{Trade payables} + \text{Bank overdraft}\)
\(\text{Current liabilities} = 12800 + 3680 = 16480\)

\(\text{Liquid ratio} = 14180 : 16480 = 0.8604 : 1\) which is \(0.86 : 1\)

(a) Retained earnings at 30 June 2023 [Total: 2 marks]:
- Correct addition of profit and subtraction of dividends [1 mark]
- Correct subtraction of transfer to general reserve to arrive at $34 600 [1 mark]

(b) Liquid (acid test) ratio [Total: 3.5 marks]:
- Calculation of liquid assets ($14 180) [1 mark]
- Calculation of current liabilities ($16 480) [1 mark]
- Division formula setup / working shown [0.5 marks]
- Final correct ratio of 0.86 : 1 (allow own figure based on incorrect liquid assets/liabilities) [1 mark]

Advantages of Option 1 (Issuing 5% Debentures):
1. Ownership and control of existing shareholders are not diluted because debenture holders do not have voting rights.
2. Interest paid on debentures is a fixed cost, allowing for easier financial planning, and is paid out before dividends.

Advantages of Option 2 (Issuing Ordinary Shares):
1. Ordinary shares do not have to be repaid (equity is permanent capital), which avoids the future cash-flow burden of principal redemption.
2. Dividends are discretionary and are only paid if the company makes sufficient profit, reducing financial risk during economic downturns.

Recommendation:
Since Zeta Limited's current liquid ratio is relatively weak at 0.86 : 1, adding mandatory interest payments under Option 1 would put additional pressure on cash flow. Therefore, the directors are advised to choose Option 2 (Ordinary shares) to keep the company's financial risk low.

Award marks as follows:
- Two advantages of Option 1 (Debentures): [2 marks] (1 mark per valid point)
- Two advantages of Option 2 (Ordinary shares): [2 marks] (1 mark per valid point)
- Reasonable recommendation supported by an evaluation/justification (e.g., linking to Zeta's liquidity): [1.5 marks]

Max 5.5 marks total.

The calculation of the retained earnings at 31 May 2023 is as follows: Retained earnings at 1 June 2022 = $24 500; Add: Profit for the year = $58 000; Less: Transfer to general reserve = ($12 000); Less: Dividends paid = ($35 000); Retained earnings at 31 May 2023 = $35 500.

1 mark for adding profit for the year of $58 000. 1 mark for subtracting both the transfer to general reserve of $12 000 and dividends paid of $35 000. 1 mark for the correct final retained earnings of $35 500.

Liquid assets = Trade receivables + Cash in hand = $28 000 + $2 000 = $30 000. Current liabilities = Trade payables + Bank overdraft = $18 000 + $6 000 = $24 000. Liquid (acid test) ratio = Liquid assets / Current liabilities = $30 000 / $24 000 = 1.25 : 1.

1 mark for calculating liquid assets of $30 000. 1 mark for calculating current liabilities of $24 000. 1 mark for the correct final ratio of 1.25 : 1.

Advantage of issuing ordinary shares: There is no fixed commitment to pay dividends if profits are low, and the capital does not have to be repaid (unlike a loan). Advantage of a bank loan: The existing shareholders do not dilute their control or ownership of the company. Recommendation: A clear advice indicating which method is preferred under the given circumstances.

1 mark for stating one valid advantage of issuing ordinary shares (e.g. no fixed interest/repayment). 1 mark for stating one valid advantage of a bank loan (e.g. no dilution of control). 1 mark for a clear, justified recommendation.