2023 Cambridge IGCSE Accounting (0452) Practice Paper with Answers

The accruals (matching) principle states that revenue and expenses should be matched to the financial period to which they relate. Since the insurance covers three years, only the expense relating to the current year is recognized in the current income statement, while the rest is deferred as a prepayment.

1 mark for the correct option A.

Using the accounting equation: Opening Capital = Assets - Liabilities = $120 000 - $45 000 = $75 000. Closing Capital = Assets - Liabilities = $140 000 - $40 000 = $100 000. Change in Capital = Closing Capital - Opening Capital = $100 000 - $75 000 = $25 000 increase. Change in Capital = Profit + Capital Introduced - Drawings. Therefore, $25 000 = Profit + $15 000 - $8 000. $25 000 = Profit + $7 000. Profit = $18 000.

1 mark for the correct option A.

The purchases journal is only used for credit purchases of goods intended for resale (inventory). Non-current assets (such as office equipment) purchased on credit are recorded in the general journal.

1 mark for the correct option B.

Inventory is valued at the lower of cost and net realisable value (NRV) for each product separately. For Product X: Lower of $12 (cost) and $15 (NRV) is $12. Value = 100 * $12 = $1 200. For Product Y: Lower of $8 (cost) and $6 (NRV) is $6. Value = 200 * $6 = $1 200. Total inventory value = $1 200 + $1 200 = $2 400.

1 mark for the correct option A.

An error of principle occurs when an entry is made in the wrong class of account (e.g., treating a revenue expenditure like vehicle maintenance/repairs as a capital asset cost in the motor vehicles cost account).

1 mark for the correct option B.

First, allocate Manoj's salary from the profit: Residual profit = $43 000 - $8 000 = $35 000. Manoj's share of residual profit = 3/5 * $35 000 = $21 000. Manoj's total share = Salary + Residual profit share = $8 000 + $21 000 = $29 000.

1 mark for the correct option D.

The sales ledger control account tracks the total trade receivables. Any transaction that reduces trade receivables is recorded on the credit side. Irrecoverable debts written off reduce receivables, so they are credited. Credit sales and interest charged increase receivables and are debited.

1 mark for the correct option C.

Liquid ratio = (Current Assets - Inventory) / Current Liabilities. Liquid Assets = Trade receivables ($18 000) + Bank ($2 000) = $20 000. Current Liabilities = Trade payables ($16 000) + Other payables ($4 000) = $20 000. Liquid ratio = $20 000 / $20 000 = 1.00 : 1.

1 mark for the correct option A.

Using a T-account for subscriptions:

$$\text{Dr Subscriptions Account Cr}$$
* Debit side (assets increased / liabilities decreased):
* Opening balance (arrears on 1 Jan 2022): $800
* Closing balance (advance on 31 Dec 2022): $600
* Income & Expenditure (balancing figure): $12 750
* Credit side (liabilities increased / assets decreased):
* Opening balance (advance on 1 Jan 2022): $500
* Bank (received): $12 400
* Irrecoverable subscriptions (written off): $150
* Closing balance (arrears on 31 Dec 2022): $1 100

Balancing the account:
$$\text{Debit Total} = 800 + 600 + 12 750 = 14 150$$
$$\text{Credit Total} = 500 + 12 400 + 150 + 1 100 = 14 150$$

Thus, the amount transferred to the income and expenditure account is $12 750.

1 mark for the correct option C.

The debit entry in the office equipment account was undercast by $900 ($3 200 - $2 300). The credit entry in J. Wood's account was correct. To correct this, the office equipment account must be debited with $900 and the suspense account credited with $900.

1 mark for the correct option A.

1. Calculate the total interest on capital:
* Hasan: $60 000 \times 5\% = $3 000
* Ibrahim: $40 000 \times 5\% = $2 000
* Total interest = $5 000

2. Subtract interest on capital and salary from profit to find the residual profit:
$$\text{Residual Profit} = \$34 000 - \$5 000 - \$8 000 = \$21 000$$

3. Calculate Hasan's share of residual profit:
$$\text{Hasan's share} = \frac{3}{5} \times \$21 000 = \$12 600$$

1 mark for the correct option B.

Credit purchases of goods for resale are recorded in the purchases journal. Transactions that do not fit into any other book of prime entry, such as credit purchases of non-current assets, are recorded in the general journal.

1 mark for the correct option B.

1. Calculate the number of ordinary shares:
$$\text{Number of shares} = \frac{\$200 000}{\$0.50} = 400 000 \text{ shares}$$

2. Calculate the total dividend per share:
$$\text{Total dividend per share} = \$0.02 + \$0.05 = \$0.07$$

3. Calculate the total dividend paid and proposed:
$$\text{Total dividend} = 400 000 \times \$0.07 = \$28 000$$

1 mark for the correct option D.

1. Calculate the profit for the year:
$$\text{Profit for the year} = \text{Gross Profit} - \text{Operating Expenses} = \$60 000 - \$24 000 = \$36 000$$

2. Calculate the profit margin:
$$\text{Profit margin} = \frac{\text{Profit for the year}}{\text{Revenue}} \times 100 = \frac{\$36 000}{\$180 000} \times 100 = 20.00\%$$

1 mark for the correct option B.

1. Calculate depreciation for 2020:
$$\text{Depreciation} = 20\% \times \$20 000 = \$4 000$$
$$\text{Net Book Value (NBV) at 31 Dec 2020} = \$20 000 - \$4 000 = \$16 000$$

2. Calculate depreciation for 2021:
$$\text{Depreciation} = 20\% \times \$16 000 = \$3 200$$
$$\text{NBV at 31 Dec 2021} = \$16 000 - \$3 200 = \$12 800$$

3. Depreciation for 2022:
No depreciation is charged in the year of disposal, so the NBV remains $12 800.

4. Calculate profit or loss on disposal:
$$\text{Loss on disposal} = \text{NBV} - \text{Proceeds} = \$12 800 - \$11 000 = \$1 800 \text{ loss}$$

1 mark for the correct option C.

1. Update the cash book balance:
$$\text{Adjusted Cash Book Balance} = \$1 450 \text{ (debit)} - \$45 \text{ (bank charges)} + \$120 \text{ (dividends received)} = \$1 525$$

2. Prepare the bank reconciliation starting from the adjusted cash book balance to find the bank statement balance:
$$\text{Bank Statement Balance} = \text{Adjusted Cash Book Balance} + \text{Unpresented Cheques}$$
$$\text{Bank Statement Balance} = \$1 525 + \$380 = \$1 905 \text{ (credit balance)}$$

1 mark for the correct option D.

Under the materiality principle, items of very low value, even if they are technically non-current assets (since they provide benefits over multiple years), are treated as revenue expenses because the cost of depreciating them outweighs the benefit of precision in the financial statements.

1 mark for the correct option (B).

Initial Assets = $85 000, Initial Liabilities = $27 000.
1. Purchase of inventory on credit: Assets increase by $4 000 (Inventory) and Liabilities increase by $4 000 (Trade Payables).
New Assets = $85 000 + $4 000 = $89 000.
New Liabilities = $27 000 + $4 000 = $31 000.
2. Payment of credit supplier by cheque: Assets decrease by $1 500 (Bank) and Liabilities decrease by $1 500 (Trade Payables).
Final Assets = $89 000 - $1 500 = $87 500.
Final Liabilities = $31 000 - $1 500 = $29 500.

1 mark for the correct option (A).

The payment of $450 was correctly recorded in the cash book, but the insurance account was debited with $540 (an overstatement of $90 on the debit side of the trial balance). To correct this, we must credit the insurance account with $90. The corresponding debit entry must be made in the suspense account to correct the trial balance error.

1 mark for the correct option (B).

First, prepare the appropriation calculation:
Profit for the year: $45 000
Add: Interest on drawings ($800 + $500) = $1 300
Total = $46 300
Less: Salary to Anil = $6 000
Less: Interest on capital ($1 200 + $1 000) = $2 200
Residual profit = $46 300 - $6 000 - $2 200 = $38 100
Sunil's share (2/5) = $38 100 * 2/5 = $15 240.

1 mark for the correct option (A).

Let's reconstruct the Subscriptions Account:
Debit side:
- Balance b/d (Opening Arrears): $600
- Income & Expenditure Account (balancing figure): $8 950
- Balance c/d (Closing Advance): $300
Total Debits = $9 850

Credit side:
- Balance b/d (Opening Advance): $400
- Bank (Subscriptions received): $8 500
- Irrecoverable Subscriptions (written off): $150
- Balance c/d (Closing Arrears): $800
Total Credits = $9 850

Income & Expenditure = $9 850 - $600 - $300 = $8 950.

1 mark for the correct option (C).

Transactions in the purchases journal are recorded net of trade discount. Cash discount (discount received) is only recorded when payment is made, so it is not included in the purchases journal.
Net price = $1 200 - (15% * $1 200) = $1 200 - $180 = $1 020.

1 mark for the correct option (B).

Dividends are calculated on the number of issued shares, not on the value of the share capital.
Number of shares = 400 000.
Interim dividend = 400 000 * $0.02 = $8 000.
Final dividend = 400 000 * $0.03 = $12 000.
Total dividends = $8 000 + $12 000 = $20 000.

1 mark for the correct option (C).

Liquid assets = Current assets - Inventory = $45 000 - $15 000 = $30 000.
Liquid (acid test) ratio = Liquid assets / Current liabilities = $30 000 / $20 000 = 1.5 : 1.

1 mark for the correct option (A).

When a customer returns credit sales goods, the seller issues a credit note to confirm the return. This transaction is then recorded in the sales returns journal of the seller.

1 mark for the correct combination: Credit note and Sales returns journal.

First, calculate the Net Book Value (NBV) of the machine at the date of disposal.
NBV at 31 December 2021: $20 000 - (20% of $20 000) = $16 000
NBV at 31 December 2022: $16 000 - (20% of $16 000) = $12 800
Since no depreciation is charged in the year of disposal (2023), the NBV remains $12 800 at disposal.
Profit/Loss on disposal = Disposal Proceeds - NBV = $11 000 - $12 800 = -$1 800 (Loss of $1 800).

1 mark for calculating the correct loss of $1800.

Inventory is valued at the lower of cost and net realisable value (NRV) for each product.
- Product X:
Cost per unit = $8.00
NRV per unit = Selling price - Selling expenses = $9.50 - $2.00 = $7.50
Value of Product X = 150 units * $7.50 = $1125

- Product Y:
Cost per unit = $12.00
NRV per unit = $11.50 - $0.50 = $11.00
Value of Product Y = 200 units * $11.00 = $2200

Total inventory value = $1125 + $2200 = $3325.

1 mark for correct calculation of the total inventory value of $3325.

To find the cash book balance starting from the bank statement balance:
Bank statement balance (debit balance / overdraft) = -$850
Add uncredited deposits: +$410
Less unpresented cheques: -$240
Cash book balance = -$850 + $410 - $240 = -$680.
This represents an overdrawn credit balance in the cash book of $680.

1 mark for calculating $680 credit.

Partnership profit = $48 000
Less: Noah's salary = $8 000
Residual profit to be shared = $48 000 - $8 000 = $40 000
Noah's share of residual profit = 2/5 of $40 000 = $16 000.

1 mark for the correct calculation of Noah's share of residual profit ($16 000).

Error 1: The purchases journal is overcast by $300, meaning purchases (debit) is too high. To correct, credit purchases by $300 and debit suspense by $300.
Error 2: Rent account was debited with $540 instead of $450, so rent (debit) is too high by $90. To correct, credit rent by $90 and debit suspense by $90.
Total debit to suspense account = $300 + $90 = $390.

1 mark for identifying that suspense must be debited with $390.

Subscriptions income = Subscriptions received during the year - Arrears at start + Arrears at end + Advance at start - Advance at end
= $14 500 - $600 + $800 + $400 - $500 = $14 600.

1 mark for calculating the correct subscriptions income of $14 600.

The dividend is paid per share, not on the value of capital.
Total number of shares = 400 000 shares
Dividend per share = $0.04
Total dividend = 400 000 shares * $0.04 = $16 000.

1 mark for calculating the total dividend payment of $16 000.

Under the materiality principle, items of very low value (such as $35 calculators) do not significantly affect the financial position or profitability of the business. Recording them as non-current assets and depreciating them over several years would involve unnecessary administrative work that exceeds the benefit of the information. Therefore, they are treated as revenue expenditure (office expenses) for the year.

1 mark for the correct option (B).

Inventory must be valued at the lower of cost and net realisable value for each individual product line.

- Product X:
- Cost per unit: $4.00
- Net realisable value per unit: $3.50
- Value to use: $3.50
- Value of Product X = 150 * $3.50 = $525

- Product Y:
- Cost per unit: $5.00
- Net realisable value per unit: $6.00
- Value to use: $5.00
- Value of Product Y = 250 * $5.00 = $1250

Total inventory value = $525 + $1250 = $1775.

1 mark for the correct option (A).

1. Calculate interest on capital:
- Lina: $40 000 * 4% = $1600
- Mona: $50 000 * 4% = $2000
Total Interest on Capital = $1600 + $2000 = $3600

2. Deduct salary and interest on capital from the profit:
- Profit for the year: $28 000
- Less: Lina's salary: ($6000)
- Less: Total interest on capital: ($3600)
Residual Profit = $28 000 - $6000 - $3600 = $18 400

3. Calculate Mona’s share of residual profit:
- Mona's share = 2/5 * $18 400 = $7360.

1 mark for the correct option (A).

### **(a) Nadia - Cash Book for May 2023**

| Date | Details | Disc. Allowed ($) | Cash ($) | Bank ($) | Date | Details | Disc. Received ($) | Cash ($) | Bank ($) |
| :--- | :--- | :---: | :---: | :---: | :--- | :--- | :---: | :---: | :---: |
| **2023** | | | | | **2023** | | | | |
| May 1 | Balance b/d | | 150 | 850 | May 2 | Stationery | | 45 | |
| May 10 | Sales | | | 920 | May 5 | Karan | 12 | | 468 |
| May 14 | Capital | | | 2,000 | May 25 | Rent | | | 500 |
| May 22 | Tariq | 10 | | 390 | May 31 | Balance c/d | | 105 | 3,192 |
| | | **10** | **150** | **4,160** | | | **12** | **150** | **4,160** |
| **June 1** | **Balance b/d** | | **105** | **3,192** | | | | | |

*Note: Credit purchases on May 18 ($650) and May 29 ($420) are credit transactions and do not appear in the Cash Book.*

---

### **(b) Karan Account**

| Date | Details | $ | Date | Details | $ |
| :--- | :--- | :---: | :--- | :--- | :---: |
| **2023** | | | **2023** | | |
| May 5 | Bank | 468 | May 1 | Balance b/d | 480 |
| May 5 | Discount received | 12 | May 18 | Purchases | 650 |
| May 31 | Balance c/d | 1,070 | May 29 | Purchases | 420 |
| | | **1,550** | | | **1,550** |
| | | | **June 1** | **Balance b/d** | **1,070** |

---

### **(c) Nadia's Decision Evaluation**

#### **Option 1: Continue buying from Karan only**
* **Advantages:**
1. Nadia currently receives a \( 2.5\% \) cash discount, which helps reduce cash outflow upon early settlement.
2. Maintaining an established relationship with Karan ensures continuity, trust, and potentially flexible credit terms.
3. Familiar with the quality of Karan's goods, reducing the risk of customer complaints.
* **Disadvantages:**
1. If payment is made after the due date, she loses the \( 2.5\% \) discount completely.
2. No trade discount is allowed, meaning Nadia receives no cost reduction on goods sold if she faces tight liquidity and pays late.

#### **Option 2: Buy from Zoya only**
* **Advantages:**
1. A \( 5\% \) trade discount reduces the purchase cost immediately on the invoice, regardless of when she pays.
2. The unit cost of sales will be lower, leading to an improved gross profit margin.
3. She is not pressured to pay early just to save money on purchases.
* **Disadvantages:**
1. No cash discount is available to encourage prompt payment or optimize cash flow benefits.
2. Buying from a new supplier carries risks regarding product quality, lead times, and reliability.
3. She might damage her existing business relationship with Karan.

### **(a) Cash Book [11 Marks]**
* **Debit Side Entries:**
* May 1: Balance b/d (Cash $150, Bank $850) **[1]**
* May 10: Sales (Bank $920) **[1]**
* May 14: Capital (Bank $2,000) **[1]**
* May 22: Tariq (Discount allowed $10, Bank $390) **[1]**
* **Credit Side Entries:**
* May 2: Stationery (Cash $45) **[1]**
* May 5: Karan (Discount received $12, Bank $468) **[1]**
* May 25: Rent (Bank $500) **[1]**
* **Balances & Formatting:**
* Discount allowed total ($10) and Discount received total ($12) correctly shown and not balanced **[1]**
* Correct balance c/d on 31 May (Cash $105, Bank $3,192) **[1]**
* Correct balance b/d on 1 June (Cash $105, Bank $3,192) **[1]** (Own Figure rule applies)
* No credit purchase entries included in the cash book **[1]**

### **(b) Karan Account [4 Marks]**
* May 1: Correct opening balance b/d ($480 credit) **[1]**
* May 5: Bank ($468) and Discount received ($12) on the debit side **[1]**
* May 18 & 29: Credit Purchases ($650 & $420) on the credit side **[1]**
* June 1: Balance b/d of $1,070 on the credit side **[1]** (Own Figure rule applies)

### **(c) Advice / Recommendation [5 Marks]**
* Clear recommendation statement (Option 1 or Option 2) **[1]**
* Three distinct advantages of the selected option explained **[3]**
* One distinct disadvantage of the selected option explained **[1]**

(a)
**Jared**
**Journal**

| Item number | Details | Debit ($) | Credit ($) |
| :--- | :--- | :---: | :---: |
| 1 | Irrecoverable debts
Peter | 180 |
180 |
| 2 | Office equipment
Office Solutions | 950 |
950 |
| 3 | Bank loan
Interest on bank loan | 800 |
800 |
| 4 | Rent received
Bank | 90 |
90 |
| 5 | Drawings
Wages | 300 |
300 |

(b)

| Item | Increase in profit ($) | Decrease in profit ($) | No effect on profit | Profit ($) |
| :---: | :---: | :---: | :---: | :---: |
| **Draft profit** | | | | **14 200** |
| 1 | | 180 | | |
| 2 | | | 0 | | |
| 3 | 800 | | | |
| 4 | | 90 | | |
| 5 | 300 | | | |
| **Totals / Adjusted profit** | **1 100** | **270** | | **15 030** |

(c)
(i) Prudence principle states that assets and profits should not be overstated, and liabilities and expenses should not be understated. Writing off the irrecoverable debt of $180 ensures that trade receivables (assets) and the profit for the year are not overstated.
(ii) Business entity principle states that the business is treated as completely separate from its owner. Drawings of cash should be recorded separately in the drawings account rather than being debited to business expenses (wages) to avoid understating the business profit.

(a) 1 mark for each correct debit and 1 mark for each correct credit with correct amount. [10 marks]
- Item 1: Debit Irrecoverable debts $180 (1), Credit Peter $180 (1)
- Item 2: Debit Office equipment $950 (1), Credit Office Solutions $950 (1)
- Item 3: Debit Bank loan $800 (1), Credit Interest on bank loan $800 (1)
- Item 4: Debit Rent received $90 (1), Credit Bank $90 (1)
- Item 5: Debit Drawings $300 (1), Credit Wages $300 (1)

(b) [6 marks]
- Item 1: Decrease in profit $180 (1)
- Item 2: No effect on profit (1)
- Item 3: Increase in profit $800 (1)
- Item 4: Decrease in profit $90 (1)
- Item 5: Increase in profit $300 (1)
- Adjusted profit: $15 030 (1) [Own Figure / OF applies]

(c)
(i) Prudence: Overstatement of assets/profits avoided (1) + Specific application to irrecoverable debts/receivables (1) [2 marks]
(ii) Business entity: Business is separate from owner (1) + Personal drawings should be kept separate from business expenses (wages) (1) [2 marks]

(a)
**Jared**
**Journal**

| Item number | Details | Debit ($) | Credit ($) |
| :--- | :--- | :---: | :---: |
| 1 | Irrecoverable debts
Peter | 180 |
180 |
| 2 | Office equipment
Office Solutions | 950 |
950 |
| 3 | Bank loan
Interest on bank loan | 800 |
800 |
| 4 | Rent received
Bank | 90 |
90 |
| 5 | Drawings
Wages | 300 |
300 |

(b)

| Item | Increase in profit ($) | Decrease in profit ($) | No effect on profit | Profit ($) |
| :---: | :---: | :---: | :---: | :---: |
| **Draft profit** | | | | **14 200** |
| 1 | | 180 | | |
| 2 | | | 0 | | |
| 3 | 800 | | | |
| 4 | | 90 | | |
| 5 | 300 | | | |
| **Totals / Adjusted profit** | **1 100** | **270** | | **15 030** |

(c)
(i) Prudence principle states that assets and profits should not be overstated, and liabilities and expenses should not be understated. Writing off the irrecoverable debt of $180 ensures that trade receivables (assets) and the profit for the year are not overstated.
(ii) Business entity principle states that the business is treated as completely separate from its owner. Drawings of cash should be recorded separately in the drawings account rather than being debited to business expenses (wages) to avoid understating the business profit.

(a) 1 mark for each correct debit and 1 mark for each correct credit with correct amount. [10 marks]
- Item 1: Debit Irrecoverable debts $180 (1), Credit Peter $180 (1)
- Item 2: Debit Office equipment $950 (1), Credit Office Solutions $950 (1)
- Item 3: Debit Bank loan $800 (1), Credit Interest on bank loan $800 (1)
- Item 4: Debit Rent received $90 (1), Credit Bank $90 (1)
- Item 5: Debit Drawings $300 (1), Credit Wages $300 (1)

(b) [6 marks]
- Item 1: Decrease in profit $180 (1)
- Item 2: No effect on profit (1)
- Item 3: Increase in profit $800 (1)
- Item 4: Decrease in profit $90 (1)
- Item 5: Increase in profit $300 (1)
- Adjusted profit: $15 030 (1) [Own Figure / OF applies]

(c)
(i) Prudence: Overstatement of assets/profits avoided (1) + Specific application to irrecoverable debts/receivables (1) [2 marks]
(ii) Business entity: Business is separate from owner (1) + Personal drawings should be kept separate from business expenses (wages) (1) [2 marks]

**(a)**

$$\begin{array}{llc|llc}
\text{Date} & \text{Details} & \mathbf{\$} & \text{Date} & \text{Details} & \mathbf{\$} \\
\hline
\text{2023} & & & \text{2023} & & \\
\text{Jan 1} & \text{Balance b/d (arrears)} & 640 & \text{Jan 1} & \text{Balance b/d (advance)} & 320 \\
\text{Dec 31} & \text{Income and Expenditure} & 8800 & \text{Dec 31} & \text{Bank} & 7760 \\
\text{Dec 31} & \text{Balance c/d} & 160 & \text{Dec 31} & \text{Subscriptions written off} & 400 \\
& & & \text{Dec 31} & \text{Balance c/d} & 1120 \\
\hline & & 9600 & & & 9600 \\
\hline \text{2024} & & & \text{2024} & & \\
\text{Jan 1} & \text{Balance b/d} & 1120 & \text{Jan 1} & \text{Balance b/d} & 160 \\
\end{array}$$

*(Workings for Subscriptions written off: 5 members \times $80 = $400)*
*(Workings for Income & Expenditure: 110 members \times $80 = $8800)*

***

**(b)**

$$\begin{array}{lrc}
\text{Oakridge Athletics Club} & & \\
\text{Income and Expenditure Account for the year ended 31 December 2023} & & \\
\hline
& \mathbf{\$} & \mathbf{\$} \\
\text{Income} & & \\
\text{Subscriptions (110 members } \times \text{ \$80)} & & 8800 \\
\text{Less Expenses} & & \\
\text{Rent (\$2800 + \$400 - \$450)} & 2750 & \\
\text{Equipment maintenance} & 1450 & \\
\text{Administration expenses} & 1980 & \\
\text{Subscriptions written off} & 400 & 6580 \\
\hline \text{Surplus for the year} & & 2220 \\
\end{array}$$

***

**(c)**

**For increasing subscriptions:**
* A small increase of $20 per member would raise $2200 (110 \times $20), which is more than enough to fund the scoreboard ($1200).
* It avoids having to seek external finance or bank loans which may incur interest charges.
* It avoids depleting the existing cash and bank reserves of the club.
* The subscription rate may not have been increased for several years, so an adjustment for inflation/rising costs is reasonable.

**Against increasing subscriptions:**
* The increase may be unpopular and cause members to resign, lowering overall membership and subscription income in the long term.
* The club is already suffering from written-off subscriptions ($400 in 2023) and high arrears ($1120); a fee increase might cause more members to default.
* The scoreboard is a one-off capital purchase; increasing annual subscriptions indefinitely for a one-off expense may not be justified. Alternative funding (e.g. sponsorship, fund-raising event, donations) could be used.

**Recommendation:**
The treasurer should explore alternative one-off fundraising methods or sponsorship first before raising fees, as membership is already declining and arrears are rising.

***

**(d)**

**(i)** **Receipts and payments account:** A summary of the cash book of a club or society, showing all cash and bank transactions during a financial year.

**(ii)** **Accumulated fund:** The capital of a club or society, representing the surplus of total assets over total liabilities accumulated over time.

**(a)** [Total: 7 marks]
* Jan 1 Balance b/d (arrears) and Balance b/d (advance) (1) [both]
* Dec 31 Bank credit entry of $7760 (1)
* Dec 31 Subscriptions written off credit entry of $400 (1)
* Dec 31 Income & Expenditure debit entry of $8800 (1) [or OF if calculated correctly from membership]
* Dec 31 Balance c/d (debit & credit) (1) [both]
* Jan 1 Balance b/d (debit & credit) (1) [both]
* Correct dates used throughout the account (1)

**(b)** [Total: 6 marks]
* Subscriptions income of $8800 (1) [OF from (a)]
* Rent adjustment: add opening prepayments $400 (1)
* Rent adjustment: subtract closing prepayments $450 (1)
* Equipment maintenance $1450 & Administration expenses $1980 (1) [both]
* Subscriptions written off $400 (1)
* Surplus for the year of $2220 (1) [OF]

**(c)** [Total: 5 marks]
* Max 2 marks for points in favour.
* Max 2 marks for points against.
* 1 mark for clear final recommendation.

**(d)** [Total: 2 marks]
* **(i)** 1 mark for stating it is a summary of the cash book / cash and bank transactions.
* **(ii)** 1 mark for stating it is the difference between assets and liabilities / capital of a non-trading organization.

**(a) Chloe and Ethan**
**Appropriation Account for the year ended 31 December 2023**

| | $ | $
|---|---|---|
| **Profit for the year** | | 52 500 |
| **Add: Interest on drawings** | | |
| - Chloe \((\$15\,000 \times 6\%)\) | 900 | |
| - Ethan \((\$12\,000 \times 6\%)\) | 720 | 1 620 |
| | | **54 120** |
| **Less: Interest on capital** | | |
| - Chloe \((\$120\,000 \times 4\%)\) | 4 800 | |
| - Ethan \((\$80\,000 \times 4\%)\) | 3 200 | (8 000) |
| **Less: Salary to Ethan** | | (8 000) |
| **Residual profit** | | **38 120** |
| **Profit share** | | |
| - Chloe \((70\% \times \$38\,120)\) | 26 684 | |
| - Ethan \((30\% \times \$38\,120)\) | 11 436 | 38 120 |


**(b) (i) Ethan's Current Account**

| Date | Details | $ | Date | Details | $
|---|---|---|---|---|---|
| 2023 | | | 2023 | | |
| Jan 1 | Balance b/d | 1 500 | Dec 31 | Interest on capital | 3 200 |
| Dec 31 | Drawings | 12 000 | Dec 31 | Salary | 8 000 |
| Dec 31 | Interest on drawings | 720 | Dec 31 | Profit share | 11 436 |
| Dec 31 | Balance c/d | 8 416 | | | |
| | | **22 636** | | | **22 636** |
| | | | 2024 | | |
| | | | Jan 1 | Balance b/d | 8 416 |


**(b) (ii) Ethan's Revised Current Account Balance**
Ethan's original closing balance: $8 416 credit
Plus: Loan interest due: +$1 200
Less: Reduction in share of profit \((30\% \times \$1200)\): -$360
Revised current account balance: $9 256 credit

**(c) Other Partnership Agreement Items (any two):**
1. Capital contribution of each partner.
2. Limits on partners' drawings.
3. Interest rate payable on partners' loans.
4. Duties, roles, and responsibilities of each partner.
5. Procedures for the admission of a new partner or retirement of a partner.

**(d) Advice on forming a limited company:**
**Advantages (Max 2):**
- Limited liability: Chloe and Ethan's personal assets are protected as their liability is restricted to their investment in the company.
- Separate legal identity: The company can own property, sue, and be sued in its own name.
- Continuity: The business continues to exist even if one of the owners retires or dies.

**Disadvantages (Max 2):**
- Higher administrative and compliance costs, including legal set-up fees and annual audit/reporting costs.
- Less privacy, as the company's annual financial statements must be filed with registries and made public.
- More complex accounting processes and strict rules regarding capital distributions.

**Recommendation (1 mark):**
Chloe and Ethan should form a limited company because of the significant benefit of limited liability and the potential to expand, or they should remain a partnership to avoid heavy regulatory burdens since they are only two owners.

**(a) Appropriation Account [6 marks]:**
- Interest on drawings (calculation and addition of both): 1 mark
- Interest on capital (calculation of both): 1 mark
- Salary to Ethan (correct placement): 1 mark
- Residual profit (own figure): 1 mark
- Chloe's share of profit (own figure): 1 mark
- Ethan's share of profit (own figure): 1 mark

**(b) (i) Current Account [5 marks]:**
- Jan 1 Opening Balance b/d on debit side: 1 mark
- Drawings and Interest on Drawings on debit side: 1 mark
- Interest on Capital and Salary on credit side: 1 mark
- Profit share on credit side: 1 mark (OF)
- Closing balance b/d on 1 Jan 2024 on credit side: 1 mark (OF)

**(b) (ii) Revised Balance [2 marks]:**
- Adding $1 200 loan interest: 1 mark
- Deducting $360 reduction in profit share: 1 mark
- Correct final balance of $9 256 (OF): 1 mark (max 2 marks for part ii)

**(c) Partnership Agreement Items [2 marks]:**
- 1 mark per valid listed point (Max 2)

**(d) Limited Company Advice [5 marks]:**
- 1 mark for each valid advantage discussed (Max 2)
- 1 mark for each valid disadvantage discussed (Max 2)
- 1 mark for a clear recommendation based on the points raised (1)

**(a) Corrected Trial Balance**
$$\begin{array}{lrr}
\text{Corrected Trial Balance at 31 October 2023} \\
\hline
& \text{Debit (\$)} & \text{Credit (\$)} \\
\text{Equipment at cost} & 45\,000 & \\
\text{Provision for depreciation of equipment} & & 11\,250 \\
\text{Trade receivables} & 9\,150 & \\
\text{Bank overdraft} & & 4\,650 \\
\text{Trade payables} & & 5\,220 \\
\text{Capital} & & 30\,000 \\
\text{Sales} & & 110\,400 \\
\text{Purchases} & 62\,700 & \\
\text{Discount received} & & 2\,970 \\
\text{Returns inwards} & 5\,100 & \\
\text{Carriage inwards} & 1\,830 & \\
\text{General expenses} & 9\,650 & \\
\text{Rent and rates} & 11\,100 & \\
\text{Drawings} & 14\,200 & \\
\text{Inventory (1 November 2022)} & 5\,640 & \\
\text{Suspense} & 120 & \\
\hline
\text{Total} & 164\,490 & 164\,490 \\
\hline
\end{array}$$

**(b) Suspense Account**
$$\begin{array}{llr|llr}
\text{Date} & \text{Details} & \text{\$} & \text{Date} & \text{Details} & \text{\$}\\
\hline
\text{Oct 31} & \text{Trial balance difference} & 120 & \text{Oct 31} & \text{General expenses} & 900 \\
& \text{Rent and rates} & 360 & & & \\
& \text{Drawings} & 210 & & & \\
& \text{Discount received} & 210 & & & \\
\hline
& & 900 & & & 900 \\
\hline
\end{array}$$

**(c) Trading Section of Zayd's Income Statement**
$$\begin{array}{lrr}
\text{Income Statement (Trading Section) for the year ended 31 October 2023} \\
\hline
& \text{\$} & \text{\$} \\
\text{Revenue} & & 110\,400 \\
\text{Less: Returns inwards} & & (5\,100) \\
\hline
\text{Net Revenue} & & 105\,300 \\
\text{Cost of Sales} & & \\
\text{Opening Inventory} & 5\,640 & \\
\text{Purchases} & 62\,700 & \\
\text{Carriage inwards} & 1\,830 & \\
\hline
& 70\,170 & \\
\text{Less: Closing Inventory} & (5\,900) & (64\,270) \\
\hline
\text{Gross Profit} & & 41\,030 \\
\hline
\end{array}$$

**(d) Gross Margin Calculation**
$$\text{Gross margin} = \frac{\text{Gross Profit}}{\text{Net Revenue}} \times 100 = \frac{41\,030}{105\,300} \times 100 = 38.96\%$$

**(e) Discussion**
- Zayd and Yasmin are in the same trade, so their gross margins are expected to be similar.
- Yasmin owns her premises and does not pay rent, meaning her operating expenses are lower, which results in a higher profit margin.
- Zayd should be satisfied because his trading performance (gross profit) is competitive, and the lower profit margin is mainly due to fixed overheads (rent) rather than poor operational efficiency.

**(a)**
- Correct debit/credit classification of equipment cost and provision [1] for both.
- Correct bank overdraft and trade payables classification [1] for both.
- Correct purchases and discount received classification [1] for both.
- Correct opening inventory debit classification and exclusion of closing inventory [1].
- Correct entry of Suspense balance on Debit side ($120) [1] OF.
- Correct matching totals ($164 490) [1] for both.

**(b)**
- Correct entry of debit balance / Trial balance difference ($120) [1] OF.
- Rent and rates debit entry ($360) [1].
- Drawings debit ($210) [1] and Discount received debit ($210) [1].
- General expenses credit entry ($900) [1].

**(c)**
- Correct Net Revenue ($105 300) [1].
- Correct calculation of Cost of Goods Available ($70 170) [1].
- Correct Cost of Sales ($64 270) [1] OF.
- Correct Gross Profit ($41 030) [1] OF.

**(d)**
- Correct formula shown [1].
- Correct answer: 38.96% [1] OF.

**(e)**
- Similar gross margins are expected as they are in the same trade [1].
- Yasmin does not pay rent, lowering her overheads / increasing her profit margin [1].
- Zayd should be satisfied as his trading performance is competitive [1].