2025 Cambridge IGCSE Accounting (0452) Practice Paper with Answers

To correct the omission of the debit balance of the discount allowed account, we must debit the discount allowed account and credit the suspense account with the corresponding amount of $85.

1 mark for the correct option. Credit suspense account, debit discount allowed account.

The calculation is as follows: \( \text{Opening Retained Earnings} + \text{Profit} - \text{Transfer to General Reserve} - \text{Dividend} \). This gives: \( \$45,000 + \$32,000 - \$5,000 - \$8,000 = \$64,000 \).

1 mark for the correct calculation leading to option A.

The purchase of a non-current asset on credit cannot be recorded in the purchases journal (which is only for goods bought for resale on credit) or the cash book. It must be recorded in the general journal.

1 mark for identifying the general journal as the correct book of prime entry.

Prime Cost consists of direct materials consumed plus direct labor. Direct materials consumed = Purchases of raw materials ($58,000) + Carriage inwards ($2,500) = $60,500. Direct labor = Direct factory wages ($34,000). Total Prime Cost = $60,500 + $34,000 = $94,500.

1 mark for the correct calculation of prime cost.

Annual depreciation = \( \$24,000 \times 15\% = \$3,600 \). Total depreciation for 3 years (2022 to 2024) = \( \$3,600 \times 3 = \$10,800 \). Net Book Value = \( \$24,000 - \$10,800 = \$13,200 \). Loss on disposal = \( \$13,200 - \$11,500 = \$1,700 \).

1 mark for calculating the loss on disposal correctly.

The credit note from a supplier represents a purchase return. We debit the supplier's account to reduce our liability to them, and credit the purchases returns account.

1 mark for identifying the correct debit and credit entry.

Liquid ratio = \( \frac{\text{Current Assets} - \text{Inventory}}{\text{Current Liabilities}} \). Here, Current Assets - Inventory = Trade receivables ($12,000) + Cash ($2,000) = $14,000. Current Liabilities = Bank overdraft ($4,000) + Trade payables ($16,000) = $20,000. Ratio = \( 14,000 / 20,000 = 0.70 : 1 \).

1 mark for the correct ratio calculation.

According to IAS 2, inventory is valued at the lower of cost and net realisable value for each separate item. For X: lower is cost of $8. Value = \( 100 \times \$8 = \$800 \). For Y: lower is net realisable value of $10. Value = \( 200 \times \$10 = \$2,000 \). Total value = \( \$800 + \$2,000 = \$2,800 \).

1 mark for the correct calculation of inventory value.

Bookkeeping is the process of detailed recording of daily financial transactions (e.g., recording in journals, posting to ledger accounts, and performing basic bank reconciliations). Accounting involves the higher-level analysis, interpretation, and communication of these financial statements to stakeholders for decision-making purposes.

1 mark for the correct choice. [1]

The trade payables account is cleared by $500 (Liabilities decrease by $500). Bank is reduced by $490 (Assets decrease by $490). The difference of $10 represents discount received, which is an income that increases the profit and therefore owner's equity (Capital increases by $10).

1 mark for the correct choice. [1]

When a customer returns goods, the business issues a credit note to the customer to reduce the amount they owe. This transaction is then recorded in the sales returns journal of the business.

1 mark for the correct choice. [1]

An error of principle occurs when an entry is made in the wrong class of account. In this case, capital expenditure (office equipment, an asset) has been treated as revenue expenditure (office expenses, an expense).

1 mark for the correct choice. [1]

Year 1 (2023) Depreciation: \(25\% \times \$12\ 000 = \$3000\). Net book value at 31 December 2023: \(\$12\ 000 - \$3000 = \$9000\). Year 2 (2024) Depreciation: \(25\% \times \$9000 = \$2250\).

1 mark for the correct choice. [1]

Inventory is valued at the lower of cost and net realisable value for each separate item. Item X: lower is Cost \(\$200\). Item Y: lower is Net Realisable Value \(\$310\). Item Z: lower is Cost \(\$150\). Total value: \(\$200 + \$310 + \$150 = \$660\).

1 mark for the correct choice. [1]

Cost of raw materials consumed = \(\text{Opening Inventory} + \text{Purchases} + \text{Carriage Inwards} - \text{Closing Inventory} = \$4000 + \$32\ 000 + \$1200 - \$3500 = \$33\ 700\). Prime Cost = \(\text{Cost of raw materials consumed} + \text{Direct factory wages} = \$33\ 700 + \$15\ 000 = \$48\ 700\). (Note: The factory supervisor's salary is an indirect factory overhead expense and is therefore excluded from prime cost.)

1 mark for the correct choice. [1]

Liquid (acid test) ratio is calculated as: \(\frac{\text{Liquid Assets}}{\text{Current Liabilities}}\). Liquid Assets = \(\text{Trade Receivables} + \text{Bank Balance} = \$12\ 000 + \$3000 = \$15\ 000\) (excluding inventory). Current Liabilities = \(\text{Trade Payables} = \$10\ 000\). Ratio: \(\frac{\$15\ 000}{\$10\ 000} = 1.5 : 1\).

1 mark for the correct choice. [1]

1. Correcting the repair error requires a debit to the repairs account (expense) of $1,200, which reduces profit by $1,200.
2. Correcting the omitted rent received requires a credit to rent received (income) of $400, which increases profit by $400.

Corrected Profit = \( \$24\ 500 - \$1\ 200 + \$400 = \$23\ 700 \).

Award 1 mark for the correct answer A.

Total equity is calculated as:
Opening Equity: \( \$200\ 000 + \$45\ 000 = \$245\ 000 \)
Add: Profit for the year: \( +\$38\ 000 \)
Less: Dividends paid: \( -\$12\ 000 \)
Note: The transfer of $10,000 to the general reserve is a movement within equity and does not change total equity.

Total Equity = \( \$245\ 000 + \$38\ 000 - \$12\ 000 = \$271\ 000 \).

Award 1 mark for the correct answer B.

Since the office equipment is a non-current asset and not inventory (goods for resale), its return cannot be recorded in the purchases returns journal. It must be recorded in the general journal.

Award 1 mark for the correct answer A.

Cost of raw materials consumed = \( \text{Opening inventory} + \text{Purchases} + \text{Carriage inwards} - \text{Closing inventory} \)
Cost of raw materials consumed = \( \$4\ 000 + \$45\ 000 + \$1\ 500 - \$5\ 200 = \$45\ 300 \).

Prime Cost = \( \text{Cost of raw materials consumed} + \text{Direct wages} \)
Prime Cost = \( \$45\ 300 + \$18\ 000 = \$63\ 300 \).

(Factory supervisor's salary and lubricants are indirect expenses/factory overheads).

Award 1 mark for the correct answer B.

Year 1 Depreciation (31 Dec 2023) = \( 15\% \times \$20\ 000 = \$3\ 000 \).
Net Book Value at 1 Jan 2024 = \( \$20\ 000 - \$3\ 000 = \$17\ 000 \).
Year 2 Depreciation (31 Dec 2024) = \( 15\% \times \$17\ 000 = \$2\ 550 \).

Total provision for depreciation on 31 December 2024 = \( \$3\ 000 + \$2\ 550 = \$5\ 550 \).

Award 1 mark for the correct answer B.

Discount allowed = \( 4\% \times \$500 = \$20 \).
Amount received by cheque = \( \$500 - \$20 = \$480 \).

To record receipt of funds and discount allowed:
- Debit Bank $480
- Debit Discount Allowed $20
- Credit David $500

Award 1 mark for the correct answer A.

Using the accounting equation \( \text{Capital} = \text{Assets} - \text{Liabilities} \):
Opening Capital = \( \$85\ 000 - \$30\ 000 = \$55\ 000 \).
Closing Assets = \( \$85\ 000 + \$12\ 000 = \$97\ 000 \).
Closing Liabilities = \( \$30\ 000 - \$4\ 000 = \$26\ 000 \).
Closing Capital = \( \$97\ 000 - \$26\ 000 = \$71\ 000 \).

Profit = Closing Capital - Opening Capital + Drawings - Capital Introduced
Profit = \( \$71\ 000 - \$55\ 000 + 0 - 0 = \$16\ 000 \).

Award 1 mark for the correct answer C.

Insurance Expense = \( \text{Opening Prepaid Insurance} + \text{Insurance Paid} - \text{Closing Prepaid Insurance} \)
Insurance Expense = \( \$300 + \$2\ 400 - \$450 = \$2\ 250 \).

Award 1 mark for the correct answer A.

When a customer returns goods to a credit supplier, the supplier issues a credit note to the customer to acknowledge the reduction in the amount owed. In Sarah's books (the purchaser), this transaction is recorded in the purchases returns journal.

1 mark for the correct option (A). No partial marks.

The materiality principle states that insignificant items can be treated as expenses rather than being capitalised as non-current assets and depreciated over their useful lives, as the cost of detailed accounting outweighs the benefit.

1 mark for the correct option (C). No partial marks.

Constructing an extension ($2000) is capital expenditure, which correctly increases non-current assets. Repairing the roof ($400) is revenue expenditure and should be treated as an expense. By debiting the entire $2400 to premises, non-current assets are overstated by $400. Because the $400 expense was omitted from the income statement, expenses are understated and profit for the year is overstated by $400.

1 mark for the correct option (A). No partial marks.

Purchases returns should have a credit balance. Because it was debited in error, the credit side is short of the correct amount. To correct this, we must credit the purchases returns account by $700 (which cancels the incorrect $350 debit and records the correct $350 credit). The matching entry is to debit the suspense account with $700.

1 mark for the correct option (B). No partial marks.

Inventory must be valued at the lower of cost and net realisable value (NRV) for each item:

* **Product X:** Cost = $10, NRV = $12 - $1 = $11. Lower is $10. Valuation = 100 * $10 = $1000.
* **Product Y:** Cost = $15, NRV = $18 - $4 = $14. Lower is $14. Valuation = 200 * $14 = $2800.
* **Product Z:** Cost = $8, NRV = $7. Lower is $7. Valuation = 150 * $7 = $1050.

Total Inventory Value = $1000 + $2800 + $1050 = $4850.

1 mark for the correct option (A). No partial marks.

1. Depreciation for 2023 = 20% of $20 000 = $4000.
2. Net Book Value (NBV) at 31 December 2023 = $20 000 - $4000 = $16 000.
3. Since no depreciation is charged in the year of disposal (2024), the NBV at disposal is $16 000.
4. Loss on disposal = NBV - Disposal proceeds = $16 000 - $13 500 = $2500 loss.

1 mark for the correct option (A). No partial marks.

Depreciation of factory supervisors' office equipment is an indirect manufacturing expense, so it is classified as a factory overhead. Carriage inwards on raw materials, factory machine operators' wages, and production royalties are all direct costs that form part of the Prime Cost.

1 mark for the correct option (D). No partial marks.

1. Residual profit to share = Profit for the year - Amin's salary - Total interest on capital = $35 000 - $6000 - ($1200 + $1800) = $26 000.
2. Bilal's share of residual profit = 2/5 of $26 000 = $10 400.
3. Bilal's total share = Interest on capital ($1800) + Share of residual profit ($10 400) = $12 200.

1 mark for the correct option (B). No partial marks.

Cost of raw materials consumed:
$$\text{Opening Inventory} + \text{Purchases} + \text{Carriage Inwards} - \text{Closing Inventory}$$
$$\text{Cost of raw materials consumed} = \$12,500 + \$84,200 + \$2,300 - \$14,100 = \$84,900$$

Prime Cost:
$$\text{Cost of raw materials consumed} + \text{Direct wages}$$
$$\text{Prime Cost} = \$84,900 + \$41,600 = \$126,500$$

Cost of Production:
$$\text{Prime Cost} + \text{Factory Overheads} + \text{Opening WIP} - \text{Closing WIP}$$
$$\text{Cost of Production} = \$126,500 + \$31,200 + \$8,700 - \$9,400 = \$157,000$$

Note: Carriage outwards on finished goods is a selling and distribution expense and is not included in the manufacturing account.

1 mark for the correct calculation of cost of production ($157,000).

The closing balance of retained earnings is calculated as follows:
$$\text{Opening retained earnings} = \$65,000$$
$$\text{Add: Profit for the year} = +\$48,000$$
$$\text{Less: Transfer to general reserve} = -\$15,000$$
$$\text{Less: Final ordinary dividend paid} = -\$12,000$$
$$\text{Less: Interim ordinary dividend paid} = -\$8,000$$
$$\text{Closing retained earnings} = \$65,000 + \$48,000 - \$15,000 - \$12,000 - \$8,000 = \$78,000$$

1 mark for the correct calculation of retained earnings balance ($78,000).

According to the rule of inventory valuation, inventory should be valued at the lower of cost and net realisable value (NRV) for each item or group separately:

- **Type X**:
Lower value per unit = $\text{NRV} = $140$
Value = $40 \times $140 = $5,600$

- **Type Y**:
Lower value per unit = $\text{Cost} = $200$
Value = $25 \times $200 = $5,000$

- **Type Z**:
Lower value per unit = $\text{Cost} = $180$
Value = $30 \times $180 = $5,400$

Total value of inventory = $$5,600 + $5,000 + $5,400 = $16,000$.

1 mark for the correct calculation of the total valued inventory ($16,000).

(a)
DateDetailsDebit ($)Credit ($)2025 July 1Equipment12 000Motor vehicle8 500Inventory4 200Trade receivables - Jamil800Trade receivables - Sania1 100Cash at bank1 500Petty cash45Trade payables - Munir950Trade payables - Fay650Capital (balancing figure)26 545Assets, liabilities and capital at this date
(b) Petty Cash Book
Total received ($)Date 2025DetailsTotal paid ($)Travel expenses ($)Office expenses ($)Ledger accounts ($)45July 1Balance b/d155July 1BankJuly 4Window cleaning1515July 9Munir5050July 14Office stationery2828July 20Bus fares1212July 26Motor fuel3535July 29Office tea and coffee1010150475350July 31Balance c/d5020020050Aug 1Balance b/d150Aug 1Bank
(c) Munir Account
DateDetails$DateDetails$2025
July 9
July 22
July 31Petty cash
Purchases returns (\(80 - 10\%\))
Balance c/d50
72
1 1882025
July 1
July 18Balance b/d
Purchases (\(400 - 10\%\))950
360Total1 310Total1 310Aug 1Balance b/d1 188

(a) [Total: 4 marks]
- 1 mark for debiting all correct assets with correct amounts (Equipment, Motor vehicle, Inventory, Jamil, Sania, Cash at bank, Petty cash).
- 1 mark for crediting correct liabilities (Munir, Fay).
- 1 mark for correct calculation of Capital: \(28 145 - 1 600 = 26 545\).
- 1 mark for correct opening entry narrative.

(b) [Total: 11 marks]
- 1 mark for July 1 opening Balance b/d ($45) and Bank drawing ($155) on the received side.
- 6 marks (1 mark per payment transaction) for correct details, date, total paid, and corresponding analysis column entries.
- 2 marks for totaling the analysis columns ($47, $53, $50) and matching the total paid column ($150).
- 1 mark for balancing and bringing down the balance on August 1 ($50 on the received side).
- 1 mark for recording August 1 Bank drawing ($150) to restore the imprest.

(c) [Total: 5 marks]
- 1 mark for correct credit balance b/d on July 1 ($950).
- 1 mark for correct debit of Petty cash on July 9 ($50).
- 1 mark for correct credit of Purchases on July 18 ($360) after deducting 10% trade discount.
- 1 mark for correct debit of Purchases returns on July 22 ($72) after deducting 10% trade discount.
- 1 mark for correct credit balance b/d on August 1 ($1 188) (Own Figure).

**(a)**
Depreciation charges:
- Year ended 31 October 2021: $20\% \times $16000 = $3200$
- Year ended 31 October 2022: $20\% \times ($16000 - $3200) = $2560$
- Year ended 31 October 2023: $20\% \times ($12800 - $2560) = $2048$
- Year ended 31 October 2024: No depreciation charged (year of disposal).

Total Accumulated Depreciation = $$3200 + \$2560 + \$2048 = \$7808\$

***

**(b)**
$$\begin{array}{llc|llc} \text{Date} & \text{Details} & \$ & \text{Date} & \text{Details} & \$ \\ \hline 2024 & & & 2024 & & \\ \text{June 30} & \text{Motor vehicles (cost)} & 16000 & \text{June 30} & \text{Provision for depreciation} & 7808 \\ & & & \text{June 30} & \text{Bank} & 7500 \\ & & & \text{Oct 31} & \text{Income statement (loss)} & 692 \\ \hline & & 16000 & & & 16000 \\ \hline \end{array}$$

***

**(c)**
Capital expenditure components:
- Cost of van: $$18500$
- Sign-writing: $$650\$

Total recorded in Delivery Van account = $$18500 + $650 = $19150$

*(Note: Motor insurance and road tax are revenue expenditure and are excluded)*

***

**(d)**
**Advantages:**
- Frees up Elena's time to focus on core tasks such as floral arrangement, marketing, and managing customer relations.
- Might allow the business to handle a higher volume of orders, potentially increasing sales revenue.
- Customers may receive quicker and more reliable deliveries.

**Disadvantages:**
- Increases the operating expenses of the business (wages, national insurance contributions, potential training costs).
- Risk of poor customer service or damage to delicate flowers during delivery if the assistant is careless.
- Demands time and effort from Elena to recruit, train, and supervise the employee.

**Recommendation:**
Elena should hire the assistant if the value of the extra business she can generate by staying in the shop exceeds the cost of paying the assistant's wages.

***

**(e)**
$$\begin{array}{llc|llc} \text{Date} & \text{Details} & \$ & \text{Date} & \text{Details} & \$ \\ \hline 2023 & & & 2024 & & \\ \text{Nov 1} & \text{Balance b/d} & 240 & \text{Feb 15} & \text{Bank} & 320 \\ 2024 & & & \text{Aug 10} & \text{Bank} & 720 \\ \text{Oct 31} & \text{Income statement (12} \times \$80\text{)} & 960 & \text{Oct 31} & \text{Balance c/d} & 160 \\ \hline & & 1200 & & & 1200 \\ \hline 2024 & & & & & \\ \text{Nov 1} & \text{Balance b/d} & 160 & & & \end{array}$$

***

**(f)**
(i) Elena may obtain goods at a lower cost price (bulk discount) or charge higher selling prices than Flora.
(ii) Elena may pay lower rent, have lower administrative costs, or avoid unnecessary expenses compared to Flora.

**(a)**
- $20\% \times $16000 = $3200$ (1)
- $20\% \times $12800 = $2560$ (1)
- $20\% \times $10240 = $2048$ (1)
- Total accumulated depreciation = $\mathbf{$7808}$ (1)OF
*(Max 3 marks)*

**(b)**
- Debit side: Motor vehicles (cost) $16000$ (1)
- Credit side: Provision for depreciation $7808$ (1)OF
- Credit side: Bank (proceeds) $7500$ (1)
- Credit side: Income statement (loss on disposal) $692$ (1)OF
*(Max 4 marks)*

**(c)**
- Identification of cost + sign-writing (1)
- Correct calculation: $\mathbf{$19150}$ (1)OF
*(Max 2 marks)*

**(d)**
- Up to 2 marks for advantages discussed (1 each)
- Up to 2 marks for disadvantages discussed (1 each)
- 1 mark for a justified recommendation based on points made (1)
*(Max 5 marks)*

**(e)**
- Opening Balance b/d on Debit: $240$ (1)
- Income statement transfer on Debit: $960$ (1)
- Bank receipt entries on Credit: $320$ and $720$ (1 for both)
- Closing Balance b/d on Debit (1 Nov 2024): $160$ (1)OF
*(Max 4 marks)*

**(f)**
(i) 1 mark for a valid reason, e.g., higher selling price / lower cost of sales. (1)
(ii) 1 mark for a valid reason, e.g., lower overhead costs / better cost control. (1)
*(Max 2 marks)*

### Part (a) Journal Corrections

| Error | Debit Account | Debit $ | Credit Account | Credit $ |
| :--- | :--- | :--- | :--- | :--- |
| **Discount received** | Suspense | 70 | Discount received | 70 |
| **Purchases journal overcast** | Suspense | 200 | Purchases | 200 |
| **Unrecorded purchases** | Purchases | 310 | Bank | 310 |
| **Bank charges error** | Bank | 100 | Bank charges | 100 |
| **Rent payment correction** | Rent
Suspense | 150
150 | Bank | 300 |

---

### Part (b) Suspense Account

**Tariq – Suspense account**

| Date 2025 | Details | $ | Date 2025 | Details | $ |
| :--- | :--- | :--- | :--- | :--- | :--- |
| May 31 | Discount received | 70 | May 31 | Difference on trial balance | 420 |
| | Purchases | 200 | | | |
| | Rent | 150 | | | |
| | **Total** | **420** | | **Total** | **420** |

---

### Part (c) Bank Balance Calculation

* Original cash at bank balance: $1 150
* **Add:** Correction of over-recorded bank charges: $100
* **Less:** Unrecorded purchases payment: ($310)
* **Less:** Correction of rent payment wrongly debited: ($300)
* **Corrected cash at bank balance:** **$640**

---

### Part (d) Reason for preparing a trial balance

* To test the arithmetical accuracy of the double-entry records.
* To help locate bookkeeping errors.
* To assist in the preparation of the year-end financial statements.

### Part (a) [11 marks]
* Discount received correction: **Debit Suspense $70** (1), **Credit Discount received $70** (1)
* Purchases journal overcast correction: **Debit Suspense $200** (1), **Credit Purchases $200** (1)
* Unrecorded purchases: **Debit Purchases $310** (1), **Credit Bank $310** (1)
* Bank charges error correction: **Debit Bank $100** (1), **Credit Bank charges $100** (1)
* Rent payment correction: **Debit Rent $150** (1), **Debit Suspense $150** (1), **Credit Bank $300** (1)

### Part (b) [4 marks]
* Opening credit balance of $420 (Difference on trial balance) (1)
* Debit entries: Discount received $70 (1)OF, Purchases $200 (1)OF, Rent $150 (1)OF

### Part (c) [4 marks]
* Original balance $1 150 (no mark)
* Add: Bank charges correction $100 (1)
* Less: Purchases payment $310 (1)
* Less: Rent payment correction $300 (1)
* Corrected balance $640 (1)OF

### Part (d) [1 mark]
* Accept: Check arithmetical accuracy / locate errors / assist in preparing financial statements (1)

**(a) Statement of Changes in Equity**

| Details | Ordinary share capital $ | General reserve $ | Retained earnings $ | Total $ |
| :--- | :---: | :---: | :---: | :---: |
| On 1 June 2024 | 150,000 | 25,000 | 42,100 | 217,100 |
| Profit for the year | - | - | 32,400 | 32,400 |
| Transfer to general reserve | - | 6,000 | (6,000) | - |
| Dividends paid | - | - | (4,500) | (4,500) |
| **On 31 May 2025** | **150,000** | **31,000** | **64,000** | **245,000** |

**(b) Statement of Financial Position**

**Velo Limited**
**Statement of Financial Position at 31 May 2025**

**Assets**
**Non-current assets**
Premises: $180,000
Office equipment: $24,500
Total non-current assets: $204,500

**Current assets**
Inventory: $31,250
Trade receivables ($28,400 - $852): $27,548
Bank: $4,037
Total current assets: $62,835
**Total assets: $267,335**

**Equity and Liabilities**
**Equity and Reserves**
Ordinary share capital: $150,000
General reserve: $31,000
Retained earnings: $64,000
Total Equity: $245,000

**Non-current liabilities**
6% Debentures: $10,000

**Current liabilities**
Trade payables: $12,335
**Total equity and liabilities: $267,335**

**(c) Meaning of capital employed**
Capital employed is the total long-term funds invested in a business (or: Total Equity + Non-current Liabilities, or Total Assets - Current Liabilities).

**(d) Return on capital employed (ROCE)**
$$\text{ROCE} = \frac{\text{Profit before interest}}{\text{Capital Employed}} \times 100\%$$
$$\text{Profit before interest} = \$32,400 + \text{Debenture Interest } (6\% \times \$10,000) = \$32,400 + \$600 = \$33,000$$
$$\text{Capital Employed} = \text{Equity } (\$245,000) + \text{Non-current Liabilities } (\$10,000) = \$255,000$$
$$\text{ROCE} = \frac{\$33,000}{\$255,000} \times 100\% = 12.94\%$$ (to 2 decimal places)

**(e) Advisory Advice**

**Points for Option 1 (Debentures):**
* Ownership/control of existing shareholders is not diluted.
* Interest expense reduces the taxable profit.
* Debenture interest rate is fixed (6%), whereas dividends might rise if profits are high.

**Points for Option 2 (Ordinary Shares):**
* Shares do not have to be repaid (no redemption date), unlike debentures.
* Dividends are optional and paid only if there are profits, whereas debenture interest is a legal obligation even if the company makes a loss.
* Does not increase the gearing ratio/financial risk of the company.

**Recommendation:**
The directors should choose Option 2 (Ordinary Shares) to avoid raising their debt burden and interest commitment, keeping financial risks low while seeking expansion funds.

**(a) Statement of Changes in Equity [4 marks]**
* (1) mark for correctly showing the 'Profit for the year' row ($32,400 in Retained Earnings and Total columns).
* (1) mark for correctly showing the 'Transfer to general reserve' row ($6,000 in General Reserve and ($6,000) in Retained earnings, with total as nil/dash).
* (1) mark for correctly showing the 'Dividends paid' row (($4,500) in Retained Earnings and Total columns).
* (1) mark for correct final row balances on 31 May 2025 ($150,000; $31,000; $64,000; $245,000) [Own Figure rule applies].

**(b) Statement of Financial Position [7 marks]**
* (1) mark for correct Non-current assets total ($204,500).
* (1) mark for correct Net Trade Receivables calculation ($28,400 - $852 = $27,548).
* (1) mark for correct Current assets total ($62,835).
* (1) mark for correct Total Assets ($267,335).
* (1) mark for correct Equity section total ($245,000) [Own Figure from part a].
* (1) mark for correct classification of 6% Debentures as Non-current liabilities ($10,000).
* (1) mark for correct current liabilities (Trade payables $12,335) and final balance check.

**(c) State meaning of capital employed [1 mark]**
* (1) mark for identifying that it is total long-term finance/capital invested (Equity + Non-current liabilities).

**(d) Return on capital employed (ROCE) [3 marks]**
* (1) mark for calculating profit before interest = $33,000.
* (1) mark for calculating capital employed = $255,000.
* (1) mark for final ROCE of 12.94% [Own Figure applies].

**(e) Recommendation and Justification [5 marks]**
* Max (2) marks for points supporting Option 1.
* Max (2) marks for points supporting Option 2.
* (1) mark for a clear, reasoned recommendation.

**(a)**

**Tariq**

**Manufacturing Account for the year ended 30 June 2025**

| | $ | $ |
|---|---|---|
| **Cost of material consumed** | | |
| Opening inventory of raw materials | 6 120 | |
| Purchases of raw materials | 68 400 | |
| Carriage inwards | 1 450 | |
| | 75 970 | |
| Less: Closing inventory of raw materials | 7 340 | 68 630 (1) |
| Direct wages | | 31 500 (1) |
| **Prime cost** | | **100 130** (1)OF |
| **Factory overheads** | | |
| Wages of factory manager ($22 000 + $1 500) | 23 500 (1) | |
| Factory heat and light ($9 800 + $950) | 10 750 (1) | |
| Rent and rates ($16 000 \times 70\%) | 11 200 (1) | |
| Depreciation of factory machinery (($150 000 - $54 000) \times 15\%) | 14 400 (1) | 59 850 |
| | | 159 980 (1)OF |
| Add: Opening work-in-progress | | 11 400 |
| | | 171 380 |
| Less: Closing work-in-progress | | 12 150 (1)* |
| **Cost of production** | | **159 230** (1)OF |

*(1) mark for both WIP adjustments*

***

**(b)**

**Calculation of Inventory of Dining Chairs at 30 June 2025**

* **Perfect chairs:** 180 - 20 - 10 = 150 chairs
Value: 150 chairs \times $40 (cost) = $6 000 (1)
* **Slightly damaged chairs:** 20 chairs
Cost = $40 per chair
Net Realisable Value (NRV) = $45 - ($160 / 20) = $37 per chair
Value: 20 chairs \times $37 = $740 (1)
* **Severely damaged chairs:** 10 chairs
Cost = $40 per chair
NRV = $15 per chair
Value: 10 chairs \times $15 = $150 (1)
* **Total Valuation:** $6 000 + $740 + $150 = $6 890 (1)OF

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**(c)**

Under the prudence principle, inventory is valued at the lower of cost and net realisable value (1). Tariq applies this by writing down the damaged dining chairs below their original cost to their net realisable values, preventing profits and assets from being overstated.

***

**(d)**

**Points for producing dining chairs:**
* Not dependent on suppliers for delivery schedules, price increases, quality issues, or reliability (1).
* May be able to manufacture chairs more cheaply than buying them in, raising the overall profit margin (1).
* Better control over design to ensure chairs match the styling of the custom tables (1).
* Opportunity to utilise spare capacity in the workshop (1).
*(Max 2 marks)*

**Points against producing dining chairs:**
* May require capital expenditure for new specialized equipment/machinery to make chairs (1).
* May require hiring additional skilled workers or retraining existing ones, increasing labor expenses (1).
* Cost of production, materials, and workshop overheads will increase (1).
* Less physical space in the workshop will be available for table manufacturing (1).
*(Max 2 marks)*

**Recommendation:**
* A clear recommendation supported by the arguments presented (1).

**(a) Manufacturing Account [10 marks]**
* 1 mark for correct calculation of raw materials consumed ($68 630).
* 1 mark for direct wages ($31 500).
* 1 mark (OF) for Prime Cost ($100 130).
* 1 mark for factory manager wages ($23 500).
* 1 mark for factory heat and light ($10 750).
* 1 mark for rent and rates ($11 200).
* 1 mark for depreciation of factory machinery ($14 400).
* 1 mark (OF) for total before WIP adjustments ($159 980).
* 1 mark for correct inclusion/treatment of both opening and closing WIP inventories.
* 1 mark (OF) for Cost of production ($159 230).

**(b) Inventory Valuation [4 marks]**
* 1 mark for valuation of 150 perfect chairs ($6 000).
* 1 mark for valuation of 20 slightly damaged chairs ($740).
* 1 mark for valuation of 10 severely damaged chairs ($150).
* 1 mark (OF) for total valuation ($6 890).

**(c) Accounting Principle [1 mark]**
* 1 mark for stating that inventory is valued at the lower of cost and net realisable value to prevent overstating profits/assets.

**(d) Decision/Advice [5 marks]**
* Max 2 marks for points in favour of producing chairs.
* Max 2 marks for points against producing chairs.
* 1 mark for a clear, reasoned recommendation.