2023 Cambridge IAS-Level Accounting (9706) 模擬試題連答案詳解

Opening Retained Earnings = \( \$45,000 \). Add Profit for the year = \( \$32,000 \). Deduct Paid Interim Dividend = \( -\$5,000 \). Deduct Transfer to General Reserve = \( -\$10,000 \). The proposed final dividend of \( \$8,000 \) is not recorded as a liability or deducted from retained earnings until it is approved at the Annual General Meeting. Therefore, Closing Retained Earnings = \( \$45,000 + \$32,000 - \$5,000 - \$10,000 = \$62,000 \).

1 mark for the correct calculation of closing retained earnings of \( \$62,000 \) (recognising that proposed dividends are excluded).

First, adjust the cash book balance: Unadjusted cash book balance = \( -\$2,300 \) (credit balance is an overdraft). Less Bank charges = \( -\$150 \). Adjusted cash book balance = \( -\$2,450 \). Now, reconcile to the bank statement: Bank Statement Balance + Deposits not yet credited - Unpresented cheques = Adjusted cash book balance. Let Bank statement balance be \( X \). \( X + \$850 - \$400 = -\$2,450 \). \( X + \$450 = -\$2,450 \). \( X = -\$2,900 \) (which represents an overdraft, or a debit balance on the bank statement).

1 mark for the correct calculation of the bank statement balance of \( \$2,900 \) debit.

Year 2021 Depreciation = \( 20\% \times \$80,000 = \$16,000 \). NBV at 31 Dec 2021 = \( \$64,000 \). Year 2022 Depreciation = \( 20\% \times \$64,000 = \$12,800 \). NBV at 31 Dec 2022 = \( \$51,200 \). On 1 January 2023, the remaining net book value is depreciated using straight-line: Depreciation for 2023 = \( (\$51,200 - \$5,000) / 5 = \$46,200 / 5 = \$9,240 \).

1 mark for the correct straight-line depreciation calculation of \( \$9,240 \) based on the revised net book value.

Budgeted OAR = Budgeted Overheads / Budgeted Hours = \( \$120,000 / 40,000 = \$3 \) per direct labour hour. Absorbed Overheads = Actual Hours \( \times \) Budgeted OAR = \( 43,000 \times \$3 = \$129,000 \). Under/Over absorption = Absorbed Overheads - Actual Overheads = \( \$129,000 - \$125,000 = \$4,000 \) over-absorbed.

1 mark for calculating the over-absorbed overhead amount of \( \$4,000 \).

At 1 Oct: 100 units @ \( \$10 = \$1,000 \). At 8 Oct purchase: 150 units @ \( \$12 = \$1,800 \). Total units = 250, total value = \( \$2,800 \). Average cost per unit = \( \$2,800 / 250 = \$11.20 \). At 15 Oct sale: 180 units sold. Remaining units = 70. Value of remaining inventory = \( 70 \times \$11.20 = \$784 \). At 22 Oct purchase: 100 units @ \( \$13 = \$1,300 \). Total units = 170, total value = \( \$784 + \$1,300 = \$2,084 \).

1 mark for the correct calculation of AVCO perpetual inventory value of \( \$2,084 \).

Paying trade payables with cash reduces both current assets (cash) and current liabilities by the same amount. Since both the current ratio (2.5) and liquid ratio (1.1) are greater than 1.0, reducing both the numerator and the denominator by the same absolute value will increase the value of both ratios. For example, if current assets = \( \$25,000 \), liquid assets = \( \$11,000 \), and current liabilities = \( \$10,000 \); after paying \( \$5,000 \), the new current ratio is \( \$20,000 / \$5,000 = 4.0:1 \) (increase) and the new liquid ratio is \( \$6,000 / \$5,000 = 1.2:1 \) (increase).

1 mark for identifying that both the current and liquid ratios will increase.

Rent paid of \( \$850 \) should be recorded as credit cash \( \$850 \) and debit rent \( \$850 \). The debit entry made was only \( \$580 \), meaning the debit total is understated by \( \$850 - \$580 = \$270 \). Therefore, the credit total of the trial balance will be \( \$270 \) higher than the debit total.

1 mark for identifying that the credit total is \( \$270 \) more than the debit total.

First, credit the old partners with goodwill in their old ratio: Y's share = \( 2/5 \times \$50,000 = \$20,000 \) (Credit). Next, debit all partners with goodwill in the new ratio: Y's share = \( 3/10 \times \$50,000 = \$15,000 \) (Debit). Net adjustment for Y = \( \$20,000 \text{ Credit} - \$15,000 \text{ Debit} = \$5,000 \text{ Credit} \).

1 mark for the correct net adjustment of \( \$5,000 \) credit to Y's capital account.

First, determine the number of ordinary shares originally held: \(\$300,000 / \$0.50 = 600,000\) shares. A bonus issue of 1 for 3 means \(200,000\) new shares are issued. Their nominal value is \(200,000 \times \$0.50 = \$100,000\). This is funded from the Share Premium account, reducing it from \(\$120,000\) to \(\$20,000\), and increasing the Ordinary Shares balance to \(\$400,000\). There are now \(800,000\) shares in issue. Next, a rights issue of 1 for 4 is made, resulting in \(200,000\) new shares. The issue price is \(\$0.80\) per share, which is a premium of \(\$0.30\) per share. The Ordinary Shares balance increases by \(200,000 \times \$0.50 = \$100,000\), making the new total \(\$500,000\). The Share Premium account increases by \(200,000 \times \$0.30 = \$60,000\), making the new total \(\$20,000 + \$60,000 = \$80,000\).

1 mark for the correct option. Method: calculate the impact of the bonus issue first on both accounts, then calculate the impact of the rights issue on both accounts.

First, update the Cash Book balance: Draft cash book balance = \(-\$8,400\) (overdraft); Less: Bank charges = \(-\$350\); Less: Returned cheque = \(-\$1,200\). Corrected cash book balance = \(-\$9,950\). Second, perform the bank reconciliation to find the Bank Statement balance (\(B\)): \(B + \text{Lodgements in transit} - \text{Unpresented cheques} = \text{Corrected Cash Book}\); \(B + \$3,400 - \$2,100 = -\$9,950\); \(B + \$1,300 = -\$9,950\); \(B = -\$11,250\). Therefore, the bank statement shows an overdraft of \(\$11,250\).

1 mark for the correct option. Method: adjust the draft cash book balance for unrecorded items, then apply bank reconciliation logic to isolate the bank statement balance.

Accumulated depreciation before revaluation (3 years from 2018 to 2020) = \(3 \times (2\% \times \$400,000) = \$24,000\). Carrying amount on 1 January 2021 = \(\$400,000 - \$24,000 = \$376,000\). Revaluation on 1 January 2021 increases the carrying amount to \(\$520,000\). Post-revaluation depreciation for 2 years (2021 and 2022) = \(2 \times (\$520,000 / 40) = \$26,000\). Carrying amount on 31 December 2022 = \(\$520,000 - \$26,000 = \$494,000\). Profit on disposal = Proceeds - Carrying amount = \(\$510,000 - \$494,000 = \$16,000\). Note that the revaluation reserve is transferred directly within equity and does not affect the profit on disposal in the income statement.

1 mark for the correct option. Method: calculate post-revaluation carrying amount and subtract from the sales proceeds.

Under-absorbed overheads occur when actual overheads exceed absorbed overheads. Under-absorbed overheads = Actual overheads - Absorbed overheads; \(\$7,000 = \$262,000 - \text{Absorbed overheads}\); \(\text{Absorbed overheads} = \$255,000\). Since overhead is absorbed based on actual hours worked: \(\text{Absorbed overheads} = \text{Actual hours worked} \times \text{OAR}\); \(\$255,000 = \text{Actual hours} \times \$12.50\); \(\text{Actual hours} = 20,400\) hours.

1 mark for the correct option. Method: establish the absorbed overheads and divide by the predetermined overhead absorption rate.

First, calculate individual costs: Direct materials = \(\$4,800\); Direct labour = \(120 \times \$15 = \$1,800\); Variable overheads = \(120 \times \$6 = \$720\); Fixed overheads = \(120\% \times \$1,800 = \$2,160\). Total cost = \(\$4,800 + \$1,800 + \$720 + \$2,160 = \$9,480\). To achieve a gross profit margin of 25%, the cost must represent 75% of the selling price: \(\text{Selling price} = \text{Total cost} / 0.75 = \$9,480 / 0.75 = \$12,640\).

1 mark for the correct option. Method: calculate total cost of job (including variable and fixed overheads), then apply the profit margin formula.

We must identify which errors affect the control account: 1. No correction is needed in the control account as the contra was correctly credited there (though omitted in the sales ledger). 2. This error only affects the customer's personal account, not the control account. 3. Interest charged must be debited to the control account: \(\$120\). 4. An undercast sales day book means total sales posted were too low, so we must add \(\$1,000\) to the control account. Corrected balance = \(\$42,600 + \$120 + \$1,000 = \$43,720\).

1 mark for the correct option. Method: distinguish between errors affecting control accounts and individual ledgers, then adjust the control account balance accordingly.

Prepare the appropriation details: Net Profit = \(\$95,000\); Add: Interest on Drawings (X: \(10\% \times \$20,000 = \$2,000\); Y: \(10\% \times \$10,000 = \$1,000\)) = \(\$3,000\). Profit before other appropriations = \(\$98,000\). Less: Interest on Capital (X: \(5\% \times \$100,000 = \$5,000\); Y: \(5\% \times \$80,000 = \$4,000\)) = \(\$9,000\). Less: Salary to Y = \(\$14,000\). Residual Profit = \(\$98,000 - \$9,000 - \$14,000 = \$75,000\). Y's share of residual profit = \(1/3 \times \$75,000 = \$25,000\).

1 mark for the correct option. Method: construct the appropriation statement to find residual profit, then apply Y's profit sharing ratio.

Let current assets be \(\$220\) and current liabilities be \(\$100\) (Current ratio = 2.2). Let liquid assets be \(\$90\) and inventory be \(\$130\) (Liquid ratio = 0.9). Assume inventory of \(\$30\) is purchased on credit. New current assets = \(\$250\), new current liabilities = \(\$130\). New current ratio = \(250 / 130 = 1.92 : 1\) (decrease). New liquid assets remain \(\$90\) (as inventory is excluded from liquid assets), and new current liabilities = \(\$130\). New liquid ratio = \(90 / 130 = 0.69 : 1\) (decrease). Thus, both ratios decrease.

1 mark for the correct option. Method: test the transaction with hypothetical figures conforming to the original ratios and calculate the new ratios.

1. Calculate the number of shares currently in issue: \( \$200,000 / \$0.50 = 400,000 \) shares.
2. Calculate the number of bonus shares to be issued: \( 400,000 \text{ shares} \times 1/5 = 80,000 \) shares.
3. Calculate the nominal value of the bonus issue: \( 80,000 \text{ shares} \times \$0.50 = \$40,000 \).
4. Fund the bonus issue from the share premium reserve: The share premium reserve decreases by \( \$40,000 \), leaving a balance of \( \$50,000 - \$40,000 = \$10,000 \).
5. Increase the ordinary share capital by \( \$40,000 \), resulting in a new balance of \( \$200,000 + \$40,000 = \$240,000 \).

1 mark for the correct selection of option A. Awarded for correctly calculating the nominal value of the bonus issue of \( \$40,000 \) and adjusting the ordinary share capital and share premium balances accordingly.

1. Calculate Profit After Tax: \( \$62,000 - \$12,000 = \$50,000 \).
2. Note that the proposed final dividend of \( \$40,000 \) is not recorded as an adjustment to retained earnings until it is formally approved by shareholders. Therefore, it is ignored in this calculation.
3. Calculate Closing Retained Earnings: \( \text{Opening Retained Earnings } (\$85,000) + \text{Profit After Tax } (\$50,000) - \text{Transfer to General Reserve } (\$15,000) - \text{Interim Dividend Paid } (\$25,000) = \$95,000 \).

1 mark for the correct selection of option B. Awarded for correctly excluding the proposed dividend and adjusting retained earnings for taxation, reserve transfer, and interim dividend.

1. Calculate the corrected bank/cash book balance starting from the bank statement: \( \text{Bank statement balance } (-\$3,450) + \text{Outstanding lodgements } (+\$850) - \text{Unpresented cheques } (-\$1,200) = -\$3,800 \) (overdraft).
2. This adjusted balance of \( \$3,800 \) (overdraft) represents the correct cash book balance after all adjustments have been entered (including the bank interest of \( \$150 \)).
3. Since the bank interest of \( \$150 \) has been deducted to reach this balance, the unadjusted balance before this entry must have been less overdrawn: \( -\$3,800 + \$150 = -\$3,650 \) (overdraft of \( \$3,650 \)).

1 mark for the correct selection of option A. Awarded for performing the reconciliation calculation to obtain the corrected balance of \( \$3,800 \) overdrawn and successfully reversing the unrecorded bank interest.

1. Draft balance: \( \$48,200 \)
2. Less irrecoverable debt (not entered in control account): \( -\$350 \)
3. Add sales journal undercast (sales postings to control account were too low): \( +\$1,200 \)
4. Correct the contra entry: A contra should be credited to the sales ledger control account. It was incorrectly debited. To correct this, we must credit the control account to remove the error and record the actual entry, which requires a reduction of \( 2 \times \$450 = -\$900 \).
5. Correct balance: \( \$48,200 - \$350 + \$1,200 - \$900 = \$48,150 \).

1 mark for the correct selection of option A. Awarded for correctly adjusting the control account balance for the credit sale write-off, the sales journal undercast, and double-adjusting the misplaced contra entry.

1. Year 2021 depreciation: \( 20\% \times \$80,000 = \$16,000 \). Carrying value at 31 Dec 2021 = \( \$64,000 \).
2. Year 2022 depreciation: \( 20\% \times \$64,000 = \$12,800 \). Carrying value at 31 Dec 2022 = \( \$51,200 \).
3. Year 2023 depreciation: \( \$0 \) (no depreciation is charged in the year of disposal under this policy).
4. Carrying value at date of disposal (30 June 2023) = \( \$51,200 \).
5. Loss on disposal = \( \text{Carrying Value } (\$51,200) - \text{Disposal Proceeds } (\$48,000) = \$3,200 \) loss.

1 mark for the correct selection of option A. Awarded for calculating the carrying value of \( \$51,200 \) based on two years of reducing balance depreciation and correctly identifying a loss of \( \$3,200 \).

1. Calculate annual depreciation: \( (\$120,000 - \$20,000) / 5 = \$20,000 \) per annum.
2. Calculate accumulated depreciation for 2 years (from 1 July 2021 to 30 June 2023): \( \$20,000 \times 2 = \$40,000 \).
3. Calculate carrying value at 30 June 2023: \( \$120,000 - \$40,000 = \$80,000 \).
4. Calculate the revaluation surplus: \( \text{Revalued amount } (\$90,000) - \text{Carrying value } (\$80,000) = \$10,000 \).
5. The balance on the revaluation reserve will be \( \$10,000 \).

1 mark for the correct selection of option A. Awarded for calculating the carrying value of \( \$80,000 \) (correctly factoring in the residual value for depreciation) and computing the correct surplus of \( \$10,000 \).

1. Calculate the predetermined Overhead Absorption Rate (OAR): \( \$180,000 / 15,000 \text{ machine hours} = \$12 \) per machine hour.
2. Calculate the overhead absorbed: \( 16,000 \text{ actual machine hours} \times \$12 = \$192,000 \).
3. Compare absorbed overheads with actual overheads: \( \text{Overhead absorbed } (\$192,000) - \text{Actual overheads incurred } (\$185,000) = \$7,000 \).
4. Since absorbed overheads exceed actual overheads, the overhead is \( \$7,000 \) over-absorbed.

1 mark for the correct selection of option A. Awarded for calculating the OAR of \( \$12 \), determining the absorbed overheads of \( \$192,000 \), and evaluating that overheads are over-absorbed by \( \$7,000 \).

1. 1 October: 100 units @ \( \$8.00 = \$800 \).
2. 8 October purchase: 100 units @ \( \$10.00 = \$1,000 \). New total inventory = 200 units, value = \( \$1,800 \). Average unit cost = \( \$1,800 / 200 = \$9.00 \).
3. 15 October sale: 120 units sold at average cost of \( \$9.00 = \$1,080 \). Remaining inventory = 80 units @ \( \$9.00 = \$720 \).
4. 22 October purchase: 120 units @ \( \$11.50 = \$1,380 \). New total inventory = 200 units, value = \( \$720 + \$1,380 = \$2,100 \). Average unit cost = \( \$2,100 / 200 = \$10.50 \).
5. 28 October sale: 50 units sold at average cost of \( \$10.50 = \$525 \). Remaining units = 150 units @ \( \$10.50 = \$1,575 \).

1 mark for the correct selection of option A. Awarded for calculating the continuous average unit rate after each purchase (\( \$9.00 \) on 8 October, and \( \$10.50 \) on 22 October) and finding the correct final inventory value.

1. Calculate initial number of shares: \( \$200,000 / \$0.50 = 400,000 \) shares.
2. Calculate rights issue shares: \( 400,000 \times 1/4 = 100,000 \) shares.
3. Calculate rights issue premium per share: \( \$0.80 - \$0.50 = \$0.30 \) per share.
4. Increase in share premium: \( 100,000 \times \$0.30 = \$30,000 \). New share premium balance: \( \$60,000 + \$30,000 = \$90,000 \).
5. Total shares after rights issue: \( 400,000 + 100,000 = 500,000 \) shares.
6. Calculate bonus issue shares: \( 500,000 \times 1/5 = 100,000 \) shares.
7. Cost of bonus issue (using share premium): \( 100,000 \times \$0.50 \text{ (nominal value)} = \$50,000 \).
8. Final share premium balance: \( \$90,000 - \$50,000 = \$40,000 \).

1 mark for the correct answer. Method: Award marks for identifying the rights premium of \( \$30,000 \) and the bonus issue funding of \( \$50,000 \) from the share premium account.

1. Calculate accumulated depreciation up to 31 December 2022 (5 years): \( \$500,000 \times 2\% \times 5 = \$50,000 \).
2. Calculate Net Book Value (NBV) on 31 December 2022: \( \$500,000 - \$50,000 = \$450,000 \).
3. Calculate revaluation surplus on 31 December 2022: \( \$540,000 - \$450,000 = \$90,000 \).
4. Determine the remaining useful life: 2% straight-line implies a 50-year total life. Remaining life is \( 50 - 5 = 45 \) years.
5. Calculate excess depreciation to transfer on 31 December 2023: \( \$90,000 / 45 \text{ years} = \$2,000 \) per year.
6. Calculate the revaluation reserve balance on 31 December 2023: \( \$90,000 - \$2,000 = \$88,000 \).

1 mark for the correct answer. Method: Award marks for calculating the correct revaluation surplus of \( \$90,000 \) and the correct annual excess depreciation transfer of \( \$2,000 \).

To find the corrected cash book balance, we start from the bank statement balance and adjust for outstanding items (unpresented cheques and uncleared deposits):
1. Bank statement overdraft: \( (\$3,500) \).
2. Add: Cheques received but not yet cleared (outstanding deposits): \( +\$1,400 \).
3. Less: Cheques issued but not yet presented (unpresented cheques): \( -\$2,100 \).
4. Corrected cash book balance: \( -\$3,500 + \$1,400 - \$2,100 = -\$4,200 \) (which is a credit/overdrawn balance of \( \$4,200 \)). Note: Adjustments 1 and 2 in the question are cash book errors/omissions, so they are already resolved when calculating the corrected cash book balance from the bank statement side.

1 mark for the correct answer. Method: Correctly adjusting the bank statement balance for unpresented cheques and uncleared deposits to arrive at the corrected cash book balance.

1. Distributable reserves consist of Retained Earnings and the General Reserve.
2. Calculate Retained Earnings: Opening balance \( \$150,000 \) + Profit \( \$115,000 \) - Interim dividend paid \( (500,000 \text{ shares} \times \$0.05 = \$25,000) \) - Transfer to General Reserve \( \$15,000 \) = \( \$225,000 \).
3. Calculate General Reserve: Opening balance \( \$0 \) + Transfer from Retained Earnings \( \$15,000 = \$15,000 \).
4. Total distributable reserves: \( \$225,000 + \$15,000 = \$240,000 \). Note that proposed dividends are not recognized as a liability or deducted from reserves until declared, and revaluation reserves and share premium are non-distributable.

1 mark for the correct answer. Method: Award marks for correctly excluding non-distributable reserves, calculating the interim dividend, and ignoring the proposed final dividend.

1. Calculate the Predetermined Overhead Absorption Rate (OAR): \( \$160,000 / 20,000 \text{ hours} = \$8 \) per direct labour hour.
2. Calculate absorbed overheads using actual and under-absorbed figures:
\( \text{Under-absorbed overheads} = \text{Actual overheads} - \text{Absorbed overheads} \)
\( \$6,000 = \$182,000 - \text{Absorbed overheads} \implies \text{Absorbed overheads} = \$176,000 \).
3. Calculate actual direct labour hours worked: \( \text{Absorbed overheads} / \text{OAR} = \$176,000 / \$8 = 22,000 \) hours.

1 mark for the correct answer. Method: Award marks for calculating the correct OAR of \( \$8 \) and correctly identifying the absorbed overheads of \( \$176,000 \).

1. Calculate Direct labour cost: \( 150 \text{ hours} \times \$12 = \$1,800 \).
2. Calculate Prime cost: \( \text{Direct materials } (\$4,500) + \text{Direct labour } (\$1,800) = \$6,300 \).
3. Calculate Production overheads: \( 150 \text{ hours} \times \$8 = \$1,200 \).
4. Calculate Non-production overheads: \( 20\% \times \text{Prime cost } (\$6,300) = \$1,260 \).
5. Calculate Total cost: \( \$6,300 \text{ (prime cost)} + \$1,200 \text{ (production overheads)} + \$1,260 \text{ (non-production overheads)} = \$8,760 \).
6. Calculate Selling price with a 25% net profit margin on selling price (which means total cost is 75% of selling price): \( \text{Selling price} = \$8,760 / 0.75 = \$11,680 \).

1 mark for the correct answer. Method: Award marks for calculating prime cost (\( \$6,300 \)), total cost (\( \$8,760 \)), and converting cost to selling price using the 25% margin on selling price.

**(a) P Limited - Statement of Profit or Loss for the year ended 31 December 2023**

* **Revenue**: $620,000
* **Cost of Sales**:
* Opening inventory: $48,000
* Purchases: $340,000
* Less: Closing inventory (see note 1): ($50,000)
* *Total Cost of Sales*: ($338,000)
* **Gross Profit**: $282,000
* **Expenses**:
* Distribution costs ($56,000 + $3,200): ($59,200)
* Administrative expenses ($88,000 - $1,500 prep.): ($86,500)
* **Profit from operations**: $136,300
* **Finance costs** (Debenture interest: 5% * $100,000): ($5,000)
* **Profit before tax**: $131,300
* **Taxation**: ($12,000)
* **Profit for the year**: $119,300

*Note 1 (Closing inventory valuation):*
* Damaged items: NRV = Selling price $4,500 - repair costs $500 = $4,000.
* This is lower than cost of $6,000. Inventory must be written down by $2,000 ($6,000 - $4,000).
* Adjusted Closing inventory = $52,000 - $2,000 = $50,000.

**(b) Calculation of Revenue Reserves at 31 December 2023**
* **General Reserve**:
* Opening balance: $15,000
* Add: Transfer: $10,000
* *Closing balance*: $25,000
* **Retained Earnings**:
* Opening balance: $42,000
* Add: Profit for the year: $119,300
* Less: Transfer to general reserve: ($10,000)
* Less: Dividends paid ($0.05 * 200,000 shares): ($10,000)
* *Closing balance*: $141,300
* **Total Revenue Reserves** = $25,000 + $141,300 = $166,300.

**(c) Financing Advice to Directors**
* **Option 1: 6% Debentures**
* *Pros*: Debenture interest is tax-deductible, which lowers the effective cost. No dilution of ownership or control for current shareholders. No voting rights given to debenture holders.
* *Cons*: Interest must be paid regardless of profitability. Gearing increases, raising financial risk. Debentures must be repaid at maturity in 2028, creating a liquidity obligation.
* **Option 2: Ordinary Shares**
* *Pros*: No obligation to pay dividends if profits are low, making it safer. Permanent capital with no repayment date. Gearing ratio is reduced, improving financial stability.
* *Cons*: Dilutes control and ownership of existing shareholders. Dividends are not tax-deductible.
* **Recommendation**: If the company has steady and reliable cash flows, issuing debentures is beneficial to retain control and benefit from tax savings. However, if profit levels are uncertain, issuing ordinary shares is safer as it avoids fixed commitment obligations.

**(a) Statement of Profit or Loss (8 Marks)**
* Adjusted Closing inventory of $50,000 (1 mark)
* Cost of sales of $338,000 (1 mark for process)
* Gross profit of $282,000 (1 mark of)
* Distribution costs of $59,200 (1 mark)
* Administrative expenses of $86,500 (1 mark)
* Finance costs of $5,000 (1 mark)
* Profit for the year of $119,300 (1 mark of)
* Correct presentation/headings (Profit from operations, Profit before tax) (1 mark)

**(b) Revenue Reserves (3 Marks)**
* Closing general reserve of $25,000 (1 mark)
* Closing retained earnings of $141,300 (1 mark of)
* Total Revenue Reserves of $166,300 (1 mark of)

**(c) Advice (4 Marks)**
* Up to 3 marks for analysis of debentures and ordinary shares (benefits/drawbacks of each).
* 1 mark for a clear, justified recommendation.

### Working Calculations

**1. Rights Issue (1 March 2023)**
* Number of existing shares = \(\frac{\$200,000}{\$0.50} = 400,000\) shares
* Rights issue = \(\frac{400,000}{4} = 100,000\) shares
* Ordinary Share Capital increase = \(100,000 \times \$0.50 = \$50,000\)
* Share Premium increase = \(100,000 \times (\$0.80 - \$0.50) = 100,000 \times \$0.30 = \$30,000\)
* Total cash received = \(\$80,000\)

**2. Interim Dividend (1 September 2023)**
* Total shares in issue = \(400,000 + 100,000 = 500,000\) shares
* Dividend paid = \(500,000 \times \$0.05 = \$25,000\) (deducted from Retained Earnings)

**3. Transfer to General Reserve**
* Deduct \(\$15,000\) from Retained Earnings and add \(\$15,000\) to General Reserve.

### Statement of Changes in Equity for P Limited for the year ended 31 December 2023

| Details | Ordinary Share Capital ($) | Share Premium ($) | General Reserve ($) | Retained Earnings ($) | Total ($) |
| :--- | :---: | :---: | :---: | :---: | :---: |
| **Balance at 1 Jan 2023** | 200,000 | 40,000 | 20,000 | 85,000 | 345,000 |
| Profit for the year | - | - | - | 62,000 | 62,000 |
| Rights issue | 50,000 | 30,000 | - | - | 80,000 |
| Dividend paid | - | - | - | (25,000) | (25,000) |
| Transfer to General Reserve | - | - | 15,000 | (15,000) | - |
| **Balance at 31 Dec 2023** | **250,000** | **70,000** | **35,000** | **107,000** | **462,000** |

Total Marks: 6

* **1 mark** for correct calculations of Rights Issue ($50,000 added to Share Capital and $30,000 added to Share Premium).
* **1 mark** for correct Interim Dividend calculation and deduction of $25,000 from Retained Earnings.
* **1 mark** for adding Profit for the year of $62,000 to Retained Earnings.
* **1 mark** for the transfer to General Reserve ($15,000 subtracted from Retained Earnings and added to General Reserve).
* **1 mark** for correct closing balances of General Reserve ($35,000) and Retained Earnings ($107,000).
* **1 mark** for the correct Total column presentation and final closing balance of $462,000.

Revenue reserves are created out of business profits and are available for distribution as dividends. These consist of: General reserve ($35,000) + Retained earnings ($112,000) = $147,000. Share premium and the Revaluation reserve are capital reserves and are excluded from this calculation.

Award 1 mark for identifying both correct revenue reserves (General reserve and Retained earnings). Award 1 mark for the correct final total of $147,000.

(a) Calculation of Revenue Reserves: Retained Earnings at 31 December 2023 = Opening Retained Earnings ($45,000) + Profit for the year ($62,000) - Dividends paid ($15,000) = $92,000. General Reserve = $30,000. Total Revenue Reserves = $92,000 + $30,000 = $122,000. (Note: Share premium and Revaluation reserve are capital reserves, not revenue reserves). (b) Any two of: Statement of financial position, Statement of profit or loss and other comprehensive income, Statement of changes in equity, Statement of cash flows. (c) Evaluation of Options: Option 1 (Debentures): Debenture interest of $8,000 is a fixed finance cost that must be paid regardless of profitability, which increases gearing and financial risk. However, it does not dilute control for current shareholders. Option 2 (Ordinary Shares): Dividends are discretionary and do not represent a fixed obligation, keeping financial risk low. However, issuing new shares dilutes the voting power and ownership percentage of existing shareholders. Recommendation: Directors should choose Option 1 if they want to retain full control and are confident in stable future profits, or Option 2 if they wish to keep financial risk low and avoid fixed interest commitments.

(a) Total 3 marks: 1 mark for calculating closing retained earnings of $92,000 ($45,000 + $62,000 - $15,000); 1 mark for identifying the General Reserve of $30,000; 1 mark for adding them to get the correct total of $122,000. (b) Total 1 mark: 1 mark for stating any two correct financial statements. (c) Total 3 marks: 1 mark for explaining one impact of Option 1 (interest obligation / gearing / control); 1 mark for explaining one impact of Option 2 (discretionary dividend / dilution of ownership); 1 mark for a clear, justified recommendation.

First, calculate the depreciation for each period of ownership: Year 1 (2021): \( 24000 \times 20\% = 4800 \). Net Book Value (NBV) on 31 December 2021: \( 24000 - 4800 = 19200 \). Year 2 (2022): \( 19200 \times 20\% = 3840 \). NBV on 31 December 2022: \( 19200 - 3840 = 15360 \). Year 3 (1 January 2023 to 30 June 2023 - 6 months): \( 15360 \times 20\% \times \frac{6}{12} = 1536 \). NBV on date of disposal: \( 15360 - 1536 = 13824 \). Profit on disposal: \( \text{Proceeds} - \text{NBV} = 14000 - 13824 = 176 \) profit.

1 mark for calculating correct Net Book Value (NBV) at disposal of $13,824 (or total accumulated depreciation of $10,176). 1 mark for the final profit of $176 (clearly identified as profit).

To prepare the Machinery Disposal Account, we need to calculate the accumulated depreciation up to the date of disposal.

Since the policy is to charge no depreciation in the year of disposal (2023), the accumulated depreciation comprises only the charges for 2021 and 2022.

**Depreciation calculations:**
- **Year 2021 (Year 1):** \(20\% \times \$40,000 = \$8,000\)
- Net Book Value at 31 Dec 2021: \(\$40,000 - \$8,000 = \$32,000\)
- **Year 2022 (Year 2):** \(20\% \times \$32,000 = \$6,400\)
- Total Accumulated Depreciation up to disposal: \(\$8,000 + \$6,400 = \$14,400\)

**Machinery Disposal Account**
| Date | Details | Amount ($) | Date | Details | Amount ($) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2023 | | | 2023 | | |
| Sept 30 | Machinery (cost) | 40,000 | Sept 30 | Provision for Depreciation | 14,400 |
| | | | Sept 30 | Bank (sale proceeds) | 22,000 |
| | | | Dec 31 | Income Statement (Loss on disposal) | 3,600 |
| | | **40,000** | | | **40,000** |

- 1 mark for correct entry on the debit side: Machinery cost $40,000
- 1 mark for correct calculation and entry of Provision for Depreciation: $14,400
- 1 mark for correct entry of Bank (proceeds): $22,000
- 1 mark for correct balancing figure of loss on disposal transferred to the Income Statement: $3,600

**1. Accumulated depreciation on the disposed vehicle:**
- Annual depreciation: \(20\% \times \$15,000 = \$3,000\)
- Period owned: 1 January 2020 to 1 July 2022 = 2.5 years (30 months)
- Accumulated depreciation: \(\$3,000 \times 2.5 = \$7,500\)
This amount is transferred to the Motor Vehicles Disposal Account.

**2. Depreciation charge for the year 2022 (Income Statement):**
- For the disposed vehicle (owned for 6 months): \(\$15,000 \times 20\% \times \frac{6}{12} = \$1,500\)
- For the remaining vehicles (held for the full year): \((\$60,000 - \$15,000) \times 20\% = \$45,000 \times 20\% = \$9,000\)
- Total charge for 2022: \(\$1,500 + \$9,000 = \$10,500\)

**Provision for Depreciation of Motor Vehicles Account**
| Date | Details | Amount ($) | Date | Details | Amount ($) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 2022 | | | 2022 | | |
| July 1 | Motor Vehicles Disposal | 7,500 | Jan 1 | Balance b/d | 18,000 |
| Dec 31 | Balance c/d | 21,000 | Dec 31 | Income Statement | 10,500 |
| | | **28,500** | | | **28,500** |
| | | | 2023 | | |
| | | | Jan 1 | Balance b/d | 21,000 |

- 1 mark for correct entry on the debit side: Motor Vehicles Disposal $7,500
- 1 mark for correct calculation and entry of the 2022 depreciation charge for the remaining vehicles: $9,000
- 1 mark for correct calculation and entry of the 2022 depreciation charge for the disposed vehicle: $1,500
- 1 mark for correct balancing of the account showing Balance c/d and Balance b/d of $21,000

1. Calculate depreciation for Year 2021: $40,000 * 30% = $12,000. Carrying value on 31 December 2021: $40,000 - $12,000 = $28,000. 2. Calculate depreciation for Year 2022: $28,000 * 30% = $8,400. Carrying value on 31 December 2022: $28,000 - $8,400 = $19,600. 3. Calculate profit or loss on disposal: Since no depreciation is charged in the year of disposal (2023), the carrying value at the date of sale remains $19,600. Loss on disposal = Carrying Value ($19,600) - Disposal Proceeds ($18,000) = $1,600.

1 mark for calculating correct carrying value of $19,600 at the date of disposal. 1 mark for calculating correct loss of $1,600 (must identify as a loss).

Factors to consider include:

1. **Expected pattern of consumption of economic benefits**: The depreciation method should reflect how the asset's economic benefits are consumed (e.g., straight-line for equal usage, or reducing balance for higher usage/productivity in early years) (1 mark).

2. **Technological obsolescence**: If the asset is subject to rapid technological changes (e.g., IT equipment), the reducing balance method may be more appropriate to write off most of the cost early (1 mark).

3. **Repair and maintenance costs**: If maintenance costs rise significantly over time, the reducing balance method helps equalize the total annual cost of the asset (depreciation + maintenance) over its useful life (1 mark).

Award 1 mark for each valid explained factor (maximum 3 marks):
- Expected pattern of consumption of economic benefits / asset usage (1)
- Impact of technological change / obsolescence (1)
- Expected pattern of repair and maintenance costs over time (1)
- Nature / type of the non-current asset (1)

**(a) Sales Ledger Control Account for the month ended 31 October 2023**

| Date | Details | Amount ($) | Date | Details | Amount ($) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Oct 31 | Balance b/d | 12,450 | Oct 31 | Sales journal correction (overcast) | 400 |
| | | | Oct 31 | Sales returns (omitted credit note) | 220 |
| | | | Oct 31 | Balance c/d | 11,830 |
| | **Total** | **12,450** | | **Total** | **12,450** |
| Nov 1 | Balance b/d | 11,830 | | | |

**(b) Statement to Reconcile the Schedule of Balances**

| Details | Amount ($) |
| :--- | :--- |
| Original schedule of balances total | 11,800 |
| Add: Understatement of sale to J. Smith ($310 - $130) | 180 |
| Less: Contra entry omitted | (150) |
| **Corrected schedule of balances total** | **11,830** |

**(c) Limitations of Control Accounts (any two)**
1. They do not detect errors of complete omission (where a transaction is entirely left out of the books of prime entry).
2. They do not detect errors of commission (where an entry is posted to the wrong person's account but in the correct ledger).
3. They do not detect errors of original entry (where an incorrect amount is recorded in the journal and posted to both accounts).
4. They do not detect errors of principle (e.g., entering a revenue expense as non-current assets).
5. They do not detect compensating errors.

**Part (a) [4 Marks total]**
- 1 mark for correct entry of Sales journal overcast ($400) on the credit side.
- 1 mark for correct entry of Sales returns / Credit note ($220) on the credit side.
- 1 mark for calculating and bringing down the correct final balance of $11,830 (debit balance b/d on Nov 1).
- 1 mark for correct structure, formatting, and general ledger terminology used.

**Part (b) [3 Marks total]**
- 1 mark for adding J. Smith correction of $180.
- 1 mark for deducting contra entry of $150.
- 1 mark for correct final reconciled total of $11,830 (must match the answer in part a).

**Part (c) [2 Marks total]**
- 1 mark for each valid limitation listed (max 2 marks).

To reconcile the accounts, adjustments must be applied either to the control account (for general ledger errors) or to the schedule of balances (for subsidiary ledger errors).

**Reconciliation Statement**:

| Adjustment | Sales Ledger Control Account ($) | Schedule of Balances ($) |
| :--- | :---: | :---: |
| **Draft balances** | 14,600 | 14,150 |
| **Error 1**: Omitted customer balance | — | +490 |
| **Error 2**: Discount allowed omitted from control account | (80) | — |
| **Error 3**: Bad debt omitted from customer's personal account | — | (120) |
| **Corrected balances** | **14,520** | **14,520** |

- 1 mark for correcting the Sales Ledger Control Account with the discount allowed of \(\$80\) subtracted.
- 1 mark for adding the omitted customer balance of \(\$490\) to the schedule of balances.
- 1 mark for subtracting the bad debt written off of \(\$120\) from the schedule of balances.
- 1 mark for showing both adjusted balances reconciled at \(\$14,520\).

A sales ledger control account is used to verify the arithmetical accuracy of the sales ledger by comparing its balance with the total of the list of individual customer balances. However, it cannot detect certain errors where double entry is still mathematically maintained. These include: 1. Error of omission: A transaction completely omitted from the books of prime entry will not appear in either the control account or the individual ledger account. 2. Error of commission: An entry posted to the incorrect individual customer account (e.g., posting a debit to A. Smith instead of B. Smith) will still result in the total of the individual balances matching the control account balance. 3. Error of original entry: If an incorrect amount is recorded in the journal, the incorrect amount will be posted to both the control account and the individual account, thus matching. 4. Compensating errors: Where two distinct errors of equal value cancel each other out.

Award 1 mark for each valid limitation stated, up to a maximum of 2 marks. Acceptable answers include: Error of omission (1 mark), Error of commission (1 mark), Error of principle (1 mark), Compensating errors (1 mark), Complete reversal of entries (1 mark), and Errors of original entry / prime entry errors (1 mark).

Part (a): 1. Reapportion Canteen overheads ($15,000) based on employees (60:40 ratio). Assembly share: \( \frac{60}{100} \times \$15,000 = \$9,000 \). Packaging share: \( \frac{40}{100} \times \$15,000 = \$6,000 \). 2. Total overheads: Assembly: \( \$45,000 + \$9,000 = \$54,000 \). Packaging: \( \$35,000 + \$6,000 = \$41,000 \). 3. Calculate OAR: Assembly OAR: \( \frac{\$54,000}{9,000 \text{ labor hours}} = \$6.00 \) per direct labor hour. Packaging OAR: \( \frac{\$41,000}{8,200 \text{ machine hours}} = \$5.00 \) per machine hour. Part (b): 1. Calculate variable cost per unit of Product X: Direct materials ($10) + Direct labor ($8) = $18 per unit. (Absorbed overheads are fixed and therefore irrelevant as there is spare capacity). 2. Calculate contribution: Selling price ($25) - Variable cost ($18) = $7 contribution per unit. 3. Total contribution: \( 100 \text{ units} \times \$7 = \$700 \). Recommendation: Accept the order as it yields a positive contribution of $700, which will directly increase the firm's total profit.

Part (a) [Total: 4 marks]: Reapportionment of Canteen overheads to Assembly ($9,000) and Packaging ($6,000) (1 mark for both). Total overheads for Assembly ($54,000) and Packaging ($41,000) (1 mark for both). Assembly OAR calculation: $6.00 per direct labor hour (1 mark, including unit). Packaging OAR calculation: $5.00 per machine hour (1 mark, including unit). Part (b) [Total: 2 marks]: Calculation of unit variable cost ($18) or contribution per unit ($7) / total contribution ($700) (1 mark). Clear recommendation to accept based on the positive contribution of $700 (1 mark).

1. Apportion rent based on floor area (Total = 10,000 sq m):
- Machining: $30,000 * (5,000 / 10,000) = $15,000
- Assembly: $30,000 * (3,000 / 10,000) = $9,000
- Canteen: $30,000 * (2,000 / 10,000) = $6,000

2. Calculate total Canteen overheads before reallocation:
$10,000 (direct) + $6,000 (rent) = $16,000

3. Reallocate Canteen overheads based on employees (Total = 16 employees):
- Machining share: $16,000 * (12 / 16) = $12,000
- Assembly share: $16,000 * (4 / 16) = $4,000

4. Calculate final Machining overheads:
$60,000 (direct) + $15,000 (rent) + $12,000 (canteen reallocation) = $87,000

- Apportionment of rent to Machining ($15,000): 1 mark
- Apportionment of rent to Canteen ($6,000) and finding total Canteen overheads ($16,000): 1 mark
- Reallocation of Canteen overheads to Machining ($12,000): 1 mark
- Correct final total overheads for Machining ($87,000): 1 mark

1. Calculate the Predetermined Overhead Absorption Rate (OAR):
OAR = Budgeted Overheads / Budgeted Direct Labor Hours = $98,000 / 14,000 hours = $7.00 per direct labor hour

2. Calculate the overheads absorbed during the period:
Absorbed Overheads = Actual Direct Labor Hours * OAR = 14,200 hours * $7.00 = $99,400

3. Calculate the over/under absorption:
Over/under absorption = Absorbed Overheads - Actual Overheads = $99,400 - $102,500 = -$3,100 (Under-absorbed)

- Calculation of OAR ($7.00 per direct labor hour): 1 mark
- Calculation of absorbed overheads ($99,400): 1 mark
- Comparison with actual overheads ($102,500): 1 mark
- Correct final answer of $3,100 under-absorbed (both amount and direction must be correct): 1 mark

1. Identify relevant costs per unit (variable costs only):
Direct materials ($15) + Direct labor ($12) + Variable overhead ($6) = $33 per unit. Note that fixed overheads ($10 per unit) are not relevant as they are already fully covered by normal production and will not change.

2. Calculate contribution per unit of the special order:
Special selling price - Variable cost = $38 - $33 = $5 per unit

3. Calculate total net change in profit:
1,500 units * $5 contribution = $7,500 increase in profit

4. Recommendation: The company should accept the special order because it generates a positive contribution of $5 per unit, resulting in an overall profit increase of $7,500.

- Correct identification of relevant variable costs of $33 per unit: 1 mark
- Calculation of positive unit contribution of $5: 1 mark
- Calculation of the total increase in profit of $7,500: 1 mark
- Clear recommendation to accept the order based on the positive financial impact: 1 mark

To evaluate the special order, we must use marginal costing principles, identifying relevant costs only (general allocated fixed overheads of $10 per unit are irrelevant as they do not change):

1. **Relevant Revenue**:
\( 1,000 \text{ units} \times \$40 = \$40,000 \)

2. **Relevant Variable Costs**:
- Direct Materials: \( 1,000 \text{ units} \times \$12 = \$12,000 \)
- Direct Labor: \( 1,000 \text{ units} \times \$16 = \$16,000 \)
- Variable Overheads: \( 1,000 \text{ units} \times \$8 = \$8,000 \)
Total Variable Costs = \( \$12,000 + \$16,000 + \$8,000 = \$36,000 \)

3. **Contribution**:
\( \text{Contribution} = \text{Revenue} - \text{Total Variable Costs} \)
\( \text{Contribution} = \$40,000 - \$36,000 = \$4,000 \) (or $4 per unit)

4. **Relevant Fixed Cost (Specific Tooling)**:
\( \text{Special Tooling Cost} = \$3,000 \)

5. **Net Financial Benefit/Loss**:
\( \text{Net Benefit} = \text{Contribution} - \text{Special Tooling Cost} \)
\( \text{Net Benefit} = \$4,000 - \$3,000 = +\$1,000 \)

**Advice**:
The directors should accept the special order. From a financial perspective, it yields a net positive benefit of $1,000 and utilizes spare capacity. However, they should ensure this discounted sale does not upset regular customers or lead to expectations of permanent price cuts.

- **1 mark**: Correct total relevant variable cost calculated ($36,000 or $36 per unit).
- **1 mark**: Correct treatment of general fixed overheads (correctly excluded from calculations).
- **1 mark**: Inclusion of the specific tooling cost of $3,000.
- **1 mark**: Correct calculation of the final net financial benefit of $1,000.
- **1 mark**: Clear advice to accept the order based on the positive financial benefit of $1,000, with a brief qualitative warning (e.g., customer conflict, capacity issues).

**a) Calculation of Budgeted Overhead Absorption Rate (OAR)**

$$\text{Total Machining Overheads} = \text{Allocated Overheads} + \text{Apportioned Maintenance Overheads}$$
$$\text{Total Overheads} = \$48,000 + \$12,000 = \$60,000$$

$$\text{Overhead Absorption Rate (OAR)} = \frac{\text{Total Overheads}}{\text{Budgeted Machine Hours}} = \frac{\$60,000}{2,400 \text{ machine hours}} = \$25 \text{ per machine hour}$$

---

**b) Evaluation and Recommendation**

**1. Financial Analysis**

* **Absorption Costing Basis:**
$$\begin{array}{lr} & \text{\$ per unit} \\ \hline \text{Direct materials} & 30.00 \\ \text{Direct labour} & 25.00 \\ \text{Absorbed production overheads } (1.5 \text{ hours} \times \$25) & 37.50 \\ \text{Special attachment cost } (\$1,200 / 200 \text{ units}) & 6.00 \\ \hline \text{Total cost per unit} & 98.50 \\ \text{Offered price per unit} & (85.00) \\ \hline \text{Net loss per unit} & 13.50 \\ \hline \text{Total loss on order } (200 \text{ units} \times \$13.50) & \$2,700 \end{array}$$

* **Incremental (Marginal Cost) Basis:**
$$\begin{array}{lrr} & \text{\$ per unit} & \text{Total (200 units)} \\ \hline \text{Revenue} & 85.00 & 17,000 \\ \text{Less incremental costs:} & & \\ \text{ - Direct materials} & (30.00) & (6,000) \\ \text{ - Direct labour} & (25.00) & (5,000) \\ \text{ - Special attachment} & (6.00) & (1,200) \\ \hline \text{Incremental Profit (Contribution)} & 24.00 & 4,800 \\ \hline \end{array}$$

* **Financial Conclusion:** Fixed overheads of $37.50 per unit (total $7,500) are already covered by normal production and will not change if this order is accepted. Therefore, on an incremental basis, accepting the order increases total profit by $4,800.

**2. Qualitative Factors**

* **Positive factors:** Utilises existing spare capacity; keeps workforce active; potential for future business from this new customer.
* **Negative factors:** Risk that existing customers find out about the discounted price and demand similar terms; if the customer expects the same price for future orders, it is unsustainable in the long run.

**3. Recommendation**

Accept the order because it provides a positive incremental profit of $4,800 and utilises spare capacity, provided existing markets are isolated from this discounted pricing.

**Part a) (2 marks):**
* 1 mark: Calculation of total apportioned Machining overheads of $60,000.
* 1 mark: Calculation of OAR of $25 per machine hour (method: divide total overheads by 2,400 hours).

**Part b) (5 marks):**
* 1 mark: Calculation of either total incremental revenue ($17,000) and total incremental costs ($12,200) OR unit variable cost of $61 (including special attachment).
* 1 mark: Calculation of total incremental profit of $4,800 (or unit contribution of $24).
* 1 mark: Identification that absorption costing shows a loss of $2,700 / unit loss of $13.50 because fixed overheads are sunk/already covered.
* 1 mark: Discussion of at least one qualitative factor (e.g., spare capacity, impact on current customers, future business potential).
* 1 mark: Clear, justified recommendation based on the candidate's financial calculations.