2024 Cambridge IAS-Level Accounting (9706) 模擬試題連答案詳解

First, calculate the carrying value of the machine on 31 December 2022:
- Cost on 1 January 2021: $80,000
- Depreciation for 2021: $80,000 \\times 20\% = $16,000
- Carrying value on 31 December 2021: $80,000 - $16,000 = $64,000
- Depreciation for 2022: $64,000 \times 20\% = $12,800
- Carrying value on 31 December 2022: $64,000 - $12,800 = $51,200

Next, apply the straight-line method to the remaining carrying value on 1 January 2023 over 5 years with a $5,200 residual value:
- New depreciation base: $51,200 - $5,200 = $46,000
- Depreciation for 2023: $46,000 / 5 \\text{ years} = $9,200.

1 mark for the correct answer A.

First, calculate the predetermined Overhead Absorption Rate (OAR):
\\text{OAR} = \\frac{\\text{Budgeted Overheads}}{\\text{Budgeted Direct Labor Hours}} = \\frac{$240,000}{40,000 \text{ hours}} = $6 \\text{ per direct labor hour}

Next, calculate the overheads absorbed based on actual hours worked:
\\text{Overheads Absorbed} = 41,500 \\text{ hours} \\times $6 = $249,000

Finally, compare the absorbed overheads to actual overheads incurred:
\\text{Under-absorption} = \\text{Actual Overheads} - \\text{Absorbed Overheads} = $258,000 - $249,000 = $9,000.

1 mark for the correct answer A.

1. Profit for the year after tax = $85,000 - $18,000 = $67,000.
2. Final proposed dividends are not recognized as a liability or a deduction from equity under IAS 10 because they are not approved before the year-end.
3. Retained earnings balance at 31 December 2023 = Opening retained earnings ($120,000) + Profit after tax ($67,000) - Interim dividend paid ($12,000) - Transfer to general reserve ($15,000) = $160,000.

1 mark for the correct answer B.

To correct the cash book, we only adjust for items that affect the cash book directly but have not yet been recorded. Timing differences (unpresented cheques and outstanding deposits) are reconciling items for the bank statement reconciliation, not the cash book itself.
Corrected cash book balance = $8,450 (Draft balance) - $120 (Bank charges) - $450 (Dishonoured cheque) = $7,880.

1 mark for the correct answer B.

- The sales day book error understates both the control account and customer accounts by $270 ($850 - $580). This must be added to the control account: +$270.
- The irrecoverable debt write-off was not entered in the control account. This must be deducted: -$300.
- The contra entry was omitted from the control account. This must be deducted: -$400.
- Corrected balance = $42,600 + $270 - $300 - $400 = $42,170.

1 mark for the correct answer B.

1. Calculate Cost of Sales:
Cost of Sales = Revenue \\times (1 - \\text{Gross Profit Margin}) = $600,000 \times 0.75 = $450,000.
2. Calculate Average Inventory:
Average Inventory = (\\text{Opening Inventory} + \\text{Closing Inventory}) / 2 = ($45,000 + $55,000) / 2 = $50,000.
3. Calculate Inventory Turnover:
Inventory Turnover = \frac{\text{Cost of Sales}}{\text{Average Inventory}} = \frac{$450,000}{$50,000} = 9 \\text{ times}.

1 mark for the correct answer B.

1. Calculate Residual Profit to share:
Residual Profit = Net Profit ($50,000) - Total Interest on Capital ($2,000 + $1,500) - B's Salary ($8,000) = $50,000 - $3,500 - $8,000 = $38,500.
2. B's share of residual profit = $38,500 \times 2/5 = $15,400.
3. Reconstruct B's Current Account:
- Opening Balance (Cr): $4,200
- Add Interest on Capital: +$1,500
- Add Salary: +$8,000
- Add Share of profit: +$15,400
- Less Drawings: -$15,000
- Closing Balance (Cr) = $4,200 + $1,500 + $8,000 + $15,400 - $15,000 = $14,100.

1 mark for the correct answer B.

1. Calculate the contribution per unit:
Contribution per unit = Selling Price - Variable Cost = $25 - $15 = $10 per unit.
2. Calculate the sales volume required for target profit:
Required Sales Units = \frac{\text{Fixed Costs} + \text{Target Profit}}{\text{Contribution per unit}} = \frac{$60,000 + $30,000}{$10} = 9,000 \\text{ units}.

1 mark for the correct answer C.

On 31 December 2021, the carrying value is $120,000 - (15% * $120,000) = $102,000. On 31 December 2022, the carrying value is $102,000 - (15% * $102,000) = $86,700. The surplus on revaluation is the revalued amount minus the carrying value at 1 January 2023: $100,000 - $86,700 = $13,300.

1 mark for the correct option. Calculated as: $100,000 - ($120,000 * 0.85 * 0.85).

1. Calculate the initial number of ordinary shares: \(\text{Number of shares} = \frac{\$400,000}{\$0.50} = 800,000\text{ shares}\). 2. Calculate the bonus issue: \(\text{Bonus shares} = \frac{800,000}{4} = 200,000\text{ shares}\). The nominal value of bonus shares is \(200,000 \times \$0.50 = \$100,000\). 3. Adjust the share premium account after the bonus issue: \(\text{New share premium balance} = \$120,000 - \$100,000 = \$20,000\). 4. Calculate the total number of shares after the bonus issue: \(\text{Total shares} = 800,000 + 200,000 = 1,000,000\text{ shares}\). 5. Calculate the rights issue: \(\text{Rights shares} = \frac{1,000,000}{5} = 200,000\text{ shares}\). The premium per rights share is \(\$0.80 - \$0.50 = \$0.30\). The addition to share premium is \(200,000 \times \$0.30 = \$60,000\). 6. Determine the final share premium balance: \(\text{Final balance} = \$20,000 + \$60,000 = \$80,000\).

1 mark for the correct option. 0 marks for an incorrect or omitted option.

1. Calculate the overhead absorption rates (OAR) for each department: - \(\text{Machining OAR} = \frac{\$360,000}{45,000\text{ hours}} = \$8.00\text{ per machine hour}\) - \(\text{Assembly OAR} = \frac{\$180,000}{30,000\text{ hours}} = \$6.00\text{ per direct labor hour}\) 2. Calculate the overhead absorbed by each department: - \(\text{Machining overhead absorbed} = 46,000\text{ actual hours} \times \$8.00 = \$368,000\) - \(\text{Assembly overhead absorbed} = 29,500\text{ actual hours} \times \$6.00 = \$177,000\) 3. Compare absorbed overheads to actual overheads to find under/over-absorption: - \(\text{Machining under-absorption} = \$375,000\text{ (actual)} - \$368,000\text{ (absorbed)} = \$7,000\text{ under-absorbed}\) - \(\text{Assembly over-absorption} = \$177,000\text{ (absorbed)} - \$172,000\text{ (actual)} = \$5,000\text{ over-absorbed}\) 4. Calculate the net total absorption for the company: \(\text{Net under-absorption} = \$7,000\text{ under} - \$5,000\text{ over} = \$2,000\text{ under-absorbed}\).

1 mark for the correct option. 0 marks for an incorrect or omitted option.

1. Calculate depreciation accumulated up to the revaluation date (3 years from 1 January 2019 to 31 December 2021): - \(\text{Annual depreciation} = \frac{\$600,000}{40\text{ years}} = \$15,000\text{ per year}\) - \(\text{Accumulated depreciation} = \$15,000 \times 3 = \$45,000\) 2. Calculate carrying amount on 1 January 2022: - \(\text{Carrying amount} = \$600,000 - \$45,000 = \$555,000\) 3. Calculate the revaluation surplus: - \(\text{Revaluation surplus} = \$666,000 - \$555,000 = \$111,000\) 4. Calculate remaining useful life and new depreciation charge for 2022: - \(\text{Remaining useful life} = 40\text{ years} - 3\text{ years} = 37\text{ years}\) - \(\text{New annual depreciation} = \frac{\$666,000}{37\text{ years}} = \$18,000\) Since no transfer is made from the revaluation reserve to retained earnings, the reserve balance remains at \(\$111,000\).

1 mark for the correct option. 0 marks for an incorrect or omitted option.

To find the corrected cash book balance, only items that have occurred but are not yet updated in the cash book are adjusted. Uncredited deposits and unpresented cheques do not affect the corrected cash book balance. 1. Start with the draft cash book debit balance: \(\$8,450\) 2. Subtract bank charges not entered: \(-\$180\) 3. Subtract direct debits not recorded: \(-\$310\) 4. Correct the supplier payment error (the cash book payment was under-recorded by \(\$540 - \$450 = \$90\), so an additional credit/reduction is needed): \(-\$90\) \(\text{Corrected Cash Book Balance} = \$8,450 - \$180 - \$310 - \$90 = \$7,870\).

1 mark for the correct option. 0 marks for an incorrect or omitted option.

Capital expenditure includes costs incurred to acquire, deliver, and prepare a non-current asset for its intended use, as well as modifications that improve its capability. Capitalized costs: - Purchase price: \(\$18,000\) - Delivery of the vehicle: \(\$450\) - Installation of racking system: \(\$1,200\) - Testing brakes before initial use: \(\$250\) \(\text{Total capitalized cost} = \$18,000 + \$450 + \$1,200 + \$250 = \$19,900\). Revenue expenditure (not capitalized): - Annual road tax (\(\$180\)) and first-year insurance (\(\$920\)) are recurring operational expenses. - Repainting a scratch (\(\$150\)) is a maintenance/repair expense.

1 mark for the correct option. 0 marks for an incorrect or omitted option.

1. Calculate the average inventory for Year 2: \(\text{Average Inventory} = \frac{\text{Opening Inventory} + \text{Closing Inventory}}{2} = \frac{\$40,000 + \\$64,000}{2} = \$52,000\). 2. Calculate the inventory turnover in days: \(\text{Inventory Turnover (days)} = \frac{\text{Average Inventory}}{\text{Cost of Sales}} \times 365 = \frac{\$52,000}{\$520,000} \times 365 = 0.1 \times 365 = 36.5\text{ days}\). Rounding to the nearest day gives 37 days.

1 mark for the correct option. 0 marks for an incorrect or omitted option.

1. Calculate interest on drawings (add to profit): - X: \(\$12,000 \times 10\% = \$1,200\) - Y: \(\$8,000 \times 10\% = \$800\) - \(\text{Total interest on drawings} = \$2,000\) 2. Calculate interest on capital (deduct from profit): - X: \(\$100,000 \times 5\% = \$5,000\) - Y: \(\$8,000 \times 5\% = \$4,000\) - \(\text{Total interest on capital} = \$9,000\) 3. Calculate residual profit: - \(\text{Residual profit} = \text{Net Profit} + \text{Total Interest on Drawings} - \text{Total Interest on Capital} - \text{Y's Salary} = \$64,000 + \$2,000 - \$9,000 - \$15,000 = \$42,000\) 4. Calculate Y's share of residual profit (2/5 parts): - \(\text{Y's share} = \$42,000 \times \frac{2}{5} = \$16,800\).

1 mark for the correct option. 0 marks for an incorrect or omitted option.

1. Calculate the current margin of safety: - \(\text{Current contribution per unit} = \$30 - \$18 = \$12\) - \(\text{Current breakeven point (units)} = \frac{\$180,000}{\$12} = 15,000\text{ units}\) - \(\text{Current margin of safety} = 20,000\text{ (actual)} - 15,000\text{ (breakeven)} = 5,000\text{ units}\) 2. Calculate the proposed margin of safety: - \(\text{Proposed contribution per unit} = \$27 - \$18 = \$9\) - \(\text{Proposed breakeven point (units)} = \frac{\$180,000}{\$9} = 20,000\text{ units}\) - \(\text{Proposed margin of safety} = 28,000\text{ (actual)} - 20,000\text{ (breakeven)} = 8,000\text{ units}\) 3. Calculate the change in the margin of safety: - \(\text{Change} = 8,000\text{ units} - 5,000\text{ units} = 3,000\text{ units increase}\).

1 mark for the correct option. 0 marks for an incorrect or omitted option.

1. **Initial shares in issue:** $400,000 / $0.50 = 800,000 shares.

2. **Rights issue (1 for 4):**
- Number of rights shares issued = 800,000 / 4 = 200,000 shares.
- Premium per share = $0.80 - $0.50 = $0.30.
- Contribution to Share Premium = 200,000 * $0.30 = $60,000.
- Total shares in issue after rights issue = 1,000,000 shares.
- Share Premium balance after rights issue = $150,000 + $60,000 = $210,000.

3. **Bonus issue (1 for 10):**
- Number of bonus shares issued = 1,000,000 / 10 = 100,000 shares.
- Nominal value of bonus shares (funded from Share Premium) = 100,000 * $0.50 = $50,000.
- Remaining balance on Share Premium = $210,000 - $50,000 = $160,000.

1 mark for the correct answer.
- Award 1 mark for Option B.
- 0 marks for incorrect options.

1. **Calculate the Overhead Absorption Rate (OAR):**
\(\text{OAR} = \frac{\text{Budgeted Overheads}}{\text{Budgeted Hours}} = \frac{\$180,000}{15,000 \text{ hours}} = \$12 \text{ per direct labor hour}\)

2. **Calculate overheads absorbed:**
\(\text{Absorbed Overheads} = \text{Actual Hours} \times \text{OAR} = 15,800 \times \$12 = \$189,600\)

3. **Calculate over/under absorption:**
\(\text{Over/(Under) Absorption} = \text{Absorbed Overheads} - \text{Actual Overheads} = \$189,600 - \$194,000 = -\$4,400\) (Under-absorbed)

1 mark for the correct calculation and identification of under-absorption.
- Award 1 mark for Option A.

1. **Depreciation for 2021:**
\(20\% \times \$80,000 = \$16,000\)
Net Book Value (NBV) at 31 Dec 2021 = $80,000 - $16,000 = $64,000

2. **Depreciation for 2022:**
\(20\% \times \$64,000 = \$12,800\)
NBV at 31 Dec 2022 = $64,000 - $12,800 = $51,200

3. **Depreciation for 2023:**
No depreciation is charged in the year of disposal. Thus, the NBV at disposal remains $51,200.

4. **Profit/Loss on Disposal:**
\(\text{Profit/Loss} = \text{Disposal Proceeds} - \text{NBV} = \$48,000 - \$51,200 = -\$3,200\) (Loss of $3,200)

1 mark for the correct calculation of loss on disposal.
- Award 1 mark for Option A.

1. **Adjust Cash Book Balance:**
\(\text{Adjusted Cash Book Balance} = \$8,450 \text{ (Debit)} - \$120 \text{ (Bank Charges)} - \$450 \text{ (Dishonoured Cheque)} = \$7,880 \text{ Debit}\)

2. **Reconcile to Bank Statement Balance (X):**
\(\text{Adjusted Cash Book Balance} = X \text{ (Bank Statement Balance)} + \text{Outstanding Lodgements} - \text{Unpresented Cheques}\)
\(\$7,880 = X + \$850 - \$1,200\)
\(\$7,880 = X - \$350\)
\(X = \$7,880 + \$350 = \$8,230\)

1 mark for the correct calculation of the bank statement balance.
- Award 1 mark for Option C.

1. **Opening Suspense Account Balance:** $840 Debit.

2. **Correction of Error 1:**
- Credit sales of $650 posted to customer account as $560. J. Wood's debit entry is short by $90.
- Correcting entry: Debit J. Wood $90, Credit Suspense $90.
- New Suspense balance = $840 (Dr) - $90 (Cr) = $750 (Dr).

3. **Correction of Error 2:**
- Purchases journal was undercast by $750, meaning total debits in the purchases account are short by $750.
- Correcting entry: Debit Purchases $750, Credit Suspense $750.
- New Suspense balance = $750 (Dr) - $750 (Cr) = $0 (Nil).

1 mark for the correct identification of the remaining suspense balance.
- Award 1 mark for Option A.

1. **Calculate Cost of Sales (COS):**
\(\text{COS} = \text{Revenue} \times (100\% - \text{Gross profit margin}) = \$600,000 \times 70\% = \$420,000\)

2. **Calculate Inventory:**
\(\text{Inventory Turnover} = \frac{\text{COS}}{\text{Inventory}}\)
\(6 = \frac{\$420,000}{\text{Inventory}}\)
\(\text{Inventory} = \$70,000\)

3. **Calculate Current Liabilities (CL):**
\(\text{CL} = \text{Trade Payables} + \text{Bank Overdraft} = \$35,000 + \$15,000 = \$50,000\)

4. **Calculate Liquid (Acid Test) Ratio:**
\(\text{Liquid Assets} = \text{Trade Receivables} = \$42,000\)
\(\text{Liquid Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}} = \frac{\$42,000}{\$50,000} = 0.84 : 1\)

1 mark for the correct calculation of the liquid ratio.
- Award 1 mark for Option A.

**Part (a) Workings:**

1. **Depreciation on Buildings:**
* Cost of buildings = $600,000 (total Land & Buildings) - $200,000 (Land) = $400,000
* Depreciation expense = \(2\% \times \$400,000 = \$8,000\)
* Charged to Administrative expenses.

2. **Depreciation on Equipment:**
* Net Book Value = \( \$240,000 - \$96,000 = \$144,000 \)
* Depreciation expense = \( 20\% \times \$144,000 = \$28,800 \)
* Allocated to Distribution costs (60%): \( \$28,800 \times 60\% = \$17,280 \)
* Allocated to Administrative expenses (40%): \( \$28,800 \times 40\% = \$11,520 \)

3. **Receivables & Doubtful Debts:**
* Bad debt written off = $4,000 (charged to Administrative expenses)
* Adjusted Receivables = \( \$88,000 - \$4,000 = \$84,000 \)
* Required Allowance = \( 5\% \times \$84,000 = \$4,200 \)
* Existing Allowance = $3,600
* Increase in Allowance = \( \$4,200 - \$3,600 = \$600 \) (charged to Administrative expenses)

4. **Debenture Interest:**
* \( \$150,000 \times 8\% = \$12,000 \) (Finance cost)

5. **Interim Dividend Correction:**
* Number of shares on 1 June 2023 = \( \$400,000 \text{ nominal value} / \$0.50 = 800,000 \text{ shares} \)
* Interim dividend paid = \( 800,000 \times \$0.02 = \$16,000 \)
* Correction: Remove $16,000 from Administrative expenses and debit directly to Retained Earnings.

6. **Adjusted Administrative Expenses:**
* Draft amount: $194,000
* Less: Dividend correction: \(-\$16,000\)
* Add: Depreciation on Buildings: \(+\$8,000\)
* Add: Depreciation on Equipment (40%): \(+\$11,520\)
* Add: Bad debt written off: \(+\$4,000\)
* Add: Increase in allowance for doubtful debts: \(+\$600\)
* **Total Administrative Expenses = $202,120**

7. **Adjusted Distribution Costs:**
* Draft amount: $112,000
* Add: Depreciation on Equipment (60%): \(+\$17,280\)
* **Total Distribution Costs = $129,280**

**Zelona PLC - Statement of Profit or Loss for the year ended 31 December 2023**

\(\begin{array}{lr} & \$ \\ \text{Revenue} & 1,240,000 \\ \text{Cost of sales} & (680,000) \\ \hline \text{Gross Profit} & 560,000 \\ \text{Distribution costs} & (129,280) \\ \text{Administrative expenses} & (202,120) \\ \hline \text{Profit from operations} & 228,600 \\ \text{Finance costs (Debenture interest)} & (12,000) \\ \hline \text{Profit before tax} & 216,600 \\ \text{Income tax expense} & (24,000) \\ \hline \text{Profit for the year} & \mathbf{192,600} \\ \hline \end{array}\)

---

**Part (b) Workings for Statement of Changes in Equity:**

1. **Rights Issue:**
* Shares held: \( 800,000 \text{ shares} \)
* Rights shares issued: \( 800,000 \times 1/4 = 200,000 \text{ shares} \)
* Proceeds: \( 200,000 \times \$0.80 = \$160,000 \)
* Nominal value increase (Share Capital): \( 200,000 \times \$0.50 = \$100,000 \)
* Premium value increase (Share Premium): \( 200,000 \times \$0.30 = \$60,000 \)

**Zelona PLC - Statement of Changes in Equity for the year ended 31 December 2023**

\(\begin{array}{|l|c|c|c|c|c|} \hline & \text{Share} & \text{Share} & \text{General} & \text{Retained} & \text{Total} \\ & \text{Capital (\$)} & \text{Premium (\$)} & \text{Reserve (\$)} & \text{Earnings (\$)} & \text{Equity (\$)} \\ \hline \text{Balances at 1 January 2023} & 400,000 & 120,000 & 50,000 & 165,000 & 735,000 \\ \text{Profit for the year} & - & - & - & 192,600 & 192,600 \\ \text{Rights issue} & 100,000 & 60,000 & - & - & 160,000 \\ \text{Interim dividend paid} & - & - & - & (16,000) & (16,000) \\ \text{Transfer to general reserve} & - & - & 25,000 & (25,000) & - \\ \hline \text{Balances at 31 December 2023} & \mathbf{500,000} & \mathbf{180,000} & \mathbf{75,000} & \mathbf{316,600} & \mathbf{1,071,600} \\ \hline \end{array}\)

---

**Part (c) Evaluation of Financing Options:**

* **Option 1: Issue 6% Debentures ($300,000)**
* *Calculation:* Additional annual interest charge = \( \$300,000 \times 6\% = \$18,000 \).
* *Analysis:* No dilution of ownership or control for existing shareholders. Interest is tax-deductible, reducing net finance costs. However, this increases financial risk (gearing) and is a fixed expense that must be paid regardless of profitability. Gearing ratio will increase (Non-current liabilities will rise from $150,000 to $450,000).

* **Option 2: Issue 500,000 ordinary shares at $0.60 per share ($300,000)**
* *Calculation:* Number of shares increases by 500,000 (from 1,000,000 shares at 31 Dec 2023 to 1,500,000 shares). Share capital increases by $250,000; share premium increases by $50,000.
* *Analysis:* No obligation to pay regular cash interest or dividends if profits are low (reduces financial risk). It expands the equity base, lowering gearing levels. However, it will lead to dilution of earnings per share (EPS) and control/voting power for existing shareholders. Issue costs for equity are often higher than debt.

* **Conclusion/Advice:** The directors should weigh financial risk against control. If they wish to maintain control and have stable profit streams to cover the fixed interest, Option 1 is recommended. If they wish to avoid financial risk and fixed costs, Option 2 is recommended. (Either recommendation is acceptable if supported by valid reasons).

**Part (a) [14 marks]**
* **Revenue & Cost of sales** (or Gross Profit $560,000) [1]
* **Distribution costs** ($112,000 + $17,280 [1] = $129,280) [2]
* **Administrative expenses** ($194,000 - $16,000 [1] + $8,000 [1] + $11,520 [1] + $4,000 [1] + $600 [1] = $202,120) [5]
* **Profit from operations** ($228,600) [1 OF]
* **Finance costs** ($12,000 accrued debenture interest) [1]
* **Profit before tax** ($216,600) [1 OF]
* **Taxation** ($24,000) [1]
* **Profit for the year** ($192,600) [2 OF]

**Part (b) [8 marks]**
* **Opening balances column check** [1]
* **Profit for the year** ($192,600 in Retained Earnings and Total) [1 OF]
* **Rights issue** ($100,000 Share Capital [1], $60,000 Share Premium [1]) [2]
* **Interim dividend paid** ($16,000 reduction in Retained Earnings and Total) [2]
* **Transfer to general reserve** ($25,000 transfer between columns, Nil impact on total) [1]
* **Closing balances column checks** (All columns mathematically correct) [1 OF]

**Part (c) [8 marks]**
* **Calculations** (Interest expense of $18,000 [1]; Increase in number of shares to 1.5 million [1]) [2]
* **Discussion of Option 1 (Debentures)** (Max 2 marks: details on interest obligation, tax deductibility, risk/gearing) [2]
* **Discussion of Option 2 (Shares)** (Max 2 marks: details on non-mandatory dividends, dilution of control, impact on EPS) [2]
* **Final justified advice/recommendation** [2]

(a) Journal Entries


ErrorDetailsDebit ($)Credit ($)
(1)Suspense360
Sales360
(2)Peter980
Suspense980
(3)Insurance430
Suspense430
(4)Office Equipment1,800
Purchases1,800
(5)Mary150
Sales150



(b) Suspense Account


DateDetailsAmount ($)DateDetailsAmount ($)
2023 Dec 31Difference on Trial Balance (b/d)1,0502023 Dec 31Peter980
Dec 31Sales360Dec 31Insurance430
Total1,410Total1,410



(c) Statement of Corrected Profit


DetailsAmount ($)
Draft profit for the year18,400
Add: Sales undercast (1)360
Add: Purchases adjustment (Office Equipment) (4)1,800
Add: Omitted credit sales (5)150
Less: Insurance expense omitted (3)(430)
Corrected profit for the year19,480

Part (a) Journal Entries [8 marks]

- Error 1: Dr Suspense $360, Cr Sales $360 (1 mark)

- Error 2: Dr Peter (1 mark) and Cr Suspense (1 mark) with $980.

- Error 3: Dr Insurance $430, Cr Suspense $430 (1 mark)

- Error 4: Dr Office Equipment $1,800 (1 mark), Cr Purchases $1,800 (1 mark)

- Error 5: Dr Mary $150 (1 mark), Cr Sales $150 (1 mark)


Part (b) Suspense Account [4 marks]

- Opening balance of $1,050 on the Debit side (1 mark)

- Sales of $360 on the Debit side (1 mark)

- Peter of $980 on the Credit side (1 mark)

- Insurance of $430 on the Credit side (1 mark)

Note: Reject if account does not balance or if incorrect names are used.


Part (c) Statement of Corrected Profit [3 marks]

- Correctly adjusting Sales items (Error 1 +$360 & Error 5 +$150) and Insurance (Error 3 -$430) (1 mark)

- Correctly adjusting Purchases (Error 4 +$1,800) (1 mark)

- Final correct profit of $19,480 (1 mark for accuracy, or follow-through based on errors in part a).

Workings:

1. Accumulated depreciation of Vehicle A up to 31 December 2020:
- Year 2019 (6 months): $40 000 * 20% * 6/12 = $4 000
- Year 2020 (12 months): ($40 000 - $4 000) * 20% = $7 200
- Accumulated depreciation to 31 Dec 2020 = $4 000 + $7 200 = $11 200

2. Depreciation of Vehicle A in 2021 up to disposal (3 months):
- ($40 000 - $11 200) * 20% * 3/12 = $28 800 * 20% * 3/12 = $1 440
- Total accumulated depreciation at disposal = $11 200 + $1 440 = $12 640

3. Depreciation of Vehicle B in 2021 (12 months):
- Accumulated depreciation to 31 Dec 2020: $30 000 * 20% * 3/12 = $1 500
- Carrying Value on 1 Jan 2021 = $30 000 - $1 500 = $28 500
- Depreciation for 2021 = $28 500 * 20% = $5 700

4. Depreciation of Vehicle C in 2021 (6 months):
- $50 000 * 20% * 6/12 = $5 000

5. Total depreciation charge to Income Statement for 2021:
- Vehicle A: $1 440
- Vehicle B: $5 700
- Vehicle C: $5 000
- Total: $12 140

(a)(i)
Provision for Depreciation of Delivery Vehicles Account
Date | Details | Amount ($) || Date | Details | Amount ($)
2021 ||| 2021 ||
Apr 1 | Disposal (Vehicle A) | 12 640 || Jan 1 | Balance b/d | 12 700
Dec 31 | Balance c/d | 12 200 || Dec 31 | Income Statement | 12 140
| | 24 840 || | | 24 840
||| 2022 Jan 1 | Balance b/d | 12 200

(a)(ii)
Disposal of Delivery Vehicles Account
Date | Details | Amount ($) || Date | Details | Amount ($)
2021 ||| 2021 ||
Apr 1 | Delivery Vehicles (Cost) | 40 000 || Apr 1 | Prov. for Deprec. | 12 640
|||| Apr 1 | Cash/Bank | 23 000
|||| Dec 31 | Income Statement (Loss) | 4 360
| | 40 000 || | | 40 000

(b) Carrying value calculation at 31 December 2021:
- Cost of remaining vehicles (B & C) = $30 000 + $50 000 = $80 000
- Accumulated depreciation remaining = $7 200 (Vehicle B) + $5 000 (Vehicle C) = $12 200
- Carrying Value = $80 000 - $12 200 = $67 800
(Alternatively: Vehicle B carrying value $22 800 + Vehicle C carrying value $45 000 = $67 800)

(c) Discussion points:
- Motor vehicles typically lose a higher proportion of their value in the early years of service because of obsolescence, wear, and market factors. The reducing balance method charges higher depreciation in early years, which reflects this pattern.
- Over time, repairs and maintenance costs for vehicles increase. By combining reducing balance depreciation (which decreases over time) with increasing maintenance costs, the total annual operational cost of the vehicles remains relatively stable, which satisfies the matching/accruals principle.
- Conversely, the straight-line method assumes equal economic benefits are consumed each year, which is rarely true for delivery vehicles.
- Thus, the reducing balance method is considered more appropriate for delivery vehicles.

Part (a)(i) Provision for depreciation of delivery vehicles account (5 marks):
- $12 700 Balance b/d (1)
- $12 640 Debit to Disposal (1)
- $12 140 Credit to Income Statement (2) [1 mark for workings, 1 mark for correct value]
- $12 200 Balance c/d and Balance b/d (1)

Part (a)(ii) Disposal of delivery vehicles account (4 marks):
- $40 000 Debit for Cost of Vehicle A (1)
- $12 640 Credit for accumulated depreciation (1)
- $23 000 Credit for Disposal Proceeds (1)
- $4 360 Credit to Income Statement (Loss on disposal) (1)

Part (b) Carrying value calculation (2 marks):
- Correctly showing remaining cost ($80 000) and/or remaining accumulated depreciation ($12 200) (1)
- Correct carrying value of $67 800 (1)

Part (c) Discussion (4 marks):
- Identify that motor vehicles experience higher loss of value/efficiency in early years (1 mark)
- Explain that maintenance and repairs increase as vehicles age (1 mark)
- Explain that reducing balance method + rising repair cost creates a more even overall expense charge over the asset's useful life (matching/accruals principle) (1 mark)
- Reach a clear conclusion/recommendation favoring reducing balance method (1 mark)

### **Part (a): Overhead Analysis Sheet**

| Overhead Cost | Basis of Apportionment | Machining ($) | Assembly ($) | Finishing ($) | Maintenance ($) | Canteen ($) | Total ($) |
| :--- | :--- | :---: | :---: | :---: | :---: | :---: | :---: |
| Indirect Materials | Direct Allocation | 12,000 | 8,000 | 6,000 | 4,000 | 2,000 | 32,000 |
| Indirect Labor | Direct Allocation | 18,000 | 22,000 | 14,000 | 8,000 | 5,000 | 67,000 |
| Rent and Rates | Floor Area (4:3:2:0.6:0.4) | 36,000 | 27,000 | 18,000 | 5,400 | 3,600 | 90,000 |
| Power | Kilowatt Hours (8:4:2:1:0) | 24,000 | 12,000 | 6,000 | 3,000 | 0 | 45,000 |
| Depreciation | NBV of Machinery (12:4:2:2:0) | 36,000 | 12,000 | 6,000 | 6,000 | 0 | 60,000 |
| **Total Allocated/Apportioned** | | **126,000** | **81,000** | **50,000** | **26,400** | **10,600** | **294,000** |

*Workings:*
* **Rent and Rates ($90,000):** Allocated based on Floor Area (total 10,000 sq m)
* Machining: \( 90,000 \times \frac{4,000}{10,000} = \$36,000 \)
* Assembly: \( 90,000 \times \frac{3,000}{10,000} = \$27,000 \)
* Finishing: \( 90,000 \times \frac{2,000}{10,000} = \$18,000 \)
* Maintenance: \( 90,000 \times \frac{600}{10,000} = \$5,400 \)
* Canteen: \( 90,000 \times \frac{400}{10,000} = \$3,600 \)
* **Power ($45,000):** Allocated based on Kilowatt Hours (total 15,000 kWh)
* Machining: \( 45,000 \times \frac{8,000}{15,000} = \$24,000 \)
* Assembly: \( 45,000 \times \frac{4,000}{15,000} = \$12,000 \)
* Finishing: \( 45,000 \times \frac{2,000}{15,000} = \$6,000 \)
* Maintenance: \( 45,000 \times \frac{1,000}{15,000} = \$3,000 \)
* Canteen: \( 45,000 \times 0 = \$0 \)
* **Depreciation ($60,000):** Allocated based on Net Book Value of Machinery (total $200,000)
* Machining: \( 60,000 \times \frac{120,000}{200,000} = \$36,000 \)
* Assembly: \( 60,000 \times \frac{40,000}{200,000} = \$12,000 \)
* Finishing: \( 60,000 \times \frac{20,000}{200,000} = \$6,000 \)
* Maintenance: \( 60,000 \times \frac{20,000}{200,000} = \$6,000 \)
* Canteen: \( 60,000 \times 0 = \$0 \)

---

### **Part (b): Re-apportionment of Service Department Overheads (Step-Down Method)**

1. **Maintenance Department (Total = $26,400)**
* Apportioned based on Maintenance Hours Worked: Machining (1,200), Assembly (600), Finishing (400), Canteen (200). Total hours = 2,400.
* Rate: \( \frac{\$26,400}{2,400 \text{ hours}} = \$11.00 \text{ per hour} \)
* Machining: \( 1,200 \times \$11 = \$13,200 \)
* Assembly: \( 600 \times \$11 = \$6,600 \)
* Finishing: \( 400 \times \$11 = \$4,400 \)
* Canteen: \( 200 \times \$11 = \$2,200 \)

2. **Canteen Department (Total = $10,600 (original) + $2,200 (re-apportioned) = $12,800)**
* Apportioned based on Number of Employees in Production Departments only: Machining (18), Assembly (14), Finishing (8). Total employees = 40.
* Machining: \( \$12,800 \times \frac{18}{40} = \$5,760 \)
* Assembly: \( \$12,800 \times \frac{14}{40} = \$4,480 \)
* Finishing: \( \$12,800 \times \frac{8}{40} = \$2,560 \)

**Summary of Re-apportionment:**

| Department | Machining ($) | Assembly ($) | Finishing ($) | Maintenance ($) | Canteen ($) |
| :--- | :---: | :---: | :---: | :---: | :---: |
| Initial Totals | 126,000 | 81,000 | 50,000 | 26,400 | 10,600 |
| Re-apportion Maintenance | 13,200 | 6,600 | 4,400 | (26,400) | 2,200 |
| Re-apportion Canteen | 5,760 | 4,480 | 2,560 | — | (12,800) |
| **Total Overheads** | **144,960** | **92,080** | **56,960** | **0** | **0** |

---

### **Part (c): Overhead Absorption Rates (OAR)**

* **Machining:** Mainly capital-intensive (machine hours exceed labor hours). Appropriate base: **Machine Hours**.
* \( \text{OAR} = \frac{\$144,960}{12,080 \text{ machine hours}} = \$12.00 \text{ per machine hour} \)
* **Assembly:** Mainly labor-intensive (labor hours exceed machine hours). Appropriate base: **Direct Labor Hours**.
* \( \text{OAR} = \frac{\$92,080}{11,510 \text{ labor hours}} = \$8.00 \text{ per direct labor hour} \)
* **Finishing:** Mainly labor-intensive (labor hours exceed machine hours). Appropriate base: **Direct Labor Hours**.
* \( \text{OAR} = \frac{\$56,960}{14,240 \text{ labor hours}} = \$4.00 \text{ per direct labor hour} \)

---

### **Part (d): Selling Price for Job 412**

* **Direct Materials:** $450.00
* **Direct Labor:**
* Machining: \( 5 \text{ hours} \times \$15 = \$75.00 \)
* Assembly: \( 12 \text{ hours} \times \$12 = \$144.00 \)
* Finishing: \( 8 \text{ hours} \times \$10 = \$80.00 \)
* *Total Direct Labor:* $299.00
* **Prime Cost:** \( \$450.00 + \$299.00 = \$749.00 \)
* **Overheads Absorbed:**
* Machining: \( 15 \text{ machine hours} \times \$12.00 = \$180.00 \) (using Machining OAR based on machine hours)
* Assembly: \( 12 \text{ direct labor hours} \times \$8.00 = \$96.00 \) (using Assembly OAR based on labor hours)
* Finishing: \( 8 \text{ direct labor hours} \times \$4.00 = \$32.00 \) (using Finishing OAR based on labor hours)
* *Total Overheads:* $308.00
* **Total Cost:** \( \$749.00 + \$308.00 = \$1,057.00 \)
* **Add: Profit Markup (25% on cost):** \( \$1,057.00 \times 25\% = \$264.25 \)
* **Quoted Selling Price:** \( \$1,057.00 + \$264.25 = \$1,321.25 \)

---

### **Part (e): Evaluation of Absorption Costing for Pricing Decisions**

* **Advantage (Max 2 marks):**
* It ensures that all production costs (both fixed and variable) are fully recovered in the selling price, protecting the company from selling at an overall loss in the long run (1) + expansion/explanation (1).
* **Disadvantage (Max 2 marks):**
* Since fixed costs are allocated on an arbitrary basis, the resulting product cost can be inaccurate, which may lead to uncompetitive pricing or overpricing, causing loss of sales to competitors (1) + expansion/explanation (1).
* Alternatively, it is not suitable for short-term decision making (like accepting special one-off orders) where only marginal (incremental) costs are relevant (1).

**Part (a): Overhead Analysis (8 marks)**
* Rent & Rates apportionment & basis (Floor Area): [1] mark
* Power apportionment & basis (Kilowatt Hours): [1] mark
* Depreciation apportionment & basis (NBV of Machinery): [1] mark
* Machining total ($126,000): [1] mark
* Assembly total ($81,000): [1] mark
* Finishing total ($50,000): [1] mark
* Maintenance total ($26,400): [1] mark
* Canteen total ($10,600): [1] mark

**Part (b): Re-apportionment (6 marks)**
* Maintenance allocation to production and Canteen (rate of $11/hr or correct values): [2] marks
* Updated Canteen total ($12,800): [1] mark (method/accuracy)
* Canteen re-apportionment to production (M: $5,760, A: $4,480, F: $2,560): [2] marks
* Final Production totals (Machining: $144,960; Assembly: $92,080; Finishing: $56,960): [1] mark (for all three correct)

**Part (c): OAR calculations (6 marks)**
* Identification of appropriate bases (Machining = Machine hours; Assembly & Finishing = Labor hours): [1] mark for Machining, [1] mark for Assembly & Finishing
* Machining OAR ($12.00 per machine hour): [1] mark (Allow OF from (b))
* Assembly OAR ($8.00 per labor hour): [1] mark (Allow OF from (b))
* Finishing OAR ($4.00 per labor hour): [1] mark (Allow OF from (b))
* Correct OAR labels/units (e.g., "per hour"): [1] mark

**Part (d): Job 412 Quote (6 marks)**
* Prime Cost ($749.00): [1] mark (showing Materials and Labor)
* Machining overhead absorbed (15 hrs \(\times \$12\) OAR = $180.00): [1] mark (Allow OF)
* Assembly overhead absorbed (12 hrs \(\times \$8\) OAR = $96.00): [1] mark (Allow OF - check that labor hours were used, not machine hours)
* Finishing overhead absorbed (8 hrs \(\times \$4\) OAR = $32.00): [1] mark (Allow OF - check that labor hours were used, not machine hours)
* Total Cost calculation ($1,057.00): [1] mark
* Selling Price with 25% markup ($1,321.25): [1] mark (Allow OF)

**Part (e): Discussion (4 marks)**
* [1] mark for stating an advantage + [1] mark for development.
* [1] mark for stating a disadvantage + [1] mark for development.