Cambridge International AS & A Level

* 4 5 2 7 2 9 1 2 8 3 *

ACCOUNTING 9706/22
Paper 2 Fundamentals of Accounting February/March 2024

1 hour 45 minutes

You must answer on the question paper.

No additional materials are needed.

INSTRUCTIONS
● Answer all questions.
● Use a black or dark blue pen.
● Write your name, centre number and candidate number in the boxes at the top of the page.
● Write your answer to each question in the space provided.
● Do not use an erasable pen or correction fluid.
● Do not write on any bar codes.
● You may use an HB pencil for any rough working.
● You may use a calculator.
● You should present all accounting statements in good style.
● International accounting terms and formats should be used as appropriate.
● You should show your workings.

INFORMATION
● The total mark for this paper is 90.
● The number of marks for each question or part question is shown in brackets [ ].

This document has 20 pages. Any blank pages are indicated.

DC (LK) 326544/4
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1 The following trial balance was extracted from the books of V Limited at 31 December 2023.

$ $
8% debentures (2029) 240 000
Administrative expenses 17 200
Bank loan 32 000
Bank loan interest 2 600
Carriage inwards 4 500
Carriage outwards 8 700
Cash and cash equivalents 8 200
Distribution costs 30 700
Dividends paid 37 500
Furniture and equipment at carrying value, 1 January 2023 956 000
Inventory at 1 January 2023 47 800
Property at valuation 980 000
Purchases 522 000
Rental income 13 300
Retained earnings 174 000
Returns 5 100
Revenue 997 100
Share capital: 4 000 000 ordinary shares of $0.25 each 1 000 000
Share premium 215 000
Trade payables 57 800
Trade receivables 47 900
Wages: office staff 49 300
Wages: sales staff 38 300
2 742 500 2 742 500

The following information is also available.

1 At 31 December 2023 inventory was valued at $49 500.

2 Distribution costs include a prepayment of $6000.

3 At 31 December 2023, rental income of $3000 had been received in advance.

4 Provision should be made for depreciation of furniture and equipment at 20% per annum
using the reducing balance method.

Depreciation charges should be allocated: 60% administrative expenses; 40% distribution

costs.

5 At 31 December 2023, office wages of $5800 were due but unpaid.

6 The debentures had been issued on 1 October 2023. The first interest payment is due on
31 March 2024.

7 Tax for the year ended 31 December 2023 is estimated to be $27 900.

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(a) Prepare the statement of profit or loss for the year ended 31 December 2023. Use the space
provided on page 4 to show your workings.

V Limited
Statement of profit or loss for the year ended 31 December 2023

Revenue

Cost of sales

Gross profit

Other income

Distribution costs

Administrative expenses

Profit from operations

Finance costs

Profit before tax

Tax

Profit for the year

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Workings:

Cost of sales

Distribution costs

Administrative expenses

Finance costs

[14]

Additional information

During the year ended 31 December 2023 the following transactions had been recorded in the
books of account.

1 September A rights issue had been made of one ordinary share for every three ordinary
shares currently held. The issue was made at a premium of $0.05 per share.
The rights issue was fully subscribed.
31 December Property had been revalued and the value reduced by $60 000.

(b) Complete the statement of changes in equity for the year ended 31 December 2023 on
page 5.

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 Statement of changes in equity for the year ended 31 December 2023

Share Share premium Revaluation Retained Total

capital $ reserve earnings

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$ $ $ $
Balances, 1 January 2023 60 000 174 000
5

9706/22/F/M/24
Balances, 31 December 2023 1 000 000 215 000 -
[7]

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(c) State two factors that directors should take into account when declaring a dividend.

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[2]

Additional information

The directors wish to improve the company’s performance. They are considering two options.

Option A: Delaying payments to credit suppliers by an extra eight days.

Option B: Switching to a new supplier who is prepared to offer a trade discount if large orders are
made.

(d) Advise the directors which option they should choose. Justify your choice by considering the
effect on both profitability and liquidity.

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[Total: 30]

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2 Zainab uses the straight-line method of depreciation for business vehicles.

The non-current assets of the business include two vehicles.

Vehicle Cost Date of purchase

$
1 26 000 1 January 2021
2 28 200 1 September 2022

Vehicles are depreciated by 20% per annum. Depreciation is calculated on a month-by-month

basis in the year of purchase. No depreciation is provided in the year of disposal. The financial
year ends on 31 December.

(a) Prepare the journal entry to record the depreciation charge for the year ended
31 December 2022. A narrative is not required.

Journal

Dr Cr
$ $

[3]

(b) Prepare the provision for depreciation – vehicles account for the year ended
31 December 2022.

Provision for depreciation – vehicles

$ $

[3]

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Additional information

On 15 February 2023 Vehicle 1 was disposed of at a profit of $4200 and the proceeds were paid
into the business’s bank account.

(c) Prepare the vehicle disposal account.

Vehicle disposal

$ $

[4]

(d) State one reason why it may be better to use the reducing balance method of depreciation for
vehicles.

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(e) Explain two accounting concepts which apply to depreciation.

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[Total: 15]

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3 Rahul owns a retail business. He has not maintained full accounting records. He is able to supply
the following information about the financial year ended 31 January 2024.

1 Valuation of inventories

1 February 2023 31 January 2024

$21 400 $19 800

2 Rahul sells goods so as to achieve a gross profit margin of 40%.

3 The usual rate of inventory turnover is 9 times a year.

(a) Calculate the revenue for the year ended 31 January 2024.

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Additional information

Rahul has not kept a record of his cash drawings during the year ended 31 January 2024.
However, the following information is available concerning cash transactions.

1 On 1 February 2023 there was cash in hand of $840.

2 Cash sales accounted for 70% of all sales.

3 Bank statements recorded total cash takings of $187 300 for the year ended 31 January 2024.
However, at 31 January 2024 there were cash takings banked but not yet credited of $3800.

4 Cash was used to pay a part-time assistant’s wages of $320 per week. The assistant worked
for 44 weeks during the year ended 31 January 2024.

5 At 31 January 2024 cash in hand was $1830.

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(b) Calculate Rahul’s cash drawings for the year ended 31 January 2024.

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Additional information

Rahul’s accountant has suggested he should start keeping full accounting records and that he
should use an accounting software package.

(c) State two ways in which Rahul will benefit from the accountant’s suggestions.

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(d) Explain two possible reasons for not accepting the accountant’s suggestions.

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[Total: 15]

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4 K Limited uses absorption costing at one of its factories. The product manufactured in this factory
goes through two production departments: cutting department and finishing department.

The following budgeted information was available for the year ended 31 December 2023.

Cutting department Finishing department

Overhead absorption rate $3.62 $2.34
Labour hours 17 400 8 400
Machine hours 22 900 5 200

A customer placed an order for 250 units in November 2023. The following budgeted information
is available about the production of one unit.

Per unit
Direct materials $17.28
Direct labour
Cutting department 1.2 hours at $11.50 per hour
Finishing department 3.1 hours at $11.50 per hour
Machine hours
Cutting department 2.2 hours
Finishing department 1.4 hours

Selling prices are set to achieve a profit margin of 40%.

(a) Prepare a statement to show the total selling price for the customer’s order.

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Additional information

Actual production hours for the year ended 31 December 2023 were as follows:

Cutting department Finishing department

Labour hours 16 200 7 900
Machine hours 24 300 5 800

Total actual overheads were the same as budgeted overheads.

(b) Calculate the over-absorption or under-absorption of overheads for each production

department for the year ended 31 December 2023.

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Additional information

K Limited uses marginal costing at another factory where a single type of product is made.

The following budgeted information is available.

$ per unit
Selling price 42
Direct materials 12
Direct labour (1.5 hours per unit) 18
Other variable costs 3

Fixed costs per month are $38 500.

Currently the factory is producing 9920 units per month.

(c) Calculate both the total monthly contribution and the total monthly profit currently being
made in this factory.

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Additional information

The directors hope to increase demand by changing the selling price. They are considering the
following two options.

Option A

1 Reduce the selling price per unit by 5%.

2 Increase production by 4000 units on the current production level.

3 A commission of $0.25 per unit will be paid.

4 Overtime will be required on all units produced over 12 400 units and is paid at a premium
of 25%.

5 Cancel the current advertising campaign costing $8000 a month.

Option B

1 Reduce the selling price per unit to $41.

2 Increase production by 10% on the current production level.

3 Invest in more up-to-date machinery at a cost of $180 000.

4 It is proposed to partly finance the purchase of new machinery by borrowing $150 000 at
8% per annum interest.

5 Machinery is depreciated by 25% per annum on cost.

6 As a result of improvements to machinery, the time each worker takes to produce one unit will
be reduced by 8% and a higher quality product can be made.

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(d) Prepare marginal costing statements to show the monthly forecast profit, rounded to the
nearest dollar, for each option.

(i) Option A

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(ii) Option B

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(e) Advise the directors which option they should choose. Justify your advice by discussing both
financial and non-financial factors.

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BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every
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Assessment International Education Copyright Acknowledgements Booklet. This is produced for each series of examinations and is freely available to download
at www.cambridgeinternational.org after the live examination series.

Cambridge Assessment International Education is part of Cambridge Assessment. Cambridge Assessment is the brand name of the University of Cambridge
Local Examinations Syndicate (UCLES), which is a department of the University of Cambridge.

© UCLES 2024 9706/22/F/M/24