UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

General Certificate of Education

Advanced Subsidiary Level and Advanced Level

ACCOUNTING 9706/41
Paper 4 Problem Solving (Supplementary Topics) October/November 2009
2 hours
Additional Materials: Answer Booklet/Paper
*2049128241*

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At the end of the examination, fasten all your work securely together.
The number of marks is given in brackets [ ] at the end of each question or part question.

This document consists of 7 printed pages and 1 blank page.

IB09 11_9706_41/5RP
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1 Yip and Sim have been in partnership for many years sharing profits and losses in the ratio 2 : 1
respectively. The partners do not take an active part in running the business. Instead, Danny has
managed the business for them for the past few years.

The partners provide the following balance sheet at 31 January 2009:

$ $
Fixed assets at cost 129 000
Depreciation to date 51 600 77 400
Current assets
Stock 38 700
Trade debtors 25 800
Bank balance 9 675
74 175
Current liabilities
Trade creditors 18 850 55 325
132 725
Capital accounts
Yip 80 000
Sim 50 000
Current accounts
Yip 4 875
Sim (2 150)
132 725

Profits shared by the partners for each of the past three years have been $39 000 after paying
Danny a manager’s salary of $27 000. It is believed that this level of profitability can be
maintained in the future.

Danny wishes to expand the business. This would involve expenditure on new fixed assets at a
cost of $250 000. The finance for the new fixed assets would be in the form of a loan at 8 %
interest per annum.

Yip, Sim and Danny all agree that the expansion should take place. This would increase the
operating profit by $50 000.

Yip and Sim are considering retirement from the business.

Yip and Sim offer Danny two options.

Option 1: Danny will be admitted to the business as a partner. He would introduce a total of
$60 000 cash for his capital and goodwill. He would be entitled to 75 % of profits and losses, the
remainder being shared by Yip and Sim in the same ratios as previously. Danny would keep his
salary as a manager.

Yip, Sim and Danny agree that:

(i) the existing fixed assets of the business would be revalued at $100 000;

(ii) stock would be valued at $38 100;

(iii) a debt of $1000 would be written off as bad;

(iv) goodwill would be valued at $72 000 but would not be shown in the books of account;

(v) the proposed expansion would take place immediately.

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Option 2: Danny would buy all the assets including cash and assume all the liabilities of the
business for a payment of $185 000. The expansion would also take place immediately.

REQUIRED

(a) Prepare the balance sheet of the partnership as it would appear immediately after option 1
was implemented. [20]

(b) Prepare the balance sheet of Danny as it would appear immediately after option 2 was
implemented. [8]

(c) Compare the annual profits to be gained by Danny from the implementation of each of the
options being considered. [7]

(d) Advise Danny which option he should choose. Support your answer with financial data. [5]

[Total: 40]

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2 The managers of Svennsen Ltd provide the following information.

Selected balances at 1 October 2009

$
Fixed assets (Net book value) 210 000
Ordinary issued share capital 150 000
Profit and loss account 27 150
Revaluation reserve 25 000
Share premium account 40 000
Stock 1 000

Cash budget for the six months ending 28 February 2010

Sept Oct Nov Dec Jan Feb

$ $ $ $ $ $
Receipts
Cash sales 4 600 3 700 4 700 4 800 4 600 4 200
Debtors (1 month’s credit) 24 000 23 000 18 500 23 500 24 000 23 000
Debtors (2 month’s credit) 16 800 19 200 18 400 14 800 18 800 19 200
Sale of fixed assets 8 000
45 400 45 900 49 600 43 100 47 400 46 400
Payments
Creditors (1 month’s credit) 22 000 21 000 18 000 21 000 24 000 20 000
General expenses 14 500 16 800 16 600 20 400 17 700 15 900
Ordinary dividend 4 000
Purchase of fixed asset 8 500
36 500 37 800 43 100 45 400 41 700 35 900
Net cash flow 8 900 8 100 64 500 (2 300) 5 700 10 500
Balance b/fwd (9 250) (350) 7 750 14 250 11 950 17 650
Balance c/fwd (350) 7 750 14 250 11 950 17 650 28 150

REQUIRED

(a) Explain two measures that might be taken to resolve a forecast cash deficit in one month. [4]

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Additional information:

1 10 % of sales each month are cash sales.

50 % of sales are expected to be settled one month following the sale.

The remaining 40 % of sales are expected to be settled two months after sale.

2 All purchases will be on credit. Suppliers will be paid in the month following purchase.

3 General expenses will be paid as incurred.

4 A bonus issue of 1 new ordinary share for every 3 held will be made on 1 December 2009.
The directors propose that equal amounts are used from the company’s capital reserves.

5 Fixed assets will be purchased on 1 November 2009 for $17 000. Half of the cost will be paid
on that date, the balance will be paid on 1 April 2010.

6 Fixed assets that cost $20 000 will be sold in November 2009 for $8000. They will have been
depreciated by $11 000 at the date of sale.

7 Fixed assets are depreciated at 10 % per annum on net book value at the balance sheet
date.

8 Stock at 31 December 2009 was valued at $2000.

REQUIRED

(b) Prepare a forecast trading and profit and loss account and an appropriation account for the
three months ending 31 December 2009 in as much detail as possible. [19]

(c) Prepare a forecast balance sheet at 31 December 2009 in as much detail as possible. [17]

[Total: 40]

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3 The Clang company manufactures parts for the car industry. The company has two production
departments and a works canteen that provides meals and refreshments for the two production
departments.

The following information is available:

Department A B Canteen
Floor area (m2) 13 000 10 000 2 000
Staff employed 30 70 10
Power used (Kwh) 1 200 300 100
Cost of machinery $80 000 $20 000 $5 000

The following budgeted costs for the month of May have not been apportioned to a department.

$
Rent and rates 10 000
Insurance of machinery 2 625
Heating and lighting expenses 7 500
Supervisory wages 12 100
Power 4 800
Depreciation of machinery 9 030

Additional budgeted information per month

Department A Department B
Direct labour hours 5 120 12 605
Direct machine hours 17 250 1 000

REQUIRED

(a) Prepare a statement showing the apportionment of overheads for the month of May. [17]

(b) Calculate an overhead absorption rate for department A and department B using the most
appropriate method. [8]

The managers of the Clang company have been asked to cost a new job, reference 55/ZR.

The job would require:

6 kilos of materials costing $7.40 per kilo;

Other variable costs of $30.50.

The job would spend 14 hours in department A and a further 6 hours in department B.

The job would be marked up by 60 % on cost to achieve the selling price.

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REQUIRED

(c) Calculate the price to be quoted to the customer for job 55/ZR. [8]

The Kustom Bilt car company requires a special component for one of its cars. This will be a
unique “one off” order.

The special component would take:

5 kilos of materials at $7.40 per kilo;

Variable overheads of $18.30;
It will require extra power estimated to cost $28.00.

The component will spend 10 hours in department A and 5 hours in department B.

The managers of Clang have calculated a selling price of $170.08. Kustom Bilt cars are only
willing to pay $100.

REQUIRED

(d) Advise the managers of Clang whether or not they should accept the order from Kustom Bilt
cars at a price of $100. Support your answer with financial and non financial data. [7]

[Total: 40]

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