UNIVERSITY OF CAMBRIDGE INTERNATIONAL EXAMINATIONS

General Certificate of Education

Advanced Subsidiary Level and Advanced Level
* 8 3 8 8 0 9 8 3 9 3 *

ACCOUNTING 9706/23
Paper 2 Structured Questions May/June 2011
1 hour 30 minutes
Candidates answer on the Question Paper.
No Additional Materials are required.

READ THESE INSTRUCTIONS FIRST

Write your Centre number, candidate number and name on all the work you hand in.
Write in dark blue or black pen.
You may use a soft pencil for rough working.
Do not use staples, paper clips, highlighters, glue or correction fluid.
DO NOT WRITE IN ANY BARCODES.

Answer all questions.

All accounting statements are to be presented in good style.
International accounting terms and formats should be used as appropriate.
Workings must be shown.
You may use a calculator.

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.

For Examiner’s Use

Total

This document consists of 14 printed pages and 2 blank pages.

DC (NH) 31868/4
© UCLES 2011 [Turn over
 2

1 The following is the draft balance sheet of Marshall Klingsman, a sole trader, at 30 April 2011. For
Examiner’s
Balance Sheet at 30 April 2011 Use

$ $ $
Non-current assets
Buildings at valuation 300 000
Equipment at book value 540 000
Motor vehicles at book value 330 000
1 170 000
Current assets
Inventories 70 000
Trade receivables 19 000
Other receivables 2 000
Cash and cash equivalents 4 000
95 000
Current liabilities
Trade payables 57 000
Other payables 3 000 60 000

Net current assets 35 000

1 205 000
Non-current liabilities
Loan 200 000
Net assets 1 005 000

Financed by:
Capital at start 1 000 000
Add Profit for the year (net profit) 80 000
1 080 000
Less Drawings 75 000
Capital at end 1 005 000

Additional information:

After preparation of the draft balance sheet the following errors were found.

1 Goods in inventory at 30 April 2011, valued at cost $15 000, were found to be
damaged. The estimated net realisable value is $8 000.

2 Loan interest of 4% per annum had been omitted from the accounts.

3 No provision for depreciation on equipment had been made for the year. Depreciation
should have been provided at 5% per annum using the reducing balance method.

4 Motor vehicles are depreciated by 10% per annum. During the year vehicle repairs
of $10 000 had been incorrectly debited to the motor vehicles account.

5 On 28 April 2011 a credit customer, who owed $3600, was declared bankrupt. It
was decided to write off this amount in full. No record of this has been made in the
accounts.

© UCLES 2011 9706/23/M/J/11

 3

REQUIRED For
Examiner’s
(a) Prepare a statement to show the corrected profit for the year (net profit) ended Use

30 April 2011.

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[9]

© UCLES 2011 9706/23/M/J/11 [Turn over

 4

(b) Prepare the corrected balance sheet at 30 April 2011. For

Examiner’s
.......................................................................................................................................... Use

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[7]

© UCLES 2011 9706/23/M/J/11

 5

(c) (i) Explain two differences between cost and net realisable value. For
Examiner’s
.................................................................................................................................. Use

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

(ii) Discuss the accounting treatment of the damaged inventory in item 1.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[4]

(d) Using your answers to (a) and (b) calculate the following ratios to two decimal places:

(i) current ratio

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(ii) liquid ratio (acid test).

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

© UCLES 2011 9706/23/M/J/11 [Turn over

 6

(e) State four ways in which Klingsman could improve his working capital. For
Examiner’s
.......................................................................................................................................... Use

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[4]

(f) Explain why the liquid ratio (acid test) is a more reliable indicator of liquidity than the
current ratio.

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[2]

[Total: 30]

© UCLES 2011 9706/23/M/J/11

 7

BLANK PAGE

Question 2 is on the next page.

© UCLES 2011 9706/23/M/J/11 [Turn over

 8

2 Robbie and Liza are in partnership with capitals of $90 000 and $60 000 respectively. For
Examiner’s
The following information is available for the year ended 30 April 2011. Use

Revenue $240 000

Inventory (30 April 2011) $9 000
Gross profit as a percentage of turnover 35%
Inventory turnover 12 times
Expenses ratio 15%

All purchases and sales of inventory are on credit.

REQUIRED

(a) Prepare a detailed income statement (profit and loss account) showing gross profit and
profit for the year (net profit) for the year ended 30 April 2011.

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[7]

© UCLES 2011 9706/23/M/J/11

 9

On 1 May 2010 the current account balances were Robbie $5000 (credit) and Liza $2000 For
(debit). Examiner’s
Use

The partnership agreement provides for the following:

1 Partners are permitted to withdraw up to a maximum of 20% of capital invested.

2 Interest is charged on drawings at 8% per year.

3 Interest on capital is payable at 5% per year.

4 Liza is to receive a salary of $1250 per month.

5 Profits and losses are shared in the ratio of capital invested.

Both partners withdrew the maximum amount of drawings permitted during the year.

REQUIRED

(b) Prepare the appropriation account of the partnership for the year ended 30 April 2011.

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[9]

© UCLES 2011 9706/23/M/J/11 [Turn over

 10

At 30 April 2011 Robbie and Liza had a debit balance in the bank column of their cash book For
of $12 000. Their bank statement, however, showed that the partnership had $9000 in the Examiner’s
bank at that date. Use

On comparing the cash book with the bank statement the following differences were found:

1 Bank charges of $250 appeared in the bank statement but had not been entered in
the cash book.

2 Cheques received from customers amounting to $3750 had been entered in the
cash book but had not been credited by the bank.

3 A cheque for $600 received from a debtor had been entered in the cash book but
had been returned by the bank marked ‘insufficient funds for payment’.

4 Cheques issued by the business amounting to $1600, recorded in the cash book,
did not appear in April’s bank statement.

REQUIRED

(c) (i) Update Robbie and Liza’s cash book for the month of April 2011.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[4]

(ii) Prepare a bank reconciliation statement at 30 April 2011 to reconcile the bank
statement balance with the updated cash book balance.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[4]

© UCLES 2011 9706/23/M/J/11

 11

(d) Give three reasons why the bank column balance in the cash book does not always For
agree with the balance shown in the bank statement at the same date. Examiner’s
Use

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

..........................................................................................................................................

......................................................................................................................................[6]

[Total: 30]

© UCLES 2011 9706/23/M/J/11 [Turn over

 12

3 Paul owns two car wash businesses, called City Centre Car Wash and Suburban Car Wash. For
Examiner’s
City Centre Car Wash has the following monthly costs: Use

Per car $
Detergent 1.00
Electricity 0.50
Water costs 0.05
Wage costs 1.25

Per month $
Insurance of site 800
Lease of equipment 2040
Manager’s salary 1000

Additional information:

Both car wash businesses are open for 400 hours every month.

The cars are washed one at a time.

The average time taken to wash each car is 10 minutes.

City Centre Car Wash is currently operating at 80% capacity and Suburban Car Wash at
70% capacity.

REQUIRED

(a) For City Centre Car Wash, calculate the following correct to two decimal places:

(i) the total number of cars washed per month

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(ii) the total variable operating cost per month

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

© UCLES 2011 9706/23/M/J/11

 13

(iii) the total operating cost per month For

Examiner’s
.................................................................................................................................. Use

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(iv) the average cost per car wash

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(v) the price to be charged per car to give a profit margin of 20%

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(vi) the total profit per month.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

© UCLES 2011 9706/23/M/J/11 [Turn over

 14

(b) Using the price calculated in (a)–(v) above, calculate the following for City Centre Car For
Wash, correct to two decimal places: Examiner’s
Use

(i) the contribution per car (per unit)

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(ii) the break-even point in units

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(iii) the margin of safety, in dollars, when operating at 80% capacity

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(iv) the margin of safety, in dollars, if operating efficiency falls to 60% capacity

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

(v) the contribution/sales (C/S) ratio when operating at 80% capacity.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[2]

© UCLES 2011 9706/23/M/J/11

 15

Suburban Car Wash charges the same price as City Centre Car Wash. For
Examiner’s
At that price Suburban Car Wash shows a contribution to sales (C/S) ratio of 40%. Fixed Use

costs are $3240.

REQUIRED
(c) Calculate, for Suburban Car Wash

(i) the break-even point in units and in dollars

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[4]

(ii) the total monthly profit when operating at 70% capacity.

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..................................................................................................................................

..............................................................................................................................[4]

[Total: 30]

© UCLES 2011 9706/23/M/J/11

 16

BLANK PAGE

Permission to reproduce items where third-party owned material protected by copyright is included has been sought and cleared where possible. Every
reasonable effort has been made by the publisher (UCLES) to trace copyright holders, but if any items requiring clearance have unwittingly been included, the
publisher will be pleased to make amends at the earliest possible opportunity.

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

© UCLES 2011 9706/23/M/J/11