TRUST ACADEMY

HIGH SCHOOL

Accounting
Paper 2
UPPER 6 CAMB
Answer All questions

END OF TERM TIME 2 hours

Instructions to candidates

Answer all question in this paper.

Write neatly and legibly.

Question 1

T Limited buys and sells standard furniture. Due to the increasing demand for furniture, T Limited
rented a factory and also started manufacturing luxury furniture from 1 January 2021.

The draft income statement for the year ended 31 December 2021 is shown as follows.
$ $
Sales revenue – standard furniture 510000
– luxury furniture 484
000
994
000
Opening inventory at cost – standard furniture 71
Purchases – standard furniture 292 000 000
– direct materials 76 500 368
Closing inventory at cost 500
Direct materials 14 200
Work in progress 12 500
Finished goods – standard furniture 66 500
– luxury furniture 35 000
Cost of sales
Gross profit
Wages and salaries
Depreciation 28
100
Other expenses 188
000
Carriage outwards 18 500
600
600
Profit for the year 82
100
Further information is also available.

1 The directors consider that a manufacturing account should be prepared and the factory profit
should be 20% on cost of goods produced.
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2 Wages and salaries comprised of:

$
Factory workers 119 000
Factory manager 36 000
Office staff 167 000
Salespeople 44 000
366 000

3 Depreciation comprised of:

$
Office equipment 8 600
Motor vehicles for transportation of finished goods 10 500
Factory machines 9 000
28 100

The newly acquired factory machines had been depreciated at the annual rate of 25% by using
reducing balance method. It was decided that the annual rate should have been 20% instead and
the draft income statement is to be amended.
4 Other expenses included $32 000 factory rent and $46 000 office rent. The remaining was 20%
attributable to indirect manufacturing costs and 80% to office administrative expenses.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Explain the term ‘indirect manufacturing costs’. [2]

(b) Prepare the manufacturing account for the year ended 31 December 2021. [7] (c)

Prepare the revised income statement for the year ended 31 December 2021.

Your statement should show separately the gross profit for each of standard furniture and luxury
furniture.

It should also show expenses split into ‘total administrative expenses’ and ‘total selling and
distribution costs’. [11]

(d) Assess the impact on the profitability of T Limited for the year ended 31 December 2021 of
manufacturing luxury furniture. Support your answer with appropriate calculations. [5]

[Total: 25]
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Question 2

X Limited provided the following information relating to its non-current assets at 1 January 2021.
Plant and Motor
Building Machinery Vehicle
$ $ $
Cost 600 000 400 000 60 000
Accumulated depreciation 150 000 160 000
Net book value 450 000 240 000

The following transactions took place during the year ended 31 December 2021.

1 The building, which has a useful life of 20 years, was purchased on 1 January 2016. It was
revalued to $750 000 on 1 January 2021.

2 A new machine was purchased on 1 March 2021 costing $200 000. Other related costs were
also incurred as follows:

$
Installation 11 000
Delivery 8 000
Pre-production testing 5 000
Repair and maintenance for a 5-year contract

3 The motor vehicle is a diesel lorry which was bought on 1 January 2019. It has an estimated
useful life of 5 years with no residual value. A recent government environmental policy urged X
Limited to review the value of this lorry. Further information at 31 December 2021 relating to the
lorry was as follows:

$
Estimated value in use 18 500
Expected selling price, before incurring selling costs of $4000 21 000

4 The depreciation policy of X Limited is as follows:

Building straight-line method

Plant and machinery reducing balance method at an annual rate of 25%
Motor vehicles straight-line method

A full year’s depreciation is charged in the year of purchase.

Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Explain why a business may need to impair its non-current assets. [3]

(b) Explain to what extent the value of the diesel lorry is to be impaired. Support your answer
with calculations. [6]
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(c) Prepare the non-current assets schedule in a format suitable for inclusion in the notes to
the financial statements for the year ended 31 December 2021. A total column is not
required.
[11]

Additional information

The repair and maintenance cost of $30 000 for the 5-year contract for the new machine was
paid on 1 March 2021.

(d) Advise the directors whether or not X Limited should have entered into the contract. Justify your
answer. [5]

[Total: 25]

QUESTION 3
SS Club had the following balances at 31 December.
2018 2019
$ $
Café equipment (net book value) 126 500 101
200
Furniture and fixtures (net book value) 48 200 66 560
Café inventory 13 000 ?
Subscriptions in advance 2 600 1 500
Subscriptions in arrears 3 800 4 200
Café trade payables 26 400 29 600
Café wages accrued 5 000 Nil
Cash at bank 33 500 ?
The following information related to the year ended 31 December 2019.

1 Café sales $240 000 were on a cash basis. All café takings were banked on the same day. One
quarter of the café sales were made to non-members at a gross margin of 50%. The remaining
café sales were made to members at a gross margin of 40%.

2 Café purchases were $141 000.

3 No records had been kept for ascertaining café inventory at 31 December 2019.

4 There were no purchases or disposals of café equipment.

5 Café wages recognised in the income and expenditure account were $46 000.

Answer the following questions in the Question Paper. Questions are printed here for
reference only.

(a) Prepare the café trading account for the year ended 31 December 2019, showing clearly the
closing café inventory. [5]

Additional information

The club had prepared an income and expenditure account for the year ended 31 December 2019.
The following items were shown in the income and expenditure account.
$
 6

Subscriptions 322
000
Administrative expenses 251
100
Depreciation: furniture and fixtures 16 640
(b) Prepare the receipts and payments account for the year ended 31 December 2019. [10]

State two differences between an income and expenditure account and a receipts and payments
account. [5]

Question 4

The statements of financial position for W Limited are as follows:

31 December 2021 2020

$000 $000
Non-current assets
Land and buildings
Cost/valuation 1150 650
Accumulated depreciation 201
949
Plant and equipment
Cost 539 454
Accumulated depreciation 326
213

1162 670
Current assets
Inventory 117 89
Trade receivables 135 103
Cash and cash equivalents – 37
252
Total Assets 1414

Equity and Liabilities

Ordinary share capital ($1 shares) 600 400
Share premium 120 70
Revaluation reserve 80 –
Retained earnings 136
936
Non-current liabilities
12% debenture (2030) 150 200
Current liabilities
Trade payables 86 120
Bank overdraft 242 –
328
Total liabilities 478

Total equity and liabilities 1414 899

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The following information is also available.

1 The cost of land and buildings at 31 December 2020 comprised of land $250 000 and buildings
$400 000. The land, which is not depreciated, had been revalued to $330 000 on 1 July 2021.

2 On 1 March 2021, a final dividend for 2020 of $0.20 per share was paid.

3 An additional 200 000 ordinary shares were issued on 1 April 2021.

4 On 1 September 2021 an interim dividend of $0.10 per share was paid on all shares in issue on
that date.

5 During the year ended 31 December 2021, an item of plant and machinery, costing $12 000, was
sold for $3000 at a profit of $2000.

6 In the year to 31 December 2021, all interest due, $44 000, has been paid.
Answer the following questions in the question paper. Questions are printed here for reference
only.

(a) Explain what is meant by the term ‘cash equivalents’. [2]

(b) Prepare the statement of cash flows for the year ended 31 December 2021 in accordance
with IAS 7. [14]

(c) Explain two reasons why a business prepares a statement of cash flows in addition to an
income statement and a statement of financial position. [4]

Additional information

During a directors’ meeting, the finance director had been asked why he had raised a bank overdraft
to finance the acquisition of non-current assets.

(d) Advise the directors whether or not the finance director was correct in raising a bank overdraft to
finance the acquisition of non-current assets. Justify your answer. [5]

[Total: 25]
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© UCLES 2022 9706/32/INSERT/F/M/22