O-LevelCommerceCredit7100/22 · Oct/Nov 2015 · Q620 Marks

Renco is a private limited company selling and maintaining agricultural machinery and tractors.

(a)(i)Mr Gamba decided to buy a tractor. Its cash price was $16000. He decided to buy the tractor on hire purchase. He paid a 25% deposit and 24 monthly instalments of $580. Calculate how much more he paid on hire purchase than if he had paid the cash price. Show your working.[4]
(a)(ii)State two differences between hire purchase and deferred payments.[4]
(b)(i)Mrs Guruve bought a plough. Its cash price was $10000. She was given a discount of 2% on the purchase price. Calculate how much she paid. Show your working.[2]
(b)(ii)Explain the benefits to Renco of customers paying by cash rather than hire purchase.[3]
(b)(iii)What name is given to discount offered to traders?[1]
(c)Renco is planning to expand its business by opening two new branches. It needs finance. Its Board of Directors is considering the following two options: • changing from a private limited company to a public limited company • borrowing from a commercial bank. Discuss both options. Which would you recommend? Give reasons for your choice.[6]

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2015). The mark or mark type is shown in brackets.

[4] $16000 × 25/100 = $4000 (1 mark) +
$580 × 24 = $13920 (1 mark) = $17920 (1 mark)
$17920-$16000 = $1920 (1 mark)
OFR applies. Award full marks if the correct answer is given without working.
[4] Any two differences × 2 marks each – (Must be distinct differences for the full marks)
hire purchase – you become the owner on the final payment
def. payments – you become the owner on the first payment
hire purchase – used to purchase goods with a second-hand value or example
def. payments – used to purchase goods with little second-hand value or example
hire purchase - goods can be repossessed
def. payments – goods cannot be repossessed – taken to court for non-payment
hire purchase - written agreement
def. payments – no written agreement
Any other relevant difference.
[2] $10000 × 2/100 = $200 (1 mark) $10000 – $200 = $9800 (1 mark)
OFR applies. If a candidate gives the correct answer without working, award full marks.
[3] Any three points × 1 mark and up to 2 marks for a well-developed point –
Renco would have no bad debts (1)
Renco would be able to use the cash to pay its own debts/obtain new supplies (1)/improve cash flow (1)
Renco would have more working capital (1) in liquid form (1)
Renco would be able to take advantage of cash discounts offered by its suppliers (1) for prompt payment (1)
Renco would not have to keep detailed records (1)
Renco would not have to wait for the money (1) which would be spread over a period of time (1)
Any other relevant point.
[1] One mark for trade discount.
[6] Level 2 (4-6 marks) Has discussed both options and has given a reasoned recommendation. (If a candidate has discussed only one option award 4 marks max).
If the Board of Directors needs a large amount of finance, it might consider changing to a public limited company. This would give it access to large amounts of finance from the public and its shares would be quoted on a stock exchange. It would not have to pay interest on the finance which would not have to repaid. However, this will take a long time to arrange and the company will fundamentally change. The existing Board of Directors would be replaced and shares would be freely transferable, making the company, in the long term, vulnerable to take-over bids.
If the company wants to open two new branches it is possible that a huge amount of finance would not be needed. It may have substantial retained profits which it could use and so its borrowing requirement would not be so great. It may be able to negotiate a loan from a commercial bank on favourable terms with fixed interest rates. Control of the company would remain with a small number of people, possibly a family group.
If, however, the Board has plans for a greater expansion programme long-term, it might seriously consider forming a public limited company. For its immediate plans, borrowing from a commercial bank is the better option.
Level 1 (1-3 marks) Has commented on one or both options with/without a recommendation.