Nala is a trader who buys and sells stationery. She provided the following information about her inventory at 28 February 2022. Item Number of units Cost per unit $ Carriage inwards per unit $ Selling expenses per unit $ Selling price per unit $ Packs of paper 240 4.50 – – 8.00 Packs of envelopes 225 5.50 1.00 1.50 10.00 Notepads 150 4.00 2.00 – 5.00 Boxes of pencils 96 3.50 – – 6.00 Nala has treated the receipt of a bank loan as a revenue receipt. Nala has charged depreciation on her shop fittings at 25% per annum using the reducing balance method. This year she is considering changing this to 10% per annum using the straight-line method, as this would improve her profit for the year.

Mark scheme

Marking points from the official mark scheme (May/June 2022). The mark or mark type is shown in brackets.

1. [1] Packs of paper valuation $4.50 x 240 = $1080
2. [1] Packs of envelopes valuation $6.50 x 225 = $1462.50
3. [1] Notepads valuation $5.00 x 150 = $750
4. [1] Boxes of pencils valuation $3.50 x 96 = $336
5. [2] Total $3628.50 (OF)
6. [1] Prudence
7. [1] Computer equipment: Capital expenditure
8. [1] Installation of computer equipment: Capital expenditure
9. [1] Insurance of motor vehicle: Revenue expenditure
10. [1] Delivery of motor vehicle: Capital expenditure
11. [1] Recording low value non-current assets can be costly and time consuming
12. [1] The cost could be greater than the benefit gained from treating as a non-current asset
13. [1] Items not significantly affecting profit or the non-current assets need not be recorded as a non-current asset
14. [1] What is material for a small business may not be material for a larger business
15. [1] Effect on capital: overstated
16. [1] Effect on liabilities: understated
17. [1] Easier to calculate than the reducing balance method
18. [1] The straight-line method may be more representative of the annual loss in value
19. [1] Non-current assets may be shown at a more realistic value
20. [1] The annual depreciation charge would be reduced
21. [1] Higher profits may encourage investors / lenders
22. [1] Method of charging depreciation should be applied consistently
23. [1] Increasing profit is not a sufficient reason to change the method
24. [1] Profit may be overstated in the year of change
25. [1] The book value of non-current assets may not be accurate / may be overstated
26. [1] Comparison with previous years not meaningful
27. [1] Recommendation (Need at least one advantage and one disadvantage in order to get recommendation mark)