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O-LevelAccountingAccounting procedures7707/21 · May/June 2025 · Q220 Marks

Mo is a farmer. He prepares his financial statements to 31 December each year. He delivers his farm produce to his customers in his delivery vehicle. Mo charges depreciation on vehicles at 20% per annum using the reducing balance method. He charges a full year's depreciation in the year of purchase and no depreciation in the year of disposal. On 31 March 2024, he sold his delivery vehicle for $2900 and received payment by cheque. He had purchased this delivery vehicle in June 2021 for $10000.

  1. (a)Calculate the accumulated depreciation on the delivery vehicle which Mo sold on 31 March 2024.[3]
  2. (b)Prepare the disposal account for the sale of the delivery vehicle on 31 March 2024.[4]
  3. (c)Mo purchased a new delivery vehicle on 1 April 2024. The purchase price is made up as follows: Cost of vehicle $12500 Petrol $60 Insurance (6 months) $475 Number (licence) plates $215 Total $13250 Calculate the amount which Mo will record in his delivery vehicle account for this transaction on 1 April 2024.[2]
  4. (d)Mo is considering opening a shop to sell his farm produce. He hopes that customers will come to his farm and buy from the shop so that he will not need to deliver to them. He will use an existing farm building as his shop. Advise Mo whether or not he should open the shop. Justify your answer by providing advantages and disadvantages of opening the shop.[5]
  5. (e)Mo owns his farmland and rents out one of his fields to a neighbouring farmer, Barry, for $80 a month. Barry pays Mo by bank transfer. On 1 January 2024, Barry owed Mo two months' rent. During the year ended 31 December 2024, Barry paid the following amounts to Mo for rent: 1 March $320 1 September $720 Prepare Mo's rental income account for the year ended 31 December 2024. Total the account and bring down the balance at 1 January 2025.[4]
  6. (f)(i)Mo has noticed that his gross margin and profit margin are higher than those of Barry. State one reason why: Mo's gross margin is higher than Barry's[1]
  7. (f)(ii)Mo's expenses are lower than Barry's.[1]

Mark scheme

Marking points from the official mark scheme (May/June 2025). The mark or mark type is shown in brackets.

  1. [1] Depreciation 2021: $10 000 × 20% = $2 000.
  2. [1] Depreciation 2022: ($10 000 – $2 000) × 20% = $1 600.
  3. [1] Depreciation 2023: ($8 000 – $1 600) × 20% = $1 280. Total accumulated depreciation = $2 000 + $1 600 + $1 280 = $4 880 (OF).
  4. [1] Mar 31 Motor vehicles $10 000
  5. [1] Mar 31 Provision for depreciation of motor vehicles $4 880 (OF)
  6. [1] Mar 31 Bank $2 900
  7. [1] Dec 31 Income statement $2 220 (OF)
  8. [1] Cost of vehicle $12 500.
  9. [1] Number plates $215. Total to be recorded in Delivery Vehicle account $12 715 (OF).
  10. [1] Advantage: There would be no motor expenses/no delivery costs.
  11. [1] Advantage: Can utilise his time on other aspects of the business.
  12. [1] Advantage: Might increase sales/increase customers/increase profits.
  13. [1] Advantage: He could sell his vehicle/vehicle is no longer required.
  14. [1] Disadvantage: Cost of converting the farm building into a shop.
  15. [1] Disadvantage: Cost of running the shop.
  16. [1] Disadvantage: Customers may not be willing to travel/may prefer their goods delivered/no guarantee that customers will come/may spoil relationship with customers.
  17. [1] Disadvantage: New van has just been purchased.
  18. [1] Recommendation (based on advantages and disadvantages provided).
  19. [1] Jan 1 Balance b/d $160 (2 months owed * $80)
  20. [1] Dec 31 Income statement $960 (12 months * $80)
  21. [1] Mar 1 Bank $320 and Sep 1 Bank $720
  22. [1] Jan 1 Balance b/d $80 (OF)
  23. [1] They may sell different types of produce / Mo has a higher selling price than Barry / Mo's cost of producing/cost of sales is lower than that of Barry.
  24. [1] Barry has to pay rent whereas Mo does not / Mo has lower expenses/controls his expenses better / Using different accounting methods e.g. different depreciation methods.

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About this question

Topic
Accounting procedures, O-Level Accounting (syllabus 7707). Structured question, 20 marks.
Source
O-Level Accounting, May/June 2025 Paper 2 Variant 1, question 2.

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