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Master POA
Suggested Answers · 2026 GCE O Level · 7087/01 Paper 1
3 Questions · 40 Marks
Unofficial — rebuilt from what candidates remembered after the paper7087/01/2026/RECON
Heads up: we don’t have the paper yet. Question totals (12 / 13 / 15) are confirmed. Parts with a mark in [brackets] are firm; parts marked est. or NOT YET RECALLED are still being pieced together.
(a) Describe the entries in the account
(i)The business sold motor vehicle costing $25 000.
(ii)The business charged a total depreciation of $9 000 and transferred it to the sale of non-current asset account.
(iii)The business sold the motor vehicle for $14 500 on credit to RSTY Private Limited.
Net book value = 25 000 – 9 000 = $16 000. Sold for $14 500, so the business lost $1 500.
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(b) Gain or loss, presentation and effect
(i)Loss
(ii)Other expenses
(iii)Decrease
Wrote “gain”? The $1 500 sits on the credit side of the disposal account as the balancing figure. That credit doesn’t mean income: $16 000 of book value went in and only $14 500 came back. Read it as a ledger, not a journal.
Common mix-up: “Income summary is on the debit side at year end, so it’s a profit.” Not always. In a sale of non-current asset account, income summary on the credit side is the balancing figure for a loss (more went in than came out). On the debit side, it’s a gain.
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(c) Depreciation method
Reducing-balance method. (1)
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(d) Accounting theory
Historical cost theory (1)
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(e) Accounting theory
Consistency theory states that once an accounting method is chosen, the same method should be applied in all future accounting periods so that meaningful comparisons can be made. (2)
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(f) Accounting theory: the workforce
Monetary theory. Monetary theory states that only business transactions that can be measured in monetary terms are recorded. As the value of an efficient workforce cannot be measured in monetary terms, it cannot be recorded in the books of the business. (2)
Wrote materiality? That’s the most common slip. Materiality asks whether something already recorded is big enough to matter. Here nothing can be recorded in the first place.
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[Total Q1: 12]
(a) Rental income for the year
$1 750 × 12 = $21 000
Income earned covers all 12 months, whether or not the cash came in. ×10 gives $17 500, which is only the cash received.
Counting months: 1 July 2025 to 30 June 2026 is 12 months, because June counts too. 1 July to 31 May would be 11 months. Used 11 months? If you showed your working all the way, you can still pick up follow-through marks in the later parts.
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(b) Statement of financial performance (extract)
| Maya Extract of Statement of financial performance for the year ended 30 June 2026 | |
| $ | |
| Other income | |
| Rental income | 21 000 |
| Workshop income | 2 150 |
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(c) Statement of financial position (extract)
| Maya Extract of Statement of financial position as at 30 June 2026 | |
| $ | |
| Current assets | |
| Rental income receivable | 3 500 |
| Current liabilities | |
| Workshop income received in advance | 150 |
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(d) Effect on profit
| Item | Amount | Effect on profit |
| Rent income receivable | $3 500 | Understated |
| Workshop income received in advance | $150 | Overstated |
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(e) Reversing entry
| Account to be debited | Account to be credited |
| Rental income | Rental income receivable |
Dr Rental income receivable, Cr Rental income is the year-end adjustment, not the reversal.
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(f) Accounting theory
Matching theory states that expenses incurred must be matched against income earned in the same period to determine the profit for that period. Hence, it is important for a business to adhere to matching theory so as to ensure that the profit is accurate. (2)
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[Total Q2: 13]
(a) Importance of profit any two
•Reward for the owner. The owner contributes capital and bears the risk of running the business. Profit is the owner’s return on that capital and risk, and part of it can be withdrawn as drawings. Without profit, the owner may move the money into another investment.
•Survival of the business (going concern). Profit shows that income exceeds expenses, so the business can pay its expenses and liabilities as they fall due. Continued losses reduce capital, and the business may eventually have to close down.
•Growth and expansion. Profit retained in the business increases capital. The business can use it to expand, for example by buying more equipment or opening a new branch, without borrowing and paying interest expense.
•Obtaining loans and attracting investors. A steady record of profit shows the business is financially stable. Banks are more willing to lend, and investors more willing to invest, as the business is able to pay interest and repay loans.
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(b) Mark-up on cost
| 31 August 2025 | 31 August 2026 | |
| Workings | 79 320 ÷ (198 300 – 79 320) × 100 | 96 120 ÷ (213 600 – 96 120) × 100 |
| Mark-up on cost | 66.67% | 81.82% |
Mark-up on cost = Gross profit ÷ Cost of sales × 100. Cost of sales = Net sales revenue – Gross profit. Used profit for the year instead of gross profit? That’s profit margin, not mark-up.
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(c) Comment on profitability
The mark-up on cost of 81.82% for the year ended 31 August 2026 was better than 66.67% for the year ended 31 August 2025. This suggests that the business earned about $0.15 more gross profit for every dollar of cost of sales.
The profit margin of 11.12% for 2026 was worse than 12.35% for 2025. The business earned about $0.01 less profit for every dollar of net sales revenue in 2026. This suggests that the business is less efficient in managing its operating expenses in 2026 as compared to 2025.
The return on equity of 5.28% for 2026 was also worse than 6.12% for 2025. The business generated about $0.01 less profit for every dollar of equity invested by the owner.
Overall, both profit margin and return on equity have worsened. Hence, the business was less profitable in the year ended 31 August 2026 than in the year ended 31 August 2025.
A higher mark-up alone doesn’t make the business more profitable. Look at profit margin and return on equity too, then conclude.
Net realisable value is the estimated selling price less transaction cost. Inventory is valued at the lower of cost and net realisable value.
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(d) Accounting theory
Revenue recognition theory: revenue is earned when goods have been delivered or services have been provided, regardless of when payment is collected. (1)
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(e) Why sell on credit any two
•Increase sales revenue. Selling on credit lets customers buy now and pay later. Customers without enough cash can still buy, so the business makes more sales, which increases revenue and profit.
•Encourage bulk purchases. As customers do not have to pay immediately, they may buy in larger quantities. Larger orders increase sales volume and revenue.
•Stay competitive. Competitors may already offer credit terms. If the business only accepts cash, customers may switch to competitors. Offering credit helps the business keep its customers and market share.
•Build customer loyalty. Credit terms are convenient and show trust in the customer. Customers given credit are more likely to keep buying from the business, giving it repeat sales and steadier revenue.
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(f) Revenue of a service business any one
Consultancy fee revenue / Cleaning fee revenue / Tuition fee revenue / Legal fee revenue / Advertising fee revenue / Hairstyling fee revenue (1)
“Barbershop” is a type of business, not an account. “Received in advance” is a liability, not revenue.
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[Total Q3: 15] — [Grand Total: 40]
Paper 2 is next. Let’s get that A1.
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