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A-Level Accounting Past Papers & Drilling (Paper 3): Financial Statements with Answers
TUTORZONE ORIGINAL DRILLING MOCK · CAMBRIDGE A-LEVEL ACCOUNTING (9706) PAPER 3
Written to the 9706 syllabus (2026-2028): Paper 3 Financial Accounting, 75 marks, 1 h 30 min, three questions of 25 marks, 30% of the A Level, with the AS content assumed. The three questions cover the statement of changes in equity and the statement of financial position, admitting a new partner with goodwill and revaluation, and investment ratio analysis, with step-by-step answers.
What is in Cambridge A-Level Accounting (9706) Paper 3?
Direct answer: Paper 3 Financial Accounting is three structured questions of 25 marks each, 75 marks in 1 h 30 min, worth 30% of the A Level, with the AS content assumed and source material on a separate insert.
Assessment at a glance (2027)
| Component | Content | Weighting | Duration |
|---|---|---|---|
| Paper 1 (Multiple Choice) | 30 multiple-choice questions, 30 marks (22 financial accounting + 8 cost and management) | 30 · 28% AS / 14% A Level | 1 hour |
| Paper 2 (Fundamentals of Accounting) | four structured questions, 90 marks (Q1 30, Q2-Q3 15 each, Q4 30) | 90 · 72% AS / 36% A Level | 1 h 45 min |
| Paper 3 (Financial Accounting, A Level) | three structured questions of 25 marks, 75 marks; source material is on a separate insert | 75 · 30% A Level | 1 h 30 min |
| Paper 4 (Cost and Management Accounting, A Level) | two structured questions of 25 marks, 50 marks; source material is on a separate insert | 50 · 20% A Level | 1 hour |
Paper 3 technique: 75 marks in 1 h 30 min across three questions is about 30 minutes each. Take the statement of changes in equity first (the format marks are quick), then the partners’ capital accounts (revaluation in the old ratio, goodwill written off in the new ratio), and leave the investment ratios until last, writing each formula before substituting.
How this paper was built
This is a TutorZone original drilling mock: the questions follow the Cambridge 9706 structure (Paper 3 Financial Accounting: 75 marks, 1 h 30 min, three questions of 25 marks) and the answers are our own, not Cambridge past papers or marking references.
Every figure was recomputed programmatically, including the balance of the statement of financial position and the net assets check on the partners’ capital.
Pacing
| Section | Marks | Suggested time | What to do first |
|---|---|---|---|
| Paper 1 (Multiple Choice) | 30 · 28% AS / 14% A Level | about 2 min per question | concept items first, then ratio and cost calculations |
| Paper 2 (Fundamentals of Accounting) | 90 · 72% AS / 36% A Level | about 35 min on question 1 | statements first, decisions last |
| Paper 3 (Financial Accounting, A Level) | 75 · 30% A Level | about 30 min per question | notes and statements first, evaluation last |
| Paper 4 (Cost and Management Accounting, A Level) | 50 · 20% A Level | about 30 min per question | calculations before recommendations |
How does a rights issue affect share capital and share premium?
Direct answer: a 1 for 4 issue at $1.50 creates 100,000 new shares: $1 goes to share capital (+$100,000, giving $500,000) and the $0.50 premium goes to share premium (+$50,000, giving $170,000).
Paper 3: financial accounting drilling (3 questions, 75 marks)
Three questions of 25 marks each: a limited company’s statement of changes in equity and statement of financial position (IAS 10), admitting a partner with goodwill, and investment ratio analysis; allow the full 1 h 30 min.
Question 1 (25 marks)
Mei Tak Ltd has a year end of 31 December 2026 (all in $): 400,000 ordinary shares of $1 = share capital 400,000; share premium 120,000; retained earnings brought forward 260,000; profit for the year 96,000; dividends paid in the year 60,000 (interim 24,000 and the previous year’s final 36,000); a 1 for 4 rights issue at $1.50 was fully taken up during the year.
At the year end: land and buildings at cost 1,000,000 with accumulated depreciation 220,000; inventory 210,000; trade receivables 250,000; bank 40,000; trade payables 120,000; other accruals 44,000; a 6% loan (non-current liability) 150,000. In January 2027 the directors proposed a final dividend of $36,000.
(a) Prepare the statement of changes in equity for the year ended 31 December 2026 (10 marks).
(b) Prepare the statement of financial position at 31 December 2026 (10 marks).
(c) Explain why the proposed final dividend is not recognised as a liability in the 2026 statement of financial position (5 marks).
Question 2 (25 marks)
A and B are in partnership sharing profits 3:2 with capital of $90,000 and $70,000; other net assets are $160,000. On 1 January 2026 C is admitted: C pays in $60,000 cash for a 3/10 share of profits, and the new ratio is A 4, B 3, C 3. On admission the premises are revalued upwards by $20,000 and goodwill is valued at $50,000, to be written off immediately in the new ratio.
(a) Prepare the partners’ capital accounts to record the revaluation and the goodwill (14 marks).
(b) State the capital balances after C is admitted and check them against net assets (6 marks).
(c) Explain the difference between purchased goodwill and inherent goodwill (5 marks).
Question 3 (25 marks)
A listed company reports for 2026 (all in $): profit from operations 280,000; interest payable 40,000; profit for the year 240,000; 1,000,000 ordinary shares of $0.50; retained earnings 750,000; an 8% loan (non-current liability) 500,000; market price $2.40 per share; an interim dividend of 40,000 was paid and a final dividend of 60,000 was proposed after the year end.
(a) Calculate ROCE, gearing, interest cover, earnings per share, the price/earnings ratio, dividend per share, dividend yield and dividend cover (12 marks).
(b) Assess the company’s performance from these ratios and advise a potential investor (8 marks).
(c) State three limitations of ratio analysis (5 marks).
How should the $50,000 goodwill be allocated?
Direct answer: credit it in the old ratio 3:2 ($30,000 to A, $20,000 to B) and write it off in the new ratio 4:3:3 ($20,000 A, $15,000 B, $15,000 C); the net effect is A +$10,000, B +$5,000 and C -$15,000.
Paper 3 model answers
Question 1
(a) Statement of changes in equity: share capital brought forward 400,000 plus the rights issue of 100,000 shares at $1 = +100,000, giving 500,000. Share premium brought forward 120,000 plus the premium on the rights issue, 100,000 shares x ($1.50 – $1) = +50,000, giving 170,000. Retained earnings: 260,000 + 96,000 profit – 60,000 dividends paid = 296,000. Total equity rises from 780,000 to 966,000. (10)
(b) Statement of financial position: non-current assets 1,000,000 – 220,000 = 780,000; current assets 210,000 + 250,000 + 40,000 = 500,000, so total assets are 1,280,000. Equity 966,000; non-current liabilities, the 6% loan, 150,000; current liabilities 120,000 + 44,000 = 164,000; total equity and liabilities 1,280,000. (10)
(c) The final dividend was only proposed by the directors in January 2027, so no obligation existed at the reporting date and it does not meet the definition of a liability (IAS 10, events after the reporting period: a dividend declared after the period end is not recognised as a liability and is disclosed in the statement of changes in equity). Recording the 36,000 would understate equity and overstate liabilities. (5)
Question 2
(a) The revaluation surplus of $20,000 is shared in the old ratio 3:2: A +12,000, B +8,000. Goodwill of $50,000 is first credited in the old ratio 3:2 (A +30,000, B +20,000) and then written off in the new ratio 4:3:3 (A -20,000, B -15,000, C -15,000).
A’s capital = 90,000 + 12,000 + 30,000 – 20,000 = 112,000; B’s capital = 70,000 + 8,000 + 20,000 – 15,000 = 83,000; C’s capital = 60,000 cash – 15,000 = 45,000. (14)
(b) Total capital = 112,000 + 83,000 + 45,000 = 240,000. Check: net assets before admission 160,000 + revaluation 20,000 + cash introduced 60,000 = 240,000, which agrees; raising and writing off goodwill leaves the partnership as a whole unchanged and simply transfers 15,000 from C to A and B. (6)
(c) Purchased goodwill is the excess of the price paid for a business over the fair value of its identifiable net assets, so it has a cost; inherent goodwill is the value of a business’s own reputation, location and customers, with no transaction behind it, and is only valued when capital has to be reallocated, such as on admission, retirement or dissolution. (5)
Question 3
(a) Capital employed = 500,000 + 750,000 + 500,000 = 1,750,000; ROCE = 280,000 / 1,750,000 x 100 = 16.0%; gearing = 500,000 / 1,750,000 x 100 = 28.6%; interest cover = 280,000 / 40,000 = 7.0 times; EPS = 240,000 / 1,000,000 = $0.24; P/E = 2.40 / 0.24 = 10.0; DPS = (40,000 + 60,000) / 1,000,000 = $0.10; dividend yield = 0.10 / 2.40 x 100 = 4.2%; dividend cover = 240,000 / 100,000 = 2.4 times. (12)
(b) Assessment: ROCE of 16.0% is above the 8% cost of the loan, so borrowing is adding to shareholder returns; interest cover of 7.0 times and gearing of 28.6% show the risk is still manageable. EPS of $0.24 with a P/E of 10, a 4.2% yield and dividend cover of 2.4 times suggest the dividend is sustainable. Advice: if the company can keep earning 16% on capital employed the current valuation looks reasonable, but a low P/E can also reflect an expected slowdown, so compare with similar companies before investing. (8)
(c) Limitations: there is no single correct ratio, as it depends on the industry and size; ratios are based on historical figures and may not predict the future; and they are affected by accounting policies such as inventory valuation and depreciation while ignoring non-financial factors such as staff and brand. (5)
What are gearing and interest cover?
Direct answer: gearing = non-current liabilities / capital employed x 100 = 500,000 / 1,750,000 = 28.6%; interest cover = profit from operations / interest payable = 280,000 / 40,000 = 7.0 times.
Where these marks are usually lost
| Mistake | What it looks like | What it costs | Instead |
|---|---|---|---|
| Rights issue premium treated as capital | Crediting the whole rights price to share capital | Only the par value goes to capital; the $0.50 goes to share premium | share premium 170,000 |
| Proposed dividend shown as a liability | Including the 36,000 final dividend in current liabilities | IAS 10: a dividend declared after the period end is not a liability | disclose only, do not recognise |
| Goodwill credited in the new ratio | Using 4:3:3 to raise goodwill | Raise in the old ratio and write off in the new ratio | A +10,000, B +5,000, C -15,000 |
| Revaluation shared in the new ratio | Splitting 20,000 4:3:3 | The revaluation is shared in the old ratio 3:2 | A 12,000, B 8,000 |
| ROCE denominator using share capital only | Using 500,000 alone | Capital employed = shares + reserves + non-current liabilities | 16.0% |
How to use this paper
First drill: all three questions in 1 h 30 min, presenting the statements and capital accounts in proper format with ruled lines.
Mark it: check which ratio applies to each adjustment and prove that the totals balance.
Second drill: redo three to seven days later, aiming to finish inside 75 minutes.
What should I do after drilling Paper 3?
Direct answer: log every question where you used the wrong ratio (old versus new), redo the paper in three to seven days, then move on to Paper 4 cost and management accounting (ABC, standard costing and investment appraisal).
FAQ
Is this a Cambridge past paper?
No. This is not a Cambridge past paper: the questions and answers are TutorZone originals, not marking references.
What is in Cambridge A-Level Accounting 9706 Paper 3?
Three financial accounting questions of 25 marks each, 75 marks in 1 h 30 min, worth 30% of the A Level; the AS content is assumed and the source material is on a separate insert.
Why is goodwill credited in the old ratio but written off in the new one?
The goodwill was built up by the old partners before the admission, so it is credited in the old ratio, but it is then shared by, and written off against, all the partners in the new ratio.
When are Papers 3 and 4 taken?
In the second year of the A Level, together; the first year’s Papers 1 and 2 give the AS Level.
Official references
| Resource | What to check |
|---|---|
| Cambridge A-Level Accounting 9706 syllabus (2026-2028) | Confirm the question count, marks and IAS coverage of Paper 3 |
| https://www.tutorzone.com.hk/en-alevel-accounting-9706-paper-4-mock-2027/ | A-Level Accounting 9706 Paper 4 drilling mock (cost and management accounting) |
Related: practice area · · A-Level Accounting 9706 drilling guideA-Level Accounting Paper 1 drilling mock · A-Level Accounting Paper 2 drilling mock
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