Limited companies — Paper 2 · IGCSE Accounting (9-1) 0985

1 Dev owns a business selling furniture. The following transactions took place during August 2020. Transaction Date Details $ 1 August 9 Sold goods on credit to Petra 675 2 14 Petra returned damaged goods to Dev 120 3 23 Banked cash sales 412 4 29 Petra settled her outstanding balance at 1 August by credit transfer after taking a cash discount of 5% On 1 August 2020, the balance on credit customer Petra’s sales ledger account was $940 debit. REQUIRED (a) Complete the table to name each business document and book of prime entry for the following transactions in Dev’s accounting records. Transaction Business document Book of prime entry 2 3 4 [6] (b) Prepare the account of Petra for August 2020 as it would appear in Dev’s sales ledger. Balance the account and bring down the balance on 1 September 2020. Dev Petra account Date Date 2020 Details $ 2020 Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (c) Identify the section of Dev’s statement of financial position at 31 August 2020 in which the balance on Petra’s account would appear. … [1] Dev allows his credit customers a cash discount of 5% for prompt payment. He is considering reducing this to 2%. REQUIRED (d) State one advantage and one disadvantage to Dev of this proposal. … … … … [2] Dev is considering turning his business into a limited company. REQUIRED (e) Advise Dev whether or not he should form a limited company. Justify your answer with two advantages and two disadvantages of forming a limited company. … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 1(a) Transaction Business document Book of prime entry 2 Credit note (1) Sales returns journal (1) 3 Paying-in slip (1) Cash book (1) 4 Bank statement (1) Cash book (1) 6 1(b) Dev Petra account 2020 $ 2020 $ Aug 1 Balance b/d 940 Aug 14 Sales returns 120 (1) 9 Sales 675 (1) 29 Bank 893 (1) Discount allowed 47 (1) 31 Balance c/d 555 1 615 1 615 2020 Sept 1 Balance b/d 555 (1)OF + (1) dates 6 1(c) Current assets (1) OF 1 1(d) Advantage Increase profit for the year (1) Increase cash inflow (1) Accept other valid responses Max (1) Disadvantage May lose customers/sales may fall (1) Customers may take longer to pay (1) Accept other valid responses Max (1) 2 Question Answer Marks 1(e) Advantages Dev will have limited liability for the debts of the company (1) The limited company will have a separate legal identity to Dev (1) Dev will have access to different forms of finance/increase in capital employed (1) Accept other valid responses Max (2) Disadvantages The limited company will have greater regulation than Dev as a sole trader (1) The accounting requirements of the limited company will be more complex than for Dev as a sole trader (1) The financial statements of the limited company may be viewed by the public unlike those of Dev as a sole trader (1) Accept other valid responses Max (2) Recommendation (1) 5

This question in 0985/22 Oct/Nov 2020

3 JP Limited’s financial year ended on 30 September 2020. The following balances were available at that date. $ 7% debentures (2026) 20 000 Administrative expenses 44 000 Carriage inwards 1 500 Distribution costs 38 000 Debenture interest paid 700 Inventory at 1 October 2019 66 000 Non-current assets at book value at 1 October 2019 610 000 Provision for doubtful debts 1 000 Purchases 263 000 Revenue 529 500 Trade receivables 80 500 Additional information 1 Inventory at 30 September 2020 was valued at $59 000. 2 Interest on the 7% debentures (2026) had been paid up to 31 March 2020. 3 Administrative expenses included rates of $1200 for the six months ending 31 March 2021. 4 Distribution costs of $800 were outstanding at 30 September 2020. 5 Non-current assets should be depreciated by 10% per annum using the reducing balance method. 6 Irrecoverable debts of $500 are to be written off. 7 The directors wish to maintain the provision for doubtful debts at 2% of trade receivables. REQUIRED (a) Calculate the cost of sales for the year ended 30 September 2020. … … … … … … … [2] (b) Calculate the increase or decrease in the provision for doubtful debts at 30 September 2020. … … … … … … [2] (c) Prepare the income statement for the year ended 30 S JP Limited Income Statement for the year ended 30 S …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … …………………………………………………………… … (d) Complete the table by placing a tick (✓) in the correct column to indicate the effect on the equity of JP Limited of each of the following. The first one has been completed as an example. Increase Decrease No effect Issue additional debentures ✓ Issue additional ordinary shares Payment of ordinary share dividend Proposal of ordinary share dividend Transfer from retained earnings to general reserve [4] [Total: 20]

20 marks

Mark scheme: 3(a) $ Opening inventory 66 000 Purchases 263 000 Carriage inwards 1 500 330 500 (1) Less Closing inventory 59 000 Cost of sales 271 500 (1) OF 2 3(b) $ Provision at 30 September 2020 ((80 500 – 500) x 2%) 1 600 (1) Less Provision at 1 October 2019 1 000 Increase in provision for doubtful debts 600 (1) OF 2 3(c) JP Limited Income Statement for the year ended 30 September 2020 $ $ Revenue 529 500 Less Cost of sales 271 500 (1) OF Gross profit 258 000 (1) OF Less expenses Administrative expenses (44 000(1) - 1200(1)) 42 800 Distribution costs (38 000(1) + 800(1)) 38 800 Irrecoverable debts 500 (1) Provision for doubtful debts 600 (1) OF Depreciation – non-current assets 61 000 (1) 143 700 Profit from operations 114 300 Debenture interest (700(1) + 700 (1)) 1 400 Profit for the year 112 900 (1) OF 12 Question Answer Marks 3(d) Increase Decrease No effect Issue of additional debentures  Issue of additional ordinary shares  (1) Payment of ordinary share dividend  (1) Proposal of ordinary share dividend  (1) Transfer from retained earnings to general reserve  (1) 4

This question in 0985/22 Oct/Nov 2020

3 The trial balance of HV Limited at 31 March 2021 was as follows. HV Limited Trial Balance at 31 March 2021 Debit Credit $ $ Revenue 145 000 Inventory at 1 April 2020 5 820 Purchases 64 900 Rent and insurance 9 280 Wages 24 750 Operating expenses 8 500 Fittings at cost 200 000 Provision for depreciation of fittings 72 000 Trade receivables 12 500 Bank 13 765 Trade payables 6 615 4% Debentures (repayable 1 April 2031) 30 000 Ordinary share capital 70 000 Retained earnings 21 500 Dividend paid on ordinary shares 5 600 345 115 345 115 Additional information 1 Inventory at 31 March 2021 was valued at $6090. 2 Depreciation on fittings is to be charged at 20% per annum using the reducing balance method. 3 Rent includes a payment of $1800 for the 3 months from 1 March 2021 to 31 May 2021. 4 Accrued wages at 31 March 2021 were $2250. 5 No debenture interest has been paid for the year ended 31 March 2021. 6 No dividends were outstanding at 31 March 2021. 7 $2000 is to be transferred to a general reserve on 31 March 2021. REQUIRED (a) Prepare the income statement for HV Limited for the HV Limited Income Statement for the year e … … … … … … … … … … … … … … … … … … … … (b) Prepare the statement of changes in equity for HV Limited for the year ended 31 March 2021. HV Limited Statement of Changes in Equity for the year ended 31 March 2021 Details Ordinary General Retained Total Share reserve earnings capital $ $ $ $ On 1 April 2020 … … … … … … … … … … … … … … … … … … … On 31 March 2021 … … … … [5] (c) Calculate the return on capital employed for the year ended 31 March 2021. The answer should be correct to two decimal places. … … … [3] (d) State two differences between ordinary shares and preference shares. 1 … … … 2 … … … [4] [Total: 20]

20 marks

Mark scheme: 3(a) HV Limited Income Statement for the year ended 31 March 2021 $ $ Revenue 145 000 Cost of sales Opening inventory 5 820 Purchases 64 900 70 720 Less Closing inventory 6 090 64 630 (1) Gross profit 80 370 (1)OF Less Expenses Rent and insurance (9 280 (1) – (2/3 × 1 800) (1)) 8 080 Wages (24 750 + 2 250) 27 000 (1) Operating expenses 8 500 Depreciation of Fittings 25 600 (1) 69 180 (20% × (200 000 – 72 000)) Profit from operations 11 190 Debenture interest 1 200 (1) Profit for the year 9 990 (1)OF 8 Question Answer Marks 3(b) HV Limited Statement of Changes in Equity for the year ended 31 March 2021 Details Ordinary share capital General Reserve Retained earnings Total $ $ $ $ On 1 April 2020 Profit for the year Dividend paid Transfer to general reserve 70 000 2 000 21 500 9 990 (5 600) (2 000) 91 500 9 990 (5 600) (1) (1)OF (1) (1) On 31 March 2021 70 000 2 000 23 890 95 890 (1)OF 5 3(c) Return on Capital employed = ( ) ( )( ) ( ) 11190 100 8.89% 95 890 30 000 1 × = + 1 OF 1 OF OF 1 OF 3 3(d) There is a fixed rate of dividend on preference shares (1): the dividend on ordinary shares may vary (1) There are higher risks and rewards for ordinary shares (1) than there are for preference shares (1) Ordinary shares normally carry voting rights (1): preference shares do not (1) Ordinary shares are part of the equity of the company (1). Redeemable preference shares are a non-current liability and non-redeemable preference shares are part of the equity (1). If the company is wound up, preference shares are repaid before ordinary shares(1)/ordinary shares are repaid after preference shares (1) Preference shares receive the dividend first (1) ordinary shares receive the dividend after the preference shares (1) Accept other valid points Must be two contrasting statements Max (4) 4

This question in 0985/22 May/June 2021

5 The trial balance of M Limited at 30 November 2021 was as follows. M Limited Trial Balance at 30 November 2021 Debit Credit $ $ Revenue 203 600 Inventory at 1 December 2020 12 945 Purchases 143 750 Rent and rates 12 460 Operating expenses 12 920 Wages 24 380 Equipment at cost 40 000 Provision for depreciation of equipment 17 500 Trade receivables 9 800 Provision for irrecoverable debts 295 Bank 162 Trade payables 11 585 Ordinary share capital 20 000 General reserve 3 000 Retained earnings 2 037 Dividend paid on ordinary shares 1 600 258 017 258 017 Additional information 1 Inventory at 30 November 2021 was valued at $12 830. 2 Depreciation on equipment is to be charged at 25% per annum using the reducing balance method. 3 Accrued operating expenses at 30 November 2021 were $415. 4 Rent includes a payment of $2250 for the 3 months from 1 October 2021 to 31 December 2021. 5 The provision for doubtful debts is to be set at 4% of trade receivables.

0 marks

Mark scheme: 5(a) M Limited Income Statement for the year ended 30 November 2021 $ $ Revenue 203 600 Less Cost of sales Opening inventory 12 945 Purchases 143 750 156 695 Less Closing inventory 12 830 143 865 (1) Gross profit 59 735 (1)OF Less Expenses Rent and rates (12 460 – [1/3  2 250]) 11 710 (1) Operating expenses (12 920 + 415) 13 335 (1) Wages 24 380 Depreciation of equipment ([40 000 – 17 500]  25%) 5 625 (1) Provision for doubtful debts 97 (1) (9 800  4% = 392 – 295) 55 147 Profit for the year 4 588 (1)OF 7 Question Answer Marks 5(b) M Limited Statement of Changes in Equity for the year ended 30 November 2021 Details Ordinary share capital $ General Reserve $ Retained earnings $ Total $ On 1 December 2020 20 000 3 000 2 037 25 037 (1) Profit for the year … … 4 588 4 588 (1)OF Dividend paid … … (1 600) (1 600) (1) Transfer to general reserve …………. 1 000 (1 000) … (1) On 30 November 2021 20 000 4 000 4 025 28 025 (1)OF 5 5(c) Liquid ratio workings answer (9 800 – 392 + 750 + 162) : (11 585 + 415) = 10 320 (1) : 12 000 (1) 0.86:1 (1)OF 3 Question Answer Marks 5(d) Issuing further ordinary shares: Non-current assets should normally be financed by long-term debt or capital (1) Shareholders will expect a dividend (1) If any dividend was paid liquidity would be reduced (1) The shares would not need to be repaid (1) Existing ordinary shareholders may lose control of the company (1) Could take some time to raise the finance (1) Max (2) Bank overdraft: Liability to bank ends when overdraft is cleared (1) Bank can request repayment at very short notice (1) Interest is payable until overdraft is cleared (1) Interest must be paid even if overdraft limit is reached (1) May find it difficult to repay the overdraft (1) Bank may require security for the overdraft (1) Max (2) Accept other valid points Recommendation (1) 5

This question in 0985/22 May/June 2022

7 $1000 is to be transferred to the general reserve at 30 No REQUIRED (a) Prepare the income statement for M Limited for the year e M Limited Income Statement for the year ended 30 … … … … … … … … … … … … … … … … … … … … (b) Prepare the statement of changes in equity for M Limited for the year ended 30 November 2021. M Limited Statement of Changes in Equity for the year ended 30 November 2021 Details Ordinary General Retained Total Share capital reserve earnings $ $ $ $ On 1 December 2020 … … … … … … … … … ……. … … … … … … … … … ……. … … … … … … … … … ……. … … … … … … … … On 30 November 2021 … … … … … … … … [5] (c) Calculate the liquid ratio for M Limited at 30 November 2021. The answer should be correct to two decimal places. Liquid (acid test) ratio workings answer [3] The managing director, Emily, plans to buy new equipment to be used to improve the profitability of the company. She is considering whether to fund the equipment by issuing further ordinary shares or requesting a bank overdraft. REQUIRED (d) Advise Emily whether to fund the purchase of the equipment by issuing further ordinary shares or by requesting a bank overdraft. Justify your answer. … … … … … … … … … … … … [5] [Total: 20]

20 marks

This question in 0985/22 May/June 2022

5 Q Limited prepares its financial statements to 31 March each year. The company’s retained earnings at 1 April 2022 were $16 250. During the year ended 31 March 2023, the company made a profit of $43 500 (after charging all expenses and interest). The total dividends of $39 000 for the year were paid by 31 March 2023. The following balances were extracted from the company’s ledger accounts after the income statement had been prepared. $ Fittings and equipment at cost 150 000 Provision for depreciation of fittings and equipment 40 650 Motor vehicles at cost 72 000 Provision for depreciation of motor vehicles 31 125 Inventory 51 790 Balance at bank 1 076 debit Trade receivables 19 700 Provision for doubtful debts 591 Trade payables 31 450 5% Debentures (repayable 2029) 40 000 Bank loan (repayable 2027) 10 000 Ordinary share capital 120 000 REQUIRED (a) Calculate the retained earnings of Q Limited at 31 March 2023. … … … … … … [3] (b) Prepare the statement of financial position for Q Q Limi Statement of Financial Pos … … … … … … … … … … … … … … … … … … … … … … … (c) Calculate the liquid (acid test) ratio to two decimal places. … … … [2] The directors (who are also the shareholders) would like to expand the company and wish to borrow $50 000 to fund the expansion. They are considering whether to issue further ordinary shares or to request another long-term bank loan. REQUIRED (d) (i) Suggest two reasons why although the company has made a profit, there is little cash available in the bank account to fund the expansion. 1 … … 2 … … [2] (ii) Advise the directors whether they should fund the expansion by issuing ordinary shares or requesting a bank loan. Justify your answer. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 5(a) Calculation of retained earnings $ Retained earnings at 1 April 2022 16 250 } Profit for the year 43 500 }(1) 59 750 Less Dividend (39 000) (1) Retained earnings at 31 March 2023 20 750 (1)OF 3 Question Answer Marks 5(b) Q Limited Statement of Financial Position at 31 March 2023 $ $ $ Assets Non-current Assets Cost Provision For Depreciation Net Book Value Fittings and equipment 150 000 40 650 109 350 } (1) for Motor vehicles 72 000 31 125 40 875 } both lines 222 000 71 775 150 225 (1) Current Assets Inventory 51 790 Trade receivables 19 700 Less Provision for doubtful debts 591 19 109 (1) Bank 1 076 71 975 (1)OF Total assets 222 200 Equity and Liabilities Equity Ordinary share capital 120 000 (1) Retained earnings 20 750 (1)OF 140 750 Non-current Liabilities 5% Debentures 40 000 } Bank Loan 10 000 }(1) 50 000 Current Liabilities Trade payables 31 450 (1) Total Equity and Liabilities 222 200 8 Question Answer Marks 5(c) (19 109 OF + 1 076) : 31 450 OF = 20 185 OF : 31 450 OF (1) whole formula = 0.64 : 1 (1)OF 2 5(d)(i) Dividends paid (1) Increase in level of inventory (1) Purchase of non-current assets (1) Repayment of non-current liabilities (1) Payment of trade payables/payment of a bank overdraft (1) Delay in receiving payment from trade receivables (1) Accept other valid points Max (2) 2 Question Answer Marks 5(d)(ii) Issue ordinary shares No interest payable (1) No repayment required (1) No need to provide security (1) The directors can decide on the rate of dividend (1) May dilute control/ownership (1) Shareholders will expect a dividend (1) May not be able to raise amount required (1) Already have long-term liabilities to repay (1) Accept other valid points Max (3) Obtain bank loan Repayment is required (1) Once loan is repaid no further liability to bank (1) Funds would need to be available when repayment is due (1) Security will be required (1) Interest will be charged (1) Bank may not be willing to lend as already have substantial long-term liabilities (1) Funds may be obtained more quickly than a share issue (1) If company is wound up loan must be repaid before shareholders (1) Accept other valid points Max (3) Max (4) (1) for recommendation 5

This question in 0985/21 May/June 2023

4 Akila and Darius are in partnership. The partnership agreement provides for the following: interest on capital of 3% per annum interest on drawings of 5% a salary to Akila of $9500 per annum residual profits and losses to be shared 60% to Akila and 40% to Darius. The partners provided the following list of balances. $ Capital accounts at 1 May 2022 Akila 90 000 Darius 65 000 Current accounts at 1 May 2022 Akila 2 600 debit Darius 4 745 credit Drawings for the year ended 30 April 2023 Akila 19 400 Darius 16 320 The profit for the year ended 30 April 2023 was $42 304. REQUIRED (a) Prepare the appropriation account on the opposite page for Akila and Darius for the year ended 30 April 2023. Akila and Darius Appropriation Account for the year ended 30 April 2023 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (b) (i) Prepare Akila’s current account for the year ended 30 April 2023. Akila Current account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [5] (ii) Calculate the balance on Akila’s current account at 30 April 2023 if he had been due $1000 loan interest from the partnership. … … … … [2] Akila and Darius’s partnership agreement provided for salary, interest on capital, interest on drawings, and profit share. (c) State two other items which are usually included in a partnership agreement. 1 … … 2 … … [2] Akila and Darius are considering forming a limited company. They would be the only two shareholders in the company. (d) Advise Akila and Darius whether they should form a limited company. Justify your answer with two advantages and two disadvantages of Akila and Darius forming a limited company. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 4(a) Akila and Darius Appropriation Account for the year ended 30 April 2023 $ $ Profit for the year 42 304 Add interest on drawings Akila 970 } Darius 816 } (1) 1 786 44 090 Less Interest on capital Akila 2 700 } Darius 1 950 } (1) 4 650 Salary - Akila 9 500 (1) 14 150 29 940 (1) Profit share Akila (60%  29 940) 17 964 (1) OF Darius (40%  29 940) 11 976 (1) OF 29 940 6 Question Answer Marks 4(b)(i) Akila Current account Date Details $ Date Details $ 2022 2023 May 1 Balance b/d (1) 2 600 Apr 30 Interest on capital }OF 2 700 2023 Salary }(1) 9 500 Apr 30 Drawings } 19 400 Profit share (1)OF 17 964 Interest on drawings }(1)OF 970 Balance c/d (1)OF 7 194 30 164 2023 30 164 May 1 Balance b/d 7 194 5 4(b)(ii) 7194OF + 1000 (interest on loan) (1) – 600 (reduction in profit share) (1) = 7594OF 2 4(c) Amount of capital to be invested by each partner (1) Any limit on drawings (1) Interest on partners’ loans (1) Accept other valid points Max (2) 2 Question Answer Marks 4(d) Advantages – forming a limited company May be easier to raise funds (1) Company is a separate legal identity (1) Shareholders have limited liability (1) Continuity of existence (1) May improve reputation / standing of the business (1) Accept other valid points Max (2) Disadvantages – forming a limited copy Maybe increase administration costs (1) Maybe costly to establish (1) More legal requirements (1) More complex accounting required / have to produce annual financial statements (1) More information about the business may be made public (1) Accept other valid points Max (2) Recommendation (1) 5

This question in 0985/22 May/June 2023

3 Zahra and Panya are the shareholders and directors of Q Limited. The company directors of Q Limited have provided the following trial balance. Q Limited Trial Balance at 31 January 2024 Debit Credit $ $ Revenue 78 000 Purchases 38 200 Rent and insurance 10 600 Directors’ salaries 19 000 General expenses 3 420 Advertising 5 400 Dividends paid 2 500 Fittings at cost 18 000 Provision for depreciation of fittings 5 400 Inventory at 1 February 2023 2 950 Cash at bank 915 Trade payables 2 288 Ordinary share capital 13 000 Retained earnings 2 297 100 985 100 985 Additional information 1 Inventory at 31 January 2024 was valued at $4720. 2 Depreciation on fittings is to be charged at 10% per annum using the straight-line method. 3 Payment for advertising, $75, is outstanding at 31 January 2024. 4 No dividends were outstanding at 31 January 2024. REQUIRED (a) Prepare the income statement for Q Limited for the year ended 31 January 2024. Q Limited Income statement for the year ended 31 January 2024 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (b) Calculate the retained earnings at 31 January 2024. … … … … … [3] (c) Prepare the statement of financial position for Q Limited at 31 January 2024. Q Limited Statement of financial position at 31 January 2024 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] Zahra and Panya would like to expand the company and increase sales. In order to do this they are considering increasing the amount spent on advertising by 100%. (d) Advise Zahra and Panya whether or not they should go ahead with the 100% increase in the amount spent on advertising. Justify your answer by providing two points in favour and two points against this increase. … … … … … … … … … … … … [5] [Total: 20]

20 marks

Mark scheme: 3(a) Q Limited Income statement for the year ended 31 January 2024 $ $ Revenue 78 000 Less: Cost of sales Opening inventory 2 950 Purchases 38 200 41 150 Less Closing inventory 4 720 36 430 (1) Gross profit 41 570 (1)OF Less Rent and insurance 10 600 } Directors’ salaries 19 000 }(1) General expenses 3 420 } Advertising (5 400 + 75) 5 475 (1) Depreciation of fittings (10%  18 000) 1 800 (1) 40 295 Profit for the year 1 275 (1)OF 6 3(b) Retained earnings: $ Opening balance 2 297 Profit for the year 1 275 (1)OF 3 572 Less Dividend paid (2 500) (1) Closing balance 1 072 (1)OF 3 Question Answer Marks 3(c) Q Limited Statement of financial position at 31 January 2024 $ $ $ Non-current assets Cost Accumulated depreciation Net book value Fittings 18 000 7 200 (1)OF 10 800 (1)OF Current assets Inventory 4 720 Bank 915 5 635 (1) 16 435 Equity and Liabilities Ordinary share capital 13 000 Retained earnings 1 072 (1)OF 14 072 Current liabilities Trade payables 2 288 Other payables 75 (1) 2 363 (1)OF 16 435 6 Question Answer Marks 3(d) For May increase in sales/result in more customers (1) May help reduce the level of inventory (1) May benefit future years (1) Increase in gross profit more than the extra cost of advertising may increase profit for the year (1) Accept other valid points Max (2) Against May not be able to afford the increase in advertising costs (1) May need to borrow money for increased advertising costs (and borrowing would incur interest) (1) There is no guarantee that sales would increase (1) Profit may reduce/may result in a loss/expenses will increase because of extra advertising (1) Accept other valid points Max (2) Recommendation (1) 5

This question in 0985/21 May/June 2024

4 Y Limited is a public limited company. REQUIRED: (a) State one difference between a public limited company and a private limited company. … … … [1] (b) Explain the difference between issued share capital and called up share capital. … … … … … [2] (c) State two benefits of operating as a limited company. 1. … … 2. … … [2] Y Limited’s financial year ends on 31 December each year. On 1 January 2023, the company had: 800 000 ordinary shares of $1 each, issued and fully paid. 300 000 5% redeemable preference shares of $0.50 each. Retained earnings of $62 000. General reserves of $78 000. Y Limited provided the following information: Proposed final ordinary share dividend of $43 000 for the year ended 31 December 2022 was paid on 31 March 2023. Interim ordinary share dividend of $40 000 was paid on 30 September 2023. Profit for the year ended 31 December 2023 was $126 000 (before the payment of preference share dividend). On 31 December 2023: The company decided to transfer $32 000 to its general reserve. Agreed a final ordinary share dividend for the year of 6%. REQUIRED: (d) Prepare the statement of changes in equity for Y limited for the year ended 31 December 2023 Y Limited Statement of changes in equity for the year ended 31 December 2023 Ordinary General Retained Total Share Capital Reserve Earnings $ $ $ $ On 1 January 2023 … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … On 31 December 2023 … … … … … … … … [7] (e) Using the information from your statement of changes in equity in 4(d), prepare an extract from the statement of financial position at 31 December 2023 showing the equity and reserves section only. Y Limited Extract from Statement of financial position at 31 December 2023 $ …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … …………………………………………………………… … …………… … [2] The company is considering expansion but needs to raise additional finance to do so. They are considering either issuing additional ordinary shares or debentures. REQUIRED: (f) Advise the board of directors whether they should issue additional ordinary shares or debentures to raise the additional finance required. Justify your answer. … … … … … … … … … … … … … … … … [5] (g) Name the section heading in a company’s statement of financial position where debentures would be included. … … [1] [Total: 20]

20 marks

Mark scheme: 4(a) Either - A public limited company is allowed to offer its shares to the public whereas a private limited company cannot. 1 Or - A public limited company has to publish its financial statements whereas a private limited company does not. 4(b) Issued share capital is the amount of share capital issued to the shareholders (1) 2 Called up share capital is the part of issued share capital for which payment has been requested from the shareholders (1) 4(c) Liability for the debts of the company is limited to the amount invested by the shareholder (1) 2 Separate legal identity / legal action cannot be taken against the individual shareholders of the company (1) Access to additional capital / easier to obtain loans (1) Has continuity of existence (1) Accept other valid points Max 2 4(d) 7 Y Limited Statement of changes in equity for the year ended 31 December 2023 Ordinary General Retained Total Share Capital Reserve Earnings $ $ $ $ On 1 January 2023 800 000 78 000 62 000 940 000 (1) Profit for the year 118 500 118500 (2)* Dividend paid (final) (43 000) (43000) (1) Dividend paid (interim) (40 000) (40000) (1) Transfer to general reserve 32 000 (32 000) – (1) On 31 December 2023 800 000 110 000 65 500 975500 (1)OF * 2 marks if adjusted for preference share dividends, 1 mark if not adjusted $126 000 4(e) Y Limited 2 Extract from Statement of financial position at 31 December 2023 Equity $ Ordinary Shares 800 000 (OF) General reserve (1)* 110 000 (OF) Retained earnings 65 500 (OF) *mark for inclusion of all items in 975 500 (1)OF correct order 4(f) 5 Issuing debentures Issuing ordinary shares Annual interest is payable (1) A dividend may be paid (1) Are a liability\are a loan\must be repaid (1) Do not have to be repaid (1) If company is wound up they are repaid before If company is wound up they are repaid after ordinary shareholders (1) debenture holders (1) Debenture holders are not members of the Shares will carry same voting rights/rank equally company/cannot vote (1) as existing shares (1) Issue of debentures will not dilute the control of May dilute control of existing shareholders (1) (if the existing ordinary shareholders (1) some purchase a greater proportion of shares) Interest is a fixed amount (1) (and so can be Dividend is not fixed (and may depend on profit budgeted for) levels) (1) Interest must be paid irrespective of profits (1) Directors can decide on amount of dividend they will pay (1) May be secured on the non-current assets of the May take longer to raise the funds (1) company (1) Issue may not raise adequate funds (1) Issue may not raise adequate funds (1) Max (3) Max (3) Recommendation (1) 4(g) Non-current liabilities / Long-term-liabilities 1

This question in 0985/22 Oct/Nov 2024

4 H Limited prepares its financial statements to 30 April each year. During the year ended 30 April 2025, the following took place: 1 The company made a profit for the year of $26 700 after charging debenture interest. 2 A transfer of $5000 was made to the general reserve. 3 A dividend of $5340 was paid. No other dividends are payable for the year. REQUIRED (a) Prepare the statement of changes in equity for H Limited for the year ended 30 April 2025. H Limited Statement of Changes in Equity for the year ended 30 April 2025 Ordinary General Retained Total share reserve earnings Details capital $ $ $ $ On 1 May 2024 120 000 20 000 33 635 173 635 … … … … … … … … … … … … … … … On 30 April 2025 … … … … [4] H Limited provided the following ledger account balances at 30 April 2025. $ Fixtures and equipment at book value 155 000 Motor vehicles at book value 16 875 Inventory 28 120 Trade payables 26 815 Trade receivables 33 000 Provision for doubtful debts 990 Bank overdraft 5 195 5% Debentures (repayable 2029) 5 000 REQUIRED (b) Prepare the statement of financial position for H Limited at 30 H Limited Statement of Financial Position at 30 Ap … … … … … … … … … … … … … … … … … … … … … … … … … … (c) State the meaning of the term ‘equity’. … … … [1] (d) Calculate the return on capital employed for the year ended 30 April 2025. State your answer to two decimal places. … … … … … [3] The directors of H Limited would like to expand the business. They are considering issuing debentures for $60 000 to fund an expansion. These debentures would carry interest of 3%. REQUIRED (e) Advise the directors whether or not they should issue the debentures to fund an expansion. Justify your answer by providing two points for and two points against issuing the debentures to fund an expansion. … … … … … … … … … … … … [5] [Total: 20] Question 5 starts on page 16.

20 marks

Mark scheme: 4(a) H Limited 4 Statement of Changes in Equity for the year ended 30 April 2025 Details Ordinary General Retained Total Share capital reserve earnings $ $ $ $ On 1 May 2024 120 000 20 000 33 635 173 635 Profit for the year …………… …………… 26 700 26 700 (1) row Transfer to general reserve …………… 5 000 (5 000) – (1) row Dividends paid …………… …………… (5 340) (5 340) (1) row On 30 April 2025 120 000 25 000 49 995 194 995 (1)OF row 4(b) H Limited 7 Statement of Financial Position as at 30 April 2025 $ $ $ Assets Non-current assets at book value Fixtures and equipment 155 000 Motor vehicles 16 875 171 875 (1) Current Assets Inventory 28 120 Trade receivables 33 000 Less Provision for Doubtful Debts 990 32 010 (1) 60 130 (1)OF Total assets 232 005 Equity and Liabilities Equity and Reserves Ordinary share capital 120 000 } General reserves 25 000 }(1)OF Retained earnings 49 995 } 194 995 Non-current Liabilities 5% Debentures 5 000 (1) Current Liabilities Trade payables 26 815 (1) Bank overdraft 5 195 (1) 32 010 Total Equity and Liabilities 232 005 4(c) The total funds provided by the owners of a business (1) The difference between the assets and liabilities of a business (1) 1 Max (1) 4(d) 26 700 + 250 * 26 950 (1) 100 3 =  = 13.48% (1)OF 194 995 OF + 5 000 199 995 (1)OF 1 Alternative calculation 26 700 + 250 * 26 950 (1) 100 =  = 13.48% (1)OF 171875 + 60 130 OF − 32 010 199 995 (1)OF 1 *Profit adjusted for interest on debentures 250 (5%  5 000)] 4(e) Points for issuing debentures 5 There will be no liability once the debentures have been repaid (1) Issue of debentures will not reduce shareholders’ stake in the company/ debenture holders do not take an active part in running the company/debenture holders do not have a vote (1) Only have relatively low amount of loans at present (1) Funds may be available quickly/relatively easy to obtain (1) Accept other valid points Max (2) Points against issuing debentures Interest on the debentures has to be paid/ debenture interest reduces profit/ fixed amount of debenture interest each year/ debenture interest needs to be paid even if the company makes a loss (1) May be secured against the assets of the company/are repaid before shareholders if company liquidated (1) Debentures have to be repaid/increase liabilities (1) Funds must be available when repayment is due (1) Already have commitment to repay existing debentures (1) Accept other valid points Max (2) Overall For and Against: Max (4) Recommendation (1)

This question in 0985/21 May/June 2025

2 The amount received from Merve was $357. Kadima has checked his records and found that the amount shown on the bank statement is the correct amount. REQUIRED (b) Calculate the amount for the bank balance which Kadima would show in his statement of financial position at 31 March 2025. … … … … [3] Kadima is considering stopping using cash and cheques in his business. All payments would be made directly from the bank account and all customers would be required to pay by bank transfer. He would allow cash discount of 5% for all payments received within 30 days of the invoice. REQUIRED (c) Advise Kadima whether or not he should make the above changes. Justify your answer by providing points for and against making these changes. … … … … … … … … … … … … … [5] [Total: 20] 2 Farah and Salma are sisters who trade as a partnership. Their partnership agreement provides for the following: • interest on capital of 2% per annum • interest on drawings of 4% per annum • a salary to Farah of $11 200 per annum • residual profits and losses to be shared as Farah 30%, Salma 70%. Farah and Salma provided the following details. $ Profit for the year ended 28 February 2025 38 175 Capital accounts at 1 March 2024 Farah 52 000 Salma 75 000 Current accounts at 1 March 2024 Farah 3 450 credit Salma 1 900 debit Drawings for the year ended 28 February 2025 Farah drawn from bank on 31 December 2024 14 250 Salma drawn from bank on 31 December 2024 14 250 goods taken for own use 31 August 2024 5 750 REQUIRED (a) Prepare the appropriation account for Farah and Salma for the year ended 28 February 2025. Farah and Salma Appropriation Account for the year ended 28 February 2025 $ $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [6] (b) Prepare Farah’s current account for the year ended 28 February 2025. Balance the account and bring down the balance at 1 March 2025. Farah Current account Date Details $ Date Details $ … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … … [7] Farah’s partner, Salma, wanted to take further drawings. REQUIRED (c) State two reasons why Salma should not take more drawings. 1 … … 2 … … [2] Farah and Salma would like to expand the business. They have decided to convert the business to a limited company. They are considering selling 30% of the ordinary share capital of the new company to each of their two brothers. The brothers would become directors and would manage the business. Farah and each brother would receive a salary of $15 000 each year. REQUIRED (d) Advise Farah and Salma whether or not they should make the above changes. Justify your answer with advantages and disadvantages to them of making these changes. … … … … … … … … … … … … [5] [Total: 20]

28 marks

Mark scheme: 2(a) Farah and Salma 6 Appropriation Account for the year ended 28 February 2025 $ $ Profit for the year 38 175 Add Interest on drawings Farah *95 (1) Salma **210 (1) 305 38 480 Less Interest on capital: Farah 1 040 } Salma 1 500 } (1) 2 540 Salary – Farah 11 200 (1) 13 740 24 740 Profit share: Farah (30%  24 740) 7 422 (1) OF Salma (70%  24 740) 17 318 (1) OF 24 740 (Farah (14 250  4%  2/12) =95* Salma (14 250  4%  2/12) + (5 750  4%  6/12) = 210** 2(b) Farah 7 Current account Date Details $ Date Details $ 2025 2024 Feb 28 Drawings (1) 14 250 Mar 1 Balance b/d (1) 3 450 Interest on drawings (1)OF 95 2025 Balance c/d 8 767 Feb 28 Interest on capital (1)OF 1 040 Salary (1) 11 200 Share of profit (1)OF 7 422 23 112 23 112 Mar 1 Balance b/d (1)OF 8 767 2(c) There may be insufficient money in the bank / reduces liquidity (1) 2 There may be a limit on drawings (stated in the partnership agreement) (1) May damage the relationship between the partners (1) Salma would have to pay interest on drawings (1) Accept other valid points Max (2) 2(d) Advantages of converting to a limited company 5 Easier to raise capital / finance / loans (1) Shareholders have limited liability (1) Workload / responsibility is shared (1) Profit may increase (1) Farah receives an increase in salary (1) Limited company has continuity of existence / there is separate legal identity (1) Accept other valid points Max (3) Disadvantages of converting to a limited company Farah and Salma would lose control (1) The brothers may have no business experience (1) Increased legal and administrative costs (1) Cash / profit may be reduced to pay salaries/dividends (1) The investment may not be sufficient to fund the expansion (1) Accept other valid points Max (3) Overall Advantages and Disadvantages: Max (4) Recommendation (1)

This question in 0985/22 May/June 2025