O-LevelAccountingPreparation of financial statements7707/23 · Oct/Nov 2023 · Q520 Marks
B Limited provides cleaning services to client offices and factories. The clients provide their own cleaning materials. The trial balance of B Limited at 30 June 2023 was as follows. B Limited Trial Balance at 30 June 2023 Debit $ Credit $ Revenue 135040 Wages and salaries 72000 Motor expenses 9820 Insurance 11040 General expenses 12780 Motor vehicles at cost 42000 Provision for depreciation of motor vehicles 16500 Equipment at cost 5000 Provision for depreciation of equipment 2000 Trade receivables 1640 Bank 19950 Ordinary share capital 10000 General reserve 2000 Retained earnings 13490 Dividend paid on ordinary shares 4800 179030 179030 Additional information 1 Revenue of $9240 was received in advance. 2 The insurance charge for the 12 months to 31 December 2022 was $7200 and for the 12 months to 31 December 2023 it is $7440. On 1 January 2023 insurance was paid in full for the 12 months to 31 December 2023. 3 Accrued general expenses at 30 June 2023 were $186. 4 Depreciation is to be charged on motor vehicles at 25% per annum using the reducing balance method. 5 Depreciation on equipment is to be charged at 20% per annum using the straight line method. 6 No dividends were outstanding at 30 June 2023. 7 $1000 is to be transferred to the general reserve at 30 June 2023.
- (a)Prepare the income statement for B Limited for the year ended 30 June 2023. B Limited Income Statement for the year ended 30 June 2023 $ $[6]
- (b)Prepare the statement of changes in equity for B Limited for the year ended 30 June 2023. B Limited Statement of Changes in Equity for the year ended 30 June 2023 Details Ordinary General Retained Total Share reserve earnings capital $ $ $ On 1 July 2022 On 30 June 2023[5]
- (c)(i)Explain why: B Limited has no inventory[2]
- (c)(ii)Explain why: B Limited does not require a provision for doubtful debts[2]
- (d)The directors of B Limited are also the shareholders. They plan to expand the company. They are considering whether to issue debentures or ordinary shares. REQUIRED Advise the directors whether they should issue debentures or ordinary shares. Justify your answer.[5]
Mark scheme
Marking points from the official mark scheme (Oct/Nov 2023). The mark or mark type is shown in brackets.
- [1] Revenue $135040 less $9240 (revenue received in advance) = $125800
- [1] Wages and salaries $72000
- [1] Motor expenses $9820
- [1] Insurance ((1/2 × $7200) + (1/2 × $7440)) = $7320
- [1] General expenses ($12780 + $186 (accrued)) = $12966
- [1] Depreciation of motor vehicles (($42000 - $16500) × 25%) = $6375
- [1] Depreciation of equipment ($5000 × 20%) = $1000
- [1] Total expenses $109481; Profit for the year $16319 (own figure rule applies)
- [1] Statement of Changes in Equity On 1 July 2022 row values $10000, $2000, $13490, $25490
- [1] Statement of Changes in Equity Profit for the year row values $16319, $16319 (own figure rule applies)
- [1] Statement of Changes in Equity Dividend paid row values $(4800), $(4800)
- [1] Statement of Changes in Equity Transfer to general reserve row values $1000, $(1000)
- [1] Statement of Changes in Equity On 30 June 2023 row totals $10000, $3000, $24009, $37009 (own figure rule applies)
- [1] The company provides a service rather than a product
- [1] The clients provide their own cleaning materials
- [1] There were no irrecoverable debts during the year / there are no irrecoverable trade receivables / there are very few trade receivables / trade receivables represent less than a week's revenue / some customers are paying in advance
- [1] Advantage of Issuing debentures: Annual interest is payable / are a liability / are a loan / must be repaid / if company is wound up they are repaid before ordinary shareholders / debenture holders are not members of the company / cannot vote / issue of debentures will not dilute the control of the existing ordinary shareholders / interest is a fixed amount (and so can be budgeted for) / interest must be paid irrespective of profits / may be secured on the non-current assets of the company / issue may not raise adequate funds (Max 3)
- [1] Advantage of Issuing ordinary shares: A dividend may be paid / do not have to be repaid / if company is wound up they are repaid after debenture holders / shares will carry same voting rights / rank equally as existing shares / may dilute control of existing shareholders (if some purchase a greater proportion of shares) / dividend is not fixed (and may depend on profit levels) / directors they can decide on amount of dividend they will pay / may take longer to raise the funds / issue may not raise adequate funds (Max 3)
- [1] Recommendation (1 mark for a justified conclusion based on the arguments provided)
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