Y Limited is a public limited company. Y Limited's financial year ends on 31 December each year. On 1 January 2023, the company had: 800000 ordinary shares of $1 each, issued and fully paid. 300000 5% redeemable preference shares of $0.50 each. Retained earnings of $62000. General reserves of $78000. Y Limited provided the following information: Proposed final ordinary share dividend of $43000 for the year ended 31 December 2022 was paid on 31 March 2023. Interim ordinary share dividend of $40000 was paid on 30 September 2023. Profit for the year ended 31 December 2023 was $126000 (before the payment of preference share dividend). On 31 December 2023: The company decided to transfer $32000 to its general reserve. Agreed a final ordinary share dividend for the year of 6%. The company is considering expansion but needs to raise additional finance to do so. They are considering either issuing additional ordinary shares or debentures.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2024). The mark or mark type is shown in brackets.

1. [1] Either - A public limited company is allowed to offer its shares to the public whereas a private limited company cannot. Or - A public limited company has to publish its financial statements whereas a private limited company does not.
2. [2] Issued share capital is the amount of share capital issued to the shareholders (1) Called up share capital is the part of issued share capital for which payment has been requested from the shareholders (1)
3. [2] Liability for the debts of the company is limited to the amount invested by the shareholder (1) 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. [7] Y Limited Statement of changes in equity for the year ended 31 December 2023 Ordinary Share Capital () | General Reserve () | Retained Earnings () | Total () On 1 January 2023: 800000 | 78000 | 62000 | 940000 (1) Profit for the year: | | 118500 | 118500 (2)* Dividend paid (final): | | (43000) | (43000) (1) Dividend paid (interim): | | (40000) | (40000) (1) Transfer to general reserve: | 32000 | (32000) | – (1) On 31 December 2023: 800000 | 110000 | 65500 | 975500 (1)OF * 2 marks if adjusted for preference share dividends, 1 mark if not adjusted $126000
5. [2] Y Limited Extract from Statement of financial position at 31 December 2023 Equity: Ordinary Shares: $800000 (OF) General reserve: $110000 (OF) Retained earnings: $65500 (OF) Total: $975500 (1)OF *mark for inclusion of all items in correct order
6. [5] Issuing debentures: Annual interest is payable (1) Are a liability/are a loan/must be repaid (1) If company is wound up they are repaid before ordinary shareholders (1) Debenture holders are not members of the company/cannot vote (1) Issue of debentures will not dilute the control of the existing ordinary shareholders (1) Interest is a fixed amount (1) (and so can be budgeted for) Interest must be paid irrespective of profits (1) May be secured on the non-current assets of the company (1) Issue may not raise adequate funds (1) Max (3) Issuing ordinary shares: A dividend may be paid (1) Do not have to be repaid (1) If company is wound up they are repaid after debenture holders (1) Shares will carry same voting rights/rank equally as existing shares (1) May dilute control of existing shareholders (1) (if some purchase a greater proportion of shares) Dividend is not fixed (and may depend on profit levels) (1) Directors can decide on amount of dividend they will pay (1) May take longer to raise the funds (1) Issue may not raise adequate funds (1) Max (3) Recommendation (1)
7. [1] Non-current liabilities / Long-term-liabilities