AY Limited has provided the following performance data for the last two years of trading. Ratio Year 1 Year 2 ended ended 31 March 2024 31 March 2025 Return on capital employed (ROCE) 10.67% 10.05% Gross margin 22% 23.5% Profit margin 11.5% 11.0% Rate of inventory turnover 9.46 times 11.45 times Trade payables turnover 34 days 30 days Trade receivables turnover 32 days 36 days Liquid (acid test) ratio 1.42:1 0.95:1 All sales and purchases are on credit and are subject to a 30-day credit period.

1. (a)Complete the following table by indicating whether the ratio has improved or deteriorated at the end of year 2, and give two reasons which may have caused the change. The Return on capital employed (ROCE) has been completed as an example. Ratio Improved or Possible reasons for the change deteriorated Return on capital employed (ROCE) Deteriorated Introduction of additional capital or loans. Profit for the year has decreased. Gross margin Profit margin Rate of inventory turnover (times) Liquid (acid test) ratio[10]
2. (b)The directors at AY Limited were concerned that the trade receivables turnover rate had deteriorated and so increased the provision for doubtful debts from 2% to 3% for the year ended 31 March 2025. The trade receivables balances were as follows: 31 March 2024 $ 346 000 31 March 2025 $ 399 000 REQUIRED Write up the provision for doubtful debts account in AY Limited's ledger for the year ended 31 March 2025. Balance the account and bring down the balance at 1 April 2025.[3]
3. (c)(i)Explain what is meant by 'a provision for doubtful debts'.[1]
4. (c)(ii)Name the accounting principle being applied when creating a provision for doubtful debts.[1]
5. (d)The directors of AY Limited have been considering buying a new piece of equipment costing $75000. A machinery supplier has approached them, offering a 15% discount on this equipment if they make an immediate purchase. The supplier has indicated that the purchase would need to be on a cash basis. AY Limited's accountant has suggested that they may be able to finance the purchase of the equipment by delaying payments to their trade payables. REQUIRED Advise the directors of AY Limited whether or not delaying payments to their trade payables would be a good way to secure the purchase of the equipment. Justify your answer by providing points for and against delaying payments to their trade payables.[5]