Sara and Viraj are in partnership and own a wholesale business. At 1 January 2024, the partners had the following balances. Sara $ Viraj $ Capital 80000 112000 Current account 1840 debit 2730 credit During the year ended 31 December 2024, the following drawings had been recorded. Sara $ 22960 Viraj 18930 The following balances were also available at 31 December 2024. Bank overdraft $ 4970 Non-current assets at carrying amount 150 700 Inventory 18400 Other payables 410 Other receivables 300 Trade payables 16300 Trade receivables 19980 The draft profit for the year ended 31 December 2024 was $9400 before accounting for the following: 1 Wages, $850, were owing. 2 A credit customer, owing $1200, had gone out of business. The partners believe that 20% of the amount outstanding will be recovered, and the remaining 80% is to be written off. 3 The partners have decided to create an allowance for irrecoverable debts of 5% of trade receivables. 4 Viraj had taken goods for own use valued at cost, $550. 5 Viraj had provided a loan to the partnership on 1 May 2024 of $7200 at 8% interest per annum. The loan is repayable in full at the end of five years. Interest on the loan had not been accounted for. 6 Closing inventory had been understated by $3000. 7 Sara had introduced into the business a motor vehicle, valued at $20400, on 1 September 2024. Motor vehicles are depreciated by 20% per annum using the straight-line method on a month-by-month basis.

Mark scheme

Marking points from the official mark scheme (Feb/Mar 2025). The mark or mark type is shown in brackets.

1. [8] (a) Calculate the revised profit for the year ended 31 December 2024. Draft profit 9 400 Less wages owing (850) (1) Less irrecoverable debt (80% × 1 200) (960) (1) Less allowance for irrecoverable debts (5% × (19 980 – $960)) (951) (1) Add goods taken for own use 550 (1) Less interest on loan (8% × 2/3 × $7 200) (384) (1) Add inventory 3000 (1) Less depreciation of motor vehicle (1/3 × 20% × $20400) (1360) (1) Revised profit for the year 8 445 (1) OF
2. [3] (b) Prepare the appropriation account for the year ended 31 December 2024. Sara and Viraj Appropriation account for the year ended 31 December 2024 $ $ Profit for the year 8 445 Add interest on drawings Sara (5% × $12 960) 648 (1) Viraj (5% × $8 930 + 550) 474 1 122 9 567 Less salary Sara (12000) (1) Residual loss (2433) Shares of residual loss Sara (1622) (1) OF Viraj (811) (2433)
3. [4] (c) Prepare the current account of Viraj for the year ended 31 December 2024. Dates are not required. Viraj Current account $ $ Drawings 19 480 (1) Balance b/d 2730 Interest on 474 Loan interest 384 (1)OF drawings (1)OF Residual loss 811 Balance c/d 17 651 20 765 20 765 Balance b/d 17 651 (1)OF
4. [4] (d) Prepare an extract from the statement of financial position at 31 December 2024 showing the capital and liabilities section only. Statement of financial position at 31 December 2024 $ $ $ Capital and liabilities Sara Viraj Capital accounts 100 400 112 000 212 400 (1) Current accounts (15070) (17651) (32721) Total 179 679 Non-current liabilities Loan (Viraj) 7 200 (1) Current liabilities Trade payables 16 300 (1) Other payables ($410 + 850) 1 260 Bank overdraft 4 970 22 530 Total capital and liabilities 209 409 (1)OF
5. [2] (e)(i) Explain, with reference to an accounting concept, the correct treatment of: (i) goods taken for own use by the owner of a business Concept: business entity concept (1) Explanation: only transactions affecting the business are recorded in the business's books of account (1). The business and owner are two separate (legal) entities (1) Max 1 mark for explanation Accept other valid responses.
6. [2] (e)(ii) Explain, with reference to an accounting concept, the correct treatment of: (ii) irrecoverable debts Concept: prudence concept (1) Explanation: profits and assets OR trade receivables should not be overstated (1) losses should be accounted for as soon as they are recognised (1) Max 1 mark for explanation Accept other valid responses.
7. [7] (f) Advise the partners which option they should choose. Justify your answer by discussing both_options. Option A (max 3) For The early settlement will improve the cash flow position/liquidity (1) May reduce possibility of irrecoverable debts (1) Might attract new customers so increasing revenue/sales (1) Trade receivables turnover will improve (1) Against Will reduce the amount of cash received (1) Expenses will increase due to higher discount allowed (1) Will reduce the amount of profit (1) Customers may not be encouraged to pay within 25 days (1) Customers may switch to other suppliers offering better terms so reduces revenue (1) Option B (max 3) For Improve the cash flow position/liquidity (1) Against It may damage the reputation of the business (1) It may result in the loss of cash discounts (1) It may cause a loss of suppliers/refuse credit terms (due to the extended settlement terms) (1) Suppliers may charge interest on late payment (1) Decision supported with a comment (1) Accept other valid responses