The following balances had been extracted from the books of W Limited on 1 January 2024. Share capital (ordinary shares of $0.50 each) $ 750000 Share premium 145000 Retained earnings 154000 Revaluation reserve 90 000 During the year ended 31 December 2024, the following occurred: 1 April Property was revalued at $690000. Before this date, property was valued at $800000. 30 June An interim dividend of $0.05 per share was paid. 1 October A rights issue of two ordinary shares for every three ordinary shares held at this date was made. The shares were issued at a premium of $0.20 per share. The rights issue was fully subscribed. The profit for the year ended 31 December 2024 was $148000.

Mark scheme

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

1. [9] (a) Prepare the following ledger accounts for the year ended 31 December 2024. Ordinary share capital account 2024 $ 2024 $ Dec Balance 1 250 000 Jan 1 Balance 750 000 31 c/d b/d Oct 1 Bank W1 500 000 (1) 1 250 000 1 250 000 2025 Jan 1 Balance 1 250 000 (1)OF b/d Share premium account 2024 $ 2024 $ Dec Balance 345 000 Jan 1 Balance 145 000 31 c/d b/d Oct 1 Bank W1 200 000 (1) 345 000 345 000 2025 Jan 1 Balance 345 000 (1) OF b/d Retained earnings account 2024 $ $ April 1 Property 20 000 (1) Jan 1 Balance 154 000 b/d June Bank 75 000 (1) Dec Statement 148 000 (1) 30 W2 31 of profit or loss Dec Balance 207 000 31 c/d 302 000 302 000 2025 Jan 1 Bal b/d 207 000 (1) OF Revaluation reserve account 2024 $ 2024 $ April 1 Property 90 000 (1) Jan 1 Balance b/d 90 000 W1 Rights issue Share capital: 1 500 000 × 2/3 × $0.50 = $500 000 (1) Share premium: 1 500 000 × 2/3 × $0.20 = $200 000 (1) W2 Interim dividend = $75 000 Interim dividend: 750 000 × 2 shares × $0.05 = $75 000 (1)
2. [2] (b) State two features of capital reserves. Cannot be used to finance dividend payments (1) Arise from non-trading activities of a company (1) Can be used for bonus issue of shares (1) Max 2 Accept other valid responses
3. [4] (c) State two differences between a rights issue of shares and an issue of debentures. Debenture interest will have to be paid annually affecting/reducing cashflows and profits (1) whereas dividends on shares are discretionary (1). Rights issue of shares is a permanent source of finance (1) whereas debentures have to be repaid at a future date OR long term loan (1). Shareholders have voting rights (1) debenture holders do not have voting rights (1). Debentures may require collateral (1) no collateral needed for rights issue (1). Max 4 Accept other valid responses