Paulton Ltd is a company with the following capital structure: Authorised share capital $ Issued share capital $ Ordinary shares of $1 100000 50000 5% Preference shares of $1 100000 80000 There were no changes to the number of shares in issue during the year. The retained earnings brought forward on 1 May 2010 was $8000. During the year ended 30 April 2011, the company made a profit of $40000. On 30 April 2011 it was agreed to: 1 Transfer $20000 to the general reserve 2 Pay the preference share dividend 3 Pay a final dividend of $0.05 per share on the ordinary shares. An interim dividend of $0.02 per share had been paid to the ordinary shareholders on 31 December 2010.

1. (a)Prepare the profit and loss appropriation account for the year ended 30 April 2011. Paulton Ltd Profit and Loss Appropriation Account for the year ended 30 April 2011[8]
2. (b)Distinguish between authorised share capital and paid up share capital.[2]
3. (c)Explain the term reserve.[2]
4. (d)Suggest one reason why a limited company might not distribute all of the profit for the year as dividend.[2]
5. (e) 1The sales director of Paulton Ltd made the following proposals to increase the profit of the company: 1 To include in the accounts $25000 for the increased skill of the workforce. REQUIRED State the accounting principle which prevents the company from adopting these proposals. Give a reason for your answer. 1 Accounting principle Reason[3]
6. (e) 22 To change the depreciation method on non-current assets from diminishing balance to straight line. REQUIRED State the accounting principle which prevents the company from adopting these proposals. Give a reason for your answer. 2 Accounting principle Reason[3]