O-LevelAccountingPreparation of financial statements7707/21 · May/June 2020 · Q520 Marks

MPT Limited prepares its financial statements to 30 April each year. The company's retained earnings at 1 May 2019 were $14000. The general reserve was $35000. During the year ended 30 April 2020 the following took place. 1 The company made a profit for the year of $28000 after charging debenture interest. 2 A transfer of $5000 was made to the general reserve. 3 A dividend of $4500 was paid. No other dividends were payable for the year. MPT Limited provided the following balances at 30 April 2020. Fixtures and equipment at book value $ 152000 Motor vehicles at book value $ 60400 Inventory $ 30330 Bank overdraft $ 6200 Trade payables $ 24 900 Trade receivables $ 31500 Provision for doubtful debts $ 630 5% Debentures (repayable 2025) $ 20000 Ordinary share capital $ 150000

(a)Calculate the retained earnings of MPT Limited at 30 April 2020.[3]
(b)Prepare the statement of financial position for MPT Limited at 30 April 2020.[7]
(c)State why it is not appropriate to use the general reserve to repay the bank overdraft.[1]
(d)Calculate the return on capital employed (ROCE) for the year ended 30 April 2020. The calculation should be correct to two decimal places and should be based on closing capital employed.[4]
(e)Advise the directors how the return on capital employed (ROCE) can be increased. Justify your answer by commenting on both profit and capital employed.[5]

Mark scheme

Marking points from the official mark scheme (May/June 2020). The mark or mark type is shown in brackets.

[1] Profit for the year 28000
[1] Transfer to general reserve 5000 AND Dividend 4500
[1] Retained earnings 30 April 2020 32500 (OF)
[1] Total Non-current Assets 212400 (Fixtures & Equipment 152000 + Motor Vehicles 60400)
[1] Trade receivables (31500 – 630) 30870
[1] Total Current Assets 61200 (OF)
[1] General reserve (35000 + 5000) 40000
[1] Retained earnings 32500 (OF)
[1] 5% Debentures 20000
[1] Total Current Liabilities 31100 (Trade payables 24900 + Bank overdraft 6200)
[1] General reserves may not necessarily be matched by cash balances
[1] Profit before interest calculation (28000 + 1000) = 29000
[1] Capital employed calculation (150000 + 40000 + 32500 + 20000) = 242500
[1] Correct formula applied (Profit before interest / Capital Employed × 100%)
[1] Correct value 11.96% (OF)
[1] Increase profit for the year
[1] Reduce capital employed
[1] Use capital employed more effectively
[1] Increase profit by increasing gross profit OR Reduce expenses OR Increase other income
[1] Ways to reduce capital employed: Increase dividend (so reducing reserves) OR Reduce non-current liabilities
[1] Ways to use capital employed more effectively: combine lower costs with higher sales OR sell off surplus/inefficient assets that generate little revenue/increase costs

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