Q Limited prepares its financial statements to 31 March each year. The company's retained earnings at 1 April 2022 were $16250. During the year ended 31 March 2023, the company made a profit of $43500 (after charging all expenses and interest). The total dividends of $39000 for the year were paid by 31 March 2023. The following balances were extracted from the company's ledger accounts after the income statement had been prepared. $ Fittings and equipment at cost: 150000 Provision for depreciation of fittings and equipment: 40650 Motor vehicles at cost: 72000 Provision for depreciation of motor vehicles: 31125 Inventory: 51790 Balance at bank: 1076 debit Trade receivables: 19700 Provision for doubtful debts: 591 Trade payables: 31450 5% Debentures (repayable 2029): 40000 Bank loan (repayable 2027): 10000 Ordinary share capital: 120000

Mark scheme

Marking points from the official mark scheme (May/June 2023). The mark or mark type is shown in brackets.

1. [1] (a) Retained earnings at 1 April 2022 16250 (bracketed with Profit for the year)
2. [1] (a) Profit for the year 43500 (bracketed with Retained earnings)
3. [1] (a) Less Dividend (39000)
4. [1] (a) Retained earnings at 31 March 2023 20750 (OF)
5. [1] (b) Non-current assets Net Book Value for Fittings and equipment 109350 and Motor vehicles 40875 (both lines for 1 mark)
6. [1] (b) Total Non-current assets 150225
7. [1] (b) Trade receivables net of provision 19109
8. [1] (b) Total Current assets 71975 (OF)
9. [1] (b) Ordinary share capital 120000
10. [1] (b) Retained earnings 20750 (OF)
11. [1] (b) Non-current liabilities (5% Debentures 40000 and Bank loan 10000) (both lines for 1 mark)
12. [1] (b) Trade payables 31450
13. [1] (c) (19109 OF + 1076) : 31450 OF = 20185 OF : 31450 OF (1) whole formula
14. [1] (c) = 0.64 : 1 (1)OF
15. [1] (d)(i) Dividends paid
16. [1] (d)(i) Increase in level of inventory
17. [1] (d)(i) Purchase of non-current assets
18. [1] (d)(i) Repayment of non-current liabilities
19. [1] (d)(i) Payment of trade payables/payment of a bank overdraft
20. [1] (d)(i) Delay in receiving payment from trade receivables (Max 2 for any 2 distinct points)
21. [1] (d)(ii) Advantage of issuing ordinary shares: No interest payable
22. [1] (d)(ii) Advantage of issuing ordinary shares: No repayment required
23. [1] (d)(ii) Advantage of issuing ordinary shares: No need to provide security
24. [1] (d)(ii) Advantage of issuing ordinary shares: The directors can decide on the rate of dividend (Max 3 for arguments for shares)
25. [1] (d)(ii) Disadvantage of issuing ordinary shares: May dilute control/ownership
26. [1] (d)(ii) Disadvantage of issuing ordinary shares: Shareholders will expect a dividend
27. [1] (d)(ii) Disadvantage of issuing ordinary shares: May not be able to raise amount required
28. [1] (d)(ii) Disadvantage of issuing ordinary shares: Already have long-term liabilities to repay (Max 3 for arguments against shares)
29. [1] (d)(ii) Advantage of obtaining bank loan: Funds may be obtained more quickly than a share issue
30. [1] (d)(ii) Advantage of obtaining bank loan: If company is wound up loan must be repaid before shareholders
31. [1] (d)(ii) Disadvantage of obtaining bank loan: Repayment is required
32. [1] (d)(ii) Disadvantage of obtaining bank loan: Funds would need to be available when repayment is due
33. [1] (d)(ii) Disadvantage of obtaining bank loan: Security will be required
34. [1] (d)(ii) Disadvantage of obtaining bank loan: Interest will be charged
35. [1] (d)(ii) Disadvantage of obtaining bank loan: Bank may not be willing to lend as already have substantial long-term liabilities (Max 3 for arguments for loan)
36. [1] (d)(ii) Recommendation