O-LevelAccountingPreparation of financial statements7707/21 · May/June 2024 · Q320 Marks

Zahra and Panya are the shareholders and directors of Q Limited. The company directors of Q Limited have provided the following trial balance. Q Limited Trial Balance at 31 January 2024 Debit Credit $ $ Revenue 78000 Purchases 38200 Rent and insurance 10600 Directors' salaries 19000 General expenses 3420 Advertising 5400 Dividends paid 2500 Fittings at cost 18000 Provision for depreciation of fittings 5400 Inventory at 1 February 2023 2950 Cash at bank 915 Trade payables 2288 Ordinary share capital 13000 Retained earnings 2297 100985 100985 Additional information 1 Inventory at 31 January 2024 was valued at $4720. 2 Depreciation on fittings is to be charged at 10% per annum using the straight-line method. 3 Payment for advertising, $75, is outstanding at 31 January 2024. 4 No dividends were outstanding at 31 January 2024.

(a)Prepare the income statement for Q Limited for the year ended 31 January 2024.[6]
(b)Calculate the retained earnings at 31 January 2024.[3]
(c)Prepare the statement of financial position for Q Limited at 31 January 2024.[6]
(d)Advise Zahra and Panya whether or not they should go ahead with the 100% increase in the amount spent on advertising. Justify your answer by providing two points in favour and two points against this increase.[5]

Mark scheme

Marking points from the official mark scheme (May/June 2024). The mark or mark type is shown in brackets.

[1] Cost of sales $36430
[1] Gross profit $41570 (OF)
[1] Grouping of Expenses (Rent and insurance, Directors' salaries, General expenses)
[1] Advertising ($5400 + $75) = $5475
[1] Depreciation of fittings (10% × $18000) = $1800
[1] Profit for the year $1275 (OF)
[1] Opening balance of retained earnings $2297
[1] Profit for the year $1275 (OF)
[1] Less Dividend paid ($2500)
[1] Closing balance of retained earnings $1072 (OF)
[1] Fittings Net book value ($18000 - $7200) = $10800 (OF)
[1] Total Current assets $5635
[1] Retained earnings $1072 (OF)
[1] Other payables $75
[1] Total Current Liabilities $2363 (OF)
[1] Statement of financial position totals $16435 (balancing)
[1] Advantage: May increase sales/result in more customers
[1] Advantage: May help reduce the level of inventory
[1] Advantage: May benefit future years
[1] Advantage: Increase in gross profit more than the extra cost of advertising may increase profit for the year
[1] Disadvantage: May not be able to afford the increase in advertising costs
[1] Disadvantage: May need to borrow money for increased advertising costs (and borrowing would incur interest)
[1] Disadvantage: There is no guarantee that sales would increase
[1] Disadvantage: Profit may reduce/may result in a loss/expenses will increase because of extra advertising
[1] Recommendation

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