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O-LevelAccountingPreparation of financial statements7707/22 · May/June 2024 · Q420 Marks

Tadeen and Yadid are lawyers who have been in partnership for many years. The partners provided the following trial balance at 30 April 2024. Tadeen and Yadid Trial balance at 30 April 2024 $ $ Revenue 236 350 Salaries 79 800 Rates and insurance 17 320 Advertising 16 730 Office expenses 6 150 Interest on loan from Tadeen 1 200 Premises at cost 180 000 Fittings and equipment at cost 70 000 Provision for depreciation of fittings and equipment 31 500 Receivables 24 200 Cash at bank 19 335 Cash in hand 1 375 Loan from Tadeen 20 000 Capital accounts Tadeen 125 000 Yadid 85 000 Current accounts Tadeen 3 300 Yadid 4 240 Drawings Tadeen 34 300 Yadid 46 500 501 150 501 150 Additional information 1 Rates and insurance include an amount of $1920 for the year 1 March 2024 to 28 February 2025. 2 At 30 April 2024, $1800 for salaries was due but unpaid. 3 Irrecoverable receivables of $670 are to be written off. 4 Depreciation on fittings and equipment is to be charged at 15% per annum using the straight-line method. 5 The partnership agreement provides for interest on partner's loan of 6% per annum interest on drawings of 5% interest on capital of 3% per annum a salary to Yadid of $10000 per annum residual profits and losses are to be shared 60% to Tadeen and 40% to Yadid. REQUIRED

  1. (a)Prepare the income statement for Tadeen and Yadid for the year ended 30 April 2024. Tadeen and Yadid Income Statement for the year ended 30 April 2024 $ $[8]
  2. (b)Prepare the appropriation account for Tadeen and Yadid for the year ended 30 April 2024. Tadeen and Yadid Appropriation account for the year ended 30 April 2024 $ $[5]
  3. (c)(i)State one reason why the partners might consider reducing their drawings[1]
  4. (c)(ii)State which accounting principle reflects the partners' intention to continue trading indefinitely.[1]
  5. (d)The partners employ one lawyer and office staff. The lawyer, Lakia is paid $25000 but has decided to leave. Tadeen and Yadid have found a replacement lawyer, Raim. He has worked as a lawyer for 15 years and is well known in the local area. However, Raim wants to be a partner in the business rather than an employee and would expect 40% of the residual profit of the partnership each year. REQUIRED (d) Advise Tadeen and Yadid whether or not they should offer Raim a partnership. Justify your answer by providing points for and against offering Raim a partnership.[5]

Mark scheme

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

  1. [8] Tadeen and Yadid Income Statement for the year ended 30 April 2024
  2. [8] Revenue 236 350
  3. [8] Salaries (79 800 + 1800) 81 600 (1)
  4. [8] Rates and insurance (17320 – (10/12 × 1920)=1600) 15 720 (2) / (1)OF
  5. [8] Advertising 16 730 }
  6. [8] Office expenses 6 150 }(1)
  7. [8] Depreciation of fittings and equipment (15% × 70 000) 10 500 (1)
  8. [8] Irrecoverable receivables 670 (1)
  9. [8] Profit from operations 104 980
  10. [8] Loan interest 1200 (1)
  11. [8] Profit for the year 103 780 (1)OF
  12. [5] Tadeen and Yadid Appropriation account for the year ended 30 April 2024
  13. [5] Profit for the year 103 780 OF
  14. [5] Add interest on drawings
  15. [5] Tadeen 1715 }
  16. [5] Yadid 2325 } (1)
  17. [5] 4 040
  18. [5] 107 820
  19. [5] Less
  20. [5] Interest on capital
  21. [5] Tadeen 3750 }
  22. [5] Yadid 2550 } (1)
  23. [5] 6 300
  24. [5] Salary Yadid 10000 (1)
  25. [5] 16 300
  26. [5] 91 520
  27. [5] Profit share
  28. [5] Tadeen 54 912 (1) OF
  29. [5] Yadid 36 608 (1) OF
  30. [5] 91 520
  31. [1] To avoid a debit balance on their current account (1)
  32. [1] To keep cash in the business/to benefit the business/less profits/making loss (1)
  33. [1] To reduce interest charged on drawings (1)
  34. [1] Accept other valid points
  35. [1] Max (1)
  36. [1] Going concern (1)
  37. [5] For
  38. [5] The business will benefit from the skills and experience of Raim (1)
  39. [5] Raim may contribute towards increased revenue and profit / attract more customers (1)
  40. [5] Raim would share workload (1)
  41. [5] Raim would share the risks/responsibilities/losses (1)
  42. [5] They could require Raim to introduce capital (1)
  43. [5] They may need to spend less on advertising as Raim is well known in the area (1)
  44. [5] Accept other valid points
  45. [5] Max (3)
  46. [5] Against
  47. [5] The profits would need to be shared with Raim (1)
  48. [5] Raim's profit share would be greater than an employee's salary (1)
  49. [5] Raim's profit share will significantly reduce the profit available for the existing partners (1)
  50. [5] They would need to take account of Raim's views / there may be disagreements (1)
  51. [5] They would be liable for the actions of Raim (1)
  52. [5] Accept other valid points
  53. [5] Max (3)
  54. [5] Max (4)
  55. [5] Recommendation (1)

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About this question

Topic
Preparation of financial statements, O-Level Accounting (syllabus 7707). Structured question, 20 marks.
Source
O-Level Accounting, May/June 2024 Paper 2 Variant 2, question 4.

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