Fu, Li and Yang are partners in a retail business. The partnership agreement states that they share profits and losses in the ratio 2:2:1. Interest on capital is allowed at the rate of 4% per annum and interest is charged on drawings at the rate of 5% per annum on the balances at 30 April 2011. The following balances were extracted from the books on 30 April 2011. Capital accounts Fu $40 000 Li $35 000 Yang $25 000 Current accounts Fu $2 500 Cr Li $1 500 Cr Yang $1 000 Dr Drawings Fu $10 000 Li $10 000 Yang $12 000 Premises $44 750 Motor vehicles (cost) $16 000 Fixtures and fittings (cost) $30 000 Provisions for depreciation Motor vehicles $3 200 Fixtures and fittings $17 500 Trade payables $54 700 Trade receivables $45 000 Provision for doubtful debts $1 500 Bank $7 560 Dr Purchases $111 200 Revenue (sales) $209 500 Returns outward $4 750 Inventory at 1 May 2010 $30 650 Salaries and wages $42 100 Heat and light $3 890 General expenses $16 750 Discount received $5 300 Marketing expenses $12 050 Rent $7 500 Additional information at 30 April 2011: 1 Inventory was valued at $28 100. 2 General expenses, $4 200, were prepaid. 3 Rent, $2 500, was accrued. 4 Depreciation is to be charged as follows: Motor vehicles at the rate of 20% per annum using the diminishing (reducing) balance method Fixtures and fittings at the rate of 10% per annum on cost, using the straight line method. 5 The provision for doubtful debts is to be maintained at 5% of trade receivables. 6 On 30 April 2011 the partners agreed to allow Yang to reduce his capital balance by $10 000. The sum was transferred to his current account on that date. The transfer took place after calculating the interest on capital for the year. REQUIRED

Mark scheme

Marking points from the official mark scheme (May/June 2011). The mark or mark type is shown in brackets.

1. [1] Heading: Income Statement and Appropriation Account for the year ended 30 April 2011
2. [1] Less returns: (4 750)
3. [1] Less closing inventory: (28 100)
4. [1] Cost of sales: 109 000
5. [1of] Gross profit: 100 500
6. [1] Discount received: 5 300
7. [1] Rent (7500 + 2500): 10 000
8. [1] General expenses (16 750 – 4 200): 12 550
9. [2] Depreciation - Motor vehicles ((16 000 – 3 200) x 20%): 2 560
10. [2] Depreciation - Fixtures (30 000 x 10%): 3 000
11. [2] Increase in PDD (5% of 45 000 = 2 250; 2 250 – 1 500): 750
12. [1of] Profit for the year: 18 900
13. [1] Interest on drawings - Fu (10 000 x 5%): 500
14. [1] Interest on drawings - Li (10 000 x 5%): 500
15. [1] Interest on drawings - Yang (12 000 x 5%): 600
16. [1] Interest on capital - Fu (40 000 x 4%): 1 600
17. [1] Interest on capital - Li (35 000 x 4%): 1 400
18. [1] Interest on capital - Yang (25 000 x 4%): 1 000
19. [1of] Share of profit - Fu (16 500 x 2/5): 6 600
20. [1of] Share of profit - Li (16 500 x 2/5): 6 600
21. [1of] Share of profit - Yang (16 500 x 1/5): 3 300
22. [1of] SOFP Non-current assets: Motor vehicles Net Book Value (16 000 - 5 760) = 10 240
23. [1of] SOFP Non-current assets: Fixtures Net Book Value (30 000 - 20 500) = 9 500
24. [1of] SOFP Non-current assets: Total Net Book Value = 64 490
25. [1] SOFP Current assets: Inventory 28 100
26. [1of] SOFP Current assets: Trade receivables Less PDD (45 000 - 2 250) = 42 750
27. [1] SOFP Current assets: Prepaid (General expenses) 4 200
28. [1] SOFP Current liabilities: Other payables (Rent accrued) 2 500
29. [1 of labelled] SOFP Net current assets: 25 410
30. [1] SOFP Capital: Yang (25 000 - 10 000) = 15 000
31. [1] SOFP Current Accounts (Opening balance): Fu 2 500 Cr, Li 1 500 Cr, Yang (1 000) Dr
32. [1] SOFP Current Accounts (Transfer of capital): Yang 10 000 (Cr)
33. [1of] SOFP Current Accounts (Interest on capital): Fu 1 600, Li 1 400, Yang 1 000
34. [1of] SOFP Current Accounts (Share of profit): Fu 6 600, Li 6 600, Yang 3 300
35. [1of] SOFP Current Accounts (Interest on drawings): Fu (500), Li (500), Yang (600)
36. [1] SOFP Current Accounts (Drawings): Fu (10 000), Li (10 000), Yang (12 000)
37. [1of] SOFP Current Accounts (Closing balances): Fu 200 Cr, Li (1 000) Dr, Yang 700 Cr