H Limited prepares its financial statements to 30 April each year. During the year ended 30 April 2025, the following took place: 1 The company made a profit for the year of $26700 after charging debenture interest. 2 A transfer of $5000 was made to the general reserve. 3 A dividend of $5340 was paid. No other dividends are payable for the year.

Mark scheme

Marking points from the official mark scheme (May/June 2025). The mark or mark type is shown in brackets.

1. [1] Profit for the year row: Retained earnings $26700, Total $26700.
2. [1] Transfer to general reserve row: General reserve $5000, Retained earnings $(5000).
3. [1] Dividends paid row: Retained earnings $(5340), Total $(5340).
4. [1] On 30 April 2025 closing balances (OF) for General reserve $25000, Retained earnings $49995, Total $194995.
5. [1] Total non-current assets $171 875 ($155 000 + $16 875).
6. [1] Net trade receivables $32 010 ($33 000 - $990).
7. [1] Total current assets 60 130 (OF) (28 120 + $32 010).
8. [1] General reserves $25 000 (OF) and Retained earnings $49 995 (OF).
9. [1] 5% Debentures $5 000.
10. [1] Trade payables $26 815.
11. [1] Bank overdraft $5 195.
12. [1] The total funds provided by the owners of a business / The difference between the assets and liabilities of a business.
13. [1] Profit adjusted for interest = $26 700 + $250 (5% x $5000) = $26 950.
14. [1] Capital employed = $194 995 (OF from (a)) + $5 000 = $199 995 (OF).
15. [1] ROCE = ($26 950 / $199 995) × 100 = 13.48% (OF).
16. [1] For: There will be no liability once the debentures have been repaid.
17. [1] For: Issue of debentures will not reduce shareholders' stake in the company / debenture holders do not take an active part in running the company / debenture holders do not have a vote.
18. [1] For: Only have relatively low amount of loans at present.
19. [1] For: Funds may be available quickly / relatively easy to obtain.
20. [1] Against: Interest on the debentures has to be paid / debenture interest reduces profit / fixed amount of debenture interest each year / debenture interest needs to be paid even if the company makes a loss.
21. [1] Against: May be secured against the assets of the company / are repaid before shareholders if company liquidated.
22. [1] Against: Debentures have to be repaid / increase liabilities.
23. [1] Against: Funds must be available when repayment is due.
24. [1] Against: Already have commitment to repay existing debentures.
25. [1] Recommendation (based on points discussed).