O-LevelAccountingPreparation of financial statements7707/22 · May/June 2025 · Q220 Marks

Farah and Salma are sisters who trade as a partnership. Their partnership agreement provides for the following: • interest on capital of 2% per annum • interest on drawings of 4% per annum • a salary to Farah of $11 200 per annum • residual profits and losses to be shared as Farah 30%, Salma 70%. Farah and Salma provided the following details. Profit for the year ended 28 February 2025: $38175 Capital accounts at 1 March 2024: Farah $52000 Salma $75000 Current accounts at 1 March 2024: Farah $3450 credit Salma $1900 debit Drawings for the year ended 28 February 2025: Farah drawn from bank on 31 December 2024: $14250 Salma drawn from bank on 31 December 2024: $14250 goods taken for own use 31 August 2024: $5750

(a)Prepare the appropriation account for Farah and Salma for the year ended 28 February 2025.[6]
(b)Prepare Farah's current account for the year ended 28 February 2025. Balance the account and bring down the balance at 1 March 2025.[7]
(c)State two reasons why Salma should not take more drawings.[2]
(d)Farah and Salma would like to expand the business. They have decided to convert the business to a limited company. They are considering selling 30% of the ordinary share capital of the new company to each of their two brothers. The brothers would become directors and would manage the business. Farah and each brother would receive a salary of $15000 each year. REQUIRED (d) Advise Farah and Salma whether or not they should make the above changes. Justify your answer with advantages and disadvantages to them of making these changes.[5]

Mark scheme

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

[1] Farah Interest on drawings 95
[1] Salma Interest on drawings 210
[1] Farah Interest on capital 1040 and Salma Interest on capital 1500
[1] Salary - Farah 11200
[1] Farah Profit share 7422 OF
[1] Salma Profit share 17318 OF
[1] Mar 1 Balance b/d 3450
[1] Feb 28 Drawings 14250
[1] Feb 28 Interest on drawings 95 OF
[1] Feb 28 Interest on capital 1040 OF
[1] Feb 28 Salary 11200
[1] Feb 28 Share of profit 7422 OF
[1] Mar 1 Balance b/d 8767 OF
[1] There may be insufficient money in the bank / reduces liquidity
[1] There may be a limit on drawings (stated in the partnership agreement)
[1] May damage the relationship between the partners
[1] Salma would have to pay interest on drawings
[Max 2] Accept other valid points
[1] Easier to raise capital / finance / loans
[1] Shareholders have limited liability
[1] Workload / responsibility is shared
[1] Profit may increase
[1] Farah receives an increase in salary
[1] Limited company has continuity of existence / there is separate legal identity
[Max 3] Accept other valid points (for advantages)
[1] Farah and Salma would lose control
[1] The brothers may have no business experience
[1] Increased legal and administrative costs
[1] Cash / profit may be reduced to pay salaries/dividends
[1] The investment may not be sufficient to fund the expansion
[Max 3] Accept other valid points (for disadvantages)
[Max 4] Overall Advantages and Disadvantages
[1] Recommendation

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