Question

QUESTION 1

The following trial balance was extracted from the books and records of Macaroon Limited as at 31 December 2015.

	Debit	Credit
	£’000	£’000
Sales		2,347
Inventory at 1 January 2015	542
Purchases	1,932
Selling and distribution costs	87
Administrative expenses	21
Land – cost	750
Buildings – cost	3,500
Buildings – accumulated depreciation at 1 January 2015		415
Equipment – cost	530
Equipment – accumulated depreciation at 1 January 2015		83
Vehicles – cost	42
Vehicles – accumulated depreciation at 1 January 2015		11
Trade receivables and trade payables	230	235
Cash	5
Bank	22
5½% debentures		250
£0.50 ordinary shares		550
Share premium		420
Share issue account		340
£1 6% preference shares		300
Retained earnings at 1 January 2015	_____	2,710
	7,661	7,661

Additional Information

1. Inventory on hand at 31 December 2015 is valued at £497,000 in accordance with IAS 2 Inventories.

2. Land is to be revalued to £1,000,000 at 31 December 2015.

3. Depreciation for the year ended 31 December 2015 is to be charged as follows:

• Buildings – 2% straight line;
• Equipment – 10% straight line; and
• Vehicles – 25% reducing balance.

While buildings and equipment are used 50% cost of sales, 25% selling and distribution and 25% administrative, vehicles are used solely for selling and distribution.

4. The tax liability for the year ended 31 December 2015 is estimated to be £47,000.

5. Debenture interest and preference dividends due in respect of the year ended 31 December 2015 remained unpaid at the reporting date.

6. An ordinary dividend of 4 pence per ordinary share in respect of the year ended 31 December 2015 was approved by the shareholders of Macaroon Limited prior to the reporting date.

7. The directors of Macaroon Limited believe that an allowance for irrecoverable debts of 6% is appropriate at 31 December 2015.

8. During the year ended 31 December 2015, Macaroon Limited made an issue of £0.50 ordinary shares at a premium of £1.20 per share. The proceeds of the issue were debited to the company’s bank account and credited to a share issue account. These new shares did not rank for dividend at 31 December 2015.

Requirement

1. Prepare the statement of profit or loss and other comprehensive income of Macaroon Limited for the year ended 31 December 2015 and the statement of financial position as at that date in a form suitable for publication.

20 Marks

2. Explain the difference between ordinary shares and preference shares, and outline the circumstances when a share premium account needs to be created.

5 Marks

Total 25 Marks

Answer 1

Answer a -

Macaroon Limited
Profit & Loss Account for the year ending 31st Dec 2015
		Amount in	£’000
Sales			2,347.00
Op stock	542.00
Add purchases	1,932.00
Cl Stock	(497.00)
Add Depriciation	61.50
COGS		2,038.50
Administrtive expenses	21.00
Depriciation	30.75
Total Administration Expenses		51.75
Selling & Distribution O/H	87.00
Depriciation	38.50
Provision for Bad debts	13.80
Total Selling & Distribution Expenses		139.30
Int on debenture		13.75	2,243.30
Profit before Tax & Dividend			103.70
Provision for Taxation			47.00
Profit After Tax			56.70
Proposed Dividend on Equity shares	44.00
Dividend on Preference shares	18.00	62.00	62.00
Profit/(Loss )during the year			(5.30)

Working Note - Depreciation working -

Depreciation	% of Depn.		COGS	Admin	selling
Building	2%	70.00	35.00	17.50	17.50
Equipment	10%	53.00	26.50	13.25	13.25
Vehicles	25%	7.75	-	-	7.75
Total		130.75	61.50	30.75	38.50

Macaroon Limited
Balance Sheet As at 31st Dec 2015
				Amount in	£’000
Share Capital			Fixed Assets
£0.50 ordinary shares		550.00	Land		1,000.00
£1 6% preference shares		300.00	Building	3,500.00
Share issue		340.00	Less Accumulated Depreciation	485.00	3,015.00
			Equipment	530.00
Share Premium		420.00	Less Accumulated Depreciation	136.00	394.00
			Vehicle	42.00
Retained earnings	2,710.00		Less Accumulated Depreciation	18.75	23.25
Add :-Profit/(Loss )during the year	(5.30)	2,704.70
			Current Assets
Revaluation Reserve a/c		250.00	Trade Receivables	230.00
5½% debentures		250.00	Less Prov for Bad debts	13.80	216.20
			Inventory		497.00
Current Liabilities			Cash		5.00
Trade Payable		235.00	Bank		22.00
Provision for Taxation		47.00
Interest payable on debentures		13.75
Dividend payable on preference shares		18.00
Dividend payable on equity shares		44.00
Total Liabilities		5,172.45	Total Assets		5,172.45

Answer b - Difference between ordinary shares and preference shares -

Both Ordinary and Preference Shares are part of Equity. However they are different in following ways -

1. Voting Rights - Ordinary shares are with Voting Rights where as Preference Shares have no Voting Rights.

2. Dividend - Preference Shares are with fixed Dividend Rates where as Ordinary Shares have no Fixed Dividend.

3. Priority - Before declaring the Dividend on Ordinary Shares, Dividend on Preference Shares has to be paid.

Share Premium Account has to be created when Ordinary Shares are issued at a Premium over Par Value.