Milson Ltd is a new company that sells kitchen recycling systems across the UK. It commenced life on 1st January in Year 1. Year 1 has just been completed. In January, it issued 100,000 ordinary shares with a nominal value of £1 each at a premium of £0.50 each. It also obtained a 5-year bank loan of £200,000 at an annual interest rate of 6% when it started business. During Year 1, the following occurred:
1. In January Year 1, £26,250 was spent on rent of buildings for the first eighteen months.
2. At the start of Year 1, machinery and equipment was purchased for £100,000, to be used for 5 years. Non-current assets are depreciated using the reducing balance approach (also known as the declining balance approach).
3. Inventories totalling £120,000 were purchased on credit during the year and at the end of the year closing inventories amounted to £31,000. £40,000 was still owed to trade payables at the end of the year.
4. Inventories were sold on credit and generated total revenue of £610,000, but during the year a debtor owing £20,000 went bankrupt and the debt was written off as a bad debt. At the end of the year, the business was still owed £80,000 by credit customers. It was decided to create a provision for doubtful debts of 5% of the year end receivables.
5. Various operating expenses amounted to £2,500 each month, paid with one month’s delay.
6. Wages and salaries totalled £170,000 for the year and were all paid in full. 7. At the end of Year 1, the bank loan interest due for Year 1 was paid.
8. Taxation on Year 1’s profit is estimated as being £33,000. Half of this sum had been paid midway during Year 1. The remainder is payable in the next year, Year 2.
9. At the end of Year 1 £125,000 was paid to the bank as a part-repayment of the loan taken out at the beginning of the year.
10. The directors proposed paying no dividends for Year 1.
Prepare the following statements for Milson Inc. for Year 1:
1. a) Income Statement.
2. b) Statement of Changes in Equity.
3. c) Statement of Financial Position.
d) Cash Flow statement suitable for publication using the ‘direct method’.
Please detail each item separately (i.e.: do not group items together).
If your answer is not in this format, marks awarded will be ZERO.
Note: Please show your workings where relevant. Within the allocated marks, marks are awarded for correct figures only. No method marks will be awarded.
QUESTION 2 THIS QUESTION IS COMPULSORY
You have been asked to prepare the statement of cash flows in a form suitable for publication for Nilood Ltd for the year ended 31 March 2021. The most recent income statement and statement of financial position (with comparatives for the previous year) of Nilood Ltd are set out below.
Further information relating to the year ended 31 March 2021:
• The total depreciation charge for the year was £17,520.
• Non-current assets with a carrying amount of £1,572 were sold in the year.
• No dividend was paid during year ended 2021.
• All sales and purchases were on credit; all other expenses were paid for in cash. • No capital sums from the bank loan were repaid during the year.
Using the above information generate the cash flow statement for publication using the ‘indirect method’ for year ended 31 March 2021. Please detail each item separately (i.e.: do not group items together). If your answer is not in this format, marks awarded will be ZERO.
QUESTION 3 [15 MARKS] THIS QUESTION IS COMPULSORY
Using your answers to questions ONE (1) and TWO (2) above, comment on the financial health of each company. Identify two pieces of further information that might be useful to assist potential investors with their decision making and highlight three limitations of the accounts you have prepared.
You may wish to support your analysis using simple liquidity, profitability or efficiency ratios – note that there are no direct marks for calculation of the ratios themselves, however, comments related to these figures may provide a more robust answer.
Maximum number of words: 500 words.
1. Extracts from the final accounts of a business are shown below.
Using the accounting equation, which of the following amounts is the current assets figure?
1. A £441,500
2. B £496,200
3. C £760,600
4. D £490,800
2. Buildings are to be depreciated at 2% on a straight-line basis. What is the depreciation charge for one year if the original cost of the building was £600,000 and accumulated depreciation is £156,000?
1. A £8,880
2. B £120,000
3. C £12,000
4. D £444,000
3. Berry Blue Ltd has issued 300,000 50p ordinary shares and 400,000 9% £1 preference shares. An interim dividend of 5p per ordinary share and half of the preference dividend were paid during the year. How much dividend was paid during the year?
1. A £15,000
2. B £33,000
3. C £36,000
4. D £51,000
4. Capers Ltd has an item included in their inventory which cost £2,000 and can be sold for £2,400. However, before it can be sold, it requires some modification at a cost of £300; the expected selling costs of the item are an additional £50.
How should this item be valued in inventory?
1. A £1,950
2. B £2,000
3. C £2,050
4. D £2,200
5. The Return on Capital Employed measures what?
1. A Profit before Tax and Loan Interest to Shareholders Funds plus Loans
2. B Gross Profit to Shareholders Funds plus Loans
3. C Profit after Tax to Shareholders Funds
4. D Profit after Tax and Loan Interest to Shareholders Funds minus Loans
6. Extracts from the final accounts of a business are shown below.
Which of the following amounts was the cost of sales figure?
1. A £102,880
2. B £84,680
3. C £89,065
4. D £48,860
7. A firm bought a piece of machinery for £16,000. It is to be depreciated at a rate of 25% using the reducing balance method. What is the carrying amount of the machine after two years?
1. A £12,000
2. B £3,000
3. C £9,000
4. D £4,000
8. An expense prepayment of £730 was treated as an accrual in the profit and loss for a period. Therefore, the profit was:
1. A Understated by £730
2. B Understated by £1,460
3. C Overstated by £730
4. D Overstated by £1,460
9. Rosie Ltd prepares accounts to 31 March each year. On 1 April 2021 the company’s ledger included the following balances:
Motor Vehicles at cost £40,670 Accumulated Depreciation of Motor Vehicles £18,440
On 1 October 2021 a vehicle originally bought on 1 January 2018 for £18,200 was sold for £6,460.
The company’s policy is to depreciate all motor vehicles at a rate of 20% p.a. using the straight-line method. A full year’s depreciation is charged in the year of acquisition and no depreciation is charged in the year of disposal. Calculate the profit/loss on the disposal of motor van bought in 2018.
1. A £6,460 profit
2. B £2,820 loss
3. C £6,460 loss
4. D £2,820 profit
10. The accountant for Tahir Ltd was processing the November monthly accounts. On 1 November the Electricity account showed an opening accrual of £150. During November payments made in respect of this expense were £562 and on 30 November there was a closing accrual of £85. The amount to be shown as the Electricity expense for the month of November in the income statement is: