Principles of Accounts for CSEC®

2nd edition

Answers to Chapter 9: Accounting for limited liability

companies, co-operatives and non-profit organizations
9.1 An introduction to accounting for limited companies
Question 1

$
Ordinary shares 300 000 x 0.05 15 000
Preference shares 200 000 x 0.06 12 000
Total dividends paid 27 000

Question 2

$
Ordinary shares 500 000 x 0.8 x 0.02 8 000
Preference shares 200 000 x 0.5 x 0.05 5 000
Total dividends paid 13 000

Question 3
JOURNAL
Dr Cr
$ $
Bank 130 000
  Ordinary shares 100 000
  Share Premium 30 000
Issue of shares

Question 4

JOURNAL
Dr Cr
$ $
Bank 425 000
  Ordinary shares 100 000
  Share Premium 125 000
 Debentures 200 000
Issue of ordinary shares and debentures

1 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 5

JOURNAL
Dr Cr
$ $
Bank 75 000
  Ordinary shares 50 000
  Share Premium 25 000
Issue of ordinary shares

Dividend 2 500
 Bank 2 500
Payment of dividend

Question 6

JOURNAL
Dr Cr
$ $
Jan 1 Bank 200 000
 Debentures 200 000
Issue of debentures

Dec 31 Debenture interest 12 000

 Bank 12 000
Payment of debenture interest

Question 7

EQUITY $
400 000 ordinary shares of 50c each 200 000
100 000 5% preference shares of $1 each 100 000
Share premium 60 000
General reserve 10 000
Retained earnings 80 000
450 000

2 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 8

Damian Ltd
Statement of financial position (balance sheet) at
31 December 2018
$ $
Non-current assets 240 000
Current assets 525 200
Current liabilities 41 600
Net current assets 483 600
723 600
Non-current liabilities
Debentures 100 000
623 000
EQUITY
300 000 ordinary shares of $1 each 300 000
Share premium 220 000
Retained earnings 103 600
623 600

9.2 Limited company financial statements

Question 9
Sole trader Partnership Company
Directors’ fees ✓
Auditors’ fees ✓
Interest on drawings ✓
Debenture interest ✓

Question 10
Sole trader Partnership Company
Salaries and wages ✓ ✓ ✓
Dividends paid ✓
Drawings ✓ ✓
Interest on capital ✓
Goods taken for the owners’ own use ✓ ✓

3 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 11
Dante Limited
Income statement
for the year ended 31 December 2018
$000 $000
Revenue 92 000
Cost of sales 44 500
Gross profit 47 500
Other income: rental income 500
48 000
Less expenses:
Wages and salaries 2 600
Administration expenses 1 100
Selling and distribution costs 1 400
Directors’ remuneration 2 600
Auditors’ fees 2 200
Depreciation 740
Debenture interest 100
10 740
Net profit 37 260
Transfer to general reserve 2 000
35 260
Ordinary share dividend paid and proposed
Paid 2 200
Proposed 2 200 4 400
Preference share dividend paid and proposed
Paid 800
Proposed 800 1 600

Retained profit for the year 29 260

Retained profit b/f 6 400
Retained profit c/f 35 660

4 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 12
Diplock Limited
Income statement
for the year ended 31 March 2018
$ $
Revenue 482 000
Less cost of sales:
Opening inventory 32 600
Purchases 214 000
246 600
Closing inventory 31 400
215 200
Gross profit 266 800
Dividends received 14 000
Other income: rental income 4 500
285 300
Less expenses:
Wages and salaries 82 600
Administration expenses 44 000
Selling and distribution costs 41 800
Directors’ remuneration 36 000
Auditors’ fees 12 500
Depreciation 13 480
Debenture interest 6 100
236 480
Net profit 48 820
Ordinary share dividend paid and proposed
Paid 20 000
Proposed 8 200 28 200
Retained profit for the year 20 620
Retained profit b/f 32 000
Retained profit c/f 52 620

NOTES
Depreciation:
    machinery (42 000 – 17 200) x 0.1 = 2 480
    premises 550 000 x 0.02 = 11 000
Directors’ remuneration: 32 000 + 4 000 = 36 000

5 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 13
Ramteet Ltd
Statement of financial position (balance sheet) at 31 December 2018
$ $ $

NON-CURRENT ASSETS
Premises 410 000
Fixtures and fittings 82 000
492 000
CURRENT ASSETS
Inventory 44 900
Accounts receivable 36 900
Prepayments 8 200
Rental income owing 2 100
92 100
CURRENT LIABILITIES
Accounts payable 32 100
Dividends proposed 13 000
Bank overdraft 18 100
63 200
Net current assets 28 900
520 900
NON-CURRENT LIABILITIES
Debentures 30 000
Net assets 490 900

EQUITY
Issued share capital:
  200 000 ordinary shares of $1 each 200 000
  80 000 8% preference shares of $2 each 160 000
Share premium 40 000
General reserve 40 000
Retained earnings 50 900
Total equity 490 900

6 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 14

Bendon Ltd
Statement of financial position (balance sheet) at 31 October 2018
$ $ $
Cost Depreciation Net
NON-CURRENT ASSETS
Premises 160 000 40 000 120 000
Fixtures and fittings 50 000 10 000 40 000
Vehicles 36 000 8 000 28 000
246 000 58 000 188 000
CURRENT ASSETS
Inventory 38 100
Accounts receivable 56 900
Prepayments 5 200
Cash at bank 15 300
115 500
CURRENT LIABILITIES
Accounts payable 42 400
Dividends proposed 5 000
Auditors fees owing 15 000
62 400
Net current assets 53 100
241 100
NON-CURRENT LIABILITIES
Debentures 50 000
Net assets 191 100

EQUITY
Issued share capital:
  100 000 ordinary shares of $1 each 100 000
Share premium 30 000
General reserve 20 000
Retained earnings 41 100
Total equity 191 100

7 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 15
a.  Gross profit percentage 108 500
× 100 = 60.28%
180 000
b.  Net profit percentage 60 000
× 100 = 33.33%
180 000
c.  Return on capital invested 60 000
× 100 = 27.91%
215 000
d.  Current ratio 59 300 : 31 300 = 1.89 : 1

e.  Acid test ratio 29 100 : 31 300 = 0.93 : 1

f.  Inventory turnover 71 500

30 200 = 2.37 times

g.
Ratio Explanation
Gross profit percentage For every $ of turnover, the business makes just over 60c gross
60.28% profit.
Net profit percentage For every $ of turnover, the business makes just over 33c (net)
33.33% profit.
Return on capital invested For every $ invested by the shareholders, the business makes nearly
27.91% 28c (net) profit.
Current ratio For every $ of current liabilities, the business has $1.89 of current
1.89:1 (liquid) assets.
Acid test For every $ of current liabilities, the business has 93c of current
0.93:1 assets excluding inventory.
Inventory turnover Inventory is replaced 2.37 times a year, every 154 days.
2.37 times

Question 16

Ratio Calculation
a.  Gross profit percentage 257 500
× 100 = 67.76%
180 000
b.  Net profit percentage 72 000
× 100 = 18.95%
380 000
c.  Return on capital invested 72 000
× 100 = 16%
450 000
d.  Current ratio 60 500 : 82 500 = 0.73 : 1

e.  Acid test ratio 22 300 : 82 500 = 0.27 : 1

f.   Inventory turnover 122 500

= 3.2 times
38 200

8 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations
g.
Ratio
Gross profit percentage
Net profit percentage
Return on capital invested
Current ratio
Acid test ratio
Inventory turnover
Question 17
Ratio
Gross profit margin
Net profit percentage
Current ratio
Acid test ratio
Inventory turnover
Return on capital invested
Question 18
Ratio
a.  Gross profit percentage
b.  Net profit percentage
c.  Current ratio
d.  Acid test ratio
e.  Return on capital invested
9 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
Explanation
For every $ of turnover, the business makes nearly 68c gross profit.
For every $ of turnover, the business makes nearly 19c (net) profit.
For every $ invested by the shareholders, the business makes nearly 16c (net)
profit.
For every $ of current liabilities, the business has 73c of current (liquid) assets.
For every $ of current liabilities, the business has 27c of current assets
excluding inventory.
Inventory is replaced 3.2 times a year, every 114 days.
Comments
Grand Gardening Ltd has a lower gross profit margin than the industry
average, so earns less gross profit per $ of turnover. Grand Gardening
Ltd earns 65c of gross profit per $ of turnover.
Grand Gardening Ltd has a lower profit for the year margin than the
industry average, so earns less net profit per $ of turnover. Grand
Gardening Ltd earns 20c net profit per $ of turnover.
Grand Gardening Ltd has a higher current ratio than the industry
average, so has more liquid assets to service short-term debt. Grand
Gardening Ltd has $3.10 of current assets for every $ of short-term debt.
Grand Gardening Ltd has a higher acid test ratio than the industry
average, so has more liquid assets excluding inventory to short-term
debt. Grand Gardening Ltd has $2.30 of current assets excluding
inventory for every $ of short-term debt.
Grand Gardening Ltd has a lower rate of inventory turnover. Its
inventory needs to be replaced every 32 days, whereas the industry
average is every 24 days.
The return on capital invested for Grand Gardening Ltd is lower than
the industry average which means that less profit is made per $ of
capital invested. For every $ of capital invested, the business makes
18c of profit.
Calculation
201 500
× 100 = 69.6%
289 500
60 000
× 100 = 20.73%
289 500
120 000 : 96 000 = 1.25 : 1
60 000 : 96 000 = 0.625 : 1
60 000
× 100 = 14.93%
402 000
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

f.
Ratio Explanation
Gross profit percentage For every $ of turnover, the business makes nearly 70c gross profit.
This is an improvement on last year.
Net profit percentage For every $ of turnover, the business makes nearly 21c (net) profit.
This is an improvement on last year.
Current ratio For every $ of current liabilities, the business has $1.25 of current
(liquid) assets. This is not as good as last year.
Acid test ratio For every $ of current liabilities, the business has 63c of current
assets excluding inventory. This is not as good as last year.
Return on capital invested For every $ invested by the shareholders, the business makes
nearly 15c of (net) profit. This is an improvement on last year.

9.3 Accounting for co-operatives

Question 19
a.
GENERAL JOURNAL
Dr Cr
$ $
Receipts and payments account 400 000
  Share capital account 400 000
Funds raised by the issue of 8 000 shares at $50 each

b. Service co-operative

Question 20
a.
GENERAL JOURNAL
Dr Cr
$ $
Receipts and payments account 700 000
  Share capital account 700 000
Funds raised by the issue of 50 × 14 000 shares at $1 each

b. Worker co-operative

10 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 21
a.

East Training Co-operative

Income and expenditure account
for the year ended 31 March 2018
$ $
INCOME
Membership fees 54 600
Interest received 100
54 700
EXPENDITURE
Office expenses 27 400
Motor vehicle costs 6 600
Bank charges and interest 400
Annual general meeting costs 2 500
Auditors’ remuneration 1 400
Depreciation 1 600
39 900
Surplus for the year 14 800

b. A statutory reserve is to meet a legal requirement, a fixed percentage of any net surplus
of income over expenditure is transferred to this reserve.
Question 22

Teachers Credit Union Co-operative

Income and expenditure account
for the year ended 31 December 2018
$ $
INCOME
Membership fees 16 600
Interest received 2 400
19 000
EXPENDITURE
Interest paid 200
Office expenses 8 000
Depreciation – furniture and fittings 8 250
       
– computer equipment 4 500
20 950
Deficit for the year 1 950

11 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 23
Fins Coast Fishermen’s Co-operative
Appropriation account for the year ended 31 December 2018
$ $
Surplus for the year 96 000
Transfer to statutory reserve 14 400
Transfer to scholarship fund 9 600
24 000
72 000
Less honoraria 12 000
Dividend 15 000
27 000
Undistributed surplus for the year 45 000
Add undistributed surplus b/f 112 000
Undistributed surplus c/f to next year 157 000

Question 24
Village Store Co-operative
Appropriation account for the year ended 31 January 2018
$ $
Surplus for the year 56 000
Transfer to statutory reserve 5 600
50 400
Less honoraria 8 000
Dividend 40 000
48 000
Undistributed surplus for the year 2 400
Add undistributed surplus b/f 19 200
Undistributed surplus c/f to next year 21 600

12 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 25
a.
Pathways Environmental Co-operative
Statement of financial position (balance sheet) at 31 March 2018
$ $ $
NON-CURRENT ASSETS
Woodland 150 000
Equipment 33 000
183 000
CURRENT ASSETS
Accounts receivable 24 000
Cash at bank 4 800
Prepayments 1 900
30 700
CURRENT LIABILITIES
Accounts payable 36 200
Accruals 600
Honoraria 5 000
41 800
Net current assets 11 100
171 900
LONG TERM LIABILITIES
Loan 12 000
159 900

CAPITAL AND RESERVES

Share capital 100 000
Statutory reserve 25 920
Undistributed surplus 33 980
159 900

Note:
Undistributed reserve: (54 600 + 5 300 − 10 000 − 5 000 − 10 920) = 33 980
Statutory reserve: 15 000 + 10 920 = 25 920

13 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

Question 26
a.
Goat Farmers’ Cooperative
Statement of financial position (balance sheet) at 31 October 2018
$ $ $
NON-CURRENT ASSETS
Farmland at net book value 320 000
Equipment at net book value 36 000
356 000
CURRENT ASSETS
Accounts receivable 14 000
Prepayments 3 900
17 900
CURRENT LIABILITIES
Loan interest owing 2 000
Honoraria owing 12 000
Accounts payable 22 200
Bank overdraft 4 200
40 400
Net current liabilities 22 500
333 500
NON-CURRENT LIABILITIES
Long-term loan 20 000
313 500
CAPITAL AND RESERVES
Share capital 200 000
Education stationery reserve 52 560
Undistributed surplus (see note below) 60 940
313 500

Note:
Undistributed surplus: opening balance $35 900 + surplus for year $85 600 – dividends paid
$40 000 – honoria due $12 000 < transfer to reserve $8 560

b.  Amount of dividend paid per share = ($40 000/400 000) = 10c

14 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

9.4 Accounting for non-profit organizations

Question 27
Hockey First
Receipts and payments account for the year ended 31 March 2018
$ $
Balance b/d at 1 April 2017 450 Bar purchases 6 510
Subscriptions received 18 620 Administration 735
Bar takings 9 460 Sports equipment 2 950
Club staff wages 6 050
Ground maintenance 805
Bar staff 6 460
Refreshments 3 450
Balance c/d at 31 March 2018 1 560
28 530 28 530
Balance b/d at 1  April 2018 1 560

Question 28
Island Astronomy Club
Receipts and payments account for the year ended 31 December 2018
$ $
Balance b/d at 1 January 2017 General running costs 4 580
Donations from members 1 200 Hire charges for meeting rooms 3 600
Members’ subscriptions 14 800 Loan repayments 3 500
Proceeds from sale of unwanted furniture 320 Purchase of refreshments 2 980
Sales of refreshments 3 510 Purchase of equipment 4 800
Ticket sales for social evening 1 090 Refund of member’s subscriptions 50
Balance c/d at 31 December 2018 470 Secretary’s honorarium 250
Social evening expenses 860
Wages of café staff 770
21 390 21 390
Balance b/d at 1 January 2019 470
Develop your exam skills
Paper 1
1. C  2. B  3. D  4. B  5. C  6. B  7. B  8. C
9. D  10. B  11. B  12. B  13. C  14. C   15. B  16. B  17. D

Paper 2
Case study 1: Limited liability companies
a.  Advantages include:
Shareholders have limited liability for debts of business
Limited company has separate legal identity from owners
Limited companies have the potential to raise large sums of finance
b.  Disadvantages include:
Limited companies are subject to more “red tape” (i.e., control by legislation)
Original shareholders lose control of the company if more voting shares are issued to others

15 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

c.

Sara Cakes Limited

Income statement
for the year ended 31 December 2018
$000 $000
Revenue 92 000
Less cost of sales 54 500
Gross profit 37 500
Rental income 1 500
39 000
Less expenses:
Wages and salaries 18 600
Administration expenses 3 900
Selling and distribution costs 3 200
Directors’ remuneration 4 100
Auditors’ fees 1 400
Depreciation 7 000
Debenture interest 1 000
39 200
Net loss 200

d.
Appropriation account
for the year ended 31 December 2018
$ $
Net loss (200)
Dividends paid:
  Ordinary shares 4 000
  Preference shares 2 000 6 000
(6 200)
Retained earnings at 1 January 2018 44 400
Retained earnings at 31 December 2018 38 200

16 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

e.
Sara Cakes Limited
Statement of financial position (balance sheet) at 31 December 2018
$ $ $

NON-CURRENT ASSETS
Premises 170 000 8 000 162 000
Vehicles 34 000 12 000 22 000
204 000 20 000 184 000
CURRENT ASSETS
Inventory 18 500
Accounts receivable 36 800
Cash at bank 6 000
61 300
CURRENT LIABILITIES
Accounts payable 22 100
Net current assets 39 200
223 200
NON-CURRENT LIABILITIES
Debentures 20 000
Net assets 203 200

EQUITY
Issued share capital:
  100 000 ordinary shares of $1 each 100 000
  10% preference shares 20 000
Share premium 30 000
General reserve 15 000
Retained earnings 38 200
Total equity 203 200

Case study 2: Limited liability companies

a.  Capital reserve: share premium, revaluation reserve.
b. Revenue reserves arise from everyday trading activities whereas capital reserves arise from
non-trading activities. Revenue reserves can be used to finance dividend payments; capital
reserves may not be used to finance dividend payments.

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 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

c.
Lou Kirving Limited
Income statement
for the year ended 31 March 2018
$000 $000
Revenue 142 000
Less cost of sales
Opening inventory 9 500
Purchases 54 100
63 600
Closing inventory 9 200 54 400
Gross profit 87 600
Commission received 9 500
97 100
Less expenses:
Wages and salaries 28 900
Administration expenses 14 800
Selling and distribution costs 14 400
Directors’ remuneration 14 400
Auditors’ fees 3 000
Depreciation 8 600
Debenture interest 2 000
86 100
Net profit 11 000

d.
Appropriation account
for the year ended 31 March 2018
$ $
Net profit 11 000
Dividends paid:
Ordinary shares 1 000
Preference shares 4 800 5 800
5 200
Retained earnings at 1 April 2017 40 100
Retained earnings at 31 March 2018 45 300

18 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

e.
Lou Kirving Limited
Statement of financial position (balance sheet)
at 31 March 2018
$ $ $

NON-CURRENT ASSETS
Premises 230 000 22 600 207 400
Vehicles 32 000 16 000 16 000
262 000 38 600 223 400
CURRENT ASSETS
Inventory 9 200
Accounts receivable 16 400
Prepayments 800
26 400
CURRENT LIABILITIES
Accounts payable 10 400
Bank overdraft 3 100
Debenture interest owing 1 000
14 500
Net current assets 11 900
NON-CURRENT LIABILITIES 235 300
Debentures 20 000
Net assets 215 300

EQUITY
Issued share capital:
  100 000 ordinary shares of 50c each 50 000
  6% preference shares 80 000
Share premium 30 000
General reserve 10 000
Retained earnings 45 300
Total equity 215 300

Case study 3: Non-profit organization

a. 
A receipts and payments account can help a club’s management committee to understand any change in
the club’s cash and bank balances over a financial year. This may help the committee to decide whether
they can afford additional expenditure on the club’s resources, for example, or alternatively, whether
they need to take measures to increase the club’s cash inflow (raising the annual subscription charge to
members, perhaps).

19 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019
 Answers to Chapter 9: Accounting for limited liability companies, co-operatives and non-profit organizations

b.
Charlie’s Chess Club
Receipts and payments account for the year
ended 31 October 2018
$ $
Balance b/f at 1 Nov 2017 450 Hall hire 685
Subscriptions received 2 400 Tournament fees 810
Refreshments 300
Tournament costs 680
Missing cash 70
Balance c/d at 31 Oct 2018 305
2 850 2 850
Balance b/d at 1 Nov 2018 305

20 Principles of Accounts for CSEC®, 2nd edition © Oxford University Press 2019