Level 7 Financial Accounting 2021-2022

Seminar 8 - Limited Liability Companies Part 2

9.1 Revenue reserves are

A Accumulated and undistributed profits of a company

B Amounts which can't be distributed as dividends
C Amounts set aside out of profits to replace revenue items
D Amounts set aside out of profits for a specific purpose

9.2 Which of the following would you expect to see in the Statement of Changes in Equity?

A Cost of acquisition of non current asset

B Audit fees
C Ordinary dividend proposed in previous year, but paid in the current year
D Ordinary dividend proposed in the current year, but paid in the following year

9.3 Given below are extracts from a company trial balance at 31 Dec 2011, after preparation
of the draft income statement.
Share capital (50p ordinary shares) £200,000
Share premium £40,000
General reserve £20,000
Retained profits as at 31 Dec 2011 £84,000
Since preparation of the draft income statement, it was discovered that the following had
not been accounted for:

a) On 1 Jan 2011, the company issued 100,000 new ordinary shares at a price of 80p per
share
b) Closing inventory had been overstated by £10,000
c) The directors wished to make a transfer to the general reserve of £5,000

The amended balances at 31 Dec 2011 will be:

Share capital
Share capital = issue price per share * no. of outstanding shares
80*100 000 = 800 000
Share premium
80 – 50 = 30
30*100 000 = 300 000
General reserve
20 000 + 5 000 = 25 000
Retained profits as at 31 Dec 2011
84 000 – 10 000 – 5 000 = 69

9.4 Marz plc is a wholesaler and distributor of organic foods. At 31 December 2008, the trial
balance of the company is as follows:

£000 £000
Level 7 Financial Accounting 2021-2022

Sales 114,625
Purchases 55,750
Wages and salaries:
Selling and distribution staff 22,823
Administration staff 7,425
Selling and distribution expenses 18,438
Administration expenses 2,801
Interest paid 500
Dividends paid - 2007 final 1,000
Ordinary shares (25p nominal value) 12,000
Share premium account 1,200
Retained profits at 1 January, 2008 2,395
10% Bank loan (2013) 10,000
Non-current assets at cost:
Fixtures and fittings 11,200
Vehicles 6,500
Accumulated depreciation at 1 January, 2008:
Fixtures and fittings 5,500
Vehicles 1,500
Inventory at 1 January, 2008 9,200
Receivables 16,444
Payables 7,370
Cash 2,509
----------- -----------
154,590 154,590========
=========

Additional Information:

Before preparing the year end financial statements, adjustments are required in respect of
the following:

(i) Closing inventory at 31 December 2008 cost £10,600,000.

(ii) Marz plc charges annual depreciation on the following bases:

Fixtures and Fittings Straight-line at 15% per year

Vehicles Reducing balance at 25% per year

(iii) In its Income Statement, Marz plc assigns its annual depreciation charges to
Selling & Distribution (60%) and Administration (40%)
Level 7 Financial Accounting 2021-2022

(iv) The bank loan was acquired in 2003. Interest of £500,000 was paid on 30 June
2008 and was in respect of the first six months of 2008. Unpaid interest for the
remained of 2008 is to be accrued.

(v) Taxation for the year ended 31 December 2008 is estimated at £1 million.

(vi) £90,000 of selling and distribution expenses, paid and included in the above
figures, was for rental of storage space for the period from 1 November 2008 until
31 January 2009.

(vii) Included in receivables are bad debts totalling £40,000 which the directors wish to
write off (to administration costs).

(viii) In September 2008, 8 million ordinary shares were issued at a price of 40p per
share (ie 15p above the nominal value). This issue of these shares is included in
the figures shown in the trial balance as at 31 December 2008.

Required:

Prepare the following for Marz plc using limited company formats

a) Income Statement for the year ended 31 December 2008

b) Statement of Changes in Equity for the year ended 31 December 2008

c) Statement of Financial Position as at 31 December 2008

9.6 Which of the following is not a way in which a company might raise finance.

A Issue of preference shares

B Rights issue of ordinary shares
C Bonus issue of ordinary shares
D Issue of loan stock