MetadataPastPaper.sampleTitle

Net assets acquired = Non-current assets + Inventory + Trade receivables - Trade payables
\(Net\\ assets\\ acquired = \\\$120,000 + \\\$25,000 + \\\$19,000 - \\\$15,000 = \\\$149,000\)

Purchase consideration = (100,000 shares \times \\$1.25) + \\$30,000 = \\$155,000

Goodwill = Purchase consideration - Net assets acquired
\(Goodwill = \\\$155,000 - \\\$149,000 = \\\$6,000\)

1 mark for correct calculation of goodwill. Correct option is B.

To calculate the Net Present Value (NPV):

1. Calculate the present value (PV) of annual net cash operating inflows for Years 1 to 4:
\(PV = \\\$28,000 \times (0.909 + 0.826 + 0.751 + 0.683) = \\\$28,000 \times 3.169 = \\\$88,732\)

2. Calculate the present value of the residual value in Year 4:
\(PV = \\\$10,000 \times 0.683 = \\\$6,830\)

3. Calculate the total present value of cash inflows:
\(Total\\ PV = \\\$88,732 + \\\$6,830 = \\\$95,562\)

4. Subtract the initial investment cost:
\(NPV = \\\$95,562 - \\\$80,000 = \\\$15,562\)

1 mark for correct calculation of NPV. Correct option is B.

1. Calculate Cost of Sales using the mark-up:
\(Cost\\ of\\ Sales = \frac{Revenue}{1 + Mark\\!-\\!up} = \frac{\\\$480,000}{1.25} = \\\$384,000\)

2. Formulate the Cost of Sales equation incorporating goods taken for own use (drawings):
\(Cost\\ of\\ Sales = Opening\\ Inventory + (Purchases - Drawings) - Closing\\ Inventory\)

3. Rearrange to find total purchases:
\(\\\$384,000 = \\\$40,000 + Purchases - \\\$5,000 - \\\$46,000\)
\(\\\$384,000 = Purchases - \\\$11,000\)
\(Purchases = \\\$384,000 + \\\$11,000 = \\\$395,000\)

1 mark for correct calculation of total purchases. Correct option is D.

1. Calculate the new variable cost per unit:
\(New\\ Variable\\ Cost = \\\$24 \times (1 - 0.25) = \\\$18\) per unit

2. Calculate the new contribution per unit:
\(New\\ Contribution = Selling\\ Price - New\\ Variable\\ Cost = \\\$40 - \\\$18 = \\\$22\) per unit

3. Calculate the new fixed costs:
\(New\\ Fixed\\ Costs = \\\$120,000 + \\\$12,000 = \\\$132,000\) per annum

4. Calculate the new breakeven point:
\(New\\ Breakeven\\ Point = \frac{New\\ Fixed\\ Costs}{New\\ Contribution} = \frac{\\\$132,000}{\\\$22} = 6,000\) units

1 mark for correct calculation of new breakeven point. Correct option is B.

1. Calculate the cost of production:
\(Cost\\ of\\ Production = Prime\\ Cost + Factory\\ Overheads + Opening\\ WIP - Closing\\ WIP\)
\(Cost\\ of\\ Production = \\\$250,000 + \\\$180,000 + \\\$24,000 - \\\$30,000 = \\\$424,000\)

2. Calculate the transfer value of finished goods:
\(Transfer\\ Value = Cost\\ of\\ Production \times (1 + Factory\\ Profit\\ Percentage)\\
\)Transfer\\ Value = \\\$424,000 \\times 1.20 = \\\$508,800\)

1 mark for correct calculation of transfer value. Correct option is A.

1. Calculate capital employed at the start of the year:
\(Capital\\ Employed = Ordinary\\ Shares + Share\\ Premium + Retained\\ Earnings + 8\\%\\ Debentures\)
\(Capital\\ Employed = \\\$100,000 + \\\$40,000 + \\\$60,000 + \\\$50,000 = \\\$250,000\)

2. Calculate Return on Capital Employed (ROCE):
\(ROCE = \frac{Operating\\ Profit\\ (PBIT)}{Capital\\ Employed} \times 100\\%\)
\(ROCE = \frac{\\\$45,000}{\\\$250,000} \times 100\\% = 18.0\\%\)

1 mark for correct ROCE calculation using start of year Capital Employed. Correct option is C.

1. Calculate required closing inventory:
\(Closing\\ Inventory = 10\\% \times 12,000 = 1,200\) units

2. Calculate the required number of good units to be produced:
\(Required\ Good\ Units = Sales + Closing\ Inventory - Opening\ Inventory\)
\(Required\ Good\ Units = 12,000 + 1,200 - 1,500 = 11,700\) units

3. Calculate the total units to produce, accounting for the \(2.5\%\) wastage (defective rate):
Since \(2.5\%\) are rejected, the good units represent \(97.5\%\) (i.e., \(100\% - 2.5\%\)) of total production.
\(Total\ Production = \frac{11,700}{0.975} = 12,000\) units

1 mark for correct calculation of total production. Correct option is C.

To find the corrected net profit, adjust the draft net profit for each error:

* **Draft Net Profit:** \\$74,200
* **Error 1 (undercast sales journal):** Correcting this increases sales revenue and net profit by \\$800.
* **Error 2 (overstated repairs expense):** The expense was recorded as \\$530 instead of \\$350. Reducing the expense increases net profit by \\$180 (\(\\\$530 - \\\$350\)).
* **Error 3 (rent received recorded incorrectly):** Rent received (income) was debited (as an expense) and cash credited. To correct this, we must credit Rent Received by \\$1,200 (\(\\\$600\) to cancel the incorrect debit and \\$600 to record the actual income). This increases income and net profit by \\$1,200.

\(Corrected\\ Net\\ Profit = \\\$74,200 + \\\$800 + \\\$180 + \\\$1,200 = \\\$76,380\)

1 mark for correct calculation of corrected net profit. Correct option is D.

1. Calculate Cost of Goods Sold (COGS) from sales:
\(\text{Sales} = \text{Cost of Sales} \times (1 + \text{Mark-up})\)
\(\$105,000 = \text{COGS} \times 1.25\)
\(\text{COGS} = \$105,000 / 1.25 = \$84,000\)

2. Calculate closing inventory using the inventory valuation equation:
\(\text{Opening Inventory} + \text{Purchases} - \text{Inventory Destroyed} - \text{Closing Inventory} = \text{COGS}\)
\(\$12,000 + \$85,000 - \$3,000 - \text{Closing Inventory} = \$84,000\)
\(\$94,000 - \text{Closing Inventory} = \$84,000\)
\(\text{Closing Inventory} = \$10,000\)

Note: The insurance payout of $2,000 does not affect the physical cost of closing inventory remaining in the business.

1 mark for the correct calculation of closing inventory ($10,000).

Award 0 marks for:
* $13,000 (ignoring destroyed inventory)
* $11,000 (incorrectly subtracting the insurance claim value instead of the cost of destroyed inventory)

1. Determine contribution per unit:
\(\text{Contribution} = \text{Selling Price} - \text{Variable Cost} = \$50 - \$30 = \$20\text{ per unit}\).

2. Test target volume assuming no increase in fixed costs (volume \le 10,000 units):
\(\text{Target Contribution} = \text{Fixed Costs} + \text{Target Profit} = \$120,000 + \$90,000 = \$210,000\)
\(\text{Required Units} = \$210,000 / \$20 = 10,500\text{ units}\).
Since 10,500 units is above the 10,000 unit threshold, the fixed costs will step up.

3. Calculate target volume including the stepped-up fixed costs (volume > 10,000 units):
\(\text{New Fixed Costs} = \$120,000 + \$30,000 = \$150,000\)
\(\text{Target Contribution} = \$150,000 + \$90,000 = \$240,000\)
\(\text{Required Units} = \$240,000 / \$20 = 12,000\text{ units}\).

1 mark for the correct unit calculation of 12,000 units.

Award 0 marks for:
* 10,500 units (failing to include the step-up in fixed costs)

1. Determine the fair value of net assets taken over:
\(\text{Book value of net assets} = \$180,000\)
\(\text{Less: Bank balance not taken over} = (\$15,000)\)
\(\text{Add: Revaluation of non-current assets} = \$40,000\)
\(\text{Less: Inventory write-down} = (\$10,000)\)
\(\text{Fair value of net assets acquired} = \$180,000 - \$15,000 + \$40,000 - \$10,000 = \$195,000\)

2. Calculate the purchase consideration:
\(\text{Purchase Consideration} = 100,000\text{ shares} \times \$2.20\text{ (nominal value of \$1.00 + premium of \$1.20)} = \$220,000\)

3. Calculate Goodwill:
\(\text{Goodwill} = \text{Purchase Consideration} - \text{Fair Value of Net Assets Acquired}\)
\(\text{Goodwill} = \$220,000 - \$195,000 = \$25,000\)

1 mark for the correct calculation of goodwill ($25,000).

Award 0 marks for:
* $10,000 (failing to exclude the bank account not taken over)
* $45,000 (various incorrect asset adjustments)

1. Calculate Finance Costs:
\(\text{Interest on Debentures} = 8\% \times \$100,000 = \$8,000\)

2. Calculate Profit Before Tax:
\(\text{Profit before tax} = \text{EBIT} - \text{Finance Costs} = \$108,000 - \$8,000 = \$100,000\)

3. Calculate Profit for the Year (after tax):
\(\text{Tax} = 20\% \times \$100,000 = \$20,000\)
\(\text{Profit for the year} = \$100,000 - \$20,000 = \$80,000\)

4. Calculate Earnings Per Share (EPS):
\(\text{EPS} = \text{Profit for the year} / \text{Number of ordinary shares}\)
\(\text{EPS} = \$80,000 / 500,000\text{ shares} = \$0.16\text{ per share}\)

5. Calculate P/E Ratio:
\(\text{P/E Ratio} = \text{Market Price per Share} / \text{EPS}\)
\(\text{P/E Ratio} = \$2.40 / \$0.16 = 15.0\)

1 mark for the correct P/E ratio of 15.0.

Award 0 marks for:
* 12.0 (omitting the tax calculation)
* 13.9 (omitting the interest calculation)

1. Find closing provision for unrealized profit in inventory:
The transfer price is 120% of factory cost (100% cost + 20% markup).
\(\text{Unrealized profit} = \$36,000 \times \frac{20}{120} = \$6,000\)

2. Find the movement in the provision:
\(\text{Closing Provision} - \text{Opening Provision} = \$6,000 - \$4,000 = \$2,000\text{ increase}\)

3. Determine the accounting entry:
An increase in the provision for unrealized profit increases the cost of sales/expenses and is therefore a debit to the income statement.

1 mark for the correct amount and direction of adjustment ($2,000 debit).

Award 0 marks for:
* $2,000 credit (incorrect entry direction)
* $3,200 debit (using incorrect markup fraction \(20/100\) instead of \(20/120\))

1. Calculate present value (PV) of net cash inflows:
* Year 1: \(\$50,000 \times 0.909 = \$45,450\)
* Year 2: \(\$60,000 \times 0.826 = \$49,560\)
* Year 3: \(\$40,000 \times 0.751 = \$30,040\)
* Total PV of cash inflows = \(\$45,450 + \$49,560 + \$30,040 = \$125,050\)

2. Calculate NPV:
\(\text{NPV} = \text{Total PV of inflows} - \text{Initial Outlay}\)
\(\text{NPV} = \$125,050 - \$120,000 = \$5,050\)

1 mark for the correct calculation of NPV ($5,050).

Award 0 marks for:
* $(5,050) (negative value)
* $30,000 (ignoring discounting)
* $125,050 (calculating only PV of inflows and not subtracting the outflow)

1. Determine required Closing Inventory for February:
\(\text{Closing Inventory (Feb)} = 20\% \times \text{March Sales} = 0.20 \times 15,000 = 3,000\text{ units}\)

2. Determine Opening Inventory for February (equal to Closing Inventory of January):
\(\text{Opening Inventory (Feb)} = 20\% \times \text{February Sales} = 0.20 \times 10,000 = 2,000\text{ units}\)

3. Calculate production required for February:
\(\text{Production} = \text{Sales (Feb)} + \text{Closing Inventory (Feb)} - \text{Opening Inventory (Feb)}\)
\(\text{Production} = 10,000 + 3,000 - 2,000 = 11,000\text{ units}\)

1 mark for the correct production volume of 11,000 units.

Award 0 marks for:
* 10,000 units (ignoring inventory level changes)
* 10,400 units (incorrectly using 20% of January sales as the opening inventory of February)

1. Determine the closing prepayment at 31 December 2023:
The invoice of $3,000 covers 3 months (Dec 2023, Jan 2024, Feb 2024).
At 31 December 2023, the prepayment is for 2 months (Jan and Feb 2024).
\(\text{Prepayment} = \$3,000 \times \frac{2}{3} = \$2,000\)

2. Calculate rent expense using the accrual formula:
\(\text{Rent Expense} = \text{Opening Prepayment} + \text{Rent Paid} - \text{Closing Prepayment}\)
\(\text{Rent Expense} = \$1,500 + \$18,000 - \$2,000 = \$17,500\)

1 mark for the correct rent expense calculation ($17,500).

Award 0 marks for:
* $16,500 (treating the entire $3,000 invoice as prepaid)
* $18,500 (prepaying only 1 month's rent)

First, calculate the fair value of net assets acquired: Revalued Non-current assets ($150,000) + Current assets ($40,000) - Current liabilities ($15,000) = $175,000. Goodwill is calculated as Purchase Consideration ($210,000) - Fair value of net assets acquired ($175,000) = $35,000.

1 mark for the correct calculation of goodwill ($35,000).

Present value of cash inflows: Year 1: $80,000 * 0.909 = $72,720. Year 2: $70,000 * 0.826 = $57,820. Year 3: $60,000 * 0.751 = $45,060. Year 4: $40,000 * 0.683 = $27,320. Total Present Value of Cash Inflows = $72,720 + $57,820 + $45,060 + $27,320 = $202,920. Net Present Value = Total Present Value - Initial Outflow = $202,920 - $180,000 = $22,920.

1 mark for the correct Net Present Value ($22,920).

Production requirements for October: 8,000 units * 2.5 kg = 20,000 kg. Production requirements for November: 9,000 units * 2.5 kg = 22,500 kg. Budgeted closing inventory for October (15% of November requirements) = 15% * 22,500 kg = 3,375 kg. Budgeted purchases for October = October production requirements + Closing inventory - Opening inventory = 20,000 kg + 3,375 kg - 3,000 kg = 20,375 kg.

1 mark for the correct budgeted purchases (20,375 kg).

Remaining trade receivables = $48,000 - $1,200 = $46,800. Required allowance for doubtful debts = 5% * $46,800 = $2,340. Increase in allowance required = $2,340 - $1,800 = $540. Total charge to income statement = Irrecoverable debt written off + Increase in allowance = $1,200 + $540 = $1,740.

1 mark for the correct total net charge ($1,740).

Contribution per unit = Selling price - Variable cost = $50 - $30 = $20. Total required contribution = Fixed costs + Target profit = $180,000 + $60,000 = $240,000. Required sales volume = Total required contribution / Contribution per unit = $240,000 / $20 = 12,000 units.

1 mark for the correct required sales volume (12,000 units).

Total dividend per share = Interim dividend + Final dividend = $0.03 + $0.05 = $0.08. Total dividends paid/declared = 500,000 shares * $0.08 = $40,000. Dividend cover ratio = Profit for the year / Total dividends = $120,000 / $40,000 = 3.0 times.

1 mark for the correct dividend cover ratio (3.0 times).

Cost of raw materials consumed = Opening inventory ($14,000) + Purchases ($85,000) + Carriage inwards ($3,500) - Closing inventory ($16,500) = $86,000. Prime cost = Cost of raw materials consumed + Direct wages = $86,000 + $42,000 = $128,000. Factory overheads are excluded from prime cost.

1 mark for the correct prime cost ($128,000).

The trial balance debits exceeded credits by $450, meaning the suspense account opened with a credit balance of $450. Correction of Error 1: The supplier's account was under-credited by $540 ($600 - $60). To correct this, credit the supplier's account by $540 and debit the suspense account by $540. Correction of Error 2: The sales account was over-credited by $90. To correct this, debit the sales account by $90 and credit the suspense account by $90. After these corrections, the suspense account balance is: $450 credit (opening) - $540 debit (Error 1) + $90 credit (Error 2) = $0.

1 mark for the correct final balance on the suspense account ($0).

The purchase consideration is calculated as follows:
- Cash paid: $30,000
- Market value of shares issued: \(80,000 \times \$1.75 = \$140,000\)
- Total purchase consideration: \(\$30,000 + \$140,000 = \$170,000\)

Goodwill is the difference between the purchase consideration and the fair value of the net assets acquired:
\(\text{Goodwill} = \text{Purchase consideration} - \text{Fair value of net assets}\)
\(\text{Goodwill} = \$170,000 - \$150,000 = \$20,000\).

1 mark for the correct answer (A).

Distractor Analysis:
- B: Incorrectly uses the book value of net assets of $120,000 instead of the fair value: \(\$170,000 - \$120,000 = \$50,000\).
- C: Incorrectly identifies only the market value of shares as the total purchase consideration without subtracting net assets or including cash.
- D: Incorrectly states the total purchase consideration of $170,000 without deducting the net assets acquired.

The residual value of $10,000 represents a cash inflow at the end of Year 4. Therefore, total Year 4 cash flow is \(\$20,000 + \$10,000 = \$30,000\).

Discounting the cash flows to present values:
- Year 1: \(\$30,000 \times 0.909 = \$27,270\)
- Year 2: \(\$25,000 \times 0.826 = \$20,650\)
- Year 3: \(\$25,000 \times 0.751 = \$18,775\)
- Year 4: \(\$30,000 \times 0.683 = \$20,490\)

Total present value (PV) of cash inflows: \(\$27,270 + \$20,650 + \$18,775 + \$20,490 = \$87,185\).

Net Present Value (NPV): \(\$87,185 - \$80,000 = \$7,185\).

1 mark for the correct answer (B).

Distractor Analysis:
- A: Omits the residual value from Year 4 cash inflows entirely: \(\$80,355 - \$80,000 = \$355\).
- C: Incorrectly subtracts the residual value from the initial cost of the investment upfront without discounting it: \(\$80,355 - \$70,000 = \$10,355\).
- D: Incorrectly adds the undiscounted residual value of $10,000 directly to the correct NPV: \(\$7,185 + \$10,000 = \$17,185\).

The standard quantity (SQ) allowed for actual production is:
\(\text{SQ} = 1,500\text{ units} \times 3\text{ kg} = 4,500\text{ kg}\)

The standard price (SP) is $4.00 per kg.

The material usage variance formula is:
\(\text{Material Usage Variance} = (\text{Standard Quantity} - \text{Actual Quantity}) \times \text{Standard Price}\)

Since the variance is favourable, the actual quantity (AQ) is less than the standard quantity:
\(\$600 = (4,500 - \text{AQ}) \times \$4.00\)
\(150 = 4,500 - \text{AQ}\)
\(\text{AQ} = 4,350\text{ kg}\).

1 mark for the correct answer (B).

Distractor Analysis:
- A: Incorrectly calculates the variance adjustment using an incorrect factor.
- C: Identifies only the standard quantity (SQ) of 4,500 kg, ignoring the favourable variance.
- D: Treats the favourable variance as adverse, resulting in \(4,500 + 150 = 4,650\text{ kg}\).

First, calculate the Earnings Per Share (EPS):
\(\text{EPS} = \frac{\text{Profit after tax}}{\text{Number of ordinary shares}} = \frac{\$480,000}{2,000,000} = \$0.24\text{ per share}\)

Next, calculate the Price Earnings (P/E) ratio:
\(\text{P/E ratio} = \frac{\text{Market price per share}}{\text{EPS}} = \frac{\$2.40}{\$0.24} = 10\text{ times}\).

1 mark for the correct answer (B).

Distractor Analysis:
- A: Incorrectly uses a ratio of market price to dividend per share or simple ratio of variables.
- C: Double the correct EPS or other computational error.
- D: Incorrectly calculates the ratio using the dividend paid per share instead of the EPS: \(\frac{\$2.40}{\$0.10} = 24\text{ times}\).

Since the goods are transferred at cost plus 20%, the transfer price represents 120% of cost. The profit element is \(\frac{20}{120} = \frac{1}{6}\) of the transfer price.

- Unrealised profit in opening inventory: \(\$36,000 \times \frac{1}{6} = \$6,000\)
- Unrealised profit in closing inventory: \(\$48,000 \times \frac{1}{6} = \$8,000\)

Adjustment needed = Closing provision - Opening provision = \(\$8,000 - \$6,000 = \$2,000\) increase. This increase is debited to the income statement as an expense.

1 mark for the correct answer (B).

Distractor Analysis:
- A: Incorrectly identifies the adjustment as a decrease.
- C: Incorrectly treats the 20% as margin instead of markup (\(20\%\) of transfer price) and identifies it as a decrease.
- D: Incorrectly calculates the profit element using 20% as margin (\(\$48,000 \times 20\% = \$9,600\) and \(\$36,000 \times 20\% = \$7,200\)), leading to a \(\$2,400\) increase.

First, calculate the required good production to meet sales and inventory targets:
\(\text{Good production needed} = \text{Sales} + \text{Closing inventory} - \text{Opening inventory}\)
\(\text{Good production needed} = 12,000 + 4,500 - 3,000 = 13,500\text{ units}\)

Since 10% of total units produced are defective, the good units represent 90% of the total production:
\(\text{Total production} = \frac{\text{Good production needed}}{0.90}\)
\(\text{Total production} = \frac{13,500}{0.90} = 15,000\text{ units}\).

1 mark for the correct answer (C).

Distractor Analysis:
- A: Only calculates the required good production (13,500 units), completely ignoring the 10% defect rate.
- B: Incorrectly adds 10% of the good production requirement as defects: \(13,500 \times 1.10 = 14,850\text{ units}\).
- D: Incorrectly adds the change in inventory and defect rate in a non-standard manner.

### (a) Sarah - Statement of Profit or Loss for the year ended 31 December 2023

| | $ | $ |
| :--- | :--- | :--- |
| **Revenue** | | 185,000 |
| Less: Returns inward | | (3,200) |
| **Net Revenue** | | **181,800** |
| | | |
| **Cost of Sales** | | |
| Opening Inventory | 14,500 | |
| Purchases \((112,000 - 1,500)\) | 110,500 | |
| Carriage inwards | 2,100 | |
| Less: Returns outward | (1,800) | |
| | 125,300 | |
| Less: Closing Inventory \((16,800 - 500)\) | (16,300) | |
| **Cost of Sales** | | **(109,000)** |
| **Gross Profit** | | **72,800** |
| | | |
| **Other Income** | | |
| Decrease in allowance for doubtful debts \((600 - 540)\) | | 60 |
| | | **72,860** |
| | | |
| **Expenses** | | |
| Rent and rates \((9,600 - 800)\) | 8,800 | |
| Wages and salaries \((24,400 + 1,600)\) | 26,000 | |
| General expenses \((6,800 - 1,200)\) | 5,600 | |
| Irrecoverable debts | 400 | |
| Depreciation - Equipment \((10\% \times 40,000)\) | 4,000 | |
| Depreciation - Motor vehicles \((20\% \times (28,000 - 11,200))\) | 3,360 | |
| **Total Expenses** | | **(48,160)** |
| **Profit for the year** | | **24,700** |

**Workings:**
- *Closing Inventory adjustment:* Cost of damaged inventory is $1,200. Net Realisable Value (NRV) is \(800 - 100 = 700\). Inventory is valued at the lower of cost and NRV, so inventory must be reduced by \(1,200 - 700 = 500\). Correct closing inventory = \(16,800 - 500 = 16,300\).
- *Allowance for doubtful debts:* Adjusted trade receivables = \(18,400 - 400 = 18,000\). New allowance = \(3\% \times 18,000 = 540\). Decrease = \(600 - 540 = 60\).

---

### (b) Sarah - Statement of Financial Position at 31 December 2023

| **Assets** | Cost ($) | Acc. Dep. ($) | NBV ($) |
| :--- | :--- | :--- | :--- |
| **Non-Current Assets** | | | |
| Equipment | 40,000 | 20,000 | 20,000 |
| Motor vehicles | 28,000 | 14,560 | 13,440 |
| **Total Non-Current Assets** | **68,000** | **34,560** | **33,440** |
| | | | |
| **Current Assets** | | | |
| Inventory | | | 16,300 |
| Trade Receivables \((18,000 - 540)\) | | | 17,460 |
| Other Receivables (Prepayment) | | | 800 |
| Bank | | | 3,500 |
| **Total Current Assets** | | | **38,060** |
| **Total Assets** | | | **71,500** |
| | | | |
| **Capital and Liabilities** | | | |
| **Capital** | | | |
| Balance at 1 January 2023 | | | 51,600 |
| Add: Profit for the year | | | 24,700 |
| | | | 76,300 |
| Less: Drawings \((14,900 + 1,500 + 1,200)\) | | | (17,600) |
| **Closing Capital** | | | **54,700** |
| | | | |
| **Current Liabilities** | | | |
| Trade Payables | | | 11,200 |
| Other Payables (Accrued wages) | | | 1,600 |
| **Total Current Liabilities** | | | **12,800** |
| **Total Capital and Liabilities** | | | **71,500** |

---

### (c) Differences between Capital Expenditure and Revenue Expenditure
1. **Nature/Purpose:** Capital expenditure is money spent on acquiring or improving non-current assets (yielding long-term benefits beyond one financial year). Revenue expenditure is money spent on the day-to-day running expenses of the business (yielding short-term benefits within the current financial year).
2. **Financial Statement Treatment:** Capital expenditure is capitalised and shown as a non-current asset on the Statement of Financial Position. Revenue expenditure is recognized as an expense in the Statement of Profit or Loss in the period it is incurred.

### (a) Statement of Profit or Loss [Total: 16 marks]
- Net Revenue: $181,800 [1 mark]
- Opening Inventory: $14,500 [1 mark]
- Purchases (adjusted for drawings): $110,500 [2 marks (1 mark for showing deduction of 1,500, 1 mark for correct figure)]
- Carriage inwards & Returns outward correctly positioned: [1 mark]
- Closing Inventory: $16,300 [2 marks (1 mark for showing lower of cost and NRV calculation, 1 mark for correct figure)]
- Rent and rates: $8,800 [1 mark]
- Wages and salaries: $26,000 [1 mark]
- General expenses: $5,600 [1 mark]
- Irrecoverable debts: $400 [1 mark]
- Decrease in allowance for doubtful debts: $60 [2 marks (1 mark for calculating correct new allowance of $540, 1 mark for decrease of $60)]
- Depreciation - Equipment: $4,000 [1 mark]
- Depreciation - Motor vehicles: $3,360 [1 mark]
- Profit for the year: $24,700 [1 mark (OF)]

### (b) Statement of Financial Position [Total: 10 marks]
- Non-current Assets NBV: $33,440 [2 marks (1 mark for Equipment NBV of $20,000, 1 mark for Motor vehicles NBV of $13,440)]
- Closing Inventory: $16,300 [1 mark (OF)]
- Net Trade Receivables: $17,460 [2 marks (1 mark for receivables less written-off debt, 1 mark for correct net figure)]
- Other Current Assets (Prepayments and Bank): $4,300 [1 mark for both correct]
- Current Liabilities (Payables and Accrual): $12,800 [1 mark for both correct]
- Opening Capital: $51,600 [1 mark]
- Adjusted Drawings: $17,600 [1 mark]
- Perfect balance of Statement of Financial Position: $71,500 [1 mark (OF)]

### (c) Differences [Total: 4 marks]
- Explanation of first difference (e.g., long-term vs short-term benefit): [2 marks (1 mark for capital, 1 mark for revenue)]
- Explanation of second difference (e.g., balance sheet vs income statement presentation): [2 marks (1 mark for capital, 1 mark for revenue)]

**(a) Journal Entries**

$$\begin{array}{c|l|c|c}
\textbf{Error} & \textbf{Details} & \textbf{Debit (\$)} & \textbf{Credit (\$)} \\
\hline
1 & \text{Office Equipment} & 1,200 & \\
& \quad \text{Repairs and Maintenance} & & 1,200 \\
\hline
2 & \text{J. Patel} & 340 & \\
& \quad \text{J. Patil} & & 340 \\
\hline
3 & \text{Discount Allowed} & 85 & \\
& \quad \text{Suspense} & & 85 \\
\hline
4 & \text{Purchases} & 150 & \\
& \quad \text{Suspense} & & 150 \\
\hline
5 & \text{Suspense} & 540 & \\
& \quad \text{Rent (\$820 - \$280)} & & 540 \\
\hline
6 & \text{S. Khan (\$920 - \$185)} & 735 & \\
& \quad \text{Suspense} & & 735 \\
\end{array}$$

**(b) Suspense Account**

$$\begin{array}{lr|lr}
\textbf{Debit} & \textbf{\$} & \textbf{Credit} & \textbf{\$}\\
\hline
\text{Difference on trial balance (opening)} & 430 & \text{Discount Allowed} & 85 \\
\text{Rent} & 540 & \text{Purchases} & 150 \\
& & \text{S. Khan} & 735 \\
\hline
\textbf{Total} & \textbf{970} & \textbf{Total} & \textbf{970} \\
\hline
\end{array}$$

*Note on Opening Balance:* Since the credit total of the trial balance exceeded the debit total by \( \$430 \), a debit entry of \( \$430 \) is required in the suspense account to make the trial balance agree initially.

**(c) Statement of Corrected Profit**

$$\begin{array}{l|r|r}
\textbf{Item} & \textbf{\$} & \textbf{\$} \\
\hline
\text{Draft profit for the year} & & 14,800 \\
\text{Add: decrease in Repairs and maintenance (Error 1)} & 1,200 & \\
\text{\quad\ \ decrease in Rent expense (Error 5)} & 540 & 1,740 \\
\hline
& & 16,540 \\
\text{Less: increase in Discount allowed (Error 3)} & (85) & \\
\text{\quad\ \ increase in Purchases (Error 4)} & (150) & (235) \\
\hline
\textbf{Corrected profit for the year} & & \mathbf{16,305} \\
\end{array}$$

**(a) Journal Entries [6 marks]**
- 1 mark for each correct journal entry (both debit, credit, and correct amount). No mark if accounts are reversed or incorrect amounts used.

**(b) Suspense Account [5 marks]**
- 1 mark for Opening Balance/Difference of \( \$430 \) on Debit side.
- 1 mark for Rent \( \$540 \) on Debit side.
- 1 mark for Discount Allowed \( \$85 \) on Credit side.
- 1 mark for Purchases \( \$150 \) on Credit side.
- 1 mark for S. Khan \( \$735 \) on Credit side.

**(c) Statement of Corrected Profit [4 marks]**
- 1 mark for adding Repairs of \( \$1,200 \).
- 1 mark for adding Rent of \( \$540 \).
- 1 mark for subtracting both Discount Allowed (\( \$85 \)) and Purchases (\( \$150 \)).
- 1 mark (Own Figure - OF) for corrected profit of \( \$16,305 \) (conditional on working shown).

**(a) Statement of Changes in Equity for Veloce PLC for the year ended 31 December 2022**

\begin{array}{|l|c|c|c|c|c|c|}
\hline
& \text{Ordinary} & \text{Share} & \text{Revaluation} & \text{General} & \text{Retained} & \text{Total} \\
& \text{Shares} & \text{Premium} & \text{Reserve} & \text{Reserve} & \text{Earnings} & \\
& \text{$} & \text{$} & \text{$} & \text{$} & \text{$} & \text{$} \\
\hline
\text{Balance at 1 Jan 2022} & 300,000 & 120,000 & 40,000 & 50,000 & 185,000 & 695,000 \\
\text{Profit for the year} & - & - & - & - & 93,000 & 93,000 \\
\text{Other comprehensive income (Revaluation)} & - & - & 25,000 & - & - & 25,000 \\
\text{Rights issue (W1)} & 60,000 & 30,000 & - & - & - & 90,000 \\
\text{Dividends paid (W2)} & - & - & - & - & (36,000) & (36,000) \\
\text{Bonus issue (W3)} & 45,000 & (45,000) & - & - & - & - \\
\text{Transfer to general reserve} & - & - & - & 15,000 & (15,000) & - \\
\hline
\textbf{Balance at 31 Dec 2022} & \textbf{405,000} & \textbf{105,000} & \textbf{65,000} & \textbf{65,000} & \textbf{227,000} & \textbf{867,000} \\
\hline
\end{array}

**Workings:**

* **W1: Rights Issue (1 March 2022)**
$$\text{Number of opening shares} = \frac{\$300,000}{\$0.50} = 600,000 \text{ shares}$$
$$\text{Rights shares issued} = \frac{600,000}{5} = 120,000 \text{ shares}$$
$$\text{Increase in Ordinary Share Capital} = 120,000 \times \$0.50 = \$60,000$$
$$\text{Increase in Share Premium} = 120,000 \times (\$0.75 - \$0.50) = \$30,000$$
$$\text{Total Cash Received} = 120,000 \times \$0.75 = \$90,000$$

* **W2: Dividend Paid (1 September 2022)**
$$\text{Shares in issue} = 600,000 \text{ (opening)} + 120,000 \text{ (rights)} = 720,000 \text{ shares}$$
$$\text{Interim Dividend Paid} = 720,000 \times \$0.05 = \$36,000$$

* **W3: Bonus Issue (1 November 2022)**
$$\text{Shares in issue} = 720,000 \text{ shares}$$
$$\text{Bonus shares issued} = \frac{720,000}{8} = 90,000 \text{ shares}$$
$$\text{Value of bonus issue} = 90,000 \times \$0.50 = \$45,000$$
Since the directors wish to leave revenue reserves as flexible as possible, they fund the bonus issue from the share premium account (capital reserve) first:
$$\text{Debit Share Premium } \$45,000 \text{ and Credit Ordinary Share Capital } \$45,000$$

* **W4: Profit for the year**
$$\text{Net Profit after Tax} = \$115,000 - \$22,000 = \$93,000$$

***

**(b) Capital vs Revenue Reserves**
* **Capital Reserves**: Created from non-trading events, such as share issues premium or revaluation of non-current assets. They are generally not available for distribution as cash dividends.
* *Example from question*: Share premium or Revaluation reserve.
* **Revenue Reserves**: Created out of undistributed trading profits. They are available for distribution as cash dividends to shareholders.
* *Example from question*: Retained earnings or General reserve.

**Part (a) [11 Marks]**
* **Opening balances**: Correctly brought forward. (1 mark for all correct)
* **Profit for the year**: $93,000 correctly entered in Retained Earnings and Total columns. (1 mark)
* **Revaluation**: $25,000 correctly entered in Revaluation Reserve and Total columns. (1 mark)
* **Rights issue**:
* Increase of $60,000 in Ordinary Shares. (1 mark)
* Increase of $30,000 in Share Premium. (1 mark)
* Increase of $90,000 in Total. (1 mark)
* **Interim Dividend**: Correct calculation ($36,000) and presentation as a deduction in Retained Earnings and Total columns. (2 marks; 1 mark for correct working, 1 mark for correct column entry)
* **Bonus issue**:
* Increase of $45,000 in Ordinary Shares. (1 mark)
* Decrease of $45,000 in Share Premium (no impact on Total). (1 mark)
* **Transfer to general reserve**: $15,000 transfer from Retained Earnings to General Reserve (no impact on Total). (1 mark)
* **Closing balances**: Correct total figures across all columns. (1 mark)

**Part (b) [4 Marks]**
* **Capital reserves definition**: Created from non-trading transactions / not distributable as cash dividends. (1 mark)
* **Capital reserve example**: Share premium OR Revaluation reserve. (1 mark)
* **Revenue reserves definition**: Created from retained trading profits / distributable as cash dividends. (1 mark)
* **Revenue reserve example**: Retained earnings OR General reserve. (1 mark)

(a) Absorption Costing Income Statement for Month 1
First, calculate the Overhead Absorption Rate (OAR):
\(\text{OAR} = \frac{\$40,000}{\text{10,000 units}} = \$4.00\) per unit.
Total absorption cost per unit = \(\$12 \text{ (Materials)} + \$12 \text{ (Labour)} + \$3 \text{ (Variable Overhead)} + \$4 \text{ (Fixed Overhead)} = \$31.00\).

Revenue (8,000 units * $45) = $360,000
Cost of Goods Sold:
Opening Inventory = $0
Add: Cost of Goods Manufactured (9,500 units * $31) = $294,500
Less: Closing Inventory (1,500 units * $31) = ($46,500)
Cost of Goods Sold (at standard) = $248,000
Add: Under-absorbed overheads = $2,000
Workings for under-absorption: Budgeted fixed overheads ($40,000) - Absorbed overheads (9,500 units * $4 = $38,000) = $2,000.
Adjusted Cost of Goods Sold = $250,000
Gross Profit = $110,000
Less Expenses:
Variable selling and distribution (8,000 * $2) = $16,000
Fixed selling and administration = $15,000
Net Profit = $79,000

(b) Marginal Costing Income Statement for Month 1
Total variable production cost per unit = \(\$12 + \$12 + \$3 = \$27.00\).
Revenue (8,000 units * $45) = $360,000
Variable Cost of Goods Sold:
Opening Inventory = $0
Add: Variable Cost of Goods Manufactured (9,500 * $27) = $256,500
Less: Closing Inventory (1,500 * $27) = ($40,500)
Variable Cost of Goods Sold (at standard) = $216,000
Add: Variable selling and distribution (8,000 * $2) = $16,000
Total Variable Cost = $232,000
Contribution = $128,000
Less Fixed Costs:
Fixed manufacturing overheads = $40,000
Fixed selling and administration = $15,000
Net Profit = $73,000

(c) Reconciliation Statement
Profit under Absorption Costing = $79,000
Less: Fixed overhead element in closing inventory (1,500 units * $4.00 OAR) = ($6,000)
Profit under Marginal Costing = $73,000
Explanation: Under absorption costing, $6,000 of fixed manufacturing overheads is carried forward to the next period inside the closing inventory value, increasing the reported profit. Under marginal costing, all fixed overheads incurred ($40,000) are expensed in the current period.

(d) Special Order Evaluation
- Capacity constraint: The maximum capacity is 10,000 units. Normal demand in Month 2 is 8,500 units. The special order is for 2,000 units.
- Total required production = \(8,500 + 2,000 = 10,500\) units. This exceeds capacity by 500 units.
- Therefore, Zeta Ltd must sacrifice 500 units of normal sales to accept the order.
- Contribution from special order = \(\text{Special price (\$29)} - \text{Variable manufacturing cost (\$27)} = \$2.00\) per unit.
- Total contribution from special order = \(2,000 \text{ units} \times \$2 = \$4,000\).
- Contribution from normal sales = \(\text{Normal price (\$45)} - \text{Total variable cost (\$27 + \$2)} = \$16.00\) per unit.
- Total lost contribution from normal sales = \(500 \text{ units} \times \$16 = \$8,000\).
- Net financial effect = \(\text{Special order contribution (\$4,000)} - \text{Lost normal contribution (\$8,000)} = -\$4,000\) (decrease in profit).
- Advice: The directors should reject the special order as it reduces the company's net profit by $4,000.

(e) Advantages of Marginal Costing for Decision-making
1. Fixed costs are treated as period costs, meaning profits are not influenced by changes in inventory levels, providing a more realistic picture of operational performance.
2. It highlights the contribution per unit, which is vital for short-term decisions such as special pricing, make-or-buy decisions, and optimal product mix under limiting factors.
3. It avoids the arbitrary allocation of fixed overheads to products, preventing potential decision errors caused by distorted product cost estimates.

(a) Absorption Costing Statement [8 marks]
- Revenue $360,000 [1]
- Unit Cost $31 (and OAR $4) calculation shown [1]
- Cost of Goods Manufactured $294,500 [1]
- Closing inventory valuation $46,500 [1]
- Under-absorbed overhead $2,000 correctly calculated and added [1]
- Gross Profit $110,000 [1 OF]
- Variable selling $16,000 and fixed admin $15,000 [1]
- Net Profit $79,000 [1 OF]

(b) Marginal Costing Statement [6 marks]
- Revenue $360,000 [1]
- Variable production cost $256,500 and Closing inventory $40,500 [1]
- Variable selling expenses $16,000 [1]
- Contribution $128,000 [1 OF]
- Deducting both fixed costs ($40,000 + $15,000) [1]
- Net Profit $73,000 [1 OF]

(c) Reconciliation [4 marks]
- Showing correct profit figures ($79,000 and $73,000) [1]
- Identifying difference of $6,000 [1]
- Explaining difference is due to change in inventory of 1,500 units [1]
- Showing calculation: \(1,500 \text{ units} \times \$4.00 = \$6,000\) [1]

(d) Special Order [6 marks]
- Special order contribution per unit ($2) or total ($4,000) [1]
- Identifying capacity shortfall of 500 units [1]
- Calculating normal contribution lost per unit ($16) [1]
- Calculating total contribution lost ($8,000) [1]
- Calculating net decrease in profit of $4,000 [1]
- Recommendation to reject based on financial analysis [1]

(e) Advantages [6 marks]
- Award 2 marks for each well-explained advantage up to a maximum of 3 points.

Part (a): Realisation Account calculation
To calculate the gain or loss on realisation:
Debits (Assets transferred at book values + Dissolution expenses):
- Premises: $120,000
- Equipment: $45,000
- Inventory: $18,000
- Trade receivables: $22,000
- Dissolution expenses: $3,500
Total Debits = $208,500

Credits (Liabilities transferred + Purchase Consideration):
- Trade payables: $15,000
- Purchase consideration: $240,000
Total Credits = $255,000

Gain on Realisation = $255,000 - $208,500 = $46,500.
Shared in profit-sharing ratio (3:2):
- Wood: \(\$46,500 \times \frac{3}{5} = \$27,900\)
- Forest: \(\$46,500 \times \frac{2}{5} = \$18,600\)

Part (b): Partners' Capital Accounts
First, determine the total purchase consideration shares value = $240,000 (total) - $50,000 (cash) = $190,000.
Distribution of shares (3:2 ratio):
- Wood: \(\$190,000 \times \frac{3}{5} = \$114,000\) (equivalent to 60,000 shares at $1.90 each)
- Forest: \(\$190,000 \times \frac{2}{5} = \$76,000\) (equivalent to 40,000 shares at $1.90 each)

DetailsWood ($)Forest ($)DetailsWood ($)Forest ($)Ordinary Shares in Vee Ltd114,00076,000Balance b/d110,00070,000Bank (Final settlement)32,90018,600Current account transfer9,0006,000Realisation gain27,90018,600Total146,90094,600Total146,90094,600
Note on cash check: Partnership bank balance originally was $5,000. Cash paid for dissolution was $3,500, leaving $1,500. Cash received from Vee Limited was $50,000. Total bank cash available = $51,500, which exactly equals Wood's settlement ($32,900) + Forest's settlement ($18,600).

Part (c): Goodwill in the books of Vee Limited
Purchase consideration = $240,000
Fair value of net assets acquired:
- Premises: $150,000
- Equipment: $38,000
- Inventory: $16,500
- Trade receivables: \(\$22,000 - \$1,100\) (5% allowance) = $20,900
- Less: Trade payables: ($15,000)
Total fair value of net assets = \(\$150,000 + \$38,000 + \$16,500 + \$20,900 - \$15,000 = \$210,400\)
Goodwill = Purchase consideration - Net assets fair value = \(\$240,000 - \$210,400 = \$29,600\).

Part (d): Reasons to sell to a limited company
1. Limited liability: Owners are only liable for the amount they invest in shares, protecting personal assets.
2. Access to capital: Companies can raise substantial funds by issuing shares or debentures to the public or private investors.
3. Separate legal identity: The company can sue and be sued, sign contracts, and own property in its own name.
4. Perpetual succession / Continuity: The business continues to exist irrespective of the death, retirement, or bankruptcy of individual owners/shareholders.

Part (a) [Total: 6 marks]
- 1 mark for listing/transferring all assets at book value (Premises, Equipment, Inventory, Receivables) to Realisation account.
- 1 mark for transferring Trade Payables ($15,000).
- 1 mark for entering Dissolution expenses ($3,500).
- 1 mark for crediting Purchase consideration ($240,000).
- 1 mark for calculating correct total Gain on Realisation of $46,500.
- 1 mark for correct split of gain: Wood ($27,900) and Forest ($18,600) (allow OF from previous lines).

Part (b) [Total: 10 marks]
- 1 mark for correct opening capital balances (Wood: $110,000 Cr; Forest: $70,000 Cr).
- 1 mark for transferring current accounts (Wood: $9,000 Cr; Forest: $6,000 Cr).
- 1 mark for transferring realisation gain (Wood: $27,900 Cr; Forest: $18,600 Cr) [OF].
- 3 marks in total for Vee Ltd Shares distribution:
* 1 mark for calculating the total share valuation of $190,000 (PC $240,000 - Cash $50,000).
* 1 mark for Wood's share allocation of $114,000 (Dr).
* 1 mark for Forest's share allocation of $76,000 (Dr).
- 4 marks in total for Bank settlement entries:
* 1 mark for establishing the total cash available in the partnership is $51,500 (calculation of bank balance).
* 1 mark for Wood's final cash payment of $32,900 (Dr).
* 1 mark for Forest's final cash payment of $18,600 (Dr).
* 1 mark for balancing and closing both capital accounts correctly.

Part (c) [Total: 5 marks]
- 1 mark for identifying the correct Purchase Consideration of $240,000.
- 1 mark for fair value adjustments of Premises ($150,000) and Equipment ($38,000).
- 1 mark for fair value adjustments of Inventory ($16,500) and Trade Receivables ($20,900).
- 1 mark for deducting Trade Payables taken over ($15,000).
- 1 mark for correct goodwill of $29,600 (allow OF from calculated net asset value).

Part (d) [Total: 4 marks]
- 1 mark for each valid reason stated, up to a maximum of 4 marks:
* Limited liability of shareholders.
* Greater capacity to raise capital for expansion.
* Separate legal entity status.
* Perpetual succession / continuous existence.
* Ease of transferring ownership through share transfers.
* Potential for economies of scale or synergy.

**(a) Calculation of current ratios (31 December 2023):**

(i) **Return on Capital Employed (ROCE):**
$$\text{Capital Employed} = \text{Total Equity} + \text{Non-current Liabilities} = \\$1,040,000 + \\$200,000 = \\$1,240,000$$
$$\text{ROCE} = \frac{\text{Operating Profit}}{\text{Capital Employed}} \times 100 \\% = \frac{\\$240,000}{\\$1,240,000} \times 100 \\% = 19.35\\%$$ (or 19.4%)

(ii) **Gearing ratio:**
$$\text{Gearing Ratio} = \frac{\text{Non-current Liabilities}}{\text{Capital Employed}} \times 100 \\% = \frac{\\$200,000}{\\$1,240,000} \times 100 \\% = 16.13\\%$$ (or 16.1%)

(iii) **Working capital cycle in days:**
- **Inventory turnover period:**
$$\frac{\text{Inventory}}{\text{Cost of Sales}} \times 365 = \frac{\\$180,000}{\\$1,080,000} \times 365 = 60.83 \text{ days}$$
- **Trade receivables collection period:**
$$\frac{\text{Trade Receivables}}{\text{Revenue}} \times 365 = \frac{\\$120,000}{\\$1,800,000} \times 365 = 24.33 \text{ days}$$
- **Trade payables payment period:**
$$\frac{\text{Trade Payables}}{\text{Credit Purchases}} \times 365 = \frac{\\$200,000}{\\$900,000} \times 365 = 81.11 \text{ days}$$
- **Net Working Capital Cycle:**
$$\text{Inventory days} + \text{Receivables days} - \text{Payables days} = 60.83 + 24.33 - 81.11 = 4.05 \text{ days}$$

***

**(b) Projections under expansion options:**
New operating profit = \$240,000 + \$95,000 = \$335,000
New Capital Employed = \$1,240,000 + \$600,000 = \$1,840,000 (under both options)

(i) **Option 1 (Ordinary Shares):**
- **Projected ROCE:**
$$\text{Projected ROCE} = \frac{\\$335,000}{\\$1,840,000} \times 100 \\% = 18.21\\%$$ (or 18.2%)
- **Projected Gearing ratio:**
Debt remains \$200,000.
$$\text{Projected Gearing} = \frac{\\$200,000}{\\$1,840,000} \times 100 \\% = 10.87\\%$$ (or 10.9%)

(ii) **Option 2 (8% Debentures):**
- **Projected ROCE:**
$$\text{Projected ROCE} = \frac{\\$335,000}{\\$1,840,000} \times 100 \\% = 18.21\\%$$ (or 18.2%)
- **Projected Gearing ratio:**
Debt increases to \$200,000 + \$600,000 = \$800,000.
$$\text{Projected Gearing} = \frac{\\$800,000}{\\$1,840,000} \times 100 \\% = 43.48\\%$$ (or 43.5%)

***

**(c) Advice and EPS calculations:**

**Current EPS:**
$$\text{EPS} = \frac{\text{Profit for the year}}{\text{Number of ordinary shares}} = \frac{\\$182,400}{500,000} = \\$0.3648 \text{ (36.48 cents)}$$

**Option 1 (Ordinary Shares) Projected EPS:**
- Operating profit: \$335,000
- Less: Interest on existing debentures: (\$12,000)
- Profit before tax: \$323,000
- Less: Tax (20%): (\$64,600)
- Profit for the year: \$258,400
- New number of ordinary shares: 500,000 + 400,000 = 900,000 shares
- **Projected EPS:**
$$\text{EPS} = \frac{\\$258,400}{900,000} = \\$0.2871 \text{ (28.71 cents)}$$

**Option 2 (8% Debentures) Projected EPS:**
- Operating profit: \$335,000
- Less: Interest on existing debentures: (\$12,000)
- Less: Interest on new debentures (8% of \$600,000): (\$48,000)
- Total Finance Costs: (\$60,000)
- Profit before tax: \$275,000
- Less: Tax (20%): (\$55,000)
- Profit for the year: \$220,000
- Number of ordinary shares: 500,000 shares
- **Projected EPS:**
$$\text{EPS} = \frac{\\$220,000}{500,000} = \\$0.4400 \text{ (44.00 cents)}$$

**Evaluation:**
- **Financial Performance (EPS and ROCE):** ROCE decreases slightly from 19.35% to 18.21% under both options because the new assets do not immediately generate as high a return as existing assets. However, Option 2 offers significantly higher EPS (44.00 cents compared to 28.71 cents in Option 1 and the current 36.48 cents). This is due to positive financial leverage (the ROCE of 18.21% exceeds the 8% cost of the debt).
- **Risk and Gearing:** Option 1 reduces gearing to 10.87%, lowering financial risk and giving the company substantial future borrowing capacity. Option 2 increases gearing to 43.48%, which represents a much higher interest burden (\$60,000 vs. \$12,000). If operating profits fall, the interest must still be paid, increasing insolvency risk.
- **Control and Ownership:** Option 1 dilutes the ownership and voting rights of existing shareholders (issuing 400,000 new shares). Option 2 preserves existing ownership control.

**Recommendation:**
The directors should choose **Option 2** because it maximizes shareholder wealth by significantly increasing EPS to 44.00 cents (avoiding the dilution under Option 1 which drops EPS to 28.71 cents). Gearing remains below 50%, which is generally acceptable given the strong profitability of the expansion.

**(a) [10 marks total]**
- (i) ROCE: 1 mark for capital employed calculation, 1 mark for correct ROCE (19.35%). [2 marks]
- (ii) Gearing: 1 mark for formula/workings, 1 mark for correct gearing (16.13%). [2 marks]
- (iii) Working capital cycle in days: [6 marks total]
- Inventory period: 1.5 marks (1 mark working, 0.5 mark answer of 60.83 days)
- Receivables period: 1.5 marks (1 mark working, 0.5 mark answer of 24.33 days)
- Payables period: 1.5 marks (1 mark working, 0.5 mark answer of 81.11 days)
- Net cycle: 1.5 marks (1 mark for net formula/working, 0.5 mark for correct net cycle of 4.05 or 4.1 days)

**(b) [8 marks total]**
- (i) Option 1: 2 marks for Projected ROCE (18.21%), 2 marks for Projected Gearing (10.87%). [4 marks]
- (ii) Option 2: 2 marks for Projected ROCE (18.21%), 2 marks for Projected Gearing (43.48%). [4 marks]
*(Allow OF from part (a) if consistent errors were carried forward)*

**(c) [7 marks total]**
- Projected EPS calculations: 3 marks (1.5 marks for Option 1 of 28.71 cents, 1.5 marks for Option 2 of 44.00 cents).
- Discussion of financial/non-financial factors (e.g., dilution of control, interest burden risk, debt leverage, gearing impact): 3 marks (1 mark per valid point up to 3).
- Clear advice/recommendation with justification: 1 mark.

**(a) Vance Limited
Manufacturing Account for the year ended 31 December 2023**

\begin{array}{lrr}
\hline
& \text{$} & \text{$} \\
\hline
\textbf{Direct materials:} & & \\
\text{Opening inventory of raw materials} & 34,000 & \\
\text{Purchases of raw materials} & 245,000 & \\
\text{Carriage inwards} & 8,500 & \\
\hline
& 287,500 & \\
\text{Less: Closing inventory of raw materials} & (38,500) & \\
\hline
\text{Cost of raw materials consumed} & & 249,000 \\
\textbf{Direct factory wages} (165,000 + 4,500) & & 169,500 \\
\hline
\textbf{PRIME COST} & & \mathbf{418,500} \\
\textbf{Factory overheads:} & & \\
\text{Indirect factory wages} (54,000 - 1,200) & 52,800 & \\
\text{Factory heating and lighting} & 22,000 & \\
\text{Factory administrative expenses} & 38,000 & \\
\text{Rent and rates} (45,000 - 5,000) \times 80\% & 32,000 & \\
\text{Depreciation of plant and machinery} (180,000 \times 10\%) & 18,000 & 162,800 \\
\hline
& & 581,300 \\
\text{Add: Opening inventory of work-in-progress} & & 18,500 \\
\text{Less: Closing inventory of work-in-progress} & & (21,200) \\
\hline
\textbf{COST OF PRODUCTION} & & \mathbf{578,600} \\
\text{Factory profit} (20\% \times 578,600) & & 115,720 \\
\hline
\textbf{TRANSFER VALUE OF FINISHED GOODS} & & \mathbf{694,320} \\
\hline
\end{array}

***

**(b) Vance Limited
Statement of Profit or Loss (Trading and Profit or Loss section) for the year ended 31 December 2023**

\begin{array}{lrr}
\hline
& \text{$} & \text{$} \\
\hline
\text{Sales revenue} & & 820,000 \\
\text{Less: Cost of sales} & & \\
\text{Opening inventory of finished goods (at transfer price)} & 54,000 & \\
\text{Add: Transfer value of goods completed} & 694,320 & \\
\hline
& 748,320 & \\
\text{Less: Closing inventory of finished goods} & (66,000) & (682,320) \\
\hline
\textbf{Gross Profit on Trading} & & \mathbf{137,680} \\
\text{Add: Factory profit} & & 115,720 \\
\hline
\textbf{Total Gross Profit} & & \mathbf{253,400} \\
\text{Less: Expenses} & & \\
\text{Distribution costs} & 48,000 & \\
\text{Administrative expenses (office)} & 62,000 & \\
\text{Rent and rates} ((45,000 - 5,000) \times 20\%) & 8,000 & \\
\text{Increase in provision for unrealised profit} & 2,000 & (120,000) \\
\hline
\textbf{Profit for the year} & & \mathbf{133,400} \\
\hline
\end{array}

*Working for Provision for Unrealised Profit (PUP):*
- Opening PUP: $54,000 \times \frac{20}{120} = $9,000
- Closing PUP: $66,000 \times \frac{20}{120} = $11,000
- Increase in PUP: $11,000 - $9,000 = $2,000

***

**(c) Conceptual Explanation**
- **Prudence Principle:** This principle states that assets and profits should not be overstated. When a manufacturing business transfers finished goods to the warehouse at a transfer price containing a factory profit markup, that profit is only "realised" when the goods are sold to an external third party. Any inventory of finished goods remaining in stock at the year-end still contains an element of unrealised internal factory profit. If this unrealised profit is not removed, both the inventory value (current assets) and the profit for the year will be overstated. Therefore, a provision for unrealised profit (PUP) is created to eliminate the internal profit from the unsold closing inventory.
- **Realisation Principle:** Profit is only recognized when it is realized, which occurs when goods are sold to external customers.
- **SFP Presentation:** Finished goods inventory is presented in the current assets section of the Statement of Financial Position at its original transfer price less the cumulative provision for unrealised profit, which effectively returns the inventory to its actual manufacturing cost. For example:
- Finished goods inventory (at transfer price): $66,000
- Less: Provision for unrealised profit: ($11,000)
- Net carrying value: $55,000

**(a) Manufacturing Account [12 marks]**
- Raw materials consumed calculation: $34,000 + $245,000 + $8,500 - $38,500 = $249,000 [2 marks] (1 mark for correctly adjusting carriage inwards, 1 mark for correct final consumption figure).
- Direct factory wages: $165,000 + $4,500 = $169,500 [1 mark].
- Prime Cost calculation: $418,500 [1 mark] (must equal raw materials consumed + direct wages).
- Indirect factory wages: $54,000 - $1,200 = $52,800 [1 mark].
- Apportionment of rent and rates to factory: ($45,000 - $5,000) \times 80\% = $32,000 [1 mark].
- Depreciation of plant and machinery: $180,000 \times 10\% = $18,000 [1 mark].
- Other factory overheads (heating/lighting and admin): $22,000 + $38,000 = $60,000 [1 mark].
- Total Overheads summation and WIP adjustments: opening WIP +$18,500 and closing WIP -$21,200 [2 marks].
- Cost of Production: $578,600 [1 mark].
- Factory profit: $115,720 [1 mark] (20% of Cost of Production) and Transfer value: $694,320 [1 mark].

**(b) Statement of Profit or Loss [8 marks]**
- Revenue: $820,000 [1 mark].
- Cost of sales calculation including correct transfer value: $54,000 + $694,320 - $66,000 = $682,320 [2 marks] (1 mark for opening and closing finished goods, 1 mark for correct cost of sales figure).
- Gross Profit on trading: $137,680 [1 mark].
- Addition of Factory Profit ($115,720) to find Total Gross Profit ($253,400) [1 mark].
- Rent and rates office portion: ($45,000 - $5,000) \times 20\% = $8,000 [1 mark].
- Adjustment for increase in provision for unrealised profit: $2,000 [1 mark] (working must be shown: $11,000 - $9,000).
- Profit for the year: $133,400 [1 mark] (after deducting distribution, administrative, rent, and PUP increase).

**(c) Principles & Presentation [5 marks]**
- Definition/application of Prudence concept: To prevent overstatement of profits and current assets [1 mark].
- Explanation that internal factory profit is unrealised until sold to an external customer [1 mark].
- Definition of Realisation concept: Revenue/profit is earned only when legal ownership passes to an external buyer [1 mark].
- Statement of Financial Position Presentation: Inventories are valued at the lower of cost and net realisable value [1 mark]; finished goods are presented at transfer value less the closing balance of provision for unrealised profit (or net cost of $55,000) [1 mark].

(a) Payback Period Calculation:
- Year 0 Outflow: ($320,000)
- Year 1 Inflow: $120,000 (Cumulative: ($200,000))
- Year 2 Inflow: $140,000 (Cumulative: ($60,000))
- Remaining amount to recover in Year 3 = $60,000
- Year 3 Inflow: $110,000
- Fraction of Year 3 = $60,000 / $110,000 = 0.545 years
- Months = 0.545 * 12 months = 6.55 months (accept 6.5 months or rounded to 7 months)
- Payback Period = 2 years 6.5 months (or 2 years 7 months)

(b) ARR Calculation:
- Total operating cash flows over 4 years = $120,000 + $140,000 + $110,000 + $80,000 = $450,000
- Total Depreciation = Initial cost - Scrap value = $320,000 - $40,000 = $280,000
- Total Accounting Profit = Total cash flows - Total Depreciation = $450,000 - $280,000 = $170,000
- Average Annual Profit = $170,000 / 4 years = $42,500
- Average Investment = (Initial investment + Scrap value) / 2 = ($320,000 + $40,000) / 2 = $180,000
- ARR = (Average Annual Profit / Average Investment) * 100 = ($42,500 / $180,000) * 100 = 23.61\%

(c) Net Present Value (NPV) Calculation:
- Year 0 Cash Flow: ($320,000) * 1.000 = ($320,000)
- Year 1 Cash Flow: $120,000 * 0.909 = $109,080
- Year 2 Cash Flow: $140,000 * 0.826 = $115,640
- Year 3 Cash Flow: $110,000 * 0.751 = $82,610
- Year 4 Cash Flow (including $40,000 scrap): $120,000 * 0.683 = $81,960
- Total Present Value (PV) of Inflows = $109,080 + $115,640 + $82,610 + $81,960 = $389,290
- NPV = PV of Inflows - Initial Outflow = $389,290 - $320,000 = +$69,290

(d) Evaluation:
- Financial Factors: The NPV is positive at +$69,290, which means the project exceeds the required 10\% rate of return and increases shareholder wealth. ARR of 23.61\% is high and likely exceeds target hurdles. Payback is within 2.5 years, which is relatively short and reduces cash-flow risk.
- Non-financial/Qualitative Factors: The company must ensure stable market demand for Widget X, availability of skilled workers to run the production line, and consider competitor actions. Environmental issues and safety measures should also be evaluated.
- Limitations: Payback ignores the time value of money and cash flows after the payback period. ARR is based on accounting profit, not cash, and ignores timing of cash flows. NPV relies on estimates of cash flows and cost of capital, which may be inaccurate over 4 years.
- Recommendation: Proceed with the project because it is financially viable based on all metrics.

(a) Payback Period (Max 4 marks):
- 1 mark for cumulative cash flows concept showing $60,000 remaining at Year 2.
- 1 mark for correct fraction calculation ($60,000/$110,000).
- 1 mark for correct calculation of months (6.5 months / 7 months).
- 1 mark for final correct payback period (2 years and 6.5 or 7 months).

(b) ARR (Max 6 marks):
- 1 mark for calculating total operating cash flows ($450,000).
- 1 mark for calculating total accounting profit ($170,000) or total depreciation ($280,000).
- 1 mark for calculating average annual profit ($42,500).
- 1 mark for calculating average investment ($180,000).
- 2 marks for final correct ARR percentage of 23.61\% (1 mark for correct formula/working, 1 mark for correct final value).

(c) NPV (Max 7 marks):
- 1 mark for correct Year 0 discounting ($320,000).
- 1 mark each for correct discounted cash flows of Year 1 ($109,080), Year 2 ($115,640), and Year 3 ($82,610).
- 1 mark for adding the scrap value to Year 4 cash flows ($120,000 total).
- 1 mark for correct Year 4 discounted cash flow ($81,960).
- 1 mark for correct final NPV of +$69,290 (allow OF rule if previous arithmetic errors occur).

(d) Evaluation (Max 8 marks):
- Max 3 marks for analysis of financial metrics calculated in parts (a), (b), and (c) (positive NPV, high ARR, fast payback).
- Max 2 marks for non-financial factors (competitors, demand, labor, technology).
- Max 2 marks for explaining limitations of methods used (NPV estimation errors, ARR profit focus, Payback lack of time value/post-payback cash flow details).
- 1 mark for a clear, justified recommendation.

### **(a) Production Budget (in units)**

| | October | November | December |
|---|---|---|---|
| Budgeted Sales (units) | 1,200 | 1,500 | 1,800 |
| Add: Closing inventory (20% of next month's sales) | 300 | 360 | 280 (1) |
| **Total Required** | **1,500** | **1,860** | **2,080** |
| Less: Opening inventory (20% of current month's sales) | (240) | (300) | (360) (1 for all opening) |
| **Budgeted Production (units)** | **1,260** (1) | **1,560** (1) | **1,720** (1) |
*(plus 1 mark for structured presentation/logic)*

**Working for Closing Inventory:**
* Oct: \(20\% \times 1,500 = 300\)
* Nov: \(20\% \times 1,800 = 360\)
* Dec: \(20\% \times 1,400 = 280\)

---

### **(b) Raw Materials Purchases Budget**

| | October | November |
|---|---|---|
| Production Units | 1,260 | 1,560 |
| RM needed for Production (\(3\text{ kg} \times \text{units}\)) | 3,780 kg (1) | 4,680 kg (1) |
| Add: Closing RM inventory (10% of next month's RM need) | 468 kg (1) | 516 kg (1) |
| **Total RM required** | **4,248 kg** | **5,196 kg** |
| Less: Opening RM inventory | (380) kg | (468) kg (1 for both) |
| **Budgeted Purchases (kg)** | **3,868 kg** | **4,728 kg** (1 for both) |
| Purchase price per kg | $12 | $12 |
| **Budgeted Purchases ($)** | **$46,416** (1) | **$56,736** (1) |

**Working for Closing RM:**
* December RM production requirement: \(1,720 \text{ units} \times 3\text{ kg} = 5,160\text{ kg}\)
* Oct Closing RM (10% of Nov): \(4,680 \times 10\% = 468\text{ kg}\)
* Nov Closing RM (10% of Dec): \(5,160 \times 10\% = 516\text{ kg}\)

---

### **(c) Trade Payables Payment Budget**

| | October ($) | November ($) |
|---|---|---|
| **Payment for Current Month's Purchases:** | | |
| (70% of Purchases less 2% discount) | | |
| * October: \(\$46,416 \times 70\% \times 98\%\) | 31,841 (2) | |
| * November: \(\$56,736 \times 70\% \times 98\%\) | | 38,921 (2) |
| **Payment for Prior Month's Purchases:** | | |
| (30% of previous month's purchases) | | |
| * September: \(\$38,000 \times 30\%\) | 11,400 (1) | |
| * October: \(\$46,416 \times 30\%\) | | 13,925 (1) |
| **Total Cash Payments** | **$43,241** (1of) | **$52,846** (1of) |

*Note: Decimals are rounded to the nearest dollar.*

---

### **(d) Evaluation of Low Inventory Policy**

**Advantages:**
* **Reduced Holding Costs:** Minimizes storage, warehousing, insurance, and security costs.
* **Working Capital Efficiency:** Frees up cash that would otherwise be tied up in raw materials inventory.
* **Reduced Risk:** Lowers the likelihood of inventory damage, obsolescence, or theft.

**Disadvantages:**
* **Stock-outs:** Risk of manufacturing halts if suppliers delay raw material delivery, leading to unfulfilled customer orders.
* **Loss of Discounts:** Smaller, more frequent purchasing orders may lead to a loss of bulk purchase discounts.
* **Increased Transaction Costs:** Ordering more frequently increases administration and transport costs.

**(a) Production Budget [Total: 6 marks]**
* 1 mark for December closing inventory of 280 units.
* 1 mark for correct treatment of opening inventory across all months.
* 1 mark for October production (1,260 units).
* 1 mark for November production (1,560 units).
* 1 mark for December production (1,720 units).
* 1 mark for structured presentation showing Add Closing/Less Opening logic.

**(b) Raw Materials Purchases Budget [Total: 8 marks]**
* 1 mark for October production RM usage (3,780 kg).
* 1 mark for November production RM usage (4,680 kg).
* 1 mark for October closing inventory (468 kg).
* 1 mark for November closing inventory (516 kg).
* 1 mark for correct opening inventory deduction applied to both months.
* 1 mark for correct purchases in kg for both months.
* 1 mark for October purchase value ($46,416).
* 1 mark for November purchase value ($56,736).

**(c) Trade Payables Payment Budget [Total: 7 marks]**
* 2 marks for October current purchases cash payment ($31,841) (1 mark for applying 70%, 1 mark for applying 2% discount).
* 2 marks for November current purchases cash payment ($38,921) (1 mark for applying 70%, 1 mark for applying 2% discount).
* 1 mark for September settlement in October ($11,400).
* 1 mark for October settlement in November ($13,925).
* 1 mark for correct column totals (allow own figure (of) totals from sub-elements).

**(d) Discussion [Total: 4 marks]**
* Max 2 marks for advantages (1 mark per distinct point, e.g., lower storage costs, improved cash flow).
* Max 2 marks for disadvantages (1 mark per distinct point, e.g., risk of production stoppage, loss of quantity discounts).