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First, the irrecoverable debt is written off from trade receivables: \( \$84,000 - \$4,000 = \$80,000 \). The new provision required is 5% of this adjusted balance: \( 5\% \times \$80,000 = \$4,000 \). The increase in the provision for doubtful debts is: \( \$4,000 - \$2,500 = \$1,500 \). The total expense charged to the income statement is the sum of the bad debt written off and the increase in the provision: \( \$4,000 + \$1,500 = \$5,500 \).

1 mark for the correct answer of $5,500.

First, find the original number of shares: \( \$400,000 / \$0.50 = 800,000 \) shares. The rights issue is 1 for 4, which equals \( 800,000 / 4 = 200,000 \) new shares. The total shares after the rights issue are \( 800,000 + 200,000 = 1,000,000 \) shares. The dividend paid is \( 1,000,000 \times \$0.05 = \$50,000 \). The updated retained earnings balance is: \( \$180,000 \text{ (opening)} + \$115,000 \text{ (profit for the year)} - \$50,000 \text{ (dividend)} = \$245,000 \). Note that the rights issue proceeds only affect Ordinary Share Capital and Share Premium.

1 mark for the correct answer of $245,000.

First, update the bank ledger balance: \( \$12,450 \text{ (draft balance)} - \$380 \text{ (bank charges)} - \$1,200 \text{ (dishonoured cheque)} = \$10,870 \) debit. Next, reconcile to the bank statement balance (X): \( X \text{ (bank statement balance)} + \$1,650 \text{ (lodgements)} - \$2,900 \text{ (unpresented cheques)} = \$10,870 \text{ (corrected ledger balance)} \). Solving for X gives: \( X - \$1,250 = \$10,870 \), which means \( X = \$12,120 \) (credit/positive bank statement balance).

1 mark for the correct bank statement credit balance of $12,120.

The predetermined overhead absorption rate (OAR) is \( \$360,000 / 45,000 = \$8.00 \) per direct labour hour. The overhead absorbed during the period is \( 47,000 \text{ actual hours} \times \$8.00 = \$376,000 \). The actual overheads incurred are \( \$385,000 \). Comparing the absorbed overheads to the actual overheads: \( \$376,000 - \$385,000 = -\$9,000 \), which means overheads were under-absorbed by \( \$9,000 \).

1 mark for the correct answer of Under-absorbed by $9,000.

Under marginal costing, profit is calculated as total contribution minus total fixed costs. Contribution per unit is \( \text{Selling price} - \text{Total variable costs} = \$40 - (\$18 + \$4) = \$18 \) per unit. Total contribution for the 8,500 units sold is \( 8,500 \times \$18 = \$153,000 \). Profit is \( \text{Total contribution} - \text{Fixed costs} = \$153,000 - \$120,000 = \$33,000 \).

1 mark for the correct marginal costing profit of $33,000.

The amount to be transferred to the Capital Redemption Reserve (CRR) is equal to the nominal value of the preference shares redeemed minus the nominal value of any new shares issued for the purpose of the redemption. Nominal value of shares redeemed is \( \$200,000 \). Nominal value of new ordinary shares issued is \( 120,000 \text{ shares} \times \$1.00 = \$120,000 \). Minimum transfer to CRR is \( \$200,000 - \$120,000 = \$80,000 \).

1 mark for the correct CRR transfer of $80,000.

First, calculate the Earnings Per Share (EPS): \( \text{EPS} = \$450,000 / 1,500,000 = \$0.30 \). Next, determine the Dividend Per Share (DPS) using the dividend cover ratio: \( \text{Dividend cover} = \text{EPS} / \text{DPS} \), so \( 2.5 = \$0.30 / \text{DPS} \), which gives \( \text{DPS} = \$0.12 \). Finally, calculate the dividend yield: \( \text{Dividend Yield} = (\text{DPS} / \text{Market Price}) \times 100\% = (\$0.12 / \$3.00) \times 100\% = 4.0\% \).

1 mark for the correct dividend yield of 4.0%.

Standard Hours Allowed (SHA) for actual production of 1,200 units = \( 1,200 \times 4 \text{ hours} = 4,800 \) hours. Actual Hours Worked (AHW) = \( 5,130 \) hours. Standard Rate (SR) = \( \$15.00 \). Actual Rate (AR) = \( \$74,385 / 5,130 \text{ hours} = \$14.50 \). Labour Rate Variance = \( (\text{SR} - \text{AR}) \times \text{AHW} = (\$15.00 - \$14.50) \times 5,130 = \$2,565 \) Favourable (since actual rate was lower than standard). Labour Efficiency Variance = \( (\text{SHA} - \text{AHW}) \times \text{SR} = (4,800 - 5,130) \times \$15 = -330 \text{ hours} \times \$15 = \$4,950 \) Adverse (since more hours were used than standard).

1 mark for the correct combination of Labour Rate Variance ($2,565 Favourable) and Labour Efficiency Variance ($4,950 Adverse).

First, adjust trade receivables for the year-end bad debt write-off: \( \text{Adjusted Trade Receivables} = \$52,400 - \$1,400 = \$51,000 \). Next, calculate the closing provision for doubtful debts: \( 4\% \times \$51,000 = \$2,040 \). The increase in the provision is: \( \$2,040 - \$1,800 = \$240 \). The total bad debts written off during the year are: \( \$2,400 + \$1,400 = \$3,800 \). Thus, the total expense for bad and doubtful debts is: \( \$3,800 \text{ (bad debts)} + \$240 \text{ (increase in provision)} = \$4,040 \).

1 mark for the correct option B. Award 0 marks for incorrect options based on incorrect handling of the year-end write-off or provision increase.

1. Initial ordinary shares = \( \$200,000 / \$0.50 = 400,000 \text{ shares} \).
2. Rights issue of 1 for 4 = \( 400,000 / 4 = 100,000 \text{ shares} \).
- Ordinary share capital increase = \( 100,000 \times \$0.50 = \$50,000 \).
- Share premium increase = \( 100,000 \times (\$1.20 - \$0.50) = \$70,000 \).
- Post-rights balances: Share Capital = \( \$250,000 \) (500,000 shares), Share Premium = \( \$70,000 + \$70,000 = \$140,000 \).
3. Bonus issue of 1 for 5 = \( 500,000 / 5 = 100,000 \text{ shares} \).
- Value of bonus shares = \( 100,000 \times \$0.50 = \$50,000 \).
- To keep reserves in their most flexible form, the company uses the Share Premium account (which is restricted) to fund the bonus issue instead of Retained Earnings.
- Final Share Capital = \( \$250,000 + \$50,000 = \$300,000 \).
- Final Share Premium = \( \$140,000 - \$50,000 = \$90,000 \).

1 mark for the correct option B. Incorrect options represent failure to account for rights premium, or failing to utilise the share premium first for the bonus issue.

1. Credit goodwill to X and Y in the old profit sharing ratio (3:2):
- X's share = \( \$40,000 \times \frac{3}{5} = \$24,000 \)
- Y's share = \( \$40,000 \times \frac{2}{5} = \$16,000 \)
2. Write off goodwill in the new profit sharing ratio (5:3:2):
- X's share = \( \$40,000 \times \frac{5}{10} = \$20,000 \)
- Y's share = \( \$40,000 \times \frac{3}{10} = \$12,000 \)
3. Calculate the net capital account balances:
- X: \( \$80,000 + \$24,000 - \$20,000 = \$84,000 \)
- Y: \( \$60,000 + \$16,000 - \$12,000 = \$64,000 \)

1 mark for the correct option C. Incorrect options result from applying incorrect ratios or failing to adjust capital balances for goodwill write-off.

1. Calculate the predetermined overhead absorption rate (OAR):
\( \text{OAR} = \frac{\$180,000}{15,000 \text{ direct labour hours}} = \$12 \text{ per direct labour hour} \).
2. Calculate the overheads absorbed based on actual hours:
\( \text{Overheads absorbed} = 16,500 \text{ direct labour hours} \times \$12 = \$198,000 \).
3. Compare with actual overheads incurred:
\( \text{Over-absorption} = \$198,000 - \$195,000 = \$3,000 \text{ (Over-absorbed)} \).

1 mark for the correct option A. Incorrect options are based on comparing budgeted and actual figures directly without absorbing based on actual activity.

1. Contribution per unit = \( \$25 - \$15 = \$10 \).
2. Breakeven sales in units = \( \frac{\$120,000}{\$10} = 12,000 \text{ units} \).
3. Target sales in units = \( \frac{\$120,000 + \$30,000}{\$10} = 15,000 \text{ units} \).
4. Margin of safety in units = \( 15,000 \text{ units} - 12,000 \text{ units} = 3,000 \text{ units} \).

1 mark for the correct option A. Incorrect options confuse breakeven units, target units, or make arithmetic errors.

1. Calculate Operating Profit (Profit before interest and tax):
\( \text{Operating Profit} = \$85,000 \text{ (Profit for the year)} + \$18,000 \text{ (Tax)} + \$6,000 \text{ (Interest)} = \$109,000 \).
2. Adjust for non-cash items:
- Add back depreciation: \( +\$22,000 \)
- Deduct profit on disposal: \( -\$4,500 \)
- Operating cash flow before working capital changes = \( \$109,000 + \$22,000 - \$4,500 = \$126,500 \).
3. Adjust for working capital changes:
- Less: Increase in inventory: \( -\$8,000 \)
- Add: Decrease in trade receivables: \( +\$5,200 \)
- Add: Increase in trade payables: \( +\$3,100 \)
- Cash generated from operations = \( \$126,500 - \$8,000 + \$5,200 + \$3,100 = \$126,800 \).

1 mark for the correct option C. Incorrect options are generated by failing to add back interest/tax, or by applying incorrect signs to working capital adjustments.

1. Earnings per share (EPS) = \( \frac{\$480,000}{2,000,000} = \$0.24 \).
2. Price-Earnings (P/E) Ratio = \( \frac{\$3.60}{\$0.24} = 15 \text{ times} \).
3. Dividend per share (DPS) = \( \frac{\$160,000}{2,000,000} = \$0.08 \).
4. Dividend Yield = \( \frac{\$0.08}{\$3.60} \times 100\% = 2.22\% \).

1 mark for the correct option B. Distractors are set by confusing EPS/DPS formulas or multiplying ratios incorrectly.

1. Material Price Variance = \( (\text{Standard Price} - \text{Actual Price}) \times \text{Actual Quantity} \).
- Actual Price = \( \frac{\$26,775}{5,100 \text{ kg}} = \$5.25 \text{ per kg} \).
- Price Variance = \( (\$5.50 - \$5.25) \times 5,100 = \$1,275 \text{ Favourable (F)} \) (since the actual price paid was less than standard).
2. Material Usage Variance = \( (\text{Standard Quantity} - \text{Actual Quantity}) \times \text{Standard Price} \).
- Standard Quantity for actual output = \( 1,200 \text{ units} \times 4 \text{ kg/unit} = 4,800 \text{ kg} \).
- Usage Variance = \( (4,800 \text{ kg} - 5,100 \text{ kg}) \times \$5.50 = 300 \text{ kg} \times \$5.50 = \$1,650 \text{ Adverse (A)} \) (since actual quantity exceeded standard).

1 mark for the correct option C. Incorrect options are generated by using the incorrect price for usage variance or confusing Favourable/Adverse tags.

Standard hours for actual production = 1,500 units * 3 hours = 4,500 hours. Actual hours worked = 4,700 hours. Difference in hours = 4,700 - 4,500 = 200 hours (Adverse, because actual hours > standard hours). Labour efficiency variance = 200 hours * $12.00 standard rate = $2,400 Adverse.

1 mark for the correct calculation of the labour efficiency variance of $2,400 Adverse.

The number of ordinary shares currently held is $400,000 / $0.50 = 800,000 shares. A 1-for-4 bonus issue means issuing 200,000 new shares (800,000 / 4). The nominal value of these new shares is 200,000 * $0.50 = $100,000. Funding this $100,000 from the share premium account reduces the share premium from $150,000 to $50,000. The retained earnings remain unchanged at $280,000.

1 mark for identifying the correct balances: Share premium $50,000 and Retained earnings $280,000.

Contribution per unit of X = $50 - $30 = $20. Contribution per kg of material for X = $20 / 4 kg = $5.00. Contribution per unit of Y = $80 - $50 = $30. Contribution per kg of material for Y = $30 / 5 kg = $6.00. Since Y has a higher contribution per kg of limiting factor, Product Y should be prioritised.

1 mark for calculating correct contributions per kg and choosing Product Y.

Fair value of net assets acquired = Fair value of non-current assets ($480,000) + Fair value of current assets ($140,000) - Fair value of current liabilities ($80,000) = $540,000. Goodwill = Purchase consideration ($650,000) - Fair value of net assets acquired ($540,000) = $110,000.

1 mark for the correct goodwill calculation of $110,000.

Capital Employed = Total Equity + Non-current liabilities = $600,000 + $300,000 = $900,000. ROCE = (Operating Profit / Capital Employed) * 100% = ($180,000 / $900,000) * 100% = 20%.

1 mark for calculating ROCE as 20.0% using operating profit and total capital employed.

March cash collections: 1) March sales: $150,000 * 40% = $60,000, less 2% cash discount ($1,200) = $58,800. 2) February sales: $120,000 * 50% = $60,000. 3) January sales: $100,000 * 8% = $8,000. Total budgeted cash received = $58,800 + $60,000 + $8,000 = $126,800.

1 mark for the correct total cash received of $126,800.

Total available profit = Net profit ($90,000) + Total interest on drawings ($1,000 + $1,500 = $2,500) = $92,500. Less: Salaries ($12,000 + $8,000 = $20,000) and Interest on capital (5% * $100,000 + 5% * $80,000 = $5,000 + $4,000 = $9,000). Residual profit = $92,500 - $20,000 - $9,000 = $63,500. P's share of residual profit = 3/5 * $63,500 = $38,100.

1 mark for calculating P's share of residual profit as $38,100.

Predetermined OAR = $240,000 / 40,000 hours = $6.00 per direct labour hour. Overheads absorbed = 42,500 actual hours * $6.00 = $255,000. Actual overheads incurred = $258,000. Under-absorption = $258,000 - $255,000 = $3,000.

1 mark for identifying the correct amount of $3,000 under-absorbed.

1. Initial ordinary shares = \( \frac{\$400,000}{\$0.50} = 800,000 \) shares.
2. Bonus issue = \( 800,000 \times \frac{1}{4} = 200,000 \) shares. Nominal value = \( 200,000 \times \$0.50 = \$100,000 \). Funded using share premium, so share premium drops to \( \$120,000 - \$100,000 = \$20,000 \).
3. Total ordinary shares after bonus issue = \( 800,000 + 200,000 = 1,000,000 \) shares.
4. Rights issue = \( 1,000,000 \times \frac{1}{5} = 200,000 \) shares. Premium per share = \( \$0.80 - \$0.50 = \$0.30 \).
5. Contribution to share premium = \( 200,000 \times \$0.30 = \$60,000 \).
6. Ending share premium balance = \( \$20,000 + \$60,000 = \$80,000 \).

1 mark for the correct final share premium balance of $80,000.

1. New Direct Materials cost = \( \$10 \times 1.20 = \$12 \) per unit.
2. New Variable Cost per unit = \( \$12 + \$6 + \$4 = \$22 \) per unit.
3. New Contribution per unit = \( \$30 - \$22 = \$8 \) per unit.
4. New Fixed Overheads = \( \$150,000 \times 1.12 = \$168,000 \).
5. Required Contribution = \( \text{New Fixed Overheads} + \text{Target Profit} = \$168,000 + \$48,000 = \$216,000 \).
6. Required Sales (units) = \( \frac{\$216,000}{\$8} = 27,000 \) units.

1 mark for the correct calculation of required units (27,000).

1. Capital Redemption Reserve (CRR) is created to maintain the capital base of the company when shares are redeemed without a corresponding full new issue.
2. Nominal value of shares being redeemed = \( 50,000 \times \$1 = \$50,000 \).
3. Nominal value of new share issue = \( 30,000 \times \$1 = \$30,000 \).
4. Transfer to CRR = \( \text{Nominal value of redeemed shares} - \text{Nominal value of new issue} = \$50,000 - \$30,000 = \$20,000 \).

1 mark for the correct calculation of the Capital Redemption Reserve transfer ($20,000).

Cash receipts in April arise from:
1. April Sales: \( \$160,000 \times 40\% \times (100\% - 2\%) = \$62,720 \)
2. March Sales: \( \$150,000 \times 50\% = \$75,000 \)
3. February Sales: \( \$140,000 \times 8\% = \$11,200 \)
Total cash receipts in April = \( \$62,720 + \$75,000 + \$11,200 = \$148,920 \).

1 mark for the correct calculation of total cash receipts in April ($148,920).

1. Actual Price (AP) per kg = \( \frac{\$23,800}{7,000\text{ kg}} = \$3.40 \) per kg.
2. Standard Price (SP) = \( \$3.50 \) per kg.
3. Price Variance (at purchase) = \( (\text{SP} - \text{AP}) \times \text{Quantity purchased} = (\$3.50 - \$3.40) \times 7,000 = \$700 \text{ Favourable} \).
4. Standard Quantity (SQ) allowed for actual production = \( 1,500 \times 4\text{ kg} = 6,000 \) kg.
5. Actual Quantity used (AQ) = \( 6,200 \) kg.
6. Usage Variance = \( (\text{SQ} - \text{AQ}) \times \text{SP} = (6,000 - 6,200) \times \$3.50 = \$700 \text{ Adverse} \).

1 mark for the correct identification of both variances ($700 F and $700 A).

1. Preference Dividend = \( 8\% \times \$100,000 = \$8,000 \).
2. Earnings attributable to ordinary shares = \( \$248,000 - \$8,000 = \$240,000 \).
3. Number of ordinary shares = \( \frac{\$400,000}{\$0.50} = 800,000 \) shares.
4. Earnings Per Share (EPS) = \( \frac{\$240,000}{800,000} = \$0.30 \).
5. P/E Ratio = \( \frac{\text{Market Price per share}}{\text{EPS}} = \frac{\$4.50}{\$0.30} = 15 \) times.

1 mark for the correct calculation of the P/E ratio (15.0 times).

**a) Calculations of Purchases and Sales:**

**(i) Calculation of Total Purchases:**

\(\text{Purchases} = \text{Payments to suppliers} + \text{Closing payables} - \text{Opening payables}\)
\(\text{Purchases} = \$39,500 + \$5,700 - \$4,200 = \$41,000\)

**(ii) Calculation of Total Sales:**

*Credit Sales:*
\(\text{Credit Sales} = \text{Receipts from customers} + \text{Closing receivables} - \text{Opening receivables}\)
\(\text{Credit Sales} = \$36,800 + \$6,600 - \$5,400 = \$38,000\)

*Cost of Sales:*
\(\text{Cost of Sales} = \text{Opening Inventory} + \text{Purchases} - \text{Closing Inventory}\)
\(\text{Cost of Sales} = \$8,500 + \$41,000 - \$9,500 = \$40,000\)

*Total Sales (using 20% Margin):*
\(\text{Total Sales} = \frac{\text{Cost of Sales}}{1 - \text{Margin}}\)
\(\text{Total Sales} = \frac{\$40,000}{0.80} = \$50,000\)

*(Alternative Cash Sales Check: Cash sales = Cash deposited in bank $8,000 + Cash drawings $2,400 ($200 \times 12) + Cash wages $1,600 = $12,000. Total Sales = Credit Sales $38,000 + Cash Sales $12,000 = $50,000)*

---

**b) Income Statement of Tariq for the year ended 31 December 2023:**

| | $ | $ |
|---|---|---|
| **Revenue** | | **50,000** |
| **Cost of Sales** | | |
| Opening Inventory | 8,500 | |
| Purchases | 41,000 | |
| | 49,500 | |
| Less: Closing Inventory | (9,500) | (40,000) |
| **Gross Profit** | | **10,000** |
| **Expenses** | | |
| Rent \((\$6,000 + \$500 - \$800)\) | 5,700 | |
| Electricity \((\2,400 - \$300 + \$450)\) | 2,550 | |
| Casual shop wages | 1,600 | |
| Sundry expenses | 3,500 | |
| Depreciation on Equipment \((15\% \times \$25,000)\) | 3,750 | (17,100) |
| **Loss for the year** | | **(7,100)** |

---

**c) Statement of Affairs (Opening Capital calculation) at 1 January 2023:**

| **Assets** | $ |
|---|---|
| Equipment | 20,000 |
| Inventory | 8,500 |
| Trade receivables | 5,400 |
| Prepaid rent | 500 |
| Bank balance | 16,000 |
| **Total Assets (A)** | **50,400** |

| **Liabilities** | $ |
|---|---|
| Trade payables | 4,200 |
| Accrued electricity | 300 |
| **Total Liabilities (B)** | **4,500** |

\(\text{Opening Capital} = \text{Total Assets (A)} - \text{Total Liabilities (B)} = \$50,400 - \$4,500 = \$45,900\)

---

**d) Advantages of keeping full double-entry records:**
1. Reduces the occurrence of errors and makes fraud harder to commit/easier to detect.
2. Allows for the preparation of a Trial Balance to check the arithmetical accuracy of the accounts.
3. Provides more complete and reliable financial information for decision-making and facilitates securing finance from banks.

**Part a) [8 marks total]**
- **(i) Purchases Calculation:**
- $39,500 [1 mark]
- Add closing payables ($5,700) and deduct opening payables ($4,200) [1 mark]
- Correct Purchases of $41,000 [1 mark]
- **(ii) Sales Calculation:**
- Credit sales calculation of $38,000 [2 marks] (1 mark for working)
- Cost of sales calculation of $40,000 [1 mark]
- Total sales calculation of $50,000 [2 marks] (either via Margin formula or Cash Sales reconciliation of $12,000)

**Part b) [14 marks total]**
- Revenue of $50,000 [1 mark OF]
- Opening inventory $8,500 [1 mark]
- Purchases $41,000 [1 mark OF]
- Closing inventory $9,500 [1 mark]
- Cost of sales correctly calculated at $40,000 [1 mark OF]
- Gross profit of $10,000 [1 mark OF]
- Rent expense $5,700 [2 marks] (1 mark for working)
- Electricity expense $2,550 [2 marks] (1 mark for working)
- Casual shop wages $1,600 [1 mark]
- Sundry expenses $3,500 [1 mark]
- Equipment depreciation $3,750 [2 marks] (1 mark for working)
- Loss for the year $7,100 [1 mark OF]

**Part c) [5 marks total]**
- Correct recognition of all Assets (totaling $50,400) [2 marks] (deduct 1 mark if prepaid rent or bank balance is omitted)
- Correct recognition of all Liabilities (totaling $4,500) [2 marks] (deduct 1 mark if accrued electricity is omitted)
- Opening Capital $45,900 [1 mark OF]

**Part d) [3 marks total]**
- 1 mark for each valid advantage stated up to a maximum of 3 marks.

### (a) Rights Issue Calculations
* **Existing shares on 1 January 2022**: \(\frac{\$400,000}{\$0.50} = 800,000\) shares.
* **Rights issue shares**: \(800,000 \times \frac{1}{4} = 200,000\) shares.
* **Cash received**: \(200,000 \text{ shares} \times \$0.80 = \$160,000\).
* **Recorded in Ordinary Shares (Nominal Value)**: \(200,000 \times \$0.50 = \$100,000\).
* **Recorded in Share Premium**: \(200,000 \times \$0.30 = \$60,000\).

### (b) Statement of Changes in Equity for the year ended 31 December 2022

| Details | Ordinary Shares ($) | Share Premium ($) | Revaluation Reserve ($) | General Reserve ($) | Retained Earnings ($) | Total ($) |
| :--- | :---: | :---: | :---: | :---: | :---: | :---: |
| **Balances at 1 January 2022** | 400,000 | 120,000 | 50,000 | 40,000 | 135,000 | 745,000 |
| Rights Issue (1 March) | 100,000 | 60,000 | - | - | - | 160,000 |
| Final Dividend (1 June) | - | - | - | - | (50,000) | (50,000) |
| Bonus Issue (1 Sept) | 50,000 | (50,000) | - | - | - | - |
| Interim Dividend (1 Nov) | - | - | - | - | (22,000) | (22,000) |
| Profit for the year | - | - | - | - | 115,000 | 115,000 |
| Revaluation | - | - | 60,000 | - | - | 60,000 |
| Transfer to General Reserve | - | - | - | 30,000 | (30,000) | - |
| **Balances at 31 December 2022** | **550,000** | **130,000** | **110,000** | **70,000** | **148,000** | **1,008,000** |

**Workings for Dividends and Bonus Issue:**
* **Final Dividend (1 June)**: Shares in issue on 1 June = \(800,000 + 200,000 = 1,000,000\) shares.
\(\text{Dividend paid} = 1,000,000 \times \$0.05 = \$50,000\).
* **Bonus Issue (1 September)**: Shares in issue on 1 September before bonus issue = \(1,000,000\) shares.
\(\text{Bonus shares} = 1,000,000 \times \frac{1}{10} = 100,000\) shares.
\(\text{Value of bonus shares} = 100,000 \times \$0.50 = \$50,000\).
To keep reserves in their most flexible form, the capital reserve (Share Premium) is utilized. Thus, Share Premium is reduced by $50,000.
* **Interim Dividend (1 November)**: Shares in issue on 1 November = \(1,000,000 + 100,000 = 1,100,000\) shares.
\(\text{Dividend paid} = 1,100,000 \times \$0.02 = \$22,000\).

### (c) Capital vs. Revenue Reserves
* **Capital Reserves**: Reserves that are created from non-trading activities (e.g., share premium, revaluation of non-current assets) and are generally not available for the distribution of dividends.
*Example from Veloce PLC*: Share Premium or Revaluation Reserve.
* **Revenue Reserves**: Reserves that are created from normal trading profits (retained earnings) and are available for the distribution of dividends.
*Example from Veloce PLC*: General Reserve or Retained Earnings.

### Part (a) [Total: 4 marks]
* Calculation of 200,000 rights shares (1)
* Calculation of total cash received of $160,000 (1)
* Correct credit to Ordinary Shares of $100,000 (1)
* Correct credit to Share Premium of $60,000 (1)

### Part (b) [Total: 8 marks]
* Rights issue row: $100,000 in OS, $60,000 in SP, and $160,000 in Total (1)
* Final dividend calculation & row: $50,000 deducted from Retained Earnings (1)
* Bonus issue row: $50,000 added to OS, $50,000 deducted from SP (1)
* Interim dividend calculation & row: $22,000 deducted from Retained Earnings (1)
* Revaluation row: $60,000 added to Revaluation Reserve (1)
* Profit for the year row: $115,000 added to Retained Earnings (1)
* Transfer to General Reserve row: $30,000 added to General Reserve, $30,000 deducted from Retained Earnings (1)
* Correct final column totals and individual balances calculated (1)

### Part (c) [Total: 3 marks]
* Explanation of Capital Reserves vs Revenue Reserves (1)
* Correct example of Capital Reserve (Share Premium / Revaluation Reserve) (1)
* Correct example of Revenue Reserve (General Reserve / Retained Earnings) (1)

**(a) General Journal Entries**

| Error | Account | Debit ($)| Credit ($)|
|---|---|---|---|
| **1** | Office Equipment | 1,200 | |
| | Suspense | 900 | |
| | Repairs | | 2,100 |
| **2** | J. Patel (Trade Receivable) | 450 | |
| | Sales | | 450 |
| **3** | Suspense | 270 | |
| | Rent Received | | 270 |
| **4** | Discount Allowed | 130 | |
| | Discount Received | 130 | |
| | Suspense | | 260 |
| **5** | Suspense | 90 | |
| | M. Rashid (Trade Payable) | | 90 |

*(Workings for Journal Entries)*:
* Error 1: Credit Repairs \( \$2,100 \) to remove the incorrect debit. Debit Office Equipment with correct cost of \( \$1,200 \). The difference of \( \$900 \) is debited to Suspense to balance the journal entry.
* Error 2: Standard entry for complete omission.
* Error 3: Credit Rent Received was short by \( \$270 \) (\( \$850 - \$580 \)). Suspense must be debited to balance.
* Error 4: Discount Allowed was omitted on the debit side (Debit \( \$130 \)). Discount Received was incorrectly credited (Debit \( \$130 \) to reverse). Suspense is credited for the sum of \( \$260 \).
* Error 5: M. Rashid's account was over-debited by \( \$90 \) (\( \$430 - \$340 \)). Credit M. Rashid with \( \$90 \) and debit Suspense with \( \$90 \).

***

**(b) Suspense Account**

| Date (2023) | Details | $ | Date (2023) | Details | $ |
|---|---|---|---|---|---|
| Dec 31 | Repairs / Office Equip. (Error 1) | 900 | Dec 31 | Balance b/d (balancing figure) | 1,000 |
| Dec 31 | Rent Received (Error 3) | 270 | Dec 31 | Discount Allowed / Rec'd (Error 4) | 260 |
| Dec 31 | M. Rashid (Error 5) | 90 | | | |
| | **Total** | **1,260** | | **Total** | **1,260** |

***

**(c) Statement of Corrected Profit for the year ended 31 December 2023**

| Details | Adjustments ($) | Profit ($) |
|---|---|---|
| **Draft profit before corrections** | | **42,500** |
| Add: Error 1 (Repairs overstatement corrected) | 2,100 | |
| Add: Error 2 (Omitted sales revenue added) | 450 | |
| Add: Error 3 (Rent received understatement corrected) | 270 | 2,820 |
| Less: Error 4 (Discount allowed recorded) | (130) | |
| Less: Error 4 (Discount received reversed) | (130) | (260) |
| **Corrected Profit for the year** | | **45,060** |

*(Note: Error 5 only affects a trade payable account and the suspense account, thus has no impact on profit).*

**(a) General Journal Entries [8 marks total]**
* Error 1: Debit Office Equipment \( \$1,200 \) [1], Debit Suspense \( \$900 \) [1], Credit Repairs \( \$2,100 \) [1].
* Error 2: Debit J. Patel \( \$450 \) and Credit Sales \( \$450 \) [1].
* Error 3: Debit Suspense \( \$270 \) and Credit Rent Received \( \$270 \) [1].
* Error 4: Debit Discount Allowed \( \$130 \) and Debit Discount Received \( \$130 \) [1], Credit Suspense \( \$260 \) [1].
* Error 5: Debit Suspense \( \$90 \) and Credit M. Rashid \( \$90 \) [1].

**(b) Suspense Account [4 marks total]**
* Correct opening balance b/d on credit side of \( \$1,000 \) (as balancing figure) [1].
* Debit entry for Repairs / Office Equip. (Error 1) \( \$900 \) [1].
* Debit entries for Rent Received (Error 3) \( \$270 \) and M. Rashid (Error 5) \( \$90 \) [1 for both entries].
* Credit entry for Discounts (Error 4) \( \$260 \) [1].

**(c) Statement of Corrected Profit [3 marks total]**
* Draft profit \( \$42,500 \) adjusted for Error 1 (add \( \$2,100 \)) [1].
* Adjustments for Error 2 (add \( \$450 \)) and Error 3 (add \( \$270 \)) [1].
* Adjustments for Error 4 (less \( \$130 \) twice or less \( \$260 \)) to yield final Corrected Profit of \( \$45,060 \) [1].

(a) Predetermined Fixed Overhead Absorption Rate (OAR):
OAR = Budgeted Fixed Manufacturing Overheads / Budgeted Production Units
OAR = $110,000 / 20,000 units = $5.50 per unit

(b) Workings:
- Marginal cost per unit = Direct Materials ($12) + Direct Labour ($8) + Variable Manufacturing Overheads ($3) = $23 per unit
- Absorption cost per unit = Marginal cost ($23) + Fixed OAR ($5.50) = $28.50 per unit
- Closing inventory units = Production (22,000 units) - Sales (18,000 units) = 4,000 units
- Closing inventory value under Absorption Costing = 4,000 units * $28.50 = $114,000
- Closing inventory value under Marginal Costing = 4,000 units * $23 = $92,000
- Over-absorbed overheads: Overheads absorbed (22,000 units * $5.50 = $121,000) less Actual overheads ($115,000) = $6,000 (Over-absorbed)

(b)(i) Absorption Costing Income Statement for the year ended 31 December 2023:
Revenue (18,000 * $45) = $810,000
Less Cost of Sales:
Opening inventory = $0
Cost of production (22,000 * $28.50) = $627,000
Less Closing inventory (4,000 * $28.50) = ($114,000)
Cost of sales (at standard) = $513,000
Less Over-absorption of overheads = ($6,000)
Adjusted Cost of sales = $507,000
Gross Profit = $810,000 - $507,000 = $303,000
Less:
Variable selling overheads (18,000 * $2) = ($36,000)
Fixed selling & administrative overheads = ($40,000)
Profit for the year (Absorption Costing) = $227,000

(b)(ii) Marginal Costing Income Statement for the year ended 31 December 2023:
Revenue (18,000 * $45) = $810,000
Less Variable Cost of Sales:
Opening inventory = $0
Variable cost of production (22,000 * $23) = $506,000
Less Closing inventory (4,000 * $23) = ($92,000)
Variable cost of goods sold = $414,000
Variable selling overheads (18,000 * $2) = $36,000
Total Variable Costs = $450,000
Contribution = $810,000 - $450,000 = $360,000
Less Fixed Costs:
Actual fixed manufacturing overheads = $115,000
Fixed selling and administrative overheads = $40,000
Total Fixed Costs = $155,000
Profit for the year (Marginal Costing) = $205,000

(c) Reconciliation Statement:
Profit under Absorption Costing = $227,000
Less: Fixed manufacturing overheads in closing inventory (4,000 units * $5.50) = ($22,000)
Profit under Marginal Costing = $205,000

(d) Evaluation:
- Marginal costing is useful for short-term decision making because it distinguishes clearly between fixed and variable costs, highlighting contribution per unit.
- It helps management in decision-making areas such as make-or-buy decisions, accepting special orders below total cost but above marginal cost, and selecting the optimal product mix under key factor constraints.
- Profits are not influenced by changes in inventory levels, as all fixed overheads are written off in the period they occur, avoiding profit distortion through overhead loading in stock.
- However, absorption costing is preferred for long-term pricing as it ensures all manufacturing costs are recovered. It is also required by IAS 2 for external financial reporting, meaning marginal costing is only used for internal management purposes.

Part (a) [2 marks]:
- 1 mark for correct formula / identification of budgeted figures.
- 1 mark for final correct OAR of $5.50 per unit.

Part (b)(i) [10 marks]:
- Revenue ($810,000): 1 mark
- Cost of production ($627,000): 1 mark
- Closing inventory ($114,000): 2 marks (1 mark for units, 1 mark for valuation)
- Standard Cost of Sales ($513,000): 1 mark
- Identification and subtraction of over-absorbed overhead ($6,000): 2 marks
- Variable selling overheads ($36,000): 1 mark
- Fixed selling & admin overheads ($40,000): 1 mark
- Correct final profit figure ($227,000): 1 mark

Part (b)(ii) [8 marks]:
- Revenue ($810,000): 1 mark
- Variable cost of production ($506,000): 1 mark
- Closing inventory ($92,000): 1 mark
- Variable selling overheads ($36,000): 1 mark
- Total Variable Costs / Contribution ($360,000): 1 mark
- Actual fixed manufacturing overheads ($115,000): 1 mark
- Fixed selling and admin ($40,000): 1 mark
- Correct final profit figure ($205,000): 1 mark

Part (c) [4 marks]:
- Correct start profit (AC or MC): 1 mark
- Correct identification of closing inventory volume (4,000 units): 1 mark
- Correct adjustment value ($22,000): 1 mark
- Correctly reconciled finish profit: 1 mark

Part (d) [6 marks]:
- Up to 4 marks for explaining benefits of marginal costing (e.g., contribution analysis, key factor, no profit distortion via stock levels).
- Up to 2 marks for limitations/benefits of absorption costing (e.g., long-run pricing, IAS 2 compliance).
- Max 6 marks total.

**(a) Calculation of Revised Profitability**

- **Draft Profit from Operations**: \( \$148,000 \)
- **Adjustment 1 (Inventory write-down)**:
- Net Realisable Value (NRV) = \( \$12,500 - \$1,500 = \$11,000 \).
- Since NRV is less than Cost (\( \$18,000 \)), inventory is written down by \( \$18,000 - \$11,000 = \$7,000 \).
- Adjustment: \( -\$7,000 \)
- **Adjustment 2 (Disposal)**:
- Sales was incorrectly credited with \( \$16,000 \). This must be removed: \( -\$16,000 \).
- The carrying value of \( \$22,000 \) must be removed: \( -\$22,000 \).
- (Net loss on disposal is \( \$6,000 \), but because sales was credited with \( \$16,000 \), the total correction to PBIT is \( -\$16,000 - \$22,000 = -\$38,000 \)? No, wait. Let us look at the net effect: The draft profit included \( +\$16,000 \) sales and did not record the carrying value removal of \( \$22,000 \). Removing the incorrect sale reduces profit by \( \$16,000 \). Accounting for the removal of the asset reduces profit by \( \$22,000 \). Net effect on PBIT = \( -\$38,000 \). Wait, let us check: Correct entry should be Dr Cash \( \$16,000 \), Cr NCA \( \$22,000 \), Dr Loss on disposal \( \$6,000 \). The actual entry made was Dr Cash \( \$16,000 \), Cr Sales \( \$16,000 \). To correct this: Dr Sales \( \$16,000 \) (reduces revenue), Dr Loss on disposal \( \$6,000 \) (expense), Cr NCA \( \$22,000 \). Thus, PBIT reduces by \( \$16,000 \) (sales) + \( \$6,000 \) (loss) = \( \$22,000 \). Yes! Correct profit correction is \( -\$22,000 \).)
- Adjustment: \( -\$22,000 \)
- **Adjustment 3 (Receivables)**:
- Bad debt write-off: \( -\$8,000 \)
- Remaining gross trade receivables: \( \$95,000 - \$8,000 = \$87,000 \)
- Required allowance: \( 5\% \times \$87,000 = \$4,350 \)
- Existing allowance: \( \$4,000 \)
- Increase in allowance: \( \$4,350 - \$4,000 = \$350 \) (expense)
- Net Receivables Adjustment: \( -\$8,000 \) (bad debt) \( -\$350 \) (allowance) = \( -\$8,350 \)

**Revised Profit from Operations (PBIT)**:
\( \$148,000 - \$7,000 - \$22,000 - \$8,350 = \$110,650 \)

**Revised Profit for the Year**:
- Revised Profit from Operations: \( \$110,650 \)
- Less: Debenture Interest (Finance Costs): \( 8\% \times \$100,000 = \$8,000 \)
- Less: Corporation Tax: \( \$18,500 \)
- **Revised Profit for the Year (PAT)**: \( \$110,650 - \$8,000 - \$18,500 = \$84,150 \)

---

**(b) Equity and Liabilities Section of Statement of Financial Position**

**Equity**:
- Ordinary shares (\( \$0.50 \) each): \( \$400,000 \)
- Share premium: \( \$60,000 \)
- Revised Retained earnings: \( \$159,150 \) *(Calculation: Opening Retained earnings = \( \$223,000 - \$148,000 = \$75,000 \). Revised Retained earnings = \( \$75,000 + \$84,150 \) revised profit = \( \$159,150 \).)*
- **Total Equity**: \( \$619,150 \)

**Non-current liabilities**:
- \( 8\% \) Debentures: \( \$100,000 \)

**Current liabilities**:
- Trade and other payables (draft): \( \$115,000 \)
- Accrued interest: \( \$8,000 \)
- Current tax payable: \( \$18,500 \)
- **Total Current Liabilities**: \( \$141,500 \)

**Total Equity and Liabilities**: \( \$619,150 + \$100,000 + \$141,500 = \$860,650 \)

---

**(c) Ratio Calculations**

1. **Return on Capital Employed (ROCE)**:
- *Draft*:
- Draft PBIT = \( \$148,000 \)
- Draft Capital Employed = Draft Equity + Debentures = \( \$683,000 + \$100,000 = \$783,000 \)
- ROCE = \( \frac{\$148,000}{\$783,000} \times 100 = 18.90\% \)
- *Revised*:
- Revised PBIT = \( \$110,650 \)
- Revised Capital Employed = Revised Equity + Debentures = \( \$619,150 + \$100,000 = \$719,150 \)
- ROCE = \( \frac{\$110,650}{\$719,150} \times 100 = 15.39\% \)

2. **Current Ratio**:
- *Draft*:
- Draft Current Assets = \( \$358,000 \)
- Draft Current Liabilities = \( \$115,000 \)
- Current Ratio = \( \frac{\$358,000}{\$115,000} = 3.11:1 \)
- *Revised*:
- Revised Current Assets = \( \$358,000 - \$7,000 \) (inventory) \( - \$8,350 \) (receivables) = \( \$342,650 \)
- Revised Current Liabilities = \( \$115,000 + \$8,000 \) (interest accrued) \( + \$18,500 \) (tax) = \( \$141,500 \)
- Current Ratio = \( \frac{\$342,650}{\$141,500} = 2.42:1 \)

---

**(d) Discussion of Profitability and Liquidity**

- **Profitability**: Profitability has significantly declined after adjustments. ROCE fell from \( 18.90\% \) to \( 15.39\% \). This is due to a reduction in profit from operations (PBIT) from \( \$148,000 \) to \( \$110,650 \), caused by inventory write-downs, bad debts, and correct accounting for the asset sale (loss on disposal).
- **Liquidity**: Liquidity has also deteriorated but remains in a healthy state. The current ratio decreased from \( 3.11:1 \) to \( 2.42:1 \). This is a result of a decrease in current assets (due to inventory and receivable adjustments) combined with a substantial increase in current liabilities (due to unpaid debenture interest and estimated taxation).

**(a) Calculations (8 Marks)**
- Inventory write-down of \( \$7,000 \) (1 mark)
- Sales & carrying value disposal adjustments (reversing \( \$16,000 \) sales and recording \( \$22,000 \) asset removal / net \( \$22,000 \) reduction to profit) (2 marks)
- Receivables adjustments: Bad debt write-off of \( \$8,000 \) (1 mark) and increase in allowance of \( \$350 \) (1 mark)
- Revised Profit from Operations of \( \$110,650 \) (1 mark for accuracy/consequential)
- Debenture interest expense of \( \$8,000 \) (1 mark) and Taxation provision of \( \$18,500 \) (1 mark)
- Revised Profit for the year of \( \$84,150 \) (1 mark for accuracy/consequential)

**(b) SFP Equity and Liabilities Section (7 Marks)**
- Share capital and share premium presented correctly (1 mark)
- Revised Retained earnings calculation (showing \( \$159,150 \)) (2 marks: 1 method, 1 accuracy)
- Non-current liabilities (Debentures: \( \$100,000 \)) presented correctly (1 mark)
- Accrued interest payable (\( \$8,000 \)) in Current Liabilities (1 mark)
- Tax payable (\( \$18,500 \)) in Current Liabilities (1 mark)
- Formatting and correct sub-totals of CL (\( \$141,500 \)) and Total Equity & Liabilities (\( \$860,650 \)) (1 mark)

**(c) Ratios (6 Marks)**
- Draft ROCE: \( 18.90\% \) (1 mark)
- Revised ROCE: \( 15.39\% \) (2 marks: 1 for revised Capital Employed of \( \$719,150 \), 1 for correct calculation)
- Draft Current Ratio: \( 3.11:1 \) (1 mark)
- Revised Current Ratio: \( 2.42:1 \) (2 marks: 1 for revised current assets/current liabilities, 1 for correct calculation)

**(d) Discussion (4 Marks)**
- Max 2 marks for profitability analysis referencing ROCE decline from \( 18.90\% \) to \( 15.39\% \) and reasons.
- Max 2 marks for liquidity analysis referencing Current Ratio decline from \( 3.11:1 \) to \( 2.42:1 \) and reasons (accruals of interest/tax, asset write-downs).

**(a) Realisation Account**

| Debit | $ | Credit | $ |
| :--- | :---: | :--- | :---: |
| Premises | 120,000 | Trade Payables | 15,000 |
| Equipment | 40,000 | Cee Limited (Purchase Consideration) | 210,000 |
| Inventory | 18,000 | | |
| Trade Receivables | 12,000 | | |
| Bank (Dissolution expenses) | 4,000 | | |
| Profit on Realisation transferred to Capital: | | | |
| - Andy (3/5) | 18,600 | | |
| - Basil (2/5) | 12,400 | | |
| **Total** | **225,000** | **Total** | **225,000** |

**(b) Partners' Capital Accounts**

| Details | Andy ($) | Basil ($) | Details | Andy ($) | Basil ($) |
| :--- | :---: | :---: | :--- | :---: | :---: |
| Shares in Cee Ltd | 96,000 | 64,000 | Balance b/f | 100,000 | 60,000 |
| Bank (final settlement) | 34,600 | 16,400 | Current Accounts | 12,000 | 8,000 |
| | | | Realisation Profit | 18,600 | 12,400 |
| **Total** | **130,600** | **80,400** | **Total** | **130,600** | **80,400** |

**(c) Bank Account**

| Debit | $ | Credit | $ |
| :--- | :---: | :--- | :---: |
| Balance b/f | 5,000 | Realisation (expenses) | 4,000 |
| Cee Limited (Cash from PC) | 50,000 | Andy Capital Account | 34,600 |
| | | Basil Capital Account | 16,400 |
| **Total** | **55,000** | **Total** | **55,000** |

**(d) Four advantages of transferring to a limited company:**
1. **Limited Liability:** The partners' liability is limited to the amount they invest in the company's shares. Their personal assets are protected.
2. **Access to Capital:** A limited company can raise extra capital more easily by issuing shares to new investors or obtaining bank loans and debentures.
3. **Separate Legal Entity:** The company has its own legal existence separate from its owners, allowing it to enter contracts and own property in its own name.
4. **Perpetual Succession:** The business is unaffected by the death, retirement, or bankruptcy of any shareholder or director, unlike a partnership.

**(a) Realisation Account [8 marks]**
- Debit Non-current assets: Premises $120,000 (1), Equipment $40,000 (1)
- Debit Current assets: Inventory $18,000 (1), Trade receivables $12,000 (1)
- Debit Bank (dissolution expenses): $4,000 (1)
- Credit Trade payables: $15,000 (1)
- Credit Cee Limited (PC): $210,000 (1)
- Credit Share of Profit on Realisation: Andy $18,600 and Basil $12,400 (1 for both correct / OF split 3:2 from total profit)

**(b) Partners' Capital Accounts [9 marks]**
- Credit balance b/f: Andy $100,000 and Basil $60,000 (1 for both)
- Credit Current Account transfers: Andy $12,000 and Basil $8,000 (1 for both)
- Credit Realisation Profit: Andy $18,600 and Basil $12,400 (1 OF for both)
- Debit Shares in Cee Ltd: Andy $96,000 (1) and Basil $64,000 (1) [Calculated as 100,000 shares * $1.60 = $160,000 distributed in 3:2 profit-sharing ratio]
- Debit Bank (final settlement): Andy $34,600 (2 OF) and Basil $16,400 (2 OF) [Calculated as balancing figures]

**(c) Bank Account [4 marks]**
- Debit balance b/f $5,000 (1)
- Debit Cee Limited (Cash from PC) $50,000 (1)
- Credit Realisation (expenses) $4,000 (1)
- Credit Partners' Capital Accounts: Andy $34,600 and Basil $16,400 (1 OF for both matching the capital account balancing figures)

**(d) Advantages [4 marks]**
- 1 mark for each valid advantage stated up to a maximum of [4].
- Acceptable answers include: limited liability, separate legal identity, perpetual succession, easier access to capital/loans, ease of transferability of ownership.

### **Part (a) Calculations**

**(i) Depreciation charge for the year**
$$\text{Opening Accumulated Depreciation} - \text{Depreciation on disposal} + \text{Depreciation charge} = \text{Closing Accumulated Depreciation}$$
$$\$310,000 - \$85,000 + \text{Depreciation charge} = \$360,000$$
$$\text{Depreciation charge} = \$360,000 - \$225,000 = \$135,000$$

**(ii) Cash paid for the purchase of property, plant and equipment**
$$\text{Opening Cost} - \text{Cost of disposal} + \text{Purchases} = \text{Closing Cost}$$
$$\$950,000 - \$140,000 + \text{Purchases} = \$1,120,000$$
$$\text{Purchases} = \$1,120,000 - \$810,000 = \$310,000$$

**(iii) Dividends paid during the year**
$$\text{Opening Retained Earnings} + \text{Profit for the year} - \text{Dividends paid} = \text{Closing Retained Earnings}$$
$$\$132,000 + \$96,000 - \text{Dividends paid} = \$178,000$$
$$\text{Dividends paid} = \$228,000 - \$178,000 = \$50,000$$

**(iv) Income tax paid during the year**
$$\text{Opening Tax Liability} + \text{Tax Charge} - \text{Tax paid} = \text{Closing Tax Liability}$$
$$\$24,000 + \$31,000 - \text{Tax paid} = \$28,000$$
$$\text{Tax paid} = \$55,000 - \$28,000 = \$27,000$$

---

### **Part (b) Statement of Cash Flows**

**Vanguard PLC**
**Statement of Cash Flows for the year ended 31 December 2023**

| | $ | $ |
|---|---|---|
| **Cash flows from operating activities** | | |
| Profit before tax | | 127,000 |
| Adjustments for: | | |
| Depreciation charge | 135,000 | |
| Finance costs (Interest expense) | 8,000 | |
| Loss on disposal of PPE (1) | 13,000 | 156,000 |
| **Operating profit before working capital changes** | | **283,000** |
| Increase in inventory ($148,000 - $125,000) | (23,000) | |
| Decrease in trade receivables ($94,000 - $82,000) | 12,000 | |
| Increase in trade payables ($91,000 - $88,000) | 3,000 | (8,000) |
| **Cash generated from operations** | | **275,000** |
| Interest paid (2) | (6,000) | |
| Income tax paid | (27,000) | (33,000) |
| **Net cash from operating activities** | | **242,000** |
| | | |
| **Cash flows from investing activities** | | |
| Purchase of PPE | (310,000) | |
| Proceeds from sale of PPE | 42,000 | |
| **Net cash used in investing activities** | | **(268,000)** |
| | | |
| **Cash flows from financing activities** | | |
| Proceeds from issue of shares (3) | 130,000 | |
| Redemption of debentures ($100,000 - $50,000) | (50,000) | |
| Dividends paid | (50,000) | |
| **Net cash from financing activities** | | **30,000** |
| | | |
| **Net decrease in cash and cash equivalents** | | **(12,000)** |
| Cash and cash equivalents at 1 Jan 2023 | | 15,000 |
| **Cash and cash equivalents at 31 Dec 2023** | | **3,000** |

**Notes/Workings:**
1. Loss on disposal = Carrying value ($140,000 - $85,000 = $55,000) - Sale proceeds ($42,000) = $13,000.
2. Interest paid = Opening interest payable ($0) + Expense ($8,000) - Closing interest payable ($2,000) = $6,000.
3. Proceeds from share issue = Increase in Share Capital ($100,000) + Increase in Share Premium ($30,000) = $130,000.

---

### **Part (c) Evaluation**
* **Operating cash generation**: Operating activities generated significant positive cash flow of $242,000, which is much higher than the net profit of $96,000. This indicates strong viability and quality of earnings.
* **Capital expansion**: The company is expanding aggressively, investing $310,000 in PPE, which exceeds its total operating cash generation of $242,000.
* **Financing details**: To fund this net investing outflow of $268,000 and the redemption of debentures ($50,000), Vanguard PLC relied on a combination of operating cash flows ($242,000) and equity finance via a new share issue ($130,000).
* **Liquidity position**: As a result of the high investment and debt repayment activities, cash and cash equivalents declined significantly from $15,000 to only $3,000 (a decrease of $12,000). The current cash position is very tight, which might present liquidity risks if trade payables or interest charges need urgent settlement.

### **Part (a) Marking Scheme [Total: 10 Marks]**

**(i) Depreciation charge for the year [3 Marks]**
* $310,000 - $85,000 (1 Mark for correct carrying value adjustment/disposal dep)
* + Depreciation charge = $360,000 (1 Mark for method)
* Answer: **$135,000** (1 Mark Accuracy)

**(ii) PPE purchases [3 Marks]**
* $950,000 - $140,000 (1 Mark for disposal cost deduction)
* + Purchases = $1,120,000 (1 Mark for method)
* Answer: **$310,000** (1 Mark Accuracy)

**(iii) Dividends paid [2 Marks]**
* $132,000 + $96,000 - $178,000 (1 Mark for method)
* Answer: **$50,000** (1 Mark Accuracy)

**(iv) Income tax paid [2 Marks]**
* $24,000 + $31,000 - $28,000 (1 Mark for method)
* Answer: **$27,000** (1 Mark Accuracy)

---

### **Part (b) Statement of Cash Flows [Total: 11 Marks]**
* Start with Profit before tax: **$127,000** (1 Mark)
* Adjust for:
* Depreciation: **$135,000** (1 Mark OF from a(i))
* Finance costs: **$8,000** (1 Mark)
* Loss on disposal of PPE: **$13,000** (1 Mark) [Accept: Carrying value $55,000 - Proceeds $42,000]
* Working capital adjustments (combined):
* Inventory increase ($23,000), trade receivables decrease $12,000, trade payables increase $3,000 (1 Mark for all three correct, or 1/2 Mark if only two correct)
* Interest paid: **($6,000)** (1 Mark) [Working: $0 + $8,000 - $2,000]
* Tax paid: **($27,000)** (1 Mark OF from a(iv))
* Purchase of PPE: **($310,000)** (1 Mark OF from a(ii))
* Proceeds of PPE: **$42,000** (1 Mark)
* Share issue: **$130,000** (1 Mark) [Accept if broken down as Share Capital $100,000 and Premium $30,000]
* Debenture redemption: **($50,000)** (1 Mark)
* Dividends paid: **($50,000)** (1 Mark OF from a(iii))
* Net cash movement reconciliation showing decrease of **($12,000)** and correct opening/closing cash balances (1 Mark for complete reconciliation structure)
*(Note: Max 11 marks allocated to key lines/calculations)*

---

### **Part (c) Evaluation [Total: 4 Marks]**
* Max **4 marks** for evaluation points (1 mark per developed point):
* **1 Mark** for observing strong cash generation from operations ($242,000) which is significantly higher than net profit ($96,000).
* **1 Mark** for noting the aggressive expansion/investment in PPE ($310,000) as the main driver of cash outflows.
* **1 Mark** for identifying the financing mix: expansion and debt redemption were funded by operating activities and an equity share issue ($130,000).
* **1 Mark** for concluding on the tight liquidity position (cash has fallen to a critically low level of $3,000).

### **(a) Purchases Budget for Raw Materials**

* **Production units**:
- October: 800 frames
- November: 1,000 frames
- December: 1,200 frames
- January 2025: 1,100 frames

* **Raw material requirements (kg) (Production units \(\times\) 4 kg)**:
- October: \(800 \times 4 = 3,200\) kg
- November: \(1,000 \times 4 = 4,000\) kg
- December: \(1,200 \times 4 = 4,800\) kg
- January: \(1,100 \times 4 = 4,400\) kg

* **Raw material closing inventory policy**: 20% of next month's requirement
- October closing inventory: \(20\% \times 4,000\text{ kg} = 800\text{ kg}\)
- November closing inventory: \(20\% \times 4,800\text{ kg} = 960\text{ kg}\)

| | October 2024 | November 2024 |
|---|---|---|
| Production requirements (kg) | 3,200 | 4,000 |
| Add: Budgeted closing inventory (kg) | 800 | 960 |
| **Total requirements (kg)** | **4,000** | **4,960** |
| Less: Budgeted opening inventory (kg) | (640) | (800) |
| **Budgeted purchases (kg)** | **3,360** | **4,160** |
| Purchase price per kg | $12 | $12 |
| **Budgeted purchases ($)** | **$40,320** | **$49,920** |

---

### **(b) Workings for Cash Budget**

#### **1. Cash Receipts from Customers**
* Sales values:
- August: \(700 \times \$150 = \$105,000\)
- September: \(750 \times \$150 = \$112,500\)
- October: \(800 \times \$150 = \$120,000\)
- November: \(1,000 \times \$150 = \$150,000\)
- December: \(1,200 \times \$150 = \$180,000\)

* Cash Receipt formula per month's sales:
- Month of sale: \(\text{Sales} \times 60\% \times 98\% = 58.8\%\) of Sales
- Month following sale: \(30\%\) of Sales
- Second month following sale: \(10\%\) of Sales

| Receipts Details | October ($) | November ($) | December ($) |
|---|---|---|---|
| August sales (10%) | 10,500 | - | - |
| September sales (30% / 10%) | 33,750 | 11,250 | - |
| October sales (58.8% / 30% / 10%) | 70,560 | 36,000 | 12,000 |
| November sales (58.8% / 30%) | - | 88,200 | 45,000 |
| December sales (58.8%) | - | - | 105,840 |
| **Total Cash Receipts** | **114,810** | **135,450** | **162,840** |

#### **2. Cash Payments**
- **Raw Materials**: Paid in the month following purchase.
- October payment: September purchases = $18,000
- November payment: October purchases = $40,320
- December payment: November purchases = $49,920
- **Direct Labour** (\(2 \text{ hours} \times \$18 = \$36\) per frame):
- October: \(800 \times \$36 = \$28,800\)
- November: \(1,000 \times \$36 = \$36,000\)
- December: \(1,200 \times \$36 = \$43,200\)
- **Variable Overheads** (\(\$5\) per frame):
- October: \(800 \times \$5 = \$4,000\)
- November: \(1,000 \times \$5 = \$5,000\)
- December: \(1,200 \times \$5 = \$6,000\)
- **Fixed Overheads** (\(\$12,000 - \$3,000\text{ depreciation} = \$9,000\) paid in cash monthly):
- $9,000 per month
- **Capital Expenditure (Welding Machine)**:
- October only: $24,000

#### **Cash Budget Statement**
| Details | October ($) | November ($) | December ($) |
|---|---|---|---|
| **Opening Cash Balance** | **8,500** | **39,510** | **84,640** |
| **Add: Receipts** | 114,810 | 135,450 | 162,840 |
| **Total Cash Available** | **123,310** | **174,960** | **247,480** |
| **Less: Payments** | | | |
| Raw Materials | 18,000 | 40,320 | 49,920 |
| Direct Labour | 28,800 | 36,000 | 43,200 |
| Variable Overheads | 4,000 | 5,000 | 6,000 |
| Fixed Overheads | 9,000 | 9,000 | 9,000 |
| Purchase of Welding Machine | 24,000 | - | - |
| **Total Payments** | **83,800** | **90,320** | **108,120** |
| **Closing Cash Balance** | **39,510** | **84,640** | **139,360** |

---

### **(c) Budgeted Income Statement for the three months ending 31 December 2024**
Total frames sold in the 3 months: \(800 + 1,000 + 1,200 = 3,000\) frames.

| Budgeted Income Statement | $ | $ |
|---|---|---|
| **Revenue** (\(3,000 \times \$150\)) | | 450,000 |
| **Less: Cost of Sales** | | |
| Raw Materials Consumed (\(3,000 \times 4\text{ kg} \times \$12\)) | 144,000 | |
| Direct Labour (\(3,000 \times 2\text{ hours} \times \$18\)) | 108,000 | |
| Variable Overheads (\(3,000 \times \$5\)) | 15,000 | |
| Fixed Overheads (including Depreciation) (\(3 \times \$12,000\)) | 36,000 | (303,000) |
| **Gross Profit** | | **147,000** |
| **Less: Operating Expenses** | | |
| Cash Discount Allowed (Workings below) | | (5,400) |
| **Budgeted Profit for the Period** | | **141,600** |

*Working for Cash Discount Allowed*:
- October Sales Discount: \(800 \times \$150 \times 60\% \times 2\% = \$1,440\)
- November Sales Discount: \(1,000 \times \$150 \times 60\% \times 2\% = \$1,800\)
- December Sales Discount: \(1,200 \times \$150 \times 60\% \times 2\% = \$2,160\)
- Total Discount Allowed = \(\$1,440 + \$1,800 + \$2,160 = \$5,400\)

*(Note: Subtracting the cash discount directly from Revenue to show Net Revenue of $444,600 is also acceptable.)*

---

### **(d) Benefits of preparing cash budgets**
1. **Identifies cash surpluses and deficits in advance**: This allows the company to arrange bank overdrafts or short-term loans before a deficit occurs, or to plan investment of surplus cash to earn interest.
2. **Aids planning and decision-making**: Helps the management plan the timing of capital investments (like purchasing the new welding machine) to ensure they do not cause a cash crisis.
3. **Facilitates control**: By comparing actual cash flows against budgeted cash flows, management can identify variances and take immediate corrective action.

### **(a) Purchases Budget [6 Marks]**
- **1 Mark**: Calculating raw material requirement for production in October (3,200 kg) and November (4,000 kg).
- **1 Mark**: Calculating closing inventory requirements for October (800 kg) and November (960 kg).
- **1 Mark**: Subtracting correct opening inventories (640 kg for October and 800 kg for November).
- **1 Mark**: Obtaining correct purchase quantities in kg: October (3,360 kg) and November (4,160 kg).
- **2 Marks** (1 per month): Obtaining correct purchase values: October ($40,320) and November ($49,920).

### **(b) Cash Budget [11 Marks]**
- **3 Marks** (1 per month): Correct calculation of cash receipts from customers:
- October: $114,810 (1 Mark)
- November: $135,450 (1 Mark)
- December: $162,840 (1 Mark)
- **1 Mark**: Correct raw material payments for all three months (Oct: $18,000, Nov: $40,320, Dec: $49,920) (all 3 correct for 1 mark, or method mark if based on incorrect (a)).
- **1 Mark**: Correct direct labour payments for all three months (Oct: $28,800, Nov: $36,000, Dec: $43,200).
- **1 Mark**: Correct variable overhead payments (Oct: $4,000, Nov: $5,000, Dec: $6,000).
- **1 Mark**: Correct cash fixed overhead payments of $9,000 per month (depreciation excluded).
- **1 Mark**: Correct welding machine capital expenditure of $24,000 in October.
- **3 Marks** (1 per month): Correct closing balances (Oct: $39,510, Nov: $84,640, Dec: $139,360) (accuracy marks, must follow through correctly on student's own calculated figures).

### **(c) Budgeted Income Statement [5 Marks]**
- **1 Mark**: Budgeted Revenue correct at $450,000.
- **2 Marks**: Cost of sales components calculated accurately:
- Materials: $144,000, Labour: $108,000, Variable OH: $15,000 (1 Mark for all three correct).
- Fixed OH (including depreciation): $36,000 (1 Mark).
- **1 Mark**: Budgeted Cash Discount Allowed correctly calculated at $5,400.
- **1 Mark**: Correct Budgeted Profit for the Period ($141,600) based on student's own figures.

### **(d) Discussion of Benefits [3 Marks]**
- **3 Marks** (1 mark per benefit): Any three of the following points:
- To identify potential cash deficits so that short-term funding (e.g., overdrafts) can be arranged in advance.
- To identify cash surpluses so they can be invested productively.
- To assist in decision-making regarding the timing of non-current asset acquisitions.
- To provide a target for monitoring and controlling departmental cash usage.
- To support loan/overdraft applications with commercial lenders.

Part (a):
(i) Material Price Variance = \((SP - AP) \times AQ\)
\(AP = \frac{\$159,900}{2,050 \text{ kg}} = \$78.00 \text{ per kg}\)
\(Variance = (\$80.00 - \$78.00) \times 2,050 = \$4,100 \text{ Favourable (F)}\)

(ii) Material Usage Variance = \((SQ - AQ) \times SP\)
\(SQ = 4,200 \text{ units} \times 0.5 \text{ kg} = 2,100 \text{ kg}\)
\(Variance = (2,100 - 2,050) \times \$80 = \$4,000 \text{ Favourable (F)}\)

(iii) Labour Rate Variance = \((SR - AR) \times AH\)
\(AR = \frac{\$112,000}{6,400 \text{ hours}} = \$17.50 \text{ per hour}\)
\(Variance = (\$18.00 - \$17.50) \times 6,400 = \$3,200 \text{ Favourable (F)}\)

(iv) Labour Efficiency Variance = \((SH - AH) \times SR\)
\(SH = 4,200 \text{ units} \times 1.5 \text{ hours} = 6,300 \text{ hours}\)
\(Variance = (6,300 - 6,400) \times \$18 = \$1,800 \text{ Adverse (A)}\)

(v) Fixed Overhead Expenditure Variance = Budgeted Fixed Overhead - Actual Fixed Overhead
\(Variance = \$72,000 - \$74,500 = \$2,500 \text{ Adverse (A)}\)

(vi) Fixed Overhead Volume Variance = (Actual Production - Budgeted Production) * Standard Fixed Overhead Rate per unit
\(Variance = (4,200 - 4,000) \times \$18 = \$3,600 \text{ Favourable (F)}\)

Part (b):
Statement Reconciling Standard Cost and Actual Cost:

- Standard Cost of Actual Production (4,200 units * $85.00): $357,000

Favourable Variances:
- Material Price Variance: $4,100
- Material Usage Variance: $4,000
- Labour Rate Variance: $3,200
- Fixed Overhead Volume Variance: $3,600
Total Favourable: $14,900

Adverse Variances:
- Labour Efficiency Variance: ($1,800)
- Fixed Overhead Expenditure Variance: ($2,500)
Total Adverse: ($4,300)

- Net Variance: $10,600 (Favourable)
- Actual Cost of Production: $346,400

(Verification: $159,900 + $112,000 + $74,500 = $346,400)

Part (c):
- 1. Lower price materials might be of inferior quality. This can lead to difficulties in handling or shaping during production, resulting in workers taking longer than standard time (causing adverse efficiency).
- 2. Lower-quality materials may suffer from higher defect rates, requiring rework or extra inspection, which consumes more labour hours without increasing final output volume.

Part (d):
- 1. Assists in cost control and performance measurement by highlighting variations from expectations through variance analysis.
- 2. Simplifies product costing and inventory valuation since standard costs are predefined and stable.

Part (a) [12 marks]:
- (i) Material Price Variance: 1 mark for correct calculation ($4,100), 1 mark for stating Favourable (F).
- (ii) Material Usage Variance: 1 mark for correct calculation ($4,000), 1 mark for stating Favourable (F).
- (iii) Labour Rate Variance: 1 mark for correct calculation ($3,200), 1 mark for stating Favourable (F).
- (iv) Labour Efficiency Variance: 1 mark for correct calculation ($1,800), 1 mark for stating Adverse (A).
- (v) Fixed Overhead Expenditure Variance: 1 mark for correct calculation ($2,500), 1 mark for stating Adverse (A).
- (vi) Fixed Overhead Volume Variance: 1 mark for correct calculation ($3,600), 1 mark for stating Favourable (F).

Part (b) [7 marks]:
- Standard cost of production ($357,000) [1 mark]
- List/add Favourable variances ($14,900) [2 marks (all 4 correct = 2 marks, 2-3 correct = 1 mark)]
- List/deduct Adverse variances ($4,300) [1 mark]
- Net variance subtotal calculated ($10,600) [1 mark]
- Actual cost of production correctly reconciled ($346,400) [1 mark]
- Proper structure/format of reconciliation statement [1 mark]

Part (c) [4 marks]:
- 2 marks per explained reason. 1 mark for identifying the issue (e.g. lower quality material), 1 mark for connecting it to the labor efficiency effect (e.g. takes longer to process, requires rework).

Part (d) [2 marks]:
- 1 mark for each valid standard costing benefit (such as budgeting aid, pricing support, simplified valuation). Maximum 2 marks.