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1. Determine current number of shares: $400,000 / $0.50 = 800,000 shares.
2. Determine bonus shares to be issued: 800,000 shares * (1/4) = 200,000 shares.
3. Determine nominal value of bonus shares: 200,000 shares * $0.50 = $100,000.
4. To maintain reserves in the most flexible form, the share premium account is fully utilized before using retained earnings.
5. Remaining share premium balance: $120,000 - $100,000 = $20,000.

1 mark for the correct option (A).
Method: Deduct the nominal value of the bonus issue ($100,000) from the opening share premium balance ($120,000) to arrive at $20,000.

1. Calculate the predetermined Overhead Absorption Rate (OAR):
OAR = Budgeted Overheads / Budgeted Hours = $180,000 / 12,000 hours = $15 per direct labour hour.
2. Calculate absorbed overheads:
Absorbed Overheads = Actual Hours * OAR = 11,500 hours * $15 = $172,500.
3. Compare absorbed and actual overheads:
Actual overheads incurred = $176,000.
Since absorbed overheads ($172,500) are less than actual overheads incurred ($176,000), there is an under-absorption of $3,500.

1 mark for the correct option (A).
Method: Deduct absorbed overheads of $172,500 from actual overheads of $176,000 to find under-absorbed amount of $3,500.

1. Adjust the cash book balance (credit balance of $4,350 is an overdraft, so -$4,350):
Adjusted cash book balance = -$4,350 - $120 (bank charges) - $450 (dishonoured cheque) = -$4,920 (credit/overdrawn).
2. Prepare the bank reconciliation to find bank statement balance (B):
Adjusted Cash Book Balance = Bank Statement Balance + Uncredited Deposits - Unpresented Cheques
-$4,920 = B + $2,140 - $1,890
-$4,920 = B + $250
B = -$5,170 (debit balance, i.e., overdrawn).

1 mark for the correct option (A).
Method: Accurately adjust the cash book to -$4,920, then reconcile to the bank statement balance of -$5,170 (debit).

1. Depreciation for Year 2021 (full year): 20% of $80,000 = $16,000.
Carrying value at 31 December 2021: $80,000 - $16,000 = $64,000.
2. Depreciation for Year 2022 (full year): 20% of $64,000 = $12,800.
Carrying value at 31 December 2022: $64,000 - $12,800 = $51,200.
3. Depreciation for Year 2023 (9 months, Jan to Sep): 20% of $51,200 * (9/12) = $7,680.
Carrying value at disposal date (30 September 2023): $51,200 - $7,680 = $43,520.
4. Calculation of profit or loss on disposal:
Disposal proceeds: $38,000
Carrying value: $43,520
Loss on disposal: $43,520 - $38,000 = $5,520.

1 mark for the correct option (B).
Method: Calculate cumulative depreciation up to disposal ($36,480), determine carrying value ($43,520), and subtract from proceeds to identify the loss.

1. Share of Goodwill created in old ratio (3:2):
X: $50,000 * 3/5 = +$30,000
Y: $50,000 * 2/5 = +$20,000
2. Goodwill written off in new ratio (5:3:2):
X: $50,000 * 5/10 = -$25,000
Y: $50,000 * 3/10 = -$15,000
Z: $50,000 * 2/10 = -$10,000
3. Partner Capital balances after Goodwill adjustments (before cash input):
X: $60,000 + $30,000 - $25,000 = $65,000
Y: $40,000 + $20,000 - $15,000 = $45,000
Z: $0 - $10,000 = -$10,000
4. Calculate required cash injection (C) by Z:
Z's capital balance = C - $10,000
Total partnership capital = $65,000 + $45,000 + (C - $10,000) = $100,000 + C
Set Z's capital balance to 20% of total capital:
C - $10,000 = 0.20 * ($100,000 + C)
C - $10,000 = $20,000 + 0.20C
0.80C = $30,000
C = $37,500

1 mark for the correct option (D).
Method: Calculate capital account balances after goodwill, set up an algebraic equation for the 20% capital share, and solve for cash introduced.

1. Determine closing assets and liabilities at 31 December 2023:
- Trade receivables = $35,000 (opening) + $25,000 (sales) - $17,500 (receipts) = $42,500.
- Cash and cash equivalents = $10,000 (opening) + $17,500 (receipts) - $30,000 (payments) = -$2,500. This is negative, representing a bank overdraft (current liability).
- Trade payables = $50,000 (opening) - $30,000 (payments) = $20,000.
- Short-term bank loan = $15,000.
2. Calculate closing totals at 31 December 2023:
- Total Liquid Assets (receivables and positive cash only) = $42,500.
- Total Current Liabilities = Trade payables ($20,000) + Short-term bank loan ($15,000) + Bank overdraft ($2,500) = $37,500.
3. Calculate Liquid Ratio:
Liquid Ratio = Liquid Assets / Current Liabilities = $42,500 / $37,500 = 1.13 : 1.

1 mark for the correct option (A).
Method: Correctly identify closing trade receivables ($42,500) and closing current liabilities including overdraft ($37,500) to find the ratio.

1. Calculate cost of raw materials consumed:
Raw materials consumed = Opening Inventory + Purchases + Carriage Inwards - Closing Inventory
Raw materials consumed = $22,000 + $145,000 + $4,000 - $26,000 = $145,000.
2. Calculate Prime Cost:
Prime Cost = Raw materials consumed + Direct wages
Prime Cost = $145,000 + $95,000 = $240,000.
(Note: Indirect wages, factory power, depreciation, and work in progress are factory overheads and are excluded from prime cost).

1 mark for the correct option (A).
Method: Raw materials consumed ($145,000) + Direct wages ($95,000) = $240,000. Overheads and work-in-progress adjustments are excluded.

1. Calculate required ending inventory of finished goods at the end of Quarter 1:
Ending Inventory Q1 = 10% * 20,000 sales in Q2 = 2,000 units.
2. Calculate required good production in Quarter 1:
Required good units = Budgeted Sales + Ending Inventory - Opening Inventory
Required good units = 15,000 + 2,000 - 3,000 = 14,000 units.
3. Account for defective units (12.5% of units started are defective, meaning 87.5% of started units are good):
Total units started = 14,000 units / 0.875 = 16,000 units.

1 mark for the correct option (C).
Method: Good production requirement (14,000 units) / 0.875 = 16,000 units started.

1. Find the number of existing ordinary shares: $200,000 / $0.50 = 400,000 shares.
2. Calculate the bonus shares to be issued: 400,000 * 1/4 = 100,000 shares.
3. Calculate the nominal value of the bonus shares: 100,000 shares * $0.50 = $50,000.
4. Allocate the funding for the bonus issue: Use the Share Premium account up to its full balance of $45,000 (reducing the Share Premium balance to $0). The remaining balance of $5,000 ($50,000 - $45,000) is funded from Retained Earnings.
5. Calculate the new Retained Earnings balance: $120,000 - $5,000 = $115,000.

1 mark for correct calculation of both the share premium account balance ($0) and retained earnings balance ($115,000).

1. Calculate the predetermined Overhead Absorption Rate (OAR): Budgeted overheads / Budgeted labour hours = $180,000 / 45,000 hours = $4.00 per hour.
2. Calculate overheads absorbed: Actual direct labour hours * OAR = 47,000 hours * $4.00 = $188,000.
3. Compare absorbed overheads with actual overheads: Actual overheads incurred ($195,000) - Overheads absorbed ($188,000) = $7,000 under-absorbed.

1 mark for correct calculation of the under-absorption amount of $7,000.

1. Start with the uncorrected cash book balance of $8,450 (debit).
2. Adjust for items that require entries in the cash book itself:
- Deduct Bank charges: -$150
- Deduct Dishonoured cheque: -$400
3. Corrected cash book balance = $8,450 - $150 - $400 = $7,900 (debit).
Note: Unpresented cheques ($1,200) and uncredited receipts ($850) are timing differences and are only used to reconcile the corrected cash book balance to the bank statement balance, so they do not affect the corrected cash book balance itself.

1 mark for identifying the relevant adjustments (bank charges and dishonoured cheque) and calculating the correct balance of $7,900 debit.

1. Calculate carrying value on 31 December 2022 (before revaluation):
Accumulated depreciation for 2 years (2021 and 2022) = $120,000 * 10% * 2 = $24,000.
Carrying value = $120,000 - $24,000 = $96,000.
2. Revaluation on 1 January 2023: Asset is revalued to $112,000.
3. Depreciation for 2023: Revalued amount ($112,000) / Remaining useful life (8 years) = $14,000.
4. Carrying value on date of sale (31 December 2023) = $112,000 - $14,000 = $98,000.
5. Profit or loss on disposal = Sale proceeds - Carrying value = $92,000 - $98,000 = $6,000 loss.

1 mark for calculating the correct carrying value of $98,000 on the date of disposal and the resulting loss on disposal of $6,000.

1. Record initial capital of X: $60,000.
2. Calculate credit for goodwill in the old profit sharing ratio (3:2):
Goodwill share for X = $50,000 * 3/5 = $30,000.
3. Calculate debit for goodwill written off in the new profit sharing ratio (2:2:1):
Goodwill share written off for X = $50,000 * 2/5 = $20,000.
4. Calculate new capital account balance for X: $60,000 (initial) + $30,000 (goodwill credit) - $20,000 (goodwill debit) = $70,000.

1 mark for calculating both the goodwill credit ($30,000) and debit ($20,000) to arrive at the correct final capital balance of $70,000.

1. Inventory holding period = (Inventory / Cost of sales) * 360 days = ($40,000 / $400,000) * 360 = 36 days.
2. Trade receivables collection period = (Trade receivables / Credit sales) * 360 days = ($60,000 / $600,000) * 360 = 36 days.
3. Trade payables payment period = (Trade payables / Credit purchases) * 360 days = ($20,000 / $240,000) * 360 = 30 days.
4. Working capital cycle = Inventory holding period + Trade receivables collection period - Trade payables payment period = 36 days + 36 days - 30 days = 42 days.

1 mark for calculating the three periods (36 days, 36 days, 30 days) and combining them correctly to get 42 days.

1. Calculate unrealised profit in opening inventory: $36,000 * 20/120 = $6,000.
2. Calculate unrealised profit in closing inventory: $48,000 * 20/120 = $8,000.
3. Change in provision = $8,000 - $6,000 = $2,000 increase.
4. Treatment in the Income Statement: An increase in the provision for unrealised profit is a cost/expense and is debited to the Income Statement (reducing profit).

1 mark for calculating the correct change in provision ($2,000 increase) and its correct accounting treatment (debited to the Income Statement).

1. Calculate receipts from June sales: $100,000 * 60% = $60,000 raw sales. Applying the 2% discount: $60,000 * 0.98 = $58,800.
2. Calculate receipts from May sales: $90,000 * 30% = $27,000.
3. Calculate receipts from April sales: $80,000 * 8% = $6,400.
4. Total cash received in June = $58,800 + $27,000 + $6,400 = $92,200.

1 mark for calculating the correct component receipts for each of the three months and finding the total cash received of $92,200.

1. Accumulated depreciation up to the date of revaluation (1 January 2021 to 31 December 2022 = 2 years): $200,000 * 2% * 2 years = $8,000. 2. Carrying value before revaluation: $200,000 - $8,000 = $192,000. 3. Remaining useful life after revaluation: 50 years (original life) - 2 years = 48 years. 4. Annual depreciation after revaluation: $240,000 / 48 years = $5,000 per year. 5. Carrying value on date of sale (31 December 2024, after another 2 years of depreciation): $240,000 - ($5,000 * 2) = $230,000. 6. Profit on disposal: $235,000 (disposal proceeds) - $230,000 (carrying value) = $5,000 profit.

1 mark for the correct option. Award 1 mark for calculating the carrying value of $230,000 and the resulting profit on disposal of $5,000.

1. Opening Retained Earnings: $140,000. 2. Add profit for the year: +$85,000. 3. Deduct interim dividend paid: 300,000 shares * $0.05 = -$15,000. 4. Bonus issue (1-for-4): 300,000 / 4 = 75,000 shares of $1 each = $75,000. This is funded first from the Share Premium account of $60,000, leaving a remaining $15,000 to be funded from Retained Earnings. So, deduct $15,000. 5. Rights issue does not affect Retained Earnings. 6. Closing Retained Earnings: $140,000 + $85,000 - $15,000 - $15,000 = $195,000.

1 mark for the correct option. Award 1 mark for the complete calculation of Retained Earnings including the correct treatment of the bonus issue.

Error 1 occurs in the control account posting only, causing a discrepancy. Error 2 occurs in the book of prime entry (purchases journal) and affects both the control account and the individual ledger accounts equally, causing no difference. Error 3 occurs in posting to an individual supplier's account only, which affects the total of the purchases ledger but not the control account, causing a discrepancy. Therefore, only errors 1 and 3 cause a difference.

1 mark for selecting the correct option (B) based on identifying that control account specific errors and individual ledger specific errors cause a difference, while errors in books of prime entry do not.

1. Credit Y's capital account with share of goodwill in old ratio (3:2): $50,000 * 2/5 = +$20,000. 2. Debit Y's capital account with share of goodwill in new ratio (5:3:2) to write it off: $50,000 * 3/10 = -$15,000. 3. Net adjustment to Y's capital account: +$5,000. 4. Final capital account balance for Y: $50,000 + $5,000 = $55,000.

1 mark for the correct option. Award 1 mark for calculating the net movement in Y's capital account for goodwill (+$5,000) and adding it to the opening balance.

1. Calculate the number of ordinary shares: $200,000 / $0.50 = 400,000 shares. 2. Calculate Earnings Per Share (EPS): $60,000 profit / 400,000 shares = $0.15 per share. 3. Calculate the P/E Ratio: Market price per share / EPS = $2.50 / $0.15 = 16.67 times.

1 mark for the correct option. Award 1 mark for correctly determining the number of shares as 400,000, EPS as $0.15, and the P/E ratio as 16.67 times.

1. Cost of raw materials consumed: $18,000 (opening) + $185,000 (purchases) + $12,000 (carriage inwards) - $22,000 (closing) = $193,000. 2. Prime cost: $193,000 + $140,000 (direct wages) + $15,000 (royalties) = $348,000. 3. Factory overheads: $45,000 (indirect wages) + $35,000 (supervisor) + $28,000 (depreciation) = $108,000. 4. Work-in-progress adjustments: $348,000 (prime cost) + $108,000 (overheads) + $14,000 (opening WIP) - $16,000 (closing WIP) = $454,000.

1 mark for the correct option. Award 1 mark for step-by-step correct inclusion of carriage inwards in materials consumed, royalties in prime cost, and the adjustment of opening and closing WIP.

1. From December sales: $100,000 * 60% * 98% (reflecting 2% cash discount) = $58,800. 2. From November sales: $90,000 * 30% = $27,000. 3. From October sales: $80,000 * 8% = $6,400. 4. Total receipts for December: $58,800 + $27,000 + $6,400 = $92,200.

1 mark for the correct option. Award 1 mark for the correct calculation of all three components of the December cash receipts including the cash discount on current month sales.

1. Present Value of Year 1: $40,000 * 0.909 = $36,360. 2. Present Value of Year 2: $50,000 * 0.826 = $41,300. 3. Present Value of Year 3: $45,000 * 0.751 = $33,795. 4. Present Value of Year 4 (operating inflow + scrap value = $35,000 + $20,000 = $55,000): $55,000 * 0.683 = $37,565. 5. Total Present Value of inflows: $36,360 + $41,300 + $33,795 + $37,565 = $149,020. 6. Net Present Value: $149,020 - $120,000 = $29,020.

1 mark for the correct option. Award 1 mark for correctly incorporating the scrap value in the Year 4 cash flow, calculating the total present values, and subtracting the initial cost.

Predetermined overhead absorption rate (OAR) = \(\frac{\$180,000}{12,000\text{ hours}} = \$15\) per hour. Overheads absorbed = \(11,500\text{ hours} \times \$15 = \$172,500\). Actual overheads incurred = \(\$176,000\). Under-absorbed overheads = \(\$176,000 - \$172,500 = \$3,500\).

1 mark for the correct option (A). Award 1 mark for finding $3,500 under-absorbed. Award 0 marks for other options.

1. Calculate the initial number of shares: \(\frac{\$200,000}{\$0.50} = 400,000\) shares. 2. Bonus issue is 1 share for every 4 held: \(\frac{400,000}{4} = 100,000\) shares. Nominal value of bonus shares = \(100,000 \times \$0.50 = \$50,000\). This is funded from the share premium account. New share premium balance = \(\$60,000 - \$50,000 = \$10,000\). 3. Issue of shares on 1 October: 100,000 shares at $0.80 per share. Premium per share = \(\$0.80 - \$0.50 = \$0.30\). Total share premium generated = \(100,000 \times \$0.30 = \$30,000\). 4. Final share premium balance = \(\$10,000 + \$30,000 = \$40,000\).

1 mark for the correct option (C). Award 1 mark for calculating $40,000. Award 0 marks for incorrect options.

Liquid assets are current assets excluding inventory. Original liquid assets = Trade receivables ($40,000) + Cash and bank ($10,000) = $50,000. The transaction decreases inventory by $15,000 (no effect on liquid assets) and increases trade receivables by $25,000. New liquid assets = \(\$50,000 + \$25,000 = \$75,000\). Current liabilities remain unchanged at $50,000. New liquid ratio = \(\frac{\$75,000}{\$50,000} = 1.5 : 1\).

1 mark for the correct option (D). Award 1 mark for 1.5 : 1. Award 0 marks for other choices.

Depreciation for 2021 = \(\$80,000 \times 20\% = \$16,000\). Carrying value at 31 December 2021 = \(\$80,000 - \$16,000 = \$64,000\). Depreciation for 2022 = \(\$64,000 \times 20\% = \$12,800\). Carrying value at 31 December 2022 = \(\$64,000 - \$12,800 = \$51,200\). Depreciation for 2023 (9 months to 30 September) = \(\$51,200 \times 20\% \times \frac{9}{12} = \$7,680\). Carrying value at disposal = \(\$51,200 - \$7,680 = \$43,520\). Loss on disposal = Carrying value - Sale proceeds = \(\$43,520 - \$38,000 = \$5,520\) loss.

1 mark for the correct option (B). Award 1 mark for $5,520 loss. Award 0 marks for incorrect options.

1. Calculate the residual profit: Residual profit = Partnership profit - Salary - Total interest on capital = \(\$68,000 - \$8,000 - (\$3,000 + \$2,000) = \$55,000\). 2. Y's share of residual profit: \(2/5 \times \$55,000 = \$22,000\). 3. Calculate Y's closing current account balance: Opening balance (Cr) + Salary + Interest on capital + Share of profit - Drawings = \(\$4,200 + \$8,000 + \$2,000 + \$22,000 - \$22,000 = \$12,200\) credit.

1 mark for the correct option (B). Award 1 mark for $12,200 credit. Award 0 marks for other options.

First, update the cash book: Adjusted Cash Book Balance = \(\$1,480\text{ (Dr)} - \$45\text{ (Bank charges)} - \$120\text{ (Dishonoured cheque)} = \$1,315\text{ (Dr)}\). Next, reconcile the bank statement balance (B) to the adjusted cash book balance: \(B + \text{Outstanding lodgements} - \text{Unpresented cheques} = \text{Adjusted cash book balance}\) which is \(B + \$510 - \$340 = \$1,315 \Rightarrow B + \$170 = \$1,315 \Rightarrow B = \$1,145\) (credit balance on bank statement).

1 mark for the correct option (A). Award 1 mark for $1,145 credit. Award 0 marks for alternative choices.

### **Workings**

**1. Closing Inventory Valuation**
- Raw closing inventory at cost = $62,000
- Damaged items cost = $4,500
- Net Realisable Value (NRV) of damaged items = Expected Selling Price \( (\$3,200) \) - Costs to Complete \( (\$600) \) = $2,600
- Since NRV ($2,600) is lower than cost ($4,500), inventory must be written down by: \( \$4,500 - \$2,600 = \$1,900 \)
- Valuation of Closing Inventory = \( \$62,000 - \$1,900 = \$60,100 \)

**2. Depreciation Expenses**
- **Buildings:** Cost of buildings = Total Cost \( (\$450,000) \) - Land Cost \( (\$150,000) \) = $300,000.
- Annual Depreciation = \( 2\% \times \$300,000 = \$6,000 \).
- Split: 50% to Distribution costs = $3,000; 50% to Administrative expenses = $3,000.
- **Equipment:** Net Book Value (NBV) on 1 January 2023 = Cost \( (\$120,000) \) - Accumulated Depreciation \( (\$48,000) \) = $72,000.
- Depreciation for 2023 = \( 20\% \times \$72,000 = \$14,400 \).
- Charged to Distribution costs.

**3. Distribution Costs**
- Trial Balance amount = $68,000
- Less: Prepayment = ($1,800)
- Add: Depreciation on Buildings = $3,000
- Add: Depreciation on Equipment = $14,400
- Adjusted Distribution Costs = \( \$68,000 - \$1,800 + \$3,000 + \$14,400 = \$83,600 \)

**4. Administrative Expenses**
- Trial Balance amount = $95,000
- Add: Accrual = $3,400
- Add: Depreciation on Buildings = $3,000
- Add: Bad debt written off = $4,000
- Add: Increase in Allowance for Doubtful Debts:
- Remaining Receivables = \( \$74,000 - \$4,000 = \$70,000 \)
- New Allowance Required = \( 5\% \times \$70,000 = \$3,500 \)
- Existing Allowance = $2,200
- Increase in Allowance = \( \$3,500 - \$2,200 = \$1,300 \)
- Adjusted Administrative Expenses = \( \$95,000 + \$3,400 + \$3,000 + \$4,000 + \$1,300 = \$106,700 \)

**5. Finance Costs**
- Interest on 8% Debentures = \( 8\% \times \$100,000 = \$8,000 \) (entire amount is accrued/outstanding)

**6. Rights Issue**
- Number of shares at 1 January 2023 = \( \$150,000 / \$0.50 = 300,000 \) shares.
- Rights issue shares = \( 300,000 / 5 = 60,000 \) shares.
- Nominal value of issue = \( 60,000 \text{ shares} \times \$0.50 = \$30,000 \).
- Share premium on issue = \( 60,000 \text{ shares} \times (\$0.75 - \$0.50) = \$15,000 \).
- Total cash received = $45,000.

**7. Dividends Paid**
- Shares in issue at 1 October 2023 = \( 300,000 \text{ (existing)} + 60,000 \text{ (rights)} = 360,000 \) shares.
- Interim dividend paid = \( 360,000 \text{ shares} \times \$0.04 = \$14,400 \).

---

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

| | $ | $
|---|---|---|
| **Revenue** | | 840,000 |
| **Cost of Sales:** | | |
| Opening Inventory | 54,000 | |
| Purchases | 420,000 | |
| | 474,000 | |
| Less: Closing Inventory | (60,100) | (413,900) |
| **Gross Profit** | | **426,100** |
| Distribution costs | (83,600) | |
| Administrative expenses | (106,700) | (190,300) |
| **Profit from operations** | | **235,800** |
| Finance costs | | (8,000) |
| **Profit for the year** | | **227,800** |

---

### **(b) Statement of Changes in Equity for the year ended 31 December 2023**

| | Share Capital ($) | Share Premium ($) | Retained Earnings ($) | Total ($) |
|---|---|---|---|---|
| **Balance at 1 Jan 2023** | 150,000 | 30,000 | 52,600 | 232,600 |
| Rights issue | 30,000 | 15,000 | - | 45,000 |
| Profit for the year | - | - | 227,800 | 227,800 |
| Dividends paid | - | - | (14,400) | (14,400) |
| **Balance at 31 Dec 2023** | **180,000** | **45,000** | **266,000** | **491,000** |

---

### **(c) Capital Reserves vs Revenue Reserves**
- **Capital Reserves:**
- These reserves are created from non-trading activities, such as the revaluation of non-current assets or the premium received on share issues.
- They are capital in nature and are generally not available for distribution as cash dividends.
- *Example:* Share premium or Revaluation reserve.
- **Revenue Reserves:**
- These reserves are created out of retained profits earned from regular trading activities.
- They represent realized profits and are available for distribution to shareholders as cash dividends.
- *Example:* Retained earnings or General reserve.

---

### **(d) Evaluation of Financing Options**
- **Option 1: Ordinary Shares Issue**
- *Pros:* No obligation to pay interest or dividends; reduces financial gearing (increasing safety); capital does not need to be repaid.
- *Cons:* Dilutes ownership control of existing shareholders; can reduce Earnings Per Share (EPS); issue costs can be high.
- **Option 2: 10-Year Bank Loan**
- *Pros:* No dilution of ownership or voting power; interest expense is tax-deductible; can increase returns to equity (financial leverage) if project return exceeds 7%.
- *Cons:* Fixed interest must be paid regardless of performance, increasing risk; must be repaid in 10 years; increases gearing. The company already has $100,000 of debentures in issue; adding a $200,000 loan would increase debt significantly.
- **Recommendation/Conclusion:** A reasoned conclusion is required. For example, given that Veloce Limited's gearing is currently low \( (\$100,000 / \$591,000 = 16.9\%) \), taking on a loan might be acceptable and keeps control concentrated. However, issuing shares at par provides a risk-free buffer with no debt-servicing obligations, which may be safer if future trading cash flows are uncertain.

### **Marking Scheme Breakdown**

#### **Part (a): Statement of Profit or Loss [Total: 14 marks]**
- Revenue correctly formatted: **[1]**
- Closing inventory adjustment calculations: **[3]**
- *1 mark* for identifying NRV is $2,600 (i.e. $3,200 - $600)
- *1 mark* for calculating write-down of $1,900 ($4,500 - $2,600)
- *1 mark* for final inventory value of $60,100 ($62,000 - $1,900)
- Cost of sales computed correctly based on inventory: **[1 OF]**
- Gross Profit correct: **[1 OF]**
- Distribution costs: **[3]**
- *1 mark* for prepayments adjustment ($68,000 - $1,800)
- *1 mark* for Buildings depreciation of $3,000
- *1 mark* for Equipment depreciation of $14,400
- Administrative expenses: **[3]**
- *1 mark* for accrual adjustment ($95,000 + $3,400)
- *1 mark* for Buildings depreciation of $3,000
- *1 mark* for Receivables adjustments: Bad debt written off ($4,000) and Increase in allowance ($1,300)
- Finance costs: **[1]** (for debenture interest accrued/charged)
- Profit for the year: **[1 OF]** (dependent on Gross profit minus operating and finance costs)

#### **Part (b): Statement of Changes in Equity [Total: 8 marks]**
- Correct opening balances: **[1]**
- Rights issue - Share capital increase $30,000: **[1]**
- Rights issue - Share premium increase $15,000: **[1]**
- Rights issue - Total column increase $45,000: **[1]**
- Profit for the year entered correctly: **[1 OF]** (must match Part a profit)
- Dividend paid entered correctly as deduction: **[2]**
- *1 mark* for dividend amount calculation (360,000 shares * $0.04 = $14,400)
- *1 mark* for showing as deduction in Retained Earnings
- Correct closing balances across all columns: **[1]**

#### **Part (c): Capital vs Revenue Reserves [Total: 4 marks]**
- **Capital reserves explanation:** created from non-trading activities / not available for cash dividends: **[1]**
- **Capital reserve example:** e.g. Share premium, Revaluation reserve: **[1]**
- **Revenue reserves explanation:** created from trading profits / available for cash dividends: **[1]**
- **Revenue reserve example:** e.g. Retained earnings, General reserve: **[1]**

#### **Part (d): Financing Options Evaluation [Total: 4 marks]**
- Discussing advantages/disadvantages of issuing ordinary shares: **[1]**
- Discussing advantages/disadvantages of taking a bank loan: **[1]**
- Analysis of the business scenario (e.g. mention of existing debentures or gearing impact): **[1]**
- Clear and justified recommendation/conclusion: **[1]**

(a)
**Harrison**
**Sales Ledger Control Account for the month ended 31 October 2023**

| Date | Details | Amount ($) | Date | Details | Amount ($) |
|---|---|---|---|---|---|
| 31 Oct | Balance b/d | 18,450 | 31 Oct | Sales (overcast journal) | 450 |
| | | | 31 Oct | Irrecoverable debts | 180 |
| | | | 31 Oct | Purchases ledger (contra) | 220 |
| | | | 31 Oct | Bank (omitted cash) | 150 |
| | | | 31 Oct | Balance c/d | 17,450 |
| | | **18,450** | | | **18,450** |
| 1 Nov | Balance b/d | **17,450** | | | |

Workings & explanations for SLCA corrections:
- Error 1: Overcast sales journal total debited to control account, must be credited: \( \$450 \).
- Error 3: Irrecoverable debt written off in individual account must also credit control account: \( \$180 \).
- Error 4: Contra omitted from control account must be credited: \( \$220 \).
- Error 6: Completely omitted receipt of cash must credit control account: \( \$150 \).

(b)
**Statement Reconciling the Schedule of Trade Receivables with the Control Account**
**as at 31 October 2023**

| Details | Amount ($) | Amount ($) |
|---|---|---|
| **Draft total of schedule of trade receivables** | | **17,120** |
| *Add:* | | |
| J. Benson (Error 2: discount adjustment \( \$300 - \$270 \)) | 30 | |
| H. Patel (Error 5: under-posting of sale \( \$540 - \$450 \)) | 90 | |
| Omitted debit balance (Error 7) | 360 | 480 |
| | | **17,600** |
| *Less:* | | |
| M. Cole (Error 6: omitted cash receipt) | | (150) |
| **Corrected total of schedule of trade receivables** | | **17,450** |

Workings & explanations for Schedule corrections:
- Error 2: Benson was credited \( \$300 \) instead of the net \( \$270 \) (\( \$300 \times 90\% \)). His account balance was understated by \( \$30 \). We must add back \( \$30 \) to correct this.
- Error 5: Patel was debited \( \$450 \) instead of \( \$540 \). We must add the difference of \( \$90 \).
- Error 7: Omitted ledger balance of \( \$360 \) must be added back.
- Error 6: Cash received was omitted from both books. Credit customer's personal account, reducing schedule by \( \$150 \).

(c)
Reasons why Harrison maintains control accounts:
1. Helps to locate and identify errors within the accounting system.
2. Acts as an internal check on the accuracy of the ledgers (independent verification).
3. Assists in preventing and detecting fraud or unauthorized postings.
4. Provides an immediate total of trade receivables/trade payables for the preparation of interim financial statements.

Part (a) [Total: 6 marks]
- 1 mark for starting balance of \( \$18,450 \) on debit side.
- 1 mark for Sales overcast entry \( \$450 \) on credit side.
- 1 mark for Irrecoverable debts entry \( \$180 \) on credit side.
- 1 mark for Contra entry \( \$220 \) on credit side.
- 1 mark for Bank entry \( \$150 \) on credit side.
- 1 mark for correctly balancing and bringing down the balance of \( \$17,450 \) on the debit side on 1 Nov.

Part (b) [Total: 6 marks]
- 1 mark for starting with draft schedule balance of \( \$17,120 \).
- 1 mark for adding \( \$30 \) for Benson error.
- 1 mark for adding \( \$90 \) for Patel error.
- 1 mark for adding \( \$360 \) for omitted balance.
- 1 mark for subtracting \( \$150 \) for Cole cash omission.
- 1 mark for final reconciled total of \( \$17,450 \) (must agree with part a).

Part (c) [Total: 3 marks]
- 1 mark for each valid reason stated up to a maximum of 3 marks.

**(a) Calculation of depreciation charge for year ended 31 December 2021**

- **Machine A**:
- Cost = $40 000
- Depreciation 2019: \(20\% \times \$40 000 = \$8 000\)
- Depreciation 2020: \(20\% \times (\$40 000 - \$8 000) = \$6 400\)
- Net Book Value (NBV) at 1 Jan 2021 = $25 600
- Depreciation for 2021 (full year): \(20\% \times \$25 600 = \$5 120\) [1]

- **Machine C**:
- Cost = $40 000
- Net Book Value (NBV) at 1 Jan 2021 = $25 600
- Depreciation for 2021 (full year): \(20\% \times \$25 600 = \$5 120\) [1]

- **Machine B**:
- Cost = Cost of purchase ($30 000) + Installation costs ($2 000) = $32 000
- Depreciation for 2021 (9 months from 1 April to 31 December):
\(\$32 000 \times 20\% \times \frac{9}{12} = \$4 800\) [1]

- **Total Depreciation Charge for 2021**:
\(\$5 120 + \$5 120 + \$4 800 = \$15 040\) [1]

***

**(b) Machinery Disposal Account**

| Date (2022) | Details | $ | Date (2022) | Details | $ |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 1 Oct | Machinery (Machine A) [1] | 40 000 | 1 Oct | Provision for Depr. (Machine A) [2] | 22 592 |
| | | | 1 Oct | Bank (Proceeds) [1] | 15 000 |
| | | | 31 Dec | Income Statement (Loss) [1 OF] | 2 408 |
| | **Total** | **40 000** | | **Total** | **40 000** |

*Working for Accumulated Depreciation of Machine A at disposal*:
- 2019: $8 000
- 2020: $6 400
- 2021: $5 120
- 2022 (9 months): \((\$25 600 - \$5 120) \times 20\% \times \frac{9}{12} = \$3 072\)
- Total Accumulated Depreciation = \(\$8 000 + \$6 400 + \$5 120 + \$3 072 = \$22 592\)

***

**(c) Provision for Depreciation of Machinery Account**

| Date (2022) | Details | $ | Date (2022) | Details | $ |
| :--- | :--- | :--- | :--- | :--- | :--- |
| 1 Oct | Machinery Disposal [1 OF] | 22 592 | 1 Jan | Balance b/d (28 800 + 15 040) [1] | 43 840 |
| 31 Dec | Balance c/d [1 OF] | 33 856 | 31 Dec | Income Statement [1] | 12 608 |
| | **Total** | **56 448** | | **Total** | **56 448** |
| | | | 1 Jan 23 | Balance b/d | 33 856 |

*Working for Income Statement Depreciation Charge (2022)*:
- Machine A: $3 072 (9 months up to disposal)
- Machine B: \((\$32 000 - \$4 800) \times 20\% = \$5 440\)
- Machine C: \((\$25 600 - \$5 120) \times 20\% = \$4 096\)
- Total for 2022 = \(\$3 072 + \$5 440 + \$4 096 = \$12 608\)

***

**(d) Differences between Capital Expenditure and Revenue Expenditure**

1. Capital expenditure is spending on purchasing or improving non-current assets (which increases their earning capacity), whereas revenue expenditure is spending on the day-to-day running and maintenance of non-current assets. [1]
2. Capital expenditure is shown in the Statement of Financial Position (as non-current assets), whereas revenue expenditure is shown as an expense in the Income Statement. [1]

**(a) Depreciation 2021 (Max 4 marks):**
- 1 mark for Machine A depreciation of $5 120.
- 1 mark for Machine C depreciation of $5 120.
- 1 mark for Machine B depreciation of $4 800 (including capitalisation of installation costs).
- 1 mark for total sum $15 040 (consequential on calculations).

**(b) Machinery Disposal Account (Max 5 marks):**
- 1 mark for debiting cost of Machine A ($40 000).
- 2 marks for accumulated depreciation of Machine A ($22 592) (1 mark if calculation mistake but method shown correctly: 2019 + 2020 + 2021 + 2022 pro-rata).
- 1 mark for credit entry of Bank proceeds ($15 000).
- 1 mark for loss on disposal ($2 408) transferred to Income Statement.

**(c) Provision for Depreciation Account (Max 4 marks):**
- 1 mark for correct opening Balance b/d of $43 840.
- 1 mark for correct Income Statement depreciation transfer of $12 608.
- 1 mark for debiting the accumulated depreciation on disposal of $22 592.
- 1 mark for correct closing balance c/d of $33 856.

**(d) Distinctions (Max 2 marks):**
- 1 mark per valid distinction clearly contrasted between Capital and Revenue expenditure (e.g., long-term vs. short-term benefit, SOFP asset presentation vs. Income Statement expense presentation).

Part (a) Overhead Analysis Sheet
1. Allocated Overheads:
- Machining: $60,500
- Assembly: $44,300
- Maintenance: $16,200
- Canteen: $11,000

2. Rent and rates ($45,000) - Apportioned on Floor Area (4:3:2:1):
- Machining: \( \frac{4,000}{10,000} \times 45,000 = \$18,000 \)
- Assembly: \( \frac{3,000}{10,000} \times 45,000 = \$13,500 \)
- Maintenance: \( \frac{2,000}{10,000} \times 45,000 = \$9,000 \)
- Canteen: \( \frac{1,000}{10,000} \times 45,000 = \$4,500 \)

3. Building insurance ($15,000) - Apportioned on Floor Area (4:3:2:1):
- Machining: \( \frac{4,000}{10,000} \times 15,000 = \$6,000 \)
- Assembly: \( \frac{3,000}{10,000} \times 15,000 = \$4,500 \)
- Maintenance: \( \frac{2,000}{10,000} \times 15,000 = \$3,000 \)
- Canteen: \( \frac{1,000}{10,000} \times 15,000 = \$1,500 \)

4. Machinery depreciation ($50,000) - Apportioned on NBV of Machinery (15:6:3:1):
- Machining: \( \frac{150,000}{250,000} \times 50,000 = \$30,000 \)
- Assembly: \( \frac{60,000}{250,000} \times 50,000 = \$12,000 \)
- Maintenance: \( \frac{30,000}{250,000} \times 50,000 = \$6,000 \)
- Canteen: \( \frac{10,000}{250,000} \times 50,000 = \$2,000 \)

5. Power ($18,000) - Apportioned on Kilowatt hours (12:4:2:0):
- Machining: \( \frac{12,000}{18,000} \times 18,000 = \$12,000 \)
- Assembly: \( \frac{4,000}{18,000} \times 18,000 = \$4,000 \)
- Maintenance: \( \frac{2,000}{18,000} \times 18,000 = \$2,000 \)
- Canteen: $0

Primary Apportionment Totals:
- Machining: \( 60,500 + 18,000 + 6,000 + 30,000 + 12,000 = \$126,500 \)
- Assembly: \( 44,300 + 13,500 + 4,500 + 12,000 + 4,000 = \$78,300 \)
- Maintenance: \( 16,200 + 9,000 + 3,000 + 6,000 + 2,000 = \$36,200 \)
- Canteen: \( 11,000 + 4,500 + 1,500 + 2,000 + 0 = \$19,000 \)

Reallocation of Service Departments:
1. Canteen ($19,000) - allocated 50% / 30% / 20%:
- Machining: \( 19,000 \times 50\% = \$9,500 \)
- Assembly: \( 19,000 \times 30\% = \$5,700 \)
- Maintenance: \( 19,000 \times 20\% = \$3,800 \)
- Canteen: \( (\$19,000) \)

2. Maintenance (Total = \( 36,200 + 3,800 = \$40,000 \)) - allocated 60% / 40%:
- Machining: \( 40,000 \times 60\% = \$24,000 \)
- Assembly: \( 40,000 \times 40\% = \$16,000 \)
- Maintenance: \( (\$40,000) \)

Final Reallocated Totals:
- Machining: \( 126,500 + 9,500 + 24,000 = \$160,000 \)
- Assembly: \( 78,300 + 5,700 + 16,000 = \$100,000 \)

Part (b) Overhead Absorption Rates
- (i) Machining Department (machine hours): \( \frac{\$160,000}{8,000\text{ hours}} = \$20.00 \) per machine hour.
- (ii) Assembly Department (direct labour hours): \( \frac{\$100,000}{10,000\text{ hours}} = \$10.00 \) per direct labour hour.

Part (c) Under/Over-Absorption
- Machining Department:
- Overheads absorbed: \( 8,100\text{ actual hours} \times \$20.00 = \$162,000 \)
- Actual overheads incurred: $165,500
- Under-absorbed overheads: \( \$165,500 - \$162,000 = \$3,500 \) under-absorbed.
- Assembly Department:
- Overheads absorbed: \( 9,900\text{ actual hours} \times \$10.00 = \$99,000 \)
- Actual overheads incurred: $96,200
- Over-absorbed overheads: \( \$99,000 - \$96,200 = \$2,800 \) over-absorbed.

Part (d) Job Price Quotation
- Direct Materials: $1,450
- Direct Labour:
- Machining: \( 15\text{ hours} \times \$18 = \$270 \)
- Assembly: \( 35\text{ hours} \times \$14 = \$490 \)
- Prime Cost = \( 1,450 + 270 + 490 = \$2,210 \)
- Absorbed Overheads:
- Machining: \( 25\text{ machine hours} \times \$20.00 = \$500 \)
- Assembly: \( 35\text{ direct labour hours} \times \$10.00 = \$350 \)
- Total Cost = \( 2,210 + 500 + 350 = \$3,060 \)
- Quoted Price (25% profit margin): \( \frac{\$3,060}{1 - 0.25} = \frac{\$3,060}{0.75} = \$4,080 \).

Part (e) Reasons for Under/Over-Absorption
1. Actual overhead expenditure was different from budgeted expenditure.
2. Actual production volume or activity levels (machine/labour hours) differed from the budgeted levels.
3. Non-productive or idle time was higher/lower than budgeted (affecting the actual base hours).

Part (a) Overhead Analysis Sheet (12 marks in total):
- 1 mark for correct Rent and rates apportionment across all columns.
- 1 mark for correct Building insurance apportionment across all columns.
- 1 mark for correct Machinery depreciation apportionment across all columns.
- 1 mark for correct Power apportionment across all columns.
- 1 mark for correct Primary totals across all columns.
- 2 marks for correct Canteen reallocation (amounts & direction).
- 2 marks for correct Maintenance reallocation (amounts & direction).
- 3 marks for final correct reallocated totals for Machining ($160,000) and Assembly ($100,000).

Part (b) OAR (4 marks in total):
- 2 marks for Machining OAR of $20.00 per machine hour (1 for method, 1 for accuracy).
- 2 marks for Assembly OAR of $10.00 per direct labour hour (1 for method, 1 for accuracy).

Part (c) Under/Over-Absorption (6 marks in total):
- Machining: 1 mark for absorbed amount ($162,000), 2 marks for identifying $3,500 under-absorbed (1 for value, 1 for stating under-absorbed).
- Assembly: 1 mark for absorbed amount ($99,000), 2 marks for identifying $2,800 over-absorbed (1 for value, 1 for stating over-absorbed).

Part (d) Job Price (5 marks in total):
- 1 mark for correct Direct Labour total ($760) / Prime Cost ($2,210).
- 1 mark for correct Machining overhead absorbed ($500).
- 1 mark for correct Assembly overhead absorbed ($350).
- 1 mark for total Job cost ($3,060).
- 1 mark for final Selling Price with 25% margin ($4,080).

Part (e) Theory (3 marks in total):
- 1 mark per valid reason stated and explained up to 3 marks.

**(a) Revaluation Account on 1 October 2022**

| Debit | \(\$\) | Credit | \(\$\) |
| :--- | :--- | :--- | :--- |
| Equipment (\(\$40,000 - \$32,000\)) | 8,000 | Premises (\(\$150,000 - \$120,000\)) | 30,000 |
| Inventory write-down | 2,000 | | |
| **Profit on Revaluation transferred to:** | | | |
| Amina Capital (3/5) | 12,000 | | |
| Ben Capital (2/5) | 8,000 | | |
| | **30,000** | | **30,000** |

*(Workings: Net surplus = \(\$30,000 - \$8,000 - \$2,000 = \$20,000\). Shared in 3:2 ratio: Amina = \(\$12,000\); Ben = \(\$8,000\).)*

***

**(b) Partners' Capital Accounts (on 1 October 2022)**

| Details | Amina (\(\$\)) | Ben (\(\$\)) | Chloe (\(\$\)) | Details | Amina (\(\$\)) | Ben (\(\$\)) | Chloe (\(\$\)) |
| :--- | :---: | :---: | :---: | :--- | :---: | :---: | :---: |
| Goodwill write-off | 20,000 | 12,000 | 8,000 | Balance b/d | 80,000 | 50,000 | - |
| | | | | Revaluation profit | 12,000 | 8,000 | - |
| | | | | Goodwill raised | 24,000 | 16,000 | - |
| Balance c/d | 96,000 | 62,000 | 30,000 | Cash/Bank | - | - | 38,000 |
| | **116,000** | **74,000** | **38,000** | | **116,000** | **74,000** | **38,000** |
| | | | | **Balance b/d** | **96,000** | **62,000** | **30,000** |

*Workings for Chloe's cash contribution:*
- Goodwill write-off debit = \(\$40,000 \times 2/10 = \$8,000\).
- Target closing credit balance = \(\$30,000\).
- Therefore, Cash contribution required = \(\$30,000 + \$8,000 = \$38,000\).

***

**(c) Partnership Profit and Loss Appropriation Account for the year ended 31 December 2022**

| | Pre-admission (9 months)
1 Jan – 30 Sep (\(\$\)) | Post-admission (3 months)
1 Oct – 31 Dec (\(\$\)) | Total (\(\$\)) |
| :--- | :---: | :---: | :---: |
| **Profit for the period** | 36,000 | 12,000 | 48,000 |
| *Less: Interest on Capital* | | | |
| - Amina | (3,000) | (1,200) | (4,200) |
| - Ben | (1,875) | (775) | (2,650) |
| - Chloe | - | (375) | (375) |
| *Less: Salary (Ben)* | (6,000) | (2,000) | (8,000) |
| **Residual Profit** | **25,125** | **7,650** | **32,775** |
| **Share of Profit:** | | | |
| - Amina | 15,075 | 3,825 | 18,900 |
| - Ben | 10,050 | 2,295 | 12,345 |
| - Chloe | - | 1,530 | 1,530 |
| | **25,125** | **7,650** | **32,775** |

**Workings for Interest on Capital:**
- **Pre-admission (9 months):**
- Amina: \(\$80,000 \times 5\% \times 9/12 = \$3,000\)
- Ben: \(\$50,000 \times 5\% \times 9/12 = \$1,875\)
- **Post-admission (3 months):**
- Amina: \(\$96,000 \times 5\% \times 3/12 = \$1,200\)
- Ben: \(\$62,000 \times 5\% \times 3/12 = \$775\)
- Chloe: \(\$30,000 \times 5\% \times 3/12 = \$375\)

**Workings for Share of Residual Profit:**
- **Pre-admission (Ratio 3:2):**
- Amina: \(\$25,125 \times 3/5 = \$15,075\)
- Ben: \(\$25,125 \times 2/5 = \$10,050\)
- **Post-admission (Ratio 5:3:2):**
- Amina: \(\$7,650 \times 5/10 = \$3,825\)
- Ben: \(\$7,650 \times 3/10 = \$2,295\)
- Chloe: \(\$7,650 \times 2/10 = \$1,530\)

***

**(d) Evaluation of goodwill treatment**
- Goodwill is an intangible asset representing the reputation, client base, and brand value of the business.
- Under accounting standards (IAS 38), internally generated goodwill must not be recognised as an asset in the ledger because it does not have a readily determinable cost or reliable market value.
- If the partners had decided to maintain a Goodwill Account, it would have appeared as a non-current asset in the Statement of Financial Position, which would violate standard accounting practices and potentially overstate the partnership's total net assets.
- Adjusting for goodwill through the partners' capital accounts (by crediting existing partners in the old ratio and debiting all partners in the new ratio) ensures that the value created by Amina and Ben is equitably shared. Chloe compensates them directly through her capital account adjustment on entry.
- **Conclusion:** Therefore, the partners were correct not to retain a goodwill account in the ledger, as this adheres to the prudence concept and regulatory standards while still ensuring fairness among partners.

**(a) Revaluation Account [Total: 4 marks]**
- 1 mark for debiting Equipment with \(\$8,000\) and Inventory with \(\$2,000\) (both must be correct/clearly detailed).
- 1 mark for crediting Premises with \(\$30,000\).
- 1 mark for calculating and splitting the total revaluation surplus of \(\$20,000\).
- 1 mark for correct individual partner capital transfers: Amina \(\$12,000\) (Cr) and Ben \(\$8,000\) (Cr).

**(b) Partners' Capital Accounts [Total: 8 marks]**
- 1 mark for correct opening balances of Amina (\(\$80,000\)) and Ben (\(\$50,000\)) on the credit side.
- 1 mark for posting correct Revaluation profit shares on the credit side.
- 1 mark for correctly raising Goodwill in the old ratio (Amina \(\$24,000\), Ben \(\$16,000\)) on the credit side.
- 1 mark for correctly writing off Goodwill in the new ratio (Amina \(\$20,000\), Ben \(\$12,000\), Chloe \(\$8,000\)) on the debit side.
- 2 marks (method and accuracy) for calculating and showing the cash introduced by Chloe of \(\$38,000\) on the credit side.
- 2 marks for calculating correct closing balances (Amina \(\$96,000\), Ben \(\$62,000\), Chloe \(\$30,000\)) as balances c/d and b/d.

**(c) Profit and Loss Appropriation Account [Total: 9 marks]**
- 1 mark for splitting profit for the year into pre-admission (\(\$36,000\)) and post-admission (\(\$12,000\)) periods.
- 2 marks for Interest on Capital in pre-admission period (Amina \(\$3,000\), Ben \(\$1,875\)).
- 2 marks for Interest on Capital in post-admission period (Amina \(\$1,200\), Ben \(\$775\), Chloe \(\$375\)).
- 1 mark for correct allocation of Ben's salary: pre-admission \(\$6,000\), post-admission \(\$2,000\).
- 1 mark for calculating correct residual profit for both periods (pre: \(\$25,125\); post: \(\$7,650\)).
- 2 marks for correct final shares of profit (1 mark for pre-admission split: Amina \(\$15,075\), Ben \(\$10,050\); 1 mark for post-admission split: Amina \(\$3,825\), Ben \(\$2,295\), Chloe \(\$1,530\)).

**(d) Evaluation of goodwill [Total: 4 marks]**
- 1 mark for stating that internally generated goodwill cannot be recognized as an asset under IAS 38/accounting standards.
- 1 mark for explaining that maintaining a goodwill account overstates assets / violates prudence.
- 1 mark for explaining that the capital account adjustment ensures the incoming partner pays for their share of existing goodwill without keeping it on the balance sheet.
- 1 mark for a clear, reasoned conclusion (i.e., partners were correct).

### Part (a) Non-Current Asset Schedule for the year ended 31 December 2023

#### 1. Land & Buildings
- **Cost / Valuation**
- Balance at 1 January 2023: $1,200,000
- Revaluation: Land originally purchased for $200,000 was revalued to $350,000, resulting in a surplus of $150,000.
- Balance at 31 December 2023: $1,200,000 + $150,000 = $1,350,000
- **Accumulated Depreciation**
- Balance at 1 January 2023: $150,000
- Charge for the year: Depreciable cost of buildings = Total cost ($1,200,000) - Land ($400,000) = $800,000.
Depreciation = $800,000 \times 2\% = $16,000.
- Balance at 31 December 2023: $150,000 + $16,000 = $166,000
- **Carrying Amount at 31 December 2023**: $1,350,000 - $166,000 = $1,184,000

#### 2. Machinery & Equipment
- **Cost**
- Balance at 1 January 2023: $450,000
- Additions: $120,000
- Disposals: ($80,000)
- Balance at 31 December 2023: $450,000 + $120,000 - $80,000 = $490,000
- **Accumulated Depreciation**
- Balance at 1 January 2023: $180,000
- Charge for the year:
- **Disposed Machine** (owned for 6 months: Jan to Jun): Carrying amount at 1 Jan 2023 = $80,000 - $48,000 = $32,000.
Depreciation for 2023 = $32,000 \times 20\% \times \frac{6}{12} = $3,200.
- **Remaining Machinery** (owned for the full year): Cost = $450,000 - $80,000 = $370,000. Accumulated Depreciation = $180,000 - $48,000 = $132,000.
Carrying amount at 1 Jan 2023 = $370,000 - $132,000 = $238,000.
Depreciation for 2023 = $238,000 \times 20\% = $47,600.
- **New Machinery** (owned for 3 months: Oct to Dec): Cost = $120,000.
Depreciation for 2023 = $120,000 \times 20\% \times \frac{3}{12} = $6,000.
- **Total charge for the year**: $3,200 + $47,600 + $6,000 = $56,800.
- Disposals: Accumulated depreciation on disposed machine = Opening ($48,000) + Current Year Charge ($3,200) = $51,200.
- Balance at 31 December 2023: $180,000 + $56,800 - $51,200 = $185,600
- **Carrying Amount at 31 December 2023**: $490,000 - $185,600 = $304,400

| PPE Schedule Row | Land & Buildings ($) | Machinery & Equipment ($) | Total ($) |
| :--- | :--- | :--- | :--- |
| **Cost / Valuation** | | | |
| At 1 January 2023 | 1,200,000 | 450,000 | 1,650,000 |
| Additions | - | 120,000 | 120,000 |
| Revaluation | 150,000 | - | 150,000 |
| Disposals | - | (80,000) | (80,000) |
| **At 31 December 2023** | **1,350,000** | **490,000** | **1,840,000** |
| | | | |
| **Accumulated Depreciation** | | | |
| At 1 January 2023 | 150,000 | 180,000 | 330,000 |
| Charge for the year | 16,000 | 56,800 | 72,800 |
| Disposals | - | (51,200) | (51,200) |
| **At 31 December 2023** | **166,000** | **185,600** | **351,600** |
| | | | |
| **Carrying Amount** | | | |
| **At 31 December 2023** | **1,184,000** | **304,400** | **1,488,400** |
| **At 1 January 2023** | **1,050,000** | **270,000** | **1,320,000** |

---

### Part (b) Ratio Calculations

(i) **Earnings per share (EPS)**:
- \text{Profit for the year} = \text{Profit from operations} - \text{Finance costs} - \text{Tax}
- \text{Profit for the year} = $215,000 - $25,000 - $38,000 = $152,000
- \text{Number of ordinary shares} = \frac{$400,000}{$0.50} = 800,000 \text{ shares}
- \text{EPS} = \frac{$152,000}{800,000} = $0.19 \text{ per share} \text{ (or } 19 \text{ cents)}

(ii) **Price earnings (P/E) ratio**:
- \text{P/E Ratio} = \frac{\text{Market price per share}}{\text{EPS}}
- \text{P/E Ratio} = \frac{$1.90}{$0.19} = 10 \text{ times}

(iii) **Dividend yield**:
- \text{Dividend per share (DPS)} = \frac{$48,000}{800,000} = $0.06 \text{ per share}
- \text{Dividend Yield} = \frac{$0.06}{$1.90} \times 100\% = 3.16\% \text{ (or } 3.20\% \text{)}

(iv) **Dividend cover**:
- \text{Dividend Cover} = \frac{\text{EPS}}{\text{DPS}} = \frac{$0.19}{$0.06} = 3.17 \text{ times}
- *Alternative:* \frac{\text{Profit for the year}}{\text{Total dividends}} = \frac{$152,000}{$48,000} = 3.17 \text{ times}

---

### Part (c) Evaluation and Recommendation
- **Price Earnings (P/E) Ratio**: Valerius PLC has a P/E ratio of 10, which is lower than the sector average of 14. This could indicate that the company is undervalued relative to its peers, representing a potential buying opportunity. Alternatively, it might indicate that the market expects lower future growth from Valerius PLC than the industry average.
- **Dividend Yield**: The company's dividend yield of 3.16% is lower than the sector average of 4.5%. This makes Valerius less appealing to immediate income-seeking investors who rely on cash distributions.
- **Dividend Cover**: At 3.17 times, the company's dividend cover is significantly higher than the sector average of 2.0 times. This suggests that the dividend is highly secure with a minimal risk of being reduced. It also indicates that the company retains \approx 68.4\% of its earnings, providing substantial retained earnings to fund future organic growth or expansion without relying heavily on debt.
- **Recommendation**:
- **To buy**: If the investor is a growth-oriented investor looking for capital gains, the combination of a low P/E ratio (undervalued stock) and a high dividend cover (profits retained for growth) makes Valerius PLC a good purchase.
- **Not to buy**: If the investor requires high immediate cash dividends, they should avoid Valerius PLC because its dividend yield is below average.

### Part (a) Non-Current Asset Schedule [Total: 12 Marks]
- **Land & Buildings Cost/Valuation [2 Marks]**:
- $1,200,000 (opening) & $1,350,000 (closing) (1 mark for both)
- Revaluation: $150,000 (1 mark)
- **Land & Buildings Depreciation [2 Marks]**:
- Charge for the year: $16,000 (1 mark)
- Closing balance: $166,000 (1 mark)
- **Machinery Cost [2 Marks]**:
- Opening: $450,000, Addition: $120,000, Disposal: $80,000 (1 mark for all three)
- Closing: $490,000 (1 mark)
- **Machinery Depreciation [4 Marks]**:
- Opening balance: $180,000 (1 mark)
- Charge for the year: $56,800 (1 mark for working: disposal $3,200 + remaining $47,600 + new $6,000; 1 mark for correct total charge)
- Eliminated on disposal: $51,200 (1 mark)
- Closing balance: $185,600 (1 mark)
- **Carrying Amounts [2 Marks]**:
- Land & Buildings carrying amount ($1,184,000) (1 mark)
- Machinery & Equipment carrying amount ($304,400) (1 mark)

### Part (b) Ratios [Total: 8 Marks]
- **(i) Earnings per share (EPS)**:
- Profit after tax of $152,000 (1 mark)
- $0.19 or 19 cents (1 mark)
- **(ii) Price earnings (P/E) ratio**:
- Working: $1.90 / $0.19 (1 mark)
- 10 times / 10 (1 mark)
- **(iii) Dividend yield**:
- Working: $0.06 / $1.90 (1 mark)
- 3.16% (or 3.20%) (1 mark)
- **(iv) Dividend cover**:
- Working: $0.19 / $0.06 or $152,000 / $48,000 (1 mark)
- 3.17 times (or 3.2 times) (1 mark)

### Part (c) Evaluation [Total: 5 Marks]
- Analysis of P/E ratio (10 vs 14) – indicates undervaluation or lower market expectations (1 mark)
- Analysis of Dividend Yield (3.16% vs 4.5%) – less attractive to income-focused investors (1 mark)
- Analysis of Dividend Cover (3.17 times vs 2.0 times) – indicates high security and large retention of profits (1 mark)
- Discussion of growth potential based on high retention (1 mark)
- Clear final recommendation aligned with the arguments presented (1 mark)

Part (a) Production Budget (in units)
Formula: Budgeted Production = Budgeted Sales + Closing Inventory - Opening Inventory

Alloy-X:
- October production: \( 800 + 200\text{ (20% of 1,000)} - 160 = 840 \) units
- November production: \( 1,000 + 240\text{ (20% of 1,200)} - 200 = 1,040 \) units

Carbon-Z:
- October production: \( 400 + 100\text{ (20% of 500)} - 80 = 420 \) units
- November production: \( 500 + 120\text{ (20% of 600)} - 100 = 520 \) units


Part (b) Materials Purchases Budget (October)
First, determine November production requirements for closing inventory calculation:
- Aluminium Alloy (November requirement): \( 1,040\text{ units} \times 3\text{ kg} = 3,120 \) kg. Desired closing inventory (10%) = 312 kg.
- Carbon Fiber (November requirement): \( 520\text{ units} \times 2\text{ kg} = 1,040 \) kg. Desired closing inventory (10%) = 104 kg.

Aluminium Alloy Budget:
- Oct production requirement: \( 840\text{ units} \times 3\text{ kg} = 2,520 \) kg
- Add: Closing inventory: 312 kg
- Less: Opening inventory: (252) kg
- Purchase quantity required: \( 2,520 + 312 - 252 = 2,580 \) kg
- Purchase cost: \( 2,580\text{ kg} \times \$12 = \$30,960 \)

Carbon Fiber Budget:
- Oct production requirement: \( 420\text{ units} \times 2\text{ kg} = 840 \) kg
- Add: Closing inventory: 104 kg
- Less: Opening inventory: (84) kg
- Purchase quantity required: \( 840 + 104 - 84 = 860 \) kg
- Purchase cost: \( 860\text{ kg} \times \$45 = \$38,700 \)


Part (c) Budgeted Cash Receipts (November)
First, calculate total sales revenues:
- October sales: \( (800 \times \$150) + (400 \times \$350) = \$120,000 + \$140,000 = \$260,000 \)
- November sales: \( (1,000 \times \$150) + (500 \times \$350) = \$150,000 + \$175,000 = \$325,000 \)

Cash receipts in November:
1. From September sales (8%): \( \$220,000 \times 8\% = \$17,600 \)
2. From October sales (30%): \( \$260,000 \times 30\% = \$78,000 \)
3. From November sales (60% prompt payment, subject to 2% cash discount):
- Gross collection: \( \$325,000 \times 60\% = \$195,000 \)
- Less: 2% cash discount: \( \$195,000 \times 2\% = \$3,900 \)
- Net collected: \( \$195,000 - \$3,900 = \$191,100 \)
Total November Cash Receipts: \( \$17,600 + \$78,000 + \$191,100 = \$286,700 \)


Part (d) Advantages and Disadvantages of Budgetary Control
Advantages (any two):
1. Planning: It forces managers to anticipate future problems and opportunities rather than react on a day-to-day basis.
2. Coordination: It ensures all departments (e.g., sales, production, purchasing) are working towards the same strategic objectives.
3. Control & Performance Appraisal: It provides a benchmark (standard) against which actual performance can be measured and evaluated using variance analysis.

Disadvantages (any two):
1. Cost and Time: Constructing and maintaining a budgetary control system requires significant management time and financial resources.
2. Rigidity: Strict adherence to budgets can discourage initiative, slow down decision-making, and prevent managers from exploiting unexpected opportunities.
3. Behavioral issues: Budgets can cause conflict between departments competing for resources, or result in slack (deliberate underestimation of sales or overestimation of expenses) if targets are tied to bonuses.

Part (a) Production Budget [6 marks total]:
- 1.5 marks for Alloy-X Oct production: \( 840 \) units (showing working).
- 1.5 marks for Alloy-X Nov production: \( 1,040 \) units (showing working).
- 1.5 marks for Carbon-Z Oct production: \( 420 \) units (showing working).
- 1.5 marks for Carbon-Z Nov production: \( 520 \) units (showing working).

Part (b) Materials Purchases Budget [8 marks total]:
- 1 mark for correct Aluminium production usage (2,520 kg).
- 1 mark for correct Carbon Fiber production usage (840 kg).
- 2 marks (1 mark each) for calculating the correct desired closing inventory (Aluminium: 312 kg; Carbon Fiber: 104 kg), based on November production requirements (3,120 kg and 1,040 kg respectively).
- 2 marks (1 mark each) for correct purchase quantities (Aluminium: 2,580 kg; Carbon Fiber: 860 kg).
- 2 marks (1 mark each) for correct purchase cost (Aluminium: $30,960; Carbon Fiber: $38,700).

Part (c) Budgeted Cash Receipts [6 marks total]:
- 1 mark for September sales collection: \( \$17,600 \).
- 1 mark for calculating correct total October sales: \( \$260,000 \).
- 1 mark for October sales collection: \( \$78,000 \).
- 1 mark for calculating correct total November sales: \( \$325,000 \).
- 1.5 marks for November net collection: \( \$191,100 \) (allowing 2% discount on 60% of sales).
- 0.5 marks for total cash receipts: \( \$286,700 \) (fully correct own figure total).

Part (d) Advantages and Disadvantages [5 marks total]:
- 2 marks: Two well-explained advantages (1 mark per advantage).
- 2 marks: Two well-explained disadvantages (1 mark per disadvantage).
- 1 mark: Professional application or conclusion context (e.g., referencing coordination of production and purchasing departments).

### **(a) Calculations for the proposed project**

#### **(i) Net Present Value (NPV) at 10%**

* **Contribution per unit** = Selling Price $12.00 - Variable Cost $6.50 = $5.50 per unit.

* **Annual Contribution**:
* Year 1: 15,000 units \times $5.50 = $82,500
* Year 2: 20,000 units \times $5.50 = $110,000
* Year 3: 25,000 units \times $5.50 = $137,500
* Year 4: 18,000 units \times $5.50 = $99,000

* **Operating Cash Flows (Contribution - Fixed Overheads)**:
* Year 1: $82,500 - $30,000 = $52,500
* Year 2: $110,000 - $30,000 = $80,000
* Year 3: $137,500 - $30,000 = $107,500
* Year 4: $99,000 - $30,000 = $69,000

* **NPV Schedule**:

| Year | Cash Flow Type | Cash Flow ($) | Discount Factor (10%) | Present Value ($) |
|---|---|---|---|---|
| **0** | Machinery Purchase | (240,000) | 1.000 | (240,000) |
| **0** | Working Capital | (25,000) | 1.000 | (25,000) |
| **1** | Operating cash flow | 52,500 | 0.909 | 47,722.50 |
| **2** | Operating cash flow | 80,000 | 0.826 | 66,080.00 |
| **3** | Operating cash flow | 107,500 | 0.751 | 80,732.50 |
| **4** | Operating cash flow | 69,000 | 0.683 | 47,127.00 |
| **4** | Scrap Value | 40,000 | 0.683 | 27,320.00 |
| **4** | Working Capital release | 25,000 | 0.683 | 17,075.00 |
| **Total** | | | | **NPV = $21,057.00** |

*Alternatively, Year 4 Net Cash Flow can be summed as: $69,000 + $40,000 + $25,000 = $134,000 \times 0.683 = $91,522.00.*

$$\text{Total Present Value of Inflows} = \$47,722.50 + \$66,080.00 + \$80,732.50 + \$91,522.00 = \$286,057.00$$
$$\text{Less Outlays} = -\$265,000.00$$
$$\text{Net Present Value (NPV)} = \$21,057.00$$

---

#### **(ii) Accounting Rate of Return (ARR)**

1. **Total Cash Inflows (excluding capital/WC items)** = $52,500 + $80,000 + $107,500 + $69,000 = $309,000
2. **Total Depreciation** = $240,000 - $40,000 = $200,000
3. **Total Profits over 4 years** = $309,000 - $200,000 = $109,000
4. **Average Annual Profit** = $\frac{109,000}{4} = $27,250
5. **Average Investment of Machinery** = $\frac{240,000 + 40,000}{2} = $140,000

$$\text{ARR} = \left( \frac{\$27,250}{\$140,000} \right) \times 100 = 19.46\%$$ (to two decimal places)

---

#### **(iii) Internal Rate of Return (IRR)**

First, calculate the NPV at a higher rate (15%):

| Year | Cash Flow ($) | Discount Factor (15%) | Present Value ($) |
|---|---|---|---|
| **0** | (265,000) | 1.000 | (265,000) |
| **1** | 52,500 | 0.870 | 45,675.00 |
| **2** | 80,000 | 0.756 | 60,480.00 |
| **3** | 107,500 | 0.658 | 70,735.00 |
| **4** | 134,000 | 0.572 | 76,648.00 |
| **Total** | | | **NPV = ($11,462.00)** |

Using the IRR interpolation formula:
$$\text{IRR} = L + \left[ \frac{NPV_L}{NPV_L - NPV_H} \times (H - L) \right]$$
$$\text{IRR} = 10\% + \left[ \frac{21,057}{21,057 - (-11,462)} \times (15\% - 10\%) \right]$$
$$\text{IRR} = 10\% + \left[ \frac{21,057}{32,519} \times 5\% \right]$$
$$\text{IRR} = 10\% + (0.6475 \times 5\%) = 10\% + 3.24\% = 13.24\%$$

---

### **(b) Advantages and Disadvantages of NPV**

**Advantages (Any 3 points, 1 mark each):**
1. It considers the time value of money by discounting future cash flows back to present values.
2. It looks at the cash flows of the project rather than subjective accounting profits.
3. It considers all cash flows throughout the entire life of the project (unlike simple Payback Period).
4. It is directly aligned with the objective of maximizing shareholder wealth (a positive NPV adds value).

**Disadvantages (Any 2 points, 1 mark each):**
1. It can be difficult to calculate or estimate an accurate cost of capital (discount rate).
2. It assumes that cash flows occur at the exact end of each year, which is unrealistic as cash flows occur throughout the year.
3. It is complex to explain to non-financial managers compared to simpler methods like payback period.

---

### **(c) Advice**
* **Financial Factors**: The project is financially viable because it yields a positive NPV of $21,057.00. The IRR of 13.24% exceeds the cost of capital of 10%. Additionally, the ARR of 19.46% provides a healthy accounting rate of return.
* **Non-Financial / Strategic Factors**: The project introduces an eco-friendly product range, which can enhance the brand image and open up new markets. However, the company must verify if the sales volume forecasts are realistic and whether the working capital can be managed effectively.
* **Conclusion/Recommendation**: The directors should proceed with the investment.

### **(a)(i) NPV Calculation [Total: 10 marks]**
* Calculation of annual contribution for Years 1–4 [1 mark]
* Year 1–4 operating cash flows (subtracting $30,000 fixed costs) [1 mark]
* Year 0 cash flows (Machinery cost + working capital = -$265,000) [1 mark]
* Year 4 cash flows including scrap value and working capital release ($134,000) [1 mark]
* Correct discount factors applied for Year 1 [1 mark]
* Correct discount factors applied for Year 2 [1 mark]
* Correct discount factors applied for Year 3 [1 mark]
* Correct discount factors applied for Year 4 [1 mark]
* Summing present values correctly [1 mark]
* Correct final positive NPV of $21,057.00 (allow OCF rounding limits) [1 mark]

### **(a)(ii) ARR Calculation [Total: 4 marks]**
* Correct depreciation calculation of $200,000 over project life [1 mark]
* Correct average annual profit calculation of $27,250 [1 mark]
* Correct average investment of machinery of $140,000 [1 mark]
* Correct ARR percentage of 19.46% (allow OF based on previous figures) [1 mark]

### **(a)(iii) IRR Calculation [Total: 4 marks]**
* Correct PV of cash flows at 15% ($253,538.00) [1 mark]
* Correct negative NPV at 15% (-$11,462.00) [1 mark]
* Correct application of interpolation formula [1 mark]
* Correct final IRR of 13.24% (allow 13.2% to 13.3% depending on rounding) [1 mark]

### **(b) Advantages and Disadvantages of NPV [Total: 5 marks]**
* 3 marks for three valid advantages stated (1 mark each).
* 2 marks for two valid disadvantages stated (1 mark each).

### **(c) Advice [Total: 2 marks]**
* 1 mark for referencing quantitative results (positive NPV, IRR > cost of capital).
* 1 mark for final decision recommendation based on a balanced view of financial and non-financial factors.