Marvin and Chiquita (see previous case studies) have been working very successfully together, so on 1 July 2013, the start of Marvin’s third year in business, they decided to form a ‘conventional’ partnership (i.e. not an LLP), to be called Machiq Partners, sharing profits or losses in the ratio Marvin 3/5 and Chiquita 2/5. All of Marvin’s assets and liabilities are transferred to the partnership at their depreciated value. This totals

£17,570, which is transferred to Marvin’s capital account. Chiquita pays in £10,000 as her capital. No payment was required for any goodwill built up by Marvin in the previous two years.

They agree that no interest should be charged on their drawings or credited on their capital balances. No salaries are to be paid to either partner. During a successful year together the partnership earned an operating profit of £58,800. Marvin had drawings of

£32,850 and Chiquita drew £18,520.

Required

(a) Show the relevant extracts from the partnership income statement for the year ended 30 June 2014 (appropriation section) and its statement of financial position at that date.

On 30 June 2014, the partners received the following letter from Esmeralda, Marvin’s former assistant:

Dear Marvin My seven brothers and sisters and I have consulted legal advice and are going to sue you for £10 million as compensation for wrongful dismissal when you sacked us two years ago. We would have written sooner but it has taken us this long to recover from the shock of losing our jobs.

Hope you are keeping well.

Esmeralda Marvin thinks (incorrectly) that the only protection from this claim is to immediately form a limited company, so Machiq Partners became Machiq Limited with effect from 1 July 2014. The company took over all the assets and liabilities of Machiq Partners at their book values, and had a share capital of 14,000 ordinary shares of £1 each. The shares, which were issued at a premium, were allocated to Marvin and Chiquita in the same proportions as their closing capital balances in the partnership. During the year ended 30 June 2015, Machiq Limited made an operating profit before taxation of

£92,000. Taxation was to be provided on this amount at 20%, and a dividend of £2.25 per share was paid. Nothing further was heard from Esmeralda or her family during the year, although there were rumours that she had rejoined her former employer, Kaboosh Limited.

Required

(b) Show Machiq Limited’s income statement (starting with the operating profit before taxation) for the year ended 30 June 2015, and the ‘total equity’ section of the statement of financial position as at that date.