QUESTION 1

The following trial balance was extracted from the books and records of Macaroon Limited as at 31 December 2015.

	Debit	Credit
	000	000
Sales		2,347
Inventory at 1 January 2015	542
Purchases	1,932
Selling and distribution costs	87
Administrative expenses	21
Land cost	750
Buildings cost	3,500
Buildings accumulated depreciation at 1 January 2015		415
Equipment cost	530
Equipment accumulated depreciation at 1 January 2015		83
Vehicles cost	42
Vehicles accumulated depreciation at 1 January 2015		11
Trade receivables and trade payables	230	235
Cash	5
Bank	22
5% debentures		250
0.50 ordinary shares		550
Share premium		420
Share issue account		340
1 6% preference shares		300
Retained earnings at 1 January 2015	_____	2,710
	7,661	7,661

Additional Information

1. Inventory on hand at 31 December 2015 is valued at 497,000 in accordance with IAS 2 Inventories.

2. Land is to be revalued to 1,000,000 at 31 December 2015.

3. Depreciation for the year ended 31 December 2015 is to be charged as follows:

• Buildings 2% straight line;
• Equipment 10% straight line; and
• Vehicles 25% reducing balance.

While buildings and equipment are used 50% cost of sales, 25% selling and distribution and 25% administrative, vehicles are used solely for selling and distribution.

4. The tax liability for the year ended 31 December 2015 is estimated to be 47,000.

5. Debenture interest and preference dividends due in respect of the year ended 31 December 2015 remained unpaid at the reporting date.

6. An ordinary dividend of 4 pence per ordinary share in respect of the year ended 31 December 2015 was approved by the shareholders of Macaroon Limited prior to the reporting date.

7. The directors of Macaroon Limited believe that an allowance for irrecoverable debts of 6% is appropriate at 31 December 2015.

8. During the year ended 31 December 2015, Macaroon Limited made an issue of 0.50 ordinary shares at a premium of 1.20 per share. The proceeds of the issue were debited to the companys bank account and credited to a share issue account. These new shares did not rank for dividend at 31 December 2015.

Requirement

1. Prepare the statement of profit or loss and other comprehensive income of Macaroon Limited for the year ended 31 December 2015 and the statement of financial position as at that date in a form suitable for publication.

20 Marks

2. Explain the difference between ordinary shares and preference shares, and outline the circumstances when a share premium account needs to be created.

5 Marks

Total 25 Marks