Question 5 Changying Tannehill owns and manages a wholesale food supplier. Her business, 'Tannehill Canting Yongpin', supplies luxury food to restaurants and delicatessens in Newcastle upon Tyne, United Kingdom (UK). Income is also generated from the direct provision of catering services to organisations and individuals in North East England (UK). The business is not a limited company: Changying is a sole trader. Tannehill Canting Yongpin operates from three sites: an office in Durham (UK), a warehouse in Newcastle upon Tyne and a preparation facility in Washington (UK). All of these premises are rented: the business does not own the buildings from which it operates. Financial statements for Tannehill Canting Yongpin are prepared to 30 September. On 30 September 2020, Changying extracted a trial balance from the business's accounting records. This trial balance is provided, below: 1,110,000 233,100 655,000 17,000 28,000 6,500 4,000 63,000 8,800 4,300 Trial balance at 30 September 2020 Trading account: Sales Opening inventory Purchases Other revenue and expenses: Catering income Rent Heating and lighting Advertising expense Wages Motor expenses Discounts allowed Statement of financial position accounts: Motor vehicles at cost Motor vehicles - accumulated depreciation at 1 October 2019 Fixtures at cost Fixtures - accumulated depreciation at 1 October 2019 Receivables Allowance for receivables Bank VAT liability Payables Loan Capital Drawings Total 50,000 21,875 70,000 14,000 65,400 3,375 45,150 15,000 37,000 30,000 60,000 75,000 1,308,250 1,308,250 (2) Changying has also provided the following additional information: (1) The closing inventory on 30 September 2020 was valued at 175,200. Catering income includes 2,125 for catering services to be delivered in the next accounting period. The customer has paid for these catering services in advance. (3) Changying depreciates the business's motor vehicles using the reducing- balance method; a rate of 25% per annum is applied. (4) The business's fixtures and fittings are depreciated using the straight- line method; a rate of 10% per annum is applied. (5) (6) Changying anticipates that 4,280 due from customers will be irrecoverable and must be written off. The allowance for irrecoverable receivables is to be set at 5% of net receivables at the year end. On 1 August 2020, Tannehill Canting Yongpin paid rental expenses of 6,600 for the three-month period until 31 October 2020. The business paid 2,125 for advertising on 1 July 2020. This expense was in respect of the five-month period to 30 November 2020. (7) (8) (9) Changying estimates that an accrual for Tannehill Canting Yongpin's heating and lighting expenses is required: she estimates that an accrual of 990 is needed. (10) The business's long-term loan is repayable in ten years' time. Interest payable on the loan is 6% per annum and is paid once per year. On 1 October 2020, the business will be incorporated and become 'Tannehill Catering Services and Supplies Ltd. Opportunities for wholesale food suppliers and catering services businesses in the UK mean that Changying plans to expand the business. This will be financed by converting the business into a limited company and the issue of equity share capital and preference share capital. 200,000 equity shares will be issued at a unit issue price of 0.50 per share on 1 October 2020: the nominal value of Tannehill Catering Services and Supplies Ltd equity share capital will be 0.50. On 1 April 2021, 10,000 5% preference shares will be issued at a unit issue price of 1.50. Changying has a keen interesting in accounting and financial reporting. She likes to help to prepare the financial statements for her business but is unsure of the main differences between the financial statements of sole traders and limited companies, respectively. She has stated: I know that there are differences between some elements of the financial statements for sole traders and companies. How do each of expenses in the statement of profit or loss, equity in the statement of financial position, reserves in the statement of financial position and dividends in the statement of profit or loss differ between these two types of business entity? Expansion of the business will mean that Changying will need greater support from professional accountants. She has read about some of the recent scandals' in which some accountants have failed to apply the required standards of professional ethics. Changying has stated: 'Professional accountants will be important when I convert the business into a limited company. But accountants work for firms: those firms need to generate profits. How can the tension between professional ethics and commercial imperatives be managed? Required: a. Prepare a statement of profit or loss for Tannehill Canting Yongpin for the year ended 30 September 2020. Support your response with full workings. (12 marks) b. Prepare a statement of financial position for Tannehill Canting Yongpin as at 30 September 2020. Support your response with full workings. (8 marks) c. Prepare journal entries to record: i.the issue of equity share capital on 1 October 2020 and ii.the issue of preference share capital on 1 April 2021and, ii.the related finance charge for the year ended 30 September 2021. Support your response with full workings. (3 marks) d. Explain the differences between the elements of the financial statements for sole traders and limited companies identified by Changying Tannehill. (8 marks) e. Critically discuss how the tension between professional ethics and commercial imperatives might be managed. (9 marks) (Total 40 marks)