Question 5 Tom Mahomes is a self-employed performance services agent: he owns and manages a business that provides musical instruments, broadcast technology and consultancy services to musicians, writers and performers in the music industry in the United Kingdom (UK). Income is also generated from the operation of a music and comedy festival at Hardwick Hall, Durham (UK), The business is called "Mahomes Music Services'. Tom is a sole trader: the business is not a limited company. Mahomes Music Services operates from three sites, all of which are rented the business does not own the buildings from which it operates. Financial statements for Mahomes Music Services are prepared to 31 October. On 31 October 2020, Tom extracted a trial balance from the business's accounting records. This trial balance is provided, below: 923,750 341,250 652,400 152,000 30,000 5,200 13,000 29,000 10,800 2.100 Trial balance at 31 October 2020 Trading account: Sales Opening inventory Purchases Other revenue and expenses: Festival income Rent Heating and lighting Advertising expenses Wages Motor expenses Discounts allowed Statement of financial position accounts: Motor vehicles at cost Motor vehicles-accumulated depreciation at 1 November 2019 Equipment at cost Equipment - accumulated depreciation at 1 November 2019 Receivables Allowance for receivables Bank VAT liability Payables Loan Capital Drawings Total 50,000 10,000 150,000 30,000 45,900 4,000 23.100 60.000 33,000 100.000 200,000 160,000 1,512,750 1,512,750 CONTINUED Tom has also provided the following additional information: 1) The closing inventory on 31 October 2020 was valued at 325,100. 2) The business supplied broadcast technology to a festival on 20 August 2020 for which it has not yet received payment. Tom expects that, eventually, the business will receive 15,200. 3) Tom depreciates Mahomes Music Services' motor vehicles using the reducing-balance method; a rate of 20% per annum is applied. 4) The business's equipment is depreciated using the straight-line method; a rate of 10% per annum is applied. 5) Tom expects that 3,900 due from customers will be irrecoverable and must be written off. 6) The allowance for irrecoverable receivables is to be set at 5% of net receivables at the year end. 7) On 1 September 2020, Mahomes Music Services paid rental expenses of 9,000 for the three-month period to 30 November 2020. 8) The business paid 6,000 for advertising on 1 August 2020. This expense was in respect of the four-month period to 30 November 2020. 9) Tom estimates that an accrual for Mahomes Music Services' heating and lighting expenses is required: he estimates that an accrual of 890 is needed. 10) The business's long-term loan is repayable in ten years' time. Interest payable on the loan is 8% per annum and is paid once per year. Opportunities for performance services agencies in the UK music industry mean that Tom plans to expand Mahomes Music Services; this will be financed by converting the business into a limited company and the issue of equity share capital. On 1 November 2020, the business will be incorporated and become 'Mahomes Music Services Ltd 100,000 equity shares will be issued at a unit issue price of 1.00 per share on 1 November 2020: the nominal value of Mahomes Music Services' equity share capital will be 1.00. On 1 May 2021, a further 25,000 equity shares will be issued at a unit issue price of 1.25. Tom would like to raise additional finance to support the expansion of the business, but is unsure of the other financing arrangements that are available to limited companies. He has stated: "I know that limited companies can raise finance by issuing equity share capital, but what are the alternatives? Other performance service agency businesses borrow money that is secured against their non-current assets: will I be able to do this for Mahomes Music Services Ltd?" Page 6 of 7 ACCT1041-WE01 Expansion of the business will mean that Tom will need greater support from professional accountants. He has read about some of the recent 'scandals' in which some accountants have failed to apply the required standards of professional ethics. Tom has stated: "I'm concerned about paying fees to accountants who seem to have poor standards of professional ethics. The business is going to need much more support with financial reporting, auditing and tax accounting. These are very different activities." Required: 0 Prepare a statement of profit or loss for Mahomes Music Services for the year ended 31 October 2020. Support your response with full workings. (12 marks) Prepare a statement of financial position for Mahomes Music Services as at 31 October 2020. Support your response with full workings. (8 marks) (ii) Prepare journal entries to record the issues of equity share capital on 1 November 2020 and 1 May 2021, respectively. Support your response with full workings. (3 marks) (iv) Critically advise Tom Mahomes of the other financing arrangements that might be used by Mahomes Music Services Ltd. (8 marks) Critically discuss the need for different standards of professional ethics for financial reporting, auditing and tax accounting. (9 marks) () (Total 40 marks)