SECTION A Question 1 [40 marks] YOU MUST ANSWER THIS QUESTION The trial balance at 31st August 2021 and additional information relating to the year then ended for Grace Ltd are given below. 5% Redeemable preference shares at 1/9/20 42,000 5% Loan notes 36,000 Accountancy fees 3,960 Administration expenses (note iv) 113,940 Allowance for doubtful debt at 1/9/20 (note ix) 1,260 Carriage inwards 800 Cash and bank 7,140 Directors' remuneration 118,160 Dividends from Leng plc 900 Interest paid 1,080 Inventories at 1/9/20 48,240 Ordinary shares (25p) 71,300 Preference dividends paid (note viii) 2,100 Property, plant and equipment: At cost 244,000 Accumulated depreciation 32.490 Purchases 387,900 Receipt from sale of equipment (note i) 9,600 Retained earnings 34,970 Revenue 837,900 Sales commission paid 114,000 Share premium 33,680 Shares in Leng plc 45,900 Trade payables 54,620 Trade receivables 67,500 1.154,720 1.154,720 Additional information at 31/08/21 i) During the year computer equipment which had cost 20,000 in December 2017 was sold. To record this the trainee bookkeeper debited the bank account and opened a new account to record the other side of the entry. No other adjustments have been made in respect of this ii) Closing inventory was valued at 53,500. ii) Included in the administrative expenses is a payment of 1600 for services to be received in April 2022. iv) Costs should be allocated on the basis of their function. Costs and gains relating to property, plant and equipment should be apportioned to the cost of sales, distribution expenses and administrative expenses in the ratio 2:1:2. v) Depreciation is to be charged at 10% on the straight line basis, with a full year's charge in the year of acquisition and none in the year of disposal: vi) The directors elected to pay no ordinary cash dividends during the year. Instead, on 5th July 2021 they made a 2 for 5 bonus issue of shares. As at the year-end no adjustments had been made to record the transaction. vii) The tax expense for the year should be estimated as 20% of the pre- tax profits. viii) None of the long-term capital is due to mature in the foreseeable future. The full annual dividend for the preference share has been paid and correctly recorded ix) The allowance for doubtful debts should be adjusted to 1500 at the year-end. x) At the year-end the directors propose to pay a cash dividend of 10% of the year's profits. Required: a) Use the information above to prepare for Grace Ltd, in a format suitable for publication, the following: 0 An income statement for the year ended 31st August 2021 with all expenses classified by function, (24 marks) (ii) A statement of changes in equity for the year ended 31st August 2021 (6 marks) (1) A statement of financial position at 31st August 2021 and (16 marks) (iv) Any relevant accompanying notes. (1 mark) b) While the trainee bookkeeper is looking through the financial statements he notes your treatment of the preference share capital. Explain, WITH REASONS, how you have dealt with the preference share capital in preparing the financial statements above. (3 marks) [TOTAL 50 MARKS] Question 3 a) You are approached by one of the shareholders of Grace Ltd (See Grace Ltd financial statement prepared in question 1) Mr Fredrick Patrick, who has some concerns about the summary financial statements you just prepared. 1. Explain to Fredrick the purpose of preparing financial statements (90 words) (3 marks) ii. Explain briefly how each of the 3 statements you just prepared above can help Fredrick in his capacity as a shareholder of the company. (180 words) (6 marks) Explain why adjustments had to be made in respect of the doubtful debts at 31st of August 2021 above in question 1 (note ix). (120 words) (4 marks) A trading company's financial year ended on Thursday 31st March 2022, but it was not practicable to carry out the stocktaking until Sunday 3rd April 2022, when the store was closed for business. It was found that value of the inventory in the store on that date was 95,728. During the period 1st April to 2nd April 2022, the following transactions took place: i) Goods received and placed into stock 5,214 ii) Goods returned to suppliers 986 Sales 22,514 Goods returned by customers 1,574 The company's normally sells goods at a profit margin of 20% Required b) 1) Explain the rationale behind the accounting treatment of inventory according to AS 2. Credit will be given for reference to relevant accounting concepts. (120 words) (4 marks) 2) Draw up a statement showing the value of the inventory at 31st March 2022 (120 words) (6 marks) 3) Prepare the journal entries to record the inventory at 31st March 2022 (40 words) (2 marks) (25 marks) a) Describe any three sources of finance for a limited company? (120 words) (6 marks) b) Explain 2 difference between redeemable and irredeemable preference shares. (80 words) (4 marks) c) The directors of Indigo plc wish to raise a large amount of additional capital for expansion and diversification of the business. They currently have in issue one million 5Op ordinary shares and one million loan which mature next year. Recommend the best source of finance to replace the loan by comparing and contrasting at least 3 sources of finance. (Up to 300 words) (15 marks) Important notes +Half the marks will be reserved for discussions showing an appreciation of the different option of capital altematives. + Failure to identify the sources of finance and discuss the various option in the context of a pic will limit the marks achievable here. For example, if you focus on 1 sources of finance only the maximum marks you can achieve is 5, even if you address each of the requirements above extensively for this sources of financing. + You should attempt in your answers, to avoid repetitiveness. If, for example, you present the same argument for each of the financing method you will only receive credit for the first sources of finance and none for the other sources of finance where you have repeated the same argument. [TOTAL 25 marks]