244

CHAPTER 9: ACCOUNTS OF LIMITED LIABILITY

COMPANIES.

AN INTRODUCTION

There are basically two types of limited liability companies namely public and private
limited companies. Both are owned by shareholders and managed by the board of
directors. Limited companies enjoy limited liability. This means in the event that the
company fails to repay any borrowed funds, the creditor may not claim anything
beyond what was invested in the company. Thus the company is liable only to the
extent of investments made in the company.

CAPITAL

Limited companies raise their capital through various ways which include

(a) Issuing shares.

(b) Issuing debentures
(c) Borrowing loans
(d) Ploughing back profits

A limited company can be registered with different types of shares. The two main types
of shares are ordinary shares (also known as equity shares) and preference shares.
Ordinary shares carry voting rights but are not entitled to a fixed rate of dividend. The
amount of dividends paid to ordinary shareholders is normally determined by directors
who consider the amount of profit the company has made.

Preference shares are those shares which always carry a fixed rate of dividend and the
dividend is paid before the ordinary shareholders receive their dividends. However
preference and ordinary shareholders will only receive dividends when the company
makes profit.

Types of preference shares.

(a) Non cumulative preference shares.

Holders of these shares are not entitled to any arrear of dividend. If in any year the
company fails to pay preference dividends because there is no profit,this dividend will
not be carried over to the following year.
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(c) Cumulative preference share

Holders of such shares are entitled to receive all their arrear dividends before ordinary
shareholders receive any dividend. Thus a dividend missed in one bad year will be
recovered in the good year when profits are realized.

(b) Participating cumulative preference shares.

Holders of these shares are entitled to receive an extra dividend over and above
their fixed dividend rate when the company’s profits reach a certain level.

(c) Redeemable preference shares

These are shares which the company has the right to repay or buy back from
the shareholders.

ORDINARY SHARES

The holders of ordinary shares are called ordinary shareholders. They are entitled to
the residue of the profits (ie they receive their dividends after preference dividend has
been paid) and therefore they represent risk capital . In the event that the company is
wound up, they will receive their capital after the preference shareholders and
debenture holders have been paid. Ordinary shareholders have voting rights ie they
participate in the elections of the board of directors. Preference shareholders have no
voting rights and therefore may not vote nor voted for in an election.

Different meanings of share capital

Authorised share capital

This is sometimes called registered capital or norminal capital. It is the total of the
share capital which the company is allowed to issue to shareholders. This capital is
stipulated by the registra of companies.

Issued share capital

This is the total share capital actually issued to shareholders. If all the authorized
share capital has been issued then the authorized share capital would be equal to the
issued and fully paid share capital.

Called up share capital

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Where only part of the amount payable on each issued share has been asked for, the
total amount asked for on all the issued shares is called the called up share capital.

DEBENTURES.

A Debenture is a document containing details of a loan made to a company. The loan

may be secured on the assets of the company when it is called the mortgage
debenture. If the security of the loan is on certain specified assets of the company, the
debenture is said to be secured by a fixed charge. If the assets are not specified then
the debenture is secured by a floating charge on the assets. An unsecured debenture
is known as simple or naked debenture. Debentures carry a fixed rate of interest. This
interest must be paid whether or not the company makes profits. Debenture interest is
debited to the profit and loss account as an expense.

Unlike shareholders, debenture holders are not owners of the company. Debentures
are always shown as long term liabilities or non current liabilities in the statement of
financial position. Debentures are usually redeemable on or before a specified date
which is shown as part of their description.

Convertible loan stock

This gives the holders of debentures the opportunity at a future date to convert the
loan into shares of the company at a predetermined price. This means the person will
no longer be a debenture holder but a share holder. He will now be entitled to
dividends and not interest. The advantage is that the person now becomes a part
owner of the company instead of being just a creditor. He now participates in the day
to day running of the company.

RESERVES

TYPES OF RESERVES

(a) Revenue reserves

These are profits that have been ploughed back into the company by debiting profit
and loss appropriation account(statement of comprehensive income) and crediting the
appropriate reserve account. They may either be specific or general.
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(i) Specific reserves- these are revenue reserves that have been set aside
for some specific purpose such as replacement of fixed ( noncurrent)
assets or in anticipation of an expansion of the business.

(ii) General reserves- these are other revenue reserves considered

desirable or necessary to reinforce the financial position of the
company.

Setting aside profits as revenue reserves reduces the amount

available for dividends at least for the time being. If at some future
date the revenue reserves are found to be unnecessary or excessive
they may be credited back to the profit and loss appropriation
account and made available for the payment of dividends.

CAPITAL RESERVES

These reserves are not created by debiting the profit and loss appropriation account.
Therefore they may not be credited back to the profit and loss account and be used to
pay dividends to shareholders. Examples of capital reserves are:

(a) SHARE PREMIUM ACCOUNT

The share premium account is created whenever shares are issued at a price above
their norminal value ie at a premium. The directors of a company may consider that
shares to be issued are worth more than their norminal value or par value. In that
case they may issue them at a premium. For example, ordinary shares of $1 each may
be issued at $1,20 each ie at a premium of 20c per share . This share premium will be
credited to the share premium account and debited to the bank account. The share
premium account will be used:

(a) In paying up unissued shares as fully paid bonus shares.

(b) To write off preliminary expenses ie expenses incurred in
forming the company.
(c) To write off expenses on any issue of shares.
(d) To write off the commission paid on any issue of shares or
debentures.
(e) To provide any premium payable on the redemption of shares
or debentures.
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REVALUATION RESERVE

A revaluation reserve is created when an asset is revalued to reflect an increase in

value. The bookkeeping entries are

Dr asset account
Cr revaluation account

CAPITAL REDEMPTION RESERVE

If a company redeems or buys back any of its shares otherwise than out of the
proceeds of a new issue of shares, it must create a capital redemption reserve and
credit it with the norminal value of shares so redeemed. The capital redemption
reserve created in this way may be used to issue unissued shares as fully paid up
bonus shares. When the company uses reserves to issue fully paid up bonus shares to
its shareholders the reserves are transferred to the credit side of the share capital
account. Revenue reserves capitalized in this way no longer become available for
distribution as dividends. It is important all reserves belong to ordinary share holders.
It is important to note that all reserves belong to the ordinary shareholders.

BONUS SHARES (SCRIP ISSUE)

Bonus shares or scrip issue are shares that are issued free of charge to existing
ordinary shareholders. If the directors of a company consider that the balance on the
ordinary share capital account does not adequately reflect the long term capital of the
company, they may decide to issue an additional bonus shares. The issue of bonus
shares may be considered an indirect way of distributing reserves to ordinary
shareholders since all the reserves belong to ordinary shareholders. When the bonus
shares have been issued, the accounts of different reserves should be debited with the
norminal value of the shares issued as bonus shares. The ordinary share capital
account is then credited with bonus shares. Generally, whenever bonus shares are
issued by utilizing certain reserves, the various reserves will be reduced by the
norminal value of the bonus shares and ordinary share capital increases by the same
value.

RIGHTS ISSUE

A rights issue is one in which shares are issued to existing ordinary shareholders for
cash. An advantage of both bonus and rights shares is that the control of the
company.
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remains with the existing shareholders and this may not be the case if shares were
issued to the general public.

DISTRIBUTABLE RESERVES

Distributable profits are accumulated realized profits less accumulated realized losses.
Revenue reserves including retained profits are all distributable reserves. When the
profits of the company are insufficient to meet the dividend demand, the board of
directors may recommend that excessive revenue reserves be credited back to the
profit and loss appropriation account be available for dividend payment. However,
before recommending a dividend, the directors of the company will have regard to the
following.

1. The availability of distributable profits.

2. The availability of liquid funds to pay the dividend.
3. Whether the revenue reserves are adequate or need to be increased by further
profits ploughed back into the business.
4. A balance between dividend growth and capital growth.
5. The effect of the dividend policy on the market price of the shares.

In general, revenue reserves such as specific and general reserves are the only
reserves which should be distributed as cash dividends to shareholders. Therefore
these are the distributable reserves. In the event that the profits of the company are
insufficient and revenue reserves are excessive, then the revenue reserves can be
credited back to the profit and loss appropriation account and made available for
dividend payment. Capital reserves such as revaluation reserve, redemption reserve,
share premium account etc are called non distributable reserves meaning that they
cannot be distributed as cash dividends.

All reserves belong to ordinary shareholders. Therefore in a liquidation, shareholders

will get what they invested in the business together with reserves. This is what is
collectively known as shareholder’s funds.

DIVIDENDS.

Dividends are the return on the shareholder’s investments in a limited company.

Dividends may be declared as a percentage of the total share capital or as a certain
amount per share. The declared rate of dividend will be calculated as follows:

𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑖𝑑 𝑝𝑙𝑢𝑠 𝑝𝑟𝑜𝑝𝑜𝑠𝑒𝑑 × 100

𝑜𝑟𝑑𝑖𝑛𝑎𝑟𝑦 𝑠ℎ𝑎𝑟𝑒𝑐𝑎𝑝𝑖𝑡𝑎𝑙

ADVANTAGES OF INVESTING IN:

Ordinary shares:
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Advantages Disadvantages

1. When profits are high, ordinary 1. Ordinary shareholders will get

dividend rises as well. their dividend after debenture
holders and preference
2. Ordinary shareholders have shareholders.
voting rights and they can be
elected into the board of 2. Ordinary share capital is risky
directors. capital. This means in times of
low profits they may get little or
3. All reserves belong to ordinary no dividend at all.
shareholders. Therefore in a
liquidation, ordinary
shareholders tend to benefit. 3. In a liquidation, ie when the
company is wound up, ordinary
4. Share holders may receive shareholders are the last to get
bonus shares free of charge and their capital back.
this increases their share
capital.
4. Ordinary shares cannot be
5. Ordinary shares can be issued redeemable.
at a premium

(a) Preference shares

Advantages. Disadvantages.

1. The holders get their dividend 1. Their dividend does not

before ordinary shareholders. increase with profit since it’s
fixed.
2. They get their capitals first 2. In the case of non cumulative
before ordinary shareholders preference shares, a divided
in a liquidation. lost in any bad year is lost for
good
3. Their shares can be redeemed 3. Preference shareholders do not
at any time at a premium. have voting rights and
therefore they can not be
4. In the case of cumulative elected in the board.
preference shares,any 4. They do not have any share in
dividend lost in any bad year reserves.
will be recovered in the good 5. Their share capital may not
years. increase through bonus and
rights shares
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Debentures

Advantages Disadvantages
1. They are relatively safe investment. 1. The rate of interest on the debenture
because they are secured on the assets of is fixed. If interest rates generally
the company. fall, the reward for debenture
holders will be less attractive.
2. Debenture holders are the first to
Get their interest on their debentures 2. During hyper inflation debenture
before shareholders get their dividends. holders tend to lose as their returns
will be eroded by inflation as they
3. In the event of company liquidation are fixed returns.
Debenture holders are the first to be paid.
3. The interest on the debenture does
4. A debenture holder is just a not increase with profits.
Creditor to the company and this relieves
him of the burden of managing and making
daily business decisions.

Differences between bonus and rights shares

Bonus shares Rights shares

1. Issued free of charge to existing 1. Issued for cash to existing ordinary

ordinary shareholders. shareholders.

2. Reserves are utilized in the process 2. No reserves are utilized in the

process.

3. Used as a way of distributing

reserves to ordinary shareholders. 3. Not issued for the reason of
distributing reserves.
4. May not be issued at a premium or
at a discount. 4. May be issued at a premium or
discount.

5. Does not result in an increase in

assets (cash/bank) of the company 5. Results in an increase in
assets(cash/bank) of the business.
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Similarities between bonus and rights shares.

1. They both are issued to existing ordinary shareholders

2. They result in an increase in ordinary share capital.
3. They may result in an increase in dividends for ordinary shareholders

THE DISTINCTIONS BETWEEN RESERVES, PROVISIONS AND LIABILITIES.

Provisions are amounts written off or retained by way of providing for depreciation,
renewals or diminution in the value of the assets or retained by way of providing for
any known liability of which the amount cannot be ascertained with much accuracy.
The increase or decrease in provision are debited or credited in the profit and loss
account.

Reserves are any other amounts set aside out of profits by debiting profit and loss
account and crediting the relevant reserve account or amounts placed to capital
reserve in accordance with the companies act. Liabilities are amounts owing which
can be determined with much accuracy.

FULLY WORKED EXAMPLE 1

The following information was extracted from the books of Jimax ltd for the year ended
31 December 1994.

Authorised share capital.

100 000 ordinary shares of 50c each

20 000 8% preference shares of $1 each

Dr Cr
Ordinary share capital, fully paid 40 000
Preference share capital, fully paid 20 000
Share premium account 4 000
General reserves 3 000
Profit and loss(balance as at 1 January 1994) 5 400
Trading inventory (as at 1 January 1994) 16 000
Trade receivables and trade payables 22 000 10 000
Purchases and sales 38 000 59 500
6% debentures 15 000
Salaries and wages 6 500
Sales and purchases returns 1 000 800
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Investments at cost 18 000

Administration expenses 3 200
Rent and rates 5 600
Furniture and fixtures, at cost 14 500
Motor vehicles, at cost 26 000
Provision for depreciation(as at 1 Jan 1994)
Furniture and fittings 1 440
Motor vehicles 5 460
Preliminary expenses 2 000
Carriage on purchases 500
Carriage on sales 600
Income from investments 2 000
Interest on debentures paid 900
Preference dividend paid 1 600
Interim ordinary dividends paid 800
Director’s emoluments 1 100
Auditors’ remuneration 900
Provision for bad debts(as at 1 Jan 1994) 1 200
bank 8 600
167 800 167 800

The following additional information is available

(i) Trading stock(inventory) as at 31 December 1994 was $25 200.

(ii) $600 rent was paid in advance, while $300 administration expenses was
owing as at 31 December 1994.
(iii) Corporation tax for the year is estimated at $1 570
(iv) The directors have decided to:
-transfer $1 500 to the general reserve.

-propose a final dividend on ordinary shares of 2c per share.

(v) Provision for bad and doubtful debts is to be adjusted to 4% of debtors.

(vi) Motor vehicles and furniture and fixtures are depreciated at 20% and 10%
per annum on cost, respectively.

Required (a) Statement of comprehensive income (Trading and profit and loss and
appropriation account) for the year ended 31 December 1994.

(b Statement of changes in equity for the year ended 31 December 1994

(c Statement of financial position as at 31 December 1994

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Suggested answer

(a) Statement of comprehensive income for the year ended 31 December 1994

$ $
Sales 59 500
Less sales returns 1 000
58 500
Less cost of sales
Opening inventory 16 000
Add purchases 38 000
Add carriage on purchases 500
54 500
Less purchases returns (800)
Less closing inventory (25 200) 28 500
Gross profit 30 000
Income from investments 2 000
Decrease in bad debts provision 320
32 320
Less operating expenses
Salaries and wages 6 500
Rent and rates(5 600-600) 5 000
Admin expenses (3 200+300) 3 500
Depreciation- furniture and Fixtures 1 450
-Motor van 5 200
Carriage on sales 600
Directors’ emoluments 1 100
Auditor’s remuneration 900 24 250

Profit from operations 8 070

Debenture interest (900)
Profit before taxation 7 170
Less corporation tax (1 570)
Profit for the year 5 600

(b) Statement of changes in equity for the year ended 31 December 1994

Retained earnings $ $
Balance at 1 January 1994 5 400
Add profit for the year 5 600
11 000
Dividend paid (1 600 + 800) 2 400
Transfer to general reserve 1 500 (3 900)
Retained earnings carried forward (7 100)
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(c ) Statement of financial position as at 31 December 1994.

Cost Depn Nbv

NON CURRENT ASSETS $ $ $

Furniture and Fixtures 14 500 2 890 11 610

Motor vehicles 26 000 10 660 15 340
40 500 13 550 26 950
Investments at cost 18 000
Preliminary expenses 2 000
46 950

CURRENT ASSETS
Inventory 25 200
Trade receivables 22 000
Less provision for doubtful debts 880 21 120
Bank 8 600
Prepaid expenses 600 55 520
102 470

EQUITY AND LIABILITIES

Share capital and reserves
Authorised share capital
100 000 ordinary shares of 50c 50 000
20 000 8% preference shares of $1 20 000
70 000
Issued share capital
80 000 ordinary shares of 50c 40 000
20 000 preference shares of $1 20 000
Reserves
Share premium 4 000
General reserve 4 500
Retained profits 7 100
75 600
NON CURRENT LIABILITIES
6% debentures 15 000

CURRENT LIABILITIES
Trade payables 10 000
Accrued expenses 300
Corporation tax 1 570
102 470
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FULLY WORKED EXAMPLE 2

The Trial balance of Makuvaza Limited as at 31 March 2002

Dr Cr
$ $
Land and buildings 85 920
Ordinary share capital 85 000
Sales 75 000
Opening inventory 5 000
Purchases 28 000
Retained profit 23 700
Motor vehicle at cost 40 000
Provision for depreciation on motor vehicle 8 000
Preference Dividend 1 920
Rent 1 500
Light and water 1 900
10% debentures 50 000
8% Preference shares 48 000
Advertisement cost 500
Trade receivables 20 000
Bank 8 080
Motor expenses 1 500
Debenture interest 2 500
Wages and salaries 2 100
Bad debts 200
Provision for credit losses 1 000
Director’s emoluments 21 580
Auditing fees 5 000
Trade payables 5 000
Cash in hand 70 000
295 700 295 700

Notes

1. Inventory at 31 March 2002 was valued at cost at $9 000

2. Motor vehicles are depreciated using the reducing balance method at 20%
3. Rent prepaid was $500 and wages and salaries accrued was $3 300 at 31
March 2002.
4. Provision for credit losses to be 4% of receivables
5. Tax of $2 200 is to be provided.
6. The directors proposed the following:
-to transfer $2 000 to general reserve
-to pay a dividend of 10% on ordinary shares.
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Required: 1) Statement of comprehensive income for the year ended 31 March 2002.

2) Statement of financial position as at 31 March 2002.

3) Statement of changes in equity for the year ended 31 March 2002

The accounts should be presented in accordance with IAS 1

Suggested answer.

$ $
Sales 75 000
Less cost of sales
Opening inventory 5 000
Add Purchases 28 000
33 000
Less Closing inventory 9 000 24 000
Gross profit 51 000
Decrease in provision for bad debts (1 000 – 800) 200
51 200
Less operating expenses
Rent (1 500 – 500) 1 000
Wages and salaries(2 100 + 3 300) 5 400
Light and water 1 900
Depreciation: Motor vehicle 6 400
Directors’ emoluments 21 580
Audit fees 5 000
Bad debts 200
Advertisement cost 500
Motor expenses 1 500 43 480
Operating profit 7 720
Less debenture interest 5 000
Profit before tax 2 720
Less corporation tax 2 200
Profit for the year 520
 258

Statement of financial position as at 31 March 2002.

$ $ $
NON CURRENT ASSETS
Land and buildings 85 920
Motor vehicles (40 000 – 8000 – 6 400) 25 600
111 520
CURRENT ASSETS
Inventory 9 000
Trade receivables 20 000
Less provision for credit losses 800 19 200
Bank 8 080
Cash 70 000
Prepayment 500 106 780
218 300
EQUITY AND LIABILITIES:
Share capital and reserves
Ordinary share capital 85 000
Preference share capital 48 000
General reserve 2 000
Retained profits 20 300
155 300
NON CURRENT LIABILITIES
10% Debentures 50 000
205 300
CURRENT LIABILITIES
Tax 2 200
Unpaid wages 3 300
Unpaid debenture interest 2 500
Trade payables 5 000
218 300
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Statement of changes in equity for the year ended 31 March 2002

Ordinary Preference General Retained Total

Share share Reserves profit
capital capital
$ $ $ $ $
Balance b/d 85 000 48 000 - 23 700 156 700
Profit for the year - - - 520 520
Transfer to general reserve - - 2 000 (2 000) -
Preference dividend
(Interim) - - - (1 920) (1 920)
Balance c/d 85 000 48 000 2 000 20 300 155 300

SELF HELP EXERCISES

1. The following balances were taken from the books of Komark Limited for the
year ended 31 December 2003

$
Ordinary shares of $0,50 each 250 000
10% Preference shares of $1 each 300 000
General reserve 90 000
Retained profit at 1 January 2003 80 000
Investments 741 000
Land and buildings at cost 200 000
Plant and equipment at cost 240 000
Office machinery at cost 280 000
Accumulated depreciation at 1 January 2003:
Land and buildings 40 000
Plant and equipment 24 000
Office machinery 56 000
Trade receivables 118 000
Trade payables 58 000
Inventory at 1 January 2003 41 000
Bank 121 000
Sales 1 900 000
Purchases 420 000
Returns inwards 50 000
Returns outwards 20 000
Discount received 25 000
Discount allowed 95 000
Rent and rates 73 000
Insurance 70 000
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Light and heat 68 000

Wages and salaries 46 000
Auditor’s fees 90 000
Director’s remuneration 95 000
10% debentures 100 000

Additional information.

a) During the year to 31 December 2003, the directors of Komark Ltd.

i) Transferred $80 000 to general reserve
ii) Paid half year’s preference dividend.
iii) Paid dividend of 10c per share on ordinary shares.

Komark Limited depreciate their noncurrent assets as follows:

10% per annum on cost of Land and buildings and Plant and equipment.

20% per annum on cost of Office machinery.

It is Komark Limited’s policy to provide a full year’s depreciation on noncurrent

assets in the year of purchase but no depreciation charged in the year of sale.

b) During the year ended 31 December 2003.

i) A bonus issue of shares was made on the basis of 2 for every 5 ordinary
shares held utilizing the general reserves. These shares do not rank for
dividends at 31 December 2003.
ii) An additional building was built at a total cost of $70 000
iii) An additional Plant costing $40 000 was acquired and installation costs
amounting to $10 000 were incurred.
iv) An office machinery which had cost $60 000 and had an accumulated
depreciation of $24 000 was sold for $30 000 by cheque. This was
however not recorded in the bank account.

Corporation tax for the year amounted to $42 000

Inventory at 31 December 2003 was valued at $61 000 at cost.

Required:
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a) Statement of comprehensive income for the year ended 31 December 2003

b) Statement of changes in equity as at 31 December 2003
c) Noncurrent assets schedule for the year ended 31 December 2003.
d) Statement of financial position as at 31 December 2003.

2. The following balances were extracted from the books of Abdul Delphi Ltd for
the year ended 31 December 2012.
Dr Cr
Ordinary shares of 50c each 400 000
10% Redeemable Preference shares of $1 each 200 000
General reserves 245 000
Share premium account 20 000
Retained earnings 50 000
Buildings at cost 230 000
Plant and equipment at cost 350 000
Motor vehicles at cost 180 000
Accumulated depreciation at 1 January 2012:
Buildings 92 000
Plant and equipment 35 000
Motor vehicles 54 000
Investments at 10% interest 200 000
Trade receivables 160 000
Inventory at 1 January 2012 58 000
Bank 745 000
Trade payables 55 000
Sales 900 000
Purchases 80 000
Returns 20 000 35 000
Carriage inwards 32 000
Carriage outwards 10 000
Rent and rates 15 000
Insurance 18 000
Light and heat 22 000
Wages and salaries 25 000
Stationery and postages 20 000
Directors’ emoluments 12 000
Auditors’ fees 16 000
Advertising 5 000
Bad debts 9 000
Provision for doubtful debts at 1 January 2012 16 000
20% Debentures 150 000
 Notes: 262
1. The directors of Abdul Delphi Ltd issued bonus shares during the year on the
basis of one share for every two ordinary shares already held utilizing the
general reserves. These shares were not to rank for dividends at 31 December
2012.
2. The bonus share issue was followed by a rights issue on the basis of one
ordinary share for every five shares already held. These shares were issued at a
premium of 20c each. This transaction was not recorded in the bank account.

3. 50 000 Preference shares of $1 each were redeemed at par during the year from
the profits of the company. However, this transaction was not recorded in the
books.
4. Existing buildings were revalued by $60 000 during the year. A new building
was purchased by cheque for $90 000 but this was no recorded in the bank
account.
5. New plant and equipment costing $140 000 was purchased by cheque during
the year but this was not recorded in the bank account. Installation costs on
the new Plant and equipment amounting to $30 000 was paid during the same
year but again it was not recorded in the bank account.

6. A new Motor vehicle costing $70 000 was purchased during the year by cheque
but the accountant did not record this in the bank account. A Motor vehicle
which had cost $40 000 was sold during the year for $22 000 by cheque but
the bank account was not debited with this transaction. The Motor vehicle was
purchased on 1 January 2010.

During the year ended 31 December 2012, the directors of Abdul Delphi Ltd:

(i) Transferred $100 000 to the general reserve account.

(ii) Paid ordinary dividend amounting to $20 000 and proposed to pay a
dividend of 10c per each ordinary share by 31 December 2012.
(iii) Paid a full year’s preference dividend on the unredeemed shares.

Additional information:

1. Inventory at 31 December 2012 was valued at $28 000 at cost.

2. The provision for doubtful debts should be adjusted to 15% of trade receivables
at 31 December 2012.
3. Taxation for the year amounted to $55 000
4. Accrued expenses at 31 December 2012 were as follows:
Rent and rates $5 000
Insurance $2 000
 263

5. Prepaid expenses at 31 December 2012 were:

Wages and salaries $5 000.
6. Abdul Delphi Ltd depreciate their noncurrent assets as follows:
Buildings 20% per annum on cost
Plant and equipment 10% per annum on cost
Motor vehicles 10% per annum on cost

A full year’s depreciation is charged on noncurrent assets in the year of purchase but
no depreciation is charged in the year of sale.

You are required to prepare:

(a) Statement of comprehensive income for the year ended 31 December 2012.
(b) A statement of changes in equity as at 31 December 2012.
(c) A noncurrent assets schedule for the year ended 31 December 2012
(d) A Statement of financial position as at 31 December 2012.
3. The following trial balance was extracted from the books of Melland Ltd on 31
May 2000.

Debit ($) Credit($)

$1 Ordinary shares 1 500 000
General reserves 63 600
Profit and loss balance 67 680
Inventory at 1 June 1999 292 665
Purchases 1 594 383
Sales 3 256 587
Premises at cost 1 440 000 288 000
Provision for depreciation-Premises
Office equipment at cost 186 000
Provision for depreciation-office equipment 102 000
Delivery vehicles at cost 93 000
Provision for depreciation-delivery vehicles 36 000
Provision for bad debts 15 360
Trade payables 257 055
Trade receivables 580 998
Discounts received 48 435
Bad debts 21 600
General administration expenses 798 801
Bank 53 400
General distribution expenses 678 570
Loss on sale of delivery van 2 100
5 688 117 5 688 117

Additional information

The authorized capital is 2 400 000 in ordinary shares of $1 each.

 264

Depreciation is provided for as follows:

Delivery vehicles 20% per annum on cost.

Office equipment 10% per annum on cost

1
Premises 22% per annum on cost.

It is company policy to charge a full year’s depreciation on all assets held at year end.

Office equipment costing $18 000 was bought during the year. A delivery van bought
during the year ended 31 May 1998 for $21 000 was sold for $10 500 on 1 January
2000. These transactions have already been correctly dealt with in the accounts. The
Premises are divided between distribution and administration in the ratio 3:2.

At 31 May 2000 inventory was valued as follows:

a. At net realizable value $298 260

b. At cost to the company $285 600
Provision for bad debts is to be provided as follows: $1 758 for a specific debt
1
plus 22% on the remainder of trade receivables. The item is to be treated as an

administrative expense. $480 is owing for general distribution expenses and the
general administration expenses include a prepayment of $2 760. The directors
recommend a transfer of $30 000 and an ordinary share dividend of 6%.
Corporation tax for the year on the profit from ordinary activities is estimated at
$52 500.
NB: Apart from noncurrent assets purchase and disposals in note 3 above, the
rest of the transactions have not been taken into account.
You are required to provide
(a) A Statement of comprehensive income for the year ended 31 May 2000
(b) A Statement of financial position as at 31 May 2000
(c) A Statement of changes in equity for the year ended 31 May 2000
(d) A noncurrent asset schedule for the year ended 31 May 2000
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4. The trial balance of Sunrise limited at 31 December 2007 is given below.

Dr Cr
Ordinary shares of $2 each 500 000
8% Preference shares of $1 each 125 000
Share premium account 65 000
Land and buildings at cost 600 000
Plant and equipment at cost 620 000
Provision for depreciation, plant and
equipment. 170 000
Gross profit 891 000
Trade receivable and payables 80 000 12 000
Provision for bad debts 7 000
Discount received 6 000
Stock (inventory) at 31 December 2007 109 000
Bank 6 000
Rent and rates 230 000
Salaries and wages 339 000
Sundry expenses 140 000
Debenture interest 4 000
Preference dividend paid 5 000
10% Debentures (2010) 80 000
General reserves 180 000
Profit and loss account 85 000

Additional information:
1. Rent of $10 000 was prepaid on 31 December 2007.
2. Sundry expenses of $3 000 were outstanding on 31 December 2007.
3. The debentures and share capital were issued several years ago.
4. Depreciation is provided on plant and equipment at 20% using the reducing
balance method.
5. The provision for bad debts is maintained at 5% of Trade receivables each
year.
6. Taxation is to be provided at 30%
7. The directors declared an ordinary dividend of 6c per share on 31 December
2007.
8. An amount of $20 000 is to be transferred to general reserve

Required:(i) What are cumulative preference shares?

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(a) State three disadvantages of cumulative preference shares over ordinary

shares?

(c) Prepare sunrise limited’s statement of comprehensive income( Trading and profit
and loss and appropriation account) for the year ended 31 December 2007 and a
Statement of financial position( balance sheet as at 31 December 2007).

(ZIMSEC NOV 2010)

5. The trial balance of RF ltd as at 30 June 2008 is as given below.

Dr Cr
Share capital: Authorised and issued 50 000
Stock (inventory) as at 30 June 2007 38 295
Trade receivables 26 890
Trade payables 12 310
10% Debentures 20 000
Noncurrent asset replacement reserve 10 000
General reserve 6 000
Profit and loss account as at 30 Jun 2007 3 964
Debenture interest 1 000
Equipment at cost 35 000
Motor vehicles at cost 28 500
Bank 3 643
Cash in hand 180
Sales 99 500
Purchases 66 350
Returns inwards 1 150
Carriage inwards 240
Wages and salaries 10 360
Rent, rates and insurance. 5 170
Discounts allowed 1 246
Director’s remuneration 2 500
Provision for depreciation at 30 Jun 2007
:equipment 8 400
:motors 10 350
220 524 220 524

Additional information:
1. Stock (inventory) at 30 June 2008 was valued at $49 371.
2. The share capital consisted of 25 000 ordinary shares of $1 and 25 000 10%
preference shares of $1 each. The dividend on the preference shares was
proposed as well as a dividend of 20% on the ordinary shares.
3. Accrued rent at 30 June 2008 was $700 and director’s remuneration
amounting to $2 500 was prepaid.
4. Half year’s interest on the debenture was owing at 30 June 2008.
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5. It is the company’s policy to provide depreciation on its noncurrent assets as

follows: Equipment 10%
Motors 20%
6. At 31 December 2008, the directors propose to transfer:

(i) $2 000 to general reserve

(ii) $1 000 to noncurrent assets replacement reserve

Required:

(a) Statement of comprehensive income (Trading and profit and loss and
appropriation account) for the year ended 30 June 2008.
(b) A statement of financial position (balance sheet) as at 30 June 2008.

6. The following Trial balance was extracted from books of Modesty Ltd on 31
December 2008.
Debit Credit
$ $
Ordinary shares of $1 each 20 000
Share premium account 2 200
General reserve 800
Retained earnings (1 January 2008) 9 000
Freehold land at cost 32 000
Fixtures at cost 6 000
Provision for depreciation of fixtures 3 600
Motor vehicles at cost 11 200
Provision for depreciation of vehicles 5 600
Revenue 124 000
Cost of sales 86 000
Insurance 800
Wages 13 600
General expenses 5 300
Trade receivables 12 000
Trade payables 9 600
Cash and cash equivalents 4 440
12% Debentures 16 000
Interest on debentures 960
Inventory at cost 18 000
Interim dividend paid: Ordinary 500
190 800 190 800
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Additional information:

(i) Depreciation is to be provided as follows:

Fixtures 10% per annum on cost.
Motor vehicles 20% per annum on cost
(ii) Wages of $1 200 were accrued and insurance of $120 had been prepaid at
the year end.
(iii) Taxation of $1 090 is to be provided.
(iv) Transfer $2 000 to general reserve
(v) Freehold land is to be revalued at $35 000.
(vi) The directors have recommended a final dividend of 15% on the Ordinary
shares.

You are required to prepare.

(a) Statement of comprehensive income for the year ended 31 December
2008.
(b) Statement of financial position as at 31 December 2008
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7. The following is a trial balance of Munkuli Ltd at 30 June 2015.

Dr Cr
$ $
Revenue 720 000
Purchases 280 000
Inventory at 1 July 2014 14 000
Discounts 11 200 4 000
Debenture interest 500
Rent received 12 000
6% Irredemable preference shares of $1 each 50 000
Ordinary shares of $1 each 130 000
5% debentures 20 000
General administration expenses 128 000
Selling expenses 92 000
Trade receivables 36 000
Trade payables 24 000
Retained earnings at 1 July 2014 16 000
Premises 265 000
Office equipment 48 000
Machinery 80 000
Salaries 35 000
Bad debts 5 000
Bank 52 000
Provision for depreciation: Machinery 8 000
Office equipment 20 000
Provision for doubtful debts 1 400
General reserve 4 800
Share premium 40 000
Interim dividends paid: Preference 1 500
Ordinary 2 000

1 050 200 1 050 200

Additional information
(i) The closing inventory was valued at $12 000
(ii) General administration expenses owing at year end were $1 440.
(iii) Selling expenses prepaid at year end were $1 320
(iv) Rent receivable of $640 is outstanding at year end
(v) On 10 July 2015, a customer who owed Munkuli Ltd $3 000 on 30 June
2015 was declared bankrupt. The debt has been considered as good at year
end.
(vi) The provision for doubtful debts was to be adjusted to 3% of trade
receivables.
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(vii) Depreciation is to be provided as follows:

Machinery 20% reducing balance method
Office equipment 15% on cost
(viii) A transfer of $6 000 is to be made to general reserve
(ix) Munkuli Ltd had its premises revalued to $320 000 during the year
(x) Corporation tax for the year on profit from ordinary activities is estimated to
be $42 000.

Prepare:

(a) Munkuli Ltd’s Income Statement for the year ended 30 June 2015
(b) Statement of changes in equity for the year ended 30 June 2015
(c) Statement of financial position as at 30 June 2015

8. Buisybee Limited: Statement of financial position as at 1 January 2017

Cost Accumulated Net book
Depreciation value
Non current assets $ $ $
Buildings 300 000 50 000 250 000
Motor vehicles 102 000 24 000 78 000
Equipment 140 000 20 000 120 000
542 000 94 000 448 000
Net Current Assets 106 000
554 000
Financed by:
Ordinary shares of $1 each 230 000
Share premium 45 000
Capital redemption reserve 10 000
General reserve 38 000
Retained earnings 111 000
4% Redeemable preference shares of
$0,50 each 50 000
10% Debentures 40 000
8% Convertible loan stock 30 000
554 000

The following transactions took place during the year ended 31 December 2017:

January 1 4% Redeemable preference shares were redeemed at $0,60 each

1 Buildings were revalued to $264 000

June 22 A rights issue of one Ordinary share for every four held was made at $1,20

each.
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August 1 Equipment costing $12 000 was purchased on credit.

September 30 An interim dividend of $16 000 was paid and a proposed dividend of

20 cents per share was made.

November 30 A bonus issue of one for five shares was made, utilizing equal amounts

from distributable reserves.

The profit after tax for the year ended 31 December 2017 was $88 000.

Prepare:

(i) Journal entries to record the above transactions.

(ii) A statement of changes in equity for the year ended 31 December 2017

VALUATION OF SHARES USING THE STAMENT OF FINANCIAL POSITION

VALUES.

The summarized balance sheet (statement of financial position) of Timail ltd is as

follows: $

Non current assets 200 000

Current assets 100 000

300 000

Equity and liabilities

50 000 Ordinary shares of $1 each 50 000

Revenue reserves 40 000

Retained profit 110 000

200 000

Current liabilities

Trade payables 100 000

300 000
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The value of one ordinary share will be calculated as follows

Total net assets [non current assets + current assets – current liabilities]

No of ordinary shares

200 000
= $4
50 000

SELF HELP EXERCISE

1. What are the advantages and disadvantages to the investor of investing in

(i) Preference shares (ii) Ordinary shares (iii) Debentures (iv) Convertible
loan stock.
2. (a) State and describe any three revenue reserves and any four capital reserves.

(b What are distributable reserves?. Give examples of such distributable

reserves and explain the circumstances under which they will be distributed.

3. What are the uses of a share premium account?

4. What factors should be taken into account when designing a dividend policy?

5. Distinguish between bonus (scrip) issue and rights issue.

DIRECTOR’S REPORT

The directors are under a statutory instrument to prepare a director’s report and one
copy will be filed with the registra of companies. The contents of the director’s report
are.

1. A fair review of the development of the business of the company and its
subsidiary undertakings during the financial year and of its position at the end
of the year. Principal activities of the company during the year and significant
changes in those activities.
2. Particulars of significant changes in fixed (non current) assets during the
financial year. Where the market value of land differs substantially from that
shown in the statement of financial position and that difference is significant,
 273

an indication of that difference is required to be disclosed as a note to the

accounts.
3. Particulars of important events affecting the company since the end of the
financial year
4. An indication of likely future developments in the company.
5. An indication of the company’s activities in research and development.
6. Amounts of any recommended dividends and proposed transfers to reserves.
7. Names of persons who were directors at any time during the year. Their
interests in shares or debentures of the company.
8. Information regarding the arrangements in force for securing the health, safety
and welfare at work of the employees.
9. Principal activities of the company and its subsidiary undertakings and any
significant changes in those activities in the year.
10. Acquisition by the company of its own shares or a change in them.
11. Involvement of the employees in the affairs, policy and performance of the
company.

AUDITOR’S REPORT
The auditor’s report is usually directed to shareholders not to directors.
This is a report on the director’s findings on the process of verifying the
accounting statements of the company. It explains the authenticity (or lack of it)
of the financial statements of the limited company. The auditors must therefore
satisfy themselves that the company has kept proper accounting records and
that the statement of financial position and comprehensive income are in
agreement with those records. They should also state in their report whether
the accounting statements prepared are in accordance with the requirements of
the companies act.

The preparation of financial statements therefore implies an acquaintance with the

various directives issued by the authoritative bodies from time to time and such
directives have been directed towards one fundamental objective of ensuring that the
entity gives a fair view of its financial position.