Q Limited draws up its financial statements to 31 March each year. At 1 April 2022, the company’s retained earnings stood at $16250.
In the year ended 31 March 2023, the company earned a profit of $43500 (after charging all expenses and interest). Dividends totalling $39000 for the year had been paid by 31 March 2023.
After the income statement was completed, the following balances were taken from the company’s ledger accounts.
Fittings and equipment at cost $150000
Provision for depreciation of fittings and equipment $40650
Motor vehicles at cost $72000
Provision for depreciation of motor vehicles $31125
Inventory $51790
Balance at bank $1076 debit
Trade receivables $19700
Provision for doubtful debts $591
Trade payables $31450
5% Debentures (repayable 2029) $40000
Bank loan (repayable 2027) $10000
Ordinary share capital $120000
(a)[3]
Calculate the retained earnings of Q Limited at 31 March 2023.
(b)[8]
Prepare the statement of financial position for Q Limited at 31 March 2023.
(c)[2]
Calculate the liquid (acid test) ratio to two decimal places.
(d(i))[2]
Suggest two reasons why, despite making a profit, the company has very little cash in the bank account to support the expansion.
(d(ii))[5]
Advise the directors whether they should finance the expansion by issuing ordinary shares or by taking out a bank loan. Support your answer.
Worked solution & mark scheme
This 20-mark question has a full step-by-step worked solution and mark scheme. One marking point: “Profit for the year added correctly (1)” …