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9706 · 3.1.5

Limited companies: financial statements — practice questions

Practice and worked examples for 9706 Limited companies: financial statements. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Beta Ltd provided the following information for the year ended 31 December 2024:

  • Revenue $900,000
  • Cost of sales $540,000
  • Distribution costs $95,000
  • Administrative expenses $120,000
  • 8% debentures (repayable 2030) $250,000, with the year's interest paid in full
  • Corporation tax for the year $27,000
  • Ordinary dividend paid during the year $30,000
  • Retained earnings at 1 January 2024 $160,000
  • Issued share capital: 500,000 ordinary shares of $0.50 each
  • Share premium $60,000

(a) Prepare the Statement of Profit or Loss for the year ended 31 December 2024. (b) Prepare the equity section of the Statement of Financial Position at 31 December 2024.

Show solution outline

Step 1 — Gross profit: 900,000 − 540,000 = $360,000.

Step 2 — Profit from operations: 360,000 − 95,000 − 120,000 = $145,000.

Step 3 — Finance costs: 8% × 250,000 = $20,000, so profit before tax = $125,000.

Step 4 — Profit for the year: 125,000 − 27,000 = $98,000.

Beta Ltd — Statement of Profit or Loss for the year ended 31 December 2024

$
Revenue900,000
Cost of sales(540,000)
Gross profit360,000
Distribution costs(95,000)
Administrative expenses(120,000)
Profit from operations145,000
Finance costs(20,000)
Profit before tax125,000
Taxation(27,000)
Profit for the year98,000

Step 5 — Retained earnings at 31 December 2024: 160,000 + 98,000 − 30,000 = $228,000. The dividend is deducted in equity, not charged in the Statement of Profit or Loss.

Step 6 — Equity section (b):

$
Ordinary share capital (500,000 × $0.50)250,000
Share premium60,000
Retained earnings228,000
Total equity538,000

The 8% debentures of $250,000 are a non-current liability, not part of equity.

Common error: charging the dividend as an expense in the Statement of Profit or Loss. It is a distribution of profit, shown in the statement of changes in equity.

Worked example 2

Alpha Ltd has the following information for the year ended 31 December 2023:

  • Retained earnings at 1 January 2023: $245,000
  • Profit for the year: $112,000
  • Interim ordinary dividend paid: $30,000
  • Final ordinary dividend proposed: $50,000

Calculate the retained earnings balance to be shown in the Statement of Financial Position at 31 December 2023.

Show solution outline

The calculation is performed as part of the Statement of Changes in Equity. The retained earnings column would be as follows:

Step 1: Start with the opening balance. Opening Retained Earnings: $245,000

Step 2: Add the profit for the year. Profit for the year is added as it increases the accumulated profits. $245,000 + $112,000 = $357,000

Step 3: Deduct all dividends for the year. Dividends are a distribution of profit to shareholders and reduce retained earnings. Interim Dividend Paid: ($30,000) Final Dividend Proposed: ($50,000) Total Dividends = $30,000 + $50,000 = $80,000

Step 4: Calculate the closing balance. Closing Retained Earnings = Opening Balance + Profit for the year - Total Dividends $245,000 + $112,000 - $80,000 = $277,000

Final Answer: The closing balance for retained earnings at 31 December 2023 is $277,000.

This would be presented in the SOCIE as:

Retained Earnings at 1 Jan 2023$245,000Profit for the year$112,000Dividends (interim + final)($80,000)‾Retained Earnings at 31 Dec 2023$277,000‾‾\begin{array}{lr} \text{Retained Earnings at 1 Jan 2023} & \text{\textdollar}245,000 \\ \text{Profit for the year} & \text{\textdollar}112,000 \\ \text{Dividends (interim + final)} & \underline{(\text{\textdollar}80,000)} \\ \text{Retained Earnings at 31 Dec 2023} & \underline{\underline{\text{\textdollar}277,000}} \end{array}
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