The following information relates to Khan Ltd for the year ended 31 December 2024. $ Revenue 680 000 Cost of sales 408 000 Administrative expenses 72 000 Di...
Question 1 Report
The following information relates to Khan Ltd for the year ended 31 December 2024.
| $ | |
|---|---|
| Revenue | 680 000 |
| Cost of sales | 408 000 |
| Administrative expenses | 72 000 |
| Distribution costs | 35 000 |
| Interest received | 3 000 |
| Debenture interest | 9 000 |
| Corporation tax | 31 800 |
The company has 200 000 ordinary shares of $1 each and 50 000 6% preference shares of $1 each. The directors propose a final ordinary dividend of $0.10 per share.
(a) Prepare the income statement of Khan Ltd for the year ended 31 December 2024. [8]
(b) Prepare the appropriation section showing the profit available for appropriation and the retained earnings carried forward. Retained earnings brought forward were $24 000. [6]
(c) State two items that would appear in a company's income statement but not in a sole trader's income statement. [2]
(d) Explain why a company's financial statements must be published but a sole trader's do not. [4]
Answer Details
(a) Income statement of Khan Ltd for the year ended 31 December 2024
| Khan Ltd - Income Statement | $ |
|---|---|
| Revenue | 680 000 [1] |
| Less: Cost of sales | (408 000) |
| Gross profit | 272 000 [1] |
| Less: Administrative expenses | (72 000) |
| Less: Distribution costs | (35 000) [1] |
| Profit from operations | 165 000 [1] |
| Add: Interest received | 3 000 |
| Less: Debenture interest | (9 000) [1] |
| Profit before tax | 159 000 [1] |
| Less: Corporation tax | (31 800) [1] |
| Profit for the year | 127 200 [1] |
Interest received is added to operating profit as non-operating income. Debenture interest is a finance cost deducted before arriving at profit before tax. Corporation tax is then deducted to give the final profit for the year.
(b) Appropriation section
| Khan Ltd - Appropriation Account | $ |
|---|---|
| Profit for the year | 127 200 [1] |
| Add: Retained earnings brought forward | 24 000 [1] |
| Available for appropriation | 151 200 |
| Less: Preference dividend (6% x $50,000) | (3 000) [1] |
| Less: Ordinary dividend (200,000 x $0.10) | (20 000) [1] |
| Retained earnings carried forward | 128 200 [1] [1] |
The preference dividend is calculated at the fixed rate (6%) on the preference share capital ($50,000). The ordinary dividend is based on the proposed amount per share ($0.10) multiplied by the number of shares (200,000).
(c) Two items in a company's income statement that would not appear in a sole trader's
- Corporation tax (tax on profits). A sole trader pays personal income tax, not corporation tax, and this does not appear in the business's income statement. [1]
- Debenture interest. A sole trader does not issue debentures as a form of borrowing. Alternatively, dividends proposed would not appear in a sole trader's accounts. [1]
(d) Why a company's financial statements must be published but a sole trader's do not
Companies have a legal obligation to publish their financial statements to protect shareholders who may not be involved in the day-to-day management of the business. [1]
Shareholders need access to financial information to assess the company's performance, the directors' stewardship, and whether their investment is being managed effectively. [1]
A sole trader is the sole owner and manager of the business. There are no other owners who need to be informed, so there is no need for public disclosure. [1]
A sole trader's financial information is private, and there is no legal requirement to publish it. The accounts may only be needed for the owner's personal use and for tax purposes. [1]
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