Chapter 7: Equity, capital and dividends

Chapter 7: Equity, capital and dividends

7.1 Introduction
This chapter of the subject guide extends the preparation of financial
statements to businesses other than sole traders, namely, partnerships and
limited companies. The distinction between these private sector business
structures was explained in Chapter 3 of this subject guide. Partnerships
differ from sole traders because they have more than one owner.
Companies are even more different because their owners only have limited
liability for the losses of the business.
Because companies are more likely to be owned by people (shareholders)
who are not involved in the daily management of the business, there are
more rules and regulations about the financial information that companies
report. In the UK, these rules are within the Companies Act 2006 together
with accounting standards for private companies and international
accounting standards for larger and listed companies.
Details of these requirements for company accounts are outside the scope
of this course but you do need to understand what a number of terms
mean that only appear in company financial statements. You also need to
appreciate in outline several issues that typically only arise in company
accounts; namely, accounting for intangible assets and groups of companies.
You should be comfortable with the material covered in Chapters 2 to 6 of
this subject guide before attempting this chapter.

7.1.1 Aims
The aims of this chapter are to:
• illustrate the differences in basic financial statements prepared for
different business forms
• explain the nature of share capital and the distinctions between
ordinary and preference shares
• explain and demonstrate the accounting for the issue of new shares,
bonus issues and rights issues
• explain and demonstrate the accounting for ordinary and preference
dividends
• show the ‘statements of movements in equity’.

7.1.2 Learning outcomes

By the end of this chapter, and having completed the Essential reading and
Activities, you should be able to:
• describe how a partnership and company differ from each other and
from a sole trader, and the effect this has on the presentation and
content of their financial statements
• outline the advantages and disadvantages of trading as a limited
company rather than a sole trader or partnership
• prepare a basic statement of financial position and income statement
for a company
• explain and account for bonus issues and rights issues
• produce a ‘statement of movements in equity’

83
AC1025 Principles of accounting

• account for dividends on ordinary shares and dividends on preference

shares.

7.1.3 Essential reading

Leiwy, D. and R. Perks Accounting: understanding and practice. (Maidenhead:
McGraw-Hill, 2013) Chapter 11.

7.1.4 Synopsis of chapter content

This chapter introduces the idea of different accounting formats for
different purposes, discusses the type of business form before discussing
how to prepare the company accounts.
Stop and read
Chapter 11 in Leiwy and Perks (2013), which provides useful background reading on the
nature of corporate enterprises and their capital structure.

7.2 Different formats for different purposes

The financial statements of a sole trader, partnership and company have
many things in common. However, there are certain key differences in the
format and content of these statements. In particular, the owners’ equity
sections of the S of FP will appear as follows:

Sole trader:

£ £
Capital brought forward (at start of year) (note 1) XXX
Add: Net Profit (earned in year) XXX
Less: Drawings (note 2) (XXX)
Capital carried forward XXX

Note 1: In the company’s first year of business, the owner will invest some money
(‘capital’) in the business – include this here.
Note 2: Drawings are cash or goods taken out of the business, by the owner, for personal
use or payments made by the business on behalf of the owner, personally. Drawings
are not to be treated as an expense in arriving at the profit figure since they are an
appropriation of profit.

Partnership:

Partner (note 3): A B Total

£ £ £
Capital brought forward XXX XXX XXX
Add: Share of net profit (note 4) XXX XXX XXX
Less: Drawings (XXX) (XXX) (XXX)
Capital carried forward XXX XXX XXX

Note 3: A partnership is much like a sole trader except there must be at least two partners.
All the partners are personally liable jointly and severally for the debts of the business.
Note 4: The exact share each receives is determined by the Partnership Agreement.
Sometimes partners receive agreed ‘salaries’ and ‘interest on their capital’ and the
remaining net profit is then shared out between or amongst them after deducting the
‘salaries’ and ‘interest’. All three elements are considered to be shares of profit and are
not considered expenses of the business in determining its profit for the year.

84
 Chapter 7: Equity, capital and dividends

Company:
£
Issued Share Capital (note 5)
Ordinary Shares (note 6) XXX
Share Premium (note 7) XXX
Revaluation reserve (note 8) XXX
Retained profits XXX
Total equity XXX

Note 5: A company may issue any amount of shares up to its authorised limit, which is
determined when the company is first set up and may only be changed by a vote amongst
the shareholders.
Note 6: Ordinary shareholders own the company and share the risks (and rewards) of
ownership. They gain from any dividends that the company distributes, and from capital
growth in the value of their shares. However, if the business does badly they may not
receive any dividends and the value of their shares may fall. Sometimes, ordinary share
capital is referred to as equity share capital.
Note 7: Issued share capital is shown at its ‘nominal value’ (or ‘par value’ or ‘authorised
value’) but shares may be issued for more than their nominal value when they are issued
by the company. The difference is share premium.1 1
After they have been
issued, shares may be
Note 8: Revaluation reserve arises when a property is independently revalued. It is bought and sold at
part of shareholders’ equity but it is not distributable as a dividend since it not a realised prices that are different
profit. Further details appear later in this chapter of this subject guide. to the nominal value.
This is especially true
Preference shareholders often have guaranteed annual dividends which are either if the company is
paid each year or if they are not paid in a year, any arrears are accumulated and paid in registered with a stock
subsequent years before any dividend is paid to ordinary shareholders. Furthermore, if exchange. These prices
the company goes into liquidation, preference shareholders will recover their investment that shares subsequently
before any remaining funds are paid out to ordinary shareholders. Therefore, they bear change hands at are
called market values.
less risk than the ordinary shareholders, but their rewards are also limited and they may
These trades are not
not have any voting rights. Since they have characteristics more like a loan than ordinary reflected in the financial
shares, preference shares are shown in the S of FP as Non-current liabilities and not in the statements of the
Equity section. company as they affect
only the individual
Pause and think shareholders concerned
(this is an application of
What are the similarities and differences between the owners’ equity sections of these the entity concept).
three business types? Why do you think partnership accounts separate out the capital
owned by each individual partner? Why do you think companies do not do this for their
shareholders?

In addition, the names given to appropriations of profit differ. For a

sole trader or a partnership, money or other assets withdrawn from
the business for the personal use of the owners are called drawings.
However, in a company, distributions of profits to the ordinary
shareholders are called dividends. The directors of the company do not
have to pay dividends in any particular year (unless there are preference
shareholders). Ordinary dividends always appear in the ‘Statement of
changes to equity’ note, as in the following example:

85
AC1025 Principles of accounting

Z plc: Statement of changes in equity for the year ended 31 December

20X2
Share Share Rev’n Retained Total
capital premium reserve profits £000
£000 £000 £000 £000
Balance at 1 Jan 20X2 2,160 9,137 2,859 44,695 58,851
Plus: Profit for the year 12,568 12,568
Less: dividends (9,253) (9,253)
Balance at 31 Dec 20X2 2,160 9,137 2,859 48,010 62,166

Note 9: Listed companies (i.e. those whose ordinary shares are traded on a stock
exchange) often pay an ‘interim’ dividend in the second half of the year and pay a ‘final’
dividend in the first half of the following year. The figure in Note 9 above is the dividend
actually paid in the year, comprising last year’s final dividend paid early this year and
this year’s interim dividend paid in the second half of this year. Any proposed ordinary
dividend, to be paid in the following year, is generally not accounted for until it is actually
paid, but it will be referred to in a written note to the accounts.
Dividends on preference shares are generally included in the income statement along
with any interest on loans and to the extent it has not yet been paid, will be accrued.

Pause and think

In some countries, but not in the UK, proposed final dividends are included in the
financial statements, in the year to which they relate and the final proposed dividend is
accrued. Try to find out what the situation is in your own country. Which method do you
think is most in keeping with the accounting concepts?

7.2.1 Choice of business form

When two or more people wish to go into business jointly, they have to
decide whether to create a partnership or set up a limited company. Of
course, a single person would also have to choose between trading as a
sole trader, or setting up a company. In order to be as general as possible,
2
Although the discussion here
the rest of this section will consider the advantages and disadvantages of
applies to the UK, many other
partnerships versus companies, but the issues are essentially the same for countries have similar sorts of
sole traders versus companies.2 legal distinctions in terms of
business forms.
A partnership may be defined as the carrying on of a business in
common for the purpose of profit. The rights and duties of partners 3
In the UK, and certain
are fixed by mutual agreement, and it is advisable to have a written other countries, it is now
Partnership Agreement. In the UK, the Partnership Act 1890 applies if possible to set up a form
of business called a limited
there is no specific Partnership Agreement in force.
liability partnership or
A partnership, like a sole trader, is not a separate legal entity, so all ‘LLP’. Many large firms of
partners are personally liable for the debts of the firm and the property is accountants have chosen
to convert to this form of
owned by them all jointly as partners. If a partnership cannot meet its
business. As its name implies,
debts from the assets of the business, then the partners are liable for the an LLP has some features
full amount of the deficit; this would have to be paid from their own of a partnership and some
private resources, meaning they have unlimited liability.3 If a partner features of a limited company.
dies or wishes to leave the business, the existing business ends and a new Compared to a partnership,
business must be set up. an LLP has to meet more
rules and requirements and
In contrast, the owners of a limited company have limited liability. has to publish its financial
A limited company is a separate legal entity quite distinct from the statements. However, it does
‘members’ (shareholders) who form the company. The liability of not have to meet all the same
rules and requirements as a
individual members is limited to the fully paid nominal value of the
company. You do not need to
shares they own. Hence, if a company goes into liquidation, which usually know these details.

86
 Chapter 7: Equity, capital and dividends

happens because the company has been unable to pay its debts, those
owed money by the company cannot usually recover that money from the
shareholders; the liability of the shareholders is limited to any sums they
have not yet paid to the company for their shares. A company can own
property in its own name, and sue and be sued. If a shareholder dies or
otherwise transfers his or her shares, it does not affect the company which
continues in operation as a business without interruption.
All companies in the UK are subject to the legislation contained in the
Companies Act 2006 and must apply UK accounting standards or
international accounting standards when they prepare their financial
statements.4
4
The majority of UK
companies are private
There is a relatively new business structure called a Limited Liability companies and have
Partnership (LLP) which is somewhat like a cross between a partnership the letters ‘Ltd’ after
and a limited liability company. If you are interested in this new structure their name (this stands
which is increasingly adopted by firms of accountants and lawyers, you for ‘limited’). Although
some private companies
can investigate LLPs via the internet.
are large, the majority
are small. The largest
7.2.2 Advantages of limited company status companies tend to be
It is the limited liability of company members that has proved so public companies, which
attractive to investors. Other advantages of limited company status may have the initials ‘plc’
after their name (this
include taxation. Profits earned by sole traders and partners are taxed
stands for ‘public limited
on the owners personally and not on the business itself. Companies pay company’). Public
Corporation Tax on their profits.5 Sometimes there may be tax advantages companies may sell
or disadvantages in operating via a company rather than a sole trader or shares to the general
partnership. Companies may also find it easier to raise finance (especially public but private
companies may not.
if they are listed on a stock exchange).
Some public companies
go one step farther and
Pause and think
register with a stock
Why do you think companies may find it easier to raise finance? Consider the different exchange, making it
easier for investors to
sources of finance for a business (owners’ investment, loans, overdrafts, trade credit) and
trade in their shares.
the differences between companies and sole traders/partnerships. In what circumstances These companies are
is a company likely to find it easier to raise these different kinds of finance than a sole called listed companies.
trader or partnership? 5
You do not need to
If companies have so many advantages for their owners, can you guess what any of the know any details of the
disadvantages might be? UK taxation system as
they are outside the
syllabus of this course.
7.2.3 Disadvantages of limited company status
What is commonly seen as the main disadvantage of incorporating
a business as a company is the increased rules and regulations that
companies must comply with. In the UK, companies have to file a number
of pieces of information, and their annual financial statements, with the
Registrar of Companies at Companies House.
This costs money (there are fees for filing this information and sometimes
experts such as professional accountants need to be hired to assist the
companies in preparing the information) and time. There are also fines if
companies fail to return the information required by the due date.
It also means that anyone who wishes to can inspect this information.
Business owners may want to keep their business as a sole trader or
partnership simply to avoid the prospect of public access to their financial
information. 6
You do not need
There are also a number of other disadvantages: to know about the
different ways of
• for some people, there may be a tax advantage to remaining as a sole calculating tax in the
trader or partner, rather than trading as a company; for others there UK.
may be a tax advantage in trading as a company6
87
AC1025 Principles of accounting

• there may also be concerns over loss of control: shareholders may sell
or transfer their shares to anyone they wish, whereas partners cannot
transfer their stake in a partnership without the consent of all partners
• finally, because of the limited liability of the shareholders, there
are restrictions on what dividends can be paid out by a company in
order to protect creditors of the business (if a company paid out a
lot of money as dividends, there may not be enough left to meet the
company’s debts, whereas if a partnership distributed too much money
to the partners, creditors could always sue the partners to recover their
money). The general rule is that profit can be distributed but capital
(e.g. share premium) may not be.

Pause and think

In addition to legal restrictions, what other factors do you think directors might consider
when deciding what dividend to pay?

7.3 Preparing company accounts

Most of the issues we will meet when preparing a S of FP and IS for a
company are the same as those we met in Chapter 5 of this subject guide,
for a sole trader.7 You do not need to know or apply detailed UK or 7
You do not need to
know how to prepare
international accounting standards. So, the new things that you do need to
partnership accounts
know are the key differences in the owners’ equity part of the S of FP, and but these are even more
the appropriation of profit as dividends; these differences were illustrated similar to a sole trader’s
earlier in this chapter. accounts – the key
difference is in the split
7.3.1 Accounting for share issues of capital between the
different partners in the
Companies first issue shares when they are initially created, but even
bottom of the S of SP.
established companies may decide to issue shares. There are a number of
reasons for this, and a number of different methods they may use. First
of all, if the company needs to raise finance, and the value of its shares in
the marketplace is high enough, it may issue new shares at a premium,
namely, at a price in excess of the ‘par value’.
The share premium is the difference between the price that the shareholders
pay for the new shares, and the nominal value (NV) of those shares.8 The 8
Companies only
company receives the full amount of the cash (say, £1,000), increases its account for share
premium when new
share capital account by the NV of the new shares issued (say, £500), and
shares are issued for
increases its share premium account by the premium: the first time. If and
when shareholders
£ £ subsequently sell their
Dr Cash at Bank 1,000 shares on to someone
else, this has no effect
Cr Issued Share Capital 500 on the company’s
accounts. The market
Cr Share Premium 500
value of the issued
share capital is not
One problem with issuing new shares is that the total number of shares reflected in the financial
goes up, so the original shareholders may lose some of their control. For statements.
example, a shareholder may own 10 per cent of the issued share capital of
a company before a share issue, and only 5 per cent afterwards.
To prevent the dilution of existing shareholders’ voting rights in this
way, companies may decide to offer new shares only to their existing
shareholders, in what is called a rights issue. As well as maintaining
existing shareholders’ voting rights (assuming they decide to buy the
new shares that are offered to them), a rights issue is usually cheaper

88
 Chapter 7: Equity, capital and dividends

to arrange. The existing shareholders can choose to subscribe for the

shares they have been offered. Alternatively, they could sell those rights
to someone else or allow the company to sell those rights on the open
market. Those rights have a market value. Generally, rights issues are
‘underwritten’ by a financial institution which advises the company on the
transaction but also guarantees to take up any shares not subscribed for by
any other existing or potential shareholder. Hence, the rights issue will be
fully subscribed for.

Example 7.1
Beta plc has the following net assets and share capital and reserves as at
31 December 200X:

Assets less liabilities 3,500,000

1,000,000 ordinary shares of £1 each (at par)9 1,000,000
9
‘Par’ is another way of
saying nominal value.
Retained profit 2,500,000
Total equity 3,500,000

The company makes a one-for-five rights issue to its existing shareholders

for £3 each. This means that for every five shares that an existing
shareholder owns, they (or someone else) will purchase one new share for
£3, this means that a total of 1,000,000 × 1/5 = 200,000 new shares will
be issued.
The accounting entries arising from this rights issue is as follows:

Dr Cr
Dr: cash (200,000 shares issued for £3 each) 600,000
Cr: share capital (200,000 shares at a par value of £1 each) 200,000
Cr: share premium (200,000 shares at a premium of
400,000
£(3 – 1) each

The statement of financial position after the rights issue, is as follows:

£
Net assets 4,100,000
1,200,000 ordinary shares of £1 each (at par) 1,200,000
Share premium (200,000 × (£3 – £1)) 400,000
Retained profit 2,500,000
Total equity 4,100,000

The assets will have increased by £600,000 and the equity, in total, will
have increased by £600,000, so the S of FP still balances.

Bonus or scrip issue

Instead of a rights issue, sometimes companies may make a scrip or
bonus issue of shares to existing shareholders.10 10
The US name for this
is a ‘stock dividend’.
In a bonus issue, no cash changes hands, so companies do not use these These issues may also
issues to raise finance. A beneficial effect of a bonus issue that lowers the be called ‘capitalisation’
market value of each share is that investors may find it easier to buy and issues.
sell shares if they are cheaper since sometimes shareholders are loathe to
buy shares with a high unit price. Investors may regard holding the shares
as less risky in this situation, which again may help maintain the total
market capitalisation, namely, total market value of the company.
Companies might use bonus issues when they have built up reserves in
the S of FP that will not otherwise be distributed to owners. Because the
89
AC1025 Principles of accounting

company will end up with more shares in issue in total, if the company is
listed on a stock exchange the market is likely to expect the dividend per
share to be lower than before. This would consequently lower the market
value of all the shares of the company.
In practice, the amount by which the market value is lowered will not
just depend on the changes to the expected dividends per share, but also
on the signals that a bonus issue sends out – the market may interpret a
bonus issue as a signal that the company has favourable future prospects;
in other words, as ‘good news’ that keeps the market value high.
The double entry arising from a bonus issue is as follows:
Cr: Share capital with the par value of the shares issued
Dr: Share premium (the share premium account cannot become negative)
Dr: Revaluation reserve (if the share premium account has a zero balance;
the revaluation reserve account cannot become negative)
Dr: Retained profits (if necessary)
Of course, as with every accounting transaction and adjustment, the total
of the debits must agree with the total of the credits.

Example 7.2
Meta plc has the following share capital and reserves as at 31 August 200X:

£
Ordinary shares: 1.5m shares of 25p each fully paid 375,000
Share premium 225,000
Retained profit 200,000
Total equity 800,000

One of the few uses for share premium account under UK law is to ‘pay’
for the issue of fully paid bonus shares. The directors therefore decide to
use the reserves to issue fully paid bonus shares at par in the ratio of two
shares for every three currently held.
Required
a. Show the revised account entries for owners’ equity after the bonus
issue.
b. Assuming that the market value of each share has tended to stay
around 50p ex div (i.e. excluding the value of any dividend expected
in the new future) and the total annual dividend paid has remained at
£75,000 for many years, what would you expect the market price of
each share to be after the bonus issue?

Suggested solution
a.
£
2,500,000 ordinary shares of 25p each fully paid 625,000
Share premium –
Retained profit (200,000 – 25,000) 175,000
800,000

The overall owners’ equity has not changed: 1,500,000 × 2/3

= 1,000,000 new shares were issued at 25p each, a total cost of
90
 Chapter 7: Equity, capital and dividends

£250,000. The directors first use up all the share premium account
(£225,000) to fund this, then take the last £25,000 out of retained
profits.
c. Before the bonus issue, the market value of the company is 1,500,000
shares × 50p = £750,000.
If there is no change in the market’s expectations of future prospects,
including the total amount of dividends to be paid out, this total
market value should not change after the bonus issue. However, now
there are 2,500,000 shares in issue, so each individual share must have
a market value of £750,000/2,500,000 = 30p.

7.3.2 Dividends
Dividends on ordinary shares are an appropriation of profit and are
not an expense. Such dividends, as stated earlier in this chapter, are only
accounted for when they are paid and hence, any proposed dividend is
not accrued. Ordinary dividends are shown as a deduction from Retained
profits in the Statement of movements in equity.
Dividends on preference shares, on the other hand, are considered to be
much like an interest expense and shown in the income statement as an
expense alongside any real interest on loans. Since preference shares are
usually ‘cumulative’; (that is to say, any preference dividend not paid in
one year will be carried forward as a liability to be paid in the following
year), any unpaid preference dividends must be accrued, much like
accrued electricity, wages or interest.
Ordinary dividends: how much should a company distribute to its
shareholders? The directors have the responsibility of determining the
dividend payment which is voted on at a company’s annual general
meeting. There are five different factors which directors will consider in
determining their proposal.
First, the legal position. Dividends can only be paid from cumulative
retained profits. As will be explained further in Chapter 11 of this subject
guide, profits and cash are not the same thing. Hence, the second factor
is the availability of cash and/or an agreement by the bank to allow a
company an overdraft. Of course, other immediate requirements for cash
must be considered. These will be considered further in Chapter 16 of this
subject guide. Thirdly, what are the investment opportunities available to
the company? These will be considered further in Chapters 18 and 19 of
this subject guide. If a company has many attractive projects available,
that would argue that a lower dividend should be paid because there
are attractive alternative uses for the cash in the business. While, on
the other hand, if no attractive projects present themselves, they would
argue that the company should increase its dividend payment. Fourthly,
companies generally try to maintain a consistent dividend policy. This will
be developed further in Chapter 12 of this subject guide. Some types of
shareholder are attracted to invest in companies which pay out a large
proportion of their profits as a dividend while others prefer to invest in
companies which retain a larger proportion of their profits. Companies
generally try to follow a consistent policy and this way, shareholders will
be attracted to companies which follow the dividend policy they prefer.
And lastly, the dividend paid by a company is a signal to the stock market
in terms of the company’s confidence in its future. So a cut in dividend
might indicate retrenchment while maintaining the previous year’s
dividend, or increasing it is likely to be indicate the directors’ confidence
in the company’s future.

91
AC1025 Principles of accounting

All these factors will be considered by the board of directors in

determining exactly how much to distribute as a dividend and how much
to retain within the business for the maintenance and expansion of the
business.

7.4 Overview of chapter

This chapter has provided a suggested approach to preparing a set of
financial statements from structured and unstructured information.
Calculating the figures for inclusion in the financial statements should
reinforce the application of accounting concepts met earlier in this subject
guide. In particular, the accruals concept and basis of accounting is key.
You must practise answering these types of questions to improve your
skills and as preparation for the examination.
Preparation of financial statements is easier if you understand and can
apply the material covered in the earlier chapters of this guide. Therefore,
if you have any difficulties with specific areas of this chapter, you should
review the material in Chapters 3–6 of this subject guide.

7.5 Reminder of learning outcomes

Having completed this chapter, and the Essential readings and Activities,
you should be able to:
• describe how a partnership and company differ from each other and
from a sole trader, and the effect this has on the presentation and
content of their financial statements
• outline the advantages and disadvantages of trading as a limited
company rather than a sole trader or partnership
• prepare a basic statement of financial position and income statement
for a company
• explain and account for bonus issues and rights issues
• produce a ‘statement of movements in equity’
• account for dividends on ordinary shares and dividends on preference
shares.

7.6 Test your knowledge and understanding

7.6.1 Sample examination question

7.1 Sammels Ltd

At 1.1.X2, the equity of Sammels Ltd was as follows:

£
Share capital: 200,000 shares of 50p each 100,000
Share premium 80,000
Revaluation reserve 20,000
Retained profits 450,000
Total equity 650,000

The following events occurred:

1. On 31.7.X2 an ordinary dividend was paid of £60,000.
2. On 31.8.X2 a 3 for 2 bonus issue was arranged.
92
 Chapter 7: Equity, capital and dividends

3. On 30.9.X2 a 1 for 2 rights issue took place, all shares being subscribed
for £1.10 each.
4. Profits for the year 20X2 were £85,000.
5. A proposed dividends of £70,000 will be voted on by the shareholders
and should be paid to them on 31.3.X3.
6. A revaluation of property from £500,000 to £800,000.
Required
Show the statement of movements in equity in the 20X2 accounts of the
company.

7.2 Paper Ltd

Paper Ltd trades as a retail stationer from a rented shop. Its accounts are
kept on a computer, but in January 20X2 an electrical fault caused the
loss of much of the information. Reference to the available print-outs has
established the following data:
Bank Account: year to 31 December 20X1
£ £
Sales ledger receipts 103,900 Balance, 1 January 20X1 8,250
Cash Sales 97,200 Purchases ledger payments 119,400
New shares issued 2,500 Wages 21,200
Rent 11,000
Trading expenses 14,700
New van 3,250
Directors’ salaries 20,000
Balance, 31 Dec 20X1 5,800
203,600 203,600
Bal b/f 5,800

Extracts from trial balances as at: 31 Dec 20X0 31 Dec 20X1

£ £
Inventory, at cost 43,100 55,800
Receivables 9,470 11,880
Payables 10,560 9,640
Rent paid in advance 1,000 –
Trade expenses accrued 1,330 2,530
Shop fittings:   cost 3,700 3,700
                       accumulated depreciation 1,200 1,500
Van:                cost 3,500 (note 1)
                       accumulated depreciation 2,100 (note 1)
Share capital 20,000 (note 2)
Notes
1. A new van was bought in January 20X1 at a cost of £5,000 less a
trade-in allowance of £1,750 on the old one. Depreciation is to be
provided for 20X1 at 20 per cent of the cost of the new van.
2. The company is authorised to issue a maximum of 50,000 ordinary
shares with a par value of £1 each. 20,000 shares were issued at par
when the company was formed. During 20X1, 1,000 new shares were
issued to an employee at £2.50 each.

93
AC1025 Principles of accounting

3. Bad debts totalling £1,360 were written off during 20X1. Of the
£11,880 receivables at the end of 20X1, £240 are considered to be bad
and £440 doubtful.
4. A dividend of 30p a share was paid on 31 December 20X1 but not yet
accounted for.
5. All the other receipts and payments have gone through the bank
account: no discounts were allowed or received.
Required
a. The Statement of financial position for Paper Ltd as at 31 December
20X0.
b. The Income statement for the year ended 31 December 20X1, a
Statement of changes in equity note for 20X1 and the Statement of
financial position as at 31 December 20X1, for Paper Ltd.

94