Question

2. a) Distinguish reserves from share capital. (5 Marks)

b) The trial balance of plastics ltd as at 31 October 2004 is as follows

sh’000’ sh’000’
Ordinary shares capital of sh
50 each 10,000
10% preference share of sh 100 each 9,000
105 debentures 8,000
Land and buildings (NBV) 25,000
Plant and machinery (NBV) 8,000
Motor vehicles (NBV) 2,000
Inventory 6,000
Accounts receivable and payable 20,000 19,000
Capital redemption reserve 6,000
Cash at bank 4,100
Share premium 4,000
Retained profits as at (November 2003) 3,000
Debentures interest 4,000
Preference dividends 450
Gross profit 25,000
Other operation income 4,000
Administration expenses 13,000
Distribution costs 6,000
Other operating expenses 1,550
Interim ordinary dividends paid 2,000
Corporation tax 500

Additional information
a) A building whose het book value is correctly sh 5 million is to be revalued to sh 9 million

b) A final ordinary dividends of sh 2 million as proposed.

c) The balance of the corporation tax for the current year is estimated at sh 3 million.

Required:
i) Income statement for the year ended 31 October 2004.
(8 Marks)
ii) Balance sheet as at 31 October 2004.

Answer 1

Answer 2 a.

Reserves are appropriation of profits. It is not contributed by owners or stockholder's rather it is created from the profit earned by the company for some specific purpose like for acquiring fixed assets or paying liabilities in future.

Share capital is the amount contributed by owners or stockholder's at the inception of business.

Plastics ltd.
Answer 2 b.
Income Statement	$'000
Gross profit	25,000.00
Add: Other operation income	4,000.00
Less:
Debentures interest	4,000.00
Administration expenses	13,000.00
Distribution costs	6,000.00
Other operating expenses	1,550.00
Depreciation Expense- Buildings	10,500.00
Operating Income	(6,050.00)
Less: Corporation tax	3,500.00
Net Income	(9,550.00)
Statement of Retained profits	$'000
Opening Balance	3,000.00
Add: Net Income	(9,550.00)
Less: Dividends	4,450.00
Closing Balance	(11,000.00)
Balance Sheet
Assets	Amount $
Current Assets
Cash	4,100.00
Accounts Receivable	20,000.00
Inventory	6,000.00
Total Current Assets	30,100.00
Fixed Assets
Land and buildings (NBV)	29,000.00
Plant and machinery (NBV)	8,000.00
Motor vehicles (NBV)	2,000.00
Total Fixed Assets	39,000.00
Total Assets	69,100.00
Liabilities & Stockholders' Equity
Liabilities	Amount $
Current Liabilities
Accounts Payable	19,000.00
Dividend Payable	2,000.00
Corporation tax Payable	3,000.00
Total Current Liabilities	24,000.00
Long Term Liabilities
105 debentures	800.00
Total Long Term Liabilities	800.00
Total Liabilities	24,800.00
Stockholder's Equity
Ordinary shares capital of sh 50 each	10,000.00
10% preference share of sh 100 each	9,000.00
Share premium	4,000.00
Retained profits	11,300.00	This is balancing figure.
Capital redemption reserve	6,000.00
Revaluation reserve	4,000.00
Stockholder's Equity	44,300.00
Total Liabilities & Owner's Equity	69,100.00