Edexcel A-Level Accounting: Limited companies (YAC11) – Revision Notes

These notes condense topic 2.1, Limited companies, from Unit 2: Corporate and Management Accounting of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2 (September 2018). They cover outcomes 2.1.1 to 2.1.15, all Unit 2 (A2) only. The study guide has the full explanations and worked examples; the practice set has exam-style questions.

Other links: Edexcel A-Level Accounting hub, printable checklist, free diagnostics, and the Unit 1 notes on principles of double entry.

2.1.1 The three IAS 1 statements

Statement of profit or loss and other comprehensive income (the specification also calls it the statement of comprehensive income), in order:

1. Revenue − cost of sales = gross profit
2. − distribution costs − administrative expenses = profit from operations
3. − finance costs (debenture and loan interest) = profit before tax
4. − tax = profit for the year from continuing operations
5. ± profit or loss from discontinued operations (one line) = profit for the year
6. • other comprehensive income (for example, revaluation gains) = total comprehensive income

Statement of changes in equity: one column per component (share capital, share premium, each reserve, retained earnings, total). Rows: opening balance, share issues, profit for the year, other comprehensive income, dividends paid, transfers between reserves, closing balance.

Statement of financial position: non-current assets (intangible, including goodwill; property, plant and equipment) + current assets = total assets. Equity (share capital + reserves) + non-current liabilities (debentures, loans) + current liabilities (trade payables, other payables, tax payable) = total equity and liabilities.

2.1.2 Reports and governance

Item	Key points
Auditor	Independent of the directors; reports to shareholders; checks the directors’ stewardship; part of corporate governance
Auditors’ Report	Opinion: do the statements show a true and fair view? Plus the basis for that opinion; a modified opinion (for example, qualified) is a warning
Directors’ Report	Written by directors; under UK company law includes directors’ names, the recommended dividend, political donations, employee matters

2.1.3 Continuing, discontinued and exceptional

• Discontinued operations: a single amount on the face of the statement, detail in the notes.
• Purpose: users forecast from continuing operations only, because discontinued activities will not recur.
• Exceptional items: material items whose nature and amount are disclosed separately (IAS 1). They stop one-off gains or losses distorting judgements about normal performance.

2.1.4–2.1.5 Reserves at a glance

Reserve	Capital or revenue	Double entry when created
Retained earnings	Revenue	Profit for the year credited
General	Revenue	Dr Retained earnings, Cr General reserve
Share premium	Capital	Cr Share premium with the excess over nominal value
Revaluation	Capital	Dr Asset, Cr Revaluation reserve (through other comprehensive income)
Foreign exchange	Capital	Translation gains credited through other comprehensive income
Capital redemption	Capital	Dr Retained earnings, Cr Capital redemption reserve (nominal value of shares bought back out of profits)

Uses: revenue reserves can fund dividends. Share premium and capital redemption reserve can pay up bonus shares; share premium can also absorb share issue costs. The revaluation reserve may be moved straight to retained earnings when the asset is sold or used up. The foreign exchange reserve goes to profit or loss when the foreign operation is disposed of.

2.1.6–2.1.8 Share capital and share issues

Term	Meaning
Authorised	Maximum shares the company may issue
Issued	Shares actually allotted
Called-up	Amount requested from shareholders so far

Method in steps: rights issue

1. New shares = existing shares × ratio (for example, 2 for 9 means × 2/9).
2. Cash = new shares × rights price.
3. Dr Bank (cash); Cr Share capital (new shares × nominal); Cr Share premium (new shares × (price − nominal)).

Method in steps: bonus issue

1. New shares = existing shares × ratio.
2. Nominal value needed = new shares × nominal value.
3. Dr the reserves the question names (companies often use capital reserves first); Cr Share capital.
4. Check: total equity unchanged; no bank entry.

Forfeiture of shares is not examined.

2.1.9–2.1.11 Finance

Feature	Ordinary shares	Debentures
Status	Ownership	Loan
Return	Dividend, at directors’ discretion	Interest, a legal obligation
Charged	Dividends through the statement of changes in equity	Interest as a finance cost in profit or loss
Control	Votes	No votes
Repayment	Not repaid while the company continues	Repaid on the redemption date

Preference shares carry a fixed-rate dividend paid before ordinary dividends, usually with no vote.

Gearing (specification formula, not supplied in the examination):

Gearing ratio = Fixed cost capital (debt) / Total capital employed (debt + equity) × 100

High gearing means more fixed interest to pay, greater risk to ordinary shareholders in poor years, bigger swings in their returns, and less room to borrow.

Provisions (IAS 37): a liability of uncertain timing or amount. All three conditions are needed: present obligation from a past event, probable outflow, reliable estimate. An increase is charged to profit or loss; a decrease is credited. Only a possible outflow means a contingent liability: note only.

2.1.12–2.1.15 Purchase and merger

Method in steps: vendor’s books

1. (Merger) Revaluation account: restate assets and liabilities to agreed values; net gain or loss to shareholders.
2. Realisation account: Dr assets transferred; Cr liabilities transferred; Cr purchaser with the consideration. Balance = profit (Dr) or loss (Cr) on realisation.
3. Sundry shareholders account: Cr share capital, reserves and realisation profit. Dr shares received in the purchaser and cash paid out.

Method in steps: purchaser’s books

1. Purchase price = consideration: shares at their agreed value + cash (or agreed revalued net assets + agreed goodwill).
2. Acquisition account: Dr with share capital, share premium and bank given, and liabilities taken over. Cr with assets taken over at agreed values.
3. Balance = goodwill (Dr Goodwill). If negative, it is a bargain purchase gain in profit or loss.
4. Add agreed values line by line to the purchaser’s own statement of financial position.

Goodwill: an intangible non-current asset; not amortised; tested for impairment at least annually.

Must-know distinctions

• Provision vs reserve: a provision is a liability and reduces profit; a reserve is equity and is an allocation of profit.
• Rights vs bonus: rights raise cash; bonus converts reserves and raises nothing.
• Issued vs called-up: called-up can be less than issued when instalments are still to come.
• Carrying value vs agreed value: the vendor’s realisation account uses carrying values; the purchaser records agreed values.
• Contingent liability vs provision: possible versus probable outflow.

Quick self-test

1. 250,000 ordinary shares of 0.40 are issued at 0.90 for cash. Give the credits.
2. A company with 600,000 ordinary shares of 0.25 makes a 1 for 6 bonus issue. How many shares, and what nominal value is capitalised?
3. 1,400,000 shares of 1.00; a 2 for 7 rights issue at 1.30. Find new shares, cash and share premium.
4. Debentures 455,000; equity 845,000. Calculate gearing.
5. A company buys back 80,000 of its own ordinary shares of 0.50 at par out of profits. What transfer is made to the capital redemption reserve?
6. Land with a carrying value of 210,000 is revalued to 265,000. State the effect on reserves.
7. Consideration 480,000; agreed net assets acquired 437,500. Find goodwill.
8. Consideration 300,000; agreed net assets 315,000. What arises, and where does it go?
9. A warranty provision is to be 1.5% of revenue of 820,000; last year’s provision was 14,000. State the entry in profit or loss.
10. 500,000 shares of 1.00 have been issued, with 0.70 per share called. What is the called-up capital?
11. Vendor’s assets transferred at carrying value 410,000; liabilities transferred 60,000; consideration 395,000. Find the realisation result.
12. Classify each as capital or revenue reserve: general reserve, share premium, capital redemption reserve.

Answers

1. Share capital 100,000; share premium 125,000 (bank debited 225,000).
2. 100,000 new shares; 25,000 capitalised.
3. 400,000 new shares; cash 520,000; share premium 120,000.
4. 455,000 ÷ 1,300,000 × 100 = 35.0%.
5. 40,000 (nominal value of the shares bought back).
6. Revaluation reserve rises by 55,000, through other comprehensive income.
7. 42,500.
8. A bargain purchase gain of 15,000, recognised in profit or loss.
9. Required 12,300; provision falls by 1,700, credited to profit or loss.
10. 350,000.
11. 395,000 + 60,000 − 410,000 = 45,000 profit on realisation, credited to sundry shareholders.
12. General: revenue. Share premium: capital. Capital redemption: capital.

Where marks are usually lost

• Charging dividends paid as an expense; they belong in the statement of changes in equity.
• Missing finance costs on debentures, or calculating a full year’s interest on debentures issued part-way through the year.
• Splitting discontinued operations line by line instead of showing one figure.
• Debiting bank for a bonus issue, or crediting share premium on a bonus issue.
• Using the rights price instead of nominal value for the share capital credit.
• Writing “reserves are cash” when explaining why a dividend cannot be paid.
• Classing a provision as a reserve, or recording a contingent liability.
• Valuing consideration shares at nominal value, so understating goodwill and omitting share premium.
• Using the vendor’s carrying values in the purchaser’s statement of financial position.
• Calculating gearing with equity alone as the denominator instead of debt + equity.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Accounting (XAC11/YAC11) specification, Issue 2, September 2018 (first teaching September 2015), Pearson Education Limited. Unit 2, topic 2.1: Limited companies.