1
Explain what you understand by the accounting term ‘debentures’ and indicate the circumstances
under which a debenture issue would or would not be an appropriate form of financing.
(Scottish Qualifications Authority)
2
Spectrum Ltd is a private company with an authorised capital of £700,000 divided into
shares of £1 each. 500,000 shares have been issued and are fully paid. The company has been
formed to acquire small retail shops and establish a chain of outlets.
The company made offers to three sole traders and purchased the businesses run by Red, Yellow
and Blue.
The assets acquired, liabilities taken over, and prices paid are listed below:
Red Yellow Blue
£ £ £
Premises 75,000 80,000 90,000
Delivery vans 7,000 – 10,000
Furniture and fittings 12,000 13,000 13,000
Stock 8,000 7,000 12,000
Creditors 6,000 8,000 7,000
Purchase price 120,000 130,000 150,000
The company also purchased a warehouse to be used as a central distribution store for £60,000.
This has been paid.
Preliminary expenses (formation expenses) of £15,000 have also been paid.
Approaches have also been made to Green for the purchase of his business for £100,000. Green
has accepted the offer and the company will take over in the near future the following assets and
liabilities:
£
Premises 70,000
Stock 18,000
Creditors 3,000
The transaction had not been completed on 1 January 2002 and Green was still running his own
business.
(a) Prepare the opening balance sheet of Spectrum Ltd as at 1 January 2002.
(b) How would you advise Spectrum Ltd to finance the purchase of Green’s business when the deal
is completed?
(Edexcel Foundation, London Examinations (University of London))