Mark Scheme

Section A — Structured Questions

Question 1

(a) Define the term 'returns inwards'. [2]

• Goods returned by customers / trade receivables [1]
• To the business [1]

Accept: sales returns, goods returned by credit customers Reject: goods returned to suppliers (this is returns outwards)

(b) Explain why carriage inwards is treated differently from carriage outwards. [3]

• Carriage inwards is the cost of transporting goods into the business / from suppliers [1]
• It is added to purchases / part of cost of sales / treated as an expense in calculating gross profit [1]
• Carriage outwards is the cost of delivering goods to customers [1]
• It is an expense / distribution cost / deducted from gross profit [1]

Maximum 3 marks

Accept: carriage inwards increases the cost of inventory purchased Accept: carriage outwards is a selling/distribution expense

(c)(i) Calculate cost of sales. [4]

	$
Opening inventory	18,600
Add: Purchases	112,800
Add: Carriage inwards	2,800
Less: Returns outwards	(3,900)
	130,300
Less: Closing inventory	(21,400)
Cost of sales	108,900

Award marks as follows:

• Opening inventory + Purchases [1]
• Add carriage inwards and/or deduct returns outwards [1]
• Deduct closing inventory [1]
• Correct answer $108,900 [1]

(c)(ii) Calculate gross profit. [2]

Sales - Returns inwards = $185,400 - $6,400 = $179,000 [1] Gross profit = $179,000 - $108,900 = $70,100 [1]

Accept: mark awarded for correct method even if carried forward error from (c)(i)

(c)(iii) Calculate net profit. [3]

Total expenses calculation:

• Carriage outwards: $4,200
• Discount allowed: $2,340
• Rent: $12,000
• Wages: $24,600
• Insurance: $3,200
• Total: $46,340 [1]

Less: Discount received: $1,850 [1] Net expenses = $46,340 - $1,850 = $44,490

Net profit = $70,100 - $44,490 = $25,610 [1]

Alternative method accepted: Add all expenses, add discount allowed, deduct discount received from gross profit

(d) Advantages and disadvantages of partnership. [4]

Advantages (any two × 1 mark each):

• More capital available / additional finance
• Shared workload / responsibilities
• Complementary skills / expertise
• Shared risk / losses shared
• Cover for illness/holidays

Disadvantages (any two × 1 mark each):

• Profits must be shared
• Potential for disagreements / disputes
• Joint and several liability / liable for partner's actions
• Requires consultation / slower decision-making
• Limited life / dissolves if partner leaves

[Total Question 1: 18 marks]

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Question 2

(a) Calculate capital at 1 March 2024. [2]

Total assets: $150,000 + $18,000 + $12,400 + $8,600 + $4,800 + $350 = $194,150 [1] Capital = $194,150 - $9,200 = $184,950 [1]

Alternative: Using accounting equation Assets = Capital + Liabilities

(b)(i) S Watson account [4]

Dr	S Watson Account	Cr
Date	Details	$
Mar 15	Returns outwards	(not in data)
Mar 22	Bank	3,200
Mar 22	Discount received	160
		3,360

Corrected version:

Dr	S Watson Account	Cr
Date	Details	$
Mar 22	Bank	3,200
Mar 22	Discount received	160

Award marks:

• Credit entry: Purchases $3,200 [1]
• Debit entry: Bank $3,200 [1]
• Debit entry: Discount received $160 [1]
• Correct format with Dr/Cr and totals balanced [1]

(b)(ii) K Rahman account [4]

Dr	K Rahman Account	Cr
Date	Details	$
Mar 8	Sales	4,800
	4,800

Award marks:

• Debit entry: Sales $4,800 [1]
• Credit entry: Returns inwards $400 [1]
• Credit entry: Bank $4,400 [1]
• Correct format and balanced [1]

(b)(iii) Bank account [5]

Dr	Bank Account	Cr
Date	Details	$
Mar 1	Balance b/d	4,800
Mar 28	K Rahman	4,400
	9,200
Apr 1	Balance b/d	4,000

Award marks:

• Opening balance $4,800 (debit) [1]
• Receipt from K Rahman $4,400 (debit) [1]
• Three payments correctly shown on credit side: rent $1,500, cash $500, S Watson $3,200 [2]
• Correct closing balance $4,000 [1]

(c) Double entry for 18 March transaction. [2]

Debit: Cash account $500 [1] Credit: Bank account $500 [1]

(d) Purpose of three-column cash book. [3]

• Records cash transactions [1]
• Records bank transactions [1]
• Records discount allowed and discount received [1]
• Saves time / acts as both a book of original entry and part of the ledger [1]

Maximum 3 marks

Accept: combines cash account, bank account and discount accounts in one book

[Total Question 2: 20 marks]

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Question 3

(a) Reasons why trial balance may fail to balance. [2]

Any two × 1 mark:

• Addition error in totalling the trial balance
• Entry made on one side only (single entry)
• Different amounts entered on debit and credit sides
• Balance extracted incorrectly from an account
• Balance entered on wrong side of trial balance
• Balance omitted from trial balance

(b) Errors that would NOT prevent trial balance from balancing. [2]

Any two × 1 mark:

• Error of omission
• Error of commission
• Error of principle
• Error of original entry
• Compensating error
• Complete reversal of entries

(c) Calculate depreciation charge on equipment. [3]

Carrying amount at start of year = Cost - Accumulated depreciation = $36,000 - $14,400 = $21,600 [1]

Depreciation = 20% × $21,600 [1] = $4,320 [1]

(d) Income statement for year ended 31 October 2023. [12]

Northern Traders Income Statement for the year ended 31 October 2023

	$	$
Sales		289,400
Less: Returns inwards		(4,200)
Net sales		285,200
Opening inventory	22,400
Add: Purchases	156,800
Less: Returns outwards	(3,600)
Add: Carriage inwards	1,680
	177,280
Less: Closing inventory	(26,800)
Cost of sales		(150,480)
Gross profit		134,720
Add: Rent received	1,400 [9,800-1,400]	8,000
		142,720
Less: Expenses
Discount allowed	2,850
General expenses	18,900
Salaries [42,600+3,200]	45,800
Depreciation	4,320
Total expenses		(71,870)
Net profit		70,850

Mark allocation:

• Revenue section: Sales less returns inwards = $285,200 [1]
• Cost of sales calculation (opening inventory + purchases - returns outwards + carriage inwards - closing inventory) [3]
• Cost of sales = $150,480 [1]
• Gross profit = $134,720 [1]
• Rent received adjustment: $8,400 - $1,400 = $8,000 [1]
• Salaries adjustment: $42,600 + $3,200 = $45,800 [1]
• Depreciation included $4,320 [1]
• All other expenses correctly included [1]
• Net profit correctly calculated $70,850 [1]
• Correct presentation/format [1]

Note: Award marks for correct method even with carried forward errors

[Total Question 3: 19 marks]

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Question 4

(a) Define 'drawings'. [2]

• Cash or goods taken out of the business [1]
• By the owner for personal use [1]

Accept: money/assets withdrawn by proprietor Reject: expenses (drawings are not expenses)

(b) Calculate capital at 30 June 2024. [3]

	$
Capital at 1 July 2023	142,600
Add: Net profit	64,800
Add: Capital introduced	20,000
Less: Drawings	(28,400)
Capital at 30 June 2024	199,000

Award:

• Opening capital + net profit [1]
• Add capital introduced and/or deduct drawings [1]
• Correct answer $199,000 [1]

(c) Statement of financial position at 30 June 2024. [10]

Ahmed Statement of Financial Position at 30 June 2024

	$	$
Non-current assets		156,000
Current assets
Inventory	18,900
Trade receivables	24,600
Cash	680
		44,180
Current liabilities
Trade payables	13,980
Bank overdraft	8,200
		(22,180)
Net current assets		22,000
Net assets		178,000
Financed by:
Capital		199,000

Note: Net assets should equal capital of $199,000

Error check: $156,000 + $44,180 - $22,180 = $178,000 (discrepancy of $21,000)

Recheck question data or accept either:

• Working capital approach correctly shown [marks for method]
• Recognition that net assets ≠ capital indicates error

Mark allocation:

• Non-current assets correctly stated [1]
• All current assets listed correctly [2]
• Total current assets $44,180 [1]
• All current liabilities listed correctly [2]
• Total current liabilities $22,180 [1]
• Net current assets calculated [1]
• Net assets calculated [1]
• Capital shown [1]
• Correct format and headings [1]

Note: If net assets do not equal capital from part (b), award marks for correct method

[Total Question 4: 15 marks]

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Section B — Extended Response

Question 5

(a)(i) Gross profit margin [2]

2024: (182,400 ÷ 456,000) × 100 = 40.00% [1] 2023: (152,000 ÷ 380,000) × 100 = 40.00% [1]

(a)(ii) Net profit margin [2]

2024: (63,840 ÷ 456,000) × 100 = 14.00% [1] 2023: (60,800 ÷ 380,000) × 100 = 16.00% [1]

(a)(iii) Current ratio [2]

2024: 89,600 ÷ 52,800 = 1.70:1 [1] 2023: 72,400 ÷ 38,600 = 1.88:1 [1]

(a)(iv) Rate of inventory turnover [3]

Average inventory 2024: (34,200 + 28,600) ÷ 2 = 31,400 [1] Rate 2024: 273,600 ÷ 31,400 = 8.71 times [1]

Average inventory 2023: (28,600 + inventory 2022) ÷ 2 Accept: Using closing inventory only: 273,600 ÷ 34,200 = 8.00 times (2024) 228,000 ÷ 28,600 = 7.97 times (2023) [1]

Alternative accepted: Cost of sales ÷ closing inventory

(b) Explanation and comment on ratios. [12]

Mark in levels:

Level 3 (9-12 marks):

• Detailed explanation of what each ratio measures
• Insightful comments on changes between years
• Links between ratios identified
• Specific figures quoted and compared
• Judgements about business performance clearly justified

Level 2 (5-8 marks):

• Adequate explanation of most ratios
• Some relevant comments on changes
• Some use of figures to support comments
• Basic judgements made

Level 1 (1-4 marks):

• Limited explanation of ratios
• Generalised or vague comments
• Little use of specific figures
• Assertions without justification

Indicative content:

Gross profit margin:

• Measures gross profit as a percentage of sales
• Remained constant at 40% – shows consistent markup/pricing
• Good control over cost of sales relative to sales

Net profit margin:

• Measures net profit as a percentage of sales
• Decreased from 16% to 14% – concerning trend
• Expenses have increased faster than sales
• Expenses increased by 30% while sales only increased by 20%

Current ratio:

• Measures ability to pay current liabilities from current assets
• Decreased from 1.88:1 to 1.70:1
• Still above 1:1 so business can pay debts
• Slight deterioration in liquidity position
• Ideal ratio often considered to be 2:1 – below this

Rate of inventory turnover:

• Measures how many times inventory is sold and replaced
• Increased slightly (improved)
• Shows inventory is moving faster
• Good for cash flow
• Reduces risk of obsolescence

Overall: Mixed picture – sales growing and gross profit maintained, but expense control needs attention and liquidity has weakened slightly.

(c) Evaluate advantages and disadvantages of converting to limited company. [10]

Mark in levels:

Level 3 (8-10 marks):

• Detailed evaluation of both advantages and disadvantages
• Application to Sarah's specific circumstances
• Clear recommendation with full justification
• Consideration of financial and non-financial factors
• Balanced argument presented

Level 2 (5-7 marks):

• Sound discussion of advantages and/or disadvantages
• Some application to context
• Recommendation made with some justification
• Some factors considered

Level 1 (1-4 marks):

• Limited discussion of advantages/disadvantages
• Little or no application to context
• Weak or no recommendation
• Assertions without development

Indicative content:

Advantages:

• Limited liability – personal assets protected if business fails
• Easier to raise finance – can issue shares
• Separate legal entity – continues beyond owner's death
• More professional image – may attract more customers/suppliers
• Tax advantages may exist depending on profit level
• Easier to bring in investors without forming partnership

Disadvantages:

• More expensive to set up – legal and registration costs
• More regulations and legal requirements to comply with
• Annual accounts must be filed publicly – loss of privacy
• More complex accounting requirements
• Corporation tax rules differ from income tax
• Profits cannot be withdrawn as easily – must take salary/dividends

Application to Sarah:

• Business is profitable ($63,840)
• Growing business (sales up 20%)
• Capital £216,800 – significant personal investment at risk
• No indication she wants to expand significantly
• As sole trader, maintains full control

Recommendation (either way can achieve full marks if justified):

• Should convert IF concerned about liability risk given growth of business, or wants to expand further and needs investment
• Should not convert IF privacy important, wants to avoid complexity, sufficient profit for personal needs, no need for external investment

[Total Question 5: 31 marks]

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Question 6

(a) Difference between capital and current accounts. [3]

Capital account:

• Records capital introduced and withdrawn [1]
• Usually fixed balance / permanent investment [1]

Current account:

• Records share of profits, salary, interest on capital, drawings, interest on drawings [1]
• Balance fluctuates / changes regularly [1]

Maximum 3 marks

Accept: capital account shows owner's investment; current account shows accumulated profits/losses

(b) Calculate interest on capital. [4]

Daniel: 1 January to 30 June: $80,000 × 8% × 6/12 = $3,200 [1] 1 July to 31 December: $100,000 × 8% × 6/12 = $4,000 [1] Total = $7,200

Priya: $60,000 × 8% = $4,800 [1]

Award 1 mark for method if calculation errors made [1]

(c) Profit and loss appropriation account. [7]

Partnership of Daniel and Priya Profit and Loss Appropriation Account for the year ended 31 December 2023

	$	$
Net profit		74,600
Less: Interest on capital
Daniel	7,200
Priya	4,800	(12,000)
Partnership salary – Priya		(18,000)
		44,600
Interest on drawings
Daniel	800
Priya	700	1,500
Profit available for distribution		46,100
Share of residual profit:
Daniel (3/5)	27,660
Priya (2/5)	18,440	(46,100)
		0

Marks:

• Net profit shown [1]
• Interest on capital for both partners [1]
• Partnership salary [1]
• Interest on drawings added back [1]
• Residual profit calculated $46,100 [1]
• Divided in ratio 3:2 correctly: Daniel $27,660, Priya $18,440 [1]
• Correct format [1]

(d) Current accounts for both partners. [7]

Current Accounts

Dr		Cr
	Daniel $	Priya $	Daniel $	Priya $
Balance b/d			4,200	2,800
Interest on capital			7,200	4,800
Salary				18,000
Share of profit			27,660	18,440
Interest on drawings	800	700
Drawings	32,000	28,000
Balance c/d	6,260	15,340
Total	39,060	44,040	39,060	44,040

Marks:

• Opening balances correctly shown [1]
• Interest on capital credited [1]
• Salary to Priya credited [1]
• Share of profit credited to both [1]
• Interest on drawings debited [1]
• Drawings debited [1]
• Closing balances correctly calculated: Daniel $6,260, Priya $15,340 [1]

(e) Factors to consider before admitting new partner and assessment. [10]

Mark in levels:

Level 3 (8-10 marks):

• Comprehensive discussion of factors to consider
• Detailed assessment of benefits and drawbacks
• Clear application to the scenario (Chen, $50,000, 25% share)
• Judgements well supported
• Consideration of impact on existing partners
• Balanced conclusion reached

Level 2 (5-7 marks):

• Sound discussion of some relevant factors
• Some assessment of benefits/drawbacks
• Some application to scenario
• Some judgements made
• Conclusion attempted

Level 1 (1-4 marks):

• Limited discussion of factors
• Little evaluation
• Limited or no application
• Weak or no conclusion
• Mainly descriptive

Indicative content:

Factors to consider:

Financial factors:

• Additional capital of $50,000 available for expansion
• Current capital: Daniel $100,000, Priya $60,000 (total $160,000)
• New capital would be $210,000
• Could fund purchase of new equipment/premises
• Impact on profit share for existing partners

Current profit shares:

• Daniel currently gets 60% (3/5)
• Priya currently gets 40% (2/5)
• If Chen gets 25%, only 75% left for Daniel and Priya
• Need to negotiate new profit-sharing ratio

Financial impact calculation:

• Current year profit (after appropriations): Daniel $27,660, Priya $18,440
• If Chen takes 25% of residual profit: 25% × $46,100 = $11,525
• Remaining $34,575 to share between Daniel and Priya
• Even maintaining 3:2 ratio: Daniel $20,745, Priya $13,830
• Both would receive less unless profits increase

Other factors:

• Chen's skills/expertise – what does he bring?
• Compatibility/working relationship
• Will Chen's expertise increase profits?
• Legal requirements – need new partnership agreement
• Impact on decision-making and control
• Goodwill considerations – should existing partners receive credit for business built up?

Assessment:

Benefits:

• Significant injection of capital
• Shared workload
• Potentially complementary skills
• Risk spread over three partners

Drawbacks:

• Reduced profit share for existing partners (unless profit increases by more than 33%)
• More potential for disagreement
• Need to reorganise profit-sharing arrangements
• Loss of control

Recommendation:

• Should admit IF: Business needs capital for expansion that would increase profits by more than the reduction in share, or Chen brings specific expertise that would grow business
• Should not admit IF: Sufficient capital already exists, no clear benefit to profitability, risk of personality conflicts

Judgement: Need to ensure profit increase from Chen's contribution exceeds loss of 25% of current profits.

[Total Question 6: 31 marks]

[TOTAL PAPER: 120 marks]

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Sample Answers with Examiner Commentary

Question 5(c) — Sample Answers

Grade A (high distinction) answer*

Converting Sarah's business to a limited company would have several significant advantages. Limited liability is the most important benefit – currently as a sole trader, Sarah is personally liable for all business debts, which means her personal assets such as her house and savings are at risk if the business fails. Given that her business has £216,800 in capital invested, this is a substantial amount at risk. As a limited company, the company becomes a separate legal entity, so Sarah's liability would be limited to her investment in shares.

Another advantage is that it would be easier to raise finance for expansion. Her sales have increased by 20% from £380,000 to £456,000, showing the business is growing. As a limited company, she could issue shares to new investors without forming a partnership, which would give her more flexibility. Banks may also be more willing to lend to a limited company as they are seen as more permanent and professional.

The company would also have perpetual succession – it continues to exist even if Sarah dies or wants to retire, making it easier to pass on or sell the business.

However, there are significant disadvantages. Setting up a limited company involves legal costs and registration fees with Companies House. There are also ongoing compliance costs – the company would need to file annual accounts and confirmation statements publicly, meaning Sarah would lose the privacy she currently enjoys as a sole trader. Competitors could see her financial information.

Limited companies face more complex accounting and legal requirements. Sarah would need to follow the Companies Act 2006 and prepare accounts according to company accounting standards. This may require employing an accountant, increasing costs. Her expenses have already increased by 30% (from £91,200 to £118,560), which is faster than sales growth, so additional costs could further reduce her net profit margin, which has already fallen from 16% to 14%.

Taxation might work differently – she would pay corporation tax instead of income tax. Depending on profit levels, this could be advantageous or disadvantageous. She also cannot simply withdraw profits whenever she wants – she would need to take a salary (taxed as income) or dividends (with dividend tax), which is less flexible than drawings as a sole trader.

For Sarah specifically, the key question is whether she needs the protection of limited liability and whether she plans to expand significantly. Her business is profitable and growing, which suggests expansion might be planned. However, her current ratio has fallen from 1.88:1 to 1.70:1, showing some liquidity pressure, though she still has £89,600 in current assets to cover £52,800 in current liabilities.

I would recommend that Sarah should convert to a limited company if she plans significant expansion and wants to protect her substantial personal investment. The risk to her £216,800 capital is considerable. However, if she values privacy, wants to avoid complexity and compliance costs, and can manage the business growth with current resources, she should remain a sole trader. Given that her net profit margin is declining, she should first focus on controlling expenses before incurring additional costs of incorporation.

Mark: 10/10

Examiner commentary: This is an excellent response that demonstrates comprehensive understanding. The student identifies all key advantages and disadvantages, applies financial data from the question specifically to Sarah's situation (quoting figures for capital at risk, sales growth, expense growth, profit margins, and liquidity ratios), and reaches a balanced, justified recommendation. The answer shows sophisticated judgement by noting that either decision could be appropriate depending on Sarah's priorities. Technical terminology is used accurately throughout (limited liability, perpetual succession, separate legal entity, corporation tax, dividend tax). The structure is clear with distinct paragraphs for advantages, disadvantages, application, and recommendation.

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Grade C (pass) answer

There are several advantages of Sarah converting to a limited company. The main one is limited liability, which means that Sarah would only lose the money she invested in shares if the business failed, and her personal possessions would be safe. This is important because she has a lot of capital in the business.

Another advantage is that it is easier to get money from banks and investors. Limited companies look more professional and banks trust them more. Sarah's sales have gone up from £380,000 to £456,000 so the business is growing and she might need more money to expand.

Also, a limited company continues even if the owner dies, so it is more permanent.

The disadvantages are that it costs money to set up a limited company and you have to follow more rules. Sarah would have to send her accounts to Companies House and anyone can look at them, so she would lose privacy. Competitors could see how much profit she makes.

Limited companies have more complicated accounting which might mean Sarah needs to pay an accountant. Her expenses have already gone up quite a lot, so this could be a problem.

Also, Sarah can't just take money out whenever she wants like she can now with drawings. She would have to take a salary or dividends which are taxed differently.

I think Sarah should probably convert to a limited company because her business is growing and she needs to protect herself from liability. Her business is worth £216,800 and this is a lot of money to risk. The limited liability protection is the most important thing.

Mark: 6/10

Examiner commentary: This response demonstrates sound understanding of the main issues and achieves a mid-Level 2 mark. The student correctly identifies key advantages (limited liability, easier finance, perpetual succession) and disadvantages (costs, regulations, privacy, complexity, restrictions on withdrawals). There is some application to Sarah's circumstances, with appropriate reference to capital and sales growth figures. However, the analysis lacks depth – for example, the student doesn't calculate or compare profit shares, doesn't discuss the specific impact of declining profit margins, and doesn't fully explore taxation implications. The recommendation is present but could be better justified by weighing up more factors. To reach higher marks, the answer needs more detailed evaluation and more sophisticated application of the financial data provided.

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Grade E (near miss) answer

A limited company is when the business is separate from the owner. Sarah should convert to a limited company because it has limited liability. This means she cannot lose her house if the business goes wrong because she is only liable for what she put into the company.

Also limited companies can get more money because they can sell shares. Sarah's business is making good profit of £63,840 so investors would want to buy shares.

Another advantage is that there is more people so more ideas and less work for Sarah.

The disadvantages are that it costs more to set up and there is more paperwork. Also Sarah would have to share the profits with other shareholders instead of keeping it all herself. The profits might go down.

I think Sarah should convert to a limited company because it is safer and better for the business. Limited companies are bigger and more successful than sole traders and her business is growing so it makes sense to become a limited company.

Mark: 3/10

Examiner commentary: This response shows some basic knowledge but contains significant errors and lacks development, placing it in Level 1. The student correctly identifies limited liability as an advantage and mentions cost and paperwork as disadvantages. However, there are misconceptions: the student confuses converting to a limited company with necessarily bringing in other shareholders ("more people so more ideas"), and incorrectly states Sarah would have to share profits (she could be the sole shareholder). The application is weak – while the profit figure is quoted, there's no meaningful analysis of the financial data provided. The recommendation is poorly justified with a vague assertion that "limited companies are bigger and more successful" which is not necessarily true. To improve, the student needs to: (1) understand that becoming a limited company doesn't automatically mean bringing in other shareholders; (2) develop points with explanation rather than listing; (3) use specific figures from the question to support analysis; (4) avoid generalizations and provide reasoned judgement based on Sarah's specific circumstances.

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Question 6(e) — Sample Answers

Grade A (high distinction) answer*

Before admitting Chen as a new partner, Daniel and Priya must carefully consider both financial and non-financial factors.

Financial considerations:

The most significant issue is the impact on existing partners' profit shares. Currently, Daniel receives 3/5 (60%) and Priya receives 2/5 (40%) of residual profit. This year, the residual profit was £46,100, giving Daniel £27,660 and Priya £18,440. If Chen receives 25% of residual profit, this leaves only 75% (£34,575) to share between the existing partners. Even if they maintain their 3:2 ratio, Daniel would receive £20,745 and Priya £13,830. This represents a reduction of £6,915 for Daniel (25% decrease) and £4,610 for Priya (25% decrease).

However, Chen would contribute £50,000 capital. Current total capital is approximately £160,000 (Daniel £100,000, Priya £60,000), so this represents a 31% increase in capital available. This additional capital could fund significant expansion, such as purchasing new equipment, opening a second location, or increasing inventory to meet higher demand.

The key question is whether the business can increase profits sufficiently to offset the reduction in profit share. For Daniel and Priya to maintain their current level of income, the business would need to generate at least £61,467 residual profit (so that 75% = £46,100). This is a 33% increase. This seems achievable if the £50,000 investment generates significant additional revenue, but depends entirely on what the capital would be used for and Chen's contribution.

Goodwill considerations:

Daniel and Priya have built up the business over time and it presumably has goodwill value. Before admitting Chen, they should consider whether Chen should pay for a share of goodwill in addition to capital, or whether existing partners should be credited with goodwill in their capital accounts.

Non-financial factors:

Chen's skills and expertise are crucial. If Chen has specialist knowledge in computer sales and repair, strong customer relationships, or technical skills that Daniel and Priya lack, this could significantly increase business profitability beyond the 33% needed. For example, if Chen specializes in corporate clients or has expertise in emerging technologies, this could open new revenue streams.

Compatibility and working relationships matter greatly. Disagreements between three partners can be more complex than between two. They must ensure Chen shares similar business values and work ethic. The partnership would need a comprehensive partnership agreement specifying profit-sharing ratios, decision-making processes, and procedures for dispute resolution.

The existing partnership agreement includes salary for Priya and interest on capital. Would Chen receive a salary? This must be negotiated. If Chen also receives salary or demands different terms, the entire appropriation structure may need renegotiating.

Decision-making and control would change. Currently, Daniel has effective control with 60% profit share, but if Chen has 25%, Daniel's influence dilutes. Strategic decisions might require all three partners to agree, which could slow business agility.

Legal requirements include drafting a new deed of partnership and dissolving the old partnership. There would be legal costs involved.

Assessment:

The admission would be beneficial if:

• The £50,000 investment is needed for a specific expansion opportunity with clear ROI
• Chen brings specialist skills