Part (b) asked candidates to calculate the gearing levels based on book values to assess when the gearing levels would be breached. Few candidates could apply the annuity factor to calculate the annual amount payable.

Instead they opted to do it on a straight-line basis but this ignored the time value of money. However, a good number of responses then structured the profit or loss statement appropriately to take account of interest, tax and dividends, to get to the retained earnings figures.

Nonetheless, some responses did not do this and therefore kept the book value of equity unchanged, casting doubt about whether or not they understand the relationship between the profit or loss statement and the statement of financial position. In a small number of cases, candidates calculated tax after deducting both interest (correct) and dividends (incorrect).