Marvin (see previous case studies) was finding that as the year progressed he was in
great demand. He felt he needed an assistant so decided to employ Esmeralda, who had
previously been chief inventor at Kaboosh Limited, a company manufacturing equipment
for magic tricks and novelties. As a leaving present, that company had given
Esmeralda a ‘disappearing lady’ apparatus. Being unsentimental about such things, she
promptly sold it to Marvin on 1 December for £2,000. Esmeralda started to appear (and
disappear) as part of Marvin’s magic act.
After two months in her new job, Esmeralda persuaded Marvin to diversify by buying
in items made by her former employers and selling them at the children’s parties to the
parents and guests.
During the following January, Marvin received a letter from his bank, asking for
financial summaries for his first six months in business. January is a quiet month for
him, so he spent some time producing the following information:
| £ | |
| Cash and bank receipts | |
| Sales of novelties bought from Kaboosh Ltd | 2,500 |
| Appearance fees as entertainer | 18,320 |
| Cash and bank payments | |
| Kaboosh Ltd for novelties to be sold | 1,500 |
| Wages | 1,200 |
| Kazam Limited for playing cards | 400 |
| Travel expenses | 2,600 |
| Rabbits and rabbit food, less returns (expenses) | 430 |
| Cleaning | 140 |
| Esmeralda for ‘disappearing lady’ apparatus | 2,000 |
| Marvin’s drawings | 11,890 |
| Other information | |
| Cash balance at 31 December | 560 |
| Bank balance at 31 December | 120 |
| Total invoices received from Kaboosh Ltd up to 31 December | 1,700 |
| Inventory of unsold novelties at cost price at 31 December | 80 |
| (Note: there was no ‘opening inventory.’) | |
| Amounts owing from customers for novelties | 350 |
| Other non-current assets still owned at 31 December: | |
| Costume at cost | 3,000 |
| Magic book at cost | 2,000 |
| Opening equity (see case study in Chapter 2) | 5,020 |
Notes
1 The costume, the magic book and the playing cards are to be grouped as ‘Magician’s
equipment’ and depreciated at 20% p.a. (that is, over 5 years), straight line method, with
no residual value. Note that the depreciation period here is only 6 months.
2 The ‘disappearing lady’ apparatus is to be depreciated at 40% p.a. on the diminishing
balance method. The full 6 months’ depreciation is to be deducted, even though it was
owned for only part of that time.
3 Marvin owed £100 wages to Esmeralda at 31 December, and had paid £50 in December
for a train ticket which was going to be used in January.
Required
Prepare Marvin’s income statement for the 6 months to 31 December, and a statement
of financial position as at that date. Note that in the income statement, gross profit
on novelties should be calculated first and the fees added to that before deducting the
expenses.
