9.18 Zoe starts up an independent fast food outlet on 1 January 20X4, trading as Zoe's Snacks. She has the following balances in her books at 31 December 20X4. Her accountant has advised her that she should depreciate her machinery and fixtures over a period of between four and seven years on a straight-line basis. Zoe, who is a keen amateur accountant, decides to prepare her profit and loss account and balance sheet on the basis of straight-line depreciation over a four- year period. However, she is also interested to see what difference it would make to her profits if she depreciated machinery over the maximum advisable period of seven years. Her books show the following list of balances (before any adjustment for depreciation):

£

Sales 132614 Staffing costs 15 030 Rental of premises 7 400 Purchases 83 430 Electricity 2 961 Phone 1 806 Insurance 1 437 Sundry expenses 981 Accountant's fees 600 Machinery and fixtures at cost 28 760 Stocks of food etc 1 209 Cash at bank 3 406 Creditors 1 650 Capital introduced by Zoe 20 000 Drawings 8453 The following are required:

a) Draw up the profit and loss account and balance sheet for Zoe's Snacks at 31 December 20X4 making adjustments for depreciation of machinery and fixtures on the basis of the straight-line method of depreciation over four years, with an estimated residual value of nil.

b) Calculate the increase or decrease in net profit that would arise if Zoe depreciated the machinery and fixtures on the basis of the straight-line method of depreciation over seven years.

c) Calculate the net profit margin on the basis of i) depreciating the fixed assets over four years; and, ii) depreciating the fixed assets over seven years.
9.19A For several years Zak has run a contract office cleaning business. He employs several part-time staff who work at night and weekends. Zak has always run the business from rented premises; he has a small office to deal with the paperwork and a storage area where cleaning equipment and machinery is kept. He also runs three vans which deliver staff and their equipment to offices around the city.
Zak has the opportunity to buy the freehold office premises he currently occupies for £51 370. He would be able to obtain a commercial mortgage for £40 000 at a rate of 8% per annum. He would like some advice on whether or not to take out the mortgage to buy the premises.
Zak has the following balances in his books at 31 March 20X3:
£
Capital at 1 April 20X2 21 410 Bank overdraft (note: overdraft limit £20 000)
10447 Cleaning equipment at cost 6400 Accumulated depreciation on cleaning equipment at 1 April 20X2 1 920 Office fixtures and fittings at cost Accumulated depreciation on office fixtures and fittings at 1 700 1 April 20X2 1 660 Vans at cost 22419 Accumulated depreciation on vans at 1 April 20X2 14490 Debtors 13 796 Drawings 32 479 Creditors 1 624 Sundry stocks of cleaning materials 1 408 Sales 107614 Premises rental 7 462 Electricity and other premises costs 2 444 Sundry office expenses 799 Staff costs 63 491 Accountancy and tax advice 1 200 Cleaning materials 5 177 Interest paid 390 Zak has not made any accounting adjustments in respect of depreciation in the above list of figures. He charges depreciation as follows:
• Cleaning equipment: straight-line basis over ten years, equipment is fully depreciated at 31 March 20X3.
• Office fixtures and fittings: straight-line basis over ten years.
• Vans: 25% on the reducing balance basis.

There were no additions or disposals of fixed assets during the year ending 31 March 20X3.

a) Prepare Zak's profit and loss account for the year ending 31 March 20X3 and a balance sheet at 31 March 20X3

b) Advise him on whether or not, in your opinion, he should take out the mortgage and buy the premises.