5.20 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 2012:

£

Capital at 1 April 2011 21 410 Bank overdraft (NB overdraft limit £20 000) 10 447 Cleaning equipment at cost 6 400 Accumulated depreciation on cleaning equipment at 1 April 2011 1 920 Office fixtures and fittings at cost 1 700 Accumulated depreciation on office fixtures and fittings at 1 April 2011 1 660 Vans at cost 22 419 Accumulated depreciation on vans at 1 April 2011 14 490 Trade receivables 13 796 Drawings 32 479 Trade payables 1 624 Sundry inventory of cleaning materials 1 408 Revenue 107 614 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 10 years. None of the equipment is fully depreciated at 31 March 2012 Office fixtures and fittings Straight-line basis over 10 years Vans 25% on the reducing balance basis There were no additions or disposals of non-current assets during the year ending 31 March 2012.

a) Prepare Zak’s income statement for the year ending 31 March 2012 and a statement of financial position at 31 March 2012.

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