Zo6 starts up an independent fast food outlet on 1 January 20X4, trading as Zos Snacks. Her

Zo6é starts up an independent fast food outlet on 1 January 20X4, trading as Zoé’s Snacks. 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. Zoé, 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 CHAPTER 9 ADJUSTMENTS TO THE PROFIT AND LOSS ACCOUNT AND BALANCE SHEET: PART D 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) at 31 December 20X4:

£

Sales 132 614 Staffing costs 155030 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 Zoé 20 000 Drawings 8 453 The following are required:

a) | Draw up the profit and loss account and balance sheet for Zoé’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 Zoé

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.