Ashok and Pravin are equal shareholders in a small agency selling foam rubber products to industries on the east rand. They sell ready-made products from their supplier, who allows them to take most of their stock on consignment. Things had been going well for the last few years, but the elimination of an import tariff means that they will have to compete with cheap Asian imports next year. This is expected to reduce demand and/or profitably significantly. Pravin has been approached by a UN group to supply them with foam mattresses for humanitarian work in Central Africa and feels that this large 4-year contract is just what is needed to save the business. The problem is that it will require All-Star to set up its own manufacturing plant as the product does not form part of its existing range. This will require taking on a large amount of debt to fund the initial capital investment. Ashok is not interested in this as he hates debt (All-Star has never even had an overdraft facility) and recognizes that his expertise is in sales and NOT manufacturing.

Pravin has come to you during the Christmas shutdown and asked you to help him examine the impact of his proposed plan for 2018. Before you can do that you need to finalize this year’s accounts; the following information is available for the year ended 31^st December 2017:-

1. Sales for the year amounted to R4,000,000 (All on credit). 80% of which was paid across to the supplier and 20% retained by All-Star as their commission/margin.
2. The authorised share capital of All-Star was 1,000,000. Of this only 200 000 shares of R1 each had been issued – 100,000 each to Ashok and Pravin at incorporation.
3. The closing stocktake showed inventory to the value of R79,000 on hand at the end of the year.
4. General and Admin costs for the year totaled R85,000 while Selling costs were 7½% of Sales.
5. At year-end, All-Star still owed their sole supplier R232,800 for goods used but not yet paid for.
6. The company’s only fixed asset was a fleet of five delivery vehicles that were depreciated at a rate of R225,000 per annum. The NBV of the vehicles (which were all purchased at the same time) at the end of 2017 was R450,000.
7. The tax rate is 35% of pre-tax earnings and All-Star’s dividend policy was to pay out 20% of annual earnings after tax.
8. Last year’s balance sheet showed retained earnings at the end of 2016 to be R523,000.
9. The actual Debtors figure was not available, but Pravin knew that they took an average of 44 days to pay.
10. As there was no overdraft or long-term debt, there was no interest expense for the year.
11. As the bookkeeper was on leave the exact cash position at year-end was not known.

Pravin’s plan for 2018 is as follows:-

1. As Ashok was not keen to expand, Pravin proposed to buy him out and thus become the sole shareholder of All-Star Agencies. A price of R400,000 was agreed for Ashok’s 100,000 shares and Pravin would pay the money directly to him from his personal savings.
2. An investment of R1,200,000 would be made immediately to establish the necessary manufacturing unit to take on the big supply contract. Most of this investment would be funded through raising an L-T bank loan of R1,000,000.
3. The manufacturing plant was to be depreciated evenly over 4 years (which was the duration of the contract). A full year’s depreciation was to be charged for 2018 and added to the existing amount of R225,000 for the fleet of delivery vehicles.
4. Sales from the ongoing agency business were expected to drop to R3,000,000 for the year and commission earned on that would remain at 20%.
5. The contract to supply mattresses would result in annual sales of 5,000 units at R600 each. Detailed costings showed that direct production costs would be R380 per unit.
6. Pravin disliked unnecessary spending on marketing so planned to reduce Selling & Distribution costs to 3% of total sales.
7. The additional paperwork generated by such a big contract would push General & Admin costs up to R120,000 for 2018.
8. Raw material stocks for the manufacturing process would need to be bought in bulk, so Stock holdings were expected to rise to R212,000 by 31^st Dec 2018.
9. The tax rate for 2018 would remain the same as last year.
10. As payments for the contract had to be made from Brussels, debtors were expected to more than double to R1,002,740 by the end of 2018.
11. Strict payment terms by the suppliers of the manufacturing raw materials meant that creditors were unlikely to increase. It was agreed to carry forward exactly the same figure as last year.
12. The new debt position would mean that All-Star incurred an interest expense for the first time. This was expected to come to R162,000 for the year. Pravin also proposed to increase his dividend to 40% of earnings after tax.
13. The new trading model would enable Pravin to reduce cash on hand to R35,260 by the end of 2018. He hoped this plan would not require large amounts of expensive overdraft funding but had organized a facility with All-Star’s bank just in case. You are to work out what overdraft funding would be required on the projected balance sheet.

You have been asked to prepare the following for presentation to Pravin and the bankers as soon as possible: -

1. The Income Statement for the year ended 31^st December 2017 and the Balance Sheet as of that date.
2. The projected Income Statement and Balance sheet for 2018, are based on the plan outlined above.