The Scenario

The Starsky Limited is a children$$s Leisure & Entertainment company. It had been

highly profitable for a number of years and its growth had been quite remarkable.

The Chairman and Managing Director, Raya Croft, had always been meticulous in

supervising all company activities, but over recent years she has been finding it

increasingly difficult to maintain day$-$to$-$day control. Raya has been careful to

minimise the company$$s administrative costs. The annual financial accounts had

always confirmed her intuitions about the company$$s progress, so there seemed to

be no need for more frequent reporting.

However, because of the recent moderate inflation and cost of living crisis, The

Starsky Ltd has been finding it very difficult to win new contracts. It is company

policy to depreciate all company vehicles at $20\%$ per annum on a reduced$-$balance

basis. The company$$s premises are listed buildings, and accordingly, there are

restrictions on refurbishment. Raya had noticed deterioration, and she was relieved

that these buildings are depreciated annually at $1\%$ on a straight$-$line basis.

Raya has explored various ways to improve the sales of the company, and the

Marketing Manager, Liam Stone also outlined a number of ideas. Liam is proposing

to start an online service for the local community; according to his business plan, the

sales revenue would increase by $20\%.$ However, Liam estimates that there will be

an initial cost of $50,000,$ and operating costs will increase by $5\%.$ His second

proposal is to allow discounts to young parents, which he forecasts will yield a $2\%$

increase in revenue, after any additional costs. However, Raya is not convinced

that providing service directly to the young parents will increase the revenue. Raya

is looking to approach local companies in an effort to promote her business.

Raya decides to review the financial position of the company before making any

decisions about future plans, and the company accountant has prepared the Trial

Balance for $31$ December $2023($see over$).$

Trial Balance for The Starsky for the year ended $31$ December $2023$

$$

Sales $404,250$

Sales returns $23,100$

Premises : cost $220,000$

: opening cumulative depreciation $5,500$

Vehicle : cost $132,000$

: opening cumulative depreciation $13,200$

Purchases $127,050$

Purchase returns $11,550$

Light and heat $18,150$

Rent and rates $16,500$

Bank $110,000$

Insurance $6,600$

Trade debtors $19,800$

Bad debts written off during the year $5,500$

Bad debt provision $(1$ Jan $2023)375$

Trade Creditors $22,000$

Loan interest paid $5,500$

Long term loan $125,000$

Capital $196,825$

Notes

$1.$ The vehicles are depreciated at $20\%$ per annum on a reduced$-$balance basis.

$2.$ Premises are depreciated at $1\%$ per annum on a straight$-$line basis.

$3.$ The trade debtors$$ figure of $19,800$ includes the bad debts of $5,500$ and is

before any provision. Analysis of the debts shows that additional bad debt of

$550$ should be written off.

$4.$ After dealing with $(3)$ the bad debt provision is to be maintained at $5\%$ of

debts.

$5.$ Light & heat $1,000$ still has not yet been paid at the year$-$end $31$ December.

$6.$ The tax for the year is $13,250,$ of which $6,600$ was outstanding at $31$

December $2023.$

$7.$ The rent amount $1,375$ for next year is paid for in advance on $1$ December

$2023.$

$8.$ On $1$ January $2023,$ there were $100,000$ inventories and on $31$ December

$2023$ there were inventories valued $80,000$ unsold.

Prepare the Income Statement for The Starsky Ltd for the period ended $31$

December $2023$

$(30$ Marks$)$

$2.$ Prepare the Statement of financial position for The Starsky Ltd for the period

ended $31$ December $2023$