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On 1st April 2020, to start the business, Rajiv purchased the store for Rs. 500,000. At the time of purchase, the price of land on which the store is built was estimated at Rs. 250,000, and the store was expected to have a useful life of 10 years and no salvage value. The purchase of the store was financed with the help of borrowings of Rs.180,000 from the bank that need to be repaid by equal installments of Rs.10,000 annually.

To make "U-turn" a famous brand, Rajiv spent heavily on the advertisement. He spent Rs. 400,000 but he expects that his business will benefit from this advertisement for the next two years.

He also hired Natasha to look after the business. Her salary is 24,000 per month. However, at the end of the year, her three months salary was still due. Miscellaneous utilities worth Rs.

25,000 were also purchased during the year. In March 2021, Rajiv also made a payment of Rs. 20,000 for the utilities that would be received in May 2021.

To bargain for the lower price, Rajiv committed the supplier that the business will buy 2500 units of merchandise inventory every quarter, the payment for which would be made in the next quarter. The cost for the first and second quarter of merchandise inventory is Rs. 100 per unit. However, due to an increase in the oil prices, the cost of the third and fourth quarter of merchandise inventory increased to Rs. 120 per unit. In each quarter, the business sold 2,250 units at Rs. 150 per unit. However, the business also commits its customers for three free drycleaning services and for this, the business considers 10% of the revenue as an advance payment for the next year services. Out of the sales made in the year, Mrs. Sharma, one of the biggest customers store still owes business Rs. 15,000. Other accounts receivables stand at Rs. 20,000.

The store purchased a three-year fire insurance policy for Rs. 1,224, paying cash. On 31st March 2021, Rajiv's wife and daughter came to the store and took ten units of merchandise inventory for themselves.

Other Transactions:

1) Apart from this, the business also gets a rent payment of Rs. 20,000 from the tailors who sit outside his store, and he also has a cafeteria inside the store, which earned Rs. 100,000 profits.

2) The rent, electricity, and other miscellaneous expense amounted to Rs. 50,000 and were paid in cash.

3) Rajiv is planning to have a sale for May and June 2021 at store. On online and offline advertisement for this, the business has spent Rs. 20,000 till March 2021. 4) Salary of Rs. 40,000 per year was paid for other employees working at the store. 5) Rajivs sister also helps him at the store but does not take the salary. The fair value of the services provided by Rajivs sister is Rs. 1200 per month.

Other information:

1) Advertising would be considered as capitalization cost.

2) The firm considers FIFO as its inventory management technique.

3) Rajiv wants to start a practice where the business considers 10% as a provision for doubtful accounts.

Questions

Q-1. Create a profit and loss statement and balance sheet for U-Turn for the year ending on 31st March 2021. Kindly show all the workings.

Q-2. How would this firm's profit and inventory in the balance sheet change if Rajiv decides to use LIFO instead of FIFO?

Q-3. If given an option between his earlier job and current business, what option should Rajiv choose?