QUESTION1) Following scenario is required to answer questions. You are required to use the formats provided where applicable.
Mr Jack Black has been involved in pool construction for 20 years. He worked hard for Creative Pools CC over the past 20 years. Sadly, Creative Pools CC was declared insolvent and Mr. Black lost his job.
Mr. Black wasn’t that unhappy about losing his job as through years he had built good relationships with clients in pool industry and had always wanted to start his own business. He seized the opportunity and decided to go for it.
Mr. Black decided to start his business on 1st March 2012 as the sole proprietor trading as Peoples Pools and hoped that in time the business will grow and he will be able to convert business to the private company. He opened the bank account in the name of the business and deposited R400 000 cash into it as his capital contribution on the 1st March.
In order to start business, Mr. Black had to get the following assets:
1. A “digging” machine was purchased at the cost price of R55 000 from Global Diggers (Pty) Ltd. Mr Black paid cash for the machine.
(The machine is depreciated at 15% per annum – straight line)
2. A Ford truck was purchased at the cost price of R265 000. Mr Black paid R26 500 cash on the truck and the remaining balance was finance by the loan obtained from ABC Bank. Loan carries interest at 15% paid per annum and is repayable in five equal annual installments starting on the 28/2/2013.
(The truck is depreciated over five years, being its estimated useful life)
3. Tools were purchase from The Poolmans Warehouse (Pty) Ltd at the total cost of R40 000-00. Mr Black paid cash for the tools.
(Tools are depreciated at 20% diminishing balance method.)
He paid the deposit (prepayment) of R5 000 for the offices he had let from 1st March 2012. He would receive full deposit back at the end of his stay, must the offices be in good condition. Lease contract was for 10 years.
Mr Black had taken the loan out from his brother for R200 000 cash. Mr Black and his brother agreed that loan will carry 10% interest payable per annum but loan itself would be paid in full at the end of 5 years.
All of these activities mentioned took place in a first week of March 2012 and all the assets were delivered and ready for use at the same time.
With his experience in building pools Mr Black has designed the pool that he knows will be ideal for the South African climate and will be popular amongst local consumers. He intended on only building this particular shape and size pool.
Furthermore, as Mr Black had made such good connections in the pool construction business, he had landed his first contract with ‘Developerz 101 (Pty) Ltd’. Contract stated he needed to build pools for them starting on 1st April 2012. Contract was for total of 55 pools at 5 pools to be built per month. ‘Developerz 101 (Pty) Ltd’ have agreed to pay R65 000 per completed pool. All pools were completed, sold and paid for by year end.
The cost of making a single pool as mentioned above is made up as follows:
Materials: R
Concrete needed per pool 5 000
Sand needed per pool 5 000
Re-enforced wire needed per pool 3 500
Bricks needed per pool 10 000
Labour:
6 casual workers employed at a rate of R150 per hour at 24 hours per pool required.
All materials were paid for in cash when purchased and casual workers were paid their wages on time at the end of each completed pool. There was no opening or closing balance of materials for the period.
Mr Black also had some fixed overhead expenses which require to be considered as follows:
• Mr Black had taken on the advertising contract from month he started his business, to gain exposure, at an amount of R10 000 a month.
• Mr Black had employed Mrs Black to take care of all his HR needs. She was employed from the 1st March 2012 and was paid R10 000 per month on the last day of each month.
• Mr Black had also employed Mr White. Mr White has his code 10 drivers license to drive the truck and is also qualified to operate digging machine. Mr. White was paid R5 000 per month and would also be paid on the last day of the month.
Other expenses which need to be accounted for are:
R
Monthly rental of the offices 5 000
Monthly rates and taxes 3 000
Petrol and supplies paid for the year 12 000
Telephone line rental per month 1 100
Mr. Black has cashed in his entire pension to be able to give this business venture a chance. He really wants to be successful in being an entrepreneur doing what he knows best. After his first full year of trading (ending on the 28 February 2013) he has serious doubts and concerns and has approached you to assist him with some advice and in compiling certain accounting statements.
REQUIRED
2.1 Compute the cost of making a single pool.
2.2 Create an Income Statement for the period ending 28 February 2013 assuming that everything has gone according to plan.
2.3 Create a Balance Sheet showing the financial position as at the 28th of February 2013.