KAR KRAFTHaving worked for a number of years as a supervisor in a reputed automobile workshops, Ravi and Raju decided to set up their own garage at the urging of their customers. On January 1, 20X6, they established Kar Kraft, a partnership with a capital of Rs 25,000, contributed equally by them. Profits and losses were to be shared equally by them. They bought tools and equipment costing Rs 10,000 (expected life 10 years for cash. Spares were to be provided by the customers to avoid expensive inventories; however, in order to meet emergency requirements, spares for Rs 3,300 were bought on credit. Office supplies costing Rs 2,700 were bought for cash.

The business seemed successful from the start, as Kar Kraft received orders from many customers who had been associated with Ravi and Raju for a long time. They worked very hard and were always available when problems came up. Yet they were disappointed when they found from the company's bank statement that they were barely managing to survive with a balance of Rs 3,000 at the end of 20X6. Following is the summary of the bank statement of Kar Kraft for the year:

Receipts Share Capital Rs. 25,000Collection from Customers Rs. 31,200Total Receipts 56,200Payments Tools & equipment Rs. 10,000Salaries of assistants Rs. 8,800Rent advance for 24 months (Paid on Jan 1) Rs. 9,600One year insurance policy dated Jan 1 20X6 Rs. 1,200Office supplies Rs. 2,700Payments to creditors for spares Rs. 2,900Total payments 35,200WithdrawalsRavi Rs. 9,000Raju Rs. 9,000Total Drawings 18,000

Balance: December 31, 20X6 3,000

On examining this statement, Ravi said to himself, “It looks like I made a mistake in plunging into this venture. After all, I was earning Rs. 20,000 in salaries per year in a 9-to-5 job. After a whole year of hard work, I have just got Rs. 9,000 from the business”The following additional information is relevant.

a) Amounts receivable for services provided to customers Rs.29,900b) Salaries of assistants for December 20X6 Rs.800 not yet paidc) Inventory of office supplies on December 31, 20X6, Rs. 1,930d) Inventory of spares on December 31, 20X6. Rs. 2,600.

Required:Do you agree with Ravi’s view? Prepare a report on the performance of KarKraft during 20X6. Recommend a set of accounting records that will be appropriate for the business, keeping in mind the company does not intend to employ additional staff.

VALLEY TRANSPORTERSOn June 1, 2003, Jayaraj set up Valley Transporters for moving vegetables from Kodaikai to Madurai with a capital of Rs 50,000. On the same day, he took a bank loan of Rs 2,50,000 for purchasing a small truck. The loan carries interest at 12 per cent per annum and repayable in five equal yearly instalments beginning June 1, 2004. Interest is to be paid along with each installment. The loan agreement stipulates that if the profit before interest & income tax is less than 3 times the interest expense, the interest rate will rise to 15 per cent the following year or else the loan will have to be fully repaid. The bank requires financial statements for every year until the loan is fully repaid. The following is the trial balance the business on May 31, 2004:

TRIAL BALANCE AS ON MAY 31, 2004Account Debit Credit

Truck Rs.2,50,000Spares 4,100

Debtors 9,200

Cash 67,810

Prepaid Insurance 24,000

Bank loan Rs.2,50,000Creditors 3,410

Capital, Jayaraj 50,000

Service Revenue Earned 1,23,700Salaries Expense 11,200Fuel Expense 49,800

Rent Expense 11,000

Total 4,27,110 4,27,110

On June 1, 2004, Jayaraj visited the bank to pay the first installment of Rs 50,000. He gave the bank manager the financial statements for the year just ended. The manager looked at the statements and told him that a charterered accountant should attest the statements. Soon after, Jayaraj approached a chartered accountant who collected the following additional information:

The truck has a useful life of ten years and no scrap value in the end.The value of spares held on May 31, 2004 is Rs 3,500.Insurance for the truck covers the period of 24 months beginning June 1,

2003.Rent for May 2004 unpaid, Rs 1,000.Unpaid salaries, Rs 900.Services provided but bills not raised on customers, Rs 32,500.Income tax expense to be paid, Rs 6,000.

REQUIRED Prepare the financial statements of Valley Transporters for the year ended May 31, 2004. Will the firm be required to pay a higher rate of interest in the following year?