Case study Esmeralda doesn’t d

Case study

Esmeralda doesn’t disappear, so Chiquita appears

As Marvin (see previous case studies) entered the second year of his business, things appeared to be going well. His fame was spreading and he was invited to appear on 1 July 2012 at the prestigious Gala Stars Show. As the highlight of his act was the ‘disappearing lady’ trick, he was highly embarrassed when, after saying the ‘magic words’ and tapping the correct number of times with his wand, the curtains drew back to reveal Esmeralda in a close embrace with a stagehand. Marvin was so furious that as soon as the show was over he not only sacked Esmeralda but also closed his magic set factory (thereby putting Esmeralda’s seven brothers and sisters, the factory’s only employees, out of work). Immediately, all the factory’s inventory was sold at cost and the factory machinery was sold at its depreciated value. During the six months to 31 December 2012, the following events occurred:

1 The disappearing lady apparatus was sold on 1 August 2012 for £1,000. Its depreciated value at 30 June 2012 was £1,200 (cost £2,000 less 40% p.a. diminishing balance depreciation). A further one month’s depreciation is to be charged prior to calculating the profit or loss on disposal.

2 Marvin took on a new assistant, Chiquita, who was previously employed as a receivables ledger clerk at Kaboosh Limited. She was to perform in a new ‘saw the lady in half ’ routine (for which a new prop costing £3,000 was bought on 1 September 2012) as well as supervising the collection of Marvin’s trade receivables. She immediately prepared a report on the Receivables Ledger, showing that at 31 August 2012 he was owed £900, including £200 from Tanya Turner who was a ‘bad’ debtor, and £150 from Carlos Gonzales whose cheque had been returned by his bank three times marked ‘no funds available’ and was to be considered doubtful.

Required

(a) Calculate the profit or loss on disposal of the ‘disappearing lady’ apparatus.

(b) Explain the effect on Marvin’s profit and assets of classifying debts as ‘bad’ or ‘doubtful’

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