MP Taps and Fittings Enterprise
Mr. Manohar Prakash could not believe his luck. Just when he thought that the difficult days were over and the situation was under control, news came about accident of his accountant Mr. Arun Chandra. He was also informed that all the books of accounts were destroyed in the same accident. It was March 2016 now, the financial year closing time, the time to prepare the final accounts. What was to be done now …?
Background
Manohar Prakash (Manohar) and Arun Chandra (Arun) worked in SriRam Faucet Ltd., Okhla, Delhi, as Chief Marketing Manager and Senior Accounts Officer respectively. SriRam Faucet Ltd. used to manufacture taps and faucets and supply them to the construction companies like DLF, Parshwanath, Ansals, Amrapali, Unitech, etc. The business was good and the salary (INR40,000 per month) was adequate for Manohar. However, he always felt that he could earn more with little more efforts. As a Chief Marketing Manager, he used to interact a lot with the purchase heads, production heads, and CEOs of these construction companies. He had realized during these interactions that the home buyers always looked for variety as well as better features from the taps and faucets they bought and were ready to pay more for better utility products. He could see the supply gap on these lines and understood that the market needed more players who could cater to these needs........
Preparing for the Set-up
Armed with these information, Manohar went ahead to acquire infrastructure. He rented a building to serve as his factory cum office in Patparganj, Delhi, belonging to his friend Nixit Arnold (Nexit) who waived off the security deposit of INR 50,000 for him. Nixit let out his homeat a discounted rent of INR15,000 per month only (which otherwise would have amounted to at least INR20,000 per month)but with a condition in the rental agreement that if the ROI of the faucet business is more than 20% after first year, the rent would be revised upward by 20% in the second year and by 10% thereafter every year. Mahonar agreed and promised to send him the copy of his Profit and Loss account at the year end.............
Beginning of the Operations
The operations in the factory started in the last week of April after an order of 250 ‘wall-mounted kitchen faucets with spray/stream/foam selector options’ was received from Amrapali builders for one of their semi-luxury residential project in Noida Extension. Mahonar made sure that the quality of the faucets was the best and also that the delivery was as per schedule on May 15th 2015. He believed that a good word of mouth would ensure regular flow of orders from other customers as well...............
Issues and Challenges
However, things after the initial euphoria were not as rosy as Manohar thought. There were no orders. For the entire duration between mid-May to mid-June, he kept on knocking the doors of those construction companies for procuring sales orders. But there were hardly any requisitions from those builders mostly due to the logjam of Farmers - Greater Noida Urban development authority in the area where maximum residential projects were coming up..............
The Turnaround
Aditya did not disappoint him. Mid-July onwards, Manohar saw a steady flow of orders from builders across the city as well as outside of which only sales worth INR600,000 was through Manohar’s efforts and old contacts. So much so that he had to hire 5 additional workers in his factory from September 1st 2015 onwards at a wage rate of INR6,000 per month to ensure timely deliveries.............
The Data Loss
This was the last official conversation he had with Arun. After coming back from his vacation, Arun worked doubly hard to complete the pending accounting work for preparing final accounts. He used to take the journal books and ledger to his house after office for checking the work done by office manager in his absence and used to bring them back to the office the next day...........
Reports Available
This was a big setback for Manohar. There were no books of accounts to refer to, though he had a report prepared by Arun as a summary of major expenses paid (except salary, wages and rent) and of incomes through sales till December 31st 2015 on cash as well as credit basis (Exhibit III)..........
Assignment Questions
I. Clarify all the doubts (as mentioned above) divulged by Manohar by citing relevant accounting principles.
a) How should he treat the sale which was on approval basis? No approval was received till March 31st 2016, although his sales manager had assured him that the customer had liked the product and was keeping it.
b) How should he treat the rumor of his customer going into bankruptcy?
c) Should he include the sales order of INR210,000 from BPTP builder in his P/L account?
d) Before starting his business, Manohar had paid for information about types of faucets and their customization work. Could he show this in his final accounts? And in what way?
e) ........................
Exhibits
Exhibit I: Types of Faucets
Exhibit II: Additional Customization Required
Exhibit III: Summary Report of Incomes and Expenses Paid
