SAMANVYA BUILDING

In January 2004, Mr. Pandit decided to buy a residential property and rent to various
tenants. On 1st January 2004, he borrowed Rs. 30 lakhs from a housing bank on a
condition of repaying the loan in 10 annual installments with an interest @ 10% per
annum. He put in his own savings of Rs. 15 lakhs and bought a property having 5 flats
in a fast-developing locality. The cost of the property was Rs. 30 lakhs comprising
land valued at Rs. 15 lakhs and the building valued at Rs. 15 lakhs.
The entire year of 2004 was spent in repairing and repainting the property. The cost of
one-time repairs was Rs. 5 lakhs and that of repainting, which was completed on 31 st
December 2004, was Rs. 1.20 lakh. Mr. Pandit expected that this paint would last for
3 years before it was repainted. The life of the property after repairs was expected to
be 20 years. Mr. Pandit was informed that the cost of repairs and the first years
interest on the bank loan had to be added to the cost of building as it were incurred in
bringing the asset to a position of generating revenue. On December 31 st of 2004, Mr.
Pandit paid the first installment of the loan together with interest @ 10%.
The flats were ready to let out on 1st January 2005. Five tenants signed the agreement
and paid interest-free deposit equivalent to 10-month rent. The monthly rent of each
flat was Rs. 8000. The three tenants paid their rent regularly on the last day of the
month during 2005. One tenant, Mr. Khanna, had indicated that he would vacate the
flat on 31st December 2005 and had not paid his rent for November and December,
requesting Mr. Pandit to adjust the same against his deposit. Though Mr. Khanna
vacated the flat on the decided date, Mr. Pandit had yet to pay his balance deposit
amount. Another tenant, Mr. Khan went abroad in December 2005 but had promised
to pay the rent on return. Mr. Pandit had already found a tenant for the flat vacated by
Mr. Khanna and the new tenant paid a deposit of Rs. 80000 on 31st December 2005.
Mr. Pandit paid the second installment of loan together with interest on 31 st December
2005. Mr. Pandit had made the following payments during 2005:
Taxes
Rs. 20,000
Electricity
Rs. 10,000
Telephone
Rs. 10,000
Fire Insurance was taken on January 1, 2005 for 4 years premium Rs. 60,000.
The closing cash/bank balance was Rs. 5,46,000 on 31st December 2005.
Required: Prepare the income statement and the balance sheet of Samanvya
Building as on 31st December 2005.
Selected Answers: Income Statement: Rental income = 480000, Interest exp =
270000, Depre = 115000, Paint exp written off = 40000, PBT = 0
Closing Balance Sheet: Loan =2400000, Deposit =464000, TOTAL LIA = 4364000,
Building (net) = 2185000, Rent Receivable = 8000, Prepaid Paint = 80000, Prepaid
insurance = 45000, TOTAL ASSETS = 4364000