This document is authorized for personal use only in Indian Institute of Management Lucknow's PG; PGP / FRA course

by Prof. Prakash Singh, from Aug 9, 2021 to Aug 16, 2021.

Indian Institute of Management

Ahmedabad IIMA/F&A0200
Revised in 2002

Latif Khan, Architect1

In 1996 Mr. Latif Khan, retired from service as the Chairman of Urban Planning Board of a
State Government in Western India and set himself up as a consulting architect. While his
primary interest was in town planning and building institutional complexes he also advised
some wealthy clients on designing their residential homes. Khan was somewhat allergic to
accounting as he felt that it stifled creative and innovative abilities. However, when he
received a notice from the Income Tax Officer around early July, 2002 asking him to submit
his tax return along with the required financial statements i.e. a profit and loss statement in
respect of his operations as well as a balance sheet as at 31st March, 2002, he felt that some
attempt had to be made to put together a set of accounts to satisfy the tax authorities.

He requested Miss Joshi, the young lady who acted as his secretary to collect all the
necessary details relating to billings made, cash received, expenses incurred, assets held and
outstanding amounts due to suppliers and others during the relevant period so that some
kind of a financial statement could be prepared in response to the Income Tax Officer’s
request. After much effort on the part of Khan and Miss Joshi, the following data were
assembled:-

1. His business assets consisted primarily of office furniture and equipment which
were acquired on 1st October, 1996. It was decided that these assets should be
depreciated at the rate of 10% per year. The acquisition cost of these assets was
Rs.350,000.

2. The office records showed that the following cash had been received during the
year ended 31st March, 2002.

Rs.

Collections relating to bills raised on clients between the 1,750,000

period April 1, 2001 to March 31, 2002

Collections in respect of prior periods’ billings 595,000

Dividends and interest received from stocks and debentures 119,000

held by Khan

Total 2,464,000

Prepared by Professor S K Bhattacharyya, Indian Institute of Management, Ahmedabad.

Teaching material of the Indian Institute of Management, Ahmedabad, is prepared as a basis for class
discussion. Cases are not designed to present illustrations of either correct or incorrect handling of
administrative problems.
© 1973, Indian Institute of Management, Ahmedabad.
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3. A thorough analysis of the stubs of used cheque books disclosed that the
following payments were made during that period:

Expenses Expenses
relating to relating to the
previous year ending
periods March 31, 2002

Rs. Rs.

a. Salaries of architects employed and wages of office 11,900 1,039,920

staff

b. Supplies used for preparation of architectural plans, 57,400 345,450

blue prints, etc., display material and related expenses

c. Rent for office premises 14,000 170,800

d. Dues payable to professional associations and 35,000

expenses for attending architectural conferences

e. Shares purchased during the year, through 168,000

stockbrokers, in Capital Constructions Ltd.

f. Amount withdrawn by Khan for personal expenses 560,000

g. Miscellaneous expenses, including advertising, 5,600 120,400

establishment expenses, municipal rates and taxes,
etc.

88,900 2,439,570

Khan knew that at the beginning of the accounting period he held shares and debentures
worth Rs. 3,500,000 in companies manufacturing building material and undertaking
construction activity. These companies were actively associated with Khan’s business
operations. At his request, Miss Joshi looked up the cash book and found that the cash
balance at the end of the working day on 31st March, 2001 was Rs.112,000. She found that the
following bills in respect of expenses relating to the period ending 31st March, 2002 were
outstanding on April 1, 2002:

Rs.

Salaries 17,500

Rent 16,800

Supplies 45,150

Miscellaneous expenses, including office establishment charges 1,750 81,200

The inventory of supplies material as at the end of March 31, 2002 was Rs.70,000.
This document is authorized for personal use only in Indian Institute of Management Lucknow's PG; PGP / FRA course by Prof. Prakash Singh, from Aug 9, 2021 to Aug 16, 2021.

3 of 3 IIMA/F&A0200

Khan was rather happy about the fact that while actual billings during the 31st March, 2002
period were Rs.2,079,000, the cash received was Rs.2,464,000. However, he was quite
shocked when Miss Joshi informed him that some of the clients, including some of the very
wealthy ones who had consulted him for designing private residential homes, had refused
to pay as they believed that the advice was given on the basis of the personal friendship
which they had with him. They pointedly mentioned that they were rather shocked to
receive bills for professional services and maintained that since there was no legal contract,
they were not liable to pay up the amounts billed. The estimates of such uncollectible
amounts came to Rs.37,800 in respect of billings made during the period 1st April, 2001 to
31st March, 2002 and Rs.121,800 in respect of billings pertaining to prior periods. Khan
thought that he would have to be more careful in future before he gave any professional
advice, but in any case, it would not be worthwhile to get involved in legal proceedings in
order to recover all these amounts. He decided that the best course would be to write off
these claims.

When Khan submitted this information to the Income Tax Officer, he received a curt
reception and was instructed to provide, without any further delay, a proper balance sheet
as on 31.3.2002 and profit and loss account for the period ended on that date. Khan was
rather perplexed by this request as he was not sure what additional information could
possibly be provided to the Income Tax Officer. However, he knew from his past experience
that in the long run it was advisable to comply with the instructions of Income Tax officials
rather than to raise questions of logic. He has sought your help for the preparation of the
financial statements on the basis of the information set out above. Ignore income tax for your
purposes on the assumption that this payment will be on Mr. Khan’s personal account.