Michael Baldwin owns B's Casuals, a company specialising in low-quality, high-priced clothing. The material is purchased from Canada, made up into the finished garments in his own factory, and then sold in the local markets through stallholders. During the year ended 30 June 2017 Michael had sales of £260,040. Inventory levels have remained relatively consistent over the years, the starting inventory being £21,500 and the closing inventory £22,500. Michael is not very generous to his staff. This is reflected in the wages paid during the year of only £24,500.

Business rates are a problem, since there is a dispute with the local council. He has paid a total of £7,500 but there is a good chance that he will have to pay a further £2,450.
Postage and advertising is another problem area. For the imports from Canada it is necessary to pay all of the flight costs. These amounted to £5,200 over the year.
He delivers all of his invoices to the stallholders in person and is paid promptly, with the exception of one debtor who owes £2,000 and who has been declared bankrupt. This amount is to be written off.
Advertising is minimal and is done in the local pub: £20 per week is paid to the landlord in return for permission to pin leaflets on the walls and an agreement that the landlord will place a leaflet every day on each table in the bar. Insurance of £3,500 has been paid, but £650 of this relates to the year ending 30 June 2018.
Electricity bills amounted to £2,900, but the bill for the final quarter is still outstanding and is expected to be approximately £500. Purchases of cloth from Canada for the year are currently recorded as being £65,000, but there is an outstanding bill of £3,500 which is not yet included in that figure. The factory and the machinery were bought at the same time and originally cost £400,000. Depreciation has accumulated to the sum of £100,000. The current year charge is 5 per cent on the reducing balance basis.
The business had a computer which was purchased about three years ago and which Michael reckons has about another two years of life left. It cost £4,000 and Michael uses the straight line method of calculating the depreciation charge. The computer will be worthless at the end of that time. Stationery charges amounted to £1,350 and he had telephone bills of £3,500, £200 of which relates to July and August 2017. In the year ending 30 June 2017, he had paid £150 which related to telephone charges in the year ending 30 June 2017. Michael has also paid £5,000 for a top-of-the-range digital home cinema system. He has enquired as to whether he can class this as a business expense as it has enabled him to unwind after long days at the office. His salary for the year was £50,000. Cash in hand at 30 June 2017 was £600 which he borrowed from his wife temporarily on 30 June when he realised that there was no cash available to pay any expenses.

Required:

(a) Prepare a statement of profit or loss for the year ending 30 June 2017.

(b) Prepare a statement of financial position as at 30 June 2017 showing clearly Mr Baldwin's opening capital, net assets and the profit for the year.

(c) Michael has enquired why he should include the amounts owing to both the council and the Canadians in the current year's financial statements and also why he cannot include his own wages within expenses since they have been paid out from the business. Write a letter to Michael explaining these points and answering his query concerning the home cinema system.