Lara Knoffs, a qualified commercial artist, had worked as an employee of a large advertising agency for a number of years. She decided to resign her position and set up her own business which would be coordinated from the new home she and her husband had bought.

To establish the business, she invested $25 000 of her cash savings as capital. From this capital, she then purchased for the business equipment worth $15 000 with an expected life of 10 years and no residual value. Other specialist equipment cost $6600 (estimated life 6 years — expected residual value of $600). Lara charged competitive prices, produced quality work and built up a good clientele. Most customers paid a deposit before work started and bad debts had never been a problem.

Although there was a general feeling that the business was going well, Lara was concerned that she always seemed to have cash problems when trying to withdraw cash from the business at the same levels and above that she had earned as an employee. You have been asked by Lara to examine her business as she feels that it is not profitable.

An analysis of the Cash at Bank account for the financial year ended 30 June 2017 revealed the following:

Balance of cash at 1 July 2016 Cash received from clients				$  3 100 88 750
				91 850
Cash payments: Accounts payable Insurance prepaid (2 years from 1 July 2016) Materials and stationery Electricity and telephone Drawings for personal use Sundry expenses	$25 750 3 600 10 000 5 500 31 000 14 700			90 550
Balance of cash at 30 June 2017				$   1 300

This analysis highlighted Lara’s major concern in that the $31 000 she had withdrawn was several thousand dollars below the wage which she had earned as an employee of the advertising firm. She believed, given her assessment of the poor profitability of her business, that perhaps she should return to work as an employee.

Other enquiries reveal the following:

1. Cash received from clients ($88 750) included payments for work done in the financial year ended 30 June 2016 to the value of $6750 and also $8000 prepaid for work to be done in the next financial year.

2. Materials and stationery on hand at 30 June 2017 were costed at $4500.

3. $14 250 was yet to be collected from clients for work done during the year ended 30 June 2017.

Required

A. Prepare a report for Lara which discloses the profitability of her business. Produce figures to substantiate the report.

B. Prepare the closing entries that would be needed on 30 June 2017.

C. Advise Lara as to whether she should dispose of the business and return to the advertising firm as an employee.