BCG Laundry and Linen Pvt Ltd

Introduction

In April 2003, Harshad Chopra, a practicing senior accountant, came across an unusual business idea
while conducting the internal audit of a leading hospital chain. The idea was to provide laundry and
linen services to large hospitals. Harshad often found hospitals struggling with laundry services,
though it cost them less than even 0.1% of their overall budget. Being a critical activity for a hospital,
the hospitals were wary of outsourcing these services to small vendors for mainly two reasons –
quality and reliability. As regards quality, the hospitals demanded a strict hygiene protocol for
providing safe, uncontaminated and clean linen. The hospitals wanted reliability in terms of timely
supply to the different user units (hospitals) across the region.

Harshad shared this newfound business idea with his friend Deepanshu Ghatge(Deep), who was an
executive of a large company. Deep was immediately able to see that the business had considerable
growth potential in a country like India, where small, informal players provided the laundry service.
However, with the experience of working in a couple of start-ups, Deep insisted that they conducted a
detailed need-assessment survey and prepared the commercials. With deep contacts in the NCR
region, it was not difficult for Harshad and Deep to survey the administrative departments of major
hospitals for a need-assessment study. While Harshad focused on the need-assessment study by
contacting the large hospitals, Deep started working on the commercials of the project. Coming from
affluent families, both the partners knew that financing would not be difficult for them.

Both the partners found that the project had tremendous growth potentials. The project, however,
required large capital investment towards industrial-size washing machines, ironing machines,
furniture and fixtures, and transport vehicles. As the machines would be operating in three shifts a
day, more than 100 employees were required for cleaning, folding, ironing, loading and unloading,
and truck drivers.

Registration and pre-commencement activities:

The two friends hired a consultant to help them in the registration process, financing of the project
from leading banks, and working with the government departments for various subsidies relating to
start-ups. The consultant recommended them to register the firm as a private limited company so that
it would be easier to induct new investor into the business. The firm was registered by the name
“BCG Laundry and Linen Private Limited” (in short, BCG) on November 1, 2003. The first few
months were spent on locating a lease space, internal design of the leased space, recruiting employees
and labor contractors, acquisition and fittings of the machines, internal gas and water piping. While no
revenue transactions occurred till March 31,2004, the following pre-commencement transactions
occurred before March 31, 2004:
1. The firm spent 501 on the registration of the company and the consultant. The two promoters
decided to treat the amount as preliminary expenses and write it off over five years after the
commencement of the business.
2. Issue of total 500 shares with a face value of INR 10 to the two promoters. Both the
promoters bought an equal number of shares.
3. The company entered into a lease agreement for the laundry plant by paying a refundable
security deposit of 500. The monthly lease rental was 40, and the lease rental was payable at
the end of each month. The lease was effective from January 1, 2004. As the first three

1 All amounts mentioned in the case are in INR ‘000. The number of shares are in thousands and the face value
of the shares was INR 10.
 months were spent on internal design work, the partner decided to capitalize the rent for the
first three months by adding it to the cost of the fixture and fittings.
4. A 12% loan for 6,000 was taken from KAMDHENU bank to pay for the purchase of
machines. The loan (principal and interests) had a moratorium of 2 years, after which it was
to be repaid in 10 equal instalments. As of March 31, 2004, no amount was due or paid
towards interests. The firm decided to capitalize the interest accrued during the first three
months by adding it to the machine account.2
5. The following assets were purchase against cash:

Asset Amount Useful life

Machines 6,000 5 years
Furniture and fixtures 1,600 8 years
Vehicles 2,000 4 years
The above amount includes the cost of transportation and installation. Assets were all ready
for commercial usage on April 1, 2004, and the expected salvage value at the end of the
useful life was zero for all the assets.
6. On March 31, 2004, a start-up subsidy of 1,000 was credited to the firm’s bank account. The
amount was received from the state government as a capital subsidy grant. The firm decided
to write-it off against the machine account.
7. BCG had a no-cash policy, and all the receipts and payments were either through online mode
or through cheques.

Post-commencement activities:
BCG started servicing its first client during the first week of April. By the end of the first year of
operations (March 31, 2005), BCG was doing business with close to a dozen large hospitals in the
region. While most of the hospitals owned their linen (and BCG was providing only laundry services),
there were a couple of hospitals to whom BCG even supplied the linen. As the linen had a life of close
to two months, BCG decided to consider them as consumables and expense it in the year of purchase
itself. The major expenses for BCG were for rent, salaries (workers, drivers and managers),
depreciation and maintenance of machines, vehicle expenses (fuel, taxes, and maintenance), gas and
fuel expenses, chemicals (used for washing), and linen. The details of payments towards various
expenses and assets were as under:

Particulars Payment Remarks

Rent 480
Salaries of managers 5,200 April 2005 salary of 400 was paid in advance
Salaries of workers 22,000 March 2005 salaries of 2,000 were unpaid
Repair and maintenance 450
Vehicle fuel and taxes 600
Gas 7,500 Gas bill for March 2005 was not received.
The estimated bill amount was 500

2 As per GAAP, interest during the construction phase were allowed to be capitalized.
 Electricity 2,000 March 2005 bill for 300 was unpaid
Chemicals 5,000 The closing balance of accounts payable was
400. The physical inventory of chemicals on
March 31, 2005 was 600.
Linen 800 Invoice of 200 was unpaid at the end of the
year
Income tax for 2004-19 1,200 Excluding TDS
Machines 4,000 Bought (and installed) on October 1, 2004
New vehicle 100 Refer additional information
Interim dividend 10,000 Distributed in March 2005
Investments in shares 12,000
Purchase of new vehicle 100 Refer additional information

The firm receipts during the year include the following:

Particulars Receipts Remarks

Receipts against invoices (net
of TDS amounting to 10,000)
Sale of old vehicle
Issue of shares
Sale of shares investments
90,000 Refer additional information
200 A small truck that was bought before
March 31,2004, for 400 was sold on
December 31, 2004. The firm replaced it by a
new (larger) truck
2,000 100 new shares were issued at a premium of
10 per share
15,000

Additional information:

In addition to the above receipts and payments, the following additional information was collected by
the accountant:
1. A new vehicle was purchased on January 1, 2005 for 800. Only 100 was paid as down-
payment, and the remaining was financed by the auto manufacturer at 12% interest. The loan
was supposed to be paid in 10 equal annual instalments along with interest. The first
instalment was due on December 31, 2005.
2. Invoices raised during the year were for 120,000. The actual bad debt during the year was
1,000. The company decided to create a provision for doubtful debts at 2% of the amount
outstanding.
3. Investments were mostly for short term purposes and transacted very frequently. The
company did not hold any investment at the end of the year.
4. The tax accountant estimated the tax expenses to be 5,000.
5. No amount was paid towards principal and interest against the loan from KAMDHENU bank
during the year as the loan had a 2-year moratorium period.
(2) Required: Prepare the following in the excel format provided:
1. Prepare the (opening) balance sheet of BCG as at March 31, 2004, in the excel format
provided.
2. Balance Sheet as at March 31, 2005
3. Income statement for the year ended March 31, 2005
4. Cash Flow Statement for the year ended March 31, 2005 using the indirect method.