On completing his MBA, James sees a possibility to make a profit selling computers. he has...

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Accounting

On completing his MBA, James sees a possibility to make a profitselling computers. he has the opportunity to buy a job-lot ofcomputers for 50,000 Euros, and he can buy a shop lease with twoyears to run for 5,000 Euros and pay an annual rent of 6,000 Euros.He happens just to have inherited 60,000 Euros, so he starts acompany and puts the money in as a share capital
During the first year he sells 30,000 Euros of computers for45,000 Euros. During the second year he sells no computers at all,and at the end of the year he sells the remaining inventory for1000 Euros and liquidates the company.
Tasks
a. Calculate his accounting profit for each of the twoyears of operations (IFRS)
b. Explain why the assumptions made at the end of thefirst year led to the wrong profit estimate
c. What are the consequenses of the assumptions thatproved to be incorrect.

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4.4 Ratings (761 Votes)

Solution Note All figures are in Euro Investments Cost 2 year Computers cost Shop lease 2 yrs annual rent 30000 5000 2 6000 57000 Equity 60000 inhirited Sales 45000 1st year Gain from liquidation 1000 If we average the investment or cost See Answer

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On completing his MBA, James sees a possibility to make a profitselling computers. he has the opportunity to buy a job-lot ofcomputers for 50,000 Euros, and he can buy a shop lease with twoyears to run for 5,000 Euros and pay an annual rent of 6,000 Euros.He happens just to have inherited 60,000 Euros, so he starts acompany and puts the money in as a share capitalDuring the first year he sells 30,000 Euros of computers for45,000 Euros. During the second year he sells no computers at all,and at the end of the year he sells the remaining inventory for1000 Euros and liquidates the company.Tasksa. Calculate his accounting profit for each of the twoyears of operations (IFRS)b. Explain why the assumptions made at the end of thefirst year led to the wrong profit estimatec. What are the consequenses of the assumptions thatproved to be incorrect.