Question

On completing his MBA, James sees a possibility to make a profit selling computers. he has the opportunity to buy a job-lot of computers for 50,000 Euros, and he can buy a shop lease with two years 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 a company and puts the money in as a share capital

During the first year he sells 30,000 Euros of computers for 45,000 Euros. During the second year he sells no computers at all, and at the end of the year he sells the remaining inventory for 1000 Euros and liquidates the company.

Tasks

a. Calculate his accounting profit for each of the two years of operations (IFRS)

b. Explain why the assumptions made at the end of the first year led to the wrong profit estimate

c. What are the consequenses of the assumptions that proved to be incorrect.

Answer 1

Solution :

Note :All figures are in Euro .

Investment's Cost (2 year) = Computers' cost + Shop lease (2 yrs) + annual rent

= 30,000 + 5,000 + 2 * 6,000

= 57,000

Equity = 60000 (inhirited)

Sales = 45000 (1st year)

Gain from liquidation = 1000

If we average the investment (or cost) for each year, it is 57000/2 = 28500 in each year 1 and 2.

(a) :

Hence, Profit in Year 1 = Sales - Cost

= 45000 - 28500

= 16500 (profit)

Profit in Year 2 = Liquidation Value - Cost

= 1000 - 28500

= -27500 (loss) .

(b) -

As James chooses to exchange the organization in second year and offers no PCs by any means, he purposely happens to close down a business which was gainful and has got acknowledgment in the perspectives of clients. The piece estimation of stock was the unimportant measure of 1000 and it was a goof by James to the extent business esteem is concerned.

(c)

first presumption that James would maintain a business instantly subsequent to finishing MBA was not reasonable but rather the thought filled in as he could receive rewards in the extremely first year. Be that as it may, being a fledgling agent, he couldn't maintain it in the second year and on wards and altered his opinion. Along these lines, one must have a reasonable outlook before he/she puts such a great amount in any business.