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James, on completing his MBA, sees a possibility to make a profit sell- ing computers. He has the opportunity to buy a job-lot of computers for €50 000, and he can buy a shop lease with two years to run for €5000 and pay an annual rent of €6000. He happens just to have inherited €60 000, so he starts a company and puts the money in as share capital. During the first year, he sells €30 000 of computers for €45 000. During the second year he sells no computers at all, and at the end of the year he sells the remaining inventory for €1000 and liquidates the company.

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

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

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M91719679

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