Preparing Financial Statements The Historical Preservation Guild of the Town of Lower Switchback was created more than twenty years ago to help restore and preserve the hallowed history of the town. The guild was formed with hopes of restoring the town to its past glory. Five years ago, the guild was able to persuade Elmer Switch, the great grandson of the town’s founder, to invest in their town. Elmer became a successful real estate developer after the family left Lower Switchback. Elmer formed a company, The Lower Switchback Corporation, to carry out the restoration. Many of the members of the guild and other town leaders invested in Elmer’s new corporation. The corporation purchases property identified by the guild and, with the help of the guild, restores the buildings and lists them on the town’s historical register. Each building is then sold to a new owner who is required to maintain the building in its original state and obtain approval from the guild for any significant change in its use.

To date, the corporation has restored 10 buildings. Its work, along with the guild’s restoration of the old courthouse, has had a significant impact on the town.

The purchase prices of the buildings acquired by the corporation have ranged from $275,000 to $410,000. The corporation spends between $150,000 and $250,000 on the restoration of each building. Much of the money needed to purchase and restore the buildings is borrowed from the Lower Switchback National Bank, a loyal supporter of the Historical Preservation Guild. To date, 8 of the 10 restored buildings have been sold and, in all cases, the buyer was able to obtain a bank loan and pay the corporation the full price.

a. Explain why the corporation needs financial statements.

b. Matching is an important part of the income measurement process for businesses. When the corporation undertakes the process of purchasing and restoring a building, how is the matching concept applied? What is the relevance for the management of the corporation? What is the relevance for the investors in the corporation?

c. Since each restoration project is unique, should the corporation prepare an income statement each year or for each project? Why?

d. How should the corporation value the two buildings that have not yet been sold?