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.