(a) ABC Company specializes in restoring old flats. It purchased an old flat and revived it. It was purchased for $12,500,000. A new heating and air-conditioning system was added for $3,000,000. The flat was completely rewired and re-plumbed at a cost of $5,000,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $7,500,000.

The project was such a success that, an investor offered to purchase the flat for $17,500,000 five years after its restoration. The president of the company, Charlie Smith, decided that a modest return was all that was required and agreed to sell. It was only afterward that he was informed that the company had a $1,000,000 loss on the sale. Charlie did not believe that a loss was possible. "We sold that flat for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for five years. Why do we have a loss?" Straight-line method was used for depreciation of the restored flat, with an estimated useful life of 15 years and residual value of $250,000.

Required:

Explain to Charlie Smith how it would be possible to have a loss of $1,000,000. Suggest how his misunderstanding can be avoided in future.

(b) Below shows inventory of DEF company in the first quarter of 2019.

Assume DEF company uses perpetual inventory system instead of periodic system. How would the amount of cost of goods sol for the quarter ending March 31 and the cost of inventory on March 31 using FIFO and LIFO be different? Explain with calculations.

Transcribed Image Text:

Unit Cost per unit Beginning inventory, January 1 Purchase, January 4 Purchase, January 23 Sales, January 28 Purchase, February 14 Sales, February 20 Purchase, March 7 Sales, March 12 $5.00 3,000 5,000 5.10 6,000 5.15 (12,000) 8,000 (7,000) 4,000 (5,000) 5,000 (4,000) 6.00 5.25 6.00 4.95 6.15 Purchase, March 21 Sales, March 25 5.10 6.15 Unit Cost per unit Beginning inventory, January 1 Purchase, January 4 Purchase, January 23 Sales, January 28 Purchase, February 14 Sales, February 20 Purchase, March 7 Sales, March 12 $5.00 3,000 5,000 5.10 6,000 5.15 (12,000) 8,000 (7,000) 4,000 (5,000) 5,000 (4,000) 6.00 5.25 6.00 4.95 6.15 Purchase, March 21 Sales, March 25 5.10 6.15

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