The Old Fix-It Is a Company Specializing in the Restoration

question 302

Essay

The Old Fix-It is a company specializing in the restoration of old homes. To showcase its work, the company purchased an old Victorian home in downtown Pittsburg, Kansas on January 2, 2010. The original home was purchased for $125,000. A new heating and air-conditioning system was added for $30,000. The house was completely rewired and re-plumbed at a cost of $50,000. Custom cabinets were added, and the floors and trim were refurbished to their original condition, at a cost of $75,000.
The project was such a success, that Old Fix-It decided on January 2, 2014, to purchase another very large home, this time in nearby Joplin, Missouri. On January 3, 2014, a realtor offered to purchase the home in Pittsburg for $175,000. He plans to lease it as luxury short-term apartments for visiting dignitaries. Mark Gibson, the president of Old Fix-It, decided that the $50,000 gain over purchase price was appropriate, and so he agreed to sell the showcase house. Only afterward did he learn that Old Fix-It had a loss of almost $30,000 on the sale. Mark does not believe that a loss is possible. "We sold that house for more than we paid for it," he said. "I know we put some money in it, but we had depreciated it for four years. How in the world can we have a loss?"
Due to the commercial aspects of the property and its expected traffic flow, the life of the showcase house was established as 15 years. Old Fix-It utilized straight-line depreciation with no salvage or residual value. Old Fix-It took full years' of depreciation in 2010 through 2013 and none in 2014 due to the sale date of January 3, 2014.
Required:
Write a short memo to Mr. Gibson explaining how it would be possible to have a loss. Address cost and depreciation as general numbers rather than specific values.

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Definitions:

Process Costing System

A process costing system assigns costs to masses of similar units, making it an effective method for organizations that produce goods in continuous processes, like chemicals or fuel.

Conversion Costs

The sum of direct labor and manufacturing overhead costs, representing the expenses incurred to convert raw materials into finished goods.

Process

A sequence of activities linked together for performing a particular task.

Perpetual Inventory Accounts

An inventory system that continuously keeps track of inventory levels and costs, updating the accounts after each purchase or sale.