The portfolio manager of a real estate investment trust (REIT) purchased 8 parcels of land for $1 mil each exactly one year ago. Recently, an appraiser values 4 of the parcels at $1.5 mil each and the other 4 at $700000 each. The fiscal year of the company is identical to the calendar year and you can ignore any income received from the properties and taxes.
a) What are the company’s accounting earnings and economic earnings if the company sells all the properties that have risen in value and keep the others at the end of the year?
b) Referring to the policy expressed in a. above, does it mean that the company will always show a gain on its real estate investment activities? Explain.