Accounting concepts Questions

Question 1: State the appropriate concept for the following transactions. 1. Company A included a disclosure note describing a lawsuit it is defending even though the suit has not yet been settled. 2. Mr X, proprietor of Company XYZ does not list his personal house on the balance sheet of the Company.

3. Due to high inflation rate, the replacement cost of existing raw materials has increased by 30%. The company ignores this inflationary factor and records it at the value it has earlier bought. 4. A company has bought this property for $1m in 2003 but now the property has appreciated to $5m. The company is recording the property at $1m.

5. The success of the company is mainly attributed to the hard work of 3 employees X,Y and Z. However, these employees are not recorded as assets in the balance sheet.

6. A large company purchases a $150 chair and expenses it immediately instead of recording it as an asset and depreciating it over its useful life. 7. Ray is the owner of A Company. He has paid his private electricity bill from the business bank account and wants to show it as expenses of the business. Which concept is not being applied?

8. Company A includes $15,000 as provision for bad debts in its financial statements. 9. Mr A, the accountant of Company XYZ, changed the straight line method of depreciation to reducing balance method. Which concept is not being applied? 10. Fixed assets are generally shown at cost price. 11. The motor car purchased by the owner of a business for his private use, was not recorded in the books of the business. 12. A firm bought goods $ 300 by cash. The accountant recorded the entry in the purchase account, but did not record in the cash book. Which accounting concept is violated?

Question 2 In 2007, Mr Alex, a sole trader, receives Rs100,000 for services rendered. His customers still owe him $50,000 for services rendered in the same year. Operating expenses was $20,000 while accrued expenses amounted to $10,000. (a) Calculate his total revenue and expenses for the year 2007. (b) What is his profit for 2007? (c) Which accounting concept is being applied? Question 3 For each of the following examples, identify the relevant accounting concept and give a brief description of each concept:

(i) KipFit Gym Ltd is currently being sued by a customer who has been injured at the gym. The company has included a disclosure note describing the lawsuit it is defending, even though the suit has not yet been settled. (ii) Mr Millionaire, the owner of Fortune Ltd, has recently purchased a yacht, costing Rs1m, for his personal use. He wants to show this as an asset in the companys balance sheet. However, his accountant has explained to him that this cannot be done. (iii) Mr Miser, the owner of Economy Ltd, has bought a stapler costing Rs40. He believes that since he expects to use the stapler for at least 3 years, this should appear as an asset. The accountant has refused to show this as an asset. (iv) XYZ Store sold a television set to its customer, Mr Alan, for Rs1000 on 10 th May. Mr Alan pays on 9th June but XYZ records the sale on 10th May and not 9th June.