Need help with correcting theory questions please!

[hello_kitty]

In an exam, for these sort of questions, is it appropriate to answer them using I.D.L as in identify the principle/characterisitc, then define it, and then link it??

Please correct my answers if possible Thanks Guys!


Amy has commenced a dress-design project that will last for two years. She decides to calculate profit at the end of the period
Reporting Period, The life of the business must be divided into periods of time, so that reports can be prepared, and the accounting records should reflect the reporting period of which the transaction occurs. According to taxation requirements, reports must be prepared at least yearly, therefore Amy cannot wait till the end of the two year period to calculate the profit 

Lara thought she would record her shop which she has just bought for $375 000 at $425 000 in anticipation of a rise in real estate prices
Conservatism, states that losses should only be recorded when probably and gains when certain, so that liabilities and expenses are not understated, and asset and revenues are not overstated. Lara is recording revenue that hasn’t been gained yet, therefore overstating her assets.

Karla was sometimes slack in completing or saving documents for each transaction. Consequently she had to make an estimate of the value of some transactions
Historical Cost, all transactions must be recorded at its original purchase price, as this value is verifiable by source document evidence. With Karla estimating the value of some transactions means that there are not any source documents to verify this, and the estimate is not free from bias.

The Hwang Brothers are twins and run successful small businesses. Andy Hwang is the owner of Andy’s Breads and Kevin is the owner of Kevin’s Books.
The transactions of both businesses are combined and recorded in one set of accounting records
Entity Principle, the business is assumed to be a separate accounting entity from the owner and other entities, and its records should be kept on this basis. Andy and Kevin can’t combine their business records in one set of accounting records because they are separate entities.

[nacho]

Quickly reading over, they seem fine, could you post the actual questions though?
Just a note on the second question,
When you define, only give the appropriate part of the definition.
For example, if you see, that question has nothing to do with expenses or losses, you needn't write "states that losses should only be recorded when probable... so that liabilities and expenses are not understated, revenues not overstated"
And, the property itself isn't a revenue, so your link part is incorrect in that you wrote "lara is recording revenue that hasn't been gained yet". (Note, the better word to use is "earned" in any case, gain could have implications of received i.e cash received

Could you post the question for question 3? i'm not entirely sure whether your link part will gain full marks.

sorry if i've made any mistakes

[hello_kitty]

Oh okay so what would be an appropriate answer for 2? and 3?

The question is For each of the following scenarios, an accounting principle hsa been breached or followed. Identify which has been breached and justify your choice.

But also just clarifying, in an exam i am able to use IDL??

Tahank!

[luffy]

In an exam, for these sort of questions, is it appropriate to answer them using I.D.L as in identify the principle/characterisitc, then define it, and then link it??

Please correct my answers if possible Thanks Guys!


Amy has commenced a dress-design project that will last for two years. She decides to calculate profit at the end of the period
Reporting Period, The life of the business must be divided into periods of time, so that reports can be prepared, and the accounting records should reflect the reporting period of which the transaction occurs. According to taxation requirements, reports must be prepared at least yearly, therefore Amy cannot wait till the end of the two year period to calculate the profit 

Lara thought she would record her shop which she has just bought for $375 000 at $425 000 in anticipation of a rise in real estate prices
Conservatism, states that losses should only be recorded when probably and gains when certain, so that liabilities and expenses are not understated, and asset and revenues are not overstated. Lara is recording revenue that hasn’t been gained yet, therefore overstating her assets.

Karla was sometimes slack in completing or saving documents for each transaction. Consequently she had to make an estimate of the value of some transactions
Historical Cost, all transactions must be recorded at its original purchase price, as this value is verifiable by source document evidence. With Karla estimating the value of some transactions means that there are not any source documents to verify this, and the estimate is not free from bias.

The Hwang Brothers are twins and run successful small businesses. Andy Hwang is the owner of Andy’s Breads and Kevin is the owner of Kevin’s Books.
The transactions of both businesses are combined and recorded in one set of accounting records
Entity Principle, the business is assumed to be a separate accounting entity from the owner and other entities, and its records should be kept on this basis. Andy and Kevin can’t combine their business records in one set of accounting records because they are separate entities.

I don't know if my answers will get you full marks for q2 and 3... but these would be my responses:

2)Lara thought she would record her shop which she has just bought for $375 000 at $425 000 in anticipation of a rise in real estate prices.
In my opinion, this has two answers:
Historical Cost, which states that transactions should be recorded at their original purchase price in order to ensure they can be verified by source documents, has been breached. Lara should record the value at $375000 because this is the value, which is free from bias.

Conservatism, which states that assets/gains should be understated when uncertain, has been breached. Lara should record the value of the shop at $375000 because this is the most conservative price, in order to ensure assets are not overstated.
I don't think my conservatism answer would gain full marks..

3) Karla was sometimes slack in completing or saving documents for each transaction. Consequently she had to make an estimate of the value of some transactions.
- I think your answer is fine.... I can't see anything you have missed.

[nacho]

But also just clarifying, in an exam i am able to use IDL??

Yea, most definitely, this is the model we are told to use.

I don't know if my answers will get you full marks for q2 and 3... but these would be my responses:

2)Lara thought she would record her shop which she has just bought for $375 000 at $425 000 in anticipation of a rise in real estate prices.
In my opinion, this has two answers:
Historical Cost, which states that transactions should be recorded at their original purchase price in order to ensure they can be verified by source documents, has been breached. Lara should record the value at $375000 because this is the value, which is free from bias.

Conservatism, which states that assets/gains should be understated when uncertain, has been breached. Lara should record the value of the shop at $375000 because this is the most conservative price, in order to ensure assets are not overstated.
I don't think my conservatism answer would gain full marks..

3) Karla was sometimes slack in completing or saving documents for each transaction. Consequently she had to make an estimate of the value of some transactions.
- I think your answer is fine.... I can't see anything you have missed.

Also, in my opinion, it'd be safer to go with conservatism for this one. Because there is a clash between relevance and historical cost when it comes to the value in regards to property and it's market value.
I was just unsure about question 3 because the link may contain too much information? I'm just being picky here, but historical cost's definition is only in regards to source documents (i think..), and whilst it links with reliability (free from bias) it does not explcitly say so.. Probably right though, im just being unnecessarily pedantic (and perhaps incorrect..)

Edit: But then again, it does only say "Which accounting principle has been breached" rather than "explain why.."

[hello_kitty]

Alright cool! because i thought it was pointless to state the definition, but as long as we link it with the questions it is okay right?

ALso how would you explain why Wages Incurred is an expense? Using the correct parts of the defintioin?

and what is Goodwill and why is it a current asset??

Thanks again guys!

[nacho]

Alright cool! because i thought it was pointless to state the definition, but as long as we link it with the questions it is okay right?

ALso how would you explain why Wages Incurred is an expense? Using the correct parts of the defintioin?

and what is Goodwill and why is it a current asset??

Thanks again guys!

Expense: is a consumption of an economic benefit which reduces owner's equity

I'm not to sure about goodwill, and i don't think we need to know it (the definition of the word and such).. but it has to do with the fact that the company is worth more than it's A - L if it were being sold cause of like it's built customer base.
You could perhaps use it to answer questions such as "Explain why this franchise is worth more than its A - L ..."

[eeps]

Goodwill is an intangible asset. It can't be classified in other words. It's beyond VCE Accounting; I remember Fyrefly posting about it a while back. It's never come up on any exam, so I wouldn't worry about it. If customers are satisfied, and happy with the business, they may pay more into the business. Customer-based relationships with the business.

[hello_kitty]

THanks
but for wages incurred - so is it a consumption of an economic benefit in the from of a DECREASE IN ASSETS OR INCREASE IN LIABITLIES??? which reduces owner's equity?

[hello_kitty]

Also, nacho, you know how you said

When you define, only give the appropriate part of the definition.
For example, if you see, that question has nothing to do with expenses or losses, you needn't write "states that losses should only be recorded when probable... so that liabilities and expenses are not understated, revenues not overstated"
And, the property itself isn't a revenue, so your link part is incorrect in that you wrote "lara is recording revenue that hasn't been gained yet". (Note, the better word to use is "earned" in any case, gain could have implications of received i.e cash received

Would it be overstating assets instead of revenues? or both? And i shouldnt include in my deifnition that conservatism is when losses are recorded whe nprobable, so that liabiltieis and expenses are not understated..and instaed just say conservatism states that gains shsould only be recorded when certain, so that assets and revenues are not overstated (or do i just say so that assets are overstated, vice versa??)

[nacho]

Also, nacho, you know how you said

When you define, only give the appropriate part of the definition.
For example, if you see, that question has nothing to do with expenses or losses, you needn't write "states that losses should only be recorded when probable... so that liabilities and expenses are not understated, revenues not overstated"
And, the property itself isn't a revenue, so your link part is incorrect in that you wrote "lara is recording revenue that hasn't been gained yet". (Note, the better word to use is "earned" in any case, gain could have implications of received i.e cash received

Would it be overstating assets instead of revenues? or both? And i shouldnt include in my deifnition that conservatism is when losses are recorded whe nprobable, so that liabiltieis and expenses are not understated..and instaed just say conservatism states that gains shsould only be recorded when certain, so that assets and revenues are not overstated (or do i just say so that assets are overstated, vice versa??)

hey, what i meant was, you have to be specific in terms of your definition, as stated by the vcaa who said "Students
are advised to avoid rote-learned definitions and not to make statements such as ‘either a decrease in assets or a
reduction in an inflow’. When goods are donated it is clear that an asset has been decreased (that is, stock) and inflows
are not affected." - 2009 Assessment report (btw, this was a comment in regards to a donation of goods, so that's what it's referring to in the last sentence)
So,  in your question,
as premises isn't a revenue, you would not say overstates revenue, but you would say overstates assets.
In your definition for conservatism, in this particular case, you would not include the whole deal on losses, because this question has nothing to do with losses (do you get what i'm saying?)

[hello_kitty]

Ah alright! i get it thanks!

[hello_kitty]

I'm unsure on what the follow ledger accounts are and why they are classified as what they are??
This is a question relating closing the general ledger!

Acc Dep't Equipment (Credit Balance)

Dep't of Equipment (Debit Balance)

[Camo]

Depreciation of equipment?

[luffy]

Depreciation of equipment is an outflow of economic benefit (i.e. the equipment) resulting in a decrease in assets and decrease in profit. Thus, its an expense, which means when increasing the account, you must debit it.

Accumulated Depreciation reduces the "value" of your equipment account. Therefore, (as it clearly is not a liability) it is a negative asset account. As you are decreasing the asset account, if you want to "increase" the negative Asset account, you would credit it.