Question 1: Business Entity Concept

Scenario: Sarah owns a small bakery called “Sweet Treats.” During the month of January, the following transactions occurred:

• Sarah withdrew $2,000 cash from the bakery to pay her personal credit card bill
• She purchased a new oven for the bakery, worth $5,000
• Sarah used her personal car (valued at $15,000) to deliver bakery orders, but did not formally transfer ownership to the business
• She paid $800 for her daughter’s school fees using the bakery’s business account
• The bakery earned $12,000 in sales revenue

Required: a) Identify which transactions violate the business entity concept and explain why.

1. b) Explain how each violation should be correctly recorded in the bakery’s books.
2. c) What potential problems could arise if Sarah continues to mix personal and business transactions?

Question 2: Matching and Realisation Concepts

Scenario: ABC Electronics sells computers and offers warranty services. The following events occurred in December 2024:

• On December 15, the company sold 50 computers for $100,000 on credit. Payment is due in 30 days (January 2025)
• The cost of these 50 computers was $60,000
• On December 20, a customer paid $5,000 advance for computers that will be delivered in February 2025
• On December 28, the company paid $3,000 for a 12-month insurance policy covering January to December 2025
• On December 30, employees worked and earned salaries of $8,000, but the payment will be made on January 5, 2025

Required: a) For each transaction, determine in which accounting period the revenue or expense should be recognised. Provide clear reasoning based on the matching and realisation concepts.

2024. b) Calculate the total revenue and total expenses that should be recorded in December 2024.
2025. c) Explain why the timing of cash receipt or payment does not always determine when revenue or expense should be recognised.

Question 3: Cost Concept and Going Concern

Scenario: Green Valley Ltd. purchased the following assets:

The company’s accountant wants to update the balance sheet to show current market values to “present a more accurate picture” of the company’s financial position.

Required: a) Explain whether the accountant’s proposal is correct according to the cost concept. Support your answer with clear reasoning.

1. b) Discuss the advantages and disadvantages of recording assets at historical cost versus market value.
2. c) How does the going concern concept relate to the cost concept in this scenario?
3. d) Under what circumstances might assets be valued at amounts different from historical cost?

Question 4: Dual Aspect Concept

Scenario: The following independent transactions occurred in XYZ Trading Company during March 2024:

Transaction 1: Purchased goods worth $25,000 on credit from suppliers

Transaction 2: Owner invested additional capital of $50,000 cash into the business

Transaction 3: Paid rent for office premises $3,000 in cash

Transaction 4: Sold goods costing $10,000 for $15,000 cash

Transaction 5: Borrowed $30,000 from the bank (deposited into business bank account)

Transaction 6: Purchased office equipment for $8,000, paying $3,000 cash and the balance on credit

Required: a) For each transaction, identify the two accounts affected and explain whether each account increases or decreases.

1. b) Show how each transaction maintains the accounting equation: Assets = Liabilities + Owner’s Equity
2. c) Prepare a table showing the dual effect of each transaction with proper classifications (Asset, Liability, or Equity).

Question 5: Comprehensive Application of Multiple Concepts

Scenario: Bright Future Coaching Institute started operations on January 1, 2024. The following information is available:

• The owner, Mr Kumar, invested $100,000 cash and a building valued at $200,000 (purchased by him 2 years ago for $180,000)
• The institute received $60,000 as advance fees from students for courses to be conducted between February and May 2024
• In January, the institute conducted classes and earned fees of $40,000. Out of this, $25,000 was received in cash, and $15,000 is receivable in February
• Salaries of $12,000 for January were paid in cash
• Mr Kumar used $5,000 from the institute’s cash to pay his personal house loan
• The institute purchased furniture for $15,000 cash
• The electricity bill for January, amounting to $800 will be paid in February

Required: a) Identify which accounting concepts apply to each of the above transactions. List at least TWO concepts for each transaction.

1. b) Calculate the correct revenue and expenses for January 2024, explaining your treatment of each item.
2. c) At what value should the building be recorded in the institute’s books? Explain your answer.
3. d) How should the advance fees of $60,000 be treated in January 2024? In which accounting period should this be recognised as revenue?
4. e) What is the total capital invested by Mr Kumar according to the business entity concept?