Level 2 Accounting, 2011

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Iris Dickerson
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1 SUPERVISOR S Level 2 Accounting, Describe the conceptual basis of accounting for a sole proprietor 9.30 am uesday Tuesday 1 November 2011 Credits: Three Check that the National Student Number (NSN) on your admission slip is the same as the number at the top of this page. You should attempt ALL the questions in this booklet. If you need more room for any answer, use the extra space provided at the back of this booklet. Check that this booklet has pages 2 8 in the correct order and that none of these pages is blank. YOU MUST HAND THIS BOOKLET TO THE SUPERVISOR AT THE END OF THE EXAMINATION. Achievement Criteria Achievement Achievement with Merit Achievement with Excellence Describe the conceptual basis of accounting. Describe and explain the conceptual basis of accounting. Overall level of performance Comprehensively describe and explain the conceptual basis of accounting. New Zealand Qualifications Authority, All rights reserved. No part of this publication may be reproduced by any means without the prior permission of the New Zealand Qualifications Authority.

2 2 You are advised to spend 30 minutes answering the questions in this booklet. The Statement of Financial Position and the Balance Sheet are the same financial statement. In this assessment, the Statement of Financial Position has been used. QUESTION ONE Paiea owns Paiea s Pedals, a bike shop that sells a variety of bicycles including mountain bikes and road bikes. (a) State the financial element defined by the following passage:... present obligations of the entity as a result of past events, the settlement of which is expected to result in an outflow of economic benefits from the entity. Source: New Zealand Framework (b) Paiea s Pedals purchased shop fixtures and fittings to display the latest models of competition road bicycles. Explain why the purchase of shop fixtures and fittings meets the definition of capital expenditure. (c) Explain how a Statement of Financial Position for Paiea s Pedals illustrates the going concern assumption.

3 (d) The office computer for Paiea s Pedals is depreciated using the diminishing value method. Explain why Paiea s Pedals uses the diminishing value method to depreciate the office computer. 3 During school holidays, Paiea s Pedals offers free workshops to existing and potential customers, on techniques to improve bike riding skills. Paiea estimates that the goodwill generated by the free workshops is valued at $ (e) Using the qualitative characteristic of reliability, explain why the goodwill generated by offering free workshops to customers cannot be recorded in the Statement of Financial Position of Paiea s Pedals.

4 4 QUESTION TWO Paiea offers bike repair and maintenance services in his workshop at Paiea s Pedals. Paiea reports in the property, plant and equipment note under the heading repair equipment, assets with a total cost of $ (a) A tool kit is used in the workshop to repair bikes. The tool kit, which cost $600, is not reported separately in the property, plant and equipment note. Instead, the tool kit is included in repair equipment. (i) State the qualitative characteristic being applied by NOT reporting the tool kit separately in the property, plant and equipment note. (ii) Explain why the qualitative characteristic identified above has been applied to the tool kit. (b) Explain how the accounting entity notion would have been applied to the reporting of repair equipment in Paiea s Pedals property, plant and equipment note.

5 (c) On Balance Sheet day, a customer paid a deposit of $500 to secure the purchase of the latest model of mountain bike. Explain in terms of the accrual basis how the income received in advance from the deposit will be reported in Paiea s Pedals : 5 (i) Income Statement (ii) Statement of Financial Position

6 6 QUESTION THREE Paiea wants to expand his business, and offer other types of bicycles, including unicycles and tandem bikes. This will require him to extend his shop premises. As part of a loan application to finance this project, Paiea included the 2009 and 2010 Income Statements for Paiea s Pedals. (a) Explain ONE limitation of an Income Statement. (b) State the qualitative characteristic that Paiea s Pedals is following by including both the 2009 and 2010 Income Statements in the loan application. (c) Explain why the bank manager would be interested in viewing both the 2009 and 2010 Income Statement figures.

7 7 Paiea s loan application was successful. (d) Explain why interest on the loan would be reported as an expense for Paiea s Pedals using the following definition: Expenses are decreases in economic benefits in the form of outflows, such as a decrease in assets or an increase in liabilities. This results in a decrease in equity, and does not relate to drawings by the owner. Source (adapted): New Zealand Framework. (e) Explain, using the recognition criterion for income below, why the servicing of bicycles on credit can be recognised as Bicycle Service Income for Paiea s Pedals. It is probable that any future economic benefit associated with the item will flow to the entity. Source: New Zealand Framework.

8 8 QUESTION NUMBER Extra space if required. Write the question number(s) if applicable

Level 2 Accounting, 2008

90220 2 902200 For Supervisor s Level 2 Accounting, 2008 90220 Describe the conceptual basis of accounting for a sole proprietor Credits: Three 9.30 am Thursday 27 November 2008 Check that the National