Flamingo Limited is a dancing school providing a wide variety of dance classes for all ages. The financial statements are prepared annually on 31 December. The Companys 2020 financial statements were issued on 31 March 2021.

A new accounting clerk, May was hired by Flamingo Limited on 1 January 2020. When the accountant, Yan, reviewed the financial statements prepared by May, she discovered the following improper accounting treatments.

(1) The Company provides ballet dance classes for a primary school in January 2021. The tuition fee is $32,000 and the whole amount was received on 30 December 2020. May recorded the total amount received as revenue earned on 30 December 2020.

(2) The Company did not report a legal case filed against the Company for possible infringement of copyright for $200,000 during the year in the notes to the financial statements. The hearing date is fixed on June 1, 2021.

(3) On 31 December, 2020, the Company purchased a van at cost of $200,000. The list price of the van was $250,000. May has recorded the van at the value of $250,000 and a gain of $50,000 was included in the income statement.

(4) The Owner of the Company has employed a web designer to design a personal website for him. May included the web designers salary of $70,000 in the income statement of the Company.

(5) On 1 January 2020, the Company purchased an audio equipment with cost of $ 300,000. May recorded it as an asset and made no depreciation adjustment as she found that the audio equipment is still in a very good condition at 31 December 2020. (Note: The fixed assets of the Company were depreciated by straight-line method over an estimated useful life of 5 years.)

(6) On 1 January 2020, a calculator costing $120 was purchased for office use. May recorded the cost of calculator as asset and depreciated by straight-line method with the estimated useful life of 5 years. Page 4 BHMH2101 2020/21 S2 Assignment 1 Required:

For each of the situations describe above, (a) identify the relevant accounting principle/concept that has been violated/departed. (12marks)

• Accounting Periods Provides users of financial statements with timely information, profit is measured for relatively short accounting periods of equal length.

• - Matching Principle - Requires that costs incurred to generate revenues must be recognised in the same period and offsets all expenses against revenue on a basis of cause of effect.

• - Recognition Principle: Revenue is normally recognised when earned (at the time goods are sold and services are rendered). Revenue is earned when title, risk, and rewards of ownership are transferred to the customer.

• Stable-dollar Principle Value of monetary unit or dollar is always stable.

• - Business Entity A business entity or legal entity is separated from the personal

  affairs of its owner.

• - Cost Principle Assets should be recorded in the statement of financial position at historical cost, i.e. amount paid to acquire the assets.

• - Going-concern assumption Business is a continuing enterprise.

• - Objectivity Principle Assets valuations should be objective and can be verified

• - Concept of Materiality:

  Materiality refers to the relative importance of an item or an event. It is a matter of professional judgement. The cost of immaterial items can directly be charged to expense rather than asset accounts for the purpose of convenience and cost-effective. This accounting treatment eliminates the need to prepare adjusting entries to depreciate these items.