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Exercise 3 A sole trader Malcolm buys inventory of 20 motorcycles, each costing $1000. During the year he sells 17 vehicles at $1500 each. How should the remaining machines be valued at 31 December in the following circumstances? A. He is forced to close down his business at the end of the year and the remaining machines will realise only $800 each in a forced sale. B. He intends to continue his business into the next year. Exercise 4 Which accounting assumption or principle dictates that the owner of a company personally acquires an office building, and rents space in it to his company at $5,000 per month? This rent expenditure is a valid expense to the company, and is taxable income to the owner. a. Business entity assumption. b. Monetary unit assumption. c. Cost principle. d. Basic accounting equation. Exercise 5 Which accounting assumption or principle dictates that the owner of a business loans $100,000 to his company? This is recorded by the company as a liability, and by the owner as a loan receivable. Exercise 6 A business entity is owned and run by Alpha, Beta and Gamma and all partners have unlimited liability. What type of business is this an example of? A. Sole trader B. Partnership C. Limited liability company D. A \& C E. B&C F. None of the above Find correct accounting principle and match revenue recognition principle, matching principle, concept of accounting consistency, business entity concept, monetary unit assumption, going concern concept full disclosure principle, historical cost principle, accrual principle, time period assumption 1. principle states that all business entities should be accounted for separately 2. businesses should be treated as if they will continue to operate indefinitely or at least long enough to accomplish their objectives 3. expenses should be recognized and recorded when those expenses can be matched with the revenues those expenses helped to generate 4. all business transactions and relationships can be expressed in terms of money or monetary units 5. companies should use the same accounting methods to record similar transactions over time 6. businesses ean divide up their activities into artificial time periods - periodicity assumption or time period assumption 7. businesses must record and account for most assets and liabilities at their purchase or acquisition price 8. revenues and expenses are recorded as they are eamed and incurred, not necessarily when cash is received or paid Exercise 2 Identify and fill in the blanks 1. Under the accrual basis of accounting, income is recognized when regardless of when ; and expenses are recognized when regardless of when 2. refers to the assumption than an entity will exist indefinitely in the absence of evidence that suggest otherwise. 3. The means that the indefinite life of an entity is subdivided into equal periods. 4. means that a specific business enterprise is considered one accounting entity. separate and distinct from its owners. 5. What are the two characteristics of the monetary unit assumption? 6. The states that expenses are recognized in the period the related revenues are earned
