Question $1$: Compulsory

The Piano Warehouse Company Limited was established on $1$ January $2022$ for the

purpose of making pianos. Benson Munkumba, the managing director, had $20$ years'

experience in the manufacture of pianos and was an acknowledged technical expert in

the field. He had invested his life's savings of $$15,000$ in the company, and his decision

to launch the company reflected his desire for complete independence. Nevertheless,

his commitment to the company represented a considerable financial gamble. He paid

close attention to the management of its financial affairs and ensured that a careful

record of all transactions was kept.

The company's activities during the year ended $31$ December $2022$ were as follows:

$($i$)$ Four pianos had been built and sold for a total sum of $$8,000.$ Munkumba

calculated their cost of manufacture as follows:

$($ii$)$ Two pianos were $50\%$ completed at $31$ December $2022.$ Amapiano Music

Limited had agreed to buy them for a total of $$4,500$ and had made a down$-$

payment amounting to $20\%$ of the agreed sale price. Munkumba estimated their

costs of manufacture to $31$ December $2022$ as follows:

$($iii$)$ Two pianos had been rebuilt and sold for a total of $$3,000.$ Munkumba

paid $$1,800$ for them at an auction and had spent a further $$400$ on rebuilding

them. The sale of these two pianos was made under a hire purchase agreement

under which The Piano Warehouse Company received $$1,000$ on delivery and

two payments over the next two years plus interest of $15\%$ on the outstanding

balance.

At the end of the company's first financial year, Benson Munkumba was anxious that

the company's net profit to $31$ December $2022$ should be represented in the most

accurate manner. There appeared to be several alternative bases on which the

transactions for the year could be interpreted. It was clear to him that, in simple terms,

the net profit for the year should be calculated by deducting expenses from revenues.

As far as cash sales were concerned he saw no difficulty. But how should the pianos

that were $50\%$ completed be treated? Should the value of the work done up to $31$

December $2022$ be included in the profit of that year, or should it be carried forward to

the next year, when the work would be completed and the pianos sold? As regardis the

pianos sold under the hire purchase agreement, should profit be taken in $2022$ or

spread over the years in which a proportion of the revenue is received?

Required

$($a$)$ Examine the problems implied in the timing of the recognition of revenues.

illustrating your answer by the facts in the case of The Piano Warehouse.

$($b$)$ Discuss the significant accounting conventions that would be relevant to profit

determination in this case, and discuss their limitations in this context.

$($c$)$ Advise the company on alternative accounting treatments that could increase

$[20]$

the profit for the year.