Question 2 (25 marks) Part I (a) Describe Notes to the Financial Statements. Identify what is the accounting concept that support for preparing the notes. (3 marks) (b) Refer to Question 1 of Always Fit Company and assume the Companys financial statements were issued on March 25, 2019. State Yes or No whether situation (1) to (4) below require disclosure with the financial statements. If Yes, identify the nature of disclosure. If No, give the reason to support. (1) On February 28, 2019, there was serious water leakage problem in several studio classrooms. It was expected to take three months for repair. (2) The information about the lender, the interest rate and the repayment schedule of the Notes payable. (3) A customer fell down in studios toilet and his arm was seriously injured and the company was sued by the customer for medical compensation of $100,000 in 2018. The hearing date is fixed on April 25, 2019. (4) On February 27, 2019, the companys accountant found $300 cash was stolen by a parttime staff. (12 marks) Part II (a) Identify and explain relevant accounting principle(s) that determine profit of a company. (4 marks) (b) Refer to Question 1, Always Fit Company entered an agreement to provide tailored-made fitness class for HKCC. The contract price was $24,000. The class was held between November 1, 2018 and February 28, 2019 with four lessons per month. On December 31, 2018, Always Fit Company received a partial payment of $10,000 from HKCC. The company did not make any monthly adjustment and only recorded this amount as service revenue for this particular contract for the year ended December 31, 2018. i) Identify and explain relevant accounting concept/principle that has been violated for the above situation. (3 marks) ii) Indicate the effect (with dollar amount) of the above error on each of the financial statement elements described in the column headings in the table below. Use the following symbols: O = overstated, U = understated and NE = no effect. Assets Liabilities Equity

Error (3 marks)