You are involved in the review of financial statements of various entities and come across the following situations. (a) Fatu Limited buys its merchandise by the lorry and trans-load. Fatu Limited expenses the transportation costs in the period incurred. Such transportation costs although varying from period to period, are always material in amount. (b) The Kahrabaa Company has purchased a large amount of generators over a number of years. Kahrabaa Company has decided that because the general price level has changed materially over the years, they will issue only price-level adjusted financial statements. (c) The inventory of a retailing enterprise contains a large quantity of an item for which demand has largely disappeared. The manager of the retailing enterprise insists that the item be included in the statement of financial position on the grounds that the item is not subject to deterioration and customers demand for it may revive. (d) Likole Nikalu Enterprise entered into an agreement with its suppliers to supply goods at Sh.290 per unit. In October 2019, the purchasing manager was able to negotiate a special price and acquired 10,000 units at Sh.250 per unit. The difference between the agreed price of Sh.290 per unit and the purchase price of Sh. 250 per unit had been recognised as revenue. (e) In an attempt to report a desired amount of operating profit, depreciation for the year on a secondhand truck purchased on January 2, 2019 for Sh.1,800,000 was provided at Sh.100,000. The truck had an estimated residual value of Sh.200,000 and a useful life of 4 years. (f) Leasehold improvements with an estimated useful life of eight years were completed early in the year 2019 at a cost of Sh.9,000,000. The company had a five-year non-renewable lease on the property to which the improvements were made. The company decided to amortise the lease improvements over eight years. Required: For each item, determine which accounting assumption or principle (s) if any, have been violated and explain the nature of the violation and for each violation indicate the correct treatment. If you believe the treatment is proper defend your position. Note: More than one violation may have occurred but list for each situation only the most applicable main violation.

You are involved in the review of financial statements of various entities and come across the following situations. (a) Fatu Limited buys its merchandise by the lorry and trans-load. Fatu Limited expenses the transportation costs in the period incurred. Such transportation costs although varying from period to period, are always material in amount. (b) The Kahrabaa Company has purchased a large amount of generators over a number of years. Kahrabaa Company has decided that because the general price level has changed materially over the years, they will issue only price-level adjusted financial statements. (C) The inventory of a retailing enterprise contains a large quantity of an item for which demand has largely disappeared. The manager of the retailing enterprise insists that the item be included in the statement of financial position on the grounds that the item is not subject to deterioration and customer's demand for it may revive. (d) Likole Nikalu Enterprise entered into an agreement with its suppliers to supply goods at Sh.290 per unit. In October 2019, the purchasing manager was able to negotiate a special price and acquired 10,000 units at Sh.250 per unit. The difference between the agreed price of Sh.290 per unit and the purchase price of Sh. 250 per unit had been recognised as revenue. (e) In an attempt to report a desired amount of operating profit, depreciation for the year on a secondhand truck purchased on January 2, 2019 for Sh.1,800,000 was provided at Sh.100,000. The truck had an estimated residual value of Sh.200,000 and a useful life of 4 years. (1) Leasehold improvements with an estimated useful life of eight years were completed early in the year 2019 at a cost of Sh.9,000,000. The company had a five-year non-renewable lease on the property to which the improvements were made. The company decided to amortise the lease improvements over eight years. Required: For each item, determine which accounting assumption or principle (s) if any, have been violated and explain the nature of the violation and for each violation indicate the correct treatment. If you believe the treatment is proper defend your position. Note: More than one violation may have occurred but list for each situation only the most applicable main violation. (Total: 20 marks) You are involved in the review of financial statements of various entities and come across the following situations. (a) Fatu Limited buys its merchandise by the lorry and trans-load. Fatu Limited expenses the transportation costs in the period incurred. Such transportation costs although varying from period to period, are always material in amount. (b) The Kahrabaa Company has purchased a large amount of generators over a number of years. Kahrabaa Company has decided that because the general price level has changed materially over the years, they will issue only price-level adjusted financial statements. (C) The inventory of a retailing enterprise contains a large quantity of an item for which demand has largely disappeared. The manager of the retailing enterprise insists that the item be included in the statement of financial position on the grounds that the item is not subject to deterioration and customer's demand for it may revive. (d) Likole Nikalu Enterprise entered into an agreement with its suppliers to supply goods at Sh.290 per unit. In October 2019, the purchasing manager was able to negotiate a special price and acquired 10,000 units at Sh.250 per unit. The difference between the agreed price of Sh.290 per unit and the purchase price of Sh. 250 per unit had been recognised as revenue. (e) In an attempt to report a desired amount of operating profit, depreciation for the year on a secondhand truck purchased on January 2, 2019 for Sh.1,800,000 was provided at Sh.100,000. The truck had an estimated residual value of Sh.200,000 and a useful life of 4 years. (1) Leasehold improvements with an estimated useful life of eight years were completed early in the year 2019 at a cost of Sh.9,000,000. The company had a five-year non-renewable lease on the property to which the improvements were made. The company decided to amortise the lease improvements over eight years. Required: For each item, determine which accounting assumption or principle (s) if any, have been violated and explain the nature of the violation and for each violation indicate the correct treatment. If you believe the treatment is proper defend your position. Note: More than one violation may have occurred but list for each situation only the most applicable main violation. (Total: 20 marks)