Question

Assignment 1 Question 120 marka) At the end of 1999, two employees at Zest Manufacturing Harne Healthick and Nomwolis Loud-Racket decided to quit their jobs. They had 25 years of experience in manufacturing equipment for Xtra Active Gyms across the country They collected a total of N$ 500 000 between the two of them and planned to open their Eym, based on their expertise. After brainstorming they decided to register the entity under the name Health and kickstart Gym CHKG). On March 2000, after successfully completing the registration, the friends opened their gym. In an attempt to gain entry into the fitness market. HKG decided to run a special offer to entice Fitness freaks to move from other ens to HKG. The special ran for the first month only and specified these conditions: • All members who joined in the first month and signed a 2 year contract would pay a low fee of N$ 1800 for the entire 3 year period at no additional cost. • As per the agreement, the payment would have to be made in the first month that is March 2000 At the end of March, HG noted that 1 250 people had taken avantage of the offer and paid the NS 1 800 before month end. At the end of the first financial year 28 February 2001, the couvant showed the entire amount received as revenue for the current year. An amount N$ 2 250 000 was showed on the statement of profit or loss & other comprehensive income for the year ended 28 February 2001. Health and kickstart are uncertain as to the treatment of this and have approached you to find out whether the cash received from all 1 250 gym members have been correctly recorded. You are required to: 1.1 Advise HKG as to whether the cash received as at 28 February 2001 was appropriately treated as income using the conceptual framework. If it was incorrect, please provide the correct treatment. (NB: Kindly refer to the Conceptual Framework's definitions and recognition criteria of the elements of the financial statements.) [15 marks 1.2 Explain the objective of general purpose financial reporting, 15 marks] Question 2 (40 marks]

Answer 1

Accrual concept is the most fundamental principle of accounting which requires recording revenues when they are earned and not when they are received in cash, and recording expenses when they are incurred and not when they are paid.

GAAP allows preparation of financial statements on accrual basis only (and not on cash basis). This is because under accrual concept revenues and expenses are recorded in the period to which they relate and not when they are received or paid. Application of accrual concept results in accurate reporting of net income, assets, liabilities and retained earnings which improves analysis of the company’s financial performance and financial position over different periods.

At the end of each reporting period, companies pass adjusting journal entries to record any accruals, for example accrual of utilities expense, interest expense, accrual of wages and salaries, adjustment of prepayments, etc.

In the given case the contract is made for three years.so the amount of 22,50,000 should be distributed equally over the contract period of three years equally

So the adopted method of accounting is wrong.only 1/3 of 22,50,000 should be recognized in profit and loss a/c for the current year.