Question

\(a) Identify and explain the accounting principle that requires the company to prepare financial statements annually. (b) Refer to Question 1 of Relax Hotel Company and assume the Company’s 2019 financial statements were issued on 31 March 2020. 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) The details of revenue earned from Century Bank, the corporate client of Relax Hotel Company, is amounted to $900,000 for the year 2019. (2) On 24 February 2020, Relax Hotel Company starts building a new hotel wing that will contain 500 rooms. (3) During the year 2019, Relax Hotel Company has purchased stationeries of $500 from Refresh Limited, a company owned by Company’s director. (4) During the year 2019, Relax Hotel Company was sued by a guest for compensation of $1,000,000 as his child almost drowned in the swimming pool of the hotel. The hearing date is fixed on June 1, 2020.

A new accounting clerk, John was hired by Relax Hotel Company on 1 January 2020 and he made the following errors: (1) Relax Hotel Company sold 580 gift vouchers with value of $500 each to the customers for cash and recorded as revenue earned in January 2020. 300 gift vouchers were redeemed in January 2020 for spa treatments and dining. (2) On 31 January 2020, the owner of Relax Hotel Company, lent $100,000 to the Company. John did not record this transaction thinking it is the owner’s money. (3) John did not provide depreciation for the hotel equipment in January 2020 as Relax Hotel Company has suffered losses for the period because of COVID-19. (4) On 31 January 2020, Relax Hotel Company has purchased a van for $211,500 on account. As John believed that the van could only be sold for $200,000, the van is reported on the statement of financial position at the value of $200,000 and a loss of $11,500 is shown in the income statement. Required: Refer to the information in Question 1, for each of the situations describe above, (a) identify the relevant accounting principle that has been violated. (b) indicate the effect (with dollar amount) of the above error on each of the financial statement elements at the end of January 2020 described in the column headings in the table below. Use the following symbols: O = overstated, U = understated and NE = no effect

Answer 1

a) Full disclosure principle, requires that a company's financial statements include disclosure notes. These notes include information that helps readers of the financial statements make investment and credit decisions.

1) "Yes"- Revenue Amount financial aspect

2)"Yes" - investment

3) "Yes" - expenses

4)"No"- contigent in nature

Transaction	principle violated	effect of transactio	"O"/"U" Amount
1 gift voucher	realisation	income statement	O $580
2 borrowings from owner $100,000 not recorded	seperate enity concept	balance sheet and cash	U- $100,000
3 not provide depreciation for equipment	conservatism	income statement balance sheet-asset	O O
4 van purchased	Cost principle	asset in balancesheet Income statement	O-$9500 U-$11500