AS91174 Demonstrate understanding of accounting concepts for an entity that operates accounting subsystems (2021)

Question 1

All questions in this examination relate to Puzzling, a sole proprietor business owned by Andy. Puzzling is a manufacturer and supplier of New Zealand-themed puzzles for retail stores.

Question 1.a

Puzzling Trial Balance (extract) as at 31 March 2021


Inventory	40 000		Accounts payable	20 000
Cost of goods sold	203 000		Sales	487 000

Additional information

A number of puzzles, included in inventory, have been damaged. These puzzles have a cost of $8 000 and a net realisable value of $3 000 and are to be written down.

Explain why inventory will be reported as a current asset in Puzzling's Statement of Financial Position as at 31 March 2021.

Question 1.b

The NZ Framework includes the following information regarding an expense:

expenses are decreases in assets that result in decreases in equity, other than drawings
the historical cost of an asset is updated over time to reflect the effect of events that cause part of the historical cost to be no longer recoverable.

With reference to the definition and recognition criteria above, justify why:

the write down of inventory to its net realisable value will be recognised as an expense in Puzzling's Income Statement for the year ended 31 March 2021
the inventory asset will be reported in the Statement of Financial Position at $35 000.

Question 2

During the year, Puzzling purchased new machinery to make its puzzles. The machinery, purchased from Australia, cost $23 000 Australian dollars. Puzzling's accountant converted this to $25 000 New Zealand dollars to report the machinery in the property, plant, and equipment note to the Statement of Financial Position as at 31 March 2021.

Question 2.a

Use the monetary concept to explain why Puzzling's accountant reported the new machinery in New Zealand dollars when it was purchased from Australia.

Question 2.b

Justify why the new machinery is an asset that:

is controlled by Puzzling
has potential to produce economic benefits
meets the recognition criterion of faithful representation.

Question 3

Puzzles became so popular during the various levels of COVID-19 lockdown that customers were willing to pay in advance for the puzzles they particularly liked, to be delivered as soon as they became available.

Puzzling's half-yearly Statement of Financial Position prepared on 30 September 2020 included the following:

Puzzling Statement of Financial Position (extract) as at 30 September 2020

Current liabilities
Income in advance	6 000

Question 3.a

Use the accrual basis to explain why this $6000 is not reported in Puzzling's half-year Income Statement for the six months ended 30 September 2020.

Question 3.b

Justify why this current liability, income in advance $6 000, is:

relevant information
material in nature
a present obligation of Puzzling on 30 September 2020.