Chapter 1 - Accounting Theory Task B

1. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
Page | 1
Name
Chapter 1 – Task B
Question 1
High Street School Uniforms, a small retail business selling a range of uniforms for students at
nearby schools, operates two stores in Balwyn and Richmond. The building in which the Balwyn
store is located was purchased in 2010 for $470,000, while the Richmond building was bought in
2003 for $250,000. Both properties have been listed at their original purchase prices in the
respective Balance Sheets of each firm.
The owner of High Street School Uniforms has decided to have re‐value the buildings and, based on
his research, he estimates that the current market value of the Balwyn property is $420,000 and the
Richmond property is worth $540,000.
a) Explain the value at which each building should be valued in the Balance Sheet according to
the Historical Cost Principle.
Explanation
3 marks
b) Explain the value at which each building should be valued in the Balance Sheet according to
the Conservatism Principle.
Explanation
3 marks

2. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
Page | 2
Question 2
Rod Tidwell owns and operates two small businesses:
 Rod’s Racers – a car dealership in Kew selling new and used vehicles
 Cleaner Cars – a business in Camberwell cleaning the cars of customers.
Both businesses were started in 2011 but Rod has only calculated the firms’ profits once since
operations began.
a) Explain how Rod has breached an Accounting Principle.
Accounting Principle
Explanation
1 + 2 = 3 marks
Given that both of Rod’s businesses are similar and have many of the same customers, Rod has
decided to combine the financial reports of each firm into one overall consolidated set of reports. In
addition, both firms have a phone plan with Telstra, so Rod often pays the accounts for both firms
from the bank account of Rod’s Racers.
b) Explain how Rod has breached an Accounting Principle in this situation.
Accounting Principle
Explanation
1 + 2 = 3 marks

3. VCE ACCOUNTING
UNIT 3 – RECORDING AND REPORTING FOR A TRADING BUSINESS
CHAPTER 1 – THE NATURE OF ACCOUNTING
Page | 3
The car dealership in Kew has four vehicles remaining from last year’s inventory that it has been
unable to sell. Each of these vehicles has a sale price of $35,000 and cost the business $27,000 to
buy. Because they are now a year old, Rod believes he can only sell the vehicles for $25,000 and, as
such, believes he should write down their value in the Balance Sheet. In previous years, the business
has always written down the value of old stock to its current market value.
c) Explain how Rod should value these vehicles in the Balance Sheet according to the
Consistency Principle.
Explanation
2 marks
Total /14 marks