"Q1(a) Or (b)1. Adanna opened Ceramics Unlimited (a ceramic studio) on November 1st 2016 in leasedoffice space, paying the first month's rent of $300 and a $1,000 security deposit with a checkon her personal account.-Solution: She paid Rent of $300 for first month on her personal account which is disclosed inthe income statement but was paid from her personal account. She has violated economicentity assumptionShe has paid a security deposit of $1000 and was paid from personal account. There is aviolation of Economic entity assumption. The transcation did not show in the financialstatement. This should have been shown as security deposit in asset side of balance sheet.Hence there is a violation of full disclosure principle.1. Ceramics Unlimited sells ceramic pieces as well as offers training courses that teachparticipants how to make their own ceramics pieces.Solution:She is running two businesses –selling of ceramic pieces and other one training course.There should have been shown separately in the income statement with consolidation.But was not shown separately. There is a violation of full disclosure principle.2. Adanna had been making ceramic pieces as a hobby. She took molds and tools, worthabout $7,500, from her home in order to start the studio.-Solution:She took molds and tools worth $7500 from her house to start the studio. But thistranscation is not recorded. Hence violation of Full disclosure principle. This asset shouldbe recorded at cost less depreciation. She has violated cost principle.3. Adanna also bought a new firing kiln (oven) to start the business. The new kiln had a listprice of $5,000. This is not recorded. Hence there is a violation of full disclosure principle.Adanna wrote a check on her personal checking account.Hence there is an violation ofEconomic entity principle.1The first customer of Ceramics Unlimited’s paid a total of $1,400 to attend classes fortwo months. Adanna opened a checking account in the company's name with the$1,400.- Solution: $1400 paid by customer is an advance and this is not shown in Balancesheet. There is a violation of full disclosure principle. In fact it is shown as income.There is a violation of revenue recognition principle.4 Ceramics Unlimited has conducted classes for one month and has sold some ceramicpieces for $3,000 cash. Cost incurred in making the ceramic pieces was $1,000.Adanna paid these cost with her personal credit card.Solution: Ceramics Unlimited has conducted classes for one month and has sold someceramic pieces for $3,000 cash.This is recorded. But bifurcation of classes income andsale of ceramic pieces not shown. Violation of full disclosure. Cost incurred in making theceramic pieces was $1,000. Adanna paid these cost with her personal credit card..Thereis a violation of Economic Entity principle. This $1000 is not recorded. Hence violation offull disclosure principle.Q (b)(i)Explain how each event should have been handled in accordance with the generally acceptedaccounting principles.1. Adanna opened Ceramics Unlimited (a ceramic studio) on November 1st 2016 in leasedoffice space, paying the first month's rent of $300 and a $1,000 security deposit with a checkon her personal account.-Solution: This amount of $1300 should have been paid out of company account. It is requiredto show Security deposit $1000 in Balance sheet. Now that it is already paid out of personalaccount this amount of $1300 to be shown as Loan from Adanna.1. Ceramics Unlimited sells ceramic pieces as well as offers training courses thatteach participants how to make their own ceramics pieces.Solution: Expenses and income relating to sale of ceramics and training should be shown separatelyin Income statement.2. Adanna had been making ceramic pieces as a hobby. She took molds and tools,worth about $7,500, from her home in order to start the studio. Solution: Moulds and tools worth $7500 is to be incorporated since the company isusing them for business. This should be shown in Balance sheet in asset side.There is no payment for this .Should be treated as Loan from Adanna.3. Adanna also bought a new firing kiln (oven) to start the business. The new kiln hada list price of $5,000. Adanna wrote a check on her personal checking accountSolution: Klin bought should be shown as asset in balance sheet at $5000 and Loanfrom adanna at $50001. The first customer of Ceramics Unlimited’s paid a total of $1,400 to attendclasses for two months. Adanna opened a checking account in the company'sname with the $1,400.Solution: The amount paid should be treated as advance to be shown inBalance sheet..4. Ceramics Unlimited has conducted classes for one month and has sold someceramic pieces for $3,000 cash. Cost incurred in making the ceramic pieces was$1,000. Adanna paid these cost with her personal credit cardSolution: Bifercation in sales to be shown out of $3000 towards both businesses.$1000 paid for making ceramic pieces to be shown as expense and this amountpaid by adanna is to be shown as Loan from Adanna.Q(b)(ii)TH STATEMENT OF INCOME FOR THE PERIOD ENDING 30 SEPT 2016PARTICULARS EXPENSE INCOMESales -Ceramics$3000Making charges $1000 Rent $300 Net income $1700 Total $3000 $3000 BALANCE SHEET AS ON SEPT 2016ASSETSLIABILITIES Cash 4400 Advance from customer 1400Security Deposit 1000 Loan from Adanna 19300Moulds and tools 7500 P&L account Profit from operation 1700Kin 95002240022400Note : There is no details about equity in the information provided. Hence does notappear in Balance sheet. None of the transcation which are paid by Adanna can beclassified as equity. Hence those transcations classified as “ Loan from Adanna” "