ExpertHard1 markShort Answer
ACCA · Question 51 · Preparing basic financial statements
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
Calculate the adjusted Net Profit for the year ended 31 December 20X8. (Enter numbers only)
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
Calculate the adjusted Net Profit for the year ended 31 December 20X8. (Enter numbers only)
How to approach this question
Start with draft profit. Subtract omitted expenses (depreciation, bad debt). Add back prepayments (half of the insurance). Adjust for inventory (overvalued closing inventory means profit was overstated, so subtract it).
Full Answer
Draft profit: $850,000.
1) Omitted depreciation: Deduct $50,000.
2) Insurance prepaid: 6 months (Jan-Jun 20X9) = $12,000 * 6/12 = $6,000. Since it was expensed in full, add back $6,000 to profit.
3) Closing inventory overvalued: Reduces profit by $30,000.
4) Irrecoverable debt: Deduct $15,000.
Adjusted Net Profit = $850,000 - $50,000 + $6,000 - $30,000 - $15,000 = $761,000.
Common mistakes
Adding the inventory overvaluation instead of subtracting it, or missing the 6-month calculation for the insurance prepayment.
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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