Question 1

SCENARIO: AgriSteel Heavy Industries manufactures specialized farming machinery. Draft financial statements for the year ended 30 September 20X6 show a draft net profit of $1,200,000. The following adjustments are needed:
1) Closing inventory was valued at cost $450,000, but includes damaged tractors costing $50,000 that can only be sold for $30,000 after $5,000 repair costs.
2) A machine bought for $200,000 on 1 Oct 20X5 was incorrectly charged to repairs. Depreciation is 20% reducing balance.
3) A provision for a legal claim of $80,000 needs to be created.
4) The allowance for receivables needs to increase by $15,000.

What is the NET impact of correcting the machine error (including depreciation) on the draft net profit?

Accepted Answer

Combine the effect of removing the incorrect expense (increases profit) and adding the correct expense (decreases profit).

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Forgetting to deduct the depreciation from the add-back.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 3

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