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Preparing Basic Financial StatementsProfit AdjustmentFinancial Statements

ACCA · Question 59 · Preparing Basic Financial Statements

Section B - Case 2: Single Entity Accounts

Scenario: AquaHarvest Marine Farms
AquaHarvest prepares its financial statements for the year ended 30 September 20X6. The draft profit before adjustments is $120,000.
Issue 1: A payment for marine insurance of $6,000 for the year ending 31 December 20X6 was recorded entirely as an expense in the P&L.
Issue 2: Depreciation on harvesting equipment (Cost $80,000, Acc Dep $30,000) needs to be charged at 20% reducing balance.
Issue 3: A customer went bankrupt owing $2,500. This needs to be written off.
Issue 4: A suspense account has a $4,500 Credit balance because a cash receipt of $4,500 from a credit customer was only recorded in the cash book.

Calculate the final adjusted profit for the year. (Enter the number only)

How to approach this question

Start with draft profit. Add back the prepayment (reduces expense). Deduct depreciation (new expense). Deduct irrecoverable debt (new expense). Suspense clearance has no effect.

Full Answer

Draft Profit = $120,000. Issue 1: Prepayment of $1,500 reduces expenses, so ADD to profit (+1,500). Issue 2: Depreciation of $10,000 is an expense, so DEDUCT from profit (-10,000). Issue 3: Irrecoverable debt of $2,500 is an expense, so DEDUCT from profit (-2,500). Issue 4: Suspense clearance has no effect on profit. Adjusted Profit = $120,000 + $1,500 - $10,000 - $2,500 = $109,000.

Common mistakes

Deducting the prepayment instead of adding it, or adjusting for the suspense account.
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