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ACCA · Question 51 · Preparing a Trial Balance
Section B - Case 2
Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
What is the adjustment to the draft profit to correct the initial incorrect expensing of the machine (before calculating depreciation)?
Section B - Case 2
Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
What is the adjustment to the draft profit to correct the initial incorrect expensing of the machine (before calculating depreciation)?
How to approach this question
The machine was incorrectly expensed, reducing profit by $120,000. To correct this, the $120,000 expense must be reversed (added back to profit).
Full Answer
The $120,000 cost of the machine was incorrectly recorded as an expense in the statement of profit or loss. To correct this error of principle, the expense must be removed, which increases (adds back to) the draft profit by $120,000.
Common mistakes
Deducting the $120,000 or confusing it with the depreciation adjustment.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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