Question 1

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:
1) A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
2) Closing inventory was undervalued by $15,000.
3) An allowance for receivables of $8,000 needs to be created.
4) Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.

How does the adjustment for the prepaid rent affect the draft profit?

Accepted Answer

The full $12,000 was expensed. You need to remove the $8,000 prepaid portion from expenses. Reducing expenses increases profit.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Decreasing profit, confusing a prepayment with an accrual.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FA — Financial Accounting Practice Exam 6

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