ExpertMedium1 markMultiple Choice
ACCA · Question 57 · The Use of Double-Entry and Accounting Systems
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.
How does the adjustment for the prepaid rent affect the draft profit?
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.
How does the adjustment for the prepaid rent affect the draft profit?
Answer options:
A.
It decreases profit by $8,000.
B.
It increases profit by $8,000.
C.
It increases profit by $12,000.
D.
It decreases profit by $4,000.
How to approach this question
The full $12,000 was expensed. You need to remove the $8,000 prepaid portion from expenses. Reducing expenses increases profit.
Full Answer
B.It increases profit by $8,000.✓ Correct
The full $12,000 was recorded as an expense. However, $8,000 of this relates to the next financial year (prepaid). To correct this, $8,000 must be credited (removed) from the rent expense account. Reducing an expense increases the net profit by $8,000.
Common mistakes
Decreasing profit, confusing a prepayment with an accrual.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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