ExpertHard1 markShort Answer
ACCA · Question 61 · Preparing Basic Financial Statements
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 total net increase in Total Assets as a result of all four adjustments? (in $)
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 total net increase in Total Assets as a result of all four adjustments? (in $)
How to approach this question
Sum the asset impacts: Machine carrying amount = +$108,000. Inventory = +$15,000. Allowance for receivables = -$8,000. Prepaid rent = +$8,000. Total = 108k + 15k - 8k + 8k = 123k.
Full Answer
The adjustments affect assets as follows: 1) Non-current assets increase by the carrying amount of the machine ($120,000 - $12,000 = $108,000). 2) Inventory (current asset) increases by $15,000. 3) Receivables (current asset) decrease by the $8,000 allowance. 4) Prepayments (current asset) increase by $8,000. Net increase in total assets = $108,000 + $15,000 - $8,000 + $8,000 = $123,000. (Note: This matches the net increase in profit, maintaining the accounting equation).
Common mistakes
Forgetting to deduct the depreciation from the machine's asset value.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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