ExpertEasy1 markMultiple Choice
ACCA · Question 65 · 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.
What is the correct double-entry to record the prepaid rent adjustment at year-end?
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 correct double-entry to record the prepaid rent adjustment at year-end?
Answer options:
A.
Debit Rent Expense $8,000; Credit Prepayments $8,000
B.
Debit Prepayments $8,000; Credit Rent Expense $8,000
C.
Debit Prepayments $12,000; Credit Rent Expense $12,000
D.
Debit Rent Expense $4,000; Credit Bank $4,000
How to approach this question
Identify the asset: Prepayments (Debit). Identify the account to reduce: Rent Expense (Credit). Amount is $8,000.
Full Answer
B.Debit Prepayments $8,000; Credit Rent Expense $8,000✓ Correct
Since the full $12,000 was already debited to Rent Expense, an adjustment is needed to remove the $8,000 relating to the next year. This is done by crediting the Rent Expense account (reducing the expense) and debiting the Prepayments account (creating a current asset).
Common mistakes
Reversing the debit and credit, or using the full $12,000 amount.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
65 questions · hints · full answers · grading
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