Question 1

SECTION C

EcoBuild Construction Co is preparing its financial statements for the year ended 31 October 20X8. The draft profit before tax is $4,200,000. The following issues remain unresolved:

1. On 1 November 20X7, EcoBuild entered into a 10-year lease for a new crane. The present value of the lease payments was $1,500,000. The lease agreement transfers ownership of the crane to EcoBuild at the end of the lease term. The crane has an estimated useful life of 15 years. No accounting entries have been made for this lease yet. The implicit interest rate is 6%.

2. EcoBuild's tax team has estimated the current tax liability for the year at $850,000. Additionally, the deferred tax liability needs to increase by $120,000 due to accelerated tax depreciation. Neither of these tax figures has been recorded.

Required:
(a) Calculate the adjusted Profit After Tax for EcoBuild for the year ended 31 October 20X8. Show all workings for depreciation, finance costs, and tax.
(b) Assuming the adjusted Total Assets are $25,000,000 and adjusted Total Equity is $12,000,000, calculate the Return on Equity (ROE) and Return on Assets (ROA). Briefly explain what these two ratios indicate to stakeholders.

Accepted Answer

Part (a): Start with the draft profit. Calculate the lease depreciation (watch out for the useful life vs lease term rule). Calculate the lease interest. Deduct both from draft profit. Then deduct both current and deferred tax to get PAT. Part (b): Apply the standard formulas for ROE and ROA using your calculated PAT. Provide a 1-2 sentence explanation for each ratio.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Depreciating the leased asset over 10 years instead of 15 years. Forgetting to include the deferred tax movement in the total tax expense.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 1

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