Question 1

**Section C - Constructed Response 2**

BioPharma Innovations is preparing its financial statements for the year ended 31 December 20X5.

**Draft figures before adjustments ($'000):**
Revenue: 45,000
Cost of Sales: (22,000)
Gross Profit: 23,000
Operating Expenses: (12,000)
Operating Profit: 11,000
Finance Costs: (1,000)
Profit Before Tax: 10,000

**Equity and Liabilities at 31 Dec 20X5 (Draft, $'000):**
Equity: 30,000
Long-term Loan: 15,000

**Adjustments required:**
1. *R&D:* Operating expenses include $3,000,000 spent on developing a new drug. Technical and commercial feasibility were established on 1 July 20X5. $1,000,000 of the $3,000,000 was incurred evenly between 1 July and 31 December. The drug is not yet complete, so no amortization is required.
2. *Revaluation:* Lab equipment with a carrying amount of $4,000,000 was revalued to $5,500,000 on 31 December 20X5. This has not been recorded.
3. *Taxation:* The current tax bill for the year is estimated at $1,800,000. Additionally, the deferred tax liability needs to increase by $400,000 (of which $300,000 relates to the lab equipment revaluation, and $100,000 relates to temporary differences in profit or loss).

**Requirement:**
(a) Prepare the revised Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 20X5. (10 marks)
(b) Calculate the following ratios for 20X5 based on your revised figures: 
    i. Operating Profit Margin
    ii. Interest Cover
    iii. Return on Capital Employed (ROCE) (Use closing capital employed). (6 marks)
(c) Briefly comment on the impact of capitalizing the development costs on the ROCE compared to if they had been fully expensed. (4 marks)

Accepted Answer

Part A: Adjust operating expenses by removing the eligible development costs. Calculate the tax expense (current + P&L deferred). Calculate OCI (revaluation gain less deferred tax on it). 
Part B: Use the standard formulas. Remember to update the Equity figure for the new profit and OCI before calculating ROCE.
Part C: Explain the mathematical effect of increasing both profit and capital employed by the same amount.

Question 2

What mistakes do candidates make on this ACCA question?

Accepted Answer

Putting the deferred tax on the revaluation into the P&L tax expense. Forgetting to update the Capital Employed figure with the adjustments before calculating ROCE.

How to approach this question

Full Answer

Common mistakes

Practice the full ACCA FR — Financial Reporting Practice Exam 2

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