ExpertEasy1 markMultiple Choice
ACCA · Question 53 · Preparing basic financial statements
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
How will the adjustment for the insurance premium affect the Statement of Financial Position?
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
How will the adjustment for the insurance premium affect the Statement of Financial Position?
Answer options:
A.
Create a current liability (accrual) of $6,000
B.
Create a current asset (prepayment) of $6,000
C.
Create a current asset (prepayment) of $12,000
D.
No effect on the Statement of Financial Position
How to approach this question
Identify if the expense is paid in advance (prepayment/asset) or in arrears (accrual/liability). Calculate the portion relating to the next financial year.
Full Answer
B.Create a current asset (prepayment) of $6,000✓ Correct
The $12,000 premium covers 1 July 20X8 to 30 June 20X9. The financial year ends 31 December 20X8. Therefore, 6 months (Jan-Jun 20X9) are paid in advance. $12,000 * 6/12 = $6,000. This is a prepayment, which is classified as a current asset.
Common mistakes
Classifying it as an accrual (liability).
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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