ExpertMedium1 markShort Answer
ACCA · Question 60 · Interpretation of 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.*
Calculate the Gearing Ratio using the unadjusted draft equity figures. (Formula: Debt / (Debt + Equity). Enter as a percentage to one decimal place, e.g., 30.5)
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.*
Calculate the Gearing Ratio using the unadjusted draft equity figures. (Formula: Debt / (Debt + Equity). Enter as a percentage to one decimal place, e.g., 30.5)
How to approach this question
Identify Debt ($1.5m) and Equity ($1m + $2m = $3m). Apply the formula: 1.5 / (1.5 + 3.0).
Full Answer
Debt = $1,500,000 (Long-term loan).
Equity = $1,000,000 (Share capital) + $2,000,000 (Retained earnings) = $3,000,000.
Gearing = $1,500,000 / ($1,500,000 + $3,000,000) = $1,500,000 / $4,500,000 = 0.3333... = 33.3%.
Common mistakes
Calculating Debt / Equity (which would be 50%) instead of Debt / (Debt + Equity).
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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