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Single Entity AccountsSection BSyllabus DFinancial Accounting

This question is part of a case study — click to read the full scenario(Case 51)

SCENARIO: AgriSteel Heavy Industries manufactures specialized farming machinery. Draft financial statements for the year ended 30 September 20X6 show a draft net profit of $1,200,000. The following adjustments are needed:

Closing inventory was valued at cost $450,000, but includes damaged tractors costing $50,000 that can only be sold for $30,000 after $5,000 repair costs.
A machine bought for $200,000 on 1 Oct 20X5 was incorrectly charged to repairs. Depreciation is 20% reducing balance.
A provision for a legal claim of $80,000 needs to be created.
The allowance for receivables needs to increase by $15,000.

Calculate the Net Realizable Value (NRV) of the damaged tractors. (Enter the number only)

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ACCA · Question 57 · Single Entity Accounts

SCENARIO: AgriSteel Heavy Industries manufactures specialized farming machinery. Draft financial statements for the year ended 30 September 20X6 show a draft net profit of $1,200,000. The following adjustments are needed:

Closing inventory was valued at cost $450,000, but includes damaged tractors costing $50,000 that can only be sold for $30,000 after $5,000 repair costs.

A machine bought for $200,000 on 1 Oct 20X5 was incorrectly charged to repairs. Depreciation is 20% reducing balance.

A provision for a legal claim of $80,000 needs to be created.

The allowance for receivables needs to increase by $15,000.

What is the journal entry to record the legal provision?

Answer options:

Debit Provision for Legal Claim $80,000; Credit Legal Expense $80,000

Debit Legal Expense $80,000; Credit Cash $80,000

Debit Legal Expense $80,000; Credit Provision for Legal Claim $80,000

Debit Retained Earnings $80,000; Credit Provision for Legal Claim $80,000

How to approach this question

Recognize that creating a provision creates an expense and a liability.

Full Answer

C.Debit Legal Expense $80,000; Credit Provision for Legal Claim $80,000✓ Correct

To create a provision, an expense must be recognized in the statement of profit or loss (Debit Legal Expense) and a liability must be recognized in the statement of financial position (Credit Provision for Legal Claim).

Common mistakes

Crediting cash, assuming the claim has already been paid.

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Practice the full ACCA FA — Financial Accounting Practice Exam 3

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Practice the full ACCA FA — Financial Accounting Practice Exam 3

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