ExpertMedium1 markMultiple Choice
ACCA · Question 53 · Preparing a Trial Balance
Section B - Case 2
Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
What is the net impact of adjustment 1 (the machine correction and depreciation) on the draft profit?
Section B - Case 2
Scenario: EcoBuild Ltd is preparing financial statements for the year ended 30 September 20X6. Draft profit before tax is $450,000. Adjustments required:
- A machine costing $120,000 bought on 1 April 20X6 was incorrectly expensed in full. Depreciation is 20% straight-line (pro-rata).
- Closing inventory was undervalued by $15,000.
- An allowance for receivables of $8,000 needs to be created.
- Rent of $12,000 paid for the quarter ending 30 November 20X6 was fully expensed.
What is the net impact of adjustment 1 (the machine correction and depreciation) on the draft profit?
Answer options:
A.
Increase by $120,000
B.
Decrease by $12,000
C.
Increase by $108,000
D.
Decrease by $108,000
How to approach this question
Combine the two parts of the correction: Add back the $120,000 incorrect expense. Deduct the $12,000 correct depreciation expense. +120,000 - 12,000 = +108,000.
Full Answer
C.Increase by $108,000✓ Correct
To correct the error, the $120,000 cost incorrectly charged to the P&L must be added back to profit. Then, the correct depreciation charge of $12,000 must be deducted. The net effect is an increase in profit of $108,000 ($120,000 - $12,000).
Common mistakes
Only adjusting for one part of the error.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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