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ACCA · Question 55 · Preparing Basic Financial Statements
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 impact of creating the allowance for receivables (adjustment 3) on the draft profit? (State the amount and whether it is an increase or decrease, e.g., 'Decrease 8000').
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 impact of creating the allowance for receivables (adjustment 3) on the draft profit? (State the amount and whether it is an increase or decrease, e.g., 'Decrease 8000').
How to approach this question
Creating an allowance is an expense. Expenses decrease profit. Amount is $8,000.
Full Answer
Creating an allowance for receivables requires a debit to the statement of profit or loss (an expense) and a credit to the allowance account (reducing the asset). This expense decreases the draft profit by $8,000.
Common mistakes
Adding it to profit instead of deducting it.
Practice the full ACCA FA — Financial Accounting Practice Exam 6
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