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Difficulty: MediumPreparation of Company Statement of Profit or Loss

Apex Trading Company Plc extracted the following financial balances for the year ended 31 December 2025:

- Gross profit: ₦850,000
- Salaries and wages: ₦180,000
- Rent and rates paid: ₦60,000 (including ₦10,000 prepaid for the next financial year)
- Debenture interest paid: ₦15,000 (the total annual interest expense due is ₦25,000)
- Provision for corporate taxation: ₦110,000

What is the net profit after taxation for the company?

  1. A
    ₦465,000
  2. ₦485,000Answer
  3. C
    ₦495,000
  4. D
    ₦595,000

Answer

The net profit after taxation for the company is ��485,000.
The net profit after taxation is computed by deducting all relevant operating expenses and finance costs adjusted for accruals and prepayments from gross profit, followed by the deduction of corporate taxation. Adjusted rent expense is ₦50,000 (₦60,000 - ₦10,000 prepayment), and total debenture interest charged is ₦25,000. Total expenses equal ₦255,000 (₦180,000 + ₦50,000 + ₦25,000). Deducting ₦255,000 from gross profit of ₦850,000 gives a net profit before tax of ₦595,000. Finally, subtracting the ₦110,000 tax provision leaves ₦485,000.

Step-by-Step Solution

1
Calculate adjusted rent expense
₦60,000 - ₦10,000 = ₦50,000
Prepaid rent must be subtracted from rent paid to arrive at the actual expense incurred for the accounting period.
2
Determine total debenture interest expense
₦25,000
The full annual interest accrued must be recognized in the statement of profit or loss regardless of cash paid.
3
Calculate net profit before taxation
₦850,000 - (₦180,000 + ₦50,000 + ₦25,000) = ₦595,000
Deduct total operating expenses (salaries, adjusted rent, and debenture interest) from gross profit.
4
Calculate net profit after taxation
₦595,000 - ₦110,000 = ₦485,000
Deduct corporate taxation provision from net profit before tax to get the final net profit after tax.

Key Concept

Preparation of Company Statement of Profit or Loss
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Preparation of Company Statement of Profit or Loss

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