A sole proprietor, Kemi, began the financial year with an opening capital of ₦1,800,000. D… — JAMB UTME

A sole proprietor, Kemi, began the financial year with an opening capital of $₦1,800,000$ . During the year, the business earned a net profit of $₦450,000$ . In the same period, Kemi withdrew $₦60,000$ in cash for personal use, took business inventory costing $₦40,000$ (with a retail selling price of $₦55,000$ ) for private domestic consumption, and paid a personal residential utility bill of $₦25,000$ directly from the business bank account. What is the value of Kemi's capital at the end of the financial year?

$₦2,125,000$ Answer
B
$₦2,110,000$
C
$₦2,375,000$
D
$₦2,165,000$

Answer

The value of Kemi's capital at the end of the financial year is

₦2,125,000

The correct closing capital is calculated by taking Opening Capital (

₦1,800,000

), adding Net Profit (

₦450,000

), and subtracting Total Drawings (

₦125,000

). Total drawings include cash withdrawn (

₦60,000

), goods withdrawn at cost (

₦40,000

), and personal bills paid using business funds (

₦25,000

). This gives

₦1,800,000 + ₦450,000 - ₦125,000 = ₦2,125,000

Step-by-Step Solution

Calculate total drawings made by the owner during the period.

Total Drawings =

₦60,000

(cash) +

₦40,000

(goods at cost) +

₦25,000

(personal bill paid) =

₦125,000

Goods withdrawn for personal use must be recorded at cost price, and business cash paid for personal expenses is treated as drawings under the business entity concept.

Apply the closing capital formula for a sole trader.

Closing Capital = Opening Capital + Net Profit - Drawings =

₦1,800,000 + ₦450,000 - ₦125,000 = ₦2,125,000

Net profit increases equity while total drawings decrease equity in the Statement of Financial Position.

Key Concept

Treatment of Owner's Capital, Drawings, and Goods Withdrawn

Estimated Time:1m 30s

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic