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Difficulty: Very hardTreatment of Owner's Capital, Drawings, and Goods Withdrawn

The draft financial statements of a sole trader for the year ended 31st December 2025 showed a net profit of ₦350,000₦350,000. During an end-of-year audit, the following errors and unrecorded items were discovered:

1. Goods costing ₦40,000₦40,000 (with a normal selling price of ₦55,000₦55,000) withdrawn by the owner for personal consumption were not recorded in the books.
2. Additional capital of ₦150,000₦150,000 introduced by the owner during the year was erroneously credited to the Sales Account.
3. Payment of ₦20,000₦20,000 from the owner's personal bank account for repairing business delivery equipment was incorrectly debited to the Drawings Account, with no entry made in the repairs account.

What is the corrected net profit for the year ended 31st December 2025?

  1. ₦220,000₦220,000Answer
  2. B
    ₦255,000₦255,000
  3. C
    ₦140,000₦140,000
  4. D
    ₦440,000₦440,000

Answer

The corrected net profit for the year ended 31st December 2025 is ₦220,000₦220,000.
To arrive at the corrected net profit, start with the draft net profit of ₦350,000₦350,000. Goods withdrawn for personal use must be credited to the Purchases Account at cost price (₦40,000₦40,000), reducing cost of goods sold and increasing profit. Capital introduced (₦150,000₦150,000) erroneously credited to Sales must be removed from revenue, reducing profit by ₦150,000₦150,000. Finally, business repairs (₦20,000₦20,000) paid from personal funds must be charged as an expense, reducing profit by ₦20,000₦20,000. Thus, corrected net profit = 350,000+40,000−150,000−20,000=₦220,000350,000 + 40,000 - 150,000 - 20,000 = ₦220,000.

Step-by-Step Solution

1
Adjust for goods withdrawn by the proprietor
Increase net profit by ₦40,000₦40,000
Goods taken for personal use must be credited to the Purchases Account at cost price (₦40,000₦40,000), which reduces the Cost of Goods Sold and increases Net Profit.
2
Correct the misclassification of capital introduced
Decrease net profit by ₦150,000₦150,000
Capital introduced was incorrectly credited to Sales, overstating revenue. Removing it from Sales reduces Net Profit by ₦150,000₦150,000.
3
Record unposted business repair expense
Decrease net profit by ₦20,000₦20,000
Business repairs paid from private funds represent additional capital, but since the expense was not debited to Repairs Account, profit was overstated by ₦20,000₦20,000.
4
Compute corrected net profit
₦350,000+₦40,000−₦150,000−₦20,000=₦220,000₦350,000 + ₦40,000 - ₦150,000 - ₦20,000 = ₦220,000
Combining the draft net profit with all three profit-impacting adjustments yields ₦220,000₦220,000.

Key Concept

Adjustments for Goods Withdrawn, Capital Introduced, and Business Expenses Paid from Personal Funds
Estimated Time:2m 0s
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Topics

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

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