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Difficulty: MediumProfit and Loss Account and Net Profit Determination

The following balances were extracted from the books of Kalu Stores at the end of the financial year on 31st December 2025:

ItemAmount (N\text{N})
Gross Profit95,00095,000
Discount Received4,0004,000
Rent Paid18,00018,000
Salaries and Wages24,00024,000
Carriage Outwards3,5003,500
Discount Allowed2,5002,500

Additional year-end adjustments are provided below:
1. Rent prepaid amounted to N3,000\text{N}3,000.
2. Salaries accrued amounted to N2,000\text{N}2,000.
3. Provision for doubtful debts, which stood at N1,500\text{N}1,500, is to be increased to N2,500\text{N}2,500.

What is the Net Profit of Kalu Stores for the year ended 31st December 2025?

  1. N51,000\text{N}51,000Answer
  2. B
    N49,000\text{N}49,000
  3. C
    N49,500\text{N}49,500
  4. D
    N56,000\text{N}56,000

Answer

The Net Profit of Kalu Stores for the year ended 31st December 2025 is N51,000\text{N}51,000.
Net profit is computed by adding non-trading revenues (discount received) to gross profit and deducting all adjusted operating expenses. Adjusted expenses comprise Rent (N15,000\text{N}15,000), Salaries (N26,000\text{N}26,000), Carriage Outwards (N3,500\text{N}3,500), Discount Allowed (N2,500\text{N}2,500), and the increase in Provision for Doubtful Debts (N1,000\text{N}1,000). Subtracting total expenses (N48,000\text{N}48,000) from total income (N99,000\text{N}99,000) yields N51,000\text{N}51,000.

Step-by-Step Solution

1
Calculate total gross income
Gross Profit (N95,000\text{N}95,000) + Discount Received (N4,000\text{N}4,000) = N99,000\text{N}99,000
Discount received is a gain/income added to Gross Profit in the Profit and Loss Account.
2
Calculate adjusted operating expenses
Rent: N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000; Salaries: N24,000+N2,000=N26,000\text{N}24,000 + \text{N}2,000 = \text{N}26,000; Increase in Provision for Doubtful Debts: N2,500−N1,500=N1,000\text{N}2,500 - \text{N}1,500 = \text{N}1,000; Carriage Outwards: N3,500\text{N}3,500; Discount Allowed: N2,500\text{N}2,500. Total Expenses = N15,000+N26,000+N1,000+N3,500+N2,500=N48,000\text{N}15,000 + \text{N}26,000 + \text{N}1,000 + \text{N}3,500 + \text{N}2,500 = \text{N}48,000.
Prepayments are deducted, accruals are added, and only the net increase in provision for doubtful debts is charged as an expense.
3
Determine Net Profit
Total Income (N99,000\text{N}99,000) - Total Expenses (N48,000\text{N}48,000) = N51,000\text{N}51,000
Net Profit is the excess of total gains over total operating expenses.

Key Concept

Determination of Net Profit incorporating accruals, prepayments, and provision for doubtful debts adjustments.
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Topics

Profit and Loss Account and Net Profit Determination

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