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Difficulty: MediumProfit and Loss Appropriation Account

Emeka and Tunde are partners in a business. For the year ended 31 December 2025, the net profit before adjusting for interest on Tunde's loan of ₦30,000 was ₦450,000. The partnership agreement provides for:
- Salary to Emeka: ₦50,000
- Total interest on capital: ₦70,000
- Total interest on drawings: ₦20,000

What is the net divisible profit to be shared between the partners?

  1. ₦320,000Answer
  2. B
    ₦350,000
  3. C
    ₦280,000
  4. D
    ₦250,000

Answer

The net divisible profit to be shared between the partners is ₦320,000.
Net divisible profit is determined after deducting charges such as loan interest in the Profit and Loss Account (₦450,000 - ₦30,000 = ₦420,000). Adding interest on drawings (₦20,000) and subtracting appropriations for salary (₦50,000) and interest on capital (₦70,000) gives ₦320,000.

Step-by-Step Solution

1
Calculate net profit after charging interest on partner loan
₦450,000 - ₦30,000 = ₦420,000
Interest on partner's loan is an expense in the Profit and Loss Account, not an appropriation of profit.
2
Add interest on drawings to net profit
₦420,000 + ₦20,000 = ₦440,000
Interest on drawings is income charged to partners, increasing total profits available for appropriation.
3
Deduct partner salary and interest on capital
₦440,000 - ₦50,000 (Salary) - ₦70,000 (Interest on Capital) = ₦320,000
Partner salaries and interest on capital are appropriations paid to partners out of divisible profits.

Key Concept

Profit and Loss Appropriation Account adjustments
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Topics

Profit and Loss Appropriation Account

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