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Difficulty: MediumProfit and Loss Account and Net Profit Determination

Ade Trading Store extracted the following balances for the financial year ended 31 December 2025:

- Gross profit: N150,000\text{N}150,000
- Rent paid: N18,000\text{N}18,000 (including a prepayment of N3,000\text{N}3,000)
- Carriage outwards: N5,000\text{N}5,000
- Discount received: N4,000\text{N}4,000
- Existing provision for doubtful debts: N4,000\text{N}4,000
- New provision for doubtful debts required: N6,000\text{N}6,000
- Office furniture purchased: N10,000\text{N}10,000

What is the Net Profit for the year?

  1. N132,000\text{N}132,000Answer
  2. B
    N128,000\text{N}128,000
  3. C
    N126,000\text{N}126,000
  4. D
    N122,000\text{N}122,000

Answer

N132,000\text{N}132,000
The correct Net Profit of N132,000\text{N}132,000 is computed by adding discounts received (N4,000\text{N}4,000) to Gross Profit (N150,000\text{N}150,000) to obtain total income of N154,000\text{N}154,000, and subtracting total operating expenses of N22,000\text{N}22,000. Operating expenses comprise adjusted rent (N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000), carriage outwards (N5,000\text{N}5,000), and the increase in provision for doubtful debts (N6,000−N4,000=N2,000\text{N}6,000 - \text{N}4,000 = \text{N}2,000). Capital purchases such as office furniture are excluded.

Step-by-Step Solution

1
Calculate total gross income by adding discounts received to gross profit.
Total Income = N150,000+N4,000=N154,000\text{N}150,000 + \text{N}4,000 = \text{N}154,000
Discounts received represent revenue income that increases gross profit.
2
Adjust rent expense for prepayment.
Adjusted Rent Expense = N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000
Prepaid expenses relate to the next accounting period and must be deducted from cash paid.
3
Calculate the increase in provision for doubtful debts.
Increase in Provision = N6,000−N4,000=N2,000\text{N}6,000 - \text{N}4,000 = \text{N}2,000
Only the net increase in provision is debited to the Profit and Loss Account as an expense.
4
Sum total operating expenses and compute Net Profit.
Total Expenses = N15,000 (rent)+N5,000 (carriage outwards)+N2,000 (provision increase)=N22,000\text{N}15,000 \text{ (rent)} + \text{N}5,000 \text{ (carriage outwards)} + \text{N}2,000 \text{ (provision increase)} = \text{N}22,000.
Net Profit = N154,000−N22,000=N132,000\text{N}154,000 - \text{N}22,000 = \text{N}132,000
Office furniture is capital expenditure (non-current asset) and is excluded from operating expenses.

Key Concept

Determination of Net Profit by adjusting Gross Profit for revenue income, operating expenses, prepayments, and changes in provision for doubtful debts.
Estimated Time:1m 30s
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Topics

Profit and Loss Account and Net Profit Determination

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