Mr. Babatunde, a timber merchant, maintains incomplete accounting records. On 1 January 20… — JAMB UTME

Mr. Babatunde, a timber merchant, maintains incomplete accounting records. On 1 January 2024, his financial position showed Premises of ₦500,000, Equipment (cost) of ₦200,000, Inventory of ₦120,000, Trade Debtors of ₦80,000, Trade Creditors of ₦60,000, Bank Overdraft of ₦40,000, and Accrued Rent of ₦10,000.

On 31 December 2024, his assets and liabilities prior to end-of-year adjustments were: Premises ₦500,000, Equipment (cost) ₦200,000, Inventory ₦150,000, Trade Debtors ₦110,000, Cash at Bank ₦35,000, Trade Creditors ₦75,000, Prepaid Insurance ₦15,000, and Accrued Wages ₦20,000.

Additional information for the year ended 31 December 2024:
1. Equipment is to be depreciated at $10\%$ per annum on cost.
2. A provision for doubtful debts of $5\%$ is to be created on closing trade debtors.
3. He withdrew ₦6,000 cash monthly for personal use and took goods worth ₦8,000 for private consumption.
4. He introduced additional capital of ₦50,000 into the business during the year.

What is Mr. Babatunde's net profit for the year ended 31 December 2024?

Answer: ₦129,500 / 129,500 / N129,500 / 129500 / ₦129500 / N129500

Answer

The net profit for the year ended 31 December 2024 is ₦129,500.

The net profit is calculated by finding opening capital (₦790,000) and adjusted closing capital (₦889,500) from their respective Statements of Affairs. Applying the single-entry profit formula

\text{Net Profit} = (\text{Closing Capital} + \text{Drawings} - \text{Additional Capital}) - \text{Opening Capital}

gives

(₦889,500 + ₦80,000 - ₦50,000) - ₦790,000 = ₦129,500

Step-by-Step Solution

Calculate Opening Capital as at 1 January 2024 using the Statement of Affairs approach.

Total Opening Assets = ₦500,000 (Premises) + ₦200,000 (Equipment) + ₦120,000 (Inventory) + ₦80,000 (Trade Debtors) = ₦900,000.
Total Opening Liabilities = ₦60,000 (Trade Creditors) + ₦40,000 (Bank Overdraft) + ₦10,000 (Accrued Rent) = ₦110,000.
Opening Capital (

C_0

) = ₦900,000 - ₦110,000 = ₦790,000.

Capital is determined by subtracting total liabilities from total assets at the beginning of the accounting period.

Calculate Adjusted Closing Capital as at 31 December 2024 after incorporating year-end adjustments.

Net Equipment = ₦200,000 - (10% × ₦200,000) = ₦180,000.
Net Debtors = ₦110,000 - (5% × ₦110,000) = ��104,500.
Total Closing Assets = ₦500,000 (Premises) + ₦180,000 (Net Equipment) + ₦150,000 (Inventory) + ₦104,500 (Net Debtors) + ₦35,000 (Bank) + ₦15,000 (Prepaid Insurance) = ₦984,500.
Total Closing Liabilities = ₦75,000 (Trade Creditors) + ₦20,000 (Accrued Wages) = ₦95,000.
Closing Capital (

C_1

) = ₦984,500 - ₦95,000 = ₦889,500.

Depreciation and doubtful debt provisions reduce closing asset values before determining closing capital.

Calculate Total Drawings during the year.

Cash Drawings = ₦6,000 × 12 months = ₦72,000.
Goods Drawings = ₦8,000.
Total Drawings (

D

) = ₦72,000 + ₦8,000 = ₦80,000.

Drawings include both cash withdrawn periodically and goods taken for private use.

Calculate Net Profit using the capital comparison formula:

\text{Net Profit} = (\text{Closing Capital} + \text{Drawings} - \text{Capital Introduced}) - \text{Opening Capital}

Net Profit = (₦889,500 + ₦80,000 - ₦50,000) - ��790,000 = ₦919,500 - ₦790,000 = ₦129,500.

Adding drawings back and deducting introduced capital adjusts closing capital to reflect profit generated purely from business operations.

Key Concept

Statement of Affairs Method for Capital and Profit Determination

Estimated Time:3m 0s

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