Sahara Energy Works Plc extracted the following trial balance figures and notes for the fi… — JAMB UTME

Sahara Energy Works Plc extracted the following trial balance figures and notes for the financial year ended 31 December 2025:

- Gross profit: ₦2,450,000
- Administrative and distribution expenses paid: ₦680,000
- 10% Debentures (issued 1 January 2025): ₦1,000,000
- Debenture interest paid: ₦40,000
- Trade debtors: ₦600,000
- Existing provision for doubtful debts: ₦25,000

Additional Information at 31 December 2025:
1. Administrative expenses paid include ₦30,000 for prepaid insurance.
2. Audit fees of ₦50,000 remain accrued and unpaid.
3. The provision for doubtful debts is to be adjusted to $5\%$ of trade debtors.
4. Corporate income tax rate is estimated at $30\%$ on profit before tax.

What is the Net Profit after Tax for Sahara Energy Works Plc for the year ended 31 December 2025?

Answer: 1151500 ₦

Answer

The Net Profit after Tax for Sahara Energy Works Plc is ��1,151,500.

To calculate the Net Profit after Tax, first compute adjusted operating expenses: base expenses of ₦680,000 minus prepaid insurance of ₦30,000 plus accrued audit fees of ₦50,000 plus the increase in doubtful debts provision of ₦5,000 (₦30,000 required minus ₦25,000 existing), yielding ₦705,000. Subtracting this from Gross Profit (₦2,450,000) gives Operating Profit of ₦1,745,000. Next, deduct the total annual debenture interest expense of ₦100,000 (10% of ₦1,000,000) to arrive at Profit before Tax of ₦1,645,000. Finally, deduct corporate tax of 30% (₦493,500) from ₦1,645,000 to obtain Net Profit after Tax equal to ₦1,151,500.

Step-by-Step Solution

Calculate the total operating expenses incorporating adjustments for prepayments, accruals, and doubtful debt provisions.

Total operating expenses = ₦680,000 - ₦30,000 + ₦50,000 + (5% of ₦600,000 - ₦25,000) = ₦705,000.

Prepaid expenses are deducted from cash paid, accrued expenses are added, and the increase in provision for doubtful debts (₦30,000 - ₦25,000 = ₦5,000) is charged as an operating expense.

Deduct operating expenses from gross profit to find operating profit (profit before interest and tax).

Operating profit = ₦2,450,000 - ₦705,000 = ₦1,745,000.

Gross profit less total operating expenses yields the operating profit for the reporting period.

Determine full finance cost (debenture interest) and profit before taxation.

Debenture interest expense = 10% of ₦1,000,000 = ₦100,000. Profit before tax = ₦1,745,000 - ₦100,000 = ₦1,645,000.

The Statement of Profit or Loss must charge the full nominal debenture interest expense incurred for the year (

10\% \times ₦1,000,000 = ₦100,000

), regardless of the amount actually paid (₦40,000).

Calculate taxation and determine Net Profit after Tax.

Taxation = 30% of ₦1,645,000 = ₦493,500. Net profit after tax = ₦1,645,000 - ₦493,500 = ₦1,151,500.

Tax rate applies to profit before tax. Deducting taxation from profit before tax yields the final net profit after tax.

Key Concept

Preparation of Company Statement of Profit or Loss with Multi-Step Adjustments (Accruals, Prepayments, Debenture Interest, and Taxation)

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