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Difficulty: MediumProfit and Loss Appropriation Account

Dayo and Nkechi are partners in a firm. For the year ended 31 December 2025, the business recorded a net profit of ₦500,000 before considering the following financial items:

- Interest on Nkechi's loan to the firm: ₦20,000
- Interest on partners' drawings: ₦15,000
- Partners' salaries: ₦40,000
- Interest on capital: ₦30,000

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

  1. ₦425,000Answer
  2. B
    ₦445,000
  3. C
    ₦395,000
  4. D
    ₦465,000

Answer

The net divisible profit to be shared between the partners is ₦425,000.
The correct figure of ₦425,000 is derived by first deducting interest on Nkechi's loan (₦20,000) from the reported net profit (₦500,000) to get an adjusted net profit of ₦480,000. Next, adding interest on drawings (₦15,000) yields ₦495,000 available profit. Finally, deducting the total appropriations of ₦70,000 (salaries of ₦40,000 plus interest on capital of ₦30,000) results in ₦425,000.

Step-by-Step Solution

1
Calculate the adjusted Net Profit after deducting loan interest
₦500,000 - ₦20,000 = ₦480,000
Interest on a partner's loan is an expense charged to the Profit and Loss Account, not an appropriation of profit.
2
Add interest on drawings to the adjusted net profit
₦480,000 + ₦15,000 = ₦495,000
Interest charged on partner drawings increases total profits available for distribution.
3
Deduct appropriations (partner salaries and interest on capital)
₦495,000 - (₦40,000 + ₦30,000) = ₦425,000
Salaries and interest on capital are appropriations paid out to partners from available profits.

Key Concept

Profit and Loss Appropriation Account
Estimated Time:1m 30s
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Topics

Profit and Loss Appropriation Account

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