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Difficulty: HardPreparation of Company Statement of Profit or Loss

Lekki Heights Maritime Plc extracted the following financial details for the year ended 31 December 2025:

• Gross Profit: ₦1,450,000
• Rent and Rates paid: ₦180,000 (includes ₦30,000 paid in advance for 2026)
• Salaries and Wages paid: ₦420,000
• Outstanding Salaries and Wages at year-end: ₦40,000
• 10% Debentures of ₦500,000 (interest unpaid for the entire year)
• Estimated Corporate Income Tax: ₦120,000

What is the net profit after tax to be reported in the company's Statement of Profit or Loss for the year ended 31 December 2025?

  1. ₦670,000Answer
  2. B
    ₦690,000
  3. C
    ₦710,000
  4. D
    ₦720,000

Answer

The net profit after tax to be reported is ₦670,000.
The net profit after tax of ₦670,000 is correctly determined by deducting total operating expenses (adjusted rent of ₦150,000 and adjusted salaries of ₦460,000), finance costs (debenture interest of ₦50,000), and corporate taxation (₦120,000) from the gross profit of ₦1,450,000.

Step-by-Step Solution

1
Calculate adjusted Rent and Rates expense
₦180,000 - ₦30,000 (prepayment) = ₦150,000
Prepaid expenses must be deducted from cash paid to reflect the accurate expense for the current period.
2
Calculate adjusted Salaries and Wages expense
₦420,000 + ₦40,000 (accrual) = ₦460,000
Accrued expenses incurred but not yet paid at year-end must be added to cash paid.
3
Calculate Debenture Interest expense
10% of ₦500,000 = ₦50,000
Interest on debentures is a financial charge to the profit or loss account regardless of whether paid or unpaid.
4
Compute total expenses and Net Profit before Tax
Total Expenses = ₦150,000 + ₦460,000 + ₦50,000 = ₦660,000. Net Profit before Tax = ₦1,450,000 - ₦660,000 = ₦790,000
Deduct total allowable expenses from gross profit to get net profit before tax.
5
Deduct Corporate Income Tax to arrive at Net Profit after Tax
₦790,000 - ₦120,000 = ₦670,000
Taxation provision is deducted from net profit before tax to arrive at the final profit for the year.

Key Concept

Calculation of Net Profit After Tax incorporating adjustments for accruals, prepayments, debenture interest, and corporate tax.
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Topics

Preparation of Company Statement of Profit or Loss

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