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Difficulty: MediumProfit and Loss Appropriation Account and Dividend Calculation

Vanguard Logistics PLC presents the following financial balances at the end of its financial year:

Financial ItemAmount (₦₦)
Authorized Share Capital (1,000,0001,000,000 Ordinary shares of ₦1.00₦1.00 each)1,000,0001,000,000
Issued and Fully Paid-up Capital (600,000600,000 Ordinary shares of ₦1.00₦1.00 each)600,000600,000
10%10\% Preference Share Capital200,000200,000
Retained Profit brought forward45,00045,000
Net Profit for the year180,000180,000

During the year, the directors transferred ₦30,000₦30,000 to the General Reserve, paid an interim ordinary dividend of 5%5\%, and proposed a final ordinary dividend of 10%10\%. Preference share dividends were also fully provided for.

What is the retained profit to be carried forward to the next financial year?

  1. A
    ₦25,000₦25,000
  2. ₦85,000₦85,000Answer
  3. C
    ₦40,000₦40,000
  4. D
    ₦105,000₦105,000

Answer

The retained profit carried forward to the next financial year is ₦85,000₦85,000.
Total profit available for distribution is ₦225,000₦225,000 (₦45,000₦45,000 opening retained balance plus ₦180,000₦180,000 net profit). The total appropriations equal ₦140,000₦140,000, consisting of preference dividend (₦20,000₦20,000), transfer to reserve (₦30,000₦30,000), interim ordinary dividend (₦30,000₦30,000), and proposed final ordinary dividend (₦60,000₦60,000). Subtracting ₦140,000₦140,000 from ₦225,000₦225,000 yields ₦85,000₦85,000 as retained profit carried forward.

Step-by-Step Solution

1
Calculate total profit available for appropriation
Total Available Profit = Retained Profit b/f (₦45,000₦45,000) + Net Profit for the year (₦180,000₦180,000) = ₦225,000₦225,000.
Appropriations are made out of the aggregate of accumulated profits brought forward and current year profit.
2
Calculate individual appropriations and total dividends
Preference Dividend = 10%×₦200,000=₦20,00010\% \times ₦200,000 = ₦20,000.
Transfer to General Reserve = ₦30,000₦30,000.
Interim Ordinary Dividend = 5%×₦600,000=₦30,0005\% \times ₦600,000 = ₦30,000.
Proposed Final Ordinary Dividend = 10%×₦600,000=₦60,00010\% \times ₦600,000 = ₦60,000.
Total Appropriations = ₦20,000+₦30,000+₦30,000+₦60,000=₦140,000₦20,000 + ₦30,000 + ₦30,000 + ₦60,000 = ₦140,000.
Dividends must be calculated on issued and paid-up capital, not on authorized share capital.
3
Deduct total appropriations from total profit available
Retained Profit carried forward = ₦225,000−₦140,000=₦85,000₦225,000 - ₦140,000 = ₦85,000.
The remaining unappropriated balance represents the balance carried forward to the balance sheet.

Key Concept

Profit and Loss Appropriation Account and Dividend Computation on Paid-up Capital
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Topics

Profit and Loss Appropriation Account and Dividend Calculation

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