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Difficulty: MediumTypes and Sources of Business Capital

Vanguard Manufacturing Plc presents the following items in its financial records at the end of the year:

- Issued Ordinary Share Capital: ₦5,000,000\text{₦}5,000,000
- 8%8\% Debentures: ₦2,000,000\text{₦}2,000,000
- Share Premium: ₦500,000\text{₦}500,000
- Retained Earnings: ₦1,200,000\text{₦}1,200,000
- Bank Overdraft: ₦800,000\text{₦}800,000
- Trade Creditors: ₦600,000\text{₦}600,000

Calculate the total value of long-term capital available to the company in Naira.

Answer: 8700000 ₦

Answer

The total value of long-term capital available to Vanguard Manufacturing Plc is ₦8,700,000.
Long-term capital comprises equity capital, long-term loans, and reserves used to finance permanent business assets. Summing Issued Share Capital (₦5,000,000), 8% Debentures (₦2,000,000), Share Premium (₦500,000), and Retained Earnings (₦1,200,000) yields ₦8,700,000. Short-term debts like Bank Overdraft and Trade Creditors are excluded.

Step-by-Step Solution

1
Classify each financial item into long-term capital or short-term liability
Long-term capital items: Issued Ordinary Share Capital (₦5,000,000), 8% Debentures (₦2,000,000), Share Premium (₦500,000), Retained Earnings (₦1,200,000). Short-term items: Bank Overdraft (₦800,000), Trade Creditors (₦600,000).
Long-term capital includes equity, reserves, and long-term liabilities intended for permanent business operations.
2
Calculate the sum of all long-term sources of capital
₦5,000,000 + ₦2,000,000 + ₦500,000 + ₦1,200,000 = ₦8,700,000
Adding equity shares, long-term loan capital (debentures), capital reserves (share premium), and accumulated profits gives total long-term capital.

Key Concept

Distinction Between Long-Term Capital and Short-Term Liabilities

Alternative Method

Total long-term capital can also be calculated by summing Total Equity/Reserves (₦5,000,000 + ₦500,000 + ₦1,200,000 = ₦6,700,000) and Total Non-Current Debt (₦2,000,000), yielding ₦8,700,000.
Estimated Time:1m 30s
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Types and Sources of Business Capital

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