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Difficulty: MediumProfit and Loss Appropriation Account and Dividend Calculation

Kano Textiles Plc presents the following financial extracts at the end of its trading period:

Financial ItemAmount (₦)
Issued and fully paid Ordinary Shares (50k each)500,000
8% Preference Shares200,000
Share Premium Account30,000
Retained Profit brought forward30,000
Net Profit for the year180,000

The directors proposed a 6%6\% dividend on ordinary shares and resolved to transfer ₦40,000₦40,000 to the general reserve. What is the retained profit carried forward to the Statement of Financial Position?

  1. ₦124,000Answer
  2. B
    ₦154,000
  3. C
    ₦64,000
  4. D
    ₦140,000

Answer

The retained profit carried forward to the Statement of Financial Position is ₦124,000.
The total profit available for distribution consists of the current year's net profit (₦180,000) plus the retained profit brought forward (₦30,000), giving ₦210,000. Capital reserves such as Share Premium (₦30,000) cannot be added to distributable profits. The total appropriations required are the 8% Preference Share Dividend (₦16,000), the 6% Ordinary Share Dividend (₦30,000), and the transfer to General Reserve (₦40,000), totaling ₦86,000. Deducting ₦86,000 from ₦210,000 leaves a retained profit of ₦124,000 to be carried forward.

Step-by-Step Solution

1
Calculate preference share dividend
8%×₦200,000=₦16,0008\% \times ₦200,000 = ₦16,000
Preference shareholders are entitled to a fixed percentage dividend calculated on preference share capital.
2
Calculate proposed ordinary share dividend
6%×₦500,000=₦30,0006\% \times ₦500,000 = ₦30,000
Dividend rate applies to the paid-up ordinary share capital.
3
Calculate total profit available for appropriation
₦180,000 (Net Profit)+₦30,000 (Retained Profit b/f)=₦210,000₦180,000 \text{ (Net Profit)} + ₦30,000 \text{ (Retained Profit b/f)} = ₦210,000
Total revenue profit available comprises current net profit plus prior accumulated unappropriated profit. Share premium is a capital reserve and is excluded.
4
Deduct total appropriations to find retained profit carried forward
₦210,000−(₦16,000+₦30,000+₦40,000)=₦210,000−₦86,000=₦124,000₦210,000 - (₦16,000 + ₦30,000 + ₦40,000) = ₦210,000 - ₦86,000 = ₦124,000
Subtract preference dividend, ordinary dividend, and transfer to general reserve from total profit available.

Key Concept

Profit and Loss Appropriation Account and Dividend Calculation
Estimated Time:2m 0s
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Profit and Loss Appropriation Account and Dividend Calculation

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