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Difficulty: MediumPreparation of Company Statement of Profit or Loss

Kano Industrial Alliance Plc provided the following extracts from its financial records for the year ended 31 December 2025:

• Gross profit: ₦2,500,000
• Salaries and wages: ₦600,000
• Rent paid: ₦240,000
• Carriage outwards: ₦50,000
• 10% Debentures: ₦1,000,000
• Debenture interest paid: ₦60,000

Additional information:
1. Rent prepaid at 31 December 2025 amounted to ₦40,000.
2. Provision for doubtful debts is to be increased by ₦10,000.

What is the net profit before taxation for the year ended 31 December 2025?

  1. A
    ₦1,460,000
  2. ₦1,540,000Answer
  3. C
    ₦1,580,000
  4. D
    ₦1,590,000

Answer

The net profit before taxation for the year ended 31 December 2025 is ₦1,540,000.
To arrive at the correct net profit before taxation, all expenses for the year must be correctly adjusted according to accrual accounting concepts. Rent expense is adjusted for prepayment (₦240,000 paid - ₦40,000 prepaid = ₦200,000). Total debenture interest payable for the year must be charged in full (10% of ₦1,000,000 = ₦100,000), even though only ₦60,000 was paid. Adding salaries (₦600,000), carriage outwards (₦50,000), and the increase in provision for doubtful debts (₦10,000) gives total expenses of ₦960,000. Subtracting total expenses from gross profit (₦2,500,000 - ₦960,000) gives a net profit before taxation of ₦1,540,000.

Step-by-Step Solution

1
Calculate the rent expense for the current period
Rent expense = ₦240,000 (paid) - ₦40,000 (prepaid) = ₦200,000
Prepaid expenses relate to the next financial year and must be deducted from cash paid.
2
Calculate the total annual debenture interest expense
Debenture interest = 10% × ₦1,000,000 = ₦100,000
Under the accrual basis, the full interest charge for the accounting period must be recognized, regardless of the amount paid.
3
Sum all administrative, selling, and financial expenses
Total expenses = ₦600,000 (Salaries) + ₦200,000 (Rent) + ₦50,000 (Carriage outwards) + ₦100,000 (Debenture interest) + ₦10,000 (Increase in provision for doubtful debts) = ₦960,000
All operational expenses and accrued financing charges must be aggregated to determine total overhead expenses.
4
Deduct total expenses from gross profit to find net profit before taxation
Net profit before taxation = ₦2,500,000 - ₦960,000 = ₦1,540,000
Net profit before taxation is derived by subtracting all allowable administrative, selling, distribution, and finance expenses from gross profit.

Key Concept

Preparation of Company Statement of Profit or Loss with End-of-Year Adjustments
Estimated Time:2m 0s
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Topics

Preparation of Company Statement of Profit or Loss

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