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Difficulty: MediumPreparation of Company Statement of Profit or Loss

Kano Allied Products Plc extracted the following balances from its trial balance for the year ended 31 December 2025:

- Gross Profit: ₦500,000
- Rent paid: ₦60,000
- Salaries paid: ₦90,000
- Existing Provision for Doubtful Debts: ₦12,000
- Trade Receivables: ₦160,000

Additional information at year-end:
1. Rent paid includes ₦10,000 prepaid for the next accounting year.
2. Salaries of ₦10,000 are accrued and unpaid.
3. Provision for doubtful debts is to be adjusted to 5% of Trade Receivables.

What is the net profit before taxation to be reported in the Statement of Profit or Loss?

  1. A
    ₦334,000
  2. B
    ₦342,000
  3. ₦354,000Answer
  4. D
    ₦346,000

Answer

The net profit before taxation to be reported in the Statement of Profit or Loss is ₦354,000.
The correct profit calculation accounts for prepaid rent by deducting ₦10,000 from rent paid (giving ₦50,000) and adding accrued salaries of ₦10,000 to salaries paid (giving ₦100,000), yielding ₦150,000 in total operating expenses. The required provision for doubtful debts is 5% of ₦160,000 = ₦8,000. Since the existing provision is ₦12,000, there is a reduction of ₦4,000, which is added as income to Gross Profit. Thus, Net Profit = ₦500,000 + ₦4,000 - ₦150,000 = ₦354,000.

Step-by-Step Solution

1
Calculate the adjusted Rent expense for the current period.
Rent expense = ₦60,000 - ₦10,000 (prepaid) = ₦50,000.
Prepaid expenses relate to future periods and must be deducted from cash paid.
2
Calculate the adjusted Salaries expense for the current period.
Salaries expense = ₦90,000 + ₦10,000 (accrued) = ₦100,000.
Accrued expenses represent incurred costs not yet paid and must be added.
3
Determine total operating expenses.
Total operating expenses = ₦50,000 + ₦100,000 = ₦150,000.
Sum of adjusted rent and salaries expenses.
4
Calculate the required provision for doubtful debts and compare it with the existing provision.
New provision = 5% of ₦160,000 = ₦8,000. Existing provision = ₦12,000. Reduction in provision = ₦12,000 - ₦8,000 = ₦4,000 (Income).
A decrease in provision for doubtful debts is credited to the Statement of Profit or Loss as income.
5
Compute Net Profit before taxation.
Net profit = Gross Profit (₦500,000) + Provision Reduction (₦4,000) - Operating Expenses (₦150,000) = ₦354,000.
Net profit is gross profit plus other income minus operating expenses.

Key Concept

Preparation of Company Statement of Profit or Loss with End-of-Year Adjustments
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Topics

Preparation of Company Statement of Profit or Loss

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