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Difficulty: MediumProfit and Loss Account and Net Profit Determination

At the end of the financial year on 31st December 2025, Folake Enterprise extracted the following summary balances:
- Gross profit: N200,000\text{N}200,000
- Discount received: N8,000\text{N}8,000
- Total operating expenses: N85,000\text{N}85,000

The following year-end adjustments are to be made:
1. Rent prepaid of N5,000\text{N}5,000 was included in total operating expenses.
2. An increase of N3,000\text{N}3,000 in the provision for doubtful debts is to be provided for.
3. The purchase of an office computer costing N20,000\text{N}20,000 was mistakenly debited to general operating expenses.

What is the net profit of Folake Enterprise for the year?

  1. N145,000\text{N}145,000Answer
  2. B
    N125,000\text{N}125,000
  3. C
    N115,000\text{N}115,000
  4. D
    N151,000\text{N}151,000

Answer

The net profit for Folake Enterprise is N145,000\text{N}145,000.
Total revenue income is N208,000\text{N}208,000 (Gross Profit N200,000\text{N}200,000 plus Discount Received N8,000\text{N}8,000). Operating expenses are adjusted by deducting prepaid rent (N5,000\text{N}5,000) and removing capital expenditure wrongly debited as general expenses (N20,000\text{N}20,000), then adding the increase in provision for doubtful debts (N3,000\text{N}3,000), yielding N63,000\text{N}63,000. Subtracting adjusted expenses from total income gives a net profit of N145,000\text{N}145,000.

Step-by-Step Solution

1
Calculate total revenue/income to be credited to Profit and Loss Account
Total Income = Gross Profit + Discount Received = N200,000+N8,000=N208,000\text{N}200,000 + \text{N}8,000 = \text{N}208,000
Gross profit and other operating income like discounts received increase profit.
2
Calculate total adjusted operating expenses
Adjusted Expenses = N85,000−N5,000 (prepaid rent)−N20,000 (office computer)+N3,000 (provision increase)=N63,000\text{N}85,000 - \text{N}5,000 \text{ (prepaid rent)} - \text{N}20,000 \text{ (office computer)} + \text{N}3,000 \text{ (provision increase)} = \text{N}63,000
Prepaid expenses relate to future periods and must be deducted. Capital expenditure (office computer) is a non-current asset and must be excluded from revenue expenses. Increases in provision for doubtful debts represent additional expenses and must be added.
3
Determine net profit
Net Profit = Total Income - Total Adjusted Expenses = N208,000−N63,000=N145,000\text{N}208,000 - \text{N}63,000 = \text{N}145,000
Net profit is the excess of gross profit and incidental income over total adjusted operating expenses.

Key Concept

Net Profit Determination with Year-End Adjustments
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Topics

Profit and Loss Account and Net Profit Determination

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