Adjustments to Final Accounts Practice Questions — JAMB UTME — Page 2

Question 21Question →

At the end of the financial year, a trader's trial balance showed Trade Receivables of $\text{₦}85,000$ and an existing Provision for Doubtful Debts of $\text{₦}2,500$ . Before preparing final accounts, an additional bad debt of $\text{₦}5,000$ is to be written off, and the provision for doubtful debts is to be adjusted to $5\%$ of the remaining trade receivables. Calculate the net increase in the provision for doubtful debts (in $\text{₦}$ ) to be charged as an expense in the Profit and Loss Account.

Show answer & explanation

Answer: 1500

Answer

The net increase in the provision for doubtful debts to be charged to the Profit and Loss Account is

\text{₦}1,500

.

To find the income statement expense, first subtract the additional bad debts written off (

\text{₦}5,000

) from gross trade receivables (

\text{₦}85,000

), yielding net receivables of

\text{₦}80,000

. Applying the

5\%

rate yields a required provision of

\text{₦}4,000

. Subtracting the existing provision balance of

\text{₦}2,500

gives a net increase of

\text{₦}1,500

to be charged to the Profit and Loss Account.

Step-by-Step Solution

1

Deduct additional bad debts written off from total receivables

Net Trade Receivables =

\text{₦}85,000 - \text{₦}5,000 = \text{₦}80,000

Bad debts written off represent confirmed irrecoverable debts and must be deducted prior to estimating the provision for doubtful debts.

2

Calculate the new required provision balance

New Provision =

5\% \times \text{₦}80,000 = \text{₦}4,000

The provision percentage is applied to the remaining collectible trade receivables.

3

Determine the net adjustment required for the Profit and Loss Account

Net Increase =

\text{₦}4,000 - \text{₦}2,500 = \text{₦}1,500

The Profit and Loss Account only reflects the incremental change between the new provision required and the old provision balance.

Key Concept

Creation and Adjustment of Provision for Doubtful Debts

Question 22Question →

On 1 January 2025, the Advertising Account of Folake & Co. showed a prepaid balance of $\text{₦}18,000$ and an accrued balance of $\text{₦}12,000$ . During the year ended 31 December 2025, a total cash payment of $\text{₦}145,000$ was made for advertising. At the end of the financial year on 31 December 2025, advertising accrued was $\text{₦}25,000$ and advertising prepaid was $\text{₦}22,000$ . What is the total amount to be charged to the Profit and Loss Account for advertising for the year ended 31 December 2025?

Show answer & explanation

Answer: 154000

Answer

₦154,000

Under the accrual basis of accounting, expenses charged to the Profit and Loss Account must relate strictly to the current financial year. Adding the opening prepayment (₦18,000) and closing accrual (₦25,000) while deducting the opening accrual (₦12,000) and closing prepayment (₦22,000) from the cash paid (₦145,000) yields ₦154,000.

Step-by-Step Solution

1

Identify cash paid for advertising during the financial period

Total cash paid = ₦145,000

This represents the initial cash outflow before applying accrual adjustments.

2

Adjust for opening balances of prepayment and accrual

Net opening adjustment = +₦18,000 (prepaid) - ₦12,000 (accrued) = +₦6,000

Opening prepayment was paid in the previous period for the current year, whereas opening accrual represents previous period expenses settled out of this year's cash payments.

3

Adjust for closing balances of accrual and prepayment

Net closing adjustment = +₦25,000 (accrued) - ₦22,000 (prepaid) = +₦3,000

Closing accrual is an expense incurred in the current period but unpaid, while closing prepayment is a cash payment made for the upcoming period.

4

Compute net charge to Profit and Loss Account

Profit & Loss charge = ₦145,000 + ₦6,000 + ₦3,000 = ₦154,000

Summing the cash paid with all periodic adjustments applies the accrual basis of accounting to find the true expense for the financial year.

Key Concept

Accrual Accounting and Expense Adjustment

Estimated Time:2m 0s

Question 23Question →

At the end of the financial year, Adebayo Stores extracted the following balances from its financial records:

- Trade Debtors: $\text{₦}85,000$
- Bad debts to be written off: $\text{��}5,000$

The business policy requires creating a $10\%$ Provision for Doubtful Debts and a $5\%$ Provision for Discount on Debtors. What is the correct amount to be recognized as the Provision for Discount on Debtors?

\text{₦}3,600

\text{₦}4,000

\text{₦}4,250

\text{₦}3,825

Show answer & explanation

Answer: $\text{₦}3,600$

Answer

The provision for discount on debtors is

\text{₦}3,600

.

The provision for discount on debtors is computed on net good debtors. Subtracting bad debts (

\text{₦}5,000

) gives

\text{₦}80,000

. Deducting the

10\%

doubtful debts provision (

\text{₦}8,000

) leaves

\text{₦}72,000

. Applying

5\%

to

\text{₦}72,000

yields

\text{₦}3,600

.

Step-by-Step Solution

1

Deduct bad debts written off from gross trade debtors to obtain net trade debtors before provisions.

\text{₦}85,000 - \text{₦}5,000 = \text{₦}80,000

Bad debts written off represent uncollectible debts and must be removed from gross debtors prior to estimating provisions.

2

Calculate the Provision for Doubtful Debts on the adjusted trade debtors balance.

10\% \times \text{₦}80,000 = \text{₦}8,000

The provision for doubtful debts is calculated on the remaining recoverable debtors.

3

Deduct the provision for doubtful debts from the adjusted trade debtors balance.

\text{₦}80,000 - \text{₦}8,000 = \text{₦}72,000

Cash discount will only be offered to prompt-paying debtors who are not expected to default.

4

Calculate the Provision for Discount on Debtors on the net estimated good debtors balance.

5\% \times \text{₦}72,000 = \text{₦}3,600

Provision for discount on debtors must be computed strictly after deducting doubtful debt provisions.

Key Concept

Accounting order of adjustments for trade debtors: Bad Debts Written Off → Provision for Doubtful Debts → Provision for Discount on Debtors.

Estimated Time:1m 30s

Question 24Question →

At the end of an accounting period, a trading enterprise holds two categories of unsold inventory with the following details:

- Product Alpha: Cost price of $\text{N}28,000$ , estimated selling price of $\text{N}32,000$ , and estimated selling expenses of $\text{N}5,000$ .
- Product Beta: Cost price of $\text{N}42,000$ , estimated selling price of $\text{N}50,000$ , and estimated selling expenses of $\text{N}3,000$ .

In accordance with the prudence concept, what is the total valuation of closing stock to be credited to the Trading Account in Naira?

Show answer & explanation

Answer: 69000

Answer

69,000 Naira

Closing inventory must be valued at the lower of cost and net realizable value for each item. For Product Alpha, the NRV of

\text{N}27,000

(

32,000 - 5,000

) is lower than its cost of

\text{N}28,000

. For Product Beta, the cost of

\text{N}42,000

is lower than its NRV of

\text{N}47,000

(

50,000 - 3,000

). Summing these lower values (

27,000 + 42,000

) gives a total closing stock valuation of 69,000 Naira.

Step-by-Step Solution

1

Calculate Net Realizable Value (NRV) for Product Alpha and Product Beta.

Product Alpha NRV =

\text{N}27,000

; Product Beta NRV =

\text{N}47,000

.

Net Realizable Value is determined by subtracting estimated completion and selling costs from the estimated selling price.

2

Compare cost and NRV for each category to select the lower value.

Product Alpha valuation =

\text{N}27,000

; Product Beta valuation =

\text{N}42,000

.

The prudence concept mandates that closing stock is valued at the lower of cost and net realizable value on an item-by-item basis to avoid overstating assets and profit.

3

Sum the selected valuation figures for all inventory categories.

Total Closing Stock =

27,000 + 42,000 = \text{N}69,000

.

Total inventory valuation is the combined value of all individual stock categories.

Key Concept

Valuation of closing stock at the lower of cost and net realizable value (Prudence Concept)

Question 25Question →

At the end of a financial year, a trader's physical stock count reveals total inventory costing $\text{N}120,000$ . An item of inventory included in this count with a cost of $\text{N}25,000$ was damaged and can be sold for $\text{N}18,000$ after incurring necessary repair costs of $\text{N}3,000$ . In accordance with the prudence concept, what is the value of closing stock to be reported in the financial statements?

\text{N}110,000

\text{N}113,000

\text{N}116,000

\text{N}120,000

Show answer & explanation

Answer: $\text{N}110,000$

Answer

\text{N}110,000

Closing stock must be valued at the lower of cost and net realizable value (NRV). Undamaged inventory is valued at cost (

\text{N}95,000

). For the damaged portion, NRV is

\text{N}18,000 - \text{N}3,000 = \text{N}15,000

, which is lower than its cost of

\text{N}25,000

. Combining these yields a total valuation of

\text{N}95,000 + \text{N}15,000 = \text{N}110,000

.

Step-by-Step Solution

1

Calculate the cost of undamaged stock

\text{N}120,000 - \text{N}25,000 = \text{N}95,000

The undamaged items are valued at their original cost since cost is lower than expected selling value.

2

Calculate the Net Realizable Value (NRV) of damaged stock

\text{NRV} = \text{Selling Price} - \text{Repair Costs} = \text{N}18,000 - \text{N}3,000 = \text{N}15,000

Net Realizable Value is the estimated selling price minus costs needed to complete or sell the item.

3

Apply the prudence rule (lower of cost and NRV) for damaged stock

Valuation of damaged stock =

\text{N}15,000

Since NRV (

\text{N}15,000

) is lower than original cost (

\text{N}25,000

), the lower figure must be used.

4

Calculate total closing stock valuation

\text{Total Closing Stock} = \text{N}95,000 + \text{N}15,000 = \text{N}110,000

Summing the undamaged stock at cost and damaged stock at NRV gives the correct total inventory value.

Key Concept

Valuation of Inventory at Lower of Cost and Net Realizable Value (IAS 2 / Prudence Concept)

Question 26Question →

At 1 January 2025, a trader's Rates Account had a prepaid balance of $\text{₦}35,000$ . During the financial year ended 31 December 2025, total cash paid for rates was $\text{₦}210,000$ , which included $\text{₦}45,000$ paid for rates covering the first quarter of 2026. As of 31 December 2025, an amount of $\text{₦}15,000$ for rates owing for December 2025 had not been paid. What is the net rates expense to be debited to the Profit and Loss Account for the year ended 31 December 2025?

Show answer & explanation

Answer: 215000

Answer

The total rates expense to be debited to the Profit and Loss Account for the year ended 31 December 2025 is ₦215,000.

According to the matching concept, the Profit and Loss Account must reflect only expenses incurred for the specific period. Starting with cash paid (₦210,000), adding the opening prepaid balance (₦35,000) and closing accrued balance (₦15,000), and deducting the closing prepaid balance (₦45,000) yields ₦215,000 as the true expense for 2025.

Step-by-Step Solution

1

Record total cash paid during the current financial year

Cash paid = ₦210,000

This is the base amount paid through the cash book for rates.

2

Add the opening prepaid expense balance

₦210,000 + ₦35,000 = ₦245,000

Prepayments from the previous period relate to consumption in the current period.

3

Deduct the closing prepaid expense balance

₦245,000 - ₦45,000 = ₦200,000

Prepayments made at the end of the year relate to the subsequent accounting period.

4

Add the closing accrued expense balance

₦200,000 + ₦15,000 = ₦215,000

Accrued expenses incurred in the current period must be included under the matching/accrual concept even if unpaid.

Key Concept

Accrual and matching concept applied to expense accounts

Question 27Question →

The draft Trading Account of Kalu Enterprises showed the following balances at year-end:

- Opening Inventory: ₦40,000
- Purchases: ₦250,000
- Carriage Inwards: ₦10,000
- Sales: ₦400,000
- Closing Inventory: ₦45,000

It was later discovered that goods costing ₦15,000 withdrawn by the owner for personal use had been incorrectly credited to the Sales Account at their selling price of ₦20,000. What is the corrected gross profit for the year?

₦140,000

₦145,000

₦160,000

₦110,000

Show answer & explanation

Answer: ₦140,000

Answer

₦140,000

To determine the corrected gross profit, two rectifications are required. First, the selling price of ₦20,000 must be deducted from Sales, resulting in corrected Sales of ₦380,000. Second, the cost price of ₦15,000 must be deducted from Purchases, resulting in corrected Purchases of ₦235,000. Adding Opening Inventory (₦40,000) and Carriage Inwards (₦10,000) to corrected Purchases (₦235,000) and subtracting Closing Inventory (₦45,000) gives a Cost of Goods Sold of ₦240,000. Subtracting ₦240,000 from ₦380,000 yields the correct gross profit of ₦140,000.

Step-by-Step Solution

1

Adjust Sales to eliminate the incorrect entry

Corrected Sales = ₦400,000 - ₦20,000 = ₦380,000

Goods taken for personal use do not constitute business sales and must be removed from the Sales Account.

2

Adjust Purchases for goods withdrawn at cost price

Corrected Purchases = ₦250,000 - ₦15,000 = ₦235,000

Goods withdrawn by the owner must be recorded at cost price by reducing Purchases.

3

Compute the Cost of Goods Sold (COGS)

COGS = Opening Inventory (₦40,000) + Carriage Inwards (₦10,000) + Corrected Purchases (₦235,000) - Closing Inventory (₦45,000) = ₦240,000

Cost of Goods Sold includes carriage inwards and reflects net purchases.

4

Calculate corrected Gross Profit

Gross Profit = ₦380,000 - ₦240,000 = ₦140,000

Gross profit is calculated as Corrected Sales minus Cost of Goods Sold.

Key Concept

Accounting treatment for goods withdrawn by owner misclassified as sales

Estimated Time:2m 0s

Question 28Question →

On 1 January 2025, a business recorded commission income accrued of $₦14,500$ and commission income received in advance of $₦8,000$ . During the year ended 31 December 2025, total cash received and banked for commission was $₦165,000$ . At 31 December 2025, commission income accrued stood at $₦19,000$ , while commission income received in advance was $₦11,500$ . What is the total amount of commission income to be credited to the Profit and Loss Account for the year ended 31 December 2025?

Show answer & explanation

Answer: 166000

Answer

The total commission income to be credited to the Profit and Loss Account for the year ended 31 December 2025 is ₦166,000.

In accordance with the accrual concept, the Profit and Loss Account must be credited only with income earned during the financial period. Calculating the net income for 2025 requires adding opening prepaid income (₦8,000) and closing accrued income (₦19,000) to cash received (₦165,000), while deducting opening accrued income (₦14,500) and closing prepaid income (₦11,500). This gives a total credit of ₦166,000.

Step-by-Step Solution

1

Determine the cash received during the accounting year

Cash received = ₦165,000

This is the initial cash flow figure recorded in the cash book during the period.

2

Adjust for opening accruals and prepayments at 1 January 2025

Adjusted cash figure = ₦165,000 + ₦8,000 - ₦14,500 = ₦158,500

Opening prepaid income relates to the current year and must be added. Opening accrued income relates to the prior year and was collected in the current year, so it must be subtracted.

3

Adjust for closing accruals and prepayments at 31 December 2025

Final Profit & Loss credit = ₦158,500 + ₦19,000 - ₦11,500 = ₦166,000

Closing accrued income was earned in the current period and must be added. Closing prepaid income relates to the next period and must be subtracted.

Key Concept

Accrual basis of accounting for income recognition

Question 29Question →

During the financial year ended 31 December 2025, a business paid $\text{₦}95,000$ by cash for electricity expenses. At 1 January 2025, electricity prepaid was $\text{₦}12,500$ and electricity accrued was $\text{₦}8,000$ . At 31 December 2025, electricity accrued was $\text{₦}14,000$ and electricity prepaid was $\text{₦}6,500$ . Calculate the amount of electricity expense to be debited to the Profit and Loss Account for the year ended 31 December 2025.

Show answer & explanation

Answer: 107000

Answer

The amount to be debited to the Profit and Loss Account as electricity expense for the year ended 31 December 2025 is ₦107,000.

According to the matching/accrual concept of accounting, revenue and expenses must be recognized in the period they occur regardless of when cash is paid. The formula for expense to be charged to Profit and Loss is: Cash Paid + Opening Prepayment - Opening Accrual + Closing Accrual - Closing Prepayment. Performing the calculation: ₦95,000 + ₦12,500 - ₦8,000 + ₦14,000 - ₦6,500 yields ₦107,000.

Step-by-Step Solution

1

Start with total cash paid during the year

₦95,000

This is the initial cash outlay recorded in the cash book and posted to the expense account.

2

Adjust for opening prepaid and accrued balances

₦95,000 + ₦12,500 - ₦8,000 = ₦99,500

Opening prepayment paid in the prior period relates to the current period and must be added. Opening accrual incurred in the prior period was unpaid and must be subtracted.

3

Adjust for closing accrued and prepaid balances

₦99,500 + ₦14,000 - ₦6,500 = ₦107,000

Closing accrual incurred in the current period must be added. Closing prepayment paid in the current period for the future period must be subtracted.

Key Concept

Accrual concept in calculating expense to be charged to Profit and Loss Account

Estimated Time:1m 30s

Question 30Question →

The following details relate to rent income of a business for the financial year ended 31 December 2025:

Item	Amount (₦)
Rent received in cash during 2025	380,000
Rent accrued as at 1 January 2025	25,000
Rent accrued as at 31 December 2025	40,000
Rent received in advance as at 31 December 2025	18,000

What is the amount to be credited to the Profit and Loss Account as rent income for the year ended 31 December 2025?

Show answer & explanation

Answer: 377000

Answer

The amount to be credited to the Profit and Loss Account as rent income for the year ended 31 December 2025 is ₦377,000.

Under the accrual concept of accounting, income credited to the Profit and Loss Account reflects revenues earned during the accounting period rather than cash received. The formula is: Net Income = Cash Received - Opening Accrued Income + Closing Accrued Income - Closing Prepaid Income. Substituting the given values yields: ₦380,000 - ₦25,000 + ₦40,000 - ₦18,000 = ₦377,000.

Step-by-Step Solution

1

Identify the total cash received for rent

₦380,000

This represents the total cash inflows recorded in the cash book for rent during the year.

2

Deduct opening accrued rent income

₦380,000 - ₦25,000 = ₦355,000

Accrued income at the start of the year was earned in the previous financial year and must be excluded from current revenue.

3

Add closing accrued rent income

₦355,000 + ₦40,000 = ₦395,000

Accrued income at the end of the year was earned during the current period and must be included regardless of cash collection.

4

Deduct closing prepaid rent income

₦395,000 - ₦18,000 = ₦377,000

Rent received in advance at year-end relates to the next accounting period and must be deferred.

Key Concept

Determination of income earned during an accounting period using the accrual concept.

Question 31Question →

During the financial year, a firm paid $\text{₦}120,000$ by cash for salaries. At the end of the year, salaries amounting to $\text{₦}15,000$ remained accrued and unpaid. What total amount should be debited to the Profit and Loss Account for salaries?

\text{₦}135,000

\text{₦}105,000

\text{₦}120,000

\text{₦}15,000

Show answer & explanation

Answer: $\text{₦}135,000$

Answer

\text{₦}135,000

Under the accrual concept of accounting, expenses incurred during an accounting period must be matched against the income of that period. Adding the outstanding salary of

\text{₦}15,000

to the cash paid of

\text{₦}120,000

gives the total expense of

\text{₦}135,000

to be charged to the Profit and Loss Account.

Step-by-Step Solution

1

Identify cash paid and accrued expenses at year-end

Cash paid =

\text{₦}120,000

; Accrued salary =

\text{₦}15,000

Under the accrual concept, expenses incurred during the financial period must be recognized regardless of when cash is paid.

2

Calculate the total salary expense for the Profit and Loss Account

\text{₦}120,000 + \text{₦}15,000 = \text{₦}135,000

Accrued expenses at the end of the period are added to the cash paid to determine the full charge for the year.

Key Concept

Accruals adjustment for expenses

Question 32Question →

The Salaries Account of Bisi Stores for the year ended 31 December 2025 showed that salary expense charged to the Profit and Loss Account was $\text{₦}480,000$ .

Additional information:
- Salaries accrued at 1 January 2025: $\text{₦}35,000$
- Salaries paid in advance at 1 January 2025: $\text{₦}15,000$
- Salaries accrued at 31 December 2025: $\text{₦}42,000$
- Salaries paid in advance at 31 December 2025: $\text{₦}20,000$

What was the total amount of cash paid for salaries during the year ended 31 December 2025?

\text{₦}478,000

\text{₦}482,000

\text{₦}458,000

\text{₦}502,000

Show answer & explanation

Answer: $\text{₦}478,000$

Answer

\text{₦}478,000

The correct response of

\text{₦}478,000

correctly derives the total cash paid by subtracting closing accruals (

\text{₦}42,000

), adding opening accruals (

\text{₦}35,000

), adding closing prepayments (

\text{₦}20,000

), and subtracting opening prepayments (

\text{₦}15,000

) from the total expense charged to the Profit and Loss Account (

\text{₦}480,000

).

Step-by-Step Solution

1

Set up the formula relating Cash Paid to the Profit and Loss expense charge

\text{Profit \& Loss Expense} = \text{Cash Paid} + \text{Opening Prepayment} - \text{Closing Prepayment} + \text{Closing Accrual} - \text{Opening Accrual}

Accruals increase the expense of the period, while prepayments decrease the expense of the period.

2

Rearrange the formula to solve for Cash Paid

\text{Cash Paid} = \text{Profit \& Loss Expense} - \text{Closing Accrual} + \text{Opening Accrual} + \text{Closing Prepayment} - \text{Opening Prepayment}

Working backwards from the Profit and Loss charge requires reversing the standard year-end adjustment operations.

3

Substitute the given values into the rearranged equation

\text{Cash Paid} = 480,000 - 42,000 + 35,000 + 20,000 - 15,000 = 478,000

Evaluating the expression gives the net cash outflow for salaries during the financial year.

Key Concept

Reconciling expense account cash payments with Profit and Loss charges using opening and closing accruals and prepayments.

Estimated Time:2m 0s

Question 33Question →

On 1 January 2025, the Rent Account of a trader showed a prepaid balance of $\text{₦}15,000$ and an accrued balance of $\text{₦}20,000$ . Total cash paid for rent during the year ended 31 December 2025 was $\text{₦}210,000$ . At 31 December 2025, rent prepaid was $\text{₦}25,000$ while rent owing amounted to $\text{₦}35,000$ . What is the amount of rent expense to be charged to the Profit and Loss Account for the year ended 31 December 2025?

\text{₦}195,000

\text{₦}205,000

\text{₦}215,000

\text{₦}225,000

Show answer & explanation

Answer: $\text{₦}215,000$

Answer

The amount to be charged to the Profit and Loss Account for rent expense is

\text{₦}215,000

.

Under accrual accounting, the expense charged to the Profit and Loss Account reflects the actual expense incurred during the accounting period regardless of when cash is paid. Therefore, opening prepaid rent (

\text{₦}15,000

) and closing accrued rent (

\text{₦}35,000

) are added to the cash paid (

\text{₦}210,000

), while opening accrued rent (

\text{₦}20,000

) and closing prepaid rent (

\text{₦}25,000

) are deducted, giving

\text{₦}215,000

.

Step-by-Step Solution

1

Identify the base cash payment made during the financial year.

Total cash paid =

\text{₦}210,000

Cash paid forms the starting point for calculating the actual expense incurred for the year.

2

Adjust for opening balances at 1 January 2025.

Add Opening Prepaid (

\text{₦}15,000

) and Subtract Opening Accrued (

\text{₦}20,000

)

Prepaid rent brought forward belongs to the current year, whereas accrued rent brought forward relates to the previous year.

3

Adjust for closing balances at 31 December 2025.

Add Closing Accrued (

\text{₦}35,000

) and Subtract Closing Prepaid (

\text{₦}25,000

)

Accrued rent at year-end belongs to the current year's expense, whereas prepaid rent at year-end relates to the next financial year.

4

Calculate the net charge to the Profit and Loss Account.

\text{₦}210,000 + \text{₦}15,000 - \text{₦}20,000 + \text{₦}35,000 - \text{₦}25,000 = \text{₦}215,000

Combining cash paid with accrual basis adjustments yields the true rental expense for the period.

Key Concept

Accruals and Prepayments Adjustment Formula for Expense Accounts

Question 34Question →

A business paid $\text{₦}144,000$ by bank transfer on 1 April 2025 for an annual insurance policy covering the period from 1 April 2025 to 31 March 2026. At 1 January 2025, the insurance account had an opening prepaid balance of $\text{₦}24,000$ for the period from 1 January 2025 to 31 March 2025. What amount (in $\text{₦}$ ) should be debited to the Profit and Loss Account as insurance expense for the financial year ended 31 December 2025?

Show answer & explanation

Answer: 132000

Answer

The insurance expense to be debited to the Profit and Loss Account for the year ended 31 December 2025 is ₦132,000.

Under the accrual concept, the Profit and Loss Account must reflect only expenses relating to the current accounting period (12 months from 1 January to 31 December 2025). The expense consists of 3 months from the opening prepayment (₦24,000) plus 9 months of the current year's policy payment (9/12 × ₦144,000 = ₦108,000), giving a total expense of ₦132,000.

Step-by-Step Solution

1

Identify cash paid and opening prepayment

Cash paid during the year = ₦144,000; Opening prepayment at 1 January 2025 = ₦24,000.

Opening prepayment represents an expense incurred in the current accounting year that was paid for in advance in the prior year.

2

Calculate the closing prepayment at 31 December 2025

Closing prepayment = 3/12 × ₦144,000 = ₦36,000.

The policy payment of ₦144,000 covers 12 months (1 April 2025 to 31 March 2026), leaving 3 months (January to March 2026) prepaid at year-end.

3

Compute the insurance expense for the Profit and Loss Account

Insurance Expense = ₦144,000 + ₦24,000 - ₦36,000 = ₦132,000.

Applying the accrual principle matches the exact 12-month expense incurred (3 months from opening prepayment + 9 months from current payment) to the 2025 financial period.

Key Concept

Accrual concept treatment of opening and closing prepayments for expense accounts

Question 35Question →

Kalu Enterprises received cash of $\text{₦}25,000$ from a customer whose account was previously written off as a bad debt in the preceding financial year. Complete the statement below regarding the double-entry bookkeeping procedure required to reinstate the customer's account before recording the cash receipt.

Fill in the blanks below

To reinstate the customer's account, the bookkeeper must debit the account and credit the account.

Show answer & explanation

Answer

To reinstate the customer's account prior to recording cash collection, the Trade Debtors (or Personal) account is debited and the Bad Debts Recovered account is credited.

When a debt previously written off is recovered, proper double-entry accounting mandates a two-stage process. First, the debtor's account is reinstated by debiting the Trade Debtors (or customer's personal) account and crediting the Bad Debts Recovered account. Second, the cash receipt is recorded by debiting Cash/Bank and crediting Trade Debtors.

Step-by-Step Solution

1

Identify the purpose of reinstating a written-off bad debt

The debtor's personal ledger account needs to show that the previously written-off debt has now been honored.

Reinstating the account restores the debt balance temporarily so that the subsequent cash settlement can be properly posted against the customer's personal record.

2

Determine the debit entry for account reinstatement

Debit the Trade Debtors / Personal account of the customer.

Debiting the Trade Debtors account re-establishes the claim against the debtor in the accounting records.

3

Determine the credit entry for account reinstatement

Credit the Bad Debts Recovered account.

Crediting the Bad Debts Recovered account recognizes the income gained from recovering a debt that was formerly treated as an expense.

Key Concept

Bookkeeping entries for bad debts recovered

Estimated Time:1m 30s

Question 36Question →

Kenechukwu Enterprises purchased office equipment for $₦500,000$ on 1 January 2024. The equipment is expected to have a useful life of 5 years and a residual value of $₦50,000$ . Using the straight-line method, what is the annual depreciation charge?

₦100,000

₦90,000

₦450,000

₦50,000

Show answer & explanation

Answer: $₦90,000$

Answer

The annual depreciation charge for the equipment is

₦90,000

.

The correct annual depreciation is obtained by subtracting the residual value of

₦50,000

from the purchase cost of

₦500,000

to get a depreciable base of

₦450,000

, and then dividing by the 5-year useful life to get

₦90,000

per annum.

Step-by-Step Solution

1

Determine the depreciable cost of the asset.

Depreciable Amount = Cost - Residual Value =

₦500,000 - ₦50,000 = ₦450,000

.

Under the straight-line method, depreciation is computed on the total net cost consumed over the asset's useful life.

2

Divide the depreciable amount by the useful life.

Annual Depreciation =

₦450,000 / 5 = ₦90,000

.

Straight-line depreciation allocates an equal expense amount to each accounting year.

Key Concept

Straight-line Depreciation Calculation

Estimated Time:45s

Question 37Question →

On 1 April 2023, Zenith Manufacturing Company purchased a machine for $₦800,000$ and paid an additional $₦100,000$ for its installation. The company depreciates machinery at $20\%$ per annum using the reducing balance method, calculated on a pro-rata monthly basis. The financial year ends on 31 December. On 31 December 2025, the machine was traded in for a newer model valued at $₦1,200,000$ , with Zenith paying a net cash balance of $₦750,000$ . What is the profit or loss on disposal of the old machine?

Loss of

₦39,600

Profit of

₦39,600

Loss of

₦14,800

Loss of

₦10,800

Show answer & explanation

Answer: Loss of $₦39,600$

Answer

Loss of

₦39,600

The total cost of the machine includes its purchase price (

₦800,000

) plus installation (

₦100,000

), giving

₦900,000

. Depreciating by

20\%

reducing balance yields

₦135,000

for 9 months in 2023,

₦153,000

in 2024, and

₦122,400

in 2025. This leaves a net book value of

₦489,600

. The part-exchange allowance given for the old machine is

₦1,200,000 - ₦750,000 = ₦450,000

. Comparing the allowance of

₦450,000

to the carrying value of

₦489,600

results in a loss on disposal of

₦39,600

.

Step-by-Step Solution

1

Determine total initial cost of the machine

Initial Cost =

₦800,000 + ₦100,000 = ₦900,000

Installation costs are capital expenditure and must be added to the purchase price of non-current assets.

2

Calculate depreciation for 2023 (9 months from 1 April to 31 December)

Depreciation (2023) =

₦900,000 \times 20\% \times \frac{9}{12} = ₦135,000

Net Book Value at 31/12/2023 =

₦900,000 - ₦135,000 = ₦765,000

The asset was held for only 9 months in the first year.

3

Calculate depreciation for 2024 (Full year)

Depreciation (2024) =

₦765,000 \times 20\% = ₦153,000

Net Book Value at 31/12/2024 =

₦765,000 - ₦153,000 = ₦612,000

Applying

20\%

to the reducing net book value.

4

Calculate depreciation for 2025 up to date of disposal (Full year)

Depreciation (2025) =

₦612,000 \times 20\% = ₦122,400

Net Book Value at 31/12/2025 =

₦612,000 - ₦122,400 = ₦489,600

Determining carrying value immediately prior to trade-in.

5

Calculate part-exchange allowance and resulting profit or loss on disposal

Part-Exchange Allowance = Value of new machine - Cash paid =

₦1,200,000 - ₦750,000 = ₦450,000

Profit / (Loss) = Allowance - Net Book Value =

₦450,000 - ₦489,600 = -₦39,600

(Loss of

₦39,600

)

A loss occurs when the trade-in allowance is less than the net book value of the asset.

Key Concept

Reducing Balance Depreciation with Partial Year Acquisition and Asset Trade-in Disposal

Question 38Question →

On 1 January 2022, Zenith Manufacturing Enterprise purchased office equipment for $₦8,000,000$ . The firm computes depreciation at a rate of $25\%$ per annum using the reducing balance method. If accounts are prepared annually to 31 December, which double entry correctly records the depreciation expense for the year ended 31 December 2024, and what is the accumulated balance in the Provision for Depreciation Account as at that date?

Debit Profit and Loss Account with

₦1,125,000

and Credit Provision for Depreciation Account with

₦1,125,000

; Closing Provision for Depreciation balance is

₦4,625,000

Debit Profit and Loss Account with

₦2,000,000

and Credit Provision for Depreciation Account with

₦2,000,000

; Closing Provision for Depreciation balance is

₦6,000,000

Debit Provision for Depreciation Account with

₦1,125,000

and Credit Profit and Loss Account with

₦1,125,000

; Closing Provision for Depreciation balance is

₦4,625,000

Debit Profit and Loss Account with

₦1,125,000

and Credit Office Equipment Account with

₦1,125,000

; Closing Provision for Depreciation balance is

₦1,125,000

Show answer & explanation

Answer: Debit Profit and Loss Account with $₦1,125,000$ and Credit Provision for Depreciation Account with $₦1,125,000$ ; Closing Provision for Depreciation balance is $₦4,625,000$

Answer

Debit Profit and Loss Account with

₦1,125,000

and Credit Provision for Depreciation Account with

₦1,125,000

; Closing Provision for Depreciation balance is

₦4,625,000

The correct answer properly applies the reducing balance depreciation formula across all three years. In 2022, depreciation is

₦2,000,000

, leaving an NBV of

₦6,000,000

. In 2023, depreciation is

₦1,500,000

, leaving an NBV of

₦4,500,000

. In 2024, depreciation is

25\%

of

₦4,500,000 = ₦1,125,000

. To record annual depreciation, the Profit and Loss Account is debited (expense) and the Provision for Depreciation Account is credited (contra-asset). Total accumulated provision at 31 December 2024 is

₦2,000,000 + ₦1,500,000 + ₦1,125,000 = ₦4,625,000

.

Step-by-Step Solution

1

Calculate Year 1 (2022) depreciation expense and Net Book Value (NBV) at end of 2022

Year 1 Depreciation =

25\% \times ₦8,000,000 = ₦2,000,000

. NBV at end of 2022 =

₦8,000,000 - ₦2,000,000 = ₦6,000,000

.

Under the reducing balance method, the first year depreciation is calculated on original cost.

2

Calculate Year 2 (2023) depreciation expense and NBV at end of 2023

Year 2 Depreciation =

25\% \times ₦6,000,000 = ₦1,500,000

. Accumulated Depreciation end of 2023 =

₦2,000,000 + ₦1,500,000 = ₦3,500,000

. NBV at end of 2023 =

₦8,000,000 - ₦3,500,000 = ₦4,500,000

.

Depreciation in Year 2 is based on the reduced net book value at the beginning of 2023.

3

Calculate Year 3 (2024) depreciation expense and closing Provision for Depreciation balance

Year 3 Depreciation =

25\% \times ₦4,500,000 = ₦1,125,000

. Closing Provision for Depreciation balance =

₦3,500,000 + ₦1,125,000 = ₦4,625,000

.

Year 3 depreciation charge is calculated on the NBV at the start of 2024 (

₦4,500,000

). The closing provision accumulates all three years of depreciation.

4

Determine the correct double entry posting

Debit Profit and Loss Account with

₦1,125,000

and Credit Provision for Depreciation Account with

₦1,125,000

.

Depreciation is an expense (debited to P&L Account) and increases the accumulated allowance liability/contra-asset (credited to Provision for Depreciation Account).

Key Concept

Accounting Treatment of Reducing Balance Depreciation and Provision Account

Estimated Time:2m 0s

Question 39Question →

Kano Retail Outlets acquired office furniture costing $₦1,500,000$ on 1 January 2024. Depreciation is charged at $10\%$ per annum using the straight-line method. What is the accumulated balance in the Provision for Depreciation on Furniture Account as of 31 December 2025?

Show answer & explanation

Answer: 300000

Answer

The accumulated balance in the Provision for Depreciation Account as of 31 December 2025 is

₦300,000

.

The annual depreciation expense under the straight-line method is

10\% \times ₦1,500,000 = ₦150,000

. Since the asset was held for two complete accounting years (from 1 January 2024 to 31 December 2025), the total accumulated provision credited to the Provision for Depreciation Account is

₦150,000 \times 2 = ₦300,000

.

Step-by-Step Solution

1

Calculate the annual depreciation expense for one year using the straight-line method

Annual Depreciation =

10\% \times ₦1,500,000 = ₦150,000

Under the straight-line method, depreciation is computed as a fixed percentage of the historical cost of the asset.

2

Multiply the annual depreciation expense by the number of accounting periods (2 years: 2024 and 2025)

Accumulated Provision for Depreciation =

₦150,000 \times 2 = ₦300,000

The Provision for Depreciation Account accumulates total depreciation charged on the asset up to the balance sheet date.

Key Concept

Accounting Treatment of Provision for Depreciation

Estimated Time:45s

Question 40Question →

The trial balance of Danladi Commercial Enterprise as at 31 December 2025 showed Motor Vehicles at cost of $₦15,000,000$ and Provision for Depreciation on Motor Vehicles of $₦5,400,000$ .

On 30 June 2025, a vehicle that had been purchased on 1 January 2023 for $₦3,000,000$ was sold for $₦1,600,000$ .

The policy of the enterprise is to provide depreciation on motor vehicles at $20\%$ per annum using the reducing balance method, charging a full year's depreciation in the year of purchase and no depreciation in the year of disposal.

What is the balance of the Provision for Depreciation on Motor Vehicles Account to be presented in the Statement of Financial Position as at 31 December 2025?

₦5,856,000

₦5,640,000

₦6,600,000

₦6,936,000

Show answer & explanation

Answer: ₦5,856,000

Answer

The correct balance of the Provision for Depreciation on Motor Vehicles Account as at 31 December 2025 is ₦5,856,000.

The correct balance of ₦5,856,000 is derived by first removing the ₦1,080,000 accumulated depreciation of the sold vehicle from the opening provision of ₦5,400,000, leaving ₦4,320,000. Next, the net book value of the remaining vehicles (₦12,000,000 cost minus ₦4,320,000 accumulated depreciation) is ₦7,680,000. Applying the 20% reducing balance rate yields a current year depreciation charge of ₦1,536,000. Adding this charge to ₦4,320,000 gives a closing provision balance of ₦5,856,000.

Step-by-Step Solution

1

Calculate accumulated depreciation on the disposed vehicle up to 31 December 2024

Year 2023 depreciation =

20\% \times ₦3,000,000 = ₦600,000

(Net Book Value =

₦2,400,000

). Year 2024 depreciation =

20\% \times ₦2,400,000 = ₦480,000

. Total accumulated depreciation on disposed vehicle =

₦600,000 + ₦480,000 = ₦1,080,000

.

Because no depreciation is charged in the year of disposal, accumulated depreciation covers only 2023 and 2024.

2

Remove the accumulated depreciation of the disposed vehicle from the opening provision

Remaining opening provision balance =

₦5,400,000 - ₦1,080,000 = ₦4,320,000

.

When an asset is sold, its total accumulated depreciation must be debited to the Provision for Depreciation Account and credited to the Asset Disposal Account.

3

Determine the Net Book Value (NBV) of remaining vehicles at 1 January 2025

Cost of remaining vehicles =

₦15,000,000 - ₦3,000,000 = ₦12,000,000

. NBV of remaining vehicles =

₦12,000,000 - ₦4,320,000 = ₦7,680,000

.

Depreciation under the reducing balance method must be calculated on the net book value of active assets at the start of the accounting period.

4

Calculate 2025 depreciation expense and closing provision balance

Depreciation for 2025 =

20\% \times ₦7,680,000 = ₦1,536,000

. Closing Provision for Depreciation =

₦4,320,000 + ₦1,536,000 = ₦5,856,000

.

The current year's depreciation is credited to the Provision for Depreciation Account to yield the updated closing balance.

Key Concept

Accounting Treatment of Asset Disposal and Provision for Depreciation under Reducing Balance Method

Adjustments to Final Accounts

Answer

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