Company Accounts Practice Questions — JAMB UTME — Page 4

Question 61Question →

Premier Logistics Plc had an issued share capital of $2,000,000$ ordinary shares of $\text{₦}1.00$ each, a Share Premium account balance of $\text{₦}350,000$ , and a General Reserve balance of $\text{₦}450,000$ . The company first made a bonus issue of 1 new share for every 4 ordinary shares held, utilizing the Share Premium account to the maximum extent permissible before drawing from the General Reserve. Immediately following the bonus issue, the company declared a rights issue of 1 share for every 5 shares held at an issue price of $\text{₦}1.40$ per share. If all rights shares were fully subscribed and paid for, what is the final balance in the Share Premium account (in $\text{₦}$ )?

Show answer & explanation

Answer: 200000

Answer

The final balance in the Share Premium account after completing both the bonus issue and rights issue is ₦200,000.

The bonus issue requires ₦500,000 of reserves (500,000 shares at ₦1.00 nominal value). Capitalizing the full ₦350,000 Share Premium balance leaves ₦0 in Share Premium. The subsequent rights issue of 1 for 5 on the post-bonus base of 2,500,000 shares yields 500,000 rights shares. Each rights share generates a premium of ₦0.40 (₦1.40 - ₦1.00), giving a total premium of ₦200,000. Adding this to the zero balance results in a final Share Premium balance of ₦200,000.

Step-by-Step Solution

1

Calculate the number and total nominal value of bonus shares issued.

500,000 bonus shares with a total nominal value of ₦500,000.

Bonus shares are issued based on existing share capital of 2,000,000 shares at a 1 for 4 ratio.

2

Account for the capitalization of reserves to fund the bonus issue.

The Share Premium account is reduced from ₦350,000 to ₦0, and General Reserve is reduced by ₦150,000.

Non-distributable reserves like Share Premium must be utilized first before distributable reserves.

3

Determine total ordinary shares outstanding before the rights issue.

2,500,000 ordinary shares.

Original 2,000,000 shares plus the newly issued 500,000 bonus shares.

4

Calculate the number of rights shares and the premium generated per share.

500,000 rights shares generating a total premium of ₦200,000.

The 1 for 5 rights issue is based on post-bonus shares (2,500,000) at a premium of ₦0.40 per share (₦1.40 - ₦1.00).

5

Compute the final balance of the Share Premium account.

₦200,000.

Adding the ₦200,000 premium from the rights issue to the ₦0 post-bonus Share Premium balance.

Key Concept

Accounting for Bonus and Rights Issues and Reserve Capitalization Order

Estimated Time:3m 0s

Question 62Question →

Danladi Manufacturing Plc forfeited $2,500$ ordinary shares of $₦1.00$ nominal value each due to non-payment of the final call of $₦0.30$ per share. All of the forfeited shares were subsequently reissued to a new subscriber as fully paid at $₦0.80$ per share. What is the net amount (in $₦$ ) transferred to the Capital Reserve account?

Show answer & explanation

Answer: 1250

Answer

The net amount transferred to the Capital Reserve account is ₦1,250.

The total amount received on the

2,500

forfeited shares was

2,500 \times ₦0.70 = ₦1,750

. When the shares are reissued at

₦0.80

per share, the company grants a discount of

₦0.20

per share (

2,500 \times ₦0.20 = ₦500

). The net surplus remaining in the Forfeited Shares account (

₦1,750 - ₦500 = ₦1,250

) is credited to the Capital Reserve account.

Step-by-Step Solution

1

Determine the amount paid up per share prior to forfeiture

₦0.70 per share (₦1.00 called-up nominal value minus ₦0.30 unpaid call)

Only cash actually received from the defaulting shareholder is credited to the Forfeited Shares account.

2

Calculate the total credit balance in the Forfeited Shares account

2,500 shares × ₦0.70 = ₦1,750

This represents the total cash forfeited on the 2,500 shares.

3

Compute the discount allowed upon share reissue

2,500 shares × (₦1.00 - ₦0.80) = ₦500

The maximum discount allowed on reissue cannot exceed the amount previously forfeited per share.

4

Calculate the surplus balance transferred to Capital Reserve

₦1,750 - ₦500 = ₦1,250

The net profit realized on share forfeiture and reissue is a capital gain and must be transferred from the Forfeited Shares account to the Capital Reserve account.

Key Concept

Calculation of net capital gain on share reissue transferred to Capital Reserve

Question 63Question →

Nova Crest Logistics Plc issued $90,000$ ordinary shares of $\text{₦}3.00$ nominal value each at a discount of $5\%$ . Assuming all shares were fully subscribed and paid for, what is the total net cash amount, in $\text{₦}$ , received by the company from this share issue?

Show answer & explanation

Answer: 256500

Answer

The total net cash amount received by the company from the share issue is ₦256,500.

The issue price per share is determined by subtracting the 5% discount (₦0.15) from the nominal value of ₦3.00, yielding ₦2.85 per share. Multiplying ₦2.85 by 90,000 shares gives the total net cash proceeds of ₦256,500 received into the bank account.

Step-by-Step Solution

1

Calculate the discount per share

₦0.15 per share

Discount is 5% of the nominal value (5% of ₦3.00 = ₦0.15).

2

Calculate the issue price per share

₦2.85 per share

When shares are issued at a discount, issue price = nominal value minus discount (₦3.00 - ₦0.15 = ₦2.85).

3

Calculate the total net cash received

₦256,500

Total cash received equals the number of shares issued multiplied by the issue price per share (90,000 × ₦2.85 = ₦256,500).

Key Concept

Issue of Shares at a Discount

Question 64Question →

Zentith Global Plc had a gross profit of ₦120,000 for the financial year ended 31 December 2025. Total administrative expenses paid during the year amounted to ₦35,000, which excludes an accrued electricity bill of ₦5,000 at the end of the year. What is the net profit before taxation for the year?

₦80,000

₦85,000

₦90,000

₦155,000

Show answer & explanation

Answer: ₦80,000

Answer

The net profit before taxation is ₦80,000.

Under the accruals concept, expenses incurred during the financial period must be recognized regardless of whether payment has been made. The accrued electricity expense of ₦5,000 is added to the ₦35,000 expenses paid, bringing total administrative expenses to ₦40,000. Subtracting total expenses of ₦40,000 from the gross profit of ₦120,000 yields the correct net profit before taxation of ₦80,000.

Step-by-Step Solution

1

Calculate total administrative expenses including accruals

Total Expenses = ₦35,000 + ₦5,000 = ₦40,000

Accrued expenses incurred during the accounting period must be added to expenses paid under the accruals concept.

2

Deduct total expenses from gross profit to find net profit before tax

Net Profit = ₦120,000 - ₦40,000 = ₦80,000

Net profit is calculated by subtracting total operating expenses from gross profit.

Key Concept

Accrual principle adjustment in Company Statement of Profit or Loss

Question 65Question →

Apex Trading Company Plc extracted the following financial balances for the year ended 31 December 2025:

- Gross profit: ₦850,000
- Salaries and wages: ₦180,000
- Rent and rates paid: ₦60,000 (including ₦10,000 prepaid for the next financial year)
- Debenture interest paid: ₦15,000 (the total annual interest expense due is ₦25,000)
- Provision for corporate taxation: ₦110,000

What is the net profit after taxation for the company?

₦465,000

₦485,000

₦495,000

₦595,000

Show answer & explanation

Answer: ₦485,000

Answer

The net profit after taxation for the company is ��485,000.

The net profit after taxation is computed by deducting all relevant operating expenses and finance costs adjusted for accruals and prepayments from gross profit, followed by the deduction of corporate taxation. Adjusted rent expense is ₦50,000 (₦60,000 - ₦10,000 prepayment), and total debenture interest charged is ₦25,000. Total expenses equal ₦255,000 (₦180,000 + ₦50,000 + ₦25,000). Deducting ₦255,000 from gross profit of ₦850,000 gives a net profit before tax of ₦595,000. Finally, subtracting the ₦110,000 tax provision leaves ₦485,000.

Step-by-Step Solution

1

Calculate adjusted rent expense

₦60,000 - ₦10,000 = ₦50,000

Prepaid rent must be subtracted from rent paid to arrive at the actual expense incurred for the accounting period.

2

Determine total debenture interest expense

₦25,000

The full annual interest accrued must be recognized in the statement of profit or loss regardless of cash paid.

3

Calculate net profit before taxation

₦850,000 - (₦180,000 + ₦50,000 + ₦25,000) = ₦595,000

Deduct total operating expenses (salaries, adjusted rent, and debenture interest) from gross profit.

4

Calculate net profit after taxation

₦595,000 - ₦110,000 = ₦485,000

Deduct corporate taxation provision from net profit before tax to get the final net profit after tax.

Key Concept

Preparation of Company Statement of Profit or Loss

Question 66Question →

Crestview Manufacturing Ltd has an issued share capital of $800,000$ ordinary shares of $\text{₦}0.50$ each. The board of directors resolves to make a bonus issue of $1$ new ordinary share for every $4$ ordinary shares held. What is the total nominal value (in $\text{₦}$ ) of the bonus shares issued?

Show answer & explanation

Answer: 100000

Answer

The total nominal value of the bonus shares issued is ₦100,000.

To find the total nominal value of bonus shares issued, first calculate the quantity of bonus shares (800,000 existing shares divided by 4 = 200,000 bonus shares). Then multiply this quantity by the nominal value per share (200,000 shares × ₦0.50 = ₦100,000).

Step-by-Step Solution

1

Determine the number of bonus shares issued.

200,000 shares

The ratio is 1 new share for every 4 existing shares, so dividing 800,000 by 4 yields 200,000 bonus shares.

2

Calculate the monetary nominal value of the bonus shares.

₦100,000

Multiplying 200,000 bonus shares by their par value of ₦0.50 each gives ₦100,000.

Key Concept

Bonus share capitalization of reserves

Question 67Question →

Match each accounting transaction event relating to the forfeiture and re-issue of shares on the left with its correct double-entry ledger treatment on the right.

Click a left item, then click its matching right item

Show answer & explanation

Answer

1. Recording initial forfeiture matches with debited Ordinary Share Capital (called-up amount), credited Calls-in-Arrears (unpaid amount), and credited Forfeited Shares Account (amount paid).
2. Re-issue at a discount matches with debited Bank Account, debited Forfeited Shares Account for the discount, and credited Ordinary Share Capital Account.
3. Re-issue at a premium matches with debited Bank Account, credited Ordinary Share Capital Account, and credited Share Premium Account.
4. Transfer of remaining net surplus matches with debited Forfeited Shares Account and credited Capital Reserve Account.

Each transaction event strictly corresponds to double-entry accounting rules: cancelling called-up share capital upon forfeiture, using Forfeited Shares Account to absorb re-issue discounts, recognizing share premium on premium re-issues, and transferring residual forfeiture gain to Capital Reserve.

Step-by-Step Solution

1

Analyze the entry for share forfeiture

Debit Ordinary Share Capital Account with called-up value, Credit Calls-in-Arrears with unpaid calls, Credit Forfeited Shares Account with money already received.

Forfeiture cancels the share capital registered for defaulting members and isolates the forfeited funds.

2

Analyze the entry for re-issue of forfeited shares at a discount

Debit Bank with cash received, Debit Forfeited Shares Account with the discount absorbable, Credit Ordinary Share Capital Account with nominal value.

The discount offered on re-issue cannot exceed the amount forfeited on those shares, so it is absorbed from the Forfeited Shares Account.

3

Analyze the entry for re-issue at a premium

Debit Bank with full proceeds, Credit Share Capital with nominal amount, Credit Share Premium Account with excess consideration.

Shares re-issued above nominal value generate a premium that is transferred to the capital reserve account for share premiums.

4

Analyze the entry for closing the net profit on forfeited shares

Debit Forfeited Shares Account and Credit Capital Reserve Account.

The surplus balance left in the Forfeited Shares Account after re-issue represents a capital gain.

Key Concept

Accounting entries for forfeiture, re-issue, and transfer of share forfeiture profit to capital reserve

Estimated Time:1m 30s

Question 68Question →

Oasis Beverages Plc issued $5,000$ units of $12\%$ debentures of $\text{₦}100$ each at a discount of $6\%$ , redeemable at a premium of $4\%$ . What is the total loss on issue of debentures (in naira) to be recognized in the books of the company?

Show answer & explanation

Answer: 50000

Answer

The total loss on issue of debentures to be recognized is ₦50,000.

When debentures are issued at a discount and redeemable at a premium, the overall loss on issue consists of both the issue discount (₦30,000) and the redemption premium (₦20,000). Adding these two components together gives a total loss of ₦50,000.

Step-by-Step Solution

1

Calculate the nominal (face) value of the debentures issued

Nominal Value =

5,000 \times \text{₦}100 = \text{₦}500,000

The nominal value represents the aggregate principal amount of the debentures.

2

Calculate the discount allowed on issue

Discount on Issue =

6\% \times \text{₦}500,000 = \text{₦}30,000

Issuing debentures at a

6\%

discount means receiving

\text{₦}30,000

less than nominal value.

3

Calculate the premium payable on redemption

Premium on Redemption =

4\% \times \text{₦}500,000 = \text{₦}20,000

Redeeming at a

4\%

premium requires paying

\text{₦}20,000

above nominal value at maturity.

4

Calculate the total loss on issue of debentures

Total Loss = Discount on Issue + Premium on Redemption =

\text{₦}30,000 + \text{₦}20,000 = \text{₦}50,000

Both the discount granted at issue and the obligation to pay a premium on redemption constitute total capital losses arising from the debenture issue.

Key Concept

Accounting for loss on issue of debentures issued at a discount and redeemable at a premium.

Estimated Time:1m 30s

Question 69Question →

Crestline Ventures Plc has an issued share capital of $800,000$ ordinary shares of $\text{₦}0.50$ nominal value each. The company's reserves stand at: Share Premium $\text{₦}85,000$ , General Reserve $\text{₦}120,000$ , and Retained Earnings $\text{₦}95,000$ . The board of directors resolves to make a bonus issue of $1$ new ordinary share for every $4$ ordinary shares held, fully capitalizing the Share Premium account first and using the General Reserve for any remaining balance. What is the remaining balance in the General Reserve account after the capitalization for the bonus issue?

Show answer & explanation

Answer: 105000

Answer

The remaining balance in the General Reserve account after the capitalization for the bonus issue is

\text{₦}105,000

.

The bonus issue requires

200,000

new shares (

\frac{1}{4} \times 800,000

), which amounts to a total nominal value of

\text{₦}100,000

(

200,000 \times \text{₦}0.50

). Utilizing the entire Share Premium balance of

\text{₦}85,000

leaves

\text{₦}15,000

to be funded from the General Reserve. Subtracting

\text{₦}15,000

from the original General Reserve of

\text{₦}120,000

leaves a remaining balance of

\text{₦}105,000

.

Step-by-Step Solution

1

Calculate the total number of bonus shares issued

200,000 ordinary shares

The bonus issue ratio is

1

new share for every

4

existing shares:

\frac{800,000}{4} = 200,000

shares.

2

Calculate the total nominal value of the bonus shares

₦100,000

Each share has a nominal value of

\text{��}0.50

, so

200,000 \times \text{₦}0.50 = \text{₦}100,000

.

3

Determine the amount required from the General Reserve after utilizing Share Premium

₦15,000

The Share Premium account of

\text{₦}85,000

is fully utilized first, leaving

\text{₦}100,000 - \text{₦}85,000 = \text{₦}15,000

to be taken from the General Reserve.

4

Calculate the final remaining balance in the General Reserve

₦105,000

Subtracting the

\text{₦}15,000

capitalized from the initial

\text{₦}120,000

General Reserve yields

\text{₦}120,000 - \text{₦}15,000 = \text{₦}105,000

.

Key Concept

Capitalization of Reserves for Bonus Issue

Estimated Time:1m 30s

Question 70Question →

Apex Global Resources Plc has an issued share capital of 3,000,000 ordinary shares of $\text{₦}1.00$ each fully paid. The Share Premium account currently has a credit balance of $\text{₦}800,000$ . The company decides to make a bonus issue of 1 new share for every 5 ordinary shares held, utilizing the Share Premium account. What is the remaining balance in the Share Premium account after the capitalization for the bonus issue?

\text{₦}200,000

\text{₦}600,000

\text{₦}640,000

\text{₦}0

Show answer & explanation

Answer: $\text{₦}200,000$

Answer

The remaining balance in the Share Premium account after the bonus issue is

\text{₦}200,000

.

The company issues

600,000

bonus shares (1 for 5 of

3,000,000

) at a nominal value of

\text{₦}1.00

each, requiring

\text{₦}600,000

from reserves. Deducting

\text{₦}600,000

from the initial Share Premium credit balance of

\text{₦}800,000

leaves a remaining balance of

\text{₦}200,000

.

Step-by-Step Solution

1

Calculate the total number of bonus shares issued.

\text{Bonus Shares} = \frac{1}{5} \times 3,000,000 = 600,000 \text{ shares}

The bonus issue ratio is 1 new share for every 5 ordinary shares currently held.

2

Determine the monetary value of the bonus shares to be capitalized.

\text{Capitalized Amount} = 600,000 \text{ shares} \times \text{₦}1.00 = \text{₦}600,000

Bonus shares are capitalized at their nominal (par) value using available capital reserves.

3

Compute the remaining balance in the Share Premium account.

\text{Remaining Balance} = \text{₦}800,000 - \text{₦}600,000 = \text{₦}200,000

Deducting the amount capitalized for the bonus issue from the opening Share Premium balance gives the unutilized balance.

Key Concept

Capitalization of Reserves for Bonus Issues

Question 71Question →

Lekki Heights Maritime Plc extracted the following financial details for the year ended 31 December 2025:

• Gross Profit: ₦1,450,000
• Rent and Rates paid: ₦180,000 (includes ₦30,000 paid in advance for 2026)
• Salaries and Wages paid: ₦420,000
• Outstanding Salaries and Wages at year-end: ₦40,000
• 10% Debentures of ₦500,000 (interest unpaid for the entire year)
• Estimated Corporate Income Tax: ₦120,000

What is the net profit after tax to be reported in the company's Statement of Profit or Loss for the year ended 31 December 2025?

₦670,000

₦690,000

₦710,000

₦720,000

Show answer & explanation

Answer: ₦670,000

Answer

The net profit after tax to be reported is ₦670,000.

The net profit after tax of ₦670,000 is correctly determined by deducting total operating expenses (adjusted rent of ₦150,000 and adjusted salaries of ₦460,000), finance costs (debenture interest of ₦50,000), and corporate taxation (₦120,000) from the gross profit of ₦1,450,000.

Step-by-Step Solution

1

Calculate adjusted Rent and Rates expense

₦180,000 - ₦30,000 (prepayment) = ₦150,000

Prepaid expenses must be deducted from cash paid to reflect the accurate expense for the current period.

2

Calculate adjusted Salaries and Wages expense

₦420,000 + ₦40,000 (accrual) = ₦460,000

Accrued expenses incurred but not yet paid at year-end must be added to cash paid.

3

Calculate Debenture Interest expense

10% of ₦500,000 = ₦50,000

Interest on debentures is a financial charge to the profit or loss account regardless of whether paid or unpaid.

4

Compute total expenses and Net Profit before Tax

Total Expenses = ₦150,000 + ₦460,000 + ₦50,000 = ₦660,000. Net Profit before Tax = ₦1,450,000 - ₦660,000 = ₦790,000

Deduct total allowable expenses from gross profit to get net profit before tax.

5

Deduct Corporate Income Tax to arrive at Net Profit after Tax

₦790,000 - ₦120,000 = ₦670,000

Taxation provision is deducted from net profit before tax to arrive at the final profit for the year.

Key Concept

Calculation of Net Profit After Tax incorporating adjustments for accruals, prepayments, debenture interest, and corporate tax.

Question 72Question →

Sahara Energy Works Plc extracted the following trial balance figures and notes for the financial year ended 31 December 2025:

- Gross profit: ₦2,450,000
- Administrative and distribution expenses paid: ₦680,000
- 10% Debentures (issued 1 January 2025): ₦1,000,000
- Debenture interest paid: ₦40,000
- Trade debtors: ₦600,000
- Existing provision for doubtful debts: ₦25,000

Additional Information at 31 December 2025:
1. Administrative expenses paid include ₦30,000 for prepaid insurance.
2. Audit fees of ₦50,000 remain accrued and unpaid.
3. The provision for doubtful debts is to be adjusted to $5\%$ of trade debtors.
4. Corporate income tax rate is estimated at $30\%$ on profit before tax.

What is the Net Profit after Tax for Sahara Energy Works Plc for the year ended 31 December 2025?

Show answer & explanation

Answer: 1151500

Answer

The Net Profit after Tax for Sahara Energy Works Plc is ��1,151,500.

To calculate the Net Profit after Tax, first compute adjusted operating expenses: base expenses of ₦680,000 minus prepaid insurance of ₦30,000 plus accrued audit fees of ₦50,000 plus the increase in doubtful debts provision of ₦5,000 (₦30,000 required minus ₦25,000 existing), yielding ₦705,000. Subtracting this from Gross Profit (₦2,450,000) gives Operating Profit of ₦1,745,000. Next, deduct the total annual debenture interest expense of ₦100,000 (10% of ₦1,000,000) to arrive at Profit before Tax of ₦1,645,000. Finally, deduct corporate tax of 30% (₦493,500) from ₦1,645,000 to obtain Net Profit after Tax equal to ₦1,151,500.

Step-by-Step Solution

1

Calculate the total operating expenses incorporating adjustments for prepayments, accruals, and doubtful debt provisions.

Total operating expenses = ₦680,000 - ₦30,000 + ₦50,000 + (5% of ₦600,000 - ₦25,000) = ₦705,000.

Prepaid expenses are deducted from cash paid, accrued expenses are added, and the increase in provision for doubtful debts (₦30,000 - ₦25,000 = ₦5,000) is charged as an operating expense.

2

Deduct operating expenses from gross profit to find operating profit (profit before interest and tax).

Operating profit = ₦2,450,000 - ₦705,000 = ₦1,745,000.

Gross profit less total operating expenses yields the operating profit for the reporting period.

3

Determine full finance cost (debenture interest) and profit before taxation.

Debenture interest expense = 10% of ₦1,000,000 = ₦100,000. Profit before tax = ₦1,745,000 - ₦100,000 = ₦1,645,000.

The Statement of Profit or Loss must charge the full nominal debenture interest expense incurred for the year (

10\% \times ₦1,000,000 = ₦100,000

), regardless of the amount actually paid (₦40,000).

4

Calculate taxation and determine Net Profit after Tax.

Taxation = 30% of ₦1,645,000 = ₦493,500. Net profit after tax = ₦1,645,000 - ₦493,500 = ₦1,151,500.

Tax rate applies to profit before tax. Deducting taxation from profit before tax yields the final net profit after tax.

Key Concept

Preparation of Company Statement of Profit or Loss with Multi-Step Adjustments (Accruals, Prepayments, Debenture Interest, and Taxation)

Question 73Question →

The financial records of Crestwood Logistics Ltd at the end of its financial year showed Total Non-Current Assets of ₦1,200,000 and Net Current Assets of ₦350,000. If 8% Debentures stood at ₦400,000 and total reserves were ₦250,000, what is the value of the Issued Share Capital in the Statement of Financial Position?

₦900,000

₦1,300,000

₦600,000

₦1,700,000

Show answer & explanation

Answer: ₦900,000

Answer

The Issued Share Capital of Crestwood Logistics Ltd is ₦900,000.

In a corporate Statement of Financial Position, Total Net Assets equals Non-Current Assets plus Net Current Assets (₦1,200,000 + ₦350,000 = ₦1,550,000). Total Net Assets are financed by Shareholders' Funds (Issued Share Capital + Reserves) and Non-Current Liabilities (Debentures). Subtracting Reserves (₦250,000) and Debentures (₦400,000) from ₦1,550,000 gives an Issued Share Capital of ₦900,000.

Step-by-Step Solution

1

Calculate Total Net Assets (Capital Employed)

Total Net Assets = Non-Current Assets + Net Current Assets = ₦1,200,000 + ₦350,000 = ₦1,550,000

Total Net Assets represents the overall net resources employed by the company.

2

Set up the Capital Employed equation

Capital Employed = Issued Share Capital + Reserves + Non-Current Liabilities (Debentures)

The Statement of Financial Position balancing equation requires total capital financing to equal total net assets.

3

Solve for Issued Share Capital

Issued Share Capital = ₦1,550,000 - ₦250,000 - ₦400,000 = ₦900,000

Deducting reserves and long-term liabilities from capital employed yields the equity share capital.

Key Concept

Accounting Equation and Structure of Company Statement of Financial Position

Question 74Question →

Oceanic Commerce Plc earned a gross profit of ₦1,200,000 for the financial year ended 31 December 2025. During the year, the company incurred total administrative and distribution expenses of ₦450,000 and paid ₦50,000 as interest on debentures. Calculate the net profit before taxation for the year in Naira (₦).

Show answer & explanation

Answer: 700000

Answer

The net profit before taxation for the year is ₦700,000.

Net profit before taxation is derived by taking the gross profit of ₦1,200,000 and deducting both operating expenses (₦450,000) and debenture interest (₦50,000), leaving a net profit before tax of ₦700,000.

Step-by-Step Solution

1

Calculate operating profit by deducting administrative and distribution expenses from gross profit.

₦1,200,000 - ₦450,000 = ₦750,000

Operating profit measures earnings from core operations before finance expenses.

2

Deduct debenture interest from operating profit to arrive at net profit before tax.

₦750,000 - ₦50,000 = ₦700,000

Debenture interest is a mandatory finance cost charged against profit in the Statement of Profit or Loss.

Key Concept

Net Profit Determination in Company Statement of Profit or Loss

Estimated Time:1m 0s

Question 75Question →

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

Financial Item	Amount (₦)
Issued and fully paid Ordinary Shares (50k each)	500,000
8% Preference Shares	200,000
Share Premium Account	30,000
Retained Profit brought forward	30,000
Net Profit for the year	180,000

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

₦124,000

₦154,000

₦64,000

₦140,000

Show answer & explanation

Answer: ₦124,000

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\% \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\% \times ₦500,000 = ₦30,000

Dividend rate applies to the paid-up ordinary share capital.

3

Calculate total profit available for appropriation

₦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

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

Question 76Question →

Under statutory company accounting rules, which of the following is a legally permitted application of the Share Premium account balance?

Issuing fully paid bonus shares to existing shareholders

Paying cash dividends directly to ordinary shareholders

Writing off routine operating losses incurred during normal trading

Funding annual cash bonus payments to company directors

Show answer & explanation

Answer: Issuing fully paid bonus shares to existing shareholders

Answer

Issuing fully paid bonus shares to existing shareholders

The Share Premium account is a non-distributable capital reserve. Under company law and statutory accounting rules, its balance can legally be applied to issue fully paid bonus shares to existing shareholders, write off preliminary formation expenses, or write off expenses/commissions on share issues.

Step-by-Step Solution

1

Identify the nature and classification of the Share Premium account

Share Premium is classified as a capital reserve because it represents funds paid by subscribers in excess of the nominal value of shares.

Capital reserves arise from capital transactions and are legally restricted from being treated as distributable profits.

2

Evaluate statutory regulations governing the utilization of capital reserves

Company regulations strictly permit capital reserves like Share Premium to be used for capital purposes—such as issuing fully paid bonus shares, writing off preliminary expenses, or writing off share issue commission.

Using capital reserves for cash dividends or operational losses violates statutory principles protecting company capital.

Key Concept

Statutory Utilization of Share Premium

Estimated Time:45s

Question 77Question →

Match each company reserve item in Column A with its correct classification and characteristic in Column B.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Share Premium Account matches with statutory capital reserve from issuing shares above par; General Reserve matches with revenue reserve created out of distributable profits; Revaluation Reserve matches with capital reserve from upward asset revaluation; Retained Earnings matches with revenue reserve of accumulated undistributed net profits.

Share Premium and Revaluation Reserve are capital reserves created from non-trading or statutory sources and asset revaluations. General Reserve and Retained Earnings are revenue reserves created out of operational net profits.

Step-by-Step Solution

1

Distinguish between Capital Reserves and Revenue Reserves.

Capital reserves (Share Premium, Revaluation Reserve) arise from non-trading activities or statutory requirements and cannot be distributed as cash dividends. Revenue reserves (General Reserve, Retained Earnings) are created out of trading profits.

Correct classification requires understanding the source of funds and dividend availability.

2

Identify specific characteristics of each reserve item.

Share Premium represents excess price over par value. Revaluation Reserve records unrealized asset appreciations. General Reserve is allocated for general contingencies. Retained Earnings carries forward undistributed profit.

Each reserve serves a distinct accounting function within equity.

3

Match each item in Column A to its description in Column B.

Share Premium -> Capital reserve from share issue above par. General Reserve -> Revenue reserve from distributable profits. Revaluation Reserve -> Capital reserve from asset revaluation. Retained Earnings -> Revenue reserve of undistributed net profit.

Verifies precise definitions.

Key Concept

Classification of Capital Reserves and Revenue Reserves in Company Equity

Question 78Question →

Lagos Marine Services Ltd resolved to redeem $\text{₦}300,000$ nominal value of its $12\%$ debentures at a premium of $6\%$ . What is the total cash amount paid to debenture holders upon redemption?

Show answer & explanation

Answer: 318000

Answer

The total cash amount paid to debenture holders upon redemption is ₦318,000.

When debentures are redeemed at a premium, the company pays debenture holders the nominal face value plus the agreed redemption premium percentage. Premium amount = 6% of ₦300,000 = ₦18,000. Total payment = ₦300,000 + ₦18,000 = ₦318,000.

Step-by-Step Solution

1

Calculate the redemption premium amount

₦18,000

The premium on redemption is calculated as 6% of the nominal value (₦300,000).

2

Determine the total cash outflow for redemption

₦318,000

Total cash paid equals the nominal value plus the redemption premium.

Key Concept

Redemption of Debentures at a Premium

Question 79Question →

Vanguard Logistics PLC presents the following financial balances at the end of its financial year:

Financial Item	Amount ( $₦$ )
Authorized Share Capital ( $1,000,000$ Ordinary shares of $₦1.00$ each)	$1,000,000$
Issued and Fully Paid-up Capital ( $600,000$ Ordinary shares of $₦1.00$ each)	$600,000$
$10\%$ Preference Share Capital	$200,000$
Retained Profit brought forward	$45,000$
Net Profit for the year	$180,000$

During the year, the directors transferred $₦30,000$ to the General Reserve, paid an interim ordinary dividend of $5\%$ , and proposed a final ordinary dividend of $10\%$ . Preference share dividends were also fully provided for.

What is the retained profit to be carried forward to the next financial year?

₦25,000

₦85,000

₦40,000

₦105,000

Show answer & explanation

Answer: $₦85,000$

Answer

The retained profit carried forward to the next financial year is

₦85,000

.

Total profit available for distribution is

₦225,000

(

₦45,000

opening retained balance plus

₦180,000

net profit). The total appropriations equal

₦140,000

, consisting of preference dividend (

₦20,000

), transfer to reserve (

₦30,000

), interim ordinary dividend (

₦30,000

), and proposed final ordinary dividend (

₦60,000

). Subtracting

₦140,000

from

₦225,000

yields

₦85,000

as retained profit carried forward.

Step-by-Step Solution

1

Calculate total profit available for appropriation

Total Available Profit = Retained Profit b/f (

₦45,000

) + Net Profit for the year (

₦180,000

) =

₦225,000

.

Appropriations are made out of the aggregate of accumulated profits brought forward and current year profit.

2

Calculate individual appropriations and total dividends

Preference Dividend =

10\% \times ₦200,000 = ₦20,000

.
Transfer to General Reserve =

₦30,000

.
Interim Ordinary Dividend =

5\% \times ₦600,000 = ₦30,000

.
Proposed Final Ordinary Dividend =

10\% \times ₦600,000 = ₦60,000

.
Total Appropriations =

₦20,000 + ₦30,000 + ₦30,000 + ₦60,000 = ₦140,000

.

Dividends must be calculated on issued and paid-up capital, not on authorized share capital.

3

Deduct total appropriations from total profit available

Retained Profit carried forward =

₦225,000 - ₦140,000 = ₦85,000

.

The remaining unappropriated balance represents the balance carried forward to the balance sheet.

Key Concept

Profit and Loss Appropriation Account and Dividend Computation on Paid-up Capital

Question 80Question →

Match each financial item of a public limited company to its appropriate section in the Statement of Financial Position.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Share Premium Account matches Reserves and Surplus, 10% Debentures matches Non-Current Liabilities, Trade Receivables matches Current Assets, and Proposed Dividend Payable matches Current Liabilities.

In a company's Statement of Financial Position, Share Premium is presented under Reserves and Surplus (Equity), Debentures payable in 5 years fall under Non-Current Liabilities, Trade Receivables fall under Current Assets, and Proposed Dividend Payable is listed under Current Liabilities.

Step-by-Step Solution

1

Identify equity components and capital reserves.

Share Premium Account is matched to Reserves and Surplus.

Share premium is an equity reserve representing premiums received on share issues.

2

Distinguish between long-term obligations and short-term liabilities.

10% Debentures match Non-Current Liabilities, while Proposed Dividend Payable matches Current Liabilities.

Debentures maturing in 5 years are long-term liabilities, whereas proposed dividends must be settled within the upcoming accounting period.

3

Classify short-term operational assets.

Trade Receivables match Current Assets.

Amounts owed by trade debtors are realized as cash within a short operational cycle.

Key Concept

Classification of Company Balance Sheet Items

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