Capital, Credit, and Insurance Practice Questions — JAMB UTME — Page 3

Question 41Question →

A commercial enterprise records total current assets of $₦950,000$ and current liabilities of $₦400,000$ at the end of its financial year. What is the net working capital of the enterprise in Naira?

Show answer & explanation

Answer: 550000

Answer

The net working capital of the enterprise is

₦550,000

.

Working capital measures a firm's operational liquidity and is calculated by subtracting current liabilities from current assets (

₦950,000 - ₦400,000 = ₦550,000

).

Step-by-Step Solution

1

Identify current assets and current liabilities from the problem statement

Current Assets =

₦950,000

, Current Liabilities =

₦400,000

Working capital measures short-term liquidity derived from short-term financial items.

2

Subtract current liabilities from current assets using the working capital equation

₦950,000 - ₦400,000 = ₦550,000

Net working capital represents the net operational funds available to support day-to-day business activities.

Key Concept

Working Capital Calculation

Question 42Question →

Apex Enterprises Plc was registered with an authorized share capital of $\text{₦}12,000,000$ consisting of ordinary shares of $\text{₦}1.50$ each. The company issued $60\%$ of its authorized shares to the public. The board of directors made a first call of $\text{₦}0.80$ per share and a second call of $\text{₦}0.40$ per share on all issued shares. At the end of the financial period, holders of $250,000$ shares defaulted on the second call, while holders of $150,000$ shares paid the uncalled balance of $\text{₦}0.30$ per share in advance. What is the total value (in $\text{₦}$ ) of the company's paid-up share capital?

Show answer & explanation

Answer: 5660000

Answer

The paid-up share capital of Apex Enterprises Plc is

\text{₦}5,660,000

.

Paid-up capital represents the actual portion of called-up share capital that has been received from shareholders. It is derived by subtracting calls-in-arrears (

\text{₦}100,000

) from the total called-up capital (

\text{₦}5,760,000

), yielding

\text{₦}5,660,000

. Money paid in advance of calls (calls-in-advance) is treated as a short-term liability to the company and is excluded from paid-up share capital.

Step-by-Step Solution

1

Calculate the total number of authorized ordinary shares

8,000,000 shares

Authorized capital divided by the nominal value per share gives the total registered shares:

\frac{\text{₦}12,000,000}{\text{₦}1.50} = 8,000,000\text{ shares}

.

2

Determine the number of issued shares

4,800,000 shares

The company issued

60\%

of its authorized share capital:

60\% \times 8,000,000 = 4,800,000\text{ shares}

.

3

Calculate total called-up capital

₦5,760,000

Total calls made per share equal

\text{₦}0.80 + \text{₦}0.40 = \text{₦}1.20

. Multiplying by issued shares yields

4,800,000 \times \text{₦}1.20 = \text{₦}5,760,000

.

4

Calculate calls-in-arrears

₦100,000

Defaulted amount on the second call is

250,000\text{ shares} \times \text{₦}0.40 = \text{₦}100,000

.

5

Determine net paid-up capital

₦5,660,000

Paid-up share capital equals Called-up capital minus Calls-in-arrears:

\text{₦}5,760,000 - \text{₦}100,000 = \text{₦}5,660,000

. Calls-in-advance are accounted for as current liabilities rather than share capital.

Key Concept

Distinction between Authorized, Issued, Called-up, and Paid-up share capital, including accounting treatment of Calls-in-Arrears and Calls-in-Advance.

Question 43Question →

Match each source or type of business capital on the left with its corresponding defining feature or operational characteristic on the right.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Debenture matches with the long-term fixed-interest loan instrument; Bank Overdraft matches with drawing funds beyond current account balance; Trade Credit matches with deferred payment terms offered by suppliers; Venture Capital matches with risk equity capital invested in high-growth startups.

Each type or source of capital is matched based on its tenure and financing mechanism: Debenture corresponds to long-term loan capital with fixed interest, Bank Overdraft to short-term bank balance extensions, Trade Credit to supplier deferred payment terms, and Venture Capital to startup risk equity.

Step-by-Step Solution

1

Identify long-term debt securities vs short-term bank facilities

Debenture is long-term loan capital paying fixed interest; Bank Overdraft is a short-term bank facility for overdrawing account limits.

Duration and contractual commitment distinguish long-term debt from temporary cash flow assistance.

2

Analyze commercial trade credit versus equity investment models

Trade credit comes from trade suppliers as deferred payment; Venture Capital comes from equity investors taking high risk for capital growth.

Sources differ between trade suppliers financing inventory and institutional investors providing startup equity.

Key Concept

Classification of Business Capital by Duration, Source, and Risk

Question 44Question →

The financial records of Tari Traders show the following balances at the end of the trading period:
- Stock: $\text{₦}180,000$
- Trade Debtors: $\text{₦}120,000$
- Cash at Bank: $\text{₦}50,000$
- Trade Creditors: $\text{₦}100,000$
- Bank Overdraft: $\text{₦}50,000$

What is the working capital of Tari Traders?

\text{₦}200,000

\text{₦}500,000

\text{₦}350,000

\text{₦}250,000

Show answer & explanation

Answer: $\text{₦}200,000$

Answer

The working capital of Tari Traders is

\text{₦}200,000

.

Working capital is computed as Current Assets minus Current Liabilities. Total Current Assets equal

\text{₦}350,000

(

\text{₦}180,000 + \text{₦}120,000 + \text{₦}50,000

) and Total Current Liabilities equal

\text{₦}150,000

(

\text{₦}100,000 + \text{₦}50,000

). Subtracting total current liabilities from total current assets gives

\text{₦}200,000

.

Step-by-Step Solution

1

Calculate Total Current Assets

\text{₦}180,000 + \text{₦}120,000 + \text{₦}50,000 = \text{₦}350,000

Current assets consist of resources expected to be converted into cash within an accounting year (Stock, Trade Debtors, and Cash at Bank).

2

Calculate Total Current Liabilities

\text{₦}100,000 + \text{₦}50,000 = \text{₦}150,000

Current liabilities are short-term financial obligations due within one year (Trade Creditors and Bank Overdraft).

3

Subtract Current Liabilities from Current Assets

\text{Working Capital} = \text{₦}350,000 - \text{₦}150,000 = \text{₦}200,000

Working capital measures short-term operational liquidity.

Key Concept

Working Capital Calculation

Estimated Time:1m 0s

Question 45Question →

Sterling Heights Plc issued $5,000,000$ ordinary shares of $₦2.00$ each to the public. The directors called up $₦1.50$ per share. All money called was received except for a default on $200,000$ shares where shareholders failed to pay the $₦0.50$ call portion of the called-up amount. What is the total paid-up capital of the company in Naira?

Show answer & explanation

Answer: 7400000

Answer

The total paid-up capital of the company is ₦7,400,000.

Paid-up capital measures the actual sum received by a company from its shareholders. It is derived by taking the total called-up capital (

5,000,000 \text{ shares} \times ₦1.50 = ₦7,500,000

) and deducting the calls in arrears (

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

), yielding

₦7,400,000

.

Step-by-Step Solution

1

Calculate Total Called-Up Capital

₦7,500,000

Called-up capital represents the total portion of issued share capital that the company has requested shareholders to pay.

2

Calculate Calls in Arrears

₦100,000

Calls in arrears represents the unpaid portion of the called-up capital due from defaulting shareholders.

3

Subtract Calls in Arrears from Called-Up Capital

₦7,400,000

Paid-up capital is the actual amount of money received by the company from its shareholders for shares issued.

Key Concept

Distinction and relationship between Called-Up Capital, Calls in Arrears, and Paid-Up Capital

Question 46Question →

Mrs. Bello, a sole trader, presents the following financial balances at the end of the accounting period:

- Stock of goods: $\text{₦}120,000$
- Trade debtors: $\text{₦}50,000$
- Cash at bank: $\text{₦}30,000$
- Trade creditors: $\text{₦}60,000$
- Accrued wages: $\text{₦}15,000$

What is the net working capital of the business?

\text{₦}125,000

\text{₦}140,000

\text{₦}200,000

\text{₦}275,000

Show answer & explanation

Answer: $\text{₦}125,000$

Answer

The net working capital of the business is

\text{₦}125,000

.

Working capital is calculated as Current Assets minus Current Liabilities. Summing stock (₦120,000), debtors (₦50,000), and cash (₦30,000) yields ₦200,000 in current assets. Summing creditors (₦60,000) and accrued wages (₦15,000) yields ₦75,000 in current liabilities. Subtracting ₦75,000 from ₦200,000 gives ₦125,000.

Step-by-Step Solution

1

Calculate Total Current Assets

\text{Total Current Assets} = \text{Stock} + \text{Debtors} + \text{Cash at bank} = \text{₦}120,000 + \text{₦}50,000 + \text{₦}30,000 = \text{₦}200,000

Current assets consist of short-term assets convertible to cash within one financial year.

2

Calculate Total Current Liabilities

\text{Total Current Liabilities} = \text{Creditors} + \text{Accrued wages} = \text{₦}60,000 + \text{₦}15,000 = \text{₦}75,000

Current liabilities include short-term obligations payable within the accounting year.

3

Apply the Working Capital Formula

\text{Working Capital} = \text{Current Assets} - \text{Current Liabilities} = \text{₦}200,000 - \text{₦}75,000 = \text{₦}125,000

Net working capital measures the operational liquidity available to run daily business activities.

Key Concept

Working Capital Formula

Question 47Question →

A sole trader operating a supermarket requires immediate funding of $\text{₦}500,000$ to settle a supplier's invoice due in five days and secure a bulk purchase discount while awaiting payments from credit customers due in thirty days. Considering the legal form of business ownership and the short-term nature of the financial requirement, which of the following is the most appropriate source of capital?

Bank overdraft

Issue of debentures

Venture capital financing

Issue of preference shares

Show answer & explanation

Answer: Bank overdraft

Answer

Bank overdraft is the most appropriate source of capital.

A bank overdraft is a flexible short-term credit facility provided by commercial banks allowing business owners to overdraw their current account up to an approved limit. It is specifically designed to finance immediate operational expenses and bridge temporary working capital gaps, fitting both the five-day time urgency and the sole proprietorship legal structure.

Step-by-Step Solution

1

Analyze the time horizon of the financial requirement

The money is needed within five days to bridge a thirty-day gap between supplier settlement and trade credit collection, representing a short-term working capital need.

Matching the duration of funding to the asset/liability cycle prevents capital mismatching.

2

Analyze the legal constraints of the business organization

The business operates as a sole proprietorship (unincorporated entity).

Sole proprietorships cannot raise capital by issuing shares or debentures, which are legally reserved for incorporated companies.

3

Select the appropriate commercial capital instrument

A bank overdraft provides flexible short-term borrowing specifically tailored for current account holders managing immediate working capital deficits.

It fulfills both short-term duration and sole trader legal compatibility criteria.

Key Concept

Classification and suitability of short-term versus long-term capital sources across different business forms

Question 48Question →

The financial extract of Danjuma & Sons Enterprises at the close of the trading year reveals the following account balances:

- Premises and Machinery: $\text{₦}3,500,000$
- Inventory (Stock): $\text{₦}850,000$
- Trade Debtors: $\text{₦}450,000$
- Bank Overdraft: $\text{₦}300,000$
- Trade Creditors: $\text{₦}500,000$
- 10% Long-term Debentures: $\text{₦}1,200,000$

What is the Capital Owned (Proprietor's Capital) of the enterprise in Naira?

Show answer & explanation

Answer: 2800000

Answer

The Capital Owned of the enterprise is ₦2,800,000.

Capital Owned represents the net equity belonging strictly to the owner. It is calculated by taking Total Assets (Fixed Assets ₦3,500,000 + Current Assets ₦1,300,000 = ₦4,800,000) and subtracting Total Liabilities (Current Liabilities ₦800,000 + Long-term Debentures ₦1,200,000 = ₦2,000,000), giving ₦2,800,000. Alternatively, subtracting long-term liabilities from Capital Employed (₦4,000,000 - ₦1,200,000) yields ₦2,800,000.

Step-by-Step Solution

1

Identify and sum total current assets

Total Current Assets = ₦850,000 + ₦450,000 = ₦1,300,000

Current assets consist of short-term liquid assets such as inventory and trade debtors.

2

Identify and sum total current liabilities

Total Current Liabilities = ₦300,000 + ₦500,000 = ₦800,000

Current liabilities consist of short-term debts due within an accounting year, such as overdrafts and trade creditors.

3

Compute Working Capital

Working Capital = ₦1,300,000 - ��800,000 = ₦500,000

Working capital measures net current assets available for daily operations.

4

Compute Capital Employed

Capital Employed = Fixed Assets (₦3,500,000) + Working Capital (₦500,000) = ₦4,000,000

Capital employed represents total net assets invested in the business.

5

Compute Capital Owned

Capital Owned = Capital Employed (₦4,000,000) - Long-term Liabilities (₦1,200,000) = ₦2,800,000

Capital owned is the owner's net equity, derived by deducting non-current borrowed capital (debentures) from capital employed.

Key Concept

Capital Structure Calculations (Working Capital, Capital Employed, Capital Owned)

Question 49Question →

Emeka Enterprise presented the following financial balances at the end of its accounting year:

- Equipment and Motor Vehicles: $\text{₦}1,400,000$
- Inventory: $\text{₦}350,000$
- Trade Debtors: $\text{₦}180,000$
- Cash at Bank: $\text{₦}120,000$
- Trade Creditors: $\text{₦}220,000$
- Accrued Expenses: $\text{₦}80,000$
- 10% Long-term Debentures: $\text{₦}500,000$

What is the value of the enterprise's Capital Owned?

\text{₦}1,250,000

\text{₦}1,550,000

\text{₦}1,750,000

\text{₦}2,050,000

Show answer & explanation

Answer: $\text{₦}1,250,000$

Answer

The correct Capital Owned is

\text{₦}1,250,000

.

The correct answer derives from calculating Total Assets (

\text{₦}2,050,000

) minus Total Liabilities (

\text{₦}800,000

), yielding

\text{₦}1,250,000

as the net capital belonging to the owner.

Step-by-Step Solution

1

Calculate Total Assets

Total Assets = Fixed Assets + Current Assets =

\text{₦}1,400,000 + (\text{₦}350,000 + \text{₦}180,000 + \text{₦}120,000) = \text{₦}2,050,000

Total assets comprise all fixed assets and current assets owned by the enterprise.

2

Calculate Total Liabilities

Total Liabilities = Current Liabilities + Long-term Liabilities = (

\text{₦}220,000 + \text{₦}80,000

) +

\text{₦}500,000 = \text{₦}800,000

Total liabilities combine short-term obligations (creditors and accrued expenses) and long-term debt (debentures).

3

Compute Capital Owned

Capital Owned = Total Assets - Total Liabilities =

\text{₦}2,050,000 - \text{₦}800,000 = \text{₦}1,250,000

Capital Owned (Net Assets / Owner's Equity) represents the net worth remaining after deducting all external obligations from total assets.

Key Concept

Capital Owned (Net Worth / Owner's Equity)

Estimated Time:2m 0s

Question 50Question →

In a commercial transaction structured as a hire purchase agreement, legal title to the property passes to the buyer upon taking physical delivery and paying the initial deposit, whereas under a deferred payment scheme, ownership remains with the vendor until all installments are fully settled.

True

False

Show answer & explanation

Answer: False

Answer

The statement is False. Legal title under a hire purchase agreement is retained by the owner until the final installment is paid, whereas ownership under a deferred payment scheme transfers to the buyer immediately upon delivery.

The statement is false because it reverses the legal ownership principles of the two credit mechanisms. Legal ownership in hire purchase stays with the seller until the final payment, whereas in deferred payment, ownership passes to the buyer immediately upon delivery.

Step-by-Step Solution

1

Analyze the legal title rules for Hire Purchase agreements.

In hire purchase, the hirer obtains physical possession upon delivery, but legal ownership remains with the vendor/finance company until the final installment is paid.

Hire purchase is legally structured as a bailment contract coupled with an option to purchase.

2

Analyze the legal title rules for Deferred Payment (Credit Sale) transactions.

In a deferred payment transaction, legal ownership passes to the buyer immediately upon contract execution or delivery of the goods.

Deferred payment is an outright sale where ownership transfers right away, converting the outstanding balance into an ordinary trade debt.

3

Compare the statement's assertion with established commercial law principles.

The statement incorrectly swaps the legal ownership mechanisms of hire purchase and deferred payment.

Claiming that hire purchase passes title upon initial deposit while deferred payment retains title until the final payment is factually and legally false.

Key Concept

Passage of Legal Title in Credit Transactions

Question 51Question →

Under a standard hire purchase agreement, legal ownership of the goods transfers immediately to the buyer upon payment of the initial deposit.

True

False

Show answer & explanation

Answer: False

Answer

False. Legal ownership of goods under a hire purchase agreement remains with the vendor until the final installment is fully paid, whereas possession alone is transferred upon delivery.

The statement is false because hire purchase grants immediate possession to the hirer while retaining legal ownership with the seller until the final installment and option-to-purchase terms are fully satisfied.

Step-by-Step Solution

1

Examine the legal nature of a hire purchase agreement.

Hire purchase is legally structured as a hiring contract with an option to purchase at the end of the term.

Differentiating between transfer of possession and transfer of title is essential for credit instruments.

2

Compare ownership transfer in hire purchase versus credit sale/deferred payment.

In credit sales, ownership passes immediately upon agreement or delivery. In hire purchase, ownership stays with the seller until the final installment is completed.

Retention of title gives the vendor legal rights to repossess the property if the hirer defaults prior to completing all payments.

Key Concept

Distinction between hire purchase and deferred payment regarding title transfer

Estimated Time:1m 0s

Question 52Question →

A wholesaler sells goods valued at ₦500,000 to a retailer on credit and draws a 90-day trade bill of exchange, which the retailer accepts. Seeking immediate liquidity, the wholesaler discounts the bill with a commercial bank at a 10% discount rate. At maturity, the commercial bank presents the bill to the retailer for payment, but the retailer dishonours it. What is the immediate legal recourse available to the commercial bank?

Recover the full face value of the bill from the wholesaler, who remains secondarily liable as the drawer

Absorb the loss as an unrecoverable bad debt since discounting transfers all default risk permanently to the bank

Sue the Central Bank of Nigeria to recover the discounted amount under commercial credit guarantee schemes

Seize the goods supplied to the retailer under statutory repossession rights automatically conferred by the bill

Show answer & explanation

Answer: Recover the full face value of the bill from the wholesaler, who remains secondarily liable as the drawer

Answer

The commercial bank has the legal right to recover the full face value of the bill from the wholesaler, who is secondarily liable as the drawer upon dishonour by the drawee.

In commercial credit operations, discounting a bill of exchange provides immediate funds to the drawer (wholesaler), but the drawer remains secondarily liable. If the drawee (retailer/acceptor) dishonours the bill upon presentation at maturity, the holder in due course (the discounting bank) can demand full payment directly from the drawer.

Step-by-Step Solution

1

Identify the roles of the parties involved in the bill of exchange transaction.

The wholesaler is the drawer/payee, the retailer is the drawee/acceptor, and the commercial bank becomes the holder for value upon discounting.

Establishing legal obligations requires identifying drawer vs drawee roles under negotiable instruments law.

2

Analyze the legal effect of discounting a trade bill of exchange.

Discounting allows the drawer to receive immediate cash less discount interest, but the drawer guarantees payment if the drawee defaults.

Discounting is not an outright sale of debt without recourse unless specifically negotiated as non-recourse factoring.

3

Determine the primary and secondary liabilities upon dishonour at maturity.

The drawee (retailer) has primary liability, but upon dishonour, secondary liability is activated for the drawer (wholesaler).

The holder for value (the bank) holds right of recourse against the drawer for the full face value upon serving notice of dishonour.

Key Concept

Recourse Rights and Secondary Liability on Discounted Bills of Exchange

Estimated Time:1m 30s

Question 53Question →

A retailer purchases goods from a wholesaler with an agreement to pay for them 30 days after delivery. What form of credit is being utilized in this transaction?

Trade credit

Hire purchase

Bank overdraft

Credit note

Show answer & explanation

Answer: Trade credit

Answer

Trade credit is a credit facility granted directly by a seller to a buyer, allowing the buyer to receive goods immediately and settle the invoice at a later date.

Trade credit refers to an agreement between businesses where goods are supplied on credit, enabling the buyer to pay the supplier after a specific grace period (such as 30, 60, or 90 days).

Step-by-Step Solution

1

Analyze the commercial relationship in the scenario

The transaction takes place between a merchant buyer (retailer) and a merchant supplier (wholesaler).

Credit granted directly between commercial entities during the purchase of inventory is merchant-based credit.

2

Identify the credit mechanism

Goods are transferred immediately with payment deferred for 30 days.

An arrangement allowing a buyer time to pay for goods delivered by a vendor is known as trade credit.

Key Concept

Trade Credit

Estimated Time:45s

Question 54Question →

A crossed cheque can be cashed directly over the counter at a commercial bank upon presentation by the holder.

True

False

Show answer & explanation

Answer: False

Answer

False. A crossed cheque cannot be cashed over the counter; it must be deposited into a bank account.

The statement is false because crossing a cheque prevents over-the-counter cash payment to ensure security, requiring the money to be transferred directly into an account.

Step-by-Step Solution

1

Identify the structural feature of a crossed cheque.

A crossed cheque has two parallel transverse lines drawn across its face.

This visual marking instructs the drawer's bank on how the cheque should be honored.

2

Determine the legal rule governing crossed cheque payments.

Funds must be credited to an account; cash payment over the counter is prohibited.

Crossing protects the drawer and payee against loss or theft by creating an audit trail through the banking system.

Key Concept

Crossed Cheque Payment Restrictions

Question 55Question →

The financial extract of Alhaji Usman Trading Company at the end of its trading year reveals the following account balances:

- Premises: $\text{₦}2,500,000$
- Equipment: $\text{₦}800,000$
- Stock (Inventory): $\text{₦}450,000$
- Trade Debtors: $\text{₦}250,000$
- Cash at Bank: $\text{₦}100,000$
- Trade Creditors: $\text{₦}200,000$
- Bank Overdraft: $\text{₦}150,000$

What is the Capital Employed of the business?

\text{₦}3,750,000

\text{₦}4,100,000

\text{₦}4,450,000

\text{₦}3,900,000

Show answer & explanation

Answer: $\text{₦}3,750,000$

Answer

The Capital Employed of Alhaji Usman Trading Company is

\text{₦}3,750,000

.

The value stating

\text{₦}3,750,000

is correct because Capital Employed equals Fixed Assets plus Working Capital. Fixed Assets are Premises (

\text{₦}2,500,000

) + Equipment (

\text{₦}800,000

) =

\text{₦}3,300,000

. Working Capital is Current Assets (Stock

\text{₦}450,000

+ Debtors

\text{₦}250,000

+ Cash

\text{₦}100,000

=

\text{₦}800,000

) minus Current Liabilities (Creditors

\text{₦}200,000

+ Overdraft

\text{₦}150,000

=

\text{₦}350,000

), yielding

\text{₦}450,000

. Therefore, Capital Employed =

\text{₦}3,300,000 + \text{₦}450,000 = \text{₦}3,750,000

.

Step-by-Step Solution

1

Calculate total Fixed Assets

Fixed Assets = Premises (

\text{₦}2,500,000

) + Equipment (

\text{₦}800,000

) =

\text{₦}3,300,000

Fixed assets represent long-term capital assets used in operations.

2

Calculate total Current Assets

Current Assets = Stock (

\text{₦}450,000

) + Trade Debtors (

\text{₦}250,000

) + Cash at Bank (

\text{₦}100,000

) =

\text{₦}800,000

Current assets comprise short-term resources convertible to cash within an accounting year.

3

Calculate total Current Liabilities

Current Liabilities = Trade Creditors (

\text{₦}200,000

) + Bank Overdraft (

\text{₦}150,000

) =

\text{₦}350,000

Current liabilities are short-term obligations due within one year.

4

Calculate Working Capital

Working Capital = Current Assets (

\text{₦}800,000

) - Current Liabilities (

\text{₦}350,000

) =

\text{₦}450,000

Working capital measures net operational liquidity.

5

Calculate Capital Employed

Capital Employed = Fixed Assets (

\text{₦}3,300,000

) + Working Capital (

\text{₦}450,000

) =

\text{₦}3,750,000

Capital Employed is the total capital actively invested in running the business.

Key Concept

Capital Employed Calculation

Question 56Question →

A business owner acquired industrial baking machinery under an agreement requiring an initial deposit of $₦1,000,000$ and twelve equal monthly installments of $₦300,000$ . After successfully paying eight installments, the buyer defaulted on the remaining payments. If this transaction is legally classified as a deferred payment scheme rather than a hire purchase contract, which of the following statements correctly describes the vendor's legal rights regarding the machinery and the outstanding balance?

The vendor cannot repossess the machinery because title passed immediately to the buyer upon delivery, but the vendor can sue the buyer in court to recover the unpaid debt of

₦1,200,000

.

The vendor has the legal right to repossess the machinery immediately and retain all previous payments totaling

₦3,400,000

as rental compensation.

Ownership automatically reverts to the vendor upon default, requiring the vendor to refund all previous installments before taking back the machinery.

The vendor may repossess the machinery without a court order, provided the repossessed equipment is sold at an auction to recover only the unpaid balance of

₦1,200,000

.

Show answer & explanation

Answer: The vendor cannot repossess the machinery because title passed immediately to the buyer upon delivery, but the vendor can sue the buyer in court to recover the unpaid debt of $₦1,200,000$ .

Answer

The vendor cannot repossess the machinery because title passed immediately to the buyer upon delivery, but the vendor can sue the buyer in court to recover the unpaid debt of

₦1,200,000

.

In a deferred payment agreement, title passes to the buyer at the time of sale/delivery. Consequently, if the buyer defaults, the seller cannot repossess the goods and can only enforce payment of the outstanding debt (

4 \text{ installments} \times ₦300,000 = ₦1,200,000

) through court action.

Step-by-Step Solution

1

Identify the key legal distinction regarding ownership transfer in a deferred payment scheme compared to a hire purchase scheme.

Under a deferred payment (credit sale) scheme, legal title and ownership transfer to the buyer immediately upon contract signature/delivery. Under hire purchase, ownership remains with the seller until the final installment is paid.

Determines whether the vendor retains a right of repossession or merely holds a right of debt recovery.

2

Determine the vendor's legal remedy upon buyer default under deferred payment.

Because the buyer is the legal owner of the machinery, the vendor cannot legally repossess the property. The vendor's sole remedy is to sue the buyer for the unpaid debt.

Repossession of another person's property constitutes conversion/unlawful seizure.

3

Calculate the outstanding financial liability.

Total installments =

12

. Installments paid =

8

. Unpaid installments =

12 - 8 = 4

. Unpaid balance =

4 \times ₦300,000 = ₦1,200,000

.

Quantifies the exact debt the seller can claim in court.

Key Concept

Transfer of ownership and legal remedies in Deferred Payment versus Hire Purchase schemes

Estimated Time:2m 0s

Question 57Question →

Match each instrument of credit on the left with its correct defining feature or description on the right.

Click a left item, then click its matching right item

Show answer & explanation

Answer

Bill of Exchange matches the unconditional written order issued by a seller requesting a buyer to pay at a future date; Promissory Note matches the unconditional written promise made by a debtor to pay a creditor; Letter of Credit matches the guarantee issued by an importer's bank upon presentation of shipping documents; Bank Draft matches the cheque drawn by a bank upon its own funds.

Each credit instrument serves a specific commercial role: a Bill of Exchange is a seller-drawn order to pay; a Promissory Note is a debtor-issued promise to pay; a Letter of Credit is a bank guarantee for international trade conditioned on shipping documents; and a Bank Draft is a cheque drawn directly by a bank on its own funds.

Step-by-Step Solution

1

Identify the definition of a Bill of Exchange.

It is an unconditional written order drawn by a seller (creditor) demanding payment from a buyer (debtor) at a future date.

Bills of exchange originate from the seller to extend trade credit.

2

Identify the definition of a Promissory Note.

It is an unconditional written promise made and signed by the debtor promising to pay the creditor.

Unlike bills of exchange, promissory notes are promises initiated by the debtor.

3

Identify the definition of a Letter of Credit.

It is a foreign trade payment instrument issued by an importer's bank guaranteeing payment to an exporter upon presentation of shipping documents.

Letters of credit eliminate credit risk for exporters in international commerce.

4

Identify the definition of a Bank Draft.

It is a cheque drawn by a bank on its own reserves or branch, guaranteeing payment to the recipient.

Because it is drawn by a bank, it carries virtually no risk of dishonour.

Key Concept

Forms and Instruments of Credit

Question 58Question →

In foreign trade, an exporter requires maximum protection against default by requesting a credit instrument where both the importer's issuing bank and an advising bank in the exporter's country guarantee payment upon presentation of compliant shipping documents. Which credit instrument provides this dual guarantee?

Confirmed irrevocable letter of credit

Revocable letter of credit

Clean bill of exchange

Documentary sight draft

Show answer & explanation

Answer: Confirmed irrevocable letter of credit

Answer

Confirmed irrevocable letter of credit

A confirmed irrevocable letter of credit provides the highest level of security in international commercial transactions. 'Irrevocable' ensures the terms cannot be modified or cancelled without the explicit consent of all parties, while 'confirmed' means a second bank (usually in the exporter's home country) adds its binding undertaking to pay the exporter upon presentation of compliant documents.

Step-by-Step Solution

1

Identify the core feature requested in the transaction scenario.

The requirement is for a financial instrument offering a dual guarantee (issuing bank plus a bank in the exporter's country) that cannot be unilaterally cancelled.

Exporters use confirmed credit instruments to eliminate both buyer credit risk and political/country risks.

2

Analyze how different letters of credit function.

An irrevocable letter of credit cannot be modified without consent, and adding a confirmation from an advising/confirming bank adds the second layer of legal payment undertaking.

Confirmation commits the local bank in the seller's home country to pay even if the issuing foreign bank fails.

3

Select the option that meets both irrevocable and confirmation criteria.

The confirmed irrevocable letter of credit fulfills all security obligations outlined.

Other options either lack bank guarantees altogether or permit unilateral cancellation.

Key Concept

Confirmed Irrevocable Letter of Credit

Estimated Time:1m 0s

Question 59Question →

Vanguard Manufacturing Plc presents the following items in its financial records at the end of the year:

- Issued Ordinary Share Capital: $\text{₦}5,000,000$
- $8\%$ Debentures: $\text{₦}2,000,000$
- Share Premium: $\text{₦}500,000$
- Retained Earnings: $\text{₦}1,200,000$
- Bank Overdraft: $\text{₦}800,000$
- Trade Creditors: $\text{₦}600,000$

Calculate the total value of long-term capital available to the company in Naira.

Show answer & explanation

Answer: 8700000

Answer

The total value of long-term capital available to Vanguard Manufacturing Plc is ₦8,700,000.

Long-term capital comprises equity capital, long-term loans, and reserves used to finance permanent business assets. Summing Issued Share Capital (₦5,000,000), 8% Debentures (₦2,000,000), Share Premium (₦500,000), and Retained Earnings (₦1,200,000) yields ₦8,700,000. Short-term debts like Bank Overdraft and Trade Creditors are excluded.

Step-by-Step Solution

1

Classify each financial item into long-term capital or short-term liability

Long-term capital items: Issued Ordinary Share Capital (₦5,000,000), 8% Debentures (₦2,000,000), Share Premium (₦500,000), Retained Earnings (₦1,200,000). Short-term items: Bank Overdraft (₦800,000), Trade Creditors (₦600,000).

Long-term capital includes equity, reserves, and long-term liabilities intended for permanent business operations.

2

Calculate the sum of all long-term sources of capital

₦5,000,000 + ₦2,000,000 + ₦500,000 + ₦1,200,000 = ₦8,700,000

Adding equity shares, long-term loan capital (debentures), capital reserves (share premium), and accumulated profits gives total long-term capital.

Key Concept

Distinction Between Long-Term Capital and Short-Term Liabilities

Alternative Method

Total long-term capital can also be calculated by summing Total Equity/Reserves (₦5,000,000 + ₦500,000 + ₦1,200,000 = ₦6,700,000) and Total Non-Current Debt (₦2,000,000), yielding ₦8,700,000.

Estimated Time:1m 30s

Question 60Question →

A merchant insured a commercial building against fire for ₦20,000,000. During the proposal stage, the merchant knowingly concealed the fact that inflammable chemical solvents were stored on the premises. Three months later, an accidental electrical fault destroyed the building. Which basic principle of insurance allows the insurer to legally reject the compensation claim?

Utmost good faith, because the insured failed to disclose a material fact that would influence the insurer's decision.

Indemnity, because life assurance principles prohibit financial recovery when electrical faults occur.

Subrogation, because the insurer cannot recover the lost amount from the electrical company prior to claim settlement.

Insurable interest, because property owners lose legal right over their building once an electrical fault develops.

Show answer & explanation

Answer: Utmost good faith, because the insured failed to disclose a material fact that would influence the insurer's decision.

Answer

Utmost good faith, because the insured failed to disclose a material fact that would influence the insurer's decision.

The principle of utmost good faith (uberrimae fidei) imposes a duty on both the insurer and the insured to disclose all material facts prior to entering the agreement. Concealing the presence of volatile chemical solvents altered the insurer's risk assessment, giving them the legal right to void the contract and refuse compensation.

Step-by-Step Solution

1

Identify the core breach in the scenario

The merchant deliberately concealed the storage of inflammable chemical solvents during policy formation.

Insurance contracts require complete transparency regarding material facts that alter the risk profile.

2

Map the legal breach to the corresponding insurance principle

The principle of Utmost Good Faith (Uberrimae Fidei) requires full and honest disclosure of all material details.

Non-disclosure of a material fact makes the insurance contract voidable at the insurer's discretion.

Key Concept

Utmost Good Faith (Uberrimae Fidei)

Estimated Time:1m 0s

Capital, Credit, and Insurance

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