59 questions. Try each one, then open the answer to check yourself and read the explanation.
The income accruing to debenture holders is called
Answer: D (interest)
Debenture holders are lenders, so they receive interest, not dividends.
The amount by which assets exceed specific liabilities is called
Answer: A (reserve)
Reserves are the part of net assets (assets less liabilities) belonging to owners beyond share capital, built up from profits or premiums.
Which of the following has a debit balance at the end of the year?
Answer: A (Rates Prepaid Account)
A prepayment is an asset, so it has a debit balance; the others are liabilities or capital.
Which of the following is not an example of a fictitious asset?
Answer: A (Raw materials stock)
Raw materials are real goods; fictitious assets are debit balances with no real value, like preliminary expenses or a debit profit and loss balance.
Prime cost consists of
Answer: B (direct material, direct labour and direct expenses)
Prime cost is the total of all direct costs: materials, labour and expenses.
Taiwo is a sole trader who keeps his petty cash on the imprest system, the imprest amount being N4,000. The following transactions took place for a particular month:
Dec. 1 Petty cash in hand N517
1 Petty cash to imprest amount N3,483
6 Bought notebooks N328
7 Paid wages N914
14 Bought postage stamps N375
16 Paid to J. Thomas, a creditor N536
21 Paid wages N928
23 Bought envelopes N437
27 Bought postage stamps N210
Amount to be posted to the personal ledger is
Answer: C (N536)
Only the payment to J. Thomas (N536) relates to a person's account, so it goes to the personal (creditors) ledger.
Taiwo is a sole trader who keeps his petty cash on the imprest system, the imprest amount being N4,000. The following transactions took place for a particular month:
Dec. 1 Petty cash in hand N517
1 Petty cash to imprest amount N3,483
6 Bought notebooks N328
7 Paid wages N914
14 Bought postage stamps N375
16 Paid to J. Thomas, a creditor N536
21 Paid wages N928
23 Bought envelopes N437
27 Bought postage stamps N210
Amount spent on stationery is
Answer: A (N765)
Notebooks 328 + envelopes 437 = N765.
Taiwo is a sole trader who keeps his petty cash on the imprest system, the imprest amount being N4,000. The following transactions took place for a particular month:
Dec. 1 Petty cash in hand N517
1 Petty cash to imprest amount N3,483
6 Bought notebooks N328
7 Paid wages N914
14 Bought postage stamps N375
16 Paid to J. Thomas, a creditor N536
21 Paid wages N928
23 Bought envelopes N437
27 Bought postage stamps N210
Amount to be reimbursed at the end of the month is
Answer: B (N3,728)
Total spent = 328 + 914 + 375 + 536 + 928 + 437 + 210 = N3,728, which restores the float to N4,000.
Which of the following explains the short term solvency of a company?
Answer: A (Acid test ratio)
The acid-test ratio shows whether liquid assets can meet current liabilities.
Which of the following is a fictitious asset?
Answer: D (Preliminary expenses.)
Preliminary expenses have no physical value but are shown as a debit balance until written off.
A subsidiary record is a book
Answer: A (of original entry)
Subsidiary books (day books, cash book, journal) are the books of original entry.
In which ledger is the Control Account prepared?
Answer: B (General ledger)
Control accounts are kept in the general ledger to check the sales and purchases ledgers.
Suppliers personal accounts are found in the
Answer: A (Purchases Ledger)
Creditors' (suppliers') accounts are kept in the purchases ledger.
Commission of N5,000 to a sales representative is debited to salaries account. This is an error of
Answer: C (commission)
The amount was posted to the right class of account (an expense) but the wrong account (salaries instead of commission). That is an error of commission; an error of principle puts an item in the wrong class, e.g. an asset posted as an expense.
Purchase of goods of N2,000 was treated as sales and entered in the sales day book and had been carried through the accounts as such. This is an error of
Answer: A (principle)
The transaction was recorded in the wrong type of account altogether (sales instead of purchases), an error of principle.
Which of the following is not correct?
Answer: D (Decreases in liability accounts are entered on the credit side.)
A decrease in a liability is a debit entry, so statement D is wrong.
A business firm incurs labour cost in installing machinery. This should be treated as
Answer: C (machinery cost)
Costs of getting a fixed asset ready for use, such as installation labour, are capitalised as part of the machinery's cost.
Which of the following is an impersonal nominal account?
Answer: A (Salaries Account)
Salaries is an expense, a nominal (impersonal) account; machinery is real, debtors and creditors are personal.
John Udoh started business on 1st January, 1998 with the following assets: Motor Van N120,000; Buildings N300,000; Stock of goods N40,000
In addition, he had cash of N60,000, out of which N20,000 was borrowed from a friend.
The capital of the business is
Answer: B (N500,000)
Assets 120,000 + 300,000 + 40,000 + 60,000 = 520,000 − loan 20,000 = N500,000.
John Udoh started business on 1st January, 1998 with the following assets: Motor Van N120,000; Buildings N300,000; Stock of goods N40,000
In addition, he had cash of N60,000, out of which N20,000 was borrowed from a friend.
The liabilities of the business amount to
Answer: D (N20,000)
The only liability is the N20,000 borrowed from the friend.
What is the effect on a firm for making a payment of N10,000 to a creditor? Its liabilities
Answer: A (decrease and its assets decrease)
Paying a creditor reduces cash (asset) and the amount owed (liability).
The depreciation method that allocates higher value to the use of an asset in its earlier years is
Answer: A (diminishing balance method)
The reducing (diminishing) balance method charges more depreciation in early years.
Given a purchases invoice showing 5 items at N40,000 each less trade discount of 25% and cash discount of 10% the amount to be paid within the credit period is
Answer: C (N135,000)
200,000 less 25% trade discount = 150,000; less 10% cash discount = N135,000.
The Purchases Ledger Control Account is also referred to as
Answer: A (Total Creditors Account)
It totals all the creditors' accounts in the purchases ledger.
Which of the following is a primary source of entry into the debtors ledger?
Answer: C (Sales invoices)
Sales invoices sent to customers are the source for debiting debtors' accounts.
Opening Stock of Raw Materials N8,000
Purchases N45,000
Closing Stock of Raw Materials N9,500
Direct wages N6,450
Indirect wages N2,800
Depreciation – Plant and Machinery N3,200
Factory rents and rates N350
Opening work-in-progress N3,250
Closing work-in-progress N3,750
Cost of raw materials consumed is
Answer: D (N43,500.)
8,000 + 45,000 − 9,500 = N43,500.
Opening Stock of Raw Materials N8,000
Purchases N45,000
Closing Stock of Raw Materials N9,500
Direct wages N6,450
Indirect wages N2,800
Depreciation – Plant and Machinery N3,200
Factory rents and rates N350
Opening work-in-progress N3,250
Closing work-in-progress N3,750
Prime cost is
Answer: C (N49,950)
43,500 + direct wages 6,450 = N49,950.
Opening Stock of Raw Materials N8,000
Purchases N45,000
Closing Stock of Raw Materials N9,500
Direct wages N6,450
Indirect wages N2,800
Depreciation – Plant and Machinery N3,200
Factory rents and rates N350
Opening work-in-progress N3,250
Closing work-in-progress N3,750
Factory cost of production is
Answer: A (N56,300)
Prime cost 49,950 + indirect wages 2,800 + depreciation 3,200 + rent 350 = N56,300.
Opening Stock of Raw Materials N8,000
Purchases N45,000
Closing Stock of Raw Materials N9,500
Direct wages N6,450
Indirect wages N2,800
Depreciation – Plant and Machinery N3,200
Factory rents and rates N350
Opening work-in-progress N3,250
Closing work-in-progress N3,750
Production cost is
Answer: C (N55,800)
56,300 + opening WIP 3,250 − closing WIP 3,750 = N55,800.
The accounting entries for recording cash withdrawn by the proprietor for personal use are, debit
Answer: D (Drawings and credit Cash.)
Drawings increase (debit) and cash decreases (credit).
The head office usually issues goods to branches at
Answer: D (cost price.)
Of the options given, goods are charged to branches at cost price (or cost plus a mark-up).
Which of the following does not relate to government accounting system?
Answer: D (Profit and Loss Account.)
Government does not aim at profit, so it does not prepare a profit and loss account.
Jeng Limited disposed a fixed asset in 1999 for N2,000. The asset was purchased in 1996 at a cost of N10,000 and has been depreciated at the rate of 20% per annum using the straight line method.
What was the book value when the asset was sold?
Answer: C (N4,000)
Depreciation 2,000 a year for 1996, 1997 and 1998 = 6,000; book value 10,000 − 6,000 = N4,000.
Jeng Limited disposed a fixed asset in 1999 for N2,000. The asset was purchased in 1996 at a cost of N10,000 and has been depreciated at the rate of 20% per annum using the straight line method.
What is the profit or loss on the disposal of the asset?
Answer: C (N2,000 loss)
Proceeds 2,000 − book value 4,000 = N2,000 loss.
Jeng Limited disposed a fixed asset in 1999 for N2,000. The asset was purchased in 1996 at a cost of N10,000 and has been depreciated at the rate of 20% per annum using the straight line method.
What is the correct entry for the sale of the asset in the Asset Account and Disposal of Asset Account?
Answer: B (Debit Disposal of Asset Account N4,000, credit Fixed Asset Account N4,000)
The asset's book value (N4,000) is removed from the asset account (credit) and transferred to the disposal account (debit).
"The Accountant thinks the investment in the books are worthless." This is
Answer: C (conservatism concept)
Writing down an asset the accountant believes has lost its value is being cautious, the conservatism (prudence) concept.
Profits are recognised when goods are sold. What concept is this?
Answer: A (Realization)
The realisation concept recognises profit when the sale takes place.
Ali and Baba are in partnership sharing profits and losses in the ratio of 3 : 2 respectively. Net Profit for the year was N4,000,000.00. The extract from the provisions of the partnership agreement and other information relating to 1999 are as follows (Ali; Baba):
Interest on capital: 5%; 5%
Partner's salary: N500,000; N300,000
Capital Account b/d: N5,000,000; N4,000,000
Current Account b/d: N400,000; N500,000
Partner's Drawings: N2,300,000; N500,000
What is Baba's share of profit?
Answer: D (N1,100,000.)
Interest 250,000 + 200,000 and salaries 500,000 + 300,000 = 1,250,000; remaining 2,750,000 × 2/5 = N1,100,000.
Ali and Baba are in partnership sharing profits and losses in the ratio of 3 : 2 respectively. Net Profit for the year was N4,000,000.00. The extract from the provisions of the partnership agreement and other information relating to 1999 are as follows (Ali; Baba):
Interest on capital: 5%; 5%
Partner's salary: N500,000; N300,000
Capital Account b/d: N5,000,000; N4,000,000
Current Account b/d: N400,000; N500,000
Partner's Drawings: N2,300,000; N500,000
What is Ali's share of profit?
Answer: A (N1,650,000)
Remaining profit 2,750,000 × 3/5 = N1,650,000.
Ali and Baba are in partnership sharing profits and losses in the ratio of 3 : 2 respectively. Net Profit for the year was N4,000,000.00. The extract from the provisions of the partnership agreement and other information relating to 1999 are as follows (Ali; Baba):
Interest on capital: 5%; 5%
Partner's salary: N500,000; N300,000
Capital Account b/d: N5,000,000; N4,000,000
Current Account b/d: N400,000; N500,000
Partner's Drawings: N2,300,000; N500,000
What is the closing balance in Ali's Current Account?
Answer: B (N500,000 Cr.)
400,000 + interest 250,000 + salary 500,000 + share 1,650,000 − drawings 2,300,000 = N500,000 Cr.
An agreement made by partners to regulate and govern their business activities is known as
Answer: B (Partnership Deed)
The written partnership agreement is the partnership deed.
Which of the following are correct about a limited liability company? I. Members have power to bind the company II. Perpetual succession III. Certificate of incorporation IV. Wound-up on death of a shareholder.
Answer: A (II and III only)
A company continues despite members' deaths (perpetual succession) and is formed by a certificate of incorporation; members cannot bind it.
Issue of prospectus is an invitation to members of the public to
Answer: A (subscribe for shares)
A prospectus invites the public to buy (subscribe for) the company's shares.
Sales N200,000
Opening Stock N20,000
Purchases N140,000
Closing Stock N10,000
Expenses N10,000
Bank N10,000
Capital N85,000
Creditors N35,000
Debtors N50,000
Fixtures and fittings, cost N10,000
Freehold land and building N70,000
Drawings N10,000
Percentage of net profit to sales is
Answer: C (20%)
Gross profit 50,000 − expenses 10,000 = 40,000; 40,000 ÷ 200,000 = 20%.
Sales N200,000
Opening Stock N20,000
Purchases N140,000
Closing Stock N10,000
Expenses N10,000
Bank N10,000
Capital N85,000
Creditors N35,000
Debtors N50,000
Fixtures and fittings, cost N10,000
Freehold land and building N70,000
Drawings N10,000
Acid test ratio is
Answer: B (1.7:1)
(Debtors 50,000 + bank 10,000) ÷ creditors 35,000 = 1.7 : 1.
Sales N200,000
Opening Stock N20,000
Purchases N140,000
Closing Stock N10,000
Expenses N10,000
Bank N10,000
Capital N85,000
Creditors N35,000
Debtors N50,000
Fixtures and fittings, cost N10,000
Freehold land and building N70,000
Drawings N10,000
Gross profit is
Answer: C (N50,000)
Cost of sales = 20,000 + 140,000 − 10,000 = 150,000; gross profit = 200,000 − 150,000 = N50,000.
The Chief Accounting Officer of the Federation is
Answer: C (Accountant General)
The Accountant General of the Federation is the chief accounting officer of government.
The expenditure on a good or service which is consumed either immediately or within a current accounting period is
Answer: D (recurrent expenditure.)
Spending used up within the period is recurrent expenditure.
Which of the following serves as the main Government Fund used to service all operations of the government?
Answer: B (Consolidated Revenue Fund)
Government revenues are paid into and spent from the Consolidated Revenue Fund.
Which of the following serves as an input, storage and output device of a computer?
Answer: A (Diskette)
A diskette can be read from (input), hold data (storage) and be written to (output).
Section A (answer two questions only from this section)
1. (a) What is partnership? (b) State two rules which shall apply in a partnership business in the absence of any express agreement.
(a) A partnership is the relationship between two or more persons (usually 2 to 20) who carry on a business in common with a view to making profit.
(b) Any two rules of the Partnership Act: profits and losses are shared equally; no interest is allowed on capital; no interest is charged on drawings; no partner is entitled to a salary; a partner who lends money to the firm beyond his capital gets 5% interest a year on the loan; no new partner may be admitted without the consent of all partners; the firm must indemnify a partner for payments properly made in the course of the business.
Learn the Partnership Act rules: equal shares, no interest on capital or drawings, no salary, 5% on loans.
2. (a) List and explain three factors that would be considered in the computation of the annual depreciation amount of any given fixed asset (b)(i) What is the difference between depreciation and amortization? (ii) Give two examples each of assets associated with depreciation and amortization.
(a) Any three: cost of the asset (purchase price plus costs of getting it ready for use); estimated useful life (the number of years it will be used); estimated residual (scrap) value at the end of its life; the method of depreciation chosen (straight line, reducing balance, etc.).
(b)(i) Depreciation is the spreading of the cost of a tangible fixed asset over its useful life as it wears out or becomes obsolete; amortisation is the same process applied to intangible assets (or leases) over the period of the right.
(ii) Depreciation: plant and machinery, motor vehicles, furniture and fittings, buildings. Amortisation: goodwill, patents, copyrights, trademarks, leases.
Depreciation is for things you can touch; amortisation is for rights and other intangible assets.
3. (a) Write short notes on the following: (i) errors of commission (ii) accrued expenses; (iii) the ledger. (b) State four uses of the general journal.
(a)(i) An error of commission occurs when an amount is entered on the correct side but in the wrong account of the same class, e.g. a credit sale to Bampo debited to Bamfo's account; it does not affect the trial balance.
(ii) Accrued expenses are expenses incurred in a period but not yet paid at its end (e.g. wages owing); they are added to the expense in profit and loss and shown as current liabilities.
(iii) The ledger is the main book of account containing all the accounts of the business, each with a debit and a credit side; it is often divided into sales, purchases and general ledgers.
(b) Any four uses of the journal: opening entries when a business starts; correction of errors; purchase and sale of fixed assets on credit; transfers between accounts and closing entries; writing off bad debts; adjustments such as depreciation and provisions; issue of shares.
Explain each term in one or two sentences with an example.
4. (a) Distinguish between subscription in advance and subscription in arrears. (b) List four features of an Income and Expenditure Account.
(a) Subscription in advance is money received from members for a future year; it is a current liability of the club at the year end and is deducted from this year's subscription income. Subscription in arrears is subscription due for the year but not yet paid; it is a current asset and is added to this year's income.
(b) Any four: it is the non-profit body's version of the profit and loss account; it records only revenue (not capital) items; it is prepared on the accruals basis (adjusted for amounts owing and prepaid); it shows depreciation; the excess of income over expenditure is a surplus and the opposite a deficit; it is a nominal account covering a period.
Advance = liability, arrears = asset.
Section B – Financial Accounting Practice (answer three questions only from this section)
5. Fashions Shop is organised into Fabrics and Footwear Departments. The Trial Balance below was extracted for the shop for the year ended 31st October, 1999.
Capital: N12,856 (Cr)
Drawings: N2,423 (Dr)
Furniture and fittings: N2,040 (Dr)
Delivery van: N8,160 (Dr)
Purchases and sales: Fabrics N14,110 (Dr), N20,400 (Cr); Footwear N7,650 (Dr), N10,200 (Cr)
Debtors and creditors: N591 (Dr); N1,275 (Cr)
Salaries and wages: N3,600
Insurance: N1,955
Rent and rates: N850
Delivery van expenses: N555
Electricity: N1,020
Bank: N383
Stock – 1/11/98: Fabrics N850; Footwear N544
Totals: N44,731 / N44,731
Additional information:
(a) Stocks at 31/10/99 were: Fabrics N2,210; Footwear N1,632
(b) Depreciation should be provided as follows: Furniture and fittings 10%; Delivery van 25%
(c) Provision for doubtful debts should be made at 10% on debtors.
(d) The ratio of floor areas between fabrics and footwear is 3:2.
(e) Expenses are to be apportioned between the departments as follows: Rent and rates, insurance and electricity – Floor area; Salaries and wages, delivery van expenses and doubtful debts – Turnover; Others – Equal
You are required to prepare: (i) Trading and profit and Loss Account in Columnar form for the year ended 31st October, 1999. (ii) Balance Sheet for the whole business as at that date.
Bases: floor area 3 : 2; turnover 20,400 : 10,200 = 2 : 1; others (depreciation) equally.
(i) Trading (fabrics / footwear): opening stock 850 / 544 + purchases 14,110 / 7,650 − closing stock 2,210 / 1,632 = cost of sales 12,750 / 6,562; sales 20,400 / 10,200; gross profit 7,650 / 3,638 (total 11,288).
Profit and loss: rent and rates 510 / 340; insurance 1,173 / 782; electricity 612 / 408 (floor area); salaries and wages 2,400 / 1,200; delivery van expenses 370 / 185; provision for doubtful debts (10% × 591 = 59) 39 / 20 (turnover); depreciation of furniture 204 and delivery van 2,040 shared equally: 1,122 / 1,122.
Total expenses 6,226 / 4,057. Net profit: fabrics 1,424; footwear loss (419); overall net profit 1,005.
(ii) Balance sheet as at 31st October 1999: furniture 2,040 − 204 = 1,836; delivery van 8,160 − 2,040 = 6,120; fixed assets 7,956. Current assets: stock 2,210 + 1,632 = 3,842; debtors 591 − 59 = 532; bank 383 = 4,757. Creditors 1,275; working capital 3,482. Net assets 11,438 = capital 12,856 + net profit 1,005 − drawings 2,423.
Apportion each expense on its stated basis and check the two departments' profits add up to the business profit.
6. The following balances have been extracted from the books of Uduak Local Government for the year ended 31st December, 1999:
Head – General Revenue Balance 1/1/99 N5,450,000
4001 Maintenance of vehicles N25,000
4002 Stationery N18,000
4003 Sinking of bore holes N130,000
4004 Staff salaries N1,750,000
3001 Statutory allocations N8,000,750
4005 Refuse disposal expenses N5,400
3002 Interest on fixed deposit account N13,400
4006 Rehabilitation of roads N2,500,650
4007 Fines N38,000
4008 Rates N1,500,520
3003 Renewal of licences N70,860
4009 Renovation of schools N2,150,640
4010 Salary of traditional chiefs N76,000
You are required to prepare Uduak Local Government's Revenue and Expenditure statement for the year ended 31st December, 1999.
Revenue and Expenditure Statement for the year ended 31st December 1999
Revenue: statutory allocations 8,000,750; interest on fixed deposit 13,400; renewal of licences 70,860; fines 38,000; rates 1,500,520; total 9,623,530.
Expenditure: maintenance of vehicles 25,000; stationery 18,000; sinking of bore holes 130,000; staff salaries 1,750,000; refuse disposal 5,400; rehabilitation of roads 2,500,650; renovation of schools 2,150,640; salary of traditional chiefs 76,000; total 6,655,690.
Surplus for the year 2,967,840; add general revenue balance b/f 5,450,000; general revenue balance c/f 8,417,840.
Fines and rates are money the local government collects, so they are revenue even though their head numbers are in the 4000 series.
7. Inter – Regional Trading Company operates self-balancing ledgers. Extracts for the year ended 31st January, 2000 show the following:
Sales ledger balances – 1/2/99: Dr N2,450; Cr N390
Purchases ledger balances – 1/2/99: Dr N217; Cr N1,847
Credit purchases N15,800
Cash sales N20,000
Credit sales N37,600
Bad debts N188
Provision for doubtful debts N245
Discount received N683
Discount allowed N168
Returns inward N207
Returns outward N175
Cheques from debtors N22,150
Cash from debtors N14,000
Cheques drawn for creditors N15,500
Sales ledger balances – 31/1/2000 Cr. N470
Purchases ledger balances – 31/1/2000 Dr. N240
You are required to prepare: (a) Sales Ledger Control Account (b) Purchases Ledger Control Account.
(a) Sales ledger control account
Dr: balance b/f 2,450; credit sales 37,600; balance c/d (credit balances) 470 = 40,520.
Cr: balance b/f 390; bad debts 188; discount allowed 168; returns inwards 207; bank 22,150; cash 14,000; balance c/d 3,417 = 40,520.
Cash sales (20,000) and the provision for doubtful debts (245) are not entered.
(b) Purchases ledger control account
Dr: balance b/f 217; discount received 683; returns outwards 175; bank 15,500; balance c/d 1,312 = 17,887.
Cr: balance b/f 1,847; credit purchases 15,800; balance c/d (debit balances) 240 = 17,887.
Only items that pass through the personal ledgers go into control accounts: leave out cash sales and provisions.
8. The following information has been extracted from the books of Adesuwa Limited on 1st April, 1999. The provision for discounts allowed was N5,830 and the provision for bad debts was N2,234. Discounts allowed during the year to 31st March, 2000 was N18,824 and bad debts written off was N4,832. On 31st March, 2000 debtors amounted to N425,052. The provision for bad debts is to be based upon a specific provision of N5,052 and a general provision on the remainder at 1 percent. The provision for discount allowed is to be 2 percent.
You are required to prepare: (a) Bad Debts Account (b) Provision for Bad Debts Accounts (c) Discount Allowed Account (d) Provision for Discounts Allowed Account (e) Balance Sheet extract as at 31st March, 2000.
Required provisions: bad debts = specific 5,052 + general 1% × (425,052 − 5,052) = 4,200; total 9,252. Discounts = 2% × (425,052 − 9,252) = 2% × 415,800 = 8,316.
(a) Bad debts account: Dr sundry debtors 4,832; Cr profit and loss 4,832.
(b) Provision for bad debts: balance b/d 2,234; profit and loss (increase) 7,018; balance c/d 9,252.
(c) Discount allowed account: Dr sundry debtors 18,824; Cr profit and loss 18,824.
(d) Provision for discounts allowed: balance b/d 5,830; profit and loss (increase) 2,486; balance c/d 8,316.
(e) Balance sheet extract: debtors 425,052 less provision for bad debts 9,252 = 415,800, less provision for discounts 8,316 = 407,484.
Work out the bad debts provision first; the discount provision is calculated on debtors after deducting it.
9. Ikemesit Enterprises Limited has an authorised share capital of N200,000 divided into 160,000 ordinary shares of N1 each and 40,000 6% preference shares of N1 each. 120,000 of the ordinary shares had been issued and fully paid, while all the preference shares were issued and fully paid. The profit after taxation for the year ended 31st December, 1999 was N49,000. The profit and Loss Account had a credit balance of N24,000 as at 1st January, 1999.
Additional information:
(a) Write off preliminary expenses N1,700. (b) Transfer N6,000 to general reserve and N4,000 to capital reserve (c) Half of the dividend due on the preference shares had been paid in July, 1999. (d) An interim dividend of 5% had been paid on the ordinary shares in September, 1999, and the directors have proposed a final dividend of 10%.
You are required to prepare the: (i) Appropriation Account; and (ii) Balance Sheet extract as at 31st December, 1999.
(i) Profit and loss appropriation account: net profit after tax 49,000 + balance b/f 24,000 = 73,000.
Less: preliminary expenses written off 1,700; general reserve 6,000; capital reserve 4,000; preference dividend paid 1,200 and proposed 1,200 (6% × 40,000 = 2,400); ordinary interim dividend 6,000 (5% × 120,000) and proposed final 12,000 (10%); total 32,100. Retained profit c/f 40,900.
(ii) Balance sheet extract: authorised capital 160,000 ordinary + 40,000 6% preference = 200,000 (note). Issued and fully paid: 120,000 ordinary shares 120,000; 40,000 6% preference shares 40,000 = 160,000. Reserves: capital reserve 4,000; general reserve 6,000; retained profit 40,900. Shareholders' fund 210,900.
Current liabilities: proposed dividends – preference 1,200, ordinary 12,000 = 13,200.
Dividends are worked on issued shares only; proposed dividends are current liabilities.