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Question

Lee opened his new business on 1 January 2016. On that date, the only asset was a bank balance of $10,000.

During the year, Lee’d drawings from the business totalled $35,000.

On 31 December 2016, the assets and liabilities of the business were as follows:

· Computers and furniture $60,000,

· inventory of raw materials $16,500,

· finished goods, at cost $7,400,

· bank overdraft $11,600,

· trade payables, $5,500,

· prepayments $1,500,

· trade receivables $4,500,

· the provision for bad debts $2,000,

· bank loan $39,000,

· interest payable $500,

· accrued expenses, $2,600.

What is the profit of the business in the year ended 31 December 2016?

A 63,700 Correct Answer Incorrect Answer
B 1,23,700 Correct Answer Incorrect Answer
C 62,700 Correct Answer Incorrect Answer
D 53,700 Correct Answer Incorrect Answer
E 50,000 Correct Answer Incorrect Answer

Solution

Total assets on 31 Dec = Computers and furniture +inventory of raw material + finished goods + prepayments + trade receivables = 60,000+ 16,500 + 7,400 + 1,500 + 4,500 = 89,900 Total liabilities on 31 dec = bank overdraft + trades payable + provision for bad debts + bank loan + interest payable + accrued expenses = 11,600 + 5,500+2000+39,000+500+2600 = 61,200 As per accounting equation, Equity or Capital = Assets – liabilities = 89,900 – 61,200 = 28,700 As such, the closing Capital on 31st Dec is 28,700. Closing Capital = Opening capital + Profit for the year – Drawings 28,700 = 10,000 +profit – 35,000 Or Profit = 53,700

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