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A company’s assets and liabilities at the beginning and end of a year were:
1 January 31 December
$ $
Non-current assets 100,000 150,000
Current assets 120,000 110,000
Payables & accrued expenses 30,000 40,000
Liability for taxation 20,000 18,000
Issued equity shares of $1 100,000 125,000
Share premium 5,000 10,000
Reserves 50,000 ?
Dividends payable 15,000 20,000
During the year, the company issued a further 25,000 shares at $1.20 whilst cash payments of $20,000 for dividends and $22,000 for taxation were made.What was the company’s profit before taxation for the year?
The correct answer is C.
$
Opening net assets (100 + 120 ? 30 ? 20 ? 15) 155,000
Closing net assets (150 + 110 ? 40 ? 18 ? 20) 182,000Increase 27,000
Add: Dividends appropriated (20 ? 15 + 20) 25,000
Tax charge (22 ? 20 + 18) 20,00072,000
Less: Proceeds of share issue 30,000
42,000
I don’t understand why increase in net assets are used to arrive at the profit figure and why proceed of share issues are deducted.
Can you explain how they have arrived at the answer please?
It is the use of the accounting equation, which is explained in me lectures working through the second chapter of our lecture notes.
Net assets are always equal to the total shareholders funds.
Over a period, the increase in net assets = the increase in shareholders funds. Shareholders funds increase due to the profit for the period and any capital raised during the period, and fall due to any dividends for the period.
So: inc. in NA’s (27,000) = New capital (30,000) + Profit – dividends (25,000)
Therefore profit is 22,000. This is the profit after tax, so the profit before tax is 42,000.
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