Read the following information to answer.
On the basis of case study given below, answer the question which follows:
"Mikku, an alumnus of IIT Delhi, initiated his start-up "Gajanan Ltd." in the year 2016. His profit in the year 2020-21 after all appropriation was ₹6,25,000. This profit was arrived at after taking the following items into consideration (income tax paid during the year was equal to the provision for tax):
| Loss on Sale of fixed Assets | ₹5,00,000 |
| Goodwill written off | ₹3,80,000 |
| Transfer to reserve | ₹3,55,000 |
| Provision for tax | ₹2,70,000 |
| Interest on Debentures paid | ₹1,65,000 |
| Particulars | 2020(₹) | 2021(₹) |
| Prepaid Expenses | 25,000 | 10,000 |
| Accrued interest | 40,000 | 68,000 |
| Trade payables | 7,00,000 | 4,00,000 |
| Inventories | 6,50,000 | 5,50,000 |
Net profit before tax will be:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → ₹12,50,000
The profit of ₹6,25,000 is after all appropriations. To reach the net profit before tax, add back the appropriations and the provision for tax that were deducted from it:
Profit after appropriations = ₹6,25,000
Add: Transfer to reserve = ₹3,55,000
Add: Provision for tax = ₹2,70,000
Net profit before tax = ₹12,50,000
Loss on sale of fixed assets, goodwill written off and interest on debentures are genuine charges of the year; they stay in the net profit before tax and are added back only at the next stage, to reach the operating profit before working capital changes.