Apex Enterprises operates two departments: Department X and Department Y. Department X tra… — JAMB UTME

Apex Enterprises operates two departments: Department X and Department Y. Department X transfers finished goods to Department Y at cost plus $33\frac{1}{3}\%$ . At the end of the accounting year ended 31st December 2025, Department Y held closing inventory valued at $\text{N}40,000$ . An inspection of inventory records reveals that $75\%$ of Department Y's closing inventory consists of goods transferred from Department X. Given that the opening provision for unrealized profit at 1st January 2025 was $\text{N}2,500$ , what is the net amount (in Naira) to be debited to the General Profit and Loss Account for provision for unrealized profit for the year?

Answer: 5000 Naira

Answer

The net amount to be debited to the General Profit and Loss Account for provision for unrealized profit is 5000.

To calculate the net adjustment to the General Profit and Loss Account, first isolate the transfer component of Department Y's closing inventory (

75\% \times \text{N}40,000 = \text{N}30,000

). Convert the transfer mark-up of

33\frac{1}{3}\%

on cost to a margin on transfer price:

\frac{1/3}{1 + 1/3} = 25\%

. The total unrealized profit contained in closing stock is

25\% \times \text{N}30,000 = \text{N}7,500

. Since an opening provision of

\text{N}2,500

already exists, the additional amount to be debited to the General Profit and Loss Account is

\text{N}7,500 - \text{N}2,500 = \text{N}5,000

Step-by-Step Solution

Determine the proportion of closing inventory derived from inter-departmental transfers

Transferred goods portion =

75\% \times \text{N}40,000 = \text{N}30,000

Unrealized profit exists only in the portion of closing stock that was transferred from Department X, not in goods purchased externally.

Convert mark-up rate to profit margin rate

Margin =

\frac{\text{Mark-up}}{1 + \text{Mark-up}} = \frac{1/3}{4/3} = \frac{1}{4} = 25\%

Department X charges goods at cost plus

33\frac{1}{3}\%

. To extract profit from the transfer price (invoice price), mark-up must be converted to margin on transfer price.

Calculate the closing provision required at the end of the year

Closing Provision =

25\% \times \text{N}30,000 = \text{N}7,500

This represents the total profit element included in Department Y's remaining transferred stock that has not yet been sold to third parties.

Calculate the net charge to the General Profit and Loss Account

Net P&L Debit = Closing Provision - Opening Provision =

\text{N}7,500 - \text{N}2,500 = \text{N}5,000

The General Profit and Loss Account is debited with the increase in provision required for the current accounting period.

Key Concept

Provision for Unrealized Profit on Inter-Departmental Transfers

Estimated Time:2m 30s

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