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Difficulty: HardBalance Sheet Presentation of Manufacturing Inventories and Provisions

Kibo Manufacturing Company transfers finished goods from the factory to the trading account at cost plus a 20%20\% mark-up. At the end of the financial year, the following inventory balances were extracted from the books:

- Raw Materials Inventory: ₦62,000₦62,000
- Work-in-Progress Inventory: ₦38,000₦38,000
- Finished Goods Inventory (at transfer value): ₦120,000₦120,000

What is the total net carrying amount (in ₦₦) of manufacturing inventories to be presented under Current Assets in the Statement of Financial Position?

Answer: 200000 ₦

Answer

The total net carrying amount of manufacturing inventories in the Statement of Financial Position is ₦200,000₦200,000.
In the Statement of Financial Position of a manufacturing entity, inventories under current assets must be shown at cost. Raw materials (₦62,000₦62,000) and work-in-progress (₦38,000₦38,000) are brought in at cost. Finished goods transferred at cost plus 20%20\% (₦120,000₦120,000) must be adjusted by deducting the provision for unrealized profit (20120×₦120,000=₦20,000\frac{20}{120} \times ₦120,000 = ₦20,000), bringing finished goods to its net cost of ₦100,000₦100,000. Summing all three yields ₦62,000+₦38,000+₦100,000=₦200,000₦62,000 + ₦38,000 + ₦100,000 = ₦200,000.

Step-by-Step Solution

1
Compute the provision for unrealized profit on closing finished goods
Unrealized profit = ₦20,000₦20,000
Finished goods are recorded at transfer value (cost + 20%20\% markup), so profit component is 20120\frac{20}{120} of transfer value.
2
Deduct provision for unrealized profit from finished goods transfer value
Net Finished Goods Inventory = ₦100,000₦100,000
Inventories must be presented in the Statement of Financial Position at lower of cost and net realizable value, removing unrealized internal profit.
3
Aggregate all inventory components for Statement of Financial Position presentation
Total Current Asset Inventories = ₦200,000₦200,000
Total inventories comprise Raw Materials (₦62,000₦62,000) + Work-in-Progress (₦38,000₦38,000) + Net Finished Goods at cost (₦100,000₦100,000).

Key Concept

Valuation and presentation of raw materials, work-in-progress, and net finished goods (after deducting provision for unrealized profit) under current assets in manufacturing accounts.
Estimated Time:2m 0s
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Balance Sheet Presentation of Manufacturing Inventories and Provisions

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