Examkin

Question

Difficulty: HardTreatment of Normal and Abnormal Losses in Consignment

Olu & Sons consigned 1,0001,000 litres of industrial chemical costing ₦1,000\text{₦}1,000 per litre to an agent in Ibadan. Olu & Sons paid ₦120,000\text{₦}120,000 for freight and insurance. During transit, 100100 litres were completely destroyed in an accident. Upon arrival, the agent paid ₦45,000\text{₦}45,000 for clearing and unloading. Due to natural evaporation, 9090 litres were lost during storage. If the agent subsequently sold 600600 litres, what is the valuation of the unsold consignment stock?

  1. ₦273,000Answer
  2. B
    ₦245,700
  3. C
    ₦210,000
  4. D
    ₦235,200

Answer

₦273,000
To value closing stock when both normal and abnormal losses occur: first, calculate the abnormal loss in transit (100100 litres ×₦1,120=₦112,000\times \text{₦}1,120 = \text{₦}112,000) and deduct it from the total consignor outlay. Next, add consignee's direct non-recurring expenses (₦45,000\text{₦}45,000) to get ₦1,053,000\text{₦}1,053,000 for the 900900 litres received. Normal loss (9090 litres) is not assigned a cost; instead, the total cost of ₦1,053,000\text{₦}1,053,000 is divided by the remaining 810810 good litres, giving an effective unit cost of ₦1,300\text{₦}1,300 per litre. Multiplying 210210 unsold litres by ₦1,300\text{₦}1,300 yields ₦273,000\text{₦}273,000.

Step-by-Step Solution

1
Calculate total initial cost of goods sent and consignor's expenses
Total cost = (1,000×₦1,000)+₦120,000=₦1,120,000(1,000 \times \text{₦}1,000) + \text{₦}120,000 = \text{₦}1,120,000 (or ₦1,120\text{₦}1,120 per litre).
Consignor expenses are part of the total cost of goods dispatched.
2
Deduct abnormal loss in transit
Abnormal loss value = 100 litres×₦1,120=₦112,000100 \text{ litres} \times \text{₦}1,120 = \text{₦}112,000. Cost of remaining 900900 litres delivered = ₦1,120,000−₦112,000=₦1,008,000\text{₦}1,120,000 - \text{₦}112,000 = \text{₦}1,008,000.
Abnormal loss is valued at cost plus proportionate consignor expenses incurred up to the point of loss and credited to the Consignment Account.
3
Add consignee's non-recurring expenses and determine cost of good litres after normal loss
Total cost of 900900 litres = ₦1,008,000+₦45,000=₦1,053,000\text{₦}1,008,000 + \text{₦}45,000 = \text{₦}1,053,000. Good litres remaining after 9090 litres normal loss = 900−90=810900 - 90 = 810 litres. Cost per good litre = ₦1,053,000/810=₦1,300\text{₦}1,053,000 / 810 = \text{₦}1,300.
Normal loss carries no monetary valuation; its cost is absorbed by the remaining good units, inflating the cost per unit.
4
Calculate valuation of unsold stock
Unsold litres = 810−600=210810 - 600 = 210 litres. Value of unsold stock = 210×₦1,300=₦273,000210 \times \text{₦}1,300 = \text{₦}273,000.
Unsold stock is valued at the inflated cost per good unit.

Key Concept

Valuation of Unsold Stock with Normal and Abnormal Losses
Rate this question

Topics

Treatment of Normal and Abnormal Losses in Consignment

More questions from this topic