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Difficulty: EasyProvision for Unrealized Profit on Closing Inventory

Complete the financial statement adjustment statement by calculating the correct value for the blank.

Answer:A firm transfers manufactured goods to its trading department at a transfer price featuring a 20%20\% mark-up on production cost. If the closing inventory of finished goods held in the trading department is valued at a transfer price of ₦60,000\text{₦}60,000, the amount to be provided as provision for unrealized profit is ₦\text{₦}【10,000】.

Answer

The provision for unrealized profit on closing inventory is ₦10,000.
The closing inventory of ₦60,000 is valued at transfer price, which incorporates a 20% profit mark-up on manufacturing cost. Converting the 20% (or 15\frac{1}{5}) mark-up on cost to margin on transfer price yields 16\frac{1}{6}. Taking 16\frac{1}{6} of ₦60,000 gives ₦10,000 as the required provision for unrealized profit.

Step-by-Step Solution

1
Convert the mark-up on cost to margin on transfer price.
A mark-up of 20% (or 15\frac{1}{5}) on cost translates to a margin of 15+1=16\frac{1}{5 + 1} = \frac{1}{6} on transfer price.
Since closing inventory is stated at transfer price (cost plus profit mark-up), the profit element must be calculated using margin relative to the transfer price.
2
Calculate the unrealized profit embedded in the closing inventory.
16×₦60,000=₦10,000\frac{1}{6} \times \text{₦}60,000 = \text{₦}10,000.
Multiplying the margin fraction by the total transfer price of closing inventory isolates the profit portion that remains unsold.

Key Concept

Provision for Unrealized Profit on Closing Inventory
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Provision for Unrealized Profit on Closing Inventory

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