Examkin

Question

Difficulty: HardInter-departmental Transfers and Provision for Unrealized Profit

Kwara Furniture Enterprise operates two departments: Timber Department and Assembly Department. The Timber Department transfers processed wood to the Assembly Department at cost plus a 25%25\% mark-up. On 1 January 2025, the Assembly Department held opening stock valued at N50,000\text{N}50,000, of which 80%80\% represented transferred wood from the Timber Department. On 31 December 2025, the Assembly Department's closing stock was valued at N70,000\text{N}70,000, of which 75%75\% consisted of transferred wood. What is the net increase in the provision for unrealized profit to be debited to the General Profit and Loss Account for the year ended 31 December 2025?

Answer: 2500 Naira

Answer

The net increase in the provision for unrealized profit to be debited to the General Profit and Loss Account is 2500 Naira.
The correct response of 2500 is calculated by establishing the unrealized profit included in the transferred portion of both opening and closing inventory using the 20%20\% margin rate (25%25\% mark-up converted to margin). Opening provision is N8,000\text{N}8,000 (20%×80%×N50,00020\% \times 80\% \times \text{N}50,000) and closing provision is N10,500\text{N}10,500 (20%×75%×N70,00020\% \times 75\% \times \text{N}70,000). The net increase debited to General Profit and Loss is N10,500−N8,000=N2,500\text{N}10,500 - \text{N}8,000 = \text{N}2,500.

Step-by-Step Solution

1
Convert mark-up rate to profit margin rate
Profit margin on transfer price is 20%20\% (or 15\frac{1}{5})
Inter-departmental transfers are recorded at transfer price, so unrealized profit must be extracted using the profit margin on transfer price, calculated as Mark-up100+Mark-up=25125=0.20\frac{\text{Mark-up}}{100 + \text{Mark-up}} = \frac{25}{125} = 0.20.
2
Calculate opening provision for unrealized profit
Opening Provision = N8,000\text{N}8,000
Transferred goods in opening stock = 80%×N50,000=N40,00080\% \times \text{N}50,000 = \text{N}40,000. Opening provision = 20%×N40,000=N8,00020\% \times \text{N}40,000 = \text{N}8,000.
3
Calculate closing provision for unrealized profit
Closing Provision = N10,500\text{N}10,500
Transferred goods in closing stock = 75%×N70,000=N52,50075\% \times \text{N}70,000 = \text{N}52,500. Closing provision = 20%×N52,500=N10,50020\% \times \text{N}52,500 = \text{N}10,500.
4
Compute the net change in provision debited to General Profit & Loss Account
Net Increase = N2,500\text{N}2,500
The net adjustment debited to the General P&L Account is the difference between the required closing provision and the existing opening provision: N10,500−N8,000=N2,500\text{N}10,500 - \text{N}8,000 = \text{N}2,500.

Key Concept

Provision for Unrealized Profit on Inter-departmental Transfers
Rate this question

Topics

Inter-departmental Transfers and Provision for Unrealized Profit

More questions from this topic