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Difficulty: EasyClosing Stock Valuation and Adjustments

A firm has unsold inventory at the end of the accounting period with a total cost of N95,000\text{N}95,000. The estimated selling price of this inventory is N90,000\text{N}90,000, and the estimated expenses necessary to complete the sale are N2,000\text{N}2,000. In accordance with the prudence concept, what is the value of closing stock (in Naira) to be credited to the Trading Account?

Answer: 88000 Naira

Answer

The value of closing stock to be credited to the Trading Account is N88,000.
Closing stock is valued at the lower of cost (N95,000) and Net Realizable Value (NRV). The NRV is calculated by deducting estimated selling expenses (N2,000) from the estimated selling price (N90,000), yielding N88,000. Since N88,000 is lower than N95,000, N88,000 is used in the final accounts.

Step-by-Step Solution

1
Calculate the Net Realizable Value (NRV)
NRV = N90,000 - N2,000 = N88,000
Net Realizable Value is the estimated selling price minus any costs needed to bring the goods to a salable state and complete the sale.
2
Compare Cost Price and Net Realizable Value
Lower of N95,000 (Cost) and N88,000 (NRV) is N88,000
According to the accounting concept of prudence, inventory must be valued at the lower of cost and net realizable value to avoid overstating assets and profit.

Key Concept

Valuation of Closing Stock at Lower of Cost and Net Realizable Value
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Topics

Closing Stock Valuation and Adjustments

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