Benue Manufacturing Enterprise transfers finished goods from its factory to its retail out… — JAMB UTME

Benue Manufacturing Enterprise transfers finished goods from its factory to its retail outlet at a transfer price that includes a mark-up of $25\%$ on cost. On 1 January 2025, the provision for unrealized profit was $\text{₦}2,000$ . On 31 December 2025, the stock of finished goods valued at transfer price was $\text{₦}25,000$ . What is the amount of closing provision for unrealized profit (in $\text{₦}$ ) to be deducted from finished goods inventory in the Statement of Financial Position?

Answer: 5000 ₦

Answer

The closing provision for unrealized profit on finished goods inventory is \text{₦}5,000.

The closing inventory of finished goods is held at transfer price (cost + profit). To find the unrealized profit provision, the

25\%

mark-up on cost is converted to a

20\%

margin on transfer price (

\frac{25}{125} = \frac{1}{5}

). Applying

20\%

to the closing inventory value of

\text{₦}25,000

gives a closing provision of

\text{₦}5,000

Step-by-Step Solution

Convert mark-up on cost to margin on transfer price

Margin on transfer price = 20%

Since closing inventory is valued at transfer price, the profit element must be calculated using the margin on transfer price, where Margin = Mark-up / (1 + Mark-up) = 0.25 / 1.25 = 0.20.

Calculate closing provision for unrealized profit

Closing Provision = ₦5,000

Multiply the transfer price of closing inventory (₦25,000) by the profit margin rate (20%) to find the profit fraction contained in unsold inventory.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic