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Difficulty: MediumClosing Stock Valuation and Adjustments

A trader extracted a trial balance at 31st December 2025 showing physical stock at cost of N64,000\text{N}64,000. Further inspection revealed that inventory costing N14,000\text{N}14,000 had suffered water damage and could only be sold for N11,000\text{N}11,000 after incurring N2,000\text{N}2,000 in reconditioning expenses. What is the correct figure for closing stock to be credited to the Trading Account?

  1. N59,000\text{N}59,000Answer
  2. B
    N61,000\text{N}61,000
  3. C
    N64,000\text{N}64,000
  4. D
    N57,000\text{N}57,000

Answer

N59,000\text{N}59,000
Under the prudence accounting convention, inventory is valued at the lower of cost and net realizable value (NRV). The cost of undamaged stock is N50,000\text{N}50,000 (N64,000−N14,000\text{N}64,000 - \text{N}14,000). The damaged stock has a cost of N14,000\text{N}14,000 and an NRV of N9,000\text{N}9,000 (selling price N11,000\text{N}11,000 minus reconditioning costs N2,000\text{N}2,000). Taking the lower value for the damaged stock yields N9,000\text{N}9,000. Combining both gives N50,000+N9,000=N59,000\text{N}50,000 + \text{N}9,000 = \text{N}59,000.

Step-by-Step Solution

1
Calculate Net Realizable Value (NRV) of the damaged inventory
NRV=Expected Selling Price−Reconditioning Costs=N11,000−N2,000=N9,000\text{NRV} = \text{Expected Selling Price} - \text{Reconditioning Costs} = \text{N}11,000 - \text{N}2,000 = \text{N}9,000
According to the prudence concept and inventory accounting rules, Net Realizable Value is defined as estimated selling price less expenses to complete or sell.
2
Determine cost of undamaged inventory
Undamaged Stock Cost=Total Stock Cost−Damaged Stock Cost=N64,000−N14,000=N50,000\text{Undamaged Stock Cost} = \text{Total Stock Cost} - \text{Damaged Stock Cost} = \text{N}64,000 - \text{N}14,000 = \text{N}50,000
Undamaged goods are valued at their cost price since net realizable value exceeds cost.
3
Calculate total valuation of closing inventory
Total Closing Stock=Undamaged Stock+NRV of Damaged Stock=N50,000+N9,000=N59,000\text{Total Closing Stock} = \text{Undamaged Stock} + \text{NRV of Damaged Stock} = \text{N}50,000 + \text{N}9,000 = \text{N}59,000
Closing inventory must be measured at the lower of cost and net realizable value for each item/category.

Key Concept

Valuation of Closing Inventory at the Lower of Cost and Net Realizable Value

Alternative Method

Calculate total stock cost (N64,000\text{N}64,000) and deduct the inventory write-down loss. Inventory Write-down = Cost−NRV=N14,000−(N11,000−N2,000)=N5,000\text{Cost} - \text{NRV} = \text{N}14,000 - (\text{N}11,000 - \text{N}2,000) = \text{N}5,000. Closing stock valuation = N64,000−N5,000=N59,000\text{N}64,000 - \text{N}5,000 = \text{N}59,000.
Estimated Time:1m 30s
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Closing Stock Valuation and Adjustments

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