Kovaro Manufacturing Enterprise transfers finished goods from its factory to its trading d… — JAMB UTME

Kovaro Manufacturing Enterprise transfers finished goods from its factory to its trading department at a price that includes a mark-up of $33\frac{1}{3}\%$ on manufacturing cost.

Extracts from the enterprise's books for the year ended 31st December 2025 show the following balances:

Item	Value
Opening inventory of finished goods (at transfer price)	$\text{₦}48,000$
Closing inventory of finished goods (at transfer price)	$\text{₦}72,000$

What amount should be charged to the Profit and Loss Account as an adjustment for the provision for unrealized profit for the year ended 31st December 2025?

$\text{₦}6,000$ Answer
B
$\text{₦}8,000$
C
$\text{��}18,000$
D
$\text{₦}24,000$

Answer

The amount to be charged to the Profit and Loss Account as an adjustment for provision for unrealized profit is

\text{₦}6,000

Transfer price includes a mark-up of

33\frac{1}{3}\%

(or

\frac{1}{3}

) on manufacturing cost. To extract the profit element from the transfer price, convert mark-up to margin:

\text{Margin} = \frac{1/3}{1 + 1/3} = 25\%

. The opening provision is

25\% \times \text{₦}48,000 = \text{₦}12,000

and the required closing provision is

25\% \times \text{₦}72,000 = \text{₦}18,000

. The increase in provision charged to the Profit and Loss Account is

\text{₦}18,000 - \text{₦}12,000 = \text{₦}6,000

Step-by-Step Solution

Convert the mark-up on cost to margin on transfer price

Mark-up =

33\frac{1}{3}\% = \frac{1}{3}

. Margin on transfer price =

\frac{1/3}{1 + 1/3} = \frac{1}{4} = 25\%

Inventories are stated at transfer price, so the profit element contained within the transfer price is calculated using the profit margin.

Calculate the opening provision for unrealized profit contained in opening inventory

Opening Provision =

25\% \times \text{₦}48,000 = \text{₦}12,000

To determine the existing provision brought forward from the previous accounting period.

Calculate the closing provision for unrealized profit required for closing inventory

Closing Provision Required =

25\% \times \text{₦}72,000 = \text{₦}18,000

To determine the total provision needed at the end of the current accounting period.

Determine the net adjustment (increase) to be charged to the Profit and Loss Account

Adjustment = Closing Provision - Opening Provision =

\text{₦}18,000 - \text{₦}12,000 = \text{₦}6,000

Only the increase in provision during the year is charged as an expense to the Profit and Loss Account.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Estimated Time:2m 0s

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