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Difficulty: EasyProvision for Unrealized Profit on Closing Inventory

Kano Processing Company transfers all finished items from the factory to its sales unit at a price that includes a 20%20\% mark-up on factory cost. On 31st December 2025, the trading section held finished inventory valued at a transfer price of ₦48,000\text{₦}48,000. What is the amount of provision for unrealized profit required for this closing inventory in Naira?

Answer: 8000 ₦

Answer

The provision for unrealized profit on the closing inventory is ₦8,000.
Converting the 20% mark-up on cost to a profit margin yields 1/6 of the transfer price. Applying 1/6 to the ₦48,000 closing inventory at transfer price gives ₦8,000.

Step-by-Step Solution

1
Determine the profit fraction relative to the transfer price
Mark-up of 20% on cost equals a margin of 1/6 on transfer price
Since the closing inventory is recorded at transfer price, the profit element must be calculated as a proportion of the transfer price: Profit Margin = Markup / (1 + Markup) = 0.20 / 1.20 = 1/6.
2
Calculate the unrealized profit provision amount
₦8,000
Multiply the finished goods closing inventory at transfer price by the profit margin fraction: 1/6 * ₦48,000 = ₦8,000.

Key Concept

Calculation of Provision for Unrealized Profit on Closing Inventory using Mark-up to Margin conversion
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Provision for Unrealized Profit on Closing Inventory

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