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Difficulty: MediumBalance Sheet Presentation of Manufacturing Inventories and Provisions

Meridian Manufacturing Ltd extracted the following inventory figures at the end of its financial year:
- Raw materials inventory: ₦120,000\text{₦}120,000
- Work-in-progress inventory: ₦85,000\text{₦}85,000
- Finished goods inventory (at market transfer value): ₦250,000\text{₦}250,000

Finished goods were transferred from the factory to the trading account at cost plus a 25%25\% mark-up. What is the total carrying amount of manufacturing inventories to be presented under current assets in the Statement of Financial Position?

  1. A
    ₦320,000
  2. ₦405,000Answer
  3. C
    ₦455,000
  4. D
    ₦505,000

Answer

The total carrying amount of manufacturing inventories to be presented under current assets is ₦405,000.
The correct valuation of finished goods requires removing the unrealized profit component (₦250,000 × 25/125 = ₦50,000) to arrive at the actual cost of ₦200,000. Adding raw materials (₦120,000), work-in-progress (₦85,000), and net finished goods (₦200,000) gives total current asset inventory of ₦405,000.

Step-by-Step Solution

1
Calculate the profit element (unrealized profit) included in closing finished goods.
Unrealized Profit = ₦250,000 × (25 / 125) = ₦50,000.
Since finished goods are recorded at cost plus a 25% mark-up, the transfer value represents 125% of cost, so profit is 25/125 (or 20%) of the transfer value.
2
Determine the net carrying value of finished goods for balance sheet presentation.
Net Finished Goods = ₦250,000 - ₦50,000 = ₦200,000.
Inventories must be valued at the lower of cost and net realizable value; unrealized profit must be deducted from finished goods to show them at cost.
3
Sum all manufacturing inventory components (Raw Materials + Work-in-Progress + Net Finished Goods).
Total Inventories = ₦120,000 + ₦85,000 + ₦200,000 = ₦405,000.
All three inventory types are combined to determine the aggregate inventory figure reported under current assets.

Key Concept

Balance Sheet Presentation of Manufacturing Inventories and Deduction of Provision for Unrealized Profit
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Balance Sheet Presentation of Manufacturing Inventories and Provisions

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