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Difficulty: MediumClosing Stock Valuation and Adjustments

At the end of a financial year, a trader's physical stock count reveals total inventory costing N120,000\text{N}120,000. An item of inventory included in this count with a cost of N25,000\text{N}25,000 was damaged and can be sold for N18,000\text{N}18,000 after incurring necessary repair costs of N3,000\text{N}3,000. In accordance with the prudence concept, what is the value of closing stock to be reported in the financial statements?

  1. N110,000\text{N}110,000Answer
  2. B
    N113,000\text{N}113,000
  3. C
    N116,000\text{N}116,000
  4. D
    N120,000\text{N}120,000

Answer

N110,000\text{N}110,000
Closing stock must be valued at the lower of cost and net realizable value (NRV). Undamaged inventory is valued at cost (N95,000\text{N}95,000). For the damaged portion, NRV is N18,000−N3,000=N15,000\text{N}18,000 - \text{N}3,000 = \text{N}15,000, which is lower than its cost of N25,000\text{N}25,000. Combining these yields a total valuation of N95,000+N15,000=N110,000\text{N}95,000 + \text{N}15,000 = \text{N}110,000.

Step-by-Step Solution

1
Calculate the cost of undamaged stock
N120,000−N25,000=N95,000\text{N}120,000 - \text{N}25,000 = \text{N}95,000
The undamaged items are valued at their original cost since cost is lower than expected selling value.
2
Calculate the Net Realizable Value (NRV) of damaged stock
NRV=Selling Price−Repair Costs=N18,000−N3,000=N15,000\text{NRV} = \text{Selling Price} - \text{Repair Costs} = \text{N}18,000 - \text{N}3,000 = \text{N}15,000
Net Realizable Value is the estimated selling price minus costs needed to complete or sell the item.
3
Apply the prudence rule (lower of cost and NRV) for damaged stock
Valuation of damaged stock = N15,000\text{N}15,000
Since NRV (N15,000\text{N}15,000) is lower than original cost (N25,000\text{N}25,000), the lower figure must be used.
4
Calculate total closing stock valuation
Total Closing Stock=N95,000+N15,000=N110,000\text{Total Closing Stock} = \text{N}95,000 + \text{N}15,000 = \text{N}110,000
Summing the undamaged stock at cost and damaged stock at NRV gives the correct total inventory value.

Key Concept

Valuation of Inventory at Lower of Cost and Net Realizable Value (IAS 2 / Prudence Concept)
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Topics

Closing Stock Valuation and Adjustments

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