Read the financial scenario below and calculate the required provision amount to complete … — JAMB UTME

Read the financial scenario below and calculate the required provision amount to complete the statement.

Answer:A manufacturing firm transfers finished goods from the factory to the trading department at a mark-up of

20\%

on cost. If the closing inventory of finished goods valued at transfer price is

\text{₦}12,000

, the provision for unrealized profit required for the closing inventory is

\text{₦}

【2,000】.

The provision for unrealized profit on closing inventory is ₦2,000.

When finished goods are transferred at a mark-up of

20\%

on cost, the transfer price represents

120\%

of manufacturing cost. Therefore, the profit element embedded in closing inventory at transfer price is calculated as

\frac{20}{120} \times \text{₦}12,000 = \text{₦}2,000

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

A mark-up of

20\%

on cost (

\frac{20}{100}

) equals a margin of

\frac{20}{100 + 20} = \frac{20}{120} = \frac{1}{6}

on transfer price.

Closing inventory is valued at transfer price, so the profit portion must be determined using the profit margin relative to transfer price.

Calculate the unrealized profit included in closing inventory.

Unrealized Profit =

\frac{1}{6} \times \text{₦}12,000 = \text{₦}2,000

The provision for unrealized profit eliminates the internal profit element included in unsold inventory at the end of the accounting period.

Provision for Unrealized Profit on Closing Inventory

Question