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Difficulty: EasyClosing Stock Valuation and Adjustments

A business evaluated its unsold inventory at the end of the accounting period. The cost price of the inventory was N85,000\text{N}85,000, while its net realizable value was determined to be N78,000\text{N}78,000. Following the prudence convention, what amount should be credited to the Trading Account as closing stock?

  1. N78,000\text{N}78,000Answer
  2. B
    N85,000\text{N}85,000
  3. C
    N163,000\text{N}163,000
  4. D
    N7,000\text{N}7,000

Answer

N78,000\text{N}78,000
Under the prudence concept, closing stock must be valued at the lower of cost and net realizable value. Since the net realizable value (N78,000\text{N}78,000) is less than the cost price (N85,000\text{N}85,000), N78,000\text{N}78,000 is credited to the Trading Account to determine the correct cost of goods sold.

Step-by-Step Solution

1
Compare the cost price and net realizable value (NRV) of the inventory
Cost = N85,000\text{N}85,000, NRV = N78,000\text{N}78,000
According to accounting standards and the prudence convention, inventory is valued at the lower of cost and net realizable value.
2
Select the lower value for closing stock valuation
Closing Stock Valuation = N78,000\text{N}78,000
Since N78,000\text{N}78,000 is lower than N85,000\text{N}85,000, this amount is credited to the Trading Account and debited to Current Assets in the Balance Sheet.

Key Concept

Valuation of closing inventory at the lower of cost and net realizable value (Prudence Concept)
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Topics

Closing Stock Valuation and Adjustments

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