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Difficulty: MediumClosing Stock Valuation and Adjustments

At the end of an accounting period, a trading enterprise holds two categories of unsold inventory with the following details:

- Product Alpha: Cost price of N28,000\text{N}28,000, estimated selling price of N32,000\text{N}32,000, and estimated selling expenses of N5,000\text{N}5,000.
- Product Beta: Cost price of N42,000\text{N}42,000, estimated selling price of N50,000\text{N}50,000, and estimated selling expenses of N3,000\text{N}3,000.

In accordance with the prudence concept, what is the total valuation of closing stock to be credited to the Trading Account in Naira?

Answer: 69000 Naira

Answer

69,000 Naira
Closing inventory must be valued at the lower of cost and net realizable value for each item. For Product Alpha, the NRV of N27,000\text{N}27,000 (32,000−5,00032,000 - 5,000) is lower than its cost of N28,000\text{N}28,000. For Product Beta, the cost of N42,000\text{N}42,000 is lower than its NRV of N47,000\text{N}47,000 (50,000−3,00050,000 - 3,000). Summing these lower values (27,000+42,00027,000 + 42,000) gives a total closing stock valuation of 69,000 Naira.

Step-by-Step Solution

1
Calculate Net Realizable Value (NRV) for Product Alpha and Product Beta.
Product Alpha NRV = N27,000\text{N}27,000; Product Beta NRV = N47,000\text{N}47,000.
Net Realizable Value is determined by subtracting estimated completion and selling costs from the estimated selling price.
2
Compare cost and NRV for each category to select the lower value.
Product Alpha valuation = N27,000\text{N}27,000; Product Beta valuation = N42,000\text{N}42,000.
The prudence concept mandates that closing stock is valued at the lower of cost and net realizable value on an item-by-item basis to avoid overstating assets and profit.
3
Sum the selected valuation figures for all inventory categories.
Total Closing Stock = 27,000+42,000=N69,00027,000 + 42,000 = \text{N}69,000.
Total inventory valuation is the combined value of all individual stock categories.

Key Concept

Valuation of closing stock 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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