Provision for Unrealized Profit on Closing Inventory Practice Questions — JAMB UTME

Question 1Question →

A manufacturing enterprise transfers finished goods from its factory to the trading section at a mark-up of $25\%$ on manufacturing cost. For the financial year ended 31 December 2025, the opening inventory of finished goods at transfer price was $\text{₦}30,000$ with an existing provision for unrealized profit of $\text{₦}6,000$ . The closing inventory of finished goods at transfer price was $\text{₦}45,000$ . What is the amount of provision for unrealized profit to be debited to the Profit and Loss Account for the year?

\text{₦}3,000

\text{₦}5,250

\text{₦}9,000

\text{₦}11,250

Show answer & explanation

Answer: $\text{₦}3,000$

Answer

The amount to be debited to the Profit and Loss Account as provision for unrealized profit is

\text{₦}3,000

.

To determine the provision for unrealized profit, convert the

25\%

mark-up on cost to a margin on transfer value:

\frac{25}{125} = 20\%

(or

\frac{1}{5}

). Applying this fraction to the closing inventory transfer value of

\text{₦}45,000

yields a closing provision of

\text{₦}9,000

. Subtracting the existing opening provision of

\text{₦}6,000

gives a net increase of

\text{₦}3,000

, which is debited to the Profit and Loss Account.

Step-by-Step Solution

1

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

\text{Margin} = \frac{\text{Mark-up}}{100 + \text{Mark-up}} = \frac{25}{125} = \frac{1}{5} \text{ or } 20\%

.

Because inventory is valued at transfer price, the profit element contained within it must be determined using the margin ratio.

2

Calculate the total provision for unrealized profit required on closing inventory.

\text{Closing Provision} = \frac{1}{5} \times \text{₦}45,000 = \text{₦}9,000

.

This isolates the profit element that remains unrealized in unsold inventory at year-end.

3

Determine the net adjustment required in the Profit and Loss Account.

\text{Increase in Provision} = \text{₦}9,000 - \text{₦}6,000 = \text{₦}3,000

.

Only the net increase in the provision from the opening balance (

\text{₦}6,000

) is charged to the Profit and Loss Account.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Question 2Question →

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

Fill in the blanks below

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{₦}

.

Show answer & explanation

Answer

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

.

Step-by-Step Solution

1

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.

2

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.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Question 3Question →

Apex Manufacturing Enterprise transfers its completed goods from the factory to the trading section at a transfer price that includes a $25\%$ mark-up on production cost. On 1 January 2025, the opening inventory of finished goods was valued at its transfer price of $\text{₦}50,000$ , with an existing provision for unrealized profit of $\text{₦}10,000$ . At the financial year-end on 31 December 2025, the closing inventory of finished goods at transfer price was $\text{₦}75,000$ . What is the net amount to be charged to the Profit and Loss Account as an adjustment for unrealized profit for the year?

\text{₦}5,000

\text{₦}8,750

\text{₦}15,000

\text{₦}18,750

Show answer & explanation

Answer: $\text{₦}5,000$

Answer

\text{₦}5,000

The correct answer is calculated by converting the

25\%

mark-up on production cost into a

20\%

margin on transfer price. Applying

20\%

to the closing inventory value of

\text{₦}75,000

yields a total required provision of

\text{₦}15,000

. Subtracting the existing opening provision of

\text{₦}10,000

gives the net increase of

\text{₦}5,000

to be debited to the Profit and Loss Account.

Step-by-Step Solution

1

Convert mark-up on cost to margin on transfer price

Margin =

\frac{\text{Mark-up}}{100 + \text{Mark-up}} = \frac{25}{125} = \frac{1}{5} \text{ or } 20\%

Because finished goods inventory is stated at transfer price (cost plus mark-up), the profit element included must be calculated using margin on transfer price.

2

Calculate required closing provision for unrealized profit

Closing Provision =

20\% \times \text{₦}75,000 = \text{₦}15,000

The closing inventory contains

\text{₦}15,000

of profit created internally that has not been realized through external sales.

3

Determine the net adjustment for the Profit and Loss Account

Net Charge =

\text{Closing Provision} - \text{Opening Provision} = \text{₦}15,000 - \text{₦}10,000 = \text{₦}5,000

The Profit and Loss Account is only debited with the increase in provision required for the year.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Question 4Question →

Complete the financial statement adjustment statement by calculating the correct value for the blank.

Fill in the blanks below

A firm transfers manufactured goods to its trading department at a transfer price featuring a

20\%

mark-up on production cost. If the closing inventory of finished goods held in the trading department is valued at a transfer price of

\text{₦}60,000

, the amount to be provided as provision for unrealized profit is

\text{₦}

.

Show answer & explanation

Answer

The provision for unrealized profit on closing inventory is ₦10,000.

The closing inventory of ₦60,000 is valued at transfer price, which incorporates a 20% profit mark-up on manufacturing cost. Converting the 20% (or

\frac{1}{5}

) mark-up on cost to margin on transfer price yields

\frac{1}{6}

. Taking

\frac{1}{6}

of ₦60,000 gives ₦10,000 as the required provision for unrealized profit.

Step-by-Step Solution

1

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

A mark-up of 20% (or

\frac{1}{5}

) on cost translates to a margin of

\frac{1}{5 + 1} = \frac{1}{6}

on transfer price.

Since closing inventory is stated at transfer price (cost plus profit mark-up), the profit element must be calculated using margin relative to the transfer price.

2

Calculate the unrealized profit embedded in the closing inventory.

\frac{1}{6} \times \text{₦}60,000 = \text{₦}10,000

.

Multiplying the margin fraction by the total transfer price of closing inventory isolates the profit portion that remains unsold.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Question 5Question →

A manufacturing enterprise transfers finished goods to its retail department at a price that includes a mark-up of $25\%$ on manufacturing cost. At the end of the trading period on 31 December 2025, the opening inventory of finished goods at transfer price was $\text{₦}18,000$ (with an existing provision for unrealized profit of $\text{₦}3,600$ ), while the closing inventory of finished goods at transfer price was $\text{₦}25,000$ . What is the amount to be charged to the Profit and Loss Account as an adjustment for unrealized profit?

\text{₦}1,400

\text{₦}2,650

\text{₦}5,000

\text{₦}1,750

Show answer & explanation

Answer: $\text{₦}1,400$

Answer

The amount to be charged to the Profit and Loss Account as an adjustment for unrealized profit is

\text{₦}1,400

.

To find the adjustment to the Profit and Loss Account, first convert the

25\%

mark-up on cost to a margin on transfer price:

\frac{25}{100 + 25} = \frac{1}{5}

. Next, compute the required closing provision on unrealized profit:

\frac{1}{5} \times \text{₦}25,000 = \text{₦}5,000

. Finally, calculate the net increase in provision by subtracting the existing opening provision from the required closing provision:

\text{₦}5,000 - \text{₦}3,600 = \text{₦}1,400

.

Step-by-Step Solution

1

Convert the percentage mark-up on cost into a margin on transfer price.

Margin fraction =

\frac{\text{Mark-up}}{100 + \text{Mark-up}} = \frac{25}{125} = \frac{1}{5}

(or

20\%

).

Unrealized profit contained in inventory stated at transfer price must be calculated using margin rather than mark-up.

2

Calculate the required closing provision for unrealized profit on closing finished goods inventory.

Closing Provision =

\frac{1}{5} \times \text{₦}25,000 = \text{₦}5,000

.

This isolates the profit element embedded in the closing inventory valued at transfer price.

3

Determine the net adjustment (increase) to be charged to the Profit and Loss Account.

Increase in Provision = Required Closing Provision (

\text{₦}5,000

) - Opening Provision (

\text{₦}3,600

) =

\text{₦}1,400

.

Only the net change in provision between the beginning and end of the accounting period is recognized in the Profit and Loss Account.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Estimated Time:2m 0s

Question 6Question →

Kovaro Manufacturing Enterprise transfers finished goods from its factory to its trading department at a price that includes a mark-up of $33\frac{1}{3}\%$ on manufacturing cost.

Extracts from the enterprise's books for the year ended 31st December 2025 show the following balances:

Item	Value
Opening inventory of finished goods (at transfer price)	$\text{₦}48,000$
Closing inventory of finished goods (at transfer price)	$\text{₦}72,000$

What amount should be charged to the Profit and Loss Account as an adjustment for the provision for unrealized profit for the year ended 31st December 2025?

\text{₦}6,000

\text{₦}8,000

\text{��}18,000

\text{₦}24,000

Show answer & explanation

Answer: $\text{₦}6,000$

Answer

The amount to be charged to the Profit and Loss Account as an adjustment for provision for unrealized profit is

\text{₦}6,000

.

Transfer price includes a mark-up of

33\frac{1}{3}\%

(or

\frac{1}{3}

) on manufacturing cost. To extract the profit element from the transfer price, convert mark-up to margin:

\text{Margin} = \frac{1/3}{1 + 1/3} = 25\%

. The opening provision is

25\% \times \text{₦}48,000 = \text{₦}12,000

and the required closing provision is

25\% \times \text{₦}72,000 = \text{₦}18,000

. The increase in provision charged to the Profit and Loss Account is

\text{₦}18,000 - \text{₦}12,000 = \text{₦}6,000

.

Step-by-Step Solution

1

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

Mark-up =

33\frac{1}{3}\% = \frac{1}{3}

. Margin on transfer price =

\frac{1/3}{1 + 1/3} = \frac{1}{4} = 25\%

.

Inventories are stated at transfer price, so the profit element contained within the transfer price is calculated using the profit margin.

2

Calculate the opening provision for unrealized profit contained in opening inventory

Opening Provision =

25\% \times \text{₦}48,000 = \text{₦}12,000

.

To determine the existing provision brought forward from the previous accounting period.

3

Calculate the closing provision for unrealized profit required for closing inventory

Closing Provision Required =

25\% \times \text{₦}72,000 = \text{₦}18,000

.

To determine the total provision needed at the end of the current accounting period.

4

Determine the net adjustment (increase) to be charged to the Profit and Loss Account

Adjustment = Closing Provision - Opening Provision =

\text{₦}18,000 - \text{₦}12,000 = \text{₦}6,000

.

Only the increase in provision during the year is charged as an expense to the Profit and Loss Account.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Estimated Time:2m 0s

Question 7Question →

Kano Processing Company transfers all finished items from the factory to its sales unit at a price that includes a $20\%$ mark-up on factory cost. On 31st December 2025, the trading section held finished inventory valued at a transfer price of $\text{₦}48,000$ . What is the amount of provision for unrealized profit required for this closing inventory in Naira?

Show answer & explanation

Answer: 8000

Answer

The provision for unrealized profit on the closing inventory is ₦8,000.

Converting the 20% mark-up on cost to a profit margin yields 1/6 of the transfer price. Applying 1/6 to the ₦48,000 closing inventory at transfer price gives ₦8,000.

Step-by-Step Solution

1

Determine the profit fraction relative to the transfer price

Mark-up of 20% on cost equals a margin of 1/6 on transfer price

Since the closing inventory is recorded at transfer price, the profit element must be calculated as a proportion of the transfer price: Profit Margin = Markup / (1 + Markup) = 0.20 / 1.20 = 1/6.

2

Calculate the unrealized profit provision amount

₦8,000

Multiply the finished goods closing inventory at transfer price by the profit margin fraction: 1/6 * ₦48,000 = ₦8,000.

Key Concept

Calculation of Provision for Unrealized Profit on Closing Inventory using Mark-up to Margin conversion

Question 8Question →

Danbatta Manufacturing Company transfers finished goods from its factory to its retail shop at a transfer price that includes a mark-up of $25\%$ on manufacturing cost. At the end of the accounting year on 31 December 2025, the entity's records show:

- Finished goods inventory (1 January 2025 at transfer price): $\text{₦}60,000$
- Finished goods inventory (31 December 2025 at transfer price): $\text{₦}100,000$

What is the net adjustment (increase in provision for unrealized profit) to be debited to the Profit and Loss Account for the year ended 31 December 2025?

Show answer & explanation

Answer: 8000

Answer

The net increase in provision for unrealized profit to be debited to the Profit and Loss Account is ₦8,000.

The profit element contained in finished goods inventory transferred at cost plus

25\%

mark-up is

\frac{25}{125} = 20\%

of the transfer value. The unrealized profit in opening inventory is

20\% \times \text{₦}60,000 = \text{₦}12,000

and in closing inventory is

20\% \times \text{₦}100,000 = \text{₦}20,000

. The net adjustment (increase) to be charged to the Profit and Loss Account is

\text{₦}20,000 - \text{₦}12,000 = \text{₦}8,000

.

Step-by-Step Solution

1

Convert mark-up on cost to profit margin on transfer value.

Margin =

\frac{25}{100 + 25} = \frac{25}{125} = \frac{1}{5} = 20\%

.

Because inventory is valued at transfer price (cost plus mark-up), the profit component embedded in the transfer price must be calculated using the margin fraction.

2

Compute the provision for unrealized profit in the opening inventory of finished goods.

Opening Provision =

\frac{1}{5} \times \text{₦}60,000 = \text{₦}12,000

.

To determine the profit element carried forward from the previous year.

3

Compute the required provision for unrealized profit in the closing inventory of finished goods.

Closing Provision =

\frac{1}{5} \times \text{₦}100,000 = \text{₦}20,000

.

To eliminate the internal profit on unsold manufactured goods remaining at the end of the current period.

4

Calculate the net change in provision required for the current period.

Net Increase =

\text{₦}20,000 - \text{₦}12,000 = \text{₦}8,000

.

Only the change (increase or decrease) between the required closing provision and existing opening provision is adjusted in the Profit and Loss Account.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Estimated Time:2m 0s

Question 9Question →

Zaria Industrial Ltd transfers finished goods from its factory to its trading section at cost plus a $20\%$ mark-up. At the beginning of the financial year, the stock of finished goods held at transfer price was $\text{₦}30,000$ . At the end of the financial year, the stock of finished goods at transfer price was $\text{₦}45,000$ . What is the net adjustment required in the Profit and Loss Account for the provision for unrealized profit?

An increase of

\text{₦}2,500

debited to the Profit and Loss Account

An increase of

\text{₦}3,000

debited to the Profit and Loss Account

An increase of

\text{₦}7,500

debited to the Profit and Loss Account

A decrease of

\text{₦}2,500

credited to the Profit and Loss Account

Show answer & explanation

Answer: An increase of $\text{₦}2,500$ debited to the Profit and Loss Account

Answer

An increase of

\text{₦}2,500

debited to the Profit and Loss Account

When finished goods are transferred at a profit, unrealized profit contained in closing inventory must be eliminated using a provision account. With a

20\%

mark-up on cost (

\frac{1}{5}

), the margin on transfer price is

\frac{1}{6}

. The opening provision is

\frac{1}{6} \times \text{₦}30,000 = \text{₦}5,000

, and the required closing provision is

\frac{1}{6} \times \text{₦}45,000 = \text{₦}7,500

. The net increase of

\text{₦}2,500

is debited to the Profit and Loss Account.

Step-by-Step Solution

1

Convert the mark-up percentage to a margin fraction

Mark-up of

20\% = \frac{1}{5}

. Profit margin on transfer price

= \frac{1/5}{1 + 1/5} = \frac{1}{6}

.

Because finished inventory values are given at transfer price (cost + profit), margin must be applied to extract the unrealized profit element.

2

Calculate the opening provision for unrealized profit

Opening provision

= \frac{1}{6} \times \text{₦}30,000 = \text{₦}5,000

.

Determines the existing balance in the Provision for Unrealized Profit account.

3

Calculate the closing provision for unrealized profit

Closing provision

= \frac{1}{6} \times \text{₦}45,000 = \text{₦}7,500

.

Determines the required closing balance for unrealized profit in ending inventory.

4

Determine the net adjustment for the Profit and Loss Account

Increase in provision

= \text{₦}7,500 - \text{₦}5,000 = \text{₦}2,500

(debit to Profit and Loss Account).

An increase in provision represents an additional expense charged against profits.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Estimated Time:1m 30s

Question 10Question →

Benue Manufacturing Enterprise transfers finished goods from its factory to its retail outlet at a transfer price that includes a mark-up of $25\%$ on cost. On 1 January 2025, the provision for unrealized profit was $\text{₦}2,000$ . On 31 December 2025, the stock of finished goods valued at transfer price was $\text{₦}25,000$ . What is the amount of closing provision for unrealized profit (in $\text{₦}$ ) to be deducted from finished goods inventory in the Statement of Financial Position?

Show answer & explanation

Answer: 5000

Answer

The closing provision for unrealized profit on finished goods inventory is \text{₦}5,000.

The closing inventory of finished goods is held at transfer price (cost + profit). To find the unrealized profit provision, the

25\%

mark-up on cost is converted to a

20\%

margin on transfer price (

\frac{25}{125} = \frac{1}{5}

). Applying

20\%

to the closing inventory value of

\text{₦}25,000

gives a closing provision of

\text{₦}5,000

.

Step-by-Step Solution

1

Convert mark-up on cost to margin on transfer price

Margin on transfer price = 20%

Since closing inventory is valued at transfer price, the profit element must be calculated using the margin on transfer price, where Margin = Mark-up / (1 + Mark-up) = 0.25 / 1.25 = 0.20.

2

Calculate closing provision for unrealized profit

Closing Provision = ₦5,000

Multiply the transfer price of closing inventory (₦25,000) by the profit margin rate (20%) to find the profit fraction contained in unsold inventory.

Key Concept

Provision for Unrealized Profit on Closing Inventory

Provision for Unrealized Profit on Closing Inventory

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