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Zorluk: ZorProvision for Unrealized Profit on Closing Inventory

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

  1. ₦3,000\text{₦}3,000Cevap
  2. B
    ₦5,250\text{₦}5,250
  3. C
    ₦9,000\text{₦}9,000
  4. D
    ₦11,250\text{₦}11,250

Cevap

The amount to be debited to the Profit and Loss Account as provision for unrealized profit is ₦3,000\text{₦}3,000.
To determine the provision for unrealized profit, convert the 25%25\% mark-up on cost to a margin on transfer value: 25125=20%\frac{25}{125} = 20\% (or 15\frac{1}{5}). Applying this fraction to the closing inventory transfer value of ₦45,000\text{₦}45,000 yields a closing provision of ₦9,000\text{₦}9,000. Subtracting the existing opening provision of ₦6,000\text{₦}6,000 gives a net increase of ₦3,000\text{₦}3,000, which is debited to the Profit and Loss Account.

Adım Adım Çözüm

1
Convert mark-up on cost to profit margin on transfer price.
Margin=Mark-up100+Mark-up=25125=15 or 20%\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.
Closing Provision=15×₦45,000=₦9,000\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.
Increase in Provision=₦9,000−₦6,000=₦3,000\text{Increase in Provision} = \text{₦}9,000 - \text{₦}6,000 = \text{₦}3,000.
Only the net increase in the provision from the opening balance (₦6,000\text{₦}6,000) is charged to the Profit and Loss Account.

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Provision for Unrealized Profit on Closing Inventory
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