Ebonyi Processing Company operates two departments: Milling and Bakery. During the financi… — JAMB UTME

Ebonyi Processing Company operates two departments: Milling and Bakery. During the financial year ended 31 December 2025, the Milling Department transferred flour to the Bakery Department at cost plus a mark-up of $33\frac{1}{3}\%$ . At the close of the year, the Bakery Department held closing inventory valued at $\text{N}120,000$ , of which $75\%$ represented flour transferred from the Milling Department. Calculate the amount of provision for unrealized profit on closing inventory to be recognized in the general profit and loss account.

Cevap: 22500 NGN

Cevap

The provision for unrealized profit to be recognized in the general profit and loss account is N22,500.

To calculate the provision for unrealized profit, first isolate the value of transferred stock in closing inventory:

75\% \times \text{N}120,000 = \text{N}90,000

. Next, convert the mark-up of

33\frac{1}{3}\%

(

\frac{1}{3}

) on cost to margin on transfer price:

\frac{1}{3+1} = \frac{1}{4}

(

25\%

). Multiplying the margin by the transferred stock value gives

25\% \times \text{N}90,000 = \text{N}22,500

Adım Adım Çözüm

Determine the value of transferred goods included in closing inventory

Transferred inventory = 75% * N120,000 = N90,000

Only the portion of inventory transferred internally contains unrealized profit.

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

Margin = Mark-up / (1 + Mark-up) = (1/3) / (1 + 1/3) = 1/4 or 25%

Closing inventory is valued at transfer price (selling price), requiring margin to extract the profit element.

Calculate the provision for unrealized profit

Provision = 25% * N90,000 = N22,500

Unrealized profit is the profit margin embedded in unsold transferred inventory remaining at year-end.

Anahtar Kavram

Provision for Unrealized Profit on Inter-departmental Transfers

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