Apex Manufacturing Enterprise transfers its completed goods from the factory to the tradin… — JAMB UTME

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?

$\text{₦}5,000$ Cevap
B
$\text{₦}8,750$
C
$\text{₦}15,000$
D
$\text{₦}18,750$

Cevap

\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.

Adım Adım Çözüm

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.

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.

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.

Anahtar Kavram

Provision for Unrealized Profit on Closing Inventory

Soru

Cevap

Adım Adım Çözüm

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