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Difficulty: MediumAccounting for Dependent Branches at Selling / Invoice Price

A head office invoices goods to its dependent branch at a selling price that includes a profit margin of 25%25\% on invoice price. At the end of the accounting year, the branch stock count shows closing inventory valued at ₦60,000\text{₦}60,000 at invoice price. What is the amount of stock reserve (unrealized profit) required to reduce the branch closing inventory to its cost price?

Answer: 15000 ₦

Answer

The amount of stock reserve required to reduce the closing stock to cost price is ₦15,000\text{₦}15,000.
When goods are invoiced at selling price with a known profit margin percentage on invoice price, the unrealized profit (stock reserve) contained in closing stock is computed by multiplying the margin percentage directly by the closing inventory at invoice price (25%×₦60,000=₦15,00025\% \times \text{₦}60,000 = \text{₦}15,000).

Step-by-Step Solution

1
Determine the proportion of unrealized profit included in the invoice price.
Profit margin is 25%25\% on invoice price, which equals 25100=14\frac{25}{100} = \frac{1}{4} of the invoice price.
Since the rate is given as a margin on invoice price (selling price), the profit fraction is applied directly to the invoice value.
2
Calculate the stock reserve on the branch closing inventory.
Stock Reserve=14×₦60,000=₦15,000\text{Stock Reserve} = \frac{1}{4} \times \text{₦}60,000 = \text{₦}15,000.
The stock reserve represents the unrealized profit portion included in the unsold inventory at the end of the financial period.

Key Concept

Calculation of Stock Reserve on Branch Closing Stock at Invoice Price using Margin
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Topics

Accounting for Dependent Branches at Selling / Invoice Price

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