A head office supplies goods to its dependent branch at an invoice price loaded with a mar… — JAMB UTME

A head office supplies goods to its dependent branch at an invoice price loaded with a mark-up of 20% on cost. At the end of the trading period, the branch holds closing inventory valued at ₦30,000 at invoice price. What is the amount of stock reserve required to remove the unrealized profit from the closing inventory?

₦5,000Answer
B
₦6,000
C
₦25,000
D
₦30,000

Answer

₦5,000

The closing stock of ₦30,000 is stated at invoice price. A mark-up of 20% on cost translates to a margin of

\frac{20}{100+20} = \frac{20}{120} = \frac{1}{6}

on invoice price. Calculating

\frac{1}{6} \times \text{₦30,000}

yields ₦5,000, which is the exact amount of unrealized profit to be credited to the Stock Reserve Account.

Step-by-Step Solution

Convert the mark-up percentage on cost to margin percentage on invoice price

Mark-up of 20% =

\frac{20}{100} = \frac{1}{5}

on cost. Margin on invoice price =

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

Because the closing inventory figure (₦30,000) is given at invoice price, the profit element must be calculated using the margin on invoice price.

Calculate the stock reserve (unrealized profit)

Stock Reserve =

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

Multiplying the margin fraction by the closing inventory at invoice price extracts the loading added by the head office.

Key Concept

Provision for Stock Reserve on Branch Closing Inventory at Invoice Price

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