Apex Trading Company sends goods to its Enugu branch invoiced at a selling price that incl… — JAMB UTME

Apex Trading Company sends goods to its Enugu branch invoiced at a selling price that includes a mark-up of $20\%$ on cost. At the end of the financial year, the branch stock account shows closing inventory valued at $\text{₦}42,000$ at invoice price. What is the required provision for unrealized profit to be credited to the Stock Reserve Account?

$\text{₦}7,000$ Answer
B
$\text{₦}8,400$
C
$\text{₦}35,000$
D
$\text{₦}49,000$

Answer

\text{₦}7,000

To find the unrealized profit in closing inventory valued at invoice price, convert the mark-up of

20\%

on cost into a margin on selling price:

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

. Multiplying

\frac{1}{6}

by the closing inventory at invoice price (

\text{₦}42,000

) gives

\text{₦}7,000

. This amount represents the unrealized profit loading to be credited to the Stock Reserve Account.

Step-by-Step Solution

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

\text{Mark-up} = 20\% = \frac{1}{5} \implies \text{Margin} = \frac{1}{5 + 1} = \frac{1}{6}

Since closing stock is given at invoice price, the profit element must be calculated using profit margin on selling price.

Multiply the profit margin by the closing inventory value at invoice price.

\text{Stock Reserve} = \frac{1}{6} \times \text{₦}42,000 = \text{₦}7,000

The stock reserve eliminates unrealized profit from branch closing inventory to reflect true cost in the combined financial statements.

Key Concept

Calculation of Stock Reserve on Branch Closing Inventory at Invoice Price

Estimated Time:1m 30s

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