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Difficulty: EasyAccounting for Dependent Branches at Selling / Invoice Price

A branch received goods from its head office invoiced at ₦75,000\text{₦}75,000, which includes a profit margin of 20%20\% on the selling price. If one-third of these goods remain unsold at the end of the period, what is the amount of stock reserve (unrealized profit) needed for the closing inventory?

Answer: 5000 ₦

Answer

The stock reserve (unrealized profit) needed for the closing inventory is ₦5,000\text{₦}5,000.
The closing inventory at invoice price is 13×₦75,000=₦25,000\frac{1}{3} \times \text{₦}75,000 = \text{₦}25,000. Since the profit is expressed as a 20%20\% margin on selling price, the unrealized profit (stock reserve) to be eliminated is 20%×₦25,000=₦5,00020\% \times \text{₦}25,000 = \text{₦}5,000.

Step-by-Step Solution

1
Determine the value of unsold inventory at invoice price
Unsold inventory at invoice price = 13×₦75,000=₦25,000\frac{1}{3} \times \text{₦}75,000 = \text{₦}25,000
One-third of the total goods received from head office remain unsold at the end of the period.
2
Calculate the stock reserve (unrealized profit) contained in closing inventory
Stock reserve = 20%×₦25,000=₦5,00020\% \times \text{₦}25,000 = \text{₦}5,000
Margin is calculated directly on the selling (invoice) price to eliminate the profit element from closing stock.

Key Concept

Stock Reserve on Dependent Branch Closing Inventory at Invoice Price
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Topics

Accounting for Dependent Branches at Selling / Invoice Price

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