Kano Enterprises transfers goods to its Kaduna dependent branch at an invoice price calcul… — JAMB UTME

Kano Enterprises transfers goods to its Kaduna dependent branch at an invoice price calculated as cost plus $25\%$ . At the beginning of the financial year, the branch held inventory with an invoice value of $\text{₦}40,000$ . At the close of the year, branch inventory at invoice price was $\text{₦}55,000$ . What is the amount of the net increase in the provision for unrealized profit (stock reserve) to be credited to the stock reserve account at year-end?

Answer: 3000 ₦

Answer

The net increase in the provision for unrealized profit (stock reserve) is ₦3,000.

Unrealized profit contained in inventory invoiced at cost plus 25% is calculated using a profit margin of 20% (1/5) on invoice price. The opening stock reserve is 20% of ₦40,000 = ₦8,000, and the closing stock reserve is 20% of ₦55,000 = ₦11,000. Deducting the opening reserve balance from the closing reserve balance gives a net increase of ₦3,000.

Step-by-Step Solution

Calculate the profit margin fraction on invoice price

Margin = 25% / (100% + 25%) = 1/5 or 20%

Since mark-up is calculated on cost, the unrealized profit component within the invoice price is 20% of the invoice value.

Compute the opening and closing stock reserves

Opening Stock Reserve = 20% of ₦40,000 = ₦8,000; Closing Stock Reserve = 20% of ₦55,000 = ₦11,000

Stock reserve represents the unrealized profit loading embedded in branch stock valued at invoice price.

Determine the net adjustment required in the stock reserve account

Net Increase = ₦11,000 - ₦8,000 = ₦3,000

The net charge to the general profit and loss account is the difference between closing and opening stock reserve balances.

Key Concept

Calculation of Net Increase in Branch Stock Reserve at Invoice Price

Question

Answer

Step-by-Step Solution

Key Concept

Common Mistakes

Topics

More questions from this topic