A head office supplies merchandise to its dependent branch at cost plus 50\%. At the end o… — JAMB UTME

A head office supplies merchandise to its dependent branch at cost plus $50\%$ . At the end of the accounting period, the branch holds closing inventory valued at $\text{₦}18,000$ at invoice price. What is the amount of unrealized profit to be removed via the Stock Reserve account?

$\text{₦}6,000$ Answer
B
$\text{₦}9,000$
C
$\text{₦}12,000$
D
$\text{₦}4,500$

Answer

\text{₦}6,000

The correct answer is

\text{₦}6,000

. A mark-up of

50\%

on cost translates to a profit margin of

\frac{50}{150} = \frac{1}{3}

of the invoice price. Applying this margin to the branch closing stock of

\text{₦}18,000

yields

\text{₦}6,000

as the unrealized profit to be credited to the Stock Reserve account.

Step-by-Step Solution

Convert mark-up on cost to margin on invoice price.

Margin

= \frac{\text{Mark-up}}{100 + \text{Mark-up}} = \frac{50}{150} = \frac{1}{3}

Branch inventory is stated at invoice price, so the loading fraction must be expressed relative to invoice price.

Calculate unrealized profit (stock reserve) in closing stock.

Unrealized Profit

= \frac{1}{3} \times \text{₦}18,000 = \text{₦}6,000

Multiplying the margin fraction by the invoice price of closing stock isolates the profit element.

Key Concept

Stock Reserve / Unrealized Profit on Branch Closing Inventory

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