A Head Office in Lagos supplies goods to its Port Harcourt branch at an invoice price that includes a mark-up of on cost. At the end of the accounting period, the physical inventory count at the branch shows closing stock valued at at invoice price. What is the value of the stock reserve in Naira required to eliminate the unrealized profit from the closing stock?
Answer: 6000 ₦
Answer
The stock reserve required to reduce the closing inventory to cost price is ₦6,000.
To determine the stock reserve on closing stock priced at invoice price, convert the mark-up on cost (33 1/3% or 1/3) to profit margin on selling price, which is 1/4 (25%). Multiplying 25% by the closing inventory value of ₦24,000 gives ₦6,000.
Step-by-Step Solution
Key Concept
Calculation of Branch Stock Reserve on Closing Inventory at Invoice Price