A commercial enterprise forwards inventory to its dependent branch at an invoice price tha… — JAMB UTME

A commercial enterprise forwards inventory to its dependent branch at an invoice price that reflects a mark-up of $25\%$ on cost. At the close of the financial period, the branch holds a closing inventory valued at an invoice price of $\text{N}50,000$ . What is the amount of unrealized profit to be credited to the Stock Reserve account?

$\text{N}10,000$ Answer
B
$\text{N}12,500$
C
$\text{N}40,000$
D
$\text{N}62,500$

Answer

\text{N}10,000

The correct answer is

\text{N}10,000

. Since inventory is invoiced at cost plus

25\%

, the profit portion represents

\frac{25}{125} = \frac{1}{5}

(

20\%

) of the invoice price. Applying

20\%

to the branch closing inventory of

\text{N}50,000

yields

\text{N}10,000

as the unrealized profit element to be provided for in the Stock Reserve account.

Step-by-Step Solution

Convert the given mark-up percentage on cost into a margin percentage on invoice price.

Mark-up of

25\%

(or

\frac{1}{4}

) on cost equals a margin of

\frac{1}{1 + 4} = \frac{1}{5}

(or

20\%

) on invoice price.

Because the closing inventory figure is given at invoice price, the profit fraction must be expressed as a proportion of invoice price.

Calculate the loading (unrealized profit) in the closing inventory.

Unrealized Profit =

\text{N}50,000 \times \frac{1}{5} = \text{N}10,000

Multiplying the margin fraction by the total invoice value extracts the loading component.

Identify the accounting adjustment required to eliminate unrealized profit.

The amount credited to the Stock Reserve account is

\text{N}10,000

Stock Reserve account is credited (and Branch Adjustment account debited) to reduce inventory from invoice price to cost price.

Key Concept

Stock Reserve Calculation on Branch Inventory at Invoice Price

Question

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Step-by-Step Solution

Key Concept

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