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CA Intermediate · Advanced Accounting · Accounting for Branches including Foreign Branches

A head office invoices goods to its Pune branch at cost plus 20% on cost. The branch stock account at invoice price shows: opening stock Rs 24,000; goods sent Rs 1,20,000; goods returned by the branch Rs 6,000; closing stock Rs 30,000. Goods worth Rs 3,000 at invoice price were found lost by theft, which is treated as an abnormal loss. What amount is charged to the Profit and Loss Account of the head office for the abnormal loss?

Rs 2,500 is charged to Profit and Loss. The lost goods are Rs 3,000 at invoice price, which includes a 20% mark-up on cost. The loading of Rs 500 is adjusted through the Branch Adjustment Account, so only the cost of Rs 2,500 is treated as the abnormal loss.

  1. ARs 3,600
  2. BRs 3,000
  3. CRs 2,500Correct
  4. DRs 500

Explanation

Abnormal loss is charged to Profit and Loss at cost, so the unrealised loading is removed through the Branch Adjustment Account. Cost = 3,000 × 100/120 = Rs 2,500. Rs 3,000 is wrong because it charges the loss at invoice price, which includes Rs 500 of loading that was never realised as profit.

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