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CMA Intermediate · Financial Accounting · Branch (including Foreign Branch) and Departmental Accounts

A head office of Sharma Traders sends goods to its Pune branch at invoice price, which is 25% above cost. In the head office books, the excess of invoice price over cost on goods sent to the branch is best described as:

The excess of invoice price over cost on goods sent to a branch is loading. It is an unrealised profit because branch and head office are one entity, and it becomes realised only when the branch sells the goods to outside customers.

  1. ARealised profit of the head office in the year of dispatch
  2. BLoading, an unrealised profit until the goods are sold by the branchCorrect
  3. CBranch commission payable to the branch manager
  4. DTrade discount allowed to the branch

Explanation

When goods are invoiced to the branch above cost, the excess is loading. Because the goods are still within the same legal entity, profit on them is realised only when the branch sells them to outsiders. Treating it as realised profit at dispatch would overstate profit.

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