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

A wholesale branch of Pune Traders sells goods to customers at invoice price. Goods are invoiced to the branch at cost plus 20%. Branch opening stock was Rs 24,000 and closing stock Rs 36,000, both at invoice price. Under the stock and debtors method of branch accounting, to adjust the loading in stock, what entry is made at the year end for the closing stock reserve change?

Loading is one-sixth of invoice price, so the reserve rises from Rs 4,000 (opening) to Rs 6,000 (closing). Only the increase of Rs 2,000 is entered, debiting Branch Adjustment Account and crediting Stock Reserve, because the opening reserve already exists.

  1. ADebit Branch Stock Reserve Rs 2,000 and credit Branch Profit and Loss; reserve decreases
  2. BDebit Branch Adjustment (or Profit and Loss) Rs 2,000 and credit Stock Reserve Rs 2,000, as the reserve increases from Rs 4,000 to Rs 6,000Correct
  3. CDebit Stock Reserve Rs 6,000 and credit Branch Adjustment Rs 6,000
  4. DDebit Branch Adjustment Rs 4,000 and credit Stock Reserve Rs 4,000

Explanation

Loading is 20/120 = 1/6 of invoice price. Opening reserve = 24,000/6 = Rs 4,000; closing reserve = 36,000/6 = Rs 6,000. The reserve must increase by Rs 2,000, so debit Branch Adjustment and credit Stock Reserve. Using the full closing reserve ignores the existing opening reserve.

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