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

Delhi Traders Ltd. sends goods to its dependent branch at Jaipur at cost plus 25% on cost. On 31 March, the unsold stock at the branch is valued at Rs 60,000 at invoice price. The head office maintains a stock reserve for the unrealised profit in the branch's closing stock. What amount of stock reserve is required at the end of the year?

The stock reserve is Rs 12,000. Goods are invoiced at cost plus 25%, so the loading is 25/125, or one-fifth, of invoice price. One-fifth of Rs 60,000 of unsold stock gives Rs 12,000 of unrealised profit to be held back.

  1. ARs 15,000
  2. BRs 12,000Correct
  3. CRs 48,000
  4. DRs 10,000

Explanation

Invoice price is 125% of cost, so the loading is 25/125 of invoice price. Stock reserve = 60,000 × 25/125 = Rs 12,000. Rs 15,000 is wrong because it takes 25% of the invoice price, which treats the loading as a percentage of invoice price rather than of cost.

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