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

Gopal Traders, Pune, sends goods to its dependent branch at cost plus 25% (invoice price). On 31 March the branch stock, valued at invoice price, is ₹1,80,000. The head office wants to remove the unrealised profit in this stock from its profit. What amount should be provided as stock reserve (loading in closing stock)?

The stock reserve is ₹36,000. Goods are invoiced at cost plus 25%, so the loading is 25/125, or 20%, of invoice price. Twenty percent of ₹1,80,000 gives ₹36,000 of unrealised profit to be eliminated from branch closing stock.

  1. A₹36,000Correct
  2. B₹45,000
  3. C₹30,000
  4. D₹1,44,000

Explanation

Invoice price is 125% of cost, so the profit loading is 25/125 = 20% of invoice price. 20% × ₹1,80,000 = ₹36,000. Using 25% of invoice price (₹45,000) is wrong because the markup is on cost, not on invoice value. Check: cost = ₹1,44,000, and 25% of that is ₹36,000.

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