Skip to content

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

Gupta & Co invoices goods to its branch at cost plus 25%. Opening stock at the branch was ₹40,000 (invoice price) and closing stock is ₹60,000 (invoice price). The adjustment to the Branch Adjustment (loading) account for stock reserve in the current year, i.e., net effect on the head office profit, is:

Head office profit is reduced by ₹4,000. Loading is one-fifth of invoice price, so opening reserve is ₹8,000 and closing reserve ₹12,000. The increase of ₹4,000 in unrealised profit is charged against the year's profit.

  1. AProfit reduced by ₹4,000 as net reserve increasedCorrect
  2. BProfit increased by ₹4,000 as net reserve increased
  3. CProfit reduced by ₹5,000 as net reserve increased
  4. DProfit increased by ₹2,000 as net reserve decreased

Explanation

Loading is 25/125 = 1/5 of invoice price. Opening reserve = ₹8,000; closing reserve = ₹12,000. Reserve increases by ₹4,000, which is a charge, so profit reduces by ₹4,000. Option ₹5,000 wrongly uses 25% of ₹20,000 change.

Did you get it right without looking?

One question tells you little. A timed set on Branch (including Foreign Branch) and Departmental Accounts shows your real accuracy, how long you take and where you lose marks.

Practise Branch (including Foreign Branch) and Departmental AccountsFree diagnostic mock

More Branch (including Foreign Branch) and Departmental Accounts questions