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

Jaipur Fabrics sends goods to its Surat branch at cost plus 20%. Branch opening stock at invoice price was Rs 60,000, goods sent during the year were Rs 3,00,000 at invoice price, and closing stock at invoice price was Rs 90,000. Ignoring other items, what is the adjustment for loading in the Branch Adjustment (stock reserve) account for the year, i.e. the net effect on branch profit of the change in the stock reserve?

Loading is one-sixth of invoice price because the markup is 20% on cost. Opening reserve is Rs 10,000 and closing reserve is Rs 15,000, so the reserve rises by Rs 5,000. This increase is debited to the Branch Adjustment account, reducing the branch profit.

  1. ADebit of Rs 5,000 to Branch Adjustment (increase in reserve)Correct
  2. BCredit of Rs 5,000 to Branch Adjustment
  3. CDebit of Rs 15,000 to Branch Adjustment
  4. DDebit of Rs 30,000 to Branch Adjustment

Explanation

Loading is 20/120 = 1/6 of invoice price. Opening reserve = 60,000/6 = 10,000; closing reserve = 90,000/6 = 15,000. The reserve increases by Rs 5,000, which is charged (debited) to Branch Adjustment account. Using 20% of invoice price would give a wrong figure.

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