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

Kaveri Ltd invoices goods to its dependent branch at cost plus 20% on cost. A fire at the branch destroyed stock whose invoice price was ₹30,000. The insurer admitted a claim of ₹20,000. Under the invoice price method, what amount is finally charged to the Profit and Loss Account as abnormal loss?

The loss charged to Profit and Loss is ₹5,000. The destroyed stock is brought to cost, ₹30,000 × 100/120 = ₹25,000, since the loading is not a real loss. Deducting the insurance claim of ₹20,000 leaves ₹5,000 as the abnormal loss.

  1. A₹10,000
  2. B₹25,000
  3. C₹5,000Correct
  4. D₹30,000

Explanation

Abnormal loss is recorded at cost: 30,000 × 100/120 = ₹25,000, and the loading of ₹5,000 is removed from the Branch Adjustment (stock reserve) account. Net loss = 25,000 − 20,000 claim = ₹5,000. Using invoice price less the claim (₹10,000) wrongly charges the loading as a loss.

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