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

Mehta Ltd. (Mumbai) sends goods to its Surat branch at cost plus 20%. Branch opening stock at invoice price was ₹1,20,000, goods sent to branch at invoice price ₹7,20,000, and closing stock at invoice price ₹1,80,000. Under the stock and debtors system, what is the adjusting entry amount for the stock reserve (loading in closing stock) to be carried forward at year end?

The stock reserve required is ₹30,000. With a mark-up of 20% on cost, loading is one-sixth of invoice price. Applying this to closing stock at invoice price of ₹1,80,000 gives ₹30,000 of unrealised profit to be carried forward as reserve.

  1. A₹36,000
  2. B₹30,000Correct
  3. C₹1,50,000
  4. D₹20,000

Explanation

Loading is 20/120 = 1/6 of invoice price. Closing stock loading = 1,80,000 × 1/6 = ₹30,000. Using 20% of invoice price gives ₹36,000, which wrongly uses invoice price as the base.

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