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

Mehta Traders sends goods to its Jaipur branch at invoice price, which is cost plus 25% on cost. Opening branch stock was ₹80,000 and closing branch stock is ₹1,00,000, both at invoice price. The head office maintains a Branch Stock Reserve (loading) account. What amount is debited to the Branch Profit and Loss account on account of the additional stock reserve for the year?

₹4,000 is debited. The loading is 25 on 125, or one-fifth of invoice price. The closing reserve is ₹20,000 and the opening reserve is ₹16,000. Only the increase of ₹4,000 is the extra charge to branch profit for the year.

  1. A₹4,000Correct
  2. B₹5,000
  3. C₹16,000
  4. D₹20,000

Explanation

Loading is 25/125 = 1/5 of invoice price. Closing reserve = 1,00,000 × 1/5 = ₹20,000. Opening reserve = 80,000 × 1/5 = ₹16,000. The additional reserve debited is 20,000 − 16,000 = ₹4,000. Using 25% of invoice price gives the wrong ₹5,000 (25,000 − 20,000), and ₹20,000 ignores the opening reserve.

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