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

Rao Brothers, Hyderabad, invoices goods to its Chennai branch at cost plus 25% on cost. Stock with an invoice value of ₹40,000 is destroyed by fire at the branch. The insurance company admits a claim of ₹25,000. What is the net abnormal loss to be charged to the head office Profit and Loss Account?

The net abnormal loss is ₹7,000. The stock's invoice value of ₹40,000 includes 20% loading, so its cost is ₹32,000. Deducting the insurance claim of ₹25,000 from this cost leaves ₹7,000 to be charged to Profit and Loss.

  1. A₹15,000
  2. B₹7,000Correct
  3. C₹32,000
  4. D₹8,000

Explanation

Cost of the destroyed stock = ₹40,000 × 100/125 = ₹32,000, since the loading of ₹8,000 is only an internal profit and is removed through the stock reserve. Loss charged to Profit and Loss = ₹32,000 − ₹25,000 claim = ₹7,000. Using ₹15,000 wrongly deducts the claim from the invoice value.

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