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

Sundaram & Co supplies goods to its Chennai branch at invoice price, which is cost plus 25%. Data for the year: opening branch stock at invoice price ₹40,000; goods sent to branch at invoice price ₹2,00,000; goods returned by branch at invoice price ₹10,000; cash sales ₹90,000; credit sales ₹1,20,000; closing stock at invoice price ₹50,000; branch expenses paid by head office ₹15,000. Ignoring opening and closing stock reserve entries other than for the goods sold, what is the net profit of the branch as per head office books, after eliminating the loading?

The branch net profit is ₹51,000. Goods sold at invoice price total ₹1,80,000, which cost ₹1,44,000. Sales of ₹2,10,000 less this cost give gross profit of ₹66,000, and deducting branch expenses of ₹15,000 leaves ₹51,000 after eliminating the loading.

  1. A₹51,000Correct
  2. B₹15,000
  3. C₹66,000
  4. D₹81,000

Explanation

Goods sold at invoice price = 40,000 + 2,00,000 − 10,000 − 50,000 = ₹1,80,000, so the cost of these goods = 80% × 1,80,000 = ₹1,44,000. Sales are ₹2,10,000, so true gross profit is 2,10,000 − 1,44,000 = ₹66,000. Net profit = 66,000 − 15,000 = ₹51,000. Check: profit over invoice price ₹30,000 plus loading on goods sold ₹36,000 equals ₹66,000. Taking only ₹30,000 − ₹15,000 = ₹15,000 ignores the loading.

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