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

Sunrise Traders, Pune, sends goods to its dependent Nagpur branch at cost plus 25% on cost. At the year end, branch stock at invoice price is ₹80,000. The head office keeps a stock reserve (loading) for unrealised profit in branch stock. What stock reserve is required at the close of the year?

The required reserve is ₹16,000. Because invoice price is cost plus 25%, the loading is 25/125, or 20%, of invoice price. Applying 20% to closing branch stock of ₹80,000 gives the unrealised profit that must be reserved.

  1. A₹16,000Correct
  2. B₹20,000
  3. C₹64,000
  4. D₹12,000

Explanation

Invoice price = 125% of cost, so the loading is 25/125 = 20% of invoice price. Reserve = 80,000 × 20% = ₹16,000. Taking 25% of invoice price (₹20,000) uses cost as the base, which is wrong because the goods are invoiced at cost plus 25%.

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