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CMA Intermediate · Financial Accounting · Branch (including Foreign Branch) and Departmental Accounts

Under the Final Accounts (Stock and Debtors are not separately kept) system of branch accounting, what does the Branch Adjustment Account (used when goods are invoiced to the branch at a price above cost) primarily serve to determine?

The Branch Adjustment Account is used to remove the loading (invoice price over cost) from goods sent to the branch, including the loading in opening and closing stock, so that the real profit of the branch at cost can be determined.

  1. AThe branch debtors' collection period
  2. BThe unrealised loading in branch stock and the profit of the branch at costCorrect
  3. CThe depreciation on branch assets
  4. DThe head office commission payable to the branch manager

Explanation

When goods are sent to the branch at invoice price above cost, the loading (excess over cost) must be eliminated. The Branch Adjustment Account holds the loading on goods sent, stock reserve adjustments and returns, so that its balance shows the branch gross profit at cost, which is then adjusted for branch expenses to arrive at net profit. The other options are not its purpose.

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