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

Under the stock and debtors system, Sharma Hardware's Indore branch had opening stock of ₹50,000 at cost and received goods costing ₹4,00,000 from head office. Branch sales for the year were ₹3,60,000. The head office sells at a uniform gross profit of 20% on sales. A fire at year end destroyed part of the stock, and the stock actually remaining is ₹1,00,000 at cost. The insurer admitted a claim of ₹40,000. What net loss is charged to the profit and loss account for the abnormal loss?

The net loss charged to profit and loss is ₹22,000. Cost of goods sold is 80% of sales, ₹2,88,000. Stock that should remain is ₹1,62,000 against ₹1,00,000 actually found, so the abnormal loss is ₹62,000. Deducting the ₹40,000 insurance claim leaves ₹22,000.

  1. A₹22,000Correct
  2. B₹10,000
  3. C₹38,000
  4. D₹62,000

Explanation

Cost of goods sold = 80% of 3,60,000 = ₹2,88,000. Stock that should be on hand = 50,000 + 4,00,000 − 2,88,000 = ₹1,62,000. Actual stock is ₹1,00,000, so the abnormal loss is ₹62,000. Less the insurance claim of ₹40,000, the net loss is ₹22,000. Treating the margin as 20% on cost gives ₹10,000, which is wrong because the margin is on sales.

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