Question 4

Branch accounts at invoice price (Stock and Debtors System)

10 marks

Time to write: About 20 minutes

From an older CBCS paper

Question

Question 4 · 10 marks

Mehta & Sons, Agra has a branch at Moradabad, to which goods are invoiced at cost plus 25%, the branch's selling price. From the details below, prepare the Branch Stock Account, the Branch Debtors Account, the Branch Cash Account and the Branch Profit and Loss Account for the year which ends on 31st December, 2016.

	₹
The balances as on January 1, 2016
Branch Stock (at Invoice Price)	30,000
Branch Debtors	1,02,000
Branch Cash	6,000
Transactions during 2016
Goods invoiced to the Branch	4,02,000
Goods returned to head office by branch	15,000
Credit sales at branch	2,10,000
Cash sales at branch	1,20,000
Cash received at branch from debtors	1,87,200
Cash expenses at branch	33,600
Discount allowed to branch debtors	600
Normal loss of branch stock	1,200
Balance as on 31st December, 2016:
Branch stock	84,000
Branch Debtors	.......
Branch cash	24,000

Reworded from the university paper: names and figures differ, the task is the same. The original paper belongs to the University of Delhi. See DU's question bank.

Before you write

Read off the question and its marks

20 minfor 10 marks

Read from the question

prepare the Branch Stock AccountProper formats (heading, date, both sides): post the plain items, then each adjustment, and balance last.

What the paper leaves open

The normal loss is charged in full to the branch adjustment at invoice price and absorbed in gross profit (standing branch rule). Closing debtors are found from the debtors account.

Write it in this order

Read the data; tick every adjustment as you plan it 1 min
1 Branch Stock Account, with the normal loss and the shortage 3 marks 5 min
2 Branch Debtors Account 2 marks 4 min
3 Branch Cash Account 2 marks 4 min
4 Branch Adjustment (working) and Branch P&L Account 3 marks 5 min
Check: every adjustment used, both sides agree, dates in 1 min

1234

Try it first. About 20 minutes for 10 marks. Write it out, then open the solution.

Solution

Hover or tap a marked figure, like 72,000, to see how it is made and where else it appears.

Basis. Goods go to the branch at invoice price = cost + 25%, which is also the selling price, so the loading is 25/125 = 20% of invoice price. The accounts are kept on the Stock and Debtors System; the gross profit is found in a Branch Adjustment Account (shown as a working, as it is needed for the Branch P&L).

The normal loss of ₹1,200 is charged in full, at invoice price, to the Branch Adjustment Account and absorbed in gross profit (entry 11).
After it, the Branch Stock Account shows a further unexplained shortage of ₹1,800 at invoice price. A shortage beyond the stated normal loss is abnormal: its loading (20%, ₹360) goes to the Branch Adjustment Account and its cost (₹1,440) to the Branch P&L Account (entry 10).

Branch Stock Account (at invoice price)

Dr	₹	Cr	₹
To Balance b/d	30,000	By Goods sent to Branch (returns to H.O.)	15,000
To Goods sent to Branch	4,02,000	By Branch Cash (cash sales)	1,20,000
		By Branch Debtors (credit sales)	2,10,000
		By Branch Adjustment (normal loss)	1,200
		By Branch Adjustment (shortage: loading)	360
		By Branch P&L (shortage: cost)	1,440
		By Balance c/d	84,000
	4,32,000		4,32,000

Dr	₹
To Balance b/d	30,000
To Goods sent to Branch	4,02,000
	4,32,000
Cr	₹
By Goods sent to Branch (returns to H.O.)	15,000
By Branch Cash (cash sales)	1,20,000
By Branch Debtors (credit sales)	2,10,000
By Branch Adjustment (normal loss)	1,200
By Branch Adjustment (shortage: loading)	360
By Branch P&L (shortage: cost)	1,440
By Balance c/d	84,000
	4,32,000

Branch Debtors Account

Dr	₹	Cr	₹
To Balance b/d	1,02,000	By Branch Cash	1,87,200
To Branch Stock (credit sales)	2,10,000	By Branch P&L (discount allowed)	600
		By Balance c/d	1,24,200
	3,12,000		3,12,000

Dr	₹
To Balance b/d	1,02,000
To Branch Stock (credit sales)	2,10,000
	3,12,000
Cr	₹
By Branch Cash	1,87,200
By Branch P&L (discount allowed)	600
By Balance c/d	1,24,200
	3,12,000

Branch Cash Account

Dr	₹	Cr	₹
To Balance b/d	6,000	By Branch expenses	33,600
To Branch Stock (cash sales)	1,20,000	By Head Office (cash remitted, balancing figure)	2,55,600
To Branch Debtors	1,87,200	By Balance c/d	24,000
	3,13,200		3,13,200

Dr	₹
To Balance b/d	6,000
To Branch Stock (cash sales)	1,20,000
To Branch Debtors	1,87,200
	3,13,200
Cr	₹
By Branch expenses	33,600
By Head Office (cash remitted, balancing figure)	2,55,600
By Balance c/d	24,000
	3,13,200

Branch Adjustment Account (working) (loading removed on net goods sent and closing stock, reversed on opening stock; the normal loss is charged to it at invoice price, entry 11)

Dr	₹	Cr	₹
To Stock Reserve (loading on closing stock, 20% × 84,000)	16,800	By Goods sent to Branch (loading, 20% × 3,87,000)	77,400
To Branch Stock (normal loss)	1,200	By Stock Reserve (loading on opening stock, 20% × 30,000)	6,000
To Branch Stock (loading on shortage)	360
To Branch P&L (gross profit)	65,040
	83,400		83,400

Dr	₹
To Stock Reserve (loading on closing stock, 20% × 84,000)	16,800
To Branch Stock (normal loss)	1,200
To Branch Stock (loading on shortage)	360
To Branch P&L (gross profit)	65,040
	83,400
Cr	₹
By Goods sent to Branch (loading, 20% × 3,87,000)	77,400
By Stock Reserve (loading on opening stock, 20% × 30,000)	6,000
	83,400

Branch Profit and Loss Account for the year ended 31 December 2016

Dr	₹	Cr	₹
To Branch expenses	33,600	By Branch Adjustment (gross profit)	65,040
To Discount allowed	600
To Branch Stock (shortage at cost)	1,440
To Net Profit (transferred to General P&L)	29,400
	65,040		65,040

Dr	₹
To Branch expenses	33,600
To Discount allowed	600
To Branch Stock (shortage at cost)	1,440
To Net Profit (transferred to General P&L)	29,400
	65,040
Cr	₹
By Branch Adjustment (gross profit)	65,040
	65,040

Check. Cost of goods sold = (30,000 + 3,87,000 − 84,000) × 80% − 1,440 = ₹2,64,960; gross profit = sales 3,30,000 − 2,64,960 = ₹65,040, the normal loss staying inside the cost of goods sold.

Where the 10 marks sit

#	Component	Marks
1	Branch Stock Account, with the normal loss and the shortage	3
2	Branch Debtors Account	2
3	Branch Cash Account	2
4	Branch Adjustment (working) and Branch P&L Account	3
	Total	10

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