Question 4 OR (a)

Branch Adjustment and Profit and Loss Accounts (Stock and Debtors System)

7 marks

Time to write: About 14 minutes

From an older CBCS paper

Question

Question 4 OR (a) · 7 marks

Or/

M/s PQR Ltd. has branches at Lucknow and Kanpur, to which goods are invoiced at cost plus a 20% profit on sales. The information below is available about the transactions at Lucknow branch for the year ending 31st March, 2018: 7

	₹
Stock (Invoice Price) (1-4-2017)	48,000
Debtors (1-4-2017)	14,400
Petty Cash (1-4-2017)	180
Petty Cash (31-03-2018)	300
Debtors (31-03-2018)	13,200
Stock at Invoice price (31-03-2018)	60,000
Transactions during 2017-18:
Goods sent to branch (at cost)	3,13,200
Goods returned by branch to HO (at invoice price)	18,000
Cash sales	1,26,000
Credit sales	2,16,000
Normal loss at IP	420
Goods Pilfered at IP	3,600
Cash sent for petty expenses	38,400
Bad debts at Lucknow branch	480
Goods returned by Debtors	600

Under the Stock and Debtor System, calculate the profit by preparing the Branch Adjustment and Profit and Loss Account.

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

14 minfor 7 marks

Read from the question

calculateFormula first, then the working, then the answer with its unit (₹, %, units).

What the paper leaves open

The normal loss goes in full to the branch adjustment at invoice price; the pilferage is abnormal, its cost charged to branch profit and loss and its loading to the branch adjustment (standing branch rule).

Write it in this order

Read the data; note exactly what is asked 1 min
1 Invoice price of goods sent and the stock position 2 marks 3 min
2 Branch Adjustment Account 3 marks 5 min
3 Branch Profit and Loss Account 2 marks 3 min
Check: arithmetic, units (₹, %), final answer underlined 2 min

123

Try it first. About 14 minutes for 7 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. The invoice price carries a profit of 20% on sales over cost, so invoice price = cost ÷ 0.8 and the loading is 20% of invoice price; goods sent at cost ₹3,13,200 are ₹3,91,500 at invoice price. The normal loss (₹420) goes in full to the Branch Adjustment Account; the pilferage (₹3,600) is abnormal, its loading to the Branch Adjustment and its cost to the Branch P&L (paper note).

Memorandum Branch Stock Account (invoice price): the counted stock leaves a further unexplained shortage.

Dr	₹	Cr	₹
To Balance b/d	48,000	By Goods sent to Branch (returns)	18,000
To Goods sent to Branch (3,13,200 ÷ 0.8)	3,91,500	By Branch Cash (cash sales)	1,26,000
To Branch Debtors (goods returned by debtors)	600	By Branch Debtors (credit sales)	2,16,000
		By Branch Adjustment (normal loss)	420
		By Pilferage (loading 720 to adjustment, cost 2,880 to P&L)	3,600
		By Shortage (loading 3,216 to adjustment, cost 12,864 to P&L)	16,080
		By Balance c/d	60,000
	4,40,100		4,40,100

Dr	₹
To Balance b/d	48,000
To Goods sent to Branch (3,13,200 ÷ 0.8)	3,91,500
To Branch Debtors (goods returned by debtors)	600
	4,40,100
Cr	₹
By Goods sent to Branch (returns)	18,000
By Branch Cash (cash sales)	1,26,000
By Branch Debtors (credit sales)	2,16,000
By Branch Adjustment (normal loss)	420
By Pilferage (loading 720 to adjustment, cost 2,880 to P&L)	3,600
By Shortage (loading 3,216 to adjustment, cost 12,864 to P&L)	16,080
By Balance c/d	60,000
	4,40,100

The shortage of ₹16,080 beyond the stated losses is unexplained and so abnormal (standing branch rule): loading to the Branch Adjustment, cost to the Branch P&L.

Branch Adjustment Account (loading removed on net goods sent and closing stock, reversed on opening stock)

Dr	₹	Cr	₹
To Stock Reserve (loading on closing stock, 20% × 60,000)	12,000	By Goods sent to Branch (loading on 3,91,500 − 18,000)	74,700
To Branch Stock (normal loss)	420	By Stock Reserve (loading on opening stock, 20% × 48,000)	9,600
To Branch Stock (pilferage: loading)	720
To Branch Stock (shortage: loading)	3,216
To Branch P&L (gross profit)	67,944
	84,300		84,300

Dr	₹
To Stock Reserve (loading on closing stock, 20% × 60,000)	12,000
To Branch Stock (normal loss)	420
To Branch Stock (pilferage: loading)	720
To Branch Stock (shortage: loading)	3,216
To Branch P&L (gross profit)	67,944
	84,300
Cr	₹
By Goods sent to Branch (loading on 3,91,500 − 18,000)	74,700
By Stock Reserve (loading on opening stock, 20% × 48,000)	9,600
	84,300

Branch Profit and Loss Account

Dr	₹	Cr	₹
To Petty expenses (180 + 38,400 − 300)	38,280	By Branch Adjustment (gross profit)	67,944
To Bad debts	480
To Pilferage (cost)	2,880
To Stock shortage (cost)	12,864
To Net Profit (transferred to General P&L)	13,440
	67,944		67,944

Dr	₹
To Petty expenses (180 + 38,400 − 300)	38,280
To Bad debts	480
To Pilferage (cost)	2,880
To Stock shortage (cost)	12,864
To Net Profit (transferred to General P&L)	13,440
	67,944
Cr	₹
By Branch Adjustment (gross profit)	67,944
	67,944

The other reading. Read as cost plus 20% of cost, goods sent are ₹3,75,840 at invoice price and the unexplained shortage is only ₹420; gross profit would be ₹56,550 and net profit ₹14,440. The question's words ("20% on sales") are followed.

Where the 7 marks sit

#	Component	Marks
1	Invoice price of goods sent and the stock position	2
2	Branch Adjustment Account	3
3	Branch Profit and Loss Account	2
	Total	7

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