Question 4 OR

Branch Account (Debtors system) at invoice price, with an imprest float

18 marks

Time to write
About 36 minutes
Topic
Branch accounts
Notes
Crux notes

Question

Question 4 OR · 18 marks

The H.O. supplies goods to Cuttack branch at 20% profit on invoice price. H.O. pays all expenses directly (except petty expenses). Such petty expenses are paid by those branches that are allowed to keep a petty cash balance of ₹ 8,400 on imprest system. Prepare Cuttack Branch A/c from the following balances:

Balances as on 31st March, 2023:

Petty cash at branch₹ 8,400
Stock at branch at cost price₹ 4,30,080
Debtors at branch₹ 1,46,160
Creditors at branch₹ 42,000
Furniture at branch₹ 1,26,000
Prepaid rent for 3 months₹ 10,080

Transactions for the year ended 31st March, 2024:

Goods send to branch at invoice price₹ 19,48,800
Cash sales at branch₹ 15,96,000
Credit sales at branch₹ 10,92,000
Allowances to debtors₹ 20,160
Cash received from customers₹ 9,24,000
Bad debts written off₹ 5,040
Goods returned by branch to H.O. at invoice price₹ 16,800
Cash purchases by the branch (on H.O. permission)₹ 2,52,000
Cash paid to Creditors₹ 1,68,000

The H.O. made these payments:

Rent for one year (paid on October 1, 2023)₹ 40,320
Salaries (paid in advance ₹ 8,400)₹ 42,000
Insurance paid for one year (up to 30th June, 2024)₹ 30,240

Payment made by the branch:

Petty expenses₹ 20,160
Balances as on 31st March, 2024
Stock at cost₹ 6,72,000
Creditors₹ 58,800

Provide depreciation on furniture at 20% per annum.

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

36 minfor 18 marks

What the paper leaves open

  1. Rent: the opening prepayment covers three months (April to June), and a year's rent is paid on 1 October; the paper does not say what that payment covers and gives nothing for July to September. The answer charges only what the stated balances and payments produce (rent ₹30,240; six months of the October payment prepaid at the year end). If July to September were accrued as outstanding, rent would be ₹40,320 and the net profit ₹10,080 lower.
  2. The paper does not say who restores the petty-cash imprest; it is read as restored from branch cash, so the top-up reduces the cash remitted to the H.O.
  3. Stocks are given at cost and are grossed up to invoice price in the Branch Account, with a stock reserve for the loading.
  4. The salary advance and the unexpired insurance (to 30th June) are carried down as branch assets, and depreciation is on the opening furniture. "Goods send" is printed so.

Write it in this order

Workings as you go: each statement feeds the next.

  1. Read the data; note exactly what is asked 2 min
  2. 1 Invoice-price structure; opening and closing stock grossed up, stock reserves 2 marks 4 min
  3. 2 Memorandum Debtors, Creditors and Cash accounts closing debtors, credit purchases, remittance 5 marks 9 min
  4. 3 Prepayments, salary advance and depreciation WN4 2 marks 4 min
  5. 4 Branch Account: opening and closing balances, goods sent and its loading, H.O. payments 7 marks 12 min
  6. 5 Net profit and its cost-basis proof 2 marks 3 min
  7. Check: arithmetic, units (₹, %), final answer underlined 2 min

Final answer

Check your own figures against these.

Closing debtors
₹2,88,960
Credit purchases
₹1,84,800
Cash remitted
₹20,79,840
Gross profit at cost
₹9,47,520
Net Profit of the Cuttack branch
₹7,90,440

Try it first. About 36 minutes for 18 marks. Write it out, then open the solution and check your figures against the final answer.

Solution

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

Price structure: profit is 20% of invoice price, so cost = 80% of IP, IP = cost × 1.25 and the loading = 20% of IP. Opening stock at IP = 4,30,080 × 1.25 = ₹5,37,600; closing stock at IP = 6,72,000 × 1.25 = ₹8,40,000.

The convention, stated once

This question follows the DU prescribed text's own illustration of a branch supplied at a profit on the invoice price, keeping an imprest float, and buying goods with head office permission:

  1. The Branch Account is kept at invoice price. Goods sent are debited at invoice price; the loading on net goods sent is credited back through the Goods Sent to Branch Account; and a stock reserve removes the loading from opening stock (credit side) and closing stock (debit side).
  2. Branch cash. The branch pays its cash purchases, its creditors and its petty expenses out of the cash it collects, and remits the balance to the head office; the remittance is therefore the balancing figure of a memorandum Branch Cash Account, and creditors and credit purchases come from a memorandum Creditors Account.
  3. Imprest. Petty expenses are reimbursed out of branch cash, so the float stands at ₹8,400 again at the year end.
  4. Expenses paid by the head office are debited to the Branch Account; the prepaid portions and the salary advance are carried down as branch assets.

Working notes

WN1Memorandum Branch Debtors Account
Dr₹Cr₹
To Balance b/d1,46,160By Cash (received from customers)9,24,000
To Credit Sales10,92,000By Allowances to Debtors20,160
By Bad Debts5,040
By Balance c/d (closing debtors)2,88,960
12,38,16012,38,160
Dr₹
To Balance b/d1,46,160
To Credit Sales10,92,000
12,38,160
Cr₹
By Cash (received from customers)9,24,000
By Allowances to Debtors20,160
By Bad Debts5,040
By Balance c/d (closing debtors)2,88,960
12,38,160
WN2Memorandum Branch Creditors Account
Dr₹Cr₹
To Cash (paid to creditors)1,68,000By Balance b/d42,000
To Balance c/d58,800By Credit Purchases (balancing figure)1,84,800
2,26,8002,26,800
Dr₹
To Cash (paid to creditors)1,68,000
To Balance c/d58,800
2,26,800
Cr₹
By Balance b/d42,000
By Credit Purchases (balancing figure)1,84,800
2,26,800
WN3Memorandum Branch Cash Account
Dr₹Cr₹
To Cash Sales15,96,000By Cash Purchases2,52,000
To Branch Debtors9,24,000By Creditors1,68,000
By Petty Cash (imprest restored)20,160
By Cash remitted to H.O. (balancing figure)20,79,840
25,20,00025,20,000
Dr₹
To Cash Sales15,96,000
To Branch Debtors9,24,000
25,20,000
Cr₹
By Cash Purchases2,52,000
By Creditors1,68,000
By Petty Cash (imprest restored)20,160
By Cash remitted to H.O. (balancing figure)20,79,840
25,20,000
WN4Prepayments, advance and depreciation
ItemWorking₹
Rent prepaid at 31 March 202440,320 paid on 1 October 2023 covers to 30 September 2024: 40,320 × 6/1220,160
Insurance prepaid at 31 March 202430,240 for the year to 30 June 2024: 30,240 × 3/127,560
Salary advancegiven8,400
Depreciation on furniture1,26,000 × 20%25,200
Furniture at 31 March 20241,26,000 − 25,2001,00,800

Rent: a gap in the figures, followed as given. The opening prepayment covers rent only to 30 June 2023, and the year's rent is paid on 1 October 2023. The question does not say what that payment covers, and supplies nothing for July to September. No outstanding rent is given, so none is created: the account charges ₹30,240 rent (10,080 + 40,320 − 20,160), and net profit is ₹7,90,440.

The other reading. If the 1 October payment covers October 2023 to September 2024 and the July to September quarter is accrued (3 × ₹3,360 = ₹10,080 outstanding, shown on the debit side of the Branch Account as an outstanding liability), rent is ₹40,320 and net profit is ₹7,80,360. Nothing else changes.

Cuttack Branch Account in the books of the head office for the year ended 31 March 2024

Dr₹Cr₹
To Balance b/d: Petty Cash8,400By Balance b/d: Creditors42,000
To Balance b/d: Stock (at IP, 4,30,080 × 1.25)5,37,600By Stock Reserve A/c (loading on opening stock, 5,37,600 × 20%)1,07,520
To Balance b/d: Debtors1,46,160By Bank A/c (cash remitted, WN3)20,79,840
To Balance b/d: Furniture1,26,000By Goods Sent to Branch A/c (returns, at IP)16,800
To Balance b/d: Prepaid Rent10,080By Goods Sent to Branch A/c (loading on net goods sent, 19,32,000 × 20%)3,86,400
To Goods Sent to Branch A/c (at IP)19,48,800By Balance c/d: Petty Cash8,400
To Bank A/c: Rent40,320By Balance c/d: Stock (at IP, 6,72,000 × 1.25)8,40,000
To Bank A/c: Salaries42,000By Balance c/d: Debtors (WN1)2,88,960
To Bank A/c: Insurance30,240By Balance c/d: Furniture (WN4)1,00,800
To Stock Reserve A/c (loading on closing stock, 8,40,000 × 20%)1,68,000By Balance c/d: Prepaid Rent (WN4)20,160
To Balance c/d: Creditors58,800By Balance c/d: Prepaid Insurance (WN4)7,560
To Net Profit → General P&L A/c7,90,440By Balance c/d: Salary Advance8,400
39,06,84039,06,840
Dr₹
To Balance b/d: Petty Cash8,400
To Balance b/d: Stock (at IP, 4,30,080 × 1.25)5,37,600
To Balance b/d: Debtors1,46,160
To Balance b/d: Furniture1,26,000
To Balance b/d: Prepaid Rent10,080
To Goods Sent to Branch A/c (at IP)19,48,800
To Bank A/c: Rent40,320
To Bank A/c: Salaries42,000
To Bank A/c: Insurance30,240
To Stock Reserve A/c (loading on closing stock, 8,40,000 × 20%)1,68,000
To Balance c/d: Creditors58,800
To Net Profit → General P&L A/c7,90,440
39,06,840
Cr₹
By Balance b/d: Creditors42,000
By Stock Reserve A/c (loading on opening stock, 5,37,600 × 20%)1,07,520
By Bank A/c (cash remitted, WN3)20,79,840
By Goods Sent to Branch A/c (returns, at IP)16,800
By Goods Sent to Branch A/c (loading on net goods sent, 19,32,000 × 20%)3,86,400
By Balance c/d: Petty Cash8,400
By Balance c/d: Stock (at IP, 6,72,000 × 1.25)8,40,000
By Balance c/d: Debtors (WN1)2,88,960
By Balance c/d: Furniture (WN4)1,00,800
By Balance c/d: Prepaid Rent (WN4)20,160
By Balance c/d: Prepaid Insurance (WN4)7,560
By Balance c/d: Salary Advance8,400
39,06,840

Net goods sent at IP = 19,48,800 − 16,800 = ₹19,32,000; the loading on them, 20%, is ₹3,86,400.

Proof: independent Branch Trading and Profit & Loss Account at cost

Everything at cost, with no loading and no reserve: goods from the head office at cost = 19,32,000 × 80%.

Dr₹Cr₹
To Opening Stock (at cost)4,30,080By Sales (15,96,000 cash + 10,92,000 credit)26,88,000
To Goods from H.O. (at cost)15,45,600By Closing Stock (at cost)6,72,000
To Cash Purchases2,52,000
To Credit Purchases (WN2)1,84,800
To Gross Profit c/d9,47,520
33,60,00033,60,000
Dr₹
To Opening Stock (at cost)4,30,080
To Goods from H.O. (at cost)15,45,600
To Cash Purchases2,52,000
To Credit Purchases (WN2)1,84,800
To Gross Profit c/d9,47,520
33,60,000
Cr₹
By Sales (15,96,000 cash + 10,92,000 credit)26,88,000
By Closing Stock (at cost)6,72,000
33,60,000
Dr₹Cr₹
To Rent (10,080 + 40,320 − 20,160)30,240By Gross Profit b/d9,47,520
To Salaries (42,000 − 8,400)33,600
To Insurance (30,240 − 7,560)22,680
To Petty Expenses20,160
To Allowances to Debtors20,160
To Bad Debts5,040
To Depreciation on Furniture25,200
To Net Profit7,90,440
9,47,5209,47,520
Dr₹
To Rent (10,080 + 40,320 − 20,160)30,240
To Salaries (42,000 − 8,400)33,600
To Insurance (30,240 − 7,560)22,680
To Petty Expenses20,160
To Allowances to Debtors20,160
To Bad Debts5,040
To Depreciation on Furniture25,200
To Net Profit7,90,440
9,47,520
Cr₹
By Gross Profit b/d9,47,520
9,47,520

The cost-basis net profit equals the Branch Account balancing figure exactly, with zero residual: the stock reserve entries remove precisely the loading the invoice-price route adds.

Result: closing debtors ₹2,88,960 · credit purchases ₹1,84,800 · cash remitted ₹20,79,840 · gross profit at cost ₹9,47,520 · Net Profit of the Cuttack branch ₹7,90,440.

Where the 18 marks sit

#ComponentMarks
1Invoice-price structure; opening and closing stock grossed up, stock reserves2
2Memorandum Debtors, Creditors and Cash accounts (closing debtors, credit purchases, remittance)5
3Prepayments, salary advance and depreciation (WN4)2
4Branch Account: opening and closing balances, goods sent and its loading, H.O. payments7
5Net profit ₹7,90,440 and its cost-basis proof2
Total18
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