Question 4

Branch Account (Debtor System) at invoice price, with the manager's commission

18 marks

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

Question

Question 4 · 18 marks

Sankalp Ltd. invoices goods to its branch at cost plus 20%. Its branch sells goods on credit as well as for cash. It meets its expenses out of the cash collected from its debtors and its cash sales, and remits the balance of cash to the head office after withholding 12,000 necessary to meet immediate cash requirements. On 1st April, 2023 the branch's assets were as follows:

Account	Balance (Rs.)
Cash in Hand	12,000
Trade Debtors	4,60,800
Stock at invoice price	12,96,000
Furniture and Fittings	6,00,000

During the accounting year ended 31 March, 2024, goods dispatched to the branch by the head office amounted at invoice price to 1,58,40,000. Out of the goods it received, the branch sent back to the head office goods invoiced at 86,400. The branch's other transactions during the year were as follows:

	Amount (Rs.)
Cash sales	1,16,40,000
Credit sales	37,68,000
Cash collected from customers	34,10,400
Discount allowed to debtors	69,600
Returns by customers	1,22,400
Bad debts written off	44,400
Expenses paid by branch	10,10,400

On 1 January, 2024 the branch purchased new furniture for 1,20,000, for which payments were made by the head office by cheque. The head office also paid commission of Rs. 72,000 to the branch manager by cheque. On 31 March, 2024 branch expenses amounting 7,200 were outstanding, and cash in hand was again Rs. 12,000. Depreciation @ 16% p.a. on Diminishing Balances method is to be charged on furniture. Prepare the Branch Stock Account and the Branch Account in the head office's books for the year ended 31 March, 2024, assuming that the branch manager is entitled to a commission @10% of the branch's net profits after charging his commission.

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

Read from the question

assuming that the branch manager is…The paper fixes this: use it as given, and say so in your answer.
Prepare the Branch Stock AccountDraw the format first (heading, columns, dates), then fill in the figures from your working.

What the paper leaves open

The branch is read as selling at invoice price, so its sales and the customers' returns pass through the memorandum Branch Stock Account at that price, and the closing stock is that account's balancing figure (no stock count is given).
The new furniture is taken to be in use from 1st January 2024, the date it was bought, so it is depreciated for three months.
The commission paid by the head office is read as paid on account; the rest of the manager's 10% is outstanding at the year end. The commission is not a whole rupee and is shown to the paisa.

Write it in this order

Working notes first: they feed the statements.

Read the data; tick every adjustment as you plan it 2 min
1 Depreciation and the commission after charging it 3 marks 5 min
2 Memorandum Branch Stock A/c 4 marks 7 min
3 Memorandum Debtors and Cash accounts closing debtors, remittance 3 marks 5 min
4 Branch Account at invoice price with the loading adjustments 6 marks 11 min
5 Proof on the cost basis 2 marks 4 min
Check: every adjustment used, both sides agree, dates in 2 min

12345

Final answer

Check your own figures against these.

Closing stock: ₹17,64,000; IP) / ₹14,70,000 (cost
Closing debtors: ₹5,82,000
Remittance: ₹1,40,40,000
Manager's commission: ₹1,19,563.64
Net Profit: ₹11,95,636.36

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.

Pricing: invoice price = cost + 20% ⇒ IP = 1.2 × cost, loading = ⅙ of invoice price, cost = ⅚ of IP.

Working notes

WN1Memorandum Branch Stock Account (invoice price)

Dr	₹	Cr	₹
To Balance b/d (opening stock, IP)	12,96,000	By Goods returned to H.O. (IP)	86,400
To Goods Sent to Branch (IP)	1,58,40,000	By Bank (cash sales)	1,16,40,000
To Branch Debtors (returns by customers)	1,22,400	By Branch Debtors (credit sales)	37,68,000
		By Balance c/d (closing stock, IP)	17,64,000
	1,72,58,400		1,72,58,400

Dr	₹
To Balance b/d (opening stock, IP)	12,96,000
To Goods Sent to Branch (IP)	1,58,40,000
To Branch Debtors (returns by customers)	1,22,400
	1,72,58,400
Cr	₹
By Goods returned to H.O. (IP)	86,400
By Bank (cash sales)	1,16,40,000
By Branch Debtors (credit sales)	37,68,000
By Balance c/d (closing stock, IP)	17,64,000
	1,72,58,400

Closing stock at the branch (IP) ₹17,64,000 = ₹14,70,000 at cost (× ⅚).

WN2Memorandum Branch Debtors Account

Dr	₹	Cr	₹
To Balance b/d	4,60,800	By Bank (cash collected)	34,10,400
To Branch Stock (credit sales)	37,68,000	By Discount allowed	69,600
		By Branch Stock (returns by customers)	1,22,400
		By Bad debts	44,400
		By Balance c/d (closing debtors)	5,82,000
	42,28,800		42,28,800

Dr	₹
To Balance b/d	4,60,800
To Branch Stock (credit sales)	37,68,000
	42,28,800
Cr	₹
By Bank (cash collected)	34,10,400
By Discount allowed	69,600
By Branch Stock (returns by customers)	1,22,400
By Bad debts	44,400
By Balance c/d (closing debtors)	5,82,000
	42,28,800

WN3Memorandum Branch Cash Account

Dr	₹	Cr	₹
To Balance b/d (cash withheld)	12,000	By Expenses paid	10,10,400
To Bank (cash sales)	1,16,40,000	By H.O. (remittance)	1,40,40,000
To Branch Debtors (cash collected)	34,10,400	By Balance c/d (cash withheld)	12,000
	1,50,62,400		1,50,62,400

Dr	₹
To Balance b/d (cash withheld)	12,000
To Bank (cash sales)	1,16,40,000
To Branch Debtors (cash collected)	34,10,400
	1,50,62,400
Cr	₹
By Expenses paid	10,10,400
By H.O. (remittance)	1,40,40,000
By Balance c/d (cash withheld)	12,000
	1,50,62,400

The branch remits its cash sales and collections from debtors, less the expenses it pays and the ₹12,000 it keeps.

WN4Depreciation and manager's commission

Depreciation (diminishing balances, 16%) = old furniture 6,00,000 × 16% (₹96,000) + new furniture 1,20,000 × 16% × 3/12 (₹4,800) = ₹1,00,800; closing furniture = 6,00,000 + 1,20,000 − 1,00,800 = ₹6,19,200.
Net profit before commission = ₹13,15,200 (see the Branch Trading & P&L below). The commission is 10% of the profit after charging it: 13,15,200 × 10/110 = ₹1,19,563.64; ₹72,000 was paid by the head office, so ₹47,563.64 is outstanding. Net profit after commission = ₹11,95,636.36.

Commission reconciliation	₹
Net profit after commission	11,95,636.36
Manager's commission (one-tenth of 11,95,636.36)	1,19,563.64
Net profit before commission	13,15,200

Branch Trading and Profit & Loss Account (cost basis): proof of profit

Dr	₹	Cr	₹
To Opening Stock (cost)	10,80,000	By Net Sales (1,54,08,000 − returns 1,22,400)	1,52,85,600
To Goods Sent by H.O. (cost, net)	1,31,28,000	By Closing Stock (cost)	14,70,000
To Gross Profit c/d	25,47,600
	1,67,55,600		1,67,55,600
To Branch Expenses (10,10,400 + 7,200)	10,17,600	By Gross Profit b/d	25,47,600
To Discount Allowed	69,600
To Bad Debts	44,400
To Depreciation	1,00,800
To Manager's Commission	1,19,563.64
To Net Profit	11,95,636.36
	25,47,600		25,47,600

Dr	₹
To Opening Stock (cost)	10,80,000
To Goods Sent by H.O. (cost, net)	1,31,28,000
To Gross Profit c/d	25,47,600
	1,67,55,600
To Branch Expenses (10,10,400 + 7,200)	10,17,600
To Discount Allowed	69,600
To Bad Debts	44,400
To Depreciation	1,00,800
To Manager's Commission	1,19,563.64
To Net Profit	11,95,636.36
	25,47,600
Cr	₹
By Net Sales (1,54,08,000 − returns 1,22,400)	1,52,85,600
By Closing Stock (cost)	14,70,000
	1,67,55,600
By Gross Profit b/d	25,47,600
	25,47,600

Gross profit is the 20% loading on the cost of goods sold (₹1,27,38,000 × 20% = ₹25,47,600).

Branch Account in the books of the head office (invoice price; balances to the same net profit)

The Debtor-System Branch Account is one nominal account holding the branch's assets; its balancing figure is the branch profit. It is drawn up in the DU prescribed text's format: the stocks and goods sent appear at invoice price, and the loading is removed by adjusting entries, the stock reserve on closing stock debited, and the stock reserve on opening stock and the loading on net goods sent credited.

Dr	₹	Cr	₹
To Opening Stock (invoice price)	12,96,000	By Bank (remittance)	1,40,40,000
To Opening Debtors	4,60,800	By Stock Reserve A/c (loading on opening stock, 12,96,000 ÷ 6)	2,16,000
To Opening Cash	12,000	By Goods Sent to Branch A/c (returns, invoice price)	86,400
To Opening Furniture	6,00,000	By Goods Sent to Branch A/c (loading on net goods sent, 1,57,53,600 ÷ 6)	26,25,600
To Goods Sent to Branch A/c (invoice price)	1,58,40,000	By Closing Stock (invoice price)	17,64,000
To Bank (new furniture)	1,20,000	By Closing Debtors	5,82,000
To Bank (commission paid)	72,000	By Closing Cash	12,000
To Stock Reserve A/c (loading on closing stock, 17,64,000 ÷ 6)	2,94,000	By Closing Furniture	6,19,200
To Outstanding Expenses c/d	7,200
To Outstanding Commission c/d	47,563.64
To Net Profit	11,95,636.36
	1,99,45,200		1,99,45,200

Dr	₹
To Opening Stock (invoice price)	12,96,000
To Opening Debtors	4,60,800
To Opening Cash	12,000
To Opening Furniture	6,00,000
To Goods Sent to Branch A/c (invoice price)	1,58,40,000
To Bank (new furniture)	1,20,000
To Bank (commission paid)	72,000
To Stock Reserve A/c (loading on closing stock, 17,64,000 ÷ 6)	2,94,000
To Outstanding Expenses c/d	7,200
To Outstanding Commission c/d	47,563.64
To Net Profit	11,95,636.36
	1,99,45,200
Cr	₹
By Bank (remittance)	1,40,40,000
By Stock Reserve A/c (loading on opening stock, 12,96,000 ÷ 6)	2,16,000
By Goods Sent to Branch A/c (returns, invoice price)	86,400
By Goods Sent to Branch A/c (loading on net goods sent, 1,57,53,600 ÷ 6)	26,25,600
By Closing Stock (invoice price)	17,64,000
By Closing Debtors	5,82,000
By Closing Cash	12,000
By Closing Furniture	6,19,200
	1,99,45,200

The loading adjustments remove exactly the profit element: 2,16,000 + 26,25,600 − 2,94,000 = ₹25,47,600 of loading is taken out, which is why the account balances to the same net profit as the cost-basis proof.

Result: closing stock ₹17,64,000 (IP) / ₹14,70,000 (cost) · closing debtors ₹5,82,000 · remittance ₹1,40,40,000 · manager's commission ₹1,19,563.64 · Net Profit ₹11,95,636.36.

Where the 18 marks sit

#	Component	Marks
1	Memorandum Branch Stock A/c (closing stock 17,64,000)	4
2	Memorandum Debtors and Cash accounts (closing debtors, remittance)	3
3	Depreciation and the commission after charging it	3
4	Branch Account at invoice price with the loading adjustments (→ NP 11,95,636.36)	6
5	Proof on the cost basis	2
	Total	18

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