Theory question 106
Branch AccountsGadzama Trading Company Limited supplies goods to its Calabar branch. The following are the details of transactions with the branch for December 1993: On 1st December, 1993 goods costing ₦6,000 were invoiced to the branch at cost plus 331/1 percent. At the end of the month the Branch returns showed that the sales were ₦5,000. Goods invoiced at ₦80 were returned to Head Office and the Closing Stock was ₦2,880 at selling price.
You are required to prepare in the Head Office books (a) Goods send to Branch Account (b) Branch Stock Account, and (c) Branch Adjustment Account.
Show the model answer
Mark-up 33⅓% on cost = 25% of selling price; goods sent at invoice price 6,000 + 2,000 = 8,000
(a) Goods Sent to Branch Account: Cr branch stock 6,000 (cost) / Dr returns from branch at cost 60; transfer to head office trading (purchases) 5,940
(b) Branch Stock Account (at selling price): Dr goods sent 6,000 + branch adjustment (mark-up) 2,000 = 8,000 / Cr returns to head office 80; sales 5,000; stock shortage 40; balance c/d 2,880; total 8,000
(c) Branch Adjustment Account: Cr mark-up on goods sent 2,000 / Dr mark-up on returns 20; mark-up on shortage 10; unrealised profit on closing stock (25% × 2,880) 720; gross profit to profit and loss 1,250; total 2,000
(The shortage at cost, ₦30, is charged to profit and loss; gross profit = 25% × sales 5,000 = ₦1,250.)
Work out the stock account first: goods in less returns and sales should equal closing stock; any gap is a shortage.