Theory question 107
Branch AccountsThe following balances were extracted from the books of Nationwide Enterprises in respect of its branch at Kenema for the year ended 30th June, 2007.
Branch stock account 1/7/06: Le 60,000
Branch debtors account 1/7/06: Le 132,500
During the year:
Goods sent to branch at selling price: Le 540,000
Cash sales by branch: Le 144,000
Credit sales by branch: Le 360,000
Goods returned by branch debtors: Le 18,000
Cash paid by branch debtors: Le 274,000
Branch expenses paid by Head office: Le 33,200
Additional information:
(a) Closing stock at the end of the year at the branch, was valued at Le 111,600, at selling price.
(b) Goods are invoiced to branch at cost plus 20%.
You are required to prepare: (i) Branch Stock Account; (ii) Branch Profit Adjustment Account; (iii) Branch Debtors Account; (iv) Branch Profit and Loss Account.
Show the model answer
Mark-up of 20% on cost = 20/120 = 1/6 of selling price.
(i) Branch Stock Account (at selling price): Dr balance b/f 60,000; goods sent to branch 540,000; returns from branch debtors 18,000 = Le 618,000. Cr cash sales 144,000; credit sales 360,000; stock deficiency 2,400 (balancing figure); balance c/d 111,600 = Le 618,000
(ii) Branch Profit Adjustment Account: Cr mark-up on opening stock 10,000; mark-up on goods sent 90,000 = Le 100,000. Dr mark-up on stock deficiency 400; mark-up on closing stock c/d 18,600; gross profit to branch P&L 81,000 = Le 100,000
(check: net sales 486,000 × 1/6 = 81,000)
(iii) Branch Debtors Account: Dr balance b/f 132,500; credit sales 360,000 = Le 492,500. Cr returns 18,000; cash 274,000; balance c/d 200,500
(iv) Branch Profit and Loss Account: gross profit 81,000 less branch expenses 33,200 and stock deficiency at cost 2,000 (2,400 − 400) = net profit Le 45,800
With goods invoiced at cost plus 20%, the mark-up is one-sixth of the invoice price.