Theory question 108
Branch AccountsMagoro Enterprises has its head-office in Kano and operates a branch at Ibadan. All purchases are made by the head-office and invoiced to the branch at cost plus 20 per cent. All branch transactions are recorded in the books at head-office from where branch expenses are also paid. All cash received by the branch is sent to the head-office. Branch sales are strictly on cash basis.
On 1st January 2009, the stock of goods held by the branch amounted to ₦21,600 at invoice price. On the same date, the balance of the Branch Stock Adjustment Account was ₦3,600.
During the year ended 31st December, 2009, the following transactions took place at the branch:
Goods received from head-office at invoice price: ₦194,760
Goods returned to head-office at invoice price: ₦3,852
Sales: ₦200,556
Expenses: ₦24,162
On 31st December, 2009, the stock of goods at the branch at invoice price amounted to ₦11,952.
You are required to prepare: (a) Branch Stock Account; (b) Branch Stock Adjustment Account; (c) Branch Profit and Loss Account.
Show the model answer
Loading = 20/120 = 1/6 of invoice price.
(a) Branch Stock Account (invoice price)
Dr: balance b/d 21,600; goods sent to branch 194,760 = 216,360
Cr: returns to head office 3,852; cash sales 200,556; balance c/d 11,952 = 216,360
(b) Branch Stock Adjustment Account
Cr: balance b/d 3,600; loading on goods sent (194,760 ÷ 6) 32,460 = 36,060
Dr: loading on returns (3,852 ÷ 6) 642; loading on closing stock c/d (11,952 ÷ 6) 1,992; gross profit to branch P&L 33,426 = 36,060
(c) Branch Profit and Loss Account
Gross profit 33,426 − expenses 24,162 = net profit ₦9,264 transferred to general profit and loss
Check: cost of sales = 200,556 ÷ 1.2 = 167,130; 200,556 − 167,130 = 33,426
Mark-up of 20% on cost means the loading is one-sixth of the invoice price.