Chapter 15: Branch Accounting (including Foreign Branches) - Test 1: answer key

Question 1 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

Scenario. Sterling Garments Ltd has its head office at Mumbai and a dependent branch at Pune. The branch does not maintain independent books; all branch records are kept by the head office. Goods are invoiced to the Pune branch at cost plus 25%. The following particulars relate to the year ended 31 March 2027: Opening stock at invoice price ₹1,50,000; opening debtors ₹90,000; opening cash ₹10,000. Goods sent to branch at invoice price ₹12,50,000; goods returned by branch to HO at invoice price ₹25,000. Cash sales ₹4,80,000; credit sales ₹7,20,000; cash collected from debtors ₹6,60,000; discount allowed ₹15,000; bad debts ₹10,000; sales returns ₹20,000. Branch expenses paid by HO ₹1,40,000; expenses paid by branch out of collections ₹60,000. Remittances sent by branch to HO ₹6,50,000. Closing stock at branch at invoice price ₹1,95,000. The head office uses the Debtors Method for the dependent branch and creates stock reserve for loading in stock.

What is the closing balance of debtors at the Pune branch as on 31 March 2027?

1. ₹95,000
2. ₹1,00,000
3. ₹1,05,000 (correct answer)
4. ₹1,20,000

Answer: C — ₹1,05,000

Explanation. Closing debtors = opening debtors + credit sales – cash collected – discount allowed – bad debts – sales returns = ₹90,000 + ₹7,20,000 – ₹6,60,000 – ₹15,000 – ₹10,000 – ₹20,000 = ₹1,05,000. Cash sales do not affect debtors. The trap is to deduct cash sales or omit sales returns, both of which change the closing debtors figure.

Where it goes wrong. Deducting cash sales or ignoring sales returns while computing closing debtors.

Authority. ICAI SM Chapter 15, Para 5.1 Debtors Method

Question 2 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

What is the amount of stock reserve required on the closing stock of the Pune branch?

1. ₹32,500
2. ₹39,000 (correct answer)
3. ₹48,750
4. ₹30,000

Answer: B — ₹39,000

Explanation. Invoice price is cost plus 25%, so loading in invoice price = 25/125 = 20%. Closing stock at invoice price is ₹1,95,000. Stock reserve = ₹1,95,000 × 20% = ₹39,000. The distractor ₹48,750 wrongly applies 25% to invoice price; ₹30,000 is the opening stock reserve, not closing.

Where it goes wrong. Applying 25% loading instead of converting 25% on cost to 20% on invoice price.

Authority. ICAI SM Chapter 15, Para 5.2(iii) Elimination of unrealized profit

Question 3 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

What is the net profit earned by the Pune branch for the year ended 31 March 2027?

1. ₹21,000
2. ₹16,000
3. ₹36,000
4. ₹11,000 (correct answer)

Answer: D — ₹11,000

Explanation. Net sales = ₹4,80,000 + ₹7,20,000 – ₹20,000 = ₹11,80,000. Cost of goods sold = opening stock cost ₹1,20,000 + net goods sent cost ₹9,80,000 – closing stock cost ₹1,56,000 = ₹9,44,000. Gross profit = ₹2,36,000. Deduct expenses ₹1,40,000 + ₹60,000 + discount ₹15,000 + bad debts ₹10,000 = ₹2,25,000. Net profit = ₹11,000. Ignoring stock reserve adjustment gives the wrong profit.

Where it goes wrong. Computing gross profit at invoice price without eliminating loading from opening and closing stock.

Authority. ICAI SM Chapter 15, Para 5.1 and Para 5.2 Branch Adjustment

Question 4 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

What amount of opening stock reserve is reversed/credited while preparing the Branch Adjustment Account?

1. ₹30,000 (correct answer)
2. ₹37,500
3. ₹24,000
4. ₹18,000

Answer: A — ₹30,000

Explanation. Opening stock at invoice price is ₹1,50,000. Loading is 20% of invoice price. Opening stock reserve = ₹1,50,000 × 20% = ₹30,000. This reserve is credited to Branch Adjustment Account on reversal. Using 25% gives ₹37,500, a common error when cost-plus markup is confused with margin on invoice price.

Where it goes wrong. Using the markup rate on cost directly on invoice-price stock.

Authority. ICAI SM Chapter 15, Para 5.2(iii)

Question 5 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. Vardhan Chemicals Ltd manufactures and sells goods through a retail outlet at Nashik. The outlet is a dependent retail branch. Goods are invoiced by the head office to the outlet at wholesale price, which is cost plus 20%. The outlet sells goods at retail price, which is wholesale price plus 25%. The outlet does not maintain a full set of books; the head office records all transactions. For the year ended 31 March 2027, the following data are available: opening stock at the outlet at wholesale price ₹2,40,000; goods invoiced to the outlet during the year at wholesale price ₹18,00,000; retail sales made by the outlet ₹21,60,000; closing stock at the outlet at wholesale price ₹2,40,000. A fire in the outlet godown destroyed goods whose wholesale price was not directly recorded; the loss is to be ascertained from the stock account. The outlet incurred expenses of ₹1,80,000 during the year. There were no opening or closing stock reserves other than those arising from the above. The head office wants to compute gross profit, abnormal loss, net profit and closing stock reserve for the outlet under the wholesale branch method.

What is the gross profit earned by the Nashik outlet for the year ended 31 March 2027?

1. ₹3,60,000
2. ₹4,32,000 (correct answer)
3. ₹5,40,000
4. ₹4,80,000

Answer: B — ₹4,32,000

Explanation. Wholesale price = cost + 20% = 120; retail price = wholesale + 25% = 150. Gross profit at outlet = retail price – wholesale price = 30 per ₹150 retail, i.e. 20% of retail sales. Gross profit = ₹21,60,000 × 20% = ₹4,32,000. Applying 25% to sales gives ₹5,40,000, which wrongly treats the retail markup over wholesale as the outlet margin.

Where it goes wrong. Applying the 25% retail markup on wholesale as a percentage of retail sales.

Authority. ICAI SM Chapter 15, Para 5.3 Wholesale price to retail branches

Question 6 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

What is the wholesale value of goods lost by fire in the outlet godown?

1. ₹60,000
2. ₹48,000
3. ₹90,000
4. ₹72,000 (correct answer)

Answer: D — ₹72,000

Explanation. Outlet Stock A/c: opening stock ₹2,40,000 + goods sent ₹18,00,000 + gross profit ₹4,32,000 – sales ₹21,60,000 – closing stock ₹2,40,000 = goods lost ₹72,000 at wholesale price. The trap is to use cost instead of wholesale value, or to omit gross profit in the stock account.

Where it goes wrong. Omitting gross profit from the outlet stock account or valuing loss at cost.

Authority. ICAI SM Chapter 15, Para 5.3 Outlet Stock Account

Question 7 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

What is the net profit earned by the Nashik outlet after considering expenses and goods lost by fire?

1. ₹1,80,000 (correct answer)
2. ₹2,52,000
3. ₹1,08,000
4. ₹2,16,000

Answer: A — ₹1,80,000

Explanation. Gross profit = ₹4,32,000. Deduct outlet expenses ₹1,80,000 and goods lost by fire at wholesale ₹72,000. Net profit = ₹4,32,000 – ₹1,80,000 – ₹72,000 = ₹1,80,000. The distractor ₹2,52,000 ignores the fire loss; ₹1,08,000 deducts the loss twice or at an incorrect value.

Where it goes wrong. Ignoring abnormal loss or deducting it at retail price instead of wholesale value.

Authority. ICAI SM Chapter 15, Para 5.3 Outlet Profit and Loss Account

Question 8 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

What is the closing stock reserve required in respect of the outlet's closing stock?

1. ₹48,000
2. ₹30,000
3. ₹40,000 (correct answer)
4. ₹36,000

Answer: C — ₹40,000

Explanation. Closing stock at wholesale price is ₹2,40,000. Wholesale price is cost + 20%, so loading in wholesale price = 20/120 = 1/6. Stock reserve = ₹2,40,000 × 1/6 = ₹40,000. Using 20% directly gives ₹48,000, which is the classic markup-on-cost error.

Where it goes wrong. Applying 20% to wholesale price instead of 20/120.

Authority. ICAI SM Chapter 15, Para 5.3 Stock Reserve

Question 9 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

Scenario. Zenith Traders Ltd sends goods to its dependent branch at cost. For the year ended 31 March 2027: opening stock ₹40,000; goods sent to branch ₹6,00,000; closing stock ₹55,000; cash sales ₹2,20,000; credit sales ₹4,50,000; branch expenses paid by HO ₹75,000; bad debts ₹5,000; discount allowed ₹8,000. What is the branch profit or loss?

Zenith Traders Ltd sends goods to its dependent branch at cost. For the year ended 31 March 2027: opening stock ₹40,000; goods sent to branch ₹6,00,000; closing stock ₹55,000; cash sales ₹2,20,000; credit sales ₹4,50,000; branch expenses paid by HO ₹75,000; bad debts ₹5,000; discount allowed ₹8,000. What is the branch profit or loss?

1. Profit ₹3,000
2. Loss ₹3,000 (correct answer)
3. Profit ₹10,000
4. Loss ₹10,000

Answer: B — Loss ₹3,000

Explanation. Sales = ₹2,20,000 + ₹4,50,000 = ₹6,70,000. Cost of goods sold = ₹40,000 + ₹6,00,000 – ₹55,000 = ₹5,85,000. Gross profit = ₹85,000. Expenses = ₹75,000 + ₹5,000 + ₹8,000 = ₹88,000. Net result = loss of ₹3,000. The trap is to omit bad debts or discount allowed from branch expenses.

Where it goes wrong. Treating bad debts and discount allowed as non-branch expenses.

Authority. ICAI SM Chapter 15, Para 5.1 Debtors Method

Question 10 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. A dependent branch's Branch Stock Account at invoice price shows a debit balance of ₹5,00,000 before adjustment. Physical stock at invoice price is ₹4,60,000 and the difference is due to pilferage. Goods are invoiced at cost plus 25%. What amounts are debited to Goods Lost A/c and Branch Adjustment A/c respectively?

A dependent branch's Branch Stock Account at invoice price shows a debit balance of ₹5,00,000 before adjustment. Physical stock at invoice price is ₹4,60,000 and the difference is due to pilferage. Goods are invoiced at cost plus 25%. What amounts are debited to Goods Lost A/c and Branch Adjustment A/c respectively?

1. ₹40,000 and Nil
2. ₹32,000 and Nil
3. ₹32,000 and ₹8,000 (correct answer)
4. ₹40,000 and ₹8,000

Answer: C — ₹32,000 and ₹8,000

Explanation. Shortage at invoice price = ₹5,00,000 – ₹4,60,000 = ₹40,000. Loading is 25/125 = 20%, so loading = ₹8,000 and cost = ₹32,000. Entry: Goods Lost A/c Dr ₹32,000; Branch Adjustment A/c Dr ₹8,000; To Branch Stock A/c ₹40,000. Debiting the full ₹40,000 to Goods Lost ignores the unrealized loading.

Where it goes wrong. Charging the entire invoice-price shortage to Goods Lost A/c.

Authority. ICAI SM Chapter 15, Para 5.2 Closing Stock and shortage

Question 11 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. Head office invoices goods to a branch at 20% above cost. Goods sent during the year at invoice price ₹9,60,000; goods returned by branch at invoice price ₹48,000. What amount is credited to Branch Adjustment Account for loading on goods sent net of returns?

Head office invoices goods to a branch at 20% above cost. Goods sent during the year at invoice price ₹9,60,000; goods returned by branch at invoice price ₹48,000. What amount is credited to Branch Adjustment Account for loading on goods sent net of returns?

1. ₹1,52,000 (correct answer)
2. ₹1,60,000
3. ₹1,44,000
4. ₹1,80,000

Answer: A — ₹1,52,000

Explanation. Net goods sent at invoice price = ₹9,60,000 – ₹48,000 = ₹9,12,000. Loading fraction = 20/120 = 1/6. Loading = ₹9,12,000 × 1/6 = ₹1,52,000. Using 20% on invoice gives ₹1,82,400, and ignoring returns gives ₹1,60,000. The correct credit to Branch Adjustment is ₹1,52,000.

Where it goes wrong. Applying 20% directly to invoice price and/or not netting returns.

Authority. ICAI SM Chapter 15, Para 5.2 Journal Entries for invoice price

Question 12 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

Scenario. A branch maintains an imprest petty cash of ₹5,000. During the year, head office sends ₹12,000 to replenish the imprest and the branch spends ₹11,400 on petty expenses. Under the Debtors Method, what amount of closing petty cash is credited in the Branch Account?

A branch maintains an imprest petty cash of ₹5,000. During the year, head office sends ₹12,000 to replenish the imprest and the branch spends ₹11,400 on petty expenses. Under the Debtors Method, what amount of closing petty cash is credited in the Branch Account?

1. ₹5,000
2. ₹11,400
3. ₹12,000
4. ₹5,600 (correct answer)

Answer: D — ₹5,600

Explanation. Closing petty cash = opening imprest ₹5,000 + replenishment ₹12,000 – petty expenses ₹11,400 = ₹5,600. The closing petty cash is an asset and is credited to the Branch Account. Assuming the imprest remains exactly ₹5,000 ignores the unspent balance after replenishment.

Where it goes wrong. Assuming closing petty cash always equals the imprest amount.

Authority. ICAI SM Chapter 15, Para 5.1 Proforma Branch Account

Question 13 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. A retail outlet receives goods at wholesale price, being cost plus 25%, and sells at wholesale plus 20%. Opening stock at wholesale ₹1,80,000; goods sent ₹12,00,000; retail sales ₹14,40,000; closing stock at wholesale ₹2,10,000; expenses ₹90,000; goods lost by fire at wholesale ₹30,000. What is the net profit?

A retail outlet receives goods at wholesale price, being cost plus 25%, and sells at wholesale plus 20%. Opening stock at wholesale ₹1,80,000; goods sent ₹12,00,000; retail sales ₹14,40,000; closing stock at wholesale ₹2,10,000; expenses ₹90,000; goods lost by fire at wholesale ₹30,000. What is the net profit?

1. ₹1,50,000
2. ₹1,20,000 (correct answer)
3. ₹90,000
4. ₹1,35,000

Answer: B — ₹1,20,000

Explanation. Wholesale price = 125; retail price = 150. Gross profit = ₹14,40,000 × 25/150 = ₹2,40,000. Net profit = gross profit ₹2,40,000 – expenses ₹90,000 – goods lost at wholesale ₹30,000 = ₹1,20,000. The trap is to deduct goods lost at retail value or ignore the loss entirely.

Where it goes wrong. Deducting abnormal loss at retail price or omitting it.

Authority. ICAI SM Chapter 15, Para 5.3

Question 14 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. Goods are invoiced to a branch at 25% above cost. Opening stock reserve ₹18,000; goods sent at invoice price ₹7,00,000; returns to HO ₹20,000; closing stock at invoice price ₹1,50,000; branch expenses ₹40,000. What is the net profit?

Goods are invoiced to a branch at 25% above cost. Opening stock reserve ₹18,000; goods sent at invoice price ₹7,00,000; returns to HO ₹20,000; closing stock at invoice price ₹1,50,000; branch expenses ₹40,000. What is the net profit?

1. ₹84,000 (correct answer)
2. ₹94,000
3. ₹1,04,000
4. ₹74,000

Answer: A — ₹84,000

Explanation. Loading = 25/125 = 20%. Loading on net goods sent = (₹7,00,000 – ₹20,000) × 20% = ₹1,36,000. Add opening stock reserve ₹18,000; deduct closing stock reserve ₹1,50,000 × 20% = ₹30,000. Gross profit = ₹1,36,000 + ₹18,000 – ₹30,000 = ₹1,24,000. Net profit = ₹1,24,000 – ₹40,000 = ₹84,000. Ignoring opening reserve gives ₹94,000.

Where it goes wrong. Omitting reversal of opening stock reserve or applying 25% to invoice price.

Authority. ICAI SM Chapter 15, Para 5.2 Branch Adjustment Account

Question 15 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

Scenario. In a wholesale branch system, opening stock reserve is ₹15,000. Closing stock at wholesale price is ₹1,80,000 and loading in wholesale price is 1/6. What amount is charged to head office Profit and Loss Account for stock reserve?

In a wholesale branch system, opening stock reserve is ₹15,000. Closing stock at wholesale price is ₹1,80,000 and loading in wholesale price is 1/6. What amount is charged to head office Profit and Loss Account for stock reserve?

1. ₹30,000
2. ₹45,000
3. ₹15,000 (correct answer)
4. ₹10,000

Answer: C — ₹15,000

Explanation. Closing stock reserve = ₹1,80,000 × 1/6 = ₹30,000. Opening reserve already exists ₹15,000. Additional charge to P&L = ₹30,000 – ₹15,000 = ₹15,000. Charging ₹30,000 to P&L ignores the opening reserve; ₹45,000 incorrectly adds the opening reserve.

Where it goes wrong. Charging the entire closing reserve without setting off the opening reserve.

Authority. ICAI SM Chapter 15, Para 5.3 Stock Reserve

Question 16 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. Goods invoiced to a branch at cost plus 25% are destroyed by fire. The shortage at invoice price is ₹50,000. Insurance claim admitted is ₹30,000. What amount is charged to Branch Profit and Loss Account as net loss?

Goods invoiced to a branch at cost plus 25% are destroyed by fire. The shortage at invoice price is ₹50,000. Insurance claim admitted is ₹30,000. What amount is charged to Branch Profit and Loss Account as net loss?

1. ₹20,000
2. ₹40,000
3. ₹30,000
4. ₹10,000 (correct answer)

Answer: D — ₹10,000

Explanation. Shortage at invoice ₹50,000; loading 20% = ₹10,000; cost = ₹40,000. Insurance claim ₹30,000 is credited to Goods Lost A/c. Net loss = cost ₹40,000 – claim ₹30,000 = ₹10,000. Charging ₹20,000 or ₹40,000 ignores the insurance claim or the loading adjustment.

Where it goes wrong. Deducting claim from invoice value or ignoring loading in abnormal loss.

Authority. ICAI SM Chapter 15, Para 5.2 Abnormal loss and insurance claim

Question 17 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. Goods invoiced to a branch at cost plus 25%. Opening stock at invoice ₹60,000; goods sent ₹6,00,000; returns to HO ₹30,000; sales ₹5,70,000; closing stock at invoice ₹60,000. What is the gross profit disclosed by the Branch Adjustment Account?

Goods invoiced to a branch at cost plus 25%. Opening stock at invoice ₹60,000; goods sent ₹6,00,000; returns to HO ₹30,000; sales ₹5,70,000; closing stock at invoice ₹60,000. What is the gross profit disclosed by the Branch Adjustment Account?

1. ₹1,20,000
2. ₹1,14,000 (correct answer)
3. ₹96,000
4. ₹1,08,000

Answer: B — ₹1,14,000

Explanation. Loading fraction = 25/125 = 20%. Loading on net goods sent = (₹6,00,000 – ₹30,000) × 20% = ₹1,14,000. Opening reserve = ₹60,000 × 20% = ₹12,000; closing reserve = ₹60,000 × 20% = ₹12,000. Gross profit = ₹1,14,000 + ₹12,000 – ₹12,000 = ₹1,14,000. The stock reserves cancel out.

Where it goes wrong. Adding or deducting equal opening/closing reserves incorrectly, or using 25%.

Authority. ICAI SM Chapter 15, Para 5.2 Branch Adjustment Account

Question 18 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · medium

Scenario. A dependent branch has opening stock ₹30,000; goods sent by HO ₹2,00,000; closing stock ₹40,000; sales ₹2,10,000; branch expenses ₹25,000. What is the branch result?

A dependent branch has opening stock ₹30,000; goods sent by HO ₹2,00,000; closing stock ₹40,000; sales ₹2,10,000; branch expenses ₹25,000. What is the branch result?

1. Loss ₹5,000 (correct answer)
2. Profit ₹5,000
3. Profit ₹15,000
4. Loss ₹15,000

Answer: A — Loss ₹5,000

Explanation. Cost of goods sold = ₹30,000 + ₹2,00,000 – ₹40,000 = ₹1,90,000. Gross profit = ₹2,10,000 – ₹1,90,000 = ₹20,000. Net result = ₹20,000 – ₹25,000 = loss ₹5,000. The trap is to show a profit by omitting branch expenses or miscomputing closing stock.

Where it goes wrong. Omitting branch expenses or adding closing stock on the wrong side.

Authority. ICAI SM Chapter 15, Para 5.1 Debtors Method

Question 19 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. A retail outlet gets goods at wholesale price, being cost plus 20%, and sells at wholesale plus 20%. Opening stock at wholesale ₹90,000; goods sent ₹6,00,000; retail sales ₹6,48,000; closing stock at wholesale ₹1,20,000; expenses ₹40,000; goods lost by fire at wholesale ₹30,000. What is the net profit?

A retail outlet gets goods at wholesale price, being cost plus 20%, and sells at wholesale plus 20%. Opening stock at wholesale ₹90,000; goods sent ₹6,00,000; retail sales ₹6,48,000; closing stock at wholesale ₹1,20,000; expenses ₹40,000; goods lost by fire at wholesale ₹30,000. What is the net profit?

1. ₹28,000
2. ₹48,000
3. ₹38,000 (correct answer)
4. ₹58,000

Answer: C — ₹38,000

Explanation. Wholesale = 120; retail = 144; gross profit ratio = 24/144 = 1/6. Gross profit = ₹6,48,000 × 1/6 = ₹1,08,000. Net profit = ₹1,08,000 – expenses ₹40,000 – goods lost ₹30,000 = ₹38,000. Using 20% on sales gives ₹1,29,600 gross profit, a common error.

Where it goes wrong. Applying 20% on retail sales instead of 1/6.

Authority. ICAI SM Chapter 15, Para 5.3

Question 20 · 2 marks · Chapter 15: Branch Accounting (including Foreign Branches) · hard

Scenario. Opening stock reserve is ₹22,000. Closing stock at invoice price is ₹1,98,000 and loading is 1/6 of invoice price. What is the net adjustment required in respect of stock reserve in the Branch Adjustment/P&L Account?

Opening stock reserve is ₹22,000. Closing stock at invoice price is ₹1,98,000 and loading is 1/6 of invoice price. What is the net adjustment required in respect of stock reserve in the Branch Adjustment/P&L Account?

1. Credit ₹11,000
2. Debit ₹33,000
3. Credit ₹22,000
4. Debit ₹11,000 (correct answer)

Answer: D — Debit ₹11,000

Explanation. Closing stock reserve = ₹1,98,000 × 1/6 = ₹33,000. Opening reserve = ₹22,000. Increase in reserve = ₹11,000, which is debited to Branch Adjustment/P&L Account. Crediting ₹11,000 reverses the adjustment; debiting ₹33,000 ignores the opening reserve.

Where it goes wrong. Debiting the full closing reserve or crediting the increase instead of debiting it.

Authority. ICAI SM Chapter 15, Para 5.2(iii)