3. Departmental and Branch Accounts
Unit 1 : Departmental Accounts
(A) Write short notes on:
Question 1
Basis of allocation of common expenditure among different departments.
(4 marks) (Intermediate–Nov. 1998)
Answer
While preparing department accounts, expenses should be allocated among the different departments on the basis of the following principles :
1. Expenses incurred specially for each department are charged directly thereto e.g., insurance charges of stock held by a department.
2. Common expenses, the benefit of which is shared by all the dpeartments and which are capable of precise allocation, (e.g., rent, lighting expenses etc.) are distributed among the departments concerned on some equitable basis considered suitable in the circumstances of the case. Rent is charged to different departments according to the floor area occupied by each department, having regard to any favourable location specially allocated to a department. Lighting and heating expenses are distributed on the basis of consumption of energy by each department and so on.
3. Common expenses which are not capable of accurate measurement are dealt with as follows:
(i) Selling expenses, e.g., discount, bad debts, selling commission, etc. are charged on the basis of sales.
(ii) Administrative and other expenses, e.g., salaries of managers, directors, common advertisement expenses, depreciation on assets, etc., are allocated equally among all the departments that have benefited thereby. Alternatively, no allocation may be made and such expenses may be charged to the combined profit and loss account.
(B) Practical Questions:
Question 1
Department X sells goods to Department Y at a profit of 25% on cost and to Department Z at 10% profit on cost. Department Y sells goods to X and Z at a profit of 15% and 20% on sales, respectively. Department Z charges 20% and 25% profit on cost to Department X and Y, respectively.
Department Managers are entitled to 10% commission on net profit subject to unrealised profit on departmental sales being eliminated. Departmental profits after charging Managers’ commission, but before adjustment of unrealised profit are as under :
Rs.
Department X 36,000
Department Y 27,000
Department Z 18,000
Stock lying at different departments at the end of the year are as under :
Dept. X Dept. Y Dept. Z
Rs. Rs. Rs.
Transfer from Department X — 15,000 11,000
Transfer from Department Y 14,000 — 12,000
Transfer from Department Z 6,000 5,000 --
Find out the correct departmental Profits after charging Managers’ commission
(8 marks)(Intermediate–Nov. 2001)
Answer
Calculation of correct Profit
Depart– Depart– Depart–
ment X ment Y ment Z
Rs. Rs. Rs.
Profit after charging managers’ commission 36,000 27,000 18,000
Add back : Managers’ commission (1/9) 4,000 3,000 2,000
40,000 30,000 20,000
Less : Unrealised profit on stock
(Working Note) 4,000 4,500 2,000
Profit before Manager’s commission 36,000 25,500 18,000
Less : Commission for Department
Manager @10% 3,600 2,550 1,800
32,400 22,950 16,200
Working Note :
Stock lying with
Dept. X Dept. Y Dept. Z Total
Rs. Rs. Rs. Rs.
Unrealised Profit of :
Department X 1/5×15,000 =3,000 1/11×11,000 =1,000 4,000
Department Y 0.15×14,000 =2,100 0.20×12,000 =2,400 4,500
Department Z 1/6×6,000 =1,000 1/5×5,000 =1,000 2,000
Question 2
FGH Ltd. has three departments I.J.K. The following information is provided for the year ended 31.3.2004:
I
J
K
Rs.
Rs.
Rs.
Opening stock
5,000
8,000
19,000
Opening reserve for unrealised profit
―
2,000
3,000
Materials consumed
16,000
20,000
―
Direct labour
9,000
10,000
―
Closing stock
5,000
20,000
5,000
Sales
―
―
80,000
Area occupied (sq. mtr.)
2,500
1,500
1,000
No. of employees
30
20
10
Stocks of each department are valued at costs to the department concerned. Stocks of I are transferred to J at cost plus 20% and stocks of J are transferred to K at a gross profit of 20% on sales. Other common expenses are salaries and staff welfare Rs. 18,000, rent Rs. 6,000.
Prepare Departmental Trading, Profit and Loss Account for the year ending 31.3.2004.
(10 marks) (PE-II–Nov. 2004)
Answer
FGH Ltd.
Departmental Trading and Profit and Loss Account for the year ended 31st March, 2004
I
J
K
Total
I
J
K
Total
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
Rs.
To
Opening stock
5,000
8,000
19,000
32,000
By
Sales
80,000
80,000
To
To
To
Material consumed
Direct labour
Inter-departmental
16,000
9,000
20,000
10,000
36,000
19,000
By
By
Inter-departmental
transfer
Closing stock
30,000
5,000
60,000
20,000
5,000
90,000
30,000
transfer
30,000
60,000
90,000
To
Gross profit
5,000
12,000
6,000
23,000
______
______
______
_______
35,000
80,000
85,000
2,00,000
35,000
80,000
85,000
2,00,000
To
Salaries and staff welfare
9,000
6,000
3,000
18,000
By
By
Gross profit b/d
Net loss
5,000
7,000
12,000
6,000
23,000
7,000
To
To
Rent
Net profit
3,000
______
1,800
4,200
1,200
1,800
6,000
6,000
_____
_____
_____
_____
12,000
12,000
6,000
30,000
12,000
12,000
6,000
30,000
To
To
Net loss (I)
Stock reserve (J+K)
7,000
By
Stock reserve b/d
(J + K)
5,000
(Refer W.N.)
3,000
By
Net profit (J + K)
6,000
To
Balance transferred to Profit and loss account
1,000
_____
11,000
11,000
Working Note:
Calculation of unrealized profit on closing stock
Rs.
Stock reserve of J department
Cost
30,000
Transfer from I department
30,000
60,000
Stock of J department
20,000
Proportion of stock of I department = Rs.(approx.)
Total stock reserve = Rs.1,000 + Rs.333 = Rs.1,333
Unit– 2 : Branch Accounts
(Including Independent Branches and Foreign Branches)
Question 1
S & M Ltd., Bombay, have a branch in Sydney, Australia. At the end of 31st March, 1995, the following ledger balances have been extracted from the books of the Bombay Office and the Sydney Office :
Bombay . Sydney .
(Rs. thousands) (Austr dollars thousands)
Debit Credit Debit Credit
Share Capital – 2,000 – –
Reserves & Surplus – 1,000 – –
Land 500 – – –
Buildings (Cost) 1,000 – – –
Buildings Dep. Reserve – 200 – –
Plant & Machinery (Cost) 2,500 – 200 –
Plant & Machinery Dep. Reserve – 600 – 130
Debtors / Creditors 280 200 60 30
Stock (1.4.94) 100 – 20 –
Branch Stock Reserve – 4 – –
Cash & Bank Balances 10 – 10 –
Purchases / Sales 240 520 20 123
Goods sent to Branch – 100 5 –
Managing Director’s salary 30 – – –
Wages & Salaries 75 – 45 –
Rent – – 12 –
Office Expenses 25 – 18 –
Commission Receipts – 256 – 100
Branch / H.O. Current A/c 120 – – 7
4,880 4,880 390 390
The following information is also available :
(1) Stock as at 31.3.95 :
Bombay Rs. 1,50,000
Sydney A $ 3,125
(2) Head Office always sent goods to the Branch at cost plus 25%.
(3) Provision is to be made for doubtful debts at 5%.
(4) Depreciation is to be provided on buildings at 10% and on plant and machinery at 20% on written down values.
(5) The Managing Director is entitled to 2% commission on net profits.
(6) Income–tax is to be provided at 47.5%.
You are required :
(a) To convert the Branch Trial Balance into rupees;
(use the following rates of exchange :
Opening rate A $ = Rs. 20
Closing rate A $ = Rs. 24
Average rate A $ = Rs. 22
For Fixed Assets A $ = Rs. 18).
(b) To prepare the Trading and Profit & Loss Account for the year ended 31st March, 1995 showing to the extent possible H.O. results and Branch results separately. (Balance Sheet not required.)
(20 marks) (Intermediate May 1995)
Answer
(a) S & M Ltd.
Sydney Branch Trial Balance (in Rupees)
As on 31 st March, 1995
(Rs. ‘000)
Conversion Dr. Cr.
rate per A$
Plant & Machinery (cost) Rs 18 36,00
Plant & Machinery Dep. Reserve Rs. 18 23,40
Debtors / Creditors Rs. 24 14,40 7,20
Stock (1.4.94) Rs. 20 4,00
Cash & Bank Balances Rs. 24 2,40
Purchase / Sales Rs. 22 4,40 27,06
Goods received from H.O. – 1,00
Wages & Salaries Rs. 22 9,90
Rent Rs. 22 2,64
Office expenses Rs. 22 3,96
Commission Receipts Rs. 22 22,00
H.O. Current A/c 1,20
78,70 80,86
Exchange loss (balancing figure) 2,16
80,86 80,86
(b) Trading and Profit & Loss Account
for the year ended 31st March, 1995
(Rs.’000)
H.O. Branch Total H.O. Branch Total
To Opening Stock 1,00 4,00 5,00 By Sales 5,20 27,06 32,26
“ Purchases 2,40 4,40 6,80 “ Goods sent to 1,00 – 1,00
“ Goods received – 1,00 1,00 Branch
from Head Office “ Closing Stock 1,50 75 2,25
“ Gross profit c/d 4,30 18,41 22,71
7,70 27,81 35,51 7,70 27,81 35,51
By Gross profit b/d 4,30 18,41 22,71
To Wages & Salaries 75 9,90 10,65 By Commission
receipts 2,56 22,00 24,56
“ Rent – 2,64 2,64
“ Office expenses 25 3,96 4,21
“ Provision for doubtful
debts @ 5% 14 72 86
“ Depreciation 4,60 2,52 7,12
(W. N. 1)
“ Balance c/d 1,12 20,67 21,79
6,86 40,41 47,27 6,86 40,41 47,27
To Exchange loss 2,16 By Balance b/d 21,79
“ Branch Stock Reserve 11
(W. N. 2)
“ Managing Director’s
remuneration :
Salary 30
Commission 41 71
(W. N. 3)
Provision for Income-tax 8,93
(W. N. 4)
“ Balance c/d 9,88
21,79 21,79
Working Notes :
(1) Calculation of Depreciation : (Rs ‘000)
H.O. Branch
A. Building – Cost 10,00 –
Less : Dep. Reserve 2,00 –
8,00
Depreciation @ 10% 80
B. Plant & Machinery Cost 25,00 36,00
Less : Dep. Reserve 6,00 23,40
19,00 12,60
Depreciation @ 20% 3,80 2,52
Total Depreciation (A+B) 4,60 2,52
(Rs ‘000)
(2) Calculation of Branch Stock Reserve :
Closing stock 75
Reserve on closing stock (75 × 1/5) 15
Less : Branch Stock Reserve (as on 1.4.94) 4
Additional Reserve required 11
(Rs’ 000)
(3) Calculation of Managing Director’s Commission :
Profit before adjustment 21,79
Add: Provision for doubtful debts 86
22,65
Less: Branch stock reserve 11
Exchange loss 2,16 2,27
Profit u/s 349 20,38*
Commission @ 2% 41 (approx.)
(4) Calculation of provision for Income tax : (Rs ‘ 000)
Profit u/s 349 as computed above 20,38
Less : Provision for doubtful debts 86
MD’s remuneration 71 1,57
Profit before tax 18,81
Provision for tax @ 47.5% 8,93** (approx.)
Note : For the purpose of translation of financial statements of foreign operations, AS 11 (revised 2003) “The Effects of Changes in Foreign Exchange Rates” classifies the foreign operations as (i) integral foreign operations and (ii) non-integral foreign operations. The above answer has been given on the basis that the Sydney branch is an integral foreign operation of S&M Ltd.
*For the purpose of calculating profit u/s 349 of the Companies Act, 1956, depreciation based on the rates given in Schedule XIV to the Companies Act, 1956 should be deducted. Depreciation rates as per Schedule XIV are not given in this question. Hence the adjustment for depreciation is ignored.
**Alternatively provision for tax may also be computed on Rs. (000) 19,67 ignoring provision for doubtful debts.
Question 2
Head Office passes adjustment entry at the end of each month to adjust the position arising out of inter–branch transactions during the month. From the following inter–branch transactions in January, 1996, make the entry in the books of Head Office :
(a) Bombay Branch
(1) Received Goods : Rs. 6,000 from Calcutta Branch, Rs, 4,000 from Patna Branch.
(2) Sent Goods to Rs. 10,000 to Patna, Rs, 8,000 to Calcutta.
(3) Received B/R : Rs. 6,000 from Patna.
(4) Sent Acceptance : Rs. 4,000 to Calcutta, Rs. 2,000 to Patna.
(b) Madras Branch (Apart from the above)
(5) Received Goods : Rs. 10,000 from Calcutta, Rs. 4,000 from Bombay.
(6) Cash Sent : Rs. 2,000 to Calcutta, Rs. 6,000 to Bombay.
(c) Calcutta Branch (Apart from the above)
(7) Sent Goods to Patna : Rs. 6,000.
(8) Paid B/P : Rs. 4,000 to Patna, Rs. 4,000 cash to Patna.
(15 marks) (Intermediate–May 1996)
Answer
In the Books of Head Office
Journal
Date Particulars Dr. Cr.
Rs. Rs.
1996
Jan 31 Madras Branch A/c Dr. 6,000
Patna Branch A/c Dr. 16,000
To Bombay Branch A/c 6,000
To Calcutta Branch A/c 16,000
(Being adjustment entry passed by head
office in respect of inter–branch transactions
during the month.)
Working Note :
Inter – branch transactions
Bombay Madras Calcutta Patna
Rs. Rs. Rs. Rs.
(a) Bombay Branch
(1) Received Goods 10,000 (Dr.) 6,000 (Cr.) 4,000 (Cr.)
(2) Sent Goods 18,000 (Cr.) 8,000 (Dr.) 10,000 (Dr.)
(3) Received B/R 6,000 (Dr.) 6,000 (Cr.)
(4) Sent Acceptance 6,000 (Cr.) 4,000 (Dr.) 2,000 (Dr.)
(b) Madras Branch
(5) Received Goods 4,000 (Cr.) 14,000 (Dr.) 10,000 (Cr.)
(6) Cash Sent 6,000 (Dr.) 8,000 (Cr.) 2,000 (Dr.)
(c) Calcutta Branch
(7) Sent Goods 6,000 (Cr.) 6,000 (Dr.)
(8) Paid B/P and Cash 8,000 (Cr.) 8,000 (Dr.)
6,000 (Cr.) 6,000 (Dr.) 16,000 (Cr.) 16,000 (Dr.)
Question 3
Rahul Limited operates a number of retail outlets to which goods are invoiced at wholesale price which is cost plus 25%. These outlets sell the goods at the retail price which is wholesale price plus 20%.
Following is the information regarding one of the outlets for the year ended 31.3.97 :
Rs.
Stock at the outlet 1.4.96 30,000
Goods invoiced to the outlet during the year 3,24,000
Gross profit made by the outlet 60,000
Goods lost by fire ?
Expenses of the outlet for the year 20,000
Stock at the outlet 31.3.97 36,000
You are required to prepare the following accounts in the books of Rahul Limited for the year ended 31.3.97 :
(a) Outlet Stock Account.
(b) Outlet Profit & Loss Account.
(c) Stock Reserve Account. (10 marks) (Intermediate–May 1997)
Answer
Outlet Stock Account
1.4.96 Rs. Rs.
To Balance b/d 30,000 By Sales (Working Note 1) 3,60,000
To Goods sent to outlet 3,24,000 By Goods lost by fire 18,000
To Gross Profit c/d 60,000 By Balance c/d 36,000
4,14,000 4,14,000
Outlet Profit & Loss Account
To Expenses 20,000 By Gross Profit b/d 60,000
To Goods lost by fire 18,000
(W.N. 2)
To Profit transferred 22,000
60,000 60,000
Stock Reserve Account
To HO P & L A/c – Transfer 6,000 By Balance b/d 6,000
To Balance c/d 7,200 By HO P&L A/c (W.N. 3)
(Stock Res. required) 7,200
13,200 13,200
Working Notes :
Rs.
(1) Wholesale Price 100+25 = 125
Retail Price 125 + 20% = 150
Gross Profit at the outlet
Wholesale Price – Retail Price (150 – 125) 25
Retail sales value = 60,000 ×
67,200
Closing stock
8,000
Closing stock in Rupees = $8,000 x Rs.48 = Rs.3,84,000.