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Advance Financial Accounting (FIN-611)
VU
LESSON # 17
BRANCH ACCOUNTING
(Foreign branch)
Question
You are required to prepare the Trading and Profit and loss Accounts and
consolidated Balance Sheet of Ali Ltd. in Karachi and its branch at Lahore. Give
Journal Entries for incorporation of Delhi Branch Accounts in the head office and
show the Branch Account in head office books after incorporation therein the assets
and liabilities.
The trial balances as on 31st December, 2006 are as under:
H.O.
Branch
H.O.
Branch
Particulars
Dr. (Rs.) Dr. (Rs.)
Cr. (Rs.)
Cr. (Rs.)
Manufacturing expenses
30,000
10,000
---
---
Salaries
30,000
10,000
---
---
Wages
1,00,000
40,000
---
---
Cash in hand
10,000
2,000
---
---
Purchases
1,50,000
80,000
---
---
Capital
---
---
2,00,000
---
Goods received from H.O.
---
15,000
---
---
Rent
8,000
4,000
---
---
General expenses
20,000
5,000
---
---
Sales
---
---
4,50,000
1,50,000
Goods sent to branch
---
---
15,000
---
Purchases returns
---
---
5,000
1,000
Opening stock
50,000
30,000
---
---
Discounts earned
---
---
2,000
1,000
Machinery at H.O.
1,50,000
---
---
---
Machinery at Branch
50,000
---
---
---
Furniture at H.O.
7,000
---
---
---
Furniture at Branch
3,000
---
---
---
Debtors
40,000
15,000
---
---
Creditors
---
---
30,000
5,000
H.O. account
---
---
---
54,000
Branch account
54,000
---
---
---
TOTAL
7,02,000  2,11,000
7,02,000
2,11,000
Closing stock at head office was Rs. 40,000 and at branch Rs. 30,000. Depreciation is to
be provided on machinery @ 20% and on furniture @ 15%. Rent outstanding is Rs. 599
(for branch)
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Advance Financial Accounting (FIN-611)
VU
Question
A Peshawar Head Office has an independent branch at Hyderabad. From the
following particulars, give Journal Entries to close the books of the Hyderabad branch.
Show also the Peshawar Head Office Account in the branch books.
Particulars
Rs.
Particulars
Rs.
Stock on 1st January
8,200
Creditors
2,700
Purchases
12,800
Sales
34,950
Wages
6,550
Head office
14,000
Manufacturing expenses
3,400
Discount
150
Rent
1,700
Purchase returns
300
Salaries
5,500
Debtors
4,000
General expenses
2,000
Goods received from H.O.
7,200
Cash at bank
750
52,100
52,100
a. Closing stock at branch was Rs. 14,350.
b. The branch fixed assets maintained at H.O. books were: Machinery Rs. 25,000,
Furniture Rs. 1,000. Depreciation was to be allowed at 10% on Machinery and
15% on Furniture.
c. Rent due was Rs. 150.
d. A remittance of Rs. 4,000 made by the branch on 28th December, 2006 was
received by the Head Office on 4th January, 2007.
Foreign Branches
When a branch is established abroad. It is called a Foreign Branch. The accounting
arrangements for a foreign branch are exactly the same as for any independent branch
up to the Trial Balance. But in this case accounts are maintained in foreign currency to
correspond with the local conditions. The main problem, which the Head Office has to
face, is the restatement of accounts one currency into another. In order to incorporate
the Trial Balance of a foreign branch in the books of the Head Office. It must be
translated (using appropriate exchange rates) into the currency of the Head Office.
Rules for Conversion of Branch Trial Balance when Exchange Rates are `Stable'
Exchange rate is said to be stable, when it does not vary to a great extent from time to
time. In this situation, a fixed exchange rate can be used to convert the branch Trial
Balance into the currency of the Head Office with the exception of (a) Remittances, and
(b) Head Office Current Account.
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Advance Financial Accounting (FIN-611)
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a. Remittances: These are converted at the actual rates at which they were made.
b. Head Office Current Account: The actual figures shown for the Branch Current
Account in the books of the Head Office (after taking into consideration in-
transit items).
When the foreign branch Trial Balance is converted into local currency, a new Trial
Balance takes birth known as "Difference on Exchange Account" is opened to make
the Trial Balance agree.
Closing of Difference on Exchange Account
i.
For debit entry on trial balance
Profit and Loss Account
Dr.
OR
Exchange Reserve Account
Dr. (if any)
To Difference on Exchange Account
ii.
For credit entry on trial balance
Difference on Exchange Account
Dr.
To Exchange Reserve Account (Big Differences)
(If the difference is very small, it can be credited to Profit & Loss Account)
The format of the new Trial Balance of the branch is generally drawn up as follows:
Foreign Branch Converted Trial Balance as at 31st December, 2006
Sr.
Rate
Heads of Accounts
L.F
Currency
Rupees
No.
of
Dr.
Cr.
Dr.
Cr.
Exchange
$
$
Rs.
Rs.
Question
Khan Limited a company in Pakistan manufacturing consumer goods, has an overseas
branch in Sydney managed by a local agent.
The products are sent in bulk to the branch and invoiced at cost plus freight. Packing
materials are purchased locally by the branch.
The branch keeps a complete set of books in the local currency ­ Dollar
The branch Trial Balance as at 31st December, 2006 sent to the Head Office, was as
under:
Particulars
$
$
Raw material from Head Office
43,300
Purchases
Raw material
43,300
Packing
30,240
Sales
1,40,800
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Advance Financial Accounting (FIN-611)
VU
Wages
11,530
General expenses
10,440
Balance at bank
29,130
Stock at 1st January, 2006
Raw material
17,640
Packing
5,890
Local agent ­ balance due from him
18,210
Head Office Account
Balance at 1st January, 2006
14,900
Remittance to Head Office on 30th June
17,800
Remittance to Head Office on 31st December
20,000
Creditors
5,180
2,04,180
2,04,180
The currency being relatively stable, a fixed rate of exchange $ 1 = Rs. 40 is adopted
for accounting between the Head Office and the branch except for remittances.
The rupee value of the remittances at 30th June was Rs. 7,00,000 and on 31st December
was Rs. 7,92,000.
On 29th December, 2006 Head Office debited the branch with Rs. 1,60,000 in respect of
a shipment of raw material which was in-transit on 31st December, 2006. The
remittance of $ 20,000 from the branch was not received at Head Office until 3rd
January, 2007.
The agent is entitled to a 10% commission on the net profit of the branch before
charging either such commission or any profit or loss on exchange.
Stock at the branch on 31st December, 2006 was: Raw Materials $ 6,560; Packing $
6,480.
From the above information you are required to:
a. Prepare the Branch Profit and Loss Account in rupee for the year ended 31st
December, 2006.
b. Completer the entries in the Branch Account in the Head Office books, bringing
down the balance as at 1st January, 2007.
Solution
Sydney Branch Converted Trial Balance as at 31.12.2006
Currency
Rupees
Rate
Sr.
of
Heads of Accounts
L.F
Dr.
Cr.
Dr.
Cr.
No.
Exchang
$
$
Rs.
Rs.
e
43,300
17,32,000
Purchases: Raw Materials
-
12,09,600
Packing
30,240
-
Sales
1,40,80
56,32,000
4,61,200
Wages
0
11,530
4,17,200
General Expenses
10,440
-
11,65,200
Bank
29,130
-
7,05,600
Stock: Raw Materials
17,640
-
2,35,600
Packing
5,890
-
7,28,400
Local agent (Debtors)
18,210
-
Head Office Account (Note 1)
Actual
-
8,36,000
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Advance Financial Accounting (FIN-611)
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Creditors
20,400
40
2,07,200
Difference on Exchange
20,000
5,180
1,66,380
1,66,38
66,75,200
66,75,200
0
Closing Stock: Raw Materials
6,560
40
2,62,400
Packing
6,480
40
2,59,200
Sydney Branch Trading and Profit and Loss Account for the year ended 31.12.2006
Particulars
Rs.
Particulars
Rs.
To Stock: Raw Materials
7,05,600 By Sales
56,32,000
Packing
2,35,600 By Closing Stock: Raw
2,62,400
To Purchases: Raw Materials
17,32,000 Materials
2,59,200
Packing
12,09,600
Packing
To Wages
4,61,200
To Gross Profit c/d
18,09,600
61,53,600
61,53,600
To General Expenses
4,17,600 By Gross Profit b/d
18,09,600
To Difference on Exchange
20,000
To Agent's Commission
1,39,200
To Net Profit
12,32,800
18,09,600
18,09,600
In the Books of Head Office
Sydney Branch Account
.
Date
Particulars
Rs.
Date
Particulars
Rs.
31.12.06 To Balance b/d
5,96,000
By Remittance
7,00,000
To Goods sent to 17,32,000
By Cash in-Transit
7,92,000
Branch
1,60,000
By
Goods
in-  1,60,000
To Goods sent to 12,32,800
20,68,800
Transit
Branch
By Balance c/d
To Net Profit
37,20,800
37,20,800
Tutorial Note: Before branch Trail Balance is converted, the Branch Account in the
Head Office books should be updated by adjusting transit items.
This is required as the figures to be used in the converted Trial Balance are the actual
balances on Branch Current Account in the Head Office Books. Let us see how it is
done.
Memorandum Sydney Branch Account
Date
Particulars
Rs.
Date
Particulars
Rs.
01.01.06 To Balance b/d
5,96,000 30.06.06 By Bank
7,00,000
To Goods sent to 17,32,000 29.12.06 By
Goods
in-  1,60,000
Branch
1,60,000 31.12.06 Transit
7,92,000
To Goods sent to
By Cash in-Transit
8,36,000
Branch
By Balance c/d
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Advance Financial Accounting (FIN-611)
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24,88,000
24,88,000
83
Table of Contents:
  1. ACCOUNTING FOR INCOMPLETE RECORDS
  2. PRACTICING ACCOUNTING FOR INCOMPLETE RECORDS
  3. CONVERSION OF SINGLE ENTRY IN DOUBLE ENTRY ACCOUNTING SYSTEM
  4. SINGLE ENTRY CALCULATION OF MISSING INFORMATION
  5. SINGLE ENTRY CALCULATION OF MARKUP AND MARGIN
  6. ACCOUNTING SYSTEM IN NON-PROFIT ORGANIZATIONS
  7. NON-PROFIT ORGANIZATIONS
  8. PREPARATION OF FINANCIAL STATEMENTS OF NON-PROFIT ORGANIZATIONS FROM INCOMPLETE RECORDS
  9. DEPARTMENTAL ACCOUNTS 1
  10. DEPARTMENTAL ACCOUNTS 2
  11. BRANCH ACCOUNTING SYSTEMS
  12. BRANCH ACCOUNTING
  13. BRANCH ACCOUNTING - STOCK AND DEBTOR SYSTEM
  14. STOCK AND DEBTORS SYSTEM
  15. INDEPENDENT BRANCH
  16. BRANCH ACCOUNTING 1
  17. BRANCH ACCOUNTING 2
  18. ESSENTIALS OF PARTNERSHIP
  19. Partnership Accounts Changes in partnership firm
  20. COMPANY ACCOUNTS 1
  21. COMPANY ACCOUNTS 2
  22. Problems Solving
  23. COMPANY ACCOUNTS
  24. RETURNS ON FINANCIAL SOURCES
  25. IASBíS FRAMEWORK
  26. ELEMENTS OF FINANCIAL STATEMENTS
  27. EVENTS AFTER THE BALANCE SHEET DATE
  28. PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS
  29. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 1
  30. ACCOUNTING POLICIES, CHANGES IN ACCOUNTING ESTIMATES AND ERRORS 2
  31. BORROWING COST
  32. EXCESS OF THE CARRYING AMOUNT OF THE QUALIFYING ASSET OVER RECOVERABLE AMOUNT
  33. EARNINGS PER SHARE
  34. Earnings per Share
  35. DILUTED EARNINGS PER SHARE
  36. GROUP ACCOUNTS
  37. Pre-acquisition Reserves
  38. GROUP ACCOUNTS: Minority Interest
  39. GROUP ACCOUNTS: Inter Company Trading (P to S)
  40. GROUP ACCOUNTS: Fair Value Adjustments
  41. GROUP ACCOUNTS: Pre-acquistion Profits, Dividends
  42. GROUP ACCOUNTS: Profit & Loss
  43. GROUP ACCOUNTS: Minority Interest, Inter Co.
  44. GROUP ACCOUNTS: Inter Co. Trading (when there is unrealized profit)
  45. Comprehensive Workings in Group Accounts Consolidated Balance Sheet