Unit IV | unit 4 hire purchase and installment systems and accounting for branch department

Unit IV

Departmental accounts and Branch accounts

Q1) Suri is having his Head office at Mumbai and Branch Office at Nasik. Prepare the branch Account in the books of the Head Office from the following transaction with the branch:

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
Opening Balance at Branch:		Amounts remitted to the Branch for :
- Petty Cash	1,000	- Petty Cash Expenses	4,000
- Stock	39,500	- Salary	12,000
- Debtors	21,000	- Rent and Taxes	3,500
Goods Supplied to Branch during the year	3,10,000	Closing balances ay Branch:
Amounts remitted by the branch		- Petty	950
- Cash Sales	1,13,200	- Debtors	53,000
- Realisation from Debtors	2,30,300	- Stock	26,500

A1)

IN THE BOOKS OF H.O.

Dr. NASIK BRANCH ACCOUNT. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d		By Bank (Remittance):
Branch petty cash	1,000	- Petty Cash Expenses	4,000
Branch Stock	39,500	- Salary	12,000
Branch Debtors	21,000	- Rent and Taxes	3,500
To Goods sent to Branch	3,10,000	Closing balance at Branch
To cash remittedfor:		- Petty Cash	950
Petty Cash Expenses	4,000	- Debtors	53,000
Salary	12,000	- Stock	26,500
Rent	3,500
To General P&L (Bal Fig)	32,950
TOTAL	4,23,950	TOTAL	4,23,950

Q2) D of Delhi have a branch at Madras. Goods are sent by the Head Office at Invoice Price which is at the Profit of 25% on Cost Price. All the Expenses of the branch are paid by the Head Office. From the following particulars, prepare Branch Account in Head Office Books

BALANCES	OPENING	CLOSING
Stock at invoice	11,000	13,000
Debtors	1,700	2,000
Petty Cash	100	25
TOTAL	12,800	15,025

Goods sent to branch at invoice price Rs. 20,000.

Expenses made by head office: -Rent Rs.600, Wages Rs.200, Salaries Rs.900

Remittance made to Head Office: - Cash Sales Rs. 2,650, Cash collected from debtors Rs. 21,000

Goods Returned by Branch at Invoice Price Rs.400

A2)

IN THE BOOKS OF HEAD OFFICE

Dr. MADRAS BRANCH A/c. Cr.

PARTICULARS	AMOUNT	AMOUNT	PARTICULARS	AMOUNT	AMOUNT
To Balance b/d			By Stock Reserve A/c b/d(Load on OP. Stock 11,000 X 25/125)		2,200
Stock (IP)		11,000	By Bank
Debtors		1,700	Cash Sales	2,650
Petty Cash		100	Cash collected from Debtors	21,000	23,650
To Goods sent to Branch (IP)		20,000	By Goods sent to branch (Returns at IP)		400
To Bank (Expenses):			By Goods sent to branch (19,600 X 25/125; net Loading)		3,920
Rent	600		By Balance c/d
Wages	200		Stock (IP)	13,000
Salaries	900	1,700	Debtors	2,000
To Stock Reserve A/c c/d(Load on Cl. Stock 13,000 X 25/125)		2,600	Petty Cash	25	15,025
To Net Profit tfd to general P&L (Bal Fig)		8,095
TOTAL		45,195	TOTAL		45,195

Note:Goods are sent by Head Office at @ 25% on Cost Price.

So, Cost + Profit = Invoice Price

100 + 25 = 125

Profit charged by Head Office is 1/5 or 20% of Invoice Price.

Q3) One M.P. Head Office has a branch at Berhampur to which goods are invoiced at cost plus 20% .from the following particulars prepare the Branch Account in the Head Office Books :

PARTICULARS	AMOUNT
Goods sent to Branch at invoice Price	2,11,872
Total Sales	2,06,400
Cash Sales	1,10,400
Cash received from Branch Debtors	88,000
Branch Debtors at commencement	24,000
Branch Stock at commencement at Invoice price	7,680
Branch Stock at Close of the period at Invoice Price	13,440

A3)

IN THE BOOKS OF M.P. HEAD OFFICE

Dr. BERHAMPUR BRANCH ACCOUNT. Cr.

PARTICULARS	AMOUNT	AMOUNT	PARTICULARS	AMOUNT	AMOUNT
To Balance b/d			By Stock Reserve A/c b/d(Load on OP. Stock)		1,280
Stock (IP)		7,680	By Bank
Debtors		24,000	Cash Sales	1,10,400
To Goods sent to Branch (IP)		2,11,872	Cash collected from Debtors	88,000	1,98,400
To Stock Reserve A/c c/d(Load on Cl. Stock)		2,240	By Goods sent to branch (2,11,872 X 20/120; net Loading)		35,312
To Net Profit tfd to general P&L (Bal Fig)		34,640	By Balance c/d
			Stock (IP)	13,440
			Debtors	32,000	45,440



TOTAL		2,80,432	TOTAL		2,80,432

Working Note:

Dr. BERHAMPUR BRANCH DEBTORS ACCOUNT. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	24,000	By Cash	88,000
To Credit Sales	96,000	By balance c/d (balancing figure)	32,000
TOTAL	1,20,000	TOTAL	1,20,000

(2)

Total Sales =2,06,400

Less: - Cash Sales =1,10,400

Credit Sales =96,000

(3)

Goods are sent by Head Office at @ 20% on Cost Price.

So, Cost + Profit = Invoice Price

100 + 20 = 120

Profit charged by Head Office is 1/6 of Invoice Price.

Q4) The Canada commercial company invoiced goods to its Jaipur Branch at cost. The head office paid all the branch expenses from its bank except petty cash expenses which were Paid by the branch. From the following details relating to the branch, prepare

(1): Branch Stock A/c

(2)Branch Debtors A/c

(3)Branch Expenses A/c

(4)Branch P&L A/c

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
Stock (Opening)	21,000	Discount to Customer	4,200
Debtors (Opening)	37,800	Bad Debts	1,800
Petty Cash(Opening)	600	Goods returned by customers to branch	1,500
Goods sent to H.O.	78,000	Salaries	18,600
Goods returned to H.O.	3,000	Rent	3,600
Cash Sales	52,500	Debtors(Closing)	29,400
Advertisement	2,400	Petty Cash (Closing)	300
Cash received from debtors	85,500	Credit Sales	85,200
Stock(Closing)	19,500
Allowances to Customer	600

A4)

Dr. BRANCH STOCK A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	21,000	By Branch Cash	52,500
To Goods sent to sent Branch	78,000	By Goods sent to Branch	3,000
To Branch Debtors	1,500	By Branch Debtors	85,200
To Branch P&L (Transfer)	59,700	By Balance c/d	19,500
TOTAL	1,60,200	TOTAL	1,60,200

Dr. BRANCH DEBTORS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	37,800	By Branch Cash	85,500
To Branch Stock (Credit Sales)	85,200	By Branch expenses Bad Debts 1,800 Allowances 600 Discount 4,200	6,600
		By Branch Stock (Returns)	1,500
		By Balance c/d	29,400
TOTAL	1,23,000	TOTAL	1,23,000

Dr. BRANCH EXPENSES A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Debtors	6,600	By Branch P&L	31,500
To Bank Advertisement 2,400 Salaries 18,600 Rent 3,600	24,600
To Petty Expenses (600-300)	300

TOTAL	31,500	TOTAL	31,500

Dr. BRANCH PROFIT & LOSS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Expenses	31,500	By Branch Stock	59,700
To General P&L (Bal Fig)	28,200
TOTAL	59,700	TOTAL	59,700

Q5) The following are the details of ‘Indore Branch’ for the year 2018

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
Opening stock	6,000	Salaries	2,000
Opening Petty Cash	500	Rent	1,500
Opening Debtors	8,000	Closing Stock	8,000
Goods sent to Branch	24,000	Cash sent to Branch	2,200
Goods returned by Branch	800	Discount Allowed	100
Remittance from Branch	33,500	Bad Debts	150
Returns from Debtors	2,000	Commission Paid	750
Collection from Debtors	34,000	Closing Petty Cash	450
Cash Sales	1,500	Closing Debtors	9,000

Prepare: (1) Branch Stock A/c (2) Branch Debtors A/c (3) Branch Expenses A/c

(4) Branch P&L A/c (5) BranchCash (6) Goods sent to Branch A/c

A5)

Dr. BRANCH STOCK A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	6,000	By Branch Cash (Cash Sales)	1,500
To Goods sent to sent Branch	24,000	By Goods sent to Branch	800
To Branch Debtors(Return Inwards)	2,000	By Branch Debtors(Credit Sales)	37,250
To Branch P&L (Transfer)	15,550	By Balance c/d	8,000
TOTAL	47,550	TOTAL	47,550

Dr. BRANCH DEBTORS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	8,000	By Branch Cash (Received from Debtors)	34,000
To Branch Stock (Credit Sales) (Bal Fig)	37,250	Branch expenses Bad Debts 150 Discount 100	250
		By Branch Stock (Returns)	2,000
		By Balance c/d	9,000
TOTAL	45,250	TOTAL	45,250

Dr. BRANCH CASH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance (Petty Cash)	500	By Branch Expenses Salaries 2,000 Rent 1,500 Commission 750	4,250
To Bank (Remittance)	2,200	By Bank (Remittance from Branch)	33,500
To Branch stock (Cash Sales)	1,500	By Balance (Petty Cash)	450
To Branch Debtors (Received)	34,000

TOTAL	38,200	TOTAL	38,200

Dr. BRANCH EXPENSES A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Debtors	6,600	By Branch P&L	31,500
To Bank Advertisement 2,400 Salaries 18,600 Rent 3,600	24,600
To Petty Expenses (600-300)	300

TOTAL	31,500	TOTAL	31,500

Dr. BRANCH EXPENSES A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Debtors	250	By Branch P&L (Balance Transferred)	4,500
To Branch Cash	4,250


TOTAL	4,500	TOTAL	4,500

Dr. GOODS SENT TO BRANCH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Stock	800	By Branch Stock	24,000
To Purchase	23,200


TOTAL	24,000	TOTAL	24,000

Dr. BRANCH PROFIT & LOSS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Expenses	4,500	By Branch Stock (Gross Profit)	15,550
To General P&L (Bal Fig)	11,050
TOTAL	15,550	TOTAL	15,550

Q6) Mumbai Textile Mills Ltd. Has branch at Agra. Goods are invoiced to branch at cost plus 50%. Branch remits all cash received to the head office and all expenses are met by head office. From the following particulars, prepare the necessary accounts under the Stock and Debtors system to Show the Profit Earned at the Branch:

PARTICULARS	AMOUNT
Stock on the 1st April,2013 (Invoice Price)	93,000
Debtors on 1st April,2013	68,000
Goods Invoiced to Branch (Cost)	3,40,000
Sales at Branch:
Cash	2,50,100
Credit	3,10,000
Cash Collected from Debtors	3,04,000
Goods Returned by Debtors	12,000
Goods Returned by Branch to head office	1,500
Shortage of Stock	4,500
Discount Allowed to Customer	2,000
Expenses at Branch	54,000

A6)

Dr. BRANCH STOCK A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	93,000	By Branch Cash (Cash Sales)	2,50,100
To Goods sent to sentBranch (3,40,000 X 150%)	5,10,000	By Branch Debtors(Credit Sales)	3,10,000
To Branch Debtors	12,000	By Goods sent to Branch	1,500
		By Branch Adjustment (Shortage)	4,500
		By Balance c/d	48,900
TOTAL	6,15,000	TOTAL	6,15,000

Dr. BRANCH ADJUSTMENT A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Stock(Shortage)	4,500	By Stock Reserve(Loading on Opening Stock)	31,000
To Goods Sent to Branch	500	By Goods Sent to Branch	1,70,000
To Gross Profit c/d	1,79,700
To Stock Reserve(Loading on Closing Stock)	16,300
TOTAL	2,01,000	TOTAL	2,01,000

Dr. BRANCH PROFIT & LOSS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Expenses	54,000	By Branch Stock (Gross Profit)	1,79,700
To Discount	2,000
To General P&L (Bal Fig)	1,23,700
TOTAL	1,79,700	TOTAL	1,79,700

Dr. GOODS SENT TO BRANCH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Branch Stock	1,500	By Branch Stock	5,10,000
To Branch Adjustment	1,70,000	By Branch Adjustment	500
To Trading A/c(Bal Fig)	3,39,000

TOTAL	5,10,500	TOTAL	5,10,500

Dr. BRANCH DEBTORS A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Balance b/d	68,000	By Branch Cash (Received from Debtors)	3,04,000
		By Branch expenses (Discount)	2,000
To Branch Stock (Credit Sales)	3,10,000	By Branch Stock (Returns)	12,000
		By Balance c/d	60,000
TOTAL	3,78,000	TOTAL	3,78,000

Dr. BRANCH CASH A/c. Cr.

PARTICULARS	AMOUNT	PARTICULARS	AMOUNT
To Sales	2,50,100	By Head Office Cash	5,54,100
To Debtors	3,04,000	(Sent to HO)
TOTAL	5,54,100	TOTAL	5,54,100

Q7) A Ltd. Has a branch in Calcutta. Goods are invoiced at cost plus 25%.
Opening Balance	2002
Stock	3,200
Debtors	1,300
Goods sent to Branch (Invoice price)	75,000
Sales at Calcutta
Cash Sales	32,000
Credit Sales	38,000
Cash collected from Debtors	33,400
Discount allowed	400
Bad Debts written off	250
Cash sent to Branch for expenses	5,500
Stock at end	7,900

A7)

BRANCH STOCK A/C
To Balance b/d	3,200	To Cash Sales	32,000
To Goods Sent to Branch A/c		By Branch Debtors	38,000
	75,000	By Branch Adjustment A/c	300
		By Balance c/d	7,900
	78,200		78,200
GOODS SENT TO BRANCH A/C
To br. Adjustment A/c (loading)	15,000	By Br. Stock A/c	75,000
To Trading A/c (Transfer)	60,000
	75,000		75,000

BRANCH STOCK RESERVE A/C

To Br. Adjustment A/c			640	By Balance b/d		640
To balance c/d			1,580	By Branch Adj. A/c		1,580
			2,220			2,220
BRANCH DEBTORS A/C
To Balance b/d			1,300	By Cash		33,400
To Branch Stock (Cr. Sales)			38,000	By Branch Exp. A/c
				Discount	400
				Bad Debts	250	650
				By Bal. c/d		5,250
			39,300			39,300
BRANCH ADJUSTMENT A/C
To Branch Stock Reserve
(closing stock) A/c			1,580	By Stock Reserve (opening stock)		640
To br. Stock A/c(shortage)			300
To Br. Exp. A/c			7,150	By Goods sent to br. A/c		15,000
To P & L A/c			6,610
			15,640			15,640
BRANCH EXPENSES A/C
To Cash			6,500	By Branch Adjustment A/c		7,150
To branch Dr.s A/c
	Discount	400
	Bad Debts	250	650
			7,150			7,150

Q8) From the following Trial Balance, prepare Departmental Trading and Profit and Loss Account for the year ended 31.12.2013 and a Balance Sheet as at the date in the books of Sri S. Maity:

Particulars

Dr. Rs.

Cr. Rs.

Stock (1.1.2013):

Dept. A

Dept. B

Purchases:

Dept. A

Dept. B

Sales:

Dept. A

Dept. B

Wages:

Dept. A

Dept. B

Rent

Salaries

Lighting and Heating

Discount Allowed

Discount Received

Advertising

Carriage Inward

Furniture and Fittings

Plant and Machinery

Sundry Debtors

Sundry Creditors

Capital

Drawings

Cash in hand

Cash at Bank

5,400

4,900

9,800

7,350

1,340

240

1,870

1,320

420

441

738

469

600

4,200

1,820

900

1,980

16,900

13,520

133

3,737

9,530

43,820

The following information is also provided:

Rent and Lighting and Heating are to be allocated between Factory and Office in the ratio of 3:2. Rent, Lighting and Heating, Salaries and Depreciation are to be apportioned to A and B Depts. As 2:1. Other expenses and incomes are to be apportioned to A and B Depts. On suitable basis.

The following adjustments are to be made:

Rent Prepaid Rs 370; Lighting and Heating outstanding Rs 180; Depreciation of Furniture and Fittings @ 10% p.a. And Plant and Machinery @ 10% p.a.

The Stock at 31.12.2012: Dept. A Rs 2,748; Dept. B Rs 2,401.

A8)

In the books of Sri S. Maity

Departmental Trading and Profit & Loss Account for the year ended 31.12.2013

Dr. Cr

Particulars	Dept. A Rs	Dept. B Rs	Total Rs	Particulars	Dept. A Rs	Dept. B Rs	Total Rs
To Opening Stock	5,400	4,900	10,300	By Sales ,, Closing Stock By Gross Profit b/d ,, Dis. Received (4 :3) ,, Net Loss	16,900	13,520	30,420
,, Purchase	9,800	7,350	17,150		2,748	2,401	5,149
,, Wages	1,340	240	1,580
,, Carriage Inwards (4:3)	268	201	4691
,, Rent	600	300	9006
,, Lighting and Heating	240	120	3602
,, Gross Profit c/d	2,000	2,810	4,810
	19,648	15,921	35,569		19,648	15,921	35,569
To Rent	400	200	6006		2,000	2,810	4,810
,, Advertisement	410	328	7384
,, Salaries (2:1)	880	440	1,3205
,, Lighting and Heating	160	80	2402		76	57	1337
,, Discount Allowed					339	---	---
(on Sales)	245	196	4413
,, Dep. On (2:1)
Plant & Machinery	280	140	420
Furniture & Fixture	40	20	60
,, Net Profit	---	1,463	1,124
	2,415	2,867	4,943		2,415	2,867	4,943

Balance Sheet as at 31.12.2013

Liabilities	Amount Rs	Amount Rs	Assets	Amount Rs	Amount Rs
Capital	9,530		Plant and Machinery	4,200
Add: Net Profit	1,124		Less: Depreciation	420	3,780
	10,654		Furniture and Fittings	600
Less: Drawings	900	9,754	Less: Depreciation	60	540
Sundry Creditors		3,737
Outstanding Liabilities:			Closing Stock:
Lighting and Heating		180	Dept. A	2,748
			Dept. B	2,401	5,149
			Sundry Debtors		1,820
			Prepaid Rent		370
			Cash at Bank		1,980
			Cash in Hand		32
		13,671			13,671

Workings:

Allocation of Expenses and Incomes

Sl. No.	Expense/Income	Basis	Dept. A	Dept. B
1	Carriage Inward	Purchase (4:3)	=Rs 469 x 4/7 = Rs 268	= Rs 469 x 3/7 = Rs 201
2	Lighting & Heating (Rs 420 + Rs 180) Factory part = 600 x 3/5 Office part = 600 x 2/5	Rs 600 (Given) 360 240	= Rs 360 x 2/3 = Rs 240 = Rs 240 x 2/3 = Rs 160	= Rs 360 x 1/3 = Rs 120 = Rs 240 x 1/3 = Rs 80
3	Discount Allowed	= Sales	= Rs 441 x (16900/30420) = Rs 245	= Rs 441 x (13520/30420) = Rs 196
4	Advertisement	= Sales	= Rs 738 x (16900/30420) = Rs 410	= Rs 738 x (13520/30420) = Rs 328
5	Salaries	2 : 1	= Rs 1,320 x (2/3) = Rs 880	= Rs 1,320 x (1/3) = Rs 440
6	Rent Rs 1,500 = (Rs 1,870 – Rs 370) Factory part = 1,500 x 3/5 = 900 Office part = 1,500 x 2/5 =600	2 : 1 2 : 1	= Rs 900 x (2/3) = Rs 600 = Rs 600 x (2/3) = Rs 400	= Rs 900 x (1/3) = Rs 300 = Rs 600 x (1/3) = Rs 200
7	Discount Received	Purchase (4:3)	= Rs 133 x (4/7) = Rs 76	= Rs 133 x (3/7) = Rs 57

Q9) The Trading and Profit & Loss Account of Bindas Ltd. For the year ended 31st March is as under :

Particulars		Amount Rs	Particulars		Amount Rs
Purchases			Sales
Transistors	(A)	1,60,000	Transistors	(A)	1,75,000
Tape Recorders	(B)	1,25,000	Tape Recorders	(B)	1,40,000
Spare parts for Servicing and			Servicing and Repair Jobs	(C)	35,000
Repair Job	(C)	80,000	Stock on 31st March
			Transistors	(A)	60,100
Salaries and wages		48,000	Tape Recorders	(B)	20,300
Rent		10,800	Spare parts for servicing &
Sundry Expenses		11,000	Repair jobs	(C)	44,600
Net Profit		40,200
		4,75,000			4,75,000

Prepare Departmental Accounts for each of the three Departments A, B and C mentioned above after taking into consideration the following :

Transistors and Tape Recorders are sold at the Showroom. Servicing and Repairs are carried out at the Workshop.
Salaries and wages comprise as follows: Showroom 3/4th and Workshop 1/4th
It was decided to allocate the Showroom Salaries and Wages in ratio 1:2 between Departments A and B.
Workshop Rent is Rs 500 per month. Showroom Rent is to be divided equally between Departments A and B.
Sundry Expenses are to be allocated on the basis of the turnover of each Department.

A9)

Departmental P&L Accounts for the year ended 31st March (Amount in Rs)

Dr. Cr.

Particulars	A Rs	B Rs	C Rs	Particulars	A Rs	B Rs	C Rs
To Purchases		1,25,000	—	By Sales	1,75,000	1,40,000	—
To Spares	—	—	80,000	By Services	—	—	35,000
To Salary & Wages	12,000	24,000	12,000	By Closing Stock	60,100	20,300	44,600
To Rent	2,400	2,400	6,000	By Net Loss	—	—	19,500
To Sundry Expenses*	5,500	4,400	1,100
To Net Profit	55,200	4,500
	2,35,100	1,60,300	99,100		2,35,100	1,60,300	99,100

Note :Sundry Expenses are apportioned in the ratio of Turnover (5 : 4 : 1) i.e. 1,75,000 : 1,40,000 : 35,000.

Inter Departmental Transfer

Transfer made by one department to another may be recorded either:

At Cost Price; and
At Invoice Price i.e., Market Based Price.

At Cost Price

When transfers are made, Recipient Department should be debited at cost price and Transferring Department should be credited at Cost Price.

Q10) Make an appropriate entry for inter transfer of goods from one department to another. Department A transferred goods for Rs 30,000 to Department B.

A10)

In the Books of...

Journal

Date

Particulars

L/F

Debit

Credit

Department Trading (B) A/c Dr.

To Department Trading (A) A/c

(Goods are transferred to Department B from Department A.)

30,000

At Invoice Price i.e. Provision for unrealized Profit.

In case of goods transfer from one department to another, no problem arises if all goods are sold within the year. On the other hand, problem arises where all goods are not sold. Under the circumstances, appropriate adjustments must be made against the unsold stock for ascertaining the correct profit or loss. As such, provision to be made for both opening stock and closing stock. The entries for this purpose are:

For Opening Stock Reserve:

Opening Stock Reserve A/c Dr.

To General Profit and Loss A/c

For Closing Stock Reserve:

General Profit and Loss A/c Dr.

To Closing Stock Reserve A/c

Q11) Department A sells goods to Department B at a profit of 25% on cost and to department C at 10% profit on cost. Department B sells goods to Department A and Department C at a profit of 15% and 20% on sales respectively. Dept. C charges 20% and 25% profit on cost and department A and department b respectively.

Department managers are entitled to 10% commission on net profit after eliminating unrealised profit on department sales being eliminated. Departmental profit after charging managers commission but before adjustment of unrealized profits are: Dept. A Rs 72,000; Dept. B Rs 54,000; and Dept. C Rs 36,000. Stock lying at different departments at the end of the year are:

Particulars

Department A

Department B

Department C

Transfer from Department A Transfer from Department B

Transfer from Department C

---

28,000

12,000

30,000

---

10,000

22,000

24,000

---

Find out the correct departmental profit after charging manager’s commission.

A11)

Computation of correct Profit

Particulars

Department A

Department B

Department C

Profit after charging manager’s commission.

Add back: Manager’s Commission @ 1/9th

72,000

8,000

54,000

6,000

36,000

4,000

Less: Unrealised Profit on stock

80,000

8,000

60,000

9,000

40,000

4,000*

Profit before charging Manager’s Commission

Less: Manager’s Commission @10% Correct

Profit after charging commission

72,000

7,200

51,000

5,100

36,000

3,600

64,800

45,900

32,400

Workings:

Computation of unrealized Profit on Stock

Particulars	Department A Rs	Department B Rs	Department C Rs	Total Rs
Department - A	---	30,000 x 1/5 = Rs 6,000	22,000 x 1/11 = Rs 2,000	8,000
Department - B	28,000 x 15/100 = Rs 4,200	---	24,000 x 20/100 = Rs 4,800	9,000
Department - C	12,000 x 1/6 = Rs 2,000	10,000 x 1/5 = Rs 2,000	---	4,000

Q12) Snow White Ltd has two departments — Cloth and Readymade Clothes. Ready Made Clothes are made by the Firm itself out of cloth supplied by the Cloth Department at its usual selling price. From the following figures, prepare Departmental Trading and Profit and Loss Accounts for the year ended 31st March 2013.

Particulars

Cloth Department (Rs)

Readymade Clothes (Rs)

Opening Stock on 1st April, 2012

Purchases

Sales

Transfer to Readymade Clothes Department

Expenses - Manufacturing

Selling

Closing Stock on 31st March, 2013

3,00,000

20,00,000

22,00,000

3,00,000

—

20,000

2,00,000

50,000

15,000

4,50,000

—

60,000

6,000

60,000

The Stock in the Readymade Clothes Department may be considered as consisting of 75% Cloth and 25% other expenses. The Cloth Department earned Gross Profit at the rate of 15% during the year 2011-12.

General Expenses of the business as a whole came to Rs 1,10,000.

A12)

Departmental Trading and Profit and Loss A/c for the year ended 31st March 2013

Dr. Cr.

Particulars	Cloth (Rs)	RM (Rs)	Total (Rs)	Particulars	Cloth (Rs)	RM (Rs)	Total (Rs)
To Opg. Stock	3,00,000	50,000	3,50,000	By Sales	22,00,000	4,50,000	26,50,000
To Purchases	20,00,000	15,000	20,15,000	By Tfr. To RM	3,00,000	—	3,00,000
To Tfr from	—	3,00,000	3,00,000	By Closing	2,00,000	60,000	2,60,000
Cloth Dept.				Stock
To Mfg. Exps.		60,000	60,000
To Gross Profit	4,00,000	85,000	4,85,000
	27,00,000	10,000	32,10,000		27,00,000	5,10,000	32,10,000
To Selling Exp.	20,000	6,000	26,000		4,00,000	85,000	4,85,000
To Profit c/d	3,80,000	79,000	4,59,000	By Gross Profit
To Profit c/d	4,00,000	85,000	4,85,000	By Gross Profit	4,00,000	85,000	4,85,000
				By Profit b/d			4,59,000
To Gen. Exp. To Stock Reserve			1,10,000 1,575
(See Note below) To Net profit			3,47,425
(See Note below) To Net profit			4,59,000				4,59,000

Note 1 :Stock Reserve to be additionally provided is 7,200 – 5,625 = Rs 1,575; calculated as under :

Particulars

On Opening Stock

On Closing Stock

Rate of GP on Sales in Cloth Dept

Element of Cloth Stock in Readymade Clothes

Stock Reserve required to be maintained

Given = 15%

75% of 50,000 = 37,500

37,500 × 15% = 5,625

4,00,000 ÷ 25,00,000 = 16%

75% of 60,000 = 45,000

45,000 × 16% = 7,200

Note 2: In this case, it is possible to ascertain the Reserve already created against Unrealised Profit in the Opening Stock. In the absence of information, the Reserve should be calculated on the difference in the Opening and Closing Stocks i.e. Rs 10,000 in this question. Since the Closing Stock has increased, the Reserve calculated would be debited to P&L A/c. In case of decrease in Stocks, the Reserve would be credited to P&L A/c.

Q13) A & Co. Has two departments P & Q. Department P sells goods to department Q at normal selling prices. From the following particulars, prepare departmental Trading & PL account for the year ended 31.03.2018 and also ascertain the net profit to be transferred to Balance Sheet:

Particulars	Department P (Rs)	Department Q (Rs)
Opening stock	5,00,000	NIL
Purchases	28,00,000	3,00,000
Goods from P	NIL	8,00,000
Wages	3,50,000	2,00,000
Travelling expenses	20,000	1,60,000
Closing stock at cost to the department	8,00,000	2,09,000
Sales	30,00,000	2,00,0000
Printing & Stationery	30,000	25,000

The following expenses incurred for both the departments were not apportioned between the departments:

Salaries Rs 33,000, advertisement expenses Rs 1,20,000, General expenses Rs 5,00,000, Depreciation is to be charged @30% on the machinery worth Rs 96,000.

The advertisement expenses of the departments are to be apportioned in the turnover ratio. Salaries and depreciation are to be apportioned in the ratio 2:1 and 1:3 respectively. General expenses are to be apportioned in the ratio 3:1.

A13)

A & CO.

Departmental Trading and P/L Account for the year ended 31.03.2018

Dr. Cr.

Particulars	Deptt. P (Rs)	Deptt. Q (Rs)	Total (Rs)	Particulars	Deptt. P (Rs)	Deptt. Q (Rs)	Total (Rs)
To Opening Stock		Nil	5,00,000	By Sales	30,00,000	20,00,000	50,00,000
To Purchases	28,00,000	3,00,000	31,00,000	By Goods Transferred to Q	8,00,000
To Goods from P		8,00,000		By Closing Stock	8,00,000	2,09,000	10,09,000
To Wages	3,50,000	2,00,000	5,50,000
To Gross Profit c/d	9,50,000	9,09,000	18,59,000
	46,00,000	22,09,000	60,09,000		46,00,000	22,09,000	60,09,000
To Travelling Expenses	20,000	1,60,000	1,80,000	By Gross Profit b/d	9,50,000	9,09,000	18,59,000
To Printing & Stationery	30,000	25,000	55,000
To Salaries (2:1)	2,20,000	1,10,000	3,30,000
To Advertisement Expenses (3:2)	72,000	48,000	1,20,000
To General Expenses (3:1)	3,75,000	1,25,000	5,00,000
To Depreciation (1:3)	7,200	21,600	28,800
To Net Profit c/d	2,25,800	4,19,400	6,45,200
	9,50,000	9,09,000	18,59,000		9,50,000	9,09,000	18,59,000
				By Net Profit b/d			6,45,200
To Provision for unrealised profit on closing stock (note 2)			38,000
To Capital A/c (net profit transferred)			6,07,200

Working notes:

1. Gross profit ratio of department P = 9,50,000/(30,00,000 + 8,00,000)×100 = 25%

2. Proportionate P department’s stock in department Q

(Purchase from department P/total purchases of department Q)*total stock of department Q

= Rs (8,00,000/11,00,000) × Rs 2,09,000 = Rs 1,52,000

Unrealised profit = 25% of Rs1,52,000 = Rs 38,000

Q14) Samudra & Co, a Partnership Firm has three departments viz. K, L, M which are under the charge of the Partners B, C and D respectively. The following Consolidated P&L Account is given below :

Dr. Profit and Loss Account Cr.

Particulars	Amount Rs	Particulars	Amount Rs
To Opening Stocks (Note 1)	81,890	By Sales (Note 7)	4,00,000
To Purchases (Note 2)	2,65,700	By Closing Stocks (Note 8)	89,000
To Salaries and Wages	48,000	By Discounts Received (Note10)	800
(Note 3)
To Rent Expenses (Note 4)	10,800
To Selling Expenses (Note 5)	14,400
To Discount Allowed (Note 5)	1,200
To Depreciation (Note 6)	750
To Net Profit for the year	67,060
	4,89,800		4,89,800

From the above Account and the following additional information, prepare the Departmental P&L Accounts for the year ended 31st March, 2013.

Break up of Opening Stock Department wise is: K - Rs 37,890; L - Rs 24,000 and M - Rs 20,000.
Total Purchases were as under: K - Rs 1,40,700; L - Rs 80,600; M - Rs 44,400.
Salaries and Wages include Rs 12,000 wages of Department M. The balance Salaries should be apportioned to the three departments as 4:4:1.
Rent is to be apportioned in the ratio of floor space which is as 2:2:5.
Selling Expenses and Discount Allowed are to be apportioned in the ratio of Turnover.
Depreciation on assets should be equally charged to the three departments.
Sales made by the three departments were: K - Rs 1,80,000; L - Rs 1,30,000 and M - Rs 90,000.
Break up of Closing Stock Department wise is: K - Rs 45,100; L - Rs 22,300 and M - Rs 21,600. The Closing Stock of Department M includes Rs 5,700 goods transferred from Department K. However, Opening Stock does not include any goods transferred from other departments.
Departments K and L sold goods worth Rs 10,700 and Rs 600 respectively to Department M.
Discounts received are traceable to Departments K, L and M as Rs 400; Rs 250 and Rs 150 respectively.
Partners are to share the profits as under: (a) 75% of the Profits of Departments K, L and M to the respective Partner in Charge, (b) Balance Profits to be credited as 2:1:1.

A14)

Departmental P&L Accounts for the year ended 31st March, 2013

Dr. Cr.

Particulars	K (Rs)	L (Rs)	M (Rs)	Particulars	K (Rs)	L (Rs)	M (Rs)
To Opening Stock		24,000	20,000	By Sales	1,80,000	1,30,000	90,000
To Purchases	1,40,700	80,600	44,400	By Transfer	10,700	600	—
To Inter-Dept Trf	—	—	11,300	By Closing Stock	45,100	22,300	21,600
To Wages	—	—	12,000
To Gross Profit c/d	57,210	48,300	23,900
	2,35,800	1,52,900	1,11,600
To Salaries (4:4:1)	16,000	16,000	4,000		2,35,800	1,52,900	1,11,600
To Rent (2:2:5)	2,400	2,400	6,000	By Gross Profit b/d	57,210	48,300	23,900
To Selling Exp	6,480	4,680	3,240	By Discounts
To Disc. (18:13:9)	540	390	270	Received
To Depreciation	250	250	250		400	250	150
To Net Profit c/d	31,940	24,830	10,290
	57,610	48,550	24,050		57,610	48,550	24,050

2. Computation of Stock Reserve

From the above profits, Stock Reserve should be eliminated on the Closing Stock.

GP Rate in Department K = (57,210 x 100)/1,90,700 = 30%.
Stock Reserve = 30% on Rs 5,700 = Rs 1,710.

3. Profit and Loss Appropriation Account

Dr. Cr.

Particulars		Amount Rs	Particulars	Amount Rs
To Stock Reserve		1,710	By Profit b/d	67,060
To Profits transferred to Capital:			(31,940 + 24,830 + 10,290)
B : 75% of 31,940	23,955
C : 75% of 24,830	18,623
D : 75% of 10,290	7,718	50,296
To balance profits trfd in 2: 1: 1
B : 50% of 15,054	7,527
C : 25% of 15,054	3,763
D : 25% of 15,054	3,764
(bal.fig)		15,054
		67,060		67,060

Q15) Pooma Ltd. Has 2 departments M & S. From the following particulars, prepare Departmental Trading Account & Consolidated Trading Account for the year ended 31st March, 2013.

Particulars

M (Rs)

S (Rs)

Opening Stock

Purchases

Carriage Inwards

Wages

Sales (excluding inter departmental transfers)

Purchased Goods transferred

By S to M

By M to S

Finished Goods transferred

By S to M

By M to S

Return of Finished Goods

By M to S

By S to M

Closing Stock

Purchased Goods

Finished Goods

20,000

92,000

2,000

12,000

1,40,000

10,000

—

35,000

—

10,000

—

4,500

24,000

12,000

68,000

2,000

8,000

1,12,000

— 8,000

— 40,000

— 7,000

6,000

14,000

Purchased Goods have been transferred at their respective departmental Purchase Cost & Finished Goods at Departmental Market Price. 20% of Finished Stock (Closing) at each Department represented Finished Goods received from the other Department.

A15)

Departmental Trading, Profit & Loss Account for the year ended 31st March, 2013

Dr. Cr.

Particulars	M (Rs)	S (Rs)	Particulars	M (Rs)	S (Rs)
To Opening Stock		12,000	By Sales	140,000	112,000
To Purchases	92,000	68,000	By Transfer:
To Transfer :			Purchased Goods	8,000	10,000
Purchased Goods	10,000	8,000	Finished Goods	35,000	40,000
Finished Goods	40,000	35,000	By Closing Stock Purchased
To Wages	12,000	8,000	Goods	4,500	6,000
To Carriage Inwards	2,000	2,000	Finished Goods out of t/f	4,800	2,800
To Return of Finished Goods	7,000	10,000	Balance	19,200	11,200
To Gross Profit	38,500	46,000	By Return of Finished Goods	10,000	7,000

	2,21,500	1,89,000		2,21,500	1,89,000

b. Calculation of Gross Profit Ratio

Particulars

M (Rs)

S (Rs)

Sales

Add : Transfer of Finished Goods

Less : Return of Finished Goods

Net Sales [A]

Gross Profit [B] as calculated below

Gross Profit Ratio [B ÷ A]

140,000

35,000

(7,000)

168,000

38,500

22.9%

112,000

40,000

(10,000)

142,000

46,000

32.4%

c. Consolidated Trading Account for the year ended 31st March, 2013

Dr. Cr.

Particulars		Amount (Rs)	Particulars		Amount (Rs)
To	Opening Stock (20,000+12,000)		By	Sales (1,40,000 + 1,12,000)	2,52,000
To	Purchases (92,000 + 68,000)	160,000	By	Closing Stock
To	Wages (12,000 + 8,000)	20,000	By	Purchase Goods 10,500
To	Carriage Inwards	4,000		(4,500+6,000)
	(2,000+2,000)		By	Finished Goods 38,000	48,500
To	Stock Reserve:			(24,000+14,000)
	[24,000 × 20%] × 32.4%	1,555
	[14,000 × 20%] × 22.9%	641
To	Net Profit	82,304
		3,00,500			3,00,500

Q16) Department X sells goods to Department Y at a profit of 25% on cost & to Department Z at a profit of 10% on cost. Department Y sells goods to X & Z at a profit of 15% & 20% on sales, respectively.

Department Z charges 20% & 25% profit on cost to Department X & Y, respectively.

Department Managers are entitled to 10% Commission on Net Profit subject to Unrealized profits on Departmental sales being eliminated.

Departmental profits after charging manager’s commission, bur before adjustment of unrealized profits are : X = Rs 36,000; Y = Rs 27,000; Z = Rs 18,000

Stocks lying at different departments at the year end are as under :

Particulars

X (Rs)

Y (Rs)

Z (Rs)

Transfer from Department X

Transfer from Department Y

Transfer from Department Z

—

14,000

6,000

15,000

—

5,000

11,000

12,000

—

Find out the correct Departmental Profits after charging Managers’ Commission.

A16)

Computation of Unrealised Profits

From Department X to Y and Z

At 25% and 10% of Cost

Nil

15,000 × 25/125

= 3,000

11,000 × 10/110

= 1,000

4,000

From Department Y to X and Z

At 15% and 20% of Sales

14,000 × 15/100

= 2,100

Nil

12,000 × 20/100

= 2,400

4,500

From Department Z to X and Y

At 20% and 25% of Cost

6,000×20/120

= 1,000

5,000×25/125

= 1,000

Nil

2,000

Computation of Correct Departmental Profits after charging Manager’s Commission correctly

Particulars

Department X

(Rs)

Department Y

(Rs)

Department Z

(Rs)

Profits after charging Manager’s Commission

Add :Wrong Commission = 10% of Profits = 1/10 on Profits before charging commission

= 1/9 on Profits after charging commission

36,000

1/9 × 36,000

= 4,000

27,000

1/9 × 27,000

= 3,000

18,000

1/9 × 18,000

= 2,000

Profits before charging commission

Less :Unrealised Profits i.e. Stock Reserve

40,000

4,000

30,000

4,500

20,000

2,000

Profits qualifying for commission

Less :Commission at 10% of above

36,000

3,600

25,500

2,550

18,000

1,800

Correct Profits after charging commission

32,400

22,950

16,200

Q17) The following details are available in respect of a business for a year.

Department

Opening Stock

Purchase

Sales

120 units

80 units

152 units

1,000 units

2,000 units

2,400 units

1,020 units at Rs 20.00 each

1,920 units at Rs 22.50 each

2,496 units at Rs 25.00 each

The total value of purchases is Rs 1,00,000. It is observed that the rate of Gross Profit is the same in each department. Prepare Departmental Trading Account for the above year.

A17)

Computation of Closing Stock Quantity (in units)

Particulars

Opening Stock

Add: Purchases

Less : Units Sold

120

1,000

(1,020)

2,000

(1,920)

152

2,400

(2,496)

Closing Stock

100

106

Computation of Gross Profit Ratio

We are informed that the GP Ratio is the same for all departments. Selling Price is given for each department’s products but the Sale Quantity is different from that of Purchase Quantity. To find the Uniform GP Rate, the sale value of Purchase Quantity should be compared with the Total Cost of Purchase, as under. Assuming all purchases are sold, the sale proceeds would be

Department	X	1,000	Units	@	Rs 20.00	20,000
Department	Y	2,000	Units	@	Rs 22.50	45,000
Department	Z	2,400	Units	@	Rs 25.00	60,000
Total Sale Value of Purchase Quantity		125,000
Less :Cost of Purchase		1,00,000
Gross Profit Amount Gross Profit Ratio		25,000 25,000 ÷ 1,25,000				20% of Selling Price

Computation of Profit and Cost for each article

Department

Selling Price

Profit at 1/5 of SP

Cost = Sales – Profit

Department X Department Y

Department Z

Rs 20.00

Rs 22.50

Rs 25.00

1/5 of Rs 20.00 = 4.00

1/5 of Rs 22.50 = 4.50

1/5 of Rs 25.00 = 5.00

Rs 16.00

Rs 18.00

Rs 20.00

Departmental Trading Account for the year ended

Dr Cr

Particulars

X (Rs)

Y (Rs)

Z (Rs)

Total (Rs)

Particulars

X (Rs)

Y (Rs)

Z (Rs)

Total (Rs)

To Op. Stock

To Purchase

To Gross Profit

1,920

16,000

4,080

1,440

36,000

8,640

3,040

48,000

12,480

6,400

100,000

25,200

By Sales

By Cl. Stock

20,400

1,600

43,200

2,880

62,400

1,120

126,000

5,600

22,000

46,080

63,520

131,600

22,000

46,080

63,520

131,600

Opening and Closing Stocks are valued at Cost as indicated in WN 3 above. Sale Amount in the Trading Account is computed for the Sale Quantity only. Gross Profit is calculated at 20% of Sale Value.

Q18) What is the need of Branch Accounting?

A18) Need For Branch Accounting

Ascertain the profitability of each branch separately for particular accounting period.
Ascertain the financial position of each branch separately at the end of that accounting period.
Assess the progress and performance of each branch
Incorporate the profit or loss made by the branch and its assets and liabilities in the firm's final accounts
Ascertain the requirements of cash and stock for each branch,
Ascertain whether the branch should expended or closed.

Q19) What are the different types of Branch Accounting?

A19) Types of branches

From accounting point of view, the branches can be divided into the following main cases:

1) HOME BRANCHES: -

a) Dependent Branches (Where the head office maintains all the accounts)

b) Independent Branches (Where the branch keeps its own accounts)

2) FOREIGN BRANCHES: -

They almost invariably trade independently and record their transaction in foreign currency.

Dependent Branches

When the policies and administration of a branch are totally controlled by the head office, who also maintains its accounts, the branch is called as dependent branch.

Independent Branches

Independent Branches are those which make purchases from outside, get goods from Head Office, supply goods to Head Office and fix the selling price by itself Thus an independent Branch enjoys a good amount of freedom like an American Son.

Q20) Explain the Accounting System of Branches.

A20. The accounting arrangement of a branch depends upon its size, the type of activities, the methods of operation and the degree of control to be exercised by the head office. There are three main system of accounting for branches transaction, viz.

Debtors System.
Stock and Debtors System.
Final Account system.

This system of accounting is suitable for the small- size branches. Under this, a Branch Account is opened for each branch in the head office ledger. All the transaction relating to that branch is recorded in this account. The branch account is prepared in such a way that it discloses the profit or loss of the branch.

Head office may send goods to branch either at "cost price" or "selling price".

Cost price method: - under this method at the beginning of the year the branch Account is debited with the opening balances of asset such as stock, petty cash, furniture, prepaid expenses, etc. lying with the branch. Similarly, it is credited with the opening balance of liabilities of the branch such as, creditors, ots salary, rent, etc.

The branch is then debited with the amount of goods sent to the branch and other amounts remitted to meet various expenses such as, salaries, rent, rates, taxes, etc. Likewise, the branch account is credited with the return of goods by the branch and receipts from branches. At the year end, Branch Account is debited with the closing values of liabilities and credited with the closing values of assets. The difference between the two sides represents profit or loss for the branch for a particular period.

DEBTORS METHOD

Journal entries

1) For goods sent to branch

Branch A/c _______Dr.

To Goods Sent to Branch A/c

(Being goods sent to branch)

2)For goods returned by the branch

Goods Sent to Branch A/c _______Dr.

To Branch A/c

(Being goods returned by the branch)

3) For amount sent to branch for expenses

Branch A/c _______ Dr.

To Bank A/c

(Being cheque sent to branch for expenses)

4) For amount received from branch

Bank A/c _______ Dr.

To Branch A/c

(Being cash or cheque received from branch)

5) For closing goods sent to branch account

Goods Sent to Branch Alc Dr.

To Purchase A/c

(Being balance transferred to Trading Account)

6) For closing balances of assets at the branch

Branch Assets A/c ________ Dr. (Individually)

To Branch A/c

(Being closing balances of assets brought into account)

7) For closing balances of Liabilities at the branch

Branch A/c ________Dr.

To Branch Liabilities A/c (Individually)

(Being closing balances of liabilities brought into account)

8) For transferring Profit or Loss to General Profit and Loss Account

i) If Profit

Branch A/c _______ Dr.

To General Profit and Loss A/c

(Being branch profit transferred to General P & L A/c)

Ii) If Loss

General Profit and Loss A/c ________ Dr.

To Branch A/c

(Being branch loss transferred to General P & L A/c)

The closing balances of branch assets and liabilities are shown in the Balance Sheet

Of the head office. At the beginning of the next year, the entire numbers 6 and 7 are

Reversed so as to show opening balances in the Branch Account.

Q21) What is a lease? Explain its benefits.

A21) A lease is a contract that allows an asset / asset owner to use the asset / asset in exchange for something, usually money or other asset, by another party. The two most common types of leases in accounting are operating leases and finance (capital leases) leases. This step-by-step guide covers all the basics of lease accounting.

Benefits of leasing

Leasing has many advantages that can be used to attract customers.
Payment schedules are more flexible than loan contracts.
After-tax costs are lower because the tax rates are different for lenders and borrowers.
The lease includes financing 100% of the value of the asset.
For operating leases, the company creates expenses instead of debt, allowing the company to obtain funding. This is often referred to as "off-balance sheet financing."

Q22) What is a finance lease?

A22) Finance leasing is a way of providing finance. In effect, a leasing company (lessor or owner) buys asset for a user (usually called an employer or lessee) and rents them to them for an agreed period of time.

Finance leases are a statement of Standard Accounting Practice 21.

"Practically all risks and rewards of ownership of an asset to a lessee."

This basically means that the lessee is in much the same position as if he had bought the asset.

The lessor charges rent as compensation for hiring the property to the lessee. The lessor retains ownership of the asset, while the lessee uses the asset exclusively (if the terms of the lease are complied with).

The lessee pays a rent that covers the original cost of the asset during the initial or major period of the lease. You are obliged to pay all of these rents, including balloon payments at the end of the contract. When all of this is paid, the lender will recover the investment in the asset.

The customer promises to pay these rents during this period and technically the finance lease is defined as non-cancellable, although it may be possible to terminate early. At the end of the lease

What happens at the end of the primary finance lease term is different and depends on the actual contract, but the possible options are:

The lessee acts on behalf of the lessor and sells the asset to a third party.
Assets will be returned to the lessor for sale
Customer enters secondary lease term

When an asset is sold, the customer may be given a rent rebate equivalent to the majority of the sale price (minus disposal costs), as agreed in the lease agreement. If the asset is held, the lease enters the second period.

Secondary rentals can be much lower than primary rentals (“pepper cone” rentals). Alternatively, the same rental may continue to be leased monthly.

Q23) Give an example of Finance lease.

A23) Finance lease example

Finance leases are commonly used to finance vehicles, especially hard-working commercial vehicles. The company wants the benefits of leasing, but does not want the responsibility to return the vehicle to the lender in good condition.

Besides commercial vehicles, finance leases can be used for many other assets. An example is shown below.

The Health Club was considering investing in new gym equipment. The total loan amount is £ 20,000 and the contract is set to pay for 60 months without deposits. Importantly, the balloon payment was set to £ 0. This means that the client (or most likely a gym user!) Is free to sweat the device, knowing that they are not responsible when concluding the contract. After 60 months the option is to sell the equipment – keep the money made or enter the peppercorn (secondary) rental period in a relatively small amount.

Q24) Define Operating lease.

A24) In contrast to finance leases, operating leases do not transfer virtually all risks and rewards of ownership to the lessee. It usually runs for less than the full economic life of the asset, and the lessor expects the asset to have resale value (known as residual value) at the end of the lease term.

This residual value is predicted at the beginning of the lease and the lessor bears the risk of whether the asset will achieve this residual value at the end of the contract.

Operating leases are common when assets such as aircraft, vehicles, construction plants, and machinery have residual value. Customers can use the asset for the agreed term in exchange for rent payment. These payments do not cover the full cost of the asset as in the case of a finance lease.

The operating lease may include other services included in the contract. Vehicle maintenance contract.

Ownership of the asset remains with the lessor and the asset is returned at the end of the lease when the leasing company rehires it under another contract or sells it to release the residual value. Alternatively, the lessee may continue to rent the asset at the fair market rent agreed at that time.

Accounting rules are currently under consideration, but at this time operating leases are off-balance sheet arrangements and finance leases are on the balance sheet. For accounting under international accounting standards, IFRS 16 will bring operating leases to the balance sheet. Learn more about IFRS16.

A common form of operating lease in the vehicle sector is contract employment. This is the most common way to fund company cars and is growing steadily.

Q25) Why choose one sort of lease over the other?

A25) This is a complex question, and each asset investment needs to be considered individually to see which type of financing is most beneficial to the organization. However, there are two important considerations. The type and lifetime of the asset, and the way the leased asset is reflected within the organization's account.

Asset type and lifespan

As mentioned above, it is important to remember that in operating leases the risks and rewards of owning an asset remain with the lessor, and in finance leases these are primarily transferred to the lessee.

Very generally, if an asset has a relatively short service life within the business, an operating lease may be a more commonly selected option before it needs to be replaced or upgraded. This is because the asset is likely to hold a significant portion of its value at the end of the contract, thus lowering the rent during the lease term. This is priced to the overall cost of the contract, as the lessor bears the risk in terms of the residual value of the asset.

This “cost of risk” can be significantly reduced for assets that can affect their condition at the time of return to the lessor and therefore have a high degree of certainty in estimating the residual value. Asset types to which this applies include automobiles, commercial vehicles, and IT equipment.

If an asset is likely to have a longer useful life in the business, its residual value consideration is less important as it is likely to be a much smaller percentage of its original value. This may mean that the lessee is willing to take this risk internally rather than paying the lessor. Here, finance leasing is a more obvious choice.

Because the rent paid on a finance lease pays off all or most of the capital, it is often possible to set a secondary lease period and maintain the use of the asset at a significantly reduced cost.

Q26) Difference between Financial Leasing and Operating Leasing

A26) As you can see, there are some differences between financial and operating leases. Let's look at the important differences between them –

A financial lease is a type of lease that allows the lessor to use the former asset instead of a long-term, recurring payment. An operating lease, on the other hand, is a type of lease that allows the lessee to use the former asset in exchange for short-term recurring payments.
Financial leases are leases that need to be recorded under the accounting system. Operating leases, on the other hand, are a concept that does not need to be recorded in any accounting system. For this reason, operating leases are also known as "off-balance sheet leases."
In a financial lease, ownership is transferred to the lessee. In an operating lease, ownership isn't transferred to the lessee.
Contracts based on financial leases are called loan contracts / contracts. Contracts based on operating leases are called rental contracts / contracts.
Once both parties have signed the contract, it is generally not possible to cancel the financial lease. Even after an agreement between the parties, the operating lease can only be revoked during the initial period.
Financial leasing provides tax credits for depreciation and financing costs. Operating leases provide tax credits for rent payments.
Financial leases offer asset purchase options at the end of the contract period. With operating leases, there are no such offers.

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