RST Limited is a family-controlled company which operates a chain of retail outlets Aa ealal in motor spares and accessories.
Branch stocks are purchased by a centralised purchasing function in order to obtain the best terms from suppliers.
A 10 per cent handling charge is applied by headquarters to the cost of the purchases, and branches are expected to add 25 per cent to the resulting figure to arrive at normal selling prices, although branch managers are authorised to reduce normal prices in special situations. The effect of such reductions must be notified to headquarters.
On 1 April 2006, a new branch was established at Derham. The following details have been recorded for the year ended 31 March 2007:

All records in respect of branch activities are maintained at headquarters, and the branch profit margin is dealt with through a branch stock adjustment account.

Required:

(a) Prepare:
(i) the branch eee account (maintained at branch selling prices);
(ii) the branch stock adjustment account.

The book stock should be taken for this part of the question.

(b) List four of the possible reasons for the stock difference revealed when a physical stocktaking at the Derham branch on 31 March 2007 showed stock valued at selling prices amounting to £14,850.

(c) State which of the following is the figure to be included in RST Limited’s balance sheet at 31 March 2007, for Derham branch stock:
(i) £11,138 (ii) £11,880 (iii) £10,800 (iv) None of these.

Justify your choice with appropriate calculations.

Transcribed Image Text:

Purchase cost to headquarters of stock transferred to Derham Derham branch sales: cash 82,400 89,940 credit 1,870 Stocks transferred from Derham to other branches, at normal selling prices Authorised reductions from normal selling prices during the year 3,300 2,250