ACCOUNTING 7
Instructions: Choose the most correct answer for each of the following questions. Write the letter of your
choice in CAPITAL in the FIRST PAGE OF THE GREEN BOOK PROVIDED.
Questions 1 & 2 are based on the following information.
On February 14, 2012, Therese Company established a sales agency in Tagbilaran. Upon establishment of the
sales agency, the home office sent samples costing P8,000 and a working fund of P3,000 to be maintained on the
imprest basis. During the six months period, the sales agency reported to the home office sales orders. These
were billed at P70,000 of which of P40,000 was collected) the sales agency paid expenses of P5,800 but was
reimbursed by the home office.
On August 15, 2012, the sales agency samples were valued at P2,000. It was estimated that the gross profit on
goods shipped to fill sales order averaged 40% of cost.
1. The cost of sales of the sales agency for the six months period is
a. P42,000
c. P48,000
b. P44,000
d. P50,000
2. The net income of the sales agency for the six months period is
a. P16,200
c. P10,200
b. P14,200
d. P8,200
3. A branch’s ending inventory of merchandise shipped by the home office and purchased from outside vendors
amounts to P 50,000. The post-closing trial balance in the Unrealized Gross Profit in Branch Inventory
account is P 6,000 due to the home office practice of shipping merchandise at 20% above cost. The
merchandise purchased from outside vendors contained in the ending inventory of the branch amounts to:
a. P 38,000
b. P 18,000
c. P 30,000
d. P 14,000
Questions 4 and 5 are based on the following information.
The income statement submitted by Loon Branch to the Home Office for the month of December 31, 2013
follows:
Sales
Cost of Sales:
Inventory, December 31, 2013
Shipments from Home office
Purchased locally by branch
Total
Inventory, December 31, 2013
Gross Margin
Operating Expenses
Net Income for the month
P600,000
P80,000
350,000
30,000
P460,000
100,000
360,000
P240,000
180,000
P 60,000
The Branch inventories consisted of:
Merchandise purchased from home
Local purchases
Total
12/1/2012
P70,000
P10,000
P80,000
12/31/2012
P84,000
P16,000
P100,000
After effecting the necessary adjustments, the Home Office ascertained the true net income of the Branch to be
P156,000.
4. At what percentage of cost did the home office bill the branch for merchandise shipped to it?
a. 100%
c. 120%
b. 140%
d. 150%
5. What is the balance of the Allowance for Overvaluation in the branch inventory at December 31, 2013?
a. P10,000
c. P16,000
b. P24,000
d. P34,000
Questions 6 and 7 are based on the following information.
The following information is extracted from the books and records of Elaine Company and its branch. The
balances are at December 31, 2012 of the company’s operations.
Home Office
Branch
Sales
P260,000
Shipments to branch
P 78,000
Shipments from home office
104,000
Purchases
39,000
Expenses
78,000
Inventory, January 1, 2012
26,000
Allowance for overvaluation of branch inventory
31,200
However, no shipments in transit between home office and the branch were made. Both shipments accounts
are properly recorded. The ending inventory includes merchandise acquired from the home office in the
amount of P26,000 and P7,800 acquired from outsiders acquired from the home office in the amount of
P26,000 and P7,800 acquired from outsiders for a total of P33,800.
6. What is the realized profit in branch inventory?
a. P21,000
b. P31,200
c. P22,533
d. P24,700
7. What is the amount of branch merchandise beginning inventory that was acquired from the home office?
a. P14,000
c. P15,600
b. P19,000
d. P20,800
Questions 8 and 9 are based on the following information.
Auto Supply Company is engaged in merchandising both at its home office in Cebu City and its branch in Toledo
City. Selected accounts taken from the trial balances of the home office and the branch as of December 31, 2012
follow:
Debits
Inventory, January 1, 2012
Toledo Branch
Purchases
Freight in from home office
Sundry Expenses
Credits
Home Office
Sales
Sales to branch
Allowance for Overvaluation of branch inventory
January 1, 2012.
Cebu City
P 23,000
58,300
190,000
52,000
P155,000
110,000
Toledo Branch
P 11,550
105,000
5,500
28,000
P 53,300
140,000
at
1,000
Additional information:
 The Toledo City branch gets all of its merchandise from the home office. The home office bills the
goods at cost plus a 10% mark-up. At December 31, 2012, a shipment with a billed value of P5,000
was still in transit. Freight on this shipment was P250 and is to be treated as part of the inventory.
 Inventories on December 31, 2012, excluding the shipment in transit, follow:
Home office, at cost………………………………….………..
P30,000
Branch, at billed price (excluding freight of P520……
10,000
8. What is the net income of the home office from own operations?
a. P30,470
c. P21,000
b. P20,000
d. P30,470
9. What is the net income of the branch in so far as the home office is concerned?
a. P870
c. P1,500
b. P10,470
d. P12,000
10. Durable Textile Company has a single branch in Bohol. On March 1, 2012, the home office accounting records
included an Allowance for Overvaluation of Inventories – Bohol Branch ledger account with a credit balance
of P32,000. During March, merchandise costing P36,000 was shipped to the Bohol Branch and billed at a
price representing a 40% markup on the billed price. On March 31, 2012, the branch prepared an income
statement indicating a net loss of P11,500 for March and ending inventories at billed prices of P25,000. What
is the amount of adjustment for allowance for Overvaluation of Inventories to reflect the true branch net
income?
a. P39,257 debit
c. P39,333 debit
b. P46,000 credit
d. P46,000 debit
Questions 11 and 12 are based on the following information.
Yul Trading Corp. operates a branch in Talisay City. At the close of business on December 31, 2012, Talisay
Branch account in the home office books showed a debit balance of P225,770. The interoffice accounts were in
agreement at the beginning of the year. For purposes of reconciling the interoffice accounts, the following facts
were ascertained:
1. An office equipment costing the home office P3,5000 was picked up by the branch as P350.
2. Insurance premium of P675 charged by the home office was taken up twice by the branch.
3. Freight charges on merchandise made by the home office for P1,125 were recorded in the branch book
as P1,215.
4. Home office credit memo representing a discount on merchandise for P800 was not recorded by the
branch.
5. The branch failed to take up a P700 debt memo from the home office representing the share of the
branch in the advertising.
6. The home office inadvertently recorded a remittance for P3,000 from the Cebu branch as a remittance
from its Talisay branch.
11. What is the balance of the Home Office account before adjustment as of December 31, 2012?
a. P225,000
c. P228,485
b. 225,770
d.
226,485
12. What is the adjusted balance of the Home Office account as of December 31, 2012?
a. P225,000
c. P225,770
b. 226,485
d. 228,770
Questions 13 and 14 are based on the following information.
PTT Corporation retails merchandise through its home office store and through a branch store in a distant city.
Separate ledgers are maintained by the home office and the branch. The branch store purchases merchandise
from the home office (at 120% of home office cost), as well as from outside supplies. Selected information from
the December 31, 2012 trial balances of the home office and branch is as follows:
Home Office
Branch
Sales
P120,000
P50,000
Shipments to branch
16,000
---Purchases
70,000
11,000
Inventory, January 1, 2012
40,000
30,000
Shipments from home office
Expenses
Unrealized profit in branch inventory
----28,000
7,200
19,200
2,000
-----
Additional information:
 The entire difference between the shipment accounts is due to the practice of billing the branch at cost
plus 20%.
 The December 31, 2012 inventories are P40,000 and P20,000 for the home office and the branch,
respectively. (The branch purchased 16% of its ending inventory from outside supplies.)
 Branch beginning and ending inventories include merchandise acquired from home office is inventoried at
120% of home office cost.
13. What is the realized profit in branch inventory?
a. P4,000
c. P2,800
b. 7,200
d. 4,400
14. What is the net income of the branch as far the home office is concern?
a. P50,200
c. P10,600
b. 15,000
d. 12,200
Questions 15 and 16 are based on the following information.
Kulas Corporation has one branch operation located 500 miles away from the home office. The branch office
sales merchandise which is shipped to it from the home office. The merchandise is transferred at cost but the
branch pays reasonable freight charges. The branch office makes sales and incurs and pays operating expenses.
At the end of the current accounting period the true adjusted balance for the home office account on the branch’s
books and the branch office account on the home office’s books is P500,000.
The following items may or may not be reconciling items. The current year is 2012.
1) The home office has shipped merchandise to the branch office which cost P10,000 and which incurs
P500 freight charges paid by the home office but charged to the branch. This merchandise is
received by the branch on January 5, 2012.
2) The branch has transmitted P17,000 in cash back to the home office as a partial payment on such
purchased merchandise. This cash is received by the home office on January 6, 2012.
3) The branch office returns some defective merchandise to the home office. The cost of the returned
merchandise is P750. The branch office pays P25 of freight costs which will be charged back to the
home office.
4) On December 1, 2012, the home office sends a check for P25,000 to replenish the branch’s charged
back to the home office.
5) The branch pays an advertising expense of P800 that should have been paid by the home office since
it applied to advertising fees incurred by the home office of its own benefit.
6) The home office allocated P12,000 of general and administrative expenses to the branch. The branch
had not entered the allocation as of the end of the year.
7) The home office pays insurance premiums on the branch store. The amount paid by the home office
is P1,000 but the branch erroneously records it as P776.00
15. What is the unadjusted balance of the Home Office account?
a. P481,425
c. P500,000
b.
452,276
d. 518,575
16. What is the unadjusted balance of the Branch account?
a. P433,701
c. P518,575
b.
500,000
d. 452,276
Questions 17 through 20 are based on the following information.
Selected information from the trial balances for the home office and the branch of Lalay Company at December
31, 2012 is provided. The branch acquires merchandise from the home office and outside suppliers.
Home Office
Branch
Sales
P60,000
P30,000
Shipments to branch
8,000
Allowance for overvaluation of branch inventory
3,600
Shipments from home office
10,000
Purchase (outsiders)
35,000
5,500
Merchandise inventory 12.01.12
20,000
15,000
Expenses
14,000
6,000
Additional information:
Merchandise inventory, December 31, 2012:
Home office
P20,000
Branch (P7,500 from home office and P2,500 from outsiders)
10,000
17. The billing rate of home office to branch for merchandise shipments is
a. 120% of cost
c. 130% of cost
b. 125% of cost
d. 135% of cost
18. How much of the December 1 inventory of the branch represent purchases from outsiders and goods shipped
from home office
a. Home office, P5,000 and Outsiders, P10,000
c. Home office, P8,000 and Outsiders, P7,000
b. Home office, P15,000 and Outsiders, P00,000
d. Home office, P12,000 and Outsiders, P3,000
19. The net income reported by the branch is
a. P4,500
b. P5,600
c. P3,500
d. P2,500
20. The combined net income for Home office and branch operations is
a. P22,500
c. P25,100
b. P24,600
d. P21,500
21. Clang-clang Corporation’s home office ships merchandise to its Toledo branch at a billing price of 125% of
cost. During 2012 the home office makes the following entry:
Toledo Branch
75,000
Shipments to Toledo branch
75,000
At year-end 2012, P12,000 of this merchandise remains at Toledo branch inventory.
The entry to adjust the branch income in the books of the home office will include
a. Debit to Allowance for overvaluation of branch inventory, P12,600
b. Credit to Toledo branch account, P2,400
c. Debit to Shipments to Toledo branch, P12,600
d. Credit to Toledo branch inventory, P2,400
22. May Corporation operate two stores: the Head Office store and Rose branch. On December 31, 2012, the
Rose Branch account in the home office books has a balance of P340,000. Both stores use a standard 120%
markup on cost. However May’s home office ships merchandise to the branches at cost. Rose’s ending
inventory includes P20,000 of merchandise received from home office
Rose branch remitted P15,000 to home office on December 30, 2012. The Home office will not receive the
remittance until January 4, 2013. The Home office allocated P5,000 general expenses to each of the branches
but Rose branch have not yet recorded the expenses at year-end)
Rose branch paid P2,000 for advertising “after Christmas” sales that were to be allocated equally between the
two stores. The Home office has not recorded its share in the expenses.
The unadjusted balance of the Home office account in the books of Rose branch is
a. P324,000
c. P323,000
b. P319,000
d. P318,000
Questions 23 & 24 are based on the following information.
On December 31, 2012, the home office account on the branch books shows a balance of P9,735. The following
reconciling data are determined in accounting for the difference.
a. Merchandise billed at P615 shipped by the home office to the branch on December 28 is still in transit.
b. The branch collected a home office accounts receivable of P2,500, but failed to notify the home office of
this collection.
c. The home office recorded the branch net income for November at P1,125. This was in error, as the
branch reported net income was P1,215.
d. The home office was charged P640 when the branch returned merchandise to the home office on
December 31. The merchandise is in transit.
23. The unadjusted balance of Branch account is
a. P9,735
b. P10,350
c. P10,990
d. P8,400
24. The adjusting entry to correct branch net income for November is
a. Debit, Branch profit and loss P90 and Credit, Branch account P90
b. Debit, Home office account P90 and Credit, Branch profit and loss P90
c. Debit, Branch account P90 and Credit, Branch profit and loss P90
d. Debit, Branch profit and loss P90 and Credit, Home office account P90
25. BONUS
---NOTHING FOLLOWS---
CHAPTER 4
ACCOUNTING FOR BRANCHES;
COMBINED FINANCIAL STATEMENTS
HIGHLIGHTS OF THE CHAPTER
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
A branch is a unit of a business enterprise located some distance from the home office. A branch
generally caries a stock of merchandise obtained from the home office, makes sales, approves customers’
credit, and makes collections on trade accounts receivable.
The merchandise of a branch may be obtained exclusively from the home office, or a portion may be
purchased from outside suppliers. The cash receipts of the branch may be deposited in a bank account of
the home office; branch expenses then are paid from an imprest cash fund provided by the home office.
The imprest cash fund is replenished periodically by the home office. Alternatively, a branch may
maintain its own bank account.
Certain units or segments of a business enterprise may be operated as divisions. A division may consist
of either a series of branches or one or more corporations. When a segment is operated as a corporation, it
is known as a subsidiary of the parent company.
Costs of organizing a new branch and operating losses during the initial period of operations should be
recognized as expenses, not as deferred charges, per AICPA SOP 98-5.
The accounting records for branches may be centralized in the home office or may be decentralized so
that each branch maintains a complete set of accounting records. If the accounting records are centralized
in the home office, each branch prepares daily reports and documents that are used as sources for journal
entries in the accounting records of the home office. If a branch maintains its own accounting records,
some transactions or events relating to the branch may be recorded by the home office. Periodic financial
statements are provided by the branch to the home office so that combined statements may be prepared.
The accounting records of a branch include a Home Office ledger account that is credited for assets and
services provided by the home office, and for branch net income. The Home Office account is debited for
any assets and services provided by the branch to the home office or to other branches, and for branch net
losses. The Home Office account thus is an ownership equity-type account representing the net
investment of the home office in the branch.
A home office maintains a reciprocal ledger account, Investment in Branch, which is debited for the
assets and other services provided to a branch, and for net income of the branch; it is credited for the
assets and services received from the branch, and for branch net losses.
A home office generally charges its branches for expenses (such as insurance, interest, property taxes,
advertising, and depreciation) incurred for the benefit of the branch. Such expenses must be allocated to
branch operations to measure the profitability of each branch.
Merchandise shipped by a home office to branches may be billed at home office cost, at home office cost
plus a markup, or at branch retail selling price. A shipment of merchandise to a branch is not a sale.
Billing at home office cost attributes the entire gross profit on merchandise sold by a branch to the
branch. When merchandise is billed at a price above home office cost (or at branch retail selling price),
the valuation assigned to branch inventory at the end of the accounting period must be reduced to cost
when combined financial statements are prepared.
If merchandise is billed to a branch at a price above home office cost and the perpetual inventory
system is used, the home office debits Investment in Branch for the billed price of the merchandise,
credits Inventories for the cost of the merchandise, and credits Allowance for Overvaluation of
Inventories: Branch for the excess of the billed price over cost. The branch debits Inventories and credits
11.
12.
13.
14.
15.
Home Office at billed prices of merchandise; sales by the branch are debited to Cost of Goods Sold and
credited to Inventories at billed prices.
A separate income statement and balance sheet for each branch may be prepared for use by enterprise
management. The income statement has no unusual features if merchandise is billed to a branch at home
office cost. However, if merchandise is billed at a price above cost, the branch trial balance must be
adjusted by the home office so that cost of the merchandise sold by the branch is stated at cost to the
home office.
A combined balance sheet for home office and branch shows the financial position of the business
enterprise as a single entity. In the working paper for combined financial statements, the assets and
liabilities of the branch are substituted for the Investment in Branch ledger account included in the
adjusted trial balance of the home office. This is accomplished by elimination of the balances of the
Home Office and Investment in Branch reciprocal ledger accounts.
If a home office and branch use the periodic inventory system, the home office debits Investment in
Branch for the billed price of the merchandise shipped, credits Shipments to Branch for the home office
cost of the merchandise shipped, and credits any excess of billed price over cost to Allowance for
Overvaluation of Inventories: Branch. The branch debits Shipments from Home Office and credits Home
Office at billed price. At the end of the accounting period, the home office reduces (debits) Allowance for
Overvaluation of Inventories: Branch for the amount of overvaluation applicable to the branch’s cost of
goods sold and credits the amount of the reduction to the Realized Gross Profit: Branch Sales ledger
account.
At the end of an accounting period, the balance of the Investment in Branch ledger account may not agree
with the balance of the Home Office account. In such cases the reciprocal ledger accounts must be
reconciled and brought up to date before combined financial statements are prepared.
If the home office operates more than one branch, certain transactions, such as merchandise shipments,
may take place between branches. Such interbranch transactions usually are cleared through the Home
Office ledger account. For example, if Arlo Branch ships merchandise with a cost of $400 to Boone
Branch and the periodic inventory system is used, the following journal entries (explanations omitted)
are required:
Accounting records of Arlo Branch:
Home Office
Shipments from Home Office
Accounting records of Boone Branch:
Shipments from Home Office
Home Office
Accounting records of home office:
Investment in Boone Branch
Investment in Arlo Branch
16.
400
400
400
400
400
400
The transfer of merchandise from one branch to another does not justify increasing the carrying amount
of inventories by the additional freight costs incurred because of the indirect routing. Excess freight costs
incurred as a result of such transfers are recognized as operating expenses of the home office because the
home office makes the decision to transfer the merchandise.
QUESTIONS
True or False
1. T 2. F 3. T 4. F 5. F 6. F 7. T 8. F 9. F 10. F 11. F 12. F 13. T 14. T 15. F 16. F
F
17. F 18.
For each of the following statements, circle the T or the F to indicate whether the statement is true or false.
T F
1. In a centralized accounting system for branches, the branch accounting records are maintained by the
home office.
T F
2. Both the Home Office ledger account and the Investment in Branch account are displayed in the
combined financial statements for the home office and the branch.
T F
3. The combined net income for the home office and branches would be the same when the home office
bills merchandise to branches at home office cost as when the home office bills branches at amounts
above home office cost.
T F
4. In most cases, a branch is operated more as a cost center than as a profit center.
T F
5. A branch imprest cash fund is displayed under the heading Investments in the combined balance sheet
of the home office and the branch.
T F
6. The Investment in Branch ledger account is displayed as a noncurrent asset in the separate balance
sheet of the home office, and the Home Office account is displayed as a long-term liability in the
separate balance sheet of the branch.
T F
7. The fiscal year for the home office must coincide with the fiscal year for the branch to facilitate the
preparation of combined financial statements.
T F
8. A net loss reported by a branch is recorded by the home office by a debit to the Investment in Branch
ledger account.
T F
9. If branch trade accounts receivable are carried in the home office accounting records, doubtful
accounts expense of the branch is recorded by the home office by a debit to Branch Loss and a credit
to Investment in Branch.
T F
10. If merchandise is billed to a branch at a price above home office cost, the net income reported to the
home office by the branch is overstated.
T F
11. Separate financial statements for an enterprise’s home office and branches generally are prepared for
use by creditors and government agencies.
T F
12. In a working paper for combined financial statements of a home office and branches, the balance of
the Shipments to Branch ledger account is eliminated against the balance of the Home Office account.
T F
13. In a separate balance sheet for a home office, the balance of the Allowance for Overvaluation of
Inventories: Branch ledger account is deducted from the balance of the Investment in Branch ledger
account.
T F
14. The beginning inventories of a branch are reduced to home office cost in the working paper for
combined financial statements by a debit to Allowance for Overvaluation of Inventories: Branch and
a credit to beginning inventories when the periodic inventory system is used.
T F
15. The perpetual inventory system is impractical for a home office with many branches.
T F
16. If a remittance of cash by a branch has not been recorded by the home office, the balance of the
branch’s Home Office ledger account exceeds the balance of the home office’s Investment in Branch
account.
T F
17. Freight costs on merchandise shipments from Cody Branch to Dana Branch in excess of normal
freight costs from the home office to Dana Branch should be recognized as operating expenses of
Dana Branch.
T F
18. If a new branch is expected to be profitable starting with the second year of operations, a loss
incurred by the new branch in the first year should be deferred and recognized as expense over a
period of three to five years.
Completion Statements
Fill in the necessary words or amounts to complete the following statements.
1.
2.
3.
4.
5.
6.
A ____________________ is a unit of a business enterprise that sells merchandise at a location some
distance from the _______ ____________________. A branch generally is operated as a
____________________ of the home office; however, a ____________________ may be organized as a
subsidiary corporation.
The Home Office ledger account and the Investment in Branch ledger account are _______________
ledger accounts whose balances must be _______________ when _______________ financial statements
for the home office and branch are prepared.
If a home office bills merchandise to branches at a price above home office cost, the markup on the
unsold merchandise is not ____________________ and is eliminated for combined financial statements
for the home office and its branches.
If the Norco Branch remits cash to the home office of Lepore Company and a decentralized accounting
system is used, the Norco Branch debits the __________ __________ ledger account and credits Cash;
the home office debits Cash and credits the ____________________ _______ ____________________
account.
Some operating expenses incurred by the home office relate to branch operations and are
_______________ to the branch by a debit to the ____________________ _______
____________________ ledger account and a credit to the ____________________
____________________ account in the accounting records of the home office.
If shipments of merchandise by a home office to branches are billed at 33 1/3% above home office cost,
_______% of the amount of the ending inventories of the branch is reported in the Allowance _______
____________________ _______ ____________________: ____________________ ledger account in
the accounting records of the home office.
Multiple Choice
Choose the best answer for each of the following questions and enter the identifying letter in the space provided.
Multiple Choice
1. d 2. a 3. b 4. d 5. c 6. c [($39,500 x 0.20) – $1,500 = $6,400]
____ 1.
In accounting for branch transactions, it is improper for the home office to:
a. Credit cash received from a branch to the Investment in Branch ledger account.
b. Maintain Common Stock and Retained Earnings ledger accounts for only the home office.
c. Debit shipments of merchandise to the branch from the home office to the Investment in Branch
ledger account.
d. Credit shipments of merchandise to the branch to the Sales ledger account.
____ 2.
The Home Office ledger account in the accounting records of the Tahoe Branch had a credit balance
of $12,000 at the end of April, and the Investment in Branch account in the accounting records of the
home office had a debit balance of $15,000. The most likely reason for the discrepancy in the two
ledger account balances is:
a. Merchandise shipped by the home office to the branch had not been recorded by the branch.
b. The home office had not recorded the branch net income for April.
c. The branch had just collected home office trade accounts receivable in the amount of $3,000.
d. The branch had not yet recorded the home office net income for April.
____ 3.
Jayhawk Company has numerous branches in the state of Kansas. The home office purchases
merchandise and makes shipments to branches from a central warehouse at the request of branch
managers. Which of the following would be an improper accounting practice?
a. The Investment in Branch ledger account is debited in the accounting records of the home office
when merchandise is shipped to a branch, and the Shipments to Branch account is credited
(assume use of the periodic inventory system).
b. The home office debits Trade Accounts Receivable and credits Sales when merchandise is
shipped to a branch.
c. Cash received from a branch is credited to the Investment in Branch ledger account by the home
office.
d. Only the home office maintains a Common Stock ledger account and a Retained Earnings
account.
____ 4.
Neither the Palmer Branch nor the home office of Rupert Company had completed any intracompany
transactions during the last half of May, yet the credit balance of the branch’s Home Office ledger
account on May 31 was larger than the debit balance of the home office’s Investment in Palmer
Branch account. The most likely reason for this discrepancy is:
a. The home office reported a net loss for the month of May.
b. The branch reported a net loss for the month of May.
c. The branch returned merchandise to the home office.
d. The branch reported a net income for the month of May.
____ 5.
Which of the following ledger accounts is displayed in the combined financial statements for a home
office and branch?
a. Shipments to Branch
b. Home Office
c. Dividends Declared
d. Allowance for Overvaluation of Inventories: Branch
____ 6.
The home office of Irby Company bills merchandise to branches at 25% above home office cost.
Information taken from the accounting records of Kipp Branch is as follows:
Beginning inventories (at billed prices)
Shipments from home office (at billed prices)
Ending inventories (at billed prices)
Net loss for accounting period
$17,000
42,500
20,000
1,500
The net income or net loss of Kipp Branch, based on home office cost of branch merchandise, is:
a. $7,900 net income
b. $9,400 net loss
c. $6,400 net income
d. $7,000 net income
e. Some other amount
SHORT EXERCISES
1.
Below is a partial list of ledger accounts of the Vista Branch of Santee Company, followed by a series of
transactions. By placing the appropriate account number in the space provided, indicate the accounts that
are debited and credited in the accounting records of the branch to record each transaction. The branch
uses the perpetual inventory system.
1 Cash
6
Sales
2 Trade Accounts Receivable
7
Cost of Goods Sold
3 Inventories
8
Operating Expenses
4 Trade Accounts Payable
9
Income Summary
5 Home Office
10 All other ledger accounts
Transactions
a. Received cash from home office.
b. Recognized operating expenses (paid in cash) for the accounting
period.
c. Sales were made on account for the accounting period; recognized
cost of goods sold for the period.
d. Collections on trade accounts receivable were made.
e. Payments by branch to suppliers were made.
f. Branch remitted cash to home office.
g. Revenue and expense ledger accounts were closed at the end of the
accounting period. (Prepare a journal entry and assume that total
revenue exceeds total expenses.)
h. Closed Income Summary ledger account and notified home office that
a net income was earned in the latest accounting period.
Vista
Branch
ledger
accounts
debited
Vista
Branch
ledger
accounts
credited
2.
The home office of Quilly Company bills Leone Branch at 25% above home office cost for all
merchandise shipped to the branch. During January, 2002, the home office shipped merchandise to the
branch at a billed price of $24,000. The branch inventories on January 1 and January 31, 2002, were as
follows:
Jan. 1
Jan. 31
Merchandise received from home
office (at billed prices)
$27,600
$32,000
Merchandise purchased from
outsiders
12,400
12,000
Total branch inventories
$40,000
$44,000
The home office uses the periodic inventory system.
In the space below, prepare all journal entries (including adjustments) in the accounting records of the
home office for January, 2002 to record the foregoing information.
Quilly Company Home Office
Journal Entries
2002
3.
The Investment in Subble Branch ledger account of the home office of Darcy Company and the Home
Office account of the branch for the month of January, 2002, are below and on page 44.
Investment in Subble Branch
Balance, Jan. 1
Shipment of
merchandise
Expenses
allocated to
branch
61,000 Cash received
from branch
6,200 Collection of
branch note
receivable
1,150
4,500
2,000
Home Office
Cash remitted to
home office
Merchandise
returned to home
office
Balance, Jan. 1
61,000
4,500 Shipment of
merchandise
6,200
Collection of
195 home office trade
account receivable
180
a. Complete the reconciliation of the reciprocal accounts in the space below.
Investment in Subble
Branch ledger account
Home Office ledger
(in home office
account (in branch
accounting records)
accounting records)
Balances prior to adjustment
$
$
Add:
Less:
Adjusted balances
$
$
b. In the spaces below, prepare a single journal entry for both the home office and the branch to bring
each set of accounting records up to date (assume that both use the perpetual inventory system).
Darcy Company Home Office
Journal Entry
2002
Jan. 31
Subble Branch
Journal Entry
2002
Jan. 31
CASE
In your audit of the financial statements of Wallis Company, which has a single branch in Iowa, for the fiscal year
ended January 31, 2002, you review the following home office ledger account:
Date
2002
Jan. 2
16
31
Allowance for Overvaluation of Inventories: Iowa Branch
Explanation
Debit
Credit
Shipment of merchandise costing $10,000 at a 20% markup
on billed price, to stock the branch for its opening.
Shipment of merchandise costing $40,000 at a 20% markup
on billed price, to replenish the branch inventories.
Reduction of balance by unrealized markup in the branch’s
ending inventories of $3,000 at billed prices.
600
Balance
2,000
2,000 cr
8,000
10,000 cr
9,400 cr
a. Describe the errors in the journal entries posted to the foregoing ledger account.
b. Describe, but do not prepare, the journal entry required to correct the foregoing ledger account on
January 31, 2002.
SOLUTIONS TO QUESTIONS, SHORT EXERCISES, AND CASE: CHAPTER 4
QUESTIONS
True or False
1. T 2. F 3. T 4. F 5. F 6. F 7. T 8. F 9. F 10. F 11. F 12. F 13. T 14. T 15. F 16. F
F
17. F 18.
Completion Statements
1. Branch, home office, profit center, division. 2. Reciprocal, eliminated, combined. 3. Realized.
4. Home
Office, Investment in Branch. 5. Allocated, Investment in Branch, Operating Expenses.
6. 25%, for
Overvaluation of Inventories: Branch.
Multiple Choice
1. d 2. a 3. b 4. d 5. c 6. c [($39,500 x 0.20) – $1,500 = $6,400]
SHORT EXERCISES
1.
Transactions
a. Received cash from home office.
b. Recognized operating expenses (paid in cash) for the accounting period.
c. Sales were made on account for the accounting period; recognized cost of
goods sold for the period.
d. Collections on trade accounts receivable were made.
e. Payments by branch to suppliers were made.
f. Branch remitted cash to home office.
g. Revenue and expense ledger accounts were closed at the end of the
accounting period. (Prepare a journal entry and assume that total revenue
exceeds total expenses.)
h. Closed Income Summary ledger account and notified home office that a
net income was earned in the latest accounting period.
Vista
Branch
ledger
accounts
debited
1
8
Vista
Branch
ledger
accounts
credited
5
1
2, 7
1
4
5
6, 3
2
1
1
6
7, 8, 9
9
5
2.
2002
Quilly Company Home Office
Journal Entries
Investment in Leone Branch
Shipments to Leone Branch
Allowance for Overvaluation of Inventories: Leone Branch
To record shipments to branch at 25% above home office cost.
24,000
19,200
4,800
Allowance for Overvaluation of Inventories: Leone Branch
Realized Gross Profit: Leone Branch Sales
To reduce allowance amount by which ending inventories exceed
home office cost.
Billed
price
Cost Markup*
Beginning inventories
$27,600 $22,080 $
5,520
Add: Shipments from home office
24,000
19,200
4,800
Available for sale
$51,600 $41,280
$10,320
Less: Ending inventories
(32,000) (25,600)
(6,400)
Cost of goods sold
$19,600 $15,680
$
3,920
*A markup of 25% on cost is equal to a markup of 20% on billed price.
3. a.
Balances prior to adjustment
Add: Collection of home office
trade account receivable
by branch
Expenses allocated to branch
by home office
Less: Merchandise returned to
home office by branch
Collection of branch note
receivable by home office
Adjusted balances
b.
2002
Jan. 31
Investment in Subble
Branch ledger account
(in home office
accounting records)
$61,850
3,920
3,920
Home Office ledger
account (in branch
accounting records)
$62,685
180
1,150
(195)
(2,000)
$61,835
$61,835
Darcy Company Home Office
Journal Entry
Inventories
Trade Accounts Receivable
Investment in Subble Branch
To adjust Investment in Subble Branch ledger account.
195
180
15
Subble Branch
Journal Entry
2002
Jan. 31
Operating Expenses
Home Office
Notes Receivable
To adjust Home Office ledger account.
1,150
850
2,000
CASE
a. The two credits to the Allowance for Overvaluation of Inventories: Iowa Branch are of incorrect
amount. A 20% markup on billed price is a 25% markup on home office cost; therefore, the January
2, 2002, credit should be $2,500 ($10,000 x 0.25 = $2,500), and the January 16 credit should be
$10,000 ($40,000 x 0.25 = $10,000). The January 31 journal entry should be a debit of $11,900, or
20% of branch cost of goods sold of $59,500 ($10,000 + $2,500 + $40,000 + $10,000 – $3,000 =
$59,500).
b. The ending balance of the Allowance for Overvaluation of Inventories: Iowa Branch should be $600
($3,000 x 0.20 = $600). Therefore, the January 31, 2002, journal entry to correct the balance of that
account is a debit to Investment in Iowa Branch, $2,500 (the aggregate understatement of the billed
prices of the two merchandise shipments to the branch: $500 + $2,000 = $2,500); a debit to
Allowance for Overvaluation of Inventories: Iowa Branch, $8,800 ($9,400 – $600 = $8,800); and a
credit to Realized Gross Profit: Iowa Branch Sales, $11,300 ($11,900 – $600 = $11,300).
HOME OFFICE,BRANCH AND AGENCY ACCOUNTING
1.Lacoste Philippines has two merchandise outlets, its main store in Manila and in Cebu City branch. For control
purposes, all purchases are made by the main store, and shipmentsto the Cebu City branch are at cost plus 10%.
On January 01, 2016, the inventories of the main store and Cebu City branch were P13,600 and P3,960,
respectively. During 2016, the main office purchased merchandize costing P40,000 and shipped 40% of these to
the Cebu City branch.
At December 31, 2016, the following journal entry was made to prepare the Cebu City branch books for the next
accounting period:
Sales
32,000
Inventory
4,840
Inventory
3,960
Shipments from the main store
17,600
Expenses
10,480
Main store
4,800
[1]what was the actual branch income of 2016 on a cost basis, assuming the use of the provisions of the PAS,
and [2] if the main store has P11,200 worth of inventory on hand at the end of 2016, the total inventory that should
appear on the combined balance sheet at December 31, 2016?
a. [1] P4,800 [2] P15,600
c. [1] P6,320 [2] P15,600
b. [1]
d. [1] 6,480 [2]
6,320 [2] 15,160
16,040
Ans: C
[1]
actual branch income:
Sales……………………………………………………………………………..32,000
Less: Costs of Goods Sold
Inventory, Jan. 1, at billed price…………………..P 3,960
Shipments from Main store, at billed price……… 17,600
Cost of goods available for sale, at billed
Price………………………………………..P 21,560
Less: inventory, December 31, at billed
Price ………………………………………. 4,840
Cost of goods sold at billed price………………....P 16,720
Multiplied by: cost ratio ……………………………. 100/110
15,200
Gross Profit……………………………………………………………………P 16,800
Less: Expenses………………………………………………………………. 10,480
True Branch Net Income…………………………………………………….P 6,320 (c)
[2] Ending Inventory at Cost:
Home office……………………………………………….P 11,200
Branch: (P4,840 x 100/110)…………………………….
4,400
Combined ending inventory at cost……………………P 15,600 (c)
2.Barros Corporations shipments to and from its Brazil City branch are billed at 120% of cost. On December 31,
Brazil branch reported the following data at billed prices: inventory, January 1 of 33,600; shipments received from
home office of 840,000; shipment returned of 48,000; and inventory; December 31, of 36,000.
What is the balance of the allowance for over valuation of branch inventory on December 31 before adjustments?
a. 5,600
b. 137,600
c. 6000
d. 145,600
ANS:B
Inventory, January 1
Add: Shipments from office, net o returns
(840,000-48,000)
Cost of goods available for sale
Multiplied by: Mark up
Allowance for overvaluation before adjustments
33,600
792,000
825,600
20/120
137,600
3.Philippine Overseas Corporation has operated a branch in Jordan for one year . shipments are billed to the
branch at cost. The branch carries its own expenses. The transactionsfor the year are given effect to in the trial
balance below:
Accounts
Debit
Credit
Cash
P4,200
Home office Current
P17,500
Shipments From Home Office
67,680
Accounts Receivable
12,800
Expenses
6,820
Sales
74,000
P91,500
P91,500
The branch reported on inventory on December 31, 20x5 of P9,180.
The net profit of the Jordan Branch for 20x5 was:
a. P8,680
c.P6,718
b. P9,180
d. Some other answer.
ANSWER: A
Sales
P 74,000
Less: Cost of goods sold:
SFHO
Less: Inventory, ending
Gross profit
Less: Expenses
Net Profit
P67,680
9,180
58,500
P 15,500
6,820
P 8,680
4.The Clark branch of Freeport Corp. submitted the following trial balance as of 30 June 2016:
Cash
Accounts Receivable
Shipments from home office
Home-office current
Sales
Expenses
Total
Debit
P 28,600
173,800
462,000
__ 29,700
P694,100
Credit
P324,500
369,600
________
P694,100
Clark reported an ending inventory of P138,600, Shipments are billed at a mark-up of 40% on cost. What is the real net
income of Clark Branch?
a. P70,000
b. P92,400
c. P100,000
d. P108,900
ANS: D
Sales
Less: Cost of Goods Sold
Shipments from Home Office,
at cost (P462,000 x 100/140) P330,000
Less: Ending Inventory,
at cost (P138,600 x 100/140)
99,000
Gross Profit
Less: Expenses
Real Net Income of the Branch
P369,600
231,000
P138,600
29,700
P108,900
5.Tillman Textile Co. has a single branch in Bulacan. On march 1, 2016, the Home Office accounting records included an
Allowance for Overvaluation of Inventories-Bulacan Branch ledger account with a credit balance of P32,000. During
March, merchandise costing P36,000 was shipped to the Bulacan Branch and billed at a price. On March 31, 2016, the
branch prepared an income statement indicating a net loss of P11,500 for march and ending inventories at a billed prices
of P25,000. What is the amount of adjustment for Allowance for Overvaluation of Inventories to reflect the true branch net
income?
a.
b.
c.
d.
P39,257 debit
P46,000 credit
P39,333 debit
P46,000 debit
ANS: D
Merchandise Inventory, March 1, 2016
Add: Shipments (P36,000/60% = 60,000 x 40%)
Note: Mark-up is based on billed price
Cost of Goods available for sale
Less: Merchandise inventory, March 31, 2016
(25,000 x 40%)
Overvaluation of CGS/Realized the Gross Profit on Branch Sales
P32,000
24,000
P56,000
10,000
P46,000
6. As you begin to audit the books of the FIL-EM Company. YOU notice a discrepancy between the balance in the
Investment in Branch (P136,020 Dr.) and the Home Office (P175,400 Cr.) accounts. The followmg Information is
available:
A. The home office bills goods shipped to the branch at 150% of cost. At the beginning of the year, branch inventory was
stated at P7S,000 after the annual physical count, and the home office unrealized profit account had a credit balance of
PS,000. You find that a shipment with a billed value of P60,000 made toward the end of the prior year had not been
recorded by the home office.
B. On December 31 of the year under review, the branch mailed to the home office a check for 925,000 and a notice that
the branch had collected P4,380 on a home office account receivable. These items had not been recorded by the home
office. .
C. The branch was opened during the preceding year and its operating loss of P42,800 for the year was capitalized by the
branch as a start-up costs by the following entry:
Start-up Cost (Intangible Asset) 42,800
Income Summary ' 42,800
The account is not being amortized by the branch, and no entry was made by the home office to record the net loss.
How much must be the adjusted balance of reciprocal accounts
A. P175,400
B. P192,600
25 of 5
C. P115,400
D. P132,600
Answer: D
Investment ln Branch
Home Office
Unreconciled balance
P136,020
P175,400
1) Unrecorded shipment
60,000
2) Unrecorded remittance ( 25,000)
2) Accounts collected
4380
3) Net loss
( 42,800)
( 42,800)
Adjusted balance
P132,600
P132,600
7. On September 1, 2014, Ricky Company established two branches: Naga and Cebu City branches. The home office
transferred P80,000 worth of cash and P 350,000 worth of inventory to its Naga branch and instructed Naga to transfer
3/4 of the goods and cash received to Cebu City. In addition, on November 1, 2014, shipments from home office were
received by Naga amounting to P125,000 and the branch paid freight costs amounting to P6,500. 3/5 of the said
shipments were sold to outsiders. On December 1, 2014, Naga transferred half of the remaining November shipments
from the home office to Cebu City, with Cebu City branch paying freight costs of P 2,500. Had the merchandise been
shipped from the home office to Cebu City branch, only P 1,900 worth of freight would have been incurred. How much is
the balance of the Cebu City branch account in the home office books?
a. 349,400
b. 348,800
c. 206,200
d. 346,900
Answer: D
Solution:
Branch Current - Naga
9/1 430,000
9/1 (322,500)
11/1 125,000
12/1. (26,300)
Balance 206,200
Branch Current - Cebu, City
9/1. 322,500
12/1. 24,400
Balance 346,900
8. The Ray Company was organized in 2014. Shortly after opening its doors to the public t the main store, Ray Company
establish branch in another city. At the end of the second year of operations, the home office received the following
condensed income statement from the branch:
Revenues
Cost of Goods Sold
Gross Margin
Selling and Administrative expenses
140,000
110,000
30,000
25,000
Net Income
5,000
The management at the home office questioned the accuracy of these figures and assigned you the task of verifying
the branch data. Your review of the records uncovered the following facts:
1. The beginning of the year balance in Unrealized Profit to Branch was 6,000
2. During the period, the home office shipped goods to the branch taht had cost the main store P75,000. However, your
review of the branch receiving reports revealed that a number ofshipments from the home office had been recorded twice
by the branch accountant.
3. The branch is billed a uniform 25% above costand receives inventory only from te home office.
4. The branch ending inventory was correctly reported at a billed price of P21,750.
5. When reconciling reciprocal accounts, you found that the branch had not recorded 2,000 og services performed by the
home office and billed to the branch. All other selling and adminitrative expenses were correctly reported by the branch.
Compute the correct net income of the branch.
a. 31,400
b. 33,400
c. 25,400
d. 11,000
Answer: A.
Correct Net Income
Revenue
140,000
26 of 5
COGS
Beg. Inv. at cost (60,000/25%) 24,000
Add: Shipments at cost
75,000
Less: End. Inv. at cost
(21,750/125%)
(17,400)
Gross Margin
Selling and Admin. Exp (25,000+2,000)
Net Income
(81,600)
58,400
(27,000)
31,400
9. The after closing balances of Denise Corporation's home office and its branch at January 1,2014 were as follows:
Home Office
Branch
Cash
P 7,000
P 2,000
Accounts Receivable-net
10,000
3,500
Inventory.
15,000
5,500
Plant Assets, net
45,000
20,000
Branch
28,000
Total Assets
P 105,000
P 31,000
Accounts Payable
P 4,500
P 2,500
Other liabilities
3,000
500
Unrealized Profit- Branch inv.
500
Home Office
28,000
Capital Stock
80,000
Retained Earnings
17,000
Total Equities
P 105,000
P 31,000
A summary of the operations of the home office and branch for 2014 follows:
Home Office sales: P 100,000, including ,P 33,000 to the branch. A standard 10% mark up on cost applies to all sales to
the branch. Branch sales to iys customers totaled P 50,000.
Purchases from outside entities: Home Office, P 50,000; Branch P 7,000
Collections from sales: Home Office P 98,000 (including P 30,000 from branch); Branch Collections; P 51,000
Payments on account; Home Office, P 51,000; Branch P 4,000
Operating expenses paid; Home Office, P 20,000; Branch P6,000
Depreciation on Plant Assets; Home Office, P 4,000; Branch P 1,000
Home Office expenses allocated to the branch, P 2,000
At December 31,2014, the Home Office inventory is P 11,000 and the Branch inventory is P 11,000 and the Branch
inventory is P 6,000 of which P 1,050 was acquired from outside suppliers.
The combined net income amounted to
a. 0
b. 4,550
c. 21,000
d. 25,550
Answer: D.
Sales
Cost of Sales (20,000+57,000-16,000)
Gross Profit
Operating Expenses (26,000+5,000)
Consolidated Net Income
117,500
(60,450)
56,550
(31,000)
25,550
10. Rea Company operates a branch in Pangasinan. Shipments are billed to the branch at cost. The branch carries its
own accounts receivable, makes its own collections and pays its own expenses. On December 31, 2015, the branch
books shows the following balances:
Cash
P 6,500
Home Office
33,000
Shipments from Home Office
133,000
Accounts Receivable
23,000
Sales
145,000
Expenses
11,500
The branch inventory on December 31, 2015 is P 16,500. What is the balance of the investment in Branch account in the
books of the Home Office on January 1, 2016?
a. P 33,000
b. P 52,000
c. P 50,000
d. P 53,000
27 of 5
Answer: c. P 50,000
Solution:
Home Office
Net Income:
Sales
Shipments from Home Office
Inventory, End
Gross Profit
Less: Expenses
Investment in Branch
P 33,000
P 145,000
P 133,000
( 16,500) 116,500
28,500
(11,500)
17,000
P 50,000
11. Capistrano Corporation ships merchandise to its branch at 25% above cost. On its
books the branch shows a beginning inventory of home office merchandise amounting to P 20,000 and shipments from
Home Office of P 115,000. Its ending inventory of Home Office Merchandise is P 10,000. What amount should the home
office, Capistrano Corporation adjust the allowance for overvaluation of branch inventory account?
a. P 20,000
b. P 25,000
c. P 100,000
d. P 50,000
Answer: b. P 25,000
Solution:
Home Office Merchandise, beg.
Shipments from Home Office
P 20,000/ 125%= P 16,000
115,000/ 125%= 92,000
Less: Home Office Merchandise, end.
10,000/ 125%=
8,000
P 4,000
23,000
P 27,000
(2,000)
P 25,000
12. The Best acoustic. bills merchandise shipments its Cavite City branch at 125% of cost. The branch, in turn, sells the
merchandise it receives from home office at 25% above the billing price. On August @, 2016, all the branch' s
merchandise stock was destroyed by fire. The branch record that were recovered showed the following:
Inventory, Jan 1, 2016.
Shipments received from home office,
January to July(at billed price
Purchase at cost, from outside sources,
all resold at a 20% mark-up
Sales
Sales returns and allowances
P165,000
110,000
10,200
169,000
3,750
The Best Co. will file an insurance claim. How much is the estimated cost of the merchandise destroyed by fire?
a. P120,000.
b. P130,000.
c. P140,000
d. P 150,000
Answer: A
Inventory, Jan. 1, at billed price.
P165,000
Shipments received from home office at billed price
110,000
Cost of good available for sale at billed price.
P275,000
Less: cost of good sold, ffrom home office
at billed price
Sales.
P169,000
Less: sales return and allowance.
3,750
Sales price of merchandise purchased
from outsiders (P7,500 x 120%).
9,000
Net sales of merchandise acquired
from home office.
P156,250
Multiplied by: Intercompany cost ratio. 100/125
125,000
Inventory, Aug. 1, 2016, at billed price.
P150,000
Multiplied by cost ratio.
100/150
Merchandise inventory at cost destroyed by fire.
P120,000
28 of 5
13. The home office of Irby Company bills merchandise to branches at 20% above home office cost. Information taken
from the accounting records of Kipp Branch is as follows:
Beginning Inventories (at billed prices) P17,000Shipmnlents from home office P42,500Ending inventories P20,000Net
loss P 1,500
The net income or net loss of Kipp Branch, based on home office cost of branch merchandise, is:
a. P7,900 net income
b. P9,400 net loss
c. P6,400 net income
d. P7,000 net income
Answer: C
Cost of sale
Mark up%.
Total
Less: net loss
Net income
P39,500
20%
P 7,900
1,500
P 6,400
For question no. 14-15
Ruby Corporation shipped inventory to its Licab branch, costing P375,000 plus freight. Ruby bills inventory to its branches
at 120% of original cost, plus the actual amount of shipping charges. At the end of the year, the Licab branch had resold
50% of the inventory from the home office. Shipping cost paid by Ruby were P2,000.
14. What amount should the inventory will be reported in the branch statement of financial position?
a. P197,500
b. P188,500
c.
P377,000
d. P287,500
Ans. B
Cost
Add: shipping cost
Total
Multiply by :
P375,000
P2,000
P377,000
50%
P188,500
15. Using the data above, what amount should the branch inventory from the home office be reported in the financial
position of Ruby Corp. As a whole?
a. P157,250
b. P188,500
c.
P198,500
d. P377,000
Ans. A
Cost
Divided by:
Add: shipping cost
Total
Less: Resold
P375,000
120%
P312,500
P2,000
P314,000
P157,250
P157,250
16. On July 31, 2013, the home office in Manila establishes a sales agency in Bulacan. The following assets are sent to
the agency:
Cash (working fund to be operated under the imprest system)
P22, 000
29 of 5
Samples of merchandise
36, 000
During the month of August, the following transactions occurred:
The sales agency submits sales order of P272, 000, sales per invoice was billed at P268, 000. Cost of sales to customers
is P124, 000.
Collections during the month amount to P58, 200, net of 3% discount.
Home office disbursements chargeable to the agency are as follows:
Furniture
P40, 000.
Salaries for the month
21, 600
Annual rent of office space
36, 000
On August 31, the sales agency working fund is replenished. Paid vouchers submitted by the sales agency amounting to
P17, 925. Samples are useful until December 31, 2013, which at this time, are believed to have a salvage value of 15% of
cost. Furniture is depreciated at 18% per annum.
What is the total comprehensive income of the sales agency for the month of August?
a. P91, 425
b. P93, 225
c. P92, 955
d. P58, 425
Ans.: C
Solution:
Sales
Sales discount(P58, 200 ÷ 97%) x 3%
Net sales
Cost of expenses:
Cost of sales
Salaries
Rent expense(P36, 000 x 1/12)
Expenses
Samples(P36, 000 x 85%) x 1/5
Depreciation(P40, 000 x 18% x 1/12)60
Net income
P268, 000
1800
266, 200
P124, 000
21, 600
3000
17, 925
6, 120
173, 245
P92, 955
17. The account balances shown below were taken from the trial balances submitted to Bon-Apetit Corporation by its
Alabang Branch:
2015
2016
Petty cash fund
P1500
P1500
Accounts receivable
43, 800
49,140
Inventory37, 170
Sales
173, 180
195, 120
Shipments from home (140% of cost)
107, 450
136, 080
Expenses
51, 260
57, 930
Accounts written off
1, 220
1, 920
All branch collections are remitted to the home office. All branch expenses are paid out of the petty cash fund. When the
petty cash fund is replenished, the branch debits appropriate expense accounts and credits Home Office Current. The
petty cash is counted every December 31, and its composition was as follows:
12/31/1512/31/16
Currency and coinsP580P860
Expense vouchers920640
The branch inventory on December 31, 2016 was P41, 370. The correct branch net income for 2016 was:
a. P3, 390
b. P3, 670
c. P41, 070
d. P41, 350
Ans.: D
Solution:
Sales
Less: Cost of goods sold:
Inventory, 1/1/16, at cost (37, 170 x 100/140)
Add: Shipments, at cost (P136, 080 x 100/140)
Cost of goods available for sale
Less: Inventory, 12/31/16, at cost(P41, 370 x 100/140)
Gross profit
Less: Expenses(P57, 930 + P1, 920* – P280** )
Correct branch net income
P195, 120
26,550
97,200
P123, 750
29,550
30 of 5
94,200
100, 920
59, 570
P41, 350
*Direct write-off was used in recording doubtful accounts since there is no allowance account given in the trial balance.
**There was P280 reduction on unreimbursed petty cash expense vouchers, incidentally, the entry for the adjustment
would be:
Petty cash 280
Expense
280
18.A branch’s ending inventory of merchandise shipped by the home office and purchased from outside vendor’s amounts
to P100,000. The post closing balance in the unrealized gross profit in branch inventory account is P12,000 due to the
home office practice of shipping merchandise at 20% above cost. The merchandise purchased from outside vendors
contained in the ending inventory of the branch amounts to:
a. 38,000
b. 30,000
c.
14,000
d. 28,000
Ans. D
Unrealized gross profit 12,000/ 20% =
Unrealized gross profit
Total Inventory cost
Branch Ending Inventory
Less: Inventory cost
Total branch ending inventory
60,000
12,000
72,000
100,000
72,000
28,000
19. Items below are taken from the unadjusted trial balance of Anjie Company and its branch on December 31,2015.
Home office books
Branch books
Shipment to branch
500,000
Allowance for overvaluation of branch inventory
99,900
Shipments from home office
590,000
Merchandise Inventory, Jan.1
64,500
Merchandise Inventory, Dec.31
48,750
Sales
600,000
Expenses
81,000
It is the company’s policy to bill all branches for merchandise shipments at 30% above cost.
How much of the branch inventory on January 1 represents purchases from outsides?
a. 11,700
b. 42,000
c.
12,870
d. 27,600
Ans. D
Inventory, Jan.1
Less: (99,900-(590,000-500,000)
(9,900/30%)
Total Inventory
64.500
9,900
33,000
27,600
20. On December 3, 2016. the home or recorded a shipment of merchandise to its Davao Branch as follows,
Davao Branch ...................................................... 30,000
Shipments to Branch ............................... 25,000
Unrealized Profit in Branch inventory………4,000
Cash (for freight charges)…………………….1,000
The Davao branch sells 40% of the merchandise to outside entities during the rest of December 2016. The books at the
home office and Kathy Office Supply are closed on December 31 of each year.
On January 5, 2017 , the Davao branch transfer 'half of the original shipment to the Baguio branch, and the Davao
branch pays P500 as the shipment.
31 of 5
At what amount should the 60% of the merchandise remaining unsold at December 31, 2016 be included in (1) inventory
of the Davao branch at Decmbr 31, 2016 and (2) the published balance sheet of Kathy office supply Company at
December 31, 2016 shows inventory at:
A. (1)P15,600(2) P18,000
B. (1)P17,400(2) P15,000
C. (1)P18,000(2)P15,600
D. (1)P18,400(2)P16,000
ANSWER: C
[1] Inventory of Davao branch at December 31, 2016:
Shipment from home office at billed price………………………………….. P 29,000
Multiplied by: ending inventory………………………………………………
60%
P 17,400
Add: freight in (1000 x 60%) …………………………………………………
600
P 18,000 (c)
[2] inventory at published (external reporting) balance sheet at cost:
Shipment at cost……………………………………………………………… P 25,000
Multiplied by: ending inventory………………………………………………
60%
P 15,000
Add: freight in (1000 x 60%) …………………………………………………
600
P 15,600 (c)
21. Macoy starts a branch operation on January 1, 2013. Inventory costing P 72,000 is shipped to this branch at a transfer
price of P 100,000. Freight is an additional P6,000. The branch sells 70 percent of this inventory for P 110,000 and remits
P 70,000 in cash to the home office. On Macoy's financial statements for this period, what appropriate Cost of Goods Sold
figure?
a. P 50,400
b. P 54,600
c. P 70,000
d. P 74,200
Answer: b
Shipment to branch, at cost
Ending inventory, at cost (P72,000 x 30%)
Cost of goods sold
Freight (P6000 x P50,400/P72,000)
Total
P 72,000
(21 600)
P 50,400
P 4,200
P 54,600
22. Power Corporation shipped inventory to its Bacolod branch, costing P 375,000 plus freight. Power bills inventory to its
branches at 120 percent of original cost, plus the actual amount of shipping charges. At the end of the year, the Bacolod
branch had resold 50 percent of the inventory from the home office. Shipping costs paid by Power were P 2,000. What
amount should the inventory be reported in the branch's statement of financial position?
a. P 187,500
b. P 188,500
c. P 226,000
d. P 377,000
Answer: b
Shipment to branch, at billed price
Shipping cost
Total cost
Sold (50%)
Inventory
P 375,000
P 2,000
P 377,000
P 188,500
P 188,500
23. Lobster Trading bills its Nueva Ecija branch for shipments of goods at 25% above cost. All the close of business on
October 31, 20x6, a fire gutted the branch warehouse and destroyed 60% of the merchandise stock stored therein.
Therefore, the following data were gathered:
January 1 inventory, at billed price
Shipments from home office to Oct. 31
Not sales to Oct. 31
If undamaged merchandise recovered are marked to sell for P30,000, the estimated cost of the merchandise destroyed by
fire was:
a. P14,400
c. P24,000
b. 21,600
d. 27,500
32 of 5
Ans: b
Inventory, January 1 at billed price
Add: Shipments from home office, at billed price
Cost of Goods Available for Sale at billed price
Divided by: Cost of Goods Available for sale
at sales price:
Net Sales
Add:
Inventory before the fire:
Undamaged merchandise
Divided by: Recovery Percentage
Percentage of Billing Price to Selling Price
P 50,000
130,000
P180,000
P225,000
P 30,000
40%
75,000
Estimated cost of merchandise destroyed by fire:
Inventory before the fire at selling price (P30,000/40%)
x: % of damaged merchandise
Damaged merchandise at selling price
x: % of Billing Price to Selling Price
Damaged Merchandise at Billed Price
x: Cost Ratio
Cost of Merchandise destroyed by fire
300,000
60%
P 75,000
60%
P 45,000
60%
P 27,000
100/125
P 21,600
24.On August 31, 20x6, a fire destroyed totally the rented “bodega” or stockroom of Adobo Company. The following are
some of the data of the company:
Merchandise Inventory, Dec. 31, 20x5
For the period Jan. 1 – Aug. 31, 20x6:
Purchases
Freight In
Purchases returns
Sales
Sales returns and allowances
P110,000
560,500
5,600
10,200
695,000
7,500
Using a 20% gross profit rate, the cost of the merchandise lost in the fire was:
a. P 90,700
c. P88,400
b. 115,900
d. 63,200
Ans: b
Merchandise inventory, 12/31/20x5
Add:
Net Purchases
Purchases
Add: Freight-in
Total
Less: Purchase returns
Cost of Goods Available for Sale
Less: Cost of Goods Sold:
Net Sales (P695,000 – P7,500)
x: Cost Ratio
Merchandise inventory, 8/31/20x6
loss due to fire
P110,000
P560,500
5,600
P566,100
10,200
555,900
P665,900
P687,500
80%
550,000
P115,900
25. The Lewis Co. bills merchandise shipments in its Quezon City branch at 120% of cost. The branch, in turn,
sells the merchandise it receives from the home office at 20% above the billing price. On July 31, 2016, all of the
branch’s merchandise stock was destroyed by fire. The branch records that were recovered showed the following:
Inventory, January 1, 2016 (at billed price)………………..
P330,000
Shipments received from home office,
January to June (at billed price)……………………….
220,000
Purchases, at cost, from outside sources,
All re-sold at a 25% mark-up…………………………..
15,000
Sales…………………………………………………………..
338,000
Sales return and allowances………………………………...
7,500
The Lewis Co. will file an insurance claim. How much is the estimated cost of that merchandise destroyed by the
fire?
a. P290,792
b. P259,792
c. P232,166
d. P230,166
33 of 5
ANSWER: (c)
Inventory, January 1, at billed price……………………………………….
Shipments received from home office at billed price……………………
Cost of goods available for sale at billed price…………………………..
Less: Cost of goods sold, from home office at billed price
Sales……………………………………………………..
P338,000
Less: Sales return and allowances…………………..
7,500
Sales price of merchandise purchased
from outsiders (P15,000 x 125%)…………
18,750
Net sales of merchandise acquired
From home office……………………………………….
P311,750
Multiplied by: Intercompany cost ratio………………………
100/120
Inventory, July 31, 2016, at billed price……………………..
Multiplied by: Cost ratio……………………………………….
Merchandise inventory at cost destroyed by fire…………..
P330,000
220,000
P550,000
259, 792
290,208
100/120
P232,166
26. Pascual Branch was billed by Home Office for merchandise at 140% of cost. At the end of its first month,
Pascual branch submitted among other things the following data:
Merchandise from Home Office (at billed price)……………
P196,000
Merchandise purchased locally by branch………………….
80,000
Inventory, December 31 of which P14,000 are of
Local purchase…………………………………………..
56,000
Net sales for month……………………………………………
360,000
The branch inventory at cost and the gross profit of the branch as far as the home office is concerned are:
a.
b.
c.
d.
Gross Profit
P184,000
P184,000
P140,000
P154,000
Ending Inventory of Branch at Cost
P154,000
P176,000
P176,000
P140,000
ANSWER: (b)
Net sales
Less: Cost of good sold:
Purchases
Shipments from home office, at cost
(P196,000 x 100/140)
Cost of goods available for sale
Less: Inventory, December 31
[(P56,000 – P14,000) x 100/140 + 14,000]
Gross profit
P360,000
P 80,000
140,000
P220,000
P 44,000
(b
)
176,000
P184,000
(b)
27. Ryder Corporation has one branch operation located 500 miles away from the home office. The branch office sells
merchandise which is shipped to it from the home office. The merchandise is transferred at cost but the branch pays
reasonable freight charges. The branch office makes sales and incurs and pays operating expenses. At the end of the
current accounting period the true adjusted balance for the home office account on the branch’s books and the branch
office account on the home office’s books is P500,000.
The following items may or may not be reconciling items.
 The current year is 20x4.
 The home office has shipped merchandise to the branch office which cost P1O, 000 and which incurs P500
freight charges paid by the home office but charged to the branch. This merchandise is received by the branch on
January 5, 20x5.
 The branch has transmitted P17, 000 in cash back to the home office as a partial payment on such purchased
merchandise. This cash is received by the home office on January 6th, 20x5.
 The branch office returns some defective merchandise to the home office. The cost of the returned merchandise
is P750. The branch office pays P25 of freight costs which will be charged back to the home office.
 On December 1, 20x4, the home office sends a check for P25,000 to replenish the branch’s working capital. The
check is received on January 4, 20x5.
34 of 5



The branch pays an advertising expense of P800 that should have been paid by the home office since it applied
to advertising fees incurred by the home office for its own benefit.
The home office allocated P12,000 of general and administrative expenses to the branch. The branch had not
entered the allocation as of the end of the year.
The home office pays insurance premiums on the branch store. The amount paid by the home office is P1,000 but
the branch erroneously records It as P776.00
Compute the unadjusted balances for the branch and home office accounts as of December 31, 20x4.
Home Office Current
P481,425
P500,000
P452,276
P518,575
a.
b.
c.
d.
Branch Current
P433,701
P500,000
P518,575
P452,276
ANSWER: C
Unadjusted balance (SQUEEZED)
Add (deduct) adjustments:
In transit
Remittance
Returns
Cash in transit
Expenses - HO
Expenses - Branch
Error
Adjusted balance
Home Office Books
(Branch Current - Dr. Bal)
P518,575
Branch Books
(Home Office Current - Cr. Bal)
P452,276
10,500
(17,000)
( 775)
25,000
(
800)
P500,000
12,000
224
P500,000
28. At December 31, 20x5, the following information has been collected by Maxwell Company's office and branch for
reconciling the branch and home office accounts.





The home office's branch account balance at December 31, 20x5 is P590,000. The branch’s home office account
balance is P506,700.
On December 30, 20x5, the branch sent a check for P40,000 to the home office to settle its account. The check
was not delivered to the home office until January 3, 20x6.
On December 27, 20x5, the branch returned P15,000 of seasonal merchandise to the home office for the January
clearance sale. The merchandise was not received by the home office until January 6, 20x6.
The home office allocated general expenses of P28,000 to the branch. The branch had not entered the allocation
at the year-end.
Branch store insurance premiums of P900 were paid by the home office. The branch recorded the amount at
P600.
The correct balance of the reciprocal account amounted to:
a. P575,000
b. P535,000
c. P534,700
d. P501,000
ANSWER: B
Unadjusted balance
Add (deduct) adjustments:
Remittance
Returns
Error by the branch
Expenses - Branch
Adjusted balance
Home Office Books
(Branch Current - Dr. Bal)
P590,000
Branch Books
(Home Office Current - Cr. Bal)
P506,700
(40,000)
(15,000)
P535,000
35 of 5
300
28,000
P535,000
29.Tarlac Branch of Quezon City Company, at the end of its first quarter of operations, submitted the following
statement of comprehensive income:
Sales
P300,000
Cost of sales:
Shipments from Home Office
P280,000
Local Purchases
30,000
Total
P310,000
Inventory at end
50,000
Gross Margin on Sales
260,000
P40,000
Expenses
35,000
Comprehensive Income
P5,000
Shipments to the Branch were billed at 140% of cost. The branch inventory as at September 30 amounted to
P50,000 of which P6,600 was locally purchased. Markup on local purchases is 20% over cost. Branch expenses
incurred by Head Office amounted to P2,500.
On September 30, the inventory at cost and the net income realized by the home office from the Tarlac branch
operation are:
Branch inventory at cost
Net income realized
a. P37,600
b. P50,000
c. P31,600
d. P37,600
P72,600
P55,000
P 5,000
P70,100
Answer: D
Acquired from Home Office:
Billed price (P50,000-P6,600)
P43,400
Divide by billing percentage on cost
140%
Local Purchases
P31,000
6,600
Branch inventory at cost (September 30)
P37,600
Branch net income (P5,000 - P2,500 expenses)
P2,500
Add: Overvaluation of Branch Cost of Sales:
Shipment from Home Office:
Billed price
Cost (P280,000/140%)
P280,000
200,000
P80,000
Less: Inventory end
Billed price(P50,000 – P6,600)
P43,400
Cost (P43,400/140%)
31,000
Branch net income realized by Home Office
12,400
67,600
P70,100
36 of 5
30. Nariza Company opened its Tuguegarao branch on January 1. Merchandise shipments from home office
during the month, billed at 120% of cost, is P125,000. Branch returned damaged merchandise worth P15,620. On
January 31, the branch reported a net loss of (P2,270) and an Inventory of P84,000. What is the net income (loss)
of the branch to be taken up in the books of the Home Office?
a. (P1,690)
b. P6,500
c. (P2,270)
d. P1,960
ANSWER: D
Rationale
Net income (loss) per branch books
Add: Realized profit from sale made by branch/
Overvaluation of cost of goods sold:
Beginning Inventory
Add: Shipments
Less: Returns
Cost of goods available for sale at billed price
Less: Ending Inventory, at billed price
P(2,270)
P
125,000
15,620
P109,380
84,000
Cost of goods sold at billed price
Multiplied by: Mark-up
Adjusted Branch Net Income
P25,380
20/120
P1,960
31. The ZG Corp. established its Bulacan Branch in January 2016. During its first year of operations, home office
shipped to its Bulacan branch merchandise worth P130,000 which included a mark up of 15% on cost. Sales on
account totalled P250,000 while cash sales amounted to P80,000. Bulacan reported operating expenses of
P38,000 and ending inventory of P15,000, at billed price. In so far as the home office is concerned, the real net
income of Bulacan is:
a. P82,000
b. P147,000
c. P177,000
d. P192,000
ANSWER: D
Rationale
Sales (P250,000 + P80,000)
Less: Cost of goods sold:
Shipments from office
P130,000
Less: Ending Inventory
15,000
Cost of goods sold at billed price P115,000
Multiplied by: Cost ratio
100/115
Gross Profit
Less: Operating Expenses
Net Income of the branch in so far as the
Home office is concerned
P330,000
100,000
P230,000
38,000
P192,000
32. Selected accounts from the December 31,2016 trial balance of Sarang Trading Co. And it’s Baguio Branch follow:
Debits
Manila
Baguio Branch
Inventory, January 1,2016
P 25,000
P 11,550
Baguio branch
58,300
Purchases
200,000
105,000
Freight in from home office
5,500
Expenses
40,000
27,500
Credits
Home office
P P 53,300
Sales
160,000
150,000
Sales to branch
110,000
Allowance for overvaluation of
branch inventory at Jan. 1,2016
1,000
-
37 of 5
Additional Information:
1. The Baguio City branch gets all of its merchandise from the home office. The home office bills the goods at cost
plus a 10% mark-up. At December 31,2016 a shipment with a billed amount of P5,000 was still in transit. Freight
on this shipment was P300 and is to be treated as part of the inventory.
2. Inventories on December 31,2016, excluding the shipment in transit, follow:
Home office, at cost
P30,000
Branch. At billed price(excluding freight of P520)
10,000
Compute the (1)net income of the home office from own operations, and (2)the net income of the branch in so far as
home office is concerned.
a. (1)P25,000; (2) P 770
b. (1)P20,000; (2) P10,470
c.
(1)P20,000; (2) P
770
d. (1)P25,000; (2) P20,970
SOLUTION:
ANS: D
(1) Net income of the home office from own operations:
Sales
Less: Cost of goods sold:
Inventory, January 1,2016
Add: Purchases
Cost of goods available for sale
Less: Shipments to branch at cost
Cost of goods available for home office
Sale
Less: inventory, December 31,2016
Gross Profit
Less: Expenses
Net Income
(2) True Branch Income:
P160,000
P 25,000
200,000
P225,000
100,000
P125,000
30,000
Sales
Less: Cost of goods sold:
Inventory, Jan.1,2016, at cost
(P11,550-P1,000 mark-up)
Add: Purchases from home office, at cost
(P105,000+ P5,000 in transit) x
100/110
Freight-In (P5,500+P300 freight-in
transit)
Cost of goods available for sale
Less: Inventory, Dec. 31,2016, at cost from
Home Office:(P10,400 + P5,000)
X 100/110
P14,000
Add: Freight-In (P520+P300)
820
Gross Profit
Less: Expenses
Net Income of the branch in so far as the
Home Office is concerned
95,000
P 65,000
40,000
P 25,000
P150,000
P 10,550
100,000
5,800
P116,350
14,820
101,530
P 48,470
27,500
P 20,970
33. On December 31,2016, the Investment in Branch account on the home office’s books has a balance of P175,000. In
analyzing the activity in each of these accounts for December, you find the following differences:
1. A P14,000 branch remittance to the home office initiated on December 28,2016, was recorded on the home office
books on January 2, 2017.
2. A home office inventory shipment to the branch on December 27,2016 was recorded by the branch on January
4,2017; the billing of P26,000 was at cost.
3. The home office incurred P13,500 of advertising expenses and allocated P5,500 of this amount to the branch on
December 15,2016. The branch has not recorded this transaction.
4. A branch customer erroneously remitted P3,600 to the home office. The home office recorded this cash collection
on December 23,2016. Meanwhile, back at the branch, no entry has been made yet.
38 of 5
5. Inventory costing P51,600 was sent to the branch by the home office on December 11,2016. The billing was at
cost, but the branch recorded the transaction at P40,800.
Compute the balance as of December 31,2016:
Unadjusted Balance
Adjusted
Of The Home Office Account
Balance Of The Reciprocal Account
a.
P84,300
P143,000
b.
P122,300
P 96,000
c.
P151,200
P139,200
d.
P122,300
P161,000
Solution:
ANS: D
Unadjusted balance(s), December 31,2016
Add (deduct); adjustments:
1. Branch remittance not yet recorded by
the home office in 2016
2. Shipments not yet recorded by the
Investment in
Branch Account
P175,000
Home Office
Current
P122,300*
( 14,000)
Branch in 2016
3. Unrecorded branch expenses
26,000
5,500
4. Branch customers’ remittance recorded
by the home office nut not yet recorded
by the branch
5. Erroneous recording of branch shipments
(P51,600 – P40,800)
Adjusted Balance(s) December 31,2016
( 3,600)
P161,000
10,800
P161,000
*The P52,800 is computed by simply working back with P90,000 adjusted balance as the starting point
34. Nueva Ecija Branch of Malabon Company, at the end of its first quarter of operations has the following income
statement:
Sales......................................................................................................
Cost of Sales:
Shipments from Home Office ......................................................P285,000
Local Purchases.......................................................................... 50,000
Total......................................................................................... P335,000
Inventory end.......................................................................... 80,000
Gross profit on sales.............................................................
Expenses..............................................................................
Net Income..............................................................................
P650,000
255,000
P395,000
150,000
P245,000
Shipments to the branch were billed at 140% of cost. The branch inventory at September 30 amounted to P50,000 of
which P6,600 was locally purchased . Mark up on local purchases, 20% over cost. Branch expenses incurred by head
office amounted to P2,500 not yet recorded by the branch. In the combined income statement, true branch net income:
A.P245,000
B.P314,029
C.P311,529
D.P314,029
Answer: C
Branch net income as reported................................................................................. P245,000
Add(Deduct):
39 of 5
Overvaluation of cost of goods sold/realized profit
From sales made by branch:
Shipments from home office...........................P285,000
Less:Ending inventory,at billed price
(50,000-6600)........................................... 43,400
Cost of goods sold from home office at
Billed price..............................................P 241,600
Multiplied by: Mark-up.................................... 40/140
Unrecorded branch expenses.............................................
69,029
(2,500)
True Branch Net Income.........................................................
P 311,529(C)
i
.35.Which represents the proper journal entry for a periodic inventory system that should be made on the books of the
home office when goods that cost the home office $100,000 to manufacture are shipped to a branch at a transfer price of
$125,000 and the billed price is not recorded in the shipments to branch account?
A. Branch office
$100,000
Shipments to branch
B.
Branch office
$100,000
$125,000
Shipments to branch
C.
Branch office
$125,000
$125,000
Shipments to branch
$100,000
Unrealized profit
D.
Shipment to branch
25,000
$100,000
Unrealized profit
25,000
Shipments from home office
$125,000
ii
36.Which represents the proper journal entry for a periodic inventory system that should be made on the books of the
branch when goods that cost the home office $100,000 to manufacture are shipped to the branch at a price of $125,000?
A.
Shipments from home office
$100,000
Home office
B.
Shipments from home office
$100,000
$125,000
Home office
C.
D.
Shipments from home office
$125,000
$125,000
Unrealized profit
$ 25,000
Home office
100,000
Shipments to branch
$100,000
Unrealized profit
25,000
Shipments from home office
$125,000
40 of 5
41 of 5
i
.35.REQUIRED: The home office journal entry to reflect merchandise shipments at cost plus a markup.
DISCUSSION: (C) When goods are shipped from a home office to a branch at a transfer price that reflects
original cost plus a markup, the branch must record the shipment at the transfer price. The home office most
often reflects the shipments to branch at original cost. To maintain a reciprocal relationship between the
home office and the branch office accounts, an unrealized profit in branch inventories account reflects the
markup.
Answers (A) and (B) are incorrect because neither reflects the unrealized profit. Answer (A) is incorrect
because the branch office should be recorded at $125,000. Answer (B) is incorrect because the shipments
to branch should be recorded at original cost of $100,000. Answer (D) is incorrect because it is the work
sheet entry necessary to eliminate this intercompany transaction in the preparation of the financial
statements.
Answer () is incorrect because
ii
.36.REQUIRED: The journal entry on the branch book s to reflect the receipt of merchandise shipments at a
transfer price that reflects cost plus a markup.
DISCUSSION: (B) In a periodic system, when merchandise is received by a branch from the home office,
the merchandise should be reflected as a shipment from the home office in the amount of the transfer price,
with a corresponding entry to the home office account to indicate the equity of the home office in the net
assets of the branch.
Answer (A) is incorrect because the shipments should be reflected at the transfer price. Answer (C) is
incorrect because the home office equity should be reflected at the transfer price. Answer (D) is incorrect
because it is the worksheet entry used to eliminate this intercompany transaction in the preparation of the
enterprise’s financial statements.
37. 1A gain should be reported on an acquisition if:
a. The fair value of the consideration paid is less than the book value of the net assets acquired.
b. The fair value of the consideration paid plus the present value of any earnings contingency is less than
the book value of the net assets acquired.
c. The fair value of the consideration paid is less than the fair value of net assets acquired plus the fair value
of identifiable intangibles acquired.
d.The fair value of the consideration paid plus the present value of any earnings contingency is less than the
fair value of identifiable net assets acquired.
ANS: D
38. In accounting for branch transactions, it is improper for home office to,
A. Credit cash received from a branch to the investment in Branch ledger account.
B. Maintain common stock and retained earnings ledger accounts for only the home office
C. Debit shipments of merchandise to the branch from the home office to the Investment in Branch Ledger
account.
D. Credit shipments of merchandise to the branch to the sales ledger account.
Answer: D
39.Aca, Inc. has several branches. Goods costing P10,000 were transferred by the head
office to Cebu Branch with the latter paying P600 for freight cost. Subsequently, the head
office authorized Cebu Branch to transfer the goods to Davao branch for which the was billed
fot the P10,000 cost of the goods and freight charge of P200 for the transfer. If the head office
had shipped the goods directly to Davao branch, the freight charge would have been P700.
The P100 difference in freight cost would be disposed of as follows:
a. Considered as savings
b. Charged to Cebu Branch
c. Charged to Davao Branch
d. Charged to the Head Office
ANS: D
In arriving at the cost of the merchandise inventory at the end of the period, freight
charges are properly recognized as part a part of the cost. But a branch should not be
charged with excessive freight charges when, because of indirect routing, excessive
cost are incurred. Under such circumstances, the branch acquiring the goods should
be charged for no more than the normal freight from the usual shipping point. The
office directing the interbranch transfers are responsible for the excessive cost should
absorb the excess as an expense because it represents management mistakes or
inefficiencies.
40.Jayhawk Company has numerous branches in the state of Kansas. The home office purchases merchandise
and makes shipments to branches from a central warehouse at the request of branch managers. Which of the
following would be an improper accounting practice?
a. The Investment in Branch ledger account is debited in the accounting records of the home office
when merchandise is shipped to a branch, and the Shipments to Branch account is credited
(assume use of the periodic inventory system).
b. The home office debits Trade Accounts Receivable and credits Sales when merchandise is shipped
to a branch.
c. Cash received from a branch is credited to the Investment in Branch ledger account by the home
office.
d. Only the home office maintains a Common Stock ledger account and a Retained Earnings account.
Answer: B