MULTIPLE CHOICE PROBLEMS
1. The Petite Branch of Dainty Company submitted trial balance as of December 31, 20x4, after the first
year of operations:
Debit
Cash
P 10,400
Accounts receivable
63,200
Shipments from home office
168,000
Expenses
10,800
Credit
Sales
P134,400
Home office current
118,000
P252,400
P252,400
Merchandise inventory, P50,400.
Shipments to the branch are billed at 140% of cost.
The overstatement in the Branch inventory at December 31,20x4 was:
a. P -0- c. P14,400
b. 6,000 d. P33,600
Answer: C
Merchandise Inventory
50,400
Billed price
x 40/140
Overstatement in the Branch Inv.
P14,400
Use the following information for questions 2 and 3:
Pangasinan Branch of Malate Company, at the end of its first quarter operations, submitted the following
income statement:
Sales
P300,000
Cost of sales:
Shipments from Home Office
Local purchases
P280,000
30,000
Total
P310,000
Inventory at end
50,000
260,000
Gross profit on sales
P40,000
Expenses
35,000
Net Income
P5,000
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.
2. Compute the branch ending inventory that should be presented in the combined income statement:
a. P36,500 c. P43,400
b. P37,600 d. P50,000
Answer: B
Home Office (P50,000-6,600) / 140%
P31,000
Outsiders
6,600
Branch Ending Inventory
P37,600
3. The true branch net income
a. P70,100 c. P2,500
b. P5,000 d. None of the above
Answer: A
Unadjusted Branch Net Income
P5,000
Shipments from Home Office
280,000
Less: Ending Inventory at Billed price (50,000-6,600)
(43,400)
236,600 x 40/140 =
67,600
Unrecorded Branch Expenses
(2,500)
True Branch Net Income
70,100
4. In 20x6, a home office shipped inventory costing 60,000 to its branch for P90,000. At the end of 20x6,
the branch reported P30,000 of this inventory in its balance sheet. The amount of unrealized
intracompany profit at end of 20x6 is
a. P10,000
c. P30,000
b. P15,000
e. None of the above.
c. P25,000
Answer: A
Unrealized intracompany profit = P30,000 x (90,000 – 60,000)/90,000 = P10,000
5. In 20x6, a branch sold inventory it had acquired from its home office in 20x5 at a markup of P8,000.
Which entry is required in the combining statement worksheet in 20x6?
Debit
Credit
a. Branch Income
Cost of Sales
b. Intracompany Profit
Deferred Cost of Sales
c. Intracompany Profit
Deferred Branch Income
d. Cost of Sales
Branch Income
e. Cost of Sales
Intracompany Profit Deferred
Answer: A
6. A home office ships inventory costing P40,000 to its branch at a transfer price of P50,000. The markup
percentage (rounded) using the branch’s cost basis is
a. 0.20 d.
25
b. 0.25 e.
None of the above
c. 20
Answer: B
Markup percentage = (50,000-40,000)/40,000 = 0.25
7. In 20x6, a home office shipped inventory costing P400,000 to its newly established branch at a transfer
price of P480,000. In the branch’s year-end closing entries, the branch charged P360,000 of this
inventory to Cost of Sales. The adjusted general ledger balance in the Intracompany Profit Deferred
account at year-end should be
a. P3,333
d. P30,000
b. P10.000
e. None of the above.
c. P20,000
Answer: C
Adjusted Intracompany Profit Deferred = (P480,000 – P360,000) x (P80,000/P480,000) = P20,000
8. For the year ended 12/31/x6, the adjusted financial statements of a home office and its branch show
net income of P700, 000 and P100, and 000, respectively. At the end of 20x5, the home office adjusted
the Intracompany profit deferred account by debiting it for P40, 000, leaving a balance of P10, 000. The
combined net income for 20x6 is
a. P660, 000
d. P800, 000
b. BP690, 000
e. None of the above
c. P700, 000
Answer: C
Because the company has already adjusted its intracompany profit deferred and recognized
700,000 as the home office net income, hence considered as combined net income.
Use the following Questions for 9 and 10
For the year ended 12/31/x6, selected line items from the home office and branch
columns of the combining statement worksheet below:
Home Office
Cost of sales
P (500,000)
Branch income
Branch
P (100,000)
50,000
Net income
180,000
Intracompany Profit Deferred
30,000
6,000
9. What amount would recorded in the combined column for Cost of Sales?
a. P570, 000
d. P600, 000
b. P580, 000
e. P620, 000
c. . P 594,000
Answer: B
Reported branch income
30,000
True branch income
(50,000)
AOI, Cost of Goods sold
P20, 000
Cost of sale, Home office 500,000
Cost of sale, Branch
100,000
AOI, Cost of Goods sold
(20,000)
Combines Cost of Sales
P580, 000
10. What is the combined net income as reported in the combined column?
a. P150, 000
d. P204, 000
b. P160, 000
e. P210, 000
c. P180, 000
Answer: C
The P180, 000 stated in the given under home office is recognized by the home office as the
combined net income of branch and home office.
Use the following information questions 11 and 12:
The income statement submitted by the Pampanga Branch to the Home office for the
month of December, 20x4 is shown below. After effecting the necessary adjustments, the true net
income of the branch was ascertained to be P156, 000
Sales
P 600,000
Cost of sales:
Inventory, December 1
P 80,000
Shipments from Home office
350,000
Local Purchases
30,000
Total available for sale
P460, 000
Inventory, December 31
100,000
360,000
Gross margin
P
Operating expenses
240,000
180,000
Net income
P
60,000
The branch inventories were:
12/01/20x4
Merchandise from Home office
P 70,000
P 84,000
10,000
16,000
Local Purchases
Total
12/31/20x4
P 80,000
P 100,000
11. The billing price based on cost imposed by the home office to the branch, and
a. 1.40%
c. 40%
b. 100%
d. 29%
Answer: A
336,000/240,000*100%
Cost
Billed
AOI
True branch net income
Beg. Inventory
50,000
70,000
20,000
Reported Branch income
(60,000)
Ship from Home Office
250,000
350,000
100,000
AOI, COGS
96,000
Goods available for sale
300,000
420,000
120,000
156,000
Ending Inventory
(60,000)
(84,000)
COGS
240,000
336,000
(24,000)
96,000
COGS, BILLED
336,000
AOI, COGS
(96,000)
COGS, COST
240,000
12. The balance of allowance for overvaluation of branch December 21,20x4 after adjustment
a. P10, 000
c. P16, 000
b. P24, 000
d. None of the above
Answer: B
Allowance of overvaluation = 84,000*40*/140% or 60,000 x 40%13. Following is the income
statement of XYZ Branch in Cebu City Company, for the six months period ending June 30, 20x4:
13. Following is the income statement of XYZ Branch in Cebu City Company, for the six months period
ending June 30, 20x4:
Sales
P 620,000
Cost of sales:
Inventory, January 1
P
0
Shipments from Home Office
550,000
Purchases
50,000
Total available for sale
600,000
Inventory, December 31
From home office
75,000
From outsiders
10,000
515,000
Gross margin
105,000
Operating expenses
85,000
Net income
20,000
The Home Office ships merchandise to, and bills the Branch Office at 125% of cost. The rent of the
Branch office for six months at a monthly rate of P1,000 was paid by the home. The Home Office net
profit from its Branch Office in Cebu City for the six (6) months ending June 30, 20x4 is:
A. P -0B. P109,000
C. P125,000
D. P139,000
Answer: B
Sales
620,000.00
Cost of goods sold
Inventory, January 1, 20x4
-
Purchases
50,000.00
Shipments from home office (550,000/1.25)
440,000.00
Cost of goods available for sale
490,000.00
Inventory, December 31, 20x4 (75,000/1.25)+10,000
-70,000.00
Cost of sale
420,000.00
Gross Margin
200,000.00
Expense (85,000+6,000)
91,000.00
Net income
109,000.00
14. Summary adjusted trial balance for the home office and branch of TJ Corporation at December 31,
20x4 are as follows:
Debits:
Home Office
Branch
Other assets
P 530,000
P 165,000
Inventories, January 1, 20x4
50,000
45,000
Branch
200,000
-
Purchases
500,000
-
Shipments from Home Office
-
240,000
Expenses
120,000
50,000
Dividends
100,000
-
P1,500,000
P500,000
Other liabilities
P 90,000
P 25,000
Capital stock
500,000
-
Retained earnings
100,000
-
Home office
-
175,000
Unrealized profit in branch inventory
10,000
Sales
537,500
Shipments to branch
200,000
Total debits
Credits:
300,000
-
Branch profit
Total credits
62,000
-
P1,500,000
P 500,000
Additional information:
A. The home office ships merchandise to its branch at 120% of home office cost
B. Inventories at December 31, 20x4 are P70,000 for the home office and P60,000 for the branch.
The branch inventory is at transfer prices.
Compute the combined:
Net income
Cost of Goods Sold
A. P 370,000
P 480,000
B. P 200,000
P 480,000
C. P 132,500
P 467,500
D. P 200,000
P 467,500
Answer: D
Sales (537,500+300,000)
P 837,500
Less: COGS
MI, beg. [50,000+(45K/1.20)]
87,500
Add: Purchases
500,000
Cost of Goods Available for Sale
587,500
Less: MI, end [70K+(60K/1.20]
120,000)
467,500
Gross Profit
370,000
Less: Expense(120K+50K)
(170,000)
Net Income
P 200,000
15. Charito 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 suppliers. Selected information from the December 31, 20x4 trial balances of the home
office and branch is as follows:
Home Office
Branch
Sales
P 120,000
P 60,000
Shipments to branch
16,000
Purchases
70,000
11,000
Inventory, January 1, 20x4
40,000
30,000
-
Shipments from home office
-
19,200
Expenses
28,000
12,000
Unrealized profit in branch inventory
7,200
-
Additional information:
a. The entire difference between the shipment account is due to the practice of billing the branch at cost
plus 20%.
b. The December 31, 20x4 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 suppliers.)
c. Branch beginning and ending inventories include merchandise acquired from the home office as well
as from outside suppliers. Merchandise acquired from home office is inventoried at 120% of home office
cost.
Compute the:
Overvaluation of
Adjusted
Cost of Goods Sold
Branch Net Income
a. P 4,400 P 50,200
b. P 2,800 P 10,600
c. P 7,200 P 15,000
d. P 4,400 P 12,200
Answer: D
Overvaluation of COGS:
Unrealized profit in branch inventory
P7,200
Less: Allowance of ending branch inventory
(2,800)
(20,000 x 0.16 = 3,200
20,000 – 3,200 = 16,800 x 20/120)
Overvaluation of Cost of Goods Sold
P4,400
Adjusted branch net income:
Sales
P60,000
Cost of Sales:
Beginning Inventory
30,000
Purchases
11,000
Shipments from Home Office
19,200
Total Goods available for sale
60,200
Less: Ending Inventory
(20,000)
(40,200)
Gross Profit
19,800
Less: Expenses
(12,000)
Add: Overvaluation of COGS
4,400
Adjusted branch net income
P12,200
16. Using the same information in No. 15, determine the combined net income of the home office and
the branch for the year 20x4:
a. P40,800
c.
b. P49,000
e.
P50,200
P55,800
Answer: C
Charito Corporation
Combined Income Statement
For the Year Ended December 31, 20x4
Sales
180,000.00
Cost of goods sold
Inventory, January 1, 20x4
66,000.00
Purchases
81,000.00
Shipments to branch
16,000.00
Shipments from home office
-16,000.00
Cost of goods available for sale
147,000.00
Inventory, December 31, 20x4
-57,200.00
Cost of sale
89,800.00
Gross Margin
90,200.00
Expense
40,000.00
Net income
50,200.00
17. Trial balances for the home office and the branch of the Helen Company show the following accounts
on December 31, 20x5. The home office policy of billing the branch for merchandise is 20% above cost.
Home Office
Allowance for overvaluation of branch merchandise
Shipments to branch
Purchases (outsiders)
Branch
P 10,800
24,000
P 7,500
Shipments from home office
28,000
Merchandise inventory, December 31, 20x4
45,000
Answer: D
Billed
Merch. Inventory, 12/31/20x5
36,0000
Shipments
28,800
Cost
Allowance
30,000
6,000
24,000
4,800
Cost of Goods Sold
P10,800
From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000.
From Outsiders: P45,000 – P36,000 = P9,000
18. Selected information from the trial balances for the home office and the branch of Gerty Company at
December 31, 20x4 is provided. These trial balances cover the period from December 1 to December 31,
20x4. The branch acquires some of its merchandise from the home office (the branch is billed at 20%
above the cost to the home office and some of it from outsiders. Differences in the shipments accounts
result entirely from the home office policy of billing the branch 20% above cost
Sales
Shipments to branch
Home Office
Branch
P 60,000
P 30,000
8,000
-0-
Shipments to branch – loading/Unrealized profit in
branch inventory
3,600
-0-
Purchases (outsiders)
35,000
5,500
Shipments from home office
-0-
9,600
Merchandise inventory December 1 20x4
20 000
15 000
Merchandise inventory, December 31, 20x4:
Home Office P 20,000
Branch
10,000
How much of the December 1, 20x4 inventory of the branch represents purchases from outsiders and
how much represents goods acquired from the home office?
Outsiders Home Office Outsiders Home Office
A. P -0- P 15,000 c. P 12,000 P 3,000
B. P 5,000 P 10,000 d. P 3,000 P 12,00
Answer: D
Cost
Billed
AOI
MI, December 31
P 10,000
P 12,000*
P 2,000
Shipments
8,000
9,600
1,600
COGS
MI, December 31, 20x4
3,600
P 15,000
Less: Shipments from home office at billed price (12,000)
Merchandise from outsiders
P 3,000
19. Anselmo Company operates retail hobby shops from the main store and a branch store.
Merchandise is shipped from the main store and to the branch and billed to the branch at an arbitrary
10% markup. Trial balances of the main store and the branch as of December 31, 20x5 are as follows:
Main Store
Branch
Cash
P1,500
P1,000
Accounts receivable - net
200
Inventory, December 31, 20x4
3,500
2,500
Building - net
60,000
18,000
Equipment - net
30,000
2,000
Branch store
32,300
-
Purchases
240,000
11,000
Debits:
Shipments from home office
-
-
99,000
Other expenses
15,000
7,000
Total debits
P382,500
P150,500
Accounts payable
P15,000
P500
Unrealized inventory profit
9,000
Credits:
Main store
-
30,000
Capital stock
50,000
-
Retained earnings
16,000
-
Sales
200,000
120,000
Shipments to branch
90,000
-
Profit from branch
2,300
-
Total credits
P382,500
P150,500
Inventories on hand at December 31, 20x5 at the main store and branch are P3,000
and P1,800, respectively. The December 31, 20x4 branch inventory includes merchandise purchase
from outsiders of P300, and the December 31, 20x5 branch inventory includes P150 of
merchandise purchased from outsiders. The combined cost of goods sold amounted to:
a. P261,200 c. P243,150
b. P252,200 d. P252,150
Answer: D
Cost of Sales:
Inventories, January 1, 20x4 (3,500 + 300 + 2,200/1.10)
5,800
Add: Purchases
251,000
TGAS
256,800
Less: Ending Inventory December 31, 20x5
(4,650)
(3,000 + 150 + 1,650/1.10)
P252,150
20. Tillman Textile Company has a single branch in Bulacan. On March 1, 20x4, 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 representing a 40% markup on the
billed price. On March 31, 20x4, 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
Answer: D
100%
60%
40%
Billed
Cost
AOI
MI, 1/1/x4
Shipments
32,000
60,000
36,000
24,000
COGS
56,000
Less: MI 3/31/X4 (25,000 x 0.40)
(10,000)
Overvaluation of CGS
46,000
*36,000 cost / 60,000 x 40% = 24,000. (Note: Markup is based on billed price)
**Realized Profit from Branch Sales
21. The home office of Glendale Company, which uses the perpetual inventory system, bills shipments of
merchandise to the Montrose Branch at a markup of 25% on the billed price. On August 31,20x4, the
credit balance of the home office’s Allowance for Overvaluation of Inventories – Montrose Branch ledger
account was P60,000. On September 17, 20x4, the home office shipped merchandise to the branch at a
billed price of P400,000. The branch reported an ending inventory, at billed price, of
P160,000 on September 30, 20x4. Compute the realized gross profit?
a. P20,000 c. P108,000
b. P28,000 d. P120,000
Answer: D
25%
BP
COST
Beg. Merchandise Inventory
AOI
60,000
Shipments (400,000 x 0.25)
400,000
100,000
Cost of Goods Available for sale
160,000
Less: End. Merchandise Inventory
160,000
(40,000)
(160,000 x 0.25)
Realized Gross Profit
P120,000
22. Alamo Company has two merchandise outlets, its main store and its Bonomo branch.
All purchases are made by the main store and shipped to the branch at cost plus 10%. on January 1,
20x4, the main store and Bonomo inventories were P17,000 and P4,950, respectively. During 20x4, the
main store purchased merchandise costing P50,000 and shipped 40% of it to Bonomo. At December 31,
20x4 Bonomo made the following closing entry:
Sales
40,000
Inventory
6,050
Shipments from the main store
22,000
Expenses
13,100
Inventory
4,950
Main store
6,000
Compute the (1) actual branch income for 20x4 on a cost basis assuming generally accepted accounting
principles and (2) the combined cost of goods sold that should appear in Alamo Company’s income
statement for 20x4 if the main store inventory at December 31, 20x4 is P14,000:
a. (1) P6,000; (2) P74,000 c. (1) P8,100; (2) P54,000
b. (1) P7,900; (2) 52,000 d. (1) P7,900; (2) P53,900
Answer: B
Sales
Cost of goods sold
40,000.00
Inventory, January 1, 20x4 (4,950/1.10)
4,500.00
Shipments from home office (22,000/1.10)
20,000.00
Cost of goods available for sale
24,500.00
Inventory, December 31, 20x4 (6,050/1.10)
-5,500.00
Cost of sale
19,000.00
Gross Margin
21,000.00
Expense
13,100.00
Net income
7,900.00
Cost of goods sold
Main Store
Bonomo Branch
Combined
Inventory, January 1, 20x4
17,000.00
4,500.00
21,500.00
Shipments to branch
-20,000.00
20,000.00
Purchase
50,000.00
-
50,000.00
Cost of goods available for sale 47,000.00
24,500.00
71,500.00
Inventory, December 31, 20x4
-14,000.00
-5,500.00
-19,500.00
Cost of goods sold
33,000.00
19,000.00
52,000.00
-
Used the following information for question 23 to 25:
The Ventures Corporation decided to open a branch store in Manila. Shipments of merchandise to the
branch totaled P108,000 which included a 20% mark-up on cost. All accounting records are to be kept at
the home office. The branch submitted the following report summarizing its operations for the period
ended December 31, 20x4.
Sales on account
P148,000
Sales on cash basis
44,000
Collections of accounts
120,000
Expenses paid
76,000
Expenses unpaid
24,000
Purchase of merchandise for cash
52,000
Inventory on hand, December 31 (80% from home office)
60,000
Remittances to home office
110,000
23. How much is the ending inventory at cost?
a. P40,000 c. P52,000
b. P50,000 d. None of the above.
Answer: A
60,000 x 0.20 = 12,000 (Outside Ending Inventory)
60,000 – 12,000 = 48,000 x 0.20/1.20 = 8,000
Ending Inventory at Billed Price
P60,000
Less: Outsiders
(12,000)
Less: AOI
(8,000)
Ending Inventory at Cost
P40,000
24. What is the adjusted balance of the allowance for overvaluation of branch inventory account?
a. P8,000
c. P12,000
b. P18,000
d. None of the above
Answer: A
Allowance for overvaluation of Branch Inventory Account = 8,000
25. The branch operations, in so far as the home office is concerned, resulted in a net income (loss) of:
a. P1,600
c. P8,000
b. P2,000
d. None of the above
Answer: B
Sales (148,000 + 44,000)
192,000
Cost of Sales:
Purchase merchandise
52,000
Shipment from home office
108,000
Total Merchandise available for sale
160,000
Ending Inventory at billed price
(60,000)
(100,000)
Gross Profit
92,000
Less: Expenses (76,000 + 24,000)
(100,000)
Unadjusted Net Income
(8,000)
Overvaluation of COGS (60,000 x 0.20/1.20)
10,000
Adjusted net income
P2,000
Used the following information for question 26 and 27:
The Best Corporation operates a branch in Dagupan City. The home office ships merchandise to the
branch at 125 percent of its cost. Selected information from the December 31, 20x4 trial balances are as
follows:
Home Office
Branch
Books
Books
Sales
P600,000
P300,000
Shipments to branch
200,000
-
Purchases
350,000
-
Shipments from home office
-
250,000
Inventory, January 1, 20x4
100,000
40,000
Allowance for overvaluation of branch inventory
Expense
58,000
120,000
50,000
Inventory at December 31, 20x4: Home office P30,000; Branch P60,000
26. The realized profit on sales made by the branch or overvaluation of cost of goods sold is:
a. P40,000 c. P46,000
b. P86,000 d. None of the above
Answer: C
At Billed Price
At True Cost
AOI
Beg. inv. from HO
40,000.00
32,000.00
8,000.00
Shipments
250,000.00
200,000.00
50,000.00
Available for sale
290,000.00
232,000.00
58,000.00
Ending inv. from HO -
60,000.00
-48,000.00
-12,000.00
Cost of goods sold
230,000.00
184,000.00
46,000.00
27. The combined net income of the home office and the branch after adjustments is:
a. P226,000 c. P496,000
b. P326,000 d. P500,000
Answer: B
Best Corporation
Combined Income Statement
For the Year Ended Decemeber 31, 20x4
Sales
900,000.00
Cost of goods sold
Inventory, January 1, 20x4
132,000.00
Purchases
350,000.00
Shipments to branch
-200,000.00
Shipments from home office
200,000.00
Cost of goods available for sale
482,000.00
Inventory, December 31, 20x4
-78,000.00
Cost of sale
404,000.00
Gross Margin
496,000.00
Expense
170,000.00
Net income
326,000.00
28. The after-closing balances of Carter Corporation’s home office and its branch at January 1, 20x4 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
-0-
Total Assets………………………………………………………………... P105,000 P31,000
Accounts Payable…………………………………………………………. P 4,500 P 2,500
Other liabilities……………………………………………………………..
3,000
500
Unrealized profit-branch inventory………………………………………
500-
-0-
Home office………………………………………………………………..
-0- 28,000
Capital stock……………………………………………………………… 80,000
Retained earnings……………………………………………………….. 17,000
-0-0-
Total Assets………………………………………………………………. P105,000 P31,000
A summary of the operations of the home office and branch for 20x4 follows:
1. Home office sales: P100,000, including P33,000 to the branch. A standard 10% markup on cost applies
to all sales to the branch. Branch sales to its customers totalled P50,000.
2. Purchases from outside entities: home office, P50,000; branch P7,000.
3. Collections from sales: home office P98,000 (including P30,000 from branch); branch collections,
P51,000.
4. Payments on account; home office, P51,000; branch P4,000.
5. Operating expenses paid: home office, P20,000; branch P6,000.
6. Depreciation on plant assets: home office, P4,000; branch P1,000.
7. Home office operating expenses allocated to the branch, P2,000.
8. At December 31, 20x8, the home office inventory is P11,000 and the branch inventory is P6,000, of
which P1,050 was acquired from outside suppliers.
The combined net income amounted to:
A. P-0- C. P21,000
B. P 4,550 D. P25,550
Answer: D
Sales (P100,000 – P33,000 + P50,000)
P117,000
Less: Cost of goods sold:
Inventory, beg. [P15,000 + (5,500/110%) or (P5,500 – P500)]
20,000
Add: Purchases (P50,000 + P7,000)
57,000
COGS
P77,000
Less: Inventory, end [P11,000 + P1,050 + (P6,000-P1,050)/110%] 16,550
60,450
Gross Profit
P56,550
Less: Expenses (P20,000 + P6,000 + P5,000)
31,000
Combined Net Income
P25,550
29. Apo Supply Company is engaged in merchandising both at Home Office in Makati, Metro Manila and
a branch in Davao. Selected account in the trial balances of the Home Office and the branch at
December 31, 20x4 follow:
Debit
Home Office
Inventory
P
23,000
Davao branch
58,300
Purchases
190,000
Freight-in from home office
Sundry expenses
Branch
P
11,550
105,000
5,500
52,000
28,000
Credits
Home office
53,300
Sales
155,000
Sales to branch
110,000
Allowance for branch inventory, 1/1/20x4
1,000
140,000
Additional information:
1. Davao branch receives all it’s merchandise from the home office. The Home Office bills the goods at
cost plus 10% mark-up. At December 31, 20x4, a shipment with a billing value of P5,000 was n transit to
the branch. Freight on this shipment was P250 which is to be treated as part of inventory.
2. December 31, 20x4 inventories excluding the shipment in transit, are:
Home office, at cost
P30,000
Davao branch, at billed value (excluding freight of P520) 10,400
29. Net income of the Home Office was:
a. P10,000 c. P20,000
b. P15,000 d. P25,000
Answer: C
Sales
P155,000
Less: Cost of Sales
Inventory
P23,000
Purchases
190,000
TGAS
213,000
Less: Shipments (100,000)
At cost (110K/110%)
TGAS – Home Office 113,000
Less: Ending Inventory (30,000)
(83,000)
Gross Profit
72,000
Less: Sundry Expenses
(52,000)
Net Income – Home Office
P20,000
30. Net income of Davao branch was:
a. P10,470 c. P12,470
b. P11,470 d. P13,470
Answer: A
Sales
P140,000
Less: Cost of Sales
Inventory
P11,550
Purchases
105,000
Freight-in
5,500
Shipments
5,250
TGAS
127,300
Less: Ending Inventory (16,170)
(111,130)
(10,400 + 5250 + 520)
Gross Profit
28,870
Less: Expenses
28,000
Unadjusted Net Income - Davao Branch
870
*Add: Overvaluation of COGS
9,600
Adjusted Net Income – Davao Branch
P10,470
BP
COST
Beg. Merchandise Inventory
Shipments
1,000
110,000 100,000
Cost of Goods Available for sale
Less: End. Merchandise Inventory
AOI
10,000
11,000
15,400
14,000
(1,400)
(5,000 + 10,400 x 10/110)
*Overvaluation of COGS
P9,600
31. The Best Co. bills merchandise shipments in its Cavite City branch at 125% of cost. The branch, in
turn, sells the merchandise it receives from the home office at 25% above the billing price. On August 1,
20x4, all of the branch’s merchandise stock was destroyed by fire. The branch records that were
recovered showed the following:
Inventory, January 1, 20x4 (at billed price)
P 165,000
Shipments received from home office,
January to July (at billed price)
110,000
Purchases, at cost, from outside sources,
All re-sold at a 20% mark-up
Sales 169,000
7,500
Sales returns and allowances
3,750
The Best Co. will file an insurance claim. How much is the estimated cost of the merchandise destroyed
by the fire?
A. P120,000 C. P140,000
B. P130,000 D. P150,000
Answer: A
Inventory, 1/1 at billed price
P165,000
Add: Shipments at billed price . 1
10,000
Cost of goods available for sale at billed pric
P275,000
Less: CGS at BP:
Sales
P169,000
Less: Sales returns and allowances
3,750
Sales price of merchandise acquired
From outsiders (P7,500 / 120%)…
9,000
Net Sales of merchandise acquired
From home office
P156,250
x: Intercompany cost ratio
100/125
125,000
Inventory, 8/1/2008 at billed price
150,000
x: Cost ratio
100/125
Merchandise Inventory at cost destroyed by fire
P120,000
32. The Brooke Corporation has two branches, Branch P and Branch Q. The home office shipped P80,
00 in merchandise to Branch P and prepaid the Freight charges of P500. A short time thereafter, Branch
P was instructed to ship this merchandise to Branch Q at a prepaid Freight cost of P700. Freight charges
for this merchandise normally cost P800 when shipped from the home office directly to Branch Q.
Compute the excess freight on transfers of merchandise:
A. P700
C. P500
B. 800
D. P400
Answer: D
Freight of Home office to Branch P 500
Freight of Branch P to Branch Q
700
Total freight
1,200
Actual freight cost
(800)
Excess freight
400
33. 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 latter was billed for the P10,000 cost of the good and
freight charge of P200 for the transfer. If the head office has 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.
Answer: D
On December 3, 20x4, the Home Office of Karen Office Supply Company recorded a shipment of
merchandise to its Davao Branch as follows:
Davao Branch
39,000
Shipments to Branch
32,500
Unrealized Profit in Branch Inventory
5,200
Cash (for freight charges)
1,300
The Davao branch sells 40% of the merchandise to outside entities during the rest of December 20x4.
The books of the home office and Karen Office Supply are closed on December 31 of each year.
On January 5, 20x5, the Davao branch transfer half of the original shipment to the Baguio branch, and the
Davao branch pays P650 as the shipment.
34. What amount should the 60% of the merchandise remaining unsold be included in the inventory of the
Davao Branch at December 31, 20x4
a. P20,280 c. P23,400
b. P22,620 d. P23,920
Answer: B
Shipments from home office (32,500 + 5,200)
37,700.00
Less: Sold merchandise (37,770*40%)
15,080.00
Merchandise remaining unsold
22,620.00
35. What amount should the 60% of the merchandise remaining unsold at December 31, 20x4 be
included in the published balance sheet of Karen Office Supply at December 31, 20x4 shows inventory at:
a. P19,500 c. P20,800
b. P20,280 d. P23,400
Answer: A
Shipments from home office (32,500 = at cost)
32,500.00
Less: Sold merchandise (32,500*40%)
13,000.00
Merchandise remaining unsold
19,500.00
36. What is the entry on the home office books in respect to January 5, 20x5 transfers, assuming that the
transfer cost of the merchandise to Baguio branch would have been P780.
a. Home Office 20,150
Cash
780
Inventory
19,500
b. Shipments
18,850
Freight-in
780
Home Office Current
19,630
c. Branch Current - Baguio
19,630
Excess Freight
520
Branch Current - Davao
d. Branch Current - Baguio
20,150
19,630
Excess Freight 780
Branch Current - Davao
20,410
Answer: C
Use the following information for questions 37 to 39:
Fetzler Company’s branch in Virginia began operations on January 1, 20x4. During the first year of
operations, the home office shipped merchandise to the Virginia branch that cost P250,000 at a billed
price of P300,000. One-fourth of the merchandise remained unsold at the end of 20x4. The home office
records the shipments to the branch at the P300,000 billed price at the time shipments are made.
37. The home office should make:
A. A year-end adjusting entry or entries to establish an unrealized profit (loading) account of P75,000
B. A year-end adjusting entry or entries to establish an unrealized profit (loading) account of P62,500
C. A year-end adjusting entry or entries to establish an unrealized profit (loading) account of P12,500
D. no year-end adjusting entry because the shipments to branch (home office books) and shipments from
home office (branch books) are reciprocal
Answer: C
A year-end adjusting entry or entries to establish an unrealized profit (loading) account of P12,500
300K x ¼ = 75K x (300K-250K)/ 300K = 12, 500
38. Freight-in of P2,000 on the shipments from home office was paid by the branch. The home office
should make:
A. A year-end adjusting entry debiting the branch account for P500
B. A year-end adjusting entry debiting the branch account for P2,000
C. A year-end adjusting entry crediting the branch account for P500
D. no year-end adjusting entry for the freight charges
Answer: D
No year-end adjusting entry for the freight charges
39. The home office will credit the branch account when:
A. shipments of merchandise are made to the branch
B. It takes up branch profits
C. It allocates expenses to the branch that were paid by the home office
D. It record the receipt of cash from the branch
Answer: D
It records the receipt of cash from the branch.
Use the following information for question 40 to 42:
Alamo Company has two merchandise outlets, its main store and its Bonomo branch. All purchases are
made by the main store and shipped to the branch at cost plus 10%. On January 1,20x4, the main store
and Bonomo inventories were P17, 000 and P4, 950, respectively. During 20x4, the main store
purchased merchandise costing P50, 000 and shipped 40% of it Bonomo. At December 31,20x4 Bonomo
made the following closing entry:
Sales
Inventory
40,000
6,050
Shipment from main store
22,000
Expense
13,100
Inventory
4,950
Main store
6,000
40. What was the actual branch income 20x4 on a cost basis assuming generally accepted accounting
principles?
A. P6, 000
C. P8, 100
B. P7, 900
D. 8,550
Answer: B
Sales
P 40,000
COS:
Inventory @cost
P 4,500
Shipment from main store @cost
Goods available for sale
20,000
P 24,500
Ending inventory
(5,500)
19,000
Gross Profit
P 21,000
Expense
(13,100)
Net income
7,900
41. If the main store inventory at December 31,20x4 is P14, 000, the combined main store and branch
inventory that should appear in Alamo Company’s December 31,20x4 balance sheet is:
A. P18, 950
C. P20, 050
B. 19,500
D. 21,500
Answer: B
5,500 (6,050/110%) + 14,000= P19, 500
42. If the main store inventory at December 31,20x4 is P14, 000, the combined cost of goods sold that
should appear in Alamo Company’s income statement for 20x4 is:
A P74, 000
C. P52, 000
B. P54, 000
D. 33,000
Answer: C
Beginning inventory:
Home office
Branch
17,000
4,500
P 21,500
Purchases
50,000
Goods available for sale
71,500
Ending Inventory
Home office
14,000
Branch
Combined COGS
5,500
(19,500)
P 52,000
Use the following information for questions 43 and 44:
The stone Corporation has one remote location operating as a branch, Rock Branch. Stones
make shipments of merchandise to Rock at cost plus ten percent. For the current accounting period,
Rock Branch has P2,000 of branch profit and has P5,000 of inventory on hand at cost which was
originally received from Stone.
43. Which of the following statements concerning stone and Rock is correct?
A. Stone will have both a Rock Branch account and Shipments from Stone account on its home office
books.
B. Stone will have both a Stone Home Office account and Shipments from Stone account on its branch
office books.
C. Rock will have both a Stone Home Office account and Shipments from Stone account on its branch
office books.
D. Rock will have both a Stone Home Office account and Shipments from Stone account on its branch
office books.
Answer: C
Rock will have both a Stone Home Office account and Shipments from Stone account on its branch office
books.
44. In the preparation of Stone’s financial statements at the end of the period, Stone will do which of the
following:
A. Credit the Rock Branch account for P2,000 of branch profit and eliminate the P5,000
of ending inventory
B. Credit the Rock Branch account for P2,000 of branch profit and combine the P5,000
of branch inventory with its own ending inventory.
C. Debit the Rock Branch account for P2,000 of branch profit , credit the Rock Branch Profit account for
the P2,000 branch profit and eliminate the P5,000 of branch ending inventory
D. Debit the Rock Branch account for P2,000 of branch profit , credit the Rock Branch Profit account for
the P2,000 branch profit and combine the P5,000 of branch ending inventory.
Answer: C
Debit the Rock Branch account for P2,000 of branch profit, credit the Rock Branch Profit account
for the P2,000 branch profit and eliminate the P5,000 of branch ending inventory.
THEORIES
TRUE OR FALSE
1.The balance of the Allowance for Overvaluation of Inventories: Branch ledger account is deducted from
the balance of the Investment in Branch account in the separate balance sheet of the home office.
Answer: TRUE
2. If the home office bills shipment of merchandise to the branch at 25% above home office cost and the
adjusted balance of the allowance for Overvaluation of Inventories: Branch ledger account is 20,400 and
amount of branch inventories at build prices is 81,600.
Answer: FALSE
3. If the branch managers are responsible for ordering merchandise from the home office any excess
freight costs incurred as a result of inter-branch shipments are absorbed by the appropriate branch rather
than by the home office.
Answer: FALSE
4. Freight cost on merchandise shipped, as directed by the home office, by Westside branch to Eastside
branch in excess of normal freight costs from the home office to Eastside Branch are recognized as
operating expenses of the home office.
Answer: TRUE
5. A markup of 16 2/3% on billed price is equal to the markup of 14 2/7% on cost of merchandise shipped
to the branch by the home office.
Answer: FALSE
6. If the home office bills merchandise shipments to the branch at prices above the home office cost, the
net income reported to the home office by the branch is overstated from a total company point of view.
Answer: FALSE
7. In a combined balance sheet for home office and branch, the balance of the Allowance for
Overvaluation of Inventories: Branch Ledger account is deducted from the balance sheet of the
Investment in Branch Account.
Answer: FALSE
8. A Home office ships merchandise to its branch at a transfer price greater than cost. When this
merchandise is resold by the branch to outside entities, the branch’s profit will be overstated.
Answer: FALSE
9. A closing entry prepared by a branch will adjust the loading account and record branch profit or loss in
the home office account.
Answer: TRUE
10. Unrealized profits from transactions between a home office and its branch are eliminated in preparing
combined financial statements for the enterprise.
Answer: TRUE
11. A home office records shipments to its branch at billing prices and adjust the loading account at yearend. When this approach is used, the loading account during the period will always be zero.
Answer: FALSE
12. If a "loading" account is used, the "shipments to branch" account on the home office books is created
for the actual cost of shipments made to the branch whereas the "shipments from the home office" on the
branch's books includes any initial unrealized profit.
Answer: TRUE
13. Freight charges incurred by the branch office on merchandise inventory shipped from the home office
would be included in the branch's cost of goods available for sale even if the wrong merchandise was
shipped from the home office.
Answer: FALSE
14. One reason why a branch office would not have a "loading" account is that the home office usually
does not want the branch personnel to know the amount of unrealized profit built in to the merchandise's
transfer price.
Answer: TRUE
15. It is equally probable that a "loading" account could be charged with an unrealized inventory loss as it
is that it could be charged with an unrealized inventory profit.
Answer: FALSE
16. As a general rule, the "loading" account will be credited for the unrealized profit element of
merchandise shipped to the branches and debited for the amount of any realized inventory profits.
Answer: TRUE
17. If the “Shipment from the Home Office” account and the “Shipment to the Branch Office” are kept on a
reciprocal basis and the home office charges a mark-up on these shipments, there will be no need to
adjust the loading account at the end of the period for any realized inventory profits.
Answer: TRUE
18. If the “Shipment from the Home Office” account and the “Shipment to the Branch Office” are kept on a
reciprocal basis and the home office charges a mark-up on these shipments, two adjustments to the
loading account will be needed at the end of the period. One adjustment will be needed to adjust the
“Shipment to Branch” account down to its cost basis, and, a second adjustment will be needed to transfer
any realized inventory profits from the loading to the “Branch Profit” account.
Answer: TRUE
19. When a branch receives merchandise at transfer prices that include a loading factor and sells that
merchandise, its cost of goods sold will be understated and its income will be overstated.
Answer: FALSE
MULTIPLE CHOICE
20. The Allowance for Overvaluation of Inventories: Branch ledger account of the home office is debited:
a. When the home office ships merchandise to the branch at a billed price that exceeds cost.
b. In a journal entry to close the account at the end of an accounting period.
c. When the branch’s ending inventory is recorded in the home office accounting records.
d. In some other circumstances.
Answer: B
21. Amongst the various reasons given for the internal transfer of merchandise inventory at a price above
its cost are:
a. The equitable allocation of income amongst the various units of the business enterprise.
b. Efficiency in pricing inventories
c. Concealment of the true profit margins from branch personnel
d. All of the above are considered valid reasons.
Answer: D
22. A branch office is allowed to make sales, carry inventory for resale to customers, and incur normal
operating expenses. The home office ships merchandise to the branch office at cost plus a 20% markup.
The home office uses a loading account. If the loading account is used in its customary fashion, it will
track:
A. Unrealized inventory profits only.
B. Unrealized inventory profits and overall branch profits but not branch losses.
C. Unrealized inventory profits and overall branch profits and losses.
D. Overall branch profits and losses but not unrealized inventory profits.
Answer: A
23. It is generally accepted that a branch office should incur and pay for, or at least be changed with it,
the reasonable caused of transporting merchandise into the branch office and preparing it for a
sale to customers. In light of this generally accepted practice, which of the following charges for a freight
costs would be considered unreasonable if imposed on the branch office.
A. Requiring the branch to ship some of its inventory or another branch location due to
inventory shortages at the destination branch.
B. Charging a cost to the branch for freight charges that is a fixed percentage of the cost billed to the
branch for the inventory itself.
C. Charging freight charges to a branch office for inventory shipped by mistake where the number of such
mistakes occurs rather frequently.
D. All of the situations would normally be considered unreasonable.
Answer: D
24. In preparing combined financial statements, which of the following accounts are eliminated (brought to
a zero balance) in the combining process?
Branch Income or Loss
Purchases Sent to Branch
A.
Yes
Yes
B.
No
Yes
C.
No
No
D.
Yes
No
Answer: D
25. In the year and general ledger closing procedures, which accounts are closed in arriving at Cost of
Sales?
Purchases Sent to Branch
Purchases from Home Office
A. Yes
Yes
B. No
Yes
C. No
No
D. Yes
No
Answer: A
26. The general ledger entry to adjust the Intracompany Profit Deferred account at the
end of an accounting period.
A. Is reversed in the following accounting period.
B. Is reversed in the combining process.
C. Results in an entry in the company process that is essentially a reclassification entry.
D. Results in the Intracompany Profit Deferred account being reduced to a zero balance in the combined
column of the combining statement worksheet.
E. None of the above.
Answer: C