Home Office, Branch and Agency Accounting

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. ABC Co. is currently preparing its combined financial statements. At December 31, 20X1, the home
office shows a P156,000 balance in its “Investment in Branch” account while the branch showed a
P70,200 balance in its “Home Office” account. The following information has been gathered:

a. The home office shipped merchandise worth P20,000 to the branch during December 20X1 which the
latter has received and recorded only in January 20X2.
b. The home office collected P10,000 accounts receivable on behalf of the branch. The branch did not
yet receive the credit memo sent by the home office.
c. The branch returned damaged merchandise worth P30,000 to the home office. The home office did
not yet receive the debit memo sent by the branch.
d. A remittance of cash collections amounting to P40,000 was not yet recorded by the home office.
e. The home office allocated overhead cost of P5,000 to the branch which the latter has recorded twice.
f. Freight charge of P12,000 paid by the home office for shipments of merchandise to the branch was
recorded by the latter as P1,200.

Compute for the adjusted balances of the reciprocal accounts.

a. xx c. xx
b. xx d. xx

____ 2. Dudez Company is currently preparing its combined financial statements. At December 31, 20X1, the home
office shows a P182,000 balance in its “Investment in Branch” account. The following information has been
gathered during the reconciliation process:

a. A credit memo sent by the home office to the branch amounting to P12,000 was not recorded by the branch.
b. A debit memo sent by the home office to the branch amounting to P9,000 was not recorded by the branch.
c. A credit memo sent by the branch to the home office amounting to P20,000 was recorded by the home
office twice.
d. A debit memo sent by the branch to the home office amounting to P30,000 was recorded by the home office
as P3,000.
e. The branch sent by mistake a credit memo amounting to P7,000 to the home office. The home office did not
record it.

Compute for the unadjusted balance of the home office account.

a. xx c. xx
b. xx d. xx

____ 3.

____ 4. Aleksandrahhh OMG Company has several branches. On December 31, 20X1, the “Investment in Branch
One” maintained by the home office shows a balance of P100,000 while the “Home Office” account
maintained by Branch One show a balance of P142,000. The following information was determined:

a. Branch Two acquired equipment for P30,000 to be maintained in the books of the home office. This was
recorded by the home office as a transaction with branch one.
b. Branch One acquired equipment for P40,000 to be maintained in its books. This was not recorded by the
home office.
c. Branch Four remitted cash collections of P10,000 to the home office which the latter failed to record.
d. The home office erroneously charged Branch One for a debit memo of P12,000 received from Branch Five.
e. Branch One reversed a previous debit memo from Branch Six amounting to P6,000. The home office
decided that this charge is appropriately Branch Seven’s cost.

Compute for the adjusted balances of the reciprocal accounts of the home office and Branch One.

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 a. Xx c. xx
b. Xx d. xx

____ 5. For external reporting, the individual financial statements of the home office and the branch are combined

a. By using complex consolidation procedures

b. By recognizing the home office’s own assets, liabilities, income and expenses plus its
share in the branch’s assets, liabilities, income and expenses
c. By adding together similar items of assets, liabilities, income and expenses
d. By adding together similar items of assets, liabilities, income and expenses and
eliminating reciprocal accounts

____ 6. Excess freight on inter-branch transfers of merchandise is

a. Charged as expense in the home office books

b. Recorded as freight-in in the books of the recipient branch
c. Charged as expense in the books of the recipient branch
d. Not recorded

____ 7. Freight savings on inter-branch transfers of merchandise is

a. Recognized as gain in the home office books

b. Recorded as a reduction to the cost of shipments
c. Recognized as gain in the transferring branch’s books
d. Not recorded

____ 8. The combined profit of the entity is equal

a. To the individual profits of the home office and the branch

b. To the individual profits of the home office and the branch after eliminating any unrealized
mark-up during the period
c. To the individual profit of the home office plus the true profit of the branch
d. To the true profit of the home office plus its share in the profit of the branch

____ 9. When shipments to the branch are billed at other than cost, the individual profit of the branch is not equal to
its true profit. The difference pertains to the

a. Unrealized mark-up c. Total mark-up

b. Realized mark-up d. Errors committed

____ 10. After year-end adjustments but before elimination entries, the balance in the “allowance for mark-up on
shipments to branch”

a. is equal to zero c. represents the realized mark-up

b. represents the unrealized mark-up d. represents profit

____ 11. Shipments to branch may be billed at other than cost. When billing prices are above cost, the unrealized mark-
up is initially recorded by the home office

a. in an “allowance” account
b. as a credit to investment in branch account
c. as an addition to the cost of “shipments to branch”
d. a and c

____ 12. Transactions between branches are recorded by the transacting branches

a. As if each of them is transacting with the home office

b. By debiting or crediting their own investment in branch accounts
c. a and b
d. A branch is not permitted to transact with another branch

____ 13. A cash remittance from the branch to the home office is recorded by the home office as

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 a. Debit to investment account c. Debit to home office
b. Credit to cash d. Credit to investment account

____ 14. The freight on shipments to branch paid by the branch is recorded by the home office as

a. Debit to freight-in c. Credit to investment account

b. Credit to Freight-in d. Not recorded

____ 15. The freight on shipments to branch paid by the home office is recorded by the home office as

a. Debit to freight-in c. Credit to investment account

b. Credit to freight-in d. Credit to cash

____ 16. A credit memo received from the branch is recorded by the home office as

a. Credit to home office account c. Credit to investment account

b. Credit to allocated expense d. Debit to investment account

____ 17. A debit memo received from the home office is recorded by the branch as

a. Debit to home office account c. Debit to investment account

b. Debit to allocated expense d. Credit to home office account

____ 18. The depreciation expense on equipment being used by the branch but carried in the books of the home office
is recorded in the branch’s books as

a. Debit to investment in branch and credit to accumulated depreciation

b. Debit to depreciation expense and credit to investment in branch
c. Debit to depreciation expense and credit to home office account
d. Not recorded

____ 19. Magalang Company opened its Cebu Branch a year ago. At year end, the branch summarized operating data
as follows: Sales, 364,000; Shipments from HO, 148,500; Purchases, 137,500; Expenses, 71,500; Ending
Inventory, 82,500 (of which 16,500 is from outsiders); Beginning Inventory, 60,000 (of which 45,000 came
from HO).

The overstatement in branch cost of sales assuming shipments by home office are made at 20% gross profit
rate is

a. P25,500 c. 16,250
b. 21,000 d. 21,250

____ 20. The Bieseypor Company operates a branch in San Isidro. Operating data of the home office and the branch for
2012 are as follows:
Home Office Branch
Sales 456,250 218,125
Shipments to branch 120,000 -
Shipments from home office - 150,000
Purchases from outsiders 275,000 43,750
Operating expenses 68,200 15,950
Inventories, January 1, 2012:
Home office 106,250
Branch
Acquired from outsiders 11,875
Acquired from home office @ billed price 52,500
Inventories, December 31, 2012
Home office 81,250
Branch
Acquired from outsiders 8,125

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 Acquired from home office @ billed price 37,500

Merchandise from the home office were billed at 125% of cost in 2012. How much is the combined net
income of Bieseypor Company

a. 230,725 c. 186,475
b. 110,725 d. 274,475

____ 21. Sad Co. has a sales agency in Cebu. Agency revenues and expenses are recorded in separate agency accounts,
with the operating results of both the agency and the home office generated at each month-end. For the month
of August 2013, the home office paid P10,000 for advertising costs on behalf of the agency and recorded this
as follows:

a. Cebu Agency 10,000

Cash 10,000
b. Advertising Expense 10,000
Cash 10,000
c. Accounts Receivable - Cebu Agency 10,000
Cash 10,000
d. Advertising Expense - Cebu Agency 10,000
Cash 10,000

____ 22. The JJ Company, Inc. opened an agency in Makati in 2012. The following is a summary of the transactions of
the agency:

Sales orders sent to home office 66,000

Sales orders filled by home office in 2011 55,800
Freight in shipment to agency 1,320
Collections, net of 2% discount 47,628
Selling expenses paid from the agency working fund 3,384
Administrative expenses charged to agency ...... (5% of gross sales)
Samples shipped to agency
Cost 3,600
Inventory, December 31, 2011 1,320

The company maintains its gross margin on agency gross sales at 30% excluding the freight cost on shipment
to agency.

The agency cost of sales including freight and agency’s net income would amount to:
a. 39,000 & 5,994 c. 40,380 & 5,994
b. 47,520 & 7,668 d. 40,380 & 7,320

____ 23. The Symanuevo Co.’s home office bills Rizal Branch at 20% above cost during 2009 and 125% of cost during
2010. In 2010, goods billed at 355,600 were shipped to the branch. Also, during the year, the branch returned
119,050 worth of defective merchandise to the home office. The account unrealized intra-company inventory
profit has a balance of 18,240 at the end of last year. The branch started to acquire merchandise from outsiders
during the year in the amount of 54,000 and returned defective merchandise to the vendor amounting to
19,570.

How much is the cost of goods available for sale at cost?

a. 314,870 c. 311,222
b. 189,308 d. 300,420

____ 24. The following information was taken from the records of a Branch.

Sales by branch 700,000

Billings to branch by home office 625,000
Operating expenses 100,000
Ending inventory at billed price 250,000

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 The following information was taken from the records of the home office:

Branch current account 650,000

Shipments to branch 500,000
Allowance for mark-up 125,000

Compute for the billing rate based on cost or mark-up percentage based on cost.
a. xx c. xx
b. xx d. xx

____ 25. How much is the realized mark-up?

a. xx c. xx
b. xx d. xx

____ 26. Cost of goods sold of branch to be included in the combined financial statements.
a. xx c. xx
b. xx d. xx

____ 27. Ending inventory of the branch to be included in the combined financial statement and unrealized mark-up in
ending inventory.
a. xx c. xx
b. xx d. xx

____ 28. Individual profit of the branch.

a. xx c. xx
b. xx d. xx

____ 29. True profit of the branch.

a. xx c. xx
b. xx d. xx

____ 30. Adjusted balance of the branch current account immediately prior to combining the financial statements.
a. xx c. Xx
b. xx d. Xx

____ 31. The following information was taken from the records of the home office and the branch of Wawawally
Company.
Home Office Branch
Sales 1,500,000 600,000
Purchases 1,200,000 40,000
Shipments to Branch (300,000) -
Shipments from home office - 420,000
Operating expenses 230,000 90,000

Inventory, beg.
-from outside purchases 57,000 2,000
-from home office 30,000

Inventory, end.
-from outside purchases 460,000 10,000
-from home office 280,000

How much is the individual profit of the branch?

a. Xx c. Xx
b. Xx d. Xx

____ 32. How much is the combined profit of the home office and the branch?
a. Xx c. xx
b. Xx d. xx

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____ 33. The home office consistently bills its branch for shipments at 130% of cost. During the period, the home
office made total shipments of P780,000, at billed price to the branch. The “allowance for mark-up” account
had a net increase of 45,000 after year-end adjustments but before elimination entries. The individual
financial statements of the branch reported gross profit of P15,000.

How much is the true gross profit of the branch?

a. Xx c. xx
b. Xx d. xx

____ 34. The following closing entry was made in the books of the branch at year-end:

Dec. 31, 20X1 Sales 600,000

Inventory, end. 290,000
Inventory, beg. 32,000
Shipments from HO 420,000
Purchases 40,000
Operating expenses 90,000
Income summary 308,000

Dec. 31, 20X1 Income summary 308,000

Home Office 308,000

The beginning and ending inventories consist of the following:

Inventory, beg. Inventory, end.
From outside purchases 2,000 10,000
From home office 30,000 280,000

The “allowance for markup” account in the home office books has beginning and ending adjusted balances
P5,000 and P80,000, respectively.

What is the billing rate based on cost in the previous and current period?
a. xx c. xx
b. xx d. xx

____ 35. How much is the true profit of the branch?

a. xx c. Xx
b. xx d. Xx

____ 36. The home office consistently bills its branch for shipments at 120% of cost. The following selected
information was taken from the records of the home office and the branch.

Home Office Books

Sales 1,600,000
Inventory, beg. 50,000
Purchases 850,000
Freight-in 30,000
Shipments to branch (300,000)
Markup on shipments to branch during the period (60,000)
Inventory, end 320,000
Operating expenses 120,000
Investment in branch - end.
(before year-end closing entry) 640,000

Branch Books
Inventory, end
from outside purchases 18,000
from home office (at billed price excluding freight-in) 120,000
Cash sales 300,000

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 Collections on receivables 200,000
Disbursements for purchases from unrelated parties 40,000
Disbursements for operating expenses 60,000
Remittances of collections to home office 25,000

Additional information

a. Accounts receivable has a net increase of 80,000 while accounts payable has a net decrease of 10,000.
b. Accrued expenses has an ending balance of 5,000. Not included in this account is a 2,000 allocated expense
from the home office. There were no accrued expenses as of the beginning of the period.
c. As at year-end, a shipment from the home office with a billed price of P12,000 was in transit. Normally, the
home office pays 5% freight based on the billed price of the goods shipped to the branch.
d. The realized markup is 41,000 while the combined profit of the home office and branch is 1,441,700.

Compute for the true profit of the branch.

a. xx c. xx
b. xx d. xx

____ 37. How much is the beginning inventory of the branch from outside purchases?
a. xx c. xx
b. xx d. xx

____ 38. Leila Co.’s Clark Branch submitted the following data for 2011, its first year of operation:

Sales 203,500 Cr.

Shipments from HO 186,120 Dr.
Operating expenses 18,755 Dr.
Home Office - Current 48,125 Cr.

Shipments to the branch are billed at cost. The December 31 inventory of the branch was P25,245. What is the
correct balance on December 31, 2011 of the Branch Account - Current as per Home Office books?
a. 46,750 c. 65,505
b. 48,125 d. 71,995

____ 39. Jude, Inc. established its first branch on May 1, 2011. During the first month of operation, the home office
shipped merchandise to the branch worth 138,000 which included a markup of 15% on cost. Sales for cash
were P80,000 while sales on account were 250,000. At month’s end, the branch reported operating expenses
of 38,000 and a closing inventory of 23,000 at billed price. As far as the home office is concerned, the true
branch net income for May, 2011 is:

a. 82,000 c. 177,000
b. 147,000 d. 192,000

____ 40. Tillman Textile Company has a single branch in Bulacan. On March 1, 20X1, the home office accounting
records included an Allowance for Overvaluation of Inventories - Bulacan Branch ledger account with a
credit balance of 32,000. During March, merchandise costing 36,000 was shipped to Bulacan Branch and
billed at a price representing a 40% markup on the billed price. On March 31, 2011, the branch prepared an
income statement indicating a net loss of 11,500 for March and ending inventories at billed prices 25,000.
What is the amount of adjustment for allowance for overvaluation of inventories to reflect the true branch net
income?
a. 39,257 debit c. 39,333 debit
b. 46,000 credit d. 46,000 debit

____ 41. The following information pertains to shipments of merchandise from Home Office to Branch during 20X1:

Home Office’s cost of merchandise 160,000

Intracompany Billing 200,000
Sales by Branch 250,000
Unsold merchandise of Branch on

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 December 31, 20X1 20,000

In the combined income statement of Home Office and Branch for the year ended December 31, 20X1, what
amount of the above transactions should be included in sales?
a. 250,000 c. 200,000
b. 230,000 d. 180,000

____ 42. The Robert Corp. established its Nueva Ecija Branch in January 20X1. During its first year of operations,
home office shipped to its Nueva Ecija Branch merchandise worth 130,000 which included a markup of 15%
on cost. Sales on account totaled 250,000 while cash sales amounted to 80,000. Nueva Ecija reported
operating expenses of 38,000 and ending inventory of 15,000, at billed price. In so far as the home office is
concerned, the real net income of Nueva Ecija is?
a. 177,000 c. 147,000
b. 82,000 d. 192,000

____ 43. 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, 2011, all of the
branch’s merchandise stock was destroyed by fire. The branch records that were recovered showed the
following:

Inventory, January 1, 2011 (at billed price) 165,000

Shipments received from Home Office,
January to July (at billed price) 110,000
Purchases, at cost, from outside sources,
all resold at a 20% mark-up 7,500
Sales 169,000
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
fire?
a. 120,000 c. 140,000
b. 130,000 d. 150,000

____ 44. Mga CPA na Kayo Company is engaged in merchandising both at its Home Office in Manila and its branch in
San Isidro, N.E. Selected accounts taken from the trial balances of the home office and the branch as of
December 31, 2011 follow.

Debits Manila Davao Branch

Inventory, January 1, 2011 23,000 11,550
San Isidro Branch 58,300 -
Purchases 190,000 105,000
Freight-in from Home Office - 5,500
Sundry Expenses 52,000 28,000

Credits
Home Office - 53,300
Sales 155,000 140,000
Sales to Branch 110,000 -
Allowance for overvaluation of branch
inventory at Jan. 1, 2011 1,000 0

Additional Information
a. The San Isisdro branch gets all of its merchandise from the home office. The home office bills the goods at
cost plus a 10% markup. At December 31, 2011, 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.
b. Inventories on December 31, 2011, excluding the shipment in transit, follow:
Home Office at cost 30,000
Branch, at billed price (excluding freight of 520) 10,400

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 Compute for the net income of the home office from own operation.
a. xx c. xx
b. xx d. xx

____ 45. Compute for the net income of the branch in so far as the home office is concerned,
a. xx c. xx
b. xx d. xx

“You can’t fall if you don’t climb.

But there’s no joy in living your whole life….
on the ground.”

Prepared by:

JOHN LYNDON D. RAYOS, CPA

Reviewer

9
REVIEW MATERIAL FOR HOME OFFICE AND BRANCH
Answer Section

MULTIPLE CHOICE

1. ANS: A
Home Office Books Branch Books
Unadjusted balance 156,000.00 70,200.00
A. 20,000.00
B. (10,000.00)
C. (30,000.00)
D. (40,000.00)
E. (5,000.00)
F. 10,800.00
Adjusted balances: 86,000.00 86,000.00

PTS: 1
2. ANS: A
Start from the unadjusted balance of the Investment in Branch and squeeze the balance of the Home Office
Current!

Home Office’s Books Branch’s Books

Unadjusted balances 182,000.00 145,000.00
A. (12,000.00)
B. 9,000.00
C. (20,000.00)
D. (27,000.00)
E. (7,000.00)
Adjusted balances 135,000.00 135,000.00

PTS: 1
3. ANS: A
Home Office’s Books Branch’s Books
Unadjusted balance 95,000.00 132,000.00
A. 10,000.00
B. 25,000.00
C. (25,000.00)
D. 3,000.00
Net adjustments 25,000.00 (12,000.00)
Adjusted balances 120,000.00 120,000.00

PTS: 1
4. ANS: A
Several branches - adjusted balance
Home Office’s Books Branch’s Books
Unadjusted balances 100,000 142,000
A. 30,000
B.
C.
D. 12,000
E.
Adjusted balances 142,000 142,000

B. There is no entry needed in the books of the home office when a branch acquires assets to be maintained in
its books. No correcting entry is needed.

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 C. This transaction does not affect the reciprocal accounts of branch one and the home offce. No correcting
entry is needed.
D. The reversal of the debit memo was properly made since charge does not belong to the branch one.
Although, correcting entries may be needed in Branch Six’s and 7’s reciprocal accounts with the home office,
no correcting entries are needed in branch one’s reciprocal accounts with the home office.

PTS: 1
5. ANS: D PTS: 1
6. ANS: A PTS: 1
7. ANS: D PTS: 1
8. ANS: C PTS: 1
9. ANS: B PTS: 1
10. ANS: B PTS: 1
11. ANS: A PTS: 1
12. ANS: A PTS: 1
13. ANS: D PTS: 1
14. ANS: D PTS: 1
15. ANS: D PTS: 1
16. ANS: D PTS: 1
17. ANS: D PTS: 1
18. ANS: C PTS: 1
19. ANS: A
ANS: A
COGS @ BP: Beg. Inv.- Outside 15,000 @ Cost 15,000
- Inside 45,000 (45*.80) 36,000
Shipments from HO 148,500 (148.5*.80) 118,800
Purchases 137,500 137,500
TGAS @ BP 346,000 307,300
Less: End. Inv. - Out. 16,000 16,000
- Ins. 66,000 (66*.80) 52,800
COGS @ BP 264,000 238,500

Overstatement of COGS (264-238.5) 25,500

Shortcut: Conisder all transactions with the HO only!!!

Beg. Inventory from HO 45,000
Shipments from HO 148,500
Ending Inventory from HO (66,000)
Cost of Inventory sold from HO
@ Billed Price 127,500 x 20% = 25,500

PTS: 1
20. ANS: A
ANS: A
Home Office Branch
Sales 456,250 218,125
Cost of Goods Sold:
Add: Beg. Inventory 106,250 11,875
42,000 (52,500/1.25)
Purchases 275,000 43,750
Less: Inv. End 81,250 8,125
______ 300,00030,000 (37,500/1.25) 59,500
Gross Profit 156,250 158,625
Less: Operatimg Expenses 68,200 15,950
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 Net Income/True Income 88,050 142,675

Combined Net Income (88,050 + 142,675) 230,725

PTS: 1
21. ANS: D PTS: 1
22. ANS: C
Sales 55,800
Less: Sales Discount (47,628 / .98 x .02) 972
Net Sales 54,828
Less: Cost of Goods Sold (55,800 x .70) + 1,320 40,380 (C.)
Gross Profit 14,448
Less: Expenses
Selling 3,384
Administrative (.05 x 55,800) 2,790
Samples (3,600 - 1,320) 2,280 8,454
Net Income 5,994 (C.)

PTS: 1
23. ANS: A
Shipments form HO at BP 355,600
Less: Defective Merchandise 119,050
Net Shipments from HO at BP 236,550
Cost (236,550/125%) 189,240
Add: Net Purchases 34,430 (54,000-19,570)
Beg. Inventory 91,200 (18,240/20%)
TGAS at Cost 314,870

PTS: 1
24. ANS: A
Billing rate based on cost
(500,000 + 125,000) / 500,000 = 125%

Mark-up percentage based on cost

(125,000 / 500,000) = 25%

PTS: 1
25. ANS: A
Total unrealized mark-up (or unadjusted balance of allowance account) 125,000
(625,000 x 25% / 125%)
Less: Unrealized mark-up in ending inventory
(250,000 x 25% / 125%) (50,000)
Realized mark-up 75,000

PTS: 1
26. ANS: A
Beg. Inventory @ Cost -
Shipments from home office 500,000
Total Goods Available for Sale 500,000
Inventory, End @ Cost (200,000)
Cost of Goods Sold @ Cost 300,000

Inventory, Beg @ BP -
Shipments from HO at BP 625,000

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 Total Goods Available for Sale 625,000
Ending Inventory @ BP (250,000)
Cost of Goods Sold 375,000
Less: Realized Mark-up (75,000)
Cost of Goods Sold at Cost 300,000

Notice that the realized mark-up can also be computed by using the cost of gooods sold at BP.

PTS: 1
27. ANS: A
Ending inventory
250,000 / 125% = 200,000

Unrealized Mark-up
25,000 x 25% = 50,000

PTS: 1
28. ANS: A
Sales 700,000
Less: Cost of Sales @ BP 375,000
Individual gross profit of the branch 325,000
Less: Operatig expenses (100,000)
Individual profit of the branch 225,000

PTS: 1
29. ANS: A
Sales 700,000
Cost of Sales @ Cost (300,000)
True Gross Profit of the Branch 400,000
Less: Operating Expenses (100,000)
True Profit of the Branch 300,000

Checking:
Individual Profit of the Branch 225,000
Add: Realized Mark-up 75,000
True Profit of the Branch 300,000

PTS: 1
30. ANS: A
Unadjusted investment in branch 650,000
Individual profit of the branch 225,000
Adjusted Investment in branch 875,000

PTS: 1
31. ANS: A
Sales 600,000
Beg. Inv. 32,000
Shipments from HO 420,000
Purchases 40,000
Inv. End. (290,000) 202,000
Individual Gross Profit of the branch 398,000
Operating Expenses (90,000)
Individual profit of the branch 308,000

PTS: 1
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32. ANS: A
Sales (1,500,000 + 600,000) 2,100,000
Cost of Sales
Beg. Inv. from outside (57k + 2k) 59,000
from home office (30k / 1.2) 25,000
Purchases (1,200,000 + 40,000) 1,240,000
End. Inv. from outside (460k + 10K) (470,000)
from home office (280k / 1.4) (200,000) 654,000
Combined gross profit 1,446,000
Less: Operating expenses (230,000 + 90,000) (320,000)
Combined Net income 1,126,000

PTS: 1
33. ANS: A
Allow. for markup beginning -
Markup on shipments during the period (780,000 / 1.30 x 30) 180,000
Realized markup (squeeze) 135,000
Net increase 45,000

15,000 individual gross profit

135,000 realized markup
150,000true gross profit of the branch

PTS: 1
34. ANS: A
Beginning Ending
Inventories @ BP 30,000 280,000
Less: Allow. for markup (5,000) (80,000)
Inventories @ Cost 25,000 200,000
30,000 / 25,000 = 120% 280,000 / 200,000 = 140%

PTS: 1
35. ANS: A
Individual profit (income summary) 308,000
Realized markup (80k - 120k - 5k) 45,000
True profit of the branch 353,000

PTS: 1
36. ANS: A
Home office
Sales 1,600,000
Inventory, beg. 50,000
Purchases 850,000
Freight-in 30,000
Shipments to branch (300,000)
TGAS 630,000
Inventory, end. 320,000 310,000
Individual gross profit of the home office 1,290,000
Operating expenses (120,000)
Individual profit of the home office 1,170,000

Combined Profit 1,441,700

Less: profit of HO 1,170,000
True profit of the Branch 271,700*

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 PTS: 1
37. ANS: A PTS: 1
38. ANS: D
HO Current account before branch net income 48,125
Sale 203,500
COGS 186,120
(25,245) 160,875
Gross profit 42,625
Less: Operating expense 18,755 23,870
HO - Current Account 12/31 71,995

PTS: 1
39. ANS: D PTS: 1
40. ANS: A
32,000
14,400
(7,143)
39,257 Dr.

PTS: 1
41. ANS: A
In the preparation of the combined income statement of home office and branch, all intercompany
transactions are eliminated as if it had never occurred. Therefore, the only transaction that should remain are
transactions to unrelated customers.

PTS: 1
42. ANS: D PTS: 1
43. ANS: A
TGAS at BP (165k + 110k) 275,000

Sales 169,000
Sales ret. and alllow. (3,750)
Sales price of merchandise acquired
from outsiders (7500 x 1.2) (9,000)
Net sales of Merch. acquired from HO 156,250 cogs @ bp
Multiplied by: Intercomp. cost ratio 100/125 125,000
Inv. August 1, 2011 at BP 150,000
Multiplied by Cost ratio 100/125
Merchandise destroyed by fire 120,000

PTS: 1
44. ANS: A
20,000
The allowance of 1k is not the correct allow. it should be 11k. The home office erroneously recorded the
transfer at bp which, in fact, should be in cost with a corresponding credit to allowance.

PTS: 1
45. ANS: A
10,470

PTS: 1

15