III.

PROBLEMS

Problem 1: The unsecured creditors of ABC Corporation filed a petition on July 1, 2020 to force ABC Corporation
into bankruptcy. The court order for relief was granted on July 10 at which time an interim an interim trustee was
appointed to supervise liquidation of the estate. A listing of assets and liabilities of ABC Corporation as of July 10,
2020, along with the estimated realizable values, is as follows:
Assets Book Value Estimated Realizable Value
Cash P61,400 P61,400
Accounts Receivable 250,000 15% of the accounts receivable is estimated to
Allowance for doubtful accounts (20,000) be uncollectible
Inventories 420,000 Estimated Selling Price, P340,000 which will
require additional costs of P50,000
Prepaid Expenses 40,000 ?
Investments 180,000 P110,000
Land 210,000 An offer of P500,000 has been received for land
Building, net 260,000 and buildings
Machinery and equipment, net 220,000 P53,900
Goodwill 200,000 ?
Total Asset P1,821,400
Liabilities & Equity
Accounts Payable P670,000
Wages Payable 3,400
Notes Payable 160,000
Accrued Interest-Notes 5,000
Mortgage Payable, secured by land and 400,000
building
Capital Stock 800,000
Deficit (297,000)
Total Liabilities & Equity P1,821,400

Additional information:
a. Patents completely written-off the books in past years but with realizable value of P10,000.
b. The books do not show the following accruals (unrecorded expenses/additional liabilities): Taxes, P16,400;
and Interest on mortgage, P10,000.
c. The investments have been pledged as security for holder of the notes payable.
d. The trustee fees and other costs of liquidating estate are estimated to be P60,000.

Requirement: Prepare a statement of affairs and determine the following:

1. Total free assets
2. Net free assets
3. Estimated deficiency to unsecure creditors
4. Expected recovery percentage of unsecured creditors
5. Estimated payment to each class of creditors

Problem 2: XYZ Company had a very unstable financial condition caused by a deficiency of liquid assets. On
February 5, 2020, the following information was available:
Cash P 112,000
Assets Not Realized
Accounts receivable 80,000
Merchandise Inventory 160,000
Investment in common stock 26,400
Land 100,000
Building 60,000
Machinery and equipment 48,000

Liabilities Not Liquidated

Notes payable 244,000
Accounts payable 288,000
Salaries and wages 40,000
Taxes payable 8,000
Bank loan 180,000
Estate deficit (173,600)

During the six-month period ending July 31,2020, the trustee sold the investment in common stock for P26,000,
realized P84,000 for the accounts receivable, sold the merchandise for P152,000, and paid-off P26,000 of the bank
loan and all liabilities with priorities (salaries and wages payable, and taxes payable) as well as P7,440 for estate
administration expense.
Requirement: Prepare a statement of realization and liquidation and determine the following:
1. Estate Deficit, ending
2. Net (gain) loss on realization and liquidation
3. Cash Balance, ending

Problem 3. Katherine, a CPA, has prepared a statement of affairs. Asset which there are no claims or liens are
expected to produce P70,000, which must be allocated to unsecured claims of all classes totalling P105,000. The
following are some of the claims outstanding:
a. Accounting fees for Katherine, P1,500.
b. An unrecorded note for P1,000 on which P60 of interest has accrued, held by Angie.
c. A note for P3,000 secured by P4,000 receivables, estimated to be 60% collectible held by Joy.
d. P1,500 note, on which P30 of interest has accrued, held by Joyots. Property with a book value P1,000
and a market value of P1,800 is pledged to guarantee payment of principal and interest.
e. Unpaid income taxes of P3,500.
Compute:
1. Percentage of Recovery of Unsecured Creditors without Priority
2. Estimated deficiency
3. Net free asset
4. Total payment to partially secured creditors

Problem 4. ASDF Corporation filed a voluntary petition for bankruptcy on January 2020. On March 31, 2020, the
trustee provided the following information about the corporation’s financial affairs:
ASSETS BOOK VALUE FAIR VALUE
Cash 40,000 40,000
Accounts receivable 200,000 150,000
Inventories 300,000 140,000
Plant assets-net 500,000 560,000
TOTAL ASSETS 1,040,000

LIABILITIES
Liabilities for priority claims 160,000
Accounts payable-unsecured 300,000
Notes payable, secured by Accounts receivable 200,000
Mortgage payable, secured by Plant assets 440,000
TOTAL LIABILITIES 1,100,000

1. What amount is the deficit?

2. How much is the estimated deficiency?
3. How much are the net free assets?
4. What is the estimated recovery percentage of unsecured creditors without priority?

Problem 5. The following balances were ascertained in ZXC Inc. Which is experiencing insolvency:

Cash 8,000 Accounts payable 80,000

Notes Receivable 120,000 Accrued expenses 30,000
Inventories 80,000 Salaries payable 15,000
Prepaid expense 10,000 Mortgage payable 155,000
Equipment, net 150,000 Ordinary Shares 100,000
Deficit (12,000)
TOTAL 368,000 TOTAL 368,000

Additional information:
➢ Estimated net realizable value of the notes receivable was 105,000 and was pledged to the mortgage
payable.
➢ 80% of the book value of the inventories can be sold at 45,000 and was pledged to 60% of the accounts
payable.
➢ The remaining book value of the inventories has an estimated fair value of 20,000.
➢ 80% of the remaining unpaid accounts payable were secured by the equipment having an estimated fair
value of 60,000.
➢ Prepaid expense has no estimated fair value.
➢ Liquidation and administration expenses were estimated in the amount of 8,000.
II. TRUE OR FALSE

A. General Procedures

1. Branch Fixed Assets can be carried on the home office’s books under a decentralized accounting system.
2. If branch fixed assets assets are recorded on the home office’s books, the depreciation expense would not
be charged to branch operations
3. Separate financial statements of home office and branch do not meet the needs of investors, creditors, or
other outside users of financial statements.
4. In a working paper for combined financial statements of home office and branch, the balance of Shipment to
Branch ledger account is eliminated against the balance of the investment in branch account.
5. The incremental profitability of a branch office may be hidden if the home office allocates too many fixed
costs to the branch office.
6. A major disadvantage of a centralized accounting system is that the profitability of branch operations cannot
be determined because branch operations are not accounted for in a separate general ledger.
7. Home office allocations to a branch are not required under current standards.
8. Income taxes can be allocated to a branch.
9. When inventory is received from the home office, a branch increases its home office accounts.
10. Reciprocal Home office and branch accounts are eliminated when home office and branch financial
statements are combined for external reporting.

B. Special Procedures

1. Closing entry prepared by a branch will adjust the loading account and record branch profit or loss in the
home office account.
2. Unrealized profits from transactions between a home office and its branch are eliminated in preparing
combined financial statements for the enterprise.
3. It is equally probable that a “loading” account could be charged with an unrealized inventory loss as it could
be charged with an unrealized inventory profit.
4. 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 profit.
5. A mark-up of 16 2/3% on billed price is equal to a markup of 14 2/7% on cost of merchandise shipped to the
branch by the home office.
6. If the home office bills merchandise shipments to the branch at prices above home office costs, the net
income reported to the home office by the branch is overstated from a total company point of view.

Problem 1: The following transactions were entered in the branch current account of Makati Head Office for the year
2020
DEBIT CREDIT
Beg. Balance 459,258
Shipment to branch, 4/1/20 212,400
Cash forwarded, 6/1/20 15,000
Collection of AR, 9/1/20 33,300
Operating expenses charged to the
Branch12/31/20 2,880

 Shipment to the branch during the year were made at 20% above cost

 The balance of the allowance for overvaluation of branch inventory account was P21,300 at the beginning,
and the allowance was written down to P14,700 at year-end.

 On 12-10-20, the home office purchased a piece of equipment amounting to P36,000 for its branch in
Ortigas. The said equipment has a useful lifr of the five years and will be carried in the books of the branch,
but the home office recorded the purchased by debiting Equipment

 The branch recorded the depreciation of the equipment by debiting the Home Office current account and
crediting Accumulated Depreciation.

 Debit memo regarding the allocation of operating expenses to the Ortigas branch was received by the
branch on January 2, 2021.

 The Ortigas branch reported net income of P197,730

  It also remitted cash to the home office on 12-31-20 amounting to P33,000, which the home office received
and recorded on January 1, 2021

 The interoffice accounts were in agreement at the beginning of the year.

Compute for the following

a) How much is the unadjusted balance of the branch current account on 12-31-20 before necessary
closing entries were made?
b) What is the amount of adjustment in the allowance for overvaluation of Branch inventory account?
c) How much is the net income of Ortigas branch that will be reported in the combined income statement
of The Makati Company.
d) What is the amount of the Home Office Current account that will be reported in the books of Ortigas
Branch after closing entries are made?

Problem 2: FTC Co has a branch in Baguio and Davao. The reciprocal accounts between the home office and the
branches were in agreement at the beginning of 2020. However at 12-31-20, the following reciprocal balances are
found in the home office books:
Investment in Baguio P186,500
Investment in Davao 84,000
Data for reconciliation of the reciprocal accounts are as follows:
 On Dec. 29, 2020, the home office has instructed Baguio to transfer P74,000 cash to Davao. Baguio
recorded this transaction immediately. Upon receipt, Davao has recorded this transfer at P47,000. The
home office however has not yet recorded this interbranch transaction as of the end of the year.

 FTC has transferred goods costing P28,900 to Baguio branch and paid P2,500 of shipping cost on 12-16-
20. Baguio shipped all of these goods to Davao upon instruction of the home office on 12-30-20. Shipping
cost is P3,600 freight collect. Had the goods were shipped directly to the Davao, P5,000 of freight cost
should have been incurred. The inter branch shipment was not recorded by the branches and the home
office as well.

 Baguio has collected cash of P5,750 from Davao’s customer. This transaction is not yet recorded by Davao
and the home office.

 The home Office has already allocated P11,000 and P9,000 of administrative expenses to Baguio and
Davao respectively. The branches are not yet notified.

 Baguio remitted P14,300 cash to the home office on 12-12-20. The home office has failed to record the said
remittance.

 Davao returned goods costing P6,850 to the home office. The goods were shipped on 12-19 and received
on 12-24 but no entries have been made in the home office books.

Compute for the following:

a) Excess freight on inter-branch transfer of inventories
b) Adjusted balance of Investment In Baguio account
c) Adjusted balance of Investment in Davao account
d) Unadjusted balance of Home Office Current account in Baguio’s book
Unadjusted balance of home Office Current account in Davao’s books

Problem 3: The following information are extracted from the books of JJJ Company and its branch. The balances are
at 12-31-20 of the company’s operations
Home Office Branch
Sales P300,000
Shipment to branch P96,000
Shipment from home Office 120,000
Purchases 42,000
Expenses 76,000
Inventory, 01-01-20 28,000
Allowance for overvaluation of Branch inventory 27,920

The branch is billed by the home office at 25% mark-up on cost. The ending inventory includes merchandise shipped
and acquired from the home office in the amount of P29,000 and P9,200 acquired from outsiders for a total of
P38,200.

How much is the branch net income as far as the home office is concerned?

Problem 4: On December 31, 2020 the home office current account on the books of BBB Branch has a balance of
P2,275,000. In analyzing the activity in each of these accounts for December, you find the following differences.

 A P84,000 branch remittance to the home office initiated on December 21, 2020 was recorded twice by the
home office on December 26 and 28.
 The home office incurred P126,000 of advertising expenses and allocated 1/3 of this amount to the branch
on December 20. The branch recorded this transaction on December 22 amounting to P63,000
 Inventory costing P853,300 was sent to branch by the home office on December 15. The billing was at cost,
but the branch recorded the transaction at P903,700
 The home office erroneously recorded the branch net income at P243,075. The branch reported net income
of P261,975

The unadjusted balance of the Home office as of December 31, 2020?

Problem 5: KKL Company Inc. opened an agency in Tarlac in 2020 The following is a summary of the transactions
of the agency:
Sales order sent to home office P660,000
Sales orders filled by home office in 2020 558,000
Freight on shipment to agency 13,200
Collections, net of 2% discount 476,280
Selling expenses paid from the agency working fund 33,840
Administrative expenses charged to agency 5% of gross sales
Samples shipped to agency:
Cost P36,000
Inventory, 12-31-20 13,200

The company maintains its gross margin on agency gross sales at 30% excluding the freight cost on shipments to
agency.
a) How much is the cost of sales of the agency?
b) How much is the net income?

Problem 6: The following information are extracted from the books and records of RR Company and its branch. The
balances are at 12-31-13 of the company’s operations:

Home Office Branch

Sales P260,000
Shipment to Branch P78,000
Shipment from home Office 104,000
Purchases 39,000
Expenses 78,000
Inventory, January 1 2013 26,000
Allowance for overvaluation 31,200

However no shipments in transit between the 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 for a total of P33,800.
Compute for:
a) realized inventory profit of home office from sales made by the branch
b) the amount of branch merchandise beginning inventory that was acquired from home office

Problem 7: Heart Corporation operates a number of branches in the provinces. On 12-31-2020, its Davao branch
showed a Home office account balance of P54,700 and the Home Office showed an Investment in Davao branch
account balance of P51,100. The following information may help in reconciling both accounts.
 A P24,000 shipment charged by Home Office to Davao branch, was actually sent to and retained by cebu
branch.