Meekness

Group 2

2019-0340 Manansala, Mark Daniel M.

2019-0053 Morales, Gewelle B.
2019-0159 Reyes, Isabelle S.
2019-0023 Roman, Rachelle L.
2019-0132 Visda, Patricia Anne G.

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 Credit
Cash P 10,400
Accounts receivable 63,200
Shipments from home office 168,000
Expenses 10,800
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 P280,000
Local purchases 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 Branch
Cost of sales P (500,000) P (100,000)
Branch income 50,000

Net income 180,000 30,000

Intracompany Profit Deferred 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 240,000

Operating expenses 180,000
Net income P 60,000
The branch inventories were:

12/01/20x4 12/31/20x4
Merchandise from Home office P 70,000 P 84,000
Local Purchases 10,000 16,000
Total 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 156,000

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

Ending Inventory (60,000) (84,000) (24,000) COGS, BILLED 336,000

COGS 240,000 336,000 96,000 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 -0-
B. 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 -
Total debits P1,500,000 P500,000
Credits:
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 537,500 300,000
Shipments to branch 200,000 -
Branch profit 62,000
Total credits 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 d. P50,200
b. P49,000 e. 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 Branch

Allowance for overvaluation of branch merchandise P 10,800
Shipments to branch 24,000
Purchases (outsiders) P 7,500
Shipments from home office 28,000
Merchandise inventory, December 31, 20x4 45,000

Answer: D

Billed Cost Allowance

Merch. Inventory, 12/31/20x5 36,0000 30,000 6,000

Shipments 28,800 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,

Home Office Branch

Sales P 60,000 P 30,000
Shipments to branch 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
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.
Additional information:
 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 3,600
MI, December 31, 20x4 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

Debits:
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 12,000
Branch store 32,300 -
Purchases 240,000 11,000
Shipments from home office - 99,000
Other expenses 15,000 7,000
Total debits P382,500 P150,500
Credits:
Accounts payable P15,000 P500
Unrealized inventory profit 9,000 -
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 32,000

Shipments 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 AOI
Beg. Merchandise Inventory 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 40,000.00
Cost of goods sold
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
47,000.00 24,500.00 71,500.00
sale
Inventory, December 31,
-14,000.00 -5,500.00 -19,500.00
20x4
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 58,000 -
Expense 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 -0-
Retained earnings……………………………………………………….. 17,000 -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 Branch

Inventory P 23,000 P 11,550
Davao 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 branch inventory, 1/1/20x4 1,000

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
 in 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 AOI
Beg. Merchandise Inventory 1,000
Shipments 110,000 100,000 10,000
Cost of Goods Available for sale 11,000
Less: End. Merchandise Inventory 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 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 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 . 110,000
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 20,150
d. Branch Current - Baguio 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 40,000
Inventory 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 20,000
Goods available for sale 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 17,000
Branch 4,500 P 21,500
Purchases 50,000
Goods available for sale 71,500
Ending Inventory
Home office 14,000
 Branch 5,500 (19,500)
Combined COGS 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 year-
end. 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