CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/MARASIGAN

HOME OFFICE AND BRANCH ACCOUNTING

Part I: Theory of Accounts

1. In the separate statement of financial position of the home office, the investment in branch account
shall be presented as
a. Liability
b. Equity
c. Asset
d. Income

2. If the home office receives debit memo from the branch, the home office shall record it in its
separate statement of financial position by
a. Increasing the investment in branch account
b. Decreasing the investment in branch account
c. Disclosure only
d. None of the above

3. If the branch receives credit memo from the home office, the branch shall record it in its separate
statement of financial position by
a. Increasing the home office account
b. Crediting the home office account
c. Debiting the home office account
d. Disclosure

4. Which of the following transactions will increase the home office account in the branch’s separate
statement of financial position?
a. Net loss of the branch
b. Collection by the home office of branch’s receivable
c. Debit memo received from the home office
d. Payment by the branch of home office’s liability

5. Which of the following transactions will decrease the investment in branch’s account in the home
office’s separate statement of financial position?
a. Net income of the branch
b. Payment of branch’s liability by the home office
c. Credit memo received from the branch
d. Return by branch to home office of merchandise shipped

6. Which of the following reconciling transactions will require credit to home office current account
in Branch A’s book for the adjustment?
a. Collection by Branch A of Branch B’s accounts receivable
b. Payment by branch A of home office’s accounts payable
c. Credit memo received by branch A from home office
d. Reshipment of goods received by branch A to branch B

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Part II: Problem Solving

Problem 1. LGM Inc. Head Office and its sole branch in Cavite reported the following for the month
of January 2023:
Home Office Current Account
Jan. 1, 2023 Beginning balance 117,000
Jan. 4, Shipments from the home office 234,000
Jan. 5, Cash remitted to the home office 156,000
Jan. 28, Expenses allocated by the home office 78,000
Jan. 28, Cash remitted to the home office 58,000
Jan. 28, Merchandise returned to the home office 23,000
Investment in Branch Account
Jan. 1, 2023 Beginning balance 117,000
Jan. 3, Shipments to branch 234,000
Jan. 5, Cash received from branch 156,000
Jan. 28, Expense allocation to branch 87,000
Jan. 28, Shipments to branch 46,000
Jan. 28, Collection from branch customer 35,000
Jan. 28, Supplies purchased for branch 15,000
Except for the error by the branch in recording its share of allocated expenses, all other reconciling
items are due to timing differences.
How much is the correct balance of reciprocal accounts?
a. 218,000
b. 227,000
c. 308,000
d. 539,000

Problem 2. On December 31, 2023, DMF Corp. showed a debit balance of P85,000 in its investment in
branch account. The following facts were ascertained:
a) On December 31, 2023, merchandise billed at cost of P8,000 was in transit from the home
office to the branch. The branch only records the shipments on the day it receives the goods.
b) The branch had collected home office accounts receivable of P1,000 and recorded the correct
entry. However, it neglected to inform the home office of the said collection.
c) A debit memo amounting to P2,000 was issued by the home office to the branch for the share of
the branch in advertising expense. The branch debited its home office current account for the
same amount.
d) The newly hired branch accountant mistakenly thought the debit memo in item (c) has not yet
been recorded, which led to the accountant debiting P2,000 to the home office current account
once more.
e) Acquisition of equipment by the branch, P15,000. The equipment account is to be maintained in
the home office books. The home office had not been notified of the acquisition.
f) A branch customer remitted P1,250 to the home office for their own personal convenience. The
home office recorded this cash collection, but the branch is yet to make an entry.
g) Home office purchased P11,000 worth of supplies for the branch. The branch was not notified
of the transaction, hence it did not record it. On the other hand, the home office accountant
presumed that the transaction will not be recorded in the home office books since it is for the
benefit of the branch.

How much is the unadjusted balance of the home office current account in the books of the branch?
a. 58,250
b. 69,250
c. 71,000
d. 82,000

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Problem 3. LUCAS Inc. has two branches. One is situated in Subic, and the other in Baguio.

During the month, the head office shipped goods billed at cost of P880,000 to its Subic branch. The
shipping fee of P40,000 was paid by Subic branch. Immediately after receiving these goods, the home
office instructed Subic to store only P396,000 worth of goods, and ship the rest to the Baguio branch.
Subic branch paid P30,000 for the reshipping of goods to the Bacoor branch.

1. What if it would have only costed the main office P29,000 to ship the goods intended for
Baguio branch directly to its location, how much is the loss to be recognized by the main
office?
a. 23,000
b. 20,000
c. 17,000
d. 0

2. What if it would have costed the main office P62,000 to ship the goods intended for Baguio
branch directly to its location, how much is the debit to freight-in in the Baguio branch
books?
a. 22,000
b. 40,000
c. 52,000
d. 62,000

Problem 4. During 2022, LUNA Corporation’s home office shipped its goods to its branch at a markup
of 20% above cost. In 2023, this rate was increased to 25%, when the branch had a total of P112,200
beginning inventory, all of which came from the home office.
During the year 2023, the branch purchased P240,000 worth of goods from its suppliers, and received
goods from the home office billed at P215,625. As per the 2023 separate statement of financial position
of the home office, the loading in branch inventory account had an adjusted ending balance of P18,750.
As per the 2023 combined statement of profits and losses, the cost of goods sold totaled P852,600,
inclusive of P446,600 attributable to the home office.

1. How much is the cost of goods sold reported by the branch for the year ended December 31,
2023?
a. 496,000
b. 424,750
c. 443,325
d. 449,075

2. By how much is the 2023 branch net income understated?

a. 61,825
b. 43,075
c. 18,750
d. 0

3. As of December 31, 2023, how much inventory will the branch report in its separate
statement of financial position?
a. 75,000
b. 93,750
c. 100,000
d. 118,750

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Problem 5. GENELYN Corporation’s home office ships goods to its only branch at the same mark-up
percentage every year. The following data were made available:

Home Office Branch

Sales revenue 7,500,000 6,000,000
Inventory, January 1, 2023 1,666,500 1,256,400
Inventory, December 31, 2023 450,000 2,593,500
Shipments to branch 1,224,000 -
Shipments from home office - 1,508,400
Purchases 2,257,500 1,986,000
Operating expenses 2,018,400 1,785,750

Additional information:
 All inventory balances were derived from a physical inventory count.
 There were no goods in transit at the beginning of the year.
 The branch beginning inventory from outsiders is valued twice as much as its beginning
inventory from the home office.
 Allowance for overvaluation of branch inventory account at the start of the year amounted to
P157,050.
 Cost of goods sold reported by the branch for 2023 is overvalued by P191,700.

1. How much is the true cost of goods sold of the branch?

a. 1,965,600
b. 2,157,300
c. 2,349,000
d. 2,540,700

2. How much is the net income in the combined financial statements of the company?
a. 4,256,250
b. 4,706,250
c. 5,288,550
d. 5,480,250

Problem 6. On December 1, 2023, GENEFER Corp established a sales agency in Pasay by sending
cash to be maintained at a P100,000 imprest balance and by shipping a year’s worth of samples costing
P312,000. During the month, the agency submitted to the home office sales order amounting to
P528,000 but only 75% of which were approved and invoiced by the end of the calendar year. Expense
vouchers for the month were as follows: meal allowance P4,000, rent P9,000, transportation allowance
P2,000. The gross profit rate of the company is 50% based on sale.

How much is the net income to be reported by the sales agency for the year ended
December 31, 2023?
a. 157,000
b. 183,000
c. 223,000
d. 249,000

-- END --

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 CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/MARASIGAN

JOINT ARRANGEMENT

Part I: Theory of Accounts

1. The following are true regarding Joint Arrangement except

A. A joint arrangement is an arrangement of which two or more parties have joint control.
B. The parties in the Joint Arrangement are bound by a contractual arrangement
C. The contractual arrangement gives two or more of those parties joint control over the
arrangement.
D. A Joint Arrangement is a joint venture only.

2. It is the contractually agreed sharing of control of an arrangement, which exists only when the
decisions about the relevant activities require unanimous consent of the parties sharing control.
A. Meeting of the minds
B. Joint control
C. Joint venture
D. Joint operation

3. The following are true regarding Joint Arrangement except

A. A Joint Arrangement structured without a separate vehicle is joint operation.
B. Joint operation is an arrangement whereby the parties that have joint control over the arrangement
have the rights to the assets and obligations for the liabilities relating to the arrangement.
C. A Joint Arrangement structured with a separate vehicle is joint venture.
D. Joint venture is an arrangement whereby the parties that have joint control over the arrangement
have the rights to the net assets of the arrangement.

4. When an arrangement is structured through a separate vehicle, in order to determine if it is joint

operation or joint venture, the entity shall consider
A. the legal form of the separate vehicle
B. the terms of the contractual arrangement
C. when relevant, other facts and circumstances
D. all of the above

5. If the entity is a SME, invested in a joint venture, and the joint venture has a published price
quotation, furthermore, the entity opted to account using the cost model. How shall the entity account
its investment in joint venture?
A. Equity model
B. Cost model
C. Fair value model
D. Either equity, cost or fair value model

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Part II: Problem Solving

Problem 1

Entity A and Entity B incorporated Entity C by contributing cash in the amount of P6,750,000 and
P8,250,000 respectively. The contractual agreement of the incorporating entities provided that the
decisions on relevant activities of Entity C will require the unanimous consent of both entities.

Entity A and Entity B have rights to the assets, and obligations for the liabilities, relating to the
arrangement. At the end of first operation of Entity C, the financial statements provided the following
data:

Cash 7,500,000
Inventory 275,000
Land and Building 3,500,000
Equipment 600,000
Accounts payable 750,000
Notes payable 1,250,000
Ordinary shares 1,000,000
Retained earnings 750,000
Expenses 250,000
Sales 8,375,000

The following were the contractual arrangement/agreement of Entity A and Entity B:

a) Cash and inventory will be shared based on their capital contribution.
b) Entity A had the rights to the land and building while Entity B had the rights to the equipment.
c) The accounts payable will be settled by Entity A while the notes payable will be shared by Entity A
and B based on their capital contribution.
d) Revenues and expenses will be divided between Entity A and Entity B, using a 70:30 ratio
respectively. Included in the sales of Entity C were sales to Entity A and to Entity B in the amount of
P1,125,000 and 500,000 respectively. At the end of the year Entity A only sold 35% of the inventory
coming from Entity C to third persons while only 40% of the inventory coming from Entity C
remained in Entity B.

1. What is the share of Entity A in the total assets of Entity C?

A. 6,998,750
B. 5,343,750
C. 8,942,500
D. 3,500,000

2. What is the share of Entity B in the total liabilities of Entity C?

A. 1,100,000
B. 600,000
C. 687,500
D. 1,437,500

3. What is the amount of sales revenue to be reported by Entity B in relation to his interest in
Entity C?
A. 2,512,500
B. 2,233,125
C. 2,304,375
D. 2,025,000

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Problem 2

On January 1, 2023, Entity A and Entity B incorporated Entity C by investing P1,500,000 and P250,000
for capital interest ratio of 70:30. The contractual agreement of the incorporating entities provided that
the decisions on relevant activities of Entity C will require the unanimous consent of both entities. Entity
A and Entity B will have rights to the net assets of Entity C.

The following transactions were ascertained:

 In 2023 Entity C sold an inventory to Entity A resulting to a gross profit of 250,000. Only 40% of the
said inventories were sold by Entity A to third persons during the same year and the remaining
inventories were sold in 2024

 Also in November 1, 2023 Entity C sold an equipment to Entity B resulting into a loss of 500,000 and
the remaining life of the equipment was 5 years

Below were the net income / (net loss) and dividends declared reported by Entity C:

Net Income / (Net loss) Dividends Declared

2023 500,000 150,000
2024 (2,000,000) -
2025 3,500,000 200,000

1. What is the amount of investment income/(loss) to be reported by Entity A and Entity B

respectively for the year ended December 31, 2023?
A. 350,000 and 150,000
B. 200,000 and 633,333
C. 245,000 and 295,000
D. 455,000 and 5,000

2. What is the amount of investment income/(loss) to be reported by Entity B at December 31,

2024?
A. (600,000)
B. (500,000)
C. (630,000)
D. (485,000)

3. What is the amount of Investment in Entity C to be reported by Entity B at December 31, 2025?
A. 830,000
B. 990,000
C. 860,000
D. 1,075,000

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Problem 3

On January 1, 2023, Entity A, a small-medium enterprise, invested P400,000 for a 30% interest in a joint
venture.
Assume the INDEPENDENT CASES:

Case 1:
For the year ended December 31, 2023, the joint venture reported a net income of P150,000 and declared
dividends of P40,000. The fair value of the investment was P325,000 and the cost to sell was P15,000.
There was no public price quotation for the joint venture.

1. Entity A opted to use the cost model, what is the amount to be reported in profit or loss for the
year ended December 31, 2023?
A. 12,000
B. 45,000
C. (90,000)
D. (78,000)

2. Entity A opted to use the cost model, what is the balance of the Investment in Joint Venture
account to be reported at December 31, 2023?
A. 310,000
B. 400,000
C. 444,000
D. 325,000

Case 2:
For the year ended December 31, 2023, the joint venture reported a net income of P300,000 and declared
dividends of P90,000. The fair value of the investment was P550,000 and the cost to sell was P50,000.
There was a public price quotation for the joint venture.

1. Entity A opted to use the cost model, what is the amount to be reported in profit or loss for the
year ended December 31, 2023?
A. 90,000
B. 27,000
C. 177,000
D. 127,000

2. Entity A opted to use the cost model, what is the balance of the Investment in Joint Venture
account to be reported at December 31, 2023?
A. 500,000
B. 550,000
C. 400,000
D. 463,000

Case 3:
For the year ended December 31, 2023, the joint venture reported a net loss of P100,000. The fair value
of the investment was P390,000 and the cost to sell was P25,000. There was a public price quotation for
the joint venture.
Entity A opted to use the equity model, what is the balance of the Investment in Joint Venture
account to be reported at December 31, 2023?
A. 400,000
B. 355,000
C. 370,000
D. 365,000
END
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