Cebu Branch Submitted The Following Data To Its Home Office in Manila For 2016, Its First Year of Operation

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HOME OFFICE AND BRANCH ACCOUNTING

PROBLEMS:

1. Cebu branch submitted the following data to its home office in Manila for 2016, its first year of operation:

Sales P 2,300,000
Shipments from home office 1,850,000
Operating expenses 235,000
Home Office 480,000

Shipments to the branch are billed at cost. The December 31 inventory of the branch was P255,500.

What is the balance of the Investment in Branch account on December 15, 2016 on the home office books?
a. P 950,500
b. P 470,500
c. P 950,000
d. P 480,000

SOLUTION:

Answer: A

Since the balance of the reciprocal accounts “Home Office” account and “Investment in Branch”
account are equal, then the balance of the Home Office account after closing the branch profit is to be
computed. The computation is:

Home Office account balance before branch profit P 480,000


Add: Profit (loss)
Sales P 2,300,000
Cost of sales:
Shipments from HO P 1,850,000
Inventory, Dec. 31 255,500 1,954,500
Gross profit P 705,500
Operating expenses 235,000 470,500
Home Office account balance, December 31, 2014 P 950,500

2. The home office in Quezon City ships and bill merchandise to its provincial branch at cost. The branch
carries its own accounts receivable and makes its own collections. The branch also pays its expenses.

The transactions for 2016 are reflected in the branch trial balance that follows:

Cash P 20,000
Accounts Receivable 80,000
Home Office P 180,000
Shipments from Home Office 250,000
Sales 225,500
Expenses 55,500

Total P 405,500 P 405,500

December 31, inventory P 65,000


No. 2 – Continued

Assuming all the transactions are properly recorded, what is the balance of the Investment in Branch account in the
home office books?
a. P 180,000
b. P 195,000
c. P 165,000
d. P 175,000

SOLUTION:

Answer: C

Home Office account before branch profit (loss) P 180,000


Add: Profit (loss)
Sales P 225,500
Cost of Sales:
Shipments from HO P 250,000
Inventory, 12/31 65,000 185,000
Gross profit P 40,500
Expenses 55,500 ( 15,000)
Home Office account balance, 12/31 P 165,000

Therefore the balance of the Investment in Branch account is also P 165,000.

3. The following data pertains to the shipments of merchandise from Home Office to Branch during 2016:

Home office’s cost of merchandise P 350,000`


Inter-office billings 420,000
Sales by branch to outsiders 520,000
Merchandise inventory on December 31, 2016 50,000

In the combined statement of comprehensive income of the Home Office and the Branch for the year ended
December 31,2016, what amount of the above transactions should be included as sales?
a. P 570,000
b. P 520,000
c. P 470,000
d. P 350,000

SOLUTION:

Answer: B

In the preparation of combined statements of the home office and the branch, all inter-office transactions are
eliminated as if it had never occurred. Therefore, the only transactions that should be presented are transactions to
outsiders, which is in this problem, the P 520,000 sales by branch to outsiders.
4. Nike Corporation operates a number of branches in the provinces. On December 31, 2016, its Davao branch
showed a Home Office account balance of P 54,700 and the home office books showed an Investment in Davao
Branch account balance of P 51,100. The following information they help in reconciling both accounts:

1. A P 24,000 shipment, charged by Home Office to Davao Branch, was actually sent to and retained by Cebu
Branch.
2. A P 30,000 shipment, intended and charged to Aklan Branch was shipped to Davao Branch and retained by the
latter.
3. A P 4,000 emergency cash transfer from Cebu Branch was not taken up in the Home Office books.
4. Home Office collects a Davao Branch accounts receivable of p 7,200 and fails to notify the branch.
5. Home Office was charged for P 2,400 for merchandise returned by Davao Branch on December 30. The
merchandise is in transit.

Home Office erroneously recorded Davao Branch’s net income for 2016 at P 32,550.

What is the adjusted balances of the Home Office and Davao Branch reciprocal accounts on December 31, 2016?
a. P 40,300
b. P 54,700
c. P 47,500
d. P 43,500

SOLUTION:

Answer: C

To compute the adjusted balances of the reciprocal accounts a reconciliation statement is to be prepared as follows:

(HO Books)
(Branch books) Investment in
Home Office Davao Branch
Account Account
Unadjusted balances, December 31, 2016 P 54, 700 P 51, 100
Add (deduct) the following adjustments
1. Shipment charged to Davao branch
but actually sent to Cebu branch ( 24,000)
2. Shipment charged to Aklan branch
but actually sent to Davao branch
3. No effect.
4. Home office collection of Davao Branch
accounts receivable ( 7,200)
5. Merchandise returned by Davao branch.
Still in transit to home office. ( 2,400)
6. Overstatement of Davao branch net
Net income (P 32,550 – P 25,350) ( 7,200)
Adjusted balances, December 31, 2016 P 47,500 P 47,500
5. The branch manager of Tower Cosmetics in Cebu submitted a report as of May 31, 2016 containing the following
information:

Petty Cash Fund P 1,500


Sales 198,720
Sales Returns 3,600
Accounts Wriiten Off 1,920
Shipments from Home Office 136,080
Accounts Receivable – May 31, 2015 43,800
Accounts Receivable – May 31, 2016 49,140
Inventory – May 31, 2015 37,170
Inventory – May 31, 2016 41,370
Expenses (reimbursed by H.O) 57,930

Assuming all cash collected by the branch is remitted to Tower Cosmetics home office, the remittances for the
period amounted to:
a. P 187,860
b. P 189,780
c. P 195,120
d. P 198,720

SOLUTION:

Answer: A

The P 187, 860 is computed as follows:

Accounts receivable, 5/31/2015 P 43, 800


Net Sales (P 198,720 – P 3,600) 195, 120
Total P 238, 920
Less: Accounts Receivable, 5/31/2016 P 49, 140
Accounts written off 1, 920 51, 060
Remittance P 187,860

6. On December 31, the Investment in Branch account in the home office books shows a balance of P 50,000. The
following facts are ascertained:
1. Merchandise billed at P 12,500 is in transit on December 31 from the home office to the branch.
2. The branch collected a home office accounts receivable for P 3,500. The branch did not notify the home
office of such collection.
3. On December 30, the home office sent cash of P 7,500 to the branch, but this was charged to General
Expense; the branch has not received the cash as of December 31.
4. Branch profit for December was recorded by the home office at P 2,400 instead of P 2,040.
5. The branch returned supplies of P 1,500 to the home office but the home office ha snot yet recorded the
receipt of the supplies.

Assume all the other transactions have been properly recorded.

What is the unadjusted balance of the Home Office account on the branch books on December 31?
a. P 64, 140
b. P 39, 140
c. P 14, 000
d. P 13, 000
SOLUTION:

Answer: B

P 39, 140 is computed as follows:

Investment in Branch account balance,12/31 P50,000


(Home Office books)
Add (Deduct):
Merchandise in transit (12,500)
Collection of Home Office accounts receivable by Branch 3,500
Erroneous recording of Branch profit ( 360)
Supplies returned by Branch ( 1,500)
Home Office account balance,12/31 (Branch books) P39,140

7. A reconciliiation of the Dagupan Branch account of Mandaluyong Company and the Home Office account carried
in the branch’s books shown the following discrepancies at December 31,2016.
1. A credit for merchandise allowance for P 300 was taken by the branch as P 360.
2. A charge by the branch of P 550 for an advance taken by the president when he visited the branch has
not yet been recorded by the home office.
3. The branch has not taken up P900 covered by a debit memo from the home office as share in advertising
expenses.

The Invesrment in Dagupan Branch account in the home office books had a debit balance of P 43,000 at December
31,2016. The reciprocal accounts were in agreement at the beginning of the year.

The unadjusted balance of the Home Office account in the branch’s books at December 31,2016 was:
a. P 43, 500
b. P 42, 950
c. P 41, 990
d. P 41, 490

SOLUTION:

Answer: D

The P 41, 490 unadjusted balance of Home Office account is computed as follows:

Unadjusted balance, Investment in Branch account, 12/31 P43,000


Less: Merchandise allowance (error) P 60
Branch advances to President 550
Advertising expense charged to Branch 900 1,510
Unadjusted balance, Home office account, 12/31 P41,490
8. The following were found in your examination of the interplant accounts between the Home Office and the
Butuan Branch:

a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked by the branch.
b. P10,000 covering marketing expense of another branch was charged by Home Office to Butuan
c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice.
d. Home Office recorded a cash transfer of P65,700 from Butuan Branch as coming from Davao Branch
e. Butuan reversed a previous debit memo from Cagayan de Oro Branch amounting to P10,500. Home Office
decided that this charge is appropriately Davao Branch’s cost.
f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560

The net adjustments DR (CR) to the Investment in Butuan Branch account to the Home Office account are:
Investment in Butuan Home Office
a. P (75,700) P20,950
b. 75,700 ( 20,950)
c. ( 55,700) 75,000
d. ( 65,700) ( 74,000)

SOLUTION:

Answer: A

Dr. (Cr.) Adjustment to Investment in Butuan Branch account


Marketing expense of another branch charged to Butuan (b) P(10,000)
Butuan’s remittance credited to Davao branch (d) ( 65,000)
Dr. (Cr.) adjustment to Butuan Branch
account in the home office books P(75,000)

Dr, (Cr.) Adjustment to Home Office account:


Fixed assets transfer not book by Butuan (a) P(53,960)
Inventory transfer recorded twice by Butuan (c) 75,000
Error in recording DM for P4,650 as P4,560 (f) ( 90)
Dr. (Cr.) adjustment to Home Office account
In Butuan Branch books P 20,950

9. After examining on a comparative basis the inter-office account of the Bulacan Company with its suburban
branch and the similar account carried on the latter’s books, the following discrepancies at the close of the business
on June 30, 2016 were seen:
a. A charge for labor by the Home Office P500 was recorded twice by the branch.
b. A charge of P895 was made by the Home Office for freight on merchandise, but the amount was recorded
by the Branch as P89.50.
c. A charge of P980 (furniture and fixture) on the Home Office books was taken up by the Branch as P890.
d. A credit by the Home Office for P350 (merchandise allowances) was taken up by the Branch as P400.
e. The Home Office charged the Branch P425 for interest on open account which the Branch failed to take up
in full; instead, the Branch sent to the Home Office a wrong adjusting memo, reducing the charge by P100
and set up a liability for the next amount.
f. The Home Office received P5,000, from the sale of a truck which it erroneously credited to the Branch; the
Branch did not change the Home Office therewith.
g. The Branch by mistake sent the Home Office a debit note for P370 representing its proportion of a bill for
repairs of truck; the Home Office did not record it.
h. The Branch inadvertently received a copy of the Home Office entry dated July 19, 2014 correcting item (f)
and entered a credit in favor of the Home Office as of June 30, 2016.
At June 30, 2016, the unadjusted balance of the Investment in Branch account on the Home Office books showed
P175,520. At the beginning of the year, the interoffice accounts were in balance.

What is the unadjusted balance of the Home Office account on the branch books on June 30, 2016?

a. P184,279.50
b. P160,725.50
c. P18,729.00
d. P165,279.50

SOLUTION:

Answer: A

Unadjusted balance of investment in branch account, 6/30 P175,520.00


(a) Charge for labor 500.00
(b) Charge for freight ( 805.50)
(c) Purchase of furniture and fixture ( 90.00)
(d) Merchandise allowance ( 50.00)
(e) Charge for interest ( 425.00)
(f) Proceeds from sales of truck 5,000.00
(g) Charge for truck repairs ( 370.00)
(h) Proceeds from sales of truck 5,000.00
Unadjusted balance of Home Office account, 6/30 P184,279.50

10. Rustans, Philippines has two merchandise outlets, its Home Office in Manila and its Cebu City branch. For
control purposes, all purchases are made by the Home Office and shipped to the Cebu City branch at cost plus 10%.
On January 1, 2016 the inventories of the Home Office in Manila and the Cebu City branch are P13,600 and P3,960
respectively. During 2016, the Home Office purchased merchandise costing P40,000 and shipped 40% of it to the
Cebu City branch. At December 31, 2016, the following journal entry to prepare the books for the next accounting
period was prepared by the branch”

Sales 32,000
Inventory, December 31 4,840
Inventory, January 1 3,960
Shipments from main store 17,600
Expenses 10,480
Home Office 4,800

What was the actual branch income for 2016 on a cost basis assuming the use of the provisions of the Statement of
Financial Accounting Standards?

a. P4,800
b. P6,320
c. P6,480
d. P6,840
SOLUTION:

Answer: B

Sales P32,000
Cost of sales:
Inventory, Jan. 1 3,960
Shipment from Home Office 17, 600
Inventory, Dec. 31 ( 4,840) 16,720
Gross Profit 15,280
Expenses 10,480
Net income per branch books 4,800
Add: Overvaluation of cost of sales
Billed Price (above) 16,720
Cost to H.O ( 16, 720 / 110%) 15,200 1,520
Actual branch income at cost basis P 6,320

11. On September 1, Star Company opened a branch in Dagupan City, shipping to it merchandise billed at P60,000.
During the month, additional shipments were made at a billed price of P24,000. Returns by the branch of bad-order
goods were credited for P1,680. At the end of the month, the branch reported its inventory of P33,600 and its net
loss for the month at P5,200 Shipments to and from the branch were consistently billed at 120% off cost.

a. P28,000 and P2,920, respectively


b. P28,000 and (P5,200), respectively
c. P33,600 and P2,920, respectively
d. P33,600 and P5,200, respectively

SOLUTION:

Answer: A

Branch Inventory at Cast:


Branch inventory at billed price P33,600
Divide by the billing percentage of cost 120%
Branch inventory of cost P 28,000

Branch net income as far as the Home office is concerned:

Branch net loss, as reported (P5,200)


Add: Overvaluation of Cost of Sales of the Branch:
Total Shipment to Branch:
Billed price (P60,000 + P24,000) P84,000
Cost (84,000 120%) 70,000 P14,000
Less: Branch returns –
Billed price P 1,680
Cost(P1,680 120%) 1,400 280
Net Shipment P13,720
Less: Inventory, 9/30-
Billed price P33,600
Cost 28,000 5,600 8,120
Branch Net Income P 2,92
12. Makati Company bills its Valenzuela Branch for merchandise at 140% of cost. At the end of January, 2016, the
branch reported the following information.

Merchandise from
Home Office
(At Billed Price)

Inventory, January 1 P 7,560


Shipments received 28,280
Inventory, January 31 8,400

What should be the balance of the allowance account for overvaluation of the branch inventory at
January 31 before adjustment?
a. P 2,400
b. P 2,160
c. P 9,080
d. P10,240

SOLUTION:

Answer: D

The balance of the Allowance for Overvaluation of Branch Inventory account represents the overvaluation of branch
inventory on January 1 and overvaluation of the shipment received. Computation is as follows:

Billed Billing Over-


Price + Percentage = Cost Valuation

Inventory. January 1 P 7,560 140% P 5,400 P2,160


Add: Shipment 28,280 140% 20,200 8,080

Balance of allowance before adjustment P 10,240

13. The Binondo branch of China Products Inc. buys merchandise from third parties and receives
merchandise from the home office for which it is billed at 20% above cost. Below are excepts from the
trial balances and data on the home office and Binondo branch for the month just eneded.

Home Office
Allowance for overvaluation of branch merchandise P370,000
Shipments to Branch 850,000

Branch
Beginning inventory 1,440,000
Shipments from home office 1,020,000
Purchases 410,000
Month end additional data:
Ending inventory of branch P1,460,000
From home office at Billed Price P1,170,000
From outsiders (at cost) 290,000

The total cost of goods sold of the Binondo branch at cost (net of overvaluation) for the month just ended
amounted to.

a. P1,410,000
b. P1,385,000
c. P1,235,000
d. P1,850,000

SOLUTION:

Answer: C

Beginning inventory P1,440,000


Purchase 410,000
Shipment from home office 1,020,000
Goods available for sale 2,870,000
Ending inventory 1,460,000
Cost of sales 1,410,000
Less: Overvaluation
Beginnning inventory and shipments 370,000
Less:Ending inventory
Billed price P1,170,000
Cost(P1,170,000/120%) 975,000 195,000 ` 175,000
Cost of goods sold (net) P 1,235,000

14. Shopper Company started a branch office in Iloilo City on June 1,2016. On this date, the company shipped
to its Branch merchandise billed at P90,000. On June 15, another shipment was made at billed prices of
P36,000. During the month, the branch was credited for P2,520 for the damaged goods returned by the
branch. On June 30,2016, branch reported the following:

Inventory, June 30 P50,400


Net loss for the month (P7,800)

Shipments to and from the branch wee uniformly billed at 120% of cost.

a. No net income or loss


b. Net income of P4,380
c. Net income of P12,180
d. Net loss of P7,800
SOLUTION:

Answer: B

According to the Home Office books, Iloilo branch will have a P4,30 net income as computed below:

Branch net loss (P7,800)


Add: Overvaluation of Cost of Sales of branch –
Total shipment to Branch:
Billed price(90,000+P36,000) P126,000
Cost (P126,000 120%) 105,000 P21,000

Less: Branch returns


Billed price P 2,520
Cost (P2,520 120%) 2,100 420
Net Shipment to Branch P 20,580
Less: Inventory, 6/30
Billed price P 50,400
Cost (P50,400 120%) 42,000 8,400 12,180
Branch Net Income P 4,380

15. Tarlac branch of Quezon City Company, at the end of its first quarter of operations, submitted the following
statement of comprehensive income.

Sales P300,000
Cost of sales:
Shipments from Home Office P28,000
Local purchases 30,000
Total P 310,000
Inventory at end 50,000 P 260,000
Gross margin on sales P 40,000
Expenses 35,000
Comprehensive income P 5,000

Shipments to the branch wee billed at 140% of cost. The branch inventory as at September 30 amounted to P50,000
of which P6,600 was locally purchased, Markup on local purchases, 20% over cost. Branch expenses incurred by
Head office amounted to P2,500

On September 30, the branch inventory at cost and the net income realized by the home office from the Tarlac
branch operation are:

Branch inventory at cost Net income realized


a. P37,600 P72,600
b. P50,000 P55,000
c. P31,600 P 5,000
d. 37,600 P70,100
SOLUTION:

Answer: D

P37,600 is computed as follows:

Acquired from Home Office:


Billed price (P50,000-P6,600 P43,400
Divide by billing percentage of cost 140% P 31,000
Local purchases 6,600
Branch inventory at cost, 9/30 P 37,600

Below is the computation of Home Office income from branch operation of P70,100.
Branch net income (P5,000 – P2,500 expense) `` P 2,500
Add: Overvaluation of Branch Cost of Sales:
Shipment from Home Office:
Billed price P280,000
Cost(P280,000 + 140%) 200,000 P80,000
Less: Inventory, end-
Billed price (P50,00-P6,600) P43,400
Cost (43,400 + 140%) 31,000 12,400 67,600
Branch net income realized by Home Office P 70,100

16. Ayala Branch was billed by Home Office for merchandise at 140% of cost. At the end of its first month, Ayala
Branch submitted among other things, the following data:

Merchandise from Home from Home Office (at billed price) P 98,000
Merchandise purchased locally by Branch P55,000
Iventory, December 31 of which P7,000 are local purchase 28,000
Net sales for month 180,000

SOLUTION:

Answer: B

Branch inventory, at cost, 12/31:


Acquired from Home Office (P21,000 / 140%) P 15,000
Local purchases 7,000
Total P 22,000

Branch Gross Profit:


Net sales P 180,000
Cost of sales insofar as Home Office is concerned:
Shipment from Home Office, at cost
(P98,000 / 140%) P70,000
Purchases 40,000
Cost of goods available for sale 110,000
Inventory, at cost, 12/31:
Acquired from Home Office
(21,000 140%) P 15,000
Local purchases 7,000 22,000 88,000
Gross profit insofar as Home Office is concerned P 92,000
17. The Coffee Blend Corporation decided to open a branch in Manila. Shipments of merchandise to the branch
totaled P54,000 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 operation for the period ended December 31, 2016.

Sales on account P74,000


Sales on cash basic 22,000
Collections of account 60,000
Expenses paid 38,000
Expenses unpaid 12,000
Purchase of merchandise for cash 26,000
Inventory on hand, December 31; 80% from home office 30,000
Remittance to home office 55,000

The branch 12/31 inventory at cost and the branch net income (loss) as far as the home office is concerned are:

Branch Branch
Inventory at Cost Net income (loss)
a. P26,000 (P1,000)
b. P25,000 (P4,000)
c. P26,000 P1,000
d. P20,000 P 800

SOLUTION:

Answer: C

Below is the computation of Branch ending Inventory at cost:

Acquired from Home Office (80% x P30,000) / 120% P 20,000


Add: Acquired from outsiders (20% x P30,000) 6,000
Branch inventory at cost, 12/31 P 26,000

The P1,000 net income is derived as follows:

Sales (P74,000 + P22,000) P 96,000


Cost of sales insofar as Home Office is concerned:
Shipment from Home Office at cost
(54,000 / 120%) P45,000
Purchases 26,000
Cost of goods available for sale 71,000
Inventory, at cost, 12/31 26,000 45,000
Gross profit P 51,000
Expenses (38,000+ P12,000) 50,000
Branch net income insofar as Home Office is concerned P 1,000
18. Trial balances before adjustments for the home office and the branch of the King Company show the following
items on December 31. The home office bills the branch at 20% above cost.

Home Office Branch

Allowance for overvaluation of branch merchandise P 3,600


Shipment to branch 8,000
Purchases P2,500
Shipment from home office 9,600
Merchandise inventory, December 1 15,000

What part of the branch inventory as of December 1 represented purchases from outsiders?
a. P3,000
b. P5,000
c. P2,000
d. P1,800

SOLUTION:

Answer: A

Merchandise Inventory, December 1 P 15,000


Less: Merchandise acquired from Home Office at Billed Price
Overvaluation (3,600 – P 1,600) P 2,000
Cost (P2,000 / 20%) 10,000 12,000
Merchandise acquired from outsiders P 3,000

19. The Manila Sales Co. established a branch in San Pablo City early last year, it shipped merchandise and billed
the branch for P300,000 prior to its opening. For the year, it made additional shipments at billed price of P120,000.
Within the year the branch shipped back P7,500 inventory and got the credit memo for said returns. On the last
working day of the year, an inventory count was made. Ending inventory of P1855,000 was established consisting of
purchases from third parties at P20,000, with the balance coming from home office shipments at billed price. The
home office billed the branch at 20% above cost. The total purchases of the branch from outside suppliers amounted
to P72,6500. The total goods available for sale by the branch at cost (net of overvaluation and returns amounted to:

a. P416,250
b. P485,000
c. P422,500
d. P435,250
SOLUTION:

Answer: A

Total shipment from office P 420,000


Returns ( 7,500)
Purchases 72,500
Good available for sale, at Billed Price P 485,000
Less: Overvaluation of shipment:
Billed Price P420,000
Cost (P420,000 / 120) 350,000 70,000
Returns:
Billed Price P 7,500
Cost (7,500 / 120%) 6,250 ( 1,250) 68,750
Goods available for sale, at Cost P 416,250

20. The income statement submitted by the Bulacan Branch to the Home Office for the month of December,2016 is
shown below. After effecting the necessary adjustments the true net income of the Branch was ascertained to be
P156,000. The Branch inventories were:

12/01/2016 12/31/2016
Merchandise from home office P70,000 P 84,000
Local purchases 10,000 16,000
Total P 80,000 P 100,000

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 P 460,000
Inventory, December 31 100,000 360,000
Gross margin P 240,000
Operating expenses 180,000
Total comprehensive income for December 2016 P 60,000

What is the balance of the “Allowance for Overvaluation in Branch Invetory” account at December 31, 2016?

a. P10,000
b. P16,000
c. P24,000
d. P34,000
SOLUTION:

Answer: C

Before computing the balance of the allowance account, the percent of billing price to cost should be computed first
as follows:

Branch net income, per Home Office P 156,000


Branch net income, per Branch 60,000
Realized mark-up on merchandise from the
Home Office already sold by the Branch P 96,000

Shipments from Home Office 350,000


Less: Increase is portion of Branch inventory
Acquired from Home Office 14,000
Portion already sold by Branch 336,000
Less Mark-up Thereon (above) 96,000
Cost of portion already sold by Branch P 240,000

Percent of billing price to cost P336,000/240,000 140%

The balance of the “Allowance for Overvaluation in Branch inventory” accounted December 31, 2016 after
adjustment represent the overvaluation of the branch ending inventory acquired from the Home Office computed as
follows:

Billed price P 84,000


Cost (P84,000 / 140%) 60,000
Balance of the allowance account P 24,000

21. Mahiyain Commercial Corporation operates a branch in Iloilo City. Selected accounts taken from the books of
Mahiyain and its branch show balances as of December 31,2016 as follows:

Home Office Branch

Merchandise inventory, January 1 P 12,000 P 8,000


Purchase 150,000 30,000
Shipments from home office - 93,750
Shipments to branch 75,000 -
Branch inventory allowance 19,750 -
Sales 115,000 176,500
Merchandise inventory, December 31 14,000 10,350

The ending inventory of the branch includes items costing P4,350 which were acquired from suppliers other than the
home office.

As far as the home office is concerned, the cost of sales of the Iloilo City branch was:
a. P 97,120
b. P102,850
c. P121,400
d. P131,850
SOLUTION:

Answer: B

Branch inventory, January 1 P 8,000


Purchases 30,000
Shipments from home office 93,750
Merchandise available for sale P 131,750
Less: Branch inventory, Dec31 10,350
Branch cost of sales, per branch books P 121,400
Less: Mark-up on merchandise from the home office
already sold by the branch:
Branch inventory allowance P 19,750
Less: Mark-up on portion of Dec.31 inventory
acquired from home office:
(P10,350 – P4,350) x 25/125 1,200 18,550
Branch cost of sales, as far as the home office is concerned P 102,850

Note: Shipments of merchandise from the home office to the branch are billed as 125% of cost, determined as
follows:

Shipments from Home Office = P93,750


= 140%
Shipments to Branch = P75,000

22. The Neneng Corporation established its San Pedro branch in March 2016. During the first year of operations, the
home office shipped to the branch merchandise which had cost P120,000. Three-fourths of these merchandise was
sold by the branch for P141,000. Operating expenses of the branch amounted to P27,000.

How much total comprehensive income will the branch report if merchandise is billed by the home office to the
branch at 25% above cost?
a. P 800
b. P 1,200
c. P 1,500
d. P 8,000

SOLUTION:

Answer: C

Sales P 141,000
Less: Cost of sales at Billed Price (sch.1) 112,500
Gross profit 28,500
Expenses 27,000
Total comprehensive income to be reported by the Branch P 1,500

Schedule 1
Cost of shipment to branch P 120,000
Add:25% mark-up 30,000
Billed price of shipment to branch 150,000
Portion sold x 3/4
Cost of sales at billed price P 112,500
23. A branch store in Marikina was established by Marco Co. on March 1. Shipments of merchandise, billed to this
branch at 125% of cost, were as follows:

March 5 P 120,000
March 10 50,000
March 20 35,000

On March 24, the branch returned defective merchandise worth P3,050 and on March 31, it reported a net loss of
P6,200 and merchandise inventory of P85,000.

In the home office books, the branch total comprehensive income (loss) is:

a. P (6,200)
b. P 17.190
c. P 20,240
d. P 23,390

SOLUTION:

Answer: B

Reported branch loss P ( 6, 200)


Add: Overvaluation in branch cost of sales
Shipment to branch P 205,000
Less: Returns 3,050
Ending inventory 85,000 88,050
Cost of sales, at Billed Price 116,950
Cost of sales, at Billed cost to Home Office
(116,950/125%) 93,560 23,390
Branch total comprehensive income, per Home Office books P 17,190

24. The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City. During 2016, the home
office shipped to the branch supplies costing P120,000 at a billed price of 20% above cost. The inventories of
supplies at the branch were as follows: January 1, 2016, P90,000; December 31,2016, P108,000. On December 31,
2016 the home office holds inventories of P160,500 which includes P10,500 held on consignment.

How much is the inventories in a combined statement of financial position as of December 31, 2016?

a. P210,000
b. P240,000
c. P270,000
d. P300,000

SOLUTION:

Answer: B
The combined inventories on Dec,31 2016 statement of financial position is computed as follows:
Home Office (P160,500 – P10,500) P 150,000
Branch, at cost (P108,000 / 120%) 90,000
Combined inventories, 12/31 P 240,000

25. The Iloilo Company operates a branch in Davao, and the profit and loss data for the home office and the branch
for 2016 follows:
Home office Branch

Sales P250,000 P 75,000


Purchases from outsiders 200,000 15,000
Shipments to branch
Cost to home office 30,000
Billing price to branch 37,500
Expenses 40,000 10,000
Inventories Jan, 1,2016
Home office, at cost 80,000
Branch:
From outsiders, at cost 7,500
From Home Office at 20% above cost 24,000
Inventories, Dec. 31, 2016
Home office, at cost 55,000
Branch:
From outsiders, at cost 5,500
From Home office at 2016 billing 26,000

The combined total comprehensive income (loss) of the home office and the branch on December 31, 2016 is:
a. P30,800
b. P(33,800)
c. P33,800
d. P27,000

SOLUTION:

Answer: C

Sales P 325,000
Less: Cost of sales
Jan. 1 inventories, at cost (sc.1) P 107,500
Purchases 215,000
Merchandise available for sale P 322,500
Less: Dec, 31 inventories, at cost (sch.1) 81,300 241,200
Gross profit on sales P 83,800
Less: Expenses 50,000
Total comprehensive income P 33,800

Schedules 1:
Inventories
Jan. 1 Dec. 31
Home Office P 80,000 55,000
Branch, at cost
Acquired from outsiders 7,500 5,500
Acquired from Home Office
Jan. 1 (P 24,000 / 120%) 20,000
Dec. 31 (P 26,000 / 125%) 20,800
Combined P 107,500 P 81,300
2016 Billing (7,500 / 30,00) = 140%
26. Manila Inc. established a branch in Cebu to distribute part of the goods purchased by the home office. The home
office prices inventory shipped to the branch at 20% above cost. The following account balances were taken form
the ledger maintained by the home office and the branch:

Manila Inc, Cebu Branch

Sales P 600,000 P 210,000


Beginning inventory 120,000 60,000
Purchases 500,000 -
Shipment to branch 130,000 -
Shipment from home office - 156,000
Operating expenses 72,000 36,000
Ending inventory 98,000 48,000

All of the branch inventory is acquired from the home office –

The combined total comprehensive income of the home office and the branch is:

a. P 170,000
b. P 70,000
c. P 278,000
d. P 132,000

SOLUTION:

Answer: A

Sales
Cost of Sales:
Beginning inventory:
Home Office P 120,000
Branch, at cost (P60,000/120%) 50,000 P 170,000
Purchases 500,000
Total 670,000
Ending inventory:
Home Office 98,000
Branch, at cost (P48,000/120%) 40,000 138,000 532,000
Gross profit 278,000
Operating expenses 108,000
Combined total comprehensive income P 170,000
27. Selected accounts from the December 31, 2016 trial balances of Heart Co. and its branch follow:
Heart Branch
Inventory, Jan. 1 P 46,000 -
Investment in Branch 116,600 -
Purchases 380,000 -
Shipments from home office - 209,000
Freight in - 10,450
Expenses 104,000 58,100
Home Office - (106,600)
Sales (310,000) (280,000)
Shipments to branch (200,000) -
Branch merchandise markup (22,000) -

As of December 31, 2016, a shipment with a billing price of P11,000 was in transit to the branch. Freight cost,
typically 5% of the billing price, is inventoriable. Merchandise on hand at year-end wee” at home office, P64,000 at
cost; at branch, P33,000 at billing price.

What is the combined total comprehensive income of Heart Company and its branch for 2016?

a. P 77,000
b. P 84,900
c. P 76,000
d. P 76,100

SOLUTION:

Answer: C

Sales (P310,000 + P280,000) P 590,000


Cost of sales
Inventory, 1 /1 (Schedule 1) P 67,100
Purchases P 380,000
Freight in (P220,000 x 5%) 11,000 391,000
Goods available for sale P 458,100
Inventory, 12/31 (schedule 1} P 104,000
Freight in (P 44,000 x 5%) 2,000 106,200 351,900
Gross profit P 238,100
Expenses (P 104,00 + P 58,100) 162,000
Combined total comprehensive income P 76,000

Schedule 1: Combined inventories – at cost:


Inventories
January 1 December 31
Home office, at cost P 46,000 P 64,000

Branch, at cost:
Inventory, January 1:
Billed price P 23,100
Mark-up (schedule 2) 2,000 21,000
Inventory, December 31:
At cost [(P33,000 + P11,00) / 110 %] 40,000
Combined P 67,100 P 104,000
*Billing % (P 209,000 + P 11,000) / P200,200 = 110%

Schedule 2: Mark-up on Branch beginning inventory

Branch merchandise markup before adjustment P 22,000


Less: overvaluation of shipments [(P 209,000 + P 11,000) – P 200,000] 20,000
Mark up of branch beginning inventory P 2,000

28. Apo Supply Company is engaged in merchandising both at its Home Office in Makati and at its Branch in
Davao City. Selected accounts taken from the trial balances of the Home Office and the branch as of December 31,
2016 follow:
Makati Branch
Debits

Inventory, January 1, 2016 P 23,000 P 11,550


Davao Branch P 58,300 -
Purchases 190,000 105,000
Freight in from Home Office - 5,500
Sundry expenses 52,000 28,000

Credits

Home Office -P - P 53,300


Sales 155,000 140,000
Sales to Branch 110,000 -
Allowance for Overvaluation of
Branch Inventory at Jan. 1, 2016 1,000 -

Additional information:

- The Davao City branch gets all of its merchandise from the home office. The home office bills the goods at
cost plus a 10% mark-up, At December 31,2016, a shipment with 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.

- Inventories eon December 31, 2016, excluding the shipment in transit, follow:
Home Office, at cost P 30,000
Branch, at billed price (excluding freight of P520) 10,400

What is the combined total comprehensive income (loss) of the home office and the branch on December 31, 2016?

a. P 30,470
b. P 20,870
c. P (10,000)
d. P (30,470)
SOLUTION:
Answer: A

Sales P 295,000
Cost sales:
Inventory, 1/1:
Home Office P 23,000
Branch, at cost (11,550 – 1,000) 10,550
Freight-in (5,500 + 250) 5,750 39,300
Purchases, Home Office 190,000
Total 229,300
Inventory 12/31:
Home Office P 30,000
Branch, at cost [(10,400 + 5,000)
/110%] 14,000
Freight- in (P 520 + P250) 770 44,770 84,330
Gross profit 110,470
Sundry Expenses 30,000
Combined total comprehensive income P 30,470

29. On November 2, 2016, the home office of Toby Sport Company recorded a shipment of merchandise to its
Bulacan Branch as follows:
Investment in branch – Bulacan 60,000
Shipments to Branch 50,000
Allowance for overvaluation of
Branch inventory 8,000
Cash (for freight charges) 2,000

The Bulacan branch sells 40% of the merchandise to outside customers during the rest of the period. The books of
the home office are closed on December 31 of each year.

On January 10,2017, the Bulacan branch transfer half of the original shipment to the Baguio branch, and the Bulacan
branch pays P1,000 freight for the shipment. If the shipment had been made by the home office to Baguio Branch,
the freight charges would have been P1,500.

What is the entry of the Bulacan branch to record the receipt of the shipment from the home office on November 2,
2016?
a. Shipments from home office 50,000
Accounts receivable 8,000
Freight in 2,000
Home office 60,000

b. Shipment from home office 60,000


Home office 60,000

c. Shipment from home office 58,000


Freight in 2,000
Home office 52,000

d. Shipment from home office 50,000


Freight out 2,000
Home office 52,000
SOLUTION:

Answer: C

Choice ( c ) is correct, because the branch should record the shipment from office at billed price (P50,000 +
P8,000), and should treat the freight changed to the office as inventoriable cost.

30. Using The same data in No. 29, at what amount should the 60% of the merchandise remaining unsold at
December 31, 2016 be included in the inventory of the Bulacan Branch?

a. P31,200
b. P36,000
c. P36,800
d. P34,800

SOLUTION:

Answer: B

Shipments from home office at billed price P 58,000


Unsold 60%
Ending inventory P 34,800
Freight in (P2,000 x 60%) 1,200
Total P 36,000

31. Using The same data in No.29, what is the entry in the books of Bulacan branch to record the transfer
on January 10,2017?

a. Baguio branch 31,000


Shipment from home office 31,000

b. Home office 31,000


Inventory 31,000
c. Home office 31,000
Inventory 30,000
Cash 1,000

d. Home office 31,000


Cash 1,000
Inventory 30,000

SOLUTION:

Answer: D
In the books of Bulacan branch (sending branch) the inter-branch transfer should be treated as if it was returned to
the home office. Inventory account should be treated as if it was returned to the home office. Inventory account
should be credited in place of the Shipment from Home Office account and freight-in which was already closed at
the end 2013. Therefore entry (d) is correct (P29,000 + P2,0000).

32. Using the same data in No. 29, what is the entry in the books of baguio branch to record the transfer on
January 10,2017?

a. Shipments from Bulacan Branch 30,200


Bulacan branch 30,200

b. Shipments from home office 29,000


Freight in 1,500
Home office 30,500
Cash 1,000

c. Shipments from home office 29,000


Freight in 1,500
Home Office 30,500

d. Shipments from home office 30,000


Freight in 1,000
Home office 31,000

SOLUTION:

Answer: C

In the books of Baguio branch (receiving branch) the inter-branch transfer should be treated as if it was received
from the home office. And the freight to be recognized should be the freight from the office. Therefore choice ( c ) is
correct.

33. Using the same data in No. 29, what is the entry in the home office books to record the inter-branch transfer on
January 10,2017?

a. Investment in branch – Baguio 30,500


Excess freight 1,500
Investment in branch Bulacan 32,000

b. Investments in branch – Baguio 30,500


Investments in branch – Bulacan 30,500

c. Investment in Branch – Bulacan 32,500


Investment in branch – Baguio 32,500

d. Investment in branch – Baguio 30,500


Excess freight 500
Investment in branch – Bulacan 31,000
SOLUTION:

Answer: A

In the books of the home office the inter-branch transfer can be cleared by debiting the receiving branch (Baguio)
and crediting the sending branch (Bulacan). Excess Freight account should be changed for the difference which is
treated as an expense of the home office. Therefore choice (a) is correct

Alternative entry: If the Allowance for Overvaluation of Branch Inventory account is classified by branch:

Investment in Branch – Baguio 30,500


Allowance for Overvaluation of Branch Inventory
Bulacan (P 8,000 x 50%) 4,000
Excess freight 1,500
Ivestment in Branch – Bulacan 32,000
Allowance for Overvaluation Branch
Inventory – Baguio 4,000

34. Papa. Inc. of Makati opens a sales agency in Pasig City and a working fund of P100,000 is established on
imprest basis. The first payment from the fund is P5,000 for rent of the store space.

What is the entry in the books of the home office to record the payment of rent by the agency?

a. Rent expense – Pasig agency 5,000


Cash 5,000

b. Pasig agency 5,000


Cash 5,000

c. Rent expense – Pasig agency 5,000


Working fund 5,000

e. No entry.

SOLUTION:

Answer: D

The expenses paid by the branch are not recorded in the home office book. It is only recognized upon replenishment
of the working fund (pretty cash fund).
35. Mama, Inc. opened a sales agency in San Pedro Laguna in 2016. The following is a summary of the transactions
of the sales agency:

Sale orders sent to Home office P 120,000


Sales orders filled by home office in 2016 95,000
Freight on shipment of agency 2,000
Collections, net of 10% discount 81,000
Selling expenses paid from the agency working fund 5,500
Administrative expenses charged to agency 5% gross sales
Samples shipped to agency:
Cost 8,200
Inventory, December 31, 2016 4,550

The company’s gross profit rate on agency sales is 30% excluding the freight cost on shipments yo agency.

What is the total comprehensive income of the agency for 2016?


a. P 3,600
b. P 5,600
c. P 1,600
d. P 6,300

SOLUTION:

Answer: A

Sales P 95,000
Sales discount (P 81,000 / 90%) x 10% 9,000
Net sales 86,000
Cost of sales (P95,000 x 70% ) + 200 68,500
Gross profit 17,500
Expenses:
Selling expenses P 5,500
Administrative expenses (P 95,000 x 5%) 4,750
Samples expenses (P 8,200- P 4,550) 3,650 13,900
Net income P 3,600

36. A Makati home office transfers inventory to its Pasig Branch at 140% of cost. During 2016, the reciprocal
account in the statement of comprehensive income of the home office amounts to P 328,125. On December 31,2016,
the home office adjusted the branch income summary by debiting the Allowance for Overvaluationof Branch
inventory account in the amount of P 81,250. The branch’s statement of financial position at the beginning of the
year shows P 105,000 of inventory acquired from the home office.

How much is the ending inventory of the branch per books?


a. P 200,000
b. P 161,250
c. P 280,000
d. P 80,000

SOLUTION:

Answer: C

Branch beginning inventory — acquired from home office P 105,000


Shipment from home office — at billed (P 328,125 x 140%) 459,375
Goods available for sale at billed price 564,375
Cost of sales (P 81,250 / 40%) x 140% (284,375)
Branch ending inventory per books P 280,000

37. On July 31, 2016, the home office in Manila establishes a sales agency in Bulacan. The following assets are
sent to the agency:
Cash (working fund to be operated under the imprest system) P 22,000
Samples of merchandise 36,000

During the month of August, the following transactions occured:


 The sales agency submits sales order of P 272,000 sales per invoice was billed at P 268,000. Cost of sales
to customers is P 124,000.
 Collections during the month amount to P 58,200, net of 3% discount.
 Home office disbursements chargeable to the agency are as follows:
Furniture P 40,000
Salaries for the month 21,600
Annual rent of office space 36,000
 On August 31, the sales agency working fund is replenished. Paid vouchers submitted by the sales agency
amounting to P 17,925. Samples are useful until December 31, 2016 which, at this time, are believed to
have a salvage value of 15% cost. Furniture is deprecited at 18% per annum.

What is the total comprehensive income of the sales agency for the month of August?
a. P 91,425
b. P 93,225
c. P 92,955
d. P 58,425

SOLUTION:

Answer: C

Sales P 268,000
Sales discount (P 58,200/ 97%) x 3% 1,800
Net sales 366,200
Cost and expenses:
Cost of sales P 124,000
Salaries 21,600
Rent expense (P36,000 x 1/12) 3,000
Expenses 17,925
Samples (P 36,000 x 85%) x 1/5 6,120
Depreciation (P 40,000 x 18% x 1/12) 600 P 173,245
Net income P 92,955

38. The home office in Makati shipped merchandise costing P 55,500 to Pasig branch, prepaid the freight
amounting to P 4,200. The home office transfers inventory to the branch at a 20% mark up above cost. Pasig branch
was subsequently instructed by the home office to transfer the merchandise to Alabang branch wherein the latter
paid freight of P 2,800. If the shipment was made directly from Makati to Alabang, the freight cost would have been
P 6,200.

Which of the following is true as a result of the interbranch transfer of merchandise?


a. The home office debits Alabang Branch Current for P 73,600
b. Alabang branch debits the Home Office for P 70,000
c. Pasig branch credits freight in for P 6,200.
d. The home office will credit Pasig Branch Current for P 70,800

SOLUTION:

Answer: D

Choice (d) is correct due to the following entries to record the interbranch transfer of merchandise:

Pasig Branch Books:


Home Office 70,800
Freight in 4,200
Shipment from home office 66,600
To record transfer of merchandise to Alabang

Alabang Branch Books:


Shipment from home office 66,600
Freight in 6,200
Cash 2,800
Home office 70,000
To record receipt of merchandise from Pasig

Home Office Books:


Alabang branch current 70,000
Excess freight 800
Pasig branch current 70,800
To record interbranch transfer of merchandise.

39. The following are some of the account balances on the books of the home office and its branch on December 31,
2016:
Home Office Books Branch Books
Inventory, January 1,2016 P 20,000 P 58,000
Shipments from home office 150,000
Purchases 900,000 200,000
Shipments to branch 145,000
Allowance for overvaluation of branch inventory 52,500
Sales 1,200,000 720,000
Operating expenses 290,000 110,000
Per physical count, the ending inventory of the is P 42,000 including goods purchased from outsiders of P 27,700
while the ending inventory of the home office is P 120,000. Home office bills its branch for merchandise shipments
at 30% above cost.
What is the amount of the unrealized inventory profit in the books of the home office on December 31,2016?
a. P 9,000
b. P 7,600
c. P 12,000
d. P 3,300

SOLUTION:

Answer: C

The unrealized inventory profit balance on December 31 is the difference between the branch ending inventory at
billed price and cost. Computed as follows:

Branch ending invty. per physical count — from HO (P42,000 — P 27,700) P 14,300
Shipment to transit:
Shipment from HO at BP (P 145,000 / 130%) P 188,500
Shipment from HO per books 150,000 37,700
Correct branch ending inventory at billed price P 52,000
Branch ending at cost (P52,000 / 130%) 40,000
Unrealized inventory profit, December 31, 2011 P 12,000

40. Using the data in No. 39, how much is the combined total comprehensive income on December 31,2016?

a. P 538 700
b. P 547,400
c. P 541,700
d. P 498,200

SOLUTION:

Answer: A

The combined net income is computed by preparing a combined income statement as follows:

Sales P 1,920,000
Cost of sales:
Inventory, January 1 (Sch.1) P 69,000
Purchases 1,100,000
Goods available 1,169,000
Inventory, December 31 (Sch.1) 187,700 981,300
Gross Profit 938,700
Expenses 400,000
Combined net income P 538,700

Schedule 1:
Inventory at cost
January 1 December 31
Home office P 20,000 P 120,000
Branch: Acquired from HO (Sch.2) 30,000 40,000
Acquired from outsiders (P 58,000 – P 39,000) 19,000 27,700
Total 49,000 67,700
Combined P 69,000 P 187,700
Schedule 2:

Allow for overvaluation before adjustment P 52,800


Overvaluation in the Shipments:
Shipment from HO at BP (P 145,000 x 130%) P 188,500
Shipment to branch at cost 145,000 43,500
Overvaluation in the branch beginning inventory P 9,000

Branch beginning inventory at cost (P 9,000 / 30%) P 30,000

Branch ending inventory at cost (per No. 39) P 40,000

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