Chapter 13

Problem I
Sales....................................................................................................................... 42,000
Shipments to Newark Branch................................................................
35,000
Unrealized Intercompany Inventory Profit...........................................
7,000
Cost of merchandise shipped t branch: P42,000/1.20= P35,000.
Shipments to Newark Branch.............................................................................
Unrealized Intercompany Inventory Profit........................................................
Sales Returns...........................................................................................
Cost of merchandise returned by branch: P750/1.20= P625.

625
125

Newark Branch Income.....................................................................................

Newark Branch.......................................................................................

2,600

Unrealized Intercompany Inventory Profit........................................................

Newark Branch.......................................................................................
Decrease in Unrealized Intercompany Inventory Profit:
Balance prior to adjustment, 12/31, P7,000 P125............... P6,875
Balance required in account, 12/31,
P16,500 (P16,500/1.20)........................................................... 2,750
Decrease.................................................................................... P4,125

4,125

750

2,600
4,125

Newark Branch Income...................................................................................... 1,525

Income Summary....................................................................................

1,525

Problem II
a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on
December 31, calculated as follows:
Merchandise transferred by home office at billed price,
35% above cost (P16,200 plus P20,250)............................................. P36,450
Merchandise transferred by home office at cost, P36,450/1.35.... 27,000
Additions to unrealized profit account resulting from transfers
by home office..................................................................................... P9,450
b. Unrealized Intercompany Inventory Profit.................................................. 4,550
Cash.......................................................................................................

4,550

Balance of unrealized profit account at December 31

(as calculated above).......................................................................................................... P 9,450
Required balance, December 31, to reduce inventory to cost:
Ending inventory of merchandise shipped to branch by home office:
At billed price................................................................................................. P 18,900
At cost (P 18,900/1.35).................................................................................. 14,000
4,900
Required decrease in unrealized profit account as a result
of branch sales...................................................................................................................... P4,550

c. Branch Books:
Home Office........................................................................................... 540
Shipments from Home office...................................................
Home Office Books:
Shipments to Branch.............................................................................. 400
Unrealized Intercompany Inventory Profit........................................... 140
Branch........................................................................................
Cost of merchandise returned: P540/1.35, or P400.

540

540

Problem III
a. The branch office inventory as of December 1 considered of:
Shipments from Home Office (see below)............................................................. P 12,000
Purchases from outsiders (balance of inventory)..................................................
3,000
Total inventory........................................................................................................... P 15,000
Goods acquired from home office and included in branch inventory at billed price are calculated
as follows:
Balance of unrealized intercompany inventory profit, December 31.................... P 3,600
Additions to unrealized profit account during December, 20% of
shipments to branch (20% x P8,000)............................................................................. 1,600
Balance of unrealized profit account, December 1.................................................. P 2,000
Balance of unrealized profit account, December 1, P2,000 / 20% markup on
cost equals December 1 inventory at cost................................................................ P 10,000
Add 20% markup...........................................................................................................
2,000
Goods in branch inventory at billed price................................................................. P 12,000
b. Unrealized Intercompany Inventory Profit......................................... 2,200
Branch Income............................................................................

2,200

Calculation of reduction in Unrealized Intercompany

Inventory Profit:
Balance of unrealized profit account, December 31.........................P 3,600
Required balance, December 31, to reduce inventory to cost
At billed price................................................................... P8,400
At cost (P8,400/1.20)....................................................... 7,000
1,400
Required decrease in unrealized profit account as a result
of branch sales........................................................................................ P 2,200
Problem IV
(1) Dec.31 Selling Expenses............................................................................ 260
Store Supplies............................................................................
Supplies used: P400 P140, or P260.
31

Selling Expenses............................................................................ 80
Accumulated Depreciation-Store Furniture........................
Depreciation:1% of P8,000, or P80.

260

80

31 Selling Expenses............................................................................
Accrued Expenses Payable.................................................

120
120

31 Prepaid Selling Expenses.............................................................

150
Selling Expenses.....................................................................
31 Income Summary......................................................................... 16,000
Merchandise Summary.........................................................
31 Merchandise Summary................................................................. 16,950
Income Summary......................................................................
31 Notes Payable..................................................................................1,000
Home Office...............................................................................

150
16,000
16,950
1,000

31 Sales.................................................................................................20,500
Income Summary.......................................................................

20,500

31 Income Summary........................................................................... 21,900

Purchases....................................................................................
Shipments from Home Office...................................................
Selling Expenses..........................................................................
General Expenses.......................................................................

5,000
10,500
4,560
1,840

31 Home Office....................................................................................... 450

Income Summary.......................................................................

450

(2) Dec.31 Branch No. 1.................................................................................... 1,000

Cash............................................................................................

1,000

Branch No. 1 Income.....................................................................

Branch No. 1...............................................................................

450

31 Unrealized Intercompany Inventory Profit....................................... 2,200

Branch No. 1 Income.................................................................

450
2,200

Calculations of unrealized profit adjustment on merchandise shipped by home office:

Billing to
Cost
Unrealized
Branch
(Billing/1.1/
Profit
3)
(Billing Price
Minus Cost)
Inventory, Dec.1............................................................
P 12,500
P 9,375
P 3,125
Shipments during December......................................
10,500
7,875
2,625
Total in unrealized profit on December 31.................
P 5,750
Inventory, Dec.31.........................................................
14,200
10,650
3,550
Reduction in unrealized profit accountadjustment to branch profit for overstated of cost
of goods sold.................................................................
P 2,200
31 Branch No. 1 Income............................................................... 1,750
Income Summary.............................................................

1,750

Problems V
(1)
SPENCER CO.
Balance Sheet for Branch
December 31,20x4
Assets
Cash..................................................... P 2,650
Accounts receivable........................ 12,850
Merchandise inventory..................... 14,600
Store supplies......................................
300
Prepaid expenses...............................
120
Furniture and fixtures.............. P 3,600
Less: Accumulated
depreciation..............
576 3,024
Total assets....................................... P 33,544

Liabilities____________________
Accounts payable................................... P 4,200
Accrued expenses...................................
105
Home office............................................... 29,239

________
Total liabilities............................................ P 33,544

SPENCER CO.
Income Statement for Branch
For Month Ended December 31, 20x4
Sales........................................................................................................................................... P 20,000
Cost of goods sold:
Merchandise inventory, December 1................................................ P 14,400
Purchases..............................................................................................
4,100
Shipments from home office............................................................... 10,200
Merchandise available for sale.......................................................... P 28,700
Less: Merchandise Inventory, December 31..................................... 14,600
Cost of goods sold....................................................................................................... 14,100
Gross profit................................................................................................................................. P 5,900
Operating expenses:
Advertising expense............................................................................. P 2,800
Salaries and commissions expense.....................................................
2,350
Store supplies expense.........................................................................
280
Miscellaneous selling expense............................................................
1,050
Rent expense........................................................................................
1,500
Depreciation expense furniture and fixtures..................................
36
Miscellaneous general expense.........................................................
905
Total operating expenses..........................................................................................
8,921
Net loss...................................................................................................................................... P 3,021
SPENCER CO.
Balance Sheet for Home Office
December 31, 20x4
Assets
Liabilities and Stockholders Equity_______
Cash..................................................... P10,350
Liabilities
Cash in transit.....................................
1,500
Accounts payable................ P 35,400
Accounts receivable........................ 26,200
Accrued expenses...............
260 P 35,660
Merchandise inventory..................... 24,200
Stockholders Equity
Store supplies......................................
380
Capital Stock......................... P 65,000
Prepaid expenses...............................
350
Less deficit..............................
4,476
60,524
Furniture and fixtures.............. P 8,500

Less: Accumulated
depreciation.............. 2, 585 5,915
Branch..................................... P29,239
Less: Unrealized intercompany
inventory profit............ 1,950 27,289
Total assets........................................ P 96,184

Total liabilities and

________
stockholders equity............................... P 96,184

SPENCER CO.
Income Statement for Home Office
For Month Ended December 31, 20x4
Sales........................................................................................................................................... P 44,850
Cost of goods sold:
Merchandise inventory, December 1................................................ P 31,500
Purchases..............................................................................................
27,600
Merchandise available for sale.......................................................... P 59,100
Less: Shipments to branch...................................................................
8,500
Merchandise available for own sales................................................ P 50,600
Less: Merchandise Inventory, December 31..................................... 24,200
Cost of goods sold.......................................................................................... 26,400
Gross profit................................................................................................................................. P 18,450
Operating expenses:
Advertising expense............................................................................. P 2,850
Salaries and commissions expense.....................................................
4,250
Store supplies expense.........................................................................
560
Miscellaneous selling expense............................................................
1,850
Rent expense........................................................................................
2,700
Depreciation expense furniture and fixtures..................................
85
Miscellaneous general expense.........................................................
2,510
Total operating expenses............................................................................. 14,805
Net income from own operations......................................................................................... P 3,645
Less: Branch net loss................................................................................................................
1,271
Total income............................................................................................................................ P 2,374
2. WORKSHEET refer to a separate sheet
SPENCER CO.
Combined Balance Sheet for Home Office and Branch
December 31, 20x4
Assets

Liabilities and Stockholders Equity

Cash .
P 14,500
Accounts Receivable
39,050
Merchandise Inv .
36,850
Store Supplies ..
680
Prepaid Expenses ..
470
Furniture & Fixtures
P12,100
Less accumulated
Depreciation ...
3,161 8,939
Total assets
P100,489

Liabilities
Accounts Payable ..
P39,600
Accrued Expenses .
365
Stockholders Equity
Capital Stock
P65,000
Less deficit .
4,476

P 39,965
60,524

Total liabilities and

stockholders equity P100,489

SPENCER CO.

Combined Income Statement for Home Office and Branch

For Month Ended December 31, 20x4
Sales P64,850
Cost of goods sold:
Merchandise Inventory, December 1 P43,900
Purchases 31,700
Merchandise available for sale P75,600
Less merchandise inventory, December 31 . 36,850
Cost of goods sold ..
38,750
Gross profit
P26,100
Operating Expenses:
Advertising Expense P 5,650
Salaries and Commissions expense
6,600
Store supplies expense ..
840
Miscellaneous selling expense
2,900
Rent expense
4,200
Depreciation Expense F&F .
121
Miscellaneous general expense .
3,415
Total operating expense . 23,726
Net Income P 2,374
(a)
Dec

Branch Books
31
31
31

Dec.

31
31
31

31
31

Income Summary ..
Merchandise Inventory ..

14,400

Merchandise Inventory
Income Summary .

14,600

Store Supplies Expense .

Store Supplies
Store supplies used: P580 P300, or P280

280

14,400
14,600
280

Prepaid Expenses
Miscellaneous General Expense .

120

Miscellaneous General Expense

Accrued Expenses ..

105

Depreciation Expense F&F ..

Accumulated Depreciation
Depreciation: 1% of P3,600

36

Miscellaneous General Expense ..

Home Office

220

Sales
Income Summary .

20,000

120
105
36

220
20,000

31

31
(b)
Dec

22,221

Home Office .
Income Summary ..

3,021

4,100
10,200
2,800
2,350
280
1,050
1,500
36
905
3,021

Home Office Books

31
31
31

31
31
31

31
31

Dec

Income Summary
Purchases
Shipments from Home Office
Advertising Expense .
Salaries and Commissions Expense .
Store Supplies Expense
Miscellaneous Selling Expense ..
Rent Expense .
Depreciation Expense F&F .
Miscellaneous General Expense .

31

Income Summary .
Merchandise Inventory .

31,500

Merchandise Inventory ...

Income Summary

24,200

Store Supplies Expense .

Store Supplies
Store supplies used: P940 P380, or : 560

560

Prepaid Expense
Miscellaneous General Expense

350

Miscellaneous General Expense ..

Accrued Expenses .

260

Depreciation Expense ..
Accumulated Depreciation F&F .
Depreciation: 1% of P8,500, or P85

85

Cash in Transit .
Branch

31,500
24,200
560

350
260
85
1,500
1,500

Sales
Shipments to branch .......................
Income Summary .

44,850
8,500

Income Summary
Purchases
Advertising Expense .
Salaries and Commissions Expense .
Store Supplies Expense
Miscellaneous Selling Expense ..
Rent Expense .
Depreciation Expense F&F .
Miscellaneous General Expense .

42,405

53,350
27,600
2,850
4,250
560
1,850
2,700
85
2,510

31
31

31
31

Branch Income ..
Branch

3,021

Unrealized Intercompany Inventory Profit .

Branch Income
Calculation of unrealized profit adjustment:
Balance of unrealized profit account,
December 31 ..
P3,700
Inventory merchandise received from
Home office at billed price on
December 31, P11,700
Inventory at cost: P11,700/ 1.20, or P9,750
Balance of unrealized profit account on
December 31, P11,700 P9,750 ....
1,950
Required decreased in unrealized profit
Adjustment to branch income for
Overstatement of cost of goods
Sold .. P1,750

1,750

Income Summary
Branch Income .

1,271

Income Summary
Retained Earnings .

2,374

3,021
1,750

1,271
2,374

Problem VI
1.
Branch
Current
Unadjusted balance, 12/31/20x4
Add (Deduct): Adjustments
1 Cash in transit
2. Merchandise in transit
3. Branch expenses paid by home office
4. Cash in transit from home office
Adjusted balance, 12/31/20x4

P 44,000

H. Office
Current
P 9,000

( 10,000)

_______
P 34,000

10,000
12,000
3,000
P34,000

2. Combined Income Statement

Sales [(P350,000 P105,000) + P150,000)....................................................... P395,000
Less: Cost of goods sold [(P220,000 P84,000) +
(P93,000 + P3,600 P21,000 P1,200)]. 210,400
Gross profit................................................................................................................... P184,600
Operating expenses (P70,000 + P41,000 + P12,000)................................................ 123,000
Net income................................................................................................................... P 61,600
Problem VII
(1)
PAXTON CO.
Income Statement for Dayton Branch
For Year Ended December 31, 20x5

Sales.............................................................................................................................. P315,000
Cost of goods sold:
Merchandise inventory, January 1, 20x5................................... P 44,500
Shipments from home office...................................................... 252,000
Merchandise available for sale................................................. P296,500
Less: Merchandise Inventory, December 31, 20x5..................
58,500 238,000
Gross profit................................................................................................................. P 77,000
Operating expenses................................................................................................. 101,500
Net loss....................................................................................................................... P 24,500
PAXTON CO.
Income Statement for Cincinnati Home Office
For Year Ended December 31, 20x5
Sales.............................................................................................................................. P1,060,000
Cost of goods sold:
Merchandise inventory, January 1, 20x5................................... P115,000
Shipments from home office...................................................... 820,000
Merchandise available for sale................................................. P935,000
Less: Shipments to branch.......................................................... 210,000
Merchandise available for own sales....................................... P725,000
Less: Merchandise Inventory, December 31, 20x5.................. 142,500
582,500
Gross profit..................................................................................................................
P477,500
Expenses......................................................................................................................
382,000
Net income from own operations............................................................................
P 95,500
Add branch net income...........................................................................................
16,650
Total income...............................................................................................................
P112,150
(2)
PAXTON CO.
Combined Income Statement for Home Office and Branch
For Year Ended December 31, 20x5
Sales.............................................................................................................................. P1,375,000
Cost of goods sold:
Merchandise inventory, January 1, 20x5...................................P 150,600
Purchases...................................................................................... 820,000
Merchandise available for sale................................................. P970,600
Less: Merchandise Inventory, December 31, 20x5.................. 191,250
779,350
Gross profit.................................................................................................................... P595,650
Operating expenses....................................................................................................
483,500
Net income................................................................................................................... P112,150
(3) Merchandise Inventory, December 31................................................................ 58,500
Sales.......................................................................................................................... 315,000
Income Summary............................................................................................

373,500

Income Summary......................................................................................................... 398,000

Merchandise Inventory, January 1................................................................
Shipments from Home Office.........................................................................
Operating expenses........................................................................................

44,500
252,000
101,500

Home Office...............................................................................................................

24,500

Income Summary..........................................................................................

24,500

(4) Branch Income.....................................................................................................

Branch............................................................................................................

24,500

Unrealized Intercompany Inventory Profit...............................................................

Branch Income..............................................................................................
Calculation of unrealized profit adjustment:
Branch inventory, January 1, acquired from home office
at billed price...................................................................................... P 44,500
Less: Cost of inventory (P44,500/1.25)......................................................... 35,600
Unrealized Intercompany Inventory Profit Jan. 1....................................... P 8,900
Add: Increase in unrealized profit for shipments
made during year, billed price of goods,
P252,000, cost of goods, P210,000.................................................... 42,000
P 50,900

41,150

Deduct balance to remain in unrealized profit account:

Branch inventory, December 31,
acquired from home office....................................... P 58,500
Less: Cost of inventory to home office,
P58,500/1.20................................................................
48,750
Reduction in unrealized profit account- adjustment to
branch income for overstatement of cost of
goods sold..................................................................

24,500
41,150

9,750
41,150

Branch Income............................................................................................................. 16,650

Income Summary............................................................................................

16,650

Merchandise Inventory, December 31...................................................................... 142,500

Sales............................................................................................................................... 1,060,000
Shipments to Branch.................................................................................................... 210,000
Income Summary.............................................................................................
1,412,500
Income Summary......................................................................................................... 1,317,000
Merchandise Inventory, January 1................................................................
Purchases.........................................................................................................
Expenses...........................................................................................................

115,000
820,000
382,000

Income Summary.......................................................................................................... 112,150

Retained Earnings............................................................................................

112,150

Problem VIII
(1)
RUGGLES CO.
Income Statement for Branch
For Year Ended December 31, 20x4
Sales................................................................................................................................ P 78,500
Cost of goods sold:
Merchandise inventory, January 1, 20x4......................................... P 32,000
Shipments from home office........................................... P 40,000

Purchases from outsiders.................................................

20,000 60,000
Merchandise available for sale....................................................... P 92,000
Less: Merchandise Inventory, December 31, 20x4........................ 31,500
Cost of goods sold.............................................................................
60,500
Gross profit.................................................................................................................... P 18,000
Operating expenses....................................................................................................
12,500
Net income................................................................................................................... P 5,500
RUGGLES CO.
Income Statement for Home Office
For Year Ended December 31, 20x4
Sales..............................................................................................................................
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 80,000
Purchases...................................................................................... 210,000
Merchandise available for sale................................................. P 290,000
Less: Shipments to branch..........................................................
30,000
Merchandise available for own sales....................................... P 260,000
Less: Merchandise Inventory, December 31, 20x4..................
55,000
Cost of goods sold.............................................................................
Gross profit...................................................................................................................
Operating Expenses....................................................................................................
Net loss from own operations.....................................................................................
Add branch net income............................................................................................
Total income................................................................................................................

P 256,000

205,000
51,000
60,000
P
9,000
13,500
P
4,500
P

(2)
RUGGLES CO.
Combined Income Statement for Home Office and Branch
For Year Ended December 31, 20x4
Sales.............................................................................................................................. P 334,500
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 107,500
Purchases...................................................................................... 230,000
Merchandise available for sale.................................................. P 337,500
Less: Merchandise Inventory, December 31, 20x4...................
80,000
Cost of goods sold.............................................................................
257,500
Gross profit.................................................................................................................... P 77,000
Operating expenses....................................................................................................
72,500
Net income................................................................................................................... P 4,500
(3) Merchandise Inventory......................................................................................... 31,500
Sales.......................................................................................................................... 78,500
Income Summary............................................................................................
110,000
Income Summary......................................................................................................... 104,500
Merchandise Inventory...................................................................................
Shipments from Home Office.........................................................................
Purchases.........................................................................................................
Expenses...........................................................................................................

32,000
40,000
20,000
12,500

Income Summary......................................................................................................... 5,500

Home Office.....................................................................................................

5,500

(4) Branch......................................................................................................................
Branch Income................................................................................................

5,500
5,500

Unrealized Intercompany Inventory Profit...............................................................

Branch Income..............................................................................................

8,000
8,000

Calculation of unrealized profit adjustment:

Branch inventory, January 1, acquired from home office
at billed price.................................................................................... P 24,500
Less: Cost of inventory (P24,500/1.225).................................................... 20,000
Unrealized Intercompany Inventory Profit Jan. 1................................... P 4,500
Add: Increase in unrealized profit for shipments
made during year, billed price of goods,
P40,000, cost of goods, P30,000....................................................
10,000
P 14,500
Deduct balance to remain in unrealized profit account:
Branch inventory, December 31,
acquired from home office....................................... P 26,000
Less: Cost of inventory to home office,
P26,000/1.1/3................................................................ 19,500
6,500
Reduction in unrealized profit account- adjustment to branch
income for overstatement of cost of goods sold...........................
8,000
Branch Income............................................................................................................. 13,500
Income Summary............................................................................................

13,500

Merchandise Inventory................................................................................................ 55,000

Sales............................................................................................................................... 256,000
Shipments to Branch.................................................................................................... 30,000
Income Summary.............................................................................................
341,000
Income Summary......................................................................................................... 350,000
Merchandise Inventory...................................................................................
80,000
Purchases.........................................................................................................
210,000
Expenses...........................................................................................................
60,000
Income Summary..........................................................................................................
Retained Earnings............................................................................................

4,500
4,500

Problem IX
1.
Branch
Current
Unadjusted balance, 12/31/20x4
Add (Deduct): Adjustments
1 Remittance
2. Cash in transit
3. Shipments in transit

P 60,000

H. Office
Current
P 51,500

I 1,700)
1,800
5,800

Adjusted balance, 12/31/20x4

P 57,300

P 57,300

2. Income Statement - Branch

Sales................................................................................................................................ P 140,000
Cost of goods sold:
Merchandise inventory, January 1, 20x4 (P11,550 P1,000)....... P 10,550
Shipments from home office (P105,000 + P5,000 P10,000)........ 100,000
Freight-in (P5,500 + P250)..
5,750
Merchandise available for sale..................................................... P116,300
Less: Merchandise Inventory, December 31, 20x4...................... 14,770
Cost of goods sold.............................................................................
101,530
Gross profit.................................................................................................................... P 38,470
Operating expenses....................................................................................................
24,300
Net income................................................................................................................... P 14,170
Income Statement Home Office
Sales..............................................................................................................................
P 155,000
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 23,000
Purchases...................................................................................... 190,000
Merchandise available for sale................................................. P 213,000
Less: Shipments to branch.......................................................... 100,000
Merchandise available for own sales....................................... P 113,000
Less: Merchandise Inventory, December 31, 20x4..................
30,000
Cost of goods sold........................................................................
83,000
Gross profit................................................................................................................... P 72,000
Operating Expenses....................................................................................................
42,000
Net loss from own operations..................................................................................... P 30,000
Add branch net income............................................................................................
14,170
Combined net income.............................................................................................. P 44,170
3.
Combined Income Statement for Home Office and Branch
For Year Ended December 31, 20x4
Sales.............................................................................................................................. P
Cost of goods sold:
Merchandise inventory, January 1, 20x4................................... P 33,550
Purchases...................................................................................... 190,000
Freight-in
5,750
Merchandise available for sale.................................................. P 229,300
Less: Merchandise Inventory, December 31, 20x4...................
44,770
Cost of goods sold........................................................................
Gross profit.................................................................................................................... P
Operating expenses....................................................................................................
Net income................................................................................................................... P
Problem X
a. The cost of the merchandise destroyed was P30,000.
Total merchandise acquired from home ofiice, at billed price:
Inventory, January 1...................................................................................... P26,400
Shipments from home office, Jan. 1-17....................................................... 20,000
P46,400

295,000

184,530
110,470
66,300
44,170

Cost of goods sold, January 1-17, at billed price:

Net sales, P13,000/1.25...................................................................................... 10,400
Merchandise on hand, January 17, at billed price....................................... P36,000
Merchandise on hand, January 17, at cost, P36,000/1.20............................ P30,000
b. Branch Books:
Loss from Fire (or Home Office)............................................................ 36,000
Merchandise Inventory............................................................
36,000
Home Office Books:
No entry needs to be made on the books of the home office until the end of the fiscal period, when
the branch earnings (including the loss from fire) are recognized and when the balance of the
account Unrealized Intercompany Inventory Profit is adjusted to conform to the branch ending
inventory. If it is desired to recognized the loss from fire on the home office books immediately, the
following entry may be made:
Branch Loss from Fire (or Retained Earnings)...................................... 30,000
Unrealized Intercompany Inventory Profit........................................... 6,000
Branch.........................................................................................
36,000
Problem XI
a. Books of Branch A:
Home Office........................................................................................ 1,500
Cash.........................................................................................

1,500

b. Books of branch B:
Cash...................................................................................................... 1,500
Home Office............................................................................

1,500

c. Books of Home Office:

Branch B............................................................................................... 1,500
Branch A..................................................................................

1,500

Problem XII
a. Books of Branch No. 1 :
Home Office .
Shipments from Home Office..
Freight In

1,600
350

b. Books of branch No. 5:

Shipments from Home Office
Freight In
Home Office.
Cash
c. Books of the Home Office
Branch No. 5..
Excess Freight on Inter branch Transfer of Merchandise..
Branch No. 1
Shipments to Branch No. 1..
Shipments to Branch No. 5

1,950

1,600
400
1,750
250
1,750
200
1,950
1,600
1,600

Multiple Choice Problems

1. c - P50,400, billed price x 40/140 = P 14,400
2. b
Ending inventory in the combined income statement:
From Home Office: (P50,000-P6,600) x 100/140
From Outsiders

P 31,000
6,600
P 37,600

3. a
True Branch Net Income
Branch Net Income
Add (deduct):
Overvaluation of cost of goods sold/realized profit
from sales made by branch:
Shipments from home office.
P 280,000
Less: Ending inventory, at billed
price (P50,000 P6,600)
43,400
Cost of goods sold from home
office at billed price
P 236,600
Multiplied by: Mark-up
40/140
Unrecorded branch expenses
True Branch Net Income

5,000

67,600
( 2,500)
P 70,100

4. c
True Branch Net Income
Less: branch Net Income as reported by the branch
Overvaluation of CGS
Less: Cost of goods sold from home office at BP
Inventory, December 1
Shipment from HO
COGAS
Less: Inventory, December 31
CGS from home office, at cost

P156,000
60,000
P 96,000
P 70,000
350,000
P 420,000
84,000

336,000
P 240,000

Billing Price: P336,000 / P240,000 = 140%.

5. c Allowance for overvaluation after adjustment / for December 31 inventory: (refer to
No. 4 for further computation): P84,000 x 40/140 = P24,000.
6. No answer available P109,000
Net Income as reported by the Branch
Less: Rental expense charged by the home office
(P1,000 x 6 months)
Adjusted NI as reported by the Branch
Add: Overvaluation of CGS
MI, beginning
SFHO
COGAS
Less: MI, ending

P 20,000
6,000
P 14,000
Billed Price
0
550,000
550,000
75,000

CGS, at BP
X: Mark-up ratio
True/Adjusted/Real Branch Net Income

475,000
25/125

95,000
P109,000

7. d
Sales (P537,500 + P300,000).. P 837,500
Less: Cost of goods sold
Merchandise inventory, beg. [P50,000 + (P45,000 / 1.20)]P 87,500
Add: Purchases. 500,000
Cost of Goods Available for Sale... P 587,500
Less: MI, ending [P70,000 + (P60,000 / 1.20)]. 120,000 467,500
Gross profit.
P 370,000
Less: Expenses (P120,000 + P50,000...
170,000
Net Income
P 200,000
8. d
Overvaluation of Cost of Goods Sold:
Unrealized Profit in branch inventory/ before adjustment.P 7,200
Less: Allowance of ending branch inventory (P20,000 x 84% =
P16,800 x 20/120.. 2,800
Overvaluation of Cost of Goods Sold. .P 4,400
Adjusted branch net income:
SalesP60,000
Less: Cost of goods sold:
Inventory, January 1, 2003.P 30,000
Add: Purchases..... 11,000
Shipments from home office.. 19,200
Cost of Goods available for sale P 60,200
Less: Inventory, December 31, 2003.
20,000
40,200
Gross profit.. P 19,200
Less: Expenses.. 12,000
Unadjusted branch net income.P 7,800
Add: Overvaluation of Cost of Goods Sold.
4,400
Adjusted branch net income..P 12,000
9. d
Merchandise Inventory, 12/31/2005
Shipments
Cost of goods sold

Billed Price
*P 36,000
28,800

Cost
P 30,000
24,000

Allowance
P 6,000
4,800
P10,800

From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000.

From outsiders: P45,000 P36,000 = P9,000
10. d
Merch. Inventory, 12/31/20x4
Shipments
Cost of Goods Sold

Billed Price
*P12,000
9,600

Cost
P10,000
8,000

Allowance
P 2,000
1,600
P 3,600

*P2,000 / 20% = P10,000 + P2,000 = P12,000.

Merchandise inventory, December 1, 20x4P 15,000
Less: Shipments from home office at billed price* 12,000
Merchandise from outsidersP 3,000
11. d
Combined Cost of Goods Sold:
Merchandise Inventory, 1/1/2003:
Home Office, cost
P 3,500
Branch: Outsiders, ...........................P 300
From Home Office (P2,500 P300)/110%................. 2,000
2,300 P 5,800
Add Purchases (P240,000 + P11,000)..
251,000
COGAS
P256,800
Less: Merchandise Inventory, 12/31/2003
Home Office, cost.
P 3,000
Branch: Outsiders. P 150
From Home Office (P1,800 P150)/110%................ 1,500 1,650
4,650
Cost of Goods Sold
P252,150
12. d
100%
Billed Price

60%
Cost

40%
Allowance
Merchandise inventory, 1/1/x4
32,000
Shipments
*60,000
36,000
*24,000
Cost of goods available for sale
56,000
Less: MI, 3/31/x4 (25,000 x 40%)
10,000
Overvaluation of CGS**
46,000
*36,000 cost / 60% = 60,000 x 40% = 24,000. (Note: Markup is based on billed price)
**Realized Profit from Branch Sales
13. d
Billed
Price
Merchandise inventory, 8/1/x4
Shipments (400,000 x 25%)
Cost of goods available for sale
Less: MI, 8/31/x4 (160,000 x 25%)
Overvaluation of CGS/RPBSales

400,000
160,000

14. b
(1) Sales
Less: Cost of goods sold:
Inventory, 1/1/2003 (P4,950 / 110%)
Add: Shipments
(P22,000 / 110%)
COGAS
Less: Inventory, 12/31/2003 (P6,050 / 110%)
Gross profit
Less: Expenses
Net income from own operations
(2) Combined Cost of Goods Sold:

Cost

Allowance
60,000
*100,,000
160,000
40,000
120,000

P 40,000
P 4,500
20,000
P 24,500
5,500
P
_
P

19,000
21,000
13,100
7,900

Merchandise Inventory, 1/1/2003:

of Home Office, cost..P 17,000
of Branch, cost: P4,950 / 110%.
4,500
Add Purchases.
COGAS..
Less: Merchandise Inventory, 12/31/2003
of Home Office, cost P 14,000
of Branch, cost: P6,050 /100%..
5,500
Cost of Goods Sold.

P 21,500
50,000
P 71,500
19,500
P 52,000

15. a - P48,000 / 120% = P40,000

16. a P48,000 x 20/120 = P8,000 (note: adjusted allowance refers to the allowance related to the
ending inventory, so, the allowance related to the CGS, which is P10,00 in this case is considered
to be the adjustments in the books of Home Office to determine the adjusted branch net
income)
120%
100%
20%
Billed Price
Cost
Allowance
Merchandise inventory, 1/1/x4
0
Shipments
108,000
Cost of goods available for sale
108,000
Less: MI, 12/31/x4 (P60,000 x 80%)
48,000
Overvaluation of CGS (60,000 x 20/120)
60,000
10,000*
17. b
Sales (P148,000 + P44,000)
Less: Cost of Sales
Inventory, 1/1/20x4
Purchases
Shipments from home office
Cost of goods available for sale
Less: Inventory, 12/31/20x4
Gross profit
Less: Expenses (P76,000 + P24,000)
Net income, unadjusted
Add: Overvaluation of CGS
Adjusted branch net income

P192,000
P

0
52,000
108,000
P 160,000
60,000

100,000
P 92,000
100,000
P( 8,000)
10,000
P 2,000

18. c

Merchandise inventory, 1/1/x4

Shipments
Cost of goods available for sale
Less: MI, 12/31/x4 (P60,000 x 80%)
Overvaluation of CGS(230,000x 25/125)

125%
Billed Price
40,000
250,000
290,000
60,000
230,000

100%
Cost

25%
Allowance

46,000*

19. d P326,000
Sales (P600,000 + P300,000)
Less: Cost of goods sold
Merchandise inventory, beg.
[P100,000 + (P40,000/1.25)]
Add: Purchases
Cost of goods available for sale
Less: MI, ending
[P30,000 + (P60,000/1.25)]
Gross profit
Less: Expenses (P120,000 + P50,000)
Net Income

P 900,000
P132,000
350,000
P482,000
78,000

404,000
P 496,000
_ 170,000
P 326,000

20. b
Sales (P537,500 + P300,000)
Less: Cost of goods sold
Merchandise inventory, beg.
[P50,000 + (P60,000/1.20)]
Add: Purchases
Cost of goods available for sale
Less: MI, ending
[P70,000 + (P60,000/1.20)]
Gross profit
Less: Expenses (P120,000 + P50,000)
Net Income

P 837,500
P 87,500
500,000
P587,500
120,000

467,500
P 370,000
_ 170,000
P 200,000

21. c
Sales (P120,000 + P60,000)
P 180,000
Less: Cost of goods sold:
Merchandise inventory, beg. [P40,000 + P6,000 +
(P24,000 / 1.2)] P 66,000
Add: Purchases (P70,000 + P11,000)
81,000
Cost of Goods Available for SaleP 147,000
Less: MI, ending [P40,000 + P3,200 + (P16,800 / 1.20)] 57,200
89,800
Gross profit
P 90,200
Less: Expenses (P28,000 + P12,000)
40,000
Net Income.
P 50,200
22. d
Sales (P100,000 P33,000 + P50,000)
P 117,000
Less: Cost of goods sold:
Inventory, beg. [P15,000 + (P5,500/110%) or (P5,500 P500)] P20,000
Add: Purchases (P50,000 + P7,000) 57,000
COGAS.. P77,000
Less: Inventory, end [P11,000 + P1,050 +
(P6,000- P1,050)/110%] 16,550
60,450
Gross profit
P 56,550
Less: Expenses (P20,000 + P6,000 + P5,000)
31,000
Combined Net income.
P 25,550
23. c
Sales
Less: Cost of Sales
Inventory, 1/1/10

P155,000
P 23,000

Purchases
Cost of goods available for sale
Less: Shipment/Sales to Branch,
at cost (P110,000/110%)
Cost of goods available for HO
Sale
Less: Inventory, 12/31/10
Gross profit
Less: Expenses
Net income home office

190,000
P213,000
100,000
P113,000
30,000

83,000
P 72,000
52,000
P 20,000

24. a
Sales
P140,000
Less: Cost of Sales
Inventory, 1/1/10
P 11,550
Purchases
105,000
Freight-in
5,500
Shipment in transit (P5,000+P250)
5,250
Cost of goods available for sale P127,300
Less: Inventory, 12/31/10
(P10,400 + P520 + P5,250)
16,170 111,130
Gross profit
P 28,870
Less: Expenses
28,000
Net income per branch books/unadjusted
P
870
Add: Overvaluation of CGS*
9,600
Net Income of Davao Branch, adjusted
P 10,470
BP

Cost

Allowance
1,000

100,000

**10,000
11,000
****1,400
9,600

MI. 1/1/2010
Shipments
110,000
Available for sale
-: MI, 12/31/10
***15,400
CGS
**110,000 x 10/110
***10,400 + 5,000, in transit
****15,400 x 10/110
25. a

Inventory, 1/1 at billed price

P165,000
Add: Shipments at billed price
110,000
Cost of goods available for sale at billed price
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
P150,000
x: Cost ratio
100/125
Merchandise inventory at cost destroyed by fire
P120,000

26. d
Merchandise inventory, January 1
Shipments from home office
Cost of goods available for sale
Less: Cost of goods sold, at BP:
Sales
Less: Sales returns
Net sales
Divided by: SP based on cost
Merchandise inventory, ending at BP
Divided by: Billed price
Merchandise inventory, ending at cost
lost due to fire)

P 26,400
__20,000
P 46,400
P 15,000
___2,000
P 13,000
____125%

__10,400
P 36,000
____120%
P 30,000

27. d
Freight actually paid by:
Home OfficeP 500
Branch P
700
TotalP 1,200
Less: Freight that should be recorded..
800
Excess freightP 400
28. d in arriving at the cost of merchandise inventory at the end of the period, freight charges are
properly recognized as a part of the cost. But a branch should not be charged with excessive
freight charges when, because of indirect routing, excessive costs are incurred. Under such
circumstances, the branch acquiring the goods should be charged for no more than the normal
freight from the usual shipping point. The office directing the inter-branch transfers are
responsible for the excessive cost should absorb the excess as an expense because it represents
management mistakes (or inefficiencies.)
29. c
Inventory of the Branch:
Shipments from home office at billed price.........................................P 37,700
X: Ending inventory %................................................................................
60%
Ending inventory at billed price.....P 22,620
Add: Freight (P1,300 x 60%)......
780
P 23,400
Or, P39,000 x 60% = P23,400
30. b
Inventory in the published balance sheet, at cost
Shipments at cost..........................................P 32,500
X: Ending inventory %....................................................................................
60%
Ending inventory at billed price.P19,500
Add: Freight (P1,300 x 60%).........
780
P 20,280
31. c
Home Office Books
Davao Branch39,000

Davao Branch
SFHO.37,700

Baguio Branch

STB, cost.
32,500
Unrealized profit
5,200
Cash (freight).
1,300
BC Baguio19,630
Excess freight 520
BC-Davao.
20,150

Freight-in. 1,300
HOC..
39,000
HOC.20,150
SFHO(50%)
18,850
Freight-in (50%)
650
Cash......
650

SFHO18,850
Freight-in.. 780
HOC...
19,630

32. d
(1) Branch Inventory, 12/31/20x4: P30,000 x 60%...................................P 18,000
(2) Branch Inventory, at cost: (P25,000 + P1,000) x 60%.........................P 15,600
33.
34.
35.
36.
37.
38.
39.
40.

c (P300,000 x = P75,000, ending inventory x (P300,000 P250,000)/P300,000 = P12,500

d
d
b refer to No. 14
b refer to No. 14
c refer to No. 14
c
d

Theories
1. True
2. False
3. True
4. True
5. False
20.
21.
22.
23

d
d
a
d

6.
7.
8.
9.
10.

False
False
False
True
True

11.
12.
13.
14.
15.

False
True
False
True
False

16.
17.
18.
19.

True
True
True
False