Chapter 13

Problem I
1.
Home Office Books Branch Books
Branch Current 55,000 Shipm from Home Office 55,000
Shipments to Branch 50,000 Home Office Current 55,000
Unrealized Int Inv. Profit 5,000

Billed price P55,000 / 110%

Cost 50,000
Allowance for overvaluation of branch inventory/ _______
Unrealized Intercompany Inventory Profit/Deferred Profit P 5,000
2.
Sales...................................................................................................................................... P140,000
Cost of goods sold:
Merchandise inventory, September 1................................................ P 35,200
Purchases.............................................................................................. 24,000
Shipments from home office............................................................... 55,000
Merchandise available for sale.......................................................... P 114,200
Less: Merchandise Inventory, September 30..................................... 30,000
Cost of goods sold....................................................................................................... 84,200
Gross profit............................................................................................................................P 55,800
Operating expenses:
Selling expenses..................................P 8,000
General expenses......................................................... 12,000
Total operating expenses.......................................................................................... 20,000
Unadjusted branch net income...................................................................................... P 15,800
3. Results of Branch Operations:
a. Branch Net Income/Loss from its own operations:
Branch Current........................................................................... 15,800
Branch Income Summary................................................................... 15,800
b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/
Unrealized Intercompany Inventory Profit:
Unrealized Intercompany Inventory Profit.................................................... 4,600
Branch Income Summary.................................................................. 4,600
Unrealized Profit
Cost (Billing Price
Billing Price (Billing/1.10) Minus Cost)
Inventory, 9/1 *P 17,600 P 16,000 P 1,600
Shipments during December __55,000 __50,000 __ 5,000
Available for Sale (before adjustment) P 72,600 P 66,000 P 6,600
Less: Inventory, 9/30 (after adjustment) **22,000 __20,000 __2,000
Reduction in unrealized profit account-
adjustment to branch profit for overstated of
cost of goods sold (adjustment) P 50,600 P 46,000 ***P 4,600
* P35,200 x 50% = P17,600
** P30,000 P8,000
***or, P50,600 x 10/110 = P4,125; Decrease in Unrealized Intercompany Inventory Profit:
Therefore, the True/Real/Adjusted Branch Net Income or Branch Net Income in so far as HO is
concerned amounted to:
Unadjusted branch net income...............................................................................P15,800
Add: Allowance for Overvaluation of CGS. 4,600
Adjusted Branch Net Income..P20,400
Problem II
Books of Home Office
Correcting entries:
A. Sales............................................................................................................... 42,000
Shipments to Branch................................................................ 35,000
Unrealized Intercompany Inventory Profit........................................... 7,000
Cost of merchandise shipped t branch: P42,000/1.20= P35,000.
Entry Made Correct/Should be Entry
Branch Current 42,000 Branch Current.. 42,000
Sales 42,000 Shipments to Branch 35,000
Unrealized Int. Inv Pr. 7,000
B. Shipments to Branch...................................................................................... 625
Unrealized Intercompany Inventory Profit................................................... 125
Sales Returns........................................................................................... 750
Cost of merchandise returned by branch: P750/1.20= P625.
Entry Made Correct/Should be Entry
Sales Returns 750 Shipments to Branch. 625
Branch Current 750 Unrealized Int. Inv Profit 125
Branch Current. 750
Results of Branch Operations:
A. Branch Net Income/Loss from its own operations:
Branch Income Summary............................................................................... 2,600
Branch Current................................................................................ 2,600
B. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/
Unrealized Intercompany Inventory Profit:
Unrealized Intercompany Inventory Profit.................................................... 4,125
Branch Income Summary.................................................................. 4,125
Unrealized Profit
Cost (Billing Price
Billing Price (Billing/1.20) Minus Cost)
Inventory, December 1 P 0 P 0 P 0
Shipments during December 42,000 35,000 7,000
Less: Returns _____750 ____625 ____125
Available for Sale (before adjustment) P 41,250 P 34,375 P 6,875
Less: Inventory, Dec. 31 (after adjustment) 16,500 13,750 __2,750
Reduction in unrealized profit account-
adjustment to branch profit for overstated of
cost of goods sold (adjustment) P 24,750 P 20,625 *P 4,125
*or, P24,750 x 20/120 = P4,125;
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 in Allowance................................................................. P4,125
Branch Income Summary (P4,125 P2,600)....................................................1,525
Income Summary.................................................................................... 1,525
Therefore, the Real/True/Adjusted Branch Net Income/Branch Net Income in so far as HO is
concerned, amounted to P1,525, computed as follows:
Branch net loss as reported/unadjusted(P2,600)
Add: Overvaluation of branch inventory/Realized profit from branch sales.. 4,125
Real/True/Adjusted Branch Net Income or Branch NI in so far as HO is concerned P1,525
Problem III
a. Unrealized Intercompany Inventory Profit has a credit balance of P9,450 before adjustment on
December 31, calculated as follows:
Unrealized Profit
Cost (Billing Price
Billing Price (Billing/1.35) Minus Cost)
Inventory, December 1 P 16,200 P 12,000 P 4,200
Shipments during December __20,250 _ 15,000 __ 5,250
Available for Sale (before adjustment) P 36,450 P 35,625 P 9,450
Less: Inventory, Dec. 31 (after adjustment) __18,900 _14,000 __4,900
Reduction in unrealized profit account-
adjustment to branch profit for overstated of
cost of goods sold (adjustment) P 17,550 P 21,625 *P 4,550
* or, P17,550 x 35/135 = P4,550

b. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/

Unrealized Intercompany Inventory Profit (refer to a for computation):
Unrealized Intercompany Inventory Profit.................................................... 4,550
Branch Income Summary.................................................................. 4,550
c.
Home Office Books Branch Books
Shipments to Branch 400 Home Office Current 540
Unrealized Int Inv. Pr 140 Shipments to Branch 540
Branch Current 540
Cost of merchandise returned: P540/1.35, or P400.

Problem IV
1. 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:
Unrealized Profit
Cost (Billing Price
Billing Price (Billing/1.20) Minus Cost)
Inventory, December 1 **P 12,000 *P 10,000 P 2,000
Shipments during December __9,600 _ 8,000 __ 1,600
Available for Sale (before adjustment) P 21,600 P 18,000 P 3,600
Less: Inventory, Dec. 31 (after adjustment) __8,400 __7,000 __1,400
Reduction in unrealized profit account-
adjustment to branch profit for overstated of
cost of goods sold (adjustment) P 13,200 P 11,000 ***P 2,200
*P2,000/20% = P10,000; ***P13,200 x 20/120 = P2,200

2. Adjustment: Overvaluation of CGS/Allowance for Overvaluation of Branch Inventory/

Unrealized Intercompany Inventory Profit (refer to a for computation):
Unrealized Intercompany Inventory Profit......................................... 2,200
Branch Income Summary.......................................................... 2,200

Problems V
(1) Individual Statements
 SPENCER CO.
Balance Sheet for Branch
December 31,20x4
Assets Liabilities____________________
Cash..................................................... P 2,650 Accounts payable................................... P 4,200
Accounts receivable........................ 12,850 Accrued expenses................................... 105
Merchandise inventory..................... 14,600 Home office............................................... 29,239
Store supplies...................................... 300
Prepaid expenses............................... 120
Furniture and fixtures.............. P 3,600
Less: Accumulated
depreciation.............. 576 3,024 ________
Total assets....................................... P 33,544 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 liabilities and ________
Total assets........................................ P 96,184 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. Refer to Word Document Worksheet

3, Combined Statements
SPENCER CO.
Combined Balance Sheet for Home Office and Branch
December 31, 20x4

Assets Liabilities and Stockholders Equity

Cash . P 14,500 Liabilities

Accounts Receivable 39,050 Accounts Payable .. P39,600
Merchandise Inv . 36,850 Accrued Expenses . 365 P 39,965
Store Supplies .. 680 Stockholders Equity
Prepaid Expenses .. 470 Capital Stock P65,000
Furniture & Fixtures P12,100 Less deficit . 4,476 60,524
Less accumulated
Depreciation ... 3,161 8,939

Total assets P100,489 Total liabilities and SHEquity 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

4. Adjusting and Closing Entries

(a) Branch Books
Dec 31 Income Summary .. 14,400
Merchandise Inventory .. 14,400

31 Merchandise Inventory 14,600

Income Summary . 14,600

31 Store Supplies Expense . 280

Store Supplies 280
Store supplies used: P580 P300, or P280

Dec. 31 Prepaid Expenses 120

Miscellaneous General Expense . 120

31 Miscellaneous General Expense 105

Accrued Expenses .. 105

31 Depreciation Expense F&F .. 36

Accumulated Depreciation 36
Depreciation: 1% of P3,600

31 Miscellaneous General Expense .. 220

Home Office Current 220

31 Sales 20,000
Income Summary . 20,000
 31 Income Summary 22,221
Purchases 4,100
Shipments from Home Office 10,200
Advertising Expense . 2,800
Salaries and Commissions Expense . 2,350
Store Supplies Expense 280
Miscellaneous Selling Expense .. 1,050
Rent Expense . 1,500
Depreciation Expense F&F . 36
Miscellaneous General Expense . 905

31 Home Office Current.. 3,021

Income Summary .. 3,021

(b) Home Office Books

Dec 31 Income Summary . 31,500

Merchandise Inventory . 31,500

31 Merchandise Inventory ... 24,200

Income Summary 24,200

31 Store Supplies Expense . 560

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

31 Prepaid Expense 350

Miscellaneous General Expense 350

31 Miscellaneous General Expense .. 260

Accrued Expenses . 260

31 Depreciation Expense .. 85
Accumulated Depreciation F&F . 85
Depreciation: 1% of P8,500, or P85
31 Cash in Transit . 1,500
Branch Current 1,500
31 Sales 44,850
Shipments to branch ....................... 8,500
Income Summary . 53,350
Dec 31 Income Summary 42,405
Purchases 27,600
Advertising Expense . 2,850
Salaries and Commissions Expense . 4,250
Store Supplies Expense 560
Miscellaneous Selling Expense .. 1,850
Rent Expense . 2,700
Depreciation Expense F&F . 85
Miscellaneous General Expense . 2,510
 31 Branch Income Summary.. 3,021
Branch Current 3,021

31 Unrealized Intercompany Inventory Profit . 1,750

Branch Income Summary 1,750
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

31 Income Summary 1,271

Branch Income Summary. 1,271

31 Income Summary 2,374

Retained Earnings . 2,374

Problem VI
1.
Branch H. Office
Current Current
Unadjusted balance, 12/31/20x4 P 44,000 P 9,000
Add (Deduct): Adjustments
1 Cash in transit ( 10,000)
2. Merchandise in transit 10,000
3. Branch expenses paid by home office 12,000
4. Cash in transit from home office _______ 3,000
Adjusted balance, 12/31/20x4 P 34,000 P34,000

2. Refer to PDF Copy of the Worsheet

3. 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................................................................ 44,500
Shipments from Home Office......................................................................... 252,000
Operating expenses........................................................................................ 101,500
Home Office............................................................................................................... 24,500
Income Summary.......................................................................................... 24,500

(4) Branch Income Summary........................................................................................ 24,500

Branch Current..................................................................................................... 24,500

Unrealized Intercompany Inventory Profit............................................................... 41,150

Branch Income Summary.................................................................................... 41,150
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

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 9,750
Reduction in unrealized profit account- adjustment to
branch income for overstatement of cost of
goods sold.................................................................. 41,150

Branch Income Summary........................................................................................... 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................................................................ 115,000
Purchases......................................................................................................... 820,000
Expenses........................................................................................................... 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.............................................................................................................................. P 256,000
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............................................................................. 205,000
Gross profit................................................................................................................... P 51,000
Operating Expenses.................................................................................................... 60,000
Net loss from own operations..................................................................................... P ( 9,000)
Add: Adjusted branch net income............................................................................. 13,500
Combine net income.................................................................................................... P 4,500

(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................................................................................... 32,000
Shipments from Home Office......................................................................... 40,000
Purchases......................................................................................................... 20,000
Expenses........................................................................................................... 12,500
Income Summary......................................................................................................... 5,500
Home Office..................................................................................................... 5,500

(4) Branch...................................................................................................................... 5,500

Branch Income................................................................................................ 5,500

Unrealized Intercompany Inventory Profit............................................................... 8,000

Branch Income.............................................................................................. 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.......................................................................................................... 4,500

Retained Earnings............................................................................................ 4,500

Problem IX
1.
Branch H. Office
Current Current
Unadjusted balance, 12/31/20x4 P 60,000 P 51,500
Add (Deduct): Adjustments
1 Remittance I 1,700)
2. Cash in transit 1,800
 3. Shipments in transit 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 295,000
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........................................................................ 184,530
Gross profit.................................................................................................................... P 110,470
Operating expenses.................................................................................................... 66,300
Net income................................................................................................................... P 44,170

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

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 recognize 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 . 1,950
Shipments from Home Office.. 1,600
Freight In 350

b. Books of branch No. 5:

Shipments from Home Office 1,600
Freight In 400
Home Office. 1,750
Cash 250

c. Books of the Home Office

Branch No. 5.. 1,750
Excess Freight on Inter branch Transfer of Merchandise.. 200
Branch No. 1 1,950

Shipments to Branch No. 1.. 1,600

 Shipments to Branch No. 5 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 P 31,000
From Outsiders 6,600
P 37,600
3. a
True Branch Net Income
Branch Net Income P 5,000
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 67,600
Unrecorded branch expenses ( 2,500)
True Branch Net Income P 70,100

4. a P30,000 x (90,000 60,000)/90,000

5. a

6. d (P50,000 P40,000)/P40,000 = 25% markup on cost

7. c (P480,000 P360,000) x (P80,000/P480,000) = P20,000

8. c P700,000, since the problem stated that the home office adjusted the intracompany Profit
Deferred account and the amount of P700,000 is the amount of net income in the adjusted
financial statements of the home office, and therefore it is understood to be combined net
income.

9. b
Reported (unadjusted) branch net income (per branch books) ..P 30,000
Branch Income in so far as home office is concerned per home office books. 50,000
Overvaluation of branch cost of goods soldP 20,000

Cost of sales of Home Office.P500,000

Cost of sales of Branch 100,000
Overvaluation of branch cost of sales( 20,000)
Combined cost of sales...P580,000

10. c the amount of net income as reported by Home office is considered the combined net
income.
11. a
True Branch Net Income P156,000
Less: branch Net Income as reported by the branch 60,000
Overvaluation of CGS P 96,000
Less: Cost of goods sold from home office at BP
Inventory, December 1 P 70,000
Shipment from HO 350,000
COGAS P 420,000
Less: Inventory, December 31 84,000 336,000
CGS from home office, at cost P 240,000
Billing Price: P336,000 / P240,000 = 140%.

12. b Allowance for overvaluation after adjustment / for December 31 inventory: P84,000 x
40/140 = P24,000.

13. b
Net Income as reported by the Branch P 20,000
Less: Rental expense charged by the home office
(P1,000 x 6 months) 6,000
Adjusted NI as reported by the Branch P 14,000
Add: Overvaluation of CGS
Billed Price
MI, beginning 0
SFHO 550,000
COGAS 550,000
Less: MI, ending 75,000
CGS, at BP 475,000
X: Mark-up ratio 25/125 95,000
True/Adjusted/Real Branch Net Income P109,000

14. 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
15. 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.. P19,200
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

16. d
Billed Price Cost Allowance
Merchandise Inventory, 12/31/2005 *P 36,000 P 30,000 P 6,000
Shipments 28,800 24,000 4,800
Cost of goods sold P10,800
From Home at billed price: *P6,000 / 20% = P30,000 + P6,000 = P36,000.
From outsiders: P45,000 P36,000 = P9,000
17. d
Billed Price Cost Allowance
Merch. Inventory, 12/31/20x4 *P12,000 P10,000 P 2,000
Shipments 9,600 8,000 1,600
Cost of Goods Sold 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

18. 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
19. d
100% 60% 40%
Billed Price Cost 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
20. d
Billed Cost Allowance
Price
Merchandise inventory, 8/1/x4 60,000
Shipments (400,000 x 25%) 400,000 *100,,000
Cost of goods available for sale 160,000
Less: MI, 8/31/x4 (160,000 x 25%) 160,000 40,000
Overvaluation of CGS/RPBSales 120,000
21. b
(1) Sales P 40,000
Less: Cost of goods sold:
Inventory, 1/1/2003 (P4,950 / 110%) P 4,500
Add: Shipments (P22,000 / 110%) 20,000
COGAS P 24,500
Less: Inventory, 12/31/2003 (P6,050 / 110%) 5,500 19,000
Gross profit P 21,000
Less: Expenses _ 13,100
Net income from own operations P 7,900

(2) Combined Cost of Goods Sold:

Merchandise Inventory, 1/1/2003:
of Home Office, cost..P 17,000
of Branch, cost: P4,950 / 110%. 4,500 P 21,500
Add Purchases. 50,000
COGAS.. P 71,500
Less: Merchandise Inventory, 12/31/2003
of Home Office, cost P 14,000
of Branch, cost: P6,050 /100%.. 5,500 19,500
Cost of Goods Sold. P 52,000

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

23. 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*

24. b
Sales (P148,000 + P44,000) P192,000
Less: Cost of Sales
Inventory, 1/1/20x4 P 0
Purchases 52,000
 Shipments from home office 108,000
Cost of goods available for sale P 160,000
Less: Inventory, 12/31/20x4 60,000 100,000
Gross profit P 92,000
Less: Expenses (P76,000 + P24,000) 100,000
Net income, unadjusted P( 8,000)
Add: Overvaluation of CGS 10,000
Adjusted branch net income P 2,000

25. c
125% 100% 25%
Billed Price Cost Allowance
Merchandise inventory, 1/1/x4 40,000
Shipments 250,000
Cost of goods available for sale 290,000
Less: MI, 12/31/x4 (P60,000 x 80%) 60,000
Overvaluation of CGS(230,000x 25/125) 230,000 46,000*

26. b P326,000
Sales (P600,000 + P300,000) .. P 900,000
Less: Cost of goods sold
Merchandise inventory, beg.
[P100,000 + (P40,000/1.25)] . P 132,000
Add: Purchases 350,000
Cost of goods available for sale P 482,000
Less: MI, ending
[P30,000 + (P60,000/1.25)] 78,000 404,000
Gross profit P 496,000
Less: Expenses (P120,000 + P50,000). _ 170,000
Net Income . P 326,000

27. b
Sales (P537,500 + P300,000) P 837,500
Less: Cost of goods sold
Merchandise inventory, beg.
[P50,000 + (P60,000/1.20)].. P 87,500
Add: Purchases . 500,000
Cost of goods available for sale P587,500
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

28. 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

29. 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

30. c
Sales ... P155,000
Less: Cost of Sales
Inventory, 1/1/10.. P 23,000
Purchases .. 190,000
Cost of goods available for sale .. P213,000
Less: Shipment/Sales to Branch,
at cost (P110,000/110%) 100,000
Cost of goods available for HO
Sale.. P113,000
Less: Inventory, 12/31/10 ..... 30,000 83,000

Gross profit ... P 72,000

Less: Expenses . 52,000
Net income home office . P 20,000

31. a
Sales .... P140,000
Less: Cost of Sales
Inventory, 1/1/x4 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/x4
(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
MI. 1/1/20x4 1,000
Shipments 110,000 100,000 **10,000
 Available for sale 11,000
-: MI, 12/31/x4 ***15,400 ****1,400
CGS 9,600
**110,000 x 10/110
***10,400 + 5,000, in transit
****15,400 x 10/110

32. 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

33. d
Freight actually paid by:
Home OfficeP 500
Branch P 700
TotalP 1,200
Less: Freight that should be recorded.. 800
Excess freightP 400

34. 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.)

35. 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
36. 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

37. c
Home Office Books Davao Branch Baguio Branch
Davao Branch39,000 SFHO.37,700
STB, cost. 32,500 Freight-in. 1,300
Unrealized profit 5,200 HOC.. 39,000
Cash (freight). 1,300
BC Baguio19,630 HOC.20,150 SFHO18,850
Excess freight 520 SFHO(50%) 18,850 Freight-in.. 780
BC-Davao. 20,150 Freight-in (50%) 650 HOC... 19,630
Cash...... 650

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

39. d
40. d
41. b refer to No. 21
42. b refer to No. 21
43. c refer to No. 21
44. c
45. d

Theories
1. True 6. False 11. False 16. True 21. D
2. False 7. False 12. True 17. True 22. A
3. True 8. False 13. False 18. True 23. d
4. True 9. True 14. True 19. False 24. d
5. False 10. True 15. False 20. d 25. a
26. c