Chapter 13

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 sold…………………………………………P 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:

Sales………………………………………………………………………………………P60,000
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, 20x4…………………………………P 15,000

Less: Shipments from home office at billed price*………………………… 12,000
Merchandise from outsiders……………………………………………………P 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 Sale……………………P 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 Office……………………………………………………………………P 500
Branch P………………………………………………………………………… 700
Total………………………………………………………………………………P 1,200
Less: Freight that should be recorded…………………………………………….. 800
Excess freight……………………………………………………………………………P 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 .........................................

60%
X: Ending inventory %................................................................................

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
60%
X: Ending inventory %....................................................................................

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 Branch…39,000 SFHO…………….37,700
STB, cost……. 32,500 Freight-in………. 1,300
Unrealized profit 5,200 HOC………….. 39,000
Cash (freight)…. 1,300
BC – Baguio……19,630 HOC……………….20,150 SFHO………18,850
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 ¼ = 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