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HOME OFFICE:
Sales 336,000
Cost of Sales
Beginning Inventory 69,000
Add: Purchases 222,000
Less: Shipments to Branch 66,000
Ending Inventory 48,000 177,000
Gross Profit 159,000
Less: Operating Expenses 68,000
Net Income 91,000
BRANCH:
Sales 144,000
Cost of Sales*** 124,128
Gross Profit 19,872
Less: Operating Expenses 11,200
Net Income 8,672
Cost
Beginning Inventory 38,400 35,840 [(38,400 x 1/3)/125%] + 38,400 x 2/3
Purchases 40,000
Shipments from HO 82,500 66,000 82,500/125%
- Ending Inventory 21,600 17,712 [(21,600 x 90%)/125%] + 21,600 x 10%
Cost of Sales 124,128
ANSWER: A
3. This one is simple enough. We only consider sales to outside parties. Inter-office sales,
or billings aren’t included.
ANSWER: B
ANSWER: C
To compute for the cash remittance, let’s start with the collection of receivables:
ANSWER: A
Next, is the transfer from branch A to branch B. Let us compute first for the excess
freight. The freight cost from Home Office to Branch A is 7,500. The freight cost from
Branch A to B is 6,000. Should it have been made from Home Office to B, the freight
would’ve been 11,250. So, the excess freight is (7,500 + 6,000) – 11,250 = 2,250. This
amount is to be debited to Excess Freight account by the Home Office.
ANSWER: B
7. There are two approaches for this. 1) You can get the net income of the HO and the
Branch, add them up and then adjust the Branch Income for the Allowance on
Overvaluation of shipped merchandise. Or 2) You can get the net income of the HO and
the ADJUSTED INCOME of the Branch, and add them up.
Personally, I find the second approach not as confusing as the first one. That said:
Branch Income:
Sales 540,000
COGS (see computation below)*** 335,250
Gross Profit 204,750
Less: Operating Expenses 89,000
Net Income 115,750
***Branch - Cost of Sales:
Cost
Beginning Inventory 157,500 131,250 157,500/120%
Purchases
Shipments from HO 346,500 315,000 Given or 346,500/110%
- Ending Inventory 122,100 111,000 122,100/110%
Cost of Sales 335,250
ANSWER: B
I had a difficult time answering this during review. After hours of trying, I noticed the
dates (finally!) The beginning inventory is labeled December 31, 2013. The ending
inventory is labeled January 1, 2015. And the statement about percentage of cost being
higher by 5% refers to 2012 and has nothing to do with the current year, 2014. Just
saying XD You’re good if you’ve noticed it the first time.
Branch Books
HO - Current
Unadjusted balances (none given)
1) Transfer of fixed assets - unrecorded by branch 53,960.00
2) No effect to Ironman branch
3) Debit note recorded twice
(sent to Davao branch) (75,000.00)
4) No effect to Ironman branch books (affects HO)
5) No effect to Ironman branch
6) Debit memo - amount recorded was erroneous 90.00
6. Overstatement of Davao branch NI
Adjusted balances (cannot be determined)
ANSWER: C
9. Alright, this one is agency. It’s just a normal computation of net income. The take is that
you should depreciate the samples provided (if any) and compute for discounts (as
adjustment to sales).
Sales per invoice 27,562,500.00
Less: Discount (14,784,000 / 96% x 4%) 616,000.00
Net Sales 26,946,500.00
Cost of Sales (70% of invoice) 19,293,750.00
Gross Profit 7,652,750.00
Expenses based on vouchers 1,837,500.00
Other expenses:
Depreciation for samples ( June to December) 1,960,000.00
Net Income 3,855,250.00
ANSWER: D
The rent given is for two months, so we divide that by two to get the rent for the current
month.
For sample inventory, what was given is the ending balance of 25%, so the used portion
is 75%.
Sales 220,000.00
Less: Discount (176,400 / 98% x 2%) 3,600.00
Net Sales 216,400.00
Cost of Sales (given) 150,000.00
Gross Profit 66,400.00
Other expenses:
Samples (used 75% of 10,000) 7,500.00
Advertising materials (used 20% of 5,000) 1,000.00
Rent (one month only, 10,000/2) 5,000.00
Delivery 2,500.00
Miscellaneous 2,000.00
Salaries and wages 15,000.00
Commission (5% of 220,000) 11,000.00
Net Income 22,400.00
ANSWER: B
11. Since the problem requires for the total goods available for sale of the branch from the
Home Office, we have to use the billed prices. No adjustment yet is to be made for the
Allowance for Overvaluation. And we won’t include purchases from outsiders, since the
problem specifically asked for goods available for sale FROM the home office.
Where did the 120% come from? Well, the Loading in Branch inventory account balance
before adjustment is 1,225,000. This is the allowance for overvaluation for goods in the
beginning inventory and the shipments during the year.
The shipments for the current year of 3,250,000 has an allowance of (3,250,000 / 130%
x 30%) = 750,000.
The balance of Loading in Branch inventory minus the allowance for shipments would
give us the allowance relating to the beginning inventory. That would be 1,225,000 –
750,000 = 475,000
The cost of the beginning inventory is 2,375,000 plus the markup (allowance) of 475,000
is 2,850,000. This is the billed price of the goods. From this, we can compute for the
percentage of markup, which is essentially 20%.
ANSWER: D
12. Let’s go over the problem real slowly. We have two branches here. Let’s account first for
the adjustments concerning Baguio branch.
ANSWER: 1) A 3) D
For Davao branch, the adjustments are as follows:
ANSWER: 2) C 4) C
13. For the first question, adjusted balance of Branch account is:
ANSWER: B
ANSWER: D
The allowance for the shipments is 20% above cost, meaning the cost is 100%, and the
markup is 20%. As such, the billed price is 120%. To get the allowance: 212,400/120% x
20% = 35,400. The allowance on the beginning inventory is given, 21,300. The ending
balance is also given, 14,700. It was stated that the allowance was written down TO
14,700. Meaning, it was the ending balance.
ANSWER: A
This is practically another approach to computing actual income of the branch, you start
with the net income as recorded. Adjust for any unrecorded expense (in this case,
depreciation and operating expense as allocated by HO). Then, we also adjust for the
gross profit (allowance for overvaluation). We have to recognize as realized gross profit
(RGP) the allowance on goods sold. In this case, that amounts to 42,000.
For the fourth requirement, balance of HO-current account after closing entries:
ANSWER: D