The home office consistently bills its branch from shipment at 120% of cost.

The following selected

information was taken from the records of the home office and the branch.

Home office books

Branch books
Sales 1,600,000
Inventory, end
Inventory, beg 50,000
-From outside purchases 18,000
Purchases 850,000
-From home office(at billed price, excluding freight-in)
Freight-in 30,000 120,000

Shipment to branch (300,000) Cash sales 300,000

Markup shipments to branch (60,000) Collections on receivables 200,000

Inventory end 320,000 Disbursement for purchases from outside parties 40,000

Operating expenses 120,000 Disbursement for operating expenses 60,000

Investment in branch-end 640,000 Remittances of collections to home office

25,000

Additional information:

• Accounts receivable has a net increase of 80,000 while accounts payable has a net decrease of
10,000.
• Accrued expenses has an ending balance of 5,000. Not included in this account is a 2000
allocated expense from the home office. There were no accrued expenses as of the beginning of
the period.
• As at year end, a shipment from a home office with a billed price at 12,000 was in transit.
Normally, the home office pays a 5% freight based on the billed price of the goods shipped to
the branch.
• The realized mark up is 41,000 while the combined profit of the home office and branch is
1,441,700.

Requirements:
a. True profit of branch
b. beginning inventory of branch from outside purchases
c. Beginning balance of Home office

Illustration 8: Ending inventory at cost with freight-in

The home office consistently bills it branch for shipments at 120% of cost. However, shipments to
branch are subject to 5% freight cost in billed price, which the home office prepays before shipment.
The following information was taken from the records of the branch.

Cash and cash equivalents- Sales 60,000

Jan 1 22,000
Shipments from office at
Accounts Receivable- Jan. 1 86,000 billed price, excluding
freight-in 360,000
Inventory, Jan. 1
Purchases 50,000
From outside purchases 18,000
Inventory, Dec. 31
From home office at billed
price(including freight-in) 126,000 144,000 -From outside purchases 6,000

Equipment, net Jan. 1 400,000 -From home office (at

billed price, including
Accounts Payable- Jan. 1 120,000 freight-in) 176,400 182,400
Requirements:
a. Beginning balance of home office account.
b. Beginning and ending balance of inventory at cost.
c. Understatement or overstatement in the “cost of good sold” and “gross profit” of the branch as far as
the home office is concerned.

Illustration 11: Inventory loss

The home office consistently bills its branch for shipments to external customers at 125% of the billed
price. In turn, the branch sells the shipments to external customers at 125% of the billed price. On
September 21, 20x1, all stocks of merchandise of the branch were destroyed by fire.

The following information was determined:

Inventory, beg. at billed price 12,000

Shipment form home office during the period 120,000

Sales 132,000

Sales return 6,600

Sales discounts and allowances 3,300

Requirement: Compute for the cost of inventory destroyed by fire.

Illustration 9: Shipment in-transit and Combined cost of sales

 Home Office Branch
Inventory, beg
From outside purchases 120,000 8,000

From home office, at 110% of cost 33,000

Purchases from outsiders 300,000 80,000

Shipments to branch 90,000

Shipments from home office 104,000

Inventory, end
From outside purchases 75,000 40,000

From home office, at 130% of cost 32,500

Requirements:

a. Shipment in-transit at billed price and at cost

b. Combined cost of sales