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............................................................................. 625

Unrealized Intercompany Inventory Profit........................................................ 125
Sales Returns........................................................................................... 750
Cost of merchandise returned by branch: P750/1.20= P625.

Newark Branch Income..................................................................................... 2,600

Newark Branch....................................................................................... 2,600

Unrealized Intercompany Inventory Profit........................................................ 4,125

Newark Branch....................................................................................... 4,125
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.................................................................................... P4,125

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................................................... 540

Home Office Books:

Shipments to Branch.............................................................................. 400
Unrealized Intercompany Inventory Profit........................................... 140
Branch........................................................................................ 540
Cost of merchandise returned: P540/1.35, or P400.

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............................................................................ 260
Supplies used: P400 – P140, or P260.

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

31 Selling Expenses............................................................................ 120

Accrued Expenses Payable................................................. 120

31 Prepaid Selling Expenses............................................................. 150

Selling Expenses..................................................................... 150
31 Income Summary......................................................................... 16,000
Merchandise Summary......................................................... 16,000

31 Merchandise Summary................................................................. 16,950

Income Summary...................................................................... 16,950
31 Notes Payable..................................................................................1,000
Home Office............................................................................... 1,000

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

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

Purchases.................................................................................... 5,000
Shipments from Home Office................................................... 10,500
Selling Expenses.......................................................................... 4,560
General Expenses....................................................................... 1,840

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

Income Summary....................................................................... 450

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

Cash............................................................................................ 1,000

Branch No. 1 Income..................................................................... 450

Branch No. 1............................................................................... 450
 31 Unrealized Intercompany Inventory Profit....................................... 2,200
Branch No. 1 Income................................................................. 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 account- adjustment
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 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 Stockholder’s 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 stockholder’s 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 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 liabilities and
Total assets ……………………… P100,489 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) 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 …………………………………………… 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 ……………………………………………………. 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 ………………………………………………… 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 ……………………………………………….. 3,021

Branch ………………………………………………… 3,021

31 Unrealized Intercompany Inventory Profit ………………. 1,750

Branch Income ……………………………………… 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 ……………………………………. 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. 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..................................................................................................... 24,500

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

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

Branch Income.............................................................................................. 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............................................................................................................. 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 branch net income............................................................................................ 13,500
Total 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 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 ……………………………………………………………. 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. c
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%.

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 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

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:
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…………………………………………………………………………….. 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
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

10. 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

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% 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

13. 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

14. 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

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) 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

18. 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*

19. d – P326,000
 Sales (P600,000 + P300,000) P 900,000
Less: Cost of goods sold
Merchandise inventory, beg.
[P100,000 + (P40,000/1.25)] P132,000
Add: Purchases 350,000
Cost of goods available for sale P482,000
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

20. 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

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 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

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 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

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
MI. 1/1/2010 1,000
Shipments 110,000 100,000
**10,000
Available for sale 11,000
-: MI, 12/31/10 ***15,400 ****1,400
CGS 9,600
**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 P 26,400
Shipments from home office __20,000
Cost of goods available for sale P 46,400
Less: Cost of goods sold, at BP:
Sales P 15,000
Less: Sales returns ___2,000
Net sales P 13,000
Divided by: SP based on cost ____125% __10,400
Merchandise inventory, ending at BP P 36,000
Divided by: Billed price ____120%
Merchandise inventory, ending at cost
lost due to fire) P 30,000

27. 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

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 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

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. c – (P300,000 x ¼ = P75,000, ending inventory x (P300,000 – P250,000)/P300,000 = P12,500

34. d
35. d
36. b – refer to No. 14
37. b – refer to No. 14
38. c – refer to No. 14
39. c
40. d

Theories
1. True 6. False 11. False 16. True
2. False 7. False 12. True 17. True
3. True 8. False 13. False 18. True
4. True 9. True 14. True 19. False
5. False 10. True 15. False

20. d
21. d
22. a
23 d