AFAR 2 However, no shipments in transit between home office and

branch were made. Both shipment accounts were properly

Problem 1: B Company has been operating a branch in Pili for recorded.
the year. Shipments are billed to the branch at cost. The Requirements:
branch carries its own accounts receivable, make its own a. What part of the branch inventory as of January 1,
collections, and pays its own expenses. The transactions for 2018 represented purchases from outsiders?
the year 2019 are given effect in the trial balance as follows: b. What part represented goods acquired from home
Cash 23,800 office?
Home office account 180,000 c. Assuming that the branch inventory composed of
Shipments from HO 200,000 merchandise from home office at billed price, 26,000
and merchandise from outsider at cost 7,800. What is
Purchases 40,000
the net income to be reported by the branch?
Accounts receivable 125,000 d. What is the true branch profit as far as the home
Sales 225,000 office is concerned?
Expenses 16,200
The branch inventory on December 31, 2018 is 60,000. On Problem 4: Profit and loss data for A Company and its branch
January 1, 2019, the branch current account on the books of for 2018 follows:
home office should have a balance of? Home office Branch
Sales 365,000 174,500
Problem 2: On May 1, 2019, the branch manager of J Shipment to branch 90,000
Company In Iriga submitted the following data to the home Purchases from outsiders 220,000 35,000
office in Naga: Advertising expense 13,700 2,500
Petty cash fund 3,000
Salaries and commissions 35,000 9,500
Accounts receivable, May 31, 2018 87,600
Rent expense 10,000 2,000
Accounts receivable, May 31, 2019 98,280
Miscellaneous expense 300 500
Inventory, May 31, 2018 74,340
Shipment from home office 112,500
Inventory, May 31, 2019 82,740
Sales 397,440 Inventories, January 1 85,000
Sales returns 7,200 Inventories, 1/1, from outsider 9,500
Accounts written off 3,840 Inventories, 1/1, from HO which 42,000
Shipments from home office 272,000 is billed 20% above cost
Expenses charged by Home office 115,860 Inventories, 12/31 65,000
All cash collected on accounts receivable are remitted to the Inventories, 12/31 from outsider 6,000
home office. Inventories, 12/31 from HO at 30,000
a. The net income of Iriga branch for the fiscal period billed price
ending May 31, 2019 would be? a. The branch inventory cost on December 31, 2018 is?
b. The total remittance for the period would be? b. The combined net income of HO and the branch on
c. The balance of the home office current account on December 31, 2018 is?
May 31, 2018 is?
d. On June 1, 2018, the branch current account on the Problem 4: The A Company bills the branch for merchandise at
home office books would show a balance of? 135% of cost. On December 31 the following information were
reported by the branch:
Problem 3: The following information is extracted from the Merchandis Merchandise
books and records of T Company and its branch. The balances e from HO from
are at December 31, 2018 of the company’s operations. @Billed outsider
Home office Branch price
Sales 260,000 Inventory, 12/1 64,800 16,000
Shipment to branch 78,000 Inventory into stock, 12/ 1-30 81,000 48,000
Shipment from home office 104,000 Inventory, 12/31 75,600 20,000
Purchases 39,000 Assuming that the branch has a net income of 80,000 and had
Expenses 78,000 returned to the home office merchandise originally acquired at
Inventory, January 1, 2018 26,000 a billed price of 2,160. The true branch profit as far as the
home office is concerned is?
Allowance for overvaluation of 31,200
branch inventory
Problem 5: On January 1, 2021, M entered into a franchise
Inventory, January 31, 2018 33,800
agreement with O to market their products. The agreement
provides for an initial fee of 12,500,000 payable as follows:
3,500,000 to be paid upon signing of the contract and the
balance in five equal annual payments every end of the year
starting December 31, 2021. M signs a non-interest-bearing
note for the balance. His credit rating indicates that he can
borrow at 15% interest for the loan of this type. The
agreement further provides that the franchisee must pay a
continuing franchise fee equal to 3% of the monthly gross
sales. On August 31, the franchiser completed the initial
services required in the contract at a cost of 4,290,120 and
incurred indirect cost of175,000. The franchisee commenced
business operations on November 30, 2021. The gross sales
reported to the franchiser were 1,800,000 for December 2021.
The first installment payment was made in due date.
A. Assume that the collectability of the note is not
reasonably assured, how much is the net income for
the year ended December 31, 2021?
B. Assume that the collectability of the note is reasonably
assured, how much is the net income for the year
ended December 31, 2021?
equal annual installments every December 31. The franchisee
issued a non-interest bearing note with effective rate of
interest of 10% for the balance of the initial franchise fee. The
franchise agreement also provides for ongoing payment of
royalties of 5% based on sales revenue of franchisee. As part
of the franchise agreement, S provides with a total cost of
754,894. S evaluates and determines that the contract with
the customer is a single performance obligation that need not
be separated. As of July 1, 2021, M already satisfied its
performance obligation to supply and install coffee equipment
and cash register to the franchisee. For the year ended
December 31, 2021, the franchisee reported sales revenue in
the amount of 1,000,000.
A. What is the net income to be reported by S for the
year ended December 31, 2021, if the collection of the
note is reasonably assured?
B. What is the net income to be reported by S for the
year ended December 31, 2021, if the collection of the
note is not reasonably assured?

Problem 6: X, franchisor, entered into franchise agreement

with B, franchisee in July 1, 2021. The initial franchise fees
agreed upon is 850,000 of which 150,000 is payable upon
signing and the balance to be covered by a non-interest-
bearing not payable in four equal annual installments. It was
agreed that the down payment is not refundable,
notwithstanding lack of substantial performance of services by
franchisor. Probability of collection is unlikely. The following
expenses were incurred:
Initial services:
Direct cost 235,000
Indirect cost 64,000
Continuing services:
Direct cost 23,900
Indirect cost 9,000
The management of A has estimated that they can borrow
loan at a rate of 12%. The franchisee commenced its
operation on July 31, 2021. A continuing franchise fee equal to
5% of its monthly gross sales was also specified in the
contract. A reported gross sales of 950,000 for the month.
A. How much is the net income to be reported on August
31, 2021?
B. Assuming that the collectability of the note is
reasonably assured, how much is the net income to be
reported on August 31, 2021?
C. Assuming that the note is interest bearing and the
collectability is not reasonably assured, how much is
the net income to be reported on August 31, 2021?
D. Assuming that the note is interest bearing and the
collectability is reasonably assured, how much is the
net income to be reported on August 31, 2021?

Problem 7: S operates and franchises coffee shops around the

world. On January 1, 2021, S entered into a franchise
agreement with a franchisee. As part of its franchise
agreement, S requires a franchisee to pay an initial franchise
fee in the amount of 1,500,000 of which 500,000 is payable at
the date of perfection of the contract and the balance in five