Solution Chapter 13

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

625 125

Newark Branch Income..................................................................................... Newark Branch.......................................................................................

2,600

Unrealized Intercompany Inventory Profit........................................................ Newark Branch....................................................................................... 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

4,125

750

2,600 4,125

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

540

540

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............................................................................ Supplies used: P400 – P140, or P260. 31

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

260

80

31 Selling Expenses............................................................................ Accrued Expenses Payable.................................................

120 120

31 Prepaid Selling Expenses............................................................. 150 Selling Expenses..................................................................... 31 Income Summary......................................................................... 16,000 Merchandise Summary......................................................... 31 Merchandise Summary................................................................. 16,950 Income Summary...................................................................... 31 Notes Payable..................................................................................1,000 Home Office...............................................................................

150 16,000 16,950 1,000

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

20,500

31 Income Summary........................................................................... 21,900 Purchases.................................................................................... Shipments from Home Office................................................... Selling Expenses.......................................................................... General Expenses.......................................................................

5,000 10,500 4,560 1,840

31 Home Office....................................................................................... 450 Income Summary.......................................................................

450

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

1,000

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

450

31 Unrealized Intercompany Inventory Profit....................................... 2,200 Branch No. 1 Income.................................................................

450 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 accountadjustment 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 Cash..................................................... P 2,650 Accounts receivable........................ 12,850 Merchandise inventory..................... 14,600 Store supplies...................................... 300 Prepaid expenses............................... 120 Furniture and fixtures.............. P 3,600 Less: Accumulated depreciation.............. 576 3,024 Total assets....................................... P 33,544

Liabilities____________________ Accounts payable................................... P 4,200 Accrued expenses................................... 105 Home office............................................... 29,239

________ 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 assets........................................ P 96,184

Total liabilities and ________ 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 Accounts Receivable ………… 39,050 Merchandise Inv ………………. 36,850 Store Supplies ………………….. 680 Prepaid Expenses …………….. 470 Furniture & Fixtures ……… P12,100 Less accumulated Depreciation …... 3,161 8,939 Total assets ……………………… P100,489

Liabilities Accounts Payable ……….. P39,600 Accrued Expenses ………. 365 Stockholders’ Equity Capital Stock ……………… P65,000 Less deficit …………………. 4,476

P 39,965 60,524

Total liabilities and 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) Dec

Branch Books 31 31 31

Dec.

31 31 31

31 31

Income Summary …………………………………………….. Merchandise Inventory ……………………………..

14,400

Merchandise Inventory ……………………………………… Income Summary …………………………………….

14,600

Store Supplies Expense ………………………………………. Store Supplies ………………………………………… Store supplies used: P580 – P300, or P280

280

14,400 14,600 280

Prepaid Expenses ………………………………………………… Miscellaneous General Expense …………………….

120

Miscellaneous General Expense ……………………………… Accrued Expenses ……………………………………..

105

Depreciation Expense – F&F ………………………………….. Accumulated Depreciation ………………………… Depreciation: 1% of P3,600

36

Miscellaneous General Expense …………………………….. Home Office ……………………………………………

220

Sales ……………………………………………………………… Income Summary …………………………………….

20,000

120 105 36

220 20,000

31

31 (b) Dec

22,221

Home Office ……………………………………………………. Income Summary ……………………………………..

3,021

4,100 10,200 2,800 2,350 280 1,050 1,500 36 905 3,021

Home Office Books 31 31 31

31 31 31

31 31

Dec

Income Summary ……………………………………………… Purchases ……………………………………………… Shipments from Home Office ……………………… Advertising Expense …………………………………. Salaries and Commissions Expense ………………. Store Supplies Expense ……………………………… Miscellaneous Selling Expense …………………….. Rent Expense …………………………………………. Depreciation Expense – F&F ………………………. Miscellaneous General Expense ………………….

31

Income Summary ………………………………………………. Merchandise Inventory ……………………………….

31,500

Merchandise Inventory ………………………………………... Income Summary ………………………………………

24,200

Store Supplies Expense …………………………………………. Store Supplies …………………………………………… Store supplies used: P940 – P380, or : 560

560

Prepaid Expense ………………………………………………… Miscellaneous General Expense ……………………

350

Miscellaneous General Expense …………………………….. Accrued Expenses …………………………………….

260

Depreciation Expense ………………………………………….. Accumulated Depreciation – F&F …………………. Depreciation: 1% of P8,500, or P85

85

Cash in Transit …………………………………………………. Branch …………………………………………………

31,500 24,200 560

350 260 85 1,500 1,500

Sales …………………………………………………………… Shipments to branch ………………………....................... Income Summary ………………………………….

44,850 8,500

Income Summary ……………………………………………… Purchases ……………………………………………… Advertising Expense …………………………………. Salaries and Commissions Expense ………………. Store Supplies Expense ……………………………… Miscellaneous Selling Expense …………………….. Rent Expense …………………………………………. Depreciation Expense – F&F ………………………. Miscellaneous General Expense ………………….

42,405

53,350 27,600 2,850 4,250 560 1,850 2,700 85 2,510

31 31

31 31

Branch Income ……………………………………………….. Branch …………………………………………………

3,021

Unrealized Intercompany Inventory Profit ………………. Branch Income ……………………………………… 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

1,750

Income Summary …………………………………………… Branch Income …………………………………….

1,271

Income Summary …………………………………………… Retained Earnings ………………………………….

2,374

3,021 1,750

1,271 2,374

Problem VI 1. Branch Current Unadjusted balance, 12/31/20x4 Add (Deduct): Adjustments 1 Cash in transit 2. Merchandise in transit 3. Branch expenses paid by home office 4. Cash in transit from home office Adjusted balance, 12/31/20x4

P 44,000

H. Office Current P 9,000

( 10,000)

_______ P 34,000

10,000 12,000 3,000 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................................................................ Shipments from Home Office......................................................................... Operating expenses........................................................................................

44,500 252,000 101,500

Home Office...............................................................................................................

24,500

Income Summary..........................................................................................

24,500

(4) Branch Income..................................................................................................... Branch............................................................................................................

24,500

Unrealized Intercompany Inventory Profit............................................................... Branch Income.............................................................................................. 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

41,150

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 Reduction in unrealized profit account- adjustment to branch income for overstatement of cost of goods sold..................................................................

24,500 41,150

9,750 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................................................................ Purchases......................................................................................................... Expenses...........................................................................................................

115,000 820,000 382,000

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.............................................................................................................................. 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............................................................................. Gross profit................................................................................................................... Operating Expenses.................................................................................................... Net loss from own operations..................................................................................... Add branch net income............................................................................................ Total income................................................................................................................

P 256,000

205,000 51,000 60,000 P 9,000 13,500 P 4,500 P

(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................................................................................... Shipments from Home Office......................................................................... Purchases......................................................................................................... Expenses...........................................................................................................

32,000 40,000 20,000 12,500

Income Summary......................................................................................................... 5,500 Home Office.....................................................................................................

5,500

(4) Branch...................................................................................................................... Branch Income................................................................................................

5,500 5,500

Unrealized Intercompany Inventory Profit............................................................... Branch Income..............................................................................................

8,000 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.......................................................................................................... Retained Earnings............................................................................................

4,500 4,500

Problem IX 1. Branch Current Unadjusted balance, 12/31/20x4 Add (Deduct): Adjustments 1 Remittance 2. Cash in transit 3. Shipments in transit

P 60,000

H. Office Current P 51,500

I 1,700) 1,800 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 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........................................................................ Gross profit.................................................................................................................... P Operating expenses.................................................................................................... Net income................................................................................................................... P 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

295,000

184,530 110,470 66,300 44,170

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 ……………………………………………………………. Shipments from Home Office…………………………………….. Freight In………………………………………………………………

1,600 350

b. Books of branch No. 5: Shipments from Home Office………………………………………… Freight In…………………………………………………………………… Home Office…………………………………………………………. Cash…………………………………………………………………… c. Books of the Home Office Branch No. 5…………………………………………………………….. Excess Freight on Inter branch Transfer of Merchandise……….. Branch No. 1………………………………………………………… Shipments to Branch No. 1…………………………………………….. Shipments to Branch No. 5…………………………………………

1,950

1,600 400 1,750 250 1,750 200 1,950 1,600 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 From Outsiders

P 31,000 6,600 P 37,600

3. a True Branch Net Income Branch Net Income 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 Unrecorded branch expenses True Branch Net Income

P

5,000

67,600 ( 2,500) P 70,100

4. c True Branch Net Income Less: branch Net Income as reported by the branch Overvaluation of CGS Less: Cost of goods sold from home office at BP Inventory, December 1 Shipment from HO COGAS Less: Inventory, December 31 CGS from home office, at cost

P156,000 60,000 P 96,000 P 70,000 350,000 P 420,000 84,000

336,000 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 Less: Rental expense charged by the home office (P1,000 x 6 months) Adjusted NI as reported by the Branch Add: Overvaluation of CGS MI, beginning SFHO COGAS Less: MI, ending

P 20,000 6,000 P 14,000 Billed Price 0 550,000 550,000 75,000

CGS, at BP X: Mark-up ratio True/Adjusted/Real Branch Net Income

475,000 25/125

95,000 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 Merchandise Inventory, 12/31/2005 Shipments Cost of goods sold

Billed Price *P 36,000 28,800

Cost P 30,000 24,000

Allowance P 6,000 4,800 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 Merch. Inventory, 12/31/20x4 Shipments Cost of Goods Sold

Billed Price *P12,000 9,600

Cost P10,000 8,000

Allowance P 2,000 1,600 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% Billed Price

60% Cost

40% 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 Price Merchandise inventory, 8/1/x4 Shipments (400,000 x 25%) Cost of goods available for sale Less: MI, 8/31/x4 (160,000 x 25%) Overvaluation of CGS/RPBSales

400,000 160,000

14. b (1) Sales Less: Cost of goods sold: Inventory, 1/1/2003 (P4,950 / 110%) Add: Shipments (P22,000 / 110%) COGAS Less: Inventory, 12/31/2003 (P6,050 / 110%) Gross profit Less: Expenses Net income from own operations (2) Combined Cost of Goods Sold:

Cost

Allowance 60,000 *100,,000 160,000 40,000 120,000

P 40,000 P 4,500 20,000 P 24,500 5,500 P _ P

19,000 21,000 13,100 7,900

Merchandise Inventory, 1/1/2003: of Home Office, cost……………………………………………..P 17,000 of Branch, cost: P4,950 / 110%…………………………………. 4,500 Add Purchases…………………………………………………………. COGAS………………………………………………………………….. Less: Merchandise Inventory, 12/31/2003 of Home Office, cost……………………………………………… P 14,000 of Branch, cost: P6,050 /100%………………………………….. 5,500 Cost of Goods Sold…………………………………………………….

P 21,500 50,000 P 71,500 19,500 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) Less: Cost of Sales Inventory, 1/1/20x4 Purchases Shipments from home office Cost of goods available for sale Less: Inventory, 12/31/20x4 Gross profit Less: Expenses (P76,000 + P24,000) Net income, unadjusted Add: Overvaluation of CGS Adjusted branch net income

P192,000 P

0 52,000 108,000 P 160,000 60,000

100,000 P 92,000 100,000 P( 8,000) 10,000 P 2,000

18. c

Merchandise inventory, 1/1/x4 Shipments Cost of goods available for sale Less: MI, 12/31/x4 (P60,000 x 80%) Overvaluation of CGS(230,000x 25/125)

125% Billed Price 40,000 250,000 290,000 60,000 230,000

100% Cost

25% Allowance

46,000*

19. d – P326,000 Sales (P600,000 + P300,000) Less: Cost of goods sold Merchandise inventory, beg. [P100,000 + (P40,000/1.25)] Add: Purchases Cost of goods available for sale Less: MI, ending [P30,000 + (P60,000/1.25)] Gross profit Less: Expenses (P120,000 + P50,000) Net Income

P 900,000 P132,000 350,000 P482,000 78,000

404,000 P 496,000 _ 170,000 P 326,000

20. b Sales (P537,500 + P300,000) Less: Cost of goods sold Merchandise inventory, beg. [P50,000 + (P60,000/1.20)] Add: Purchases Cost of goods available for sale Less: MI, ending [P70,000 + (P60,000/1.20)] Gross profit Less: Expenses (P120,000 + P50,000) Net Income

P 837,500 P 87,500 500,000 P587,500 120,000

467,500 P 370,000 _ 170,000 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 Less: Cost of Sales Inventory, 1/1/10

P155,000 P 23,000

Purchases Cost of goods available for sale Less: Shipment/Sales to Branch, at cost (P110,000/110%) Cost of goods available for HO Sale Less: Inventory, 12/31/10 Gross profit Less: Expenses Net income – home office

190,000 P213,000 100,000 P113,000 30,000

83,000 P 72,000 52,000 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 1,000

100,000

**10,000 11,000 ****1,400 9,600

MI. 1/1/2010 Shipments 110,000 Available for sale -: MI, 12/31/10 ***15,400 CGS **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 Shipments from home office Cost of goods available for sale Less: Cost of goods sold, at BP: Sales Less: Sales returns Net sales Divided by: SP based on cost Merchandise inventory, ending at BP Divided by: Billed price Merchandise inventory, ending at cost lost due to fire)

P 26,400 __20,000 P 46,400 P 15,000 ___2,000 P 13,000 ____125%

__10,400 P 36,000 ____120% 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…39,000

Davao Branch SFHO…………….37,700

Baguio Branch

STB, cost……. 32,500 Unrealized profit 5,200 Cash (freight)…. 1,300 BC – Baguio……19,630 Excess freight… 520 BC-Davao……. 20,150

Freight-in………. 1,300 HOC………….. 39,000 HOC……………….20,150 SFHO(50%)… 18,850 Freight-in (50%) 650 Cash…………...... 650

SFHO………18,850 Freight-in.. 780 HOC……... 19,630

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. 34. 35. 36. 37. 38. 39. 40.

c – (P300,000 x ¼ = P75,000, ending inventory x (P300,000 – P250,000)/P300,000 = P12,500 d d b – refer to No. 14 b – refer to No. 14 c – refer to No. 14 c d

Theories 1. True 2. False 3. True 4. True 5. False 20. 21. 22. 23

d d a d

6. 7. 8. 9. 10.

False False False True True

11. 12. 13. 14. 15.

False True False True False

16. 17. 18. 19.

True True True False