TEST I – Multiple Choice Section

Instruction: For each question, choose the best answer from the options provided by shading the letter in the Answer Sheet
A. Sales Agency
B. Branch

1. Displays merchandise and takes customers’ orders but does not carry inventory to fill customers’ orders.
2. A separate accounting entity for internal reporting
3. Not a separate accounting entity.
4. Maintains only cash records to account for the revolving cash fund.
5. Maintains a complete set of accounting records and prepares own financial statements which are combined with the home office’s
financial statements for external reporting.
6. Carries inventory to fill customers’ orders (or provides services similar to those provided by the home office).
7. Forwards customers’ orders to the home office for processing. Customers remit payments directly to the home office.
8. Processes customers’ orders, makes normal warranties, and makes own collections.
9. May hold revolving cash fund which is replenished when depleted.
10. Has its own assets and liabilities and generates and incurs its own income and expenses.

TEST II – True or False

Instruction: Shade letter “A” if the statement is TRUE or correct and if the statement is FALSE or incorrect shade letter “B”.

11. Inter-office accounts are eliminated when combined financial statements are prepared.
12. The "Home office" account is an equity account in the combined financial statements.
13. An agency maintains its own separate books of accounts similar to a branch.
14. A branch is viewed as a separate reporting entity for internal reporting purposes only.
15. If the perpetual inventory system is used by both the home office and the branch, the reciprocal ledger accounts used by
the branch are the Home Office and Shipments from Home Office accounts.
16. The “shipments to branch” account is added to the home office’s purchases account in determining home office cost of
goods sold.
17. When inventory is received from the home office, a branch increases its home office account.
18. Reciprocal home office and branch accounts are eliminated when home office and branch financial statements are
combined for external reporting.
19. The “branch office” account on the home office’s books and the “home office” account on the branch’s books are examples
of nonreciprocal accounts whose balances would be combined when the home office is preparing a balance sheet for all its
combined operations.
20. When performing the end-of-the-period reconciliation between the Home Office account on the branch’s books and the
Branch Account on the home office’s books, shipments in transit from the branch back to the home office will be treated as
an addition to the home office’s Branch Account.
21. When performing the end-of-the-period reconciliation between the Home Office accounts on the branch’s books and the
Branch Account on the home office’s books, home office expenses which are allocated to the branch office from the home
office will be subtracted from the Home Office Account on the branch’s books.
22. There are three ways to reconcile the balance in the home office’s Branch Account with the balance in the branch’s Home
Office Account. One way would be to reconcile from the home office balance to the branch balance. A second way would be
to reconcile from the branch balance to the home office balance. A final way would be to reconcile both the home office’s
branch balance and the branch’s home office balance to the adjusted true balance.
23. A major disadvantage of a centralized accounting system is that the profitability of branch operations cannot be
determined because branch operations are not accounted for in a separate general ledger.
24. Income taxes can be allocated to a branch.
25. If branch fixed assets are recorded on the home office’s books, depreciation expense would not be charged to branch
operations.

1. P78,000
Branch A Branch B
Assets:
Inventory, January 1 P 21,000 P 19,000
Imprest branch fund 2,000 1,500
Accounts receivable, January 1 55,000 43,500
Total Assets P 78,000 P 64,000
Less: Liabilities _____-0- _____-0-
Home Office Current Account P 78,000 P 64,000
 2. P64,000 – refer to No. 1
3. P10,416
Sales ……….………………………………………………………… P 80,000
Less: Cost of goods sold:
Purchases……………………………..………………………. P 25,000
Shipments from home office……………………………… 56,216
Less: Inventory, ending (P3,391 + P7,625)…….………… 11,016 70,200
Gross profit…………………………………………………………… P 9,800
Add (deduct):
Expenses……………………………………………………….. ( 7,500)
Interest expense………………………………………………. ( 684)
Gain on sale…………………………………………………... 8,800
Net Income……………………………………………………………….. P 10,416

4. P31,416 = P21,000 + P10,416

5. Zero, since it is a nominal account
6. P117,420
Home Office Books Branch Books
(Branch Current- (Home Office Current – Cr. balance)
Dr. balance)
Unadjusted balance P150,000 P117,420
Add (deduct) adjustments:
In transit 37,500
HO A/R collected by br. 10,500
Supplies returned ( 4,500)
Error in recording Br. NI ( 1,080)
Cash sent to branch
to General Expense by HO 25,000 25,000
Adjusted balance P 179,920 P 179,920

7. P179,920 - refer to No. 6 for computation.

8. c
9. a
10. P7,100

Sales P17,600
Less: Cost of goods sold 10,500
Gross profit P 7,100
Less: Expenses
Salaries and commission [P1,750 + (5% x (P17,600 – P10,000) P 2,130
Rent expense 800
Advertising expense 325
Samples expense [(P5,000 – P2,000) x 1/6] 500
Advertising materials expense (3/5 x P1,250) 750
Depreciati0n expense [(P2,400 / 5 years) x 1/12] 40
Miscellaneous expense ___600 __5,145
Net income P 1,955

11. P5,145 – refer to No. 10

12. P1,955 – refer to No. 10

13-16

Solution:
Shipments sent by home office to branch, at billed price (30K x 120%) 37,500
Shipments from home office received by branch, at billed price (32,500)
Shipment in transit, at billed price 5,000

Solution:
Home office Branch
Beginning inventory, at cost:
Home Office, acquired from outsiders, at cost 80,000
Branch: Acquired from outsiders at cost 7,500
Acquired from Home Office, in 20x1, at cost (24K / 120%) 20,000
 Net purchases, at cost:
Purchase from outsiders 200,000 15,000
Shipments to branch, at cost (30,000) 30,000
Total goods available for sale 250,000 72,500
Ending inventory, at cost:
Home Office, acquired from outsiders at cost (55,000)
Branch: Acquired from outsiders at cost (5,500)
Acquired from Home Office, in 20x1, at cost (21K / 125%) (16,800)
Shipment in transit, at cost (5K / 125%) (4,000)
Cost of goods sold 195,000 46,200
Combined cost of goods sold (195K +46.2K) 241,200
13. 5,000
14. 4,000
15. 81,300
16. 241,200

17 – 22
SOLUTIONS:
23-32

23. Solution:
INTERIM TEMPORARY Co.
Working paper for combined financial statements
December 31, 20x1

Home office Branch Elimina-tion Combined

Dr. (Cr.) Dr. (Cr.) Dr. (Cr.) Dr. (Cr.)
Cash 4,400,000 1,668,000 6,068,000
Accounts receivable 720,000 400,000 1,120,000
Inventory, beg. 2,600,000 - 2,600,000
Shipments from home office 920,000 (920,000) b -
Purchases 288,000 160,000 448,000
Freight-in 88,000 72,000 160,000
Shipments to branch (920,000) 920,000b -
Investment in branch 3,308,000 (3,308,000)a -
Equipment 2,880,000 1,600,000 4,480,000
Accumulated depreciation –
(288,000) (160,000) (448,000)
equipment
Furniture 360,000 200,000 560,000
Accumulated depreciation –
(36,000) (20,000) (56,000)
furniture
Accounts payable (288,000) (160,000) (448,000)
Accrued expenses (180,000) (100,000) (280,000)
Share capital (8,000,000) (8,000,000)
Share premium (2,000,000) (2,000,000)
Retained earnings – beg. (824,800) (824,800)
Home office (3,308,000) 3,308,000a -
Sales (3,600,000) (2,000,000) (5,600,000)
Depreciation expense 672,000 272,000 944,000
Utilities expense 72,000 40,000 112,000
General overhead expense 28,800 16,000 44,800
Various operating expenses 720,000 400,000 1,120,000
Totals - - - -

The elimination entries are as follows:

(a) Home office 3,308,000
Investment in branch 3,308,000
(b) Shipments to branch 920,000
Shipments from home office 920,000

The combined statement of financial position is shown below:

ABC Co.
Statement of financial position
As of December 31, 20x1

ASSETS
Cash 6,068,000
Accounts receivable 1,120,000
Inventory 1,680,000
Equipment 4,480,000
Accumulated depreciation - equipment (448,000)
Furniture 560,000
Accumulated depreciation - furniture (56,000)
Total assets 13,404,000
-
LIABILITIES AND EQUITY -
Accounts payable 448,000
Accrued expenses 280,000
Share capital 8,000,000
Share premium 2,000,000
Retained earnings 2,676,000
Total liabilities and equity 13,404,000
24 Solution:
The combined statement of profit or loss is shown below:
ABC Co.
Statement of profit or loss
For the year ended December 31, 20x1

Sales 5,600,000
Cost of goods sold:
Inventory, beg. 650,000
Purchases 112,000
Freight-in 40,000
Total goods available for sale 802,000
Inventory, end. (1,080,000 + 600,000) (420,000) (1,528,000)
Gross profit 4,072,000
Depreciation expense (944,000)
Utilities expense (112,000)
General overhead costs (44,800)
Various operating expenses (1,120,000)
Profit for the period 1,851,200

25 Solution:
(Home office books) (Branch books)
Investment in Branch Home office
Unadjusted balances 624,000 280,800
(a) Shipment in-transit 80,000
(b) Collection of receivable (40,000)
(c) Return of damaged merchandise (120,000)
(d) Unrecorded remittance (160,000)
(e) Allocation of cost recorded twice (20,000)
(f) Mathematical mistake in recording 43,200
Adjusted balances 344,000 344,000

26. Solution:
(Home office books) (Branch books)
Investment in branch Home office
Dr./(Cr.) (Dr.)/Cr.
Unadjusted balance 380,000 528,000
(a) Allocated expense not recorded in full - 40,000
(b) Erroneous credit by home office 100,000 -
(c) Erroneous correcting entry - (100,000)
(d) Erroneous debit memo - 12,000
Net adjustments - Requirement (a) 100,000 (48,000)
Adjusted balances - Requirement (b) 480,000 480,000

27 Solution:
(Home office books) (Branch One books)
Investment in Branch One Home office
Unadjusted balances 400,000 568,000
(a) Equipment maintained in
120,000 -
home office books
(b) Equipment maintained in
- -
branch's books
(c) Remittance by Branch
- -
Four
(d) Debit memo from another
48,000 -
branch
(e) Inter-branch debit memo - -
Adjusted balances 568,000 568,000
28.Solution:
(Home office books) (Branch books)
Investment in Branch Home office
Unadjusted balances Start 728,000 580,000 Squeeze
(a) Credit memo sent
- (48,000)
by home office
(b) Debit memo sent
- 36,000
by home office
(c) Credit memo from
branch recorded (80,000)
twice
(d) Debit memo from
branch recorded (108,000)
erroneously
(e) Erroneous credit
memo sent by - (28,000)
branch
Adjusted balances 540,000 540,000

29.Solution:
(Home office books) (Alpha Branch books)
Investment in Alpha Branch Home office
Unadjusted balances 556,000 Squeeze 580,000 Start
(a) Shipment to Beta
(60,000) -
charged to Alpha
(b) Shipment to Alpha
64,000 -
charged to Charlie
(c) Remittance from
Delta credited to 20,000 -
Alpha
(d) Allocable expense to
(16,000) (16,000)
Echo
Adjusted balances 564,000 564,000

30. Solution:
Sales (6.4M + 2M) 8,400,000
Cost of sales:
Inventory, beg. 1,200,000
Freight-in (128K + 72K) 200,000
Purchases (4.8M + 160K) 4,960,000
Total goods available for sale 6,360,000
Inventory, end. [1.84M + 40K + (960K ÷ 120%)] (2,680,000) (3,680,000)
Gross profit 4,720,000
Operating expenses (880K + 400K) (1,280,000)
Combined profit 3,440,000

31.
Solution:
Inventory, Dec. 31 30,000
Multiply by: 80%
Inventory, Dec. 31 from home office at billed price 24,000
Divide by: 120%
Inventory from home office at cost 20,000
Add: Inventory, Dec. 31, from local purchase (30K x 20%) 6,000
Total inventory at cost 26,000

32.Solution:
Sales on account 74,000
Sales on cash basis 22,000
Merchandise from home office at cost (54K / 120%) 45,000
Purchase of merchandise for cash 26,000
Total goods available for sale 71,000
Total ending inventory at cost (26,000) (45,000)
Gross profit 51,000
 Expenses paid (38,000)
Expenses unpaid (12,000)
Profit (loss) 1,000

33. Solution:
Shipments from home office at billed price 480,000
Returns of damaged goods (72,000)
Total goods available for sale at billed price 408,000
Multiply by: 20%/120%
Total markup on goods available for sale or
(Balance of allowance account before year-end
adjustments) 68,000

34.Solution:
Total markup on goods available for sale 68,000
Less: Unrealized markup in ending inventory (30K x 20%/120%) (20,000)
Realized markup 48,000

Loss in individual financial statements (40,000)

Add: Realized markup 48,000
True profit of branch 8,000

35.Solution:
Allowance account - beg. 16,000
Markup on shipments during the period [(960K ÷ 80%) - 960K] 240,000
Allowance account before year-end adjustments (or Total markup) 256,000
Less: Unrealized markup in ending inventory (480 x 20%) (96,000)
Realized markup 160,000