PROB.

3 -21 (Adapted)

At the end of 2016, the branch reported an inventory of PI 5,625. The home office bills this branch at 125%
of cost. During 2017, goods costing P300,000 were shipped to the branch. The account "allowance for
overvaluation of branch inventory" after adjustment, shows a balance of PI 6,250 at the end of the year.

a. What was the amount of inventory at January l , 2017 at cost?

a. 12,500
b. 15,625
c. 19,531
d. 28,125

b. What was the amount of ending inventory at billed price?

a. 309,375
b. 247,500
c. 81,250
d. 65,000

c. What was the amount of allowance for overvaluation before adjustment?

a. 61,875
b. 78,125
c. 20,312
d. 20,000

Solution
a. Suggested answer (a) P 12,500
Billed Allow. For
Price Cost Overvaluation
Inventory, beg. 15,625 125% 12,500 3,125
Shipments 375,00 125% 300,00 75,000
TGAS 390,625 125% 312,500 78,125
Inventory,end. 81,250 125% 65,000 16,250
Cost of sales 309,375 125% 247,500 61,875

Since, the amount of P15,625 is the inventory at the beginning of 2017 reported by
the branch, the same represents the inventory at the given date at billed price,
because the niark up made by the home office in billing its branch is not known to
the branch. Thus, the inventory at Janua,y 1, 2017 was P12,500 (P15,625/ 125%).

b. Suggested answer (c) P81 ,250

The amount of P16,250 representing the, balance of allowance for overvaluation of
branch inventory after adjustment is the unrealized profit of home office from the
unsold merchandise of the branch (allowance for overvaluation of branch ending
inventory), which is 25% above cost. Therefore, the branch ending inventory at
billed price was P81,250 (16,250/ x 125%).
 c. Suggested answer (b) P78, 125

The allowance for overvaluation before adjustment represents the allowance for
overvaluation of total goods available for sale. And to determine the profit realized
by the home office through markups in the merchandise shipped to the branch, this
item (allowance for overvaluation before adjustment) will be adjusted by deducting
the allowance for overvaluation of unsold merchandise at the end of the period.
(See computations in "a ".)

PROB. 3 - 22 (RPCPA)

New Era Corp. bills its newly established branch for merchandise at 140% of cost. At the end of its first
month, the branch reported, among other things, the following:

Merchandise from home office (at billed price) P28,OOO Merchandise purchased locally by branch I
O,OOO
Inventory, September 30, of which P2,000 are of local purchases 9,000 Net sales for month
43,500

a. The branch inventory at cost should be recorded at

a. 38,000
b. 7,000
c. 9,000
d. None of the above

b. The gross profit of the branch in so far as the home office is concerned was
a. 22,500
b. 14,500
c. 22,790
d. None of the above

Solution PROB. 3 - 22
a.) Suggested answer (b) P7,000
From home office (9,000-2,000)/140% 5,000
From Outsiders 2,000
Branch inventory at cost 7,000

The requirement is to determine the branch inventory at cost. Given the 140% billing percentage and P9, 000
ending inventory, of which 192, 000 are of local purchases, therefore, the remaining P7, 000 represent
merchandise from home office at billed price. Thus, the cost merchandise from home office is P5, 000, as shown
above.
 b.Suggested answer (d) None of the above (P20,500)

Branch 's sales 43,500

Less cost of sales at cost:

Shipment from home office _

(28,400/140%) 20,000

Local purchases by branch 10,000

Total goods available for sale 30,000
Less inventory end a 7,000 23,000

Gross profit 20,500

The gross profit in so far as the home office is concerned is equal to the true gross
profit by the branch, and may be computed by considering the cost of sales at cost.

PROB. 3 -23 (RPCPA)

Makati Co. bills its Valenzuela branch for merchandise at 140% of cost. At the end of January 2016, the
branch reported the following information:

Merchandise from
Home Office
(At billed price)
Inventory, January 1 7,560

Shipments received 28,280

Allowance for overvaluation ,Inventory January 31 8,400

What should be the balance of the allowance account for overvaluation of the branch inventory at January
3 1?
a. 2,400
 b. 2,160
c. 8,080
d. None of the above

Unrealized intercompany inventory profit 10,800

Shipments to branch 24,000

Purchases from outsiders 7,500

Shipments from Home Office 28,800

Merchandise inventory, December l, 2016 45,000

Solution PROB. 3-23 Suggested answer (a) P2,400

Branch inventory, January 31 at billed price 8,400

Less branch inventory, January 31 at cost
(8,400/140%) 6,000

PROB. 3-24 (RPCPA)

Trial balances for the home office and for the branch of Toby Co. show the following accounts before adjustment
as of December 31, 2016. The home office bills merchandise to the branch at 20% above cost.

What part of the December l, 2016 branch inventory represents acquisition from outsider purchases, and what
pan represents acquisition from home office?
Outsiders Home Office
a P 9,000 P 36,000
.
b I O,OOO 35,000
.
c. 12,000 33,000
d 15,000 30,000
.

Solution PROB. 3 —24 Suggested answer (a).9,OOO 36,000

Billed Allowance for

Price COST Overvaluation
Inventory beg 36,000 120% 30,000 6,000
Shipments 28,800 120% 24,000 4,800
TGAS 10,800

Total Inventory Beg. 45,000

Less inventory beg from home office @ billed price 36,000
TGAS 9,000
In the point of view of the branch, the inventories sent by the home office are stated at billed price.

PROB. 3-25 (RPCPA)

The Neneng Corp. established its San Pedro branch in March 2016. During
the first year of operations, the home office shipped to the branch
merchandise which had cost of P 120,000. Three-fourths of these
merchandise was sold by the branch for P141,000. Operating expenses of
the branch amounted to P27,000. How much net income will the branch
report if merchandise is billed by the home office to the branch at 25%
above cost?
a. 800
b. I ,200
c. 1,500
d. 8,000

Solution Suggested answer (c) 1,500

Sales 141,000
COGS @ billed price (120,000 x 25% x ¾) 112,500
Gross profit 28,500
Less Expense 27,000
Branch reported net income 1,500

For purposes of computing the branch reported net income, cost of goods sold should be at billed price, because
the mark up on merchandise sent by the home office is not known to the branch.

PROB. 3-26 (RPCPA)

The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City. During 2016, the
home office shipped to the branch supplies costing PI 20,000 at a billed price of 20% above cost. The
inventories of supplies at the branch were as follows: January I — P90,000; December 31 — P 108,000. On
December 31, 2016, the home office holds inventories of P 160,500, which includes P 10,500 held on
consignment. Both locations use the periodic invent ory method. How much inventories should be reported in
the combined balance sheet as of December 31, 2016?

a. 210,000
b. 240,000
 c. 270,000
d. 300,000

Solution Suggested answer (b) 240,000

Branch inventory, Dec. 3 1, 2016 @ cost 90,000

Home office inventory, Dec. 31, 2016 (160,500 — 10,500) 150,000
Combined inventory, December 31, 2016 @ cost 240,000

The amount of inventories to be reported in the combined balance sheet of the home office and its
branch should be stated at cost. While, consigned goods should be included in the consignor 's inventory
and excluded from the consignee 's inventory.