Dayag Chapter 14 Home Office and Branch Accounting Special Procedures
Dayag Chapter 14 Home Office and Branch Accounting Special Procedures
Dayag Chapter 14 Home Office and Branch Accounting Special Procedures
Group 2
1. The Petite Branch of Dainty Company submitted trial balance as of December 31, 20x4, after the
first year of operations:
Debit Credit
Cash P 10,400
Accounts receivable 63,200
Shipments from home office 168,000
Expenses 10,800
Sales P134,400
Home office current 118,000
P252,400 P252,400
Answer: C
Merchandise Inventory 50,400
Billed price x 40/140
Overstatement in the Branch Inv. P14,400
Sales P300,000
Cost of sales:
Shipments from Home Office P280,000
Local purchases 30,000
Total P310,000
Inventory at end 50,000 260,000
Gross profit on sales P40,000
Expenses 35,000
Net Income P5,000
Shipments to the branch were billed at 140% of cost. The branch inventory at September 30 amounted to
P50,000 of which P6,600 was locally purchased. Mark-up on local purchases, 20% over cost. Branch
expenses incurred by Head Office amounted to P2,500 not yet recorded by the branch.
2. Compute the branch ending inventory that should be presented in the combined income statement:
a. P36,500 c. P43,400
b. P37,600 d. P50,000
Answer: B
Home Office (P50,000-6,600) / 140% P31,000
Outsiders 6,600
Branch Ending Inventory P37,600
Answer: A
Unadjusted Branch Net Income P5,000
Shipments from Home Office 280,000
Less: Ending Inventory at Billed price (50,000-6,600) (43,400)
236,600 x 40/140 = 67,600
Unrecorded Branch Expenses (2,500)
True Branch Net Income 70,100
4. In 20x6, a home office shipped inventory costing 60,000 to its branch for P90,000. At the end of 20x6,
the branch reported P30,000 of this inventory in its balance sheet. The amount of unrealized
intracompany profit at end of 20x6 is
a. P10,000 c. P30,000
b. P15,000 e. None of the above.
c. P25,000
Answer: A
Unrealized intracompany profit = P30,000 x (90,000 – 60,000)/90,000 = P10,000
5. In 20x6, a branch sold inventory it had acquired from its home office in 20x5 at a markup of P8,000.
Which entry is required in the combining statement worksheet in 20x6?
Debit Credit
6. A home office ships inventory costing P40,000 to its branch at a transfer price of P50,000. The
markup percentage (rounded) using the branch’s cost basis is
a. 0.20 d. 25
b. 0.25 e. None of the above
c. 20
Answer: B
Markup percentage = (50,000-40,000)/40,000 = 0.25
7. In 20x6, a home office shipped inventory costing P400,000 to its newly established branch at a
transfer price of P480,000. In the branch’s year-end closing entries, the branch charged P360,000 of this
inventory to Cost of Sales. The adjusted general ledger balance in the Intracompany Profit Deferred
account at year-end should be
a. P3,333 d. P30,000
Because the company has already adjusted its intracompany profit deferred and recognized
700,000 as the home office net income, hence considered as combined net income.
Use the following Questions for 9 and 10
For the year ended 12/31/x6, selected line items from the home office and branch columns of the
combining statement worksheet below:
Home Office Branch
Cost of sales P (500,000) P (100,000)
Branch income 50,000
9. What amount would recorded in the combined column for Cost of Sales?
The P180, 000 stated in the given under home office is recognized by the home office as the
combined net income of branch and home office.
The income statement submitted by the Pampanga Branch to the Home office for the month of
December, 20x4 is shown below. After effecting the necessary adjustments, the true net income of the
branch was ascertained to be P156, 000
Sales P 600,000
Cost of sales:
Inventory, December 1 P 80,000
Shipments from Home office 350,000
Local Purchases 30,000
12/01/20x4 12/31/20x4
Merchandise from Home office P 70,000 P 84,000
Local Purchases 10,000 16,000
Total P 80,000 P 100,000
11. The billing price based on cost imposed by the home office to the branch, and
a. 1.40% c. 40%
b. 100% d. 29%
Answer: A
336,000/240,000*100%
12. The balance of allowance for overvaluation of branch December 21,20x4 after adjustment
a. P10, 000 c. P16, 000
13. Following is the income statement of XYZ Branch in Cebu City Company, for the six months period
ending June 30, 20x4:
Sales P 620,000
Cost of sales:
Inventory, January 1 P 0
Shipments from Home Office 550,000
Purchases 50,000
Total available for sale 600,000
Inventory, December 31
From home office 75,000
From outsiders 10,000 515,000
Gross margin 105,000
Operating expenses 85,000
Net income 20,000
The Home Office ships merchandise to, and bills the Branch Office at 125% of cost. The rent of the
Branch office for six months at a monthly rate of P1,000 was paid by the home. The Home Office net
profit from its Branch Office in Cebu City for the six (6) months ending June 30, 20x4 is:
A. P -0-
B. P109,000
C. P125,000
D. P139,000
Answer: B
Sales 620,000.00
14. Summary adjusted trial balance for the home office and branch of TJ Corporation at December 31,
20x4 are as follows:
Answer: D
15. Charito Corporation retails merchandise through its home office store and through a branch store in a
distant city. Separate ledgers are maintained by the home office and the branch. The branch store
purchases merchandise from the home office (at 120% of home office cost), as well as from outside
suppliers. Selected information from the December 31, 20x4 trial balances of the home office and branch
is as follows:
Home Office Branch
Sales P 120,000 P 60,000
Shipments to branch 16,000 -
Purchases 70,000 11,000
Inventory, January 1, 20x4 40,000 30,000
Shipments from home office - 19,200
Expenses 28,000 12,000
Unrealized profit in branch inventory 7,200 -
Additional information:
a. The entire difference between the shipment account is due to the practice of billing the branch at cost
plus 20%.
b. The December 31, 20x4 inventories are P40,000 and P20,000 for the home office and the branch,
respectively. (The branch purchased 16% of its ending inventory from outside suppliers.)
c. Branch beginning and ending inventories include merchandise acquired from the home office as well as
from outside suppliers. Merchandise acquired from home office is inventoried at 120% of home office
cost.
Compute the:
Overvaluation of Adjusted
Cost of Goods Sold Branch Net Income
a. P 4,400 P 50,200
b. P 2,800 P 10,600
c. P 7,200 P 15,000
d. P 4,400 P 12,200
Answer: D
Overvaluation of COGS:
Unrealized profit in branch inventory P7,200
Less: Allowance of ending branch inventory (2,800)
(20,000 x 0.16 = 3,200
20,000 – 3,200 = 16,800 x 20/120)
Overvaluation of Cost of Goods Sold P4,400
16. Using the same information in No. 15, determine the combined net income of the home office and
the branch for the year 20x4:
a. P40,800 d. P50,200
b. P49,000 e. P55,800
Answer: C
Charito Corporation
Combined Income Statement
For the Year Ended December 31, 20x4
Sales 180,000.00
Cost of goods sold
Inventory, January 1, 20x4 66,000.00
Purchases 81,000.00
Shipments to branch 16,000.00
Shipments from home office -16,000.00
Cost of goods available for sale 147,000.00
Inventory, December 31, 20x4 -57,200.00
Cost of sale 89,800.00
Gross Margin 90,200.00
Expense 40,000.00
Net income 50,200.00
17. Trial balances for the home office and the branch of the Helen Company show the following accounts
on December 31, 20x5. The home office policy of billing the branch for merchandise is 20% above cost.
Answer: D
18. Selected information from the trial balances for the home office and the branch of Gerty Company at
December 31, 20x4 is provided. These trial balances cover the period from December 1 to December 31,
How much of the December 1, 20x4 inventory of the branch represents purchases from outsiders and
how much represents goods acquired from the home office?
Answer: D
19. Anselmo Company operates retail hobby shops from the main store and a branch store.
Merchandise is shipped from the main store and to the branch and billed to the branch at an arbitrary
10% markup. Trial balances of the main store and the branch as of December 31, 20x5 are as follows:
a. P261,200 c. P243,150
b. P252,200 d. P252,150
Answer: D
Cost of Sales:
Inventories, January 1, 20x4 (3,500 + 300 + 2,200/1.10) 5,800
Add: Purchases 251,000
TGAS 256,800
Less: Ending Inventory December 31, 20x5 (4,650)
(3,000 + 150 + 1,650/1.10) P252,150
20. Tillman Textile Company has a single branch in Bulacan. On March 1, 20x4, the home office
accounting records included an Allowance for Overvaluation of Inventories – Bulacan Branch ledger
account with a credit balance of P32,000. During March, merchandise costing P36,000 was shipped to
the Bulacan Branch and billed at a price representing a 40% markup on the billed price. On March 31,
20x4, the branch prepared an income statement indicating a net loss of P11,500 for March and ending
inventories at billed prices of P25,000. What is the amount of adjustment for Allowance for Overvaluation
of inventories to reflect the true branch net income?
A. P39,257 debit C. P39,333 debit
Answer: D
*36,000 cost / 60,000 x 40% = 24,000. (Note: Markup is based on billed price)
Answer: D 25%
BP COST AOI
Beg. Merchandise Inventory 60,000
Shipments (400,000 x 0.25) 400,000 100,000
Cost of Goods Available for sale 160,000
Less: End. Merchandise Inventory 160,000 (40,000)
(160,000 x 0.25)
Realized Gross Profit P120,000
22. Alamo Company has two merchandise outlets, its main store and its Bonomo branch. All
purchases are made by the main store and shipped to the branch at cost plus 10%. on January 1, 20x4,
the main store and Bonomo inventories were P17,000 and P4,950, respectively. During 20x4, the main
store purchased merchandise costing P50,000 and shipped 40% of it to Bonomo. At December 31, 20x4
Bonomo made the following closing entry:
Sales 40,000
Inventory 6,050
Shipments from the main store 22,000
Expenses 13,100
Inventory 4,950
Main store 6,000
Compute the (1) actual branch income for 20x4 on a cost basis assuming generally accepted accounting
principles and (2) the combined cost of goods sold that should appear in Alamo Company’s income
statement for 20x4 if the main store inventory at December 31, 20x4 is P14,000:
Answer: B
Sales 40,000.00
Cost of goods sold
Inventory, January 1, 20x4 (4,950/1.10) 4,500.00
Shipments from home office (22,000/1.10) 20,000.00
Cost of goods available for sale 24,500.00
Inventory, December 31, 20x4 (6,050/1.10) -5,500.00
Cost of sale 19,000.00
Gross Margin 21,000.00
Expense 13,100.00
Net income 7,900.00
Answer: A
60,000 x 0.20 = 12,000 (Outside Ending Inventory)
60,000 – 12,000 = 48,000 x 0.20/1.20 = 8,000
24. What is the adjusted balance of the allowance for overvaluation of branch inventory account?
a. P8,000 c. P12,000
b. P18,000 d. None of the above
Answer: A
Allowance for overvaluation of Branch Inventory Account = 8,000
25. The branch operations, in so far as the home office is concerned, resulted in a net income (loss) of:
a. P1,600 c. P8,000
b. P2,000 d. None of the above
Answer: B
Sales (148,000 + 44,000) 192,000
Cost of Sales:
Purchase merchandise 52,000
Shipment from home office 108,000
Total Merchandise available for sale 160,000
Ending Inventory at billed price (60,000) (100,000)
Gross Profit 92,000
Less: Expenses (76,000 + 24,000) (100,000)
Unadjusted Net Income (8,000)
Overvaluation of COGS (60,000 x 0.20/1.20) 10,000
Adjusted net income P2,000
The Best Corporation operates a branch in Dagupan City. The home office ships merchandise to the
branch at 125 percent of its cost. Selected information from the December 31, 20x4 trial balances are as
follows:
26. The realized profit on sales made by the branch or overvaluation of cost of goods sold is:
a. P40,000 c. P46,000
b. P86,000 d. None of the above
Answer: C
Answer: B
Best Corporation
Combined Income Statement
For the Year Ended Decemeber 31, 20x4
Sales 900,000.00
Cost of goods sold
Inventory, January 1, 20x4 132,000.00
Purchases 350,000.00
Shipments to branch -200,000.00
Shipments from home office 200,000.00
Cost of goods available for sale 482,000.00
Inventory, December 31, 20x4 -78,000.00
Cost of sale 404,000.00
Gross Margin 496,000.00
Expense 170,000.00
Net income 326,000.00
28. The after-closing balances of Carter Corporation’s home office and its branch at January 1, 20x4 were
as follows:
A summary of the operations of the home office and branch for 20x4 follows:
1. Home office sales: P100,000, including P33,000 to the branch. A standard 10% markup on cost
applies to all sales to the branch. Branch sales to its customers totalled P50,000.
2. Purchases from outside entities: home office, P50,000; branch P7,000.
3. Collections from sales: home office P98,000 (including P30,000 from branch); branch collections,
P51,000.
4. Payments on account; home office, P51,000; branch P4,000.
5. Operating expenses paid: home office, P20,000; branch P6,000.
6. Depreciation on plant assets: home office, P4,000; branch P1,000.
7. Home office operating expenses allocated to the branch, P2,000.
8. At December 31, 20x8, the home office inventory is P11,000 and the branch inventory is P6,000,
of which P1,050 was acquired from outside suppliers.
A. P-0- C. P21,000
B. P 4,550 D. P25,550
Answer: D
COGS P77,000
Less: Inventory, end [P11,000 + P1,050 + (P6,000-P1,050)/110%] 16,550 60,450
29. Apo Supply Company is engaged in merchandising both at Home Office in Makati, Metro Manila and
a branch in Davao. Selected account in the trial balances of the Home Office and the branch at December
31, 20x4 follow:
Credits
Home office 53,300
Sales 155,000 140,000
Sales to branch 110,000
Allowance for branch inventory, 1/1/20x4 1,000
Additional information:
1. Davao branch receives all it’s merchandise from the home office. The Home Office bills the goods
at cost plus 10% mark-up. At December 31, 20x4, a shipment with a billing value of P5,000 was
in transit to the branch. Freight on this shipment was P250 which is to be treated as part of
inventory.
2. December 31, 20x4 inventories excluding the shipment in transit, are:
Home office, at cost P30,000
Davao branch, at billed value (excluding freight of P520) 10,400
Answer: C
Sales P155,000
Less: Cost of Sales
Inventory P23,000
Purchases 190,000
TGAS 213,000
Less: Shipments (100,000)
At cost (110K/110%)
TGAS – Home Office 113,000
Less: Ending Inventory (30,000) (83,000)
Gross Profit 72,000
Less: Sundry Expenses (52,000)
Net Income – Home Office P20,000
Answer: A
Sales P140,000
Less: Cost of Sales
Inventory P11,550
Purchases 105,000
Freight-in 5,500
Shipments 5,250
TGAS 127,300
Less: Ending Inventory (16,170) (111,130)
(10,400 + 5250 + 520)
Gross Profit 28,870
Less: Expenses 28,000
Unadjusted Net Income - Davao Branch 870
*Add: Overvaluation of COGS 9,600
Adjusted Net Income – Davao Branch P10,470
BP COST AOI
Beg. Merchandise Inventory 1,000
Shipments 110,000 100,000 10,000
Cost of Goods Available for sale 11,000
Less: End. Merchandise Inventory 15,400 14,000 (1,400)
(5,000 + 10,400 x 10/110)
*Overvaluation of COGS P9,600
31. The Best Co. bills merchandise shipments in its Cavite City branch at 125% of cost. The branch, in
turn, sells the merchandise it receives from the home office at 25% above the billing price. On August 1,
20x4, all of the branch’s merchandise stock was destroyed by fire. The branch records that were
recovered showed the following:
Inventory, January 1, 20x4 (at billed price) P 165,000
Shipments received from home office,
January to July (at billed price) 110,000
Purchases, at cost, from outside sources,
All re-sold at a 20% mark-up 7,500
Sales 169,000
Sales returns and allowances 3,750
The Best Co. will file an insurance claim. How much is the estimated cost of the merchandise destroyed
by the fire?
A. P120,000 C. P140,000
B. P130,000 D. P150,000
Answer: A
Inventory, 1/1 at billed price P165,000
Add: Shipments at billed price . 110,000
Cost of goods available for sale at billed pric 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 150,000
x: Cost ratio 100/125
Merchandise Inventory at cost destroyed by fire P120,000
32. The Brooke Corporation has two branches, Branch P and Branch Q. The home office shipped P80, 00
in merchandise to Branch P and prepaid the Freight charges of P500. A short time thereafter, Branch P
was instructed to ship this merchandise to Branch Q at a prepaid Freight cost of P700. Freight charges for
this merchandise normally cost P800 when shipped from the home office directly to Branch Q. Compute
the excess freight on transfers of merchandise:
A. P700 C. P500
B. 800 D. P400
Answer: D
Answer: D
On December 3, 20x4, the Home Office of Karen Office Supply Company recorded a shipment of
merchandise to its Davao Branch as follows:
Davao Branch 39,000
Shipments to Branch 32,500
Unrealized Profit in Branch Inventory 5,200
Cash (for freight charges) 1,300
The Davao branch sells 40% of the merchandise to outside entities during the rest of December 20x4.
The books of the home office and Karen Office Supply are closed on December 31 of each year.
On January 5, 20x5, the Davao branch transfer half of the original shipment to the Baguio branch, and the
Davao branch pays P650 as the shipment.
34. What amount should the 60% of the merchandise remaining unsold be included in the inventory
of the Davao Branch at December 31, 20x4
a. P20,280 c. P23,400
b. P22,620 d. P23,920
Answer: B
Shipments from home office (32,500 + 5,200) 37,700.00
Less: Sold merchandise (37,770*40%) 15,080.00
Merchandise remaining unsold 22,620.00
35. What amount should the 60% of the merchandise remaining unsold at December 31, 20x4 be
included in the published balance sheet of Karen Office Supply at December 31, 20x4 shows inventory at:
a. P19,500 c. P20,800
b. P20,280 d. P23,400
Answer: A
Shipments from home office (32,500 = at cost) 32,500.00
Less: Sold merchandise (32,500*40%) 13,000.00
Merchandise remaining unsold 19,500.00
36. What is the entry on the home office books in respect to January 5, 20x5 transfers, assuming that
the transfer cost of the merchandise to Baguio branch would have been P780.
a. Home Office 20,150
Cash 780
Inventory 19,500
b. Shipments 18,850
Freight-in 780
Home Office Current 19,630
Answer: C
Answer: C
A year-end adjusting entry or entries to establish an unrealized profit (loading) account of P12,500
38. Freight-in of P2,000 on the shipments from home office was paid by the branch. The home office
should make:
A. A year-end adjusting entry debiting the branch account for P500
B. A year-end adjusting entry debiting the branch account for P2,000
C. A year-end adjusting entry crediting the branch account for P500
D. no year-end adjusting entry for the freight charges
Answer: D
No year-end adjusting entry for the freight charges
39. The home office will credit the branch account when:
A. shipments of merchandise are made to the branch
B. It takes up branch profits
C. It allocates expenses to the branch that were paid by the home office
D. It record the receipt of cash from the branch
Answer: D
It records the receipt of cash from the branch.
40. What was the actual branch income 20x4 on a cost basis assuming generally accepted accounting
principles?
A. P6, 000 C. P8, 100
B. P7, 900 D. 8,550
Answer: B
Sales P 40,000
COS:
Inventory @cost P 4,500
Shipment from main store @cost 20,000
Goods available for sale P 24,500
Ending inventory (5,500) 19,000
Gross Profit P 21,000
Expense (13,100)
Net income 7,900
41. If the main store inventory at December 31,20x4 is P14, 000, the combined main store and branch
inventory that should appear in Alamo Company’s December 31,20x4 balance sheet is:
A. P18, 950 C. P20, 050
B. 19,500 D. 21,500
Answer: B
5,500 (6,050/110%) + 14,000= P19, 500
42. If the main store inventory at December 31,20x4 is P14, 000, the combined cost of goods sold that
should appear in Alamo Company’s income statement for 20x4 is:
A P74, 000 C. P52, 000
B. P54, 000 D. 33,000
Answer: C
Beginning inventory:
Home office 17,000
Branch 4,500 P 21,500
Purchases 50,000
Goods available for sale 71,500
Ending Inventory
Home office 14,000
Branch 5,500 (19,500)
Combined COGS P 52,000
43. Which of the following statements concerning stone and Rock is correct?
A. Stone will have both a Rock Branch account and Shipments from Stone account on its home office
books.
B. Stone will have both a Stone Home Office account and Shipments from Stone account on its branch
office books.
C. Rock will have both a Stone Home Office account and Shipments from Stone account on its branch
office books.
D. Rock will have both a Stone Home Office account and Shipments from Stone account on its branch
office books.
Answer: C
Rock will have both a Stone Home Office account and Shipments from Stone account on its
branch office books.
44. In the preparation of Stone’s financial statements at the end of the period, Stone will do which of the
following:
A. Credit the Rock Branch account for P2,000 of branch profit and eliminate the P5,000 of ending
inventory
B. Credit the Rock Branch account for P2,000 of branch profit and combine the P5,000 of branch
inventory with its own ending inventory.
C. Debit the Rock Branch account for P2,000 of branch profit , credit the Rock Branch Profit account for
the P2,000 branch profit and eliminate the P5,000 of branch ending inventory
D. Debit the Rock Branch account for P2,000 of branch profit , credit the Rock Branch Profit account for
the P2,000 branch profit and combine the P5,000 of branch ending inventory.
Answer: C
Debit the Rock Branch account for P2,000 of branch profit, credit the Rock Branch Profit account
for the P2,000 branch profit and eliminate the P5,000 of branch ending inventory.
THEORIES
TRUE OR FALSE
1.The balance of the Allowance for Overvaluation of Inventories: Branch ledger account is deducted from
the balance of the Investment in Branch account in the separate balance sheet of the home office.
Answer: TRUE
2. If the home office bills shipment of merchandise to the branch at 25% above home office cost and the
adjusted balance of the allowance for Overvaluation of Inventories: Branch ledger account is 20,400 and
amount of branch inventories at build prices is 81,600.
Answer: FALSE
3. If the branch managers are responsible for ordering merchandise from the home office any excess
freight costs incurred as a result of inter-branch shipments are absorbed by the appropriate branch rather
than by the home office.
Answer: FALSE
4. Freight cost on merchandise shipped, as directed by the home office, by Westside branch to Eastside
branch in excess of normal freight costs from the home office to Eastside Branch are recognized as
operating expenses of the home office.
Answer: TRUE
5. A markup of 16 2/3% on billed price is equal to the markup of 14 2/7% on cost of merchandise shipped
to the branch by the home office.
Answer: FALSE
6. If the home office bills merchandise shipments to the branch at prices above the home office cost, the
net income reported to the home office by the branch is overstated from a total company point of view.
Answer: FALSE
7. In a combined balance sheet for home office and branch, the balance of the Allowance for
Overvaluation of Inventories: Branch Ledger account is deducted from the balance sheet of the
Investment in Branch Account.
Answer: FALSE
8. A Home office ships merchandise to its branch at a transfer price greater than cost. When this
merchandise is resold by the branch to outside entities, the branch’s profit will be overstated.
Answer: FALSE
9. A closing entry prepared by a branch will adjust the loading account and record branch profit or loss in
the home office account.
Answer: TRUE
10. Unrealized profits from transactions between a home office and its branch are eliminated in preparing
combined financial statements for the enterprise.
Answer: TRUE
11. A home office records shipments to its branch at billing prices and adjust the loading account at year-
end. When this approach is used, the loading account during the period will always be zero.
Answer: FALSE
12. If a "loading" account is used, the "shipments to branch" account on the home office books is created
for the actual cost of shipments made to the branch whereas the "shipments from the home office" on the
branch's books includes any initial unrealized profit.
Answer: TRUE
13. Freight charges incurred by the branch office on merchandise inventory shipped from the home office
would be included in the branch's cost of goods available for sale even if the wrong merchandise was
shipped from the home office.
Answer: FALSE
14. One reason why a branch office would not have a "loading" account is that the home office usually
does not want the branch personnel to know the amount of unrealized profit built in to the merchandise's
transfer price.
Answer: TRUE
15. It is equally probable that a "loading" account could be charged with an unrealized inventory loss as it
is that it could be charged with an unrealized inventory profit.
Answer: FALSE
16. As a general rule, the "loading" account will be credited for the unrealized profit element of
merchandise shipped to the branches and debited for the amount of any realized inventory profits.
Answer: TRUE
17. If the “Shipment from the Home Office” account and the “Shipment to the Branch Office” are kept
on a reciprocal basis and the home office charges a mark-up on these shipments, there will be no need to
adjust the loading account at the end of the period for any realized inventory profits.
Answer: TRUE
18. If the “Shipment from the Home Office” account and the “Shipment to the Branch Office” are kept
on a reciprocal basis and the home office charges a mark-up on these shipments, two adjustments to the
loading account will be needed at the end of the period. One adjustment will be needed to adjust the
“Shipment to Branch” account down to its cost basis, and, a second adjustment will be needed to transfer
any realized inventory profits from the loading to the “Branch Profit” account.
Answer: TRUE
19. When a branch receives merchandise at transfer prices that include a loading factor and sells that
merchandise, its cost of goods sold will be understated and its income will be overstated.
Answer: FALSE
MULTIPLE CHOICE
20. The Allowance for Overvaluation of Inventories: Branch ledger account of the home office is
debited:
a. When the home office ships merchandise to the branch at a billed price that exceeds cost.
b. In a journal entry to close the account at the end of an accounting period.
c. When the branch’s ending inventory is recorded in the home office accounting records.
d. In some other circumstances.
Answer: B
21. Amongst the various reasons given for the internal transfer of merchandise inventory at a price
above its cost are:
a. The equitable allocation of income amongst the various units of the business enterprise.
b. Efficiency in pricing inventories
c. Concealment of the true profit margins from branch personnel
d. All of the above are considered valid reasons.
Answer: D
22. A branch office is allowed to make sales, carry inventory for resale to customers, and incur normal
operating expenses. The home office ships merchandise to the branch office at cost plus a 20% markup.
The home office uses a loading account. If the loading account is used in its customary fashion, it will
track:
D. Overall branch profits and losses but not unrealized inventory profits.
Answer: A
23. It is generally accepted that a branch office should incur and pay for, or at least be changed with it, the
reasonable caused of transporting merchandise into the branch office and preparing it for a sale to
customers. In light of this generally accepted practice, which of the following charges for a freight costs
would be considered unreasonable if imposed on the branch office.
A. Requiring the branch to ship some of its inventory or another branch location due to inventory
shortages at the destination branch.
B. Charging a cost to the branch for freight charges that is a fixed percentage of the cost billed to the
branch for the inventory itself.
C. Charging freight charges to a branch office for inventory shipped by mistake where the number of such
mistakes occurs rather frequently.
24. In preparing combined financial statements, which of the following accounts are eliminated (brought to
a zero balance) in the combining process?
Branch Income or Loss Purchases Sent to Branch
A. Yes Yes
B. No Yes
C. No No
D. Yes No
Answer: D
25. In the year and general ledger closing procedures, which accounts are closed in arriving at Cost of
Sales?
A. Yes Yes
B. No Yes
C. No No
D. Yes No
Answer: A
26. The general ledger entry to adjust the Intracompany Profit Deferred account at the end of an
accounting period.
Answer: C