Journal entries:

Transfer of HO to Cebu
HO Books
Investment in Cebu 10,000
Shipment to Cebu 10,000

Transfer from Cebu to Davao

HO Books
Shipment to Cebu 10,000
Investment in Cebu 10,000

Investment in Davao 10,000

Shipment to Davao 10,000

Investment in Davao 700

Loss on excess freight 100
Investment in Cebu 800
Transfer of HO to Cebu
Cebu Books
Shipments from HO 10,000
Home Office 10,000

Freight in 600
Cash 600

Transfer from Cebu to Davao

Cebu Books
Home Office 10,000
Shipments from HO 10,000

Home Office 800

Freight in 600
Cash 200

Receipt of goods by Davao

Davao books
Shipments from HO 10,000
Freight in 700
Home Office 10,700
1. HO net profit from Branch in Cebu
Branch reported net profit 20,000
Rent expense (6,000) (P1,000 x 6 months)
Adjustment from overvaluation 95,000 (550,000 -75,000 x 25/125)
Branch true net profit 109,000

Alternative solution:
Shipments 440,000 Sales
Purchases 50,000 COGS
TGAS 490,000 Gross profit
Ending inventory: Expenses
From shipments (60,000) Rent expense
From purchases (10,000) Net income
COGS 420,000

2. Branch inventory at cost

From HO 60,000 (P75,000/125%)
From pruchases 10,000
Branch inventory at cost 70,000
 Br Inventory from HO Allowance for Overvaluation
Beginning Ending Ending Beginning
Shipments COGS Realized profit Mark up - shipmt

620,000
(420,000)
200,000
(85,000)
(6,000)
109,000
1. True branch income for Y2
Branch reported net income 4,800
Adjustment for overvaluation:
Beginning inventory 3,960
Shipments 17,600
Ending inventorty (4,840)
COGS at biiled price 16,720
Multiplied by: 10/110 1,520 *Realized profit
True branch income for Y2 6,320

2. Total inventory at cost

HO ending inventory 11,200
Branch ending invetort at cost 4,400 (P4,840/110%)
Total inventory at cost 15,600
Realized profit
 HO Books
Butuan Br Current
a. Unrecorded transfer of fixed asset
b. Davao expense charged to Butuan (10,000)
c. Shipments from HO recorded twice
d. Cash from Butuan recorded as Davao's (65,700)
e. Reversal of previous DR memo
f. HO DR memo of P4,650 recorded as P4,560
Net adjustments (75,700)

HO Books
Butuan Br Current
Unadjusted balance 165,920
a. Unrecorded transfer of fixed asset
b. Davao expense charged to Butuan (10,000)
c. Shipments from HO recorded twice
d. Cash from Butuan recorded as Davao's (65,700)
e. Reversal of previous DR memo
f. HO DR memo of P4,650 recorded as P4,560
Adjusted balance 90,220
Branch Books
HO Current Remarks
53,960

(75,000)

*Already corrected by Butuan

90 *Branch should credit additional P90
(20,950)

Branch Books
HO Current
111,170
53,960
(75,000)

90
90,220
Journal entry - establishment of Fund
Agency fund 20,000
Cash 20,000

Payment of expense - No journal entry.

 Inventory from HO
Dec-01 300,000 420,000 Dec-31
Net Shipments 435,000 315,000 COGS Billed price
735,000 735,000

COGS - Inventory from HO 315,000

Multiplied by: 25/125
Adjustment to net income 63,000 Realized profit
JE to record agency expenses if agency has separate account
DR: Expenses - Agency
CR: Cash
 Allowance for Overvaluation
100,000 Dec-01
80,000 Mark up on shipments
180,000 Balance before adjustment

Remarks
Allowance for Overvaluation, Dec 01 100,000 Mark up
Divided by: 20%
Dec 1 inventory from HO at cost 500,000 100%
Multiplied by: 120%
Dec 1 inventory from HO at billed price 600,000 Cost

Merchandise inventory, Dec 1 750,000

Dec 1 inventory from HO at billed price 600,000
Dec 1 inventory from outside suppliers 150,000
re adjustment
Hint: Revenues and expenses were on cash basis. Convert to accrual basis.
Remarks:
Sales 450,000 (P350,000 + P100,000)
Cost of sales 360,000 (P400,000 + P50,000 - P90,000)
Gross profit 90,000
Expenses:
Rent 20,000
Advertising supplies 4,000 (P10,000 - P6,000)
Salaries and commission 70,000
Other expenses 5,000
Net loss (9,000)
al basis.
Beginning 300,000
Shipments from HO 120,000
Return to HO (7,500)
TGAS from HO inventory 412,500
Divided by: Billed rate 120%
TGAS from HO, at cost 343,750
Purchases from suppliers 72,500
TGAS at cost 416,250
Note: Allowance for overvaluation in the books of HO is normally the unadjusted balance = Beginning
Allowance for Overvaluation
Ending 195,000 370,000 Unadjusted balance
Realized markup 175,000
370,000 370,000

Beginning inventory 1,440,000

Shipments 1,020,000
Purchases 410,000
TGAS 2,870,000
Ending inventory:
From outsiders 290,000
From HO 1,170,000
COGS, unadjusted 1,410,000
Realized markup 175,000
COGS, adjusted 1,235,000
balance = Beginning + Markup on shipments.
 Inventory from HO
Oct-01 25,000 Oct-31
Shipments 125,000 100,000 COGS

125,000 125,000

Branch reported net income 5,000

Realized markup 20,000 (100,000 x 25/125)
True branch net income 25,000
Net sales 115,950 (P117,430 - P1,480)
COGS 91,500 (P104,000 - P12,500)
Gross profit 24,450
Expenses 20,000
Branch reported net income 4,450
Adjustment for overvaluation 18,300 (P91,500 x 25/125)
True branch net income 22,750
 HO Books
Butuan Br Current
Unadjusted balance 300,000
a. Shipment from HO in transit to branch
b. AR collected by branch 21,000
c. Expenses paid by HO
d. HO error (2,000)
Adjusted balance 319,000
Branch Books
HO Current
239,000
75,000

5,000

319,000
Hint: P11,000 intransit shipments to branch must be included in the "Shipments from HO" account an
Compute Mark-up rate:
Recorded shipment from HO 209,000
In transit shipments 11,000
Shipments from HO 220,000
Shipments to Branch 200,000
Mark up 20,000
Divided by: Shipments to Branch 200,000
Mark up rate 10%

Allowance for Overvaluation

*On hand inventory + in transit Ending 4,000 23,000
Adjustment 19,000
23,000 23,000

Sales 280,000
Beginning inventory 23,100
Shipments 220,000
Freight in [10,450 + (5% x 11,000)] 11,000
TGAS 254,100
Ending inventory [(33,000+11,000)*105%] (46,200)
COGS (207,900)
Gross margin 72,100
Expenses (58,100)
Net income reported by branch 14,000
Adjustment for overvaluation 19,000
True branch net income 33,000

Sales 310,000
Beginning inventory 46,000
Purchases 380,000
Shipments (200,000)
TGAS 226,000
Ending inventory (64,000)
COGS 162,000
Gross margin 148,000
Expenses (104,000)
Net income reported by HO 44,000
True branch net income 33,000
Combined net income 77,000
ments from HO" account and the ending inventory of branch

Unadjusted balance
 Allowance for Overvaluation
Ending 2,400 39,500 Unadjusted balance
Realized markup 37,100
39,500 39,500

Ending inventory branch 20,700

From outside suppliers (8,700)
Ending inventory - HO 12,000

Shipments from HO 187,500

Shipments to Branch 150,000
Mark up 37,500
Divided by: Shipments to Branch 150,000
Billing rate 25.00%
nadjusted balance
 HO Books
St Cruz Current
Unadjusted balance 25,550
a. Shipment erroneously charged to Sta Cruz (12,000)
b. Shipment erroneously charged to Quiapo 15,000
c. Adjustment to Binondo and Tondo
d. Ho collected Sta Cruz's AR
e. Shipments return to HO in transit (1,200)
f. HO error on Sta Cruz income (3,600)
Adjusted balance 23,750
St Cruz Books
HO Current
27,350

(3,600)

23,750
Net sales 325,000
COGS:
Merchandise from HO at cost (175,000/140%) 125,000
Merchandise from outside sources 140,000
Ending inventory (10,000 + (35000/140%)) (35,000) 230,000
Gross margin 95,000
OPEX 20,000
True branch net income 75,000
Sales (80,000 + 250,000) 330,000
COGS:
Merchandise from HO at cost (138,000/115%) 120,000
Ending inventory (23,000/115%) (20,000) 100,000
Gross margin 230,000
OPEX 38,000
True branch net income 192,000