CHAPTER 12 SPECIAL PROBLEMS

1. Everlasting Light of Metro Manila decided to set up two Everlasting Branches- one in Bacolod and
another in Cebu. The following are the reciprocal transactions for the last quarter of 2018, the first two
transactions of which took place October 1:
a) Home office transferred cash of P500,000 to each branch and merchandise as follows:
P300,000 to Bacolod with freight paid of P15,000 FOB shipping point and P400,000 to Cebu
with freight paid of P25,000 FOB Destination. They were instructed to sell the stock at a
mark-up of 100% of total cost.
b) Home Office transferred two sets of equipment costing P60,000 to Cebu, book value of P57,000
depreciated at a rate of 10%. It was purchased six months ago before Home Office decided the
transfer. It is home office policy that fixed assets be maintained only in the home office books.
c) On November 5, Home Office instructed Cebu to transfer one equipment costing P15,000 to
Bacolod.
d) Account sales made by each: Bacolod two thirds of the shipments made by Home Office while
Cebu was able to sell only half of the goods received.
e) Home Office issued to Cebu a debit memo for Bacolod Branch receivables of P15,000 less a
2% discount it collected.
f) All accounts from its customers were collected by Cebu including P147,000 net of the 2%
discount. Bacolod collected the remaining accounts from its customers outside of the discount
period.
g) Cebu reshipped P50,000 of the goods received in a) to Bacolod. Cebu paid for freight cost of
P1,500.
h) Depreciation starts on the first day of the month the assets are received.
i) The branch reported operating expenses paid and accrued in parenthesis: Cebu P70,000
(P5,000) and Bacolod P84,000 (3,000)
j) Cebu and Bacolod reported its result of operation to home office.
Required: a) Entries in the books of the branches in parallel column to record the above
Transactions including closing entries in the books of both branches.
b) Entries in the books of the home office.
2. Baguio Branch was billed by the home office for merchandise at 125% of cost. At the end of its
first two months of operation Baguio Branch submitted, among other things, the following data:
Nov Dec
Merchandise from home office (at billed price) P 100,000 P150,000
Merchandise purchased locally by the branch 40,000 50,000
Freight in from purchases made 4,000 5,000
Inventory at the end of the Dec of which P12,125 came from
local purchases 87,125
Net sales for each month 175,000 285,000
Required:
a) Compute for the net profit reported by the branch after two months if it incurred P78,250
expenses.
b) Give the adjusting entry prepared by the home office to realize profit from branch shipments at the
end of the fiscal year.
c) What will be the adjusted allowance for mark-up? Construct the T account starting from
November.
d) What is the correct profit of the branch?

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 3. Henry’s Sports Shop established the Henry’s Sports Branch on January 2, 2018. Branch
merchandise comes from the home office and is shipped at a mark up of 20% above cost. Freight
of 5% is paid under the term FOB destination. The branch was instructed to sell this at a price that
will earn for it a 25% gross profit. The branch reported inventory of P80,640 at the end of 2017.
The following are its 2018 transactions:
a) Cebu Branch was billed a total of P472,500 for goods shipped by the home office.
b) Cebu Branch paid for operating expenses, P175,000.
c) Cebu Branch issued a memo debiting home office P94,500 for goods transferred to Davao
branch. Additional freight of P4,500 was paid by Davao branch.
d) On December 31, Cebu branch took a physical inventory that showed merchandise on hand of
P152,250.
Required: a) Give all the entries of Cebu.
b) Give the corresponding entries of the Home Office.
c) What was the reported cost of sales of the branch?
d) What adjusting entry will home office prepare to correct the branch cost of sales?
e) Give the balance of the Allowance for Overvaluation as at December 31.
f) Home office reported net operating profit of P1,250,000. How much is its combined
profit with Cebu Branch?
g) If home office inventory is P750,000, how much is the combined inventory?
4. The following income statement was prepared by the accountant of XYZ branch preliminary to the
visit of the home office internal auditor:
Sales P720,000
Cost of Sales:
Inventory Jan 1(P115,000 came from purchases) P315,850
Shipments from Home Office 350,000
Freight In paid by H. O. based on value of goods shipped 10,500
Purchases 250,000
Total 926,350
Inventory June 30 (P80,000 came from purchases) (255,100) 671,250
Gross Income 48,750
Operating Expenses 50,000
Net Income (P 250)
The Allowance for Mark Up in the book of the Home Office (unadjusted) at the end of 2018 amounted
to P143,800. Current shipments were billed at a markup of 25% of cost. There was a shipment in
transit not recorded by the branch although it received a debit memo for this billing it a total of
P148,320. Freight rate was consistent from 2017 to 2018 under the term FOB destination.
a. Adjusting entry of the branch.
b. Give the reported cost of sales of the branch.
c. Give the adjusted balance of the Allowance for Mark Up.
d. What was the mark up rate based on cost in 2017?
e. Give the correct profit (loss) of the branch.
5. The following are the accounts in the books of the home office and the branch:
HO Books: Allowance for Mark Up Branch Books: Merchandise Inventory
Returns 1,500 Beginning balance January 1 22,700 Cost of Sales 64,040
and shipment Shipment received 29,040 Shipment Return 7,500
8,483 Purchases 40,000

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 The branch uses the perpetual method. Merchandise available for sale comes from the home
office and from outside suppliers. Included in the ending inventory of the branch at the end of the
year are P6,000 worth of goods coming from purchases. Mark up rate previous year was 5%
higher than the current mark up rate based on billed price.
Required:
a) Compute for the mark up rate in the current shipments.
b) Determine the shipments to branch in the home office books.
c) How much of the branch inventory beginning came from purchases?
d) What was the correct cost of sales of the branch?
e) Determine the adjusted allowance for mark up.
6. The home office bills its only branch at 25% above cost for all merchandise shipped to the branch. Both
the home office and the branch use the periodic inventory system. During 2018, its second year of
operation, the home office shipped merchandise to the branch at a billed price of P300,000 plus freight
of P6,000. Additionally, the branch purchased merchandise on account amounting to P220,000. Branch
inventories as at December 31 amounted to P282,210 including P80,250 from purchases made. Home
Office book showed an adjustment of P17,000 in the allowance for mark-up representing returns made
by the branch. Branch paid P900 freight for the return. Balance of the allowance account before
adjustment of branch profit for realized mark up was P74,000.
a) How much was the total inventories of the branch (billed and cost price including 2% freight)
as at January 1, 2017 if P55,000 were purchased from outsiders?
b) Assuming that the branch sales amounted to P680,000, what was its reported gross profit?
What was its correct gross profit?
c) What should be the adjusted balance of the allowance account as at December 31, 2018?

7. The Batangas Branch of Mathew Corporation is billed for merchandise by the home office at 120%
of cost. The branch in turn bills its customers at 125% of cost. On January 17 all of the branch
merchandise were destroyed by fire except some goods priced to sell for P2,500 and P6,000
coming from purchases and shipments from home office. Branch book shows the following
information:
Merchandise Inventory, January 1 (at billed price) P 26,400
Shipments from Home Office (January 1-17) 20,000
Purchases (P2,000 were not sold) 5,000
Sales 21,250
Sales Returns 2,000
Sales Allowances 1,000
Required: a) What was the reported cost of the merchandise destroyed by fire?
b) How much is fire loss in so far as the Home Office is concerned?
8. On December 31, 2017, the Investment in Beta Branch account in the general ledger of the home
office of Omega Company showed a debit balance of P40,000. You ascertain the following facts in
analyzing this account:
1) On December 31, merchandise billed at P5,800 was in transit from the home office to Beta branch.
The periodic inventory system is used by both the home office and the branch.
2) Home Office collected Beta’s customer for P2,750 but did not notify Beta Branch.
3) On December 29, the home office mailed a check for P2,000 to the branch, but the accountant
for the home office recorded the check as a debit to Charitable Contribution. The branch had
not received the check as of December 31.

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 4) Branch net income for December was recorded erroneously by the home office as P8,400
instead of P4,800.
5) Alpha Branch returned merchandise costing P2,200 to the home office. The home office
recorded the receipt of the merchandise and erroneously credited Beta’s investment.
a) Assuming that all other transactions have been properly recorded, prepare a reconciliation
statement to determine the adjusted balance of the investment account.
b) What was the unadjusted Home Office Equity account in the branch books?
c) Prepare the journal entries for the home office to bring its accounting records up to date.
d) Prepare the journal entries for the Beta Branch to bring its accounting records up to date.

9. Francesco’s Casa (which sells home furnishings) is currently preparing its combined financial
statements for the year ended December 31, 2018. As of this date, the Investment in Manila Branch
account has a balance of P180,000. The following information has been gathered.
a. The home office issued a debit memo allocating the Manila Branch for accrued expenses
amounting to P20,000 but the latter did not record this in full. Instead, it sent a credit memo
back to the home office reducing the charge to P15,000 but branch credited this to an accrued
expense account. The home office acknowledged receipt of branch memo and approved this
on January 3, 2019.
b. The home office erroneously credited Manila Branch for a return of shipments of merchandise
worth P50,000. This was a return made by Makati Branch. Manila received the credit memo
but did not make an entry for this.
c. Home Office issued a debit memo to correct entry for item (b) and gave a copy to both Makati
and Manila. Manila branch, thinking it was a shipment, entered a credit in favor of the home
office on December 31, 2018.
d. Manila Branch mistakenly sent the home office a debit memo amounting to P6,000 for an
apparent remittance of collections which did not happen. The home office recorded this as a
deposit in transit.
e. Manila Branch issued a debit memo for a cash remittance. Home Office debited the branch
upon receipt of memo for P15,000.
f. A credit posting was made by Manila for a credit memo received from the home office
instructing branch to pay a nearby supplier for an outstanding liability of P5,000.
10. You are given the trial balances of Makati and its branch as of December 31:
Home Office Branch
Debit Credit Debit Credit
Cash 25,000 8,000
Accounts Receivable 46,000 12,000
Inventories 70,000 15,000
Equipment 90,000
Investment in Branch 20,000
Accounts Payable 45,000 13,500
Accrued Expenses 14,000 3,400
Accumulated Depreciation 18,000
Home Office Equity 8,100
Capital Stock, par P100 50,000
Retained Earnings 15,000
Sales 392,000 95,000
Purchases 290,000 24,000
Shipments from Home Office 45,000

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 Expenses 44,000 16,000
Shipments to Branch 40,000
Allowance for Overvaluation ______ 11,000 _______ _______
585,000 585,000 120,000 120,000

Your examination of the accounts in the trial balance revealed the following:
a) On December 23, the branch, manager purchased equipment costing P4,000 but failed to notify the home
office. All plant assets are to be carried in the home office books and the proper entry was prepared in the
branch books. Depreciation starts on the month following the purchase.
b) On December 24, a branch customer paid his account of P2,000 at the home office which was
recorded properly by the home office accountant who failed to notify the branch.
c) On December 29, the home office remitted cash of P5,000 which was received by the branch
on January 3, 2016.
d) As of December 31, the branch had not taken up P1,000 covered in a debit memo from the
home office for its share in the general advertising expense.
e) A charge by the branch for P900 representing expenses incurred by the home office manager
when he visited the branch has not been recorded by the home office.
f) On December 31, home office shipped merchandise at a billed price of P3,000 which was
received January 3, 2016 by the branch.
g) The entire beginning inventory of the branch came from the home office. Inventories at the
end of the year excluding the shipment in transit are:
Home Office P55,000
Branch P20,000 (of which 2,000 came from purchases)
Required: req 1 and 2 one presenter, req 3 and 4 one presenter, req 5 one presenter.
1. Prepare a reconciliation statement as at December 31, 2015.
2. Make the necessary entries and change the trial balance to reflect the adjustments.
3. Prepare the closing entries in the branch books.
4. Prepare the closing entries in the home office books including the entries to take up branch profit or
loss and its realized profit on shipments to branch. Support with computations.
5. Prepare working paper for individual and combined financial statements using the financial
statement format similar to page _____. This time there are four adjusting and eliminating
entries.
11. The following are trial balances of Sierra Corporation and its Sacramento Branch as of December
31, 2018:
Debits Sierra Sacramento
Cash P 125,200 P 17,600
Receivables 510,565 75,000
Inventories, January 1 341,000 184,300
Investment in Branch 352,985
Plant Assets 1,172,600
Other Assets 229,000
Purchases 2,000,000 40,000
Expenses 381,000 78,500
Shipments from Home Office ________ 805,000
P 5,112,350 P1,200,400
Credits
Accounts Payable P 300,000 P 158,800

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 Short Term Loans 111,100
Capital Stock 1,900,000
Retained Earnings 322,250
Home Office Equity 121,600
Sales 2,450,000 920,000
Allowance for Mark Up. January 1 29,000 ________
P5,112,350 P1,200,400
Additional information:
a) Merchandise inventory beginning of the branch includes purchases of P39,300.
b) Shipments to branch are billed at 115% and recorded as sales. Shipment on December 30, 2015 by
the home office was received by the branch on January 2, 2016, billed at P51,750.
c) Merchandise inventory, December 31, 2015: Home Office, P810,000 and the Branch,
P294,200 of which P32,000 came from purchases. Freight is not yet included.
d) Expenses charged by the home office have not been recorded by the branch, P17,500.
e) Deposits to home office current account are made by the branch. Last deposits are:
Deposit Date Amount Date Recorded by Home Office
12/27/15 P 75,000 12/29/15
12/30/15 50,000 01/02/16
01/03/16 150,000 01/05/16

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f) Branch paid a short term loan of the home office on December 29, the memorandum of which
was received by the home office on January 2, 2019 for P95,000.
g) Freight on total shipments for the year chargeable to the branch was prepaid by the home
office amounting to P17,135 covered by a debit memo dated December 29 and received by the
branch on January 3, 2019.
Required:
a. Reconcile the reciprocal accounts and prepare the corresponding adjusting and correcting
entries including entry for branch profit.
b. Correct the trial balances given on the preceding page.
c. Prepare a working similar to the one prepared in Chapter 11 showing individual and combined
financial statements. Take note of 4 adjustment and elimination entries.

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