UNIVERSITY OF THE EAST

Caloocan Campus
COLLEGE OF BUSINESS ADMINISTRATION
DEPARTMENT OF ACCOUNTANCY, BUSINESS LAW AND TAXATION
www.ue.edu.ph/caloocan 105 Samson Road, Caloocan City

BAC 318 – ADVANCED FINANCIAL ACCOUNTING AND REPORTING, PART I

2ND SEMESTER, SCHOOL YEAR 2015 - 2016
FINAL DEPARTMENTAL EXAMINATION

GENERAL DIRECTION: You are given a two – part examination, consisting of Theory
Part and Problem Solving Part. Read and analyze the foregoing questions and choose the
best answer by shading the letter of your choice in your respective Scantron Answer
Sheet. Strictly no erasures allowed in the Scantron Answer Sheet.

THEORIES (20 Items)

1. Which of the following is the only reason why a home office cannot report inventory
shipments to a branch as sales?
a. The inventory transfer is a transaction with a related party.
b. There is no practicable means of determining whether the transfer prices
approximate those that would occur in an arms - length transaction between
independent parties.
c. Only inventory transaction between the company and outside third
parties can be considered sales.
d. The application of principle of conservatism prevents a home office from
doing such.

2. The Home Office bills its branch for merchandise transfers at a price in excess of
cost. When the home office prepares separate financial statements, the allowance
for unrealized gross margin in branch inventory account would appear in the
financial statements of the Home Office as
a. An operating expense of the current period.
b. Deduction from the cost of goods sold.
c. Addition to the cost of goods sold.
d. Deduction from the investment in branch account.

3. In Home Office / Branch merchandise transfers, the use of Shipment to Branch

account by the Home Office and the use of a Shipment from Home Office account
by the Branch indicates that the inventory system employed
a. Is a perpetual inventory system
b. Is a periodic inventory system
c. Is neither perpetual nor periodic
d. Cannot be determined from the information provided

4. Which of the following accounts would be shown on the combined financial

statements of the Home Office and the Branch?
a. Investment in Branch account
b. Allowance for Unrealized Gross Margin in Branch Inventory
c. Home Office account
d. None of the above

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5. Gatdula Corporation established several branches in a nearby city. Which of the
following would be possible reasons for Gatdula Corporation in establishing
branches?
a. The branches may be a suitable way to expand the firm’s sales efforts into
new markets.
b. The branches may provide Gatdula Corporation certain benefits of
decentralized operations without conferring a high level of autonomy on the
various components of the firm.
c. The branches may have been a favorable alternative to establishing a
traveling sales force operated from corporate headquarters or to the
acquisition of firms already operating in the new markets.
d. All of the above.

6. The adjustments (excluding those adjustments for in – transit items and errors)
appearing on the work sheet used in preparing combined financial statements of the
Home Office and the Branch
a. Are recorded in the accounting records of both the Home Office and the
Branch.
b. Are recorded in the accounting records of the Home Office only.
c. Are not recorded in the accounting records of the Home Office or the
Branch.
d. Are recorded in the accounting records of the Branch only.

7. The Jherome Branch receives all its inventory from the Home Office at a billing
price equal to the retail selling price of the inventory. If selling prices are correctly
anticipated, then the Branch Statement of Recognized Income and Expenses for
the year will show
a. Profit or loss depending on the sales volume.
b. Loss equal to the amount of the operating expenses.
c. Loss due to operating expenses being overstated.
d. Profit due to the cost of goods sold being correctly stated.

8. Elora Branch and Ellie Branch receive all inventories from the Home Office at cost
to the Home Office plus 10% to cover freight charges of the Home Office. The
Home Office instructed Elora Branch to transfer P20,000 of merchandise to Ellie
Branch. Freight cost of shipping inventory from Elora to Ellie was P2,400. The P400
excess freight cost of transferring inventory from Elora to Ellie over the freight cost
of direct shipment to Ellie from Home Office should be treated as
a. An increase in the value of the inventory of Ellie Branch.
b. A decrease in the value of the inventory of Elora Branch.
c. An operating expense of the current period by Elora Branch.
d. An operating expense of the current period by the Home Office.

9. Viente Corporation has two branches to which merchandise is transferred at cost

plus 20%, plus freight charges. On November 30, 2015, Viente shipped
merchandise that cost P11,000 to its Roxas City branch, and the P400 shipping
charges were paid by Viente. On December 15, 2015, the Iloilo branch encountered
an inventory shortage, and the Roxas City branch shipped the merchandise to the
Iloilo branch at a freight cost of P320 paid by the Roxas City branch. Shipping
charges from the Home Office to the Iloilo branch would have been P350.

Viente will record the P11,000 shipment to Roxas City branch, together with the
P400 shipping charge, in a journal entry that includes:
a. Shipment from Home Office, P13,200
b. Shipments to Roxas City branch, P11,400
c. Unrealized Profit in branch inventory, P2,200
d. Investment in Roxas City branch, P11,400

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10. Using the information in item 9, Roxas City branch should record the transfer of
merchandise to Iloilo branch by either a debit or a credit entry that includes the
following:
a. Shipments from Home Office, P11,000 c. Home Office, P13,920
b. Iloilo branch, P13,950 d. Inventory, P11,320
11. Revenue from long term construction contract is measured at the fair value of the
consideration received. This included the initial amount of revenue agreed in the
contract

Construction revenue may only include initial payments to the contractor for early
completion of the contract when the contract is sufficiently advanced that it is only
virtually certain as to completion.
a. Both statements are true
b. Both statements are false
c. Only the first statement is true
d. Only the second statement is true

12. Which of the following is not needed to be disclosed in the financial statements?
a. The amount of contract revenue recognized as revenue in the period
b. The methods used to determine the construction revenue in the period
c. The methods used to determine the stage of completion of contract in
progress
d. The aggregate amount of estimated costs to complete

13. Realized gross profit for the second year is computed by:
a. Contract price less estimated cost to complete
b. Estimated gross profit multiplied by the percentage of completion
c. Estimated gross profit multiplied by the percentage of completion less
gross profit realized for the previous years
d. Contract price multiplied by the percentage of completion

14. Substantial performance by the franchisor occurs when the following conditions are
met except:
a. The franchisee is not obligated in any way to refund cash already received
b. The franchisor is not obligated in any way to refund the cash already
received
c. No other material conditions or obligations exist
d. The initial services required of the franchisor by contract or otherwise
have been substantially performed

15. In franchise accounting, when substantial services has been performed and if the
collection of the note issued is assured, any cash collected plus the present value of
the note shall be recognized as revenue from franchise fee.

When substantial services have not yet performed and collection of the note is not
assured, the revenue to be recognized is equal to the cash collections but the
present value of the note must be recorded as deferred revenue.
a. Both statements are true
b. Both statements are false
c. Only the first statement is true
d. Only the second statement is true

16. Consider the following statements:

I. 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.

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 II. If the home office bills shipments 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 P20,400, the amount
of branch inventories at billed prices is P102,000.

a. Both statements are true.

b. Both statements are false.
c. Only the first statement is true.
d. Only the second statement is true.

17. Consider the following statements:

I. If 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 home office rather than by the respective branches.

II. Freight costs on merchandise shipped, as directed by the home office, by

West Branch to East Branch in excess of normal freight costs from the home
to East Branch are recognized as operating expenses of the home office.
a. Both statements are true.
b. Both statements are false.
c. Only the first statement is true.
d. Only the second statement is true.

18. Consider the following statements:

I. A home office records shipments to its branch at billing prices and adjusts the
valuation account at year-end. When this approach is used, the valuation
account will always be deducted from the account, Branch – Current in the
separate books of the home office.

II. If a “valuation” 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.
a. Both statements are true.
b. Both statements are false.
c. Only the first statement is true.
d. Only the second statement is true.

19. Consider the following statements:

I. 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.

II. One reason why a branch office would not have a “valuation” account is that the
home office usually would want the branch personnel to know the amount of
unrealized profit built in to the merchandise’s transfer price.
a. Both statements are true.
b. Both statements are false.
c. Only the first statement is true.
d. Only the second statement is true.

20. Consider the following statements:

I. If the “shipments from the home office” account and the “shipments to the
branch office” account 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 of any realized inventory profits.
II. If the “shipments from the home office” account and the “shipments to the
branch office” account are kept on a reciprocal basis and the home office
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 charges a mark-up on these shipments, two adjustments to the valuation
account will be needed at the end of the period. One adjustment will be
needed to adjust the “shipments to branch” account down to its cost basis,
and, a second adjustment will be needed to transfer any realized inventory
profits from the valuation to the “branch profit” account.
a. Both statements are true.
b. Both statements are false.
c. Only the first statement is true.
d. Only the second statement is true.

PROBLEMS (15 Items @ 2 points each)

The Guevarra Company opened an agency in Makati in 2015. The following is a summary
of the transactions of the agency:

Sales orders sent to home office P 55,000

Sales orders filled by home office in 2015 46,500
Freight on shipment to agency 1,100
Collections, net of 2% discount 39,690
Selling expenses paid from the agency working fund 2,820
Administrative expenses charged to agency 5% of sales
Samples shipped to agency:
Cost 3,000
Inventory, Dec. 31, 2015 1,100

21. The company maintains its gross margin on agency sales at 30% excluding freight
cost on shipments to agency. The agency cost of sales including freight was
a. P33,650 c. P47,430
b. P39,600 d. P30,000

Sales P46,500
x 70%
Cost of sales w/o freight P32,550
Add freight 1,100
Cost of sales w/ freight P33,650

22. Using the information in item 21, the agency’s net income must be
a. P6,100 c. P4,995
b. P6,390 d.P1,100

Sales P46,500
Less Sales Discount (39,690 / 98%) - 39,690 810 P45,690
Cost of sales 33,650
Gross Profit P12,040
Expenses:
Selling P 2,820
Administrative (46,500 x 5%) 2,325
Samples Expenses 1,900 7,045
Net Profit P 4,995

23. Uy Company had an agency in Butuan. For the first year of operations, the agency
transactions showed the following:
Receipt from sales P 400,000
Disbursements
Purchases 400,000
Salaries and commissions 30,000
Rent 10,000
Advertising supplies 10,000
Other expenses 5,000
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 The agency had no receivables nor payables as of the end of the said year but
there were inventories on hand of P70,000 and unused advertising supplies of
P6,000. The gency was set up as an experiment for one period and would be
closed if losses were incurred. The agency should
a. Continue with the profit of P21,000 from experiment
b. Continue with the profit of P15,000 from experiment
c. Close with the loss of P55,000 from experiment
d. Review carefully due to break – even results

Sales P400,000
Cost of sales ( 400,0000 - 70,000) 330,000
Gross profit 70,000
Expenses [30,000 + 10,000 + (10,000 - 6,000) + 5,000] 49,000
Net profit P 21,000

Selected balances from the Calaor Company’s Branches Jim and Emman are as follows:
JIM BRANCH EMMAN BRANCH
Inventory, January 1, 2015 21,000 19,000
Imprest Branch Fund 2,000 1,500
Inventory, December 31, 2015 19,000 12,000
Accts. Receivable, January 1, 2015 55,000 43,500
Accts. Receivable, December 31, 2015 70,000 53,500
Merchandise from Home Office 61,000 47,000
Cash Collections 85,000 70,000
Sales 100,000 80,000
Cash Expenses 21,000 14,300

All sales, collections, and expenses are handled at the branch. All cash received from
sales and collections are sent directly to the Home Office. Expenses are paid by the
branch from the imprest fund and immediately reimbursed by the Home Office and
credited to the Home Office account. All expenses paid by the branch are recorded in the
branch books.

24. The net profit of Jim Branch is:

a. P16,000 c. P15,000
b. P21,000 d. P18,000

Sales
Cost of sales P 100,000
Inventory, beg. P21,000
Merchandise from Home Office 61,000
Merchandise available for sale P82,000
Less Inventory, end 19,000 63,000
Gross profit P37,000
Operating Expenses 21,000
Net profit of Branch A P16,000

25. The balance of the Branch current account of Emman Branch, on December 31,
2015 is:
a. P70,000 c. P67,000
b. P64,000 d. P65,000

Imprest branch fund P 1,500

Accounts Receivable, Dec. 31 53,000
Inventory, Dec. 31 12,000
Balance of Branch account – current P 67,000

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 26. The entry in Emman Branch records to update the reciprocal account Home Office
Current on December 31, 2015 is:
a. Dr.- Home Office/Cr.- Profit and Loss
b. Dr.- Profit and Loss/Cr.- Branch Current
c. Dr.- Branch Current/Cr.- Profit and Loss
d. Dr.- Profit and Loss/Cr.- Home office Current

Sales P 80,000
Cost of sales
Inventory, Jan.1 P 19,000
Merchandise from Home office 47,000
Merchandise available for sale P 66,000
Less Inventory, Dec.31 12,000 54,000
Gross profit P 26,000
Operating Expenses 14,300
Net profit of Branch B P 11,700

Loro Supply Company is engaged in merchandising both at Home Office in Makati and a
Branch in Davao. Selected accounts in the trial balances of the Home Office, and the
branch at December 31, 2015 follows:

Debit Home Office Branch

Inventory, January 1 23,000 11,550
Davao Branch 58,300
Purchases 190,000 105,000
Freight in from Home Office 5,500
Sundry expenses 52,000 28,000
Credits
Home Office 53,300
Sales 155,000 140,000
Sales to Branch 110,000
Allow. for overvaluation of branch
inventory at Jan.1 1,000

Additional information:
a. Davao Branch receives all its merchandise from the home office. The Home Office
bills the goods at cost plus 10% mark-up. At December 31, 2015 a shipment with a
billing price of P5,000 was in transit to the branch. Freight on this shipment was P250
which is to be treated as part of inventory.

b. December 31, 2015 inventories excluding the shipment in transit are:

Home Office, at cost 30,000
Davao Branch, at billed value (excluding freight of P520) 10,400

27. Net income of the Home Office was:

a. P10,000 c. P20,000
b. P15,000 d. P25,000

Sales P155,000
Cost of sales:
Inventory, beginning P 23,000
Purchases 190,000
Goods available for sale P213,000
Shipments to branch (P110,000/110%) 100,000
Goods available for own sale P113,000
Less Inventory, end 30,000 83,000
Gross profit P 72,000
Expenses 52,000

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 Net income P 20,000

28. True income of Davao Branch was:

a. P10,470 c. P12,470
b. P11,470 d. P13,470

Sales P140,000
Cost of sales:
Inventory, beginning (P11,550 – P1,000) P 10,550
Shipments from HO, including freight-in 105,750
Goods available for sale P116,300
Less Inventory, end
[(P10,400 + P5,000)/110%] + P520 + P250 14,770 101,530
Gross profit P 38,470
Expenses 28,400
True branch net income P 10,470

The home office sells merchandise to its branch at 120% of cost. The branch was established with
the policy that all merchandise would be acquired from the home office. Information from the
records of the home office and branch are as follows:
Home Office Branch
Unrealized intercompany inventory profit 9,200
Inventory, beginning 7,200
Inventory, end 12,000

29. The balance of the Unrealized Intercompany Inventory Profit account on the books
of the home office after eliminations and adjusting entries is
a. P2,000 c. P4,000
b. P 800 d. P4,800

P12,000 x 20/120 = P2,000

Rodriguez Commercial Corp. maintains a branch in Iloilo City. Selected balances taken
from the books of Rodriguez Commercial and its Iloilo branch as of December 31, 2015 are
as follows:
Home office Branch
Merchandise Inventory, Jan. 1 12,000 8,000
Purchases 150,000 30,000
Shipments from Home Office 93,750
Shipments to Branch 75,000
Branch Inventory Allowance 19,750
Sales 115,000 176,500
Merchandise Inventory, Dec. 31 14,000 10,350

P4,350 of the branch’s ending inventory came from purchases from outside
vendors.

30. As far as the Home Office is concerned, the cost of sales of the branch was:
a. P 97,120 c. P121,400
b. P102,850 d. P131,850

Beginning inventory P 8,000

Purchases 30,000
Shipments from home office 93,750
Ending inventory ( 10,350)
Cost of goods sold reported by branch P 121,400
Realized markup [P19,750 - (P6,000 x 25/125)* ( 18,550)
Cost of goods sold at cost P 102,850
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 *P93,750 – P75,000 = P18,750/P75,000 = 25%

31. The branch’s net income must be understated by:

a. P18,000 c. P18,550
b. P18,250 d. P18,750
The amount of the realized markup of P18,550
32. Laab Company operates a branch in Caloocan City. On December 31, 2015,
Caloocan City Branch account in the Home Office showed a debit balance of P912,
522. The interoffice accounts were in agreement at the beginning of the year. For
the purposes of reconciling the interoffice accounts, the following facts were
determined:
 Equipment costing the Home Office P18, 975 was picked up and recorded
by the branch as a credit to the Home Office account as P19, 857. The
Home Office will maintain the record of the equipment.
 Total general expenses were P95, 850. The Home Office allocated 2/5 of
the expenses to Caloocan City Branch. The branch inadvertently debited 2/5
of the allocated amount to the Home Office account twice.
 Caloocan City Branch paid P24, 170 representing accommodation expenses
of Mr. Justin Paul, an executive vice president of the company, when the
latter attended a convention in Valenzuela City. Of the amount paid, 40%
was charged to the Home Office, 20% to Caloocan City Branch and 40% to
other Laab’s branch in Malabon City. The Home office was not yet notified of
the said event.
 The home office transferred inventory costing P24, 000 to Caloocan branch
and paid the corresponding freight of P2, 500. Caloocan Branch was
instructed by the Home office to transfer ¼ of the said inventories to
Malabon Branch and to shoulder the freight costing P1, 500. Caloocan
branch effected the transfer on its books but recorded the transfer at ¾ of
the original inventories and erroneously credited the payment for freight at
P150.
What is the unadjusted balance of the Home Office – current of Caloocan City
branch on December 31, 2015?
a. P855, 931 b. P870, 803 c. P832, 131 d. Some other amount

33. On December 1, 2015, the Pilla Company established an agency in Malabon,

sending its merchandise samples costing P15, 750 and a working fund of P9, 000 to
be maintained on the imprest basis. During the month of December, the agency
transmitted to the home office sales orders which were billed at P64, 380 of which
20, 400 was collected. A home office disbursement chargeable to the sales agency
is the acquisition of furniture and fixtures for Malabon, P25, 000 to be depreciated at
24% per annum. The agency paid expenses of P3, 815 and received replenishment
thereof from the home office. On December 31, 2015, the agency samples were
valued at P10, 075. It was estimated that the gross profit on goods shipped to bill
agency sales orders average 25% of cost. How much is the net income of the
agency for the month ended December 31, 2015?
a. P2, 886 b. P3, 386 c. P12, 876 d. P(2, 614)

34. Jogno Construction Company uses the percentage-of-completion method for long-
term construction contracts. A specific job was begun in 2013 and completed in
2015. The contract price was P1,400,000 and cost information as of each year-end
is given below:
2013 2014 2015
End of year estimated cost to
complete ...................... P400,000 P200,000 P 0 
Annual cost incurred ............ 400,000 400,000 120,000

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 Assuming Jogno correctly recorded gross profit in 2013, how much gross profit
should the company record in 2014?
a. P0 c. P300,000 e. some other amount
b. P20,000 d. P320,000

35. Gregorio Company began operations on January 1, 2014, and uses the installment
sales method of accounting. The company has the following information available
for 2014 and 2015:
2014 2015
Installment sales ......................... P4,500,000 P5,400,000
Gross profit on sales ..................... 30% 40%
Cash collections on 2014 sales ............ 1,500,000 3,600,000
Cash collections on 2015 sales ............ 4,200,000
The realized gross profit for 2015 would be
a. P1,680,000. c. P3,120,000 e. Some other amount
b. P2,760,000. d. P4,320,000

End of Final Exam

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