SAN CARLOS COLLEGE

COLLEGE BUSINESS TECHNOLOGY AND ACCOUNTANCY

ACCOUNTING ENHANCEMENT
MIDTERM MAJOR EXAMINATION
ADVANCE FINANACIAL ACCOUTING AND REPORTING

Problem M: The following information came from the books and records of the Home Office and its branch. The balances as
of December 31, 2018 are as follows:

Home office Branch

Sales 300,000 170,000
Shipments to branch 48,000
Shipments from home office 60,000
Purchases 120,000 36,000
Operating expenses 80,000 42,000
Inventory, December 31, 2017 50,000 32,000
Allowance for overvaluation of branch inventory 17,200

There are no shipment in transit between the Home office and the branch. Both shipment accounts are properly recorded.
The closing inventory of the branch at billed price is P16,800, P6,000 of which were acquired from outside suppliers. The
closing inventory of the home office is P18,000. The home office applies a uniform percentage markup on the shipments of
inventory to the branch from year to year.
1. How much is the true branch ending inventory?
A. 8,640 B. 10,800 C. 14,640 D. 16,800
2. How much is the branch cost of goods sold per GAAP?
A. 60,160 B. 75,600 C. 96,160 D. 111,200
3. How much is the net income of the branch in so far as the home office is concerned?
A. 16,800 B. 31,840 C. 52,800 D. 67,840
4. How much is the combined net income of the home office and the branch for the year 2018?
A. 99,840 B. 147,840 C. 167,680 D. 183,840
Problem N: The home office transfers merchandise to Baguio branch at a mark-up of 25% above cost during the year 2018
and 30% above cost during the year 2017. In 2018, the reciprocal account in the income statement of the branch is
P1,487,500. The Unrealized Profit in Branch Inventory has a balance of P84,000 at the end of 2017. The branch started to
acquire merchandise from outsiders during the current year in the amount of P76,000.
5. How much is the true cost of goods available for sale of the branch?
A. 1,470,000 B. 1,546,000 C. 1,851,500 D. 1,927,500
Problem O: A branch’s ending inventory of merchandise shipped by the home office and purchased from outside vendors
amounts to P100,000. The post-closing balance in the Unrealized Gross Profit in Branch Inventory account is P12,000 due to
the home office practice of shipping merchandise at 120% of cost.
6. The merchandise purchased from outside vendors contained in the ending inventory of the branch amounts to…
A. 28,000 B. 40,000 C. 60,000 D. 72,000
Problem P: The following data were taken from the records of Kadita Corporation of Manila and its Taguig branch for 2016:

Manila Office Taguig Branch

Sales 530,000 157,500
Inventory, January 1 57,500 22,250
Purchases 410,000
Shipments to branch 105,000
Shipments from office 126,000
Inventory, December 31 71,250 29,250
Expenses 191,000 50,750
In 2016, Manila office billed the Taguig branch at a certain markup on cost which was lower by 5 percentage points than last
year’s.
7. What is the combined net income?
A. 48,325 B. 48,000 C. 49,650 D. 56,075
Problem Q: The following partial transactions took place between the home office and its two branches, Iloilo branch and
Naga branch:
*Upon the instruction of the home office, Naga branch effected a fund transfer of P25,000 to Iloilo Branch.
* Iloilo Branch collected a Naga Branch’s accounts receivable of P35,000 less 2% discount.
*Naga Branch paid P250,000 representing the traveling expenses of Ms. Karen Reyes, a senior vice-president, when the
latter attended the regional conference in Canada. Of the amount paid, 60% was charged to the home office, 25% to Iloilo
Branch and the balance to Naga branch.
*Home office shipped merchandise costing P200,000 to Naga branch. Freight of P3,000 was paid by the home office. It is the
policy of the company to bill its branches at 25% above cost.
*Upon the instruction of the home office, Naga reshipped the above merchandise to Iloilo Branch. Freight of P1,500 was paid
by Iloilo Branch. Had the goods been shipped directly to Iloilo Branch, the freight would have been only P4,200.
8. How much is the excess freight to be recorded in the books of the home office?
A. 0 B. 300 C. 4,200 D. 4,500

9. What is the balance of the Investment in Naga Branch account in the home office books?
A. 524,800 B. 520,000 C. 271,800 D. 527,800
10. What is the balance of the home office account in the books of Iloilo Branch?
A. 374,500 B. 378,700 C. 312,000 D. 370,300
THEORIES
11. Refer to the following statements:
I. The “branch office” account on the home office books and the “home office” account on the branch’s books are examples
of reciprocal accounts whose balances would be combined when the home office is preparing a balance sheet for all its
combined operations.
II. When performing the end-of-period reconciliation between the Home Office account on the branch’s books and the
Branch Account on the home office’s books, shipments in transit from the branch back to the home office will be treated as
an addition to the home office’s Branch account.
A. True, true B. False, false C. True, false D. False, true
12. Refer to the following statements:
I. An expense item allocated by the home office home office to the branch is recorded by the branch by a debit to an
expense ledger account and a credit to the Home Office account.
II. A debit to the Home Office ledger account and a credit to the Trade Account Receivable account in the accounting records
of a branch indicate that the home office collected accounts receivable of the branch.
A. True, true B. False, false C. True, false D. False, true
13. CHUA Enterprises has a branch operation located in Binondo. On the home office financial record, the home office reports
Investment in Binondo Branch account with a P78,000 debit balance. At the same time, the branch operation is reporting a
Home Office Current account with an P81,000 credit balance. Which of the following statements is true?
A. Since two different sets of records are being kept, these two accounts are designed to agree.
B. The difference indicates that inventory may be in transit from the home office to the branch.
C. The difference indicates that cash may be in transit from the branch to the home office.
D. Cash may have been collected by the home office for the branch but not reported to the branch.
14. Refer to the following statements:
I. 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 reported cost of goods sold is overstated.
II. 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 reported net income or loss is overstated.
A. True, true B. False, false C. True, false D. False, true
15. Refer to the following statements:
I. One reason why a branch office would not have a “loading” or “overvaluation in branch inventory” account is that the
home office does not want the branch personnel to know the amount of unrealized profit built in to the merchandise’s
transfer price.
II. 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.
A. True, true B. False, false C. True, false D. False, true
16. What is the main reason for the difference between the branch’s reported net income and the true branch net income
computed by the home office?
A. Because of the overstatement of branch’s cost of sales for goods coming from outsiders.
B. Because of the overstatement of branch’s cost of sales for goods coming from the home office.
C. Because of the overstatement of total goods available for sale coming from the home office.
D. Because of the overstatement of branch’s ending inventory coming from the home office.
17. When the home office ships merchandise to the branch above its cost, the cost of goods sold on the branch income
statement is
A. Overstated by the overvaluation of the branch inventory acquired from outsiders.
B. Overstated by the difference between the unadjusted and post-closing balance in the allowance for overvaluation in the
branch inventory account on the home office books.
C. Overstated by the overvaluation of the branch inventory acquired from the home office.
D. Understated by the overvaluation of the inventory.
18. Transactions between branches are recorded by the transacting branches
A. by debiting or crediting their own investment in branch accounts.
B. as if each of them is transacting with the home office.
C. choices A and B are correct.
D. a branch is not permitted to transact with another branch.
19. When a home office ships merchandise to Branch A which is later shipped to Branch B, the additional freight charges to
ship the merchandise from branch A to branch B should be
A. Treated as an expense in the Home Office records.
B. Treated as an expense in the records of the payor of the freight charges.
C. Included as part of the cost of merchandise to branch B.
D. Either A or C is acceptable.
20. The acquisition method of accounting for business combination requires all, except
A. Identifying the acquirer.
B. Determining the acquisition date.
C. Recognizing and measuring the identifiable assets acquired, liabilities assumed, and noncontrolling interest in the acquiree
at book value.
D. Recognizing goodwill or gain from bargain purchase.
21. Which of the following is not true of a business combination classified as acquisition?
A. The acquirer continues to exist as a separate legal entity.
B. The acquiree ceases to exist as a separate legal entity.
C. Both entities continue their legal existence.
D. One entity acquires the assets and assumed the liabilities of one or more other companies in exchange for stock, cash, or
other consideration.
22. What date should be used as the acquisition date for a business combination?
A. The date when the acquirer signs the contract to purchase the business.
B. The date when the acquirer obtains control of the acquiree.
C. The date when all contingencies related to the transaction are resolved.
D. The date when the acquirer purchased more than 20% of the shares of the acquiree.
23. In a business combination, goodwill is measured as
A. The consideration transferred minus the identifiable net assets acquired.
B. The total of the consideration transferred plus the amount of any non-controlling interest in the acquiree minus the
identifiable net assets acquired.
C. The total of the consideration transferred plus the book value of the previously held interest in the acquiree plus the
amount of any non-controlling interest in the acquiree minus the identifiable net assets acquired.
D. The total of the consideration transferred plus the fair value of the previously held interest in the acquiree plus the
amount of any non-controlling interest in the acquiree minus the identifiable net assets acquired.
24. Under IFRS 3 B u s i n e s s C o m b i n a t i o n , acquisition costs incurred and related to a business combination should
be
A. Allocated on a pro-rata basis to the nonmonetary assets acquired.
B. Capitalized as part of goodwill and tested for impairment annually.
C. Capitalized as deferred cost and amortized over 10 years.
D. Expensed as incurred in the period of combination.
25. How should an entity account for the incomplete information in preparing the financial statements immediately after the
acquisition?
A. Do not record the uncertain items until complete information is available.
B. Record a contra account to the investment account for the amounts involved.
C. Record the uncertain items at the carrying amount of the acquiree.
D. Record the uncertain items at a provisional amount measured at the date of acquisition.
26. When does the measurement period end for a business combination in which there was incomplete accounting
information on the date of acquisition?
A. When the acquirer receives the information or one year from the acquisition date, whichever occurs earlier.
B. Thirty days from date of acquisition.
C. At the end of the reporting period in the year of acquisition.
D. On the final date when all contingencies are resolved.
27. When an acquirer holds 40% equity interest in acquiree and subsequently purchases another 25% equity interest in
order to gain control, this transaction is called
A. Pooling of interest.
B. Business combination by installment.
C. Business combination achieved in stages.
D. Restructuring business combination.
28. Which of the following is not true with regard to a business combination accomplished in the form of a stock acquisition?
A. Two entities remain in existence after the combination.
B. A parent-subsidiary relationship is said to exist.
C. Consolidated financial statements are normally required.
D. All of the foregoing statements are true.
29. The non-controlling interest shall be measured at
A. Fair value
B. NCI’s proportionate share of the acquiree’s net identifiable assets.
C. Carrying value
D. Either A or B
30. The retained earnings that appears on the consolidated statement of financial position of a parent company and its 60%-
owned subsidiary is
A. The parent company’s retained earnings.
B. The parent company’s retained earnings plus 100% of the subsidiary’s retained earnings.
C. The parent company’s retained earnings plus 60% of the subsidiary’s retained earnings.
D. The parent company’s retained earnings plus non-controlling interest.
31. When are profits from intercompany land sales realized?
A. They are realized only when sold to outsiders.
B. They are realized once legal ownership of the land has been transferred
C. They are realized when consideration has been received for the land.
D. They are realized when an agreement is signed with respect to ownership of the land.
32. During the year, an upstream sale of an equipment occurred between Cloggins Co. and Prosey Enterprises. This
equipment was sold at a gain and with a remaining life of six years from date of sale. In the consolidated financial
statements, the gain will:
A. Never be recognized
B. Be recognized over the six-year period
C. Be recognized immediately
D. Be recognized when the asset is resold to outsiders
33. How is the non-controlling interest presented in the consolidated statement of financial position?
A. It is not separately presented in the consolidated statement of financial position.
B. As a deduction from goodwill, if any.
C. By means of a note to consolidated financial statements.
D. As a separate item in the stockholders’ equity section.
34. Which of the following is the best theoretical justification for consolidated financial statements?
A. In form, the companies are considered one entity; in substance, they are separate.
B. In form, the companies are separate; in substance, they are considered one entity.
C. In form and in substance, the companies are considered one entity.
D. In form and in substance, the companies are separate.
35. Intercompany profits on sales of inventory are only realized
A. Once the seller receives the payment for the sale.
B. Once the inventory has been sold to outsiders.
C. When the inventory has been received by the purchaser.
D. When the inventory has been shipped to the purchaser.