MULTIPLE CHOICE (Solution is still required for the multiple choice problems.)

6. A branch is allowed to make sales, carry inventory for resale to customers, and incur normal operating expenses. The home office ships merchandise to the branch 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

a. Unrealized inventory profits only

b. Unrealized inventory profits and overall branch profits but not branch losses

c. Unrealized inventory profits and overall branch profits and losses

d. Overall branch profits and losses but not unrealized inventory profits

7. The Allowance for Overvaluation 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.

8. Statement 1 (S1): 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.Statement 2 (S2): 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.

a. S1- True; S2- True

b. S1- True; S2- False

c. S1- False; S2- True

d. S1- False; S2- False

9. Statement 1 (S1): A home office records shipments to its branch at billing prices and adjusts the loading account at year-end. When this approach is used, the loading account during the period will always be zero. Statement 2 (S2): 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.

a. S1- True; S2- True

b. S1- True; S2- False

c. S1- False; S2- True

d. S1- False; S2- False

10.Statement 1 (S1): A markup of 16 2/3% on billed price is equal to a markup of 14 2/7% on cost of merchandise shipped to the branch by the home office.Statement 2 (S2): If the home office bills merchandise shipments to the branch at prices above home office cost, the net income reported to the home office by the branch is overstated from a total company point of view.

a. S1- True; S2- True

b. S1- True; S2- False

c. S1- False; S2- True

d. S1- False; S2- False