The Home Office of Gledndale Company, which uses the perpetual inventory
system, bill shipments of merchandise to the Montrose Branch at a markup of
25% on the billed price. On August 31, Year 5, the credit balance of the home
office’s Allowance for Overvaluation of Inventories: Montrose Branch ledger
account was K600,000. On September 17, Year 5, the home offices hipped
merchandise to the branch at a billed price of K400,000. The branchreported an
ending inventory, at billed price, of K160,000 on September 30,Year 5.
Required:
Prepare Journal entries involving the Allowance for Over-valuationof
Inventories: Montrose Branch ledger account of the home office ofGlendale
Company on September 17 and 30, Year 5. Show supportingcomputations in the
explanations for the entries
1. Assume that Smaldino Company bills merchandise to Branch X atcost and that
Branch X maintains complete accounting records and preparesfinancial4
statements. Both the home office and the branch use the perpetualinventory
system. Equipment used at the branch is carried in the home officeaccounting
records. Certain expenses, such as advertising and insurance, areincurred by the
home office on behalf of the branch and are billed on the branch.Transactions
and events during the first year (Year 1) of operations of Branch Xare
summarized below:
i. Cash of K1,000 was forwarded by the home office to BranchX
ii. Merchandise with a cost of K60,000 was shipped by the homeoffice to
Branch X
iii. Equipment was acquired by Branch X for K550, to be carried inthe home
office accounting records. (Other plant assets for Branch Xgenerally are
acquired by the home Office.)
iv. Credit sales by Branch X amounted to K80,000; the cost ofthe
merchandise sold was K45,000.
v. Collections of trade accounts receivable by Branch X amountedto
K62,000.
vi. Payments for operating expenses by Branch X totaledK20,000.
vii. Cash of K37,500 was remitted by Branch X to the homeoffice.
viii. Operating expenses incurred by the home office and charged toBranch X
totaled K3,000.
Required: prepare journal entries in accounting records of the homeand the
branch. (20 Marks)