Question
The home office consistently bills its branch for shipments at 120% of cost. However, shipments to branch are subject to 5% freight cost on billed
The home office consistently bills its branch for shipments at 120% of cost. However, shipments to branch are subject to 5% freight cost on billed price, which the home
office prepays before shipment. The following information was taken from the records of
the branch:
Cash and cash equivalents, Jan. 1 66,000
Accounts receivable, Jan. 1 258,000
Inventory, Jan. 1
-From outside purchases 54,000
-From home office (at billed price, 378,000 432,000
freight-in)
Equipment, net, Jan. 1 1,200,000
Accounts Payable, Jan. 1 360,000
Sales 1,800,000
Shipments from home office at billed price, excluding
freight-in 1,080,000
Purchases 150,000
Inventory, Dec. 31
-From outside purchases 18,000
-From home office (at billed price, 529,200 547,200
freight-in)
Requirements: Compute for the following:
a. Beginning balance of the home office account
b. Beginning and ending balances of inventory at cost
c. Understatement or overstatement in the "cost of goods sold" and
d. Understatement or overstatement in the "gross profit" of the branch as far as the
home office is concerned.
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