CHAPTER ONE AND TWO (Exercises)
Part I: Multiple Choice Items
Instruction: Choose the correct answer from the alternatives given and write the letter of the
correct answer in the space provided.
1. A joint venture would not be organized as a(an):
A. Corporation
B. Proprietorship
C. Partnership
D. Undivided interest
2. Corporate joint ventures should be accounted for by the equity method, provided that the
joint venturer:
A. Cannot exercise significant influence over the joint venture.
B. Can participate in the overall management of the venture.
C. Owns more than 50% of the joint venture.
D. All of the above.
3. An investor in a corporate joint venture would be least likely to:
A. Be active in the management of the venture.
B. Have an ability to exercise significant influence.
C. Consent to each significant venture decision.
D. Hold title to a proportional share of joint venture assets.
4. Abdi, Boka and Chala corporations own 60%, 25%, and 15%, respectively, of the common
stock of produce Corporation, a corporate joint venture that they organized for
wholesaling fruits and vegetables. Which of the corporations should report their joint
venture interests under the equity method?
A. Abdie, Boka and Chala
B. Abdi, and Boka
C. Boka, and Chala
D. Abdi and Chala
5. Which of the following is a characteristic of a joint venture?
A. The partners all jointly share in managing and controlling the venture.
B. The partners can be individuals, but cannot be businesses.
C. Debt incurred by the venture is reported on the owners’ balance sheets.
D. The initial carrying value reported must equal the fair value of resources
contributed.
6. If a company invests in a joint venture, one accounting consequence to the company is:
A. The investment is generally accounted for using the cost method.
B. The joint venture's assets and liabilities must be added in-to the company's assets
and liabilities, in proportion to ownership.
C. Off-balance sheet financing can occur since debt incurred by the venture is not
usually reported on the company's balance sheet.
D. The company's investment account must be carried at the fair value of assets
transferred to the joint venture.
7. ABC Corporation invested Br.100, 000 in a real estate corporate joint venture on January 2,
2022. During 2022, ABC received Br.9, 500 from the joint venture, and its share of joint
venture net income (after depreciation) is Br.12, 000. The depreciation expense
applicable to ABCs share of net income was Br.4, 000. ABC values its joint-venture
investment in its December 31, 2022, balance sheet (under the equity method of
accounting) at:
A. Br.116, 000 B. Br.112, 000 C. Br.102, 500 D. Br.100, 000 E. None
8. Ambo Mineral water Corporation is a public enterprise that started its operation on January
1, 2012. The initial capital was paid in cash, Br 7,500,000 on January 1. The enterprise
incurred a net loss of Br 300,000. In the end-of-period journal entries, disregarding
income taxes:
A. Legal reserves is debited, Br 300,000
B. Other reserves is debited, Br 300,000
C. State dividend payable is credited 15,000
D. All of the above
Use the following information for questions 9 and 10:
X Company has a 50% ownership in XY joint venture. The beginning balance of the 'Investment
in XY' account was a debit of Br 250,000.AB is unincorporated joint venture and it reported
Revenues of Br 700,000 and expenses of Br 300,000. X Company has already recorded
investment income of Br 200,000. At the end of the year, after closing entries, assets of XY Joint
Venture total Br 1,000,000 and liabilities total Br 100,000 X uses the proportionate share
method.
9. The end-of-period journal entries required under the proportionate consolidation method do
not include:
A. A debit to assets, Br 500,000
B. A debit to expenses, Br 150,000
C. A credit to revenues, Br 350,000
D. All of the above
E. None of the above
10. Under the equity method of accounting, the ending balance of the Investment in XY Joint
Venture account would be:
A. Br. 350,000 B. Br. 250,000 C. Br. 450,000 D. Br. 200,000 E. None
11. Lunar Corporation is a public enterprise that started its operation on January 31, 2023. The
enterprise earned net profit of Birr 300,000 and it has got authorization to retain Birr 100,000
from the profit of the year ending December 31, 2023 and which of the following end-of-period
journal entries is appropriate?
A. Income summary 300,000
Legal Reserve 15,000
Unappropriated other Reserves 100,000
State Dividend Payable 185,000
B. Income summary 300,000
Retained Earnings 115,000
State Dividend Payable 185,000
C. Income summary 300,000
Legal Reserve 60,000
Retained Earnings 100,000
State Dividend Payable 140,000
D. Income summary 300,000
Legal Reserve 160,000
State Dividend Payable 140,000
Part II. Workout
1. Grand Co. invests Br.3, 000,000 for a 30% interest in the Rock joint venture. The condensed
balance sheets of Grand and Rock after the first year of the joint venture's operations appear
below. Grand's investment in Rock has not been adjusted for the year.
Grand Rock
Current assets Br. 22,000,000 Br. 6,000,000
Long term assets 75,000,000 40,000,000
Investment in ROC 3,000,000 ________
Br.100,000,000 Br.46,000,000
Liabilities Br. 10,000,000 Br.28,000,000
Contributed capital 50,000,000 10,000,000
Retained earnings 40,000,000 8,000,000
Br.100,000,000 Br.46,000,000
Instructions
A. Present the balance sheet of Grand as of the end of the first year of the joint venture's
operations, assuming Grand uses the equity method to account for its investment in Rock.
B. Present the balance sheet of Grand as of the end of the first year of the joint venture's
operations, assuming Grand uses proportionate consolidation to account for its investment in
Rock.
CHAPTER THREE (Exercises)
Part I: True/False: Indicate whether each of the statements below is true or false.
1. The Investment in Branch account on the books of the home office represents the dollar
amount of the branch's debt owing to the home office.
2. The Home Office account on the books of the branch may be interpreted as an owners' equity
account, where the home office is the owner.
3. The transfer of assets from the home office to the branch does not change the company's total
assets.
4. Transfers of merchandise from the home office to the branch are typically charged to the
branch at the cost of the merchandise to the home office.
5. If transfers of merchandise are charged to the branch at cost to the home office, this has the
effect of attributing the entire gross profit on merchandise sales to the home office.
6. If the home office pays the freight associated with an inventory transfer to the branch, no
entry on the branch books is required.
7. Periodic inventory accounting requires the use of offsetting reciprocal accounts to record
shipments to the branch and shipments from the home office.
8. Even though the branch uses periodic inventory accounting, if shipments from the home
office are billed at retail prices, this has the effect of creating a perpetual inventory system at
the branch.
9. If shipments from the home office are billed at retail prices, the amount of branch inventory
that should be on hand equals the amount of shipments to the branch reported by the home
office plus the sales reported by the branch.
10. When both the home office and branch employ perpetual inventory systems, the Shipments
to Branch and Shipments from Home Office accounts are unnecessary.
Part II: Multiple Choice Items
Instruction: Instruction: Choose the correct answer from the alternatives given and write the
letter of the correct answer in the space provided.
1. Inventory is typically transferred to the branch at all of the following transfer prices except:
B. Cost to the home office. C. Cost less an internal markup percentage.
C. Cost plus an internal markup percentage. D. Retail or market value.
Use the following information for questions 2 and 3:
The home office bills merchandise shipped to the branch at 25% over home office cost. Suppose
the branch's beginning inventory, shipments from home, and ending inventory are Br.50,000,
Br.200,000, and Br.80,000 respectively, at billed prices.
2. Branch cost of goods sold on the branch's books and in the combined statements is:
A. Branch: Br.170,000; Combined: Br.136,000 C. Branch: Br.230,000; Combined:
Br.184,000
B. Branch: Br.170,000; Combined: Br.127,500 D. Branch: Br.230,000; Combined:
Br.172,500
3. Now, assume that freight costs incurred by the branch (not included in the inventory balances
presented above) amount to 2% of billed prices. Branch cost of goods sold on the branch's books
and in the combined statements is:
A. Branch: Br.170,000; Combined: Br.170,000
B. Branch: Br.173,400; Combined: Br.170,000
C. Branch: Br.173,400; Combined: Br.136,000
D. Branch: Br.173,400; Combined: Br.139,400
4. Carmen Corp. establishes a branch in a nearby town. Transfers to the branch include cash
Br.65, 000, Office supplies Br.2, 000, and Furniture Br.23, 000. The entry to record this transfer
on the books of the branch would include:
A. A debit of Br.90, 000 to the Home Office account.
B. A credit of Br.90, 000 to the Investment in Branch account.
C. A credit of Br.90, 000 to the Home Office account.
D. A debit of Br.90, 000 to the Investment in Branch account.
5. The home office marks up merchandise shipped to the branch at 25 percent of billed price. If
merchandise costing Br.30, 000 is shipped to the branch, which of the following set of account
balances will result?
A. Shipments from Home: Br.37,500; Shipments to Branch: Br.30,000; Overvaluation of
Branch Inventory: Br.7,500
B. Shipments from Home: Br.40,000; Shipments to Branch: Br.30,000; Overvaluation of
Branch Inventory: Br.10,000
C. Shipments from Home: Br.30,000; Shipments to Branch: Br.22,500; Overvaluation of
Branch Inventory: Br.7,500
D. Shipments from Home: Br.40,000; Shipments to Branch: Br.32,500; Overvaluation of
Branch Inventory: Br.7,500
6. The home office marks up merchandise shipped to the branch by 40 percent of billed prices.
Assume the overvaluation account on the home office books had beginning and ending balances
of Br.4, 400 and Br.6, 000, respectively. If the branch was billed Br.180, 000 for merchandise
shipped from home during the year, the branch books will show cost of goods sold of:
A. Br.178, 400 B. Br.176, 000 C. Br.174, 000 D. Br.181,600
7. The home office accounts for shipments of merchandise to the branch as sales. The billed
price reflects a markup equal to 40 percent of billed price. The branch reported beginning and
ending inventories at billed prices of Br.80, 000 and Br.60, 000, respectively and which of the
following statements is false?
A. Home office beginning retained earnings is overstated by Br.32, 000.
B. Unrealized intrafirm profit at the end of the year is Br.24, 000.
C. The Overvaluation of Branch Inventory account balance at year-end is Br.8, 000.
D. Working paper elimination entries will reduce combined cost of goods sold by Br.8, 000.
8. At the end of the year, after adjusting and closing entries, the Overvaluation of Branch
Inventory account on the home office books will contain:
A. The markup on the branch's ending inventory.
B. The unrealized profit on branch sales for the year.
C. The markup on the branch's ending inventory less the markup on the branch's beginning
inventory.
D. The markup on the branch's beginning inventory plus the markup on this year's shipments
to the branch.
9. If the branch pays the freight cost on merchandise shipments from the home office,
A. The home office will increase its Investment in Branch account.
B. The branch will decrease its Home Office account.
C. The home office will decrease its Investment in Branch account.
D. There is no effect on either the Investment in Branch or Home Office accounts.
10. In reconciling the reciprocal accounts between a home office and a branch,
adjustments must be made to bring these accounts into balance before eliminations can be
made. Differences in these balances can be due to all of the following except:
A. Shipments in transit at the end of the period which are recorded by the home office but
not by the branch.
B. Sales to customers by the home office at the end of the accounting period which were
not recorded by the branch.
C. Remittances from the branch mailed on the last day of an accounting period which are
not recorded by the home office.
D. Collections of home office receivables by the branch close to the end of a period
which is not recorded by the home office.
Use the following information to answer questions 11 - 13 below:
The home office ships merchandise to the branch at a markup of 20% above cost.
At the end of the year, preclosing account balances related to merchandise (periodic
Inventory) are as follows:
Home Office books
Shipments to branch Br400,000
Overvaluation of branch inventory 86,000
Branch books
Beginning inventory Br 36,000
Shipments from home office 480,000
Ending inventory 48,000
11. The elimination entries made at the end of the year will have the effect of reducing
cost of goods sold as reported by the branch to the correct amount of combined cost of
goods sold. The difference between branch cost of goods sold and combined cost of
goods sold is:
A. Br.2,000 B. Br. 80,000 C. Br. 82,000 D. Br. 78,000
12. The elimination entries made at the end of the year to combine the home office and
branch accounts will include:
A. Debit to shipments from home office of br480, 000.
B. Debit to overvaluation of branch inventory of br86, 000.
C. Credit to shipments to branch of br400, 000.
D. Credit to ending inventory of br48, 000.
13. Now assume the home office accounts for shipments to the branch as sales rather than
using the shipments account. How will the elimination entry to remove unrealized
intrafirm profit from the branch's beginning inventory differ?
A. The debit is to cost of goods sold rather than to the overvaluation of branch inventory
account.
B. The credit is to beginning inventory rather than to the overvaluation of branch
inventory account.
C. The debit is to cost of goods sold rather than to the shipments to branch account.
D. The debit is to beginning retained earnings rather than to the overvaluation of branch
inventory account.
14. In accounting for branch transactions, it is improper for the home office to:
A. Credit cash received from a branch to the Investment in Branch ledger account.
B. Maintain Common Stock and Retained Earnings ledger accounts for only the home
office.
C. Debit shipments of merchandise to the branch from the home office to the Investment
in Branch ledger account.
D. Credit shipments of merchandise to the branch to the Sales ledger account.
15. Neither the Palmer Branch nor the home office of Rupert Company had completed any
intracompany transactions during the last half of May, yet the credit balance of the
branch's Home Office ledger account on May 31 was larger than the debit balance of the
home office's Investment in Palmer Branch account. The most likely reason for this
discrepancy is:
A. The home office reported a net loss for the month of May.
B. The branch reported a net loss for the month of May.
C. The branch returned merchandise to the home office.
D. The branch reported a net income for the month of May.
16. Which of the following ledger accounts is displayed in the combined financial
statements for a home office and branch?
A. Shipments to Branch
B. Home Office
C. Dividends Declared
D. Allowance for Overvaluation of Inventories: Branch
Part III. Workout
Question 1
A. During the past year, the following transactions took place between the home office and
branch of the KK Company:-
1. Cash of Br.25, 000 was transferred to the branch.
2. Merchandise costing Br.60, 000 was shipped to the branch at a billed price of Br.86, 000.
The branch paid the freight-in of Br.1, 500.
3. Home office expenses charged to the branch: depreciation, Br.4, 000; amortization of
prepaid expenses, Br.800.
4. Cash of Br.60, 000 was remitted to the home office.
@1: Instruction based on the above Transaction between the company and Branch
Prepare journal entries to record the following transactions in the books of both the home office
and the branch.
Question 2
Tokuma Fite Company’s home office bills shipments of merchandise to its Batu Branch at 140%
of home office cost. During the first year after the branch was opened, the following were among
the transactions and events completed:
1. The home office shipped merchandise with a home office cost of Br110, 000 to Batu Branch.
2. Batu Branch sold for Br80,000 cash merchandise that was billed by the home office at
Br70,000, and incurred operating expenses of Br16,500 (all paid in cash).
3. The physical inventories taken by Batu Branch at the end of the first year were Br 82,460 as
billed prices from the home office.
Instructions:
A. Assuming that the perpetual inventory system is used both by the home office and by Batu
Branch, prepare for the fiscal year:
1. All journal entries, including closing entries, in the accounting records of Batu Branch of
Tokuma Fite Company.
2. All journal entries, including the adjustments of the Inventories Overvaluation account, in
the accounting records of the home office of Tokuma Fite Company.
B. Assuming that the periodic inventory system is used both by the home office and by Batu
Branch, prepare for the fiscal year:
1. All journal entries, including closing entries, in the accounting records of Batu Branch of
Tokuma Fite Company.
2. All journal entries, including the adjustment of the Inventories Overvaluation account, in
the accounting records of the home office of Tokuma Fite Company.
Question 3
Following is the euro-denominated trial balance of the French Branch of USA Company on June
30, 2022, the end of the first month of the branch’s operations.
USA Company
French Branch Trial Balance
June 30, 2022
Cash 15,000
Trade accounts receivable 250,000
Inventories 115,000
Home office 360,000
Sales 450,000
Cost of goods sold 340,000
Operating expenses 90,000
Totals 810,000 810,000
Additional information
1. All the merchandise in the branch’s inventories on June 30, 2022, had been shipped by the
home office on June 1,2009 when the exchange rate was 1=$1.05
2. The balance of the home office’s Investment in French Branch ledger account on June 30,
2022, was $365,000.
3. The exchange rate on June 30, 2009, was 1=$1.04.
Instruction: Prepare a working paper to measure the June 30, 2009 trail balance of French
Branch of USA Company to U.S. dollars, the branch’s functional currency. Round all
remeasured amounts to the nearest dollar.
