Question

- The home office of Farah Company, bills its only branch at a markup of 25% above home office cost for all merchandise shipped to Habiba branch. During 2019 the home office shipped merchandise to the branch at a billed price of $ 30,000.Habiba branch inventories for 2019 were as follows:

	Jan.1	Dec .31
From home office(at billed price) Purchased from outsiders	15000 6800	19500 8670

Required:

1. Prepare a working paper to analyze the flow of merchandise to Habiba Branch. Assuming a uniform markup on all shipments to the branch, and compute realized gross profit.

                                                                                                                                     (7 marks)

2. Prepare journal entries (including adjusting entries) for the home office of Farah Company for 2019.                                                                                                

                                                                                                                                                      (6 marks

Answer 1

Solution:

Calculation of Realised profit
Billed during the Month	30,000
Add: Closing stock	19,500
Less: Opening Stock	(15,000)
Sold during the month	34,500
Above price including mark-up	25%
So cost before Mark up	27,600
Realised gross profit	6,900

Cost before Mark up = Sold Value * 100%/(100%+markup%)

= 34,500 * 100% / 125% = 26,600

Flow of transaction
	As per Branch	As per corporate office	As per corporate office	Note
		Cost	Mark-up
Opening Stock	15,000	12,000	3,000
Add: Transfer	30,000	24,000	6,000
Less: Sales	34,500	27,600	6,900	Realised Profit
Closing stock	15,000	12,000	3,000

Journal Entry:

Accounts Title	Debit	Credit
Branch Account	30,000
Goods sent to Branch		30,000
(For goods transfer to Branch)
Cash	34,500
Branch Account		34,500
(For collection of cash - sale by branch)
Goods sent to Branch	3,000
Stock Reserve		3,000
(For adjustment of unreliased profit in Branch stock)

Note: It is assumed that Branch transfer all cash of sales to Home office.