Chapter 7Home Office and Branch Accounting

Companies may increase their volume of sales by establishing sales outlets in various areas.These sales outlets may be a branch or an agency.

When a company operates a branch, the branch must maintain accounting records to facilitateits reporting responsibility to the home office.

Problems dealing with Home Office and Branch Accounting appear in almost every CPAexamination. Candidates should be familiar with the problems involving the following:

1. Uses of the reciprocal accounts.2. Preparation of a Reconciliation Statement.3. Billing of Merchandise by Home Office to Branch above cost.4. Preparation of Combined Financial Statements.

Uses of the Reciprocal Accounts

In recording inter-office transactions, two reciprocal accounts are used, namely, the Investmentin Branch (Branch Current) account used by the home office which is classified as an asset; andthe Home Office (HO Current account) used by the branch which is classified as a liability.

The reciprocal nature of the Investment in Branch and the Home Office accounts and the way inwhich they are affected by various inter-office transactions are shown below:

(Home Office Books)Investment in Branch

(Branch Books)Home Office

xx Assets transfer to branch xxxx Assets transfer from branch xx

xx Branch profit xxxx Branch loss xx

Preparation of Reconciliation Statement

The balances of the two reciprocal accounts should at all times equal. If the balances of thereciprocal accounts are not equal before the preparation of separate statement of financialposition, a reconciliation statement is to be prepared. This is done to determine the causes ofthe inequality between the two accounts. The accounts are then adjusted to determine theiradjusted balances. The following are the usual causes that the candidate should take note:

1. Transactions have been recorded by the branch but not by the home office.

2. Transactions have been recorded by the home office but not by the branch.3. Errors in recording have occurred in one or both books.4. Transactions have not yet been recorded on either set of books.

Billing of Merchandise by Home office to Branch above Cost

Merchandise shipped to branch by the home office may be billed at an amount above cost.Under this method of billing, the profit recognized by the branch will be less that its actualprofit, because its cost of goods sold is overstated insofar as the home office is concerned.

The problems involving billing of merchandise to branch above cost are the following

1. Computation of branch at inventory at cost.2. Computation of the actual or true branch profit insofar as the home office is

concerned.

Computation of Branch Inventory at Cost

Candidates should use the following formula:

a. If branch are all acquired from the home office, the formula is:

Branch inventory acquired from home office at billed price PxxDivide by billing percentage of cost %Branch inventory at cost Pxx

b. If branch inventory includes merchandise acquired from outsiders, the formula is:

Branch inventory acquired from home office at cost:Merchandise at billed price PxxDivide by billing percentage of cost % Pxx

Add: inventory acquired from outsiders xxBranch inventory at cost xx

Computation of Actual Branch Profit insofar as Home Office is Concerned

The actual or true branch insofar as the home office is concerned is computed as follows:

Branch profit (loss) as reported PxxAdd: Overvaluation of branch cost of goods sold (Schedule 1) xxActual branch profit insofar as home office is concerned Pxx

Schedule 1

BilledPrice ÷

Percentof Cost = Cost

Allowancefor Over-valuation

Branch inventory, beg. (acquired from HO) Pxx Pxx Pxx PxxAdd: Shipments during the period xx xx xx xxTotal before adjustmentLess: Branch inventory, end (acquired from HO) xx xx xx xxOvervaluation of branch COGS (Realized Profit) Pxx

Preparation of Combined Financial Statements

The balance sheets and the income statements of the home office and the branch must becombined for external reporting purposes. Working papers are usually prepared to eliminateaccounts affected in recording inter-office transactions before financial statements areprepared.

Candidates should remember the following working paper elimination procedures:

1. Eliminate reciprocal accounts.2. Eliminate inter-company transfer accounts.

a. Shipment to Branch and Shipment from Home Office accounts.b. Allowance for Overvaluation of Branch Inventory.

3. Eliminate the overvaluation in branch beginning inventory.4. Eliminate the overvaluation in branch ending inventory.

Combined Statement of Financial Position. The reciprocal accounts “Investment in Branch” and“Home Office” accounts are not presented as well as the Allowance for Overvaluation account.

Combined Statement of Comprehensive Income. The merchandise inventories, beginning andending inventories are presented at cost. The Shipment to Branch and Shipment from HomeOffice accounts are not presented.

Transactions between Branches

Occasionally, branch operations require that merchandise or other assets be transferred fromone branch to another. A branch does not maintain a reciprocal account with another branchbut records the transfer in the Home Office account. For example, if Bicol Branch shipsmerchandise to Laguna Branch, Bicol Branch debits Home Office account and creditsInventories (assuming that the perpetual inventory system is used). Upon receipt of themerchandise, Laguna Branch debits Inventories and credits Home Office account. The homeoffice records the transfer between branches by a debit to Investment in Laguna Branch and acredit to Investment in Bicol Branch.

The transfer of merchandise from one branch to another does not increase the cost ofinventories by the freight costs incurred because of the indirect routing. The amount of freightcosts properly included in inventories at a branch is limited to the cost of shipping themerchandise directly from the home office to its present location. Excess freight costs arerecognized as expenses of the home office.

Accounting System for Sales Agencies

An agency is simply an extension of the sales territories in which orders are received fromcustomers and then transmitted to the home office for shipping and billing. They do not havemerchandise available for sale, but they keep samples inventory.

A sales agency neither keeps a complete set of books nor uses a double-entry system ofaccounts. Usually, a record of sales to customers and a list of cash payments supported byvouchers are sufficient.

An imprest system is usually adopted by the home office for the working fund of the salesagency.

PROBLEMS

1. Cebu branch submitted the following data to its home office in Manila for 2013, its first yearof operation:

Sales P2,300,000Shipments from home office 1,850,000Operating expenses 235,000Home office 480,000

2. The home office in Quezon City ships and bills merchandise to its provincial branch at cost.The branch carries its own accounts receivable and makes its own collections. The branchalso pays its expenses.

The transactions for 2013 are reflected in the branch trial balance that follows:

Cash P20,000Accounts receivable 80,000Home office P180,000Shipments from Home Office 250,000Sales 225,500Expenses 55,500Total P405,500 P405,500December 31, inventory P65,000

Assuming all the transactions are properly recorded, what is the balance of the Investment inBranch account in the home office books?

a. P180,000b. P195,000c. P165,000d. P175,000

3. The following data pertains to the shipments of merchandise from Home Office to Branchduring 2013:

Home office’s cost of merchandise P350,000Inter-office billings 420,000Sales by branch to outsiders 520,000Merchandise inventory on December 31, 2013 50,000

In the combined statement of comprehensive income of the Home Office and the Branch forthe year ended December 31, 2013, what amount of the above transactions should beincluded as sales?

a. P570,000b. P520,000c. P470,000d. P350,000

4. Nike Corporation operates a number of branches in the provinces. On December 31, 2013,its Davao branch showed a Home Office account balance of P54,700 and the home officebooks showed an Investment in Davao Branch account balance of P51,100. The followinginformation may help in reconciling both accounts:1. A P24,000 shipment, charged by Home Office to Davao Branch, was actually sent to and

retained by Cebu Branch.2. A P30,000 shipment, intended and charged to Aklan Branch was shipped to Davao

Branch and retained by the latter.3. A P4,000 emergency cash transfer from Cebu Branch was not taken up in the Home

Office books.4. Home office collects a Davao Branch accounts receivable of P7,200 and fails to notify

the branch.5. Home office was charged for P2,400 for merchandise returned by Davao Branch on

December 30. The merchandise is in transit.

Home office erroneously recorded Davao Branch’s net income for 2013 at P32,550. Thebranch reported a net income of P25,350.

What is the adjusted balances of the Home Office and Davao Branch reciprocal accounts onDecember 31, 2013?

a. P40,300b. P54,700c. P47,500d. 43,500

5. The branch manager of Tower Cosmetics in Cebu submitted a report as of May 31, 2013containing the following information:

Petty Cash Fund P1,500Sales 198,720Sales Returns 3,600Accounts Written Off 1,920Shipments from Home Office 136,080Accounts Receivable – May 31, 2012 43,800

Accounts Receivable – May 31, 2013 49,140Inventory – May 31, 2012 37,170Inventory – May 31, 2013 41,370Expenses (reimbursed by H.O.) 57,930

Assuming all cash collected by the branch is remitted to Tower Cosmetics home office, theremittances for the period amounted to:

a. P187,860b. P189,780c. P195,120d. P198,720

6. On December 31, the Investment in Branch account in the home office books shows abalance of P50,000. The following facts are ascertained:

1. Merchandise billed at P12,500 is in transit on December 31 from the homeoffice to the branch.

2. The branch collected a home office accounts receivable for P3,500. Thebranch did not notify the home office of such collection.

3. On December 30, the home office sent cash of P7,500 to the branch, butthis was charged to General Expense; the branch has not received the cashas of December 31.

4. Branch profit for December was recorded by the home office at P2,400instead of P2,040.

5. The branch returned supplies of P1,500 to the home office but the homeoffice has not yet recorded the receipt of the supplies.

Assume all other transactions have been properly recorded.

What is the unadjusted balance of the Home Office account on the branch books on December31?

a. P64,140b. P39,140c. P14,000d. P13,000

7. A reconciliation of the Dagupan Branch account of Mandaluyong Company and the HomeOffice account carried in the branch’s books shows the following discrepancies at December 31,2013:

1. A credit for merchandise allowance for P300 was taken by the branch asP360.

2. A charge by the branch of P550 for an advance taken by the president whenhe visited the branch has not yet been recorded by the home office.

3. The branch has not taken up P900 covered by a debit memo from the homeoffice as share in advertising expenses.

The investment in Dagupan Branch account in the home office books had a debit balanceof P43,000 at December 31, 2013. The reciprocal accounts were in agreement at thebeginning of the year.

The unadjusted balance of the Home Office account in the branch’s books at December31, 2013 was:

a. P43,500b. P42,950c. P41,990d. P41,490

8. The following were found in your examination of the interplant accounts between the HomeOffice and the Butuan Branch:

a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked bythe branch.

b. P10,000 covering marketing expense of another branch was charged by Home Officeto Butuan.

c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000twice.

d. Home Office recorded cash transfer of P65,700 from Butuan Branch as coming fromDavao Branch.

e. Butuan reversed a previous debit memo from Cagayan de Oro Branch amounting toP10,500. Home Office decided that this charge is appropriately Davao Branch’s cost.

f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560.

The net adjustments DR (CR) to the Investment in Butuan Branch account and to the HomeOffice account are:

Investment in Butuan Home Officea. P(75,700) P20,950b. 75,700 (20,950)c. (55,700) 75,000d. (65,700) (74,000)

9. After examining on a comparative basis the inter-office account of the Bulacan Companywith its suburban branch and the similar account carried on the latter’s books, the followingdiscrepancies at the close of the business on June 30, 2013 were seen:

a. A charge for labor by the Home Office, P500 was recorded twice by the branch.

b. A charge of P895 was made by the Home Office for freight on merchandise, but theamount was recorded by the Branch as P89.50.

c. A charge of P980 (furniture and fixture) on the Home Office books was taken up by theBranch as P890.

d. A credit by the Home Office for P350 (merchandise allowances) was taken up by theBranch as P400.

e. The Home Office charged the Branch P425 for interest on open account which theBranch failed to take up in full; instead, the Branch sent to the Home Office a wrongmemo, reducing the charge by P100 and set up a liability for the net amount.

f. The Home Office received P5,000, from the sale of a truck which it erroneouslycredited to the Branch; the Branch did not charge the Home Office therewith.

g. The Branch by mistake sent the Home Office a debit note for P370 representing itsproportion of a bill for repairs of truck; the Home Office did not record it.

h. The Branch inadvertently received a copy of the Home Office entry dated July 19, 2011correcting item (f) and entered a credit in favour of the Home Office as of June 30,2013.

At June 30, 2013, the unadjusted balance of the Investment in Branch account on the HomeOffice books showed P175,520. At the beginning of the year, the inter-office accounts were inbalance.

What is the unadjusted balance of the Home Office account on the branch books on June 30,2013?

a. P184,279.50b. P160,725.50c. P184,729.00d. P165,279.50

10. Rustans, Philippines has two merchandise outlets, its Home Office in Manila and its CebuCity branch. For control purposes, all purchases are made by the Home Office and shipped tothe Cebu City branch at cost plus 10%. On January 1, 2013 the inventories of the Home Office inManila and the Cebu City branch are P13,600 and P3,960 respectively. During 2013 the HomeOffice purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch.At December 31, 2013, the following journal entry to prepare the books for the next accountingperiod was prepared by the branch:

Sales 32,000Inventory, December 31 4,840

Inventory, January 1 3,960Shipments from main store 17,600Expenses 10,480Home Office 4,800

What was the actual branch income for 2011 on a cost basis assuming the use of the provisionsof the Statement of Financial Accounting Standards?

a. P4,800b. P6,320c. P6,480d. P6,840

11. On September 1, Star Company opened a branch in Dagupan City, shipping to itmerchandise billed at P60,000. During the month, additional shipments were made at a billedprice of P24,000. Returns by the branch of bad-order goods were credited for P1,680. At theend of the month, the branch reported its inventory P33,600 and its net loss for the month atP5,200. Shipments to and from the branch were consistently billed at 120% of cost.

On September 30, the branch inventory at cost and the branch net income (loss) as far as theHome Office is concerned are:

a. P28,000 and P2,920, respectivelyb. P28,000 and (P5,200), respectivelyc. P33,600 and P2,920, respectivelyd. P33,600 and P5,200, respectively

12. Makati Company bills its Valenzuela Branch for merchandise at 140% of cost. At the end ofJanuary, 2013, the branch reported the following information:

Merchandise fromHome Office

(At Billed Price)Inventory, January 1 P7,560Shipments received 28,280Inventory, January 31 8,400

What should be the balance of the allowance account for overvaluation of the branch inventoryat January 31 before adjustment?

a. P2,400b. P2,160c. P9,080d. P10,240

13. The Binondo branch of China Products Inc. buys merchandise from third parties andreceives merchandise from the home office for which it is billed at 20% above cost. Below areexcerpts from the trial balances and data on the home office and Binondo branch for the monthjust ended:

Home officeAllowance for overvaluation of branch merchandise P370,000Shipments to Branch 850,000

BranchBeginning inventory 1,440,000Shipments from home office 1,020,000Purchases 410,000

Month end additional dataEnding inventory of Branch 1,460,000

From Home Office at Billed Price P1,170,000From Outsiders (at cost) 290,000

The total cost of goods sold of the Binondo branch at cost (net of overvaluation) for the month justended amounted to:

a. P1,410,000b. P1,385,000c. P1,235,000d. P1,850,000

14. Shopper Company started a branch office in Iloilo City on June 1,2013. On this date, the companyshipped to its branch merchandise billed at P90,000. On June 15, another shipment was made at billedprices of P36,000. During the month, the branch was credited for P2,520 for the damaged goodsreturned by the branch. On June 30,2013, the branch reported the following:

Inventory, June 30 P50,400Net loss for the month (P7,800)

Shipments to and from the branch were uniformly billed at 120% of cost.

In the home office books, the Iloilo branch operations resulted in:a. No net income or lossb. Net income of P4,280c. Net income of P12,180d. Net loss of P7,800

15. Tarlac Branch of Quezon City Company, at the end of its first quarter of operations,submitted the following statement of comprehensive income:

Sales P300,000Cost of Sales:

Shipments from Home office P280,000Local Purchases 30,000Total 310,000

Inventory at end 50,000 260,000Gross margin on sales 40,000Expenses 35,000Comprehensive income P 5,000

Shipments to the branch were billed at 140% of cost. The branch inventory as at September 30amounted to P50,000 of which P6,600 was locally purchased. Markup on local purchases, 20% over cost.Branch expenses incurred by Head Office amounted to P2,500.

On September 30, the branch inventory at cost and the net income realized by the home office from theTarlac branch operation are:

Branch Inventory at Cost Net income realizeda. P37,600 P72,600b. P50,000 P55,000c. P31,600 P5,000d. P37,600 P70,100

16. Ayala branch was billed by Home Office for merchandise at 140% of cost. At the end of its firstmonth, Ayala branch submitted among other things, the following data:

Merchandise from Home Office (at billed price) P98,000Merchandise purchase locally by branch 40,000Inventory, December 31 of which P7,000 are of local purchase 28,000Net sales for month 180,000

The branch inventory at cost and the gross profit of the branch as far as the home office is concernedare:

Branch Inventory at Cost Gross Profita. P92,000 P22,000b. P22,000 P92,000c. P22,000 P70,000d. P20,000 P90,000

17. The Coffee Blends Corporation decided to open a branch in Manila. Shipments of merchandise tothe branch totalled P54,000 which included a 20% mark-up on cost. All accounting records are to bekept at the home office.

The branch submitted the following report summarizing its operations for the period ended December31, 2013.

Sales on account P74,000Sales on Cash basis 22,000Collections of account 60,000Expenses paid 38,000

Expenses unpaid 12,000Purchase of merchandise for cash 26,000Inventory on hand, December 31; 80% from home office 30,000Remittance to home office 55,000

The branch 12/31 inventory at cost and the branch net income (loss) as far as the home office isconcerned are:

Branch Inventory at Cost Branch Net income (loss)a. P26,000 (P1,000)b. P25,000 (P4,000)c. P26,000 P1,000d. P20,000 P 800c

18. Trial balances before adjustments for the home office and the branch of the King Company show thefollowing items on December 31. The home office bills the branch at 20% above cost.

Home Office BranchAllowance for overvaluation of branch merchandise P3,600Shipment to branch 8,000Purchases P2,500Shipment from home office 9,600Merchandise Inventory, December 1 15,000

What part of the branch inventory as of December 1 represented purchases from outsiders?

a. P3,000b. P5,000c. P2,000d. P1,800

19. The Manila Sales Co. established a branch in San Pablo City early last year. It shipped merchandiseand billed the branch for P300,000 prior to its opening. For the year, it made additional shipments atbilled price of P120,000. Within the year, the branch shipped backP7,500 inventory and got the creditmemo for the said returns. On the last working day of the year, an inventory count was made. Endinginventory of P185,000 was established consisting of purchases from third parties at P20,000 with thebalance coming from home office shipments at billed price.. The home office billed the branch at 20%above cost. The total purchases of the branch from outside suppliers amounted to P72,500. The totalgoods available for sale by the branch at cost (net of overvaluation and returns) amounted to:

a. P416,250b. P485,000c. P422,500d. P435,250

20. The income statement submitted by the Bulacan Branch to the Home Office for the month ofDecember,2013 is shown below. After affecting the necessary adjustments the true net income of theBulacan Branch inventories were:

12/01/2011 12/31/2011Merchandise from Home Office P70,000 P84,000Local purchases 10,000 16,000Total 80,000 100,000

Sales 600,000Cost of Sales:

Inventory, December 1 80,000Shipments from home office 350,000Local purchases 30,000Total available for sale 460,000Inventory, December 31 100,000 360,000

Gross Margin 240,000Operating expenses 180,000Total comprehensive for December 2011 P60,000

What is the balance of the “Allowance for Overvaluation in Branch Inventory” account at December 31,2013?

a. P10,000b. P16,000c. P24,000d. P34,000

21. Mahiyain Commercial Corporation operates a branch in Iloilo City. Selected accounts take from thebooks of Mahiyain and its branch show balances as of December 31,2013 as follows:

Home office BranchMerchandise inventory, January1

P12,000 P8,000

Purchase 150,000 30,000Shipments from home office - 93,750Shipments to branch 75,000 -Branch inventory allowance 19,750 -Sales 115,000 176,500Merchandise inventory,December 31

14,000 10,350

The ending inventory of the branch includes items costing P4,350 which were acquired from suppliersother than the home office.

As far as the home office is concerned, the cost of sales of the Iloilo City branch was:a. P97,120b. P102,850c. P121,400

d. P131,85022. The Neneng Corporation established its San Pedro branch in March 201. During the first year of

operations, the home office shipped to the branch merchandise which had cost of P120,000. Three-fourths of these merchandise was sold by the branch for P141,000. Operating expenses of thebranch amounted to P27,000.

How much total comprehensive income will the branch report if merchandise is billed by the homeoffice to the branch at 25% above cost?a. P800b. P1,200c. P1,500d. P8,000

23. A branch store in Marikina was established by Marco Co. on March 1. Shipments of merchandise,billed to this branch at 125% of cost, were as follows:

March 5 P120,000March 10 50,000March 20 35,000On March 24, the branch returned defective merchandise worth P3,050 and on March 31, itreported a net loss of P6,200 and merchandise inventory of P85,000.

In the home office books, the branch total comprehensive income (loss) is:a. (P6,200)b. P17,190c. P20,240d. P23,390

24. The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City. During 2013, thehome office shipped to the branch supplies costing P120,000 at a billed price of 20% above cost. Theinventories of supplies at the branch were as follows: January 1,2013, P90,000; December 31,2013,P108,000. On December 31,2013, the home office holds inventories of P160,500 which includesP10,500 held in consignment.

How much is the inventories in a combined statement of financial position as of December 31,2013?a. P210,000b. P240,000c. P270,000d. P300,000

25. The Iloilo Company operate a branch in Davao, and the profit and loss data for the home office andthe branch for 2013 follows:

Home office BranchSales P250,000 P75,000Purchases from outsiders 200,000 15,000Shipments to branch:

Cost to home office 30,000Billing price to branch 37,500

Expenses 40,000 10,000Inventories, Jan. 1,2013:

Home office, at cost 80,000Branch:

From outsiders, at cost 7,500From home office, at 20% above cost 24,000Inventories, December 31,2013:

Home office, at cost 55,000Branch:

From outsiders, at cost 5,500From home office at 2013 billing 26,000

The combined total comprehensive income (loss) of the home office and the branch onDecember 31,2013 is:a. P30,800b. P(30,800)c. P33,800d. P27,000

26. Manila Inc. established a branch in Cebu to distribute part of the goods purchased by the homeoffice. The home office process inventory shipped to the branch at 20% above cost. The followingaccount balances were taken from the ledger maintained by the home office and the branch:

Manila Inc. Cebu branchSales P600,000 P210,000Beginning inventory 120,000 60,000Purchases 500,000 -Shipment to branch 130,000 -Shipment from home office - 156,000Operating expenses 72,000 36,000Ending inventory 98,000 48,000All of the branch inventory is acquired from the home office –

The combined total comprehensive income of the home office and the branch is:a. P170,000b. P70,000c. P278,000d. P132,00027. Selected accounts from the December 31,2013 trial balances of Heart Co. and its branch follows:

Heart BranchInventory, Jan.1 P46,000 P23,100Investment in Branch 116,600 -Purchases 380,000 -Shipments from home office - 209,000Freight in - 10,450Expenses 104,000 58,100Home office - (106,600)Sales (310,000) (280,000)Shipments to branch (200,000) -Branch merchandise markup (22,000) -

As of December 31,2013, a shipment with a billing price of P11,000 was in transit to the branch.Freight cost, typically 5% of the billing price, is inventoriable. Merchandise on hand at a year-endwere: at home office P64,000 at cost; at branch P33,000 at billing price.

What is the combined total comprehensive income of Heart Company and its branch for 2013?a. P77,000b. P84,900c. P76,000d. P76,10028. Apo Supply Company is engaged in merchandising both at its Home office in Makati and as itsBranch in Davao City. Selected accounts taken from the trial balances of the Home office and thebranch as of December 31,2013 follows:

Makati BranchDebits

Inventory, Jan. 1,2013 P23,000 P11,550Davao branch 58,300 -Purchases 190,000 105,000Freight in from home office - 5,500Sundry expenses 52,000 28,000

Credits

Home office P- P53,300Sales 155,000 140,000Sales to branch 110,000 -Allowances for overvaluation of

Branch inventory at Jan. 1,2013 1,000 -Additional information:- The Davao City branch gets all of its merchandise from the home office. The home office bills the

goods at cost plus a 10% mark-up. At December 31,2013, a shipment with a billed value of P5,000was still in transit. Freight on this shipment was P250 and is to be treated as part of the inventory.

- Inventories on December 31,2013, excluding the shipment in transit, follow:Home office, at cost P30,000Branch, at billed price (excluding freight of P520) 10,400What is the combined total comprehensive income (loss) of the home office and the branch onDecember 31,2013?a. P30,470b. P20,870c. P(10,000)d. P(30,470)

29. On November 2,2013, the home office of Toby Sports Company recorded a shipment ofmerchandise to its Bulacan as follows:

Investment in branch – Bulacan 60,000Shipments to branch 50,000Allowance for overvaluation of branch inventory 8,000Cash (for freight charges) 2,000

The Bulacan branch sells 40% of the merchandise to outside customers during the rest of the period.The books of the home office are closed on December 31 of each year.

On January 10,2014, the Bulacan branch transfer half of the original shipment to the Baguio branch,and the Bulacan branch pays P1,000 freight for the shipment. If the shipment had been made by thehome office to Baguio branch, the freight charges would have been P1,500.

What is the entry of the Bulacan brancg to record the receipt of the shipment from the home office onNovember 2,2013?a. Shipments from home office 50,000

Accounts receivable 8,000Freight in 2,000

Home office 60,000b. Shipments from home office 60,000

Home office 60,000c. Shipments from home office 58,000

Freight in 2,000Home office 60,000

d. Shipments from home office 50,000Freight out 2,000

Home office 52,00030. using the same data in No. 29, at what amount should the 60% of the merchandise remainingunsold at December 31,2013 be included in the inventory of the Bulacan Branch?a. P31,200b. P36,000c. P36,800d. P34,80039. Using the same data in No. 29, what is the entry in the books of Bulacan Branch to record thetransfer of January 10,2014?a. Baguio branch 31,000

shipment from home office 31,000b. home office 31,000

inventory 31,000c. home office 31,000

inventory 30,000cash 1,000

d. home office 32,000cash 1,000freight in 2,000inventory 29,000

32. Using the same data in No. 29, what is the entry in the books of Baguio branch to recorf thetransfer on January 10,2014?a. shipments from Bulacan Branch 30,200

Bulacan branch 30,200b. shipments from home office 29,000

freight in 1,500home office 30,500

cash 1,000c. shipments from home office 29,000

freight in 1,500home office 30,500

d. shipment from home office 30,000freight in 1,000

home office 31,000

33. Using the same data in No. 29 what is the entry in the home office books to record the inter-branch transfer on January 10,2014?a. investment in branch – Baguio 30,500

excess freight 1,500investment in branch – Bulacan 32,000

b. investment in branch – Baguio 30,500investment in branch – Bulacan 30,500

c. investment in branch – Bulacan 32,500investment in branch – Baguio 32,500

d. investment in branch – Baguio 30,500excess freight 500

investment in branch – Bulacan 31,000

34. Papa, Inc. of Makati opens a sales agency in Pasig City and a working funn of P100,000 isestablished on imprest basis. The first payment from the fund is P5,000 for rent of the store space.

What is the entry in the books of the home office to record the payment of rent by the agency?a. Rent expense – Pasig agency 5,000

cash 5,000b. Pasig agency 5,000

cash 5,000c. Rent expense – Pasig agency 5,000

working fund 5,000d. No entry

35. Mama, Inc. opened a sales agency in San Pedro Laguna in 2013. The following is a summary of thetransactions of the sales agency:

Sales orders sent to home office P120,000Sales orders filled by home office in 2013 95,000Freight on shipment of agency 2,000Collections, net of 10% discount 81,000Selling expenses paid from the agency working fund 5,500Administrative expenses charged to agency 5% gross salesSamples shipped to agency:

Cost 8,200Inventory, December 31,2013 4,550

The company’s gross profit rate on agency sales is 30% excluding the freight cost on shipments toagency.

What is the total comprehensive income of the agency for 2013?a.P3,600b.P5,600c. P1,600d.P6,300

36. A Makati home office transfers inventory to its Pasig branch at 140% of cost. During 2013, thereciprocal account in the statement of comprehensive income of the home office amounts to P328,125.On December 31,2013, the home office adjusted the branch income summary by debiting the Allowancefor Overvaluation of Branch Inventory account in the amount of P81,250. The branch’s statement offinancial position at the beginning of the year shows P105,000 of inventory acquired from the homeoffice.

How much is the ending inventory of the branch per books?a. P200,000b. P161,250c. P280,000d. P80,000

37. On July 31,2013, the home office in Manila establishes a sales agency in Bulacan. The followingassets are sent to the agency:

Cash(working fund to be operated under the imprest system) P22,000Samples of merchandise 36,000

During the month of August, the following transactions occurred: The sales agency submits sales order of P272,000, sales per invoice was billed at P268,000. Cost

of sales to customers is P124,000. Collections during the month amount to P58,200 net of 3% discount. Home office disbursements chargeable to the agency are as follows:

Furniture P40,000Salaries for the month 21,600Annual rent of office space 36,000

On August 31, the sales agency working fund is replenished. Paid vouchers submitted by thesales agency amounting to P17,925. Samples were useful until December 31,2013 which at thistime are believed to have a salvage value of 15% of cost. Furniture is depreciated at 18% perannum.

What is the total comprehensive income of the sales agency for the month of August?a. P91,425b. P93,225c. P92,955d. P58,425

38. The home office in Makati shipped merchandise costing P55,500 to Pasig branch, prepaid thefreight amounting to P4,200. The home office transfers inventory to the branch at a 20% markupabove cost. Pasig branch was subsequently instructed by the home office to transfer themerchandise to Alabang branch wherein the latter paid freight of P2,800. If the shipment wasmade directly from Makati to Alabang, the freight cost would have been P6,200.

Which of the following is true as a result of the interbranch transfer of merchandise?a. The home office debits Alabang Branch Current for P73,600

b. Alabang branch debits the Home Office for P70,000c. Pasig branch credits freight in for P6,200d. The home office will credit Pasig Branch Current for P70,800

39. The following are some of the account balances on the books of the home office and its branch onDecember 31,2013.

Home office books Branch booksInventory, January 1,2013 P20,000 P58,000Shipments from home office 150,800Purchases 900,000 200,000Shipments to branch 145,000Allow. For overvaluation ofbranch inventory

52,500

Sales 1,200,000 720,000Operating expenses 290,000 110,000Per physical count, the ending inventory of the branch is P42,000 including goods purchased fromoutsiders of P27,700 while the ending inventory of the home office is P120,000. Home office bills itsbranch for merchandise shipments at 30% above cost.

What is the amount of the unrealized inventory profit in the books of the home office on December31,2013?

a. P9,000b. P7,260c. P12,000d. P3,300

40. using the data in No. 39, how much is the combined total comprehensive income on December31,2013?

a. P538,700b. P547,400c. P541,700d. P498,200

e. ANSWERS

1. A 6. B 11. A 16. B 21. B 26. A 31. D 36. C2. C 7. D 12. D 17. C 22. C 27. C 32. C 37. C3. B 8. A 13. C 18. A 23. B 28. A 33. A 38. D4. C 9. A 14. B 19. A 24. B 29. C 34. D 39. C5. A 10. B 15. A 20. C 25. C 30. B 35. A 40. A

SOLUTIONS AND EXPLANATIONS1. Since the balances of the reciprocal accounts “Home Office” account and “Investment in

Branch” account are equal, then the balance of the Home Office account after closingthe branch profit is to be computed. The computation is:Home office account balance before branch profit P480,000Add: Profit (loss)

Sales P2,300,000

Cost of salesShipments from HO P1,850,000Inventory, dec. 31 255,500 1,594,500

Gross profit P705,500Operating expenses 235,000 470,500

Home office account balance, December 31,2011 P950,500

2.Home office account balance before branch profit P180,000Add: Profit (loss)

Sales P225,500Cost of sales

Shipments from HO P250,000Inventory, dec. 31 65,000 185,000

Gross profit P40,500Expenses 55,500 (15,000)

Home office account balance, December 31,2011 P165,000

Therefore the balance of the Investment in Branch a account is also P165,000.

3. In preparation of combined statements of the home office and the branch, all inter-office transactions are eliminated as if it had never occurred. Therefore, the onlytransaction that should be presented are transactions to outsiders, which is in thisproblem, the P520,000 sales by branch to outsiders.

4. To compute the adjusted balances of the reciprocal accounts a reconciliation statementis to be prepared as follows:

(branch books) home officeaccount

(HO books) Investment inDavao Branch Account

Unadjusted balances, Dec.31,2013

P54,700 P51,1100

Add(deduct) the following adjustments:1. shipment charged Davaobranch but actually sent toCebu branch

(24,000)

2. shipment charged toAklan branch but actuallysent to Davao branch

30,000

3. no effect4. Merchandise returned byDavao branch accountsreceivable

(7,200)

5. merchandise returned byDavao branch still in transitto home office

(2,400)

6. overstatement of Davaobranch net income(P32,550-P25,350)

_______ (7,200)

Adjusted balances, dec.31,2013

P47,500 P47,500

5. The P187,860 is computed as follows:Accounts receivable, 5/31/12 P43,800Net sales (P198,720 – P3,600) 195,120Total 238,920Less: Accounts receivable, 5/31/13 P49,140

Accounts written off 1,920 51,060Remittance P187,860

6. P39,140 is computed as follows:Investment in branch account balance,12/31 (HO books)

P50,000

Add(deduct):Merchandise in transit (12,500)Collection of HO accounts receivableby branch

3,500

Erroneous recording of Branch profit (360)Supplies returned by Branch (1,500)HO account balance, 12/31 (Branchbooks)

P39,140

7. The P41,490 unadjusted balance of Home office is computed as follows:Unadjusted balance, Investment in Branch account, 12/31 P43,000Less: Merchandise allowance (error) P60

Branch advances to President 550Advertising expense charged to branch 900 1,510

Unadjusted balance, home office account, 12/31 P41,490

8. Dr. (Cr.) Adjustment to investment in Butuan Branch accountMarketing expense of another branch charged to Butuan (b) P(10,000)Butuan’s remittance credited to Davao branch (d) (65,700)Dr. (Cr.) adjustment to Butuan branch

Account in the home office books P(75,700)

Dr. (Cr.) Adjustment to Home office account:Fixed assets transfer not booked by Butuan (a) P(53,960)Inventory transfer recorded twice by Butuan (c) 75,000

Error in recording DM for P4,650 as P4,560 (f) (90)Dr. (Cr.) adjustment to Butuan branch

Account in the home office books P20,950

9. unadjusted balance of investment in branch account, 6/30 P175,520(a) Charge for labor 500(b) charge for freight (805.5)(c) purchase of furniture & fixture (90)(d) merchandise allowance (50)(e) charge for interest (425)(f) proceeds from sale of truck 5,000(g) charge for truck repairs (370)(h) proceeds from sale of truck 5,000Unadjusted balance of Home office account, 6/30 P184,279.5

10.Sales P32,000Cost of salesInventory, jan.1 3,960Shipment from home office 17,600Inventory, dec. 31 (4,840) 16,720Gross profit 15,280Expenses 10,480Net income per branch books 4,800Add: overvaluation of COSBilled price (above) 16,720Cost to HO (16,720/110%) 15,200 1,520Actual branch income at cost basis P6,320

11. Branch Inventory at Cost:Branch inventory at billed price P33,600Divided by the billing percentage cots ÷120%Branch inventory of cost P28,000

Branch net income as far as the HO is concerned:Branch net loss, as reported (P5,200)Add: overvaluation of COS of theBranch:

Total shipment to BranchBilled price (P60,000+24,000) P84,000

Cost (P84,000/120%) 70,000 P14,000Less: branch returns -

Billed price P1,680Cost (P1,680/120%) 1,400 280

Net shipment P13,720Less: Inventory, 9/30

Billed price P33,600Cost 28,000 5,600 8,120

Branch net income P2,920

12. The balance of the Allowance for Overvaluation of Branch Inventory accountrepresents the overvaluation of branch inventory on January 1 and overvaluation of theshipment received. Computation is as follows:

Billed price÷

Billingpercentage =

Cost Over valuation

Inventory, Jan. 1 P7,560 140% P5,400 P2,160Add: shipment 28,280 140% 20,200 8,080Balance of allowance before adjustment P10,240

13.Beginning inventory P1,440,000Purchase 410,000Shipment from HO 1,020,000Good available for sale 2,870,000Ending inventory 1,460,000Cost of sales 1,41,000Less: Overvaluation

Beginning inventory & shipments 370,000Less: ending inventory

Billed price P1,170,000Cost (P1,170,000/120%) 975,000 195,000 175,000

Cost of goods sold (net) P1,235,000

14. According to the HO books, Iloilo branch will have a P4,380 net income as computedbelow:Branch net loss (P7,800)Add: Overvaluation of Cost of sales of Branch -

Total shipment to Branch:Billed price (90,000+36,000) P126,000Cost (P126,000/120%) 105,000 P21,000

Less: Branch returnsBilled price P2,520

Cost(2,520,/120%) 2,100 420Net shipment to Branch P20,580Less: inventory, 6/30

Billed price P50,400Cost(P50,400/120%) 42,000 8,400 12,180

Branch net income P4,380

15. P37,600 is computed as follows:Acquired from HO:

Billed price (P50,000-P6,600) P43,400Divide by billing percentage of cost 140% P31,000

Local purchases 6,600Branch inventory at cost, 9/30 P37,600

Below is the computation of Home office income from branch operation of P70,100.Branch net income (5,000-2,500expense)

P2,500

Add: overvaluation of branch costof sales:

Shipment from Home Office:Billed price P280,000Cost(P28,000/140%) 200,000 P80,000

Less: inventory, end -Billed price (50,000-6,600) P43,400Cost(P43,400/140%) 31,000 12,400 67,600

Branch net income realized by HO P70,100

16. branch inventory, at cost, 12/31:Acquired from HO (P21,000/140%) P15,000Local purchases 7,000Total P22,000

Branch gross profit:Net sales P180,000Cost of sales insofar as Home office is concerned

Shipment from HO, at cost(P98,000/140%)

P70,000

Purchases 40,000Cost of goods available for sale 110,000Inventory, at cost 12/31:

Acquired from HO (P21,000/140%) P15,000

Local purchases 7,000 22,000 88,000Gross profit insofar as HO is concerned P92,000

17. below is the computation of Branch ending inventory at cost:

Acquired from HO (80% x P30,000 ) / 120% P20,000Add: Acquired from outsiders (20% x P30,000) 6,000Branch inventory at cost, 12/31 P26,000

The P1,000 net income is derived as follows:

Sales (P74,000 + P22,000) P96,000Cost of sales insofar as Home office is concerned

Shipment from HO, at cost(P54,000/120%)

P45,000

Purchases 26,000Cost of goods available forsale

71,000

Inventory, at cost 12/31: 26,000 45,000Gross profit P51,000Expenses (P38,000+P12,000) 50,000Branch net income insofar as Home office is concerned P1,000

18. Merchandise inventory, December 1 P15,000Less: Merchandise acquired from HO at billed price

Overvaluation (3,600 – P1,600) P2,000Cost (P2,000/20%) 10,000 12,000

Merchandise acquired from outsiders P3,000

19.Total shipment from office P420,000Returns (7,500)Purchases 72,500Goods available for sale, at billed price 485,000Less: overvaluation of shipment:Billed price P420,000Cost (420,000/120%) 350,000 70,000Returns:Billed price P7,500Cost (7,500/120%) 6,250 (1,250) 68,750Goods available for sale, at cost P416,250

20. before computing the balance of the allowance account, the percent of billing price tocost should be computed first as follows:

Branch net income, per HO P156,000Branch net income, per branch 60,000Realized mark-up on merchandise from the

Home office already sold by the branch P96,000

Shipment from home office P350,000Less: increase in portion of Branch inventory

Acquired from home office 14,000Portion already sold by branch P336,000Less: Mark-up thereon (above) 96,000Cost of portion already sold by branch P240,000

Per cent of billing price to cost: P336,000/240,000 140%

The balance of the “Allowance for Overvaluation in Branch inventory” account asDecember 31,2013 after adjustment represent the overvaluation of the branch endinginventory acquired from the home office computed as follows:

Billed price P84,000Cost (P84,000/140%) 60,000Balance of the allowance account P24,000

21. branch inventory, January 1 P8,000Purchases 30,000Shipments from home office 93,750Merchandise available for sale P131,750Less: branch inventory, Dec. 31 10,350Branch cost of sales, per branch books P121,400Less: Mark- up on merchandise from the HO

Already sold by the branch: P19,750Branch inventory allowanceLess: mark-up on portion of Dec. 31 inventory

Acquired from home office:(P10,350-P4,350) x 25/125 1,200 18,550

Branch cost of sales, as far as the home office is concerned P102,850

Note: shipments of merchandise from the home office to the branch are billed at 125%of cost, determined as follows:

Shipments from Home Office = P93,750 =125%Shipments to Branch = P75,00022.Sales P141,000Less: cost of sales at Billed price (Sch. 1) 112,500Gross profit 28,500Expenses 27,000Total comprehensive income to be reported by the Branch P1,500

Schedule 1Cost of shipment to branch P120,000Add: 25% mark-up 30,000Billed price of shipment to branch 150,000Portion sold x ¾cost of sales at billed price P112,500

23. reported branch loss P(6,200)Add: overvaluation in branch cost of sales

Shipment to branch P205,000Less: returns 3,050Ending inventory 85,000 88,050Cost of sales, at billed price 116,950Cost of sales, at cost to HO(116,950/125%) 93,560 23,390

Branch total comprehensive income, per HO books P17,190

24. The combined inventories on dec. 31, 2013 statement of financial position computed asfollows:

Home office (P160,500 – P10,500) P150,000Branch, at cost (108,000/120%) 90,000Combined inventories, 12/31 P240,000

25.Sales P325,000

Less: cost of sakesJan. 1 inventories, at cost (sch 1 ) 107,500Purchases 215,000Merchandise available for sale P322,500Less: dec. 31 inventories, at cost (sch 1 ) 81,300 241,200

Gross profit on sales P83,800Less: expenses 50,000Total comprehensive income P33,800

Schedule 1:Inventories

Jan.1 Dec. 31Home office P80,000 55,000Branch, at costAcquired from outsiders 7,500 5,500Acquired from HO:Jan. 1 (P24,000/120%) 20,000Dec. 31 (P26,000/125%) _______ 20,800Combined P107,500 P81,300

2013 billing (7,500/30,000) = 125%

26.Sales P810,000Cost of salesBeg. InventoryHO P120,000Branch, at cost(P60,000/120%)

50,000 P170,000

Purchases 500,000Total 670,000Ending inventory:HO 98,000Branch, at cost(P48,000/120%)

40,000 138,000 532,000

Gross profit 278,000Operating expenses 108,000Combined net income P170,000

27.Sales (P310,000 + P280,000) P590,000Cost of sales:

Inventory, 1/1 (sch1) P67,100

Purchases 380,000Freight in (P220,000x5%) 11,000 391,000Goods available for sale 458,100Inventory, 12/31 (sch1) 104,000Freight in (P220,000x5%) 2,200 106,200 351,900

Gross profit P238,100Expenses (P104,000+P58,100) 162,100Combined totalComprehensive income

P76,000

Schedule 1 : Combined inventories – at costInventories

January 1 December 31Home office, at cost P46,000 P64,000Branch at costInventory, Jan. 1:

Billed price P23,100Mark-up (sch2) 2,000 21,00

Inventory, Dec. 31:At cost[(P33,000+P11,000)/110%*]

40,000

Combined P67,100 P104,000*Billing %: (209,000 + 11,000)/200,000 = 110%

Schedule 2: mark-up on Branch beginning inventoryBranch merchandise markup before adjustment P22,000Less: overvaluation of shipments [(P209,000 + P11,000)-P200,000] 20,000Mark up of branch beginning inventory P2,000

28.Sales P295,000Cost of sales:

Inventory, 1/1Home office P23,000Branch, at cost (11,550-1,000) 10,550Freight in (5,500-1,000) 5,750 39,300

Purchases, Home office 190,000Total 229,300Inventory, 12/31

Home office P30,000Branch, at cost

[(10,400+5,000/110%]14,000

Freight in(P520+250) 770 44,770 184,530Gross profit 110,470Sundry expneses 80,000Combined total comprehensiveincome

P30,470

29. Choice (c) is correct, because the branch should record the shipment from the office atbilled price (P50,000 + P8,000), and should treat the freight charged by the office asinventoriable cost.

30.Shipments from home office at billed price P58,000Unsold 60%Ending inventory P34,800Freight in (P2,000 x 60%) 1,200Total P36,000

31. In the books of Bulacan branch (sending branch) the inter-branch transfer should be treatedas if it was returned to the home office. Inventory account should be credited in place ofthe Shipment from Home office account which was already closes at the end of 2010.Therefore entry (d) is correct.

32. In the books of Baguio branch (receiving branch) the inter-branch transfer should be treatedas if it was received from the home office. And the freight to be recognized should be thefreight from the office. Therefore choice (c) is correct.

33. In the books of the home office the inter-branch transfer can be cleared by debiting thereceiving branch (Baguio) and crediting the sending branch (Bulacan). Excess freightaccount should be charged for the difference which is treated as an expense of the homeoffice. Therefore choice (a) is correct.

Alternative entry: If the allowance for overvaluation of branch inventory account is classified bybranch:

Investment in Branch – Baguio 30,500Allowance for overvaluation of Branch Inventory-Bulacan

(P8,000 x 50%) 4,000Excess freight 1,500

Investment in Branch – Bulacan 32,000

Allowance for overvaluation Branch inventory- Baguio 4,000

34. The expenses paid by the branch are not recorded in the home office books. It is onlyrecognized upon replenishment of the working fund (petty cash fund).

35. Sales P95,000Sales discount (P81,000 / 90%)x 10% 9,000Net sales 86,000Cost of sales (P95,000 x 70%)+ 200 68,500Gross profit 17,500Expenses:

Selling expenses P5,500Administrative expenses (P95,000 x 5%) 4,750Samples expenses (P8,200 – P4,550) 3,650 13,900

Net income P3,600

36. Branch beginning inventory – acquired from home office P105,000Shipment from home office – at billed price (P328,125 x 140%) 459,375Goods available for sale at billed price 564,375Branch ending inventory per books P280,000

37. Sales P268,000Sales discount (P58,200 ÷ 97%)x 3% 1,800Net salesCost and expenses:

Cost sales P124,000Salaries 21,600Rent expense (P36,000 x 1/12) 3,000Expenses 17,925Samples (P36,000 x 85%)x 1/5 6,120Depreciation (P40,000 x 18% x 1/12) 600 173,245

Net income P92,955

38. Choice (d) is correct due to the following entries to record the interbranch transfer ofmerchandise:

Pasig Branch Books:Home office 70,800

Freight in 4,200Shipment from home office 66,600

To record transfer of merchandise to Alabang.

Alabang Branch Books:Shipment from home office 66,600Freight in 6,200

Cash 2,800Home office 70,000

To record receipt of merchandise from Pasig.

Home Office Books:Alabang branch current 70,000Excess freight 800

Pasig branch current 70,800To record interbranch transfer of merchandise.

39. The unrealized inventory profit balance on December 31 is the difference between thebranch ending inventory at billed price and cost. Computed as follows:

Branch ending invty per physical count – from HO (42,000 – 27,000) P14,300Shipment in transit:

Shipment from HO at BP (145,000 ÷ 130%) P188,500Shipment from HO per books 150,800 37,700

Correct branch ending inventory at billed price P52,000Branch ending at cost (52,000 ÷ 130%) 40,000Unrealized inventory profit, December 31, 2008 P12,000

40. The combine net income is computed by preparing a combined income statement asfollows:

Sales P1,920,000Cost of sales:

Inventory, January 1 (Sch. 1) P69,000Purchases 1,100,000Goods available for sale 1,169,000Inventory, December 31 (Sch. 1) 187,700 981,300

Gross profit 938,700

Expenses 400,000Combined net income P538,700

Schedule 1:Inventory at cost

January 1 December 31Home office P20,000 P120,000Branch: Acquired from HO (Sch. 2) 30,000 40,000

Acquired from outsiders (58,000 – 39,000) 19,000 27,700Total 49,000 67,700

Combined P69,000 P187,700

Schedule 2:Allow for overvaluation before adjustment P52,800Overvaluation in the Shipments:

Shipment from HO at BP (P145,000 x 130%) P188,500Shipment to branch at cost 145,000 43,500

Overvaluation in the branch beginning inventory P 9,000

Branch beginning inventory at cost (P9,000 / 30%) P30,000

Branch ending inventory at cost (per No. 39) P40,000