PRACTICAL ACCOUNTING PROBLEMS II

2.0 Accounting for Branches

2.1 Transactions in the books of home office and the branch
2.2 Reconciliation of reciprocal accounts
2.3 Individual and combined financial statements
2.4 Accounting for agency transactions
2.5 Special transactions like unrealized profit in branch beginning inventory, transactions
between branches, use of perpetual inventory system, etc.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
SUMMARY OF STUDY OBJECTIVES AND KEY TERMS
1. Companies often expand into new marketing territories (an effort to increase its sales and
income) through internal growth by establishing branch offices that operate within the firm.
In other words, a branch office operates at a location separate from the firm's principal office,
called the home office, but a branch is not a separate legal entity. The rise of national and
regional chain-store operations and suburban shopping centers has contributed significantly to
the number of branch operations.
2. When a separate office is established to provide a sales outlet, it most often takes the
organizational form of either a sales agency or a branch office. Sales agencies usually take
orders that are filled by the home office. They usually have little autonomy, do not stock
merchandise, and do not have separate accounting systems. Branches vary in the degree of
autonomy. Most branches have greater autonomy than sales agencies do. They usually do
stock merchandise and frequently have their own accounting systems.
3. Transactions with external parties are recorded in the normal manner. Transactions between
the home office and a branch also are treated in the normal manner except they are recorded in
intracompany accounts. These accounts are reciprocal accounts between the home office and
the branch. When the books of both the home office and the branch are completely up to
date, the balance in an intracompany account on the home office books will be equal but
opposite that of the related intracompany account on the branch books.
4. The Home Office Equity account on the books of the branch is reciprocal to the Investment in
Branch account on the home office books. Both accounts are increased by asset transfers
from the home office to the branch and by branch profits. Both accounts are decreased by
asset transfers from the branch to the home office and by branch losses.
5. A branch office's books consist of a self-balancing set of accounts, similar to the books of a
separate company. However, a Home Office Equity account replaces the owners' equity
accounts found on the books of separate companies. The Home Office account indicates the
home office's equity in the branch.
6. Neither sales agencies nor branches are separate legal or accounting entities; they do not
prepare separate external accounting reports. While companies often prepare separate
accounting reports for the home office and each branch for internal use, the external
accounting reports must reflect the activities and position of the company as a whole. The
accounts of the home office and branches are combined to prepare financial statements for
external reporting.
7. A workpaper normally is used to facilitate the process of combining home office and branch
accounts. In addition, certain account balances must be eliminated or changed so that the
results reflect a single company. The reciprocal Home Office Equity and Investment in
Branch accounts are eliminated, and the amounts reported as cost of goods sold and ending
inventory are adjusted for any intracompany profit recorded by the home office on shipments
of merchandise to its branches.
OTHER KEY TERMS
Shipments from Home office
Shipments to Branch

Reciprocal accounts
Transfer price

Unrealized intercompany
inventory profit

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Problems
1. On January 1, the Best Company opened a new branch in a neighboring city. A summary of
transactions for the home office and the branch for the year and the balance sheet for the home
office on January 1 are as follows:
a.
b.
c.
d.
e.
f.
g.
h.
i.

Home Office Transactions

Transfers of cash to branch, P42,500.
Transfers of merchandise to branch (billed at cost), P50,200.
Sales on account, P105,000.
Purchases on account, P122,500.
Collections on account, P113,600.
Payments on account, P124,000.
Expenses paid, P26,600.
Cash received from branch, P53,400.
Dividends paid, P10,000.

Adjusting data on December 31:

Depreciation for year, P1,180.
Merchandise inventory, P48,500.
Prepaid expenses, P2,050.
Accrued expenses, P1,350.
a.
b.
c.
d.
e.
f.
g.
h.

Branch Transactions
Cash received from home office, P42,500.
Merchandise received from home office, P50,200.
Sales on account, P66,000.
Purchases on account, P22,500.
Collections on account deposited to the credit of the home office, P53,400.
Payments on account, P12,250.
Purchase of furniture and fixtures for cash, P8,000.
Expenses paid, P18,000.

Adjusting data on December 31:

Depreciation, P650.
Merchandise inventory, P23,500.
Prepaid expenses, P750.
Accrued expenses, P300.
Balance Sheet
Liabilities and Stockholders' Equity
P 59,300
Accrued expenses
P 1,250
27,650
Accounts payable
22,800
40,120
Capital stock, P20 par
50,000
1,800
Retained earnings
70,420

Assets
Cash
Accounts receivable
Merchandise inventory
Prepaid expenses
Furniture and fixtures P20,000
Less accumulated
depreciation
4,400
15,600
Total assets
P144,470

Total liabilities and

stockholders' equity

P144,470

Required:
1. Prepare journal entries to record the foregoing transactions for (a) the branch and (b)
the home office.
2. Prepare the journal entries to adjust and close the books for (a) the branch and (b) the
home office.
3. Prepare individual statements for the branch and for the home office.
4. Prepare working papers for combined statements
5. Prepare combined statements for home office and branch.

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2. The Investment in Branch account on the home office books of the Territory Co. and the Home
Office Equity account on the branch books on January 31, are as follows:
Investment in Branch

.
Jan. 1
5
1
2
1
5

20

Balance
Shipments:
100 @ P37.85
Shipments:
200 @ P37.85
200 @ 44.95
Advertising
chargeable
branch
Shipments

to

62,815

Jan. 15

3,785

22

Remittance

10,600

Returns

410

16,560
600
4,400

Home Office Equity

.
Jan.13
18

Remittance
Returns

10,600
410

Jan. 1

Balance
Shipments

62,815
3,785

Shipments
Collection of home
office account

16,650

8
22
31

Understatement of depreciation
in prior year
Remittance

540
16,000

16
20

750

Required:
1. Prepare a statement reconciling the reciprocal accounts as of January 31.
2. Prepare the necessary entries for the books of the home office as well as for the
branch before combined statements can be prepared.
3. The general ledger trial balances at December 31, for Manila Sales Company and
City Branch Office are as follows:
Home
Cash
40,000
Accounts Receivable
31,000
Inventory-Home Office, January 1
70,000
Inventory-Branch Office, January 1
-Property, Plant, and Equipment
120,000
Accumulated Depreciation
( 30,000)
Investment in Branch
20,000
Accounts Payable
( 36,000)
Accrued Expenses
( 14,000)
Home Office Equity
-Common Stock, P10 par
( 50,000)
Retained Earnings, January 1
( 45,000)
Sales
(440,000)
Purchases
290,000
Shipments from Home Office
-Operating Expenses
44,000

its Quezon
Branch
8,000
12,000
-15,000
---(14,500)
( 2,500)
( 8,000)
--(95,000)
24,000
45,000
16,000

An audit disclosed the following:

a. On December 23, the branch office manager purchased P5,000 of furniture and fixtures
but failed to notify the home office. The bookkeeper, knowing that all plant assets are
carried on the home office books, recorded the proper entry on the branch office records.
It is the company's policy not to take any depreciation on assets acquired in the last half of
the year.
b. On December 27, a branch office customer erroneously paid an account of P2,000 to the
home office. The bookkeeper made the entry on the home office books but did not notify
the branch office.
c. On December 30, the branch office remitted cash of P5,000, which was received by the
home office in January.
d. On December 31, the branch office erroneously recorded the December allocated expense
from the home office as P500 instead of P1,500.
e. On December 31, the home office shipped merchandise billed at P3,000 to the branch
office. The merchandise was received in January.
f. Depreciation for the year, not yet recorded, is P8,000 on home office assets and P4,000 on
branch assets.
g. The entire beginning inventory of the branch office had been purchased from the home
office. Home office current shipments to the branch were purchased by the home office in
the current year. The physical inventories at December 31, excluding the shipment in

PRACTICAL 2, Branches and Agencies

Page 4

transit, are: Home Office, P55,000 (at cost); Branch Office, P20,000 (comprised of
P18,000 from the home office and P2,000 from outside vendors).
h. The home office consistently bills shipments to the branch office at 25% above cost. The
sales account is billed for the invoice price.

Required:
1. Prepare a statement reconciling the reciprocal accounts as of December 31.
2. Prepare the necessary entries for the books of the home office as well as for the
branch before combined statements can be prepared.
3. Determine:
4. Inventory of Branch at cost
5. Combined inventory at cost
6. Net income of home office from own operations
7. Net income of branch
8. Net income of branch as far as the home office is concerned
9. The combined income for Manila Sales Company and its Quezon City
Branch.
Disregard income taxes.
4. The Mindanao Co. operates a branch in Cagayan. Operating data for the home office and the
branch for the year follow:
Home Office
Branch
Sales
P256,000
P 78,500
Purchases from outsiders
210,000
20,000
Shipments to Branch:
Cost to Home Office
30,000
Billing price to Branch
40,000
Operating Expenses
60,000
12,500
Inventories, January 1:
Acquired from outsiders at cost
80,000
7,500
Acquired from home office at billed price
which averaged 22.5% above cost
24,500
Inventories, December 31:
Acquired from outsiders at cost
55,000
5,500
Acquired from home office at current year's billed price
26,000
Required: Prepare individual and combined income statement.

5. On April 1 of the current year, the Domestic Company establishes an organization to

act as a sales agency. The following assets are sent to the agency on April 1:
A working fund to be operated under the imprest system
Samples from the merchandise stock
Advertising materials and literature

P1,000
5,000
1,250

During April the agency submits sales on account of P17,600 that are approved by the
home office; cost of merchandise shipped in filling orders is P10,500. Home office
disbursements chargeable to the agency are as follows:
Furniture and fixtures for agency
Salaries and commissions
Rent

P2,400
1,750
800

On April 30 the agency working fund is replenished. Paid expense vouchers submitted
by the agency are as follows:
Advertising expense
Miscellaneous expense

P 325
600

The following information is used in adjusting the agency accounts on April 30:

Agency samples will be useful until December 31; at that time it is believed they
will have a salvage value of 40% of cost.

Approximately 2/5 of the advertising materials and literature remain on hand.

Furniture and fixtures are to be depreciated on a 5-year basis.

The agency manager is to receive a bonus of 5% of all sales above P10,000 a

month, the bonus to be paid by the home office at quarterly intervals.

PRACTICAL 2, Branches and Agencies

Page 5

Required:
1. Prepare the journal entries on the home office books to record the
transactions and to adjust and close the accounts kept with the agency.
2. Prepare a statement summarizing agency activities for April.

12. Multiple Choice and Questions (Phil. CPA Board Examination)

October 1988
Trial balances for the home office and the branch of the Toby Company show the following
accounts before adjustment, on December 31, 1987. The home office policy of billing the
branch for merchandise is 20% above cost.
Home Office
Branch
Unrealized intercompany inventory profit
P10,800
Shipments to branch
24,000
Purchases (outsiders)
P 7,500
Shipments from home office
28,800
Merchandise inventory, December 1, 1987
45,000
1. What part of the branch inventory as of December 1, 1987 represent purchases from outsiders
and what part represent goods acquired from the home office?
Outsiders
Home Office
Outsiders
Home Office
(a)
P12,000
P33,000
(c)
P15,000
P30,000
(b)
P16,500
P28,500
(d)
P 9,000
P36,000
May 1989
The Mahiyain Manufacturing Co. of Quezon City opened a branch at Davao City on January
1, 1988, to expand the market of its product. Merchandise shipped during 1988 to the Davao
branch totalled P104,000, and this included a profit of 25% based on cost. At the end of the
year, the inventory was P12,500, at billed price. The branch extend credit, makes collections
and pay expenses from cash received. The company applied the periodic inventory method.
Other transactions affecting the branch are as follows: Sales on account P117,000; expenses
P20,000, of which P1,300 were unpaid on December 31, 1988; cash received from
customers' accounts, P84,000, after allowing cash discounts of P1,480; cash remitted to the
home office during the year P65,000.
2. In the book of the branch, the income or loss was:
(a) P19,300; (b) P8,300;
(c) P4,020;
(d) (P6,220);

(e) None of these.

3. In so far as the home office is concern, the true income or loss of the branch operation was:
(a) P24,300; (b) P22,320; (c) (P18,300); (d) P24,320; (e) None of these.
October 1989
The Neneng Corporation established its San Pedro branch in March, 1988. During the first
year of operation the home office shipped to the branch merchandise which had cost
P120,000. Three-fourth of this merchandise was sold by the branch for P141,000. Operating
expenses of the branch amounted to P27,000 during 1988.

PRACTICAL 2, Branches and Agencies

Page 6

4. How much is the net income the branch will report if merchandise is billed to the branch at
25% above cost?
(a) P1,500; (b) P8,000; (c) P800; (d) P1,200; (e) None of these.
The Chibas Regal, owns the Royal Crown in Quezon City. There is a branch in Davao City.
During 1988, the home office shipped supplies costing P120,000 to the branch at a billed price
of 20% above cost. The inventories of supplies at the branch were as follows: Jan. 1, 1988,
P90,000; December 31, 1988, P108,000. The home office holds inventories of P160,500
which include P10,500 held on consignment. Both locations use the periodic inventory
method.
5. How much is the inventories in a combined balance sheet as of December 31, 1988?
(a) P270,000; (b) P210,000; (c) P300,000; (d) P240,000; (e) None of these.

May 1990
The Goldie Bunch Co. has a branch in Davao City on July 3, 1988. During 1988 the home
office shipped goods to the branch at billed price totalling P250,000, which was 25% above
cost. The branch on December 31, 1988 showed an inventory of P50,000 at billed price. A
net profit of P66,000 for 1988 operations was reported by the branch.
6. How much is the true net profit of the branch?
The home office bills its Cebu branch at 125% of cost. During the year 1988, goods costing
P300,000 were shipped to the branch. The account entitled "Allowance for Valuation of
Branch inventory" has a balance of P14,000 at the end of the year after adjustment.
7. How much is the amount of ending inventory at billed price?
8. How much of ending inventory at cost?
October 1990
The following account balances were taken from the books of Goldielock Co. and its Davao
branch on December 31, 1989. Book of Davao Branch: Sales, P1,200,000; Shipments from
home office, P720,000; Expenses, P400,000. Book of Goldielock Co: Allowance for
overvaluation of branch inventory, P145,000. All merchandise of the branch came from the
home office. The inventories of the branch at billed price are as follows: January 1, 1989,
P150,000 and December 31, 1989, P168,000.
9. Compute the percentage of profit on cost that the home office use to bill merchandise shipped
to branch.
10. How much is the adjusted profit of Davao branch?
The Rose Company of Manila established a branch in Cebu. During 1989, the home office
shipped supplies costing P80,000 to the branch at a billed price of 20 percent above cost. The
inventories of supplies at the branch were as follows: January 1, 1989, P60,000; December
31, 1989, P72,000. The home office holds inventories of P107,000 which include P7,000
held on consignment. Home office and branch use the periodic inventory method.
11. How much is the inventories in a combined balance sheet at December 31, 1989?
October 1991
The National Home Company ships and bills its Provincial branch merchandise at cost. The
branch carries its own accounts receivable, makes its own collections the pays its expenses.
The transactions in 1990 are reflected in the branch trial balance as follows:

PRACTICAL 2, Branches and Agencies

Page 7

Debit
P 11,900

Cash
National Home Co. Current
Shipment from National Home Co.
Accounts Receivable
Expenses
Sales

Credit
P 90,000

120,000
62,500
8,100
.

112,500
P202,500

P202,500
Branch inventory, December 31, 1990, P30,000.

12. How much is the net profit of Branch?

(a) P22,500;
(b) P14,400; (c) P21,900;

(d) Not given.

13. The Branch current account in the home office books should be:
(a) P134,400; (b) P90,000; (c) P104,400; (d) Not given.
On December 31, 1990, the following are data in the records of the branch in Angeles City of
Big and Small Company:
Petty Cash
Accounts Receivable, Dec. 31, 1990
Merchandise Inventory, Dec. 31, 1989
Accounts Receivable, Dec. 31, 1989
Merchandise Inventory, Dec. 31, 1990
Sales
Sales Return
Accounts Receivable written off
Shipments from home office
Expenses (Paid by home office)

P 4,500
88,800
75,500
85,200
81,000
272,700
4,800
2,000
220,500
22,500

14. If all cash collections in 1990 were remitted to the home office, the remittance amounted to:
(a) P262,300; (b) P266,800; (c) P264,300; (d) P267,100
May 1992
Following is the Income Statement of XYZ Branch in Cebu City for the six months period
ending June 30, 1991:
Sales
Cost of Sales:
Shipments from Home Office
Branch purchases
Total
Inventory, June 30:
From Home Office
Branch purchases
Cost of Sales
Gross Profit
Less Expenses
Net Profit

P620,000
P550,000
50,000
P600,000
P 75,000
10,000

85,000
515,000
P105,000
85,000
P 20,000

The Head Office ships merchandise and bills the Branch Office at 125% of cost. The rent of
the Branch Office for six (6) months at P1,000 per month was paid by the Home Office.
15. The Head Office net profit in its Branch Office in Cebu City for the six (6) months ending June
30, 1991:
(a) P125,000; (b) P124,000; (c) P139,000; (d) P109,000.

PRACTICAL 2, Branches and Agencies

Page 8

16. The inventory of the XYZ Branch Office as of June 30, 1991 at cost is:
(a) P85,000;
(b) P70,000;
(c) P60,000;
(d) P75,000.

October 1992
J. C. Penny, Philippines has two merchandise outlets, its main store in Manila and its Cebu
City branch. For control purposes, all purchases are made by the main store and shipped to
the Cebu City branch at cost plus 10%. On January 1, 1992, the inventories of the main store
in Manila and the Cebu City branch are P13,600 and P3,960, respectively. During 1992, the
main store purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City
branch. At December 31, 1992, the following journal entry to prepare the books for the next
accounting period was prepared:
Sales
Inventory
Inventory
Shipments from main store
Expenses
Main store

32,000
4,840
3,960
17,600
10,480
4,800

17. What was the actual branch income for 1992 on a cost basis assuming the use of the
provisions of the statement of financial accounting standards?
(a) P4,800;
(b) P6,320;
(c) P6,480;
(d) P6,840.
18. If the main store has P11,200 worth of inventory unsold at the end of 1992, the inventory of
the main store and the branch that should appear on the combined balance sheet as at
December 31, 1992 is:
(a) P15,160; (b) P15,600; (c) P16,040; (d) P17,200.
May 1993
Selected balances from the Amorsolo Company's Branches A and B are as follows:
Inventory, Jan. 1, 1992
Imprest branch fund
Inventory, Dec. 31, 1992
Accounts receivable, Jan. 1, 1992
Accounts receivable, Dec. 31, 1992
Merchandise from Home Office
Cash collections
Sales
Cash expenses

Branch A
P 21,000
2,000
19,000
55,000
70,000
61,000
85,000
100,000
21,000

Branch B
P19,000
1,500
12,000
43,500
53,500
47,000
70,000
80,000
14,300

All sales, collections, and expenses are handled at the branch. All cash received from sales and
collections are sent directly to the Home Office. Expenses are paid by the branch from the
imprest fund and immediately reimbursed by the Home Office and credited to the Home Office
account. All expenses paid by the branch are recorded in the branch books.
19. The net profit of Branch A is:
(a) P16,000; (b) P21,000;

(c) P15,000;

(d) P18,000.

20. The balance of the Home Office account of Branch A on January 1, 1992 is:
(a) P80,000; (b) P64,000; (c) P78,000; (d) P75,000.
21. The balance of the Home Office account of Branch B on January 1, 1992 is:

PRACTICAL 2, Branches and Agencies

(a) P80,000;

(b) P64,000;

(c) P78,000;

Page 9

(d) P95,000.

22. The balance of the Branch current account of Branch B on December 31, 1992 is:
(a) P70,000; (b) P64,000; (c) P67,000; (d) P65,000.

23. The entry in Branch B records to update the reciprocal account Home Office current on
December 31, 1992 is:
a. Dr. - Home Office /
Cr. - Profit and Loss
b. Dr. - Profit and Loss /
Cr. - Branch Current
c. Dr. - Branch Current /
Cr. - Profit and Loss
d. Dr. - Profit and Loss /
Cr. - Home Office Current
October 1993
The following were found in your examination of the interplant accounts between the Home
Office and the Butuan Branch:
a.
b.
c.
d.
e.

Transfer of fixed assets from Home Office amounting to P53,960 was not booked by the branch.
P10,000 covering marketing expense of another branch was charged by Home Office to Butuan.
Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice.
Home office recorded cash transfer of P65,700 from Butuan branch as coming from Davao branch.
Butuan reversed a previous debit memo from Cagayan de Oro branch amounting to P10,500.
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.

24. The net adjustment in the Home Office books related to the Butuan Branch current account is:
(a) P75,700;
(b) P65,700;
(c) P86,200;
(d) P94,820.
25. The net adjustment in Butuan's books related to the Home Office account is:
(a) P33,335;
(b) P31,450;
(c) P20,950;
(d) P10,450.
26. Before the above discrepancies were given effect, the balance in the Home Office books of its
Butuan branch current account was a debit balance of p165,920. the unadjusted balance in
the Butuan branch books of its home office current account must be:
(a) P92,336;
(b) P98,230;
(c) P104,500 (d) P111,170.
27. The adjusted balance of the reciprocal accounts is:
(a) P84,807;
(b) P90,220;
(c) P99,200;
(d) P109,120.