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Chapter 9

Home office, Branch and Agency Accounting

PROBLEM 9-1: THEORY


1. B
6.
D
2. D
7.
D
3. C
8.
D
4. D
9.
A
5. C
10. A

B
B
C
A
D

11.
12.
13.
14.
15.

PROBLEM 9-2: COMPUTATIONAL


1. Solutions:
Requirement (a):

Home office books

Branch books

Jan . 1, 20x1

Jan . 1, 20x1

Investment in branch...500K
Cash.500K

Cash...500K
Home office.. 500K

(a)

(a)

Investment in branch...100K
Accounts payable100K

Inventory200K
Accounts payable
100K
Home office100K

(b)

(b)

No entry

Equipment120K
Cash.120K

(c)

(c)

Investment in branch... 60K


Accum. depreciation..300K
Equipment.. 360K

Equipment.60K
Home office..60K

(d)

(d)

No entry

Cash ..600K
Sales
600K
Cost of goods sold...180K
(200K 20K unsold)
Inventory180K

(e)

(e)

Cash..80K
Investment in branch..80K

Home office80K
Cash.80K

(f)

(f)

Investment in branch25K
Expenses.25K

Expenses(150K + 25K) 175K


Depreciation expense. 10K
Cash150K
Accum. depn10K
Home office.25K

(g)Closing entries:

(g) Closing entries:

Sales..600K
Cost of goods sold180K
Expenses175K
Depreciation expense.10K
Income summary..
235K
Investment in branch..235K
Income summary.235K

Income summary235K
Home office235K

Requirement (b):
Investment in
branch
Jan. 1

500,000

(a)
(c)
(f)

100,000
60,000
25,000

(g)

235,000

80,000

(e)

840,000

Home office
500,00
0
100,00
0
80,000
60,000
25,000
235,00
0
840,00
0

Requirement (c):
Cash
Inventory
Equipment
Accum. Depreciation
Total assets

750,000
20,000
180,000
(10,000)
940,000

Accounts payable
Home office

100,000
840,000

Jan.
1
(a)
(c)
(f)
(g)

Total liabilities & equity

940,000

Sales
Cost of goods sold
Gross profit
Expenses
Depreciation expense
Profit

2.

Solution:

Cash
Accounts receivable
Inventory
Investment in branch
Land
Building-net
Total assets
Accounts payable
Ordinary share
capital
Share premium
Retained earnings
Home office
Total liabilities &
equity

3.

600,000
(180,000)
420,000
(175,000)
(10,000)
235,000

Home
office
500,000
1,000,000
680,000
400,000
2,000,000
4,000,000
8,580,000

Branch
200,000
400,000
300,000
-

900,000

Combined
700,000
1,400,000
980,000
2,000,000
4,000,000
9,080,000

4,000,000

500,000

4,500,000

2,000,000
200,000
2,380,000

400,000

2,000,000
200,000
2,380,000
-

8,580,000

900,000

9,080,000

Solutions:

Requirement (a):

Home office books

Branch books

(a)

(a)

Investment in branch...470K
(300K x 150%) + 20K
Shipments to branch.. 300K
Allowance for mark-up 150K
Cash 20K

Shipments from HO..450K


Freight-in 20K
Home office 470K

(b)

(b)

No entry

Purchases..100K
Freight-in2K
Cash.102K

(c)

(c)

No entry

Cash..500K
Sales
500K

(d)

(d)

Inventory end.,,,,,,, 235K


(470K x )
Income summary..235K
Requirement (b):
Sales
Cost of goods sold:
Shipments from HO

500,000
450,000

Freight-in
Purchases

22,000

Ending inventory

(235,000)

100,000
(337,000)

Individual gross profit

163,000

Requirement (c):
Sales
Cost of goods sold:
Shipments from HO

500,000
300,000

Freight-in
Purchases

22,000

Ending inventory

(160,000)

100,000

Individual gross profit

(262,000)
238,000

Requirement (d):
150,000 allow. for markup x 50% sold = 75,000

PROBLEM 9-3: MULTIPLE CHOICE - COMPUTATIONAL


1. B
Solution:
Sales
112,500
Shipments from home office
120,000
Inventory, Dec. 31
(30,000)
(90,000)
Gross profit
22,500
Expenses
(8,100)
Profit
14,400
2. D
Solution:
Home office Current, unadjusted
Profit of branch

90,000
14,400

Adjusted balance of reciprocal accounts

104,400

3. A (see solutions below)


4. C
Solutions:
(Home
office
books)
Investment
in Branch
Unadjusted balances

175,520

(a) Charge recorded twice


(b) Mathematical mistake in
recording (895 89.5)
(c) Mathematical mistake in
recording (980-890)
(d) Mathematical mistake in
recording (400-350)
(e) Unrecorded charge
(f) Erroneous credit to
investment
(g) Erroneous debit to HO
account
(h) Erroneous correcting entry

(Branch
books)
Home
office
184,279.50
(500)
805.50
90
50
425

5,000
370
(5,000)

Adjusted balances

180,520

Notes:
5

180,520

squeez
e

(d) A credit by the home office means a deduction to the Investment


account which should have a corresponding deduction also to the
Home office account. The deduction of 350 was recorded by the
branch as 400 resulting to over-deduction. Thus the adjustment is
an addition of 50.
(e) The branch failed to record the charge as a credit to the Home
Office Account. Instead, branch recorded the charge as a liability.
Thus, the proper adjustment is an increase to the Home Office
Account.
(f) No adjustment is needed for the Home Office account because
the branch did not take up initially (see h below) the erroneous
credit by the home office.
(g) Initially, the branch did not take up the erroneous credit by the
home office in f; however, on June 30, 20x1 (cut-off date), the branch
finally recorded the erroneous credit. The proper adjusting entry is to
reverse this. A credit to the Home Office account means an
increase; therefore, the correction is a decrease.
5. C
Solution:
Inventory, Dec. 31

28,000

Less: Inventory, Dec. 31 from local purchase


Inventory, Dec. 31 from home office at billed price
Divide by:
Inventory from home office at cost
Add: Inventory, Dec. 31, from local purchase
Total ending inventory at cost

(7,000)
21,000
140%
15,000
7,000
22,000

6. D
Solution:
180,00
0

Net sales
Merchandise from home office at cost (98K /
140%)

Merchandise purchased locally by branch


Total goods available for sale
Total ending inventory at cost
True gross profit

70,000
40,000
110,000
(22,000)

7. A
Solution:
Inventory, Dec. 31
Multiply by:

(88,000
)
92,000

30,000
80%
6

Inventory, Dec. 31 from home office at billed price


Divide by:
Inventory from home office at cost
Add: Inventory, Dec. 31, from local purchase (30K x
20%)
Total inventory at cost

6,000
26,000

8. C
Solution:
Sales on account
Sales on cash basis

74,000
22,000

Merchandise from home office at cost (54K /


120%)

Purchase of merchandise for cash


Total goods available for sale
Total ending inventory at cost
Gross profit

45,000
26,000
71,000
(26,000
)

Expenses paid
Expenses unpaid
Profit (loss)
9. C
Solution:
Shipments sent by home office to branch, at billed price
(30K x 12%)

Shipments from home office received by branch, at billed


price
Shipment in transit, at billed price

24,000
120%
20,000

(45,000
)
51,000
(38,000
)
(12,000
)
1,000

37,500
(32,500
)
5,000

10. A
Solution:
Home
office
Beginning inventory, at cost:
Home Office, acquired from outsiders, at
cost
Branch: Acquired from outsiders at cost
Acquired from Home Office, in 20x1, at cost
(24K / 120%)
Net purchases, at cost:
Purchase from outsiders

Branch

80,000
7,500
20,000
200,000

15,000

Shipments to branch, at cost


Total goods available for sale
Ending inventory, at cost:
Home Office, acquired from outsiders at
cost
Branch: Acquired from outsiders at cost
Acquired from Home Office, in 20x1, at cost
(21K / 125%)
Shipment in transit, at cost (5K / 125%)
Cost of goods sold

Combined cost of goods sold

(30,000)
250,000
(55,000)

(5,500)

195,000

241,200

(195K +46.2K)

30,000
72,500

(16,800)
(4,000)
46,200

PROBLEM 9-4: EXERCISES - COMPUTATIONAL


1. Solutions:
Requirement (a):

Home office books

Branch books

Jan . 1, 20x1

Jan . 1, 20x1

Investment in branch...600K
Cash.600K

Cash...600K
Home office.. 600K

(a)

(a)

Investment in branch...25K
Accounts payable 25K

Prepaid supplies100K
Accounts payable 75K
Home office 25K

(b)

(b)

No entry

Equipment80K
Cash.80K

(c)

(c)

Investment in branch...120K
Accum. depreciation.. 80K
Equipment.. 200K

Equipment.120K
Home office120K

(d)

(d)

Accounts payable..25K
Cash.25K

No entry

(e)

(e)

No entry

Accounts payable 50K


Cash.50K

(f)

(f)

No entry

Cash ..800K
Service fees
800K

(g)

(g)

Cash..180K
Investment in branch180K

Home office180K
Cash.180K

(h)

(h)

Investment in branch60K
Expenses.60K

Expenses 250K
Depreciation expense. 40K
Advertising expense .60K
Supplies expense..95K
Cash250K
Accum. depn40K
Home office.60K
Prepaid supplies. 95K

(i)Closing entries:

(i) Closing entries:

Investment in branch..355K
Income summary.355K

Service fees.800K
Expenses 250K
Depreciation expense. 40K
Advertising expense .60K
Supplies expense..95K
Income summary..
355K
Income summary355K
Home office355K

Requirement (b):
Investment in
branch
Jan. 1
(a)

600,000
25,000

(c)
(h)

120,000
60,000

(i)

355,000

180,000

(g)

980,000

Requirement (c):
Cash
Prepaid supplies
Equipment
Accum. Depreciation
Total assets

Home office
600,00
0
25,000
180,00
120,00
0
0
60,000
355,00
0
980,00
0

840,000
5,000
200,000
(40,000)
1,005,000

Accounts payable
Home office
Total liabilities & equity

25,000
980,000
1,005,000

Service fees
Expenses
Depreciation expense
Advertising expense
Supplies expense
Profit

800,000
(250,000)
(40,000)
(60,000)
(95,000)
355,000

10

Jan.
1
(a)
(c)
(h)
(i)

2.

Solution:

Cash
Accounts receivable
Inventory
Investment in branch
Land
Building-net
Total assets
Accounts payable
Ordinary share capital
Share premium
Retained earnings
Home office
Total liabilities & equity

3.

Home office
600,000
1,200,000
816,000
480,000
2,400,000
4,800,000
10,296,000
4,800,000
2,400,000
240,000
2,856,000
10,296,000

Branch
240,000
480,000
360,000
1,080,000
600,000
480,000
1,080,000

Combined
840,000
1,680,000
1,176,000
2,400,000
4,800,000
10,896,000
5,400,000
2,400,000
240,000
2,856,000
10,896,000

Solutions:

Requirement (a):

Home office books

Branch books

(a)

(a)

Investment in branch...500K
(400K x 120%) + 20K
Shipments to branch.. 400K
Allowance for mark-up
80K
Cash 20K

Shipments from HO..480K


Freight-in 20K
Home office 500K

(b)

(b)

No entry

Purchases..80K
Freight-in2K
Cash.82K

(c)

(c)

No entry

Cash..600K
Sales
600K

(d)

(d)

Inventory end 125K


(500K x )
Income summary..125K

11

Requirement (b):
Sales
Cost of goods sold:
Shipments from HO

600,000
480,000

Freight-in

22,000

Purchases

80,000

Ending inventory

(125,000)

(457,000)

Individual gross profit

143,000

Requirement (c):
Sales
Cost of goods sold:
Shipments from HO

600,000
400,000

Freight-in

22,000

Purchases

80,000

Ending inventory

(105,000)

Individual gross profit

(397,000)
203,000

Requirement (d):
80,000 allow. for markup x sold = 60,000
4.

Answer: 250,000 - Only the sales by the branch to outside parties. Intracompany billings are eliminated in the combined financial statements.

12

PROBLEM 9-5: CLASSROOM ACTIVITIES


ACTIVITY #1:
Solutions:
Requirement (a):

Home office books

Branch books

Jan . 1, 20x1

Jan . 1, 20x1

Investment in branch...10M
Cash. 10M

Cash...10M
Home office.. 10M

(a)

(a)

Investment in branch...30M
Cash.. 30M

Land10M
Building..20M
Home office 30M

(b)

(b)

Investment in branch20.5M
Shipments to the branch..20M
Cash 500K

Shipments from HO20M


Freight-in..500K
Home office 20.5M

(c)

(c)

Investment in branch... 5M
Shipments to the branch. 5M

Shipments from HO 5M
Freight-in..100K
Home office 5M
Cash100K

(d)

(d)

Equipment 900K
Investment in branch900K

Home office900K
Cash900K

(e)

(e)

No entry

Furniture 600K
Cash600K

(f)

(f)

No entry

Purchases.. 10M
Accounts payable..10M

(g)

(g)

No entry

Cash50M
Accounts receivable.50M
Sales.100M

(h)

(h)

Cash10M
Investment in branch10M

Cash30M
Home office...10M
Accounts receivable..40M

13

(i)

(i)

Cash.35M
Home office.35M

Home office.35M
Cash.35M

(j)

(j)

No entry

Accounts payable8M
Cash..8M

(k)

(k)

Expenses1M
Investment in branch..1M

Expenses14M
Home office.1M
Cash..15M

(l)

(i)

Investment in branch3M
Expenses.3M

Expenses3M
Home office3M

(m)

(m) Adjusting entry:

No entry

Inventory end. 7.675M


(20.5M x ) + (5.1M x )

Income summary7.675M
(o) Adjusting entry:

(o) Adjusting entry:

Investment in branch..135K
Accum. Depn. Equipt.135K

Depreciation Bldg.
1M
Depreciation Equpt. 135K
Depreciation Furn.
75K
Acc. Dep. Bldg. 1M
Acc. Dep. Furn 75K
Home office.. 135K

(p)Closing entries:

(p) Closing entries:

Investment in branch..53.865M
Income summary53.865M

Sales.
100M
Income summary (m) 7.675M
Shipments from HO.25M
Freight-in. 600K
Purchases..10M
Expenses 17M
Depreciation expense.1.21M
Income summary53.865M
Income summary53.865M
Home office53.865M

14

Requirement (b):
Investment in
branch
Jan.
10,000,00
1
0
(a)
(b)
(c)
(l)
(o)
(p)

30,000,00
0
20,500,00
0
5,000,000
3,000,000

Home office

900,000
10,000,00
0
35,000,00
0
1,000,000

(d)
(h)
(i)
(k)

900,000
10,000,00
0
35,000,00
0
1,000,000

135,000
53,865,00
0

10,000,00
0
30,000,00
0
20,500,00
0

Jan.
1

5,000,000
3,000,000

(c)
(l)
(o)

135,000
53,865,00
0
75,600,00
0

(a)
(b)

(p)

75,600,00
0

Requirement (c):
Cash
Accounts receivable
Inventory
Land
Building
Accum. Depn. - Bldg.
Furniture
Accum. Depn. - Furniture
Total assets

30,400,000
10,000,000
7,675,000
10,000,000
20,000,000
(1,000,000)
600,000
(75,000)
77,600,000

Accounts payable
Home office
Total liabilities & equity

2,000,000
75,600,000
77,600,000

Sales
Cost of goods sold:

100,000,000

Shipments from HO

25,000,000

Freight-in

600,000

Purchases

10,000,000

Ending inventory

(7,675,000)

15

(27,925,000)

Gross profit

72,075,000

Expenses

(17,000,000)

Depreciation expense

(1,210,000)

Profit

53,865,000

16

ACTIVITY #2:
Solutions:
Requirement (a):

Home office books

Branch books

(a)

(a)

Investment in branch200
Shipments to the branch..200

Shipments from HO200


Home office 200

No entry

Home office 50
Shipments from HO

50

(b)

(b)

Investment in branch... 100


Cash... 100

Cash 150
Home office 150

(c)

(c)

No entry

Home office
20
Cash (or Expense)

(d)

(e)

Investment in branch 10
Expense.10

No entry

Requirement (b):
Investment in
branch
Jan.
1
1,000
(a)
200
(b)
100
(d)
10

20

Home office
1,00
0

(a)
(c)

50
20

1,310

200
150

Jan. 1
(a)
(b)

1,280

Difference = 30
Requirement (c):

Home office books

Branch books

(a)

(a)

Shipments to the branch.. 50


Investment in branch.. 50
(b)

(b)

Home office.. 50
Cash. 50
(c)

(c)

17

Expenses.. 20
Investment in branch..20
(d)

(d)

Expense
10
Home office10

Requirement (d):
Investment in
branch
Unadj
.
1,310
50
20

Home office

(a)
(c)

(b
)

18

Unadj.

10

(d)

50

1,24
0

1,240

1,280