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# AFAR 2: HOME OFFICE AND BRANCH ACCOUNTING

## KEY TO EXERCISE PROBLEMS

1. The problem requires the computation of combined income. As such, we have to
compute first for their separate net income, with the branch income adjusted for any
allowance for overvaluation.

HOME OFFICE:
Sales 336,000
Cost of Sales
Beginning Inventory 69,000
Less: Shipments to Branch 66,000
Ending Inventory 48,000 177,000
Gross Profit 159,000
Less: Operating Expenses 68,000
Net Income 91,000

BRANCH:
Sales 144,000
Cost of Sales*** 124,128
Gross Profit 19,872
Less: Operating Expenses 11,200
Net Income 8,672

## COMBINED NET INCOME:

Home Office 91,000
Branch 8,672
Total 99,672
Cost of Sales:

Cost
Beginning Inventory 38,400 35,840 [(38,400 x 1/3)/125%] + 38,400 x 2/3
Purchases 40,000
Shipments from HO 82,500 66,000 82,500/125%
- Ending Inventory 21,600 17,712 [(21,600 x 90%)/125%] + 21,600 x 10%
Cost of Sales 124,128

## Shipment to Branch 25,000

+ Freight-in 1,000
Total cost 26,000
x Percentage of unsold inventory 60%
Cost of ending inventory 15,600

3. This one is simple enough. We only consider sales to outside parties. Inter-office sales,
or billings aren’t included.

## 4. This one is a simple reconciliation:

Home Office Books Branch Books
Investment in Davao branch HO - Current
1. Shipment charged to Davao branch (24,000.00)
(sent to Cebu branch)
2. Shipment charged to Aklan branch 30,000.00
(sent to Davao branch)
3. No effect to Davao branch
4. HO collection of receivable of Davao branch (7,200.00)
5. Returned shipment by Davao branch to HO (2,400.00)
6. Overstatement of Davao branch NI (7,200.00)

## 5. The requirement is to compute for the cash remittance of the branch.

To compute for the cash remittance, let’s start with the collection of receivables:

## Accounts Receivable, beginning 43,800

Add: Net Sales (198,720 – 3,600) 195,120
Amount to be collected 238,920
Less: Accounts Receivable, ending 49,140
Accounts written-off 1,920
Total collection remitted to HO 187,860

## 6. The answer to this problem is letter B. Upon transfer of merchandise by A to B, the

home office should debit the Investment in Branch – B account and credit the Investment
in Branch – A account. The transfer was from A to B, so it’s addition to B and a
deduction from A. Also, the full entry is as follows (Home Office books):

## Investment in branch – B 58,350

Excess Freight 2,250
Investment in branch – A 60,600

## Let’s go over everything:

Upon receipt of merchandise by A from Home Office, the entry of Home Office is to debit
Investment in Branch – A account by the total cost of the shipped merchandise. That
would be the cost of 47,100 plus the freight of 7,500, totaling 54,600. The credits would
be Shipments to Branch, for the cost of the merchandise 47,100, and a debit to Cash (if
freight is paid immediately) amounting to 7,500.

Next, is the transfer from branch A to branch B. Let us compute first for the excess
freight. The freight cost from Home Office to Branch A is 7,500. The freight cost from
Branch A to B is 6,000. Should it have been made from Home Office to B, the freight
would’ve been 11,250. So, the excess freight is (7,500 + 6,000) – 11,250 = 2,250. This
amount is to be debited to Excess Freight account by the Home Office.

## Home Office – Current 60,600

Shipments from Home Office 54,600
Cash 6,000

## Shipments from Home Office 58,350

Home Office – Current 58,350

7. There are two approaches for this. 1) You can get the net income of the HO and the
Branch, add them up and then adjust the Branch Income for the Allowance on
Overvaluation of shipped merchandise. Or 2) You can get the net income of the HO and

Personally, I find the second approach not as confusing as the first one. That said:

## Home Office Income:

Sales 1,200,000
COGS (350,000 + 500,000 – 315,000 – 80,000) 455,000
Gross Profit 745,000
Less: Operating Expenses 113,000
Net Income 632,000

Branch Income:
Sales 540,000
COGS (see computation below)*** 335,250
Gross Profit 204,750
Less: Operating Expenses 89,000
Net Income 115,750
***Branch - Cost of Sales:

Cost
Beginning Inventory 157,500 131,250 157,500/120%
Purchases
Shipments from HO 346,500 315,000 Given or 346,500/110%
- Ending Inventory 122,100 111,000 122,100/110%
Cost of Sales 335,250

Home Office 632,000
Branch 115,750
Combined Net income 747,750

I had a difficult time answering this during review. After hours of trying, I noticed the
dates (finally!) The beginning inventory is labeled December 31, 2013. The ending
inventory is labeled January 1, 2015. And the statement about percentage of cost being
higher by 5% refers to 2012 and has nothing to do with the current year, 2014. Just
saying XD You’re good if you’ve noticed it the first time.

## 8. For this problem, we analyze each transaction:

Branch Books
HO - Current
1) Transfer of fixed assets - unrecorded by branch 53,960.00
2) No effect to Ironman branch
3) Debit note recorded twice
(sent to Davao branch) (75,000.00)
4) No effect to Ironman branch books (affects HO)
5) No effect to Ironman branch
6) Debit memo - amount recorded was erroneous 90.00
6. Overstatement of Davao branch NI

9. Alright, this one is agency. It’s just a normal computation of net income. The take is that
you should depreciate the samples provided (if any) and compute for discounts (as
Sales per invoice 27,562,500.00
Less: Discount (14,784,000 / 96% x 4%) 616,000.00
Net Sales 26,946,500.00
Cost of Sales (70% of invoice) 19,293,750.00
Gross Profit 7,652,750.00
Expenses based on vouchers 1,837,500.00
Other expenses:
Depreciation for samples ( June to December) 1,960,000.00
Net Income 3,855,250.00

## Be mindful of the information:

The rent given is for two months, so we divide that by two to get the rent for the current
month.

For sample inventory, what was given is the ending balance of 25%, so the used portion
is 75%.

## The commission is based on sales (gross sales).

Sales 220,000.00
Less: Discount (176,400 / 98% x 2%) 3,600.00
Net Sales 216,400.00
Cost of Sales (given) 150,000.00
Gross Profit 66,400.00
Other expenses:
Samples (used 75% of 10,000) 7,500.00
Advertising materials (used 20% of 5,000) 1,000.00
Rent (one month only, 10,000/2) 5,000.00
Delivery 2,500.00
Miscellaneous 2,000.00
Salaries and wages 15,000.00
Commission (5% of 220,000) 11,000.00
Net Income 22,400.00

11. Since the problem requires for the total goods available for sale of the branch from the
Home Office, we have to use the billed prices. No adjustment yet is to be made for the
Allowance for Overvaluation. And we won’t include purchases from outsiders, since the
problem specifically asked for goods available for sale FROM the home office.

## Beginning inventory from HO (2,375,000 x 120%) 2,850,000

Shipped goods for the current year (given billed price) 3,250,000
Total goods available for sale from HO 6,100,000

Where did the 120% come from? Well, the Loading in Branch inventory account balance
before adjustment is 1,225,000. This is the allowance for overvaluation for goods in the
beginning inventory and the shipments during the year.

The shipments for the current year of 3,250,000 has an allowance of (3,250,000 / 130%
x 30%) = 750,000.

The balance of Loading in Branch inventory minus the allowance for shipments would
give us the allowance relating to the beginning inventory. That would be 1,225,000 –
750,000 = 475,000

The cost of the beginning inventory is 2,375,000 plus the markup (allowance) of 475,000
is 2,850,000. This is the billed price of the goods. From this, we can compute for the
percentage of markup, which is essentially 20%.

## A tricky question, if we think about it. So, let us be careful.

12. Let’s go over the problem real slowly. We have two branches here. Let’s account first for

## Home Office Books Branch Books

Investment in Baguio branch HO - Current
1. Cash from Baguio to Davao branch (74,000.00)
2. Transfer of goods from Baguio to Davao (28,900.00) (28,900.00)
Freight cost on the transfer of goods (2,500.00) (2,500.00)
3. Customer of Davao paid to Baguio branch 5,750.00
4. Allocated expenses 11,000.00
5. Baguio remitted cash to HO (14,300.00)
6. Not affecting Baguio branch

For Davao branch, the adjustments are as follows:

## Home Office Books Branch Books

Investment in Davao branch HO - Current
1. Cash from Baguio to Davao branch 74,000.00
Davao branch - error in recording 27,000.00
2. Transfer of goods from Baguio to Davao 28,900.00 28,900.00
Freight cost on the transfer of goods (3,600.00) (3,600.00)
Freight cost if transferred directly 5,000.00 5,000.00
3. Customer of Davao paid to Baguio branch (5,750.00) (5,750.00)
4. Allocated expenses 9,000.00
5. Baguio remitted cash to HO
6. Returned goods to HO (6,850.00)

13. For the first question, adjusted balance of Branch account is:

## Home Office Books Branch Books

Investment in Branch HO - Current
1. Equipment purchased by HO for Branch 36,000.00
2. Depreciation - recording error 600.00
3. Operating expense charged to branch 2,880.00
4. Cash remittance (33,000.00)
Freight cost if transferred directly
3. Customer of Davao paid to Baguio branch
4. Allocated expenses
5. Baguio remitted cash to HO
6. Returned goods to HO

## For the second requirement:

Billed price Cost Allowance
Beginning inventory 21,300.00
+ Shipments from HO 212,400.00 177,000.00 35,400.00
Goods available for sale 56,700.00 before adjustment

The allowance for the shipments is 20% above cost, meaning the cost is 100%, and the
markup is 20%. As such, the billed price is 120%. To get the allowance: 212,400/120% x
20% = 35,400. The allowance on the beginning inventory is given, 21,300. The ending
balance is also given, 14,700. It was stated that the allowance was written down TO
14,700. Meaning, it was the ending balance.

## Net income per books 197,730

Depreciation expense 600
Operating expense 2,880
Adjusted income per branch books 194,250
+ RGP on sold inventory from HO 42,000
True net income of branch 236,250

This is practically another approach to computing actual income of the branch, you start
with the net income as recorded. Adjust for any unrecorded expense (in this case,
depreciation and operating expense as allocated by HO). Then, we also adjust for the
gross profit (allowance for overvaluation). We have to recognize as realized gross profit
(RGP) the allowance on goods sold. In this case, that amounts to 42,000.

For the fourth requirement, balance of HO-current account after closing entries: