DON HONORIO VENTURA STATE UNIVERSITY

COLLEGE OF BUSINESS STUDIES

1ST SEMESTER – ACADEMIC YEAR 2021-2022
MODULE IN ACCTNG 117 (ACCOUNTING INTERNSHIP - BUSCOM)

Lesson 2: Home and Branch Accounting – Special Problems

Four transactions between the home office and branch which create special accounting problems:

1. Merchandise shipments to the branch at the branch’s selling price. – not widely used because branch
will automatically operate at a loss equivalent to its operating expenses.

2. Merchandise shipments to the branch at a price in excess of cost, at billed price.

Billed price = cost plus an arbitrary percentage. (mark-up)

If the inventory shipped was at billed price – the cost of inventory is overstated and the cost of goods sold
is also overstated, hence, the income will be understated.

Sample: Shipped at cost

Transactions Home Office Books Branch Books

The home office shipped and Investment in Branch 40,000 Shipments from HO 40,000
billed the branch inventory at cost
of P40,000 Shipments to Branch 40,000 Home Office 40,000

Sample: Shipped at billed price

Transactions Home Office Books Branch Books

The home office shipped and Investment in Branch 48,000 Shipments from HO 48,000
billed the branch inventory at
billed price of P48,000 (20% Shipments to Branch 40,000 Home Office 48,000
mark-up)
Allowance for Overvaluation

Of Branch Inventory 8,000

The Allowance for overvaluation of branch inventory is also called as Unrealized Profit in branch
inventory. The portion of the realized profit will be based on the cost of goods sold.

Using the example above: (120% or 1.20) (100%) (20%)

Billed Price Cost Overvaluation
Beg. Inventory xx xx xx
Add: Shipments from Home Office xx xx xx
Available For Sale xx xx xx Unrealized Profit
Less: Ending Inventory (xx) (xx) (xx)
Cost of Goods Sold xx xx xx Realized Profit

The true profit of branch is equal to sum of its net income and the realized profit from overvaluation of
inventory.

3. Interbranch Transfers of Cash

The home office may instruct one branch to transfer cash to another branch. The branch will record it as if
it was transferred to home office. The branch will clear such transfer through its Home Office account.

Sample: The Home Office instructed Branch A to send cash of 10,000 to Branch B.

Home Branch Books Branch A Books Branch B Books

Investment in Branch B 10,000 Home Office 10,000 Cash 10,000

Investment in Branch A 10,000 Cash 10,000 Home Office 10,000

4. Interbranch Transfers of Merchandise

Branches should not carry an account with another branch but should be clear the transfer through its
Home Office account. Freight on goods received by the branch directly from Home Office are properly
included in the cost of branch inventory. The problem arises on the handling of freight charges. The
excess freight costs should be absorbed by the home office and treated as an operating expense.

Sample: The home office shipped merchandise costing 12,000 to Branch X and paid freight of 800.
Shortly afterward, the home office instructed Branch B to transfer this merchandise to Branch Y. Freight
cost of 600 were paid by Branch X to carry out the order. If the merchandise has been shipped directly
from home office to Branch Y, the freight cost would have been 1,000.

Home Branch Books Branch X Books Branch Y Books

Investment in Branch X 12,800 Shipments from HO 12,000 Shipments from HO 12,000

Shipments to Branch X 12,000 Freight In 800 Freight In 1,000
Cash 800 Home Office 12,800 Home Office 13,000

Shipments to Branch X 12,000 Home Office 13,400

Shipments to Branch Y 12,000 Shipments from HO 12,000
Freight In 8,000
Cash 400
Investment in Branch Y 13,000
Interbranch Freight Expenses 400
Investment in Branch X 13,400