AFAR 03: HOME OFFICE AND BRANCH

I. TRUE OR FALSE

1. If a branch made an entry to record branch Net Income but understated the amount,
the branch must Debit Income Summary and Credit Home Office for the remaining
balance.

2. When complete self-balancing books are kept by the branch, an account called Home
Office Current takes the customary capital accounts (credit account). The home office
in turn, keeps a reciprocal account called Branch Current or Investment in Branch
account.

3. Income taxes can be allocated to a branch.

4. Shipment from Home Account is recorded by home office on its book at billed price.

5. Net income reported by the branch plus realized gross profit equals true net income.

6. Allowance for Overvaluation of Branch Inventory is considered as contra Investment in

Branch Account.

7. The Investment in Branch accounting has a balance that equals the Home office
current.

8. On the Home office’s books, the earnings of a branch are recorded in an account
called income summary.
9. Allowance for overvaluation of branch inventory is reduced by the recognition of
realized gross profit.

10. Allowance for overvaluation of branch inventory is also known as loading account.

11. Shipment from office is recorded at billed price.

12. Shipment to branch is always recorded at cost.

13. Home Office account is also known as home office current.

14. If the home office issued credit memo, the branch will issue debit memo.

15. Cost of sales of the Home office plus cost of sales reported by the branch equals
combined cost of sales.

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Problem Solving

Use the following information for questions 1 and 2

The following data were provided by the accountants of the Home Office and Branch for the
year ended December 31, 2025:
Home Office Book Branch Book

Net sales to outside customer P1,000,000 P800,000

Beginning Inventory 300,000 140,000

Net purchase from outside supplier 800,000 250,000

Shipment to branch 400,000

Shipment from Home Office 500,000

Ending Inventory 100,000 200,000

Operating expense 200,000 100,000

Additional Notes:

➢ It is the policy of the whole company to use FIFO for its inventories.
➢ For the year ended December 31, 2025, the Home Office bills its branch with a
gross profit rate of 40% based on cost.
➢ Half of the beginning inventory of the branch was acquired from outside
suppliers while ¾ of the ending inventory of the branch was acquired from the
home office.

1. What is the combined net income to be presented by the Home Office in its
General Purpose Income Statement for the year ended December 31, 2025?

a. P270,000
b. P300,000
c. P290,000
d. P320,000

2. What is the understatement of net income reported by the branch in its separate
income statement for the year ended December 31, 2025?
a. P30,000
b. P90,000
c. P20,000
d. P40,000

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Use the following information for the next four numbers
An entity set up a branch in a province. The entity and its branch provided the following data
on the second year of branch’s operation:

Home Office Branch

Sales revenue to outside customerP1,000,000 P500,000

Beginning inventory 50,000 30,000

Purchases from outside supplier 400,000 100,000

Shipment to branch 200,000

Shipment from home office 250,000

Ending inventory 80,000 50,000

Operating expenses 150,000 40,000

The following additional data are provided:

• The home office to branch’s mark-up based on cost last year is 80% of this year’s
mark-up on cost.
• 1/5 of the beginning inventory of the branch came from outside supplier.
• 24% of the ending inventory of the branch came from the last year’s shipment from the
home office while 50% of the ending inventory of the branch came from current year’s
shipment from the home office.

3. What is the net income reported by the branch in its separate income statement for
the current year?
a. P130,000
b. P124,000
c. P95,000
d. P114,000

4. What is the ending inventory to be reported by the entity in its combined external
statement of financial position?
a. P128,000
b. P115,000
c. P130,000
d. P123,000

5. What is the overstatement in the cost of goods sold reported by the branch in its
separate income statement for the current year?
a. P54,000
b. P50,000
c. P52,000
d. P47,000

6. What is the net income to be reported by the entity in its external combined income
statement for the current year?
a. P810,000
b. P857,000
c. P853,000
d. P864,000

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Use the following information for the next number
RICHARD Company bills its ALBERT Branch for merchandise at 140% of cost. At the end of
January 2015, the branch reported the following information:

Merchandise from Home Office

(At Billed Price)

Inventory, January 1 P22,680

Shipments received 84,840

Inventory, January 31 25,200

7. What should be the balance of the allowance account for overvaluation of the
branch inventory at January 31 before adjustment?

A. P7,200

B. P6,480

C. P27,240

D. P30,720

Use the following information for questions 8 and 9

The following information is given regarding SOPHIE Company:
a. The reciprocal account in the separate income statement of the home office amount to
P450,000.
b. During the year 2025 (current year), the home office bills merchandise to the branch at
430% of cost.
c. The beginning inventory of the branch is P498,750.
d. During the 2025, the branch purchased from vendors merchandise amounting to P300,000.
e. The ending inventory of the branch as shown in the combined financial statements is
P534,250
f. The allowance for overvaluation before adjustment is P640,000.
g. The beginning inventory of the branch from the home office at cost is P306,250.
h. The unrealized profit at the end of the year must be decreased by P110,000

8. What is the cost of goods sold in the combined financial statements at the end of 2025?
A. P702,000
B. P709,800
C. P592,000
D. P612,380
9. What is the total goods available for sale recorded in the branch’s books at the end of
2025?
a. P1,766,250
b. P1,126,250
c. P1,248,750
d. P1,643,750
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Use the following information for questions 10-11
An entity set up a branch in Makati. The branch has been in operation already for two years.
The home office and branch accounts are in balance at the beginning of the current year.
The home office account has a balance of P250,000 at the end of the current year. At the end
of the current year, the accountant discovered the following transactions:
I. Makati branch returned an inventory shipped by the home office at cost. Such
inventory costing P20,000 is still in transit at the end of the current year.
II. Inventory costing P10,000 intended for Manila branch was actually received by Makati
branch.
III. Inventory costing P30,000 intended for Makati branch was actually received by
Marikina branch.
IV. Manila branch collected P40,000 receivables of Makati branch without notifying the
home office.
V. Marikina branch paid P50,000 payables of Manila branch without notifying the home
office.
VI. Makati branch collected P60,000 receivables of Home Office without notifying the
home office.
VII. The home office collected the P70,000 receivables of Marikina branch without notifying
the said branch.
VIII. Manila branch sent a P10,000 debit memo to home office which is debited twice by the
home office in the amount of P20,000.
IX. The home office sent a P20,000 credit memo to Makati branch which is credited by the
said branch in the amount of P10,000.
X. The P20,000 net income of the branch was erroneously credited by the home office to
branch account at P30,000.

10. What is the adjusted balance of the home office account at the end of the current year?
a. P260,000
b. P240,000
c. P220,000
d. P230,000

11. What is the unadjusted balance of branch account at the end of the current year?
a. P190,000
b. P210,000
c. P240,000
d. P170,000

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Use the following information for questions 12-14
The home office of Mang Donald Co. ships goods to Iloilo branch billing the branch for the
goods at P45,000, excluding freight of P6,000. Upon receipt of the goods, Iloilo branch
was instructed by the home office to transfer these goods to Cagayan de Oro branch.
Iloilo branch ships the goods and paid P4,500 for the transfer. If the goods had been
shipped by the home office directly to Cagayan de Oro branch, the freight would have
been P6,500.

12. What is the journal entry to record receipt of shipment in the books of Cagayan de
Oro branch?
a. Shipment from home office 4 5 ,0 0 0

Home office current 4 5 ,0 0 0

b. Shipment from home office 4 5 ,0 0 0

Freight in 6 ,0 0 0

Home office current 5 1 ,0 0 0

c. Shipment from home office 4 5 ,0 0 0

Freight in 6 ,5 0 0

Home office current 5 1 ,5 0 0

d. Shipment from home office 4 5 ,0 0 0

Freight in 4 ,5 0 0

Home office current 4 9 ,5 0 0

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13. What is the adjusting journal entry to be recorded by Iloilo branch?
a. Home office current 5 1 ,5 0 0

Shipment from home office 4 5 ,0 0 0

Freight in 6 ,0 0 0

b. Home office current 4 7 ,0 0 0

Shipment from home office 4 5 ,0 0 0

Freight in 2 ,0 0 0

c. Home office current 5 5 ,5 0 0

Shipment from home office 4 5 ,0 0 0

Freight in 6 ,0 0 0

Cash 4 ,5 0 0

d. Shipment from home office 4 5 ,0 0 0

Freight in 6 ,0 0 0

Home office current 5 1 ,0 0 0

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14. What is the adjusting entry to be recorded by home office?
a. Shipment to Iloilo 4 5 ,0 0 0

Excess freight on interbranch transfer of

merchandise
2 ,0 0 0

Cagayan de Oro branch current 4 5 ,0 0 0

Freight in 4 ,0 0 0

Shipment to Cagayan de Oro 4 5 ,0 0 0

Iloilo branch current 5 1 ,0 0 0

b. Shipment to Iloilo 4 5 ,0 0 0

Excess freight on interbranch transfer of

merchandise
6 ,0 0 0

Iloilo branch current 5 1 ,0 0 0

c. Shipment to Iloilo 4 5 ,0 0 0

Excess freight on interbranch transfer of

merchandise
6 ,0 0 0

Cagayan de Oro branch current 4 5 ,0 0 0

Iloilo branch current 5 1 ,0 0 0

Shipment to Cagayan de Oro 4 5 ,0 0 0

d. Cagayan de Oro branch current 5 1 ,5 0 0

Shipment to Iloilo 4 5 ,0 0 0

Excess freight on interbranch transfer of

merchandise
4 ,0 0 0

Iloilo branch current 5 5 ,5 0 0

Shipment to Cagayan de Oro 4 5 ,0 0 0

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Use the following information for question 15
Charry Corp. established an agency in Baguio City. For the first month of operation, the
agency transactions were summarized as follows:

Receipts from sales 3 5 0 ,0 0 0

Disbursements for:

Purchases 4 0 0 ,0 0 0

Rent 2 0 ,0 0 0

Advertising supplies 1 0 ,0 0 0

Salaries and commissions 7 0 ,0 0 0

Other expenses 5 ,0 0 0

At the end of that month, the agency had P100,000 of receivables and P50,000 of
payables. Also, there were P90,000 of unsold merchandise and P6,000 of unused
advertising supplies on hand. The Baguio City agency was conceived as an experiment
and it is the intention of management to close it if its operations prove to be unprofitable.
What is the result of operations of the Baguio City agency?

a. No profit, no loss.

b. P 25,000 profit

c. P 9,000 loss

d. P 155,000 loss

-END-

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