Advanced Financial Accounting Chapter 2(Supplementary Reading) RVU Bishoftu Campus

LECTURE NOTES
Agencies and branches are established to decentralize
operations or to expand into new markets. Agencies are
simple extensions of the home office; branches,
generally, are with regulated autonomy to operate as
an independent entity.
Because agencies do not maintain its own set of
accounting records, all its transactions are recorded in
the books of the home office. If the home office would
like to determine viabilities of the agencies, real and
nominal accounts for the agency are identified in the
home office books to facilitate such determination.
Otherwise, the agency items are merged without
identification with those of the home office.
The branch has its own complete set of accounting
records, therefore all its transactions, including those
with the home office, are recorded in its books. It also
presents its own set of financial statements: the income
statement, the balance sheet, and the statement of
cash flows. But because the branch is but a part of the
home office, therefore, these set of financial statements
are not acceptable for general purposes. And since the
home office is just also a part of the whole organization,
its own set of financial statements: the income
statement, the balance sheet and the statement of cash
flows are also not acceptable for general purposes.
These two different sets of financial statements are
internal to each of the reporting entities, combined
financial statements must be prepared for the combined
entities (taken as one and the same) to meet the
requirements of general-purpose statements.
A branch and its home office represent two accounting
systems but just one accounting and reporting entity.
All entries in the accounting records of the branch are
also entered, at least in summary form, in the
accounting records of the home office. The records of
the home office and the branch are linked by two
reciprocal accounts; the Home Office Equity account in
the books of the Branch and the Investment in Branch
account in the books of the Home Office. Because they
are reciprocal, it means that the two accounts always
have the same balance although the Investment in
Branch is a debit account (as an asset in the books of
the Home Office) and the Home Office is a credit
account (as an equity item in the books of the branch).
The two accounts frequently show different balances on
a temporary basis due to errors and items in transit. A
very important aspect of the study of home office and
branches is the reconciliation of the reciprocal balances.

An illustration of journal entries recorded for interoffice transactions follow:

Transactions Home Office Books Branch Books

Transfer of cash from the home office Investment in branch x Cash x
Cash x Home office equity x
Transfer of cash from the branch Cash x Home Office Equity x
Investment in branch x Cash x
Transfer of mdse from HO at cost Investment in branch x Shipment from HO x
Shipment to branch x HO Equity x
Transfer of mdse from HO at above Investment in Branch x Shipment from HO x
cost Allowance for OV x HO Equity x
Shipment to branch x
Payment by HO of branch expenses Investment in branch x Expenses x
Cash x HO Equity x
Allocation of prev. paid branch exp Investment in branch x Expenses x
Expenses x HO Equity x
Transfer of Fixed asset from home Memo entry Memo entry
office to Branch
(Note: There will be no entry if all fixed assets are accounted in the books of
the home office); otherwise:
Investment in branch x Fixed Assets x
Accumulated depn x Acc Depn x
Fixed Assets x HO Equity x
To take-up branch Profit/(loss) Investment in branch x Income Summary x
Branch Income x HO Equity x
Branch loss x HO Equity x
Investment in branch x Income Summary x
To adjust the reported branch NI /NL) Allowance for Ovrvltn x No Entry
for realized allowance Branch Income x
Note: The adjusting entry to reflect the true net income or loss of the branch
from the standpoint of the home office is always favorable and only relevant
when billing policy is above cost:
RVU Bishoftu Campus

Advanced Financial Accounting (Chapter 2 Supplementary Reading)

 allocates part of the gross margin to the branch and
the remainder to the home office.

Working paper adjustments and eliminations must be

determined in order to:
1. Eliminate inter-company balances from the combined
statements to avoid redundancy, and
2. Adjust some items in the cost of sales section of the
branch income statement to their true costs (as a
consequence of the billing policy not equal to cost).

The working paper adjustment/elimination entries are as

follows:
a. Billed at Cost b. Billed above cost
HO Equity x HO Equity x
Detailed computation of realized allowance for Investment in Branch x Investment in Branch x
overvaluation thru sales by the branch to outsiders Accounts Payable x Accounts Payable x
during the period: Accounts Receivable x Accounts Receivable x
Billed Cost Mark-up Shipment to Branch x Shipment to Branch x
Price Price on Cost Shipment from Allowance for Ovrvltn x
Branch Beg Invty xx xx xx Home Office x Shipment from HO x
(from HO)) None Allownce for Ovrvltn x
Current shipments xx xx xx Branch Beg Invty x
(from HO None Br Ending Invty (I/S) x
Branch End Invty (xx) (xx) (xx) Branch End Invty (B/S) x
(from HO)
When a company is composed of a home office and more
Cost of Goods Sold xx xx xx
than one branch, the home office records include a
Cost = Billed Price/100% + % mark-up on cost = Mark- separate investment in branch account and a separate
up on cost/% mark-up on cost. The amount of allowance allowance for overvaluation account for each branch.
considered realized will be the allowance carried by the Separate worksheet adjustments are made for each
cost of goods sold. branch.

When assets are transferred from one branch to another

There are two pricing methods generally used by the
home office in billing the branch for merchandise
transfers:
1. Billed at cost – the merchandise is transferred at
cost, thus when the branch sells the merchandise,
the entire gross margin is included in the branch net
income.
2. Billed at cost plus markup – the merchandise is
transferred at an amount between cost and the
selling price. This intermediate pricing method
branch, the home office account on each branch’s records
are used to record the transfers. (Inter-branch
receivables and payables are not created.) In essence,
the transferring branch reverses the entry to record the
transfer from the home office and the receiving branch
enters a transfer as if it comes from the home office.
- done -

MULTIPLE CHOICE THEORETICAL

Select the best answer for each of the following multiple-choice questions:
1. May be Investment in Branch account of a home office a. Income statement as an offset to purchase
be accounted for by the b. Balance sheet as an offset to Investment in
Cost Method Equity Method Branch
of accounting of accounting c. Balance sheet as an offset to inventories
a. Yes Yes d. Income statement as revenue.
b. Yes No
c. No Yes 8. If the home office maintains in its general ledger
d No No accounts for a branch’s plant assets, the branch debits
its acquisition of office equipment to:
2. Which of the following generally is not a method of a. Home Office
billing merchandise shipments by a home office to the b. Office Equipment
branch? c. Payable to Home Office
a. Billing at cost d. Office equipment carried by home office
b. Billing at a percentage above cost
c. Billing at a percentage below cost 9. In a working paper for combined financial statements
d. Billing at retail selling price of the home office and the branch of a business
enterprise, an elimination that debits Shipments to
3. A branch journal entry debiting Home Office and Branch and credits Shipments from Home Office is
crediting Cash may be prepared for: required under:
a. The branch’s transmittal of cash to the a. The periodic inventory system only
Home Office b. The perpetual inventory system only
b. The branch’s acquisition for cash of plant c. Both the perpetual inventory system and
assets to be carried in the home office accounting the periodic inventory system
records only d. Neither the perpetual inventory nor the
c. Either (a) or (b) periodic inventory system
d. Neither (a) nor (b)
10. The appropriate journal entry for the home office to
recognize the branch’s expenditure of P10,000 for
4. A Home Office ‘s Allowance for Overvaluation of
equipment to be carried in the home office accounting
Inventories: Branch ledger account, which has a credit
records is:
balance, is
a. Equipment 10,000
a. an asset valuation account c. an equity account
Inv in Branch 10,000
b. a liability account d. a revenue account
b. Home Office 10,000
Equipment 10,000
5. Does the branch use a Shipments from Home Office
c. Investment in branch 10,000
ledger account under the:
Cash 10,000
Perpetual Inventory Periodic Inventory
d. Equipment-Branch 10,000
Method Method
Inv in Branch 10,000
a. Yes Yes
b. Yes No 11. On January 31, 2009, East Branch of Far Company,
c. No Yes which uses the perpetual inventory system, prepare
d. No No the following journal entry.
Inventories in transit 10,000
6. A journal entry debiting Cash in Transit and crediting Home Office 10,000
Investment in Branch is required for: To record merchandise shipment in transit from home
a. The Home Office to record the mailing of a office.
check to the branch early in the accounting period.
b. The branch to record the mailing of a check When the merchandise is received on February 4,
to the home office early in the accounting period. 2009, East Branch should:
c. The home office to record the mailing of a a. Prepare no journal entry
check by the branch on the last day of the b. Debit Inventories and credit Home Office, P10,000
accounting period. c. Debit Home Office and credit Inventories in transit,
d. The branch to record the mailing of a check P10,000
to the home office on the last day of the d. Debit inventories and credit Inventories in transit,
accounting period. P10,000.

7. For a home office that uses the periodic inventory 12. If a Home Office bills merchandise shipments to the
system of accounting for shipments of merchandise to branch at a markup of 20% on cost, the markup on
the branch, the credit balance of the Shipments to billed price is:
Branch ledger account is displayed in the home office a. 16.67% c. 25%
separate: b. 20% d. Some other percentage

STRAIGHT PROBLEMS

Problem 1 (Branch was billed at cost)
Alet Company, which prepares financial reports at the
end of the calendar year, established a branch on July 1,
2009. The following transactions occurred during the
formation of the branch and its first six months of
operations, ending December 31, 2009.
1. The Home Office sent P35,000 cash to the branch to
begin operations.
2. The Home Office shipped inventory to the branch.
Intracompany billings totaled P75,000, which was the
Home Office's cost. (Both the Home Office and the
Branch use a periodic inventory system.)
3. The branch acquired merchandise display equipment
which cost P15,000 on July 1, 2009. (Assume that
branch fixed assets are carried on the home office
books).
4. The branch purchased inventory costing P53,750 net 80,000 50,000
from outside vendors on account. Inventory,
January 1,
5. The branch had credit sales of P106,250 and cash
2008:
sales of P43,750. Acquired
6. The branch collected P55,000 of its accounts from
receivable. vendors 230,000 50,000
7. The branch paid outside vendors P35,000. Acquired
8. The branch incurred selling expenses of P18,750 and from 20,000
home
general and administrative expenses of P15,000. office
These expenses were paid in cash when they were Deferred
incurred and include the expense of leasing the profit 25,000
branch's facilities. Fixed assets,
9. The home office charged the branch P2,500 for its net 870,000 90,000
Investment in
share of insurance.
branch 155,000
10. Depreciation expense on the display equipment Accounts
acquired by the branch is P1,250 for the six-month payable 221,000 45,000
period. (Depreciation expense is classified as a selling Long-term
expense.) debt 400,000
11. The branch remitted P12,500 cash to the home office. Common
stock 300,000
12. The branch's physical inventory on December 31,
Retained 350,000
2009 is P41,250, of which P31,250 was acquired from Earnings,
the home office (there was no beginning inventory). January 1,
2008
Home office
Requirements: equity
1. Prepare journal entries in the books of the home 115,000
office and in the books of the branch office for the Sales 960,000 320,000
above transactions. Purchases 800,000 120,000
Shipments
2. Prepare closing entries in the books of the branch
from home
office to close its income statement accounts. office 90,000
3. Prepare adjusting entry in the books of the home Shipments to
office to reflect the increase or decrease in the branch 84,000
branch's net assets resulting from the branch Selling
operations. expenses 101,000 34,000
Administrativ
Problem 2 (Branch was billed at more than cost) e expenses
69,000 _______ 16,000 _______
The following transactions pertain to a branch's first Totals P2,340,00 P2,340,000 P 480,000 P480,000
month's operations: 0
1. The home office sent P11,250 cash to the branch.
2. The home office shipped inventory costing P50,000 to Inventory per physical count on December 31, 2009:
the branch; the intracompany billing was for P62,500. Acquired from vendors P180,000 P 20,000
3. Branch inventory purchases from outside vendors Acquired from home office 30,000
totalled P37,500.
4. Branch sales on account were P100,000. Additional information:
5. The home office allocated P2,500 in advertising 1. Inventory transferred to the branch from the home
expense to the branch. office is billed at 125% of cost.
6. Branch collections on accounts receivable were 2. The home office billed the branch P15,000 for
P56,250. inventory it shipped to the branch on December 28,
7. Branch operating expenses of P17,500 were incurred, 2009; the branch received and recorded this
none of which were paid at month-end. shipment on January 2, 2010.
8. The branch remitted P21,250 to the home office. 3. The branch remitted P25,000 cash to the home office
9. The branch's ending inventory (as reported in its on December 31, 2009; the home office received and
balance sheet) is composed of: recorded this remittance on January 4, 2010.
Acquired from outside vendors............….. .P15,000
Requirements:
Acquired from home office (at billing price). 25,000
1. Prepare the year-end adjusting entries to bring the
Total .........................................………...... 40,000
intracompany accounts into agreement. Be sure to
Requirements: adjust the other accounts in the trial balance as
1. Prepare the home office and branch journal entries appropriate.
for these transactions, assuming a periodic inventory 2. Complete the following analysis of the branch’s
system is used inventory
2. Prepare the month-end closing entries for the branch.
3. Prepare the month-end adjusting entries for the
home office relating to the branch's operations for the Transfers Transfers
month. Above cost __at cost__ Mark-up
Problem 3 Beginning
The pre-closing trial balances of Nicole Company and its inventory:
Acquired
Angeles City branch for the year ended December 31,
from
2009, prior to adjusting and closing entries are as vendors P P P
follows: Acquired
from home
Home Office Branch Office office
Accounts Debit Credit Debit Credit Add:
Cash P 35,000 P P10,000 Purchases
Accounts (from vendors)
receivable, Shipments
 from office e. The home office incorrectly credited the branch by P
10,000 for the remittance of its Cubao Branch. The
Total goods Ayala Branch made no entry.
available for f. The home office corrected the above entry on
sale
January 5, 2010. However, the Ayala Branch
Less: Ending
inadvertently received a copy of this memo and
inventory
Acquired entered a credit in favor of the home office as of
from December 31, 2009
vendors g. The branch returned merchandise worth P 12,500 to
Acquired the office and was duly acknowledge by the latter
from home during the year.
office 1. The unadjusted balance of the Home Office
Cost of goods Current account as of December 31, 2009.
sold 2. The adjusted balance of the interoffice accounts
3. Prepare the following year-end adjusting entries to: as of December 31, 2009.
a. Record the branch income on the home office Problem 6
books The Armani Corp. established a branch store in Ortigas
b. Adjust the deferred profit account to the proper on June 30, 2009. The branch is to receive substantially
balance all merchandise for sale from the home office. During the
4. Prepare the year-end closing entries for the home remainder of 2009, shipments to the branch amounted to
office and the branch P240,000 that included a 20% mark-up on cost. The
5. Prepare a combining statement worksheet as of branch purchased P 180,000 additional merchandise for
December 31, 2009, after completing requirements 1 cash and reported unsold merchandise for P 145,000 at
to 4 year-end. The branch made sales of P420,000, paid
6. From the completed worksheet prepare: expenses of P105,000 and remitted to the home office all
a. An income statement and balance sheet for the sales proceeds.
branch.
b. An income statement and balance sheet for the The allowance for overvaluation of branch inventory
home office. account on the home office books showed a balance of
c. An income statement and balance sheet P22,500 after adjustment.
combined for home office and branch office. 1. The branch ending inventory that represented
purchase from outsiders
Problem 4 2. The branch net income as far as the home office is
On December 31, the Inv. in Branch account on the home concerned.
books shows a balance of P150,000. The following facts
are ascertained: Problem 7
1. Merchandise billed at P5,000 is in transit on Home office bills its branch for merchandise shipment at
December 31, from the home office to the branch. 25% above cost. The following are some of the account
2. The branch collected a home account receivable for balances appearing on the books of home office and its
P2,000. The branch did not notify the home office of branch as of December 31
cash collection. Home Office Branch's
3. On December 30, the home office mailed a check of Books Books
P10,000 to the branch but the bookkeeper charged Inventory, Jan I P 22,500 P36,000
the check to General Expenses; the branch has not Shipments from Home Office 210,000
received the check as of December 31. Purchases 675,000 225,000
4. Branch profit for December was recorded by the Shipments to branch 180,000
home office at P8,900 instead of P9,800. Allowance for overvaluation of
5. Branch returned supplies of P1,000 to the home branch inventory 49,500
office but the home office has not yet recorded the Sales 900,000 540,000
receipt of the supplies. Operating Expenses 217,500 82,500
Required:
The ending inventory of the branch of P54,000 includes
a) Compute the balance of the Home Office account on
goods from outside purchases of P12,000; the ending
the branch book as of December 31 before its
inventory of the home office is P 112,500
adjustment.
1. The amount of shipments in transit at cost
b) Prepare a reconciliation statement to compute the
2. The overstatement of branch cost of sales
adjusted balances on December 31.
3. The combined net income for the year

Problem 8
Branch A was authorized by its home office to send cash
Problem 5
of P1,500 that it can spare to Branch B. How is this
The interoffice accounts between the main office of ABC
transfer best recorded on the books of
COMPANY and its branch in Ayala were adjusted to
(a) Branch A
P145,500 as of December 31, 2008. The transactions
(b) Branch B and
between the home office and the branch for 2009 were:
(c) the Home Office
a. Remittance by the branch (P38,000 was still in transit
as of December 31, 2009) P 178,000.
Problem 9
b. Shipments to branch (includes goods worth P44,000
The DIANNA Company has established several branches
that are not yet received by the branch as of
that sell the product that it manufactures. Manufactured
December 31, 2009) are P470,000.
units are billed to the branches at the manufacturing
c. The home office has not yet informed the branch of
costs, the branches paying the freight charges from the
its share in the advertising expense amounting to P
home office. On November 1, the home office ships goods
15,000.
to Branch No.1 charging the branch P10,000. The branch
d. Accounts receivable of the branch amounting to
pays freight charges of P500. It is subsequently
P30,000 was collected by home office, net ,of 4%
discovered that the home office had shipped the goods to
discount. The branch has not yet been notified.
Branch No. 1 by mistake and the home office directs Sales 390,000
Branch No.1 to forward to goods to Branch No.2. Branch Shipment from home office 270,000
No.2 upon receiving the goods pays freight charges from Accounts receivable, January 1, 2009 86,000
Branch No. 1 of 150. If the shipment had been made Inventory, January 1, 2009 74,000
directly from the home office the freight would have been Inventory, December 31, 2009 82,000
P350. Expenses 96,000
Give journal entries to record all of the foregoing All cash collected on Accounts Receivable amounting to
transactions on the books of (1) home office; (2) Branch P378,000 were remitted to the Home Office.
No.1 and (3) Branch No. 2.
Required:
Problem 10 1. What is the balances of the Home Office Account on
On December 31, 2009, the branch manager of Nancy January 1, 2009.
Company in Iloilo City submitted the following data to the 2. What is the balance of the Home Office Account on
home office in Manila: January 1, 2010.
Petty cash fund 6,000

MULTIPLE CHOICE
Romy Corporation has one branch office, named Tibo Purchases 500,000 -
Branch. Romy is performing the end-of-the-period Shipment to branch 130,000 -
reconciliation of its Tibo Branch account whose current Shipment from home office 156,000
balance is P000,000 and Tibo’s Home Office account Operating expenses 72,000 36,000
whose current balance is P000,000. The following items Ending inventory 98,000 48,000
are unsettled at the end of the accounting period (you
may assume that the item has been reflected in the All of the branch inventory is acquired from the home
accounts of the underlined entity): office.
Romy has agreed to remove P750 of excess freight 4. On the basis of these account balances, the
charges charged to Tibo when Romy shipped twice combined net income of the home office and the
as much inventory as Tibo requested. branch is:
Tibo mailed a check for P11,000 to Romy as a payment a. P170,000 c. P278,000
for merchandise shipped from Romy to Tibo. Romy b. P 70,000 d. P132,000
has not yet received the check.
Bicol Company is engaged in merchandising both at
Tibo returned defective merchandise to Romy. The
Home Office in Makati and a branch in Cebu. Selected
merchandise was billed to Tibo at P4,000 when its
accounts in the trial balances of the Home Office, and
actual cost was P3,000.
the branch at December 31, 2008 follow:
Advertising expense attributable to the branch office
Debit Home Office Branch
were paid for by the home office in the amount of
Inventory, January P 23,000 P 11,550
P5,000.
Branch 58,300
1. If the adjusted balances for the Tibo Branch Account
Purchases 190,000
and the Romy Home Office Account is P500,000, Shipments from Home Office 105,000
what unadjusted balance was listed in (1) Romy’s Freight in from Home Office 5,500
Tibo Branch Account and (2) Tibo’s Home Office Sundry expenses 50,000 25,000
Account? Credit
a. (1) P510,250 and (2) P505,000. Home Office 53,300
b. (1) P515,000 and (2) P495,750. Sales 155,000 140,000
c. (1) P514,000 and (2) P516,000. Shipments to Branch 110,000
d. (1) P504,000 and (2) P500,750. Allow. for overvaluation of
The Meycauayan branch of Marco Company, at the end branch inventory – Jan. 1 1,000
of its first quarter of operations, submitted the following
income statement: Additional information:
Sales P300,000 a. Cebu branch receives all its merchandise from
Cost of sales: the home office. The Home Office bills the goods at
Shipments from home office P280,000 cost plus 10% mark-up. At December 31, 2008 a
Local purchases 30,000 shipment with a billing price of P5,000 was in transit
Total P310,000 to the branch. Freight on this shipment was P250
Inventory at end 50,000 260,000 which is to be treated as part of inventory.
Gross margin on sales P 40,000 b. December 31, 2008 inventories, excluding the
Expenses 35,000
shipment in transit was:
Net income P 5,000
Home Office, at cost 30,000
Shipments to the branch were billed at 140% of cost.
Cebu Branch, at billed value
The branch inventory as at September 30 amounted to
(excluding freight of P520) 10,400
P50,000 of which P6,600 was locally purchased. Markup
on local purchases, 20% over cost. Branch expenses 5. Net income of the Home Office was
incurred by home office amounted to P2,500. a. P 10,000 c. P 20,000
2. On September 30, the branch inventory at cost and b. P 15000 d. P 22,000
net income realized by the home office from the 6. True income of Cebu Branch was
branch operations, respectively are: a. P 10,470 c. P 12,470
a. P37,600 and P72,600 b. P 11,470 d. P 13,470
b. P31,600 and P 5,000
c. P50,000 and P55,000 The following data were taken from the records of Star
d. P37,600 and P70,100 Corporation of Manila and its Bulacan Branch for 2008:
Manila office Bulacan branch
A home office transfers inventory to its branch at a 20%
Sales P 530,000 P157,500
markup on cost. During 2008, inventory costing the
Inventory, Jan. 1 57,500 22,250
home office P80,000 was transferred to the branch. At
Purchases 410,000
year-end, the home office adjusted its Unrealized
Shipment to branch 105,000
Intercompany Inventory Profit account downward by
P18,200. The branch’s year-end balance sheet shows Shipment from
P4,800 of inventory acquired from the home office. home office 126,000
3. How much is the beginning inventory of the branch Inventory, Dec. 31 71,250 29,250
at cost? Expenses 191,000 50,750
a. P 15,000 c. P 3,000 In 2008, Home office billed the branch at 120% of cost
b. P 18,000 d. P 16,000 which was lower by 5% than last year’s.
7. The combined net income of the home office and the
Sulu, Inc. established a branch in Jolo to distribute part branch for 2006 was:
of the goods purchased by the home office. The home a. P48,325 c. P49,850
office prices inventory shipped to the branch at 20% b. P48,575 d. P56,075
above cost. The following account balances were taken Nicole Company has a branch in Boracay established on
from the ledger maintained by the home office and the April 1, 2008. During the year 2008, the home office
branch: shipped merchandise to the branch at billed value of
Sulu, Inc. Jolo, Branch P125,000 which was 25% above cost. At the end of the
Sales P 600,000 P 210,000 year, the branch reported sales of P200,000, operating
Beginning inventory 120,000 60,000
expenses of P95,000, and a net income from the
operation of P15,000.
8. The true income of the branch was
a. P 15,000 c. P 18,000
b. P 25,000 d. P 33,000
Xero Corporation operates a number of branches in
Metro Manila. On June 30, 2008, its Sta. Clara branch
showed a Home Office account balance of P27,350 and
the Home Office books showed a Sta. Clara branch
account balance of P25,550. The following information
may help in reconciling both accounts:
1. A P12,000 shipment charged by Home Office to Sta.
Clara branch was actually sent to and retained by
Sta. Isabel branch.
2. A P15,000 shipment, intended and charged to Sto.
Domingo branch was shipped to Sta. Clara branch
and retained by the latter.
3. A P2,000 emergency cash transfer from Sta. Isabel
branch was not taken up in the Home Office books.
4. Home Office collects a Sta. Clara branch accounts
receivable of P3,600 and fails to notify the branch.
5. Home office was charged for P1,200 for merchandise
returned by Sta. Clara branch on June 28. The
merchandise is in transit.
6. Home office erroneously recorded Sta. Clara branch's
net income for May, 2008 at P16,275. The branch
reported a net income of P12,675.
9. What is the reconciled amount of the Home Office and
Sta. Clara branch reciprocal accounts?
a. P21,750 c. P27,350
b. P23,750 d.P20,150
The LL Company established a branch in Makati City on
June 1, 2008. The branch is to receive substantially all
merchandise from the home office. During the remainder
of 2008, shipments to the branch amounted to P180,000
which included a 20% mark-up on cost. The branch
purchased P45,000 additional merchandise for cash and
reported unsold merchandise of P60,000 at year-end.
The branch made sales of P292,500, paid expenses of
P72,000 and remitted to the home office all sales
proceeds. The allowance for overvaluation of branch
inventory account on the home office books showed a
balance of P7,500 after adjustment.
10. Compute the: (1) branch inventory on December 31,
2008 at cost, and (2) the branch net income as far
as the home office is concerned:
a. (1) P45,000; (2) P78,000
b. (1) P52,500; (2) P78,000
c. (1) P52,000; (2) P55,500
d. (1) P50,000; (2) P79,500

- now do the DIY drill -

DO-IT-YOURSELF (DIY) DRILL

The following information are extracted from the books During the month of December, the agency transmitted
and records of PP Company and its branch. The to the home office sales orders which were billed at
balances are at December 31, 2009, the third year of P64,380 of which 20,400 was collected. A home office
the corporation's existence. disbursement chargeable to the sales agency is the
Home Office acquisition of furniture and fixtures for Las Pinas,
Books Branch P25,000 to be depreciated at 24% per annum. The
Books agency paid expenses of P3,815 and received
Sales P600,000 replenishment thereof from the home office. On
Expenses 200,000 December 31, 2008, the agency samples were valued
Shipments from home office 360,000 at P10,075. It was estimated that the gross profit on
Allowance for overvaluation P72,500 goods shipped to bill agency sales orders average 25%
of cost.
The branch acquired all of its merchandise from the
home office. The inventories of the branch at billed 3. How much is the net income of the agency for the
prices are as follows: month ended December 31, 2008?
January 1, 2009 P75,000 a. P 2,886 c. P 12,876
December 31, 2009 84,000 b. P 3,386 d. P (2,614)

1. The adjusted profit of the branch in so far as the Trial balances for the home office and for the branch of
home office is concerned is: Mermaid Company show the following accounts before
a. P107,500 c. P 58,500 adjustment as of December 31, 2008. The home office
b. P 49,000 d. P 60,000 bills merchandise to the branch at 20% above cost.
HO Branch
Nicole Company’s Kalibo branch reports a profit of Unrealized intercompany
P17,000 for the year 2009 and a balance in its Home inventory profit P10,800
Office account at the end of the year of P88,000 after Shipments to branch 24,000
closing. The branch income currently is unrecorded by Purchases (other vendors) P7,500
the home office. During the year, the home office had Shipments from Home Office 28,800
shipped inventory to the branch at an intracompany Merchandise inventory -
profit of P14,000. Of that amount, P6,000 currently is December 1, 2008 45,000
unrealized.
2. Assuming the branch has made all entries to adjust 4. What part of the December 1, 2008 branch
and close its books for 2009, what is balance in the inventory represents acquisitions from outside
home office’s Investment in Branch account? purchases, and what part represents acquisitions
a. P 65,000 c. P 88,000 from the home office?
b. P 71,000 d. P 94,000 Outsider Home Office
a. P9,000 P36,000
On December 1, 2009, the Dustine Company
b. 10,000 35,000
established an agency in Las Pinas, sending its
c. 12,000 33,000
merchandise samples costing P15,750 and a working
d. 15,000 30,000
fund of P9,000 to be maintained on the imprest basis.
Universal Textiles has a single branch in Cagayan de
Oro City. On March 1, 2009, the home office accounting
records included an Allowance for Overvaluation of
Inventories with a credit balance of P32,000. During
March, merchandise costing P36,000 was shipped to the
CDO branch and billed at a price representing a 40%
markup on the billed price. On March 31, the branch
reported a net loss of P11,500 for March and ending
inventories at billed prices of P25,000. Mark-up was
uniform on all shipments.
5. Calculate the overstatement of the cost of sales in
the branch income statement in terms of the actual
cost of sales, i.e. per home office cost.
a. P46,000 c. P39,257
b. P22,000 d. P40,000
On December 31, 2009, the Branch account in the
Manila Home Office books shows a balance of P55,500.
You ascertain the following facts in analyzing this
account.
1. On December 31, 2009, merchandise billed at
P5,800 was in transit from the home office to the
branch.
2. The branch had collected home office accounts
receivable of P560; the home office was not
notified.
3. On December 29, 2009, the home office mailed a
check for P2,000 to the branch, but the accountant
for the home office had recorded the check as a
debit to Charitable Contributions; the branch had
not received the check as of December 31, 2009.
4. Branch net income for December 2009 was
recorded erroneously by the home office at P840
instead of P480.
5. On December 28, 2009, the branch had returned
supplies costing P220 to the home office; the home
office had not recorded the receipt of the supplies
as at Dec. 31.
6. Calculate the adjusted balance of the reciprocal
accounts at December 31, 2009.
a. P49,680 c. P46,980
b. P57,480 d. P54,870
Excel Corporation operates a branch in Calamba City.
The Home Office ships merchandise to the branch at
20% of the billed price. Selected information from the
December 31, 2009 trial balance are as follows:
Home Office Branch
Books Books
Sales P600,000 P300,000
Shipments to branch 200,000
Purchases 350,000
Shipments from home
office 250,000
Inventory, January 1 100,000 40,000
Unrealized inter-company
inventory profit 58,000
Expenses 120,000 50,000
Inventory at December
31, 2009 30,000 60,000
7. Calculate the combined net income for the home
office and the branch for 2009:
a. P236,000 c. P280,000
b. P263,000 d. P326,000
8. The AB Trading Co. operates a branch in Iloilo. At
close of business on December 31, 2008, Home
Office account in the branch books showed a credit
balance of P372,900. The interoffice accounts were
in agreement at the beginning of the year. For
purpose of reconciling the interoffice accounts, the
following facts were ascertained;
a. A furniture costing the home office P4,600 was
picked up by the branch as P460. The branch
will maintain and use the asset.
b. The branch writes-off uncollectible, accounts of
P1,260. The allowance for doubtful accounts is
maintained on the books of the home office.
The home office was not yet notified.
c. Freight charge on merchandise made by the
home office for P2,715 was recorded in the
branch books as P7,215.
d. Home office credit memo for P9,710 was
recorded by the branch at P7,91 0.
e. Iloilo branch failed to take up a P2,450 debit
memo from the home office.
f The home office inadvertently recorded a
remittance for P3,730 from its Ilocos branch as
remittance from its Iloilo branch.
g. Insurance premium of P1,675 charged by the
home office was taken up twice by the branch.
h. A P14,500 branch remittance to the home office
initiated on December 28, 2008, was recorded
on the home office books on January 2, 2009.
i. A home office inventory shipment to Ilocos
branch on December 29, 2008, was recorded by
the branch on January 3, 2009; the billing of
P47,000 was at cost,
j. A branch customer remitted a P19,000 to the
home office, The home office recorded this cash
collection on December 22, 2008. Meanwhile,
back at the branch, no entry has been made
yet.
Determine the balance of the Investment in Branch
account before adjustments:
a. P364,545 c. P319,545
b. P307,515 d. P366,545