Chapter 7
Home Office and Branch Accounting Companies may increase their volume of sales by establishing sales outlets in various areas. These sales outlets may be a branch or an agency.
When a company operates a branch, the branch must maintain accounting records to facilitate its reporting responsibility to the home office. Problems dealing with Home Office and Branch Accounting appear in almost every CPA examination. Candidates should be familiar with the problems involving the following: 1. 2. 3. 4.
Uses of the reciprocal accounts. Preparation of a Reconciliation Statement. Billing of Merchandise by Home Office to Branch above cost. Preparation of Combined Financial Statements.
Uses of the Reciprocal Accounts In recording inter-office transactions, two reciprocal accounts are used, namely, the Investment in Branch (Branch Current) account used by the home office which is classified as an asset; and the Home Office (HO Current account) used by the branch which is classified as a liability. The reciprocal nature of the Investment in Branch and the Home Office accounts and the way in which they are affected by various inter-office transactions are shown below:
xx xx
(Home Office Books) Investment in Branch xx xx
Assets transfer to branch Assets transfer from branch Branch profit Branch loss
xx xx
(Branch Books) Home Office xx xx
Preparation of Reconciliation Statement The balances of the two reciprocal accounts should at all times equal. If the balances of the reciprocal accounts are not equal before the preparation of separate statement of financial position, a reconciliation statement is to be prepared. This is done to determine the causes of the inequality between the two accounts. The accounts are then adjusted to determine their adjusted balances. The following are the usual causes that the candidate should take note: 1. Transactions have been recorded by the branch but not by the home office.
2. Transactions have been recorded by the home office but not by the branch. 3. Errors in recording have occurred in one or both books. 4. Transactions have not yet been recorded on either set of books. Billing of Merchandise by Home office to Branch above Cost Merchandise shipped to branch by the home office may be billed at an amount above cost. Under this method of billing, the profit recognized by the branch will be less that its actual profit, because its cost of goods sold is overstated insofar as the home office is concerned. The problems involving billing of merchandise to branch above cost are the following 1. Computation of branch at inventory at cost. 2. Computation of the actual or true branch profit insofar as the home office is concerned. Computation of Branch Inventory at Cost Candidates should use the following formula: a. If branch are all acquired from the home office, the formula is: Branch inventory acquired from home office at billed price Divide by billing percentage of cost Branch inventory at cost
Pxx % Pxx
b. If branch inventory includes merchandise acquired from outsiders, the formula is: Branch inventory acquired from home office at cost: Merchandise at billed price Divide by billing percentage of cost Add: inventory acquired from outsiders Branch inventory at cost
Pxx %
Pxx xx xx
Computation of Actual Branch Profit insofar as Home Office is Concerned The actual or true branch insofar as the home office is concerned is computed as follows: Branch profit (loss) as reported Add: Overvaluation of branch cost of goods sold (Schedule 1) Actual branch profit insofar as home office is concerned Schedule 1
Pxx xx Pxx
Branch inventory, beg. (acquired from HO) Add: Shipments during the period Total before adjustment Less: Branch inventory, end (acquired from HO) Overvaluation of branch COGS (Realized Profit)
Billed Price ÷ Pxx xx
Percent of Cost = Pxx xx
Cost Pxx xx
xx
xx
xx
Allowance for Overvaluation Pxx xx xx Pxx
Preparation of Combined Financial Statements The balance sheets and the income statements of the home office and the branch must be combined for external reporting purposes. Working papers are usually prepared to eliminate accounts affected in recording inter-office transactions before financial statements are prepared. Candidates should remember the following working paper elimination procedures: 1. Eliminate reciprocal accounts. 2. Eliminate inter-company transfer accounts. a. Shipment to Branch and Shipment from Home Office accounts. b. Allowance for Overvaluation of Branch Inventory. 3. Eliminate the overvaluation in branch beginning inventory. 4. Eliminate the overvaluation in branch ending inventory. Combined Statement of Financial Position. The reciprocal accounts “Investment in Branch” and “Home Office” accounts are not presented as well as the Allowance for Overvaluation account. Combined Statement of Comprehensive Income. The merchandise inventories, beginning and ending inventories are presented at cost. The Shipment to Branch and Shipment from Home Office accounts are not presented. Transactions between Branches Occasionally, branch operations require that merchandise or other assets be transferred from one branch to another. A branch does not maintain a reciprocal account with another branch but records the transfer in the Home Office account. For example, if Bicol Branch ships merchandise to Laguna Branch, Bicol Branch debits Home Office account and credits Inventories (assuming that the perpetual inventory system is used). Upon receipt of the merchandise, Laguna Branch debits Inventories and credits Home Office account. The home office records the transfer between branches by a debit to Investment in Laguna Branch and a credit to Investment in Bicol Branch.
The transfer of merchandise from one branch to another does not increase the cost of inventories by the freight costs incurred because of the indirect routing. The amount of freight costs properly included in inventories at a branch is limited to the cost of shipping the merchandise directly from the home office to its present location. Excess freight costs are recognized as expenses of the home office. Accounting System for Sales Agencies An agency is simply an extension of the sales territories in which orders are received from customers and then transmitted to the home office for shipping and billing. They do not have merchandise available for sale, but they keep samples inventory. A sales agency neither keeps a complete set of books nor uses a double-entry system of accounts. Usually, a record of sales to customers and a list of cash payments supported by vouchers are sufficient. An imprest system is usually adopted by the home office for the working fund of the sales agency.
PROBLEMS 1. Cebu branch submitted the following data to its home office in Manila for 2013, its first year of operation: Sales Shipments from home office Operating expenses Home office
P2,300,000 1,850,000 235,000 480,000
2. The home office in Quezon City ships and bills merchandise to its provincial branch at cost. The branch carries its own accounts receivable and makes its own collections. The branch also pays its expenses. The transactions for 2013 are reflected in the branch trial balance that follows: Cash Accounts receivable Home office Shipments from Home Office Sales Expenses Total December 31, inventory
P20,000 80,000 250,000 55,500 P405,500 P65,000
P180,000 225,500 P405,500
Assuming all the transactions are properly recorded, what is the balance of the Investment in Branch account in the home office books? a. b. c. d.
P180,000 P195,000 P165,000 P175,000
3. The following data pertains to the shipments of merchandise from Home Office to Branch during 2013: Home office’s cost of merchandise Inter-office billings Sales by branch to outsiders Merchandise inventory on December 31, 2013
P350,000 420,000 520,000 50,000
In the combined statement of comprehensive income of the Home Office and the Branch for the year ended December 31, 2013, what amount of the above transactions should be included as sales? a. b. c. d.
P570,000 P520,000 P470,000 P350,000
4. Nike Corporation operates a number of branches in the provinces. On December 31, 2013, its Davao branch showed a Home Office account balance of P54,700 and the home office books showed an Investment in Davao Branch account balance of P51,100. The following information may help in reconciling both accounts: 1. A P24,000 shipment, charged by Home Office to Davao Branch, was actually sent to and retained by Cebu Branch. 2. A P30,000 shipment, intended and charged to Aklan Branch was shipped to Davao Branch and retained by the latter. 3. A P4,000 emergency cash transfer from Cebu Branch was not taken up in the Home Office books. 4. Home office collects a Davao Branch accounts receivable of P7,200 and fails to notify the branch. 5. Home office was charged for P2,400 for merchandise returned by Davao Branch on December 30. The merchandise is in transit. Home office erroneously recorded Davao Branch’s net income for 2013 at P32,550. The branch reported a net income of P25,350. What is the adjusted balances of the Home Office and Davao Branch reciprocal accounts on December 31, 2013? a. b. c. d.
P40,300 P54,700 P47,500 43,500
5. The branch manager of Tower Cosmetics in Cebu submitted a report as of May 31, 2013 containing the following information: Petty Cash Fund Sales Sales Returns Accounts Written Off Shipments from Home Office Accounts Receivable – May 31, 2012
P1,500 198,720 3,600 1,920 136,080 43,800
Accounts Receivable – May 31, 2013 Inventory – May 31, 2012 Inventory – May 31, 2013 Expenses (reimbursed by H.O.)
49,140 37,170 41,370 57,930
Assuming all cash collected by the branch is remitted to Tower Cosmetics home office, the remittances for the period amounted to: a. b. c. d.
P187,860 P189,780 P195,120 P198,720
6. On December 31, the Investment in Branch account in the home office books shows a balance of P50,000. The following facts are ascertained: 1. Merchandise billed at P12,500 is in transit on December 31 from the home office to the branch. 2. The branch collected a home office accounts receivable for P3,500. The branch did not notify the home office of such collection. 3. On December 30, the home office sent cash of P7,500 to the branch, but this was charged to General Expense; the branch has not received the cash as of December 31. 4. Branch profit for December was recorded by the home office at P2,400 instead of P2,040. 5. The branch returned supplies of P1,500 to the home office but the home office has not yet recorded the receipt of the supplies. Assume all other transactions have been properly recorded. What is the unadjusted balance of the Home Office account on the branch books on December 31? a. b. c. d.
P64,140 P39,140 P14,000 P13,000
7. A reconciliation of the Dagupan Branch account of Mandaluyong Company and the Home Office account carried in the branch’s books shows the following discrepancies at December 31, 2013: 1. A credit for merchandise allowance for P300 was taken by the branch as P360. 2. A charge by the branch of P550 for an advance taken by the president when he visited the branch has not yet been recorded by the home office.
3. The branch has not taken up P900 covered by a debit memo from the home office as share in advertising expenses. The investment in Dagupan Branch account in the home office books had a debit balance of P43,000 at December 31, 2013. The reciprocal accounts were in agreement at the beginning of the year. The unadjusted balance of the Home Office account in the branch’s books at December 31, 2013 was: a. b. c. d.
P43,500 P42,950 P41,990 P41,490
8. The following were found in your examination of the interplant accounts between the Home Office and the Butuan Branch: a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked by the branch. b. P10,000 covering marketing expense of another branch was charged by Home Office to Butuan. c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice. d. Home Office recorded cash transfer of P65,700 from Butuan Branch as coming from Davao Branch. e. Butuan reversed a previous debit memo from Cagayan de Oro Branch amounting to P10,500. Home Office decided that this charge is appropriately Davao Branch’s cost. f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560. The net adjustments DR (CR) to the Investment in Butuan Branch account and to the Home Office account are: a. b. c. d.
Investment in Butuan P(75,700) 75,700 (55,700) (65,700)
Home Office P20,950 (20,950) 75,000 (74,000)
9. After examining on a comparative basis the inter-office account of the Bulacan Company with its suburban branch and the similar account carried on the latter’s books, the following discrepancies at the close of the business on June 30, 2013 were seen: a. A charge for labor by the Home Office, P500 was recorded twice by the branch.
b. A charge of P895 was made by the Home Office for freight on merchandise, but the amount was recorded by the Branch as P89.50. c. A charge of P980 (furniture and fixture) on the Home Office books was taken up by the Branch as P890. d. A credit by the Home Office for P350 (merchandise allowances) was taken up by the Branch as P400. e. The Home Office charged the Branch P425 for interest on open account which the Branch failed to take up in full; instead, the Branch sent to the Home Office a wrong memo, reducing the charge by P100 and set up a liability for the net amount. f. The Home Office received P5,000, from the sale of a truck which it erroneously credited to the Branch; the Branch did not charge the Home Office therewith. g. The Branch by mistake sent the Home Office a debit note for P370 representing its proportion of a bill for repairs of truck; the Home Office did not record it. h. The Branch inadvertently received a copy of the Home Office entry dated July 19, 2011 correcting item (f) and entered a credit in favour of the Home Office as of June 30, 2013. At June 30, 2013, the unadjusted balance of the Investment in Branch account on the Home Office books showed P175,520. At the beginning of the year, the inter-office accounts were in balance. What is the unadjusted balance of the Home Office account on the branch books on June 30, 2013? a. b. c. d.
P184,279.50 P160,725.50 P184,729.00 P165,279.50
10. Rustans, Philippines has two merchandise outlets, its Home Office in Manila and its Cebu City branch. For control purposes, all purchases are made by the Home Office and shipped to the Cebu City branch at cost plus 10%. On January 1, 2013 the inventories of the Home Office in Manila and the Cebu City branch are P13,600 and P3,960 respectively. During 2013 the Home Office purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch. At December 31, 2013, the following journal entry to prepare the books for the next accounting period was prepared by the branch: Sales Inventory, December 31 Inventory, January 1 Shipments from main store Expenses Home Office
32,000 4,840
3,960 17,600 10,480 4,800
What was the actual branch income for 2011 on a cost basis assuming the use of the provisions of the Statement of Financial Accounting Standards? a. b. c. d.
P4,800 P6,320 P6,480 P6,840
11. On September 1, Star Company opened a branch in Dagupan City, shipping to it merchandise billed at P60,000. During the month, additional shipments were made at a billed price of P24,000. Returns by the branch of bad-order goods were credited for P1,680. At the end of the month, the branch reported its inventory P33,600 and its net loss for the month at P5,200. Shipments to and from the branch were consistently billed at 120% of cost. On September 30, the branch inventory at cost and the branch net income (loss) as far as the Home Office is concerned are: a. b. c. d.
P28,000 and P2,920, respectively P28,000 and (P5,200), respectively P33,600 and P2,920, respectively P33,600 and P5,200, respectively
12. Makati Company bills its Valenzuela Branch for merchandise at 140% of cost. At the end of January, 2013, the branch reported the following information: Merchandise from Home Office (At Billed Price) Inventory, January 1 P7,560 Shipments received 28,280 Inventory, January 31 8,400 What should be the balance of the allowance account for overvaluation of the branch inventory at January 31 before adjustment? a. P2,400 b. P2,160 c. P9,080 d. P10,240 13. The Binondo branch of China Products Inc. buys merchandise from third parties and receives merchandise from the home office for which it is billed at 20% above cost. Below are excerpts from the trial balances and data on the home office and Binondo branch for the month just ended:
Home office Allowance for overvaluation of branch merchandise Shipments to Branch Branch Beginning inventory Shipments from home office Purchases Month end additional data Ending inventory of Branch From Home Office at Billed Price P1,170,000 From Outsiders (at cost) 290,000
P370,000 850,000 1,440,000 1,020,000 410,000 1,460,000
The total cost of goods sold of the Binondo branch at cost (net of overvaluation) for the month just ended amounted to: a. b. c. d.
P1,410,000 P1,385,000 P1,235,000 P1,850,000
14. Shopper Company started a branch office in Iloilo City on June 1,2013. On this date, the company shipped to its branch merchandise billed at P90,000. On June 15, another shipment was made at billed prices of P36,000. During the month, the branch was credited for P2,520 for the damaged goods returned by the branch. On June 30,2013, the branch reported the following: Inventory, June 30 Net loss for the month
P50,400 (P7,800)
Shipments to and from the branch were uniformly billed at 120% of cost. In the home office books, the Iloilo branch operations resulted in: a. No net income or loss b. Net income of P4,280 c. Net income of P12,180 d. Net loss of P7,800 15. Tarlac Branch of Quezon City Company, at the end of its first quarter of operations, submitted the following statement of comprehensive income: Sales Cost of Sales: Shipments from Home office Local Purchases Total
P300,000 P280,000 30,000 310,000
Inventory at end Gross margin on sales Expenses Comprehensive income
50,000
260,000 40,000 35,000 P 5,000
Shipments to the branch were billed at 140% of cost. The branch inventory as at September 30 amounted to P50,000 of which P6,600 was locally purchased. Markup on local purchases, 20% over cost. Branch expenses incurred by Head Office amounted to P2,500. On September 30, the branch inventory at cost and the net income realized by the home office from the Tarlac branch operation are: a. b. c. d.
Branch Inventory at Cost P37,600 P50,000 P31,600 P37,600
Net income realized P72,600 P55,000 P5,000 P70,100
16. Ayala branch was billed by Home Office for merchandise at 140% of cost. At the end of its first month, Ayala branch submitted among other things, the following data: Merchandise from Home Office (at billed price) Merchandise purchase locally by branch Inventory, December 31 of which P7,000 are of local purchase Net sales for month
P98,000 40,000 28,000 180,000
The branch inventory at cost and the gross profit of the branch as far as the home office is concerned are: Branch Inventory at Cost Gross Profit a. P92,000 P22,000 b. P22,000 P92,000 c. P22,000 P70,000 d. P20,000 P90,000 17. The Coffee Blends Corporation decided to open a branch in Manila. Shipments of merchandise to the branch totalled P54,000 which included a 20% mark-up on cost. All accounting records are to be kept at the home office. The branch submitted the following report summarizing its operations for the period ended December 31, 2013. Sales on account Sales on Cash basis Collections of account Expenses paid
P74,000 22,000 60,000 38,000
Expenses unpaid Purchase of merchandise for cash Inventory on hand, December 31; 80% from home office Remittance to home office
12,000 26,000 30,000 55,000
The branch 12/31 inventory at cost and the branch net income (loss) as far as the home office is concerned are: Branch Inventory at Cost Branch Net income (loss) a. P26,000 (P1,000) b. P25,000 (P4,000) c. P26,000 P1,000 d. P20,000 P 800c 18. Trial balances before adjustments for the home office and the branch of the King Company show the following items on December 31. The home office bills the branch at 20% above cost.
Allowance for overvaluation of branch merchandise Shipment to branch Purchases Shipment from home office Merchandise Inventory, December 1
Home Office P3,600 8,000
Branch P2,500 9,600 15,000
What part of the branch inventory as of December 1 represented purchases from outsiders? a. b. c. d.
P3,000 P5,000 P2,000 P1,800
19. The Manila Sales Co. established a branch in San Pablo City early last year. It shipped merchandise and billed the branch for P300,000 prior to its opening. For the year, it made additional shipments at billed price of P120,000. Within the year, the branch shipped backP7,500 inventory and got the credit memo for the said returns. On the last working day of the year, an inventory count was made. Ending inventory of P185,000 was established consisting of purchases from third parties at P20,000 with the balance coming from home office shipments at billed price.. The home office billed the branch at 20% above cost. The total purchases of the branch from outside suppliers amounted to P72,500. The total goods available for sale by the branch at cost (net of overvaluation and returns) amounted to: a. b. c. d.
P416,250 P485,000 P422,500 P435,250
20. The income statement submitted by the Bulacan Branch to the Home Office for the month of December,2013 is shown below. After affecting the necessary adjustments the true net income of the Bulacan Branch inventories were:
Merchandise from Home Office Local purchases Total Sales Cost of Sales: Inventory, December 1 Shipments from home office Local purchases Total available for sale Inventory, December 31 Gross Margin Operating expenses Total comprehensive for December 2011
12/01/2011 P70,000 10,000 80,000
12/31/2011 P84,000 16,000 100,000 600,000
80,000 350,000 30,000 460,000 100,000
360,000 240,000 180,000 P60,000
What is the balance of the “Allowance for Overvaluation in Branch Inventory” account at December 31, 2013? a. b. c. d.
P10,000 P16,000 P24,000 P34,000
21. Mahiyain Commercial Corporation operates a branch in Iloilo City. Selected accounts take from the books of Mahiyain and its branch show balances as of December 31,2013 as follows: Home office Branch Merchandise inventory, January P12,000 P8,000 1 Purchase 150,000 30,000 Shipments from home office 93,750 Shipments to branch 75,000 Branch inventory allowance 19,750 Sales 115,000 176,500 Merchandise inventory, 14,000 10,350 December 31 The ending inventory of the branch includes items costing P4,350 which were acquired from suppliers other than the home office. As far as the home office is concerned, the cost of sales of the Iloilo City branch was: a. P97,120 b. P102,850 c. P121,400
d. P131,850 22. The Neneng Corporation established its San Pedro branch in March 201. During the first year of operations, the home office shipped to the branch merchandise which had cost of P120,000. Threefourths of these merchandise was sold by the branch for P141,000. Operating expenses of the branch amounted to P27,000. How much total comprehensive income will the branch report if merchandise is billed by the home office to the branch at 25% above cost? a. P800 b. P1,200 c. P1,500 d. P8,000 23. A branch store in Marikina was established by Marco Co. on March 1. Shipments of merchandise, billed to this branch at 125% of cost, were as follows: March 5 P120,000 March 10 50,000 March 20 35,000 On March 24, the branch returned defective merchandise worth P3,050 and on March 31, it reported a net loss of P6,200 and merchandise inventory of P85,000. In the home office books, the branch total comprehensive income (loss) is: a. (P6,200) b. P17,190 c. P20,240 d. P23,390 24. The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City. During 2013, the home office shipped to the branch supplies costing P120,000 at a billed price of 20% above cost. The inventories of supplies at the branch were as follows: January 1,2013, P90,000; December 31,2013, P108,000. On December 31,2013, the home office holds inventories of P160,500 which includes P10,500 held in consignment. How much is the inventories in a combined statement of financial position as of December 31,2013? a. P210,000 b. P240,000 c. P270,000 d. P300,000 25. The Iloilo Company operate a branch in Davao, and the profit and loss data for the home office and the branch for 2013 follows: Home office Branch Sales P250,000 P75,000 Purchases from outsiders 200,000 15,000 Shipments to branch: Cost to home office 30,000 Billing price to branch 37,500 Expenses 40,000 10,000 Inventories, Jan. 1,2013: Home office, at cost 80,000 Branch:
From outsiders, at cost From home office, at 20% above cost Inventories, December 31,2013: Home office, at cost Branch: From outsiders, at cost From home office at 2013 billing
7,500 24,000 55,000 5,500 26,000
The combined total comprehensive income (loss) of the home office and the branch on December 31,2013 is: a. P30,800 b. P(30,800) c. P33,800 d. P27,000 26. Manila Inc. established a branch in Cebu to distribute part of the goods purchased by the home office. The home office process inventory shipped to the branch at 20% above cost. The following account balances were taken from the ledger maintained by the home office and the branch: Manila Inc. Cebu branch Sales P600,000 P210,000 Beginning inventory 120,000 60,000 Purchases 500,000 Shipment to branch 130,000 Shipment from home office 156,000 Operating expenses 72,000 36,000 Ending inventory 98,000 48,000 All of the branch inventory is acquired from the home office – The combined total comprehensive income of the home office and the branch is: a. P170,000 b. P70,000 c. P278,000 d. P132,000 27. Selected accounts from the December 31,2013 trial balances of Heart Co. and its branch follows: Heart Branch Inventory, Jan.1 P46,000 P23,100 Investment in Branch 116,600 Purchases 380,000 Shipments from home office 209,000 Freight in 10,450 Expenses 104,000 58,100 Home office (106,600) Sales (310,000) (280,000) Shipments to branch (200,000) Branch merchandise markup (22,000) -
As of December 31,2013, a shipment with a billing price of P11,000 was in transit to the branch. Freight cost, typically 5% of the billing price, is inventoriable. Merchandise on hand at a year-end were: at home office P64,000 at cost; at branch P33,000 at billing price. What is the combined total comprehensive income of Heart Company and its branch for 2013? a. P77,000 b. P84,900 c. P76,000 d. P76,100 28. Apo Supply Company is engaged in merchandising both at its Home office in Makati and as its Branch in Davao City. Selected accounts taken from the trial balances of the Home office and the branch as of December 31,2013 follows: Makati Branch Debits Inventory, Jan. 1,2013 Davao branch Purchases Freight in from home office Sundry expenses
P23,000 58,300 190,000 52,000
P11,550 105,000 5,500 28,000
Credits Home office PP53,300 Sales 155,000 140,000 Sales to branch 110,000 Allowances for overvaluation of Branch inventory at Jan. 1,2013 1,000 Additional information: - The Davao City branch gets all of its merchandise from the home office. The home office bills the goods at cost plus a 10% mark-up. At December 31,2013, a shipment with a billed value of P5,000 was still in transit. Freight on this shipment was P250 and is to be treated as part of the inventory. - Inventories on December 31,2013, excluding the shipment in transit, follow: Home office, at cost P30,000 Branch, at billed price (excluding freight of P520) 10,400 What is the combined total comprehensive income (loss) of the home office and the branch on December 31,2013? a. P30,470 b. P20,870 c. P(10,000) d. P(30,470) 29. On November 2,2013, the home office of Toby Sports Company recorded a shipment of merchandise to its Bulacan as follows: Investment in branch – Bulacan 60,000 Shipments to branch 50,000 Allowance for overvaluation of branch inventory 8,000 Cash (for freight charges) 2,000
The Bulacan branch sells 40% of the merchandise to outside customers during the rest of the period. The books of the home office are closed on December 31 of each year. On January 10,2014, the Bulacan branch transfer half of the original shipment to the Baguio branch, and the Bulacan branch pays P1,000 freight for the shipment. If the shipment had been made by the home office to Baguio branch, the freight charges would have been P1,500. What is the entry of the Bulacan brancg to record the receipt of the shipment from the home office on November 2,2013? a. Shipments from home office 50,000 Accounts receivable 8,000 Freight in 2,000 Home office 60,000 b. Shipments from home office 60,000 Home office 60,000 c. Shipments from home office 58,000 Freight in 2,000 Home office 60,000 d. Shipments from home office 50,000 Freight out 2,000 Home office 52,000 30. using the same data in No. 29, at what amount should the 60% of the merchandise remaining unsold at December 31,2013 be included in the inventory of the Bulacan Branch? a. P31,200 b. P36,000 c. P36,800 d. P34,800 39. Using the same data in No. 29, what is the entry in the books of Bulacan Branch to record the transfer of January 10,2014? a. Baguio branch 31,000 shipment from home office 31,000 b. home office 31,000 inventory 31,000 c. home office 31,000 inventory 30,000 cash 1,000 d. home office 32,000 cash 1,000 freight in 2,000 inventory 29,000 32. Using the same data in No. 29, what is the entry in the books of Baguio branch to recorf the transfer on January 10,2014? a. shipments from Bulacan Branch 30,200 Bulacan branch 30,200 b. shipments from home office 29,000 freight in 1,500 home office 30,500
cash c. shipments from home office freight in home office d. shipment from home office freight in home office
29,000 1,500 30,000 1,000
1,000 30,500 31,000
33. Using the same data in No. 29 what is the entry in the home office books to record the interbranch transfer on January 10,2014? a. investment in branch – Baguio 30,500 excess freight 1,500 investment in branch – Bulacan 32,000 b. investment in branch – Baguio 30,500 investment in branch – Bulacan 30,500 c. investment in branch – Bulacan 32,500 investment in branch – Baguio 32,500 d. investment in branch – Baguio 30,500 excess freight 500 investment in branch – Bulacan 31,000 34. Papa, Inc. of Makati opens a sales agency in Pasig City and a working funn of P100,000 is established on imprest basis. The first payment from the fund is P5,000 for rent of the store space. What is the entry in the books of the home office to record the payment of rent by the agency? a. Rent expense – Pasig agency 5,000 cash 5,000 b. Pasig agency 5,000 cash 5,000 c. Rent expense – Pasig agency 5,000 working fund 5,000 d. No entry 35. Mama, Inc. opened a sales agency in San Pedro Laguna in 2013. The following is a summary of the transactions of the sales agency: Sales orders sent to home office P120,000 Sales orders filled by home office in 2013 95,000 Freight on shipment of agency 2,000 Collections, net of 10% discount 81,000 Selling expenses paid from the agency working fund 5,500 Administrative expenses charged to agency 5% gross sales Samples shipped to agency: Cost 8,200 Inventory, December 31,2013 4,550 The company’s gross profit rate on agency sales is 30% excluding the freight cost on shipments to agency.
What is the total comprehensive income of the agency for 2013? a.P3,600 b.P5,600 c. P1,600 d.P6,300 36. A Makati home office transfers inventory to its Pasig branch at 140% of cost. During 2013, the reciprocal account in the statement of comprehensive income of the home office amounts to P328,125. On December 31,2013, the home office adjusted the branch income summary by debiting the Allowance for Overvaluation of Branch Inventory account in the amount of P81,250. The branch’s statement of financial position at the beginning of the year shows P105,000 of inventory acquired from the home office. How much is the ending inventory of the branch per books? a. P200,000 b. P161,250 c. P280,000 d. P80,000 37. On July 31,2013, the home office in Manila establishes a sales agency in Bulacan. The following assets are sent to the agency: Cash(working fund to be operated under the imprest system) P22,000 Samples of merchandise 36,000 During the month of August, the following transactions occurred: The sales agency submits sales order of P272,000, sales per invoice was billed at P268,000. Cost of sales to customers is P124,000. Collections during the month amount to P58,200 net of 3% discount. Home office disbursements chargeable to the agency are as follows: Furniture P40,000 Salaries for the month 21,600 Annual rent of office space 36,000 On August 31, the sales agency working fund is replenished. Paid vouchers submitted by the sales agency amounting to P17,925. Samples were useful until December 31,2013 which at this time are believed to have a salvage value of 15% of cost. Furniture is depreciated at 18% per annum. What is the total comprehensive income of the sales agency for the month of August? a. P91,425 b. P93,225 c. P92,955 d. P58,425 38. The home office in Makati shipped merchandise costing P55,500 to Pasig branch, prepaid the freight amounting to P4,200. The home office transfers inventory to the branch at a 20% markup above cost. Pasig branch was subsequently instructed by the home office to transfer the merchandise to Alabang branch wherein the latter paid freight of P2,800. If the shipment was made directly from Makati to Alabang, the freight cost would have been P6,200. Which of the following is true as a result of the interbranch transfer of merchandise? a. The home office debits Alabang Branch Current for P73,600
b. Alabang branch debits the Home Office for P70,000 c. Pasig branch credits freight in for P6,200 d. The home office will credit Pasig Branch Current for P70,800 39. The following are some of the account balances on the books of the home office and its branch on December 31,2013. Home office books Branch books Inventory, January 1,2013 P20,000 P58,000 Shipments from home office 150,800 Purchases 900,000 200,000 Shipments to branch 145,000 Allow. For overvaluation of 52,500 branch inventory Sales 1,200,000 720,000 Operating expenses 290,000 110,000 Per physical count, the ending inventory of the branch is P42,000 including goods purchased from outsiders of P27,700 while the ending inventory of the home office is P120,000. Home office bills its branch for merchandise shipments at 30% above cost. What is the amount of the unrealized inventory profit in the books of the home office on December 31,2013? a. P9,000 b. P7,260 c. P12,000 d. P3,300 40. using the data in No. 39, how much is the combined total comprehensive income on December 31,2013? a. P538,700 b. P547,400 c. P541,700 d. P498,200
e. ANSWERS
1. 2. 3. 4. 5.
A C B C A
6. 7. 8. 9. 10.
B D A A B
11. 12. 13. 14. 15.
A D C B A
16. 17. 18. 19. 20.
B C A A C
21. 22. 23. 24. 25.
B C B B C
SOLUTIONS AND EXPLANATIONS
26. A 27. C 28. A 29. C 30. B
31. D 32. C 33. A 34. D 35. A
36. C 37. C 38. D 39. C 40. A
1. Since the balances of the reciprocal accounts “Home Office” account and “Investment in Branch” account are equal, then the balance of the Home Office account after closing the branch profit is to be computed. The computation is: Home office account balance before branch profit P480,000 Add: Profit (loss) Sales P2,300,000
Cost of sales Shipments from HO P1,850,000 Inventory, dec. 31 255,500 Gross profit Operating expenses Home office account balance, December 31,2011 2.
Home office account balance before branch profit Add: Profit (loss) Sales Cost of sales Shipments from HO P250,000 Inventory, dec. 31 65,000 Gross profit Expenses Home office account balance, December 31,2011
1,594,500 P705,500 235,000
470,500 P950,500 P180,000
P225,500 185,000 P40,500 55,500
(15,000) P165,000
Therefore the balance of the Investment in Branch a account is also P165,000. 3. In preparation of combined statements of the home office and the branch, all interoffice transactions are eliminated as if it had never occurred. Therefore, the only transaction that should be presented are transactions to outsiders, which is in this problem, the P520,000 sales by branch to outsiders. 4. To compute the adjusted balances of the reciprocal accounts a reconciliation statement is to be prepared as follows: (branch books) home office (HO books) Investment in account Davao Branch Account Unadjusted balances, Dec. P54,700 P51,1100 31,2013 Add(deduct) the following adjustments: 1. shipment charged Davao (24,000) branch but actually sent to Cebu branch 2. shipment charged to 30,000 Aklan branch but actually sent to Davao branch 3. no effect 4. Merchandise returned by (7,200) Davao branch accounts receivable 5. merchandise returned by Davao branch still in transit (2,400) to home office
6. overstatement of Davao branch net income (P32,550-P25,350) Adjusted balances, dec. 31,2013 5. The P187,860 is computed as follows: Accounts receivable, 5/31/12 Net sales (P198,720 – P3,600) Total Less: Accounts receivable, 5/31/13 Accounts written off Remittance 6. P39,140 is computed as follows: Investment in branch account balance, 12/31 (HO books) Add(deduct): Merchandise in transit Collection of HO accounts receivable by branch Erroneous recording of Branch profit Supplies returned by Branch HO account balance, 12/31 (Branch books)
_______
(7,200)
P47,500
P47,500
P43,800 195,120 238,920
P49,140 1,920
51,060 P187,860 P50,000 (12,500) 3,500 (360) (1,500) P39,140
7. The P41,490 unadjusted balance of Home office is computed as follows: Unadjusted balance, Investment in Branch account, 12/31 P43,000 Less: Merchandise allowance (error) P60 Branch advances to President 550 Advertising expense charged to branch 900 1,510 Unadjusted balance, home office account, 12/31 P41,490 8. Dr. (Cr.) Adjustment to investment in Butuan Branch account Marketing expense of another branch charged to Butuan (b) Butuan’s remittance credited to Davao branch (d) Dr. (Cr.) adjustment to Butuan branch Account in the home office books Dr. (Cr.) Adjustment to Home office account: Fixed assets transfer not booked by Butuan (a) Inventory transfer recorded twice by Butuan (c)
P(10,000) (65,700) P(75,700)
P(53,960) 75,000
Error in recording DM for P4,650 as P4,560 (f) Dr. (Cr.) adjustment to Butuan branch Account in the home office books
(90) P20,950
9. unadjusted balance of investment in branch account, 6/30 (a) Charge for labor (b) charge for freight (c) purchase of furniture & fixture (d) merchandise allowance (e) charge for interest (f) proceeds from sale of truck (g) charge for truck repairs (h) proceeds from sale of truck Unadjusted balance of Home office account, 6/30
P175,520 500 (805.5) (90) (50) (425) 5,000 (370) 5,000 P184,279.5
10. Sales Cost of sales Inventory, jan.1 Shipment from home office Inventory, dec. 31 Gross profit Expenses Net income per branch books Add: overvaluation of COS Billed price (above) Cost to HO (16,720/110%) Actual branch income at cost basis 11. Branch Inventory at Cost: Branch inventory at billed price Divided by the billing percentage cots Branch inventory of cost Branch net income as far as the HO is concerned: Branch net loss, as reported Add: overvaluation of COS of the Branch: Total shipment to Branch Billed price (P60,000+24,000) P84,000
P32,000 3,960 17,600 (4,840)
16,720 15,200
16,720 15,280 10,480 4,800 1,520 P6,320
P33,600 ÷120% P28,000
(P5,200)
Cost (P84,000/120%) Less: branch returns Billed price Cost (P1,680/120%) Net shipment Less: Inventory, 9/30 Billed price Cost Branch net income
70,000 P1,680 1,400 P33,600 28,000
P14,000 280 P13,720 5,600
8,120 P2,920
12. The balance of the Allowance for Overvaluation of Branch Inventory account represents the overvaluation of branch inventory on January 1 and overvaluation of the shipment received. Computation is as follows: Billed price Billing Cost Over valuation ÷ percentage = Inventory, Jan. 1 P7,560 140% P5,400 P2,160 Add: shipment 28,280 140% 20,200 8,080 Balance of allowance before adjustment P10,240 13. Beginning inventory Purchase Shipment from HO Good available for sale Ending inventory Cost of sales Less: Overvaluation Beginning inventory & shipments Less: ending inventory Billed price P1,170,000 Cost (P1,170,000/120%) 975,000 Cost of goods sold (net)
P1,440,000 410,000 1,020,000 2,870,000 1,460,000 1,41,000 370,000 195,000
175,000 P1,235,000
14. According to the HO books, Iloilo branch will have a P4,380 net income as computed below: Branch net loss (P7,800) Add: Overvaluation of Cost of sales of Branch Total shipment to Branch: Billed price (90,000+36,000) P126,000 Cost (P126,000/120%) 105,000 P21,000 Less: Branch returns Billed price P2,520
Cost(2,520,/120%) Net shipment to Branch Less: inventory, 6/30 Billed price Cost(P50,400/120%) Branch net income 15. P37,600 is computed as follows: Acquired from HO: Billed price (P50,000-P6,600) Divide by billing percentage of cost Local purchases Branch inventory at cost, 9/30
2,100 P50,400 42,000
P43,400 140%
420 P20,580 8,400
12,180 P4,380
P31,000 6,600 P37,600
Below is the computation of Home office income from branch operation of P70,100. Branch net income (5,000-2,500 P2,500 expense) Add: overvaluation of branch cost of sales: Shipment from Home Office: Billed price P280,000 Cost(P28,000/140%) 200,000 P80,000 Less: inventory, end Billed price (50,000-6,600) P43,400 Cost(P43,400/140%) 31,000 12,400 67,600 Branch net income realized by HO P70,100 16. branch inventory, at cost, 12/31: Acquired from HO (P21,000/140%) Local purchases Total Branch gross profit: Net sales Cost of sales insofar as Home office is concerned Shipment from HO, at cost (P98,000/140%) Purchases Cost of goods available for sale Inventory, at cost 12/31: Acquired from HO (P21,000/140%) P15,000
P15,000 7,000 P22,000
P180,000 P70,000 40,000 110,000
Local purchases Gross profit insofar as HO is concerned
7,000
22,000
88,000 P92,000
17. below is the computation of Branch ending inventory at cost: Acquired from HO (80% x P30,000 ) / 120% Add: Acquired from outsiders (20% x P30,000) Branch inventory at cost, 12/31
P20,000 6,000 P26,000
The P1,000 net income is derived as follows: Sales (P74,000 + P22,000) Cost of sales insofar as Home office is concerned Shipment from HO, at cost P45,000 (P54,000/120%) Purchases 26,000 Cost of goods available for 71,000 sale Inventory, at cost 12/31: 26,000 Gross profit Expenses (P38,000+P12,000) Branch net income insofar as Home office is concerned
P96,000
45,000 P51,000 50,000 P1,000
18. Merchandise inventory, December 1 Less: Merchandise acquired from HO at billed price Overvaluation (3,600 – P1,600) P2,000 Cost (P2,000/20%) 10,000 Merchandise acquired from outsiders 19. Total shipment from office Returns Purchases Goods available for sale, at billed price Less: overvaluation of shipment: Billed price Cost (420,000/120%) Returns: Billed price Cost (7,500/120%) Goods available for sale, at cost
P15,000
12,000 P3,000
P420,000 (7,500) 72,500 485,000 P420,000 350,000
70,000
P7,500 6,250
(1,250)
68,750 P416,250
20. before computing the balance of the allowance account, the percent of billing price to cost should be computed first as follows: Branch net income, per HO Branch net income, per branch Realized mark-up on merchandise from the Home office already sold by the branch
P156,000 60,000
Shipment from home office Less: increase in portion of Branch inventory Acquired from home office Portion already sold by branch Less: Mark-up thereon (above) Cost of portion already sold by branch
P350,000
Per cent of billing price to cost: P336,000/240,000
140%
P96,000
14,000 P336,000 96,000 P240,000
The balance of the “Allowance for Overvaluation in Branch inventory” account as December 31,2013 after adjustment represent the overvaluation of the branch ending inventory acquired from the home office computed as follows: Billed price Cost (P84,000/140%) Balance of the allowance account
P84,000 60,000 P24,000
21. branch inventory, January 1 Purchases Shipments from home office Merchandise available for sale Less: branch inventory, Dec. 31 Branch cost of sales, per branch books Less: Mark- up on merchandise from the HO Already sold by the branch: P19,750 Branch inventory allowance Less: mark-up on portion of Dec. 31 inventory Acquired from home office: (P10,350-P4,350) x 25/125 1,200 Branch cost of sales, as far as the home office is concerned
P8,000 30,000 93,750 P131,750 10,350 P121,400
18,550 P102,850
Note: shipments of merchandise from the home office to the branch are billed at 125% of cost, determined as follows: Shipments from Home Office = P93,750 =125% Shipments to Branch = P75,000 22. Sales Less: cost of sales at Billed price (Sch. 1) Gross profit Expenses Total comprehensive income to be reported by the Branch
P141,000 112,500 28,500 27,000 P1,500
Schedule 1 Cost of shipment to branch Add: 25% mark-up Billed price of shipment to branch Portion sold cost of sales at billed price
P120,000 30,000 150,000 x¾ P112,500
23. reported branch loss Add: overvaluation in branch cost of sales Shipment to branch P205,000 Less: returns 3,050 Ending inventory 85,000 88,050 Cost of sales, at billed price 116,950 Cost of sales, at cost to HO (116,950/125%) 93,560 Branch total comprehensive income, per HO books
P(6,200)
23,390 P17,190
24. The combined inventories on dec. 31, 2013 statement of financial position computed as follows: Home office (P160,500 – P10,500) Branch, at cost (108,000/120%) Combined inventories, 12/31
P150,000 90,000 P240,000
25. Sales
P325,000
Less: cost of sakes Jan. 1 inventories, at cost (sch 1 ) Purchases Merchandise available for sale Less: dec. 31 inventories, at cost (sch 1 ) Gross profit on sales Less: expenses Total comprehensive income
107,500 215,000 P322,500 81,300
241,200 P83,800 50,000 P33,800
Schedule 1: Inventories Jan.1 P80,000
Home office Branch, at cost Acquired from outsiders Acquired from HO: Jan. 1 (P24,000/120%) Dec. 31 (P26,000/125%) Combined 2013 billing (7,500/30,000) = 125%
Dec. 31 55,000
7,500
5,500
20,000 _______ P107,500
20,800 P81,300
26. Sales Cost of sales Beg. Inventory HO Branch, at cost (P60,000/120%) Purchases Total Ending inventory: HO Branch, at cost (P48,000/120%) Gross profit Operating expenses Combined net income
P810,000 P120,000 50,000
P170,000 500,000 670,000
98,000 40,000
138,000
532,000 278,000 108,000 P170,000
27. Sales (P310,000 + P280,000) Cost of sales: Inventory, 1/1 (sch1)
P590,000 P67,100
Purchases Freight in (P220,000x5%) Goods available for sale Inventory, 12/31 (sch1) Freight in (P220,000x5%) Gross profit Expenses (P104,000+P58,100) Combined total Comprehensive income
380,000 11,000 104,000 2,200
391,000 458,100 106,200
351,900 P238,100 162,100 P76,000
Schedule 1 : Combined inventories – at cost
Home office, at cost Branch at cost Inventory, Jan. 1: Billed price P23,100 Mark-up (sch2) 2,000 Inventory, Dec. 31: At cost [(P33,000+P11,000)/110%*] Combined *Billing %: (209,000 + 11,000)/200,000 = 110%
Inventories January 1 P46,000
December 31 P64,000
21,00 40,000 P67,100
P104,000
Schedule 2: mark-up on Branch beginning inventory Branch merchandise markup before adjustment P22,000 Less: overvaluation of shipments [(P209,000 + P11,000)-P200,000] 20,000 Mark up of branch beginning inventory P2,000 28. Sales Cost of sales: Inventory, 1/1 Home office Branch, at cost (11,550-1,000) Freight in (5,500-1,000) Purchases, Home office Total Inventory, 12/31 Home office Branch, at cost [(10,400+5,000/110%]
P295,000 P23,000 10,550 5,750
P30,000 14,000
39,300 190,000 229,300
Freight in(P520+250) Gross profit Sundry expneses Combined total comprehensive income
770
44,770
184,530 110,470 80,000 P30,470
29. Choice (c) is correct, because the branch should record the shipment from the office at billed price (P50,000 + P8,000), and should treat the freight charged by the office as inventoriable cost. 30. Shipments from home office at billed price Unsold Ending inventory Freight in (P2,000 x 60%) Total
P58,000 60% P34,800 1,200 P36,000
31. In the books of Bulacan branch (sending branch) the inter-branch transfer should be treated as if it was returned to the home office. Inventory account should be credited in place of the Shipment from Home office account which was already closes at the end of 2010. Therefore entry (d) is correct. 32. In the books of Baguio branch (receiving branch) the inter-branch transfer should be treated as if it was received from the home office. And the freight to be recognized should be the freight from the office. Therefore choice (c) is correct. 33. In the books of the home office the inter-branch transfer can be cleared by debiting the receiving branch (Baguio) and crediting the sending branch (Bulacan). Excess freight account should be charged for the difference which is treated as an expense of the home office. Therefore choice (a) is correct. Alternative entry: If the allowance for overvaluation of branch inventory account is classified by branch: Investment in Branch – Baguio Allowance for overvaluation of Branch Inventory-Bulacan (P8,000 x 50%) Excess freight Investment in Branch – Bulacan
30,500 4,000 1,500 32,000
Allowance for overvaluation Branch inventory- Baguio
4,000
34. The expenses paid by the branch are not recorded in the home office books. It is only recognized upon replenishment of the working fund (petty cash fund). 35. Sales Sales discount (P81,000 / 90%)x 10% Net sales Cost of sales (P95,000 x 70%)+ 200 Gross profit Expenses: Selling expenses Administrative expenses (P95,000 x 5%) Samples expenses (P8,200 – P4,550) Net income
P95,000 9,000 86,000 68,500 17,500 P5,500 4,750 3,650
13,900 P3,600
36. Branch beginning inventory – acquired from home office Shipment from home office – at billed price (P328,125 x 140%) Goods available for sale at billed price Branch ending inventory per books
P105,000 459,375 564,375 P280,000
37. Sales Sales discount (P58,200 ÷ 97%)x 3% Net sales Cost and expenses: Cost sales Salaries Rent expense (P36,000 x 1/12) Expenses Samples (P36,000 x 85%)x 1/5 Depreciation (P40,000 x 18% x 1/12) Net income
P268,000 1,800
P124,000 21,600 3,000 17,925 6,120 600
173,245 P92,955
38. Choice (d) is correct due to the following entries to record the interbranch transfer of merchandise: Pasig Branch Books: Home office
70,800
Freight in Shipment from home office To record transfer of merchandise to Alabang. Alabang Branch Books: Shipment from home office Freight in Cash Home office To record receipt of merchandise from Pasig. Home Office Books: Alabang branch current Excess freight Pasig branch current To record interbranch transfer of merchandise.
4,200 66,600
66,600 6,200 2,800 70,000
70,000 800 70,800
39. The unrealized inventory profit balance on December 31 is the difference between the branch ending inventory at billed price and cost. Computed as follows: Branch ending invty per physical count – from HO (42,000 – 27,000) Shipment in transit: Shipment from HO at BP (145,000 ÷ 130%) P188,500 Shipment from HO per books 150,800 Correct branch ending inventory at billed price Branch ending at cost (52,000 ÷ 130%) Unrealized inventory profit, December 31, 2008
P14,300
37,700 P52,000 40,000 P12,000
40. The combine net income is computed by preparing a combined income statement as follows: Sales Cost of sales: Inventory, January 1 (Sch. 1) Purchases Goods available for sale Inventory, December 31 (Sch. 1) Gross profit
P1,920,000 P69,000 1,100,000 1,169,000 187,700
981,300 938,700
Expenses Combined net income
400,000 P538,700
Schedule 1:
Home office Branch: Acquired from HO (Sch. 2) Acquired from outsiders (58,000 – 39,000) Total Combined Schedule 2: Allow for overvaluation before adjustment Overvaluation in the Shipments: Shipment from HO at BP (P145,000 x 130%) Shipment to branch at cost Overvaluation in the branch beginning inventory
Inventory at cost January 1 December 31 P20,000 P120,000 30,000 40,000 19,000 27,700 49,000 67,700 P69,000 P187,700
P52,800 P188,500 145,000
43,500 P 9,000
Branch beginning inventory at cost (P9,000 / 30%)
P30,000
Branch ending inventory at cost (per No. 39)
P40,000
