p2

Since 1977

PRACTICAL ACCOUNTING 2 P2.706- Home Office and Branch

DE LEON/DE LEON OCTOBER 2009

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 Transfer of cash from the home office Transfer of cash from the branch Transfer of mdse from HO at cost Transfer of mdse from HO at above cost Payment by HO of branch expenses Allocation of prev. paid branch exp Transfer of Fixed asset from home office to Branch

To take-up branch Profit/(loss)

To adjust the reported branch NI /NL) for realized allowance

Page 1 of 8

Home Office Books Investment in branch Cash Cash Investment in branch Investment in branch Shipment to branch Investment in Branch Allowance for OV Shipment to branch Investment in branch Cash Investment in branch Expenses Memo entry

x x x x

x x x x x

x x

x x

Branch Books Cash Home office equity Home Office Equity Cash Shipment from HO HO Equity Shipment from HO HO Equity Expenses HO Equity Expenses HO Equity Memo entry

x x x x

x x x x

x x

x x

(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 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 Allowance for Ovrvltn x No Entry 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:

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. Detailed computation of realized allowance for overvaluation thru sales by the branch to outsiders during the period: Billed Cost Mark-up Price Price on Cost Branch Beg Invty xx xx xx (from HO)) Current shipments xx xx xx (from HO Branch End Invty (xx) (xx) (xx) (from HO) Cost of Goods Sold xx xx xx Cost = Billed Price/100% + % mark-up on cost = Markup on cost/% mark-up on cost. The amount of allowance considered realized will be the allowance carried by the cost of goods sold. 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 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 Investment in Branch x Investment in Branch x Accounts Payable x Accounts Payable x Accounts Receivable x Accounts Receivable x Shipment to Branch x Shipment to Branch x Shipment from Allowance for Ovrvltn x Home Office x Shipment from HO x None Allownce for Ovrvltn x Branch Beg Invty x None Br Ending Invty (I/S) x Branch End Invty (B/S) x When a company is composed of a home office and more than one branch, the home office records include a separate investment in branch account and a separate allowance for overvaluation account for each branch. Separate worksheet adjustments are made for each branch. When assets are transferred from one branch to another 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 be accounted for by the Cost Method Equity Method of accounting of accounting a. Yes Yes b. Yes No c. No Yes d No No

5.

Does the branch use a Shipments from Home Office ledger account under the: Perpetual Inventory Periodic Inventory Method Method a. Yes Yes b. Yes No c. No Yes d. No No

2.

Which of the following generally is not a method of billing merchandise shipments by a home office to the branch? a. Billing at cost b. Billing at a percentage above cost c. Billing at a percentage below cost d. Billing at retail selling price

6.

3.

A branch journal entry debiting Home Office and crediting Cash may be prepared for: a. The branch’s transmittal of cash to the Home Office b. The branch’s acquisition for cash of plant assets to be carried in the home office accounting records only c. Either (a) or (b) d. Neither (a) nor (b)

A journal entry debiting Cash in Transit and crediting Investment in Branch is required for: a. The Home Office to record the mailing of a check to the branch early in the accounting period. b. The branch to record the mailing of a check to the home office early in the accounting period. c. The home office to record the mailing of a check by the branch on the last day of the accounting period. d. The branch to record the mailing of a check to the home office on the last day of the accounting period.

7.

For a home office that uses the periodic inventory system of accounting for shipments of merchandise to the branch, the credit balance of the Shipments to Branch ledger account is displayed in the home office separate: a. Income statement as an offset to purchase b. Balance sheet as an offset to Investment in Branch c. Balance sheet as an offset to inventories d. Income statement as revenue.

4.

A Home Office ‘s Allowance for Overvaluation of Inventories: Branch ledger account, which has a credit balance, is a. an asset valuation account c. an equity account b. a liability account d. a revenue account

Page 2 of 8

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. 8.

9.

If the home office maintains in its general ledger accounts for a branch’s plant assets, the branch debits its acquisition of office equipment to: a. Home Office b. Office Equipment c. Payable to Home Office d. Office equipment carried by home office In a working paper for combined financial statements of the home office and the branch of a business enterprise, an elimination that debits Shipments to Branch and credits Shipments from Home Office is required under: a. The periodic inventory system only b. The perpetual inventory system only c. Both the perpetual inventory system and the periodic inventory system d. Neither the perpetual inventory nor the periodic inventory system

10. The appropriate journal entry for the home office to recognize the branch’s expenditure of P10,000 for equipment to be carried in the home office accounting records is: a. Equipment 10,000 Inv in Branch 10,000 b. Home Office 10,000

c. d.

Equipment Investment in branch Cash Equipment-Branch Inv in Branch

10,000 10,000

10,000 10,000 10,000

11. On January 31, 2009, East Branch of Far Company, which uses the perpetual inventory system, prepare the following journal entry. Inventories in transit 10,000 Home Office 10,000 To record merchandise shipment in transit from home office. When the merchandise is received on February 4, 2009, East Branch should: a. Prepare no journal entry b. Debit Inventories and credit Home Office, P10,000 c. Debit Home Office and credit Inventories in transit, P10,000 d. Debit inventories and credit Inventories in transit, P10,000. 12. If a Home Office bills merchandise shipments to the branch at a markup of 20% on cost, the markup on billed price is: a. 16.67% c. 25% 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 from outside vendors on account. 5. The branch had credit sales of P106,250 and cash sales of P43,750. 6. The branch collected P55,000 of its accounts receivable. 7. The branch paid outside vendors P35,000. 8. The branch incurred selling expenses of P18,750 and general and administrative expenses of P15,000. These expenses were paid in cash when they were incurred and include the expense of leasing the branch's facilities. 9. The home office charged the branch P2,500 for its share of insurance. 10. Depreciation expense on the display equipment acquired by the branch is P1,250 for the six-month period. (Depreciation expense is classified as a selling expense.) 11. The branch remitted P12,500 cash to the home office. 12. The branch's physical inventory on December 31, 2009 is P41,250, of which P31,250 was acquired from the home office (there was no beginning inventory).

Page 3 of 8

Requirements: 1. Prepare journal entries in the books of the home office and in the books of the branch office for the above transactions. 2. Prepare closing entries in the books of the branch office to close its income statement accounts. 3. Prepare adjusting entry in the books of the home office to reflect the increase or decrease in the branch's net assets resulting from the branch operations. Problem 2 (Branch was billed at more than cost) The following transactions pertain to a branch's first month's operations: 1. The home office sent P11,250 cash to the branch. 2. The home office shipped inventory costing P50,000 to the branch; the intracompany billing was for P62,500. 3. Branch inventory purchases from outside vendors totalled P37,500. 4. Branch sales on account were P100,000. 5. The home office allocated P2,500 in advertising expense to the branch. 6. Branch collections on accounts receivable were P56,250. 7. Branch operating expenses of P17,500 were incurred, none of which were paid at month-end. 8. The branch remitted P21,250 to the home office. 9. The branch's ending inventory (as reported in its balance sheet) is composed of: Acquired from outside vendors............….. .P15,000 Acquired from home office (at billing price). 25,000 Total .........................................………...... 40,000 Requirements: 1. Prepare the home office and branch journal entries for these transactions, assuming a periodic inventory system is used 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 month.

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. Problem 3 The pre-closing trial balances of Nicole Company and its Angeles City branch for the year ended December 31, 2009, prior to adjusting and closing entries are as follows: Home Office Accounts Cash Accounts receivable, net Inventory, January 1, 2008: Acquired from vendors Acquired from home office Deferred profit Fixed assets, net Investment in branch Accounts payable Long-term debt Common stock Retained Earnings, January 1, 2008 Home office equity Sales Purchases Shipments from home office Shipments to branch Selling expenses Administra tive expenses Totals

Debit P 35,000

P

Branch Office

Credit

80,000

Debit P10,000

Credit

50,000

230,000

20,000

25,000 90,000

155,000

3. 221,000

45,000

400,000 300,000 350,000

4. 5.

960,000

800,000

115,000 320,000

120,000 90,000

84,000 101,000 69,000 P2,340,000

34,000 _______ P2,340,000

16,000 P 480,000

_______ P480,000

Inventory per physical count on December 31, 2009: Acquired from vendors P180,000 P 20,000 Acquired from home office 30,000 Additional information: 1. Inventory transferred to the branch from the home office is billed at 125% of cost. 2. The home office billed the branch P15,000 for inventory it shipped to the branch on December 28, 2009; the branch received and recorded this shipment on January 2, 2010. 3. The branch remitted P25,000 cash to the home office on December 31, 2009; the home office received and recorded this remittance on January 4, 2010. Requirements: 1. Prepare the year-end adjusting entries to bring the intracompany accounts into agreement. Be sure to adjust the other accounts in the trial balance as appropriate. 2. Complete the following analysis of the branch’s inventory Transfers Above cost

Transfers __at cost__

P

P

P

Total goods available for sale Less: Ending inventory Acquired from vendors Acquired from home office Cost of goods sold

50,000

870,000

inventory: Acquired from vendors Acquired from home office Add: Purchases (from vendors) Shipments from office

Mark-up

6.

Prepare the following year-end adjusting entries to: a. Record the branch income on the home office books b. Adjust the deferred profit account to the proper balance Prepare the year-end closing entries for the home office and the branch Prepare a combining statement worksheet as of December 31, 2009, after completing requirements 1 to 4 From the completed worksheet prepare: a. An income statement and balance sheet for the branch. b. An income statement and balance sheet for the home office. c. An income statement and balance sheet combined for home office and branch office.

Problem 4 On December 31, the Inv. in Branch account on the home books shows a balance of P150,000. The following facts are ascertained: 1. Merchandise billed at P5,000 is in transit on December 31, from the home office to the branch. 2. The branch collected a home account receivable for P2,000. The branch did not notify the home office of cash collection. 3. On December 30, the home office mailed a check of P10,000 to the branch but the bookkeeper charged the check to General Expenses; the branch has not received the check as of December 31. 4. Branch profit for December was recorded by the home office at P8,900 instead of P9,800. 5. Branch returned supplies of P1,000 to the home office but the home office has not yet recorded the receipt of the supplies. Required: a) Compute the balance of the Home Office account on the branch book as of December 31 before its adjustment. b) Prepare a reconciliation statement to compute the adjusted balances on December 31. Problem 5 The interoffice accounts between the main office of ABC COMPANY and its branch in Ayala were adjusted to P145,500 as of December 31, 2008. The transactions between the home office and the branch for 2009 were:

Beginning

Page 4 of 8

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. a. b. c. d. e. f.

g.

Remittance by the branch (P38,000 was still in transit as of December 31, 2009) P 178,000. Shipments to branch (includes goods worth P44,000 that are not yet received by the branch as of December 31, 2009) are P470,000. The home office has not yet informed the branch of its share in the advertising expense amounting to P 15,000. Accounts receivable of the branch amounting to P30,000 was collected by home office, net ,of 4% discount. The branch has not yet been notified. The home office incorrectly credited the branch by P 10,000 for the remittance of its Cubao Branch. The Ayala Branch made no entry. The home office corrected the above entry on January 5, 2010. However, the Ayala Branch inadvertently received a copy of this memo and entered a credit in favor of the home office as of December 31, 2009 The branch returned merchandise worth P 12,500 to the office and was duly acknowledge by the latter during the year. 1. The unadjusted balance of the Home Office Current account as of December 31, 2009. 2. The adjusted balance of the interoffice accounts as of December 31, 2009.

Problem 6 The Armani Corp. established a branch store in Ortigas on June 30, 2009. The branch is to receive substantially all merchandise for sale from the home office. During the remainder of 2009, shipments to the branch amounted to P240,000 that included a 20% mark-up on cost. The branch purchased P 180,000 additional merchandise for cash and reported unsold merchandise for P 145,000 at year-end. The branch made sales of P420,000, paid expenses of P105,000 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 P22,500 after adjustment. 1. The branch ending inventory that represented purchase from outsiders 2. The branch net income as far as the home office is concerned. Problem 7 Home office bills its branch for merchandise shipment at 25% above cost. The following are some of the account balances appearing on the books of home office and its branch as of December 31 Home Office Branch's Books Books Inventory, Jan I P 22,500 P36,000 Shipments from Home Office 210,000 Purchases 675,000 225,000 Shipments to branch 180,000 Allowance for overvaluation of

branch inventory Sales Operating Expenses

49,500 900,000 217,500

540,000 82,500

The ending inventory of the branch of P54,000 includes goods from outside purchases of P12,000; the ending inventory of the home office is P 112,500 1. The amount of shipments in transit at cost 2. The overstatement of branch cost of sales 3. The combined net income for the year Problem 8 Branch A was authorized by its home office to send cash of P1,500 that it can spare to Branch B. How is this transfer best recorded on the books of (a) Branch A (b) Branch B and (c) the Home Office Problem 9 The DIANNA Company has established several branches that sell the product that it manufactures. Manufactured units are billed to the branches at the manufacturing costs, the branches paying the freight charges from the home office. On November 1, the home office ships goods to Branch No.1 charging the branch P10,000. The branch pays freight charges of P500. It is subsequently discovered that the home office had shipped the goods to Branch No. 1 by mistake and the home office directs Branch No.1 to forward to goods to Branch No.2. Branch No.2 upon receiving the goods pays freight charges from Branch No. 1 of 150. If the shipment had been made directly from the home office the freight would have been P350. Give journal entries to record all of the foregoing transactions on the books of (1) home office; (2) Branch No.1 and (3) Branch No. 2. Problem 10 On December 31, 2009, the branch manager of Nancy Company in Iloilo City submitted the following data to the home office in Manila: Petty cash fund 6,000 Sales 390,000 Shipment from home office 270,000 Accounts receivable, January 1, 2009 86,000 Inventory, January 1, 2009 74,000 Inventory, December 31, 2009 82,000 Expenses 96,000 All cash collected on Accounts Receivable amounting to P378,000 were remitted to the Home Office. Required: 1. What is January 2. What is January

the balances of the Home Office Account on 1, 2009. the balance of the Home Office Account on 1, 2010.

MULTIPLE CHOICE Romy Corporation has one branch office, named Tibo Branch. Romy is performing the end-of-the-period reconciliation of its Tibo Branch account whose current balance is P000,000 and Tibo’s Home Office account whose current balance is P000,000. The following items are unsettled at the end of the accounting period (you may assume that the item has been reflected in the accounts of the underlined entity): Romy has agreed to remove P750 of excess freight charges charged to Tibo when Romy shipped twice as much inventory as Tibo requested.

Page 5 of 8

Tibo mailed a check for P11,000 to Romy as a payment for merchandise shipped from Romy to Tibo. Romy has not yet received the check. Tibo returned defective merchandise to Romy. The merchandise was billed to Tibo at P4,000 when its actual cost was P3,000. Advertising expense attributable to the branch office were paid for by the home office in the amount of P5,000. 1. If the adjusted balances for the Tibo Branch Account and the Romy Home Office Account is P500,000, what unadjusted balance was listed in (1) Romy’s

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. Tibo Branch Account and (2) Tibo’s Home Office Account? a. (1) P510,250 and (2) P505,000. b. (1) P515,000 and (2) P495,750. c. (1) P514,000 and (2) P516,000. d. (1) P504,000 and (2) P500,750. The Meycauayan branch of Marco Company, at the end of its first quarter of operations, submitted the following income statement: Sales Cost of sales: Shipments from home office Local purchases Total Inventory at end Gross margin on sales Expenses Net income

P300,000

P280,000 30,000 P310,000 50,000

260,000 P 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 home office amounted to P2,500. 2. On September 30, the branch inventory at cost and net income realized by the home office from the branch operations, respectively are: a. P37,600 and P72,600 b. P31,600 and P 5,000 c. P50,000 and P55,000 a d. P37,600 and P70,100 b A home office transfers inventory to its branch at a 20% markup on cost. During 2008, inventory costing the home office P80,000 was transferred to the branch. At year-end, the home office adjusted its Unrealized Intercompany Inventory Profit account downward by P18,200. The branch’s year-end balance sheet shows P4,800 of inventory acquired from the home office. 3. How much is the beginning inventory of the branch at cost? a. P 15,000 c. P 3,000 b. P 18,000 d. P 16,000 Sulu, Inc. established a branch in Jolo to distribute part of the goods purchased by the home office. The home office prices 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: Sales Beginning inventory Purchases Shipment to branch Shipment from home office Operating expenses Ending inventory

Sulu, Inc. P 600,000 120,000 500,000 130,000 72,000 98,000

Jolo, Branch P 210,000 60,000 156,000 36,000 48,000

All of the branch inventory is acquired from the home office. 4. On the basis of these account balances, the combined net income of the home office and the branch is: a. P170,000 c. P278,000 b. P 70,000 d. P132,000 Bicol Company is engaged in merchandising both at Home Office in Makati and a branch in Cebu. Selected accounts in the trial balances of the Home Office, and the branch at December 31, 2008 follow: Debit Inventory, January Branch Purchases Shipments from Home Office

Page 6 of 8

Home Office P 23,000 58,300 190,000

Branch P 11,550

Freight in from Home Office Sundry expenses Credit Home Office Sales Shipments to Branch Allow. for overvaluation of branch inventory – Jan. 1

50,000 155,000 110,000

5,500 25,000 53,300 140,000

1,000

Additional information: a. Cebu branch receives all its merchandise from the home office. The Home Office bills the goods at cost plus 10% mark-up. At December 31, 2008 a shipment with a billing price of P5,000 was in transit to the branch. Freight on this shipment was P250 which is to be treated as part of inventory. b. December 31, 2008 inventories, excluding the shipment in transit was: Home Office, at cost 30,000 Cebu Branch, at billed value (excluding freight of P520) 10,400 5.

Net income of the Home Office was a. P 10,000 c. P 20,000 b. P 15000 d. P 22,000

6.

True income of Cebu Branch was a. P 10,470 c. P 12,470 b. P 11,470 d. P 13,470

The following data were taken from the records of Star Corporation of Manila and its Bulacan Branch for 2008: Manila office Bulacan branch Sales P 530,000 P157,500 Inventory, Jan. 1 57,500 22,250 Purchases 410,000 Shipment to branch 105,000 Shipment from home office 126,000 Inventory, Dec. 31 71,250 29,250 Expenses 191,000 50,750 In 2008, Home office billed the branch at 120% of cost which was lower by 5% than last year’s. 7. The combined net income of the home office and the branch for 2006 was: a. P48,325 c. P49,850 b. P48,575 d. P56,075 Nicole Company has a branch in Boracay established on April 1, 2008. During the year 2008, the home office shipped merchandise to the branch at billed value of P125,000 which was 25% above cost. At the end of the year, the branch reported sales of P200,000, operating 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.

105,000

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. 5.

6.

Home office was charged for P1,200 for merchandise returned by Sta. Clara branch on June 28. The merchandise is in transit. 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 and records of PP Company and its branch. The balances are at December 31, 2009, the third year of the corporation's existence. Home Office Books Branch Books Sales P600,000 Expenses 200,000 Shipments from home office 360,000 Allowance for overvaluation P72,500 The branch acquired all of its merchandise from the home office. The inventories of the branch at billed prices are as follows: January 1, 2009 P75,000 December 31, 2009 84,000 1.

The adjusted profit of the branch in so far as the home office is concerned is: a. P107,500 c. P 58,500 b. P 49,000 d. P 60,000

Nicole Company’s Kalibo branch reports a profit of P17,000 for the year 2009 and a balance in its Home Office account at the end of the year of P88,000 after closing. The branch income currently is unrecorded by the home office. During the year, the home office had shipped inventory to the branch at an intracompany profit of P14,000. Of that amount, P6,000 currently is unrealized. 2. Assuming the branch has made all entries to adjust and close its books for 2009, what is balance in the home office’s Investment in Branch account? a. P 65,000 c. P 88,000 b. P 71,000 d. P 94,000 On December 1, 2009, the Dustine Company established an agency in Las Pinas, sending its merchandise samples costing P15,750 and a working fund of P9,000 to be maintained on the imprest basis. During the month of December, the agency transmitted to the home office sales orders which were billed at P64,380 of which 20,400 was collected. A home office disbursement chargeable to the sales agency is the acquisition of furniture and fixtures for Las Pinas, P25,000 to be depreciated at 24% per annum. The agency paid expenses of P3,815 and received replenishment thereof from the home office. On December 31, 2008, the agency samples were valued at P10,075. It was estimated that the gross profit on

Page 7 of 8

goods shipped to bill agency sales orders average 25% of cost. 3. How much is the net income of the agency for the month ended December 31, 2008? a. P 2,886 c. P 12,876 b. P 3,386 d. P (2,614) Trial balances for the home office and for the branch of Mermaid Company show the following accounts before adjustment as of December 31, 2008. The home office bills merchandise to the branch at 20% above cost. HO Branch Unrealized intercompany inventory profit P10,800 Shipments to branch 24,000 Purchases (other vendors) P7,500 Shipments from Home Office 28,800 Merchandise inventory December 1, 2008 45,000 4.

What part of the December 1, 2008 branch inventory represents acquisitions from outside purchases, and what part represents acquisitions from the home office? Outsider Home Office a. P9,000 P36,000 b. 10,000 35,000 c. 12,000 33,000 d. 15,000 30,000

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.

www.prtc.com.ph

P2.706

EXCEL PROFESSIONAL SERVICES, INC. 1. 2. 3.

4. 5.

6.

On December 31, 2009, merchandise billed at P5,800 was in transit from the home office to the branch. The branch had collected home office accounts receivable of P560; the home office was not notified. 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. Branch net income for December 2009 was recorded erroneously by the home office at P840 instead of P480. 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. 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

 - end of P2.701 -  - now do the classroom drill -

Page 8 of 8

www.prtc.com.ph

P2.706