ACCOUNTING 8

ADVANCED ACCOUNTING PART 2

HOME OFFICE AND BRANCH ACCOUNTING BILLING ABOVE COST
SPECIAL PROCEDURES

For numbers 1 and 2

The Meycauayan branch of Marco Company, at the end of its first quarter of operations, submitted the
following income statement:
Sales P300,000
Cost of sales:
Shipments from home office P280,000
Local purchases 30,000
Total P310,000
Inventory at end 50,000 260,000
Gross margin on sales P 40,000
Expenses 35,000
Net income 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.

1. Branch inventory at cost on September 30

2. Net income realized by the home office from the branch operations

3. A home office transfers inventory to its branch at a 20% markup on cost. During 2018, 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. How much is the
beginning inventory of the branch at cost?

4. 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:
Sulu, Inc. Jolo, Branch
Sales P 600,000 P 210,000
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.

On the basis of these account balances, the combined net income of the home office and the branch
is:

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For numbers 5 and 6

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, 2018 follow:
Debit Home Office Branch
Inventory, January P 23,000 P 11,550
Branch 58,300
Purchases 190,000
Shipments from Home Office 105,000
Freight in from Home Office 5,500
Sundry expenses 50,000 25,000
Credit
Home Office 53,300
Sales 155,000 140,000
Shipments to Branch (at billing price) 110,000
Allow. for overvaluation of branch
inventory – Jan. 1 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, 2018 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, 2018 inventories, excluding the shipment in transit was:
Home Office, at cost 30,000
Cebu Branch, at billed value
(excluding freight of P250) 10,400

5. Net income of the Home Office was 22,000

6. True income of Cebu Branch was 13,470

7. The following data were taken from the records of Star Corporation of Manila and its Bulacan
Branch for 2018:
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 2018, Home office billed the branch at 120% of cost which was lower by 5% than last year’s.

The combined net income of the home office and the branch for 2018 was:

8. 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. The true income of the branch was

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9. 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:
 A P12,000 shipment charged by Home Office to Sta. Clara branch was actually sent to and
retained by Sta. Isabel branch.
 A P15,000 shipment, intended and charged to Sto. Domingo branch was shipped to Sta. Clara
branch and retained by the latter.
 A P2,000 emergency cash transfer from Sta. Isabel branch was not taken up in the Home Office
books.
 Home Office collects a Sta. Clara branch accounts receivable of P3,600 and fails to notify the
branch.
 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.

What is the reconciled amount of the Home Office and Sta. Clara branch reciprocal accounts?

For numbers 10 and 11

The LL Company established a branch in Makati City on June 1, 2018. The branch is to receive
substantially all merchandise from the home office. During the remainder of 2018, 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. Compute the:

10. Branch inventory on December 31, 2018 at cost

11. The branch net income as far as the home office is concerned:

12. The following information are extracted from the books and records of PP Company and its branch.
The balances are at December 31, 2019, 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, 2019 P75,000

December 31, 2019 84,000

The adjusted profit of the branch in so far as the home office is concerned is:

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13. Nicole Company’s Kalibo branch reports a profit of P17,000 for the year 2019 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.

Assuming the branch has made all entries to adjust and close its books for 2019, what is balance in
the home office’s Investment in Branch account?

14. Trial balances for the home office and for the branch of Mermaid Company show the following
accounts before adjustment as of December 31, 2018. 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

What part of the December 1, 2018 branch inventory represents acquisitions from outside
purchases, and what part represents acquisitions from the home office?

15. Universal Textiles has a single branch in Cagayan de Oro City. On March 1, 2019, 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.

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.

16. 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, 2019 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

Calculate the combined net income for the home office and the branch for 2019:

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17. A home office ships inventory to its branch at a mark-up of 125% above cost. The required balance
of the allowance for overvaluation account is P1,425,000. During the year, the home office sent
merchandise to the branch costing P9,000,000. At the start of the year, the branch’s Statement of
Financial Position shows P1,800,000 of inventory on hand that was acquired from the home office.

By what amount will the Allowance for Unrealized Gross Margin in Branch Inventory account be
debited at the end of the year? P10,825,000

18. During the year 2018 goods billed at P3,250,000 were shipped to the branch at 130% of cost. The
account Loading in Branch Inventory has a balance of P1,225,000 before adjustment. The beginning
inventory of the branch from the home office at cost is P2,375,000; the beginning inventory of the
branch from outsiders is P540,000; purchases from outsiders is P1,450,000.

How much is the total goods available for sale of the branch from the home office? P6,100,000

19. PrestigeFix Co. operates a branch in Cebu. On December 31, 2017, the Cebu branch in the home
office books showed a debit balance of P3,132,660. The interoffice accounts were in agreement at
the beginning of the year. For purposes of reconciling the interoffice accounts, the following facts
were given: It is the policy of the home office to bill its branches at 20% above cost.
 Shipments from home office to Cebu branch costing P435,000 were in transit as of year-end.
Cebu branch recorded the said transfer twice at cost: one on December 31, 2017 and the other
on January 1, 2018.
 The home office allocated to the Cebu branch ¾ of the rent expenses it paid for the year ended
2017. The rent expense was P144,000. The home office sent a debit memo by debiting the home
office-current account and crediting rent payable.
 The branch wrote-off uncollectible accounts amounting to P60,720. The allowance for doubtful
accounts is maintained in the books of the home office. The home office recorded the write-off
as a write-off of its own accounts receivable.
 The branch collected accounts receivable from home office’s customers amounting to P317,520,
net of 2% cash discount. The branch treated the said transaction as if it was a collection from its
own customers .The home office was not yet notified of the said collection.

What is the unadjusted balance of the home office-current account in the books of Cebu branch on
December 31, 2017? P2,768,940

For numbers 20 to 23

Fire Company has a branch in Baguio and Davao. The reciprocal accounts between the home office and
the branches were in agreement at the beginning of 2018. However at December 31, 2018, the
following reciprocal balances are found in the home office books:

Investment in Baguio P186,500

Investment in Davao 84,000

Data for reconciliation of the reciprocal accounts are as follows:

 On December 29, 2018, the home office has instructed Baguio to transfer P74,000 cash to Davao.
Baguio recorded this transaction immediately. Upon receipt, Davao has recorded this transfer at
P47,000. The home office however has not yet recorded this interbranch transaction as of the end
of the year.
 Fire has transferred goods costing P28,900 to Baguio branch and paid P2,500 of shipping cost on
December 16, 2018. Baguio shipped all of these goods to Davao upon instruction of the home office
on December 30, 2018. Shipping cost is P3,600 freight collect. Had the goods were shipped directly
to Davao, P5,000 of freight cost should have been incurred. The interbranch shipment was not
recorded by the branches and the home as well.

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 Baguio has collected cash of P5,750 from Davao’s customer. This transaction is not yet recorded by
Davao and the home office.
 The home office has already allocated P11,000 and P9,000 of administrative expenses to Baguio and
Davao respectively. The branches are not yet notified.
 Baguio remitted P14,300 cash to the home office on December 12, 2018. The home office has failed
to record the said remittance.
 Davao returned goods costing P6,850 to the home office. The goods were shipped on December 19
and received on December 24 but no entries have been made in the home office books.

Compute for the following:

20. Adjusted balance of Investment in Baguio account P72,550

21. Adjusted balance of Investment in Davao account P175,700
22. Unadjusted balance of Home Office Current account in Baguio’s books P92,950
23. Unadjusted balance of Home Office Current account in Davao’s books P115,150

For numbers 24 to 27

The following transactions were entered in the branch current account of Makati Head Office for the
year 2018:

Investment in Branch – Ortigas

Beg. Balance, 1/1/18 459,258 Collection of AR, 9/1 33,300
Shipments to branch, 4/1/18 212,400
Cash forwarded, 6/1/18 15,000
Operating expenses charged to the
Branch, 12/31/18 2,880

 Shipments to the branch during the year were made at 20% above cost.
 The balance of the Allowance for Overvaluation of Branch Inventory account was P21,300 at the
beginning, and the allowance was written down to P14,700 at year-end.
 On December 10, 2018, the home office purchased a piece of equipment amounting to P36,000 for
its branch in Ortigas. The said equipment has a useful life of five years and will be carried in the
books of the branch, but the home office recorded the purchase by debiting Equipment.
 The branch recorded the depreciation of the equipment by debiting the Home Office Current
account and crediting Accumulated Depreciation.
 Debit memo regarding the allocation of operating expenses to the Ortigas branch was received by
the branch on January 2, 2019.
 The Ortigas branch reported net income of P197,730.
 It also remitted cash to the home office on December 31, 2018 amounting to P33,000, which the
home office received and recorded on January 1, 2019.
 The interoffice accounts were in agreement at the beginning of the year.

24. How much is the adjusted balance of the Branch Current account on December 31, 2018 before the
necessary closing entries were made? P659,238
25. What is the amount of adjustment in the Allowance for Overvaluation of Branch inventory account?
P42,000
26. How much is the net income of Ortigas branch that will be reported in the combined income
statement of Makati Company? P236,250
27. What is the amount of the Home Office Current account that will be reported in the books of Ortigas
branch after closing entries are made? P853,488

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28. During 2018, goods were shipped to the branch at 120% above cost. The reciprocal account in the
income statement of the home office amounted to P237,500. The balance of the contra branch
current account reports a balance of P375,000 before adjustment. The beginning inventory of the
branch from the home office at cost is P360,000 and from outsiders, P93,000. The branch purchased
goods from outsiders during the year amounting to P125,200. If the ending inventory of the branch
as reported in the combined statement of financial position is P345,000. The branch income as
reported in the combined financial statement and as reported in the branch’s books are P201,125
and 120,750, respectively.

How much is the cost of goods sold to be reported in the branch’s income statement for the year
ended December 31, 2018? 551,075

For numbers 29 and 30

The following are some of the account balances on the books of the home office and its branch on
December 31, 2018.

Home office books Branch books

Inventory, January 1,2018 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.

29. What is the amount of the unrealized inventory profit in the books of the home office on December
31, 2018? P12,000
30. How much is the combined total comprehensive income on December 31, 2018? P538,700