HOME OFFICE AND BRANCH ACCOUNTING

1. At the end of the year the Investment in Bacolod account of the home office is P300,500. However, there are
transactions discovered to have errors.

 Bacolod branch bought equipment on June 1, 2020 costing P63,800 for the home office’s use and the
policy is to record the asset in Bacolod’s books. During that time the home office recorded the equipment
and credited its reciprocal account of its Bacolod branch

 The policy of the company regarding the equipment’s depreciation is that it has a life of 8yrs with no
salvage value and the straight-line method should be used. No entry has been made by the home office
and branch

 The home office ships merchandise to Bacolod amounting to P96,700. Bacolod recorded the transaction
as P97,600

 Bacolod pays the home office’s creditors in the amount of P32,400 and sends a debit memo to the home
office. Upon receipt of the debit memo, the home office debited its reciprocal account in the amount of
P23,400 twice

1. What is the unadjusted balance of the home office current account in the books of Bacolod at the
end of the year?
a. 379,600
b. 252,000
c. 286,000
d. 315,800

2. What is the net adjustment of the investment in Bacolod account at the end of the year?
a. 20,052 debit
b. 20,052 credit
c. 19,387.5 debit
d. 19,387.5 credit

3. What is the net adjustment of the home office current account in the books of Bacolod branch at
the end of the year?
a. 4,887.5 debit
b. 4,887.5 credit
c. 5,552 debit
d. 5,552 credit

2. Miles Company established a branch in Ayala by sending merchandise costing P924,500 and effecting a fund
transfer of P400,000 cash on January 1, 2020.

The branch purchased computer equipment costing P420,000 on April 1. As per agreement, the home office
will maintain all the property, plant and equipment records.

Ayala branch collected P56,000 worth of Ortigas branch’s receivable on August 4. Cash remittance to the
home was P250,000 on September 28.

On November 21, Ayala branch returned defective merchandise worth P125,000 to the home office.

At the end of the year, the company’s controller found out that the branch accountant had failed to record all
the transactions initiated by the home office from the second half of the year. Because of this, there is a
significant discrepancy between the balances of the reciprocal accounts.

For the purpose of reconciling the reciprocal accounts, the controller instructed the accounting staff of the
home office to send a copy of the Investment in Ayala general ledger to the branch.

Investment in Ayala
1/1 Merchandise to branch 924,500 4/2 Equipment acquisition 240,000
1/1 Fund transfer 400,000 9/30 Remittance 225,000
7/2 Merchandise to branch 135,000 11/22 Return of goods from branch 12,500
8/31 Fund transfer 95,000
10/5 Expense paid for branch 29,000

1. What is the unadjusted balance of the Home Office account?

a. 598,500
b. 585,500
c. 723,500
d. 335,500

2. What is the adjusted balance of the reciprocal accounts?

a. 844,500
b. 574,500
c. 901,000
d. 596,500

3. The home office transfers merchandise to Manila branch at a mark-up of 25% above cost during the year
2022, and 30% mark-up above cost during the previous year. In 2022, the reciprocal account in the income
 statement of the branch is P1,487,500. The account Unrealized Branch Inventory Profit has a balance of
P84,000 at the end of the previous year. There were no inventory beginning from outside purchases in 2022,
however purchases were made during 2022 at P76,000. The ending inventory reported by the branch in 2022
was P1,650,500. At the end of 2022, an additional profit of P54,000 was realized from the Unrealized Branch
Inventory Profit account.

1. What is the cost of goods sold of the branch in the combined financial statements?
a. 180,000
b. 223,000
c. 234,000
d. 203,000

2. What is the cost of goods available for sale of the branch at cost?
a. 1,927,500
b. 1,470,000
c. 1,546,000
d. 1,851,500

3. What is the ending inventory of the branch in the combined financial statements?
a. 1,323,000
b. 1,343,000
c. 1,310,000
d. 1,290,000

4. During the year 2022, merchandise 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. The beginning inventory of the branch from
home office at cost was P2,375,000 and the beginning inventory of the branch from outside purchases was
P540,000. Purchases from outsiders during the year was P1,450,000.

What is the total goods available for sale of the branch from the home office merchandise?
a. 5,308,000
b. 6,337,000
c. 8,090,000
d. 6,100,000

5. On August 1, 2022, the home office in Ortigas established a branch in Makati to act as a sales agency. The
following assets were sent to the sales agency: Cash (for working fund to be operated under the imprest system)
P22,000; samples from the merchandise stock, which have a salvage value of 15% of the cost, P36,000 which were
useful until December 1, 2022. During August, the sales agency submits sales order of P272,000, sales per invoice
was billed at P268,000 duly approved by the home office. Collection during the month was P58,200, net of 3%
discount. Cost of merchandise shipped was P155,000 of which 80% were sold during August. Home office
disbursements chargeable to the sales agency were as follows: Furnitures & Fixtures P40,000; salaries of the
manager and salesmen for the month P21,600; annual rent of the office space P36,000. On August 31, the sales
agency working fund was replenished in the amount of P17,925. The furnitures & fixtures were depreciated 18%
per annum.

What is the net income of the agency for the month of August?
a. 51,825
b. 91,425
c. 93,225
d. 58,425

EXERCISES
1. In the separate statement of financial position of the home office, the investment in branch account shall be
presented as
a. Liability
b. Equity
c. Asset
d. Income

2. In the separate statement of financial position of the branch, the home office account shall be presented as
a. Liability
b. Equity
c. Asset
d. Income

3. In the combined statement of financial position prepared by the company, the inventory of the branch shall
be measured and presented at
a. Lower of cost or net realizable value
b. Cost
c. Billed price
d. Fair value

4. The main difference between the net income reported in the separate income statement of the branch and the
net income reported by the home office for the branch’s operation is the
a. Overstatement of beginning and ending inventory reported by the branch
b. Overstatement of total goods available for sale reported by the branch
c. Overstatement of cost of goods sold reported by the branch for the goods coming from the home office
d. Overstatement of shipment from home office reported by the branch
5. If the home office receives debit memo from the branch, the home office shall record it in its separate statement
of financial position by
a. Increasing the investment in branch account
b. Decreasing the investment in branch account
c. Debiting the investment in branch account
d. Disclosure

6. If the branch receives credit memo from the home office, the branch shall record it in its separate statement
of financial position by
a. Increasing the home office account
b. Crediting the home office account
c. Debiting the home office account
d. Disclosure

7. Which of the following transactions will increase the home office account in the branch’s separate statement
of financial position?
a. Net loss of the branch
b. Collection by the home office of branch’s receivable
c. Debit memo received from the home office
d. Payment by the branch of home office’s liability

8. Which of the following transactions will decrease the investment in branch’s account in the home office’s
separate statement of financial position?
a. Net income of the branch
b. Payment of branch’s liability by the home office
c. Credit memo received from the branch
d. Return by branch to home office of merchandise shipped

9. The trial balances before the adjustment for the home office and branch of the Neon Company show the following
items on December 31. Differences in the shipments account balances result from the home office policy of billing
the branch at 20% above cost.

Home Office books Branch books

Allowance for overvaluation of
Branch merchandise P36,000
Shipments to branch P ?
Purchases (outsiders) P 25,000
Shipments from Home Office P 96,000
Merchandise Inventory, January 1 P150,000
Sales P300,000
Expenses P 18,000

The ending inventory of the branch amount to P100,000, composed of merchandise from the home office costing
P70,000 and the remaining amount from outsiders.

In the books of the home office, compute for the amount credited to Allowance for Overvaluation account during
the year.
a. P20,000
b. P22,000
c. P16,000
d. P36,000

Using the information in number 13, In the books of the home office, compute for the amount debited to Allowance
for Overvaluation account at the end of the year
a. P22,000
b. P111,000
c. P14,000
d. P24,333

Using the information in number 13, in the working paper prepared at the end of the year, compute the amount
credited to Allowance for Overvaluation account
a. P14,000
b. P22,000
c. P-0-
d. P36,000

10. Light of Jesus operates a branch in Cagayan de Oro City. Selected accounts taken from Dec. 31, 2010 financial
statements of Light of Jesus and its branch follows:
 Home Office Branch
Sales P6,900,000 P3,765,000
Shipments to Branch 1,750,000
Shipments from home office 2,187,500
Inventory, Jan. 1 800,000 120,000
Inventory, Dec. 31 640,000 250,000
Purchases 6,800,000 1,000,000
Allowance for overvaluation before 452,500
adjustment
Expenses 356,000 250,000

The ending inventory of the branch includes P120,000 purchased from outside suppliers. The
consolidated net income is :
a. P1,791,500 b. P2,220,000 c. P2,218,000 d. P2,244,000

ANSWER
1. A
2. B
3. A
4. C
5. B
6. C
7. C
8. D
9. CAC
10. C