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HOME OFFICE AND BRANCH ACCOUNTINGPROBLEMS:1. Cebu branch submitted the following data to its home office in Manila for 2016, its first year of operation:Sales P 2,300, Shipments from home office 1,850, Operating expenses 235, Home Office 480,Shipments to the branch are billed at cost. The December 3...

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HOME OFFICE AND BRANCH ACCOUNTING PROBLEMS: 1.

Cebu branch submitted the following data to its home office in Manila for 2016, its first year of operation: Sales Shipments from home office Operating expenses Home Office

P 2,300,000 1,850,000 235,000 480,000

Shipments to the branch are billed at cost. The December 31 inventory of the branch was P255,500. What is the balance of the Investment in Branch account on December 15, 2016 on the home office books? a. P 950,500 b. P 470,500 c. P 950,000 d. P 480,000 SOLUTION: Answer: A Since the balance 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 Add: Profit (loss) Sales Cost of sales: Shipments from HO Inventory, Dec. 31 Gross profit Operating expenses Home Office account balance, December 31, 2014 2.

P 480,000 P 2,300,000 P 1,850,000 255,500

1,954,500 P 705,500 235,000

470,500 P 950,500

The home office in Quezon City ships and bill 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 2016 are reflected in the branch trial balance that follows: Cash Accounts Receivable Home Office Shipments from Home Office Sales Expenses

P 20,000 80,000

Total

P 405,500

December 31, inventory

P 65,000

P 180,000 250,000 225,500 55,500 P 405,500

No. 2 – Continued Assuming all the transactions are properly recorded, what is the balance of the Investment in Branch account in the home office books? a. P 180,000 b. P 195,000 c. P 165,000 d. P 175,000 SOLUTION: Answer: C Home Office account before branch profit (loss) Add: Profit (loss) Sales Cost of Sales: Shipments from HO Inventory, 12/31 Gross profit Expenses Home Office account balance, 12/31

P 180,000 P 225,500 P 250,000 65,000

185,000 P 40,500 55,500

( 15,000) P 165,000

Therefore the balance of the Investment in Branch account is also P 165,000.

3. The following data pertains to the shipments of merchandise from Home Office to Branch during 2016: Home office’s cost of merchandise Inter-office billings Sales by branch to outsiders Merchandise inventory on December 31, 2016

P 350,000` 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 31,2016, what amount of the above transactions should be included as sales? a. P 570,000 b. P 520,000 c. P 470,000 d. P 350,000 SOLUTION: Answer: B In the preparation of combined statements of the home office and the branch, all inter-office transactions are eliminated as if it had never occurred. Therefore, the only transactions that should be presented are transactions to outsiders, which is in this problem, the P 520,000 sales by branch to outsiders.

4. Nike Corporation operates a number of branches in the provinces. On December 31, 2016, its Davao branch showed a Home Office account balance of P 54,700 and the home office books showed an Investment in Davao Branch account balance of P 51,100. The following information they help in reconciling both accounts: 1. A P 24,000 shipment, charged by Home Office to Davao Branch, was actually sent to and retained by Cebu Branch. 2. A P 30,000 shipment, intended and charged to Aklan Branch was shipped to Davao Branch and retained by the latter. 3. A P 4,000 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 p 7,200 and fails to notify the branch. 5. Home Office was charged for P 2,400 for merchandise returned by Davao Branch on December 30. The merchandise is in transit. Home Office erroneously recorded Davao Branch’s net income for 2016 at P 32,550. What is the adjusted balances of the Home Office and Davao Branch reciprocal accounts on December 31, 2016? a. P 40,300 b. P 54,700 c. P 47,500 d. P 43,500

SOLUTION: Answer: C To compute the adjusted balances of the reciprocal accounts a reconciliation statement is to be prepared as follows:

Unadjusted balances, December 31, 2016 Add (deduct) the following adjustments 1. Shipment charged to Davao branch but actually sent to Cebu branch 2. Shipment charged to Aklan branch but actually sent to Davao branch 3. No effect. 4. Home office collection of Davao Branch accounts receivable 5. Merchandise returned by Davao branch. Still in transit to home office. 6. Overstatement of Davao branch net Net income (P 32,550 – P 25,350) Adjusted balances, December 31, 2016

(Branch books) Home Office Account P 54, 700

(HO Books) Investment in Davao Branch Account P 51, 100

( 24,000)

( 7,200) ( 2,400)

P 47,500

( 7,200) P 47,500

5. The branch manager of Tower Cosmetics in Cebu submitted a report as of May 31, 2016 containing the following information: Petty Cash Fund Sales Sales Returns Accounts Wriiten Off Shipments from Home Office Accounts Receivable – May 31, 2015 Accounts Receivable – May 31, 2016 Inventory – May 31, 2015 Inventory – May 31, 2016 Expenses (reimbursed by H.O)

P 1,500 198,720 3,600 1,920 136,080 43,800 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. P 187,860 b. P 189,780 c. P 195,120 d. P 198,720 SOLUTION: Answer: A The P 187, 860 is computed as follows: Accounts receivable, 5/31/2015 Net Sales (P 198,720 – P 3,600) Total Less: Accounts Receivable, 5/31/2016 Accounts written off Remittance

P 43, 800 195, 120 P 238, 920 P 49, 140 1, 920

51, 060 P 187,860

6. On December 31, the Investment in Branch account in the home office books shows a balance of P 50,000. The following facts are ascertained: 1. Merchandise billed at P 12,500 is in transit on December 31 from the home office to the branch. 2. The branch collected a home office accounts receivable for P 3,500. The branch did not notify the home office of such collection. 3. On December 30, the home office sent cash of P 7,500 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 P 2,400 instead of P 2,040. 5. The branch returned supplies of P 1,500 to the home office but the home office ha snot yet recorded the receipt of the supplies. Assume all the other transactions have been properly recorded. What is the unadjusted balance of the Home Office account on the branch books on December 31? a. P 64, 140 b. P 39, 140 c. P 14, 000 d. P 13, 000

SOLUTION: Answer: B P 39, 140 is computed as follows: Investment in Branch account balance,12/31 (Home Office books) Add (Deduct): Merchandise in transit Collection of Home Office accounts receivable by Branch Erroneous recording of Branch profit Supplies returned by Branch Home Office account balance,12/31 (Branch books)

P50,000

(12,500) 3,500 ( 360) ( 1,500) P39,140

7. A reconciliiation of the Dagupan Branch account of Mandaluyong Company and the Home Office account carried in the branch’s books shown the following discrepancies at December 31,2016. 1. A credit for merchandise allowance for P 300 was taken by the branch as P 360. 2. A charge by the branch of P 550 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 Invesrment in Dagupan Branch account in the home office books had a debit balance of P 43,000 at December 31,2016. 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 31,2016 was: a. P 43, 500 b. P 42, 950 c. P 41, 990 d. P 41, 490 SOLUTION: Answer: D The P 41, 490 unadjusted balance of Home Office account is computed as follows: Unadjusted balance, Investment in Branch account, 12/31 Less: Merchandise allowance (error) Branch advances to President Advertising expense charged to Branch Unadjusted balance, Home office account, 12/31

P43,000 P 60 550 900

1,510 P41,490

8. The following were found in your examination of the interplant accounts between the Home Office and the Butuan Branch: a. b. c. d. e. f.

Transfer of fixed assets from Home Office amounting to P53,960 was not booked by the branch. P10,000 covering marketing expense of another branch was charged by Home Office to Butuan Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice. Home Office recorded a cash transfer of P65,700 from Butuan Branch as coming from Davao Branch 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. 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 to the Home Office account are: Investment in Butuan Home Office a. P (75,700) P20,950 b. 75,700 ( 20,950) c. ( 55,700) 75,000 d. ( 65,700) ( 74,000) SOLUTION: Answer: A 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 book by Butuan (a) Inventory transfer recorded twice by Butuan (c) Error in recording DM for P4,650 as P4,560 (f) Dr. (Cr.) adjustment to Home Office account In Butuan Branch books

P(10,000) ( 65,000) P(75,000)

P(53,960) 75,000 ( 90) P 20,950

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, 2016 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 adjusting memo, reducing the charge by P100 and set up a liability for the next 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 change 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, 2014 correcting item (f) and entered a credit in favor of the Home Office as of June 30, 2016.

At June 30, 2016, the unadjusted balance of the Investment in Branch account on the Home Office books showed P175,520. At the beginning of the year, the interoffice accounts were in balance. What is the unadjusted balance of the Home Office account on the branch books on June 30, 2016? a. b. c. d.

P184,279.50 P160,725.50 P18,729.00 P165,279.50

SOLUTION: Answer: A Unadjusted balance of investment in branch account, 6/30 (a) Charge for labor (b) Charge for freight (c) Purchase of furniture and fixture (d) Merchandise allowance (e) Charge for interest (f) Proceeds from sales of truck (g) Charge for truck repairs (h) Proceeds from sales of truck Unadjusted balance of Home Office account, 6/30

P175,520.00 500.00 ( 805.50) ( 90.00) ( 50.00) ( 425.00) 5,000.00 ( 370.00) 5,000.00 P184,279.50

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, 2016 the inventories of the Home Office in Manila and the Cebu City branch are P13,600 and P3,960 respectively. During 2016, the Home Office purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch. At December 31, 2016, 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 2016 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

SOLUTION: Answer: B 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 cost of sales Billed Price (above) Cost to H.O ( 16, 720 / 110%) Actual branch income at cost basis

P32,000 3,960 17, 600 ( 4,840)

16,720 15,200

16,720 15,280 10,480 4,800

1,520 P 6,320

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 of P33,600 and its net loss for the month at P5,200 Shipments to and from the branch were consistently billed at 120% off cost. 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

SOLUTION: Answer: A Branch Inventory at Cast: Branch inventory at billed price Divide by the billing percentage of cost Branch inventory of cost

P33,600 120% P 28,000

Branch net income as far as the Home office is concerned: Branch net loss, as reported Add: Overvaluation of Cost of Sales of the Branch: Total Shipment to Branch: Billed price (P60,000 + P24,000) Cost (84,000 120%) Less: Branch returns – Billed price Cost(P1,680 120%) Net Shipment Less: Inventory, 9/30Billed price Cost

(P5,200)

P84,000 70,000 P 1,680 1,400

P33,600 28,000

P14,000

280 P13,720

5,600

8,120

Branch Net Income P 2,92 12. Makati Company bills its Valenzuela Branch for merchandise at 140% of cost. At the end of January, 2016, the branch reported the following information.

Merchandise from Home Office (At Billed Price) Inventory, January 1 Shipments received Inventory, January 31

P 7,560 28,280 8,400

What should be the balance of the allowance account for overvaluation of the branch inventory at January 31 before adjustment? a. P 2,400 b. P 2,160 c. P 9,080 d. P10,240 SOLUTION: Answer: D 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 + Inventory. January 1 Add: Shipment

P 7,560 28,280

Billing Percentage =

Cost

OverValuation

140% 140%

P 5,400 20,200

P2,160 8,080

Balance of allowance before adjustment

13.

P 10,240

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 excepts from the trial balances and data on the home office and Binondo branch for the month just eneded. Home Office Allowance for overvaluation of branch merchandise Shipments to Branch

P370,000 850,000

Branch Beginning inventory Shipments from home office Purchases

1,440,000 1,020,000 410,000

Month end additional data: Ending inventory of branch From home office at Billed Price P1,170,000 From outsiders (at cost) 290,000

P1,460,000

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

SOLUTION: Answer: C Beginning inventory Purchase Shipment from home office Goods available for sale Ending inventory Cost of sales Less: Overvaluation Beginnning inventory and shipments Less:Ending inventory Billed price Cost(P1,170,000/120%) Cost of goods sold (net)

14.

P1,440,000 410,000 1,020,000 2,870,000 1,460,000 1,410,000 370,000 P1,170,000 975,000

195,000

` 175,000 P 1,235,000

Shopper Company started a branch office in Iloilo City on June 1,2016. 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 30,2016, branch reported the following: Inventory, June 30 Net loss for the month Shipments to and from the branch wee uniformly billed at 120% of cost. a. No net income or loss b. Net income of P4,380 c. Net income of P12,180 d. Net loss of P7,800

P50,400 (P7,800)

SOLUTION: Answer: B According to the Home Office books, Iloilo branch will have a P4,30 net income as computed below: Branch net loss Add: Overvaluation of Cost of Sales of branch – Total shipment to Branch: Billed price(90,000+P36,000) Cost (P126,000 120%) Less: Branch returns Billed price Cost (P2,520 120%) Net Shipment to Branch Less: Inventory, 6/30 Billed price Cost (P50,400 120%) Branch Net Income

(P7,800)

P126,000 105,000

P 2,520 2,100

P21,000

420 P 20,580

P 50,400 42,000

8,400

12,180 P 4,380

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 Inventory at end Gross margin on sales Expenses Comprehensive income

P300,000 P28,000 30,000 P 310,000 50,000

P 260,000 P 40,000 35,000 P 5,000

Shipments to the branch wee 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 37,600

Net income realized P72,600 P55,000 P 5,000 P70,100

SOLUTION: Answer: D P37,600 is computed as follows: Acquired from Home Office: Billed price (P50,000-P6,600 Divide by billing percentage of cost Local purchases Branch inventory at cost, 9/30

P43,400 140%

P 31,000 6,600 P 37,600

Below is the computation of Home Office income from branch operation of P70,100. Branch net income (P5,000 – P2,500 expense) `` Add: Overvaluation of Branch Cost of Sales: Shipment from ...