Chap.07 Guerrero Home Office and Branch Acctg PDF

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Summary

Chapter 7Home Office and Branch AccountingCompanies 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 facilitateits reporting responsibili...

Description

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: (Home Office Books) Investment in Branch xx xx xx xx

Assets transfer to branch Assets transfer from branch Branch profit Branch loss

(Branch Books) Home Office xx xx 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 P180,000 250,000 225,500 55,500 P405,500 P65,000

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 merchandis...