PRACTICAL ACCOUNTING 2 (SY 2017 – 2018) – HOME OFFICE AND BRANCH ACCOUNTING

1. Reciprocal accounts:

Investment in Branch Account Home Office Account

(Home Office Books) (Branch Books)
Transfer of resources from:
Investment in Branch xx Asset xx
Home Office to Branch
Asset xx Home Office xx
Asset xx Home Office xx
Branch to Home Office
Investment in Branch xx Asset xx

Resulting of Operation:

Investment in Branch xx Income Summary xx

Branch Profit
Branch Income xx Home Office xx
Branch Loss xx Home Office xx
Branch Loss
Investment in Branch xx Income Summary xx

*The reciprocal accounts, Investment in Branch and Home Office Equity must be equal at any given time. Any difference
may be caused by timing differences or errors.

2. Shipment Accounts:
Shipments TO Branch vs. Shipments FROM Home Office
-recorded by the Home Office -recorded by the Branch
-its balance is deducted from -this will be included in the computation
total beginning inventory and of branch’s total cost of goods sold as an addition to
purchases to compute for home purchases
office’s cost of goods sold
*any freight costs incurred becomes part of the cost of inventory

3. Property, Plant and Equipment Transactions:

Case 1 Case 2 Case 3 Case 4

Acquirer Home Home Branch Branch
User Branch Branch Branch Branch
Maintain Branch Home Home Branch
Record
PPE xx PPE xx NO ENTRY
Journal entries Cash xx Investment in Branch xx
Investment in Branch xx
of Home
Cash xx
Office Investment in Branch xx Investment in Branch xx
Acc. Depreciation xx Acc. Depreciation xx
NO ENTRY Home Office xx PPE xx
Cash xx Cash xx
Journal entries PPE xx
of Branch Home Office xx
Depreciation Expense xx Depreciation Expense xx Dep. Exp xx
Home Office xx Home Office xx Acc. Dep xx

4. True Branch Profit:

Revenue xx
Cost of Goods Sold
Inventory, beg. xx @Home office cost
Shipments from Home Office xx @Home office cost
Purchases xx @cost
Inventory, end from shipments (xx) @Home office cost
Inventory, end from purchases (xx) xx @cost
Gross Profit xx
Expenses (xx)
True Branch Profit xx

OR

Branch Reported Profit xx

Realized Profit on Overvaluation in Branch Inventory
Allowance for overvaluation on inventory, beg. xx

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PRACTICAL ACCOUNTING 2 (SY 2017 – 2018) – HOME OFFICE AND BRANCH ACCOUNTING

Allowance for overvaluation on shipments from home office xx

Allowance for overvaluation on inventory, end (xx) (xx)
True Branch Profit xx

5. Branch Inventory:

Branch Inventory from Home Office billed price xx

Allowance for Overvaluation (xx)
Branch Inventory from Home Office xx
Branch Inventory from outside purchases xx
Branch Inventory - Cost xx

*mark-up shall be recognized as part of the profit or loss only if the inventories are sold to an unrelated party.

6. Inter-branch Transactions:
 Treated as if a transaction between the Branch and Home Office.
 Excess cost incurred in inter-branch transactions is treated as expense of the Home Office.

--END--

STRAIGHT PROBLEMS:

Problem I:
The Dagupan City branch of Andy Enterprises, Manila was billed for merchandise shipments from home office at cost plus 25% in
2015 and cost plus 20% in 2016. Other pertinent data for 2016:
Dagupan Branc Home Office
Sales P63,000 P212,000
Inventory, beginning 8,900 at billed price 23,000 at cost
Purchases 164,000
Inventory transfers 50,400 at billed price 42,000 at cost
Inventory, end 11,700 at billed price 28,500 at cost
Expenses 20,300 76,400

1. What will be the combined cost of sales of Dagupan branch and Andy’s home office that must be shown in the combined
income statement?
2. What will be the combined net income of Dagupan branch and Andy’s home office?

Problem II:
The following information came from the books and records of Romartin Corporation and its branch. The balances are as of
December 31,2016, the fourth year of the corporation’s existence.

Home Office Branch

Dr. (Cr.) Dr. (Cr.)
Sales P(320,000)
Shipments to branch P(100,000)
Shipments from home office 140,000
Purchases 50,000
Expenses 80,000
Inventory, January 1, 2016 37,000
Unrealized profit in branch inventory (50,000)

There are no shipments in transit between the home office and the branch. Both shipments accounts are properly recorded. The closing
inventory at billed prices includes merchandise acquired from the home office in the amount of P21,000 and P9,000 acquired form
vendors for a total of P30,000.

Required: Determine the following:

1. Beginning inventory acquired from outsiders
2. Correct cost of beginning inventory
3. Realized profit from inventory shipments
4. Correct net income of branch
5. Correct ending inventory
6. Allowance balance at the end

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