Jerah Y.

Torrejos

1.
Home Office Books Branch Books
Investment in Branch (Billed Price) xxx Shipment from Home Office xxx
Shipments to Branch (Cost) xxx Home Office xxx
Allowance for Overvaluation of
Branch xxx

The account Allowance for Overvaluation of Branch is recorded when there is

a transfer of inventory at above cost by the Home office to the branch. It is also called
Unrealized Profit in Branch Inventory. It is only realized when the inventory is
reshipped or sold to an outsider. It is used to account for the excess of the cost of the
shipment to the branch. In this way, only the home office knows the true cost of the
inventory. The branch, however, records it at the billed price.

2. The reciprocal ledger account balances of Meadow Company’s branch and home
office are not in agreement at year-end. What factors might have caused this?
The reciprocal accounts should have the same balances at any given time.
However, due to errors or timing differences in recording, they become unequal.
They result to what we call “reconciling items”. These items are identified and adjusted
so that we can arrive at the adjusted balances of the reciprocal accounts, which equate
the two accounts.
The following scenarios are examples on what could happen resulting to unequal
balances of the reciprocal accounts.
A. The Investment in Branch account is debited, but no corresponding credit is
made in the Home Office account, or vice versa. An example of this happens when
an inventory from the home office is still in transit. And the branch has not yet recorded
the shipment from the Home office.The opposite happens when the branch returns
merchandise to the Home office, but the merchandise is still in transit and the home
office hasn’t recorded the reshipment of the inventory yet.
B. Error on recording of transactions. An example of this is when the home office
recorded the remittance of the branch for a lesser amount than the actual remittance.

Reference:

Habbi, A. (2020, May 1). ARW AFAR - AGENCY, HOME OFFICE AND BRANCH
ACCOUNTING [Video file]. Retrieved August 31, 2020, from
https://www.youtube.com/watch?v=plpqUFUK21o&t=2491s