ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY
TRANSACTIONS When home office bills the branch for merchandise at a figure other than cost, billing
Introduction
As a means of achieving marketing objectives, selling units in form of agency or a
branch may be established. The distinction between an agency and a branch is based
upon the functions assigned to the organization as well as the degree of independence
that it assumes in the exercise of such functions, an organization that merely takes
orders for goods, carries no stock other than samples, and that operates under the direct
supervision of the home office is called an agency, while an organization that sells
goods out of a stock that it maintains and that possesses the authority to engage in
transactions as an independent business unit is called a branch.
ACCOUNTING FOR BRANCHES
Although a branch operates as a separate business unit, it is subject to control by the
home office. A branch's cash, merchandise, and other assets, as may be needed, are
supplied by the home office. The branch may purchase merchandise from outsiders to
satisfy certain local needs for goods not available from the affiliated unit.
Generally, the branch accounting system is maintained at the branch. Periodic financial
statements are prepared by the branch for submission to the home office. When
complete self-balancing books are kept by the branch, an account called Home Office
Current takes the customary capital accounts (credit account). The home office, in
turns, keeps a reciprocal account, called Branch Current or Investment in Branch
account (debit account).
ADJUSTMENT OF RECIPROCAL ACCOUNT
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The balances in the Branch Current account in the home office books and Home Office
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Current account in the branch books may not show identical balances at any one time,
because of certain interoffice data that have been recorded by one office but not by the
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other. The fact that the reciprocal account balances are not identical is of no concern
during the fiscal period; however, at the end of the fiscal period, appropriate journal
entries should be made to bring interoffice accounts into agreement for purposes of
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individual and combined financial statements.
The data to be considered in reconciling the two reciprocal accounts may be classified
as follows:
1. Debits in the branch account without corresponding credits in the home office
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account. (e.g. shipment of merchandise in transit)
2. Credits in the branch account without corresponding debits in the home office
account. (e.g. branch's accounts receivable collected by the home office)
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3. Debits in the home office account without corresponding credits in the branch
account. (eg cash remittance of the branch to home office in transit)
4. Credits in the home office account without corresponding debits in the branch
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account. (e.g. correction of account for the understatement of net income for the
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preceding period)
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BRANCH BILLING AT AN AMOUNT ABOVE COST
is usually made at an arbitrary rate above cost or at the retail sales price.
In order to withhold from branch complete information concerning the actual
camnings from branch operation, billing by the home office may be made at an amount
above cost. When billings to the branch exceed cost, the earnings determined by the
branch will be less than actual earnings, and the inventories reported by the branch at
the billed prices will exceed cost. The difference between the billed price recorded by
the branch and the cost of the goods shipped recorded by the home office IS credited
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to Unrealized Intercompany Inventory Profit (Allowance for Overvaluation of Branch
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Inventory). And these factors must be recognized by the home office and given effect
upon its accounting records in summarizing branch operations.
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PREPARATION OF COMBINED STATEMENTS
Although separate statements offer significant information to both home office and
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branch, such statements must be combined in fully stating a company's financial
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position and results of its operations. The financial position of the business unit as a
whole is fully presented only when the individual asset and liability items of the branch
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are substituted for the branch investment balances and combined with the home office
items. Operating results for the businesses as a whole are fully presented only when
the individual revenue and expenses of the branch are substituted for the branch net
income or loss and combined with the home office items.
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In combining branch data with home office, the elimination of certain reciprocal
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interoffice items is necessary. Since reciprocal accounts are without significance when
the related units are recognized as single entity, in preparing a combined balance sheet,
the home office account and the branch account, and other interbranch receivables and
payables, are eliminated. In preparing a combined income statement, the reciprocal
accounts Shipments from Home Office and Shipments to Branch are eliminated, since
these balances summarize interoffice transfers that are of no significance when the
related units are reported as a single entity. Other interoffice revenue and expense
items are also eliminated so that the combined statement may report only the results
of transactions with outsiders.
When goods are billed to a branch at an amount above cost, the ending inventory on
the branch balance sheet, reported at an amount above cost, must be restated in terms
of cost in preparing the combined balance sheet. The beginning and ending inventories
on the branch income statement will require restatement to cost and the Unrealized
Intercompany Inventory Profit (Allowance for Overvaluation of Branch Inventory)
must be eliminated for purposes of preparing the combined income statement.
 MULTIPLE CHOICE QUESTIONS 4. The following were found in your examination of the interplant accounts between
1. An enterprise uses a branch accounting system in which it establishes separate the Home Office and the Butuan Branch:
formal accounting systems for its home office operations and its branch office a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked by
operations. Which of the following statements about this arrangement is false? the branch.
a. The home office account on the books of a branch office represents the equity b. P10,000 covering marketing expenses of another branch was charged by the Home
Office to Butuan.
interest of the home office in the net assets of the branch.
c. Butuan recorded a debit note on inventory transfers from the Home Office of P75,000
b. The branch office account on the books of the home office represents the twice.
equity interest of the branch office in the net assets of the home office. d. Home Office recorded cash transfer of P65,700 from Butuan Branch as coming from
c. The home office and branch office accounts are reciprocal accounts that must Davao Branch.

a
be eliminated in the preparation of the enterprise's financial statements that are e. Butuan reversed a previous debit memo from Cagayan de Oro Branch amounting to

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presented in accordance with GAAP. P10,500. Home Office decided that this charge appropriately Davao Branch's cost.
d. Unrealized profit from internal transfers between the home office and a branch f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560.
must be eliminated in the preparation of the enterprise's financial statements that The net adjustment in the home office books related to the Butuan Branch Current
account is:

d
are presented in accordance with GAAP. Dr. (Cr.)
a. 75,700 Erroneous charging of expense P (10,000)

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2. Which of the following is the only reason why a home office cannot report b. 65,700
inventory shipments to a branch as sales? Erroneous cash transfer (remittance) (65,700)

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c. 86,200 Net adjustment to Butuan Branch Current account
a. The inventory transfer is a transaction with a related party. d. 94,820
b. There is no practicable means of determining whether the transfer prices in the home office books P (75,700)

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approximate those that would occur in an arms-length transaction between The net adjustment in Butuan's books related to the Home Office account is:
a. 33,335 Dr. (Cr.)
independent parties.
c. Only inventory transactions between the company and outside third parties b. 31,450 Transfer of Fixed Asset from Home Office not booked by
Butuan Branch P(53,960)

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can be considered sales. c. 20,950 Double recording of inventory transfer from home office 75,000
d. The principles of conservatism. d. 10,450 Understatement of debit memo (90)

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Net adjustment to Home Office account in the Branch books P 20,950
3. On December 31, 2016, the Branch Current in the Home Office books shows a
balance of P50,000. The following facts are ascertained: Before the above discrepancies were given effect, the balance in the home office books
1) Merchandise billed at P12.500 is in transit on December 31 from home office to the branch.

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2) The branch collected a home office accounts receivable for P3,500. The branch did not
of its Butuan Branch Current account has a debit balance of P165,920. The unadjusted
balance in the Butuan Branch books of its Home Office Current account must be:
3)
notify the home office of such collection.

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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.
a. 92,336
b. 98,230
Branch Current
Dr.(Cr.)
H.O. Current
Dr.(Cr.)
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Unadjusted balance, Debit P165,920 P 111,170
4) Branch profit for December was recorded by the home office at P2,400 instead of P2,040. c. 104,500 Net adjustment to Butuan Branch Current account "a" (75,700)
5) The branch returned supplies of P1.500 to the home office but the home office has not yet d. 111,170 Net adjustment to Home Office Current account "b" 20,950
recorded the receipt of the supplies. Adjusted balance P 90,220 P 90,220
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Assume all other transactions have been properly recorded. What is the unadjusted The adjusted balance of the reciprocal accounts is: Branch Current H.O. Current
balance of the Home Office Current account on the branch books on December 31, a. 84,807 Dr.(Cr.) Dr.(Cr.)

2016? b. 90,220 Unadjusted balance, Debit

Net adjustment to Butuan Branch Current account "a"
P165,920
(75,700)
P 111,170

a. 64,140 Branch Current HO Current c. 99,200 Net adjustment to Home Office Current account "b" 20,950
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b. 39,140 Unadjusted balance, 12/31/2016 (HO Books) (Branch Books) d. 109,120 Adjusted balance P 90,220 P 90,220
P 50,000 P 39,140
c. 14,000 1. Merchandise in transit 12,500
d. 13,000 2. Collection of home office receivable by the branch 3,500 5. The home office of Mang Do Co. ships goods to Iloilo branch billing the branch
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3. Cash sent to branch which was erroneously charged for the goods at P45,000, excluding freight of P6,000. Upon receipt of the goods,
to Gen. Exp. 7,500
3. Cash sent by home office still in transit 7,500
Iloilo branch was instructed by the home office to transfer these goods to Cagayan
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4. Erroneous recording of branch profit (2,400 - 2,040) (360) de Oro branch. Iloilo branch ships the goods and paid P4,500 for the transfer. If
5. Unrecorded supplies returned by the branch (1,500) the goods had been shipped by the home office directly to Cagayan de Oro branch,
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Adjusted balance, 12/31/2016 P 59,140 P 59,140

the freight would have been P6,500.
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 What is the journal entry to record receipt of shipment in the book Cagayan de Oro d. Cagayan de Oro branch current 51,500
branch? Shipment to Iloilo 45,000
a. Shipment from home office 45,000 Excess freight on interbranch
Home office current 45,000 transfer of merchandise 4,000
b. Shipment from home office 45,000 Iloilo branch current 55,500
Freight in 6,000 Shipment to Cagayan de Oro 45,000
Home office current 51,000
6. Vivaldi & Co. has several branches located in key cities in the south namely,
c. Shipment from home office 45,000
Cebu, Mactan, Iloilo, Bacolod, Davao, and Cagayan de Oro. It authorizes transfers
Freight in 6,500
of cash and inventories among branches. The head office ships goods (P10,000

a
Home office current 51,500
cost) to Cebu branch paying freight for P600. The home office authorizes the

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d. Shipment from home office 45,000
transfer of goods from Cebu branch to Davao branch where the latter is charged
Freight in 4,500
for the cost of the goods (P10,000) and freight charge (P200) for the transfer. If
Home office current 49,500
the shipment had been made by the home office directly to the Davao branch, the

d
What is the adjusting journal entry to be recorded by Iloilo branch? freight charge would have been P900. The transfer resulted to difference in freight

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a. Home office current 51,500 charge which should be disposed of as follows:
Shipment from home office 45,000 a. P100 savings.

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Freight in 6,000 b. P100 charge to Davao branch by Cebu branch.
b. Home office current 47,000 c. P100 charge to Davao branch by Head Office.

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Shipment from home office 45,000 d. P100 to be equally charge among head office, Cebu branch and Davao branch.
Freight in 2,000
7. Gershwin Inc. opens a sales agency in Cebu City and a working fund of P20,000
c. Home office current 55,500
is established on an imprest basis. The first payment from the fund is P3,000 for

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Shipment from home office 45,000
rent. The transaction should be recorded by the home office as follows:
Freight in 6,000
Debit Credit
Cash 4,500

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a. No entry
d. Shipment from home office 45,000
b. Rent P3,000
Freight in 6,000
Cash P3,000

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Home office current 51,000
c. Cebu agency 3,000
What is the adjusting entry to be recorded by home office?
a. Shipment to Iloilo 45,000
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Working fund
Cebu agency 3,000
3,000
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Excess freight on interbranch Cash 3,000
transfer of merchandise 2,000 An agency that operates solely as a local sales organization under the direction of a home office
Cagayan de Oro branch current 45,000 generally carries no stock other than samples of the lines that are offered for sale. Samples of the
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Freight in 4,000 merchandise, as well as advertising materials are provided by the home office. The agency is
Shipment to Cagayan de Oro 45,000 normally provided with a working fund that is to be used for the payment of expenses that can
be more conveniently settled through agency. The imprest system is often adopted for the control
Iloilo branch current 51,000
of agency cash. Operating expenses of the agency, other than those paid by the agency from its
b. Shipment to Iloilo 45,000 working fund, are met by the home office.
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Excess freight on interbranch

transfer of merchandise 6,000
8. The following information pertains to shipments of merchandise from Home
Iloilo branch current 51,000
Office to Branch during 2016:
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c. Shipment to lloilo 45,000

Home office's cost of merchandise P 160,000
Excess freight on interbranch
Intracompany billings 200,000
transfer of merchandise 6,000
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Sales by branch 250,000

Cagayan de Oro branch current 45,000
Unsold merchandise at branch, 12/31/2016 20,000
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Iloilo branch current 51,000

Shipment to Cagayan de Oro 45,000
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 In the combined income statement of Home Office and Branch for the year ended The entry in Branch B records to update the reciprocal account Home Office Current
December 31, 2016, what amount of the above transactions should be included in on December 31, 2016 is:
sales? a. Dr. - Home Office/Cr. - Profit & Loss
a. 250,000 c. 200,000 b. Dr. - Profit & Loss/Cr. - Branch Current
b. 230,000 d. 180,000 c. Dr. - Branch Current/ Cr. -Profit & Loss
d. Dr. - Profit & Loss/Cr. - Home Office Current
9. Selected balances from the Amorsolo Company's Branches A and B are as
follows: Sales 80,000
Less Cost of Sales:
Branch A Branch B Inventory, 1/1/2016 19,000
Inventory, Jan. 1, 2016 P21,000 P19,000

a
Mdse from home office 47,000
Imprest branch fund 2,000 1,500 TGAS 66,000

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Inventory, Dec. 31, 2016 19,000 12,000 Inventory, 12/31/2016 12,000 54,000
Accts. Rec., Jan. 1. 2016 55,000 43,500 Gross Profit 26,000
Accts. Rec., Dec. 31, 2016 70,000 53,500 Less: Expenses 14,300
Net Profit, Branch B 11,700

d
Mdse, from home office 61,000 47,000
Cash collections 85,000 70,000 10. On December 31, 2016, the following data are in the records of the Angeles

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Sales 100,000 80,000 branch of the Big & Small Company:

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Cash expenses 21,000 14,300 Petty cash P 94,500
All sales, collections, and expenses are handled at the branch. All cash received from Accts. Rec. Dec. 31. 2015 85,200
sales and collections are sent directly to the home office. Expenses are paid by the

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Mdse. Inventory, Dec. 31, 2015 75,500
branch from the imprest fund and immediately reimbursed by the home office and Accts. Rec. Dec. 31, 2016 88,800
credited to the Home Office account. All expenses paid by the branch are recorded in Mdse. Inventory, Dec. 31, 2016 81,000
the branch books. Sales 272,700

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The net profit of branch A is: Sales returns 4,800
a. 16,000 Sales 100,000
Accts receivable written off 2,000
Less Cost of Sales:

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b. 21,000 Shipment from Home Office 220,600
Inventory, 1/1/2016 21,000
c. 15,000 Mdse, from Home Office 61,000 Expenses (paid by home office) 22,500
d. 18,000 TGAS 82,000 If all cash collections in 2016 were remitted to home office, the total remittance

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Inventory. 12/31/2016 19,000 63,000 amount to: Accts. Receivable, Dec. 31, 2015 85,200
Gross Profit
Less: Expenses
Net Profit, Branch A co rc 37,000
21,000
16,000
a. 262,300 Net Sales (272,700 - 4,800)
b. 266,800 Accts. Receivable Written Off
267,900
(2,000)
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c. 264,300 Accts. Receivable, Dec 31, 2016 (88,800)
The balance of the Home Office account of Branch A on January 1, 2016 is: d. 267,100 Total Collections, 2016 262,300
a. 80,000 Inventory, Jan. 1, 2016 21,000
b. 64,000 Imprest Branch Fund 11. The National Home Company ships and bills merchandise to its provincial branch
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2,000
c. 78,000 Accounts Receivable. Jan. 1, 2016 55,000 at cost. The branch carries its own accounts receivable and makes its own
d. 75,000 Home Office Account, 1/1/2016 78,000 collections. The branch also pays its expenses. The transactions for 2016 i
reflected in the branch trial balance that follows:
The balance of the Home Office account of Branch B on January 1, 2016 is: Debit Credit
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a. 80,000 Inventory. Jan. 1. 2016 19,000 Cash P 11,900

b. 64,000 Imprest Branch Fund 1,500 National Home Co. Current P 90,000
c. 78,000 Accts. Rec. Jan. 1, 2016 43,500 Shipments from National Home Co. 120,000
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d. 95,000 Home Office account, 1/1/2016 64,000 Accounts receivable 62,500

The balance of the Branch Current account of Branch B on December 31, 2016 is: Expenses 8,100
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a. 70,000 Inventory, Dec 31, 2016 12,000 Sales 112,500

b. 64,000 Imprest Branch Fund Total P202,500 P202,500
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1,500
c. 67,000 Accts. Rec. Dec. 31, 2016 53,500
d. 65,000 Home Office Account, 12/31/2016 December 31 inventory P30,000
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67,000

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 The net profit of the branch was: 14. In Home Office and Branch merchandise transfers, the use of a Shipments to
a. 22,500 Sales 112,500 Branch account by the Home Office and the use of a Shipments from Home office
b. 14,400 Cost of Sales: account by the branch indicate that the inventory system employed
c. 21,900 Shipments from H.O. 120,000 a. Is a perpetual inventory system.
Inventory, Dec. 31 30,000 90,000
d. Answer Gross Profit b. Is a periodic inventory system.
22,500
not given Expenses 8,100 c. Is neither perpetual nor periodic inventory system.
Net Profit 14,400 d. Cannot be determined from the information provided.
15. The home office bills its branch for merchandise transfers at a price in excess of
In the home office books, the Branch Current account should be:
cost. In the home office separate financial statements, the allowance for unrealized

a
a. 134,400 Cost of Sale 90,000 profit in branch inventory account would appear in the financial statements of the

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b. 90,000 Net Profit 14,400 home office as
c. 104,400 Branch Current Account 104,400
a. An operating expense of the current period.
d. Answer not given
b. Deduction from the cost of goods sold.

d
c. Addition to the cost of goods sold.
12. Which represents the proper journal entry for a periodic inventory system that

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d. Deduction from the investment in branch account.
should be made on the books of the branch when goods that cost the home office

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P100,000 to manufacture are shipped to the branch at a price of P125,000? 16. Teicher Co, bills its branch for merchandise shipments at 125% of cost. As of out
a. Shipments from home office 100,000 off date, 31 December 2016, the following data were available:
Home office 100,000

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b. Shipments from home office 125,000 Mdse. From Home Mdse. Purchased Total
Home office 125,000 Office (at billed price) (from outsider)
c. Shipments from home office 125,000 Merchandise, 1. Dec. P300,000 P120,000 P420,000

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Home office 100,000 Addition to stock, Dec. 450,000 360,000 810,000
Unrealized profit 25,000 Merchandise, 31 Dec. 420,000 150,000 570,000
d. Shipments from home office 100,000

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Unrealized profit 25,000 The branch returned P15,000 merchandise to the home office acquired at billed price.
Home office 125,000 The amount of the allowance for overvaluation account that was realized as income in
In a periodic inventory system, when merchandise is received by a branch from home office, the view of branch sales for the month of December was

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merchandise should be reflected as a debit to shipment from the home office in the amount of the a. 63,000
office in the net assets of the branch.
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transfer price, with a corresponding credit to home office account to indicate the equity of the home b. 66,000
c. 87,500
Billed Price Cost Allow. For
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13. Which represents the proper journal entry for a periodic inventory system that d. 84,000
Over valuation
should be made on the books of the home office when goods that cost the home
Inventory, 12/1 300,000 125% 240,000 60,000
office P100,000 to manufacture are shipped to a branch at a transfer price of Shipments 435,000 125% 348,000 87,000
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P125,000 and the billed price is not recorded in the shipments to branch account? TGAS 735,000 588,000 147,000
a. Shipments from home office 100,000 Inventory, 12/31 420,000 125% 336,000 84,000
Home office 100,000 Cost of Sales 315,000 252,000 63,000
b. Shipments from home office 125,000
Home office 125,000
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17. Early last year, a Manila-based company established a branch in Iloilo City. It
c. Shipments from home office 125,000
Home office 100,000
shipped merchandise and billed the branch for P300,000 prior to opening. For the
Unrealized profit 25,000 year, it made additional shipments at a billed price of P120,000. Within the year,
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d. Shipments from home office 100,000 the branch shipped back P7,500 inventory and got credit memo for the said return.
Unrealized profit 25,000 On the last working day of the year, an inventory count was made. Ending
inventory of P185,000 was established consisting of purchases from outsiders at
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Home office 125,000

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When goods are shipped from a home office to a branch at a transfer price that reflects original P20,000, with the balance coming from the home office shipments at billed price
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cost plus markup, the branch must record the shipment at the transfer price; while the home of 20% above cost. The total purchases of the branch from outsiders amounted to
office reflects the shipment to branch at original cost. To maintain a reciprocal relationship
between home office and the branch office accounts, an unrealized profit in branch inventory
P72,500. What is the total goods available for sale by the branch at cost?
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 a. 416,250 Net Shipment from Home Office at Cost 19. The following is the income statement of XYZ Branch in Cebu City for the six-
b. 422,500 [(300,000+ 120,000 - 7,500)/120%] 343,750 month period ending June 30, 2016:
c. 435,250 Add: Purchases from Outsiders at Cost 72,500 Sales P620,000
d. 485,000 Total Goods Available for Sale at Cost 416,250 Cost of Sales:
Shipments from H.O. P550,000
Purchases 50,000
18. JCPENNY, Philippines has two merchandise outlets, its main store in Manila and
Total 600,000
its Cebu City branch. For control purposes, all purchases are made by the main Inventory, June 30
store and shipped to the Cebu City branch at cost plus 10%. On January 1, 2016, From H.O. 75,000
the inventories of the main store in Manila and the Cebu City branch are P13,600 Fr. Outsider 10,000 85,000 515,000

a
and P3,960, respectively. During 2016, the main store purchased merchandise Gross Profit 105,000

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costing P40,000 and shipped 40% of its merchandise to the Cebu City branch. At Expenses 85,000
December 31, 2016, the following journal entry to prepare the books for the new Net Profit P 20,000
accounting period was prepared: The home office ships merchandise to, and bills, the Branch office at 125% of cost.
The rent of the branch office for six months, at a monthly rate of P1,000 was paid by

d
Sales 32,000
Inventory 4,840 the home office.

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Inventory 3,960
The home office net profit from its Branch Office in Cebu City, for the six months

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Shipments from Main store 17,600
Expenses 10,480 ending June 30, 2016 is:
Main store 4,800 a. 125,000

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What was the actual branch income for 2016 on a cost basis, assuming the use of the b. 124,000
provisions of the statement of financial accounting standards c. 139,000
a. 4,800 d. 109,000 Billed Price Cost Allow. for
Overvaluation

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b. 6,320
TGAS 550,000 125% 440,000 110,000
c. 6,480 Inventory, end 75,000 125% 60,000 15,000
Billed Price Cost Allow. for
d. 6,840

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Overvaluation Cost of Sales 475,000 380,000 95,000
Inventory, 12/ 1 3,960 110% 3,600 360
Shipments 17,600 110% 16,000 1,600 Branch reported Net Profit 20,000

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TGAS 21,560 110% 19,600 1,960 Less: Rent paid by Home Office (1,000 x 6) 6,000
Inventory, 12/31 (4,840) 110% (4,400) 440 Adjusted reported Net Profit 14,000
Cost of Sales
Sales
16,720
32,000 co rc
15,200 1,520 Add: Realized Profit on Branch Inventory
Home Office Profit from Branch Office
95,000
109,000
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Less: Cost of Sales at Cost 15,200 The inventory of the Branch office in Cebu City, at cost, as of June 30, 2016 is:
Gross Profit 16,800 a. 85,000 Merchandise purchased from outsiders 10,000
Expenses (10,480) b. 70,000 Merchandise acquired from home office 60,000
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Actual Branch Income 6,320 c. 60,000 Total branch inventory at cost, 6/30/2016 70,000
d. 75,000
If the main store has P11,200 worth of inventory unsold at the end of 2016, the
inventory of the main store and the branch should appear on the combined balance
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sheet as at December 31, 2016 is:

a. 15,160 Inventory, 12/31/2016 Main Store 11,200
b. 15,600 Inventory, 12/31/2016 Branch 4,400
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c. 16,040 Combined inventory at cost 15,600

d. 17,200
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 20. The Manila Corp. has its main office in Cebu City and established a branch in 22. New Era Corp. bills its newly established branch for merchandise at 140% of cost.
Manila. During 2016, its first year of operations, the home office in Cebu City At the end of its first month, the branch reported, among other things, the
shipped goods to the branch in Manila at a total billing price of P303,050 which following:
was 10% above cost. At December 31, 2016, the branch reported a net loss from Merchandise from home office (at billed price) P28,000
its own operations of P5,500, and an ending inventory of P61,050. How much is Merchandise purchased locally by branch 10,000
the branch net income (loss) in so far as the home office is concerned? Inventory, September 30, of which P2,000 are of local purchases 9,000
a. (5,500) Net sales for month 43,500
b. 16,500 The branch inventory at cost should be recorded at
c. 22,000 a. 38,000 From Home Office [(9,000 – 2,000)/140%] 5,000
Billed Price Cost Allow. for

a
d. 27,500 Overvaluation
b. 7,000 From Outsiders 2,000

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Shipments/TGAS 303,050 110% 275,550 27,550 c. 9,000 Branch Inventory at Cost 7,000
Inventory, end 61,050 110% 55,550 5,550 d. None of the above
Cost of Sales 242,000 110% 220,000 22,000

d
The gross profit of the branch in so far as the home office is concerned was
Branch reported net loss (5,500) a. 22,500 Branch's Sales 43,500

e
Realized profit in inventory sold 22,000 b. 14,500 Less: Cost of Sales @ cost:

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Branch net income in so far as the home office is concerned 16,500 c. 22,790 Shipment from Home Office (28,000/ 140%) 20,000
d. None of the Local Purchases by Branch 10,000
21. At the end of 2016, the branch reported an inventory of P15,625. The home office TGAS 30,000

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above
bills this branch at 125% of cost. During 2017, goods costing P300,000 were Less: Inventory, End "a" 7,000 23,000
shipped to the branch. The account "allowance for overvaluation of branch Gross Profit 20,500
inventory" after adjustment, shows a balance of P16,250 at the end of the year.

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What was the amount of inventory at January 1, 2017 at cost? 23. Makati Co, bills its Valenzuela branch for merchandise at 140% of cost. At the
a. 12,500 end of January 2016, the branch reported the following information:
b. 15,625 Merchandise from

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c. 19,531 Billed Price Cost Allow. For Home Office (At billed price)
d. 28,125 OverValuation Inventory, January 1 P 7,560

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Inventory, Beg. 15,625 125% [1] 12,500 3,125 Shipments received 28,280
Shipments 375,000 125% 300,000 75,000 Inventory, January 31 8,400
TGAS
Inventory, End
390,625
[2] 81,250
125%
125%
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312,500
65,000
78,125
16,250
What should be the balance of the allowance account for overvaluation of the branch
inventory at January 31?
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Cost of Sales 309,375 125% 247,500 [3] 61,875
a. 2,400 Branch Inventory, January 31 @ Billed Price 8,400
b. 2,160 Less: Branch Inventory, January 31 @ Cost (8,400/ 140%) 6,000
What was the amount of ending inventory at billed price?
c. 8,080 Allowance for Overvaluation, Inventory January 31 2,400
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a. 309,375 The amount of P16,250 representing the balance of allowance for overvaluation of
d. None of the above
b. 247,500 branch inventory after adjustment is the realized profit of home office from the sold
c. 81,250 merchandise of the branch (allowance for overvaluation of branch ending
24. Trial balances for the home office and for the branch of Toby Co. show the
d. 65,000 inventory), which is 25% above cost. Therefore, the branch ending inventory at
billed price was P81,250 (16,250/25% x 125%). following accounts before adjustment as of December 31, 2016. The home office
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bills merchandise to the branch at 20% above cost.

What was the amount of allowance for overvaluation before adjustment?
H.O. Branch
a. 61,875 The allowance for overvaluation before adjustment represents the allowance for
Unrealized intercompany inventory profit 10,800
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b. 78,125 overvaluation of total goods available for sale. And to determine the profit realized
Shipments to branch 24,000
c. 20,312 by the home office through markups in the merchandise shipped to the branch, this
item (allowance for overvaluation before adjustment) will be adjusted by deducting Purchases from outsiders 7,500
d. 20,000 the allowance for overvaluation of unsold merchandise at the end of the period. (See
s
H

Shipments from Home Office 28,800

computations in "a")
Merchandise inventory, December 1, 2016 45,000
is
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 What part of the December 1, 2016 branch inventory represents acquisition from On March 20, the branch returned defective merchandise worth P3,050 and on March
outsider purchases, and what part represents acquisition from home office? 31, it reported a net loss of P6,200, and merchandise inventory of P85,000.
Outsiders Home Office
In the home office books, the cost of merchandise sold by the branch was
a. P9,000 P36,000
a. 93,560
b. 10,000 35,000
b. 116,950
c. 12,000 33,000
c. 161,560
d. 15,000 30,000 Billed Price Cost Allow. for
d. 161,950
Billed Price Cost Allow. for Overvaluation
Overvaluation Shipments (205,000 - 3,050) 201,950 125% 161,560 40,390

a
Inventory Beg. 36,000 120% 30,000 6,000 Inventory, end 85,000 125% 68,000 17,000
Cost of Sales 116,950 93,560 23,390

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Shipments 28,800 120% 24,000 4,800
TGAS 10,800 In the home office books, the branch operations resulted in a net income
(loss) of
Total Inventory Beginning 45,000

d
a. (6,200) Branch reported Net Loss (6,200)
Less: Inventory Beginning from Home Office @ billed price 36,000
b. 17,190 Realized Profit in Branch Inventory (a) 23,390

e
Inventory Beginning from Outsiders 9,000
c. 20,240 Branch Net Income in the Home Office Books 17,190

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25. The Neneng Corp. established its San Pedro branch in March 2016. During the d. 23,390
first year of operations, the home office shipped to the branch merchandise which
28. A home office has a branch in Metro Manila. The branch buys merchandise from

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had cost of P120,000. Three-fourths of these merchandise was sold by the branch
outside parties and also receives merchandise from the home office for which it is
for P141,000. Operating expenses of the branch amounted to P27,000. How much
billed at 20% above cost. Below are excerpts from the trial balances and other
net income will the branch report if merchandise is billed by the home office to
data of the home office and its branch for the month just ended:
the branch at 25% above cost?

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Home Office:
a. 800 Sales 141,000
Cr: Allowance for overvaluation 370,000
b. 1,200 Cost of Goods Sold @ Billed Price (120,000 x 125% x ¾) (112,500)
Cr: Shipments to branch 850,000

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c. 1,500 Gross Profit 28,500
Metro Manila Branch:
Less: Expenses 27,000
d. 8,000 Dr: Beginning inventory 1,440,000
Branch Reported Net Income 1,500
Dr: Shipments from home office 1,020,000

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26. The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao Dr: Purchases 410,000

co rc
City. During 2016, the home office shipped to the branch supplies costing
P120,000 at a billed price of 20% above cost. The inventories of supplies at the
Month-end branch inventory:
From home office, at billed price
From outside parties, at cost
1,170,000
290,000
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branch were as follows: January 1 - P90,000; December 31 - P108,000. On
What is the amount of allowance for overvaluation that was realized because of branch
December 31, 2016, the home office holds inventories of P160,500, which
sales for the month just ended?
includes P10,500 held on consignment. Both locations use the periodic inventory
a. 175,000 Allowance for Overvaluation 370,000
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method. How much inventories should be reported in the combined balance sheet
b. 195,000 Less: Overvaluation in Branch Ending Inventory
as of December 31, 2016?
c. 200,000 (1,170,000/120% x 20%) 195,000
a. 210,000
d. 370,000 Realized Amount of Allowance for Overvaluation
b. 240,000 Branch Inventory, Dec. 31, 2016 @ cost (108,000/120%) 90,000 175,000
Home Office Inventory, Dec. 31, 2016 (160,500 - 10,500) 150,000
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c. 270,000 Combined Inventory, December 31, 2016 @ cost 240,000 29. The combined statements may be used to present the results of operations of
d. 300,000
Entities under Common Management Commonly Controlled Entities
27. A branch store in Marikina was established by Marco Co. on March 1. a. No Yes
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Merchandise was billed to this branch at 125% of cost. Shipments of merchandise b. Yes No
were as follows: c. No No
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March 5 P120,000 (at billed price) d. Yes Yes

March 10 P 50,000 (at billed price)
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March 20 P 35,000 (at billed price)

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 30. Mr. Cord owns four corporations. Combined financial statements are being and it is the intention of management to close it if its operations prove to be
prepared for these corporations, which have inter-entity loans of P200,000 and unprofitable.
inter-entity profits of P500,000. What amount of these loans and profits should be
What is the result of operations of the Baguio City agency?
included in the combined financial statements?
a. No profit, no loss.
Inter-entity Inter-entity
Combined financial statements are appropriately b. P25,000 profit
Loans Profits
issued when two or more entities have a common c. P9,000 loss
a. 200,000 0
relationship, such as common ownership interest d. P 155,000 loss
b. 200,000 500,000 or common management. When combined
c. 0 0 financial statements are issued inter-entity loans Accounts Receivable, End 100,000

a
d. 0 500,000 and profits should be eliminated in their entirety. Add: Receipts from Sales 350,000

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Sales on Account 450,000

31. The Baguio branch of a home office in Manila is billed for merchandise it receives

d
at 125% of cost. The branch turns around and sells them at 25% of billed price.
On March 15, all branch's merchandise was destroyed by fire. The branch's

e
records recovered shows the following:

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Inventory, January 1 (at billed price) 165,000
Shipments, January 1 to the date of fire (at billed price) 110,000
Purchases (at cost) from outsiders all resold at markup of 20% 7,500

sh
Sales 169,000
Sales returns and allowances 3,750
What is the cost of merchandise destroyed by fire?

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a. 120,000 c. 130,000
b. 120,240 d. 140,000

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Total Net Sales (169,000 - 3,750) 165,250
Less: Total Sales of Merchandise Acquired from Outsiders (7,500/80%) 9,375
Total Net Sales of Merchandise Acquired from Home Office 155,875

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Total Goods Available for Sale from Home Office at Billed Price
(165,000 + 110,000)
Less: Cost of Goods Sold (at billed price) (155,875 x 80%)
275,000
124,700
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Inventory End (at billed price) 150,300

Inventory End (at cost) destroyed by fire (150,300/125%) 120,240

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32. Zeta Corp. established an agency in Baguio City. For the first month of operation,
the agency transactions were summarized as follows:
Receipts from sales 350,000
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Disbursements for:
Purchases 400,000
Rent 20,000
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Advertising supplies 10,000

Salaries and commissions 70,000
Other expenses 5,000
s
H

At the end of that month, the agency had P100,000 of receivables and P50,000 of
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payables. Also, there were P90,000 of unsold merchandise and P6,000 of unused
advertising supplies on hand. The Baguio City agency was conceived as an experiment
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