ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR)

Home Office and Branch

THEORY

1. The “Investment in Branch” and “Home Office” accounts are best described as
a. Contra accounts
b. Adjunct accounts
c. Reciprocal accounts
d. Investment accounts
2. The “Home Office” ledger account in the accounting records of a branch is best compared to
a. An equity account
b. A revenue account
c. A liability account
d. A deferred revenue account
3. For external reporting, the individual financial statements of the home office and branch are combined
a. By using complex consolidation procedures
b. By recognizing the home office’s own assets, liabilities, income and expenses plus its share in the
branch’s assets, liabilities, income and expenses
c. By adding together similar items of assets, liabilities, income and expenses
d. By adding together similar items of assets, liabilities, income and expenses and eliminating
reciprocal accounts
4. In preparing the combined financial statements of the home office and its various branches
a. Both reciprocal and non-reciprocal accounts are combined
b. Both reciprocal and non-reciprocal accounts are eliminated
c. Reciprocal accounts are eliminated but non-reciprocal accounts are combined
d. Reciprocal accounts are combined but non-reciprocal accounts are eliminated
5. Which of the following accounts would be shown in the combined financial statements of the home
office and branch
a. Investment in branch account
b. Allowance for unrealized gross margin in branch inventory
c. Home office account
d. None of the above
6. The main difference between the net income reported in the separate income statement of the branch
and the net income reported by the home office for the branch’s operation is the
a. Overstatement of beginning and ending inventory reported by the branch
b. Overstatement of total goods available for sale reported by the branch
c. Overstatement of costs of goods sold reported by the branch
d. Overstatement of shipment from home office reported by the branch
7. If the home office receives debit memo from the branch, the home office shall record it in its separate
statement of financial position by
a. Increasing the investment in branch account
b. Debiting the investment in branch account
c. Disclosure
d. Decreasing the investment in branch account

8. Which of the following transactions will increase the normal balance of home office account in the
separate statement of financial position of the branch?
a. Collection by the home office of branch’s receivable
b. Debit memo received from the home office
c. Credit memo issued by the home office
d. Payment by the branch of home office’s loans payable

9. Which of the following transactions will result to debit to investment in branch account?
a. Return by the branch to the home office of shipped inventory
b. Reporting net loss of the branch
c. Payment by the home office of its own liability
d. Collection by the branch of home office’s receivable

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10. Which of the following transactions will decrease the investment in branch’s account in the home office’s
separate statement of financial position?
a. Credit memo received from the branch
b. Return by branch to home office of merchandise shipped
c. Net income of the branch
d. Payment of branch’s liability by the home office

PROBLEM

1. Selected information from the trial balances of the home office and the branch of Pinnacle Company on
December 31 is provided. The branch acquires merchandise from the home office and outside suppliers.

Home Office Branch

Sales P60,000 P30,000
Shipments to branch 8,000
Allowance for overvaluation of branch inventory 3,600
Shipments from home office 10,000
Purchase (outsiders) 35,000 5,500
Merchandise inventory, beginning 20,000 15,000
Expenses 14,000 6,000

Additional information:
Merchandise inventory, December 31
Home office P20,000
Branch (P7,500 from home office and P2,500 from outsiders) 10,000

Q1: The markup on merchandise shipments from home office to branch is

a. 20% of cost
b. 25% of cost
c. 30% of cost
d. 35% of cost

Q2: How much of the December 1 inventory of the branch represent purchases from outsiders and goods
shipped from home office
a. Home office, P5,000 and Outsiders, P10,000
b. Home office, P15,000 and Outsiders, P00,000
c. Home office, P8,000 and Outsiders, P7,000
d. Home office, P12,000 and Outsiders, P3,000

Q3: The net income reported by the branch in its separate books is
a. P4,500
b. P5,600
c. P3,500
d. P2,500

Q4: The net income reported by the home office in its separate books is

Q5: The correct/true branch net income

Q6: The combined net income for Home office and branch is
a. P22,500
b. P24,600
c. P25,100
d. P21,500

Q7: The ending inventory in the books of the branch is

Q8: The ending inventory in the combined financial statements

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2. The following data were provided by the Home Office and Branch for the year ended December 31:

Home Office Branch

Sales to outside customer 1,000,000 800,000
Beginning inventory 300,000 140,000
Purchases from outside supplier 800,000 250,000
Shipment to branch 400,000
Shipment from Home Office 500,000
Ending inventory 100,000 200,000
Operating expenses 200,000 100,000

● Last year, the Home Office billed its branch with a gross profit rate of 40% based on cost.
● Half of the beginning inventory of the branch was acquired from outside suppliers.
● The ending inventory of the branch is broken down as follows:
o 60% from outside suppliers
o 26% from current year shipment from home office
o 14% from prior year shipment from home office

Q1: What is the net income of the branch in its books for the year ended December 31?
a. P77,000
b. P10,000
c. P7,000
d. P8,000

Q2: What is the cost of goods sold of the branch in the combined statements for the year ended December
31?
a. P588,400
b. P690,000
c. P594,600
d. P589,600

Q3: What is the combined net income to be presented by the Home Office in the Statement of
Comprehensive Income for the year ended December 31?
a. P210,000
b. P311,600
c. P314,000
d. P219,800

Q4: What is the balance of the unrealized profit in branch ending inventory on December 31?
a. P16,000
b. P17,300
c. P15,600
d. P18,400

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3. Home office bills its branch for merchandise shipments at 30% above cost. The following are some of the
account balances on the books of home office and its branch as of December 31:
Home Office Branch
Inventory, January 1 P115,000 P101,500
Shipments from Home Office - 267,150
Purchases 2,565,500 350,000
Shipments to branch (@ billed price) 332,150 -
Branch Inventory Allowance 91,650 -
Sales 2,100,000 1,260,000
Operating expense 253,500 46,150

Per physical count, the ending inventory of the branch is P69,050 including goods from outside purchases
of P45,650; the ending inventory of the home office is P230,000.

Q1: What is the amount of the unrealized profit in the separate books of the home office on December
31?
a. P5,400
b. P15,900
c. P20,400
d. P70,250

Q2: What is the branch beginning inventory that came from outside purchases?
a. P24,850
b. P36,500
c. P76,650
d. P65,000

Q3: What is the Cost of goods available for sale of the branch?
a. P649,600
b. P718,650
c. P783,650
d. P787,500

Q4: What is the total ending inventory to be shown on the combined financial statements?
a. P115,650
b. P293,650
c. P343,650
d. P345,650

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4. ABC Company is preparing its December 31 financial statements. The balance of the investment in branch
account in the books of the home office is P177,200.

The following information has been gathered:

a. A P20,000 inventory shipment from the home office on December 31 was recorded by the branch only
in January next year.
b. The home office collected P10,000 accounts receivable on behalf of the branch but the branch is not
yet notified.
c. The branch returned damaged merchandise worth P30,000 but the home office has not yet received
the shipment.
d. The home office failed to record a P40,000 cash remittance from the branch.
e. The branch recorded twice a P5,000 allocation of advertising expense from the home office.
f. The branch did not record a P12,000 debit memo from the home office.
g. The home office erroneously recorded twice a P20,000 credit memo from the branch.

Q1: What is the adjusted balance of the Investment in Branch Account in the books of the home office on
December 31?

Q1: What is the unadjusted balance of the Home Office Account in the books of the branch on December
31?

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5. Mr. Accounting Company has one branch operation. The merchandise is transferred from home office to
branch at cost. The branch pays reasonable freight charges. At the end of the current period the adjusted
balance for the home office account on the branch’s books and the branch office account on the home
office’s books is P500,000.

The following items may or may not be reconciling items. The year-end is December 31.
a. The home office has shipped merchandise to the branch office which cost P10,000 and P500 freight
charges paid by the home office but charged to the branch. This merchandise is received by the
branch on January 5.
b. The branch has transmitted P17,000 in cash back to the home office as a partial payment on such
purchased merchandise. This cash is received by the home office on January 6.
c. The branch office returns some defective merchandise to the home office. The cost of the returned
merchandise is P750. The branch office pays P25 of freight costs which will be charged back to the
home office.
d. On December 31, the home office sends a check for P25,000 to replenish the branch.
e. The branch pays an advertising expense of P800 that should have been paid by the home office since
it applied to advertising fees incurred by the home office of its own benefit.
f. The home office allocated P12,000 of general and administrative expenses to the branch. The branch
had not entered the allocation as of the end of the year.
g. The home office pays insurance premiums on the branch store. The amount paid by the home office
is P1,000 but the branch erroneously records it as P776.
Q1: What is the unadjusted balance of the Investment in Branch account?
a. P433,701
b. P500,000
c. P518,575
d. P452,276

Q2: What is the unadjusted balance of the Home Office account?

a. P481,425
b. P452,276
c. P500,000
d. P518,575

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