Illustration:

To understand further the above entries, assume that during the year of 2019, MGC Inc.
shipped merchandise to its branch in Cebu at 30% above cost. The shipment is worth
P130,000
(100,000 +30% mark-up). To said transaction will be recorded as follows:
Home Office Books:
Investment in Branch P 130,000
Shipments to Branch P 100,000
Allowance for Overvaluation of Branch Inventory 30,000
Branch Books:
Shipments from Home Office P 130,000
Home Office P 130,000
Let us now assume that at the end of the period, the branch reports its inventory at the
billed price of P52,000. The closing entries on the books of the home office and the branch
are
shown below:
Home Office Books:
Allowance for Overvaluation of Branch Inventory P 18,000
Branch Income P 18,000
Branch Books:
No Entry
The Allowance for Overvaluation of Branch Inventory Account also called Unrealized Profit
in Branch Inventory, is the peso amount above the home office’s cost that is billed to the
branch.
The amount remains in this account until the shipment is reshipped or sold by the branch to
outsiders. In the closing entry above, the home office recognizes the realized profit on sales
made
by the branch of merchandise billed above cost. Realized profit may be computed using two
approaches, namely:
Approach A:
Realized Profit =
Cost of Goods Sold by Branch
X
Balance of Allowance for
Overvaluation of Branch
Inventory
Illustration:
To understand further the above entries, assume that during the year of 2019, MGC Inc.
shipped merchandise to its branch in Cebu at 30% above cost. The shipment is worth
P130,000
(100,000 +30% mark-up). To said transaction will be recorded as follows:
Home Office Books:
Investment in Branch P 130,000
Shipments to Branch P 100,000
Allowance for Overvaluation of Branch Inventory 30,000
Branch Books:
Shipments from Home Office P 130,000
Home Office P 130,000
Let us now assume that at the end of the period, the branch reports its inventory at the
billed price of P52,000. The closing entries on the books of the home office and the branch
are
shown below:
Home Office Books:
Allowance for Overvaluation of Branch Inventory P 18,000
Branch Income P 18,000
Branch Books:
No Entry
The Allowance for Overvaluation of Branch Inventory Account also called Unrealized Profit
in Branch Inventory, is the peso amount above the home office’s cost that is billed to the
branch.
The amount remains in this account until the shipment is reshipped or sold by the branch to
outsiders. In the closing entry above, the home office recognizes the realized profit on sales
made
by the branch of merchandise billed above cost. Realized profit may be computed using two
approaches, namely:
Approach A:
Realized Profit =
Cost of Goods Sold by Branch
X
Balance of Allowance for
Overvaluation of Branch
Inventory