HOME OFFICE AND BRANCH ACCOUNTING

Home Branch 1 Branch 2 Branch 3

Office

Journal Entries:

Home Office Branch

Investment in Branch XX Cash XX

Cash XX Inventory XX
Inventory XX Shipment from HO XX
Shipments to Branch XX Home Office XX

Note:

 Investment in branch is asset to the home office

 Home office account in branch is an equity account
 Investment in Branch and Home Office account are reciprocal accounts
 Shipment to = always at cost; Home office – always at cost
 Shipment from = always at billed price; Branch – always at billed price
 As far as the branch concern, they only know the billed price, not the cost price.
 Allowance for overvaluation of inventory (AOI) – this is the mark up of cost price resulting to billed
price.

Combined Financial Statement

– you have to combined all the financial statements both home office and branch.
– In doing combined FS, you have to eliminate reciprocal accounts (Working Paper Eliminating Entries
or WPEE) such as:
 Investment in Branch; Home Office
 Shipments to Branch; Shipments to Home Office

In eliminating reciprocal accounts, all you have to do is to debit all the credit account and credit all the
debit account.
For example: You will debit home office which is a credit account and you will credit investment in
branch which is a debit account. In that way, it will be eliminated. Same with shipments, debit shipment
to branch then credit shipment from home office.

Table Format for HO and Branch Accounting:

Cost Billed AOI

Beginning Inventory
Shipments
Goods Available for Sale
Ending Inventory
Cost of Goods Sold

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

Solution:

AOI P 2, 000
Divide by: Shipments @ cost 8, 000
Mark up 25 %

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

Solution:

Beginning Inventory 8, 000 Home Office

of Branch P 15,000 7, 000 Other Supplier

Note: @ Table format

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

Solution:

Sales P 30, 000

Cost of Goods Sold
(P 10, 500 at billed + 10, 000 at outsider) ( 20, 500)
Expenses ( 6, 000)
Net Income P 3, 500

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

Solution:

Sales P 60, 000

Cost of Goods Sold * ( 27, 500)
Expenses ( 14, 000)
Net Income P 19, 000

* Cost of Goods Sold

Beginning Inventory P 20, 000
Purchase 35, 000
Shipment to ( 8, 000)
Goods Available for Sale P 47, 000
Ending Inventory ( 20, 000)
Cost of Goods Sold P 27, 000

Q5: The correct/true branch net income

Solution:

Sales P 30, 000

Cost of Goods Sold
(P 8, 400 at cost + 10, 000 at outsider) ( 18, 400)
Expenses ( 6, 000)
Net Income P 5, 600

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

Solution:

Net Income – Home Office P 19, 000

Add: Net Income – Branch 5, 600
Total Combined Net Income P 24, 600

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

Solution:

Ending Inventory at Billed P 7, 500

Ending Inventory – Outsider 2, 500
Total Ending Inventory P 10, 000

Q8: The ending inventory in the combined financial statements

Solution:

Ending Inventory
(P 6, 000 at cost + 2, 500 outsider) P 8, 500
Ending Inventory – Home Office 20, 000
Total Ending Inventory P 28, 500
 AOI
Cost Billed
(Cost - Billed)
Beginning Inventory 6, 400 8, 000 1600
Shipments 8, 000 10, 000 2,000
Goods Available for Sale 14, 400 18, 000 3,600
Ending Inventory (6, 000) (7, 500) (1, 500)
Cost of Goods Sold 8, 400 10, 500 2, 100

For Outside Supplier:

Beginning Inventory 7, 000

Add: Purchase 5, 500
Goods Available for Sale 12, 500
Ending Inventory (2, 500)
Cost of Goods Sold 10, 000

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

Additional Info:

 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
Solution:

Sales P 800, 000

Cost of Goods Sold
(P 490, 000 at billed + 200, 000 at outsider) ( 690, 000)
Expenses ( 100, 000)
Net Income P 10, 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

Solution:

Cost of Goods Sold – at Cost P 388, 400

Cost of Goods Sold – Outsider 200, 000
Total Cost of Goods Sold P 588, 400

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

Solution:

Home Office:
Sales P 1, 000, 000
Cost of Goods Sold* ( 600, 000)
Expenses ( 200, 000)
Net Income P 200, 000
Net Income Branch 10, 000
COGS at AOI 101, 600
Net Income P 311, 600

* Cost of Goods Sold

Beginning Inventory P 300, 000
Purchase 800, 000
Shipment to ( 400, 000)
Goods Available for Sale P 700, 000
Ending Inventory ( 100, 000)
Cost of Goods Sold P 600, 000

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

Answer: P 18, 400

Note: See at Table format

AOI
Cost Billed
(Cost - Billed)
Beginning Inventory 50, 000 70, 000 20, 000
Shipments 400, 000 500, 000 100, 000
Goods Available for Sale 450, 000 570, 000 120, 000
Ending Inventory (61, 600) (80, 000) (18, 400)
Cost of Goods Sold 388, 400 490, 000 101, 600

For Outside Supplier:

Beginning Inventory 70, 000

Add: Purchase 250, 000
Goods Available for Sale 320, 000
Ending Inventory (120, 000)
Cost of Goods Sold 200, 000

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

Answer: P 20, 400

Note: See at Table format

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

Answer: P 20, 400

Note: See at Table format

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

Solution:

Goods Available for Sale – Billed P 397, 150

Goods Available for Sale – Outsider 386, 500
Total Goods Available for Sale P 783, 650

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
Solution:

Ending Inventory at Cost P 68, 000

Ending Inventory – Outsider 45, 650
Total Combined Ending Inventory P 10, 000

AOI
Cost Billed
(Cost - Billed)
Beginning Inventory 50, 000 65, 000 15, 000
Shipments 255, 500 332, 150 76, 650
Goods Available for Sale 305, 500 397, 150 91, 650
Ending Inventory (68, 000) (88, 400) (20, 400)
Cost of Goods Sold 237, 500 308, 750 71, 250

For Outside Supplier:

Beginning Inventory 36, 500

Add: Purchase 350, 000
Goods Available for Sale 386, 500
Ending Inventory (45, 650)
Cost of Goods Sold 340, 850

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?

Q2: What is the unadjusted balance of the Home Office Account in the books of the branch on December
31?
Solution:

Investment in Branch Home Office

Unadjusted P 177, 200 P 70, 200
a. + 20, 000
b. (10, 000)
c. (30, 000)
d. (40, 000)
e. (5, 000)
f.
g. (20, 000)
Adjusted P 87, 200 P 87, 200

Correct Entries:

Investment in Branch Home Office

a. Investment in Branch 20, 000 Shipment from HO 20, 000

Home Office Home Office

b. Cash Home Office

10, 000 10, 000
Investment in Branch A/R

c. Shipment to Home Office

30, 000 30, 000
Investment in Branch Shipments from

d. Cash Home Office

40, 000 40, 000
Investment in Branch Cash

e. Advertising Expense Advertising Expense

5, 000 5, 000
Cash Home Office
Investment in Branch
5, 000
Advertising Expense
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

Solution:

Investment in Branch Home Office

Unadjusted P 518, 575 P 452, 276
a. + 10, 500
b. (17, 000)
c. (775)
d. + 25, 000
e. (800)
f. + 12, 000
g. + 224
Adjusted P 500, 000 P 500, 000

Correct Entries:

Investment in Branch Home Office

a. Investment in Branch 10, 500 Shipment from 10, 000

Shipment to 10, 000 Freight in 500
Cash 500 Home Office 10, 500

b. Cash Home Office

17, 000 17, 000
Investment in Branch Cash

c. Shipment to 750 Home Office 775

Expense 25 Shipment from 750
Investment in Branch 775 Cash 25

d. Investment in Branch 25, 000 Cash 25, 000

Cash Home Office

e. Advertising Expense Advertising Expense

800 800
Investment in Branch Cash
Home Office
Advertising Expense 800
f. General & Administrative Exp. 12, 000
Cash
Investment in Branch G&A Exp.
12, 000 Home Office 12, 000
General & Administrative Exp.