HOME OFFICE AND BRANCH

• All entries in the accounting records of the branch

• Branches are established to decentralize are also entered, at least in summary form, in the
operations or to expand into new markets. accounting records of the home office.

• Branches are with regulated autonomy to operate
as an independent entity.
• The branch has its own complete set of accounting
records, all its transactions including those with
the home office are recorded in its books.
• It also presents its own set of financial statements
called separate financial statements.
• A branch and its home office represent two
accounting systems but just one accounting and
reporting entity.
• The records of the home office and the branch are
linked by two reciprocal entities, the Home Office
account (an equity account) in the books of branch
and the Investment in Branch account (an asset
account) in the books of the Home Office.
• Because they are reciprocal, it means that the two
accounts always have the same balance although
the Investment in Branch is a debit account and the
Home Office is a credit account. The two accounts
frequently show different balances on a temporary
basis due to errors and items in transit.

ILLUSTRATIVE JOURNAL ENTRIES:

Transactions Home Office Branch

1) Transfer of cash from Home Investment in Branch xx Cash xx

Office Cash xx Home Office Equity xx

2) Transfer of cash from the Cash xx Home Office Equity xx

Branch Investment in Branch xx Cash xx

3) Transfer of merchandise Investment in Branch xx Shipment from HO xx

from HO at cost Shipment to branch xx HO Equity xx

4) Transfer of merchandise Investment in Branch xx Shipment from HO xx

from HO Above cost Allowance for OV xx HO Equity xx
Shipment to Branch xx

5) Payment by HO of branch Investment in Branch xx Expenses xx

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expenses Cash xx HO Equity xx

6) Allocation of paid branch Investment in Branch xx Expenses xx

expenses Expenses xx HO Equity xx
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7) Transfer of fixed assets Memo entry Memo entry

from HO to Branch

8) Take up branch profit Investment in Branch xx Income Summary xx

Branch Income xx HO Equity xx
ct

9) To take up Branch loss Branch loss xx HO Equity xx

Investment in Branch xx Income Summary xx

10) To adjust the reported Allowance for overvaluation No entry

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branch net income for Branch Income

realized allowance

INTERBRANCH TRANSFERS:

• Detailed computation of realized allowance for overvaluation thru sales by branch to outsiders during the period:

Billed Price Cost Price Mark-up on Cost

Branch beginning inventory (from HO) xx xx xx
Current shipments (from HO) xx xx xx
Branch ending inventory (from HO) (xx) (xx) (xx)
Cost of goods sold xx xx xx

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 • Cost = Billed price / 100% + % markup on cost =
Markup on cost / % markup on cost. The amount
of allowance considered realized will be the
allowance carried by the cost of goods sold.

• There are two pricing methods used by the home

office in billing the branch for merchandise
transfers:

✓ Billed at cost. The merchandise is

transferred at cost when the branch sells the
merchandise; the entire gross margin is
included in the net branch income.

✓ Billed at cost plus markup. The merchandise

is transferred at an amount between cost
and the selling price. The intermediate
pricing method allocates part of the gross
margin to the branch and the remainder to
the home office.

• Working paper adjustments and eliminations

guidelines are as follows:

✓ Eliminate intercompany balances from the

combined statements to avoid redundancy.

✓ Adjust some items in the cost of sales section

of the branch net income statement to their
true cost as a consequence of the billing
policy not equal to cost.

• The working paper adjustment/elimination entries are as follows:

Billed at cost Billed above costs

HO Equity xx HO Equity xx
22

Investment in Branch xx Investment in Branch xx

Accounts Payable xx Accounts Payable xx

Accounts Receivable xx Accounts Receivable xx
20

Shipment to Branch xx Shipment to Branch xx

Shipment from Head Office xx Allowance for Overvaluation xx
Shipment from HO xx

Allowance for Overvaluation xx

Branch beginning inventory xx
ct

Branch ending inventory (Income Statement) xx

Branch ending inventory (Balance Sheet) xx
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• When a company is composed of a home office and more than one branch, the home office records include a
separate investment in branch account and a separate allowance for overvaluation account for each branch.
Separate worksheet adjustments are made for each branch.

• When assets are transferred from one branch to another branch, the home office account on each branch’s records
is used to record the transfers. The transferring branch reverses the entry to record the transfer from the home
office, and the receiving branch enters a transfer as if it comes from the home office.

- - End - -

This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.

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 HOME OFFICE AND BRANCH
THEORY

1. The “Investment in Branch” and “Home Office” accounts are best described as
a. Contra accounts c. Reciprocal accounts
b. Adjunct 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 c. A liability account
b. A revenue 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 c. Home office account
b. Allowance for unrealized gross margin in branch inventory 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
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7. Which represents the proper journal entry for a periodic inventory system that should be made on the books
of the home office when goods that cost the home office P100,000 to manufacture are shipped to a branch
at a transfer price of P125,000 and the billed price is not recorded in the shipments to branch account?
a. Investment in Branch P100,000
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Shipments to branch P100,000

b. Investment in Branch P125,000
Shipments to branch P125,000
c. Investment in Branch P125,000
Shipments to branch P100,000
Unrealized profit 25,000
ct

d. Shipment to branch P100,000

Unrealized profit 25,000
Shipments from home office P125,000
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8. Which of the following statements is/are true regarding sales agency and branch?
I. A sales agency is not a self-contained business but rather acts only on behalf of the home office
II. A branch is a self-contained business which acts independently, but within the bounds of the company
policy and subject to the control of the home office
a. I only c. I and II
b. II only d. Neither I nor II
PROBLEMS

1. Selected information from the trial balances of the home office and the branch of Katherine Company on
December 31, 2021 is provided. The branch acquires merchandise from the home office and outside
suppliers.
Home Office Branch
Sales P60,000 P30,000
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 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 12/01/2021 20,000 15,000
Expenses 14,000 6,000

Additional information:
Merchandise inventory, December 31, 2021:
Home office P20,000
Branch (P7,500 from home office and P2,500 from outsiders) 10,000

Question 1: The billing rate of home office to branch for merchandise shipments is
a. 120% of cost c. 130% of cost
b. 125% of cost d. 135% of cost

Question 2: 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 c. Home office, P8,000 and Outsiders, P7,000
b. Home office, P15,000 and Outsiders, P00,000 d. Home office, P12,000 and Outsiders, P3,000

Question 3: The net income reported by the branch is

a. P4,500 c. P3,500
b. P5,600 d. P2,500

Question 4: The combined net income for Home office and branch operations is
a. P22,500 c. P25,100
b. P24,600 d. P21,500

2. The following data were provided by the accountants of the Home Office and Branch for the year ended
December 31, 2021:
Home Office Book Branch Book
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Net sales to outside customer 1,000,000 800,000
Beginning inventory 300,000 140,000
Net purchases from outside supplier 800,000 250,000
Shipment to branch 400,000
Shipment from Home Office 500,000
20

Ending inventory 100,000 200,000

Operating expenses 200,000 100,000
● It is the policy of the company to use specific identification for inventory.
● For the year ended December 31, 2020, the Home Office bills 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.
ct

● The ending inventory of the branch is broken down as follows:

o 60% from outside suppliers
o 26% from 2021 shipment from home office
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o 14% from 2020 shipment from home office

Question 1: What is the net income of the branch in its books for the year ended December 31, 2021?
a. P77,000 c. P7,000
b. P10,000 d. P8,000

Question 2: What is the cost of goods sold of the branch in the combined statements for the year ended
December 31, 2021?
a. P588,400 c. P594,600
b. P690,000 d. P589,600

This document is strictly private and confidential and should not be shared or distributed to a third party. Any violation gives Pinnacle the right to seek legal recourse.

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 Question 3: 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, 2021?
a. P210,000 c. P314,000
b. P311,600 d. P219,800

Question 4: What is the balance of the unrealized profit in branch ending inventory on December 31,
2021?
a. P16,000 c. P15,600
b. P17,300 d. P18,400

3. The following information is extracted from the books and records of Elaine Company and its branch. The
balances are as of December 31, 2021 of the company’s operations.
Home Office Branch
Sales P260,000
Shipments to branch P 78,000
Shipments from home office 104,000
Purchases 39,000
Expenses 78,000
Inventory, January 1, 2021 26,000
Allowance for overvaluation of branch inventory 31,200

However, no shipments in transit between home office and the branch were made. Both shipments
accounts are properly recorded. The ending inventory includes merchandise acquired from the home office
amounting to P26,000 and P7,800 from outsiders for a total of P33,800.

Question 1: What is the realized profit in branch inventory?

a. P21,000 c. P22,533
b. P31,200 d. P24,700

Question 2: What is the amount of branch merchandise beginning inventory that was acquired from the
home office?
a. P14,000 c. P15,600
b. P19,000 d. P20,800
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4. Anjelah Corporation has one branch operation located 500 miles away from the home office. The branch
office sales merchandise which is shipped to it from the home office. The merchandise is transferred at cost,
but the branch pays reasonable freight charges. The branch office makes sales and incurs and pays operating
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expenses. At the end of the current accounting period the true 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 current year is 2021.
● The home office has shipped merchandise to the branch office which cost P10,000 and which
incurred P500 freight charges paid by the home office but charged to the branch. This merchandise
ct

is received by the branch on January 5, 2021.

● 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, 2021.
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● 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.
● On December 31, 2021, the home office sends a check for P25,000 to replenish the branch’s charged
back to the home office.
● 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.
● 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.
● 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.

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 Question 1: What is the unadjusted balance of the Home Office account?
a. P481,425 c. P500,000
b. P452,276 d. P518,575

Question 2: What is the unadjusted balance of the Branch account?

a. P433,701 c. P518,575
b. P500,000 d. P452,276

5. Jensen Company has a branch in Baguio and Davao. The reciprocal accounts between the
home office and the branches were in agreement at the beginning of 2021. However as of
December 31, 2021, the following reciprocal balances are found in the home office books:

Investment in Baguio P186,500

Investment in Davao 84,000

Data for reconciliation of the reciprocal accounts are as follows:

● On December 29, 2021, the home office has instructed Baguio to transfer P74,000
cash to Davao. Baguio recorded this transaction immediately. Upon receipt, Davao
has recorded this transfer at P47,000. The home office however has not yet recorded
this interbranch transaction as of the end of the year.
● Jensen has transferred goods costing P28,900 to Baguio branch and paid P2,500 of
shipping cost on December 16, 2021. Baguio shipped all of these goods to Davao upon
instruction of the home office on December 30, 2021. Shipping cost is P3,600 freight
collect. Had the goods been shipped directly to the Davao, P5,000 of freight cost
should have been incurred. The interbranch shipment was not recorded by the
branches and the home office as well.
● Baguio has collected cash of P5,750 from Davao’s customer. This transaction is not
yet recorded by Davao and the home office.
● The home office has already allocated P11,000 and P9,000 of administrative expenses
to Baguio and Davao, respectively. The branches are not yet notified.
● Baguio remitted P14,300 cash to the home office on December 12, 2021. The home
office has failed to record the said remittance.
● Davao returned goods costing P6,850 to the home office. The goods were shipped on
December 19 and received on December 24, but no entries have been made in the
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home office books.

Question 1: Unadjusted balance of Home Office Current account in Baguio’s books

a. P52,150 c. P107,250
b. P87,200 d. P92,950
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Question 2: Unadjusted balance of Home Office Current account in Davao’s books

a. P236,250 c. P115,150
b. P122,000 d. P84,850
ct

6. On October 1, 2021, the Greenbelt Main Office established a sales agency in Ortigas.
● The main office sent samples of its merchandise amounting to P8,400 and a working fund amounting
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to P72,000 to be maintained on the imprest basis.

● The samples sent were intended to last until June 1, 2022. During the first two months of operations,
the agency transmitted to the home office sale of goods costing P291,600, but the home office were
not able to fill-up 25% of the said transmitted sales orders.
● Collections from customers amounted to P73,941, net of 2% sales discount.
● Payments made by the agency during October and November were as follows: annual rent of
P57,600, advertising expense worth P5,600 and utilities amounting to P7,200.
● It also purchased an equipment worth P9,000 which will be depreciated at 20% per annum.
● The gross profit rate on sales agency order is 20% of gross sales.
Compute the net income of the agency for the two months ended November 30, 2021
a. P17,431 c. P29,875
b. P28,366 d. P26,866

- - End - -
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