Chapter 7
Home Office and Branch Accounting
Companies may increase their volume of sales by establishing sales outlets in various areas.
These sales outlets may be a branch or an agency.
When a company operates a branch, the branch must maintain accounting records to facilitate
its reporting responsibility to the home office.
Problems dealing with Home Office and Branch Accounting appear in almost every CPA
examination. Candidates should be familiar with the problems involving the following:
1.
2.
3.
4.
Uses of the reciprocal accounts.
Preparation of a Reconciliation Statement.
Billing of Merchandise by Home Office to Branch above cost.
Preparation of Combined Financial Statements.
Uses of the Reciprocal Accounts
In recording inter-office transactions, two reciprocal accounts are used, namely, the Investment
in Branch (Branch Current) account used by the home office which is classified as an asset; and
the Home Office (HO Current account) used by the branch which is classified as a liability.
The reciprocal nature of the Investment in Branch and the Home Office accounts and the way in
which they are affected by various inter-office transactions are shown below:
xx
xx
(Home Office Books)
Investment in Branch
xx
xx
Assets transfer to branch
Assets transfer from branch
Branch profit
Branch loss
xx
xx
(Branch Books)
Home Office
xx
xx
Preparation of Reconciliation Statement
The balances of the two reciprocal accounts should at all times equal. If the balances of the
reciprocal accounts are not equal before the preparation of separate statement of financial
position, a reconciliation statement is to be prepared. This is done to determine the causes of
the inequality between the two accounts. The accounts are then adjusted to determine their
adjusted balances. The following are the usual causes that the candidate should take note:
1. Transactions have been recorded by the branch but not by the home office.
2. Transactions have been recorded by the home office but not by the branch.
3. Errors in recording have occurred in one or both books.
4. Transactions have not yet been recorded on either set of books.
Billing of Merchandise by Home office to Branch above Cost
Merchandise shipped to branch by the home office may be billed at an amount above cost.
Under this method of billing, the profit recognized by the branch will be less that its actual
profit, because its cost of goods sold is overstated insofar as the home office is concerned.
The problems involving billing of merchandise to branch above cost are the following
1. Computation of branch at inventory at cost.
2. Computation of the actual or true branch profit insofar as the home office is
concerned.
Computation of Branch Inventory at Cost
Candidates should use the following formula:
a. If branch are all acquired from the home office, the formula is:
Branch inventory acquired from home office at billed price
Divide by billing percentage of cost
Branch inventory at cost
Pxx
%
Pxx
b. If branch inventory includes merchandise acquired from outsiders, the formula is:
Branch inventory acquired from home office at cost:
Merchandise at billed price
Divide by billing percentage of cost
Add: inventory acquired from outsiders
Branch inventory at cost
Pxx
%
Pxx
xx
xx
Computation of Actual Branch Profit insofar as Home Office is Concerned
The actual or true branch insofar as the home office is concerned is computed as follows:
Branch profit (loss) as reported
Add: Overvaluation of branch cost of goods sold (Schedule 1)
Actual branch profit insofar as home office is concerned
Schedule 1
Pxx
xx
Pxx
Branch inventory, beg. (acquired from HO)
Add: Shipments during the period
Total before adjustment
Less: Branch inventory, end (acquired from HO)
Overvaluation of branch COGS (Realized Profit)
Billed
Price ÷
Pxx
xx
Percent
of Cost =
Pxx
xx
Cost
Pxx
xx
xx
xx
xx
Allowance
for Overvaluation
Pxx
xx
xx
Pxx
Preparation of Combined Financial Statements
The balance sheets and the income statements of the home office and the branch must be
combined for external reporting purposes. Working papers are usually prepared to eliminate
accounts affected in recording inter-office transactions before financial statements are
prepared.
Candidates should remember the following working paper elimination procedures:
1. Eliminate reciprocal accounts.
2. Eliminate inter-company transfer accounts.
a. Shipment to Branch and Shipment from Home Office accounts.
b. Allowance for Overvaluation of Branch Inventory.
3. Eliminate the overvaluation in branch beginning inventory.
4. Eliminate the overvaluation in branch ending inventory.
Combined Statement of Financial Position. The reciprocal accounts “Investment in Branch” and
“Home Office” accounts are not presented as well as the Allowance for Overvaluation account.
Combined Statement of Comprehensive Income. The merchandise inventories, beginning and
ending inventories are presented at cost. The Shipment to Branch and Shipment from Home
Office accounts are not presented.
Transactions between Branches
Occasionally, branch operations require that merchandise or other assets be transferred from
one branch to another. A branch does not maintain a reciprocal account with another branch
but records the transfer in the Home Office account. For example, if Bicol Branch ships
merchandise to Laguna Branch, Bicol Branch debits Home Office account and credits
Inventories (assuming that the perpetual inventory system is used). Upon receipt of the
merchandise, Laguna Branch debits Inventories and credits Home Office account. The home
office records the transfer between branches by a debit to Investment in Laguna Branch and a
credit to Investment in Bicol Branch.
The transfer of merchandise from one branch to another does not increase the cost of
inventories by the freight costs incurred because of the indirect routing. The amount of freight
costs properly included in inventories at a branch is limited to the cost of shipping the
merchandise directly from the home office to its present location. Excess freight costs are
recognized as expenses of the home office.
Accounting System for Sales Agencies
An agency is simply an extension of the sales territories in which orders are received from
customers and then transmitted to the home office for shipping and billing. They do not have
merchandise available for sale, but they keep samples inventory.
A sales agency neither keeps a complete set of books nor uses a double-entry system of
accounts. Usually, a record of sales to customers and a list of cash payments supported by
vouchers are sufficient.
An imprest system is usually adopted by the home office for the working fund of the sales
agency.
PROBLEMS
1. Cebu branch submitted the following data to its home office in Manila for 2013, its first year
of operation:
Sales
Shipments from home office
Operating expenses
Home office
P2,300,000
1,850,000
235,000
480,000
2. The home office in Quezon City ships and bills merchandise to its provincial branch at cost.
The branch carries its own accounts receivable and makes its own collections. The branch
also pays its expenses.
The transactions for 2013 are reflected in the branch trial balance that follows:
Cash
Accounts receivable
Home office
Shipments from Home Office
Sales
Expenses
Total
December 31, inventory
P20,000
80,000
250,000
55,500
P405,500
P65,000
P180,000
225,500
P405,500
Assuming all the transactions are properly recorded, what is the balance of the Investment in
Branch account in the home office books?
a.
b.
c.
d.
P180,000
P195,000
P165,000
P175,000
3. The following data pertains to the shipments of merchandise from Home Office to Branch
during 2013:
Home office’s cost of merchandise
Inter-office billings
Sales by branch to outsiders
Merchandise inventory on December 31, 2013
P350,000
420,000
520,000
50,000
In the combined statement of comprehensive income of the Home Office and the Branch for
the year ended December 31, 2013, what amount of the above transactions should be
included as sales?
a.
b.
c.
d.
P570,000
P520,000
P470,000
P350,000
4. Nike Corporation operates a number of branches in the provinces. On December 31, 2013,
its Davao branch showed a Home Office account balance of P54,700 and the home office
books showed an Investment in Davao Branch account balance of P51,100. The following
information may help in reconciling both accounts:
1. A P24,000 shipment, charged by Home Office to Davao Branch, was actually sent to and
retained by Cebu Branch.
2. A P30,000 shipment, intended and charged to Aklan Branch was shipped to Davao
Branch and retained by the latter.
3. A P4,000 emergency cash transfer from Cebu Branch was not taken up in the Home
Office books.
4. Home office collects a Davao Branch accounts receivable of P7,200 and fails to notify
the branch.
5. Home office was charged for P2,400 for merchandise returned by Davao Branch on
December 30. The merchandise is in transit.
Home office erroneously recorded Davao Branch’s net income for 2013 at P32,550. The
branch reported a net income of P25,350.
What is the adjusted balances of the Home Office and Davao Branch reciprocal accounts on
December 31, 2013?
a.
b.
c.
d.
P40,300
P54,700
P47,500
43,500
5. The branch manager of Tower Cosmetics in Cebu submitted a report as of May 31, 2013
containing the following information:
Petty Cash Fund
Sales
Sales Returns
Accounts Written Off
Shipments from Home Office
Accounts Receivable – May 31, 2012
P1,500
198,720
3,600
1,920
136,080
43,800
Accounts Receivable – May 31, 2013
Inventory – May 31, 2012
Inventory – May 31, 2013
Expenses (reimbursed by H.O.)
49,140
37,170
41,370
57,930
Assuming all cash collected by the branch is remitted to Tower Cosmetics home office, the
remittances for the period amounted to:
a.
b.
c.
d.
P187,860
P189,780
P195,120
P198,720
6. On December 31, the Investment in Branch account in the home office books shows a
balance of P50,000. The following facts are ascertained:
1. Merchandise billed at P12,500 is in transit on December 31 from the home
office to the branch.
2. The branch collected a home office accounts receivable for P3,500. The
branch did not notify the home office of such collection.
3. 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.
4. Branch profit for December was recorded by the home office at P2,400
instead of P2,040.
5. The branch returned supplies of P1,500 to the home office but the home
office has not yet recorded the receipt of the supplies.
Assume all other transactions have been properly recorded.
What is the unadjusted balance of the Home Office account on the branch books on December
31?
a.
b.
c.
d.
P64,140
P39,140
P14,000
P13,000
7. A reconciliation of the Dagupan Branch account of Mandaluyong Company and the Home
Office account carried in the branch’s books shows the following discrepancies at December 31,
2013:
1. A credit for merchandise allowance for P300 was taken by the branch as
P360.
2. A charge by the branch of P550 for an advance taken by the president when
he visited the branch has not yet been recorded by the home office.
3. The branch has not taken up P900 covered by a debit memo from the home
office as share in advertising expenses.
The investment in Dagupan Branch account in the home office books had a debit balance
of P43,000 at December 31, 2013. The reciprocal accounts were in agreement at the
beginning of the year.
The unadjusted balance of the Home Office account in the branch’s books at December
31, 2013 was:
a.
b.
c.
d.
P43,500
P42,950
P41,990
P41,490
8. The following were found in your examination of the interplant accounts between the Home
Office and the Butuan Branch:
a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked by
the branch.
b. P10,000 covering marketing expense of another branch was charged by Home Office
to Butuan.
c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000
twice.
d. Home Office recorded cash transfer of P65,700 from Butuan Branch as coming from
Davao Branch.
e. Butuan reversed a previous debit memo from Cagayan de Oro Branch amounting to
P10,500. Home Office decided that this charge is appropriately Davao Branch’s cost.
f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560.
The net adjustments DR (CR) to the Investment in Butuan Branch account and to the Home
Office account are:
a.
b.
c.
d.
Investment in Butuan
P(75,700)
75,700
(55,700)
(65,700)
Home Office
P20,950
(20,950)
75,000
(74,000)
9. After examining on a comparative basis the inter-office account of the Bulacan Company
with its suburban branch and the similar account carried on the latter’s books, the following
discrepancies at the close of the business on June 30, 2013 were seen:
a. A charge for labor by the Home Office, P500 was recorded twice by the branch.
b. A charge of P895 was made by the Home Office for freight on merchandise, but the
amount was recorded by the Branch as P89.50.
c. A charge of P980 (furniture and fixture) on the Home Office books was taken up by the
Branch as P890.
d. A credit by the Home Office for P350 (merchandise allowances) was taken up by the
Branch as P400.
e. The Home Office charged the Branch P425 for interest on open account which the
Branch failed to take up in full; instead, the Branch sent to the Home Office a wrong
memo, reducing the charge by P100 and set up a liability for the net amount.
f. The Home Office received P5,000, from the sale of a truck which it erroneously
credited to the Branch; the Branch did not charge the Home Office therewith.
g. The Branch by mistake sent the Home Office a debit note for P370 representing its
proportion of a bill for repairs of truck; the Home Office did not record it.
h. The Branch inadvertently received a copy of the Home Office entry dated July 19, 2011
correcting item (f) and entered a credit in favour of the Home Office as of June 30,
2013.
At June 30, 2013, the unadjusted balance of the Investment in Branch account on the Home
Office books showed P175,520. At the beginning of the year, the inter-office accounts were in
balance.
What is the unadjusted balance of the Home Office account on the branch books on June 30,
2013?
a.
b.
c.
d.
P184,279.50
P160,725.50
P184,729.00
P165,279.50
10. Rustans, Philippines has two merchandise outlets, its Home Office in Manila and its Cebu
City branch. For control purposes, all purchases are made by the Home Office and shipped to
the Cebu City branch at cost plus 10%. On January 1, 2013 the inventories of the Home Office in
Manila and the Cebu City branch are P13,600 and P3,960 respectively. During 2013 the Home
Office purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch.
At December 31, 2013, the following journal entry to prepare the books for the next accounting
period was prepared by the branch:
Sales
Inventory, December 31
Inventory, January 1
Shipments from main store
Expenses
Home Office
32,000
4,840
3,960
17,600
10,480
4,800
What was the actual branch income for 2011 on a cost basis assuming the use of the provisions
of the Statement of Financial Accounting Standards?
a.
b.
c.
d.
P4,800
P6,320
P6,480
P6,840
11. On September 1, Star Company opened a branch in Dagupan City, shipping to it
merchandise billed at P60,000. During the month, additional shipments were made at a billed
price of P24,000. Returns by the branch of bad-order goods were credited for P1,680. At the
end of the month, the branch reported its inventory P33,600 and its net loss for the month at
P5,200. Shipments to and from the branch were consistently billed at 120% of cost.
On September 30, the branch inventory at cost and the branch net income (loss) as far as the
Home Office is concerned are:
a.
b.
c.
d.
P28,000 and P2,920, respectively
P28,000 and (P5,200), respectively
P33,600 and P2,920, respectively
P33,600 and P5,200, respectively
12. Makati Company bills its Valenzuela Branch for merchandise at 140% of cost. At the end of
January, 2013, the branch reported the following information:
Merchandise from
Home Office
(At Billed Price)
Inventory, January 1
P7,560
Shipments received
28,280
Inventory, January 31
8,400
What should be the balance of the allowance account for overvaluation of the branch inventory
at January 31 before adjustment?
a. P2,400
b. P2,160
c. P9,080
d. P10,240
13. The Binondo branch of China Products Inc. buys merchandise from third parties and
receives merchandise from the home office for which it is billed at 20% above cost. Below are
excerpts from the trial balances and data on the home office and Binondo branch for the month
just ended:
Home office
Allowance for overvaluation of branch merchandise
Shipments to Branch
Branch
Beginning inventory
Shipments from home office
Purchases
Month end additional data
Ending inventory of Branch
From Home Office at Billed Price P1,170,000
From Outsiders (at cost) 290,000
P370,000
850,000
1,440,000
1,020,000
410,000
1,460,000
The total cost of goods sold of the Binondo branch at cost (net of overvaluation) for the month just
ended amounted to:
a.
b.
c.
d.
P1,410,000
P1,385,000
P1,235,000
P1,850,000
14. Shopper Company started a branch office in Iloilo City on June 1,2013. On this date, the company
shipped to its branch merchandise billed at P90,000. On June 15, another shipment was made at billed
prices of P36,000. During the month, the branch was credited for P2,520 for the damaged goods
returned by the branch. On June 30,2013, the branch reported the following:
Inventory, June 30
Net loss for the month
P50,400
(P7,800)
Shipments to and from the branch were uniformly billed at 120% of cost.
In the home office books, the Iloilo branch operations resulted in:
a. No net income or loss
b. Net income of P4,280
c. Net income of P12,180
d. Net loss of P7,800
15. Tarlac Branch of Quezon City Company, at the end of its first quarter of operations,
submitted the following statement of comprehensive income:
Sales
Cost of Sales:
Shipments from Home office
Local Purchases
Total
P300,000
P280,000
30,000
310,000
Inventory at end
Gross margin on sales
Expenses
Comprehensive income
50,000
260,000
40,000
35,000
P 5,000
Shipments to the branch were billed at 140% of cost. The branch inventory as at September 30
amounted to P50,000 of which P6,600 was locally purchased. Markup on local purchases, 20% over cost.
Branch expenses incurred by Head Office amounted to P2,500.
On September 30, the branch inventory at cost and the net income realized by the home office from the
Tarlac branch operation are:
a.
b.
c.
d.
Branch Inventory at Cost
P37,600
P50,000
P31,600
P37,600
Net income realized
P72,600
P55,000
P5,000
P70,100
16. Ayala branch was billed by Home Office for merchandise at 140% of cost. At the end of its first
month, Ayala branch submitted among other things, the following data:
Merchandise from Home Office (at billed price)
Merchandise purchase locally by branch
Inventory, December 31 of which P7,000 are of local purchase
Net sales for month
P98,000
40,000
28,000
180,000
The branch inventory at cost and the gross profit of the branch as far as the home office is concerned
are:
Branch Inventory at Cost
Gross Profit
a. P92,000
P22,000
b. P22,000
P92,000
c. P22,000
P70,000
d. P20,000
P90,000
17. The Coffee Blends Corporation decided to open a branch in Manila. Shipments of merchandise to
the branch totalled P54,000 which included a 20% mark-up on cost. All accounting records are to be
kept at the home office.
The branch submitted the following report summarizing its operations for the period ended December
31, 2013.
Sales on account
Sales on Cash basis
Collections of account
Expenses paid
P74,000
22,000
60,000
38,000
Expenses unpaid
Purchase of merchandise for cash
Inventory on hand, December 31; 80% from home office
Remittance to home office
12,000
26,000
30,000
55,000
The branch 12/31 inventory at cost and the branch net income (loss) as far as the home office is
concerned are:
Branch Inventory at Cost
Branch Net income (loss)
a. P26,000
(P1,000)
b. P25,000
(P4,000)
c. P26,000
P1,000
d. P20,000
P 800c
18. Trial balances before adjustments for the home office and the branch of the King Company show the
following items on December 31. The home office bills the branch at 20% above cost.
Allowance for overvaluation of branch merchandise
Shipment to branch
Purchases
Shipment from home office
Merchandise Inventory, December 1
Home Office
P3,600
8,000
Branch
P2,500
9,600
15,000
What part of the branch inventory as of December 1 represented purchases from outsiders?
a.
b.
c.
d.
P3,000
P5,000
P2,000
P1,800
19. The Manila Sales Co. established a branch in San Pablo City early last year. It shipped merchandise
and billed the branch for P300,000 prior to its opening. For the year, it made additional shipments at
billed price of P120,000. Within the year, the branch shipped backP7,500 inventory and got the credit
memo for the said returns. On the last working day of the year, an inventory count was made. Ending
inventory of P185,000 was established consisting of purchases from third parties at P20,000 with the
balance coming from home office shipments at billed price.. The home office billed the branch at 20%
above cost. The total purchases of the branch from outside suppliers amounted to P72,500. The total
goods available for sale by the branch at cost (net of overvaluation and returns) amounted to:
a.
b.
c.
d.
P416,250
P485,000
P422,500
P435,250
20. The income statement submitted by the Bulacan Branch to the Home Office for the month of
December,2013 is shown below. After affecting the necessary adjustments the true net income of the
Bulacan Branch inventories were:
Merchandise from Home Office
Local purchases
Total
Sales
Cost of Sales:
Inventory, December 1
Shipments from home office
Local purchases
Total available for sale
Inventory, December 31
Gross Margin
Operating expenses
Total comprehensive for December 2011
12/01/2011
P70,000
10,000
80,000
12/31/2011
P84,000
16,000
100,000
600,000
80,000
350,000
30,000
460,000
100,000
360,000
240,000
180,000
P60,000
What is the balance of the “Allowance for Overvaluation in Branch Inventory” account at December 31,
2013?
a.
b.
c.
d.
P10,000
P16,000
P24,000
P34,000
21. Mahiyain Commercial Corporation operates a branch in Iloilo City. Selected accounts take from the
books of Mahiyain and its branch show balances as of December 31,2013 as follows:
Home office
Branch
Merchandise inventory, January
P12,000
P8,000
1
Purchase
150,000
30,000
Shipments from home office
93,750
Shipments to branch
75,000
Branch inventory allowance
19,750
Sales
115,000
176,500
Merchandise inventory,
14,000
10,350
December 31
The ending inventory of the branch includes items costing P4,350 which were acquired from suppliers
other than the home office.
As far as the home office is concerned, the cost of sales of the Iloilo City branch was:
a. P97,120
b. P102,850
c. P121,400
d. P131,850
22. The Neneng Corporation established its San Pedro branch in March 201. During the first year of
operations, the home office shipped to the branch merchandise which had cost of P120,000. Threefourths of these merchandise was sold by the branch for P141,000. Operating expenses of the
branch amounted to P27,000.
How much total comprehensive income will the branch report if merchandise is billed by the home
office to the branch at 25% above cost?
a. P800
b. P1,200
c. P1,500
d. P8,000
23. A branch store in Marikina was established by Marco Co. on March 1. Shipments of merchandise,
billed to this branch at 125% of cost, were as follows:
March 5
P120,000
March 10
50,000
March 20
35,000
On March 24, the branch returned defective merchandise worth P3,050 and on March 31, it
reported a net loss of P6,200 and merchandise inventory of P85,000.
In the home office books, the branch total comprehensive income (loss) is:
a. (P6,200)
b. P17,190
c. P20,240
d. P23,390
24. The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City. During 2013, 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 branch were as follows: January 1,2013, P90,000; December 31,2013,
P108,000. On December 31,2013, the home office holds inventories of P160,500 which includes
P10,500 held in consignment.
How much is the inventories in a combined statement of financial position as of December 31,2013?
a. P210,000
b. P240,000
c. P270,000
d. P300,000
25. The Iloilo Company operate a branch in Davao, and the profit and loss data for the home office and
the branch for 2013 follows:
Home office
Branch
Sales
P250,000
P75,000
Purchases from outsiders
200,000
15,000
Shipments to branch:
Cost to home office
30,000
Billing price to branch
37,500
Expenses
40,000
10,000
Inventories, Jan. 1,2013:
Home office, at cost
80,000
Branch:
From outsiders, at cost
From home office, at 20% above cost
Inventories, December 31,2013:
Home office, at cost
Branch:
From outsiders, at cost
From home office at 2013 billing
7,500
24,000
55,000
5,500
26,000
The combined total comprehensive income (loss) of the home office and the branch on
December 31,2013 is:
a. P30,800
b. P(30,800)
c. P33,800
d. P27,000
26. Manila Inc. established a branch in Cebu to distribute part of the goods purchased by the home
office. The home office process inventory shipped to the branch at 20% above cost. The following
account balances were taken from the ledger maintained by the home office and the branch:
Manila Inc.
Cebu branch
Sales
P600,000
P210,000
Beginning inventory
120,000
60,000
Purchases
500,000
Shipment to branch
130,000
Shipment from home office
156,000
Operating expenses
72,000
36,000
Ending inventory
98,000
48,000
All of the branch inventory is acquired from the home office –
The combined total comprehensive income of the home office and the branch is:
a. P170,000
b. P70,000
c. P278,000
d. P132,000
27. Selected accounts from the December 31,2013 trial balances of Heart Co. and its branch follows:
Heart
Branch
Inventory, Jan.1
P46,000
P23,100
Investment in Branch
116,600
Purchases
380,000
Shipments from home office
209,000
Freight in
10,450
Expenses
104,000
58,100
Home office
(106,600)
Sales
(310,000)
(280,000)
Shipments to branch
(200,000)
Branch merchandise markup
(22,000)
-
As of December 31,2013, a shipment with a billing price of P11,000 was in transit to the branch.
Freight cost, typically 5% of the billing price, is inventoriable. Merchandise on hand at a year-end
were: at home office P64,000 at cost; at branch P33,000 at billing price.
What is the combined total comprehensive income of Heart Company and its branch for 2013?
a. P77,000
b. P84,900
c. P76,000
d. P76,100
28. Apo Supply Company is engaged in merchandising both at its Home office in Makati and as its
Branch in Davao City. Selected accounts taken from the trial balances of the Home office and the
branch as of December 31,2013 follows:
Makati
Branch
Debits
Inventory, Jan. 1,2013
Davao branch
Purchases
Freight in from home office
Sundry expenses
P23,000
58,300
190,000
52,000
P11,550
105,000
5,500
28,000
Credits
Home office
PP53,300
Sales
155,000
140,000
Sales to branch
110,000
Allowances for overvaluation of
Branch inventory at Jan. 1,2013
1,000
Additional information:
- The Davao City branch gets all of its merchandise from the home office. The home office bills the
goods at cost plus a 10% mark-up. At December 31,2013, a shipment with a billed value of P5,000
was still in transit. Freight on this shipment was P250 and is to be treated as part of the inventory.
- Inventories on December 31,2013, excluding the shipment in transit, follow:
Home office, at cost
P30,000
Branch, at billed price (excluding freight of P520)
10,400
What is the combined total comprehensive income (loss) of the home office and the branch on
December 31,2013?
a. P30,470
b. P20,870
c. P(10,000)
d. P(30,470)
29. On November 2,2013, the home office of Toby Sports Company recorded a shipment of
merchandise to its Bulacan as follows:
Investment in branch – Bulacan
60,000
Shipments to branch
50,000
Allowance for overvaluation of branch inventory
8,000
Cash (for freight charges)
2,000
The Bulacan branch sells 40% of the merchandise to outside customers during the rest of the period.
The books of the home office are closed on December 31 of each year.
On January 10,2014, the Bulacan branch transfer half of the original shipment to the Baguio branch,
and the Bulacan branch pays P1,000 freight for the shipment. If the shipment had been made by the
home office to Baguio branch, the freight charges would have been P1,500.
What is the entry of the Bulacan brancg to record the receipt of the shipment from the home office on
November 2,2013?
a. Shipments from home office
50,000
Accounts receivable
8,000
Freight in
2,000
Home office
60,000
b. Shipments from home office
60,000
Home office
60,000
c. Shipments from home office
58,000
Freight in
2,000
Home office
60,000
d. Shipments from home office
50,000
Freight out
2,000
Home office
52,000
30. using the same data in No. 29, at what amount should the 60% of the merchandise remaining
unsold at December 31,2013 be included in the inventory of the Bulacan Branch?
a. P31,200
b. P36,000
c. P36,800
d. P34,800
39. Using the same data in No. 29, what is the entry in the books of Bulacan Branch to record the
transfer of January 10,2014?
a. Baguio branch
31,000
shipment from home office
31,000
b. home office
31,000
inventory
31,000
c. home office
31,000
inventory
30,000
cash
1,000
d. home office
32,000
cash
1,000
freight in
2,000
inventory
29,000
32. Using the same data in No. 29, what is the entry in the books of Baguio branch to recorf the
transfer on January 10,2014?
a. shipments from Bulacan Branch
30,200
Bulacan branch
30,200
b. shipments from home office
29,000
freight in
1,500
home office
30,500
cash
c. shipments from home office
freight in
home office
d. shipment from home office
freight in
home office
29,000
1,500
30,000
1,000
1,000
30,500
31,000
33. Using the same data in No. 29 what is the entry in the home office books to record the interbranch transfer on January 10,2014?
a. investment in branch – Baguio
30,500
excess freight
1,500
investment in branch – Bulacan
32,000
b. investment in branch – Baguio
30,500
investment in branch – Bulacan
30,500
c. investment in branch – Bulacan
32,500
investment in branch – Baguio
32,500
d. investment in branch – Baguio
30,500
excess freight
500
investment in branch – Bulacan
31,000
34. Papa, Inc. of Makati opens a sales agency in Pasig City and a working funn of P100,000 is
established on imprest basis. The first payment from the fund is P5,000 for rent of the store space.
What is the entry in the books of the home office to record the payment of rent by the agency?
a. Rent expense – Pasig agency
5,000
cash
5,000
b. Pasig agency
5,000
cash
5,000
c. Rent expense – Pasig agency
5,000
working fund
5,000
d. No entry
35. Mama, Inc. opened a sales agency in San Pedro Laguna in 2013. The following is a summary of the
transactions of the sales agency:
Sales orders sent to home office
P120,000
Sales orders filled by home office in 2013
95,000
Freight on shipment of agency
2,000
Collections, net of 10% discount
81,000
Selling expenses paid from the agency working fund
5,500
Administrative expenses charged to agency
5% gross sales
Samples shipped to agency:
Cost
8,200
Inventory, December 31,2013
4,550
The company’s gross profit rate on agency sales is 30% excluding the freight cost on shipments to
agency.
What is the total comprehensive income of the agency for 2013?
a.P3,600
b.P5,600
c. P1,600
d.P6,300
36. A Makati home office transfers inventory to its Pasig branch at 140% of cost. During 2013, the
reciprocal account in the statement of comprehensive income of the home office amounts to P328,125.
On December 31,2013, the home office adjusted the branch income summary by debiting the Allowance
for Overvaluation of Branch Inventory account in the amount of P81,250. The branch’s statement of
financial position at the beginning of the year shows P105,000 of inventory acquired from the home
office.
How much is the ending inventory of the branch per books?
a. P200,000
b. P161,250
c. P280,000
d. P80,000
37. On July 31,2013, the home office in Manila establishes a sales agency in Bulacan. The following
assets are sent to the agency:
Cash(working fund to be operated under the imprest system) P22,000
Samples of merchandise
36,000
During the month of August, the following transactions occurred:
 The sales agency submits sales order of P272,000, sales per invoice was billed at P268,000. Cost
of sales to customers is P124,000.
 Collections during the month amount to P58,200 net of 3% discount.
 Home office disbursements chargeable to the agency are as follows:
Furniture
P40,000
Salaries for the month
21,600
Annual rent of office space
36,000
 On August 31, the sales agency working fund is replenished. Paid vouchers submitted by the
sales agency amounting to P17,925. Samples were useful until December 31,2013 which at this
time are believed to have a salvage value of 15% of cost. Furniture is depreciated at 18% per
annum.
What is the total comprehensive income of the sales agency for the month of August?
a. P91,425
b. P93,225
c. P92,955
d. P58,425
38. The home office in Makati shipped merchandise costing P55,500 to Pasig branch, prepaid the
freight amounting to P4,200. The home office transfers inventory to the branch at a 20% markup
above cost. Pasig branch was subsequently instructed by the home office to transfer the
merchandise to Alabang branch wherein the latter paid freight of P2,800. If the shipment was
made directly from Makati to Alabang, the freight cost would have been P6,200.
Which of the following is true as a result of the interbranch transfer of merchandise?
a. The home office debits Alabang Branch Current for P73,600
b. Alabang branch debits the Home Office for P70,000
c. Pasig branch credits freight in for P6,200
d. The home office will credit Pasig Branch Current for P70,800
39. The following are some of the account balances on the books of the home office and its branch on
December 31,2013.
Home office books
Branch books
Inventory, January 1,2013
P20,000
P58,000
Shipments from home office
150,800
Purchases
900,000
200,000
Shipments to branch
145,000
Allow. For overvaluation of
52,500
branch inventory
Sales
1,200,000
720,000
Operating expenses
290,000
110,000
Per physical count, the ending inventory of the branch is P42,000 including goods purchased from
outsiders of P27,700 while the ending inventory of the home office is P120,000. Home office bills its
branch for merchandise shipments at 30% above cost.
What is the amount of the unrealized inventory profit in the books of the home office on December
31,2013?
a. P9,000
b. P7,260
c. P12,000
d. P3,300
40. using the data in No. 39, how much is the combined total comprehensive income on December
31,2013?
a. P538,700
b. P547,400
c. P541,700
d. P498,200
e. ANSWERS
1.
2.
3.
4.
5.
A
C
B
C
A
6.
7.
8.
9.
10.
B
D
A
A
B
11.
12.
13.
14.
15.
A
D
C
B
A
16.
17.
18.
19.
20.
B
C
A
A
C
21.
22.
23.
24.
25.
B
C
B
B
C
SOLUTIONS AND EXPLANATIONS
26. A
27. C
28. A
29. C
30. B
31. D
32. C
33. A
34. D
35. A
36. C
37. C
38. D
39. C
40. A
1. Since the balances of the reciprocal accounts “Home Office” account and “Investment in
Branch” account are equal, then the balance of the Home Office account after closing
the branch profit is to be computed. The computation is:
Home office account balance before branch profit
P480,000
Add: Profit (loss)
Sales
P2,300,000
Cost of sales
Shipments from HO
P1,850,000
Inventory, dec. 31
255,500
Gross profit
Operating expenses
Home office account balance, December 31,2011
2.
Home office account balance before branch profit
Add: Profit (loss)
Sales
Cost of sales
Shipments from HO
P250,000
Inventory, dec. 31
65,000
Gross profit
Expenses
Home office account balance, December 31,2011
1,594,500
P705,500
235,000
470,500
P950,500
P180,000
P225,500
185,000
P40,500
55,500
(15,000)
P165,000
Therefore the balance of the Investment in Branch a account is also P165,000.
3. In preparation of combined statements of the home office and the branch, all interoffice transactions are eliminated as if it had never occurred. Therefore, the only
transaction that should be presented are transactions to outsiders, which is in this
problem, the P520,000 sales by branch to outsiders.
4. To compute the adjusted balances of the reciprocal accounts a reconciliation statement
is to be prepared as follows:
(branch books) home office
(HO books) Investment in
account
Davao Branch Account
Unadjusted balances, Dec.
P54,700
P51,1100
31,2013
Add(deduct) the following adjustments:
1. shipment charged Davao
(24,000)
branch but actually sent to
Cebu branch
2. shipment charged to
30,000
Aklan branch but actually
sent to Davao branch
3. no effect
4. Merchandise returned by
(7,200)
Davao branch accounts
receivable
5. merchandise returned by
Davao branch still in transit
(2,400)
to home office
6. overstatement of Davao
branch
net
income
(P32,550-P25,350)
Adjusted balances, dec.
31,2013
5. The P187,860 is computed as follows:
Accounts receivable, 5/31/12
Net sales (P198,720 – P3,600)
Total
Less: Accounts receivable, 5/31/13
Accounts written off
Remittance
6. P39,140 is computed as follows:
Investment in branch account balance,
12/31 (HO books)
Add(deduct):
Merchandise in transit
Collection of HO accounts receivable
by branch
Erroneous recording of Branch profit
Supplies returned by Branch
HO account balance, 12/31 (Branch
books)
_______
(7,200)
P47,500
P47,500
P43,800
195,120
238,920
P49,140
1,920
51,060
P187,860
P50,000
(12,500)
3,500
(360)
(1,500)
P39,140
7. The P41,490 unadjusted balance of Home office is computed as follows:
Unadjusted balance, Investment in Branch account, 12/31
P43,000
Less: Merchandise allowance (error)
P60
Branch advances to President
550
Advertising expense charged to branch
900
1,510
Unadjusted balance, home office account, 12/31
P41,490
8. Dr. (Cr.) Adjustment to investment in Butuan Branch account
Marketing expense of another branch charged to Butuan (b)
Butuan’s remittance credited to Davao branch (d)
Dr. (Cr.) adjustment to Butuan branch
Account in the home office books
Dr. (Cr.) Adjustment to Home office account:
Fixed assets transfer not booked by Butuan (a)
Inventory transfer recorded twice by Butuan (c)
P(10,000)
(65,700)
P(75,700)
P(53,960)
75,000
Error in recording DM for P4,650 as P4,560 (f)
Dr. (Cr.) adjustment to Butuan branch
Account in the home office books
(90)
P20,950
9. unadjusted balance of investment in branch account, 6/30
(a) Charge for labor
(b) charge for freight
(c) purchase of furniture & fixture
(d) merchandise allowance
(e) charge for interest
(f) proceeds from sale of truck
(g) charge for truck repairs
(h) proceeds from sale of truck
Unadjusted balance of Home office account, 6/30
P175,520
500
(805.5)
(90)
(50)
(425)
5,000
(370)
5,000
P184,279.5
10.
Sales
Cost of sales
Inventory, jan.1
Shipment from home office
Inventory, dec. 31
Gross profit
Expenses
Net income per branch books
Add: overvaluation of COS
Billed price (above)
Cost to HO (16,720/110%)
Actual branch income at cost basis
11. Branch Inventory at Cost:
Branch inventory at billed price
Divided by the billing percentage cots
Branch inventory of cost
Branch net income as far as the HO is concerned:
Branch net loss, as reported
Add: overvaluation of COS of the
Branch:
Total shipment to Branch
Billed price (P60,000+24,000)
P84,000
P32,000
3,960
17,600
(4,840)
16,720
15,200
16,720
15,280
10,480
4,800
1,520
P6,320
P33,600
÷120%
P28,000
(P5,200)
Cost (P84,000/120%)
Less: branch returns Billed price
Cost (P1,680/120%)
Net shipment
Less: Inventory, 9/30
Billed price
Cost
Branch net income
70,000
P1,680
1,400
P33,600
28,000
P14,000
280
P13,720
5,600
8,120
P2,920
12. The balance of the Allowance for Overvaluation of Branch Inventory account
represents the overvaluation of branch inventory on January 1 and overvaluation of the
shipment received. Computation is as follows:
Billed price
Billing
Cost
Over valuation
÷
percentage =
Inventory, Jan. 1
P7,560
140%
P5,400
P2,160
Add: shipment
28,280
140%
20,200
8,080
Balance of allowance before adjustment
P10,240
13.
Beginning inventory
Purchase
Shipment from HO
Good available for sale
Ending inventory
Cost of sales
Less: Overvaluation
Beginning inventory & shipments
Less: ending inventory
Billed price
P1,170,000
Cost (P1,170,000/120%)
975,000
Cost of goods sold (net)
P1,440,000
410,000
1,020,000
2,870,000
1,460,000
1,41,000
370,000
195,000
175,000
P1,235,000
14. According to the HO books, Iloilo branch will have a P4,380 net income as computed
below:
Branch net loss
(P7,800)
Add: Overvaluation of Cost of sales of Branch Total shipment to Branch:
Billed price (90,000+36,000)
P126,000
Cost (P126,000/120%)
105,000
P21,000
Less: Branch returns
Billed price
P2,520
Cost(2,520,/120%)
Net shipment to Branch
Less: inventory, 6/30
Billed price
Cost(P50,400/120%)
Branch net income
15. P37,600 is computed as follows:
Acquired from HO:
Billed price (P50,000-P6,600)
Divide by billing percentage of cost
Local purchases
Branch inventory at cost, 9/30
2,100
P50,400
42,000
P43,400
140%
420
P20,580
8,400
12,180
P4,380
P31,000
6,600
P37,600
Below is the computation of Home office income from branch operation of P70,100.
Branch net income (5,000-2,500
P2,500
expense)
Add: overvaluation of branch cost
of sales:
Shipment from Home Office:
Billed price
P280,000
Cost(P28,000/140%)
200,000
P80,000
Less: inventory, end Billed price (50,000-6,600)
P43,400
Cost(P43,400/140%)
31,000
12,400
67,600
Branch net income realized by HO
P70,100
16. branch inventory, at cost, 12/31:
Acquired from HO (P21,000/140%)
Local purchases
Total
Branch gross profit:
Net sales
Cost of sales insofar as Home office is concerned
Shipment from HO, at cost
(P98,000/140%)
Purchases
Cost of goods available for sale
Inventory, at cost 12/31:
Acquired from HO (P21,000/140%)
P15,000
P15,000
7,000
P22,000
P180,000
P70,000
40,000
110,000
Local purchases
Gross profit insofar as HO is concerned
7,000
22,000
88,000
P92,000
17. below is the computation of Branch ending inventory at cost:
Acquired from HO (80% x P30,000 ) / 120%
Add: Acquired from outsiders (20% x P30,000)
Branch inventory at cost, 12/31
P20,000
6,000
P26,000
The P1,000 net income is derived as follows:
Sales (P74,000 + P22,000)
Cost of sales insofar as Home office is concerned
Shipment from HO, at cost
P45,000
(P54,000/120%)
Purchases
26,000
Cost of goods available for
71,000
sale
Inventory, at cost 12/31:
26,000
Gross profit
Expenses (P38,000+P12,000)
Branch net income insofar as Home office is concerned
P96,000
45,000
P51,000
50,000
P1,000
18. Merchandise inventory, December 1
Less: Merchandise acquired from HO at billed price
Overvaluation (3,600 – P1,600)
P2,000
Cost (P2,000/20%)
10,000
Merchandise acquired from outsiders
19.
Total shipment from office
Returns
Purchases
Goods available for sale, at billed price
Less: overvaluation of shipment:
Billed price
Cost (420,000/120%)
Returns:
Billed price
Cost (7,500/120%)
Goods available for sale, at cost
P15,000
12,000
P3,000
P420,000
(7,500)
72,500
485,000
P420,000
350,000
70,000
P7,500
6,250
(1,250)
68,750
P416,250
20. before computing the balance of the allowance account, the percent of billing price to
cost should be computed first as follows:
Branch net income, per HO
Branch net income, per branch
Realized mark-up on merchandise from the
Home office already sold by the branch
P156,000
60,000
Shipment from home office
Less: increase in portion of Branch inventory
Acquired from home office
Portion already sold by branch
Less: Mark-up thereon (above)
Cost of portion already sold by branch
P350,000
Per cent of billing price to cost: P336,000/240,000
140%
P96,000
14,000
P336,000
96,000
P240,000
The balance of the “Allowance for Overvaluation in Branch inventory” account as
December 31,2013 after adjustment represent the overvaluation of the branch ending
inventory acquired from the home office computed as follows:
Billed price
Cost (P84,000/140%)
Balance of the allowance account
P84,000
60,000
P24,000
21. branch inventory, January 1
Purchases
Shipments from home office
Merchandise available for sale
Less: branch inventory, Dec. 31
Branch cost of sales, per branch books
Less: Mark- up on merchandise from the HO
Already sold by the branch:
P19,750
Branch inventory allowance
Less: mark-up on portion of Dec. 31 inventory
Acquired from home office:
(P10,350-P4,350) x 25/125
1,200
Branch cost of sales, as far as the home office is concerned
P8,000
30,000
93,750
P131,750
10,350
P121,400
18,550
P102,850
Note: shipments of merchandise from the home office to the branch are billed at 125%
of cost, determined as follows:
Shipments from Home Office = P93,750 =125%
Shipments to Branch
= P75,000
22.
Sales
Less: cost of sales at Billed price (Sch. 1)
Gross profit
Expenses
Total comprehensive income to be reported by the Branch
P141,000
112,500
28,500
27,000
P1,500
Schedule 1
Cost of shipment to branch
Add: 25% mark-up
Billed price of shipment to branch
Portion sold
cost of sales at billed price
P120,000
30,000
150,000
x¾
P112,500
23. reported branch loss
Add: overvaluation in branch cost of sales
Shipment to branch
P205,000
Less: returns
3,050
Ending inventory
85,000
88,050
Cost of sales, at billed price
116,950
Cost of sales, at cost to HO
(116,950/125%)
93,560
Branch total comprehensive income, per HO books
P(6,200)
23,390
P17,190
24. The combined inventories on dec. 31, 2013 statement of financial position computed as
follows:
Home office (P160,500 – P10,500)
Branch, at cost (108,000/120%)
Combined inventories, 12/31
P150,000
90,000
P240,000
25.
Sales
P325,000
Less: cost of sakes
Jan. 1 inventories, at cost (sch 1 )
Purchases
Merchandise available for sale
Less: dec. 31 inventories, at cost (sch 1 )
Gross profit on sales
Less: expenses
Total comprehensive income
107,500
215,000
P322,500
81,300
241,200
P83,800
50,000
P33,800
Schedule 1:
Inventories
Jan.1
P80,000
Home office
Branch, at cost
Acquired from outsiders
Acquired from HO:
Jan. 1 (P24,000/120%)
Dec. 31 (P26,000/125%)
Combined
2013 billing (7,500/30,000) = 125%
Dec. 31
55,000
7,500
5,500
20,000
_______
P107,500
20,800
P81,300
26.
Sales
Cost of sales
Beg. Inventory
HO
Branch, at cost
(P60,000/120%)
Purchases
Total
Ending inventory:
HO
Branch, at cost
(P48,000/120%)
Gross profit
Operating expenses
Combined net income
P810,000
P120,000
50,000
P170,000
500,000
670,000
98,000
40,000
138,000
532,000
278,000
108,000
P170,000
27.
Sales (P310,000 + P280,000)
Cost of sales:
Inventory, 1/1 (sch1)
P590,000
P67,100
Purchases
Freight in (P220,000x5%)
Goods available for sale
Inventory, 12/31 (sch1)
Freight in (P220,000x5%)
Gross profit
Expenses (P104,000+P58,100)
Combined total
Comprehensive income
380,000
11,000
104,000
2,200
391,000
458,100
106,200
351,900
P238,100
162,100
P76,000
Schedule 1 : Combined inventories – at cost
Home office, at cost
Branch at cost
Inventory, Jan. 1:
Billed price
P23,100
Mark-up (sch2)
2,000
Inventory, Dec. 31:
At cost
[(P33,000+P11,000)/110%*]
Combined
*Billing %: (209,000 + 11,000)/200,000 = 110%
Inventories
January 1
P46,000
December 31
P64,000
21,00
40,000
P67,100
P104,000
Schedule 2: mark-up on Branch beginning inventory
Branch merchandise markup before adjustment
P22,000
Less: overvaluation of shipments [(P209,000 + P11,000)-P200,000] 20,000
Mark up of branch beginning inventory
P2,000
28.
Sales
Cost of sales:
Inventory, 1/1
Home office
Branch, at cost (11,550-1,000)
Freight in (5,500-1,000)
Purchases, Home office
Total
Inventory, 12/31
Home office
Branch, at cost
[(10,400+5,000/110%]
P295,000
P23,000
10,550
5,750
P30,000
14,000
39,300
190,000
229,300
Freight in(P520+250)
Gross profit
Sundry expneses
Combined total comprehensive
income
770
44,770
184,530
110,470
80,000
P30,470
29. Choice (c) is correct, because the branch should record the shipment from the office at
billed price (P50,000 + P8,000), and should treat the freight charged by the office as
inventoriable cost.
30.
Shipments from home office at billed price
Unsold
Ending inventory
Freight in (P2,000 x 60%)
Total
P58,000
60%
P34,800
1,200
P36,000
31. In the books of Bulacan branch (sending branch) the inter-branch transfer should be treated
as if it was returned to the home office. Inventory account should be credited in place of
the Shipment from Home office account which was already closes at the end of 2010.
Therefore entry (d) is correct.
32. In the books of Baguio branch (receiving branch) the inter-branch transfer should be treated
as if it was received from the home office. And the freight to be recognized should be the
freight from the office. Therefore choice (c) is correct.
33. In the books of the home office the inter-branch transfer can be cleared by debiting the
receiving branch (Baguio) and crediting the sending branch (Bulacan). Excess freight
account should be charged for the difference which is treated as an expense of the home
office. Therefore choice (a) is correct.
Alternative entry: If the allowance for overvaluation of branch inventory account is classified by
branch:
Investment in Branch – Baguio
Allowance for overvaluation of Branch Inventory-Bulacan
(P8,000 x 50%)
Excess freight
Investment in Branch – Bulacan
30,500
4,000
1,500
32,000
Allowance for overvaluation Branch inventory- Baguio
4,000
34. The expenses paid by the branch are not recorded in the home office books. It is only
recognized upon replenishment of the working fund (petty cash fund).
35. Sales
Sales discount (P81,000 / 90%)x 10%
Net sales
Cost of sales (P95,000 x 70%)+ 200
Gross profit
Expenses:
Selling expenses
Administrative expenses (P95,000 x 5%)
Samples expenses (P8,200 – P4,550)
Net income
P95,000
9,000
86,000
68,500
17,500
P5,500
4,750
3,650
13,900
P3,600
36. Branch beginning inventory – acquired from home office
Shipment from home office – at billed price (P328,125 x 140%)
Goods available for sale at billed price
Branch ending inventory per books
P105,000
459,375
564,375
P280,000
37. Sales
Sales discount (P58,200 ÷ 97%)x 3%
Net sales
Cost and expenses:
Cost sales
Salaries
Rent expense (P36,000 x 1/12)
Expenses
Samples (P36,000 x 85%)x 1/5
Depreciation (P40,000 x 18% x 1/12)
Net income
P268,000
1,800
P124,000
21,600
3,000
17,925
6,120
600
173,245
P92,955
38. Choice (d) is correct due to the following entries to record the interbranch transfer of
merchandise:
Pasig Branch Books:
Home office
70,800
Freight in
Shipment from home office
To record transfer of merchandise to Alabang.
Alabang Branch Books:
Shipment from home office
Freight in
Cash
Home office
To record receipt of merchandise from Pasig.
Home Office Books:
Alabang branch current
Excess freight
Pasig branch current
To record interbranch transfer of merchandise.
4,200
66,600
66,600
6,200
2,800
70,000
70,000
800
70,800
39. The unrealized inventory profit balance on December 31 is the difference between the
branch ending inventory at billed price and cost. Computed as follows:
Branch ending invty per physical count – from HO (42,000 – 27,000)
Shipment in transit:
Shipment from HO at BP (145,000 ÷ 130%)
P188,500
Shipment from HO per books
150,800
Correct branch ending inventory at billed price
Branch ending at cost (52,000 ÷ 130%)
Unrealized inventory profit, December 31, 2008
P14,300
37,700
P52,000
40,000
P12,000
40. The combine net income is computed by preparing a combined income statement as
follows:
Sales
Cost of sales:
Inventory, January 1 (Sch. 1)
Purchases
Goods available for sale
Inventory, December 31 (Sch. 1)
Gross profit
P1,920,000
P69,000
1,100,000
1,169,000
187,700
981,300
938,700
Expenses
Combined net income
400,000
P538,700
Schedule 1:
Home office
Branch: Acquired from HO (Sch. 2)
Acquired from outsiders (58,000 – 39,000)
Total
Combined
Schedule 2:
Allow for overvaluation before adjustment
Overvaluation in the Shipments:
Shipment from HO at BP (P145,000 x 130%)
Shipment to branch at cost
Overvaluation in the branch beginning inventory
Inventory at cost
January 1
December 31
P20,000
P120,000
30,000
40,000
19,000
27,700
49,000
67,700
P69,000
P187,700
P52,800
P188,500
145,000
43,500
P 9,000
Branch beginning inventory at cost (P9,000 / 30%)
P30,000
Branch ending inventory at cost (per No. 39)
P40,000