CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila

ADVANCED FINANCIAL ACCOUNTING GERMAN/LIM/VALIX/K. DELA CRUZ/MARASIGAN

ACCOUNTING FOR HOME OFFICE & BRANCH/AGENCY

Part I: Theory of Accounts

1. Which of the following statements regarding accounting for home office and branch is
CORRECT​?
a. The required balance of the Allowance for Overvaluation account is the mark-up in the total
ending inventory of the branch. ​(from the Home Office only ; excluding outsiders)
b. The combined net income of the home office and its branches is presented in the
separate Statement of Comprehensive Income of the Home office.
c. The income of the branch as far as the home office is concern is debited to Investment in
Branch account in the separate books of the home office. ​(The income per branch books)
d. The home office ships merchandise to the branch at a mark-up based on cost, as a
consequence the retained earnings of the branch in its separate books is understated. ​(Branch
has no RE account)

2. Which of the following statements is ​CORRECT ​regarding accounting for home office and
branch?
a. Assuming the home office ships merchandise to the branch at a mark-up based on cost, the
account Shipments from Home Office in the published income statement is reported at billed
price. ​(SFHO is eliminated through the working paper)
b. If the home office purchased an equipment to be used by the branch but the record of the asset
is being maintained by the home office for uniform depreciation policy, no entry is required
on the part of the branch. ​(Memo Entry)
c. The Allowance for overvaluation account must be debited in the separate books of the
home office to adjust the results of operations of the branch whether it is a net income or
net loss per branch books.
d. A credit memo received by the branch may be a notification from the home office about
allocation of expense incurred by the latter. ​(Debit Memo)

3. Which of the following statements is ​CORRECT ​regarding accounting for home office and
branch?
a. The stockholders’ equity of each branch is eliminated through the working paper. ​(Branch has
no SHE account)
b. The accounts Shipments to Branch and Shipments from Home Office are eliminated in
the working paper and closed in the separate books.
c. The account Allowance for Overvaluation in Branch Inventory account is debited in the
working paper to make the ending inventory of the branch at cost. ​(EI - Income Statement is
debited)
d. A branch may debit an Investment in “another” Branch account for purposes of interbranch
transactions. ​(Branch will only debit or credit HOC account)
Part II: Problem Solving

Problem 1. ​On January 1, 2020, SGP Company established a branch in a nearby city. At the close of
the calendar year ended December 31, 2020, the Investment in Branch account on the books of the
home office had a balance of P66,000. The branch books reflected another amount thus the difference
in the reciprocal accounts is due to the following data:

● Cash of P10,000 forwarded to the home office by the branch is in transit and has not been
recorded on the home office books.
● Merchandise costing the home office P8,000 was transferred to the branch at a billing price of
P9,000. The merchandise is in transit and has not been recorded on the branch books.
● Notification sent by the home office to the branch, informing the branch of P5,000 of operating
expenses that the home office paid on behalf of the branch, has not been received by the branch
and thus has not been recorded by the branch.
● Cash of P2,000 received by the branch from the home office was erroneously recorded by the
branch as P20,000.
● The branch purchased, for cash P15,000 of equipment for its use; fixed asset accounts of the
branch are maintained at the home office. The home office is yet to be notified.
● The branch reported a net income of P89,000 but was recorded by the home office at P98,000.

Compute the unadjusted balance of Home Office Current account

a. 32,000
b. 36,000
c. 31,000
d. 27,000

HO books Branch Books

Inv in Branch HOC

unadjusted balance P66,000 ​P36,000

a. (10,000)
b. 9,000
c. 5,000
d. (18,000)
e. (15,000)
f. (14,000) (5,000)

adjusted balance P27,000 P27,000

Problem 2. ​Arrow Modern Clothing, ships merchandise to its Greenbelt branch at a 40% markup
based on cost during 2020, which was higher by 25% compared to the mark-up based on cost in
prior year. In 2020, the separate Statement of Comprehensive Income of Greenbelt branch shows
merchandise from Arrow Modern Clothing in the amount of P1,890,000. At year-end, Arrow
Modern Clothing adjusted its Loading in Branch Inventory account downward to P99,000. In the
books of Arrow Modern Clothing, the Income Summary – Greenbelt branch was credited in the
amount of P495,000 with a debit to the Unrealized Mark-up account of the same amount.
Compute the inventory of Greenbelt branch at the beginning of 2020
a. 360,000
b. 346,500
c. 414,000
d. 247,500
Allowance for Overvaluation after adjustment P 99,000
Add: Realized Mark-up ​ 495,000
Allowance for Overvaluation before adjustment 594,000
Deduct: Unrealized mark-up from shipment this year (540,000)​(1,890,000/140%)*40%
Unrealized mark-up from last year 54,000

P54,000 /15% * 115% = ​P414,000

Problem 3. ​On August 1, 2020, BGC, a home office established two branches: Ortigas branch and
Ayala branch. BGC, transferred P1,400,000 worth of cash and P6,125,000 worth of merchandise to
its Ortigas branch. On August 15, BGC instructed Ortigas to transfer three-fourths of the
merchandise and cash received to Ayala branch. In addition, on October 6, 2020, shipments from
BGC were received by Ortigas branch amounting to P2,187,500 and the freight collect amounting to
P113,750. Three-fifths of the said shipments were sold by Ortigas branch to Cainta customers. On
November 9, 2020, Upon instruction of BGC, Ortigas branch transferred to Ayala branch half of the
remaining immediate prior month shipments from BGC. The receiving branch paid additional freight
in the amount of P43,750. Had the merchandise been shipped from BGC directly to Ayala branch,
only P33,250 worth of freight would have been incurred.
Compute the balance of the Investment in Ayala branch account in the separate books of BGC
a. 6,060,250
b. 6,070,750
c. 6,123,250
d. 6,114,500

P1,400,000 + P6,125,000 = P7,525,000 * ¾ = P5,643,750

P2,187,500 *⅖ * ½ = 437,500 + 33,250 - 43,750 = ​ 427,000 ​P6,070,750

Problem 4. ​On June 1, 2020, Sta. Rosa, a home office established an agency in Tagaytay, sending
samples costing P490,000 which are useful until the end of the second month of the second quarter
of 2021 and have a salvage value of 10% of cost. A working fund of P398,125 is to be maintained
using the imprest basis. During 2020, the agency submitted to the home office sales order
amounting to P4,134,375. Sales per invoice were P3,215,625 which were duly approved by the
home office. Collections during the year amounted to P1,717,021.25 net of 3% sales discount. The
cost of merchandise sold during the year is equal to 75% of the gross sales. Vouchers for expenses
amounted to P214,375.

How much net income would be reported by the Tagaytay agency on December 31, 2020?
a. 279,177.50
b. 315,927.50
c. 508,865.00
d. (95,427.50)

Sales P 3,215,625
Sales Discount ( 53,103.75) (1,717,021.25/97% *3%)
CGS (2,411,718.75) (3,215,625 * 75%)
Paid Vouchers (214,375)
Samples Expense ​ (257,250) ​ (490,000 * 90% * 7/12)

Net Income P 279,177.50

Problem 5. ​Home office bills its branch for merchandise shipments at a mark-up of 30% based on
cost. The following are some of the account balances on the books of home office and its branch as
of December 31, 2020:
Home Office Books Branch Books
Inventory, January 1 P 35,000 P 101,500
Shipments from Home Office 263,900
Purchases 1,575,000 350,000
Shipments to Branch 253,750
Branch Inventory Allowance 91,875
Sales 2,100,000 1,260,000
Operating Expenses 507,500 192,500

Per physical count, the ending inventory of the branch is P73,500 including goods from outside
purchases of P48,475; the ending inventory of the home office is P210,000.

Compute for the ff:

(a) Unrealized profit in the separate books of the home office on December 31, 2020;
(b) Beginning inventory of the branch in 2020 that came from outside purchases;
(c) Total goods available for sale of the branch

A. 21,000 ; 48,475 ; 715,400

B. 15,750 ; 33,250 ; 781,375
C. 21,000 ; 33,250 ; 781,375
D. 15,750 ; 48,475 ; 715,400

(d) Total ending inventory to be shown on the published financial statements;

(e) Combined net income for the year

A. 277,725 ; 957,950
B. 328,475 ; 942,725
C. 277,725 ; 942,725
D. 328,475 ; 957,950

STB P253,750 * 130% = 329,875 (SFHO) - 263,900 = P65,975 ​mdse in transit

Billed Price Cost Mark-up

130% 100% 30%
Beginning Inventory 68,250 52,500 15,750
Shipments 329,875 253,750 ​76,125
Available for Sale 91,875 before adjustment
Ending Inventory * 91,000 70,000 ​21,000 ​ after adjustment
CGS 70,875 realized mark-up

* P73,500 +65,975 - 48,475 = P91,000

Beginning Inventory per branch P101,500

Less: from Home Office (68,250)​ ​P33,250

Beginning Inventory per branch P101,500

SFHO 329,875
Purchases 350,000​ ​P781,375
Ending Inventory of HO P210,000
Ending Inventory of Branch (at cost) 70,000 + 48,475 = 118,475​ ​P328,475

NI of HO NI of Br

Sales P 2,100,000 P 1,260,000

CGS ( 1,146,250) ( 641,900)
OPEX ​( 507,500) ​ ( 192,500)
P 446,250 P 425,600
70,875
496,475 (True Income)

Combined Net Income P942,725

Problem 6. ​The following transactions were entered in the branch current account of The Fort Head
Office for the year 2020:
Investment in Pasig Branch
Beg. Balance, 1/1/20 2,296,290 166,500 Collection of AR, 9/12/20
Shipments to branch, 4/1/20 1,062,000
Cash forwarded, 6/1/20 75,000
Operating expenses charged to the
14,400
branch, 12/31/20

▪ Shipments to the branch during the year were made at a mark-up of 20% based on cost.

▪ The balance of the Allowance for Overvaluation of Branch Inventory account was P106,500 at
the beginning, and the allowance was written down to P73,500 at year-end.
▪ On December 1, 2020, the home office purchased a piece of equipment amounting to P180,000
for its branch in Pasig. The said equipment has a useful life of five years and will be carried in the
books of the branch, but the home office recorded the purchase by debiting Equipment.
▪ The branch recorded the depreciation of the equipment by debiting the Home Office Current
account and crediting Accumulated Depreciation.
▪ Debit memo regarding the allocation of operating expenses to the Pasig branch was received by
the branch on January 2, 2021.
▪ The Pasig branch reported net income of P988,650.

▪ It also remitted cash to the home office on December 31, 2020 amounting to P165,000, which the
home office received and recorded on January 1, 2021.
▪ The interoffice accounts were in agreement at the beginning of the year.

1. Compute the adjusted balance of the Investment in Pasig Branch account on December 31, 2020
before the necessary closing entries were made
a. 3,116,190
b. 3,328,590
c. 3,508,590
d. 3,296,190
2. Compute the amount of adjustment in the Allowance for Overvaluation of Branch Inventory
account
a. 73,500
b. 210,000
c. 283,500
d. 245,400

3. Compute the net income of Pasig branch that will be reported in the published Statement of
Comprehensive Income of The Fort Company
a. 971,250
b. 1,184,250
c. 1,181,250
d. 1,044,750

4. Compute the amount of the Home Office Current account that will be reported in the separate
books of Pasig branch after closing entries are made
a. 4,283,340
b. 4,477,440
c. 4,281,840
d. 4,267,440

Investment in Pasig Branch

Unadjusted: P3,281,190
180,000 (bullet #3)
​ (165,000)​ (bullet #7)
Adjusted: P3,296,190 (before closing)

Allowance for Overvaluation

Beginning P106,500
Add: Increase during the year 177,000 (1,062,000 / 120% * 20%)
Deduct: Required Balance (73,500)
Realized mark-up P210,000

NI of Branch (unadjusted and understated) P988,650

Less: Depreciation Expense (3,000) 180,000/5 yrs. / 12 months

Less: Allocated expenses ​ (14,400)
adjusted ; understated P971,250
210,000
True Income of branch P1,181,250

Investment in Branch/HOC (before closing) P3,296,190

Add: Net Income per Branch 971,250
(after closing) P4,267,440

END 8909