THEORIES

1. Which is the correct journal entry in the home office books when the outside parties purchase inventories to be carried
in the branch’s books?
a. No Entry c. Debit – Purchases; Credits – Accounts Payable
b. Debit – Purchases; Credit – Cash d. Debit – Inventories; Credit – Cash

2. Statement 1: The home office and its branch are viewed as a separate entity for external reporting.
Statement 2: The individual financial statements of the home office and the branch need not be combined when
preparing general purpose financial statements.
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

3. An initial investment from the branch to the home office is recorded by the home office as:
a. Credit to Home Office c. Debit to Cash
b. Debit to Investment in Branch d. No Entry

4. This is sent by the branch to the home office which means that the branch has decreased the home office account.
a. Debit memo
b. Credit memo
c. Investment in subsidiary
d. Prepaid expense

5. Statement 1: As of any given point of time, the “Investment in branch” and the “Home office” account must have equal
balances. If these accounts do not balance, reconciliation procedures must be performed.
Statement 2: Reconciling the reciprocal accounts is similar to bank reconciliation procedures.
a. Both statements are true
b. Both statements are false
c. Only statement 1 is true
d. Only statement 2 is true

PROBLEMS

6. On December 3, 2020, the home office of Lisa Office Supply Company recorded a shipment of merchandise to its
Pampanga Branch as follows:
Pampanga Branch 40,000
Shipments to Branch 35,000
Unrealized Profit in Branch inventory 7,000
 Cash (for freight charges) 4,000

The Pampanga branch sells 40% of the merchandise to outside entities during the rest of December 2020. The books of
the home office and Lisa Office Supply are closed on December 31 of each year.

On January 5 20x7, the Pampanga branch transfer half of the original shipment branch to the Tarlac branch and the
Pampanga branch pays P600 as the shipment. The entry on the books of the Pampanga Branch to record receipt of the
shipment from the home office on December 3, 2021 would be:

a. Shipments from Home Office 36,000

Freight-out 4,000
Home Office 40,000

b. Shipments from Home Office 29,000

Accounts Receivable 7,000
Freight-in 4,000
Home Office 40,000

c. Shipments from Home Office 40,000

Home Office 40,000

d. Shipments from Home Office 36,000

Freight-in 4,000
Home Office 40,000

7. The Roscoe Corporation operates a branch in Olongapo City. The information from the December 31, 2020 trial
balance are as follows:
Home Office Olongapo Branch
Sales P 1,040,000 P 620,000
Shipments to branch 380,000
Purchases 690,000
Shipments from home office 450,000
Inventory, January 1, 2020 240,000 76,000

Inventory at December 31, Home Office P52,000; Branch, P94.000

Compute the realized inventory profit of home office from sales made by the branch (the overvaluation of cost of goods
sold).

8. The Bacolod City branch of Achiles Enterprises, Negros, was billed for merchandise shipments from home office at
cost plus 25% in 2019 and cost plus 20% in 2020. Other pertinent data for 2020 show:
 Bacolod Branch Home Office

Sales P 73,000 P 412,000

Inventory, beginning
at cost 43,000
af billed price 10,900
Purchases. 164,000
Inventory transfers
To Bacolod, at cost. 52,000
From Negros, at billed price 56,400
Inventory, end
at cost 38,500
at billed price 11,800
Expenses 20,400 76,400

Compute the (1) net income (loss) of Bacolod City per branch books and (2) The combined net income (loss) of Achiles
Enterprises.

9. Using the data from #8, compute the (1) realized inventory profit from branch sales (or overvaluation of cost of goods
sold, and (2) The ending inventory that should be presented in the combined income statement.

10. Selected accounts from the December 31, 2020 trial balances of Rose Star Co. and its branch follow:
5-Star Branch
Inventory, Jan. 1 P 66,000 P 43,100
Branch Current 216,600
Purchases 480,000
Shipments from home office 319,000
Freight in 30,450
Expenses 204,000 58,100
Home Office Current (206,600)
Sales (410,000) (380,000)
Shipments to branch (300,000)
Branch merchandise markup (33,000)

As of December 31, 2020, 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 year-end were: at home office, P84,000 at cost; at
branch, P53,000 at billing price.

Compute the (1) branch net income in so far as home office is concerned.
11. The Vincent Store operates a branch in Cebu. Operating data for the home office and the branch for 2020 are as
follows:
Home Office Branch
Sales P 465,000 P 274,500
Shipment to branch 170,000
Purchases from outsiders 320,000 45,000
Advertising expenses 14,700 3,500
Salaries & commission expense 45,000 10,500
Rent Expense. 20,000 4,000
Miscellaneous expense 4,400 600
Shipment from home office 212,500
Inventories, Jan. 1:
Home Office 95,000
Branch:
Acquired from outsiders 10,500
Acquired from office at billed
price which is 20% above cost 52,000
Inventories, Dec. 31:
Home Office 75,000
Branch:
Acquired from outsider. 7,500
Acquired from home office
at 20x6 billed price. 40,000

Compute the combined net income of Vincent Store:

12. The Iloilo Co. operates a branch in Davao. There are shipments in transit from home office to the branch. The home
office ship merchandise to branch at 125% of cost in year 2020, Profit and loss data for the home office and branch
for 2020 follows:
Home Office Branch
Sales P 350,000 P 85,000
Purchases from outsiders 300,000 25,000
Shipments to branch:
Cost to Home Office 40,000
Billing price to branch 42,500
Expenses 50,000 20,000
Inventories, Jan. 1, 2020:
Home Office, acquired from outsiders, at cost 80,000
Branch: Acquired from outsiders at cost 8,500
Acquired from Home Office at billing price,
which averaged 20% above cost 34,000
Inventories, Dec. 31, 2020:
 Home Office, acquired from outsiders at cost 65,000
Branch: Acquired from outsiders at cost 6,500
Acquired from Home Office, at 20x6
billed price (physical count) 41,000

REQUIRED: Compute the amount of merchandise in transit.

13. The Mercadejas Home Company 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
2020 are reflected in the branch trial balance that follows:
Debit Credit
Cash P 21,900
Mercadejas Home Co. Current. P 221,000
Shipments from Mercadejas Home Co 320,000
Accounts Receivable 82,500
Expenses 9,100
Sales 212,500
Total P 433,500 P 433,500

December 31 inventory P 140,000

Compute the (1) net profit of the branch, and (2) the Branch Current Account in the home office books:

14. On December 31, 2020, the following data are in the records of the Cebu City branch of the Marem Company:

Petty Cash P 104,500

Accounts Receivable, Dec. 31, 2019 85,200
Merchandise Inventory, Dec. 31.2019 85,500
Accounts Receivable, Dec. 31, 2020 99,900
Merchandise Inventory, Dec. 31, 2020 91,000
Sales 282,800
Sales Returns 5,800
Accounts Receivable Written Off 4,000
Shipments From Home Office. 330,600
Expenses (Paid by Home Office) 33,500

If all cash collections in 2020 were remitted to Home Office, the total remittances amounted to:

15. A branch store in Caloocan was established by Eury Company on March 1. Merchandise was billed to the branch at
125% of cost. Shipments of merchandise were as follows:

March 5 P 220,000 (at billed price)

 March 10, P120,000 (at billed price) 60,000 (at billed price)
March 20 50,000 (at billed price) 35,000 (at billed price) 45,000 (at billed price)

On March 22, the branch returned defective merchandise worth P4,050. On March 31, the branch reported a net loss
of (P8,200) and merchandise inventory of P95,000. In the home office books, the cost of merchandise sold by branch
was?

ANSWER KEYS – THEORIES

1. Answer: A * transactions with external parties are recorded in regular manner

2. Answer: B. The home office and its branch are viewed as a single reporting entity for external reporting. Thus, the
individual financial statements of the home office and the branch need to be combined when preparing general
purpose financial statements.

3. Answer: B
4. Answer: A
5. Answer: A

ANSWER KEYS – PROBLEMS

Item 6

Shipments from Home Office 29,000

Accounts Receivable 7,000
Freight-in 4,000
Home Office 40,000

Item 7

Inventory, January 1, 2020 P 76,000

Add: Shipments from office 450,000
Cost of goods available for sale 526,000
Less: Inventory, December 31, 2020 94,000
Cost of goods sold at billed price 432,000
Multiplied by: Mark-up on cost (450000-380000)/450000 0.16
Overvaluation of cost of goods sold P 67,200
Item 8
(1) Branch Net Income:
Sales 73,000
less: Cost of goods sold:
Inventory, beginning 10,900
Inventory, transfers 56,400
Cost of goods available for sale 67,300
Less: Inventory, end 11,800 55,500
Gross Profit 17,500
Less: Expenses 20,400
Net Income (loss) per branch books - 2,900

(2) Combined net income

Sales 412,000
Less: Cost of goods sold
Inventory, beginning 43,000
Add: Purchases 164,000
Cost of goods available for sale 207,000
Less: Inventory transfer 52,000
Inventory, ending 38,500 116,500
Gross profit 295,500
Less: Expenses 76,400
Net income/(loss) of the home office 219,100
Add: True branch net income:
Net income/(loss) per branch books - 2,900
Add: Realized profit from branch sales:
Inventory, beginning 2,180
Shipments 9,400
Total 11,580
Less: Inventory, end 1,967 9,613 6,713
Combined net income 225,813

Item 9
(1) Realized profit from branch sales:
Inventory, beginning (10900*25/125) 2,180
Add: Shipments (56400*20/120) 9,400
Total 11,580
Less: Inventory, ending (11800*20/120) 1,967
Realized inventory profit from branch sales 9,613

(2) Ending inventory in the income statement:

Home office 38,500
Branch (11800*100/120) 9,833
48,333
Item 10
Branch Net Income in so far as home office is concerned:
Sales 380,000
Less: Cost of goods sold:
Inventory, beginning 43,100
Add: Shipments from office (319000+11000) 330,000
Freight in 11,000
Cost of goods available for sale 384,100
Less: Inventory, ending (53000+11000) 64,000
Add: Freight in (64000*0.05) 3,200 67,200 316,900
Gross profit 63,100
Less: Expenses 58,100
Branch net income from own operations 5,000
Add: Realized profit from sales made by branch:
Branch merchandise mark-up 33,000
Less: Allowance for overvaluates of ending inventory (64000*10/110) 5,818 27,182
Branch Net Income in so far as home office is concerned 32,182

Billing Price: (P319,000 + P11,000) / P300,000 = 110%

Item 11
Sales (465,000 + 274,500) 739,500
Less: Cost of goods sold:
Inventory, beginning [95000+10500+(52000*100/120)] 148,833
Purchases (320000+45000) 365,000
Cost of goods available for sale 513,833
Less: Inventory, end [(40000*100/125)+75000+7500] 114,500 399,333
Gross Profit 340,167
Less: Expenses 102,700
Net Income 237,467

Billing Price (P212,500 / P170,000 = 125% of cost)

Item 12

Shipments in transit:
Shipments from home office per branch books 42,500
Less: Shipments from home office, (40,000/125%) 50,000
Merchandise in transit 7,500
Item 13
(1) Net profit of the branch
Sales 212500
Less: Cost of goods sold:
Shipments from home office 320,000
Less: Inventory, end 140,000 180,000
Gross Profit 32,500
Less: Expenses 9,100
Net Income (loss) per branch books 23,400

(2) Branch current account, 1/1/20

Mercadejas Home current before net income of the branch 221000
Add: Net income of the branch as reported 23,400
Mercadejas Home current after net income of the branch 244,400

Item 14
Accounts receivable 12/31/19 85,200
Add: Sales on account 282,800
Total 368,000
Less: Sales returns 5,800
Accounts receivable written-off 4,000
Accounts receivable, 12/31/20 99,900
Collections remitted to Home Office 258,300

Item 15
Shipments from Home Office (220,000+60,000+45,000) 325,000
Less: Returns 4,050
Shipments from Home Office, net of returns 320,950
Less: Inventory, 3/31 95,000
Cost of goods at billed price 225,950
Less: Allowance or mark-up included in the cost of goods sold (P225,950*25/125) 45,190
Cost of goods sold made by branch 180,760