ACCOUNTING FOR SPECIAL TRANSACTIONS

Home Office and Branch Accounting – Additional Exercises

PROBLEM 1:

On December 31, 2021, the Branch Current 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 Current account on the branch books on December 31, 2021?
a. 64,140
b. 39,140
c. 14,000
d. 13,000

PROBLEM 2:

Moderna Trading Co. operates a branch in Dagupan City. At close of business on December 31,
2021, Dagupan Branch account in the home office books showed a debit balance of P225,770.
The interoffice accounts were reconciled at the beginning of the year. For purposes of
reconciling the interoffice accounts, the following facts were ascertained:

1. An office equipment costing the home office P3,500 was picked up by the branch as
P350.
2. Insurance premium of P675 charged by the home office was taken up twice by the
branch.
3. Freight charge on merchandise made by the home office for P1,125 was recorded in
the branch books as P1,215.
4. Home office credit memo representing a discount on merchandise for P800 was not
recorded by the branch.
5. The branch failed to take up a P700 debit memo from the home office representing
the share of the branch in advertising.
6. The home office inadvertently recorded a remittance for P3,000 from its Cebu branch
as a remittance from its Dagupan branch. Compute the balance as of December
31,2021.
Unadjusted Balance Adjusted Balance
of the Home Office Account of the reciprocal account
a. P 226,485 P 225,770
b. 228,485 228,770
c. 225,770 226,485
d. 226,485 228,770
SOLUTION:

Branch Home Office

Current Current
Unadjusted balances, December 31, 2021 P 225,770 P 226,485
Erroneous recording of branch equipment 3,150
Insurance premium recorded trice by the branch (675)
Erroneous recording of freight charge (P1,215 - P1,125) (90)
Discount on merchandise not yet recorded by the (800)
branch
Failure by the branch to record share in advertising 700
Error by the home office to record remittance of Cebu 3,000 .
Adjusted balance(s), December 31,2021 P 228,770 P 228,770

PROBLEM 3:

Selected accounts from the December 31, 2021 trial balances of J&J Co. and its branch follow:

Heart Branch
Inventory, Jan. 1 P 46,000 P 23,100
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, 2021, 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, P64,000 at cost; at branch, P33,000 at billing price.

What is the combined total comprehensive income of J&J Company and its branch for 2021?
a. P77,000 b. P84,900 c. P 76,000 d. P 76,100

SOLUTION:

Sales (P310,000+ P280,000) P 590,000

Cost of sales:
Inventory, 1/1 (Schedule 1) P 67,100
Purchases P 380,000
Freight in [(P209,000 + P11,000) x 5%] 11,000 391,000
Goods available for sale P 458,100
Inventory, 12/31 (Schedule 1) P 104,000
Freight in (P44,000x 5%) 2,200 106,200 351,900
Gross profit P 238,100
Expenses (P104,000 + P58,100) 162,100
Combined total comprehensive income P 76,000

Schedule 1: Combined inventories - at cost:

Inventories
January 1 December 31
Home office, at cost P 46,000 P 64,000

Branch, at cost:
Inventory, January 1:
Billed price P 23,100
Mark-up (Schedule 2) 2,000 21,100
 Inventory, December 31:
At cost [(P33,000 + P11,000) ÷ 110%*] 40,000
Combined P 67,100 P 104,000
*Billing %: (P209,000 + P11,000) / P200,000 = 110%

Schedule 2: Mark-up on Branch beginning inventory

Branch merchandise markup before adjustment P 22,000

Less: overvaluation of shipments [(P209,000 + P11,000)-P200,000] 20,000
Mark up of branch beginning inventory P 2,000

PROBLEM 4:

The Astra 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 2021 are reflected in the branch trial balance that follows:

DEBIT CREDIT
Cash P 11,900
National Home Co. Current P 90,000
Shipments from National Home Co. 120,000
Accounts receivable 62,500
Expenses 8,100
Sales . 112,500
Total P 202,500 P 202,500

December 31 inventory P 30,000

1. The net profit of the branch was:

a. 22,500
b. 14,400
c. 21,900
d. Answer not given

2. In the home office books, the Branch Current account should be:
a. 134,400
b. 90,000
c. 104,400
d. Answer not given

SOLUTION:

1)
Sales P 112,500
Cost of sales:
Shipments from H.O. P 120,000
Inventory, Dec. 31 30,000 90,000
Gross profit P 22,500
Expenses 8,100
Net profit P 14,400

2)

Generally, the branch accounting system is maintained at the branch. Branch's cash,
merchandise, and other assets, as may be needed, are supplied by the home office. The
branch may purchase merchandise from outsiders to satisfy certain local needs for goods not
available from the affiliated unit. In this case, since no purchases were recorded by the
branch, the entire goods available for sale were provided by the home office itself.
Normally, the reciprocal accounts Home Office Current in the Branch books and the Branch
Current in the Home Office books show identical balances after adjustments. In the
foregoing problem, the information provided is somewhat misleading, because the problem
failed to specify, whether the balance of the Branch Current account in question is before or
after the reported branch net income. Since the trial balance provided thereat, contains
nominal accounts, it is assumed that the home office has not yet taken up the branch net
income. When the branch reports net income for the period, the home office debits the
branch account and credits Branch income, therefore, the balance of the Branch Current
account after closing should be P104,400 (90,000 + 14,400).

PROBLEM 5:

The Sinovac Company, Inc. opened an agency in Makati in 2021. The following is a summary of
the transactions of the agency:

Sales orders sent to home office P 66,000

Sales orders filled by home office in 2021 55,800
Freight on shipment to agency 1,320
Collections, net of 2% discount 47,628
Selling expenses paid from the agency working fund 3,384
Administrative expenses charged to agency 5% of gross sales
Samples shipped to agency:
Cost P 3,600
Inventory, December 3, 2021 1,320

The company maintains its gross margin on agency gross sales at 30% excluding the freight
cost on shipments to agency.

The agency's cost of sales including freight and agency's net income would amount to:
Cost of Sales Net Income
a. P 39,000 P 5,994
b. 47,520 7,668
c. 40,380 5,994
d. 40,380 7,320

PROBLEM 6:

Delta Corp. established an agency in Baguio City. For the first month of operation, the agency
transactions were summarized as follows:

Receipts from sales P 350,000

Disbursements for:
Purchases 400,000
Rent 20,000
Advertising supplies 10,000
Salaries and commissions 70,000
Other expenses 5,000

At the end of that month, the agency had P100,000 of receivables and P50,000 of payables.
Also, there were P90,000 of unsold merchandise and P6,000 of unused advertising supplies on
hand. The Baguio City agency was conceived as an experiment and it is the intention of
management to close it if its operations prove to be unprofitable.

What is the result of operations of the Baguio City agency?

a. No profit, no loss.
b. P 25,000 profit
c. P 9,000 loss
d. P155,000 loss

PROBLEM 7:
 The home office of Pfizer Co. ships goods to Iloilo branch billing the branch for the goods at
P45,000, excluding freight of P6,000. Upon receipt of the goods, Iloilo branch was instructed
by the home office to transfer these goods to Cagayan de Oro branch. Iloilo branch ships the
goods and paid P4,500 for the transfer. If the goods had been shipped by the home office
directly to Cagayan de Oro branch, the freight would have been P6,500.

1. What is the journal entry to record receipt of shipment in the books of Cagayan de Oro
branch?
a. Shipment from home office 45,000
Home office current 45,000
b. Shipment from home office 45,000
Freight in 6,000
Home office current 51,500
c. Shipment from home office 45,000
Freight in 6,500
Home office current 51,500
d. Shipment from home office 45,000
Freight in 4,500
Home office current 49,500

2. What is the adjusting journal entry to be recorded by Iloilo branch?

a. Home office current 51,500
Shipment from home office 45,000
Freight in 6,000
b. Home office current 47,000
Shipment from home office 45,000
Freight in 2,000
c. Home office current 55,500
Shipment from home office 45,000
Freight in 6,000
Cash 4,500
d. Shipment from home office 45,000
Freight in 6,000
Home office current 51,000

3. What is the adjusting entry to be recorded by home office?

a. Shipment to Iloilo 45,000
Excess freight on inter-branch
transfer of merchandise 2,000
Cagayan de Oro branch current 45,000
Freight in 4,000
Shipment to Cagayan de Oro 45,000
Iloilo branch current 51,000
b. Shipment to Iloilo 45,000
Excess freight on inter-branch
transfer of merchandise 6,000
Iloilo branch current 51,000
c. Shipment to Iloilo 45,000
Excess freight on inter-branch
transfer of merchandise 6,000
Cagayan de Oro branch current 45,000
Iloilo branch current 51,000
Shipment to Cagayan de Oro 45,000
d. Cagayan de Oro branch current 51,500
Shipment to Iloilo 45,000
Excess freight on inter-branch
transfer of merchandise 4,000
Iloilo branch current 55,500
Shipment to Cagayan de Oro 45,000
As a general rule, the branch acquiring the goods shall record the merchandise received from
the home office for an amount equal to the cost of merchandise (in the absence of any mark
ups) plus the freight. In case of inter-branch transfer of merchandise, a branch is properly
charged with the cost of freight on goods it receives. However, a branch should not be
charged with excessive freight when, because of indirect routing, excessive costs are
incurred. Thus, the freight is P6,500 only.

The branch where the goods were erroneously shipped shall eliminate all entries made in its
books, as if no inter-branch transactions occurred. And should record the freight incurred in
shipping the goods to Cagayan de Oro, as if remitted to the home office.

In case of indirect routing of inter-branch transfer of merchandise, a branch should not be

charged with excessive freight. Under such circumstances, the branch acquiring the goods
should be charged for no more than the normal freight from the usual shipping point. The
office directing the inter-branch transfer and responsible for the excessive cost should absorb
the excess as expense.