TECHNOLOGICAL INSTITUTE OF THE PHILIPPINES.

Cubao, Quezon City

PRACTICAL ACCOUNTING 2 CPA Review

BRANCH ACCOUNTING M. C. Cerda,CPA, MBA
O2016

Topic Review Notes

ACCOUNTING FOR BRANCH OPERATIONS

A branch is a business unit located at some distance from the home office. Initial funds
and assets of the branch normally come from home office. A branch carries merchandise
obtained from home office and from outsiders. It generates its own sales, approve
customer’s credit orders, and makes collections from its customers. Cash receipts of the
branch may either be remitted to home office or deposited in a bank account. Its expenses
are normally paid by the branch, although there are some instances where its expenses are
paid by the home office.

For transactions involving the home office and the branch, reciprocal accounts are
used. At home office books, INVESTMENT IN BRANCH or BRANCH CURRENT
account, is maintained, it is usually debited for asset transfers to branch, shouldering
branch expenses, and to recognize branch profit. It is credited for asset transfers from the
branch, payments for home office expenses, and to recognize branch loss. In the branch
books, HOME OFFICE account, is debited for asset transfers to home office, payments
for home office expense, and reports branch loss to home office. It is credited for assets
transferred/ received from office, branch expenses paid by home office, and reports
branch profit to home office.

For transactions involving merchandise transfers from home office to branch where
the home office billed the branch above cost, a temporary account, ALLOWANCE FOR
OVERVALUATION, is recognized at home office books. It is credited for the excess of
billings above cost and is debited to recognize the realized profit from merchandise
received from office and already sold. To determine the realized profit from merchandise
sold, the following alternative solutions may be followed:

ALTERNATIVE 1

Cost of Goods Sold By Branch X Balance of Allowance For

GAS ( Mdse. From Home Office ) Overvaluation

ALTERNATIVE 2

Balance of Allowance for Overvaluation P xx

Less: Overvaluation on Ending Inventory
Billed Price - Cost xx
Realized Profit P xx
====
MULTIPLE CHOICE

1. Demure Corporation had an agency in Quezon Province. During the year, the
transactions of the agency are as follows:

Sales P1,400,000
Disbursements:
Purchases 1,600,000
Salaries 280,000
Rent 80,000
Supplies 40,000
Miscellaneous expense 20,000

The agency had P400,000 receivables andP200,000 payables at the end of the
period. Also, there are inventories on hand of P360,000 and unused supplies of
P24,000. The agency was set up as an experiment for one year and would be
closed if losses were incurred.

The agency’s operation for the year is

A. A break even. C. An operational loss of P236,000
B. An operational loss of P620,000. D. A profit of P100,000

2. On January 2, 2020, Ecstatic Company established a sales agency in Antipolo

City. During the year, the following transactions occurred:

* Transfer of P20,000 worth of merchandise to Antipolo as working fund.

* Receipts of sales orders from the agency, P200,000.
* Collection of agency accounts by HO, P140,000.
* HO disbursements representing agency expenses, P18,000.
* Replenishment of the agency working fund upon receipt of expense vouchers,
P9,000.
* Cost of goods sold identified with agency sales, P144.000.

The net income/(loss) of the agency for the year is:

A, 9,000 B. 28,000 C. 29,000 D. ( 29,000)

3. On December 31, 2020, the Investment in Branch account on the HO books of

Fantastic Corporation. shows a balance of P168,.000, and the Home Office
account in the branch books shows a balance of P194,700. The following are
determined for the accounts’ differences:

* Merchandise billed at P12,300 was shipped by the HO to the Branch on

December 28, and was not recorded in the branch books.
* The branch collected a HO account receivable of P50,000 but failed to notify
the HO.
* The HO incorrectly recorded the branch net income at P22,500. The correct
branch profit is P24,300.
* The HO was charged P12,800 when the branch returned merchandise to HO on
December 31. The merchandise is still in transit.

The reconciled balances of the reciprocal accounts is

A. 157,000 B. 194,700 C. 205,200 D. 207,000

4. Generous Company operates several branches in Metro Manila. On June 30,

2020, its Divisoria Branch showed a HO account balance of P54,700, while the
HO books showed Investment in Divisoria Branch account balance of P51,100.
The following were gathered in reconciling the reciprocal accounts.
 * A P24,000 shipment, charged by HO to Divisoria, was actually sent to Tondo
branch.
* A P30,000 shipment, intended and charged to Recto branch, was shipped to
Divisoria.
* The HO collects a Divisoria branch account receivable of P7,200 and fails to
notify the branch.
* The HO was charged for P2,400 for merchandise returned by Divisoria on June
28. the merchandise is still in transit.
* The HO erroneously recorded Divisoria’s net income for P32,550 instead of the
correct profit amount of P25,350.

The adjusted balances of the reciprocal accounts is

A. 40,300 B. 43,500 C. 47,500 D. 54,700

5. On December 31, 2020, the Investment in Branch account on Hustler

Corporation’s books has a balance of P170,000. The following discrepancies were
noted in the reconciliation of the reciprocal accounts.

* A P20,000 branch remittance to the HO on December 27 was recorded only in

the HO books on January 4, 2021.
* A HO merchandise shipment to the branch costing P40,000 on December 29,
2020 was recorded by the branch only in January 5, 2021.
* The HO incurred P24,000 advertising expense and allocated P10,000 of this
amount to the branch on December 15, 2020. The branch has not yet recorded
this transaction.
* A branch customer erroneously remitted P6,000 to the HO. The HO recorded
this collection on December 22, 2020. The branch has not yet made any entry
for this.
* Merchandise costing P86,000 was sent to the branch by HO on December 10,
2020, for which the branch recorded it for P68,000.

The unadjusted and adjusted balances of the Home Office account, are
A. 52,000 & 32,000 C. 88,000 & 156,000
B. 88,000 & 150,000 D. 128,000 & 190,000

6. During 2020, Immaculate Corporation transferred inventory from HO to its

branch at a billed price of P220,000. The inventory originally cost the company
P180,000. The HO reported sales and cost of sales of P2,800,000 and P1,180,000,
respectively. Its branch reported sales and cost of sales of P1,350,000 and
P600,000, respectively. All of the inventory had been sold at year end.

In the consolidated 2020 profit and loss statement of Immaculate, the amount of
cost of sales to be reflected is
A. 1,560,000 B. 1,600,000 C. 1,740,000 D. 1,780,000

For questions 7 & 8

The following balances are from the books of Lovable Company’s branch as of
December 31, 2020:
DR CR
Sales P540,000
Shipments from HO P302,400
Inventory, January 1 56,700
Expenses 180,000
 The branch purchases all of its merchandise from HO. Its December 31, 2020
inventory was P50,400. The HO bills the branch at 40% above its cost.

7. Before closing entries, the balance of Shipments to Branch account in HO books is:
A. 181,440 B. 199,800 C. 216,000 D. 256,500

8. The branch profit in so far as the HO office is concerned, is:

A. 57,600 B. 63,900 C. 139,500 D. 153,900

For questions 9 & 10

The following information is available from the records of Petite Corporation and its
branch as of December 31, 2020:
HO Books Branch Books
Sales P 400,000
Shipments to branch P 120,000
Shipments from HO 160,000
Purchases 60,000
Expenses 120,000
Inventory, January 1, 2020 40,000
Allowance for Overvaluation of
Branch Inventory 48,000

There are no shipments in transit between HO and the branch. Both shipments
accounts are properly recorded. The ending inventory at billed price includes
merchandise acquired from HO in the amount of P40,000 and P12,000 acquired from
outside vendors for a total of P52,000.

9. The amount of goods acquired by the branch from outsiders in its beginning
inventory is
A. 8,000 B. 16,000 C. 20,000 D. 24,000

10. The correct branch net income for the year is

A. 72,000 B. 80,000 C. 90,000 D. 110,000

For questions 11 & 12

The following transactions took place between the Home Office of Weather Company
and its two branches, Sunny and Cloudy.

* Upon the instruction of HO, Cloudy Branch affected a fund transfer of P50,000 to
Sunny Branch.
* Sunny Branch collected a Cloudy Branch’s account receivable of P70,000 less 2%
discount.
* Cloudy Branch paid P500,000 representing the traveling expenses of Mr. Kim, the
senior VP, when the latter attended the regional conference in Baguio. Of the amount
paid, 60% was charged to the HO, 25% to Sunny Branch, and the balance to Cloudy
Branch.
* HO shipped merchandise costing P400,000 to Cloudy Branch. Freight of P6,000 was
paid by the HO. It is the policy of the company to bill its branches at 25% above cost.
* Upon the instruction of the HO, Cloudy Branch reshipped the above merchandise to
Sunny Branch. Freight of P3,000 was paid by Sunny Branch. Had the goods been
shipped directly to Sunny Branch, the freight would have been only P8,400. .
11. The balance of the Investment in Cloudy Branch account in HO books is:
A. 543,600 B. 1,040,000 C. 1,049,600 D. 1,055,600
12. The balance of the Home Office account in the books of Sunny Branch is:
A. 624,000 B. 740,600 C. 749,000 D. 757,400

13. The following balances are from the books of Bicol Company and its Naga City
branch location as of December 31, 2020: Sales, P270,000; Shipments from HO,
P151,200; Inventory, January 1, P28,350; Expenses, P90,000. The Naga City branch
purchases all of its merchandise from the HO. Its December 31, 2020 inventory was
P25,200. The HO bills the branch at 40% above its cost.
What is the branch profit as far as the HO is concerned?
A. 28,800 B. 39,500 C. 69,750 D. 76,950

14. The following items are taken from the unadjusted trial balance of Progressive
Company and its branch on December 31, 2020: Shipment to branch, P300,000;
Allowance for Overvaluation, P99,900; Shipments from HO, P390,000; Branch
purchases from outsiders, P144,600; Merchandise inventory, January 1, P54,600;
Merchandise inventory, December 31, P48,750; Branch sales, P540,000; branch
expenses, P51,000.
It is the company’s policy to bill all its branches for merchandise shipments at 30%
above cost.

How much of the branch inventory on January 1 represents purchases from outsiders?
A. 11,000 B. 11,700 C. 42,000 D. 42,900

15. Remar Trading Company operates a branch in Mindoro. At the close of business on
December 31, 2020, Mindoro branch account in the home office books showed a
debit balance of P241,700. The inter-office accounts were in agreement at the
beginning of the year. For purposes of reconciling the inter-office accounts, the
following facts were ascertained:
* An equipment costing P2,800 at home office was picked-up by the branch
and recorded at P280.
* The branch wrote-off uncollectible accounts of P600. The allowance for
doubtful accounts is maintained at home office books. The home
office was not yet notified of this.
* Freight-charge on the merchandise by the home office for P1,315 was
recorded in the branch’s books as P1,135.
* Home office credit memo representing a discount on merchandise for P650
was not recorded by the branch.
* Mindoro branch failed to take up a P550 debit memo from the home office.
* The home office inadvertently recorded a remittance of P4,000
from its Mindoro branch as a remittance from its Batangas branch.
What is the balance in the branch books of Home Office Current account before
adjustment?
A. 234,500 B. 242,500 C. 243,700 D. 239,700

16. Baron Corporation has one branch office named Travel Branch. Baron is performing
the end-of-period reconciliation of its Travel Branch account. The following items are
unsettled at the end of the accounting period:
 Baron has agreed to remove P750 of excess freight charged to Travel when Baron
shipped twice as much inventory as requested
 Travel Branch mailed a check for P11,000 to Baron as payment for merchandise
shipped from baron to Travel. Baron has not yet received the check.
 Travel returned defective merchandise to Baron. The merchandise was billed to
Travel at P4,000, when its actual cost was P3,000.
 Advertising expense attributable to the branch were paid for by home office in the
amount of P5,000.
 If the adjusted balances for Travel Branch account and the Baron Home Office
account is P500,000, what are the unadjusted balances for Travel Branch and Baron
Home Office accounts, respectively?
A. 510,250 & 505,000 C. 514,000 & 516,000
B. 515,000 & 495,750 D. 504,000 & 500,750

17. Home Office Inc. established a branch in Abra to distribute part of the goods
purchased by the home office. The home office priced inventory shipped to the
branch at 20% above cost. The following account balances were taken from the
ledgers maintained by the home office and the branch:
Home Office Inc. Abra Branch
Sales P 600,000 P 210,000
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 net income of the home office and the branch is:
A. 70,000 B. 132,000 C. 170,000 D. 278,000

18. The Quezon City branch of Hilltop Corporation is billed for merchandise by the home
office at 20% above cost. The branch, in turn, prices merchandise for sales purposes
at 25% above billed price. On March 31, all of the branch inventory is destroyed by
fire. No insurance was maintained . Branch accounts show the following information:
Merchandise inventory, January 1 ( billed price ) P26,400
Shipments from home office ( January 1 to March 31 ) 20,000
Sales 15,000
Sales returns 2,000
Sales allowances 1,000
The cost of merchandise destroyed by fire is:
A. 30,000 B. 30,667 C. 36,000 D. 36,800

For questions 19 & 20

Bongbong Company’s branch in Vigan City began operations on January 2, 2020. During
the first year of operations, the home office shipped merchandise to Vigan branch that
cost P250,000, at a billed price of P300,000. One-fourth of the merchandise remained
unsold at the end of 2020. The home office records the shipments to the branch at
P300,000 billed price at the time shipments are made.

19. The home office should make:

A. A year-end adjusting entry to establish an unrealized profit of P12,500.
B. A year-end adjusting entry to establish an unrealized profit of P62,500.
C. A year-end adjusting entry to establish an unrealized profit of P75,000.
D. No year-end adjusting entry because the shipment to branch and shipment
from home office accounts are reciprocal.

20. Freight of P2,000 on the shipment was paid by the branch. The home office should
make:
A. A year-end adjusting entry crediting the branch account for P500.
B. A year-end adjusting entry debiting the branch account for P500.
C. A year-end adjusting entry debiting the branch account for P2,000.
D. No year-end adjusting entry for the freight charge.