Home Office and Branch
The following are some of the account balances in the books of the home office
and its branch on December 31, 2020.
Home Office Branch
Books Books
Inventory, January 1, 2020 P20,000 P58,000
Shipments from home office 188,500
Purchases 900,000 200,000
Shipments to branch 145,000
Allow for overvaluation of branch 52,500
inventory (AOI)
Sales 1,200,000 720,000
Operating expenses 290,000 110,000
Per physical count, the ending inventory of the branch is P79,700 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.
Compute the following:
a. Net income reported in the books of the Home Office
b. Net income reported in the books of the Branch
c. Combined net income
d. AOI, ending balance
e. Ending inventory to be reported in the combined financial statements
PRACTICE QUESTIONS
Theory
1. Which of the following statements about accounting for home office and branch is false?
a. The Home Office account in the books of a branch represents the equity interest of the home
office in the net assets of the branch
b. The Investment in Branch account in the books of the home office represents the equity interest
of the branch in the net assets of the home office
c. The Home Office and Branch Office accounts are reciprocal accounts that must be eliminated in
the preparation of the enterprise’s financial statements that are presented in accordance with
GAAP
d. Unrealized profit from internal transfers between the home office and a branch must be
eliminated in the preparation of the enterprise’s financial statements that are presented in
accordance with GAAP
The Investment in Branch account in the books of the home office represents the equity interest of the
home office in the net assets of the branch.
2. The “Investment in Branch” and “Home Office” accounts are best described as
a. Contra accounts
b. Adjunct accounts
c. Reciprocal accounts
d. Investment accounts
3. For external reporting, the individual financial statements of the home office and branch are combined
a. By using complex consolidation procedures
b. By recognizing the home office’s own assets, liabilities, income and expenses plus its share in
the branch’s assets, liabilities, income and expenses
c. By adding together similar items of assets, liabilities, income and expenses
d. By adding together similar items of assets, liabilities, income and expenses and eliminating
reciprocal accounts
In preparing the combined financial statements, non-reciprocal accounts (Assets, Liabilities, Income and
Expenses) are added and reciprocal accounts (Investment in branch, Home office, Shipments, AOI) are
eliminated.
4. Which of the following accounts would be shown in the combined financial statements of the home
office and branch?
a. Investment in branch account
b. Home office account
c. Allowance for overvaluation of inventory
d. None of the above
Reciprocal accounts (Investment in branch, Home office, Shipments, AOI) are eliminated and will not
appear in the combined financial statements
PROBLEMS (try to answer the following problems using our table)
Problem 1
The home office and its branch reported the following information for year 2022:
Home Office Branch
Sales P365,000 P174,500
Shipments to branch 90,000
Purchases from outsiders 220,000 35,000
Advertising expense 13,700 2,500
Salaries expense 35,000 9,500
Rent expense 10,000 2,000
Miscellaneous expense 3,300 500
Shipments from home office 112,500
Inventory, beg.
- Home office 85,000
- Branch:
- From outsiders 9,500
- From HO billed @ 20% above cost 42,000
Inventory, end.
- Home office 65,000
- Branch:
- From outsiders 6,500
- From HO 30,000
Compute for the following:
a. Billing rate
b. Combined net income
Requirement (a) Billing rate
Shipments from HO 112,500
Shipments to branch ÷ 90,000
Billing rate 125% of cost
Requirement (b) Combined net income
Sales 539,500 (365K + 174.5K)
Inventory, beg. 129,500 85K + 9.5K + (42K / 120%)
Purchases from outsiders 255,000 (220K + 35K)
Inventory, end. (95,500) 65K + 6.5K + (30K / 125%)
Cost of sales (289,000)
Gross profit 250,500
Advertising expense (16,200) (13.7K + 2.5K)
Salaries expense (44,500) (35K + 9.5K)
Rent expense (12,000) (10K + 2K)
Miscellaneous expense (3,800) (3.3K + .5K)
Combined net income 174,000
Problem 2
The home office and its branch reported the following information for year 2022:
Home Office Branch
Inventory, beg. P12,000 P8,000
Purchases 150,000 30,000
Shipment from home office 93,750
Shipments to branch 75,000
Allowance for overvaluation of inventory 19,750
Sales 115,000 176,500
Inventory, end 14,000 10,350
The branch’s ending inventory includes P4,350 from purchases from outside suppliers.
Compute for the following:
a. Billing rate
b. Realized markup
c. Branch’s true cost of goods sold
Requirement (a)
The billing rate on shipments during the period is 125% of cost (P93,750 ÷ P75,000).
Requirement (b)
Allowance, beg. 19,750
Allowance, end. (1,200) (10,350 - 4,350) x 25/125
Realized markup 18,550
Requirement (c)
Inventory (at billed price)
Beg. 8,000
Purchases 30,000
Shipments from HO 93,750 121,400 COGS at billed price
End. 10,350
COGS at billed price 121,400
Less: realized markup (18,550)
COGS at cost 102,850
Note: The “true cost of goods sold” is the cost of goods sold at cost. This amount shall be presented in the
combined financial statements.
