UL Integrated Review & Refresher Course in Accountancy R. D.

BALOCATING
AFAR 5.0

5.0 Accounting for Home Office, Branch and Agency Transactions

5.1 Transactions on the books of the home office and the branch
5.1.1 General Procedure
5.1.2 Special Procedure (inter- branch transfer of cash and merchandise at billed price)
5.2 Reconciliation of reciprocal accounts
5.3 Preparation of individual and combined financial statements
5.4 Accounting for agency transactions

HOME OFFICE & BRANCH ACCOUNTING

(including sales agency)
• DISTINCTION
Sales Agencies
➢ are established to display merchandise but do not stock merchandise to fill customers’ orders or pass
on credit.
➢ not separate accounting or business entity.
➢ cash receipts and disbursements records are sufficient for accounting purposes.
➢ to measure the contribution of agency operations to enterprise income, the accounting may be
expanded by identifying separate revenue and expense account in the name of sales agency.
Branch Operations
➢ stocks merchandise, makes sales to customer, passes on customer credit, collects receivables, incurs
expenses, and performs other functions normally associated with the operations of a separate business
enterprise.
➢ transactions are accounted for through separate branch accounting system.

• RECORDING TRANSACTION
1. Transactions between home office and external entities are recorded in the home office books in the
usual fashion.
2. Transactions between branch and external/unrelated entities are recorded on the branch books in
accordance with established accounting procedures.
3. Transactions between home office and branch are recorded on each book using reciprocal accounts.

• INVESTMENT IN BRANCH/BRANCH CURRENT

➢ an asset (reciprocal) account in the home office books representing investment of the home office in
branch net assets.
Investment in Branch
Asset transferred to branch xx Asset received from branch xx
Branch income xx Branch loss xx
Expense allocation xx Home office expenses paid
Branch expenses paid by by branch xx
home office xx

• HOME OFFICE EQUITY/HOME OFFICE CURRENT/HOME OFFICE CAPITAL

➢ an equity account in the branch books representing the equity interests of the home office in the
branch.
➢ it takes the place of owners’ equity account in the branch books.

Home Office
Asset transferred to home office xx Asset received from home office xx
Branch loss xx Branch income xx
Home office expenses paid Expense allocation xx
by branch Branch expenses paid by
home office xx

• SHIPMENTS TO BRANCH ACCOUNT (in home office books)

➢ use to record inventory shipments to branch under the periodic system.
➢ deducted from the sum of beginning inventory and purchases on the home office books to arrive at
home office’s costs of goods available for sale.
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• SHIPMENTS FROM HOME OFFICE ACCOUNT (in branch books)

➢ use to record inventory shipments from home office under the periodic system.
➢ added to separate purchases from outsiders and branch beginning inventory in determining goods
available for sale.

• COMPUTATION OF SEPARATE COSTS OF SALES

Home Office Books Branch Books
Beginning inventory xxxx xxxx
Purchases xxxx xxxx
Shipments to branch (xxxx)
Shipments from home office xxxx
Ending inventory (xxxx) (xxxx)
Cost of sales xxxx xxxx

• METHODS OF BILLING SHIPMENTS

a. At Cost
b. At above cost (with mark-up)
c. At branch selling price

• SHIPMENTS IN EXCESS OF COST

➢ Reasons:
1. Equitable allocation of income between the various units of the enterprise.
2. Efficiency in pricing inventories.
3. Concealment of true profit margins from branch personnel
➢ Recording:
A. Home Office Books
Investment in Branch xxx
Shipments to branch (cost) xxx
Intracompany Inventory Profit xxx

To record shipments to branch at cost on the home office books

Intracompany Inventory Profit xxx

Branch Profit xxx
Adjusting entry for the realized profit.

COMPUTATION:
Intracompany Inventory Profit, beginning xxx
Add: Intracompany Inventory Profit on current shipments xxx
Total xxx
Less: Intracompany Inventory Profit, ending xxx
Realized profit xxx

TO COMPUTE TRUE BRANCH PROFIT:

Branch profit (per branch income statement) xxx
Add: Realized profit xxx
True branch profit xxx
The true branch profit can be confirmed independently by preparing an income statement
reflecting all merchandise at cost.

B. BRANCH BOOKS
Shipments from home office xxx
Home office Equity xxx
To record shipments from home office on the branch books

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• FREIGHT COSTS ON SHIPMENTS- must be included in branch inventory and cost of goods sold
measurement. Excessive freight charges should be charged to loss account.

• EXPENSE ALLOCATION – the allocation of expenses among home office and branch operations is
necessary to provide an accurate measurement of income for the separate units of the enterprise.

• COMBINATION OF FINANCIAL STATEMENTS;

1. Non-reciprocal accounts are combined.
2. Reciprocal accounts are eliminated.

Problem 1
The following are intracompany transactions between a home office and its branch:
1. The home office sent P100,000 cash to the branch.
2. The home office shipped inventory costing P200,000 to the branch; the intracompany billing was at cost.
Assume that each location uses a periodic inventory system.
3. The home office allocated to the branch P3,000 of previously recorded advertising expenses totaling P9,000.
4. A branch customer erroneously remitted a P4,000 payment to the home office instead of to the branch. The
home office recorded and deposited the check and notified the branch.
5. The home office which carries branch fixed assets on its books, allocated P5,000 of depreciation expense to the
branch.
6. The branch remitted P60,000 excess cash to the home office.
Required:
a. Prepare the home office and branch journal entries for these transactions.
b. Assuming that the branch reported P22,000 of net income for the period, prepare the home office’s entry in
recognition of this income.

a. Home office Books

1. Investment in Branch 100,000
Cash 100,000
2. Investment in Branch 200,000
Shipments to Branch 200,000
3. Investment in Branch 3,000
Advertising Expense 3,000
4. Cash 4,000
Investment in Branch 4,000
5. Investment in Branch 5,000
Depreciation Expense 5,000
6. Cash 60,000
Investment in Branch 60,000

Branch Books
1. Cash 100,000
Home Office 100,000
2. Shipments from Home office 200,000
Home office 200,000
3. Advertising Expense 3,000
Home office 3,000
4. Home office 4,000
Accounts Receivable 4,000
5. Depreciation Expense 5,000
Home office 5,000
6. Home office 60,000
Cash 60,000

b. Home office books:

Investment in Branch 22,000

Branch Profit 22,000

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Problem 2
The Berg Corporation has two branches, Branch X and Branch Y. The home office shipped P50,000 of merchandise to
Branch X and paid freight charges of P3,000. A short time thereafter, Branch X was instructed to reship this merchandise
to Branch Y at a prepaid freight costs of P5,000. Freight charges for this merchandise normally cost P6,000 when
shipped from the home office directly to Branch Y (Reciprocal accounts between branches are not permitted).
Required:
a. Prepare the necessary entries on the books of Branch X.
b. Prepare the necessary entries on the books of Branch Y.
c. Prepare the necessary entries on the books of the home office.

a. Books of Branch X:
Shipments from Home Office 50,000
Freight-in 3,000
Home Office 53,000

Home Office 5,000

Cash 5,000

Home office 53,000

Shipments from Home Office 50,000
Freight – in 3,000

b. Books of Branch Y:
Shipments from Home office 50,000
Freight-in 6,000
Home Office 56,000

c. Books of Home Office:

Investment in Branch X 53,000
Shipments to Branch X 50,000
Cash 3,000

Shipments to Branch X 50,000

Investment in Branch Y 56,000
Loss on excessive freight* 2,000
Investment in Branch X 58,000
Shipments to Branch Y 50,000
*3,000 + 5,000 – 6,000

Problem 3
On December 31, 2024, the Home Office Equity account on branch books has a balance of P44,000 and the Investment
in Branch account on the home office books has a balance of P85,000. In analyzing the activity in each of these accounts
for December, you find the following differences:
1. A P10,000 branch remittance to the home office initiated on December 27, 2 024 was recorded on the home
office books on January 3, 2025.
2. A home office inventory shipment to the branch on December 28, 2024 was recorded by the branch on January
4, 2025; the billing of P20,000 was at cost.
3. The home office incurred P12,000 of advertising expenses and allocated P5,000 of this amount to the branch on
December 15, 2024. The branch has not recorded this transaction.
4. A branch customer erroneously remitted P3,000 to the home office. The home office recorded this cash
collection on December 28, 2024. Meanwhile, back at the branch, no entry has been made yet.
5. Inventory costing P43,000 was sent to the branch by the home office on December 10, 2024. The billing was at
cost, but the branch recorded the transaction at P34,000.
Required: Reconcile the reciprocal accounts.

Reconciliation of Reciprocal Account at Dec.31, 2024

(Home office Books) (Branch Books)
Investment in Branch Home Office Equity
Unadjusted Balance P85,000 P44,000
Reconciling items:
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a. Branch remittance in transit (10,000)
b. Shipments to Branch in transit 20,000
c. Expense collection 5,000
d. Branch customer remittance to Home office (3,000)
e. Branch error in recording shipments _______ 9,000
P75,000 P75,000
Entries:
a. Cash 10,000
Investment in Branch 10,000
b. Shipments from Home Office 20,000
Home Office Equity 20,000
c. Advertising Expenses 5,000
Home office Equity 5,000
d. Home office Equity 3,000
Accounts Receivable 3,000
e. Shipments from Home office 9,000
Home office Equity 9,000

Problem 4
The following entries are reflected in the intracompany accounts of a home office and its branch for June 202 4:

Investment in Branch
6/1 Balance 50,000 6/2 Remittance 10,000
6/5 Inventory shipment 30,000 6/8 Collection of branch receivable 1,000
6/12 Inventory shipment 12,000 6/27 Equipment purchase by branch 7,000
6/20 Inventory shipment 17,000
6/25 Advertising allocation to branch
(50% of 8,000) 4,000
6/28 Inventory shipment 14,000
6/30 Depreciation allocation 2,000

Home Office Capital

6/2 Remittance 10,000 6/1 Balance 50,000
6/24 Purchase of equipment (carried 6/8 Inventory shipment 30,000
on home office books) 7,000
6/29 Remittance 15,000 6/10 Collection of home office
receivable 7,000
6/30 Depreciation allocation 2,000 6/16 Inventory shipment 12,000
6/30 Inventory returned to 6/24 Inventory shipment 17,000
home office 1,000
6/28 Advertising allocation 400

Required:
a. Reconcile the intracompany reciprocal accounts.
b. Prepare journal entries to bring the accounts into agreement.

Reconciliation of Reciprocal Accounts

June 30, 2024
(Home office Books) (Branch Books)
Investment in Branch Home Office Capital
Unadjusted Balance 111,000 81,400
Reconciling items:
a. HO AR collected by branch 7,000
b. Amount error (Advertising expense allocated to branch) 3,600
4,000 – 400 = 3,600

c. Shipments to branch in transit 14,000

d. Posting/recording error (depreciation allocation-reversal) 2,000

Recording 2,000

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e. Branch AR collected by HO (1,000)

f. Remittance to HO in transit (15,000)

g. Inventory returns to HO in transit (1,000)

Adjusted balance 102,000 102,000

Entries:
a. Investment in Branch 7,000
Accounts receivable 7,000
b. Advertising expense 3,600
Home office capital 3,600
c. Shipments from home office 14,000
Home office capital 14,000
d. Depreciation expense 4,000
Home office capital 4,000
e. Home office capital 1,000
Accounts receivable 1,000
f. Cash 15,000
Investment in Branch 15,000
g. Shipments to branch 1,000
Investment in branch 1,000

Problem 5
The Winston Corporation has a branch in a nearby city. The trial balances on December 31, 20 24 are given as
follows:

WINSTON CORPORATION
Trial Balances
December 31, 2024
Debits
Home Office Branch
Cash P 15,000 P 3,000
Accounts receivable 22,500 12,000
Inventory, January 1, 2024 18,750 7,500
Investment in Branch 30,000
Equipment (net) 37,500
Purchases 225,000
Shipments from home office 60,000
Expenses 37,500 7,500
Totals P386,250 P 90,000
Credits
Accounts payable P 11,250 P 1,500
Home office equity 30,000
Capital stock 22,500
Retained earnings, January 1, 2024 60,000
Sales 232,500 58,500
Shipments to branch 60,000 .
Totals P386,250 P 90,000
Inventory, December 31, 2024 P 45,000 P 30,000

Required:

a. Prepare closing entries for the branch.

Sales 58,500
Inventory, Dec.31,2024 30,000
Inventory, Jan.1,2024 7,500
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Shipments from Home office 60,000
Expenses 7,500
Income & Expense Summary 13,500

Income & Expense Summary 13,500

Home Office Equity 13,500

b. Prepare Income Statement for the branch

Winston Corporation – Branch

Statement of Profit or Loss
Year ended Dec.31,2024
Sales P58,500
Less: Cost of Sales
Inventory, Jan.1,2024 7,500
Shipments from Home office 60,000
Total 67,500
Inventory, Dec.31,2024 (30,000) 37,500
Gross Profit P21,000
Less: Expenses 7,500
Profit P13,500

c. Prepare closing entries for the home office including the entry to record the branch net income.

Investment in Branch 13,500

Branch Profit 13,500

Sales 232,500
Branch Profit 13,500
Shipments to Branch 60,000
Inventory, Dec.31,2024 45,000
Inventory, Jan.1,2024 18,750
Purchases 225,000
Expenses 37,500
Income & Expense Summary 69,750

Income & Expense Summary 69,750

Retained Earnings 69,750

d. Prepare Income Statement for the Home Office

Winston Corporation – Home Office

Statement of Profit or Loss
Year ended Dec.31, 2024
Sales P232,500
Less: Cost of Sales
Inventory, Jan.1 18,750
Purchases 225,000
Shipments to Branch (60,000)
Total cost of goods for sale 183,750
Inventory, Dec.31 (45,000) 138,750
Gross Profit 93,750
Less: Expenses 37,500
Profit from own operations 56,250
Add: Branch Profit 13,500
Profit for the period P69,750

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e. Prepare worksheet elimination entries

Working Paper Elimination Entry:

(These entries are entered only in the working paper.)

a. To eliminate reciprocal home office and investment in branch account.

Home office equity 30,000

Branch profit 13,500
Investment in Branch 43,500

b. To eliminate intracompany shipments of inventory.

Shipments to branch 60,000

Shipments from home office 60,000

Winston Corporation
Working Paper for Combined Financial Statement
December 31, 2024
Elimination
Home Office Branch Combined
Dr. Cr. Statement
Statement of Profit or Loss:
Sales P232,500 P58,500 P291,000
Less: Cost of sales
Inventory, January 1, 2024 18,750 7,500 26,250
Purchases 225,000 225,000
Shipments to branch (60,000) b.60,000
Shipments from home office _________ 60,000 b.60,000 _________
Goods available for sale 183,750 67,500 251,250
Inventory, December 31, 2024 (45,000) (30,000) (75,000)
138,750 37,500 176,250
Gross profit 93,750 21,000 114,750
Branch profit 13,500 a. 13,500
Expenses (37,500) (7,500) (45,000)
Net income 69,750 13,500 69,750
Statement of Retained Earnings/
Home Office Equity:
Home Office Equity (pre-closing balance) 30,000 a.30,000
Retained earnings, 1/1/2024 60,000 60,000
Add: Net income 69,750 13,500 69,750
Retained Earnings/home office, end 129,750 43,500 129,750
(carry forward to statement of financial position)

Statement of Financial Position:

Cash 15,000 3,000 18,000
Accounts receivable 22,500 12,000 34,500
Inventory 45,000 30,000 75,000
Equipment (net) 37,500 37,500
Investment in Branch 43,500 ________ a.43,500 ________
Total assets 163,500 45,000 165,000

Accounts payable 11,250 1,500 12,750

Share capital 22,500 22,500
Retained earnings, 12/31/2024 129,750 129,750
Home office equity, 12/31/2024 ________ 43,500 ________
Total liabilities & equity 163,500 45,000 165,000

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f. Prepare combined Income Statement (see working paper)
g. Prepare combined Balance Sheet (see working paper)

Problem 6
Give the entries that are required on the home office books of the Millings Sales Company to record:
1. Transfer of P5,000 to an agency to establish a working fund.
2. Receipt of sales order from the agency, P50,000.
3. Collections by the home office of agency accounts, P35,000.
4. Disbursements by the home office representing agency expenses, P4,500.
5. Replenishment of the agency working fund upon receipt of expense vouchers for P2,250.
6. Cost of goods sold identified with agency sales, P36,000.
Required:

1. Assume that the company uses perpetual system and that the company does not maintain separate revenue and
expense account for the agency.

1. Agency Working Fund 5,000

Cash 5,000
2. Accounts Receivable 50,000
Sales 50,000
3. Cash 35,000
Accounts Receivable 35,000
4. Expenses 4,500
Cash 4,500
5. Expenses 2,250
Cash 2,250
6. Cost of Sales 36,000
Merchandise Inventory 36,000

2. Assume that the company uses perpetual system and that the company maintains separate revenue and expense
account for the agency.

1. Agency Working Fund 5,000

Cash 5,000
2. Accounts Receivable 50,000
Sales - Agency 50,000
3. Cash 35,000
Accounts Receivable 35,000
4. Expenses - Agency 4,500
Cash 4,500
5. Expenses - Agency 2,250
Cash 2,250
6. Cost of Sales - Agency 36,000
Merchandise Inventory 36,000

MULTIPLE CHOICE
Use the following information for 1 – 5.
Selected balances from the Faith Hill’s Branch A and Branch B are as follows:
Branch A Branch B
Inventory, January 1, 2024 P21,000 P19,000
Imprest branch fund 2,000 1,500
Inventory, December 31, 2024 19,000 12,000
Accounts receivable, January 1, 2024 55,000 43,500
Merchandise from Home office 61,000 47,000
Accounts receivable, December 31, 2024 70,000 53,500
Cash collections 85,000 70,000
Sales 100,000 80,000
Cash expenses 21,000 14,300

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All sales, collections and expenses are handled at the branch. All cash received from sales and collections are sent
directly to the Home Office. Expenses are paid by the branch from the imprest fund and immediately reimbursed
by the Home office and credited to the Home office account. All expenses paid by the branch are recorded in the
books of the branch.
1. The net profit of Branch A is
a. P16,000 b. P21,000 c. P15,000 d. P18,000
2. The balance of the home office account of branch A on January 1, 2024 is
a. P80,000 b. P64,000 c. P78,000 d. P75,000
Asset(beginning) = Liabilities (beg.) + Home office (beg)
3. The balance of the home office account of branch B on January 1, 2024 is:
a. P70,000 b. P64,000 c. P78,000 d. P95,000
4. The balance of the branch current account for Branch B on January 1, 2024 is
a. P70,000 b. P64,000 c. P67,000 d. P65,000
Home office = Branch current (since they are reciprocal account)
5. The entry in branch B’s records in order to update the reciprocal home office account on December 31, 20 24 is:
a. Dr. – Home office / Cr. – Profit and Loss
b. Dr. – Profit and loss / Cr. – Branch current
c. Dr. – Branch current / Cr. – Profit and Loss
d. Dr. – Profit and Loss / Cr. – Home office

Branch B had P11,700 net income.

Sales 80,000
Inventory, December 31, 2024 12,000
Inventory, January 1, 2024 19,000
Merchandise from home office 47,000
Expenses 14,300
Profit or loss 11,700

Profit or loss 11,700

Home office 11,700

Information for 6 to 9.
The following were found in your examination of the inter-plant accounts between the Home Office and the Butuan
Branch:
a. Transfer of fixed assets from Home Office in the amount of P53,960 was not booked by the Butuan Branch
b. P10,000 covering marketing expenses of the Davao Branch was charged by Home Office to the Butuan branch.
c. Butuan branch recorded a debit note on inventory transfer from home office of P75,000 twice
d. Home office recorded a cash transfer of P65,700 from the Butuan Branch as coming from the Davao Branch
e. Butuan branch reversed a previous debit memo from Cagayan de Oro Branch, amounting to P10,500, which
Home office decided is appropriately Davao Branch’s costs
f. Butuan Branch recorded a debit memo from Home office of P4,650 as P4,560.
6. The net adjustment in the Home office books that is related to the Butuan branch current account is
a. P75,700 b. P65,700 c. P86,200 d. P94,820
7. The net adjustment in Butuan Branch’s books related to the Home office account is
a. P33,335 b. P31,450 c. P20,950 d. P10,450
8. Before the above discrepancies were given effect, the balance in the home office books of the Butuan Branch Current
account was P165,920. The unadjusted balance in Butuan Branch’s books of its home office current account must
be:
a. P92,336 b. P98,230 c. P104,500 d. P111,170
9. The adjusted balance of the reciprocal accounts is
a. P84,807 b. P90,220 c. P99,200 d. P109,120

(HO Books) (Branch Books)

Butuan Br. Current Home Office
Unadjusted balance 165,920 (Workback )?
a. 53,960
b. (10,000)
c. (75,000)
d. (65,700)
e. NO MORE ADJUSTMENT
f. 90
Adjusted balance 90,220
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(from adjusted Br. Current)

10. Freestyle Company has a sales agency in Cebu. Agency revenues and expenses are recorded in separate agency
accounts, with the operating results of both the agency and the home office generate at each month -end. For the
month of October, 2024, the home office paid P10,000 for advertising costs on behalf of the agency and recorded
this as follows:
a. Cebu agency 10,000
Cash 10,000
b. Advertising expense 10,000
Cash 10,000
c. Accounts receivable - Cebu agency 10,000
Cash 10,000
d. Advertising expenses - Cebu Agency 10,000
Cash 10,000
Use the following information to answer the next four questions.
Rome Corporation has one branch office named Tyler branch. Rome is performing the end -of-the-period
reconciliation of its Tyler branch account whose current balance is P000,000 and Tyler’s home office accounts whose
current balance P000,000. The following items are unsettled at the end of the accounting period (you may assume
that the item has been reflected in the accounts of the underlined entity).
1. Rome has agreed to remove P750 of excess freight charges charged to Tyler when Rome shipped twice as much
as inventory as Tyler requested.
2. Tyler mailed a check for P11,000 to Rome as a payment for the merchandise shipped from Rome to Tyler. Rome
has not yet received the check.
3. Tyler returned defective merchandise to Rome. The merchandise is billed to Tyler at P4,000 when its actual
cost is P3,000.
4. Advertising expenses attributable to the branch office were paid for by the home office of the amount of P5,000.
11. Which of the following statement is correct?
a. The home office accounts on Tyler’s books is decreased for the P11,000 of cash in transit and is decreased for
the P750 of excess freight charges.
b. The home office account on Tyler’s books is decreased for the P5,000 of advertising expense and increased for
the P750 of excess charges.
c. The home office account of Tyler’s books is increased for the P11,000 cash payment to Rome and decreased by
P4,000 for the billed cost of the defective merchandise inventory.
d. The home office accounts on Tyler’s books is decreased for P750 of excessive freight charges and increase
by the P5,000 advertising expenditure
12. Which of the following statements is correct?
a. The Tyler Branch account on Rome’s books is decreased for the P11,000 of cash in transit and is decreased for
the P750 of excess freight charges
b. The Tyler Branch account on Rome’s books is decreased for the P11,000 of cash in transit and is increased for
the P750 of excess freight charges
c. The Tyler Branch account on Rome’s books is decreased for the P11,000 of cash in transit and is decreased
for the P4,000 billed cost of the defective merchandise
d. The Tyler Branch account on Rome’s books is increased for the P11,000 of cash in transit and is decreased for
the P5,000 of allocated advertising costs
13. If the adjusted balances for the Tyler Branch Account and Rome Home office account is P500,000, what unadjusted
balance was listed in Rome’s Tyler Branch account
a. P515,000 b. P510,250 c. P514,000 d. P504,000
14. If the adjusted balance for the Tyler branch account and the Rome office accounts are P500,000, what unadjusted
balance was listed in Tyler’s home office account?
a. P505,000 b. P495,750 c. P516,000 d. P500,750
15. When a home office ships merchandise to Branch A which is later shipped to Branch B by Branch A, the ending
inventory of such merchandise at Branch B should include the following charges:
a. Freight from home office to Branch A only
b. Freight from home office to Branch A and from Branch A to Branch B
c. Freight from Branch A to Branch B only
d. Normal freight for such shipments from home office to Branch B.
16. If all fixed assets are kept on the home office books, the purchase of a truck by the branch for cash should be recorded
on the branch books with a debit to:
a. Home office equity and credit to Cash c. Trucks and credit to Cash
b. Investment in branch and credit to Cash d. Trucks and a credit to Home office equity
17. The Investment in branch account is a reciprocal account normally on the:
a. Home office books with a debit balance c. Branch books with a debit balance
b. Home office books with a credit balance d. Branch books with a credit balance

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HOME OFFICE AND BRANCH ACCOUNTING: SPECIAL PROBLEMS

1. The Backstreet Co. has a branch in Davao City established in July, 20 24. During 2024, the home office shipped
goods to the branch at a total billing price of P250,000 which was 25% above cost. On December 31, 20 24, the
branch reported a net profit of P66,000 from its operations in 2024 and an ending inventory of P50,000 at billing
price.

How much was the true profit of the branch? 66,000 + 40,000 = 106,000
Inventories from HO At BP At Cost Markup
(Loading)
Beginning ÷
Shipments 250,000 ÷ 125% 200,000 50,000
Ending (50,000) ÷ 125% (40,000) (10,000)
Realized profit/loading in br. inventory 40,000

2. The following account balances were taken from the books of Westlife Co. and its Davao branch on December 31,
2024: Books of Davao Branch: Sales, P1,200,000: Shipments from H.O., P720,000; Expenses, P400,000. Books
of Westlife Co.: Allowance for overvaluation of Branch inventory, P145,000. The inventories of the branch at
billing price, were as follows: January 1, P150,000; December 31, P168,000.

a. Calculate the percentage of markup on cost that the home office used to bill merchandise shipped to the branch.

Merchandise from HO = 150,000 + 720,000 = 870,000

Markup on cost = 145,000/(870,000 – 145,000) = 20%

b. How much was the adjusted profit of the Davao Branch?

Inventories from HO At BP At Cost

Markup
(Loading)
Beginning 150,000 ÷ 120% 125,000 25,000
Shipments 720,000 ÷ 120% 600,000 120,000
Ending (168,000) ÷ 120% (140,000) (28,000)
Cost of sales 702,000 585,000
Realized profit/loading in br. inventory 117,000

Profit per branch report (1,200,000 -702,000 -400,000) 98,000

Add: Realized allowance 117,000
Adjusted profit 215,000
Or (1,200,000 – 585,000 – 400,000) 215,000

3. The MLTR Corp. has a branch in Cebu. During 2024, the home office shipped supplies costing P80,000 to the
branch at a billing price of 20% above cost. The inventories of supplies at the branch were as follows: January 1,
P60,000; December 31, P72,000. The home office holds inventories of P107,000, wh ich includes P7,000 held on
consignment. The home office and the branch used the periodic inventory method.

How much is the total inventories in the combined balance sheet as at December 31, 20 24?

100,000 + (72,000/1.20) = 160,000

4. On July 1, 2024 the home office in Manila establishes a branch in Quezon City to act as sales agency. The following
assets are sent to the sales agency on July 1:

Cash (for the working fund to be operated under the imprest system) P 10,000
Samples from the merchandise stock 50,000

During July, the sales agency submits sales on Account of P176,000 duly approved by the home office. Cost of
merchandise shipped to fill the orders from customers obtained by the sales agency is P105,000. Home office
disbursements chargeable to the sales agency are as follows:

Furniture and fixtures P 24,000

Manager’s and salesmen’s salaries 17,500
Rent 8,000
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R.D.BALOCATING
On July 31, the sales agency working fund is replenished; paid expense vouchers submitted by the sales agency
amounted to P9,250. Sales agency samples are useful until Dec. 31 which, at this time, are believed to have a salvage
value of 40% of cost. Furniture are depreciated at 20% per annum. The profit of the sales agency is:
a. P30,850 b. P31,250 c. P24,550 d. P26,750

Gross profit (176,000 – 105,000) 71,000

Less: Operating expenses
Salaries 17,500
Rent 8,000
Depreciation – F & F (24,000 x 20% x 1/12) 400
Samples shopwear (50,000 x 60% x 1/6) 5,000
Miscellaneous expenses (out of working fund) 9,250 40,150
Profit 30,850

5. The home office in Manila shipped merchandise costing P10,000 to Baguio Branch and paid for the freight charges
of P650. Baguio Branch was subsequently instructed to transfer the merchandise to Laoag branch wherein Baguio
Branch paid for P200 freight. If the shipment were made directly from Manila to Laoag, the freight cost would have
amounted to P700. The amount of freight chargeable to Laoag is:
a. P650 b. P700 c. P850 d. P100

6. On December 31, 2024, the following data are in the records of the Angeles City branch of the N’SYNC Co.
Petty Cash P94,500
Accounts receivable, Dec. 31, 2023 85,200
Merchandise Inventory, December 31, 2023 75,500
Accounts receivable, December 31, 2024 88,800
Merchandise Inventory, December 31, 2024 81,000
Sales 272,700
Sales returns 4,800
Accounts receivable written off 2,000
Shipments from Home office 220,600
Expenses (paid by Home office) 22,500

If all cash collections in 2024 were remitted to Home office, the total remittance amounted to:
a. P262,300 b. P264,300 c. P266,800 d. P276,100

Accounts receivable, Dec. 31, 2023 85,200

Sales 272,700
Sales returns (4,800)
Accounts receivable written off (2,000)
Accounts receivable, December 31, 2024 (88,800)
Cash collections 262,300

Information for 7 & 8.

Following is the income statement of Matchbox 20 Branch in Cebu City for the six -month period ending June 30,
2024:
Sales P620,000
Cost of sales:
Shipments for H. O. P550,000
Purchases 50,000
Total P600,000
Inventory, June 30:
From H.O. P75,000
From purchases 10,000 85,000 515,000
Gross profit on sales P105,000
Expenses 85,000
Net profit P20,000

The home office ships merchandise to and bills, the branch office at 125% of cost.
The rent of the branch office for six months, at a monthly rate of P1,000, was paid by the home office.

7. The home office net profit from its Branch Office in Cebu City, for the six -month ending June 30, 2024, is:
a. P125,000 b. P139,000 c. P124,000 d. P109,000
20,000 + 95,000 – 6,000 = 109,000
AFAR_5.0 UL CPA REVIEW CENTER
R.D.BALOCATING
Realized intracompany profit = [(550,000 – 75,000)/125%] x 25% = 95,000
Rent expense = 6 months x 1,000 = 6,000
8. The inventory of the Branch Office in Cebu City, at cost , as of June 30, 20 24, is
a. P85,000 b. P60,000 c. P70,000 d. P75,000

Ending inventory (frm H.O), at cost = 75,000/125%=60,000

Ending inventory from outside purchases= 10,000
Information for 9 & 10
Moffats, Philippines has two merchandise outlets, its main store in Manila and its Cebu City branch. For control
purposes, all purchases are made by the main store, and shipments to the Cebu City branch are at cost plus 10%. On
January 1, 2024, the inventories of the main store and the Cebu City branch were P13,600 and P3,960 respectively.
During 2024, the main store purchase merchandise costing P40,000 and shipped 40% of these to the Cebu City
Branch.

At December 31, 2024, the following journal entry was made to prepare the Cebu City branch books for the next
accounting period:
Sales P32,000
Inventory 4,840
Inventory P3,960
Shipments from main store 17,600
Expenses 10,480
Main store 4,800

9. What was the actual branch income for 2024?

a. P4,800 c. P6,320 d. P6,840
b. P6,480

Realized loading in inventory (realized inventory profit) = [(3,960 + 17,600 – 4840)/1.10] x 10% = 1,520
Actual branch income = 4,800 + 1,520 = 6,320

10. If the main store has P11,200 worth of inventory on hand at the end of 2024, the total inventory that should appear
on the combined balance sheet at December 31, 2024 is
a. P15,160 b. P16,040 c. P15,600 d. P17,200

11,200 + (4,840/1.10) = 15,600

11. Charlie’s Angel Corp. bills its branch for merchandise shipments at 125% of cost. As of cut-off date on December
31, the following data are available
Mdse. From H.O. Outside
(Billing Price) Purchases Total
December 1 P300,000 P120,000 P420,000
December additions 450,000 360,000 810,000
December 31 420,000 150,000 570,000

The branch returned merchandise to the branch office at P15,000 billed price. As a result of branch sales for the
month of December, the portion of the allowance for overvaluation that was realized as income was:
a. P63,000 b. P66,000 c. P84,000 d. P87,500

Realized allowance for overvaluation = [(300,000 + 450,000 – 420,000 – 15,000)/125%] x 25% = 63,000

12. A branch buys merchandise from outside parties and also receives merchandise from its home office for which it is
billed at 20% above cost. Below are excerpts from the trial balances and other data of the home office and the branch
for the month just ended:
Home office:
Allowance for overvaluation of branch merchandise P370,000
Shipments to branch 850,000
Branch Office:
Beginning inventory 1,440,000
Shipments from home office 1,020,000
Purchases 410,000

Month-end branch Inventory:

From Home office, at billed price 1,170,000
From outside parties, at cost 290,000
The amount of allowance for overvaluation that was realized because of branch sales for the month just ended was:
AFAR_5.0 UL CPA REVIEW CENTER
R.D.BALOCATING
a. P175,000 c. P200,000
b. P195,000 d. P370,000

Realized allowance for overvaluation = 370,000 – [(1,170,000/120%) x 20%] = 175,000

Using the information in number 12, the branch cost of goods sold net of overvaluation was:
a. P1,040,000 c. P1,235,000
b. P1,215,000 d. P1,410,000

Beginning inventory 1,440,000

Shipments from home office 1,020,000
Purchases 410,000
Total cost of goods available for sale 2,870,000
Less: Mdse. Inventory end (1,170,000 + 290,000) 1,460,000
Cost of goods sold (per branch books) 1,410,000
Less: Allowance for overvaluation (realized) 175,000
Cost of goods sold net of overvaluation 1,235,000

13. A branch store in Makati was established by Cretu Company. on May 1, 2025 to which shipments of merchandise,
at 125% of cost, were made as follows: on May 5, P120,000; on May 15, P50,000; and on May 20, P35,000. On
May 25, the branch returned defective merchandise worth P3,050. At the end of the month, the branch reported a
net loss of P6,200 and a closing inventory of P85,000. In the home office books, the branch operations for the month
of May resulted in a:
a. P6,200 net loss c. P20,240 net income
b. P17,190 net income d. P23, 390 net income

Net loss (per branch books) (6,200)

Add: Realized intracompany inventory profit
[(120,000 + 50,000 + 35,000 – 3,050 – 85,000)/125%] x 25% 23,390
True net income of the branch 17,190

14. Narnia Co. has a branch in Davao City established on October 1, 20 24. The home office shipped merchandise to
the branch with a billed price of P125,000, which was 25% above cost. On October 31, 20 24, the branch reported
net income from its operation of P5,000 and an ending inventory of P25,000 at billed price. What was the true net
income of the branch?
a. P5,000 c. P25,000
b. P20,000 d. P30,000

Realized intracompany profit = [(125,000-25,000)/125%] x 25% = 20,000

True income = 5,000 + 20,000 = 25,000

15. More Marketing Co. opened a branch in Dagupan City at the beginning of 2024. The branch extends credit, makes
collections, pays expense from cash receipts and acquires goods exclusively from the home office. During 2024,
goods shipped by the home office to the branch, at a billing price of 125% of cost, amount to P104,000, of which
P12,500 remained in the branch’s year-end inventory. Other branch transactions in 2024 were as follows: sales, all
on credit, P117,430; expenses, of which P1,500 are unpaid at year-end, P20,000; collections on account, after
deducting discounts of P1,480, P84,000; and, total remittance to the home office, P62,500. As far as the home office
is concerned, the operations of the branch in 2024 resulted in a:
a. P4,450 net income c. P18, 300 net income
b. P9,550 net loss d. P22,750 net income

Net sales (117,430 – 1,480) 115,950

Less: Cost of sales (104,000 – 12,500) 91,500
Gross profit 24,450
Less: Expenses 20,000
Profit (per branch books) 4,450
Add: Realized intracompany inventory profit
(91,500/125%) x 25% 18,300
Branch profit (as determined by HO) 22,750

17. Before adjustment, certain accounts for the home office and for its branch show the following balances as at
December 31, 2024 (differences in the shipments accounts result from the home office policy of billing merchandise
shipments to the branch at 20% above cost):
Home office Branch
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R.D.BALOCATING
Allowance for overvaluation
of branch merchandise P180,000
Shipments to branch 400,000
Purchases (from outside sources) P125,000
Shipments form Home office 480,000
Merchandise inventory, December 1 750,000
The portion of the December 1 branch inventory represented by goods acquired from sources other than the home
office was:
a. P90,000
b. P100,000
c. P125,000
d. P150,000

Allowance for overvaluation of branch mdse. 180,000

Less: Allowance for overvaluation-current shipments
(400,000 x 20%) 80,000
Allowance for overvaluation – December 1 100,000

Branch mdse. Inventory-December 1 750,000

Less: Merchandise from H.O. at billed price
(100,000/20%) x 120% 600,000
Acquired from outside sources 150,000