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PRACTICAL ACCOUNTING PROBLEMS II 2.0 Accounting for Branches 2.1 Transactions in the books of home office and the branch 2.2 Reconciliation of reciprocal reciprocal accounts 2.3 Individual and combined financial statements 2.4 Accounting for agency transactions 2.5 Specia Speciall transa transacti ctions ons like like unreal unrealize ized d profit profit in branch branch beginni beginning ng invent inventory ory,, transactions between branches, use of perpetual inventory system, etc. ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~~ SUMMARY OF STUDY OBJECTIVES AND KEY TERMS
1. Compani Companies es often often expand expand into new marketin marketing g territ territori ories es (an effort effort to increa increase se its sales sales and income) through internal growth by establishing branch offices that operate within the firm. In other words, a branch office operates at a location separate from the firm's principal office, but a branch is not a separate office, called the home office, separate legal entity. The rise of national national and regi region onal al chai chain-s n-sto tore re oper operat atio ions ns and subu suburb rban an shop shoppi ping ng cente centers rs has has cont contri ribut buted ed significantly to the number of branch operations. 2. When When a separ separat atee offi office ce is establ establis ishe hed d to prov provid idee a sale saless outl outlet et,, it most most often often take takess the the organizational form of either a sales agency or a branch office. Sales agencies usually take orders that that are filled by the home office. They usually usually have little little autonomy, do not stock merchandise, and do not have separate accounting systems. Branches vary in the degree of autonomy. Most branches have greater autonomy than sales agencies do. They usually do stock merchandise and frequently have their own accounting systems. 3. Transaction Transactionss with with external external parties parties are recorded recorded in in the normal normal manner. manner. Transaction Transactionss between between the home office and a branch also are treated in the normal manner except they are recorded in intracompany accounts. These accounts are reciprocal accounts between the home office and the branch. When the books of both the home home office and the branch are completely completely up to date, the balance in an intracompany account on the home office books will be equal but opposite that of the related intracompany account on the branch books. 4. The Home Office Equity account on account on the books of the branch is reciprocal to the Investment the Investment in Branch account on account on the home office books. Both accounts are increased increased by asset asset transfers from the home office office to the branch and by branch profits. profits. Both accounts accounts are decreased decreased by asset transfers from the branch to the home office and by branch losses. 5. A branch office's office's books books consist consist of a self-ba self-balanci lancing ng set of accounts accounts,, similar similar to the books of a separate separate company. company. However, However, a Home Office Equity account replaces the owners' equity accounts found on the books of separate separate companies. The Home Office account indicates the home office's equity in the branch. 6. Neither sales agencies nor branches are separate legal or accounting entities; they do not prepar preparee separa separate te extern external al account accounting ing report reports. s. While While compan companies ies often often prepar preparee separa separate te account accounting ing report reportss for the home home office office and each branch branch for intern internal al use, use, the external external accounting accounting reports reports must reflect reflect the activities activities and position position of the company as a whole. The accounts of the home office and branches are combined to prepare financial statements for external reporting. 7. A workpaper workpaper normally normally is used used to facilitate facilitate the process process of combining combining home office office and branch branch accounts. accounts. In addition, addition, certain account balances balances must be eliminated eliminated or changed so that the results results reflect reflect a single single company. company. The reciprocal reciprocal Home Home Office Equity and Investment in Branch accounts are eliminated, and the amounts reported as cost of goods sold and ending inventory are adjusted for any intracompany profit recorded by the home office on shipments of merchandise to its branches. OTHER KEY TERMS
Shipments from Home Rec Recip ipro roca call acco accoun unts ts office Shipments to Branch Transfer price
Unrea nreallized zed inter nterco comp mpan anyy inventory profit
PRACTICAL 2, Branches and Agencies
1. On January 1, the Best Company opened a new branch in a neighboring city. A summary of transactions for the home office and the branch for the year and the balance sheet for the home office on January 1 are as follows:
a. b. c. d. e. f. g. h. i.
Home Office Transactions Transfers of cash to branch, P42,500. Transfers of merchandise to branch (billed at cost), P50,200. Sales on account, P105,000. Purchases on account, P122,500. Collections on account, P113,600. Payments on account, P124,000. Expenses paid, P26,600. Cash received from branch, P53,400. Dividends paid, P10,000.
Adjusting data on December 31: Depreciation for year, P1,180. Merchandise inventory, P48,500. Prepaid expenses, P2,050. Accrued expenses, P1,350.
a. b. c. d. e. f. g. h.
Branch Transactions Cash received from home office, P42,500. Merchandise received from home office, P50,200. Sales on account, P66,000. Purchases on account, P22,500. Collections on account deposited to the credit of the home office, P53,400. Payments on account, P12,250. Purchase of furniture and fixtures for cash, P8,000. Expenses paid, P18,000.
Adjusting data on December 31: Depreciation, P650. Merchandise inventory, P23,500. Prepaid expenses, P750. Accrued expenses, P300. Balance Sheet Liabilities and Stockholders' Equity P 59,300 Accrued expenses P 1,250 27,650 Accounts payable 22,800 40,120 Capital stock, P20 par 50,000 1,800 Retained earnings 70,420
Assets Cash Accounts receivable Merchandise inventory Prepaid expenses Furniture and fixtures P20,000 Less accumulated depreciation 15,600 4,400 Total assets P144,470
Total liabilities and stockholders' equity
Required: 1. Prepare journal entries to record the foregoing transactions for (a) the branch and (b) the home office. 2. Prepare the journal entries to adjust and close the books for (a) the branch and (b) the home office. 3. Prepare individual statements for the branch and for the home office. 4. Prepare working papers for combined statements 5. Prepare combined statements for home office and branch.
PRACTICAL 2, Branches and Agencies
2. The Investment in Branch account on the home office books of the Territory Co. and the Home Office Equity account on the branch books on January 31, are as follows: Investment in Branch . Ja n. 1
Understatement of depreciation in prior year Remittance
Shipments Collection of home office account
Required: 1. Prepare a statement reconciling the reciprocal accounts as of January 31. 2. Prepare the necessary entries for the books of the home office as well as for the branch before combined statements can be prepared. 3. The general ledger trial balances at December 31, for Manila Sales Company and its Quezon City Branch Office are as follows: Home Branch Cash 40,000 8,000 Accounts Receivable 31,000 12,000 Inventory-Home Office, January 1 70,000 -Inventory-Branch Office, January 1 -15,000 Property, Plant, and Equipment 120,000 -Accumulated Depreciation ( 30,000) -Investment in Branch 20,000 -Accounts Payable ( 36,000) (14,500) Accrued Expenses ( 14,000) ( 2,500) Home Office Equity -( 8,000) Common Stock, P10 par ( 50,000) -Retained Earnings, January 1 ( 45,000) -Sales (440,000) (95,000) Purchases 290,000 24,000 Shipments from Home Office -45,000 Operating Expenses 44,000 16,000 An audit disclosed the following: a. On December 23, the branch office manager purchased P5,000 of furniture and fixtures but failed to notify the home office. The bookkeeper, knowing that all plant assets are carried on the home office books, recorded the proper entry on the branch office records. It is the company's policy not to take any depreciation on assets acquired in the last half of the year.
PRACTICAL 2, Branches and Agencies
b. On December 27, a branch office customer erroneously paid an account of P2,000 to the home office. The bookkeeper made the entry on the home office books but did not notify the branch office. c. On December 30, the branch office remitted cash of P5,000, which was received by the home office in January. d. On December 31, the branch office erroneously recorded the December allocated expense from the home office as P500 instead of P1,500. e. On December 31, the home office shipped merchandise billed at P3,000 to the branch office. The merchandise was received in January. f. Depreciation for the year, not yet recorded, is P8,000 on home office assets and P4,000 on branch assets. g. The entire beginning inventory of the branch office had been purchased from the home office. Home office current shipments to the branch were purchased by the home office in the current year. The physical inventories at December 31, excluding the shipment in transit, are: Home Office, P55,000 (at cost); Branch Office, P20,000 (comprised of P18,000 from the home office and P2,000 from outside vendors). h. The home office consistently bills shipments to the branch office at 25% above cost. The sales account is billed for the invoice price.
Required: 1. Prepare a statement reconciling the reciprocal accounts as of December 31. 2. Prepare the necessary entries for the books of the home office as well as for the branch before combined statements can be prepared. 3. Determine: 4. Inventory of Branch at cost 5. Combined inventory at cost 6. Net income of home office from own operations 7. Net income of branch 8. Net income of branch as far as the home office is concerned 9. The combined income for Manila Sales Company and its Quezon City Branch. Disregard income taxes. 4. The Mindanao Co. operates a branch in Cagayan. Operating data for the home office and the branch for the year follow: Home Office Branch Sales P256,000 P 78,500 Purchases from outsiders 210,000 20,000 Shipments to Branch: Cost to Home Office 30,000 Billing price to Branch 40,000 Operating Expenses 60,000 12,500 Inventories, January 1: Acquired from outsiders at cost 80,000 7,500 Acquired from home office at billed price which averaged 22.5% above cost 24,500 Inventories, December 31: Acquired from outsiders at cost 55,000 5,500 Acquired from home office at current year's billed 26,000 price Required: Prepare individual and combined income statement.
5. On April 1 of the current year, the Domestic Company establishes an organization to act as a sales agency. The following assets are sent to the agency on April 1: A working fund to be operated under the imprest system Samples from the merchandise stock Advertising materials and literature
P1,000 5,000 1,250
During April the agency submits sales on account of P17,600 that are approved by the home office; cost of merchandise shipped in filling orders is P10,500. Home office disbursements chargeable to the agency are as follows: Furniture and fixtures for agency Salaries and commissions Rent
P2,400 1,750 800
PRACTICAL 2, Branches and Agencies
On April 30 the agency working fund is replenished. submitted by the agency are as follows: Advertising expense Miscellaneous expense
Paid expense vouchers P 325 600
The following information is used in adjusting the agency accounts on April 30: Agency samples will be useful until December 31; at that time it is believed they will have a salvage value of 40% of cost. Approximately 2/5 of the advertising materials and literature remain on hand. Furniture and fixtures are to be depreciated on a 5-year basis. The agency manager is to receive a bonus of 5% of all sales above P10,000 a month, the bonus to be paid by the home office at quarterly intervals. •
Required: 1. Prepare the journal entries on the home office books to record the transactions and to adjust and close the accounts kept with the agency. 2. Prepare a statement summarizing agency activities for April.
12. Multiple Choice and Questions (Phil. CPA Board Examination) October 1988 Trial balances for the home office and the branch of the Toby Company show the following accounts before adjustment, on December 31, 1987. The home office policy of billing the branch for merchandise is 20% above cost. Home Branch Office Unrealized intercompany inventory profit P10,800 Shipments to branch 24,000 Purchases (outsiders) P 7,500 Shipments from home office 28,800 Merchandise inventory, December 1, 45,000 1987 1. What part of the branch inventory as of December 1, 1987 represent purchases from outsiders and what part represent goods acquired from the home office? Outsiders Home Office Outsiders Home Office (a) P12,000 P33,000 (c) P15,000 P30,000 (b) P16,500 P28,500 (d) P 9,000 P36,000
May 1989 The Mahiyain Manufacturing Co. of Quezon City opened a branch at Davao City on January 1, 1988, to expand the market of its product. Merchandise shipped during 1988 to the Davao branch totalled P104,000, and this included a profit of 25% based on cost. At the end of the year, the inventory was P12,500, at billed price. The branch extend credit, makes collections and pay expenses from cash received. The company applied the periodic inventory method.
PRACTICAL 2, Branches and Agencies
Other transactions affecting the branch are as follows: Sales on account P117,000; expenses P20,000, of which P1,300 were unpaid on December 31, 1988; cash received from customers' accounts, P84,000, after allowing cash discounts of P1,480; cash remitted to the home office during the year P65,000. 2. In the book of the branch, the income or loss was: (a) P19,300; (b) P8,300; (c) P4,020; (d) (P6,220);
(e) None of these.
3. In so far as the home office is concern, the true income or loss of the branch operation was: (a) P24,300; (b) P22,320; (c) (P18,300); (d) P24,320; (e) None of these.
October 1989 The Neneng Corporation established its San Pedro branch in March, 1988. During the first year of operation the home office shipped to the branch merchandise which had cost P120,000. Three-fourth of this merchandise was sold by the branch for P141,000. Operating expenses of the branch amounted to P27,000 during 1988. 4. How much is the net income the branch will report if merchandise is billed to the branch at 25% above cost? (a) P1,500; (b) P8,000; (c) P800; (d) P1,200; (e) None of these.
The Chibas Regal, owns the Royal Crown in Quezon City. There is a branch in Davao City. During 1988, the home office shipped supplies costing P120,000 to the branch at a billed price of 20% above cost. The inventories of supplies at the branch were as follows: Jan. 1, 1988, P90,000; December 31, 1988, P108,000. The home office holds inventories of P160,500 which include P10,500 held on consignment. Both locations use the periodic inventory method. 5. How much is the inventories in a combined balance sheet as of December 31, 1988? (a) P270,000; (b) P210,000; (c) P300,000; (d) P240,000; (e) None of these.
May 1990 The Goldie Bunch Co. has a branch in Davao City on July 3, 1988. During 1988 the home office shipped goods to the branch at billed price totalling P250,000, which was 25% above cost. The branch on December 31, 1988 showed an inventory of P50,000 at billed price. A net profit of P66,000 for 1988 operations was reported by the branch. 6. How much is the true net profit of the branch?
The home office bills its Cebu branch at 125% of cost. During the year 1988, goods costing P300,000 were shipped to the branch. The account entitled "Allowance for Valuation of Branch inventory" has a balance of P14,000 at the end of the year after adjustment. 7. How much is the amount of ending inventory at billed price? 8. How much of ending inventory at cost?
October 1990 The following account balances were taken from the books of Goldielock Co. and its Davao branch on December 31, 1989. Book of Davao Branch: Sales, P1,200,000; Shipments from home office, P720,000; Expenses, P400,000. Book of Goldielock Co: Allowance for overvaluation of branch inventory, P145,000. All merchandise of the branch came from the home office. The inventories of the branch at billed price are as follows: January 1, 1989, P150,000 and December 31, 1989, P168,000. 9. Compute the percentage of profit on cost that the home office use to bill merchandise shipped to branch.
PRACTICAL 2, Branches and Agencies
10. How much is the adjusted profit of Davao branch?
The Rose Company of Manila established a branch in Cebu. During 1989, the home office shipped supplies costing P80,000 to the branch at a billed price of 20 percent above cost. The inventories of supplies at the branch were as follows: January 1, 1989, P60,000; December 31, 1989, P72,000. The home office holds inventories of P107,000 which include P7,000 held on consignment. Home office and branch use the periodic inventory method. 11. How much is the inventories in a combined balance sheet at December 31, 1989?
October 1991 The National Home Company ships and bills its Provincial branch merchandise at cost. The branch carries its own accounts receivable, makes its own collections the pays its expenses. The transactions in 1990 are reflected in the branch trial balance as follows:
Cash National Home Co. Current Shipment from National Home Co. Accounts Receivable Expenses Sales
Debit P 11,900
Credit P 90,000
120,000 62,500 8,100 . P202,500
Branch inventory, December 31, 1990, P30,000.
12. How much is the net profit of Branch? (a) P22,500; (b) P14,400; (c) P21,900;
(d) Not given.
13. The Branch current account in the home office books should be: (a) P134,400; (b) P90,000; (c) P104,400; (d) Not given.
On December 31, 1990, the following are data in the records of the branch in Angeles City of Big and Small Company: Petty Cash Accounts Receivable, Dec. 31, 1990 Merchandise Inventory, Dec. 31, 1989 Accounts Receivable, Dec. 31, 1989 Merchandise Inventory, Dec. 31, 1990 Sales Sales Return Accounts Receivable written off Shipments from home office Expenses (Paid by home office)
14. If all cash collections in 1990 were remitted to the home office, the remittance amounted to: (a) P262,300; (b) P266,800; (c) P264,300; (d) P267,100
May 1992 Following is the Income Statement of XYZ Branch in Cebu City for the six months period ending June 30, 1991: Sales
PRACTICAL 2, Branches and Agencies
Cost of Sales: Shipments from Home Office Branch purchases Total Inventory, June 30: From Home Office Branch purchases Cost of Sales Gross Profit Less Expenses Net Profit
P550,000 50,000 P600,000 P 75,000 10,000
85,000 515,000 P105,000 85,000 P 20,000
The Head Office ships merchandise and bills the Branch Office at 125% of cost. The rent of the Branch Office for six (6) months at P1,000 per month was paid by the Home Office. 15. The Head Office net profit in its Branch Office in Cebu City for the six (6) months ending June 30, 1991: (a) P125,000; (b) P124,000; (c) P139,000; (d) P109,000. 16. The inventory of the XYZ Branch Office as of June 30, 1991 at cost is: (a) P85,000; (b) P70,000; (c) P60,000; (d) P75,000.
October 1992 J. C. Penny, 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 shipped to the Cebu City branch at cost plus 10%. On January 1, 1992, the inventories of the main store in Manila and the Cebu City branch are P13,600 and P3,960, respectively. During 1992, the main store purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch. At December 31, 1992, the following journal entry to prepare the books for the next accounting period was prepared: Sales Inventory Inventory Shipments from main store Expenses Main store
32,000 4,840 3,960 17,600 10,480 4,800
17. What was the actual branch income for 1992 on a cost basis assuming the use of the provisions of the statement of financial accounting standards? (a) P4,800; (b) P6,320; (c) P6,480; (d) P6,840. 18. If the main store has P11,200 worth of inventory unsold at the end of 1992, the inventory of the main store and the branch that should appear on the combined balance sheet as at December 31, 1992 is: (a) P15,160; (b) P15,600; (c) P16,040; (d) P17,200.
May 1993 Selected balances from the Amorsolo Company's Branches A and B are as follows:
Accounts receivable, Dec. 31, 1992 Merchandise from Home Office Cash collections Sales Cash expenses
61,000 85,000 100,000 21,000
47,000 70,000 80,000 14,300
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 branch books. 19. The net profit of Branch A is: (a) P16,000; (b) P21,000;
20. The balance of the Home Office account of Branch A on January 1, 1992 is: (a) P80,000; (b) P64,000; (c) P78,000; (d) P75,000. 21. The balance of the Home Office account of Branch B on January 1, 1992 is: (a) P80,000; (b) P64,000; (c) P78,000; (d) P95,000. 22. The balance of the Branch current account of Branch B on December 31, 1992 is: (a) P70,000; (b) P64,000; (c) P67,000; (d) P65,000.
23. The entry in Branch B records to update the reciprocal account Home Office current on December 31, 1992 is: a. Home Office / Cr. Profit and Loss D r. b. Profit and Loss / Cr. Branch Current D r. c. Branch Current / Cr. Profit and Loss D r. d. Profit and Loss / Cr. Home Office Current D r. -
October 1993 The following were found in your examination of the interplant accounts between the Home Office and the Butuan Branch: a. b. c. d.
Transfer of fixed assets from Home Office amounting to P53,960 was not booked by the branch. P10,000 covering marketing expense of another branch was charged by Home Office to Butuan. Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice. Home office recorded cash transfer of P65,700 from Butuan branch as coming from Davao branch. e. Butuan reversed a previous debit memo from Cagayan de Oro branch amounting to P10,500. Home office decided that this charge is appropriately Davao branch's cost. f. Butuan recorded a debit memo from Home office of P4,650 as P4,560.
PRACTICAL 2, Branches and Agencies
24. The net adjustment in the Home Office books related to the Butuan Branch current account is: (a) P75,700; (b) P65,700; (c) P86,200; (d) P94,820. 25. The net adjustment in Butuan's books related to the Home Office account is: (a) P33,335; (b) P31,450; (c) P20,950; (d) P10,450. 26. Before the above discrepancies were given effect, the balance in the Home Office books of its Butuan branch current account was a debit balance of p165,920. the unadjusted balance in the Butuan branch books of its home office current account must be: (a) P92,336; (b) P98,230; (c) P104,500 (d) P111,170. 27. The adjusted balance of the reciprocal accounts is: (a) P84,807; (b) P90,220; (c) P99,200; (d) P109,120.