1. The Lipa Corporation has a branch operation in Rizal.

Because of the high volume of intracompany

transactions, the company has encountered difficulty in reconciling its Home Office/Branch accounts.
Following is a listing of the components of the Branch balance (from the home office's ledger)
followed with the Home Office account as recorded by the branch.

BRANCH - Rizal
Account Composition (on financial records of home office)
Jan. 1 Beginning balance P 62,000
Jan. 2 Cash received (16,000)
Mar. 2 Inventory transferred 42,000
Apr. 1 Salary allocation 9,200
July 2 Inventory transferred 36,000
Sept. 5 Insurance expense allocation 1,000
Oct. 6 Cash received (21,000)
Nov. 4 Inventory transferred 28,000
Dec. 31 Depreciation allocation (3,000)
End-of-year balance (debit) P138,200

HOME OFFICE
Account Composition (on financial records of branch)
Jan. 1 Beginning balance P (35,000)
Jan. 2 Inventory received (11,000)
Mar. 5 Inventory received (42,000)
Apr. 5 Salary allocation (9,000)
Apr. 8 Cash transferred 45,000
July 6 Inventory received (48,000)
Sept. 10 Insurance expense allocation (1,000)
Oct. 4 Cash transferred 21,000
Nov. 8 Inventory received (28,000)
Dec. 31 Cash transferred 15,000
End-of-year balance (credit) P (93,000)

Additional Information:
1. A cash transfer received during the year was credited by the home office to Miscellaneous
Income.
2. The bookkeeper for the branch incorrectly recorded two amounts: a salary allocation and an
inventory shipment.

Required:
A. Determine the correct balance for the Home Office/Branch accounts as of December 31.
B. Prepare adjusting entries for both parties as of December 31 to properly record these
intracompany accounts.

Answer:

A. Investment in Branch account (Home Office Books)

Unadjusted balance P 138,200
Error in recording cash transfer, April 8 (45,000)
Cash transfer recorded in subsequent year, Dec. 31 (15,000)
Error in recording allocated depreciation, Dec. 31 6,000
Adjusted balance P 84,200

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 Home Office account (Branch Books)
Unadjusted balance P (93,000)
Error in recording salary allocation, April 5 (200)
Error in recording inventory transfer, July 6 12,000
Unrecorded allocated depreciation, Dec. 31 (3,000)
Adjusted balance P (84,200)

B. Adjusting Entries
Home Office Books
Other Income 45,000
Investment in Branch - Rizal 45,000

Cash 15,000
Investment in Branch - Rizal 15,000

Investment in Branch 6,000

Accumulated Depreciation 6,000
Branch Books
Salary Expense 200
Home Office 200

Home Office 12,000

Shipments from Home Office 12,000

Depreciation Expense 3,000

Home Office 3,000

2. At the end of 2013, the following records were taken from the books of the home office and the
branch:

(Branch Books)

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 Home Office
2013
2013 Jan. 1 Balance 60,000
Dec. 1 Cash remitted to home office Dec. 5 Shipments from home office
80,000 120,000
28 Cash remitted to home office 28 Expenses from home office
30,000 45,200
28 Merchandise returned to home
office 12,000 Balance 103,200

(Home Office Books)

Investment in Branch
2013 2013
Jan. 1 Dec. Balance 60,000 Dec. 3 Cash received from branch 80,000
4 Shipments to branch 120,000 28 Collection from branch customer
28 Expense allocation 52,400 18,000
28 Shipments to branch 24,000
28 Supplies purchased for branch
and shipped directly to branch
8,000

Balance 166,400

Except for the error by the branch in recording its share of allocated expenses, all differences are timing
differences.

Required:
A. Compute the correct balances of the reciprocal accounts.
B. Prepare the entries necessary to bring the reciprocal accounts into balance for a working paper
used to prepare the home office's combined financial statements.

Answer:

A. Investment in Branch account (Home Office Books)

Unadjusted balance, Dec. 31 P166,400

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 Cash remittance in transit (30,000)
Merchandise returns in transit (12,000)
Adjusted balance, Dec. 31 P124,400

Home Office account (Branch Books)

Unadjusted balance, Dec. 31 P103,200
Error in recording expense 7,200
Shipment in transit 24,000
Supplies charged to branch 8,000
Collection of branch receivable (18,000)
Adjusted balance, Dec. 31 P124,400

B. Adjusting Entries
Home Office Books
Cash 30,000
Shipment to Branch 12,000
42,000
Investment in Branch

Branch Books
Shipment from Home Office 24,000
Supplies 8,000
Expenses 7,200
Accounts Receivable 18,000
Home Office 21,200

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