Home Office, Branch, and Agency 8.

8. DEF Corporation ships its goods to its branch at a mark-up of 25% above cost
consistently every year. During the year, they had the following transactions for
1. The reciprocal account of the home office is greater than the reciprocal account of consideration in the reconciliation of their reciprocal account differences:
the branch. Which of the following is most likely the reason? 1) The home office shipped goods costing 132,000. The goods remained in transit
a. Net income of the branch is yet to be reflected in the books of the home office. as of the end of the accounting period.
b. Home office shipped goods to branch which the branch has already received and 2) The branch returned goods to the home office which it carried at 20,000. The
recorded. goods remained in transit as of the end of the accounting period.
c. The branch failed to record a home office credit memo. 3) The home office collected 50,000 from branch customers, and the branch is yet to
d. The home office purchased equipment for the use of the branch record the credit memo sent by the home office for this.
Answer: C 4) The home office paid 48,000 of the branch's accounts payable and the home
office is yet to make an entry for this and has not yet sent out the accompanying
2. In home office and branch accounting, which of the following accounts is presented debit memo to the branch.
in the combined financial statements? 5) The branch recorded a debit memo it received amounting to 69,000 as a debit to
a. Home Office Account c. Allowance for Mark-up the home office current account amounting to 96,000.
b. Shipments from Home Office d. None of the choices Assume that the correct balance of the reciprocal accounts should be 631,000, how
Answer: D much is the investment in branch account before any adjustments?
a. 303,000 c. 603,000
3. Which of the following about home office and branch accounting is incorrect? b. 468,000 d. 651,000
a. The shipments to branch account is always credited at cost in the home office Answer: C
books. Inv. In Home Office
b. The shipments from branch account is always credited at billed price in the Branch
branch books. Unadjusted balance ? ?
c. Home office shipments at billed price will always result to a branch net income 1) In-transit merchandise at billed price 165,000
lower than its reported branch net income in the combined financial statement. 2) Returned merchandise at billed price – in-transit (20,000)
d. The working paper elimination entries are not recorded in the separate books of 3) Credit memo sent by home office not yet (50,000)
the home office and the branch. recorded by the branch
Answer: B 4) Debit memo sent by home office not yet 48,000 48,000
recorded by the branch and the home office did
4. The following information are from the books of ABC Corporation and its branch in not also record the said debit memo
Location X. The balances as of December 31, 2023 are as follows: 5) Error in recording the debit memo received from 165,000
ABC Corporation Location X Branch the home office
Shipments to branch 500,000 Adjusted balance 631,000 631,000
Shipments from home office 625,000 Investment in branch = 603,000; Home office = 303,000
Purchases 400,000
Expenses 150,000 9. The Home Office had two branches, Branch A and Branch B. At the end of the year,
Inventory, beginning 200,000 December 31, 2023, the reciprocal account in Branch A was 256,600. However,
Allowance for mark-up 150,000 there were transactions discovered to have errors:
All shipments are completed before December 31, 2023. The ending balance of the 1) The home office shipped merchandise costing 87,000 to Branch A, but was
branch inventory totaled 150,000 which includes 40,000 merchandises from outside recorded by the branch in the amount of 78,000.
suppliers. How much is the beginning inventory from purchases? 2) Branch A bought 56,500 worth of equipment with useful life 4 years on June 1,
a. 75,000 c. 125,000 2023, for use of the home office and it was the policy of the company that the
b. 100,000 d. 60,000 equipment will be recorded by the branch, but Branch A recorded it as 56,050. It
Answer: A was indicated also in the policy that the straight-line method of depreciation will be
Billed Cost Markup used.
Beginning inventory 125,000 100,000 25,000 3) The Home Office and Branch A branch did not record any depreciation for the
Shipments 625,000 500,000 125,000 said equipment.
Available for sale 750,000 600,000 150,000 What is the unadjusted balance of the Investment in Branch A account?
Ending inventory (110,000) (88,000) (22,000) a. 290,600 c. 265,600
Cost of goods sold 640,000 512,000 128,000 b. 273,840 d. 247,600
Markup on cost = 125,000 / 500,000 = 25%. Beginning inventory cost = 25,000 / Answer: C
25%
Ending inventory cost = 110,000 / 125% = 88,000. 10. Based on item 9, what is the net adjustment in Home Office current account?
Inventory, beginning = 200,000 total – 125,000 billed price from home office = a. 760 credit c. 9,000 debit
75,000 from outside suppliers. b. 1,937 credit d. 17,240 debit
Cost of goods sold, outside suppliers = 75,000 + 400,000 – 40,000 = 435,000. Answer: A

5. Based on item 4, if Location X Branch sells its inventory with a markup of 50% 11. Based on item 9, what is the adjusted balance of the reciprocal accounts?
based on cost, how much is the net income of the branch in the combined financial a. 258,537 c. 239,360
statement? b. 257,360 d. 247,600
a. 387,500 c. 515,500 Answer: B
b. 925,000 d. 537,500 Inv. In Branch A Home Office
Answer: C Unadjusted balance 265,600 256,600
Cost of goods sold (640,000 + 435,000) 1,075,000 Branch error in recording shipment 9,000
Gross profit (50% based on cost) 537,500 No recording of depreciation (8,240) (8,240)
Less: Expenses (150,000) Adjusted balance 257,360 257,360
Net income, branch 387,500 Depreciation = 56,500 / 4 * 7/12 = 8,240
Add: Realized gross profit from mark up 128,000 Since it is the company’s policy to record the asset in Branch A’s books and the fact
Branch true net income 515,500 that Branch A also bought the asset; therefore, the error of Branch A has no effect
on the reciprocal accounts.
6. The home office shipped merchandise to branch at 30% above cost. On December
31, 2023, the branch warehouse was affected by a fire caused by fireworks from 12. Which of the following transactions will result to credit in home office account in the
nearby residential area. The following information was provided by the branch book of the Branch A?
accountant: a. Reported net loss of the Branch A
December 1 – Merchandise inventory 100,000 b. Payment by Branch A of home office's liability
Shipments from home office 65,000 c. Return by Branch A to home office of merchandise
Purchases from outside suppliers 30,000 d. Collection by Branch A of Branch B's receivables
Sales for December (at 25% markup on sales) 200,000 Answer: D
According to the branch accountant, 60% of the December beginning inventory was
from the home office. Also, all the inventories in the warehouse at the day of the fire 13. The following data were provided by the accountants of the Home Office and
was from the home office and the warehouseman was able to save inventories from Branch for the year ended December 31, 2024:
the home office shipment with a selling price of 10,000. How much is the cost of Home Office books Branch books
inventory destroyed by fire in the branch books? Net sales to outside customers 1,000,000 800,000
a. 45,000 c. 50,000 Beginning inventory 300,000 140,000
b. 37,500 d. 27,500 Net purchases from outside suppliers 800,000 250,000
Answer: B Shipments to branch 400,000
Beginning inventory 100,000 Shipments from home office 500,000
Shipments from home office 65,000 Ending inventory 100,000 200,000
Purchases from outside suppliers 30,000 Operating expenses 200,000 100,000
Less: Ending inventory ? The current corporate income tax rate is 30%. For the year ended December 31,
Cost of goods sold (200,000 * 75%) 150,000 2023, the Home Office bills its branch with a mark-up of 40% based on cost. Half of
Ending inventory would be 45,000. From that supposed to be balance of ending the beginning inventory of the branch was acquired from outside suppliers. The
inventory, deduct the cost of salvaged inventory (10,000 * 75% = 7,500). Therefore, ending inventory of the branch is broken down as follows: 60% from outside
the cost of inventory destroyed by fire is 45,000 – 7,500 = 37,500. suppliers; 26% from 2024 shipments from home office; 14% from 2023 shipments
from home office.
7. Based on item 6, how much is the cost of sales of the branch coming from the home What is the cost of goods sold of the branch in the combined statements for the year
office at billed price? ended December 31, 2024?
a. 160,000 c. 80,000 a. 588,400 c. 594,600
b. 117,500 d. 90,000 b. 690,000 d. 589,600
Answer: C Answer: A (388,400 + 200,000 = 588,400)
All the inventories on the day of fire were from the home office, implying all
inventories purchased from outside suppliers were sold. Beginning inventory
100,000 * 40% = 40,000 add purchases from outside suppliers 30,000 = 70,000 cost
of goods sold, outside suppliers
Cost of goods sold, all = 150,000 less from outside suppliers 70,000 = 80,000 from
HO.
 Billed Cost Markup
Beginning inventory 70,000 50,000 20,000
Shipments 500,000 400,000 100,000
Available for sale 570,000 450,000 120,000
Ending inventory (2023) (28,000) (20,000) (8,000)
Ending inventory (2024) (52,000) (41,600) (10,400)
Cost of goods sold 490,000 388,400 101,600
Markup on cost, 2023 = 40% (given)
Markup on cost, 2024 = 100,000 / 400,000 = 25%
Cost of goods sold, outside suppliers = 70,000 + 250,000 – 120,000 = 200,000.

14. Based on item 13, what is the combined net income to be presented by the Home
Office in the Statement of Comprehensive Income for the year ended December 31,
2024?
a. 217,000 c. 204,120
b. 218,120 d. 219,800
Answer: B
HO Branch Total
Sales 1,000,000 800,000 1,800,000
Cost of goods sold (600,000) (588,400) (1,188,400)
Gross profit 400,000 211,600 611,600
Operating expenses (200,000) (100,000) (300,000)
Income before tax 200,000 111,600 311,600
Tax expense (93,480)
Net income 218,120
Home Office COGS = 300,000 + 800,000 – 400,000 – 100,000 = 600,000

15. Based on item 13, what is the balance of the unrealized profit in branch inventory on
December 31, 2024?
a. 16,000 c. 15,600
b. 17,300 d. 18,400
Answer: D (8,000 + 10,400 = 18,400)

16. HIJ Company opened a sales agency in Location Y. Pertinent information regarding
the sales agency transactions are found below:
Sales 2,612,000
Collections, net of 4% discount 1,935,360
Expenses paid from the agency working fund 254,000
Expenses allocated by the home office 119,400
Agency samples:
Cost 136,000
Inventory, end 14,400
HIJ’s gross profit rate is 30% of net sales. The receivable balance is estimated to be
97% collectible. What is the net income of the Location Y sales agency?
a. 246,528 c. 288,600
b. 264,408 d. 206,348
Answer: A
Sales 2,612,000
Sales discount (1,935,360 / 96% * 4%) (80,640)
Net sales 2,513,360
Gross profit (30%) 759,408
Expenses (254,000 + 119,400) (373,400)
Agency samples (136,000 – 14,400) (121,600)
Bad debts [2,612,000 – (1,935,360 / 96%)] * 3% (17,880)
Net income 246,528

17. The home office in Location Z shipped merchandise costing 86,760 to the Location
A Branch and paid for the freight charges of 15,920. Location A Branch was
subsequently instructed to transfer the merchandise to Location B Branch wherein
Location B Branch paid for 5,000 freight. If the shipment was made directly from
Location Z to Location B Branch, the freight cost would have been 22,000.

Independent Case A. How much is the amount of Investment in Branch account to

be debited in the books of the home office as a result of the interbranch transfer of
merchandise?
a. 108,760 c. 102,680
b. 103,760 d. 107,680
Answer: C
Since the actual freight of 20,920 (15,920 + 5,000) was less than the should be
freight of 22,000, under the concept of prudence, the Location B Branch recorded
the lower amount which is the actual freight. In the books of the home office, it will
correspondingly debit the Investment in Location B Branch for 102,680.
Location B Branch: Debit Shipments from HO 86,760; Debit Freight-in 20,920;
Credit Cash 5,000; Credit Home Office 102,680.

18. Based on item 17, Independent Case B. Assuming shipments are made at a markup
of 25% based on cost, what is the amount of excess freight chargeable to the home
office?
a. 1,080 c. 0
b. 1,350 d. (1,080)
Answer: C
Since the actual freight of 20,920 (15,920 + 5,000) was less than the should be
freight of 22,000, under the concept of prudence, there will be no excess freight or
freight loss.

19. Statement 1: The branch maintains its own books as a separate legal entity from the
home office.
Statement 2: The home office and its branches may sell merchandise to one
another.
a. Both statements are true. c. Statement 1 is true; Statement 2 is false.
b. Both statements are false. d. Statement 1 is false; Statement 2 is true.
Answer: B

20. Which of the following statements regarding accounting for home office and branch
is correct?
a. A branch may debit Investment in “another” Branch account for purposes of
interbranch transactions.
b. The home office will credit Investment in Location X Branch upon its instruction to
Location Y Branch to transfer cash to Location X Branch.
c. The home office will debit Investment in Location A Branch upon collection of
Location A Branch from the customer of Location B Branch.
d. Transactions between branches have no effect in the books of the home office.
Answer: C