ReSA - THE REVIEW SCHOOL OF ACCOUNTANCY

CPA Review Batch 45  May 2023 CPA Licensure Examination

AFAR-07
ADVANCED FINANCIAL ACCOUNTING & REPORTING (AFAR) A. DAYAG  A. CRUZ

HOME OFFICE & BRANCH ACCOUNTING

General Procedures – Home Office and Branch
I – Concept of Reciprocity: Inter-office Transactions
Prepare the entries that are required on the books of the Home Office – Parker Company
and the separate book of its Manila branch to record (home office carries all
depreciable assets in its own ledger):

Inter-office (selected) transactions:

1. Transfer of cash by home office to branch, P3,000
2. Transfer of merchandise by home office to the branch, P6,000.
3. At the beginning of the period, the branch office acquires branch furniture on
account, P2,500, terms 2/10, n/30
4. The home office makes payment on the invoice (refer to No. 3 transaction) within
the discount period.
5. The home office analyzes the balance of its general and administrative expenses
account and found out that P1,250 of this balance is chargeable to the branch.
6. Depreciation on the equipment is recorded at the end of the year at 10%
7. Determination of a loss from branch operations, P1,000
II – Separate and Combined Operations: Cost of Goods Sold and Net Income
On January 1, 2021, the Barton Company opened a new branch in a neighboring city. A
summary of transaction for the home office and the branch for 2021 are as follows:
Branch transactions:
a. Cash received from home office, P42,500
b. Merchandise received from home office, P50,200
c. Sales on account, P66,000
d. Purchases on account, P22,500
e. Collections on account deposited to the credit of the home office, P53,400.
f. Payments on account, P12,250
g. Purchases of furniture and fixtures for cash, P8,000.
h. Expenses paid, P18,000
i. Adjusting data on December 31:
Depreciation, P650
Merchandise inventory, P23,500
Prepaid expenses, P750
Accrued expenses, P300
Home office transactions: (Merchandise inventory, January 1, P40,120)
a. Transfer of cash to branch, P42,500
b. Transfer of merchandise to branch (billed at cost), P50,200
c. Sales on account, P105,000
d. Purchases on account, P122,500
e. Collections on account, P113,600
f. Payments on account, P124,000
g. Expenses paid, P26,600.
h. Cash received from branch, P53,400.
i. Dividends paid, P10,000
j. Adjusting data on December 31:
Depreciation, P1,180
Merchandise inventory, P48,500
Prepaid expenses, P2,050
Accrued expenses, P1,350
Determine the:
1. Branch (books) net income from its own operations.
2. Home office net income from its own operations
3. Combined net income.

*Success does not depend on what you achieved but on how you achieved it.*
*Sail through the sands of the present time and savor present reality and pray the best in life will happen in the
III – General future.* Procedures
*We definitely reach new heights in conquering certain fears that hinders us from becoming battle-tested
individuals, enough to survive the wheels of life.*

Page 1 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
III – General Procedures
Manila Corporation has been operating a branch in Pampanga for a year. Shipments are
billed to the branch at cost. The branch carries its own accounts receivable, makes
its own cash collections, and pays its own expenses. The transactions of the branch
for the year 20x9 are given effect in the trial balance below:

Debits Credits
Cash P 200,000
Home Office Current P 400,000
Shipments from Home Office 1,600,000
Accounts Receivable 300,000
Sales 1,940,000
Expenses 240,000 __________
Totals P 2,340,000 P 2,340,000

The branch inventory on December 31, 20x9 is P260,000.

Determine:
1. On January 1, 20x9, the Shipment to Branch Account on the Home Office books
should have an opening balance of:
a. P -0- c. P 360,000
b. 1,960,000 d. 2,000,000

2. On December 31, 20x9, compute the net income of the branch:

a. P1,700,000 c. P 1,400,000
b. 360,000 d. 100,000

3. On January 1, 20y0, the Branch Current account on the books of the Home Office
should have a balance of:
a. P 760,000 c. P 2,160,000
b. 1,000,000 d. 400,000

IV – General Procedures
On December 31, 20x9, the branch manager of Rachelle Company in Marikina City submitted
the following data to the home office:

Petty Cash Fund P 10,000

Sales 564,000
Sales returns 4,000
Accounts written-off 10,000
Shipments from home office 300,000
Accounts receivable, January 1, 20x9 90,000
Accounts receivable, December 31, 20x9 100,000
Inventory, January 1, 20x9 60,000
Inventory, December 31, 20x9 70,000
Expenses (charged by Home Office) 120,000

All cash collected on accounts receivable are remitted to the home office.
Determine:
1. The balance of the Home Office Current Account on January 1, 20x9 is:
a. P -0- c. P 180,000
b. 160,000 d. 300,000

2. The net income of the Marikina Branch for the year ending December 31, 20x9 is:
a. P140,000 c. P 150,000
b. 144,000 d. 270,000

3. The total remittance for the year 20x9 is:

a. P540,000 c. P 550,000
b. 544,000 d. 560,000

4. On December 31, 20x9, the Branch Current Account on the Home Office books is:
a. P -0- c. P 180,000
b. 160,000 d. 300,000
Sometimes a winner is just a dreamer who never gave up.
Impossibilities vanish when a man and GOD confront a mountain.
What is the difference between an obstacle and an opportunity? Our attitude towards it .

Page 2 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
Reconciliation of Reciprocal Accounts
V – Adjusted Balance Method
The following entries are reflected in the intra-company accounts of a home office and
its lone branch for June 20x9:
Investment in Branch
6/01 Balance P 50,000 6/02 Remittance P 10,000
6/12 Inventory shipment 12,000 6/08 Collection of branch
6/25 Advertising allocation to receivable 500
branch (50% of advertising 6/27 Equipment purchase by branch 7,000
incurred) 4,000
6/28 Inventory shipment 14,000
6/30 Depreciation allocation 2,000
6/30 Balance P 64,500

Home Office Current

6/02 Remittance P 10,000 6/01 Balance P 50,000
6/24 Purchase of equipment 6/10 Collection of home office
carried on home office books) 7,000 receivable 2,000
6/29 Remittance 15,000 6/16 Inventory shipment 12,000
6/30 Inventory returned to
home office 1,000 6/28 Advertising allocation 400
6/30 Depreciation allocation 2,000
6/30 Balance P 29,400

Except for the error by the branch in recording its share of allocated advertising
expense and depreciation allocation, all differences are timing differences. Compute
the adjusted balance of the reciprocal account on June 30, 2019:
a. P46,900 c. P50,500
b. 48,500 d. 51,000

VI – Unadjusted/Adjusted Balance Method and Adjusting Entries

On December 31, 20x9, the Branch Current ledger account in the accounting records of
the home office of Grace Company shows a debit balance of P55,500. You ascertained the
following facts in analyzing this account:
a. On December 31, 20x9, merchandise billed at P5,800 was in transit from the home
office to the branch. The periodic inventory system is used by both the home office
and the branch.
b. The branch had collected home office trade accounts receivable of P560; the home
office was not notified.
c. On December 29, 20x9, the home office had mailed a check for P2,000 to the branch,
but the accountant for the home office had recorded the check as a debit to the
Charitable Contribution Expense ledger account; the branch had not received the
check as of December 31, 20x4.
d. Branch net income for December 20x9, was recorded erroneously by the home office at
P840 instead of P480. The credit was recorded by the home office in the Branch
Income Summary ledger account.
e. On December 28, 20x9, the branch had return supplies costing P220 to the home
office; the home office had not recorded the receipt of the supplies. The home
office records acquisitions of supplies in the Office Supplies ledger account.
f. Acquisition of equipment by the branch, P1,500. The equipment account is to be
maintained in the home office books. The home office had not been notified of the
acquisition.
g. A branch customer erroneously remitted P1,000 to the home office. The home office
recorded this cash collection on December 29, 20x9. Meanwhile, back at the branch,
no entry has been made yet.
Required:
1. The unadjusted balance of the Home Office Current account on the books of the
branch as of December 31, 20x9:
a.P53,180 c. P49,180
b. 51,180 d. 48,620

2. The adjusted balance of the reciprocal account on December 31, 20x9:

a.P50,180 c. P55,980
b. 54,480 d. 56,980
The only thing that stands between a man and what a man wants from life is often merely the will to try it and the faith to
believe that it is possible. Most men fail because of lack of purpose than lack of talent.

Page 3 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
VII
Lakers Trading Company operates a branch in Dagupan City. At close of business on
December 31, 20x9. Dagupan Branch account in the home office books showed a debit
balance of P225,770. The interoffice accounts were in agreement at the beginning of
the year. For purposes of reconciling the interoffice accounts, the following facts
were ascertained:
1. An office equipment costing the home office P3,500 was picked up by the branch
as P350.
2. Insurance premium of P675 charged by the home office was taken up twice by the
branch.
3. Freight charge on merchandise made by the home office for P1,125 was recorded in
the branch books as P1,215.
4. Home office credit memo representing a discount on merchandise for P800 was not
recorded by the branch.
5. The branch failed to take up a P700 debit memo from the home office representing
the share of the branch in advertising.
6. The home office inadvertently recorded a remittance for P3,000 from its Cebu
branch as a remittance from its Dagupan branch.

Compute the balance as of December 31, 20x9:

Unadjusted Balance Adjusted Balance
of the Home Office Current of the Reciprocal Account
a. P 226,485 P225,770
b. 228,485 228,770
c. 225,770 226,485
d. 226,485 228,770
Solutions: Problems V to VII – Reconciliation of Reciprocal Accounts
Problem V:
Branch H. Office
Current Current
Unadjusted balance, 6/30/20x9 P 64,500 P 29,400
Add (Deduct): Adjustments
3,600

b. Shipment in transit 14,000

c. Erroneous recording of depreciation 4,000
d. Collection of home office A/R 2,000
e. Shipments returned to home office ( 1,000)
f. Failure to record remittance (15,000)
g. Collection of branch A/R ________ ( 500)
Adjusted balance, 6/30/20x9 P 50,500 P 50,500
Problem VI:
Branch H. Office
Current Current
Unadjusted balance, 12/31/20x9 P 55,500 P 49,180
Add (Deduct): Adjustments
a. Shipment in transit 5,800
b. Collection of home office A/R 560
c. Cash in transit erroneously recorded 2,000 2,000
d. Overstatement of branch net income ( 360)
e. Supplies returned to home office ( 220)
f. Acquisition of equipment by the branch (1,500)
g. Cash collection not recorded by the branch _________ ( 1,000)
Adjusted balance, 12/31/20x9 P 55,980 P 55,980
Problem VII:
Branch H. Office
Current Current
Unadjusted balance, 6/30/20x9 P 225,770 P 226,485*
Add (Deduct): Adjustments
1 Erroneous recording of branch equipment 3150
2. Insurance premium recorded twice ( 675)
3. Erroneous recording of freight ( 90)
4. Discount on merchandise ( 800)
5. Failure by the Br. to record share in advert. 700
6. error by the HO to record remittance of Cebu 3,000 ________
Adjusted balance, 6/30/20x9 P228,770 P 228,770
* The P226,485 is computed simply by working back with P228,770 adjusted balance as the starting
point.

Page 4 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
VIII– Special Procedures Shipments with Unrealized Intercompany
Inventory Profit / Deferred Profit
Hope Company operates a main store at its home office and a branch store in another
city. The branch purchases most of its merchandise from the home office at 10% above
home office cost. All merchandise acquired from other suppliers is accounted for by
the branch at original cost. At September 30, 20x9, the records of the branch indicated
the following:
September Sales…………………………P140,000
Inventory, September 1………… 35,200* (50% from outside suppliers)
Shipments from home office 55,000 (at billed price)
Purchases from outsiders…… 24,000
Selling expenses………………………… 8,000
General expenses………………………… 32,000
Inventory, September 30… 30,000 (P8,000 from outside suppliers)
*Merchandise acquired from the home office is inventoried at billed prices.
Required:
1. Give the journal entries on the home office and branch books to record the
shipments.
2. Prepare the income statement for the branch.
3. Prepare all necessary entries on the home office books at September 30, 20x9 to
adjust the home office records for the branch operations for September.
IX – Computation of Beg. Inventory and True Branch Net Income
The following information came from the books and records of Davao Corporation and its
branch. The balances are as of December 31, 20x9, the fourth year of the corporation’s
existence.
Home
Office Branch
Dr. (Cr.) Dr. (Cr.)
Sales P(1,700,000)
Shipments to branch P(480,000)
Shipments from home office 720,000
Purchases 360,000
Expenses 320,000
Inventory, January 1, 20x9 144,000
Unrealized profit in branch inventory (272,000)
There are no shipments in transit between the home office and the branch. Both shipments
accounts are properly recorded. The closing inventory at billed prices includes
merchandise acquired from the home office in the amount of P108,000 and P60,000 acquired
from the vendors for a total of P168,000.
Required:
1. The billing price based on cost imposed by the home office to the branch?
2. How much of the beginning inventory was acquired from home office and from
outsiders?
3. What is the true branch net income?
X–Unrealized Inventory Profit, Merchandise Returns to Home Office and Real
Branch Net Income
The Aramis Company bills its branch at 40% markup on the billed price. On December 31
the balance in the unrealized profit account is to be calculated from the following
information reported by the branch:
Merchandise Merchandise
from H. O. Purchased
(at Billed Outsiders
Price) (at cost) Total
Merchandise inventory, 12/1 P 32,400 P 8,000 P 40,400
Merchandise into stock, 12/1-12/31 40,500 24,000 64,500
Merchandise inventory, 12/31 37,800 10,000 47,800
Required:
1. What is the balance of the unrealized profit account on the home office books
before any adjustment is made for branch sales for December?
2. Assuming that the branch had a net income of P20,000 per branch books and had
returned to the home office merchandise originally acquired at a billed price of
P1,080. Also, branch expenses incurred and paid by the home office amounted to
P2,500 were not yet recorded by the branch. What is the real branch net income?

Success does not depend on what you achieved but on how you achieved it.
Sail through the sands of the present time and savor present reality and pray the best in life will happen in the future.
We definitely reach new heights in conquering certain fears that hinders us from becoming battle-tested individuals,
enough to survive the wheels of life.

Page 5 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
XI – Branch Inventory at cost and Combined Net Income
Tagum Supply Company is engaged in merchandising both at Home Office in Makati, Metro
Manila and a branch in Davao. Selected accounts in the trial balances of the Home
Office and the branch at December 31, 20x9 follow:
Debits Home Office Branch
Inventory, January 1, 20x9 P 23,000 P 11,550
Davao Branch 58,300
Purchases 190,000 105,000
Freight-in from home office 5,500
Sundry expenses 52,000 28,000
Credits
Home office P 53,300
Sales P 155,000 140,000
Sales to Branch 110,000
Allowance for branch inventory, January 1, 20x9 1,000
Additional information:
1. Davao branch receives all its merchandise from the home office. The Home Office
bills the goods at cost plus 10% mark-up. At December 31, 20x9, a shipment with
a billing value of P5,000 was in transit to the branch. Freight on this shipment
was P250 which is to be treated as part of inventory.
2. December 31, 20x9 inventories excluding the shipment in transit, are:
Home office, at cost…………………………………………………………………………………………………………P 30,000
Davao branch, at billed value (excluding freight of P520)……… 10,400
Required:
1. The net income of the Home Office from own operations:
a. P10,000 c. P20,000
b. P15,000 d. P30,000
2. The net income (loss) of Davao branch in so far as home office is concerned:
a. P( 870) c. P12,470
b. P10,470 d. P13,470
3. The combined net income:
a. P19,130 c. P30,470
b. P29,950 d. P40,470
XII
Sharron Company operates a branch in Legazpi City. There are shipments in transit from
home office to the branch. The home office ship merchandise to the branch at 125% of
cost in the year 20x9, operating data for the home office and the branch is as follow:
Home
Office Branch
Sales P250,000 P 75,000
Purchases from outsiders 200,000 15,000
Shipments to branch:
Cost to home office 30,000
Billing price to branch 32,500
Expenses 40,000 10,000
Inventories, January 1, 20x9
Home office acquired from outsiders, at cost 80,000
Branch:
Acquired from outsiders, at cost 7,500
Acquired from home office, at billed
price, which average 20% above cost 24,500
Inventories, December 31, 20x9
Home office, acquired from outsiders, at cost 55,000
Branch:
Acquired from outsiders, at cost 5,500
Acquired from home office, at 20x9 billed 21,000
price (physical count)
Required:
1. The amount of merchandise in transit:
a. P3,500 c. P 7,500
b. P5,000 d. P10,500
2. The combined cost of goods sold:
a. P240,000 c. P242,500
b. P241,200 d. P245,200
3. The combined net income:
a. P30,000 c. P32,500
b. P32,400 d. P33,800

Page 6 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
XIII – Inter-branch Cash Transfer
Branch AA is authorized by its Home Office to send to Branch BB P10,000 cash. How is
this transfer best recorded on the books of:
(1) Home Office;
(2) Branch AA, and
(3) Branch BB.
XIV – Inter-branch Merchandise Transfer
The Manila Company maintains branches that market the products that it produces.
Merchandise is billed to the branches at manufacturing costs, with the branches paying
the freight charges from the home office to the branch. On November 15, Branch No. 1
ships a portion of its merchandise to Branch No. 5 upon authorization by the home
office. Originally, Branch No. 1 had been billed for this merchandise at P16,000 and
paid freight charges of P3,500 on the shipment from the home office. Branch No. 5,
upon receiving the merchandise, pays freight charges of P2,500 on the shipment from
Branch No. 1. if the shipment had been made from the home office directly to Branch
No. 5, the freight cost to Branch No. 5 would have been P4,000. How should the
merchandise transfers be recorded on the books of:
(1) Home Office,
(2) Branch No. 1, and
(3) Branch No. 5
XV-Inter-branch Merchandise Transfer
YY Corporation has two branches to which merchandise is transferred at cost plus 20%,
plus freight charges. On November 30, 20x8, YY Corporation shipped merchandise that
cost P5,500 to its CC Branch, and the P200 shipping charges were paid by YY Corporation.
On December 15, 20x8, the DD Branch encountered an inventory shortage, and the CC
Branch shipped the merchandise to the DD Branch at a freight cost of P160 paid by the
CC Branch. Shipping charges from the home office to the DD Branch would have been P175.
Required:
1. YY Corporation will record the P5,500 shipment to the CC Branch, together with
the P200 shipping charge, in a journal entry that includes the following:
a. Shipments from home office, P6,600
b. Shipments to CC Branch, P5,700
c. Unrealized profit – branch inventory, P1,100.
d. Investment in CC Branch, P5,700.
2. CC Branch should record the transfer of merchandise to the DD Branch by either
a debit or credit entry that includes the following:
a. Shipments from home office, P5,500.
b. DD Branch, P6,975.
c. Home Office, P6,960
d. Inventory, P5,660
3. If the merchandise is unsold at year-end, the DD Branch will inventory the
merchandise at:
a. P6,000 c. P6,760
b. P6,975 d. P6,775
4. If the merchandise is unsold at year-end, YY Corporation will include it as an
asset in its Annual Report to Stockholders in the amount of:
a. P5,500 c. P5,675
b. P5,660 d. P5,875
5. The loss on excessive freight charges on the inter-branch transfer amounted to:
a. P200 c. P175
b. P160 d. P185

XVI - Agency
The following are transaction in relation to an agency of a home office:
• The transfer of P5,000 to an agency to establish a working fund.
• Receipt of sales orders from the agency, P50,000.
• Collections of agency accounts by the home office, P35,000.
• Home office disbursements representing agency expenses, P4,500.
• Replenishment of the agency working fund upon receipt of expense vouchers for P2,250.
• Cost of goods sold identified with agency sales, P36,000.

Determine the net income identified with the agency.

a. P2,250 c. P11,750
b. P7,250 d. P14,000

Page 7 of 8 0915-2303213  www.resacpareview.com

ReSA – THE REVIEW SCHOOL OF ACCOUNTANCY
HOME OFFICE & BRANCH ACCOUNTING AFAR-07
Solutions: Problems XIII to XV
Problem XIII:
Branch AA Branch BB Home Office
Home Office Current…10,000 Cash…………………. 10,000 Branch Current-BB…10,000
Cash……………………………. 10,000 Home Office Current. 10,000 Branch Current-AA…...10,000

Problem XIV:
Home Office Branch No. 1 Branch No. 5
Branch Current-#1…16,000 Shipments from HO. 16,000
Shipments to Branch. 16,000 HOC………… 16,000
Freight-in………… 3,500
Cash………….. 3,500
Branch Current-#5. 17,500 Home Office Current.19,500 SFHO…………… 16,000
Excess Freight…… 2,000 Freight-in…………… 3,500 Freight-in……… 4,000
Branch Cur.-#1…… 19,500 SFHO………………… 16,000 Cash……… 2,500
HOC……… 17,500
Computation of Excess Freight chargeable to Home Office:
Freight actually paid by:
Branch No. 1…………………………………………………...................P 3,500
Branch No. 5…………………………………………………................... 2,500 P 6,000
Less: Freight that should be recorded in Branch No. 5…………… 4,000
Excess Freight………………………………………………………………….. P 2,000

Problem XV:
YY Corp. – H. O. CC Branch DD Branch
Branch Current-CC.. 6,600 Ship. from HO………6,600
Ship. to branch…. 5,500 Freight-in……….. …. 200
All. for Overval…. 1,100 HO Current…….. 6,800
Branch Current-CC… 200
Cash……………… 200
Branch Current-DD…6,775 HO Current…………. 6,960 SFHO………........ 6,600
Excess Freight……... 185 SFHO………….... 6,600 Freight-in…....... 175
Branch Current-CC. 6,960 Freight-in……… 200 HO Current…. 6,775
Cash…………..... 160
Answers:
1. (c) ;
2. (c);
3. (d) – P6,600, at billed price in books of Branch DD + P175 = P6,775
4. (c) – P5,500, at cost in the combined statements + P175 = P5,675
5. (d) – (P200 + P160) – P175 = P185
Freight actually paid by:
Home Office…………………………………………………......... P 200
CC Branch……………………………………………………......... 160 P 360
Less: Freight that should be recorded by DD Branch..… 175
Excess Freight…………………………………………………………… P 185

*Attitude is more important than the past, than education, than money, than circumstances, than what people do
or say. It is more important than appearance, giftedness, or skill.*
*The only way to find the limits of the possible is by going beyond them to the impossible.*
*Nothing great will ever be achieved without great mean, and men are great only if they are determined to be so.*
*The secret of life is not just to live, but to have something worthwhile to live for.*
*Great achievements are not done by strength but by perseverance*
*No one knows what he can do, until he tries*
*Not knowing when the dawn will come, Open every door*
*The great thing in the world is not so much where you are but in what direction you are going*

GOD BLESS as always!

Page 8 of 8 0915-2303213  www.resacpareview.com