Chapter 7

Home Office and Branch Accounting

Companies may increase their volume of sales by establishing sales outlets in various areas.
These sales outlets may be a branch or an agency.

When a company operates a branch, the branch must maintain accounting records to facilitate
its reporting responsibility to the home office.

Problems dealing with Home Office and Branch Accounting appear in almost every CPA
examination. Candidates should be familiar with the problems involving the following:

1. Uses of the reciprocal accounts.

2. Preparation of a Reconciliation Statement.
3. Billing of Merchandise by Home Office to Branch above cost.
4. Preparation of Combined Financial Statements.

Uses of the Reciprocal Accounts

In recording inter-office transactions, two reciprocal accounts are used, namely, the Investment
in Branch (Branch Current) account used by the home office which is classified as an asset; and
the Home Office (HO Current account) used by the branch which is classified as a liability.

The reciprocal nature of the Investment in Branch and the Home Office accounts and the way in
which they are affected by various inter-office transactions are shown below:

(Home Office Books) (Branch Books)

Investment in Branch Home Office
xx Assets transfer to branch xx
xx Assets transfer from branch xx
xx Branch profit xx
xx Branch loss xx

Preparation of Reconciliation Statement

The balances of the two reciprocal accounts should at all times equal. If the balances of the
reciprocal accounts are not equal before the preparation of separate statement of financial
position, a reconciliation statement is to be prepared. This is done to determine the causes of
the inequality between the two accounts. The accounts are then adjusted to determine their
adjusted balances. The following are the usual causes that the candidate should take note:

1. Transactions have been recorded by the branch but not by the home office.
 2. Transactions have been recorded by the home office but not by the branch.
3. Errors in recording have occurred in one or both books.
4. Transactions have not yet been recorded on either set of books.

Billing of Merchandise by Home office to Branch above Cost

Merchandise shipped to branch by the home office may be billed at an amount above cost.
Under this method of billing, the profit recognized by the branch will be less that its actual
profit, because its cost of goods sold is overstated insofar as the home office is concerned.

The problems involving billing of merchandise to branch above cost are the following

1. Computation of branch at inventory at cost.

2. Computation of the actual or true branch profit insofar as the home office is
concerned.

Computation of Branch Inventory at Cost

Candidates should use the following formula:

a. If branch are all acquired from the home office, the formula is:

Branch inventory acquired from home office at billed price Pxx

Divide by billing percentage of cost %
Branch inventory at cost Pxx

b. If branch inventory includes merchandise acquired from outsiders, the formula is:

Branch inventory acquired from home office at cost:

Merchandise at billed price Pxx
Divide by billing percentage of cost % Pxx
Add: inventory acquired from outsiders xx
Branch inventory at cost xx

Computation of Actual Branch Profit insofar as Home Office is Concerned

The actual or true branch insofar as the home office is concerned is computed as follows:

Branch profit (loss) as reported Pxx

Add: Overvaluation of branch cost of goods sold (Schedule 1) xx
Actual branch profit insofar as home office is concerned Pxx

Schedule 1
 Allowance
Billed Percent for Over-
Price of Cost = Cost valuation
Branch inventory, beg. (acquired from HO) Pxx Pxx Pxx Pxx
Add: Shipments during the period xx xx xx xx
Total before adjustment
Less: Branch inventory, end (acquired from HO) xx xx xx xx
Overvaluation of branch COGS (Realized Profit) Pxx

Preparation of Combined Financial Statements

The balance sheets and the income statements of the home office and the branch must be
combined for external reporting purposes. Working papers are usually prepared to eliminate
accounts affected in recording inter-office transactions before financial statements are
prepared.

Candidates should remember the following working paper elimination procedures:

1. Eliminate reciprocal accounts.

2. Eliminate inter-company transfer accounts.
a. Shipment to Branch and Shipment from Home Office accounts.
b. Allowance for Overvaluation of Branch Inventory.
3. Eliminate the overvaluation in branch beginning inventory.
4. Eliminate the overvaluation in branch ending inventory.

Combined Statement of Financial Position. The reciprocal accounts Investment in Branch and
Home Office accounts are not presented as well as the Allowance for Overvaluation account.

Combined Statement of Comprehensive Income. The merchandise inventories, beginning and

ending inventories are presented at cost. The Shipment to Branch and Shipment from Home
Office accounts are not presented.

Transactions between Branches

Occasionally, branch operations require that merchandise or other assets be transferred from
one branch to another. A branch does not maintain a reciprocal account with another branch
but records the transfer in the Home Office account. For example, if Bicol Branch ships
merchandise to Laguna Branch, Bicol Branch debits Home Office account and credits
Inventories (assuming that the perpetual inventory system is used). Upon receipt of the
merchandise, Laguna Branch debits Inventories and credits Home Office account. The home
office records the transfer between branches by a debit to Investment in Laguna Branch and a
credit to Investment in Bicol Branch.
The transfer of merchandise from one branch to another does not increase the cost of
inventories by the freight costs incurred because of the indirect routing. The amount of freight
costs properly included in inventories at a branch is limited to the cost of shipping the
merchandise directly from the home office to its present location. Excess freight costs are
recognized as expenses of the home office.

Accounting System for Sales Agencies

An agency is simply an extension of the sales territories in which orders are received from
customers and then transmitted to the home office for shipping and billing. They do not have
merchandise available for sale, but they keep samples inventory.

A sales agency neither keeps a complete set of books nor uses a double-entry system of
accounts. Usually, a record of sales to customers and a list of cash payments supported by
vouchers are sufficient.

An imprest system is usually adopted by the home office for the working fund of the sales
agency.
 PROBLEMS
1. Cebu branch submitted the following data to its home office in Manila for 2013, its first year
of operation:

Sales P2,300,000
Shipments from home office 1,850,000
Operating expenses 235,000
Home office 480,000

2. The home office in Quezon City ships and bills merchandise to its provincial branch at cost.
The branch carries its own accounts receivable and makes its own collections. The branch
also pays its expenses.

The transactions for 2013 are reflected in the branch trial balance that follows:

Cash P20,000
Accounts receivable 80,000
Home office P180,000
Shipments from Home Office 250,000
Sales 225,500
Expenses 55,500
Total P405,500 P405,500
December 31, inventory P65,000

Assuming all the transactions are properly recorded, what is the balance of the Investment in
Branch account in the home office books?

a. P180,000
b. P195,000
c. P165,000
d. P175,000

3. The following data pertains to the shipments of merchandise from Home Office to Branch
during 2013:

Home offices cost of merchandise P350,000

Inter-office billings 420,000
Sales by branch to outsiders 520,000
Merchandise inventory on December 31, 2013 50,000
 In the combined statement of comprehensive income of the Home Office and the Branch for
the year ended December 31, 2013, what amount of the above transactions should be
included as sales?

a. P570,000
b. P520,000
c. P470,000
d. P350,000

4. Nike Corporation operates a number of branches in the provinces. On December 31, 2013,
its Davao branch showed a Home Office account balance of P54,700 and the home office
books showed an Investment in Davao Branch account balance of P51,100. The following
information may help in reconciling both accounts:
1. A P24,000 shipment, charged by Home Office to Davao Branch, was actually sent to and
retained by Cebu Branch.
2. A P30,000 shipment, intended and charged to Aklan Branch was shipped to Davao
Branch and retained by the latter.
3. A P4,000 emergency cash transfer from Cebu Branch was not taken up in the Home
Office books.
4. Home office collects a Davao Branch accounts receivable of P7,200 and fails to notify
the branch.
5. Home office was charged for P2,400 for merchandise returned by Davao Branch on
December 30. The merchandise is in transit.

Home office erroneously recorded Davao Branchs net income for 2013 at P32,550. The
branch reported a net income of P25,350.

What is the adjusted balances of the Home Office and Davao Branch reciprocal accounts on
December 31, 2013?

a. P40,300
b. P54,700
c. P47,500
d. 43,500

5. The branch manager of Tower Cosmetics in Cebu submitted a report as of May 31, 2013
containing the following information:

Petty Cash Fund P1,500

Sales 198,720
Sales Returns 3,600
Accounts Written Off 1,920
Shipments from Home Office 136,080
Accounts Receivable May 31, 2012 43,800
 Accounts Receivable May 31, 2013 49,140
Inventory May 31, 2012 37,170
Inventory May 31, 2013 41,370
Expenses (reimbursed by H.O.) 57,930

Assuming all cash collected by the branch is remitted to Tower Cosmetics home office, the
remittances for the period amounted to:

a. P187,860
b. P189,780
c. P195,120
d. P198,720

6. On December 31, the Investment in Branch account in the home office books shows a
balance of P50,000. The following facts are ascertained:
1. Merchandise billed at P12,500 is in transit on December 31 from the home
office to the branch.
2. The branch collected a home office accounts receivable for P3,500. The
branch did not notify the home office of such collection.
3. On December 30, the home office sent cash of P7,500 to the branch, but
this was charged to General Expense; the branch has not received the cash
as of December 31.
4. Branch profit for December was recorded by the home office at P2,400
instead of P2,040.
5. The branch returned supplies of P1,500 to the home office but the home
office has not yet recorded the receipt of the supplies.

Assume all other transactions have been properly recorded.

What is the unadjusted balance of the Home Office account on the branch books on December
31?

a. P64,140
b. P39,140
c. P14,000
d. P13,000

7. A reconciliation of the Dagupan Branch account of Mandaluyong Company and the Home
Office account carried in the branchs books shows the following discrepancies at December 31,
2013:
1. A credit for merchandise allowance for P300 was taken by the branch as
P360.
2. A charge by the branch of P550 for an advance taken by the president when
he visited the branch has not yet been recorded by the home office.
 3. The branch has not taken up P900 covered by a debit memo from the home
office as share in advertising expenses.

The investment in Dagupan Branch account in the home office books had a debit balance
of P43,000 at December 31, 2013. The reciprocal accounts were in agreement at the
beginning of the year.

The unadjusted balance of the Home Office account in the branchs books at December
31, 2013 was:

a. P43,500
b. P42,950
c. P41,990
d. P41,490

8. The following were found in your examination of the interplant accounts between the Home
Office and the Butuan Branch:

a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked by
the branch.
b. P10,000 covering marketing expense of another branch was charged by Home Office
to Butuan.
c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000
twice.
d. 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 Branchs cost.
f. Butuan recorded a debit memo from Home Office of P4,650 as P4,560.

The net adjustments DR (CR) to the Investment in Butuan Branch account and to the Home
Office account are:

Investment in Butuan Home Office

a. P(75,700) P20,950
b. 75,700 (20,950)
c. (55,700) 75,000
d. (65,700) (74,000)

9. After examining on a comparative basis the inter-office account of the Bulacan Company
with its suburban branch and the similar account carried on the latters books, the following
discrepancies at the close of the business on June 30, 2013 were seen:
a. A charge for labor by the Home Office, P500 was recorded twice by the branch.
 b. A charge of P895 was made by the Home Office for freight on merchandise, but the
amount was recorded by the Branch as P89.50.
c. A charge of P980 (furniture and fixture) on the Home Office books was taken up by the
Branch as P890.
d. A credit by the Home Office for P350 (merchandise allowances) was taken up by the
Branch as P400.
e. The Home Office charged the Branch P425 for interest on open account which the
Branch failed to take up in full; instead, the Branch sent to the Home Office a wrong
memo, reducing the charge by P100 and set up a liability for the net amount.
f. The Home Office received P5,000, from the sale of a truck which it erroneously
credited to the Branch; the Branch did not charge the Home Office therewith.
g. The Branch by mistake sent the Home Office a debit note for P370 representing its
proportion of a bill for repairs of truck; the Home Office did not record it.
h. The Branch inadvertently received a copy of the Home Office entry dated July 19, 2011
correcting item (f) and entered a credit in favour of the Home Office as of June 30,
2013.

At June 30, 2013, the unadjusted balance of the Investment in Branch account on the Home
Office books showed P175,520. At the beginning of the year, the inter-office accounts were in
balance.

What is the unadjusted balance of the Home Office account on the branch books on June 30,
2013?

a. P184,279.50
b. P160,725.50
c. P184,729.00
d. P165,279.50

10. Rustans, Philippines has two merchandise outlets, its Home Office in Manila and its Cebu
City branch. For control purposes, all purchases are made by the Home Office and shipped to
the Cebu City branch at cost plus 10%. On January 1, 2013 the inventories of the Home Office in
Manila and the Cebu City branch are P13,600 and P3,960 respectively. During 2013 the Home
Office purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch.
At December 31, 2013, the following journal entry to prepare the books for the next accounting
period was prepared by the branch:

Sales 32,000
Inventory, December 31 4,840
Inventory, January 1 3,960
Shipments from main store 17,600
Expenses 10,480
Home Office 4,800
What was the actual branch income for 2011 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

11. On September 1, Star Company opened a branch in Dagupan City, shipping to it

merchandise billed at P60,000. During the month, additional shipments were made at a billed
price of P24,000. Returns by the branch of bad-order goods were credited for P1,680. At the
end of the month, the branch reported its inventory P33,600 and its net loss for the month at
P5,200. Shipments to and from the branch were consistently billed at 120% of cost.

On September 30, the branch inventory at cost and the branch net income (loss) as far as the
Home Office is concerned are:

a. P28,000 and P2,920, respectively

b. P28,000 and (P5,200), respectively
c. P33,600 and P2,920, respectively
d. P33,600 and P5,200, respectively

12. Makati Company bills its Valenzuela Branch for merchandise at 140% of cost. At the end of
January, 2013, the branch reported the following information:
Merchandise from
Home Office
(At Billed Price)
Inventory, January 1 P7,560
Shipments received 28,280
Inventory, January 31 8,400

What should be the balance of the allowance account for overvaluation of the branch inventory
at January 31 before adjustment?
a. P2,400
b. P2,160
c. P9,080
d. P10,240

13. The Binondo branch of China Products Inc. buys merchandise from third parties and
receives merchandise from the home office for which it is billed at 20% above cost. Below are
excerpts from the trial balances and data on the home office and Binondo branch for the month
just ended:
Home office
Allowance for overvaluation of branch merchandise P370,000
Shipments to Branch 850,000
Branch
Beginning inventory 1,440,000
Shipments from home office 1,020,000
Purchases 410,000
Month end additional data
Ending inventory of Branch 1,460,000
From Home Office at Billed Price P1,170,000
From Outsiders (at cost) 290,000

The total cost of goods sold of the Binondo branch at cost (net of overvaluation) for the month just
ended amounted to:

a. P1,410,000
b. P1,385,000
c. P1,235,000
d. P1,850,000

14. Shopper Company started a branch office in Iloilo City on June 1,2013. On this date, the company
shipped to its branch merchandise billed at P90,000. On June 15, another shipment was made at billed
prices of P36,000. During the month, the branch was credited for P2,520 for the damaged goods
returned by the branch. On June 30,2013, the branch reported the following:

Inventory, June 30 P50,400

Net loss for the month (P7,800)

Shipments to and from the branch were uniformly billed at 120% of cost.

In the home office books, the Iloilo branch operations resulted in:
a. No net income or loss
b. Net income of P4,280
c. Net income of P12,180
d. Net loss of P7,800

15. Tarlac Branch of Quezon City Company, at the end of its first quarter of operations,
submitted the following statement of comprehensive income:

Sales P300,000
Cost of Sales:
Shipments from Home office P280,000
Local Purchases 30,000
Total 310,000
 Inventory at end 50,000 260,000
Gross margin on sales 40,000
Expenses 35,000
Comprehensive income P 5,000

Shipments to the branch were billed at 140% of cost. The branch inventory as at September 30
amounted to P50,000 of which P6,600 was locally purchased. Markup on local purchases, 20% over cost.
Branch expenses incurred by Head Office amounted to P2,500.

On September 30, the branch inventory at cost and the net income realized by the home office from the
Tarlac branch operation are:

Branch Inventory at Cost Net income realized

a. P37,600 P72,600
b. P50,000 P55,000
c. P31,600 P5,000
d. P37,600 P70,100

16. Ayala branch was billed by Home Office for merchandise at 140% of cost. At the end of its first
month, Ayala branch submitted among other things, the following data:

Merchandise from Home Office (at billed price) P98,000

Merchandise purchase locally by branch 40,000
Inventory, December 31 of which P7,000 are of local purchase 28,000
Net sales for month 180,000

The branch inventory at cost and the gross profit of the branch as far as the home office is concerned
are:
Branch Inventory at Cost Gross Profit
a. P92,000 P22,000
b. P22,000 P92,000
c. P22,000 P70,000
d. P20,000 P90,000

17. The Coffee Blends Corporation decided to open a branch in Manila. Shipments of merchandise to
the branch totalled P54,000 which included a 20% mark-up on cost. All accounting records are to be
kept at the home office.

The branch submitted the following report summarizing its operations for the period ended December
31, 2013.

Sales on account P74,000

Sales on Cash basis 22,000
Collections of account 60,000
Expenses paid 38,000
 Expenses unpaid 12,000
Purchase of merchandise for cash 26,000
Inventory on hand, December 31; 80% from home office 30,000
Remittance to home office 55,000

The branch 12/31 inventory at cost and the branch net income (loss) as far as the home office is
concerned are:

Branch Inventory at Cost Branch Net income (loss)

a. P26,000 (P1,000)
b. P25,000 (P4,000)
c. P26,000 P1,000
d. P20,000 P 800c
18. Trial balances before adjustments for the home office and the branch of the King Company show the
following items on December 31. The home office bills the branch at 20% above cost.

Home Office Branch

Allowance for overvaluation of branch merchandise P3,600
Shipment to branch 8,000
Purchases P2,500
Shipment from home office 9,600
Merchandise Inventory, December 1 15,000

What part of the branch inventory as of December 1 represented purchases from outsiders?

a. P3,000
b. P5,000
c. P2,000
d. P1,800

19. The Manila Sales Co. established a branch in San Pablo City early last year. It shipped merchandise
and billed the branch for P300,000 prior to its opening. For the year, it made additional shipments at
billed price of P120,000. Within the year, the branch shipped backP7,500 inventory and got the credit
memo for the said returns. On the last working day of the year, an inventory count was made. Ending
inventory of P185,000 was established consisting of purchases from third parties at P20,000 with the
balance coming from home office shipments at billed price.. The home office billed the branch at 20%
above cost. The total purchases of the branch from outside suppliers amounted to P72,500. The total
goods available for sale by the branch at cost (net of overvaluation and returns) amounted to:

a. P416,250
b. P485,000
c. P422,500
d. P435,250
20. The income statement submitted by the Bulacan Branch to the Home Office for the month of
December,2013 is shown below. After affecting the necessary adjustments the true net income of the
Bulacan Branch inventories were:

12/01/2011 12/31/2011
Merchandise from Home Office P70,000 P84,000
Local purchases 10,000 16,000
Total 80,000 100,000

Sales 600,000
Cost of Sales:
Inventory, December 1 80,000
Shipments from home office 350,000
Local purchases 30,000
Total available for sale 460,000
Inventory, December 31 100,000 360,000
Gross Margin 240,000
Operating expenses 180,000
Total comprehensive for December 2011 P60,000

What is the balance of the Allowance for Overvaluation in Branch Inventory account at December 31,
2013?

a. P10,000
b. P16,000
c. P24,000
d. P34,000

21. Mahiyain Commercial Corporation operates a branch in Iloilo City. Selected accounts take from the
books of Mahiyain and its branch show balances as of December 31,2013 as follows:
Home office Branch
Merchandise inventory, January P12,000 P8,000
1
Purchase 150,000 30,000
Shipments from home office - 93,750
Shipments to branch 75,000 -
Branch inventory allowance 19,750 -
Sales 115,000 176,500
Merchandise inventory, 14,000 10,350
December 31
The ending inventory of the branch includes items costing P4,350 which were acquired from suppliers
other than the home office.

As far as the home office is concerned, the cost of sales of the Iloilo City branch was:
a. P97,120
b. P102,850
c. P121,400
 d. P131,850
22. The Neneng Corporation established its San Pedro branch in March 201. During the first year of
operations, the home office shipped to the branch merchandise which had cost of P120,000. Three-
fourths of these merchandise was sold by the branch for P141,000. Operating expenses of the
branch amounted to P27,000.

How much total comprehensive income will the branch report if merchandise is billed by the home
office to the branch at 25% above cost?
a. P800
b. P1,200
c. P1,500
d. P8,000
23. A branch store in Marikina was established by Marco Co. on March 1. Shipments of merchandise,
billed to this branch at 125% of cost, were as follows:
March 5 P120,000
March 10 50,000
March 20 35,000
On March 24, the branch returned defective merchandise worth P3,050 and on March 31, it
reported a net loss of P6,200 and merchandise inventory of P85,000.

In the home office books, the branch total comprehensive income (loss) is:
a. (P6,200)
b. P17,190
c. P20,240
d. P23,390
24. The Chivas Regal owns the Royal Crown in Quezon City and a branch in Davao City. During 2013, the
home office shipped to the branch supplies costing P120,000 at a billed price of 20% above cost. The
inventories of supplies at the branch were as follows: January 1,2013, P90,000; December 31,2013,
P108,000. On December 31,2013, the home office holds inventories of P160,500 which includes
P10,500 held in consignment.

How much is the inventories in a combined statement of financial position as of December 31,2013?
a. P210,000
b. P240,000
c. P270,000
d. P300,000
25. The Iloilo Company operate a branch in Davao, and the profit and loss data for the home office and
the branch for 2013 follows:
Home office Branch
Sales P250,000 P75,000
Purchases from outsiders 200,000 15,000
Shipments to branch:
Cost to home office 30,000
Billing price to branch 37,500
Expenses 40,000 10,000
Inventories, Jan. 1,2013:
Home office, at cost 80,000
Branch:
From outsiders, at cost 7,500
From home office, at 20% above cost 24,000
Inventories, December 31,2013:
Home office, at cost 55,000
Branch:
From outsiders, at cost 5,500
From home office at 2013 billing 26,000

The combined total comprehensive income (loss) of the home office and the branch on
December 31,2013 is:
a. P30,800
b. P(30,800)
c. P33,800
d. P27,000
26. Manila Inc. established a branch in Cebu to distribute part of the goods purchased by the home
office. The home office process inventory shipped to the branch at 20% above cost. The following
account balances were taken from the ledger maintained by the home office and the branch:
Manila Inc. Cebu branch
Sales P600,000 P210,000
Beginning inventory 120,000 60,000
Purchases 500,000 -
Shipment to branch 130,000 -
Shipment from home office - 156,000
Operating expenses 72,000 36,000
Ending inventory 98,000 48,000
All of the branch inventory is acquired from the home office

The combined total comprehensive income of the home office and the branch is:
a. P170,000
b. P70,000
c. P278,000
d. P132,000
27. Selected accounts from the December 31,2013 trial balances of Heart Co. and its branch follows:
Heart Branch
Inventory, Jan.1 P46,000 P23,100
Investment in Branch 116,600 -
Purchases 380,000 -
Shipments from home office - 209,000
Freight in - 10,450
Expenses 104,000 58,100
Home office - (106,600)
Sales (310,000) (280,000)
Shipments to branch (200,000) -
Branch merchandise markup (22,000) -
As of December 31,2013, a shipment with a billing price of P11,000 was in transit to the branch.
Freight cost, typically 5% of the billing price, is inventoriable. Merchandise on hand at a year-end
were: at home office P64,000 at cost; at branch P33,000 at billing price.

What is the combined total comprehensive income of Heart Company and its branch for 2013?
a. P77,000
b. P84,900
c. P76,000
d. P76,100
28. Apo Supply Company is engaged in merchandising both at its Home office in Makati and as its
Branch in Davao City. Selected accounts taken from the trial balances of the Home office and the
branch as of December 31,2013 follows:
Makati Branch
Debits

Inventory, Jan. 1,2013 P23,000 P11,550

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- P53,300

Sales 155,000 140,000
Sales to branch 110,000 -
Allowances for overvaluation of
Branch inventory at Jan. 1,2013 1,000 -
Additional information:
- The Davao City branch gets all of its merchandise from the home office. The home office bills the
goods at cost plus a 10% mark-up. At December 31,2013, a shipment with a billed value of P5,000
was still in transit. Freight on this shipment was P250 and is to be treated as part of the inventory.
- Inventories on December 31,2013, excluding the shipment in transit, follow:
Home office, at cost P30,000
Branch, at billed price (excluding freight of P520) 10,400
What is the combined total comprehensive income (loss) of the home office and the branch on
December 31,2013?
a. P30,470
b. P20,870
c. P(10,000)
d. P(30,470)
29. On November 2,2013, the home office of Toby Sports Company recorded a shipment of
merchandise to its Bulacan as follows:
Investment in branch Bulacan 60,000
Shipments to branch 50,000
Allowance for overvaluation of branch inventory 8,000
Cash (for freight charges) 2,000
The Bulacan branch sells 40% of the merchandise to outside customers during the rest of the period.
The books of the home office are closed on December 31 of each year.

On January 10,2014, the Bulacan branch transfer half of the original shipment to the Baguio branch,
and the Bulacan branch pays P1,000 freight for the shipment. If the shipment had been made by the
home office to Baguio branch, the freight charges would have been P1,500.

What is the entry of the Bulacan brancg to record the receipt of the shipment from the home office on
November 2,2013?
a. Shipments from home office 50,000
Accounts receivable 8,000
Freight in 2,000
Home office 60,000
b. Shipments from home office 60,000
Home office 60,000
c. Shipments from home office 58,000
Freight in 2,000
Home office 60,000
d. Shipments from home office 50,000
Freight out 2,000
Home office 52,000
30. using the same data in No. 29, at what amount should the 60% of the merchandise remaining
unsold at December 31,2013 be included in the inventory of the Bulacan Branch?
a. P31,200
b. P36,000
c. P36,800
d. P34,800
39. Using the same data in No. 29, what is the entry in the books of Bulacan Branch to record the
transfer of January 10,2014?
a. Baguio branch 31,000
shipment from home office 31,000
b. home office 31,000
inventory 31,000
c. home office 31,000
inventory 30,000
cash 1,000
d. home office 32,000
cash 1,000
freight in 2,000
inventory 29,000

32. Using the same data in No. 29, what is the entry in the books of Baguio branch to recorf the
transfer on January 10,2014?
a. shipments from Bulacan Branch 30,200
Bulacan branch 30,200
b. shipments from home office 29,000
freight in 1,500
home office 30,500
 cash 1,000
c. shipments from home office 29,000
freight in 1,500
home office 30,500
d. shipment from home office 30,000
freight in 1,000
home office 31,000

33. Using the same data in No. 29 what is the entry in the home office books to record the inter-
branch transfer on January 10,2014?
a. investment in branch Baguio 30,500
excess freight 1,500
investment in branch Bulacan 32,000
b. investment in branch Baguio 30,500
investment in branch Bulacan 30,500
c. investment in branch Bulacan 32,500
investment in branch Baguio 32,500
d. investment in branch Baguio 30,500
excess freight 500
investment in branch Bulacan 31,000

34. Papa, Inc. of Makati opens a sales agency in Pasig City and a working funn of P100,000 is
established on imprest basis. The first payment from the fund is P5,000 for rent of the store space.

What is the entry in the books of the home office to record the payment of rent by the agency?
a. Rent expense Pasig agency 5,000
cash 5,000
b. Pasig agency 5,000
cash 5,000
c. Rent expense Pasig agency 5,000
working fund 5,000
d. No entry

35. Mama, Inc. opened a sales agency in San Pedro Laguna in 2013. The following is a summary of the
transactions of the sales agency:

Sales orders sent to home office P120,000

Sales orders filled by home office in 2013 95,000
Freight on shipment of agency 2,000
Collections, net of 10% discount 81,000
Selling expenses paid from the agency working fund 5,500
Administrative expenses charged to agency 5% gross sales
Samples shipped to agency:
Cost 8,200
Inventory, December 31,2013 4,550
The companys gross profit rate on agency sales is 30% excluding the freight cost on shipments to
agency.
 What is the total comprehensive income of the agency for 2013?
a.P3,600
b.P5,600
c. P1,600
d.P6,300
36. A Makati home office transfers inventory to its Pasig branch at 140% of cost. During 2013, the
reciprocal account in the statement of comprehensive income of the home office amounts to P328,125.
On December 31,2013, the home office adjusted the branch income summary by debiting the Allowance
for Overvaluation of Branch Inventory account in the amount of P81,250. The branchs statement of
financial position at the beginning of the year shows P105,000 of inventory acquired from the home
office.

How much is the ending inventory of the branch per books?

a. P200,000
b. P161,250
c. P280,000
d. P80,000
37. On July 31,2013, the home office in Manila establishes a sales agency in Bulacan. The following
assets are sent to the agency:
Cash(working fund to be operated under the imprest system) P22,000
Samples of merchandise 36,000
During the month of August, the following transactions occurred:
The sales agency submits sales order of P272,000, sales per invoice was billed at P268,000. Cost
of sales to customers is P124,000.
Collections during the month amount to P58,200 net of 3% discount.
Home office disbursements chargeable to the agency are as follows:
Furniture P40,000
Salaries for the month 21,600
Annual rent of office space 36,000
On August 31, the sales agency working fund is replenished. Paid vouchers submitted by the
sales agency amounting to P17,925. Samples were useful until December 31,2013 which at this
time are believed to have a salvage value of 15% of cost. Furniture is depreciated at 18% per
annum.

What is the total comprehensive income of the sales agency for the month of August?
a. P91,425
b. P93,225
c. P92,955
d. P58,425

38. The home office in Makati shipped merchandise costing P55,500 to Pasig branch, prepaid the
freight amounting to P4,200. The home office transfers inventory to the branch at a 20% markup
above cost. Pasig branch was subsequently instructed by the home office to transfer the
merchandise to Alabang branch wherein the latter paid freight of P2,800. If the shipment was
made directly from Makati to Alabang, the freight cost would have been P6,200.

Which of the following is true as a result of the interbranch transfer of merchandise?

a. The home office debits Alabang Branch Current for P73,600
 b. Alabang branch debits the Home Office for P70,000
c. Pasig branch credits freight in for P6,200
d. The home office will credit Pasig Branch Current for P70,800
39. The following are some of the account balances on the books of the home office and its branch on
December 31,2013.
Home office books Branch books
Inventory, January 1,2013 P20,000 P58,000
Shipments from home office 150,800
Purchases 900,000 200,000
Shipments to branch 145,000
Allow. For overvaluation of 52,500
branch inventory
Sales 1,200,000 720,000
Operating expenses 290,000 110,000
Per physical count, the ending inventory of the branch is P42,000 including goods purchased from
outsiders of P27,700 while the ending inventory of the home office is P120,000. Home office bills its
branch for merchandise shipments at 30% above cost.

What is the amount of the unrealized inventory profit in the books of the home office on December
31,2013?
a. P9,000
b. P7,260
c. P12,000
d. P3,300
40. using the data in No. 39, how much is the combined total comprehensive income on December
31,2013?
a. P538,700
b. P547,400
c. P541,700
d. P498,200
e. ANSWERS

1. A 6. B 11. A 16. B 21. B 26. A 31. D 36. C

2. C 7. D 12. D 17. C 22. C 27. C 32. C 37. C
3. B 8. A 13. C 18. A 23. B 28. A 33. A 38. D
4. C 9. A 14. B 19. A 24. B 29. C 34. D 39. C
5. A 10. B 15. A 20. C 25. C 30. B 35. A 40. A

SOLUTIONS AND EXPLANATIONS

1. Since the balances of the reciprocal accounts Home Office account and Investment in
Branch account are equal, then the balance of the Home Office account after closing
the branch profit is to be computed. The computation is:
Home office account balance before branch profit P480,000
Add: Profit (loss)
Sales P2,300,000
 Cost of sales
Shipments from HO P1,850,000
Inventory, dec. 31 255,500 1,594,500
Gross profit P705,500
Operating expenses 235,000 470,500
Home office account balance, December 31,2011 P950,500

2.
Home office account balance before branch profit P180,000
Add: Profit (loss)
Sales P225,500
Cost of sales
Shipments from HO P250,000
Inventory, dec. 31 65,000 185,000
Gross profit P40,500
Expenses 55,500 (15,000)
Home office account balance, December 31,2011 P165,000

Therefore the balance of the Investment in Branch a account is also P165,000.

3. In preparation of combined statements of the home office and the branch, all inter-
office transactions are eliminated as if it had never occurred. Therefore, the only
transaction that should be presented are transactions to outsiders, which is in this
problem, the P520,000 sales by branch to outsiders.
4. To compute the adjusted balances of the reciprocal accounts a reconciliation statement
is to be prepared as follows:
(branch books) home office (HO books) Investment in
account Davao Branch Account
Unadjusted balances, Dec. P54,700 P51,1100
31,2013
Add(deduct) the following adjustments:
1. shipment charged Davao (24,000)
branch but actually sent to
Cebu branch
2. shipment charged to 30,000
Aklan branch but actually
sent to Davao branch
3. no effect
4. Merchandise returned by (7,200)
Davao branch accounts
receivable
5. merchandise returned by
Davao branch still in transit (2,400)
to home office
 6. overstatement of Davao _______ (7,200)
branch net income
(P32,550-P25,350)
Adjusted balances, dec. P47,500 P47,500
31,2013

5. The P187,860 is computed as follows:

Accounts receivable, 5/31/12 P43,800
Net sales (P198,720 P3,600) 195,120
Total 238,920
Less: Accounts receivable, 5/31/13 P49,140
Accounts written off 1,920 51,060
Remittance P187,860
6. P39,140 is computed as follows:
Investment in branch account balance, P50,000
12/31 (HO books)
Add(deduct):
Merchandise in transit (12,500)
Collection of HO accounts receivable 3,500
by branch
Erroneous recording of Branch profit (360)
Supplies returned by Branch (1,500)
HO account balance, 12/31 (Branch P39,140
books)

7. The P41,490 unadjusted balance of Home office is computed as follows:

Unadjusted balance, Investment in Branch account, 12/31 P43,000
Less: Merchandise allowance (error) P60
Branch advances to President 550
Advertising expense charged to branch 900 1,510
Unadjusted balance, home office account, 12/31 P41,490

8. Dr. (Cr.) Adjustment to investment in Butuan Branch account

Marketing expense of another branch charged to Butuan (b) P(10,000)
Butuans remittance credited to Davao branch (d) (65,700)
Dr. (Cr.) adjustment to Butuan branch
Account in the home office books P(75,700)

Dr. (Cr.) Adjustment to Home office account:

Fixed assets transfer not booked by Butuan (a) P(53,960)
Inventory transfer recorded twice by Butuan (c) 75,000
Error in recording DM for P4,650 as P4,560 (f) (90)
Dr. (Cr.) adjustment to Butuan branch
Account in the home office books P20,950

9. unadjusted balance of investment in branch account, 6/30 P175,520

(a) Charge for labor 500
(b) charge for freight (805.5)
(c) purchase of furniture & fixture (90)
(d) merchandise allowance (50)
(e) charge for interest (425)
(f) proceeds from sale of truck 5,000
(g) charge for truck repairs (370)
(h) proceeds from sale of truck 5,000
Unadjusted balance of Home office account, 6/30 P184,279.5

10.
Sales P32,000
Cost of sales
Inventory, jan.1 3,960
Shipment from home office 17,600
Inventory, dec. 31 (4,840) 16,720
Gross profit 15,280
Expenses 10,480
Net income per branch books 4,800
Add: overvaluation of COS
Billed price (above) 16,720
Cost to HO (16,720/110%) 15,200 1,520
Actual branch income at cost basis P6,320

11. Branch Inventory at Cost:

Branch inventory at billed price P33,600
Divided by the billing percentage cots 120%
Branch inventory of cost P28,000

Branch net income as far as the HO is concerned:

Branch net loss, as reported (P5,200)
Add: overvaluation of COS of the
Branch:
Total shipment to Branch
Billed price (P60,000+24,000) P84,000
 Cost (P84,000/120%) 70,000 P14,000
Less: branch returns -
Billed price P1,680
Cost (P1,680/120%) 1,400 280
Net shipment P13,720
Less: Inventory, 9/30
Billed price P33,600
Cost 28,000 5,600 8,120
Branch net income P2,920

12. The balance of the Allowance for Overvaluation of Branch Inventory account
represents the overvaluation of branch inventory on January 1 and overvaluation of the
shipment received. Computation is as follows:
Billed price Billing Cost Over valuation
percentage =
Inventory, Jan. 1 P7,560 140% P5,400 P2,160
Add: shipment 28,280 140% 20,200 8,080
Balance of allowance before adjustment P10,240

13.
Beginning inventory P1,440,000
Purchase 410,000
Shipment from HO 1,020,000
Good available for sale 2,870,000
Ending inventory 1,460,000
Cost of sales 1,41,000
Less: Overvaluation
Beginning inventory & shipments 370,000
Less: ending inventory
Billed price P1,170,000
Cost (P1,170,000/120%) 975,000 195,000 175,000
Cost of goods sold (net) P1,235,000

14. According to the HO books, Iloilo branch will have a P4,380 net income as computed
below:
Branch net loss (P7,800)
Add: Overvaluation of Cost of sales of Branch -
Total shipment to Branch:
Billed price (90,000+36,000) P126,000
Cost (P126,000/120%) 105,000 P21,000
Less: Branch returns
Billed price P2,520
 Cost(2,520,/120%) 2,100 420
Net shipment to Branch P20,580
Less: inventory, 6/30
Billed price P50,400
Cost(P50,400/120%) 42,000 8,400 12,180
Branch net income P4,380

15. P37,600 is computed as follows:

Acquired from HO:
Billed price (P50,000-P6,600) P43,400
Divide by billing percentage of cost 140% P31,000
Local purchases 6,600
Branch inventory at cost, 9/30 P37,600

Below is the computation of Home office income from branch operation of P70,100.
Branch net income (5,000-2,500 P2,500
expense)
Add: overvaluation of branch cost
of sales:
Shipment from Home Office:
Billed price P280,000
Cost(P28,000/140%) 200,000 P80,000
Less: inventory, end -
Billed price (50,000-6,600) P43,400
Cost(P43,400/140%) 31,000 12,400 67,600
Branch net income realized by HO P70,100

16. branch inventory, at cost, 12/31:

Acquired from HO (P21,000/140%) P15,000
Local purchases 7,000
Total P22,000

Branch gross profit:

Net sales P180,000
Cost of sales insofar as Home office is concerned
Shipment from HO, at cost P70,000
(P98,000/140%)
Purchases 40,000
Cost of goods available for sale 110,000
Inventory, at cost 12/31:
Acquired from HO (P21,000/140%) P15,000
 Local purchases 7,000 22,000 88,000
Gross profit insofar as HO is concerned P92,000

17. below is the computation of Branch ending inventory at cost:

Acquired from HO (80% x P30,000 ) / 120% P20,000

Add: Acquired from outsiders (20% x P30,000) 6,000
Branch inventory at cost, 12/31 P26,000

The P1,000 net income is derived as follows:

Sales (P74,000 + P22,000) P96,000

Cost of sales insofar as Home office is concerned
Shipment from HO, at cost P45,000
(P54,000/120%)
Purchases 26,000
Cost of goods available for 71,000
sale
Inventory, at cost 12/31: 26,000 45,000
Gross profit P51,000
Expenses (P38,000+P12,000) 50,000
Branch net income insofar as Home office is concerned P1,000

18. Merchandise inventory, December 1 P15,000

Less: Merchandise acquired from HO at billed price
Overvaluation (3,600 P1,600) P2,000
Cost (P2,000/20%) 10,000 12,000
Merchandise acquired from outsiders P3,000

19.
Total shipment from office P420,000
Returns (7,500)
Purchases 72,500
Goods available for sale, at billed price 485,000
Less: overvaluation of shipment:
Billed price P420,000
Cost (420,000/120%) 350,000 70,000
Returns:
Billed price P7,500
Cost (7,500/120%) 6,250 (1,250) 68,750
Goods available for sale, at cost P416,250
20. before computing the balance of the allowance account, the percent of billing price to
cost should be computed first as follows:

Branch net income, per HO P156,000

Branch net income, per branch 60,000
Realized mark-up on merchandise from the
Home office already sold by the branch P96,000

Shipment from home office P350,000

Less: increase in portion of Branch inventory
Acquired from home office 14,000
Portion already sold by branch P336,000
Less: Mark-up thereon (above) 96,000
Cost of portion already sold by branch P240,000

Per cent of billing price to cost: P336,000/240,000 140%

The balance of the Allowance for Overvaluation in Branch inventory account as

December 31,2013 after adjustment represent the overvaluation of the branch ending
inventory acquired from the home office computed as follows:

Billed price P84,000

Cost (P84,000/140%) 60,000
Balance of the allowance account P24,000

21. branch inventory, January 1 P8,000

Purchases 30,000
Shipments from home office 93,750
Merchandise available for sale P131,750
Less: branch inventory, Dec. 31 10,350
Branch cost of sales, per branch books P121,400
Less: Mark- up on merchandise from the HO
Already sold by the branch: P19,750
Branch inventory allowance
Less: mark-up on portion of Dec. 31 inventory
Acquired from home office:
(P10,350-P4,350) x 25/125 1,200 18,550
Branch cost of sales, as far as the home office is concerned P102,850
 Note: shipments of merchandise from the home office to the branch are billed at 125%
of cost, determined as follows:

Shipments from Home Office = P93,750 =125%

Shipments to Branch = P75,000
22.
Sales P141,000
Less: cost of sales at Billed price (Sch. 1) 112,500
Gross profit 28,500
Expenses 27,000
Total comprehensive income to be reported by the Branch P1,500

Schedule 1
Cost of shipment to branch P120,000
Add: 25% mark-up 30,000
Billed price of shipment to branch 150,000
Portion sold x
cost of sales at billed price P112,500

23. reported branch loss P(6,200)

Add: overvaluation in branch cost of sales
Shipment to branch P205,000
Less: returns 3,050
Ending inventory 85,000 88,050
Cost of sales, at billed price 116,950
Cost of sales, at cost to HO
(116,950/125%) 93,560 23,390
Branch total comprehensive income, per HO books P17,190

24. The combined inventories on dec. 31, 2013 statement of financial position computed as
follows:

Home office (P160,500 P10,500) P150,000

Branch, at cost (108,000/120%) 90,000
Combined inventories, 12/31 P240,000

25.
Sales P325,000
Less: cost of sakes
Jan. 1 inventories, at cost (sch 1 ) 107,500
Purchases 215,000
Merchandise available for sale P322,500
Less: dec. 31 inventories, at cost (sch 1 ) 81,300 241,200
Gross profit on sales P83,800
Less: expenses 50,000
Total comprehensive income P33,800

Schedule 1:
Inventories
Jan.1 Dec. 31
Home office P80,000 55,000
Branch, at cost
Acquired from outsiders 7,500 5,500
Acquired from HO:
Jan. 1 (P24,000/120%) 20,000
Dec. 31 (P26,000/125%) _______ 20,800
Combined P107,500 P81,300
2013 billing (7,500/30,000) = 125%

26.
Sales P810,000
Cost of sales
Beg. Inventory
HO P120,000
Branch, at cost 50,000 P170,000
(P60,000/120%)
Purchases 500,000
Total 670,000
Ending inventory:
HO 98,000
Branch, at cost 40,000 138,000 532,000
(P48,000/120%)
Gross profit 278,000
Operating expenses 108,000
Combined net income P170,000

27.
Sales (P310,000 + P280,000) P590,000
Cost of sales:
Inventory, 1/1 (sch1) P67,100
 Purchases 380,000
Freight in (P220,000x5%) 11,000 391,000
Goods available for sale 458,100
Inventory, 12/31 (sch1) 104,000
Freight in (P220,000x5%) 2,200 106,200 351,900
Gross profit P238,100
Expenses (P104,000+P58,100) 162,100
Combined total P76,000
Comprehensive income

Schedule 1 : Combined inventories at cost

Inventories
January 1 December 31
Home office, at cost P46,000 P64,000
Branch at cost
Inventory, Jan. 1:
Billed price P23,100
Mark-up (sch2) 2,000 21,00
Inventory, Dec. 31:
At cost 40,000
[(P33,000+P11,000)/110%*]
Combined P67,100 P104,000
*Billing %: (209,000 + 11,000)/200,000 = 110%

Schedule 2: mark-up on Branch beginning inventory

Branch merchandise markup before adjustment P22,000
Less: overvaluation of shipments [(P209,000 + P11,000)-P200,000] 20,000
Mark up of branch beginning inventory P2,000

28.
Sales P295,000
Cost of sales:
Inventory, 1/1
Home office P23,000
Branch, at cost (11,550-1,000) 10,550
Freight in (5,500-1,000) 5,750 39,300
Purchases, Home office 190,000
Total 229,300
Inventory, 12/31
Home office P30,000
Branch, at cost 14,000
[(10,400+5,000/110%]
 Freight in(P520+250) 770 44,770 184,530
Gross profit 110,470
Sundry expneses 80,000
Combined total comprehensive P30,470
income

29. Choice (c) is correct, because the branch should record the shipment from the office at
billed price (P50,000 + P8,000), and should treat the freight charged by the office as
inventoriable cost.

30.
Shipments from home office at billed price P58,000
Unsold 60%
Ending inventory P34,800
Freight in (P2,000 x 60%) 1,200
Total P36,000

31. In the books of Bulacan branch (sending branch) the inter-branch transfer should be treated
as if it was returned to the home office. Inventory account should be credited in place of
the Shipment from Home office account which was already closes at the end of 2010.
Therefore entry (d) is correct.

32. In the books of Baguio branch (receiving branch) the inter-branch transfer should be treated
as if it was received from the home office. And the freight to be recognized should be the
freight from the office. Therefore choice (c) is correct.

33. In the books of the home office the inter-branch transfer can be cleared by debiting the
receiving branch (Baguio) and crediting the sending branch (Bulacan). Excess freight
account should be charged for the difference which is treated as an expense of the home
office. Therefore choice (a) is correct.

Alternative entry: If the allowance for overvaluation of branch inventory account is classified by
branch:

Investment in Branch Baguio 30,500

Allowance for overvaluation of Branch Inventory-Bulacan
(P8,000 x 50%) 4,000
Excess freight 1,500
Investment in Branch Bulacan 32,000
 Allowance for overvaluation Branch inventory- Baguio 4,000

34. The expenses paid by the branch are not recorded in the home office books. It is only
recognized upon replenishment of the working fund (petty cash fund).

35. Sales P95,000

Sales discount (P81,000 / 90%)x 10% 9,000
Net sales 86,000
Cost of sales (P95,000 x 70%)+ 200 68,500
Gross profit 17,500
Expenses:
Selling expenses P5,500
Administrative expenses (P95,000 x 5%) 4,750
Samples expenses (P8,200 P4,550) 3,650 13,900
Net income P3,600

36. Branch beginning inventory acquired from home office P105,000

Shipment from home office at billed price (P328,125 x 140%) 459,375
Goods available for sale at billed price 564,375
Branch ending inventory per books P280,000

37. Sales P268,000

Sales discount (P58,200 97%)x 3% 1,800
Net sales
Cost and expenses:
Cost sales P124,000
Salaries 21,600
Rent expense (P36,000 x 1/12) 3,000
Expenses 17,925
Samples (P36,000 x 85%)x 1/5 6,120
Depreciation (P40,000 x 18% x 1/12) 600 173,245
Net income P92,955

38. Choice (d) is correct due to the following entries to record the interbranch transfer of
merchandise:

Pasig Branch Books:

Home office 70,800
 Freight in 4,200
Shipment from home office 66,600
To record transfer of merchandise to Alabang.

Alabang Branch Books:

Shipment from home office 66,600
Freight in 6,200
Cash 2,800
Home office 70,000
To record receipt of merchandise from Pasig.

Home Office Books:

Alabang branch current 70,000
Excess freight 800
Pasig branch current 70,800
To record interbranch transfer of merchandise.

39. The unrealized inventory profit balance on December 31 is the difference between the
branch ending inventory at billed price and cost. Computed as follows:

Branch ending invty per physical count from HO (42,000 27,000) P14,300
Shipment in transit:
Shipment from HO at BP (145,000 130%) P188,500
Shipment from HO per books 150,800 37,700
Correct branch ending inventory at billed price P52,000
Branch ending at cost (52,000 130%) 40,000
Unrealized inventory profit, December 31, 2008 P12,000

40. The combine net income is computed by preparing a combined income statement as
follows:

Sales P1,920,000
Cost of sales:
Inventory, January 1 (Sch. 1) P69,000
Purchases 1,100,000
Goods available for sale 1,169,000
Inventory, December 31 (Sch. 1) 187,700 981,300
Gross profit 938,700
 Expenses 400,000
Combined net income P538,700

Schedule 1:
Inventory at cost
January 1 December 31
Home office P20,000 P120,000
Branch: Acquired from HO (Sch. 2) 30,000 40,000
Acquired from outsiders (58,000 39,000) 19,000 27,700
Total 49,000 67,700
Combined P69,000 P187,700

Schedule 2:
Allow for overvaluation before adjustment P52,800
Overvaluation in the Shipments:
Shipment from HO at BP (P145,000 x 130%) P188,500
Shipment to branch at cost 145,000 43,500
Overvaluation in the branch beginning inventory P 9,000

Branch beginning inventory at cost (P9,000 / 30%) P30,000

Branch ending inventory at cost (per No. 39) P40,000