Chapter I SPECIAL PROBLEMS IN HOME OFFICE AND BRANCH ACCOUNTING In accounting for home office and branch transactions, special problems may be encoun- tered such as those involving inter-branch transactions, excess freight on inter-branch transfer of merchandise, shipments billed at above cost, and variations in recording intracompany trans- fers of merchandise. These need not waylay the accountant from his objective of determining the results of operations of each organizational sub-unit. Inter-Branch Transactions When there are transactions between branches of the same company, it is preferable that they be recorded by debits or credits to the Home Office Current account for a more effective internal control and 1o facilitate the reconciliation of the interoffice accounts. Inter-Branch Transfer of Cash All inter-branch transactions are cleared through the home office account so that a branch does not have to open an account with another branch. On the books of the home office, the account of the branch receiving the fund transfer is charged and the account of the branch making the remittance is credited. Example: Cebu Branch effects a fund transfer of 7,000 to Bacolod Branch. The entries on the three books of accounts are as follows: Home Office Books Bacolod Branch Books Cebu Branch Books Bacolod Branch 7,000 Cash P7,000 Home Office P°7,000 (Cebu Branch 7,000 Home Office 7,000 Cash 7,000 Inter-Branch Transfer of Merchandise As in the case of inter-branch transfer of cash, inter-branch transfer of merchandise is cleared. through the home office account. The home office makes two entries. One is to transfer the shipment from the previous transferee to the other branch; the other is to charge the account of the new trans- feree and credit the account of the transferror (or shipping) branch, Example: The following transactions transpired during the period: 4). Home office shipped merchandise costing P 15,000 to Bacolod Branch. b). Bacolod Branch reshipped the goods to Cebu Branch per instructions of the home office. Home Office Books Bacolod Branch Books Cebis Branch Books a). Bacolod Branch 15,000 Shipments from Shipments to Home Office P'15,000 Bacolod Branch F'15,000 Home Office 15,000 b). Shipments to Home Office 15,000 ‘Shipments from Bacolod Branch 15,000 Shipments from Home Office 15,000 Shipments to Home Office 15,000 Home Office =F 15,000 Cebu branch 15,000 Cebu Branch 15,000 Bacolo' Franch ‘15,000onc'os soYO owoH ; ya ye Ypuag-s7u] wo WAZ s30Ky 000'0S 2YJO aaoJ{ wor syuowdyys ‘06 BO eH0}; ons'os ypuug nqep Pune 04 pune PROT ao saoK ©} paymoure aay Pinon ys0o qYBiy oH ‘Age OY HUEY TONY PANP aan Huy OG JT ‘OTZS YO 809 1yBjayy 9yy Joy pred 9) a pow gong gegen spo emp diytes 0} pasopio Aquonbosqns fem yum Poor (q oor'os OHO OOH coos ‘ped Poot ot nes OF wy aya 00°08 SOYO WOH, waxy syusudygs oor'os ‘peng ema ryood oucsd poem Hog =o mon “OOPa Jo SaRreyS wjF}ouy oy oy pred puv YOUEIE POHOO O1 OOO'OZS Suns oepueyoious paddyys eYUEPY GY soYO omoy oq], (> conhumy ‘aay soy Jo S400q oy) Uo ouodes we ce poe Je ainien NoeeaTi uo Biel} sors kL “aoyo etmog ext wos) oop woo MoMRYS OH Py PaLMoe] wood samy INCE Im too Nia} 20) A Pad YD | PINOYs YuEq qWsIdHe: ey) “YUEN # O ssPURYYEMI Jo BuANOX PaRpU; 30 AyUIURIYSA! OA GERD UTA ‘smpuoyase_ fo sofrunsy yourug-s9uy uo RPyalg msory &Special Problems in Home Office and Branch Accounting 27 Billing the Shipments at Above Cost Billing shipments to branch at cost overstates the profitability of the branch for it gives credit only to the sales function of the branch disregarding the home office contribution to net income through procurement or manufacture of the merchandise. Billing shipments at selling price provides a perpetual inventory of branch merchandise at selling price assuming that the price charged to the branch is relatively constant, An inventory valuation account is used in the home office books (such as Allowance for Markup in Branch Inventory ot Branch Inventory Allowance) as illustrated in the following paragraphs. The account Allowance for Overvaluation in Branch Inventory is sometimes used. However, this may connote that something is wrong with the valuation of branch inventory. First Year of Operations Home office shipped merchandise: costing P 16,000 and bills the latter for P 20,000. The entries on both books are: Home Office Books Branch Books Branch 20,000 Shipments from . Shipments to Branch. P 16,000 Home Office: P-20,000 Allowance for Mark- Home Office 20,000 up in Branch Inventory 4,000 Branch sold P 12,000 of the above shipments so that its ending inventory is P'8,000. The rate of markup on the shipment was 25% of cost or 20% of billing price and if the branch inventory is P 8,000, the overstatement in cost of sales may be computed as follows: Billing Price Cost Markup Shipments P 20,000 + 125% = P 16,000 4,000 Inventory end 8000+ 125%= 6,400 __1,600 Cost of sales F 12,000 P 9,600 2,400 ‘The overstatement in cost of sales of the branch understated its net income so that an entry must be made to correct the branch net income on the home office books as follows: Allowance for Markup in Branch Inventory P2,400 Branch Net Income or Loss 2,400 ‘The above entry reduces the balance of the inventory valuation account to P 1,600, which is the overstatement in the ending inventory of the branch. Second Year of Operations ‘The second year started with beginning inventory per branch books of P'8,000 and allowance for markup in branch inventory per home office books of P 1,600. During the year, the home office made shipments costing P 24,000 and billed at P' 30,000, The ending inventory of the branch per count was P-10,000, No purchases were made by the branch from other suppliers.28 Chapter if ‘The overstatement in the cost of sales of the branch may be computed as follows: Billing Price Cost Markup Inventory, Jan. 1 P 8000+ 125%= FP 6,400 P 1,600 Shipments from home office 30,000 + 125% 2 6,000 P 38,000 P 30,400 P7,600 Inventory, Dec. 31 10,000 + 125% = 8,000 2,000 Cost of sales P 28,000 P 22,400 5,600 ‘The overstatement in branch cost of sales understates net income so that if the branch reports a net loss of P°2,400, its true net income must be P'3,200. The entries would be as follows: Branch Net Income or Loss P 2,400 Branch P 2,400 ‘To take up the branch net loss. Allowance for Markup in Branch Inventory 5,600 Branch Net Income or Loss 5,600 ‘To adjust the allowance to its correct ending balance of P'2,000. ‘The true net income of the branch of P-3,200 or [(F 2,400) + 5,600] is now reflected on the books of the home office based on the postings to the Branch Net Income or Loss account and the inventory valuation account must appear as follows: ‘Allowance for Markup in Branch Inventory 200B 200B Dec. 31 Adjustment 5,600 Jan. 1 Balance 1,600 Jan.-Dec. Markup on shipment 6,000 ‘The Allowance for Markup in Branch Inventory is deducted from the Branch account on the balance sheet of the home office. It is deducted from inventory on the combined balance sheet. Combined Financial Statements, Billings at Above Cost When shipments to the branch are billed at above cost, the inventory figures are adjusted to cost and the inventory allowance is eliminated. The following example illustrates the adjustments and eliminations made on the working paper for the preparation of the combined financial ‘Statements.Special Problems in Home Office and Branch Accounting 29 ILLUSTRATIVE PROBLEM ‘The following are some of the account balances on the home office and branch books of Camia ‘Trading Corp. as of December 31, 200B. Home Office Dr. Cr. Inventory, Jan. 1 P 25,000 Branch 30,000 Purchases. 60,000 Shipments from Home Office Shipments to Branch P 20,000 Allowance for Markup in Branch Inventory 6,500 Home Office 30,000 ‘The inventories at the end are as follows: Home Office P 18,000 Branch: From Home Office 9,000 From other suppliers 5,000 What adjustments and eliminations must be made on the working papers for the preparation of the combined financial statements for the home office and the branch? Inmay be noted from the above that the difference between billing price and cost is ? 5,000 and the markup on shipments is 25% of cost or 20% of billing price. ‘The working paper adjustments and eliminations will be as follows: 1. To eliminate the reciprocal merchandise shipment accounts with the corresponding inven- tory allowance: Shipments to Branch P 20,000 Allowance for Markup in Branch Inventory 5,000 Shipments from Home Office 25,000 ‘The allowance for markup in branch inventory is left with a balance of F 1,500 which must be the overstatement in the beginning inventory of the branch. 2. To adjust the beginning inventory of the branch to cost: Allowance for Markup in Branch Inventory 1,500 Inventory, Jan. 1 1,500 3. To eliminate the reciprocal Home Office and Branch accounts: Home Office 30,000 Branch 30,000 4. To adjust the ending inventory of the branch to cost: Inventory, Dec. 31, Income Statement 1,800 Inventory, Dec. 31, Balance Sheet 1,800 ‘The cost of the ending inventory of the: branch acquired from the home office is P9,000+ 125% or P7,200. The adjustment thereto may also be computed by multiplying 9,000 by the rate of markup based on billing price of 20% (or 25/125). On the following pages are the working papers for the financial statements of Camia Trading Corporation.@aumfoq Krojmanuy wo dmyseyy (p Summrioq Krowoam uo dnp (4 Woy (2 -woasain drogeus oy: yt somia801 1uno298 woudiys astpuRyauaUT [eIDsdIDay (O ee —— aE 000'07 (2 00°02 soe 1 7 i Tr a aT pur suauasnipy S002 te Jequiaceq] papugl reak ap JOq YOURI PUB 291 BWOH Jo SJUAWATES [BIOUEULY peuIquIOD 305 Jadeq Suro" NOLYYOAOD ONIGVUL VINVD 7800 dA0ge 18 poryiq sjusuIdIyS‘Special Problems in Home Ottice and Branch Accounting 31 Working Paper with Separate Income Statement Columns for Home Office and Branch ‘The working paper may be made more informative by providing for separate income statement columns for home office and branch. The adjustments and eliminations would be similar to those as made on the working paper on page 30 except the elimination of the inter-office shipment accounts. In this kind of working paper, the inter-office shipment accounts are merely reduced to cost before they are extended to the respective income statement columns. The working paper is illustrated on the next page. ‘The branch, home, office, and the combined financial statements of Camia Trading Corpora- tion are as follows: Income Statement of the Branch (inventory accounts at cost): CAMIA TRADING CORPORATION—Dagupan Branch Income Statement For the year ended December 31, 200B Sales ‘P 60,000 Cost of goods sold: Inventory, January 1 P 10,500 Purchases 20,000 Shipments from home office: 20,000 Available for sale P 50,500 Less: Inventory, December 31 12,200 38,300 Gross margin 21,700 Operating expenses 17,600 Net income P_4,100 Balance Sheet of the Branch: CAMIA TRADING CORPORATION—Dagupan Branch Balance Sheet As of December 31, 200B Assets Cash P 4,600 Accounts receivable, net 4,400 Inventory 12,200 Prepaid expenses 2,900 Property and equipment, net 9,000 Total assets 33,100 Liabilities Accounts payable P 5,500 Home Office (P 30,000—6,500 + 4,100) 27,600 Total liabilities32 Chapter i! O07 ‘TE 29qWID99q] popug sed X Sy) 10-4 JOYS SURE Poutquio> pue youesg uedn3eq pue 201459 aWOH Jo sluoWIaIEIg aWOOU] JO) 1924S PION wopesodioy Suypesy eye) SyUIUI}8)G FUIOUT YOUBIG pue 331JO SWOF 10J suUUNjOD ayesedag YIM Jo2YSIOM,Special Problems in Home Office and Branch Accounting 33 i ooe'o! 000'0s ooe'zt peng uedeeq, — am00m] YN PHN EI § I34 © Chapter if Income Statement and balance sheet of the home office: ‘CAMIA TRADING CORPORATION—Home Office Income Statement For the year ended December 31, 200B Sales P110,000 Cost of goods sold: Inventory, January | P 25,000 Purchases 60,000, Available for sale P 85,000 Less: Shipments to branch 20,000 Inventory, Dec. 31 18,000 38,000 47,000 Gross margin P 63,000 Operating expenses 21,500 Net income from own operations P 41,500 Add: Net income of branch 4,100 ‘Net income for 200B. P_45,600 == CAMIA TRADING CORPORATION—Home Office Balance Sheet As of December 31, 200B ASSETS LIABILITIES AND STOCKHOLDERS EQUITY Cash P 8500 Li ics: Accounts receivable, net 28,600 Accounts payable P 6,700 Inventory 18,000 Prepaid expenses 4,900 Stockholders’ equity: Property and equipment, net 25,000 Capital stock 50,000 Branch ‘29,400 Retained earnings 35,900, 105,900 Less: Allowance for Markup in branch inventory 1,800 _ 27,600 ‘Total liabilities and Total assets P'112,600 stockholders’ equity F112,600 *(P 30,000 - 4,700 + 4,100) ‘The combined income statement for Home Office and Branch (markup eliminated): (CAMIA TRADING CORPORATION Income Statement For the year ended December 31, 200B Sales 170,000 Cost of good sold: Inventory, January 1 P35,500 Purchases 80,000 Available for sale Less: Inventory, Dec, 31 Gross margin Operating expenses Net incomeSpecial Problems in Home Office and Branch Accounting 35 ‘The combined balance sheet for Home Office and Branch: CAMIA TRADING CORPORATION Balance Sheet As of December 31, 200B Assets ‘Cash Accounts receivable, net Inventory Prepaid expenses Property and equipment, net ‘Total assets Liabilities and Stockholders’ Equity Accounts payable P 12,200 ‘Stockholders’ equity Capital stock, par P'100 50,000 Retained earnings 55,900 105,900 ‘Total liabilities and stockholders’ equity P118,100 Shipments to Branch Credited to Sales Sometimes, home office shipments to branch are credited to Sales at their selling price accom- panied by a charge to Cost of Sales for the cost of the shipments. This practice, together with the required adjustments, are illustrated in the following paragraphs. First Year: In 200A, the home office ships merchandise costing P'20,000 to Iloilo Branch billing the latter for ® 25,000 or at a markup of 20%. Iloilo Branch sells 60% of the goods at 40% above cost. ‘The entries on both books would be as follows. Home Office Books Iloilo Branch Books @) To record the shipment: Tloilo Branch 25,000 Inventory P 25,000 Sales P 25,000 Home Office P-25,000 Cost of Sales 20,000 Inventory 20,000 b) To record branch sales: Accounts Receivable 21,000 Sales 21,000 Cost of sales 15,000 Inventory 15,000 At the end of the year, Sales and Cost of Sales are corrected and the difference, which was the markup on the shipment, is credited to the inventory valuation account as follows: Sales (Home Office) P 25,000 Cost of Sales (Home Office) 20,000 Allowance for Markup in Branch Inventory 5,00036 = Chapter ii ‘The inventory valuation account is subsequently adjusted by 60% because only this portion of the shipment has been sold by the branch, The entry is: Allo. for Markup in Branch Invty. 3,000 Branch Net Income or Loss P 3,000 If the given correcting and adjusting entries have not yet been made and the home office and branch statements are being combined, the adjustment on the working paper would be based on the following analysis: Home office sales..... Home office cost of sales Branch cost of sales... Branch inventory . Overstated by P 25,000 Overstated by 20,000 Overstated by 3,000 Overstated by 2,000 ‘The working paper adjusting entry would be as follows: Sales (Home Office) Cost of Sales (Home Office) Cost of Sales (Branch) Inventory (Branch) P 25,000 P 20,000 3,000 2,000 If no adjustment were made in the first year, the 200A net income would be overstated by P'2,000 for sales were overstated by P' 25,000, and cost of sales were overstated by 23,000. The 20% margin on inventory end of P'2,000 would appear as already realized by the home office. The adjustment to be made after the closing of the books in 200A would be as follows: Retained Earnings Inventory (Branch) P 2,000 P 2,000 ‘Second Year: In 200B, the home office ships merchandise costing P 40,000 to the branch and bills the latter for P50,000. Branch sales amount to P 77,000 with gross margin at 40% of its cost. The entries on both books would be as follows: Home Office Books Branch P50,000 Sales 50,000 Cost of Sales 40,000 Inventory 40,000 Branch Books Inventory P 50,000 Home Office P-50,000 Accounts Receivable — 77,000 ‘The ending inventory of the branch at billing price and at cost is computed as follows: Inventory, January 1 Shipments from home office Available for sale Cost of sales Inventory, December 31 Sales 77,000 Cost of Sales 55,000 Inventory 55,000 (P°77,000 + 140%) At Billing Price At Cost P 10,000 x 80% P 8,000 50,000 40,000 P 60,000 48,000 (55,000) (44,000) P 5,000 P 4,00096 © Chapter i/ ‘The inventory valuation account is subsequently adjusted by 60% because only this portion of, the shipment has been sold by the branch. The entry is: Allo. for Markup in Branch Invty. P 3,000 Branch Net Income or Loss P 3,000 If the given correcting and adjusting entries have not yet been made and the home office and branch statements are being combined, the adjustment on the working paper would be based on the following analysis: Overstated by P'25,000: Home office cost of sales .. Overstated by 20,000: Branch cost of sales Branch inventory .. Overstated by 3,000 Overstated by 2,000 The working paper adjusting entry would be as follows: Sales (Home Office) P-25,000 Cost of Sales (Home Office) P 20,000 Cost of Sales (Branch) 3,000 Inventory (Branch) 2,000 If no adjustment were made in the first year, the 200A net income would be overstated by ‘P 2,000 for sales were overstated by P 25,000, and cost of sales were overstated by P'23,000. The 20% margin on inventory end of P'2,000 would appear as already realized by the home office. The adjustment to be made after the closing of the books in 200A would be as follows: Retained Earnings P 2,000 Inventory (Branch) P 2,000 Second Year: In 200B, the home office ships merchandise costing P 40,000 to the branch and bills the latter for P'50,000. Branch sales amount to P 77,000 with gross margin at 40% of its cost. The entries on both books would be as follows: Home Office Books Branch Books Branch 50,000 Inventory P-50,000 Sales P 50,000 Home Office P50,000 Cost of Sales 40,000 Inventory 40,000 Accounts Receivable 77,000 Sales 77,000 ‘Cost of Sales 55,000 Inventory 55,000 (77,000 + 140%) ‘The ending inventory of the branch at billing price and at cost is computed as follows: At Billing Price At Cost Inventory, January | P 10,000 x 80% P 8,000 Shipments from home office 50,000 40,000 Available for sale P 60,000 P 48,000 Cost of sales (55,000) (44,000) Inventory, December 31 P_ 5,000 PF‘Special Problems in Home Office and Branch Accounting 37 If there were no adjustments made both in 200A and 200B, the adjustments on the working papers for the combined statements of the home office and the branch would be based on the follow- ing analysis: Overstated by P 2,000 Overstated by 50,000 '200B Cost of Sales (Branch) Overstated by 11,000 200B Ending inventory .... The working paper adjusting entry would be as follows: Retained Earnings P 2,000 Sales (Home Office) 50,000 Cost of Sales (Home Office) P 40,000 Cost of Sales (Branch) 11,000 Inventory (Branch) 1,000 Regardless of the practices adopted by a company in recording shipments, the working paper adjustments must be made with the objectives of reducing inventory figures to cost and eliminating unrealized revenue arising from intra-company transfers of merchandise. ASSIGNMENT MATERIAL QUESTIONS; 1, In recording inter-branch transactions, why is it not advisable for a branch to have an account with another? 2. When an excess freight cost arises from indirect shipments from the home office, this may have no effect on the operating cost of the receiving branch. Explain. . Why does the home office bill merchandise shipments to branch at above cost? 4. What adjustment is made on the working papers for combined statements of home office and branch when the home office trial balance includes allowance for mark-up in branch inventory? 5. The home office bills the branch for merchandise shipments at above cost and uses an allowance for markup in branch inventory on such transfers. At the end of the period, the allowance account is reduced to the mark-up on ending inventory of the branch. (a) How would you treat the allowance account on home office balance sheet’? (b) How would you treat the account in preparing the balance sheet for the entire company? 6. The home office bills the branch for merchandise shipments at above cost. How iis the value of shipments. in transit determined? 7. If shipments to branch are billed at above cost and credited to sales by the home office, what adjustments are made on the working papers for the combined statements of home office and branch? »