HOME OFFICE, BRANCH & AGENCY ACCOUNTING

Problem 1: The income statement submitted by Bacolod Branch to the HO for the month of
December 31, 2015 follows:
Sales P 600,000
Cost of Sales:
Inventory, Dec. 1, 2015 P 80,000
Shipment from HO 350,000
Purchases locally by branch 30,000
Total P460,000
Inventory, Dec. 31, 2015 100,000 360,000
Gross Margin P 240,000
Operating Expenses 180,000
Net Income for the Month P 60,000
The Branch inventories consisted of:
12/1/2015 12/31/2015
Merchandise Purchase from HO P 70,000 P 84,000
Local Purchase 10,000 16,000
Total P 80,000 P 100,000

After affecting the necessary adjustments, the Home Office ascertained the true income of
the Branch to be P156,000.

What is the balance of the Allowance for overvaluation in the branch inventory at December
31, 2015?

SOLUTION: in solving this, I did a work back:

Sales P 600,000
COGS (264,000)
Gross Profit P 336,000
OPEX (180,000)
True Income P 156,000

Inventory Locally Purchased Total COGS 264,000 360,000

Beg. COGS of LP (24,000) (24,000)
P10,000 P24,000 Sold COGS SFHO 240,000 336,000
Purc.
30,000 Realized All. For Overvaluation = 336T - 240T = 96T
P16,000 End Percentage = 96,0000 / 336,000 = 28.57% or 140%

All. For Overvaluation in Dec. 31, 2015 = P84,000 x 28.57% = 23,999 or 24,000

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Problem 2: Selected information from the trial balances for the home office and the branch
of Jack Sparrow Company at December 31, 2016 is provided. The branch acquires merchandise
from the home office and outside suppliers.

Sales P 60,000 P 30,000

Shipments to branch 8,000
Allowance for Overvaluation of Branch Inv. 3,600
Shipments from home office 10,000
Purchases (outsiders) 35,000 5,500
Merchandise Inventory 12.01.16 20,000 15,000
Expenses 14,000 5,000
Additional Information:
Merchandise inventory, December 31, 2016:
Home Office P 20,000
Branch (7,500 from HO and 2,500 from outsiders) 10,000

The combined net income from Home Office and Branch Operation is:

Solution:
Mark-up % = Shipment from HO - Shipment to Branch
Shipment to Branch
= P10,000 - P8,000 = 25% on
P8,000

Allowance for Overvaluation, End P3,600

Less: Allowance for Overvaluation of P10,000 SHFO 2,000
Allowance for Overvaluation in Beg. Inventory P1,600
Divide by: 25%
SHTB P6,400
Multiply by: 125%
 HOME OFFICE, BRANCH & AGENCY ACCOUNTING
Merchandise from HO in the Beginning Inventory P8,000

SHFO OUTSIDERS
Beginning Inventory P 8,000 Beginning Inventory P 7,000
SHFO 10,000 Purchases 5,500
Ending Inventory (7,500) Ending Inventory (2,500)
COGS P10,500 COGS P 10,000
Divide by: 125%
TRUE COGS P 8,400

HOME OFFICE BRANCH

SALES P 60,000 SALES P 30,000
COGS (27,000) COGS (18,400)
GROSS PROFIT P 33,000 GROSS PROFIT P 11,600
OPEX (14,000) OPEX ( 5,000)
INCOME P 19,000 INCOME P 6,600

Combined Net Income = P19,000 + P6,600 = 25,6000

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Problem 3: The following information are taken from the books of Norrington Company and
its branch. The balance are at December 31, 2016, the second year of their operations:
BRANCH NORRINGTON BOOKS
Shipment from Home Office P 888,000
Sales 1,200,000
Expenses 400,000
All. For overvaluation of Branch Inventory P 173,000

The branch acquires all of its merchandise from the HO. The inventories of the branch
at billed prices are as follows:
January 1, 2016 P 150,000
December 31, 2016 168,000

The HO shipments of merchandise to branch are billed at what percent of cost?

The adjusted/correct/true profit of the branch?

SOLUTION:
All. For Overvaluation = (Beg. Inventory + SFHO) x markup % on cost
173,000 = (P150,000 + P888,000) x markup % on cost
markup % on cost = 173,000 / 1,038,000
= 0.166666666 or 120% above cost

Sales P 1,200,000
COGS:
Beginning Inventory P 150,000
SFHO 888,000
Less: Ending inventory 168,000
COGS P 870,000
Divide by: 120% (725,000)
Gross Profit P 475,000
OPEX (400,000)
Net Income P 75,000
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Problem 4: The San Miguel Branch of Taiwan Products, Inc. buys merchandise from outsiders
and receive 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 San Miguel
Branch for the month of April, 2016:

Home Office
Cr. Allowance for overvaluation of Branch Merchandise 462,500
Cr. Shipment to Branch 1,062,500
Branch
Dr. Beginning Inventory 1,800,000
Shipments from home office 1,275,000
Purchases 512,000
Month-end additional data
Ending Inventory of Branch 1,825,000
From Home office, billed price of 1,462,500
From Outsiders, at cost 362,500

The total COGS of the San Miguel Branch at Cost for the month just ended amounted to:

SOLUTION:

Mark-up % = Shipment from HO - Shipment to Branch

 HOME OFFICE, BRANCH & AGENCY ACCOUNTING
Shipment to Branch
= P 1,275,000 - P 1,062,500 = 20% above cost
P 1,062,500

Allowance for Overvaluation, End P 462,500

Less: Allowance for Overvaluation of (1,275 - 1,062.5) 212,500
Allowance for Overvaluation in Beg. Inventory P 250,000
Divide by: 20%
SHTB P 1,250,000
Multiply by: 120%
Merchandise from HO in the Beginning Inventory P 1,500,000

SHFO OUTSIDERS
Beginning Inventory P 1,500,000 Beginning Inventory P 300,000
SHFO 1,275,000 Purchases 512,500
Ending Inventory (1,462,500) Ending Inventory (362,500)
COGS P 1,312,500 COGS P 450,000
Divide by: 120%
TRUE COGS P 1,093,750

Total COGS = 1,093,750 + 450,000 = 1,543,750

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Problem 5: The following information are taken from the books and records of Cebu City
Company and its branch. The balances are at December 31, 2016, the second year of the
company’s operations.

Sales P 500,000
Expense 125,000
Shipment to Branch P 250,000
Branch Inventory Allowance 71,875

The branch obtains all its merchandise from the home office. The Home office ships the
merchandise at 125% of its cost. The ending inventory of the branch is P50,000 at billed
price.

The true income of the branch is:

SOLUTION:
SHFO = SHTB x markup on cost
= P250,000 x 125% = P312,500

Branch Inventory Allowance P 71,875

Less: All. For overvaluation (312,500-250,000) 62,500
Beginning Bal. Of All. For overvaluation P 9,375
Divide by: 25%
Shipment to Branch P 37,500
Multiply by: 125%
Shipment from Home Office P 46,875

Sales P 500,000
COGS:
Beginning Inventory P 46,875
SHFO 312,500
Less: Ending Inventory (50,000)
COGS P309,375
Divide by: 125% (247,500)
Gross Profit P 252,500
OPEX (125,000)
Net Income P 127,500