Key To Exercise Problems: Afar 2: Home Office and Branch Accounting

AFAR 2: HOME OFFICE AND BRANCH ACCOUNTING
KEY TO EXERCISE PROBLEMS

1. The problem requires the computation of combined income. As such, we have to
compute first for their separate net income, with the branch income adjusted for
any allowance for overvaluation.
HOME OFFICE:
Sales 336,000
Cost of Sales
Beginning Inventory 69,000
Add: Purchases 222,000
Less: Shipments to Branch 66,000
Ending Inventory 48,000 177,000
Gross Profit 159,000
Less: Operating Expenses 68,000
Net Income 91,000
BRANCH:
Sales 144,000
Cost of Sales*** 124,128
Gross Profit 19,872
Net Income 8,672
COMBINED NET INCOME:

Home Office 91,000
Branch 8,672
Total 99,672
Cost of Sales:
Cost
Beginning Inventory 38,400 35,840 [(38,400 x 1/3)/125%] + 38,400 x 2/3
Purchases 40,000
Shipments from HO 82,500 66,000 82,500/125%
- Ending Inventory 21,600 17,712 [(21,600 x 90%)/125%] + 21,600 x 10%
Cost of Sales 124,128
ANSWER: A
2. Here we are asked for the cost of ending inventory:
Shipment to Branch 25,000

+ Freight-in 1,000
Total cost 26,000
x Percentage of unsold inventory 60%
Cost of ending inventory 15,600
ANSWER: A
3. This one is simple enough. We only consider sales to outside parties. Inter-office sales,
or billings aren’t included.
ANSWER: B
4. This one is a simple reconciliation:

Home Office Books Branch Books
Investment in Davao branch HO - Current
Unadjusted balances 51,100.00 54,700.00
1. Shipment charged to Davao branch (24,000.00)
(sent to Cebu branch)
2. Shipment charged to Aklan branch 30,000.00
(sent to Davao branch)
3. No effect to Davao branch
4. HO collection of receivable of Davao (7,200.00)
branch
5. Returned shipment by Davao branch to (2,400.00)
HO
6. Overstatement of Davao branch NI (7,200.00)
Adjusted balances 47,500.00 47,500.00
ANSWER: C
5. The requirement is to compute for the cash remittance of the branch.
To compute for the cash remittance, let’s start with the collection of receivables:
Accounts Receivable, beginning 43,800

Add: Net Sales (198,720 – 3,600) 195,120
Amount to be collected 238,920
Less: Accounts Receivable, ending 49,140
Accounts written-off 1,920
Total collection remitted to HO 187,860
ANSWER: A
6. The answer to this problem is letter B. Upon transfer of merchandise by A to B, the home
office should debit the Investment in Branch – B account and credit the Investment in
Branch – A account. The transfer was from A to B, so it’s addition to B and a deduction
from A. Also, the full entry is as follows (Home Office books):
Investment in branch – B 58,350

Excess Freight 2,250
Investment in branch – A 60,600
Let’s go over everything:

Upon receipt of merchandise by A from Home Office, the entry of Home Office is to debit
Investment in Branch – A account by the total cost of the shipped merchandise. That
would be the cost of 47,100 plus the freight of 7,500, totaling 54,600. The credits would
be Shipments to Branch, for the cost of the merchandise 47,100, and a debit to Cash (if
freight is paid immediately) amounting to 7,500.
Next, is the transfer from branch A to branch B. Let us compute first for the excess
freight. The freight cost from Home Office to Branch A is 7,500. The freight cost from
Branch A to B is 6,000. Should it have been made from Home Office to B, the freight
would’ve been 11,250. So, the excess freight is (7,500 + 6,000) – 11,250 = 2,250. This
amount is to be debited to Excess Freight account by the Home Office.
Branch A would record the transfer to B as:
Home Office – Current 60,600

Shipments from Home Office 54,600
Cash 6,000
And Branch B would record the transfer as:
Shipments from Home Office 58,350

Home Office – Current 58,350
ANSWER: B
7. There are two approaches for this. 1) You can get the net income of the HO and the
Branch, add them up and then adjust the Branch Income for the Allowance on
Overvaluation of shipped merchandise. Or 2) You can get the net income of the HO
and the ADJUSTED INCOME of the Branch, and add them up.
Personally, I find the second approach not as confusing as the first one. That said:
Home Office Income:

Sales 1,200,000
COGS (350,000 + 500,000 – 315,000 – 80,000) 455,000
Net Income 632,000
Branch Income:
Sales 540,000
COGS (see computation below)*** 335,250
Net Income 115,750
***Branch - Cost of Sales:
Cost
Beginning Inventory 157,500 131,250 157,500/120%
Purchases
Shipments from HO 346,500 315,000 Given or 346,500/110%
- Ending Inventory 122,100 111,000 122,100/110%
Cost of Sales 335,250
Add them up:

Home Office 632,000
Branch 115,750
Combined Net income 747,750
ANSWER: B
The beginning inventory is labeled December 31, 2013. The ending inventory is labeled
January 1, 2015. And the statement about percentage of cost being higher by 5%
refers to 2012 and has nothing to do with the current year, 2014.
8. For this problem, we analyze each transaction:
Branch Books
HO - Current
Unadjusted balances (none given)
1) Transfer of fixed assets - unrecorded by53,960.00
branc
2) No effect to Ironman branch
3) Debit note recorded twice
(sent to Davao branch) (75,000.00)
4) No effect to Ironman branch books (affects HO)
5) No effect to Ironman branch
6) Debit memo - amount recorded was90.00
erroneou
6. Overstatement of Davao branch NI
Adjusted balances (cannot be determined)
Net adjustment (20,950.00)
ANSWER: C
9. Let’s go over the problem real slowly. We have two branches here. Let’s account first
for the adjustments concerning Baguio branch.

Investment in Baguio HO - Current
branch
1. Cash from Baguio to Davao branch (74,000.00)
2. Transfer of goods from Baguio to Davao (28,900.00) (28,900.00)
Freight cost on the transfer of goods (2,500.00) (2,500.00)
3. Customer of Davao paid to Baguio branch 5,750.00
4. Allocated expenses 11,000.00
5. Baguio remitted cash to HO (14,300.00)
6. Not affecting Baguio branch
ANSWER: 1) A 3) D
For Davao branch, the adjustments are as follows:

Investment in Davao branch HO - Current
1. Cash from Baguio to Davao branch 74,000.00
Davao branch - error in recording 27,000.00
2. Transfer of goods from Baguio to Davao 28,900.00 28,900.00
Freight cost on the transfer of goods (3,600.00) (3,600.00)
Freight cost if transferred directly 5,000.00 5,000.00
3. Customer of Davao paid to Baguio branch (5,750.00) (5,750.00)
4. Allocated expenses 9,000.00
5. Baguio remitted cash to HO
6. Returned goods to HO (6,850.00)
ANSWER: 2) C 4) C

Key To Exercise Problems: Afar 2: Home Office and Branch Accounting

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AFAR 2: HOME OFFICE AND BRANCH ACCOUNTING

KEY TO EXERCISE PROBLEMS

COMBINED NET INCOME:

2. Here we are asked for the cost of ending inventory:

Shipment to Branch 25,000

4. This one is a simple reconciliation:

5. The requirement is to compute for the cash remittance of the branch.

Accounts Receivable, beginning 43,800

Investment in branch – B 58,350

Let’s go over everything:

Branch A would record the transfer to B as:

Home Office – Current 60,600

And Branch B would record the transfer as:

Shipments from Home Office 58,350

Home Office Income:

Add them up:

8. For this problem, we analyze each transaction:

Net adjustment (20,950.00)

Home Office Books Branch Books

Adjusted balances 72,550.00 72,550.00

Home Office Books Branch Books

Adjusted balances 175,700.00 175,700.00

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