True-False Statements

1.If the perpetual inventory system is used by both the home office and the branch, the reciprocal ledger
accounts used by the branch are the Home Office and Shipments from Home Office accounts.
2.The “shipments to branch” account is added to the home office’s purchases account in determining home
office cost of goods sold.
3.When inventory is received from the home office, a branch increases its home office account.
4.Reciprocal home office and branch accounts are eliminated when home office and branch financial statements
are combined for external reporting.
5.The “branch office” account on the home office’s books and the “home office” account on the branch’s books
are examples of nonreciprocal accounts whose balances would be combined when the home office is
preparing a balance sheet for all its combined operations.
6.When performing the end-of-the-period reconciliation between the Home Office account on the branch’s
books and the Branch Account on the home office’s books, shipments in transit from the branch back to the
home office will be treated as an addition to the home office’s Branch Account.
7.When performing the end-of-the-period reconciliation between the Home Office accounts on the branch’s
books and the Branch Account on the home office’s books, home office expenses which are allocated to the
branch office from the home office will be subtracted from the Home Office Account on the branch’s
books.
8.There are three ways to reconcile the balance in the home office’s Branch Account with the balance in the
branch’s Home Office Account. One way would be to reconcile from the home office balance to the branch
balance. A second way would be to reconcile from the branch balance to the home office balance. A final
way would be to reconcile both the home office’s branch balance and the branch’s home office balance to
the adjusted true balance.
9.The incremental profitability of a branch office may be hidden if the home office allocates too many fixed
costs to the branch office
10.A major disadvantage of a centralized accounting system is that the profitability of branch operations cannot
be determined because branch operations are not accounted for in a separate general ledger.
11.Home office allocations to a branch are not required under current standards.
12. Income taxes can be allocated to a branch.
13. Branch fixed assets can be carried on the home office’s books under a decentralized accounting system.
14. If branch fixed assets are recorded on the home office’s books, depreciation expense would not be charged
to branch operations.
15. In a combined balance sheet for home office and branch, the balance of the Allowance for Overvaluation of
Inventories: Branch ledger account is deducted from the balance of the Investment in Branch account.
16. A home office ships merchandise to its branch at a transfer price greater than cost. When this merchandise
is resold by the branch to outside entities, the branch’s profit will be overstated.
17. A closing entry prepared by a branch will adjust the loading account and record branch profit or loss in the
home office account.
18. Unrealized profits from transactions between a home office and its branch are eliminated in preparing
combined financial statements for the enterprise.
19. A home office records shipments to its branch at billing prices and adjusts the loading account at year-end.
When this approach is used, the loading account during the period will always be zero.
20. If a “loading” account is used, the “shipments to branch” account on the home office books is created for
the actual cost of shipments made to the branch whereas the “shipments from the home office” on the
branch’s books includes any initial unrealized profit.
21. Freight charges incurred by the branch office on merchandise inventory shipped from the home office
would be included in the branch’s cost of goods available for sale even if the wrong merchandise was
shipped from the home office.
22. One reason why a branch office would not have a “loading” account is that the home office usually does not
want the branch personnel to know the amount of unrealized profit built in to the merchandise’s transfer
 price.
23. It is equally probable that a “loading” account could be charged with an unrealized inventory loss as it is
that it could be charged with an unrealized inventory profit.
24. As a general rule, the “loading” account will be credited for the unrealized profit element of merchandise
shipped to the branches and debited for the amount of any realized inventory profits.
25. If the “Shipments from the Home Office” account and the “Shipments to the Branch Office” account are
kept on a reciprocal basis and the home office charges a mark-up on these shipments, there will be no need
to adjust the loading account at the end of the period for any realized inventory profits.

Problems
Use Selected balances from the Cebu Company’s Branch A and B are as follows:
Branch A Branch B
Inventory, Jan. 1, 20x4…………………………………………….. P21,000 P19,000
Imprest Branch Fund………………………………………………. 2,000 1,500
Inventory, Dec. 31, 20x4………………………………………….. 19,000 12,000
A/Receivable, Jan. 1, 20x4………………………………………. 55,000 43,500
Merchandise from Home Office………………………………... 61,000 47,000
A/Receivable, Dec. 31, 20x4……………………………………. 70,000 53,500
Cash Collections…………………………………………………… 85,000 70,000
Sales………………………………………………………………….. 100,000 80,000
Cash Expenses……………………………………………………… 21,000 14,300
All sales, collections, and expenses are handled at the branch. All cash received from sales and
collections are sent directly to the Home Office. Expenses are paid by the branch from the imprest
fund and immediately reimbursed by the Home Office and credited to the Home Office account. All
expenses paid by the branch are recorded in the books of the branch. Compute the balance of the
Home Office account on January 1, 20x4 in the:
1. Books of Branch A: ___________
2. Books of Branch B: ___________

Use the following information for questions 3 to 6::

Manila Corporation has operated a branch in Cebu for one year. Shipments are billed to the branch at
cost. The branch carries its own accounts receivable, makes its own collections, and pays its own
expenses. The transactions for the year are given effect to in the trial balance below:
Accounts Debit Credit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 5,040
Home Office Current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 21,000
Purchases from outsiders . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Shipments from Home Office . . . . . . . . . . . . . . . . . . . . . . . 56,216
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . … 15,360
Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,500
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 684
Gain on sale of equipment. . . . . . . . . . . . . . . . . . . .. . . . . . 8,800
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ________ _80,000
P109,800 P109,800
The branch reported an inventory on December 31, 20x5:
Outsiders, P3,391; Home office, P7,625
3. The net profit of the Cebu Branch for 20x5 was:
4. On January 1, 20x6, the Branch current account in the Home Office books should have a balance
of:
5. On January 1, 20x6, the Shipments to Branch account in the Home Office books should have an
opening balance of:

Use the following information for questions 6 and 7.

Pasig Garment Company operates a branch in Cabanatuan City. At the end of the year, the Branch
account in the books of the home office at Manila shows a balance of P150,000. The following
information is ascertained:
a. The home office has billed the branch the amount of P37,500 for the merchandise, which was
in transit on December 31.
b. A home office accounts receivable for P10,500 was collected by the branch. Said collection
was not reported to the home office by the branch.
c. Supplies of P4,500 was returned by the branch to the home office but the home office has not
yet reflected in its records the receipt of the supplies.
d. The branch made profit of P10,100 for the month of December but the home office erroneously
recorded it as P11,180.
e. The branch has not received the cash in the amount of P25,000 sent by home office on
December 31. This was charged to General Expense account.
All transactions are presumed to have been properly recorded.
6. What is the balance of the Home office account on the books of the branch as of December 31,
before adjustments?
7. What is the adjusted balance of the Home office account on the books of the branch as of
December 31?
8. For 20x4 a branch reported P18,000 of profit. In the combining worksheet at year-end, the Home
Office Capital account had a balance of P60,000 in the balance sheet. The basic elimination entry
would include which of the following individual postings?
a. A debit to the Home Office Capital account forP18,000.
b. A credit to the Home Office Capital account for P42,000.
c. A debit to the Home Office Capital account for P42,000.
d. A debit to the Home office Capital account for P60,000.
e. None of the above.
9. For 2004 a branch reported P18,000 of profit. In the combining worksheet at year-end, the Home
Office Capital account had a balance of P60,000 in the balance sheet. The basic elimination entry
would include which of the following individual postings?
a. A debit to the Branch Income account for P18,000.
b. A credit to the Branch Income account for P18,000.
c. A debit to the Branch Income account for P42,000.
d. A debit to the Branch Income account for P60,000.
e. None of the above.
Items 10 to 12 are based on the following information:
On July 1, 20x5, the Ambo Company of DJ Builders Company of Cagayan Valley establishes an
organization in Sampaloc, Manila to act as sales agency. The following assets are sent to the agency
on July 1:
A working fund to be operated under the imprest fund…………… P 1,000
 Samples from the merchandise stock…………………………………. 5,000
Advertising materials and literature…………………………………….. 1,250
During July the agency submits sales on account of P17,600 that are approved by the home office; cost
of merchandise shipped in filling orders is P10,500. Home office disbursements chargeable to the
agency are as follows:
Furniture and fixtures for agency……………………………………….... P 2,400
Salaries and commissions………………………………………………….. 1,750
Rent…………………………………………………………………………….. __ 800
Total……………………………………………………………………………. P 4,950
On July 31 the agency working fund is replenished. Paid expense vouchers submitted by the agency
are as follows:
Advertising expense…………………………………………………………….. P 325
Miscellaneous expense………………………………………………………… 600
The following information is used in adjusting the agency accounts on July 31:
 Agency samples will be useful until December 31; at that time it is believed they will have a
salvage value of 40% of cost.
 Approximately 2/5 of the advertising materials and literature remain on hand. Furniture and
fixtures are to be depreciated on a 5-year basis.
 The agency manager is to receive a bonus of 5% of all sales above P10,000 a month, the bonus
to be paid by the home office at quarterly intervals.
10. Determine the gross profit for the month ended July 31, 20x5.
11. Determine the amount of expenses for the month ended July 31, 20x5.
12. Determine the net income for the month ended July 31, 20x5.

Use the following information for questions 13 to 15.

The Liberty Company established a branch store in Makati on June 1, 20x5. The branch is to receive
substantially all merchandise for sale from the home office. During the remainder of 20x5, shipments
to the branch amounted to P216,000 which include a 20% mark-up on cost. The branch purchased
P54,000 additional merchandise for cash and reported unsold merchandise of P72,000 at year-end. The
branch made sales of P351,000, paid expenses of P86,400 and remitted to the home office all sales
proceeds.

The allowance for everything of branch inventory account on the home office books showed a balance
of P9,000 after adjustments.
13. What was the branch inventory on December 31, 20x5 at cost?
14. How much of the branch ending inventory represented purchases from outsiders?
15. The branch net income as far as the home office is concerned is:
Use the following information for questions 16 and 17.
Presented below are items taken from the unadjusted trial balance of Progressive Company and its
branch on December 31, 20x5.
Home Office
Books Branch Books
Shipments to branch P 360,000
Allowance for overvaluation of branch inventory 119,880
Shipments from home office P 468,000
Purchases (from outsiders) 173,520
Merchandise inventory, January 1 65,520
 Merchandise inventory, December 31 58,500
Sales 648,000
Expenses 61,200

It is the company’s policy to bill all branches for merchandise shipments at 30% above cost.
16. How much of the branch inventory on January represents purchases from outsiders?
17. Assuming that the branch ending inventory acquired from home office is P 46,800 at billed price,
what is the net income (loss) of the branch insofar as the home office is concerned?
Use the following information for questions 18 to 20.
The following information are taken from the books and records of Pacific Company and its branch.
The balances are at December 31, 20x5, the second year of the company’s operation.

Home Office
Books Branch Books
Sales P 480,000
Expenses 120,000
Shipments to branch P 240,00
Allowance for overvaluation of branch inventory 69,000

The branch obtains all of its merchandise from the home office. The home office ships the
merchandise at 125 percent of its cost. The ending inventory of the branch is P48,000 at the billed
price.
18. The beginning inventory of the branch at the billed price is:
19. The net income as reflected on the books of the branch is:
20. The true income of the branch is:
Use the following information for questions 21 to 23:
The following information are extracted from the books and records of Phil Corporation and its
branch. The balances are at December 31,20x5, the third year of the corporation’s existence.
Home Office
Books Branch Books
Sales P 720,000
Expenses 240,000
Shipments from home office 432,000
Allowance for overvaluation of branch inventory P 87,000

The branch acquires all of its merchandise from the home office. The inventories of the branch at
billed prices are as follows:
January 1, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . P 90,000
December 31, 20x5 . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,800
21. The percentage of profit on cost that the home office uses to bill merchandise shipped to branch
is:
22. The balance of the Shipments to Branch account before the books are closed is:
23. The adjusted profit of the branch is:
Use the following information for questions 12 and 13.
The following information are extracted from the books and records of Pinoy company and its branch.
The balances are at December 31, the fourth year of the company’s operations.
Home Office
Books Branch Books
Sales P 240,000
Shipments to branch P 72,000
Shipments from home office 96,000
Purchases 36,000
Expenses 72,000
Inventory, January 1, 20x5 24,000
Allowance for overvaluation of branch inventory 28,800
There are no shipments in transit between the home office and the branch. Both shipments accounts
are properly recorded. The ending inventory at billed price includes merchandise acquired from the
home office in the amount of P24,000 and P7,200 acquired from vendors for a total of P31,200.
24. How much of the beginning inventory was acquired from “outsiders”?
25. The true branch net income is: