ACCTG 12, Business Combination

Topic 2
Home Office and Branch Accounting: Specific Procedures

Introduction
In addition to the general branch-home office relationships portrayed in the preceding topic, there are other
interactions that generate special accounting problems. These interactions are:
1. Merchandise shipped to the branch at amounts other than cost such as:
a. Billing at a price in excess of cost, at billed price (original or home office cost plus
mark-up based on cost), and
b. At the branch’s retail selling price (mark-up based billed price)
2. Interbranch transfer of cash
3. Interbranch transfer of merchandise

Shipments from home office at billed price (shipment to branch at cost plus a percentage mark-up based on
home office cost, such as 115% of cost) may be intended to allocate reasonable gross profit to the home office.
When merchandise is billed to a branch at a price above home office cost, the net income reported by the
branch is understated and the ending inventories are overstated for the enterprise as a whole.
Adjustments must be made by the home office to eliminate the excess of billed price over cost
(intracompany profits) in the preparation of combined financial statements for the home office – branch.

Billing shipment to branch at retail prices may be based on a desire to strengthen internal control over
inventories. The inventories ledger account of the branch shows the merchandise received and sold at retail
selling price. Consequently, the account will show the ending inventories that should be on hand at retail
prices. This method provides very minimal information from the point of view of the company. For this basis,
this method shall not be illustrated in this topic.

Billed at a price in excess of cost, at billed price (original cost plus mark-up based on cost)

Billing by the home office may be made at some arbitrary rate above cost in order to withhold from
branch officials’ complete information concerning the actual earnings from the branch operations. In other
instances, the policy is followed as a means of assigning a charge for goods procurement and handling as well
as for the special costs that are related to the home office – branch relationship.

Upon acquiring merchandise from the home office, the branch records the charges that are listed on the
invoices accompanying the goods. When billings to the branch exceed cost, the profit determined by the
branch will be less than the actual profit; the inventories reported by the branch at the billed figures will
exceed costs. These factors must be recognized by the home office and given effect upon its

Sample Illustration: Accounting for Billing at a Price in Excess of Cost, at Billed Price (Original Cost
plus Mark-up based on Cost)
Assume the same transactions of Anton Trading (S1 from M1) except that the home office billed merchandise
shipments to the branch is at 25% of cost.

The entries to record the transactions for the home office and the branch will be the same with those
presented in the previous topic except for the entries (3 and 6) showing shipments of merchandise from the
home office to the branch amounting to ₱40,000 (₱32,000 + 25% mark-up) and shipment returns to home
office amounting to ₱2,500 (₱2,000 + 25% mark-up) are recorded as follows:
 Affected transactions:
 Received merchandise inventory shipments from the HO at ₱32,000 home office cost (Entry 3)
 Returned ₱2,000 worth of damaged inventory shipped by HO (Entry 6)

HO Books Branch Books

Branch Current (at billed price) 40,000 Shipments from Home Office,
Shipment to branch at cost 32,000 at billed price 40,000
Allowance for overvaluation of branch Home Office 40,000
inventory 8,000
Shipment to branch at cost 2,000 Home Office 2,500
Allowance to overvaluation of branch Shipments from Home Office,
Inventory 500 at billed price 2,500
Branch Current 2,500

In the home office books, the Branch Current account shows a debit balance of ₱31,500 before income
summary accounts are closed, as shown below:
Home Office Books
Cash sent to branch 40,000.00 Equipment acquired by branch 20,000.00
Shipment to branch 40,000.00 Shipment returns 2,500.00
Depreciation charged to branch 4,000.00 Remittance 30,000.00
84,000.00 52,500.00
Branch Current - Balance 31,500.00

Branch Books
Equipment acquired by branch 20,000.00 Cash sent to branch 40,000.00
Shipment returns 2,500.00 Shipment from home office 40,000.00
Remittance 30,000.00 Depreciation charged by home office 4,000.00
52,500.00 84,000.00
Balance   Home Office - Balance 31,500.00

Assume that at the end of the year, the branch reports its ending inventory at ₱14,500 (₱2,000 at cost +
[₱10,000 + 25% mark-up]). The closing entries on the books of the home office and branch on December 31
are shown as follows:
Home Office Books Branch Books
A Sales 95,000 Sales 60,000
Shipment to branch 30,000 Merchandise Inventory – end 14,500
Merchandise Inventory – end 25,000 Income Summary 1,000
Merchandise Inventory – beginning 40,000 Purchases 8,000
Purchases 90,000 Shipment from home office 37,500
*Salaries Expense 3,000 Salaries Expense 14,000
*Utilities Expense 2,000 Utilities Expense 2,000
*Depreciation Expense 2,500 Rent Expense 6,000
*Miscellaneous Expense 2,500 Depreciation Expense 4,000
Income Summary 10,000 Miscellaneous Expense 4,000
B Income Summary – Branch 1,000 Home Office 1,000
Branch Current 1,000 Income Summary 1,000
**Allowance for overvaluation 5,000
of branch inventory
Income Summary – Branch 5,000
C Income Summary – Branch 4,000
Income Summary 4,000
D Income Summary 14,000
Retained Earnings 14,000
*Figures are assumed
**Shipments to HO 40,000
Return (2,500)
Ending inventory from HO (12,500)
Sold 25,000 *25/125 = 5,000
After the entries have been posted, the accounts that affects branch operations in the books of the home office
shows the following balances:
Home Office Books
Cash sent to branch 40,000.00 Equipment acquired by branch 20,000.00
Shipment to branch 40,000.00 Shipment returns 2,500.00
Depreciation charged to branch 4,000.00 Remittance 30,000.00
Net loss reported by branch 1,000
84,000.00 53,500.00
Branch Current - Balance 30,500.00

Allowance for Overvaluation of Branch Inventory

Mark-up on returns Mark-up on shipments to branch
(2,500 * 25/125) 500.00 (40,000 * 25/125) 8,000.00
Realized profit on merchandise sold
(25,000 * 25/125) 5,000.00
  Ending balance 2,500.00

Branch Income Summary

Realized mark-up on merchandise sold by
branch
Net loss reported by branch 1,000.00 (25,000 * 25/125) 5,000.00
Net income of branch (as adjusted) closed
to Income Summary - Branch 4,000.00
5,000.00 5,000.00

Branch Books
Equipment acquired by branch 20,000.00 Cash sent to branch 40,000.00
Shipment returns 2,500.00 Shipment from home office 40,000.00
Remittance 30,000.00 Depreciation charged by home office 4,000.00
Net loss reported by branch 1,000.00
53,500.00 84,000.00
Balance   Home Office - Balance 30,500.00

An analysis of the entries made and T-account for the Allowance for overvaluation of branch inventory is as
follows:
 The branch records the goods at billed price. The home office makes the following entry: Branch Current is debited for the billed
amount, Shipment to Branch is credited for the actual cost of the merchandise and Allowance for Overvaluation of Branch
Inventory is credited for the difference between the billed price and the cost of goods shipped. Branch Current and Home Office
accounts are reciprocal (equal).

In home office income statement, merchandise shipped to branch at cost should be deducted from the subm of
beginning inventory and the purchases in arriving at the cost of goods sold for home office sale. The balance in the
allowance of overvaluation in branch inventory account is properly recognized as an offset against the branch account
in arriving at the actual investment in the branch.

 The branch records the goods returned to home office at their billed price. The home office makes the following entry: Shipment
to Branch account is debited for the cost and Allowance for Overvaluation of Branch Inventory for the difference between the
billed price and the cost of the goods returned. The shipment returns should be deducted to their respective shipment accounts
in their respective books.

 Closing entry: The branch records and reports its net loss from own operations amounting to ₱1,000. But, in addition to the
amount of the net loss reported by the branch, the home office recognizes the realized profit on sales made by the
branch of merchandise billed above cost amounting to ₱5,000. The ₱5,000 realized profit from sales made by the branch
may be computed as follows:
Balance of Allowance for Overvaluation of Branch Inventory before adjustments of realized profit [unrealized
profit (40,000 – 2,500) * 25/125] 7,500.00
Less: Overvaluations of branch ending inventories [allowance after adjustment of realized profit on branch
sales (12,000 * 25/125)] 2,500.00
Realized profit on sales made by branch / Overvaluation of Cost of Goods Sold (adjustments to reflect
 true branch net income) 5,000.00

 After closing entry, the Allowance for Overvaluation of Branch Inventory account will have a credit balance of ₱2,500 as shown
in the T-account of the said account. It should be noted that in separate balance sheet of the home office, the Allowance for
Overvaluation of Branch Inventory should be deducted from the Branch Current account. It is deducted from the
inventory on the combined balance sheet.

 The closing entry of branch net income of ₱4,000 is so far as the home office is concerned, it to the Income Summary account .

Combined Statements when Goods are billed at Amounts Other than the Cost [Billing at a Price in
Excess of Cost, at Billed Price (Original Cost plus Mark-up based on cost)]

When affiliated units record interoffice transfer of goods at cost, the preparation of combined financial
statements is a relatively simple matter. Reciprocal home office and branch account balances are
eliminated and balance sheet data are then combined. Reciprocal interoffice revenue and expense
balances are eliminated and income statement data are combined.

When goods are billed to a branch at amounts other than cost, special problems are encountered in the
preparation of combined financial statements. The ending inventory on the branch balance sheet reported an
amount other than cost must be restated in terms of cost in preparing the combined balance sheet. The
beginning and the ending balances on the branch income statement reported at amounts other than the cost
must be restated in terms of cost in preparing the combined income statement.

When the preparation of the combined financial statements calls for the restatement of real and nominal
accounts as well as the elimination of reciprocal accounts, it is generally desirable to develop such summaries
though the preparation of work sheet that include both balance sheet and income statement data. As a basis
for illustration such work sheet, the separate income statement and balance sheet for Anton Trading on
December 31, 2021, are as follows:
Individual Income Statement
Anton Trading - Home Office
Income Statement
For the Year Ended December 31, 2021

Sales 95,000.00
Less: Cost of Goods Sold
Merchandise Inventory, January 1 40,000.00
Purchases 90,000.00

Cost of Goods Available for Sale 130,000.00

Shipment to Branch (30,000.00)

Cost of Goods Available for OWN SALE 100,000.00

Merchandise Inventory, December 31 (25,000.00) 75,000.00

Gross Profit 20,000.00

Less: Operating Expenses
Salaries Expense 3,000.00
Utilities Expense 2,000.00
Depreciation Expense 2,500.00
Miscellaneous Expense 2,500.00 10,000.00

Net Income from OWN OPERATIONS 10,000.00

Add/deduct: Adjusted branch net income (loss)
Branch reported net loss (1,000.00)
Overvaluation of Cost of Goods Sold 5,000.00 4,000.00

Net Income 14,000.00

 Anton Trading - Branch Q
Income Statement
For the Year Ended December 31, 2021

Sales 60,000.00
Less: Cost of Goods Sold
Merchandise Inventory, January 1 -
Purchases 8,000.00
Shipment to Home Office, billed price 37,500.00
Cost of Goods Available for Sale 45,500.00
Merchandise Inventory, December 31 (14,500.00) 31,000.00
Gross Profit 29,000.00
Less: Operating Expenses
Salaries Expense 14,000.00
Utilities Expense 2,000.00
Rent Expense 6,000.00
Depreciation Expense 4,000.00
Miscellaneous Expense 4,000.00 30,000.00
Net Loss (1,000.00)

Individual Balance Sheet

Anton Trading - Home Office
Balance Sheet
As of December 31, 2021
Assets
Cash 106,500.00
Marketable Securities 10,000.00
Merchandise Inventory, December 31 25,000.00
Land 45,000.00
Equipment 25,000.00
Less: Accumulated Depreciation 2,500.00 22,500.00
Equipment - Branch 20,000.00
Less: Accumulated Depreciation - Branch Equipment 4,000.00 16,000.00
Branch Current 30,500.00
Less: Allowance for Overvaluation of Branch Inventory 2,500.00 28,000.00
Total Assets 253,000.00

Liability
Accounts Payable 20,000.00
Shareholders' Equity
Capital Stock 150,000.00
Retained Earnings:
Retained Earnings, January 1 70,000.00
Combined Net Income 14,000.00
Total 84,000.00
Less: Dividend paid 1,000.00 83,000.00
Shareholders' Equity 233,000.00
Total Liabilities and Equity 253,000.00
 Anton Trading - Branch Q
Balance Sheet
As of December 31, 2021
Assets
Cash 18,000.00
Merchandise Inventory, December 31 14,500.00
Total Assets 32,500.00
Liability
Salaries Payable 2,000.00

Capital
Home Office 31,500.00
Net Loss (1,000.00) 30,500.00
Total Liabilities and Capital 32,500.00

Worksheet to prepare Combined Income Statement and Balance Sheet

The entries that appear in the working paper as eliminated do not appear on the books of the home office and
branch books. They are entries only to prepare the combined financial statements for external purposes.

Illustration (continuation). Assume the same transaction during 2021 of Anton Trading as presented above except that the home office
bills shipment to the branch at 25% above cost. The entries presented in the said illustration will be the same except for entries (No. 3
and 6) showing shipment to the branch and shipment returns.

A review of working paper reveals the following eliminating entries:

1. The reciprocal account Home Office and Branch Current account Home Office 31,500
are eliminated. Branch Current 31,500
2. Account balances resulting from the transfer of merchandise Shipment to Branch, at cost 30,000
between offices are cancelled. Allowance for Overvaluation of Branch
Inventory 7,500
Shipments from Home Office,
at billed price 37,500
3. The ending inventory, which is carried at billed price in the Merchandise Inventory, Dec. 31 – I/S 2,500
balance sheet and income statement, is reduced by ₱2,500 to its Merchandise Inventory, Dec. 31 – B/S 2,500
actual cost.
4. The amount of realized profit from sales in the beginning Allowance for Overvaluation of Branch
inventory to reduce it to cost. Inventory XX
Merchandise Inventory, Jan. 1 – I/S XX

To prepare the financial statements of the two companies, the eliminating entries and the combined totals for the income statement and
balance sheet on December 31, 2021, are shown on the next page.
Illustration (continuation): The adjusted trial balance of the home office and branch, the eliminating entries and the combined totals for the income statement and balance sheet on
December 31, 2021 are as follows:
Worksheet for Combined Financial Statements
Adjusted Trial Balance Combined Income Statement Combined Balance Sheet
Debits Home Office Branch Eliminations Debit Credit Debit Credit
Cash 106,500.00 18,000.00 124,500.00
Marketable Securities 10,000.00 10,000.00
Merchandise Inventory, January 1 40,000.00 40,000.00
Shipments from Home Office 2 37,500.00 (37,500.00)
Purchases 90,000.00 8,000.00 98,000.00
Land 45,000.00 45,000.00
Equipment 25,000.00 20,000.00 45,000.00
Branch Current 1
31,500.00 (31,500.00)
Salaries Expense 3,000.00 14,000.00 17,000.00
Depreciation Expense 2,500.00 4,000.00 6,500.00
Utilities Expense 2,000.00 2,000.00 4,000.00
Rent Expense 6,000.00 6,000.00
Miscellaneous Expense 2,500.00 4,000.00 6,500.00
Dividends paid 1,000.00   1,000.00
Total 359,000.00 113,500.00

Merchandise Inventory, December

31 (to B/S)3 25,000.00 14,500.00 (2,500.00) 37,000.00

Credits
Allowance for Overvaluation of
Branch Inventory2 7,500.00 7.500.00
Accumulated Depreciation -
Equipment 2,500.00 4,000.00 6,500.00
Accounts Payable 20,000.00 20,000.00
Salaries Payable 2,000.00 2,000.00
Capital Stock 150,000.00 150,000.00
Retained Earnings, January 1 70,000.00 70,000.00
Home Office1 31,500.00 31,500.00
Sales 95,000.00 60,000.00 155,000.00
Shipments to branch2 30,000.00   30,000.00
375,000.00 97,500.00

Merchandise Inventory, December 25,000.0

31 (to I/S)3 0 14,500.00 2,500.00    37,000.00    

- 178,000.00 192,000.00 262,500.00 248,500.00

Net Income 14,000.00     14,000.00
192,000.00 192,000.00 262,500.00 262,500.00
 Anton Trading
Combined Income Statement
For the Year Ended December 31, 2021
Sales 155,000.00
Less: Cost of Goods Sold
Merchandise Inventory, January 1 40,000.00
Purchases 98,000.00
Cost of Goods Available for Sale 138,000.00
Merchandise Inventory, December 31 (37,000.00) 101,000.00
Gross Profit 54,000.00
Less: Operating Expenses
Salaries Expense 17,000.00
Utilities Expense 4,000.00
Depreciation Expense 6,500.00
Rent Expense 6,000.00
Miscellaneous Expense 6,500.00 40,000.00
Net Income 14,000.00

Anton Trading
Combined Balance Sheet
As of December 31, 2021
Assets
Cash 124,500.00
Marketable Securities 10,000.00
Merchandise Inventory, December 31 37,000.00
Land 45,000.00
Equipment 45,000.00
Less: Accumulated Depreciation 6,500.00 38,500.00
Total Assets 255,000.00
Liabilities
Accounts Payable 20,000.00
Salaries Payable 2,000.00
Liabilities 22,000.00
Shareholders' Equity
Capital Stock 150,000.00
Retained Earnings:
Retained Earnings, January 1 70,000.00
Combined Net Income 14,000.00
Total 84,000.00
Less: Dividend paid 1,000.00 83,000.00
Shareholders' Equity 233,000.00
Total Liabilities and Equity 255,000.00

In developing combined financial statements, the affiliated entities are recognized as one entity. Accounts for
the home office and the branch must be restated so that, when combined, they will offer those balances that
would have resulted if the transaction of the related entities had been in one set of books.

In this process, any balance sheet accounts that report interoffice debits and credits and have no meaning
when the related entities are recognized as one entity are eliminated. Any income statement accounts that
report transfers of merchandise or charges of services between affiliated entities similarly require
elimination.

Furthermore, when merchandise accounts report values other than cost and an unrealized intercompany
inventory profit account has been established, merchandise accounts will require restatement to cost and the
unrealized profit (allowance for overvaluation of branch inventory) account will require cancellation.

Combining branch and home office accounts results to those balances that would have been obtained if one
set of accounts had been maintained in recording activities of both the branch and the home office. Combines
account balances are carried to appropriate Income Statement and Balance Sheet columns on the work sheet.
Following such transfers, the Income Statement columns are summarized and the net income is carried to the
Balance Sheet columns.

Moreover, it should be noted for the purpose of comparison, the amounts in the combined income statement
and combined balance sheet columns of the working paper are exactly the same as those in the working
paper prepared when shipments to the branch are billed at cost.

Allowance for Overvaluation of Branch Inventory

The worksheet prepared above shows the ending inventory of the branch and related allowance for
overvaluation of branch inventory are treated. Since the worksheet is prepared for first year of operations, no
beginning inventory is involved. In the second year of operation, beginning inventory exists, and it has to be
addressed accordingly.

Illustration (continuation). Assume that Anton Trading in 2022, the second year of operations, indicates a branch inventory beginning
at ₱14,500 (₱2,000 at cost + [₱10,000 + 25% mark -up]), billing price. For the current year, the home office ships to the branch,
merchandise with a cost of ₱48,000; billed at 25% above cost, or ₱60,000. Following are the ending inventories of the home office,
₱45,000, and branch amounting to ₱30,000 (₱10,000 at cost from outsiders + ₱20,000 at billed price shipped by the home office).

The overstatement of the Cost of Goods Sold of the branch for 2022 may be computed as follows, assuming the use of FIFO method.
Billed Price Cost Overvaluation
125% 100% 25%
Beginning inventory 12,500.00 10,000.00 2,500.00
Add: Shipments from Home Office 60,000.00 48,000.00 12,000.00
Cost of Goods Available for Sale 72,500.00 58,000.00 14,500.00
Less: Ending inventory 20,000.00 16,000.00 4,000.00
Cost of Goods Sold 52,500.00 42,000.00 10,500.00

It should be noted that since FIFO method is used in costing inventory, the ending inventory of ₱20,000 comes from the current year
shipments (i.e., ₱60,000). During 2022, after the entries have been posted, the account that affects the balances:

Home Office Books

Balances, December 31, 2021 30,500.00 Remittance 30,000.00
Shipment to Branch 60,000.00
Depreciation charged to branch 4,000.00
94,500.00 30,000.00
Branch Current - Balance 64,500.00

Allowance for Overvaluation of Branch Inventory

Balance, December 31, 2021 2,500.00
Mark-up on shipments 12,000.00
Balance   Balance 14,500.00

Branch Books
Remittance 30,000.00 Balance, December 31, 2021 30,500.00
Shipments from Home Office 60,000.00
Depreciation charged to Branch 4,000.00
30,000.00 94,500.00
Home Office - Balance 64,500.00

Combined Statements when Goods are billed at Amounts Other than the Cost [Billing at a Price in
Excess of Cost, at Billed Price (Original Cost plus Mark-up based on cost)] – Second Year of Operations
The worksheet for the preparation of combined financial statements for 2022 is similar with the worksheet
during the first year of operations except for additional elimination entry (Refer to Entry No. 4 below). The
said eliminating entry tend to reduce the beginning inventory of the branch for 2022 by ₱2,500, the amount
of unrealized profit included therein.

1. The reciprocal account Home Office and Branch Current account Home Office 64,500
are eliminated. Branch Current 64,500
2. Account balances resulting from the transfer of merchandise Shipment to Branch, at cost 48,000
between offices are cancelled. Allowance for Overvaluation of Branch
Inventory 12,000
 Shipments from Home Office,
at billed price 60,000
3. The ending inventory, which is carried at billed price in the Merchandise Inventory, Dec. 31 – I/S 4,000
balance sheet and income statement, is reduced by ₱4,000 to its Merchandise Inventory, Dec. 31 – B/S 4,000
actual cost.
4. The amount of realized profit from sales in the beginning Allowance for Overvaluation of Branch
inventory to reduce it to cost. Inventory 2,500
Merchandise Inventory, Jan. 1 – I/S 2,500

Closing entries: The closing entries on the books of the home office and the branch on December 31, 2022 are shown below.
Home Office Books Branch Books
A Sales 150,000 Sales 85,000
Shipment to branch 48,000 Merchandise Inventory – end 30,000
Merchandise Inventory – end 45,000 Merchandise Inventory – beginning 14,500
Merchandise Inventory – beginning 25,000 Purchases 10,000
Purchases 120,000 Shipment from home office 60,000
*Salaries Expense 10,000 *Salaries Expense 14,000
*Utilities Expense 4,000 *Utilities Expense 4,000
*Depreciation Expense 4,000 *Depreciation Expense 2,000
*Miscellaneous Expense 32,000 *Miscellaneous Expense 2,000
Income Summary 48,000 Income Summary 6,500
B Branch Current 6,500 Income Summary 6,500
Income Summary – Branch 6,500 Income Summary 6,500
Allowance for overvaluation 10,500
of branch inventory
Income Summary – Branch 10,500
C Income Summary – Branch 17,000
Income Summary 17,000
D Income Summary 65,000
Retained Earnings 65,000

Based on the working paper prepared in the next page, the following combined financial statements of Anton Trading during the second
year of the operations of the business is presented below:
Anton Trading
Combined Income Statement
For the Year Ended December 31, 2022
Sales 235,000.00
Less: Cost of Goods Sold
Merchandise Inventory, January 1 37,000.00
Purchases 130,000.00
Cost of Goods Available for Sale 167,000.00
Merchandise Inventory, December 31 (71,000.00) 96,000.00
Gross Profit 139,000.00
Less: Operating Expenses
Salaries Expense 24,000.00
Utilities Expense 6,000.00
Depreciation Expense 8,000.00
Miscellaneous Expense 36,000.00 74,000.00
Net Income 65,000.00
The adjusted trial balance of the home office and branch, the eliminating entries and the combined totals for the income statement and balance sheet on December 31, 2022 are as follows:
Worksheet for Combined Financial Statements
Adjusted Trial Balance Combined Income Statement Combined Balance Sheet
Debits Home Office Branch Eliminations Debit Credit Debit Credit
Cash 80,500.00 41,000.00 121,500.00
Marketable Securities 55,000.00 55,000.00
Merchandise Inventory, January 1 25,000.00 14,500.00 (2,500.00) 37,000.00
Shipments from Home Office 2 60,000.00 (60,000.00)
Purchases 120,000.00 10,000.00 130,000.00
Land 45,000.00 45,000.00
Equipment 35,000.00 20,000.00 55,000.00
Branch Current1 64,500.00 (64,500.00)
Salaries Expense 10,000.00 14,000.00 24,000.00
Depreciation Expense 4,000.00 4,000.00 8,000.00
Utilities Expense 4,000.00 2,000.00 6,000.00
Miscellaneous Expense 32,000.00 4,000.00 36,000.00
Dividends paid 5,000.00   5,000.00
Total 480,000.00 169,500.00

Merchandise Inventory, December

31 (to B/S)3 45,000.00 30,000.00 (4,000.00) 71,000.00

Credits
Allowance for Overvaluation of
Branch Inventory2 14,500.00 14.500.00
Accumulated Depreciation - 10,500.0 14,500.0
Equipment 0 4,000.00 0
Accounts Payable 40,000.00 40,000.00
Capital Stock 150,000.00 150,000.00
Retained Earnings, January 1 83,000.00 83,000.00
Home Office1 64,500.00 64,500.00
Sales 150,000.00 85,000.00 235,000.00
Shipments to branch 48,000.00   30,000.00
375,000.00 97,500.00

Merchandise Inventory, December 45,000.0

31 (to I/S)3 0 30,000.00 4,000.00    71,000.00    
241,000.00 306,000.00 352,500.00 287,500.00
Net Income 65,000.00     65,000.00
306,000.00 306,000.00 352,500.00 352,500.00
 Anton Trading
Combined Balance Sheet
As of December 31, 2022
Assets
Cash 121,500.00
Marketable Securities 55,000.00
Merchandise Inventory, December 31 71,000.00
Land 45,000.00
Equipment 55,000.00
Less: Accumulated Depreciation 14,500.00 40,500.00
Total Assets 333,000.00
Liabilities
Accounts Payable 40,000.00
Shareholders' Equity
Capital Stock 150,000.00
Retained Earnings:
Retained Earnings, January 1 83,000.00
Combined Net Income 65,000.00
Total 148,000.00
Less: Dividend paid 5,000.00 143,000.00
Shareholders' Equity 293,000.00
Total Liabilities and Equity 333,000.00

Billed at retail sales price (Mark-up based on Billed Price)

The home office may bill a branch for merchandise at its retail price not only to conceal information
concerning branch earnings from branch officials, but also to provide a more effective control over
merchandise handled by the branch.

The home office, when informed of the branch sales currently, is provided with a continuous record of the
goods in the hands of the branch. The inventory position is calculated by subtracting sales to date form the
retail sales price of goods made available to the branch.

At the end of the period, a physical inventory for the branch at retail sales price should be equal to the
difference between the billed price of the goods available for sale and net sales for the period. If the inventory
reported by the branch is not equal to this difference, the discrepancy must be investigated and explained to
the satisfaction of the home office.

If the branch is billed for goods at the sales price, the branch cost of goods sold will be equal to sales, and
branch activities will show a loss from operations equal to the expenses of operation. Branch accounts may be
adjusted and closed in the usual manner at the end of the fiscal period, and the home office account debited
for the reported loss.

Branch statements may be prepared and submitted to the home office. Since the branch income statement
gives no indication of the actual profitability of branch activities, its value to the branch is limited to its use for
statistical and comparative purpose.

In accounting for shipments that are billed at sales, price, the home office may follow a procedure that is
similar to that employed for shipments at an arbitrary rate above cost. A memorandum record is maintained
by the home office, showing both the cost and the billed prices for all goods sent to the branch.

Upon shipping goods to a branch, the unrealized intercompany inventory account is credited for the
difference between the cost and the billed price.

The amount transferred from the unrealized profit account to the branch income account reports the gross
profit that has been realized as a result of branch sales. This transfer converts the loss recorded as a result of
the branch report into a net income if branch operations have actually proved profitable. The balance
remaining in the unrealized profit account reports the overstatement in the branch investment balance.

Transactions between Branches

Efficient operations may occasionally require that merchandise or other assets be transferred from one
branch to another. Generally, a branch does not carry a reciprocal ledger account with another branch but
records the transfer in the Home Office ledger account.

Inter-branch Transfer of Cash

Normally, branch activities are limited to transactions with the home office and with outsiders. On certain
occurrences, though, the home office may authorize the transfer of certain assets form one branch to another.
Instead of opening special accounts with member branches, branches will normally clear such transfers
through the home office account. The purpose of such is to prevent a branch to have an open account with
another branch.

Illustrative problem: Assume that upon the authorization of the Home Office, Branch A sends cash of ₱2,000 to Branch B. The entries to
record this transfer on the home office and branch books are:
Home Office Books Branch A Books Branch B Books
Branch A Currrent 2,000 Home Office 2,000 Cash 2,000
Branch B Current 2,000 Cash 2,000 Home Office 2,000

When this process is followed, settlement between individual branches is not required; the net extent of
branch accountability in so far as affiliated entities are concerned is summarized in one account, the Home
Office account.

Inter-branch Transfer of Merchandise

When merchandise is supplied by the home office to its branches, it may become necessary in certain
instances for the home office to authorize the transfer of goods from one branch to another. Inter-branch
transfer of merchandise, like inter-branch transfer of cash, are normally cleared through the Home Office
account rather than through special accounts with member branches.

Freight Cost on Shipments

The cost of shipping merchandise to its final sale location can be a significant element of the cost of
merchandise inventoried and sold. Accordingly, freight costs on merchandise shipped between home office
and branch locations should be included in branch inventory and cost of goods sold measurements.

The transfer of merchandise from one branch to another branch does not justify increasing the carrying
amount of inventories by the freight costs incurred because of the indirect routing. The amount of freight
costs included in inventories at a branch is limited to the cost of shipping merchandise directly from home
office to its present location. Excess freight costs are recognized as expenses of the home office.
Illustrative problem: Assume the following information:
1. Home Office ships good to Branch C, billing the branch for the goods at ₱1,500 plus freight incurred of ₱200.
2. As a subsequent date, the home office authorized the transfer of these goods to Branch D. Branch C pays the freight charge on
the transfer for ₱150. If the shipment had been made by the home office directly to Branch D, the freight charge would have
been ₱220.
Home Office Books Branch C Books Branch D Books
1. Branch C 1,700 Shipments from HO 1,500
Shipment to Branch C 1,500 Freight-in 200
Cash 200 Home Office 1,700

2. Branch D 1, 720 Home Office 1,850

Excess freight 130 Shipments form HO 1,500
Branch C 1,850 Home Office 200
Shipment from HO 1,500
Cash 150
Freight-In 220
Shipment to Branch C 1,500 Home Office 1,720
Shipment to Branch D 1, 500

In preparing the income statement for the home office, the excess freight charge may be reported as
subtraction from the summary of branch earnings in the lower section of the statement. Excessive freight
charges represent management mistakes or inefficiencies. Therefore, they are not considered normal
operating of freight expenses. On the combined income statement, the excess freight may be reported in the
cost of goods sold, selling expense or general or administrative expense section, depending on the division of
the company that is responsible for such transfers.

If excess freight results from a mistake on an order for goods by a branch from some other branch failure, the
charge should be borne by the branch and reported to its books. In some cases, if branch managers are given
authority to order transfers of merchandise between branches, the excess freight costs are recognized as
expense attributable to the branches.

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