COLLEGE OF COMMERCE
BACHELOR OF SCIENCE IN ACCOUNTANCY
MODULE 5 PACKET
PrE 7 – ACCOUNTING FOR BUSINESS COMBINATIONS
MODULE 5 HOME OFFICE AND BRANCH ACCOUNTING: SPECIAL PROCEDURES
Welcome to Module 5
In this module, we will discuss the special accounting procedures for a business in its home office
and in its branches, particularly merchandise shipments other than at cost, interbranch transfer of
cash and of merchandise.
CONSULTATION HOURS:
Virtual time: During your class schedule
Phone or Messenger: Weekdays from 1pm to 130pm
MODULE 5 LEARNING OBJECTIVES:
By the end of this module, the students will be able to:
1. Know the procedures in merchandise shipment billed at a price in excess of cost.
2. Accounting for interbranch transfers
COURSE CONTENT FOR MODULE 5:
ACTIVITY DESCRIPTION TIME TO
COMPLETE
Lecture discussion Accounting for Home Office and its Branches 3 hours
Activity Problem Solving 2 hours
Summative quiz for module 5 (to be
Quiz 1 hour
announced)
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
Page 1 of 15
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LECTURE DISCUSSIONS
5.1 MERCHANDISE SHIPMENTS TO BRANCH – BILLED AT A PRICE IN
EXCESS OF COST
The home office may prefer to bill merchandise at cost plus an arbitrary percentage, otherwise
known as billed price. Upon receipt of merchandise from the home office, the branch records the
charges listed on the invoice accompanying the goods, but is actually not aware of the actual cost
of the merchandise.
The profits that are made by the branch will therefore be less than the actual profits. The inventory
is reported by the branch are overstated in as much as they were valued based on the billed price,
not at their cost.
The entries to record the shipment will be the same but will include an Allowance for
Overvaluation of Branch Inventory for the books of the Home Office.
Transactions HOME OFFICE BOOKS BRANCH BOOKS
The Home Office Branch Current 40,000 Shipments fr HO at BP 40,000
ships merchandise Shipment to BR, cost 32,000 HO Current 40,000
costing P32,000 billed Allow. for overvaluation
at 125% of cost. of Branch Invty 8,000
Goods billed at P2,500 Shipment to BR, cost 2,000 HO Current 2,500
were returned by the Allow. for overvaluation Shipments fr HO at BP 2,500
branch of Branch Invty 500
Branch Current 2,500
You may either be given the billed price or the cost.
The HO and Branch Current accounts reflect the billed price.
See page 6
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Closing entries: Assume that the branch Reports it’s ending inventory at P14,500 composed of
P2,000 merchandise purchased from outsiders and P12,500 from the HO (P10,000 cost x 125%)
HOME OFFICE BOOKS BRANCH BOOKS
Adjust the ending inventory, close the Adjust the ending inventory, and close the
beginning inventory and the nominal accounts nominal accounts
Sales 95,000 Sales 60,000
Shipments to BR 30,000 M. Invty, 12/31 14,500
M. Invty, 12/31 25,000 Income Summary 1,000
M. Invty, 1/1 40,000 Purchases 8,000
Purchases 90,000 Shipments fr HO 37,500
Operating Exp. 10,000 Operating Exp. 30,000
Income Summary 10,000
To record result of operations reported by BR To close the loss in operations to the HO
Branch Income Summary 1,000 HO Current 1,000
Branch Current 1,000 Income Summary 1,000
To record the realization of the 25% mark-up
on merchandise sold by branch
Allow. for overvaluation Allow for OV of BI before adj. 7,500
of Branch Invty 5,000 (8000 – 500) or (30k net shipment x 25%)
OV pertaining to end. invty (10000x25%) 2,500
Branch Income Summary 5,000 Realized profit on sales made
To close the branch’s result of operations to by branch/OV of COGS 5,000
the general income summary account this represents additional branch net income
Branch Income Summary 4,000
Income Summary 4,000
After the entries have been posted, the accounts affecting branch operations in the HO books are:
Branch Current
Cash sent to branch 40,000 Equipment acquired by BR 20,000
Shipment to branch 40,000 Shipment returns 2,500
Depreciation charged to BR 4,000 Remittance 30,000
Net loss reported by BR 1,000
Balance 30,500
Allowance for Overvaluation of Branch Inventory
Mark-up on shipment returns 500 Mark-up on Shipments to BR 8,000
Realized mark-up on mdse sold by BR 5,000
Balance 2,500
Branch Income Summary
Net loss reported by BR 1,000 Realized mark-up on mdse sold by BR 5,000
Net income of BR as adjusted 4,000
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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In the books of the Branch:
Home Office Current
Equipment acquired by BR 20,000 Cash sent to branch 40,000
Shipment returns 2,500 Shipment from HO 40,000
Remittance 30,000 Depreciation charged by HO 4,000
Net loss reported by BR 1,000
Balance 30,500
Reciprocal home office and branch account balances are eliminated and balance sheet data are combined.
Reciprocal inter-office revenue and expense balances are also eliminated and income statement data are
combined.
The ending inventory on the branch balance sheet reported at an amount other than cost must be restated in
terms of cost in preparing the combined balance sheet. That beginning and ending inventory balances on
the branch income statement reported must also be restated in terms of cost in preparing the combined
income statement.
Individual Income Statements
Manila Company – Bulacan Branch
Income Statement
For the Year Ended December 31, 20x4
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Taken from Advanced Financial Accounting, by Dayag 2021
Allowance for
overvaluation is
deducted from
Branch Current
Account
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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The eliminating entries are plotted in the worksheet which will help in the preparation of the
combined statements:
Inventory of HO and Branch @ cost
Shipments to Branch and from HO
have been eliminated and are not
found in the consolidated IS
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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COLLEGE OF COMMERCE
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2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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5.2 MERCHANDISE SHIPMENTS TO BRANCH – BILLED AT A PRICE IN
EXCESS OF COST, YEAR 2
If the branch is already in its second year of operations, it will have a beginning inventory. Using
the same illustration, assume that in addition to the P14,500 ending inventory from the first year
of operations (now the beginning of the second year), the home office ships to the branch
merchandise costing P48,000, billed price of 25% of cost totaling to P60,000. The ending
inventories are: P45,000 for Home Office and P30,000 for Branch (P10,000 cost from outsiders
and P20,000 at billed price from home office).
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Elimination Entries in the Worksheet:
Closing Entries:
HOME OFFICE BOOKS BRANCH BOOKS
Adjust the ending inventory, close the beginning inventory and the nominal accounts
Sales 150,000 Sales 85,000
Shipments to BR 48,000 M. Invty, 12/31 30,000
M. Invty, 12/31 45,000 M. Invty, 1/1 14,500
M. Invty, 1/1 25,000 Purchases 10,000
Purchases 120,000 Shipments fr HO 60,000
Operating Exp. 50,000 Operating Exp. 22,000
Income Summary 48,000 Income Summary 6,500
To record result of operations reported by BR To close the income in operations to the HO
Branch Current 6,500 Income Summary 6,500
Branch Income Summary 6,500 HO Current 6,500
To record the realization of the 25% mark-up
on merchandise sold by branch
Allow. for overvaluation OV of Invty before adj. 14,500
of Branch Invty 10,500 [(12500 BI + 60k shipments fr HO) *25/125]
OV pertaining to end. invty (20000x25%) 4,000
Branch Income Summary 10,500 Realized profit on sales made
To close the branch’s result of operations to by branch/OV of COGS 10,500
the general income summary account this represents additional branch net income
Income Summary 17,000 Only difference is the presence of beginning inventory
Branch Income Summary 17,000
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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The combined income statement and balance sheet are:
Manila Company
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Net Income 65,000 65,000
Total P306,000 P306,000 P352,500 P352,500
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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5.3 TRANSACTIONS BETWEEN BRANCHES
Interbranch Transfers of Cash
Branch activities are normally limited to transactions with the home office and outsiders. There
are times that the home office may instruct one branch to transfer cash to another branch. Instead
of using special accounts with the other branches, a branch will clear such transfer through its
Home Office account.
Illustration: As instructed by HO, Branch A sends P5,000 cash to Branch B.
Home Office Books Branch A Books Branch B Books
Branch A 5,000 Home Office 5,000 Cash 5,000
Branch B 5,000 Cash 5,000 Home Office 5,000
No settlement is required in between the branches; the accountability of a branch in so far as
affiliated units are concerned is summarized in the Home Office account.
Interbranch Transfers of Merchandise
In the case of interbranch transfers of merchandise, the handling of freight charges poses a special
problem. Freight on goods received by the branch directly from home office are included in the
cost of branch inventory, but the transfer of merchandise from one branch to another does not
justify increasing the inventory value by the additional freight cost incurred because of the indirect
routing. Excess freight costs should be absorbed by the home office as an operating expense.
The Home Office shipped merchandise costing P12,000 to Branch X and paid freight of P800. The
Home Office instructed Branch X transfer this merchandise to Branch Y. Freight costs of P600
were paid by Branch X to carry out the order. If the merchandise had been shipped directly from
the Home Office to Branch Y, the freight cost could have been P1,000. The entries to be made are:
Home Office Branch X Branch Y
To record the shipment of merchandise to X and payment of freight
Branch X 2,800 Shipments fr HO 2,000 Shipments fr HO 2,000
Shipments to X 2,000 Freignt In 800 Freignt In 1,000
Cash 800 Home Office 2,800 Home Office 3,000
Transfer of merchandise from X to Y. Interbranch freight of P600 caused total freight costs to
exceed direct shipment cost by P400 (800 + 600 > 1000)
Shipments to X 2,000 Home Office 3,400
The excess freight is subtracted
Shipments to Y 2,000 Shipments fr HO 2,000 from the summary of branch
Branch Y 3,000 Freight In 800 earnings
Excess freight 400 Cash 600
Branch X 3,400
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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ACTIVITY FOR MODULE 5 TO BE ANSWERED IN NEO LMS
1.
2.
3.
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University of San Agustin, Iloilo City, 5000, Philippines
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4.
Adjusted balance in the Allowance for Overvaluation in Branch Inventory account refers to mark-up on its ending
inventory. See pages 3 and 9 wherein the overvaluation from beginning inventory is adjusted with the realized profit
by the branch to come up with Ending balance.
5.
6.
What is the branch comprehensive income or branch profit as far as the home office is concerned?
2020-2021 Module Packets for PrE 7 (Accounting for Business Combinations) | College of Commerce |
University of San Agustin, Iloilo City, 5000, Philippines
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Items 7 to 8
P270,000
P151,200
28,350
90,000
above
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University of San Agustin, Iloilo City, 5000, Philippines
Page 15 of 15
