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ILLUSTRATION OF HOME OFFICE AND BRANCH ACCOUNTING

Bert Corporation of Manila has operated a sales branch in Cebu, for a number of years. All merchandise shipped to
the Cebu branch is transferred at normal sales prices, which are 125% of home office cost. The Cebu branch also
purchases merchandise from outside suppliers. This merchandise is sold by Cebu at a 25% markup based on invoice
cost. Balance sheets for Danny Corporation’s home office and its Cebu branch at December 31, 20x1 are as follows:

BERT CORPORATION HOME OFFICE AND CEBU BRANCH


BALANCE SHEETS AT DECEMBER 31, 20X1
Home office Branch
Assets
Cash P 25,000 P11,000
Accounts receivable – net 42,000 23,000
Inventory 20,000 16,000
Plant assets – net 70,000 -
Cebu branch 43,000 - .
Total assets P200,000 P50,000

Liabilities and Equity


Accounts payable P 14,000 P 5,000
Other liabilities 10,000 2,000
Loading – branch inventory 1,600 -
Home office 43,000
Capital stock 150,000 -
Retained earnings 24,400 - .
Total liabilities and equity P200,000 P50,000

All plant asset records for Bert’s home office and Cebu branch are maintained on the home office books. Half of
the P16,000 branch inventory at December 31, 20x1 was received from local suppliers, and the remaining P8,000 was
received from the home office at established transfer prices. A summary of the transactions of Bert’s home office and
Cebu branch for 20x2 follows:
1. Bert’s sales for 20x2 were P281,750, of which P200,000 were home office sales and P81,750 were sales
made by the Cebu branch. All sales were on account.
2. Home office and branch purchases on account for 20x2 were P205,000 and P20,000, respectively. The home
office shipped P40,000 of merchandise to Cebu branch at a transfer price of P50,000.
3. The home office collected P195,000 on account during 20x2, and Cebu branch collected P79,750.
4. The Cebu branch transferred P55,000 cash to the home office during 20x2.
5. Payments on account were home office, P210,000; Cebu branch, P21,000.
6. During 20x2, the home office paid operating expenses of P20,000, and Cebu branch paid operating expenses
of P2,000. Of the operating expenses paid by the home office, P1,000 was allocated to Cebu branch.
7. Total depreciation for the year was P8,000, of which P1,500 was allocated to branch operations.
Year-end inventories are P25,000 for the home office, and P10,000 for Cebu branch, with half of the branch inventory
consisting of merchandise acquired from the home office.

Required:
1. Prepare the journal entries for the year 20x2 on the books of the home office and branch office.
2. Prepare the adjusting and closing entries on the home office books and the closing entry on the books of the
branch.
3. Prepare the unadjusted trial balance of the home office and the branch for the year 20x2.
4. Prepare the individual financial statements of the home office and the branch.
5. Prepare the combined financial statements of Bert Corporation for the year 20x2.

Bert CORPORATION
HOME OFFICE AND CEBU BRANCH JOURNAL ENTRIES
FOR THE YEAR 20X2
Number Home Office Books Cebu Branch Books
1 Accounts receivable 200,000 Accounts receivable 81,750
Sales 200,000 Sales 81,750
To record sales on account. To record sales on account.

2 Purchases 205,000 Purchases 20,000


Accounts payable 205,000 Accounts payable 20,000
To record purchases on account. To record purchases on account.

Cebu branch 50,000 Shipments from home office 50,000


Shipments to Cebu branch 40,000 Home office 50,000
Loading branch inventory 10,000 To record receipt of merchandise
To transfer merchandise to Cebu from home office.
Branch at 125% of cost.

3 Cash 195,000 Cash 79,750


Accounts receivable 195,000 Accounts receivable 79,750
To record collection on accounts receivable. To record collection on accounts receivable.

4 Cash 55,000 Home office 55,000


Cebu branch 55,000 Cash 55,000
To record receipt of cash from Cebu branch. To record cash remittance to home office.

5 Accounts payable 210,000 Accounts payable 21,000


Cash 210,000 Cash 21,000
To record payments on account. To record payments on account.

6 Operating expenses 20,000 Operating expenses 2,000


Cash 20,000 Cash 2,000
To record payment of expenses. To record payment of expenses.

Cebu branch 1,000 Operating expenses 1,000


Operating expenses 1,000 Home office 1,000
To record allocation of expenses to To record expenses allocated from
Cebu branch. home office.

7 Cebu branch 1,500 Operating expenses 1,500


Operating expenses 6,500 Home office 1,500
Accumulated depreciation 8,000 To record allocation of depreciation
To record depreciation and allocation to from home office.
Cebu branch.

BERT CORPORATION
HOME OFFICE AND CEBU BRANCH ADJUSTING & CLOSING JOURNAL ENTRIES
DECEMBER 31, 20X2
Home Office Books Cebu Branch Books
Adjusting Entries Closing Entry
(1) To record branch reported net income. To close the nominal accounts and to
Cebu branch 1,250 record the net income.
Cebu branch profit 1,250 Sales 81,750
Inventory, December 31, 20x2 10,000
(2) To adjust the net income of the branch Inventory, January 1, 20x2 16,000
and to record the realized loading. Purchases 20,000
Loading in branch inventory 10,600 Shipments from home office 50,000
Cebu branch profit 10,600 Operating expenses 4,500
Unrealized profit per books of P11,600, less Home office 1,250
P1,000 unrealized profit in branch ending
Inventory = P10,600 adjustment.
Closing Entry
To close the nominal accounts and to record
the combined net income.
Sales 200,000
Inventory, December 31, 20x2 25,000
Shipments to Cebu branch 40,000
Cebu branch profit 11,850
Inventory, January 1, 20x2 20,000
Purchases 205,000 Branch profit = 11,850
Operating expenses 25,500
Retained earnings 26,350 Home office profit = 14,500

BERT CORPORATION
HOME OFFICE AND CEBU BRANCH UNADJUSTED TRIAL BALANCE
FOR THE YEAR ENDED, DECEMBER 31, 20X2
Home Office Cebu Branch Debit Credit Debit Credit

Cash P 45,000 P 12,750


Accounts receivable – net 47,000 25,000
Inventories 20,000 16,000
Plant assets – net 62,000 -
Cebu branch 40,500 -
Accounts payable P 9,000 P 4,000
Other liabilities 10,000 2,000
Loading - branch inventory 11,600 -
Home office - 40,500
Capital stock 150,000 -
Retained earnings 24,400 -
Sales 200,000 81,750
Purchases 205,000 20,000
Shipments from home office 50,000
Shipments to Cebu branch 40,000
Operating expenses 25,500 4,500 .
Total P445,000 P445,000 P128,250 P128,250

BERT CORPORATION
HOME OFFICE INCOME STATEMENT
FOR THE YEAR ENDED, DECEMBER 31, 20X2

Sales P200,000
Cost of sales:
Inventory, January 1, 20x2 P 20,000
Add: Purchases 205,000
Available for sale P225,000
Less: Shipments to branch ( 40,000)
Inventory, December 31, 20x2 ( 25,000) 160,000
Gross profit P 40,000
Less: Operating expenses 25,500
Income from own operations 14,500
Add: Cebu branch profit 11,850
Combined net income P 26,350

BERT CORPORATION
HOME OFFICE BALANCE SHEET
AS OF DECEMBER 31, 20X2

Assets Liabilities and Equity


Cash P 45,000 Accounts payable P 9,000
Accounts receivable – net 47,000 Other liabilities 10,000
Inventories 25,000 Loading in branch inventory 1,000
Plant assets – net 62,000 Capital stock 150,000
Cebu branch 41,750 Retained earnings 50,750
Total P220,750 Total P220,750

BERT CORPORATION
CEBU BRANCH INCOME STATEMENT
FOR THE YEAR ENDED, DECEMBER 31, 20X2

Sales P81,750
Cost of sales:
Inventory, January 1, 20x2 P16,000
Add: Purchases 20,000
Shipments from home office 50,000
Available for sale P86,000
Less: Inventory, December 31, 20x2 ( 10,000) 76,000
Gross profit P 5,750
Less: Operating expenses 4,500
Net income P 1,250

BERT CORPORATION
CEBU BRANCH BALANCE SHEET
AS OF DECEMBER 31, 20X2

Assets Liabilities and Equity


Cash P12,750 Accounts payable P 4,000
Accounts receivable – net 25,000 Other liabilities 2,000
Inventories 10,000 Home office 41,750
Total P47,750 Total P47,750

BERT CORPORATION
COMBINED INCOME STATEMENT
FOR THE YEAR ENDED, DECEMBER 31, 20X2

Sales P281,750
Cost of sales:
Inventory, January 1, 20x2 P 34,400
Add: Purchases 225,000
Available for sale P259,400
Less: Inventory, December 31, 20x2 ( 34,000) 225,400
Gross profit P 56,350
Less: Operating expenses 30,000
Combined net income P 26,350

BERT CORPORATION
COMBINED BALANCE SHEET
AS OF DECEMBER 31, 20X2
Assets Liabilities and Equity
Cash P 57,750 Accounts payable P 13,000
Accounts receivable – net 72,000 Other liabilities 12,000
Inventories 34,000 Capital stock 150,000
Plant assets – net 62,000 Retained earnings 50,750
Total P225,750 Total P225,750