University of Saint Louis

School of Accountancy, Business and Hospitality

Advanced Financial Accounting and Reporting Review, Part 2 (ACRV 1083)
Pre-test #1: Home Office and Branch Accounting (April 22, 2019)
For codes 644 and 548

Code: Name: Score: /25

GENERAL INSTRUCTIONS: WRITE ALL ANSWERS ON A WHOLE SHEET OF YELLOW PAPER.

ALTERATIONS OF ANY KIND IN YOUR ANSWERS INVALIDATES THE CORRESPONDING ITEM.

I. Choose the letter which represents your answer to each question.

1. The freight on shipments to branch paid by the home office is recorded by the
home office as
A. Credit to cash C. Credit to Investment in Branch.
B. Credit to freight-in D. Debit to Freight-in

2. Which of the following statements is (are) true regarding sales agency and
branch?
I. A sales agency is not a self-contained business but rather acts only on behalf
of the home office.
II. A branch is a self-contained business which acts independently, but within
the bounds of the company policy and subject to the control of the home office.

A. I only. B. II only. C. I and II. D. Neither I nor II.

3. An enterprise uses a branch accounting system in which it establishes separate

formal accounting systems for its home office operations and its branch office
operations. Which of the following statements about this arrangement is false?
A. The home office account on the books of a branch office represents the
equity interest of the home office in the net assets of the branch.
B. The branch office account on the books of the home office represents the
equity interest of the branch office in the net assets of the home office.
C. The home office and branch office accounts are reciprocal accounts that
must be eliminated in the preparation of the enterprise’s financial
statements that are presented in accordance with GAAP.
D. Unrealized profit from internal transfers between the home office and a
branch must be eliminated in the preparation of the enterprise’s financial
statements that are presented in accordance with GAAP.

4. Hari Pata sells crispy pork pata. It opened a branch in Maguindanao and I’m
surprised the owner is still alive. Anyway, on the home office financial records
at the end of 2018, Hari Pata reports Investment in Maguindanao branch account with
a 167,000 debit balance. The branch operation reports on the same date a Home Office
account with a 162,000 credit balance. Which of the following statements is true?
A. Since two different sets of records are being kept, these two accounts are
not designed to agree.
B. The difference indicates that cash may be in transit from the branch to
the home office.
C. Cash may have been collected by the home office for the branch but not yet
reported to the branch.
D. The difference indicates that the home office might have assigned a 6,000
expense allocation to the branch that was incorrectly recorded by the
branch as 11,000.

5. The Investment in Branch account is a/an

A. Asset B. Contra-liability C. Unrealized income D. Liability

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II. Solve, and give what is required of each problem. Write your answers in a
separate sheet of yellow paper.

Problem 1

An entrepreneur named Dina put up a business that sells chicken harvested and sold
on the same day. She was able to secure a stall in the market. She named her
business, “Dina Fresh Chicken”. Her chicken business wasn’t so good, despite the
actual freshness of her chicken and her strict quality control. Up to this time,
she is clueless as to why her business wasn’t a successful one.

Not wanting to give up on business, she put up another business involving another
one of her interests: Watches. She started her watch business which she named, “2nd
time around”. Her business specializes in selling low-cost, second-hand watches.
This time, her business boomed. And in just a year, she decided to open a branch
in Timetime, Rizal. The home office is located in Oras, Isabela.

The following transactions occurred in connection with the new operations in

Timetime, Rizal:

 The home office acquired 18,000 in equipment to be used (and recorded) by the
branch.
 The home office paid 3,000 to lease a building for the last six months of this
year. This cost was charged to the branch.
 Inventory costing 80,000 was shipped to the branch by the home office at a
transfer price of 100,000. The home office separately records all of its
unrealized gains.
 The branch paid 11,000 for various operating expenses.
 The branch sold 75% of the inventory received, collecting 105,000 in cash.
 The branch transferred 60,000 in cash to the home office.

Required: Prepare journal entries for both the home office and the branch to record
the previous transactions. (10 points)

Problem 2

On December 31, 2018, the Investment in Branch account on the home office’s books
has a balance of 102,000. In analyzing the activity in each of these accounts for
December, you find the following differences:

1. A 12,000 branch remittance to the home office initiated on December 27, 2018
was recorded on the home office books on January 3, 2019.
2. A home office inventory shipment to the branch on December 28, 2018 was
recorded by the branch on January 4, 201; the billing of 24,000 was at cost.
3. The home office incurred 14,400 of advertising expenses and allocated 6,000
of this amount to the branch on December 15, 2018. The branch has not recorded
this transaction.
4. A branch customer erroneously remitted 3,600 to the home office. The home
office recorded this cash collection on December 23, 2018. Meanwhile, back at
the branch, no entry has been made yet.
5. Inventory costing 51,600 was sent to the branch by the home office on December
10, 2018. The billing was at cost, but the branch recorded the transaction at
40,800.

Required: A schedule showing each adjustment to the reciprocal accounts (5 points);

Adjusted Balance of the reciprocal accounts (2 points); Unadjusted Balance of the
Home Office account.

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