ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Problem 1

During the first part of the current year, Luzon Inc. begins a branch operation in Iloilo City. Equipment costing P
50,000is immediately sent to this site. In addition, inventory costing P 40,000 is transferred but at a price of P
60,000. Cash of P 10,000 also is conveyed to the branch.

1. The branch inventory from an outside party at a cost of P 30,000. A periodic inventory system is in use.
2. The home office pays P 10,000 on a building for the next eight months. The branch is notified of this
payment.
3. Sales of P 90,000 are made. Cash of P 40,000 is collected immediately. The rest of the sales are made on
account.
4. The branch pays P 8,000 for advertising and another P 5,000 for salaries.
5. The branch transfers P 10,000 in cash to the home office. The money is received and recorded.
6. A P 3,000 receivable is collected by the home office for the branch. The branch is notified of this collection.
7. The building rented by the branch is occupied for four months.

Required:

1. Prepare Journal Entries for the Branch and Home Office Books.
2. Prepare the Income Statement for Iloilo branch.

HOME OFFICE BOOKS BRANCH BOOKS

PARTICULARS Dr Cr PARTICULARS Dr Cr

1. ? ? ? ?
? ? ? ?
? ? ? ?
Allowance for Overvaluation of Merchandise Inventory ? ? ?
? ?

2. ? ? ?
? ?

3. ? ? ? ?
? ? ? ?

4. ? ? ?
? ?
? ?

5. ? ? ? ?
? ? ? ?

6. ? ? ? ?
? ? ? ?

7. ? ? ?
? ?

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Income Statement

Iloilo Branch
Income Statement
For the year ended December 31, XXXX

Sales ?
Costs of Goods Sold:
Shipments from Home Office ?
Purchases ?
Goods available for sale ?
Ending Inventory:
From Home Office (1/3) ?
From Outsiders (1/4) ? ?
Gross Profit ?
Expenses:
Advertising Expense ?
Salaries Expense ?
Rent Expense ? ?
Net Income 22,833.00

Problem 2

Moises Corporation has two branch, Branch Ollie and Branch Ver. The Home Office shipped P 5,000 of merchandise
to Branch Ollie and prepaid the freight charges of P 300. A short time thereafter, Branch Ollie was instructed to reship
this merchandise to Branch Ver at a prepaid freight cost of P 500. Freight charges for this merchandise normally cost
P 600 when shipped from the home office directly to Branch Ver.

a. Prepare journal entries in the books of Branch Ollie

b. Prepare journal entries in the books of Branch Ver.
c. Prepare journal entries in the books of the Home Office.

a. BOOKS OF BRANCH OLLIE

PARTICULARS Dr Cr
? ?
Freight In ?
? ?

? ?
? ?
? ?
? ?

b. BOOKS OF BRANCH VER

PARTICULARS Dr Cr
? ?
Freight In ?
? ?

c. BOOKS OF HOME OFFICE

PARTICULARS Dr Cr
? ?
? ?
? ?

? ?
Interbranch Freight Expense 300.00

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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 ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

? ?

Shipments to Branch Ver ?

Shipments to Branch Ollie ?

Problem 3

King Company’s home office has the following transactions with one of its branch operations located in Baguio:

1-Jan The beginning Investment in Branch account holds a debit balance of P 86,000
2-Jan The Home Office receives notice of a P 32,000 cash transfer deposited on Dec 31, 2021 by the Baguio Branch.
The home office had made no previous recording.
6-Jan The home office ships P 30,000 in inventory to this branch at a P 34,500 transfer price.
10-Jan The home office pays P 1,000 monthly rent to the owner of the Baguio branch’s building. This cost is assigned
to the operations of the branch. (Communication is made immediately.)
12-Jan The home office allocates P 3,000 of general corporate expenses to the branch. (Communication is made
immediately.)
14-Jan The home office ships P 40,000 in inventory to the Baguio branch at a transfer price of P 46,000. The branch
erroneously records the shipment as P 64,000.
31-Jan The home office allocates P 3,000 in transportation costs (that were incurred during January) to the branch. The
assignment is not communicated to the branch until the February 17, 2023.
1-Feb Notification of a P 74,000 cash transfer is received by the home office. The deposit was made in Baguio on
January 31, 2022.

Required:

a. Compute for the unadjusted balance of Investment in Branch Account.

b. Compute for the unadjusted balance Home Office Account.
c. Prepare a reconciliation statement showing the adjusted balances of both the Home Office Account and
Investment in Branch Account.

a. Investment in Branch Account - Unadjusted Balance, Beg. ? b. Home Office Account - Unadjusted Balance, Beg. ?
2-Jan ? ? 6-Jan ? ?
6-Jan ? ? 10-Jan ? ?
10-Jan ? ? 12-Jan ? ?
12-Jan ? ? 14-Jan ? ?
14-Jan ? ? 31-Jan ? ?
31-Jan ? ? 1-Feb ? ?
Investment in Branch Account - Unadjusted Balance, End. ? Home Office Account - Unadjusted Balance, End. ?

c. Reconciliation Statement
Inv. In Branch Home Office
Account Account
Unadjusted Balance, Ending ? ?
? ?
? ?
? ?
Adjusted Balances, Ending 67,500.00 ?

Problem 4

In hopes of increasing sales volume, Alexis Company opened a branch outlet several years ago in the city of Davao.
Merchandise is shipped to this store periodically and recorded at a transfer price that includes a 40% mark-up over
cost. At the end of 2022, Alexis assigns the following corporate expenses to this branch. Although the main office
has properly recorded these allocations, no entry has yet been made by the branch.

Expense Allocation to Branch

Advertising 9,000.00
Rent 6,000.00
Miscellaneous 2,000.00

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

The following trial balances are for the main office and the Davao branch as of Dec 31, 2022. One P 14,000
inventory shipment has not been received or recorded by Davao.

Alexis Davao
Debits:
Cash 25,000.00 18,000.00
Accounts receivable 108,000.00 25,000.00
Merchandise Inventory, 12/31 209,000.00 42,000.00
Investment in branch 207,000.00 -
Land, bldg, and equipment 340,000.00 112,000.00
Shipments from Home Office - 96,000.00
Purchases 348,000.00 -
Depreciation expense 25,000.00 8,000.00
Advertising expense 36,000.00 15,000.00
Rent expense 12,000.00 5,000.00
Miscellaneous expense 40,000.00 20,000.00
Merchandise Inventory, 1/1 175,000.00 35,000.00
Total debits 1,525,000.00 376,000.00

Credits:
Accumulated depreciation 80,000.00 16,000.00
Accounts payable 37,000.00 15,000.00
Notes payable 220,000.00 -
Home office 176,000.00
-
Share Capital 100,000.00 -
Retained earnings, 1/1 240,000.00 -
Sales 529,000.00 127,000.00
Shipments to branch 110,000.00 -
Merchandise Inventory, 12/31 209,000.00 42,000.00
Total Credits 1,525,000.00 376,000.00

Required:

a. Prepare adjusting journal entries.

b. Prepare working paper elimination entries.
c. Prepare a worksheet to combine the records of these two operations so that a single set of financial
statement can be prepared for Alexis Company.

Adjusting Journal Entries:

1. ? ?
? ?
? ?
? ?
#to record unrecorded expenses allocated to branch

2. Retained Earnings, 12/31 ?

Inventory, 1/1 ?
#to eliminate unrealized inventory profit of preceding year

3. ? 14,000.00
? 14,000.00
#to record unrecorded shipments

4. Merchandise Inventory, 12/31 (B/S) ?

Merchandise Inventory, 12/31 (I/S) ?
#to record shipment not recorded by the branch

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Working Paper Elimination Entries:

5. Merchandise Inventory, 12/31 (I/S) 16,000.00

Merchandise Inventory, 12/31 (B/S) 16,000.00
#to reduce ending inventory to cost

6. ? 110,000.00
? 110,000.00
#to eliminate intercompany shipments

7. ? 207,000.00
? 207,000.00
#to eliminate reciprocal accounts

Working Paper for Consolidated Financial Statements:

For the year ended December 31, 2022

Alexis Davao Eliminations and Income Retained Balance

Adjustments Statement Earnings Sheet
Debit Credit
Debits:
Cash ? ? ?
Accounts receivable ? ? ?
Merchandise Inventory, 12/31 (B/S) ? ? ? ? ?
Investment in branch ? ?
Land, bldg, and equipment ? ? ?
Shipments from Home Office ? ? ?
Purchases ? ? ?
Depreciation expense ? ? ?
Advertising expense ? ? ? ?
Rent expense ? ? ? ?
Miscellaneous expense ? ? ? ?
Merchandise Inventory, 1/1 ? ? ? ?
Total debits 1,525,000.00 376,000.00 ? ? ? - 877,000.00

Credits:
Accumulated depreciation ? ? ?
Accounts payable ? ? ?
Notes payable ? ? ?
Home office ? ? ?
?
Share Capital ? ? ?
Retained earnings, 1/1 ? ? ? ?
Sales ? ? ?
Shipments to branch ? ?
Merchandise Inventory, 12/31 (I/S) ? ? ? ? ?
Combined Net Income ? 179,000.00
Combined Retained Earnings ? 409,000.00
Total Credits 1,525,000.00 376,000.00 ? ? ? ? 877,000.00

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

Problem 5

JEC Company has branches in John and Eric. Account balances for the company's home office and branches on
December 31, 2022 are as follows:

Home Office John Eric

Cash 81,000.00 20,000.00 15,000.00
Accounts Receivable 100,000.00 40,000.00 25,000.00
Merchandise Inventory 260,000.00 50,000.00 44,000.00
Shipments from Home Office 70,000.00 56,000.00
Land 70,000.00 30,000.00 20,000.00
Building and Equipment 700,000.00 350,000.00 200,000.00
Less: Acculumated Depreciation (280,000.00) (120,000.00) (80,000.00)
Investment in Branch - John 395,000.00
Investment in Branch - Eric 260,000.00
Total Assets 1,586,000.00 440,000.00 280,000.00

Accounts Payable 110,000.00 45,000.00 20,000.00

Bonds Payable 400,000.00
Share Capital 300,000.00
Retained Earnings 700,000.00
Home Office 395,000.00 260,000.00
Unrealized Intercompany Profits:
Branch John 60,000.00
Branch Eric 16,000.00
Total Liabilities and Equity 1,586,000.00 440,000.00 280,000.00

The home office sells inventory to the branches at a constant mark up. During 20xx, Jec Company transferred P
200,000 of inventory to John branch and billed the branch for P 280,000. Jec Company also transferred inventory
costing P 60,000 to the Eric branch and billed the branch for P 84,000. In addition, Jec purchased equipment on Dec
31, 20xx for P 35,000 and immediately sold it to John branch for P 75,000.

Prepare a worksheet to combine the records of these two operations so that a single set of financial statements can
be prepared for Jec Company and complete the journal entries below.

Required:

a. Prepare working paper elimination entries.

b. Prepare a worksheet to combine the records of the operations so that a single set of financial statements
can be prepared for JEC Company.
c. Prepare a combined balance sheet for JEC Company.

a. Working Paper Elimination Entries

1. ? ?
? ?

2. ? ?
? ?

3. ? ?
? ?
? ?

4. ? ?
? ?

5. ? ?
? ?

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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ACCOUNTING FOR BUSINESS COMBINATIONS (ABC301)

b. JEC Company
Working Paper for Consolidated Financial Statements:
December 31, 2022

Home Office John Eric Eliminations and Combined

Adjustments
Debit Credit
Cash ? ? ? ?
Accounts Receivable ? ? ? ?
Merchandise Inventory ? ? ? ? ?
Shipments from Home Office ? ? ?
?
Land ? ? ? ?
Building and Equipment ? ? ? ? ?
Investment in Branch - John ? ?
Investment in Branch - Eric ? ?
Total Debits ? ? ? 2,055,000.00

Accumulated Depreciation ? ? ? ?
Accounts Payable ? ? ? ?
Bonds Payable ? ?
Share Capital ? ?
Retained Earnings ? ?
Home Office ? ? ?
?
Unrealized Intercompany Profits:
Branch John ? ?
?
Branch Eric ? ?
Total Credits ? ? ? ? ? 2,055,000.00

c. JEC Company
Combined Statement of Financial Position
December 31, 2022

Cash ?
Accounts Receivable ?
Merchandise Inventory ?
Land ?
Building and Equipment ?
Less: Accumulated Depreciation ? ?
Total Assets 1,575,000.00

Accounts Payable ?
Bonds Payable ?
Share Capital ?
Retained Earnings ?
Total Liabilities and Equity 1,575,000.00

***END***

ABC301| RCA CPA 2023 – Accounting for Agency, Home Office, and Branch Office (Practice Problems)
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