BRANCH ACCOUNTING 1 .

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 hoe 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 enterprises 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 enterprises financial statements that are presented in accordance with GAAP. Gleim 12.VERDI, Inc. has several branches. Goods costing P10,000 were transferred by the head office to Cebu Branch with the latter paying P600 for freight cost. Subsequently, the head office authorized Cebu Branch to transfer the goods to Davao Branch for which the latter was billed for the P10,000 cost of the goods and freight charge of P200 for the transfer. If the head office had shipped the goods directly to Davao Branch, the freight charge would have been P700. The P100 difference in freight cost would be disposed of as follows: a. Considered as savings. c. Charged to Davao Branch. b. Charged to Cebu Branch. d. Charged to the Head Office. RPCPA 0594
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B. C. D.

Shipments to branch Branch office Shipments to branch Branch office Shipments to branch Unrealized profit Shipment to branch Unrealized profit Shipments from home office

$100,000 $125,000 $125,000 $125,000 $100,000 25,000 $100,000 25,000 $125,000

. Which represents the proper journal entry for a periodic inventory system that should be made on the books of the branch when goods that cost the home office $100,000 to manufacture are shipped to the branch at a price of $125,000? Gleim A. Shipments from home office $100,000 Home office $100,000 B. Shipments from home office $125,000 Home office $125,000 C. Shipments from home office $125,000 Unrealized profit $ 25,000 Home office 100,000 D. Shipments to branch $100,000 Unrealized profit 25,000 Shipments from home office $125,000

. Which represents the proper journal entry for a periodic inventory system that should be made on the books of the home office when goods that cost the home office $100,000 to manufacture are shipped to a branch at a transfer price of $125,000 and the billed price is not recorded in the shipments to branch account? Gleim A. Branch office $100,000

ANSWER EXPLANATIONS

. REQUIRED: The false statement about branch accounting. DISCUSSION: (B) In branch accounting, the branch office account on the books of the home office represents the investment by the home office in the net assets of the branch, not the branchs equity in the home office. Answers (A), (C), and (D) are incorrect because each is a true statement about branch accounting. . REQUIRED: The home office journal entry to reflect merchandise shipments at cost plus a markup. DISCUSSION: (C) When goods are shipped from a home office to a branch at a transfer price that reflects original cost plus a markup, the branch must record the shipment at the transfer price. The home office most often reflects the shipments to branch at original cost. To maintain a reciprocal relationship between the home office and the branch office accounts, an unrealized profit in branch inventories account reflects the markup. Answers (A) and (B) are incorrect because neither reflects the unrealized profit. Answer (A) is incorrect because the branch office should be recorded at $125,000. Answer (B) is incorrect because the shipments to branch should be recorded at original cost of $100,000. Answer (D) is incorrect because it is the work sheet entry necessary to eliminate this intercompany transaction in the preparation of the financial statements. Answer () is incorrect because . REQUIRED: The journal entry on the branch book s to reflect the receipt of merchandise shipments at a transfer price that reflects cost plus a markup. DISCUSSION: (B) In a periodic system, when merchandise is received by a branch from the home office, the merchandise should be reflected as a shipment from the home office in the amount of the transfer price, with a corresponding entry to the home office account to indicate the equity of the home office in the net assets of the branch. Answer (A) is incorrect because the shipments should be reflected at the transfer price. Answer (C) is incorrect because the home office equity should be reflected at the transfer price. Answer (D) is incorrect because it is the worksheet entry used to eliminate this intercompany transaction in the preparation of the enterprises financial statements.