Question

Q4. On December 31, the Investment in Branch account in the home office books shows a balance of Br.50,000. The following facts are ascertained:
1, Merchandise billed at Br.12, 500 is in transit on December 31 from the home office to the branch.
2, The branch collected a home office accounts receivable for Br.3, 500. The branch did not notify the home office of such collection.
3, On December 30, the home office sent cash of Br.7,500 to the branch, but this was charged to General Expense; the branch has not received the cash as of December 31.
4, Branch profit for December was recorded by the home office at Br.2,400instead of Br.2,040.
5, The branch returned supplies of Br.1,500 to the home office but the home office has not yet recorded the receipt of the supplies.Assume all other transactions have been properly recorded
6, The branch recorded twice a Br.5000 allocation of overhead cost from the home office.
7, A Br.6000 freight paid by the home office for inventory shipment to the branch was recorded by the branch as Br.600.
Required: What is the adjusted and unadjusted balance of the Home Office account on the branch books on December 31?

Answer 1

Answer:

- Unadjusted Home Office account on the branch books at December 31 = Br.31,740

- Adjusted Home Office account on the branch books after making the required corrections = Br.48,140

Workings (brief):

Start from the Home Office (HO) Investment per HO books = Br.50,000 and compute the net differences between what HO has recorded and what the branch has recorded:

Effects on the branch Home Office account (branch minus HO):

1. Merchandise billed to branch in transit Br.12,500 — branch has not recorded: branch is Br.12,500 lower than HO (−12,500)
2. Branch collected HO A/R Br.3,500 but did not notify HO — branch did not credit HO: branch is Br.3,500 lower (−3,500)
3. HO sent cash Br.7,500 to branch (charged to HO expense); branch has not received — no effect on branch books (0)
4. HO recorded branch profit Br.2,400 instead of Br.2,040 — HO is Br.360 higher than branch (branch −360)
5. Branch returned supplies Br.1,500 but HO has not recorded receipt — branch is Br.1,500 lower (−1,500)
6. Branch recorded twice an allocation of overhead Br.5,000 — branch is Br.5,000 higher than HO (+5,000)
7. Freight paid by HO Br.6,000 was recorded by branch as Br.600 — branch is Br.5,400 lower (−5,400)

Sum of differences (branch − HO) = −18,260

Thus unadjusted branch Home Office balance = HO balance − 18,260 = 50,000 − 18,260 = Br.31,740.

Now adjust the branch books for the items the branch must correct (items 1, 2, 6, 7 — item 6 is a reversal of the duplicate):

Adjustments on branch books = +12,500 +3,500 −5,000 +5,400 = +16,400

Adjusted branch Home Office balance = 31,740 + 16,400 = Br.48,140.

Note: After these branch corrections, the remaining difference vs HO (50,000 − 48,140 = Br.1,860) represents items that HO must correct (HO overstated branch profit by Br.360 and has not recorded the Br.1,500 supplies return).