Agency, Home-Office Branch Accounting JLM

HOME-OFFICE BRANCH ACCOUNTING: GENERAL PROCEDURE

The branch has its complete set of accounting records, therefore all its transactions, including those with the home office,
are recorded in its books. It also presents its own set of financial statements: the income statement the balance sheet. and
the statement of cash flows. But because the branch is but a part of the home office, therefore, these set of financial
statements are not acceptable for general purposes. And since the home
office is just also a part of the whole organization, its own set of financial statements: the income statement, the balance
sheet and the statement of cash flows are also not acceptable for general purposes. These two different sets of financial
statements are internal to each of the reporting entities, combined financial statements must be prepared for the combined
entities (taken as one and the same) to meet the requirements of general-purpose statements.

A branch and its home office represent two accounting systems but just one accounting and reporting entity. All entries in
the accounting records of the branch are also entered, at least in summary form, in the accounting records of the home
office. The records of the home office and the branch are linked by two reciprocal accounts; the Home Office Equity a count
in the books of the Branch and the Investment in Branch account in the books of the Home Office. Because they are
reciprocal, it means that the two accounts always have the same balance although the Investment in Branch is a debit
account (as an asset
in the books of the Home Office) and the Home Office is a credit account (as an equity item in the books of the branch).
The two accounts frequently show different balances on a temporary basis due to errors and items in transit. A very important
aspect of the study of home office and branches is the reconciliation of the reciprocal balances.

An illustration of journal entries recorded for interoffice transactions follow:

Transactions Home Office Books Branch Books
1. Transfer of cash from the Investment in branch xx Cash xx
home office Cash xx Home Office xx
2. Transfer of cash from the Cash xx Home Office xx
branch Inv’t in Branch xx Cash xx
3. Transfer of merchandise from Inv’t in Branch xx Shipment from HO xx
HO at cost Shipment to Branch xx Home Office xx
4. Transfer of merchandise from Inv’t in Branch xx Shipment from HO xx
HO at above cost Allow for OV(mark-up) xx Home Office xx
Shipment to Branch xx
5. Payment by HO of branch Inv’t in Branch xx Expenses xx
expenses Cash xx Home Office xx
6. Allocation of previous paid Inv’t in Branch xx Expenses xx
branch expenses Expenses xx Home Office xx
7. Transfer of Fixed asset from -Memo Entry- -Memo Entry-
home to branch
8. (Note: There will be no entry if Inv’t in Branch xx Fixed Assets xx
all fixed assets are accounted Accum. Dep’n xx Accum. Dep’n xx
in the books of Fixed Asset xx Home Office xx
9. the home office); otherwise:

10. To take-up branch Profit/(loss) Inv’t in Branch xx Income Summary xx

Branch Income xx Home Office xx

Branch Loss xx Home Office xx

Inv’t in Branch xx Income Summary xx
11. To adjust the reported branch Allow of OV xx -NO Entry-
NI/Net Loss) for realized Branch Income xx
allowance

Note: The adjusting entry to

reflect the true net income or
loss of the
branch from the standpoint of
the home office is always
favorable and
only relevant when billing
policy is above cost:

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Agency, Home-Office Branch Accounting JLM
• Transactions between a home office and its branch are accounted for in reciprocal accounts, namely: "Investment
in branch" maintained in the home office books and "Home office" maintained in the branch books. These accounts
are for internal reporting purposes only and are eliminated when preparing general-purpose financial statements.
• Transactions between a branch and an external party are recorded in the regular manner.
• For external reporting, the individual financial statements of the home office and the branch are combined by adding
together similar items of assets, liabilities, income and expenses and eliminating reciprocal accounts.
• Reciprocal accounts may need to be reconciled, similar to the preparation of a bank reconciliation, prior to the
preparation of elimination entries.
• If there are several branches, the home office shall maintain separate investment accounts for each of the branches.
In turn each branch shall have its own home office account.
• Transactions between the home office and a certain branch will not affect the records of the other branches.
Transactions between a branch and another branch are accounted for as if each of the transacting branches is
transacting with the home office.
-done-
Problem 1

On January 1, 2020, the Jeremiah Company opened a new branch in a neighboring city. A Summary of transactions for the
home office and the branch for 2020 and the balance sheet for the home office on January 1 are as follows:

Home office transactions:

a. Transfer of cash to branch P42,500
b. Transfer of merchandise to branch (billed at cost) P50,200.
c. Sales on account. P105,000.
d. Purchases on account, P122,500
e. Collections on account, P113,600
f. Payments on account, P124,000.
g. Expenses paid, P26,600.
h. Cash received from branch, P53,400.
i. Dividends paid, P10,000.
j. Adjusting data on December 31: depreciation for year. P1,180; merchandise inventory. P48,500; prepaid expenses,
P2,050 and accrued expenses, P1,350

Branch transactions:
a. Cash received from home office, P42,500
b. Merchandise received from home office, P50,200.
c. Sales on account, P66,000.
d. Purchases on account, P22,500
e. Cash collections on account deposited to the credit of the home office, P53,400.
f. Payments on account. P12,250.
g. Purchase of furniture and fixtures for cash. P8,000.
h. Expenses paid, P18,000.
i. Adjusting data on December 31: depreciation, P650; merchandise inventory, P23,500; prepaid expenses, P750
and accrued expenses, P300

A balance sheet on December 31, 2020, showed the following balances:

Assets Liabilities and Stockholders’ Equity
Cash Php 59,300 Accrued expenses Php 1,250
Accounts receivable 27,650 Accounts payable 22,800
Merchandise inventory. 40,120 Common stock. P20 par 50,000
Prepaid expenses 1,800 Retained earnings 70,420
Furniture and fixtures 20,000
Accumulated depreciation (4,400)
Total assets Php 144, 470 Total Equity Php 144, 470

Required:
1. Prepare journal entries to record the foregoing transactions for (a) the branch and (b) the home office.
2. Prepare individual statements for the branch and for the home office.
3. Prepare the journal entries to adjust and close the books at the end of the month for (a) the branch and (b) the
home office.
4. Prepare combined statements for the branch and the home office.

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Agency, Home-Office Branch Accounting JLM
Problem 2
The Conqueror Corporation located in Batangas City, opened a branch on January 1, 2020 in Mabini. The transactions of
the branch are summarized as follows:
1. Received cash of P30,000 from the home office.
2. Received merchandise in the amount of P75,000 from the home office. (This merchandise was shipped at the
home office's office).
3. Purchased merchandise on account from a local vendor in the amount of Pl0,000.
4. Sales on account amounted to P125,000.
5. Returned merchandise in the amount of P2,000 to the home office.
6. Collected P105,000 from sales on account.
7. Paid P7,000 on account for purchases in (3) above.
8. Incurred the following expenditures during the year (all paid in cash):
a. Salaries-P10,000.
b. Rent-P5,000.
c. Utilities-P2,000.
d. Other operating expenses- P12,500.
9. Received a journal voucher from the home office for the following charges:
a. Depreciation expense-P1,500.
b. Rent-P5,000.
c. Insurance-P1,000.
10. Remitted P65,000 to the home office for merchandise shipments.
11. A customer paid P3,000 directly to the home office. The home office is keeping the funds.
12. Closed the income summary accounts. The closing inventory amounted to P5,000.
Required: Prepare the necessary journal entries on the books of the branch and the home office.

Problem 3
Lipa Sales decided to create a branch in Tanauan City at the start of 2020. The branch operation had the following
transactions during 2020:
1. Merchandise costing P350,000 and cash of P200,000 were transferred from the home office.
2. The branch purchased on account additional merchandise inventory of P400,000 from other distributors.
3. Sales ofP650,000 were made by the branch during the period. The cost of these sales was P425,000. Cash of
P600,000 was collected from sales during the year.
4. Advertising costs of P40,000, sales commissions of P65,000, and other operating costs of P45,000 were incurred
and paid by the branch.
5. The branch paid P370,00 on account to other distributors and remittedP120,000 to the home office.
Required:
1. Record each of the transactions on the books of the branch.
2. Prepare an income statement for the branch for 2020.
3. Prepare a statement of financial position as of December 31, 2020, for the branch.

Problem 4
Diversified Industries operated primarily in Manila. Wishing to expand its sales and operations into the southern part of the
country, a branch was established in Batangas. The following transactions occurred during the first three months of 2020:
a. Cash of P80, 000 and inventory of P150, 000 were transferred to the newly established branch.
b. Equipment of P120, 000 was purchased by the home office and given to the branch. The equipment was recorded
in the branch books.
c. It cost P1, 200 to ship the merchandise and P1, 300 to ship the equipment which were all paid for by the home
office.
d. The branch used the cash received from the home office to purchase additional merchandise costing P35, 000.
Required: What is the balance of the investment account?

Problem 5
Blessed Corporation operates several branches in Metro Manila. On June 30, 2020, its Sn. Pascual branch showed a
Home office account balance of P27, 350 and Home Office books showed a Sn. Pascual branch account balance of P25,
550. The following information may help in reconciling both accounts:

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Agency, Home-Office Branch Accounting JLM
a. A P12, 000 shipment, charged by Home Office to Sn. Pascual branch was actually sent to and retained by
Sto. Tomas branch
b. A P15, 000 shipment, intended and charged to Sn. Jose branch was shipped to Sn. Pascual branch and
retained by the latter
c. A P2, 000 emergency cash transfer from Sto. Tomas branch was not taken up in the Home Office books.
d. Home office collects a Sn. Pascual branch accounts receivable of P3, 600 and fails to notify the branch.
e. Home office was charged for P1, 200 for merchandise returned by Sn. Pascual branch on June 28. The
merchandise is in transit
Home office erroneously recorded Sn. Pascual’s net income for May 2020 at P16, 275. The branch reported a net income
of P12, 675. What is the reconciled amount of the Home office and Sn. Pascual branch reciprocal accounts?

Problem 6
On December 31, 2019, the investment in branch account of the home office’s books has a balance of P102, 000. In
analyzing the activity in each of these accounts for December, you find the following differences:
a. A P12, 000 branch remittance to the home office initiated on December 27, 2019, was recorded on the home
office books on January 3, 2020.
b. A home office inventory shipment to the branch on December 28, 2019 was recorded by the branch on January
4, 2020; the billing of P24, 000 was at cost.
c. The home office incurred P14, 400 of advertising expenses and allocated P6, 000 of this amounts to the branch
on December 15, 2019. The branch has not recorded this transaction.
d. A branch customer erroneously remitted P3, 600 to the home office. The home office recorded this cash
collection on December 23, 2019. Meanwhile, back at the branch, no entry has been made yet.
e. Inventory costing P51, 600 was sent to the branch by the home office on December 10, 2019. The billing was
at cost, but the branch recorded the transaction at P40, 800.
1. How much is the unadjusted balance of the Home Office account on December 31, 2019?
a. P76, 800
b. P151, 200
c. P93, 600
d. P52, 800

2. How much is the adjusted balance of the reciprocal account?

a. P114, 000
b. P139, 200
c. P90, 000
d. P93, 600

Problem 7
CabRia Corp. operates a branch in Batangas City. At the close of business on December 31, 2020. Batangas Branch
account in the home office books showed a debit balance of P225,770. The interoffice accounts were in agreement at
beginning the year. For purposes of reconciling the interoffice accounts, the following were facts were ascertained:
a. Office equipment costing the home office P3, 500 was picked up by the branch as P350,
b. Insurance premium of P675 charged by the home office was taken up twice by the branch.
c. Freight charges on merchandise made by the home office for P1, 125 were recorded in the branch books as P1,
215.
d. Home office credit memo representing a discount on merchandise for P800 was not recorded by the branch.
e. The branch failed to take up a P700 debit memo from the home office representing the share of the branch in
advertising.
f. The home office inadvertently recorded a remittance for P3,000 from the Cavite branch as a remittance from its
Batangas branch.
1. How much is the Unadjusted balance of the Home Office account on December 31?
A. P 226,485
B. P 228,485
C. P 225,770
D. P 228,770

2. How much is the Adjusted balance of the Current Account?

A. P 225,770
B. P 228,770
C. P 228,485
D. P 226,485

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Agency, Home-Office Branch Accounting JLM
Problem 8
Included in the accounting records of the home office and the only branch. Respectively, of Saul Company were the following
ledger accounts for June 2020:
Investment in Paul Branch
Date Explanation Debit Credit Balance
2020
May 31 Balance 51, 000 dr
June 6 Shipment of merchandise 30, 500 81, 500 dr
20 Receipt of cash 11, 500 70, 000 dr
26 Collection of branch trade receivable 9, 000 61, 000 dr
30 Shipment of merchandise 24, 000 85, 000 dr

Home Office
Date Explanation Debit Credit Balance
2020
May 31 Balance 51, 000 cr
June 8 Receipt of merchandise 30, 500 81, 500 cr
18 Payment of cash 11, 500 70, 000 cr
27 Acquisition of office equipment 14, 500 55, 500 cr
30 Payment of cash 22, 000 33, 500 cr
How much is the reconciled amount of the reciprocal account?
A. P48,500
B. P57,500
C. P63,000
D. P70,500

Problem 9
Noni’s Resort Corporation has operated a branch in Alitagtag for one year. Shipments are billed to the branch at cost. The
branch carries its own accounts receivable, makes its own collections and pays its own expenses. The transactions for the
year are given effect to in the trial balance below:
Accounts Debit Credit
Cash P 4,200
Home Office Current P 17,500
Shipments from Home Office 67,680
Accounts receivable 12,800
Expenses 6,820
Sales 74,000
P91,500 P91,500
The branch reported an inventory on December 31, 2019 of P9,180.
1. The net profit of the Alitagtag Branch for 2019 was
A. P9,180
B. P8,680
C. P67,180
D. Some other answer.

2. On January 1, 2020, the Branch current account in the Home Office books should have a balance of:
A. P26,680
B. P67,680
C. P26,180
D. Some other answer.

3. On January 1, 2020, the Shipments to Branch account in the Home Office books should have an opening balance
of:
A. Zero
B. P17,500
C. P26,180
D. Some other answer.

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