ACP 312 – Accounting for Business Combinations – Handout 1.

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Topic: Accounting for Agency and Accounting for Branches (General Procedures)
Instructor: Leenuel M. Bernarte, CPA

ACCOUNTING FOR AGENCY

ILLUSTRATIVE PROBLEM NO. 1

Assume that Anton Trading established a sales agency, the Junior Agency. Journalize the following
transactions.

1. Establishment of a petty cash fund, P10,000

2. Shipped merchandise to agency for use as samples, P4,000
3. Purchase of agency equipment, P20,000
4. Payment of salaries to agency employees, P5,000
5. Sales orders from agency are filled and customers are billed, P100,000 and goods are delivered by
the home office (with a cost of P60,000)
6. The following expenses were incurred out of working fund:
• Utilities P2,000
• Advertising expense P3,000
• Depreciation expense, P500
• Other expenses P4,000
7. Remaining samples, P300
8. Fund is replenished at the end of the period.

REQUIRED:
1. Prepare the necessary journal entries.
2. Determine the net income(loss) of the agency.

ACCOUNTING FOR BRANCHES – GENERAL PROCEDURES

ILLUSTRATIVE PROBLEM NO. 1 – Individual Financial Statements

On January 1, 2023, the Manila Company establishes its first branch in Bulacan. Separate books are to be
kept by the branch, and financial statements are to be submitted to the home office at the end of each month.
Merchandise is to be billed at cost. Transactions for the year are as follows:

1. Home office establishes a branch for an initial investment of P1,000,000 in cash.

2. Branch acquires equipment for P400,000 to be carried in the branch books (P40,000 is the annual
depreciation).
3. Branch acquires equipment for P200,000 to be carried in the home office books (P20,000 is the
annual depreciation).
4. Home office acquires furniture for P50,000 to be carried in the branch books (P5,000 is the annual
depreciation).
5. Home office acquires furniture for P30,000 to be carried in the home office books, but the branch
maintains physical possession and use (P3,000 is the annual depreciation).
6. Home office transfers inventory worth P150,000 to the branch. Home office pays freight of P10,000.
7. Home office transfers inventory worth P80,000 to the branch. Branch pays freight of P6,000.
8. Branch purchases inventory worth P40,000 on account from a supplier. Branch pays freight of P2,000.
9. Branch makes total sales of P500,000 on account.
10. Branch collects P400,000 from accounts receivable.
11. Branch remits P300,000 cash collection to home office.
12. Branch incurs salaries expense of P100,000, one-fourth of which remains unpaid.
13. Home office allocates P10,000 utilities expense and P4,000 advertising expense to the branch.
14. The branch has an ending inventory of P150,000.

REQUIRED:
a. Prepare the necessary journal entries
b. Prepare trial balance
c. Prepare individual financial statements
✓ Income statement
✓ Balance sheet

ACP 312 – Handout 1.0 Page 1 of 3

ILLUSTRATIVE PROBLEM NO. 2 – Combined Financial Statements
The trial balances of ABC Co.’s home office and branch are shown below:
ABC Company
Trial Balance
December 31, 2023
Home Office Branch
Dr. (Cr.) Dr. (Cr.)
Cash 1,100,000 417,000
Accounts receivable 180,000 100,000
Inventory, beg. 650,000 -
Shipments from home office 230,000
Purchases 72,000 40,000
Freight-in 22,000 18,000
Shipments to branch (230,000)
Investment in branch 827,000
Equipment 720,000 400,000
Accum. dep’n – equipment (72,000) (40,000)
Furniture 90,000 50,000
Accum. Dep’n – furniture (9,000) (5,000)
Accounts payable (72,000) (40,000)
Salaries payable (45,000) (25,000)
Share capital (2,000,000)
Share premium (500,000)
Retained earnings – beg. (206,200)
Home office (827,000)
Sales (900,000) (500,000)
Depreciation expense 168,000 68,000
Salaries expense 180,000 100,000
Utilities expense 18,000 10,000
Advertising expense 7,200 4,000

The home office and the branch have ending inventories of P270,000 and P150,000, respectively.

REQUIRED:
Prepare the combined statement of financial position and combined statement of profit or loss.

ILLUSTRATIVE PROBLEM NO. 3 – RECONCILIATION OF ACCOUNTS (ADJUSTED BALANCE)

ABC Co. is preparing its 2023 financial statements. The balances of the reciprocal accounts on Dec. 31, 2023
are as follows:

Investment in branch account P156,000

Home office account P70,200

The following information has been gathered:

a. A P20,000 inventory shipment from the home office in December 2023 was recorded by the branch
only in January 2024.
b. The home office collected P10,000 accounts receivable on behalf of the branch but the branch is not
yet notified.
c. The branch returned damaged merchandise worth P30,000 but the home office has not yet received
the shipment.
d. The home office failed to record a P40,000 cash remittance from the branch.
e. The branch recorded twice a P5,000 allocation of overhead cost from the home office.
f. A P12,000 freight paid by the home office for inventory shipment to the branch was recorded by the
branch as P1,200.

REQUIRED:
Compute for the adjusted balances of the reciprocal accounts.

ILLUSTRATIVE PROBLEM NO. 4 – RECONCILIATION OF ACCOUNTS (UNADJUSTED BALANCE)

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The unadjusted balance of the “Investment in Branch” account of the home office is P182,000. Relevant
information follows:
a. The branch did not record a P12,000 credit memo from the home office.
b. The branch did not record a P9,000 debit memo from the home office.
c. The home office erroneously recorded twice a P20,000 credit memo from the branch.
d. The home office recorded a P30,000 debit memo from the branch as P3,000.
e. The branch sent by mistake a P7,000 credit memo to the home office. The home office did not record
it.

REQUIRED: Compute for the unadjusted balance of the “Home Office” account.

ILLUSTRATIVE PROBLEM NO. 5 – RECONCILIATION OF ACCOUNTS (NET ADJUSTMENT)

ABC Co. has the following account balances on December 31, 2023:

Investment in branch account P95,000

Home office account P132,000

The following information has been gathered:

a. The home office allocated P10,000 utilities expense to the branch which the branch did not record in
full. Instead, the branch sent a wrong adjusting memo to the home office reducing the charge by
P2,500 and setting up a liability for the remaining amount.
b. The home office erroneously credited the branch for a return of shipment of merchandise worth
P25,000. The branch did not make any return of merchandise.
c. The branch mistakenly received a copy of the home office correcting entry for item (b) above dated
January 3, 2024 and entered a credit in favor of the home office on December 31, 2023 as a year-
end adjusting entry.
d. The branch mistakenly sent the home office a P3,000 debit memo for an apparent remittance of
collections which did not happen. The home office did not record the debit memo.

REQUIRED:
a. Net adjustments to the “Investment in Branch” and “Home office” accounts
b. Adjusted balances of the reciprocal accounts.

>END OF HANDOUT 1.0<

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