MODULE 8: HOME OFFICE , BRANCH AND AGENCY ACCOUNTING Sales agency Branch

A both located in a shopping mall that A branch of Banco De Oro located in a shopping
offers debit or credit card issued by a mall.
INTRODUCTION
bank.
This module demonstrates an understanding about the accounting principles concepts and
Applicants complete their application
procedures of home office, branch and agency. At the end of this module, learners are
with the bank’s office.
expected to learn and understand the objective of IFRS 17 is to ensure that an entity provides
relevant information that faithfully represents those contracts. This information gives a basis A booth on a side walk offering Globe Mang Tony’s fish ball – New York branch. Serves
for users of financial statements to assess the effect that insurance contracts have on the internet connection. Customers freshly cooked fish ball straight from the frying
entity's financial position, financial performance, and cash flows. complete their transaction with Globe’s pan… etc. ( end of thinking capacity. ) you already
office. got the difference between a sales agency and
INTENDED LEARNING OUTCOMES At the end of this module, student should be able to: branch … right?

1. Account for transactions between a home office and its branch Accounting for an agency
2. Reconcile interoffice accounts
3. Prepare combined financial statements of a home office and its branch Since an agency does not maintain its own separate accounting books, all of its transactions
are recorded in the home office's books. The agency only maintains a simple record (e.g., a
LEARNING CONTENT log book) to account for any revolving fund, similar to a petty cash fund.
Introduction
Branch and agency distinguished To distinguish the agency's transactions from other transactions, the home office may set up
A sales agency is not a self- contained business but rather acts only on behalf of the home specific account codes and account titles for the agency. For example a specific agency's
office. On the other hand, a branch is a self contained business that acts independently but revolving fund may have the following account code and account title:
within the bounds of company policies set by the home office. The following further
differentiate these two: Account code Account title
Sales agency Branch 101-103 Cash – Agency #1
 Displays merchandise and  Carries inventory to fill customers'
takes customers' orders but orders (or provides services similar to The 1st digit (1) refers to assets, the 2nd and 3rd digits (01) refers to ‘Agency #1’, the 4th digit (1)
does not carry inventory to fill those provided by the home office). refers to ‘cash’ and the last two digits (03) refers to ‘revolving fund’
customers' orders.
 Forwards customers' orders  Processes customers' orders, makes Illustration: Accounting for agency
to the home office for normal Agency transaction Home office books
processing. Customers remit warranties, and makes own collections. Jan. 1
payments directly to the Receipt of revolving fund from home Cash – Agency #1 1,000
home office. office Cash 1,000
Jan. 1-31
 May hold revolving cash fund  Has its own assets and liabilities and Orders sent by agency to Account receivable 200
which is replenished when generates and incurs its own income home office for processing. Sales – Agency #1 200
deleted. and expenses.
Cost of sales - Agency #1 120
 Not a separate accounting  A separate accounting entity for internal
Inventory 120
entity reporting
 Maintains only cash records  Maintaining a complete set of Cash 200
to account for the revolving accounting records and prepares own Collection by home office of agency
sales. Account receivable 200
cash fund financial statements which are
combined with the home office’s Jan. 1-31
financial statements for external Disbursements from the revolving fund No entry in H.O. books. The agency records the
reporting. disbursements in its ‘log book’.
Examples: Jan. 31
Replenishment of revolving fund Various expenses - Agency #1 50
 Cash 50
To determine the profit attributable to Sale- Agency #1 200 Illustration: Accounting for branch operations
the agency, the home office makes the Cost of sales - Agency #1 120
following closing entry: Various expenses- Agency #1 50 Initial investment
Income summary - Agency #1 30 1. Home office establishes a branch for an initial investment of P1,000,000
in cash.
Accounting for branch operations
Home office books Branch books
Although not a separate legal entity, a branch is a separate business unit. Accordingly, a
branch records its own transactions and prepares its own financial statements in the regular Investment in branch …………..1M Cash………………….1M
manner. The only peculiar accounting procedures are the following: Cash …………………………………….1M Home office ………………1M
a. Recording the transaction between the home office and the branch and Property carried in branch book- Branch acquisition
b. Preparing the combined financial statement of the home office and the branch.
2. Branch acquires equipment for P400,000 to be carried in the branch book.

Home office books Branch books

Transaction between home office and branch
No entry Equipment ……………….400K
For internal reporting purpose, the transactions between a home office and a branch are
Cash
recorded using the following reciprocal accounts (interoffice or intra- company accounts):
……………………………….400K
‘Investment in branch’ account ‘Home office’ account
(or ‘branch current’ account) (or ‘home office current’ account)
Property acquired by the branch and carried in its books is recorded in the regular manner.
Maintained in the Home Office Books as an Maintained in the Branch’s books as
No entry is made in the home office books. The recording of the subsequent depreciation
asset. equity
Used to record to record the following: Used to record to record the following: follows the same manner. Assume a subsequent depreciation of P40,000:

Notice that each debit/credit in one account has a corresponding credit/debit in the other Home office books Branch books
account. Therefore, the balance of the two must be equal at any given point of the time. For
instance, if the ‘Investment in branch ‘ account in the home office books has a P20,000 debit No entry Depreciation expense…..40K
balance the Home office account in the branch books must also have a corresponding Accumulated depreciation….40K
P20,000 credit balance. In case the two accounts do not balance, reconciliation (similar to the
‘bank reconciliation’) is prepared and adjusting entries are made before the combined
Property carried in home office book- Branch acquisition
financial statements are prepared. Later on in practice, do check immediately if the two
accounts are equal — this will save you time (not to mention the embarrassment and 3. Branch acquires equipment for P200,000 to be carried in the home office books.
sleepless nights if you commit a very simple oversight error) Accounting for branches is very
common when auditing banks. Home office books Branch books
When there are several branches, the home office will maintain a separate investment
account for each branch. Equipment – Branch…….200K Home office ……….200K
 Investment in branch ………..200K Cash ……………………………….200K

Investment in branch …….3K Depreciation expense……….3K

Property acquired by the branch but carried in the books of the home office is recorded as Accum. Depreciation………..3K Home office ……………………………….3K
reduction to both the "investment in branch" and "home office" accounts. The branch
recognizes the subsequent depreciation expense as it uses the equipment, but the home
office records the accumulated depreciation. Assume a subsequent depreciation of P20,000: Transfer of inventories – freight paid by home office
Home office books Branch books 6. Home office transfers inventory worth P150,000 to the branch .
Home office pays freight of P10,000
Investment in branch …….20K Depreciation expense……….20K
Accum. Depreciation………..20K Home office ………………………20K Home office books Branch books

Investment in branch …….160K Shipments from HO……….150K

One reason for having the asset recorded in the home office books but the branch maintains Shipments to branch ………………150K Freight-in………………………...10k
physical possession and use is to facilitate the computation of depreciation when the entity Cash ……………………………………... 10K Home office ………………………160K
uses the 'group method' or 'composite method' of depreciation.

Property carried in branch books — Home office acquisition The "Shipments from home office" account is similar to the "Purchases" account and is used
under a periodic inventory system. Under a perpetual inventory system, the "Inventory"
account may be used in lieu of the "Shipments from home office (to branch)" and freight-in
accounts.
4. Home office acquires furniture for P50,000 to be carried in the branch books.
Home office books Branch books
Transfer of inventories – freight paid by branch
Investment in branch …….50K Furniture ……….50K 7. Home office transfers inventory worth P80,000 to the branch.
Cash …………………………… Home office ……………………………50K Branch pays freight of P6,000
50K Home office books Branch books

Investment in branch …….80K Shipments from HO……….80K

Assume a subsequent depreciation of P5,000: Shipments to branch ……………….80K Freight-in………………………...6k
Home office books Branch books Home office ………………………….80K
Cash ……………………………………...
No entry Depreciation expense ……….50K 6K
Accum. Depreciation …………………50K

Regardless of whoever pays the freight (the home office or the branch), the freight forms
part of the branch's inventory.
Property carried in home office books — Home office acquisition
5. Home office acquires furniture for P30,000 to be carried in the home office Purchase of inventories — acquisition front outside parties
books, but the branch maintains physical possession and use. 8. Branch purchases inventory worth P40,000 on account from a supplier. Branch
pays freight of P2,000.
Home office books Branch books Home office books Branch books

Furniture - Branch…….30K No entry No entry Purchases ……….40K

Cash ……………………………… Freight-in………………………...2k
30K Account payable……………………40K
Cash ……………………………………...
2K
Assume a subsequent depreciation of P3,000:
Transaction with external parties are recorded in the regular manner.
Home office books Branch books
Revenue
9. Branch makes total sales of P500,000 on account. 13. Home office allocates P10,000 utilities expense and P4,000 advertising expense to
Home office books Branch books the branch.
Home office books Branch books
No entry Account receivable…………..500K
Sales…………………………………………500K Investment in branch ……….14K Utilities expense……….100K
Utilities expense…………………..10K Advertising expense…………. 75K
Advertising expense……………….4K Home office…………………………4K
Collection
10. Branch collects P400,000 from accounts receivable.
Home office books Branch books
Individual financial statement
No entry Cash………………400K
Account receivable…………………400K The trial balance of the branch as of this point is shown below:

Dr. Cr.
Remittance to home office Cash 417,000
11. Branch remits P300,000 cash collections to home office Account receivable 100,000
Home office books Branch books Shipment from home office 230,000
Purchases 40,000
Cash …………………….300K Home office……………………400K
Freight- in 18,000
Investment in branch…………300K Cash………………………...400
Equipment 400,000
K
Accumulated depreciation- equipment 40,000
Furniture 50,000
Allocation of expenses Accumulated depreciation- furniture 5,000
Expenses incurred by the branch are recorded in the regular manner. However, expenses Account payable 40,000
incurred by the home office on behalf Of the branch are recorded similar to an investment. Salaries payable 25,000
Home office 827,000
For instance, costs incurred centrally are allocated to the various business units within the Sales 500,000
company in order to properly measure the financial performance of each business unit. The Depreciation expense 68,000
following are examples of costs that may be allocated to the branch: Salaries expense 100,000
a. Cost of maintaining information systems Utilities 10,000
b. Cost of contract signed on a company level, e.g., security, pest control, insurance, Advertising expense 4,000
advertising, and the like Totals 1,437,000 1,437,000
c. Depreciation computed under the group or composite method of depreciation The branch has an ending inventory of P150,000.
d. Other general overhead costs
The branch’s individual statement of profit or loss for the period is prepared as follows:

12. Branch incurs salaries expense of P100,000, one-fourth of which remains unpaid. Sales 50,000
Cost of goods sold:
Home office books Branch books Inventory, beg. -
Shipments from home office 230,000
No entry Salaries expense……….100K Purchases 40,000
Cash ……………………………………... Freight – in 18,000
75K Total goods available for sale 288,000
Salaries payable……………………….25K Inventory, end. (150,000) (138,000)
Gross profit 362,000
Depreciation expense (68,000)
 Salaries expense (100,000) Furniture 50,000
Utilities expense (10,000) Accumulated depreciation- furniture (5,000)
Advertising expense (4,000)
Profit for the period 180,000 Total assets 1,072,000
Closing entries :
Liabilities AND Equity
1. To close the branch’s nominal accounts to the income summary account: Account payable 40,000
Salaries payable 25,000
Home office books Branch books Home office 1,007,000
No entry Sales………………………..500K
Inventory………………….150K Total liabilities and equity 1,072,000
Shipment from HO…………….230K
Purchase……………………………..40K Combined financial statements
Freight – in ………………………….18K The home office and its branch(es) are viewed as a single reporting entity for external
Depreciation expense…………..68K reporting (and also a single legal entity). Thus, the individual financial statements of the
Salaries expense………………….100K home office and its branch(es) are combined when preparing the entity's general purpose
Utilities expense…………………….10K financial statements. Combined financial statements are prepared by:
Advertising expense…………….…..4K
Income summary……………..…..180K a. Adding together similar items of assets, liabilities, income and expenses; and
b. Eliminating the reciprocal and other interoffice accounts.
2. To close the branch’s profit to the reciprocal accounts:

Home office books Branch books Illustration: Combination financial statements

Investment in branch ………………..180K Income summary……………..…..180K
Income summary – branch…… Home office……………………180K
180K The trial balances of ABC Co.’s home office and branch are shown below:

Now, let us reconcile the reciprocal accounts

ABC Co.
Trial balance
December 31, 20x1
Home office Branch
Dr. (Cr.) Dr. (Cr.)
Cash 1,100,000 417,000
Account receivable 180,000 100,000
Inventory, beg. 650,000 -
Shipment from home office - 230,000
Purchases 72,000 40,000
Freight- in 22,000 18,000
Shipments to branch (230,000)
The individual statement of financial position of the branch is prepared as follows: Investment in branch 827,000
Equipment 720,000 400,000
Accumulated depreciation- equipment (72,000) (40,000)
Assets Furniture 90,000 50,000
Cash 417,000 Accumulated depreciation- furniture (9,000) (5,000)
Account receivable 100,000 Account payable (72,000) (40,000)
Inventory 150,000 Salaries payable (45,000) (25,000)
Equipment 400,000 Share capital (2,000,000)
Accumulated depreciation- equipment (40,000) Share premium (500,000)
 Retained earnings- beg. (206,200) Salaries expense 7,200 4,000 11,200
Home office Utilities expense
Sales (900,000) (827,000) Advertising expenses - - -
Depreciation expense 168,000 (500,000)
Salaries expense 180,000 68,000 Total
Utilities expense 18,000 100,000 THE ELIMINATION ENTRIES ARE AS FOLLOWS:
Advertising expenses 7,200 10,000 (a) Home office 827,000
4,000 Investment in branch 827,000
Total - (b) Shipments to branch 230,000
- Shipments from home office 230,000
The home office and the branch have ending inventories of P270,000 and P150,000,
respectively.
ABC Co.
Statement of profit or loss
Requirements: prepare the combined statement of financial position and combined For the year ended December 31, 20x1
statement of profit or loss. Sale 1,400,000
Cost of goods sold:
Solution Inventory, beg. 650,000
Purchases 112,000
Freight – in 40.000
ABC Co. Total goods available for sale 802,000
Working paper for combined financial statements Inventory, end. (270,000 + 150,000) (420,000) (382,000)
December 31 20x1 Gross profit 1,018,000
Home office Elimination Depreciation expense (236,000)
Dr. (Cr.) Brach Dr. (Cr.) Combined Salaries expenses (280,000)
Dr. (Cr.) Dr. (Cr.) Utilities expenses (28,000)
Cash 1,100,000 417,000 1,517,000 Advertising expenses (11,200)
Account receivable 180,000 100,000 280,000 Profit for the period 462,800
Inventory, beg. 650,000 - 650,000
Shipment from HO 230,000 (230,000)b - The combined profit can be reconciled as the sum of the individual profits of the home office
Purchases 72,000 40,000 112,000 and the branch. The profit of the home office is computed as follow:
Freight- in 22,000 18,000 40,000
Shipments to branch (230,000) 230,000b - Sale 900,000
Investment in branch 827,000 (827,000)a - Cost of goods sold:
Equipment 720,000 400,000 1,120,000 Inventory, beg. 650,000
Accumulated depreciation- (72,000) (40,000) (112,000) Purchases 72,000
equipment 90,000 50,000 140,000 Shipments to branch (230,000)
Furniture 9,000 (5,000) (14,000) Freight – in 22,000
Accumulated depreciation- (72,000) (40,000) (112,000) Total goods available for sale 514,000
furniture (45,000) (25,000) (70,000)
Inventory, end. (270,000) (244,000)
Account payable (2,000,000) (2,000,0000
Gross profit 656,000
Salaries payable (500,000) (500,000
Depreciation expense (168,000)
Share capital (206,200) (206,200)
Salaries expenses (18,000)
Share premium (827,000) -
Retained earnings- beg. (900,000) 827,000a (1,400,000) Utilities expenses (7,200)
(500,000) Advertising expenses (180,000)
Home office 168,000 68,000 236,000
Sales 180,000 280,000 Profit for the period 282,800
100,000
Depreciation expense 18,000 10,000 28,000
  P282,800 profit of home office + P180,000 profit of branch (see previous A debit memo sent by the home office to the branch means the home office has
illustration) =P462,800 combined profit debited (increased) the "Investment in branch" account. Therefore, the corresponding
entry to be made in the branch books is a credit (increase) to the "Home office"
The combined statement of financial position is as follow: account. The opposite applies to a credit memo.
For example, the home office collects accounts receivable on behalf of the
ABC Co.
Statement of financial position branch and records the transaction as debit to cash and credit to "Investment in
As of December 31, 20x1 branch." Therefore, to notify the branch of the transaction, the home office will send a
credit memo. The branch will in turn record the credit memo as debit to "Home office"
Assets and credit to accounts receivable.
Cash 1,517,000 A debit memo sent by the branch to the home office means the branch has
Accountable receivable 280,000 debited (decreased) the "Home office" account. Therefore, the corresponding entry to be
Inventory (270,000 home office + 150,000 branch) 420,000 made in the home office books is a credit (decrease) to the "Investment in branch"
Equipment 1,120,000 account. The opposite applies to a credit memo.
Accumulated depreciation- equipment (112,000)
Furniture 140,000 For example, the branch returns damaged inventory to the home office and
Accumulated depreciation – furniture (14,000) records the transaction as debit to "Home Office" and credit to "Shipments from home
office." Therefore, to notify the home office of the transaction, the branch will send a debit
memo. The home office will in turn record the debit memo as debit to "Shipments to
branch" account and credit to "Investment ill branch.
Total assets
A lag in the recording of a debit or credit memo can result to imbalance in
3,351,000
the reciprocal accounts on cut-off date.
Liabilities and equity
Account payable 112,000
c. Errors
Salaries payable 70,000
Errors, such as omission in recording, double recording mathematical mistakes, and
Share capital 2,000,000
the like, can result to disparity between the reciprocal accounts.
Share premium 500,000
Retained earnings (206,200 beg. + 462,800 combined profit) 669,000
Total liabilities and equity
3,351,000 Illustration 1: Reconciliation — Adjusted balance
ABC Co. is preparing its 20x1 financial statements. The balances of the reciprocal accounts on
Dec. 31, 20x1 are as follows:
Reconciliation of reciprocal accounts
Reconciliation shall be made if the balances of the "Investment in branch" and "Home  Investment in branch account……………P156,000
office" accounts are not equal. The procedures are similar to those used when preparing  Home office account…………………………...P70,200
bank reconciliation. Reconciling items can be broadly classified into the following:
The following information has been gathered:
a. A inventory shipment from the home office in Dec. 20x1 was recorded by the
branch only in Jan. 20x2.
a. Transfers in-transit — at the time the financial statements are prepared, there may b. The home office collected P10,000 accounts receivable on behalf of the branch but
be asset transfers between the home office and the branch that the intended the branch is not yet notified.
recipient has not yet recorded. For example, the branch has not yet received or c. The branch returned damaged merchandise worth P30,000 but the home office has
recorded a shipment of inventory from the home office. The reconciling entry is not yet received the shipment.
debit to "Shipments from home office" (and probably to "Freight-in" also) and d. The home office failed to record a P40,000 cash remittance from the branch.
credit to "Home office." 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
b. Unrecorded Debit and Credit memos recorded by the branch as P1,200.

Requirement: compute for the adjustment balances of the reciprocal accounts.

Solution:  Home office account………………………………..P132,000

Unadjusted balance
a. Shipment in transit
b. Collection of receivable
c. Return of damage merchandise
d. Unrecorded remittance
e. Allocation of cost recorded twice
f. Mathematical error in recording
Adjusted balance
The compound adjusting entries are as follows:
Home office books
Shipments to branch ……30K
Cash……………………………..40K
Investment in
branch………..70K
HOME OFFICE BOOKS
Investment in branch
156,000
(30,000)
(40,000)
86,000
Branch books
Shipment from HO…………………20K
Freight – in…………………………….10.8K
Account receivable……………………….10K
Overhead expense………………………….5K
Home office……………………………….15.8K
BRANCH BOOKS The following information has been gathered:
Home office
70,200
20,000 a. The home office allocated P10,000 utilities expense to the branch which the branch
(10,000) 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.
(5,000) b. The home office erroneously credited the branch for a return of shipment of
10,800 merchandise worth P25,000. The branch did not make any return of merchandise.
86,000 c. The branch mistakenly received a copy of the home office correcting entry for item
(b) above dated Jan. 3, 20x2 and entered a credit in favor of the home office on
Dec. 31, 20x1 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.
Requirement: Compute for the following
a. Net adjustment to the ‘Investment in branch’ and ‘Home office’ accounts.
b. Adjustment balances of the reciprocal accounts

Solution:
Illustration 2: Reconciliation – unadjusted balance
The unadjusted balance of the ‘Investment in branch’ account of a home office is P182,000. HOME OFFICE BOOKS BRANCH BOOKS
Relevant information follows: Item (a)
a. The branch did not record a P12,000 credit memo from the home office Correct entry ‘should be’ entry
b. The branch did not record a P9,000 debit memo from the home office Investment in branch …………….10K Utilities expense…………10K
c. The home office erroneously record twice a P20,000 credit memo from the branch Utilities expense…………………………..10K Home office……………………10K
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 Entry made
office did not record it. Utilities expense……………….7.5K
Requirement: Compute for the unadjusted balance of the home office account. Utilities payable ………………….10K
Solution:
Correcting entry
Utilities payable ……………7.5K
Utilities expense.…………..2.5K
Home office………………………10K
Item (b)
‘should be’ entry Correct entry
None None

Illustration 3: Reconciliation – Net adjustment Entry made

Shipments to branch…………..25K
ABC Co. has the following account balances on Dec. 31, 20x1:
Investment in branch……………….25K
 Investment in branch account…………………….P95,000
 Correcting entry
Investment in branch……………….25K
Shipments to branch………………….25K
Item (c)
Correcting entry in item (b) above was
recorded but only on January 3,20x2.
Illustration 1: Several branches — Unadjusted balance
ABC Co. has several branches. On Dec. 31, 20x1, Alpha Brach's "Home office" account
should be’ entry has a balance of P145,000. The following information was determined:
none

Entry made a. The home office charged Alpha Branch a P15,000 shipment which was actually sent
Shipments from HO…25K to Beta Branch. Alpha Branch was not notified of the shipment.
Home office………………..25K b. The home office charged Charlie Branch a PI 6,000 shipment which was actually
sent to Alpha Branch. Alpha Branch retained the shipment.
Correcting entry c. The home office erroneously recorded a P5,000 cash remittance from Delta Branch
Home office ………….25K as coming from Alpha Branch.
Shipments from HO……….25K d. The home office charged Alpha Branch P4,000 utilities expense that should have
Item (d) been charged to Echo Branch. Alpha Branch recorded the erroneous debit memo.
Correct entry ‘should be’ entry
None None Requirement: Compute for the unadjusted balance of the ‘Investment in Alpha Branch’
account in the home office books.
Entry made
Home office………3K Solution:
Cash………………….3K
HOME OFFICE BOOKS BRANCH BOOKS
Correcting entry Item (a)
Cash……………….3K ‘should be’ entry Correct entry
Home office…………………..3K Investment in Beta Branch…15K None
Shipments to Beta Branch……..15K

HOME OFFICE BOOKS BRANCH BOOKS Entry made

Unadjusted balances
a. Allocated expense
b. Erroneous credit by home office
c. Erroneous correcting entry
d. Erroneous debit memo
Investment branch Home office Investment in Alpha Branch…15K
95,000 132,000 Shipments to Alpha Branch……..15K
- 10,000
25,000 - Correcting entries
- (25,000) Shipment to Alpha Branch…15K
3,000 Investment in Alpha Branch……..15K

Shipment to Beta Branch…15K

Net adjustments- Requirement (a) 25,000 (12,000) Investment in Beta Branch……..15K
Adjustment balance – Requirement (b) 120,000 120,000
Item (b)
Home office with several branches ‘should be’ entry Correct entry
When there are several branches, the home office will maintain a separate ‘investment’ Investment in Alpha Branch…16K Investment from home office…16K
account for each branch. In turn, each branch maintains its own 'home office' account Shipments to Alpha Branch……..16K Home office……..15K
and records only its own transactions with the home office. Transactions between one
branch and the home office should not affect the records of the other branches. An
error may arise if the home office records a transaction with one branch to another
branch's 'investment' account or a branch records the transaction of the home Office Entry made
with another branch. Investment in Charlie Branch…16K
 Shipments to Charlie Branch……..16K d. Allocable expense to Echo (4,000) (4,000)
Adjusted balances 141,000 141,000
Correcting entry
Shipment to Charlie Branch………….16K
Investment in Charlie Branch…………….16K Illustration 2: Several branches – Adjusted balance

Investment in Alpha Branch…16K ABC Co. has several branches. Account balances relating to Branch One on Dec . 31, 20x1 are
Shipments to Alpha Branch……..16K as follows:

 Investment in Branch One………P100,000

 Home office account …………….P132,000
Item (c) Additional information:
‘ Should be’ entry Correct entry
Cash……………………….5K None a. Branch Two acquired equipment for to be maintained in the home office rs books.
Investment in Delta Branch…………….5K The home office recorded this as a transaction with Branch One.
b. Branch One acquired equipment for P40,000 to be maintained in its books. The
Entry made home office did not record this.
Cash……………………….5K c. The home office failed to record a P10,000 cash remittance from Branch Four.
Investment in Alpha Branch…………….5K d. The home office erroneously charged Branch One a P12,000 debit memo received
from Branch Five.
Correcting entry e. Branch One reversed a previous debit memo from Branch Six amounting to P6,000.
Investment in Alpha Branch…………….5K The home office decided that this charge is appropriately Branch Seven's cost.
Investment in Delta
Branch…………….5K Requirement: Compute for the adjusted balance of the accounts.
Item (d)
‘Should be’ entry ‘should be’ entry Solution:
Investment in Echo Branch………..4K None
HOME OFFICE BRANCH BRANCH BOOKS
Utilities expense…………………………….4K
Investment in Branch Home office
Entry made
Entry made Utilities expense……….4K Unadjusted balances 100,000 142,000
Investment in Alpha Branch………….4K Home office………4K a. Brach Two’s transaction 30,000 -
Utilities expense…………………………….4K b. Branch One’s acquisition - -
c. Branch Four’s remittance - -
Correcting entry Correcting entry d. Branch Five’s debit memo 12,000 -
Investment in Echo Branch……………………..4K Home office…………………..4K e. Inter – branch debit memo - -
Investment in Alpha Branch………………….4K Utilities expense……….4K Adjusted balance 142,000 142,000

Notes:

Home Office Books Alpha Branch (b) No entry is needed in the home office’s books when a branch acquires assets to be
Books maintained in the branch’s books.
Investment in Alpha Branch Home Office
Unadjusted balances 139,000 145,000 (c) This transaction does not affect the accounts relation to Branch One.
a. Shipment to Beta charged to Alpha (15,000) -
(e) Branch One’s reversal of the debit memo is proper. The transaction is between Branch Six
b. Shipment ot Alpha charged to Charlie 16,000 -
and Branch Seven. Accordingly, only the accounts of these branches should be affected.
c. Remittance from Delta credited
Inter- branch transactions will be discussed momentarily.
To Alpa 5,000 -
Illustration 3: Difference between unadjusted accounts
Modes Co. has several branches. The following information was determined during the
reconciliation of the accounts relating to the Ionian Branch: Item d
a. The home office inappropriately allocated P4,000 utilities expense to the Dorian Correct entry Should be entry
Branch instead of Ionian Branch. Ionian Branch made the correct entry. Cash 7k Home office 7K
b. The home office recorded a cash remittance of P16,000 from Ionian Branch as Investment in Ionian Branch 7k Cash 7K
coming from Phrygian Branch. The branch failed to post the 7k debit to home office Ledger
c. Ionian Branch did not record a P10,000 debit memo from the home office.
d. Ionian Branch omitted the debit posting for a P7,000 cash remittance to the home Item e
office. Correct entry Should be entry
e. Ionian Branch omitted the credit posting for the P5,000 credit memo relating to Cash 5k Home office 5k
the home office's collection of Ionian Branch's accounts receivable. Investment in Ionian Branch 5k Accounts receivable 5k
The branch failed to post the 5k credit to the accounts
Requirement: How much is the difference between the unadjusted "Investment in Ionian receivable Ledger
Branch" and "Home office" accounts?

Solution: Special problems in Accounting for branch operations The home office and its branch(es)
The requirement is the difference between the unadjusted balances Of the accounts. To may enter into the following transactions:
solve the problem, we will NOT make any corrections. Instead, we will simply re-perform the a. Merchandise shipments to branch billed at prices above cost
errors to get their effects on the unadjusted account balances. To do this, we will apply the b. Inter-branch transactions
'concept of equilibrium' —for every peso debited, there is a corresponding peso credited. Although these transactions do 110t affect the general purpose financial statements,
they require some special accounting for internal reporting purposes.
Home Office Books Branch Books
Investment in Branch Home Office Shipments to branch billed at a price above cost
a. Allocation of expense 4,000 4,000 The home office may bill the branch for inventory shipments at prices above cost (cost plus
b. Cash remittance (16,000) (16,000) mark-up, a.k.a. the 'billed price'). Information on actual costs is withheld from the branch.
c. Debit memo from home office 10,000 10,000 Thus, the branch records the shipment at the billed price rather than at cost.
d. Debit posting of cash remittance (7,000) (7,000) This is only for internal reporting purposes and its purpose is to consider the home
e. Credit memo from home office - - office's contribution to profit through its central functions (such as procurement,
Net effect 3,000 (12,000) manufacturing, marketing, and the like) when comparing the profitability of the various
business units within the company.
 Answer: The difference between the reciprocal accounts is P15,000 (3,000 minus When shipments are billed at cost, the branch's gross Profit is attributed solely to
negative 12,000 = 15,000). The home office account is greater than the investment the branch. On the other hand, when shipments are billed above cost, a portion of the
account by P15,000. branch's gross profit is attributed to the home office.
Analyses: For example, let's say your mama gives you and your little sister allowances based
Item b on your respective grades in school (and little sister is way smarter than you). You are,
Should be entry Correct entry however, obligated to tutor little sister, help her in her home works, fetch her from school,
Cash 16k Home office 16K cook dinner, wash the dishes, do the laundry, and many more! Now, would it be fair if mama
Investment in Ionian Branch 16k Cash 16K gives you a little markup on your allowance to compensate for your extra hard work? Yes, of
Entry made course, right? Same is true with the home office (you), the branch (little sister), and the
Cash 16k company (the mama).
Investment in Dorian Branch 16k Shipment to the branch, even at billed price, is not a sale. Sale is recognized only
Item c when inventory is sold to an external party. Accordingly, any mark-up on the shipment is
Correct entry Should be entry eliminated when combined financial statements are prepared in order to restate the branch's
Investment in Ionian Branch10K Shipments from Home office 10K cost of goods sold and ending inventory to their original costs.
Shipments to Ionian Branch 10k Home Office 10K
Entry made: Illustration:
None Shipments at billed price
 1. Home office ships to the branch inventory costing P100,000 and bills the branch Revenue
120% of the cost. 5. Branch makes total sales of P50,000 on account.
Home Office books Branch books Home Office books Branch books
Investment in branch 120k Shipments from HO 120k No entry Accounts Receivable 500k
Shipments from branch 100k Home Office Sales
Allowance for markup 120k 500k
20k Expenses
6. Branch incurs utilities expense of P100,000, P20,000 of which were allocated from
Notes: the home office.
 The 'investment' and 'home office' accounts are debited/credited at the billed Home Office books Branch books
price. Investment in branch 20k Utilities expense 100k
 The home office records the markup in an allowance account (a similar account Utilities expense Home office 20k
title is 'Allowance for overvaluation of brançh inventory'), 20k Cash
 The branch, unaware of the markup, records the shipment at the billed price. 80k
 The difference between the "Shipments to branch" and "Shipments from home
office" accounts represents the markup. Individual profit of the branch
Freight paid by home office The branch has an ending inventory of P250,000, inclusive of freight. The branch’s individual
2. Home office ships to the branch inventory costing P200,000 and bills the branch profit is computed as follows:
120% of the cost. Home office pays freight of P10,000. Sales P500,000
Home Office books Branch books Cost of sales
Inventory beg -
Investment in branch 250k Shipments from HO 240k
Shipments from home office (120k+240k+96k) 456,000
Shipments from branch 200k Freight-in 10k
Freight in (10k+6k+2k) 18,000
Cash Home Office
Purchases 40,000
10k 250k
Total goods available for sale 514,000
Allowance for markup 40k
Inventory, end (250,000) (264,000)
(200,000X120%) + 10,000 freight= 250k)
Individual gross profit of branch 236,000
Operating expenses (100,000)
Freight paid by branch
Individual profit of branch 136,000
3. Home office ships to the branch inventory costing P80,000 and bills the branch
True profit of the branch
120% of the cost. Branch pays freight of P6,000.
The branch's ending inventory of P250,000 consists of P240,000 shipments from home office
Home Office books Branch books
and P10,000 purchases from supplier. In so far as the home office is concerned, the true
Investment in branch 96k Shipments from HO 96k
profit of the branch is as follows
Shipments from branch 80k Freight-in 6k
Allowance for markup Home Office 96k
Sales 500,000
16k Cash
Cost of sales:
6k
Inventory, beg. -
Purchases from outside parties
4. Branch purchases inventory from a supplier for P40,000, on account. Branch pays
freight of P2,000. Shipments from home office, at cost (456K + 120%) 380,000
Freight-in 18,000
Home Office books Branch books
No entry Purchases 40k Purchases 40,000
Freight-in 2k Total goods available for sale 438,000
Accounts payable 40k
Inventory, end at cost (240k÷120%)+10k) (210,000) (228,000)
Cash
2k True gross profit of branch 272,000
Operating expenses (100,000)
True profit of branch 172,000 Combined statement of profit or loss

Sales (1.6M + 500k) 2,100,000

 Another way of computing the true profit is to simply add the realized markup to Cost of sales:
the individual profit. The realized markup is the markup on the shipments that Inventory, beg. 300,000
were sold to external parties.

Total markup (20k+40k+16k) 76,000 Purchases (1.2M + 40k) 1,240,000

Less: Unrealized markup in ending inventory (240kx20%/120%) ( 40,000) Freight-in (32k + 18k) 50,000
Realized mark up 36,000
Total goods available for sale 1,590,000
Individual profit of branch 136,000 Inventory, end at cost [460k+10k+ (240k÷120%)] (670,000) (920,000)
Add: Realized markup 36,000 Gross profit 1,180,000
True profit of branch 172,000
Operating expenses (220k+100k) (320,000)
Combined financial statements- Shipments at billed price Combined profit 860,000
When combined financial statements are prepared the “allowance” account is eliminated
together with the “shipments” accounts in order to remove the markups and restate the
Notes:
branch’s cost of goods sold and ending inventory to their original costs.
Illustration  The shipments accounts are simply ignored
Home office Branch  The unrealized markup in ending inventory is eliminated
Dr. (Cr.) Dr. (Cr.) Checking:
Cash 1,100,000 66,000 Individual profit of home office 688,000
Accounts receivable 180,000 100,000 Individual profit of branch (previous illustration) 136,000
Inventory, beg. 300,000 - Realized markup (previous illustration) 36,000
Shipments from HO (billed at 120% above cost) 456,000 Combined profit 860,000
Purchases 1,200,000 40,000
Freight-in 32,000 18,000 Or
Shipments to branch (380,000) Individual profit of home office 688,000
Investment in branch 600,000 True profit of branch 172,000
Allowance for markup (76,000) Combined profit 860,000
Equipment 720,000 400,000
Accumulated depreciation-equip. (72,000) (40,000)
Accounts payable (72,000) (40,000) Sales 1,600,000
Share capital (2,000,000) Cost of sales:
Retained earnings-beg (152,000) Inventory, beg. 300,000
Home office (600,000)
Sales (1,600,000) (500,000) Shipments to branch (380,000)
Operating expenses 220,000 100,000
Totals - - Freight-in 32,000
Inventory end Purchases 1,200,000
-from outside purchases 460,000 10,000
Total goods available for sale 1,152,000
-from home office 240,000
Inventory, end (460,000) (692,000)
Requirements: Prepare the combined financial statements True gross profit of branch 908,000
Operating expenses (220,000)
Solutions:
True profit of branch 688,000 There is no further special accounting if later on there is settlement between the
branches. For example, Branch #2 subsequently repays P8,000 to Branch #1, the
entry is:

Combined statement of financial position

Home office books Branch #1's books Branch #2's books
Assets
Investment in Br.#l... 8K Cash 8K Home office... 8K
Cash (1.1M + 66k) 1,166,000
Investment in Br.#2..... 8K Home office 8K Cash 8K
Accounts Receivable (180k+100k) 280,000
Inventory [460k =10k = (240÷120%)] 670,000
Equipment (720k+400k) 1,120,000 Inter-branch transfers of merchandise
Accumulated depreciation – equip, (72k+40k) (112,000) Inter-branch transfers of merchandise are accounted for similar to inter-branch transfers of
Total Assets 3,124,000 cash. However, a special problem may arise on the accounting for freight.
Liabilities and Equity A branch should be charged only for the normal freight and not excessive freight.
Accounts payable (72k+40k) 112,000 Any excess freight caused by indirect routing should be charged as an expense in the home
Share capital 2,000,000 office books. The excess freight is not a necessary cost of bringing the asset to its intended
Retained Earnings(152k beg + 860k combined) 1,012,000 location as it could have been avoided; therefore, it should be charged as expense.
Total liabilities and equity 3,124,000 Illustration 1: Excessive freight
Notes: 1. Home office transfers inventory worth P150,000 to Branch #1. Home office pays freight of
P10,000.
 The allowance account is simply ignored Home office books Branch #1’s books
 The unrealized markup is ending inventory is eliminated. Investment in Br. 1 160k Shipments from Home Office 150k
Shipments to Br. 1 150k Freight in 10k
Inter-branch transactions Cash Home office
Normally, a branch transacts only with the home office and with unrelated parties. However, 10k 160k
there may be instances where the home office instructs a branch to transfer assets to
another branch. Inter-branch transfers of assets are accounted for "as if’ the asset 2. Later on, the home office instructs Branch #1 to transfer the merchandise to Branch #2.
transferred went through the home office and "as if' the branches were transacting with the Branch #1 pays freight of P3,000. If the merchandise had been shipped directly from the
home office rather than with each other. Accordingly, the inter-branch transfer is recorded home office to Branch #2, the freight cost would have been P11,000.
not only by the transacting branches but also the home office.
Inter-branch transfers of cash The excess freight is identified as follows:
The home office instructs Branch #1 to transfer P10,000 cash to Branch #2. Freight from home office to Branch #1 10,000
Freight from Branch #1 to Branch #2 3,000
Home office books Branch #1’s books Branch #2’s books Total freight on indirect routing 13,000
Investment in Br. 2 10k Home Office 10k Cash 10k Normal freight from home office to Br. 2 (11,000)
Investment in Br. 1 Cash Home office 10k Excess freight 2,000
10k 10k
Home office books Branch #1’s books Branch #2’s books
Notes; Shipments to br. 1 Home Office 163k Shipments from HO 150k
Instead of setting-up separate inter-branch receivable or payable accounts, the 150k Shipments from HO 150k Freight in 11k
transacting branches record inter-branch transfers in their respective "Home office" Shipments to Br. 2 Freight in 10k Home office
accounts. The home office will in turn increase its investment on the receiving branch and 150k Cash 161k
decrease its investment on the transferring branch. This accounting method results to more Investment in br. 2 3k
effective internal control by facilitating the reconciliation of reciprocal accounts. 161k
It is "as if' the transferring branch transferred the asset to the home office and the home Loss on excessive freight
2k
office, in turn, transferred personally the asset to the receiving branch.
Investment in Br. 1
163k
  Inter-branch transfers of assets are recorded as if the branches are transacting with
Illustration 2: Savings on freight the home office rather than with each other.
1. Home office transfers inventory worth P150,000 to Branch #1. Home office pays  Excess freight on inter-branch transfers of merchandise is charged as expense in
freight of P10,000. the home office books. Savings on freight are not accounted for.

Home office books Branch #1’s books MODULE ACTIVTY/ASSESSMENT

Investment in Br. 1 160k Shipments from Home Office 150k MULTIPLE CHOICE: THEORY/PROBLEMS
Shipments to Br. 1 150k Freight in 10k
Cash Home office 1. After year-end adjustments but before elimination entries, the balance in the
10k 160k “allowance for mark-up on shipments to branch”
2. Later on, the home office instructs Branch #1 to transfer the merchandise to a. is equal to zero c. represents the realized mark-up
Branch#2. Branch #1 pays freight of P3,000. If the merchandise had been shipped b. represents the unrealized mark-up d. represents profit
directly from the home office to Branch #2, the freight cost would have been
P14,000. 2. When shipments to branch are billed at other than cost, the individual profit of the
branch is not equal to its true profit. The difference pertains to the
Freight from home office to Br. #1 10,000 a. unrealized mark-up c. total mark-up
Freight from Branch #1 to Branch #2 3,000 b. realized mark-up d. errors committed
Total freight on indirect routing 13,000
Normal freight from home office to Branch#2 (14,000) 3. The combined profit of the entity is equal
Savings on freight (1,000) a. to the individual profits of the home office and the branch.
b. to the individual profits of the home office and the branch after eliminating any
unrealized mark-up during the period.
Home office books Branch #1’s books Branch #2’s books
c. to the individual profit of home office plus the true profit of the branch.
Shipments to br. 1 150k Home Office 163k Shipments from HO 150k
d. to the true profit of the home office plus its share in the profit of the branch.
Shipments to Br. 2 Shipments from HO 150k Freight in 13k
150k Freight in 10k Home office
4. Excess freight on inter-branch transfers of merchandise is
Cash 163k
a. charged as expense in the home office books.
Investment in br. 2 163k 3k
b. recorded as freight-in in the books of the recipient branch.
Investment in Br. 1
c. charged as expense in the books of the recipient branch.
163k
d. not recorded.
Note that the apparent “savings on freight” is not accounted for. No gain is recognized. This
5. Freight savings on inter-branch transfers of merchandise is
is an application of the “prudence” or “conservatism” concept.
a. recognized as gain in the home office books.
b. recorded as a reduction to the cost of shipments.
MODULE SUMMARy
c. recognized as gain in the transferring branch’s books.
 Transactions of a branch with external parties are recorded in the regular manner. d. not recorded.
 Transactions between the home office and the branch are recorded in reciprocal
Use the following information for the next two questions:
accounts called “Investments in branch” (in home office books) and “Home Office”
(in branch books). These are eliminated when combined financial statements are The trial balances of INTERIM TEMPORARY Co.’s home office and branch are shown below:
prepared.
 Combined financial statements are prepared by adding together similar items of
assets, liabilities, income and expenses and eliminating the reciprocal accounts and
other inter-office accounts.
 The home office may bill the branch for inventory shipments at prices above cost. INTERIM TEMPORARY Co.
The mark-up is initially recorded in an “allowance” account and recognized in profit
Trial balance
or loss only when realized (i.e., when inventory is sold to external parties).
Accordingly, the individual profit of the branch is not equal to its true profit. The December 31, 20x1
difference is the realized mark-up.
 Home office Branch 1. How much is the total assets in the combined statement of financial position?
a. 13,440,000
Dr. (Cr.) Dr. (Cr.) b. 14,800,000
c. 14,340,000
Cash 4,400,000 1,668,000
d. 13,404,000
Accounts receivable 720,000 400,000

Inventory, beg. 2,600,000 - 2. How much is the total profit in the combined statement of profit or loss?
a. 1,851,200
Shipments from home office - 920,000 b. 1,960,200
c. 1,815,200
Purchases 288,000 160,000
d. 1,720,200
Freight-in 88,000 72,000

Shipments to branch (920,000) 3. AMNESTY PARDON Co. is currently preparing its combined financial statements. At
December 31, 20x1, the home office shows a ₱624,000 balance in its “Investment
Investment in branch 3,308,000
in branch” account while the branch showed a ₱280,800 balance in its “Home
Equipment 2,880,000 1,600,000 office” account. The following information has been gathered:

Accumulated depreciation - equipment (288,000) (160,000) a. The home office shipped merchandise worth ₱80,000 to the branch during
December 20x1 which the latter has received and recorded only in January 20x2.
Furniture 360,000 200,000 b. The home office collected ₱40,000 accounts receivable on behalf of the branch.
The branch did not yet receive the credit memo sent by the home office.
Accumulated depreciation - furniture (36,000) (20,000) c. The branch returned damaged merchandise worth ₱120,000 to the home office.
Accounts payable (288,000) (160,000) The home office did not yet receive the debit memo sent by the branch.
d. A remittance of cash collections amounting to ₱160,000 was not yet recorded by
Accrued expenses (180,000) (100,000) the home office.
e. The home office allocated overhead cost of ₱20,000 to the branch which the latter
Share capital (8,000,000) has recorded twice.
f. Freight charge of ₱48,000 paid by the home office for shipments of merchandise to
Share premium (2,000,000) the branch was recorded by the latter as ₱4,800.
Retained earnings - beg. (824,800)
How much is the adjusted balance of the “home office” account?
Home office - (3,308,000)
a. 324,000
Sales (3,600,000) (2,000,000)
b. 344,000
Depreciation expense 672,000 272,000
c. 354,000
Utilities expense 72,000 40,000
d. 364,000
General overhead expense 28,800 16,000

Various operating expenses 720,000 400,000 4. ABASE HUMILIATE Co. is currently preparing its combined financial statements for
the year ended December 31, 20x1. As of this date, the “Investment in branch”
Totals - -
account has a balance of ₱380,000 while the “Home office” account has a balance
The home office and the branch have ending inventories of ₱1,080,000 and ₱600,000, of ₱528,000. The following information has been gathered:
respectively.
a. The home office allocated unpaid utilities expenses amounting to ₱40,000 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 ₱10,000 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 ₱100,000. 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, 20x2 and entered a credit in favor of the home office on
December 31, 20x1.
d. The branch mistakenly sent the home office a debit memo amounting to ₱12,000
for an apparent remittance of collections which did not happen. The home office
did not record the debit memo.

How much is the net adjustment to the “Home office” account? increase (decrease)
a. 100,000
b. 48,000
c. (48,000)
d. (52,000)

5. ABOMINABLE VERY BAD Co. has several branches. On December 31, 20x1, the
“Investment in Branch One” maintained by the home office shows a balance of
₱400,000 while the “Home office” account maintained by Branch One shows a
balance of ₱568,000. The following information was determined:

a. Branch Two acquired equipment for ₱120,000 to be maintained in the books of the
home office. This was recorded by the home office as a transaction with Branch
One.
b. Branch One acquired equipment for ₱160,000 to be maintained in its books. This
was not recorded by the home office.
c. Branch Four remitted cash collections of ₱40,000 to the home office which the
latter failed to record.
d. The home office erroneously charged Branch One for a debit memo of ₱48,000
received from Branch Five.
e. Branch One reversed a previous debit memo from Branch Six amounting to
₱24,000. The home office decided that this charge is appropriately Branch Seven’s
cost.

How much is adjusted balance of the “Home Office” account?

a. 568,000 b. 588,000 c. 628,000

d. 658,000