8

UNIVERSITY OF THE EAST

HOME OFFICE, BRANCH And AGENCY Accounting

I. ACCOUNTING FOR AGENCY TRANSACTIONS

An agency is an unincorporated entity in which orders are received and then transmitted to the
home office for processing, shipping and billing of merchandise. They do not have merchandise
available for sale but they maintain samples inventory, they rarely collect from customers
since collections are remitted by customers directly to the home office.

Ordinarily, the only accounting records required for sales agencies are for cash receipts and
disbursements which are handled essentially the same manner as petty cash system.

11. ACCOUNTING FOR BRANCH OPERATIONS

Branches:

a. Are extensions of home office

b. Have separate accounting entities but are not separate legal entities
c. Financial statements prepared are used only for internal reporting purposes
d. Carry merchandise obtained from home office, makes sales, approves customer’s
credit and makes collections from customers.
e. May also obtain merchandise from outside suppliers.
f. Their cash receipts are often deposited in a bank account.
III. RECIPROCAL ACCOUNTS: Investment in Branch and HOME OFFICE Current Account

Per home office, the INVESTMENT IN BRANCH account is an ASSET representing the investment
of the home office in branch net assets and has a normal DEBIT balance.

Per branch, the HOME OFFICE Current account is an EQUITY representing the equity of the
home office in the branch net assets and has a normal CREDIT balance.

Thus, the Investment in Branch account and the Home Office Current account are reciprocal
accounts and have to be eliminated before preparing their combined financial statements.

There could be differences in the balances of the reciprocal account due to:
• Timing Differences- like shipments in transit and remittances in transit
 • Errors- either committed by home office or the branch.

If, at the end of period these reciprocal accounts are not equal, a reconciliation statement has
to be prepared.

IV. SHIPMENTS TO BRANCH

Home office may transfer merchandise to the branch either at:

• cost or
• at billed price (cost plus mark-up).

If shipments are made at billed price there will be an equitable allocation of income between
different units of the enterprise, efficiency in pricing inventories and hiding the true profit
margins from the personnel of the branch.

When the home office ships merchandise to its branches at transfer price in excess of cost, the
accounting records of the home office are adjusted to permit measurement of actual cost of
merchandise transfer by crediting “ Allowance for Mark-up/ Overvaluation in Branch
Inventory or Loading in Branch Inventory” account. This account has to be adjusted at the end
of the year to reflect the true branch profit or loss.

Problem 1: DELBROS TRADING CORPORATION opens an agency in PULILAN. The following are the
transactions for March 31, 2024.

The following assets were sent to the agency on March 1, 2024:

A working fund to be operated under the imprest system P100,000

Samples from the merchandise stock 200,000

Advertising materials and literature 150,000

For the month of March, the agency submits sales on account of P5,000,000 that were approved
by the home office of which 70% had already been collected. The company maintains a mark-up
of 25%. Home office disbursements chargeable to the agency are as follows;
BasedFurniture and Fixtures for the use of agency
on sales

Gross P 336,000
Profit Rate

Salaries and Commissions 750,000

Rent 100,000

On March 31, the agency working fund is replenished. Paid expense vouchers from the working
fund submitted by the agency to the home office: Advertising Expense- P75,000; Transportation
Expenses-P 15,250; Miscellaneous Expense- P1,500.

31
The following information are to be used in adjusting the agency accounts as of arch
April 30:

a. Agency samples will be useful until June 1; at that time it is believed that they
would have a salvage of 10% of cost.
b. Approximately 1/5 of the advertising materials and literature are still on hand.
4
⑭ Gross Profit271.xaM 1,250,000

Expenses
-

Salaries andCom, 750,000

Rent 100,000

transportation Exp. 15,250

Adv. Exp. 7,500

Misc. Expense 1,500

samples this 90% 60,000

200,000

30,000
Adv. Supplies 1500x11

Depre .x 1 4,000

Bonus 5M. 3.5M= 1.5M 1.5% 22,500 7,058,250

x

Agency Profit 191,750 A

 c. Furniture and fixtures are to be depreciated on a 7 - year basis.
d. The agency is to receive a bonus of 1.5% on sales above P3,500,000 a month; the
bonus is to be paid by the home office at quarterly intervals.

What is the agency’s net income (loss) for the month ended, March 31, 2024?
A. P191,750 B. P214,250 C. P101,750 D.
P(58,250)

Problem 2:The post closing balances of ALTO Marketing Corporation and its PASAY Branch as at
January 1, 2024 show:

Home Office Cavite Branch

Cash P 290,000 P 125,000
Accounts Receivable, net 700,000 475,000
Inventory 1,200,000 650,000
Plant Assets 2,000,000 1,300,000
Less: Accum. Depreciation ( 250,000) (200,000)
Investment in Branch 860,000
TOTAL P4,800,000 P2,350,000

Accounts Payable P625,000 P400,000

Other Liabilities 367,500 190,000
Bonds Payable 900,000
Branch Inventory Allowance 7,500
Home Office Current 860,000
Ordinary Shares 2,000,000
Retained Earnings 1,800,000
TOTAL P4,800,800 P2,350,000

The following is the summary of the transactions of the home office and its branch for 2023:
-
a. Home Office sales- P3,750,000, including P247,500 shipments to the branch. A standard
10% mark-up on cost applies to all sales to the branch. Branch’s sales to the customers
totaled P2,500,000.

b. Purchases from outsiders: Home Office- P2,000,000; Branch- P1,500,000.

c. Home Office ‘s collections amounted P2,800,000 which includes P100,000 from the
branch customer who paid directly to the home office who in turn notified the branch;
branch own collections amounted to P250,000.

d. Home Office paid P1,400,000 of its own accounts and P150,000 of that of the branch
payables while the branch still paid P950,000 of its own accounts.

e. Operating expenses paid; Home Office- P600,000; Branch- P250,000.

f. Depreciation on plant assets- 12% per annum.
g. Operating expenses allocated by the Home Office to the Branch- P60,000.
h. Branch remittance to the home office- P500,000.
#2 Home Office Branch Branch Income statement HO IS

AR a) AR
a) Jales 2,500,000 sales 3,502.500
3,582,500 2,500.000
Sales sales
-
COS -coS:

Inv. in Branch 247,500 shipment from AO 650,000 Beg. Inventory 1,200,000

Beg. Inv
247,500
247500/1.10
shipmentt o Branch 225.000 HO 1,500,000 Purchases
cost
Purchase 2,000,000

Branch Inv. Allowance from AO TGAS

22500 shipment 3,200,000
500
b)
Purchases b)
Purchases TGAS 2.397,500 -shipment to Branch 225,000
2,000,000 1,500,000
AP
AP 1,797,500 TGAS to Outsider
-
Ending Inv. 2,975,000
-

cash 250,000 702,500 Ending Inv. 550,000 2,425,000

c)
-

Cash
2) 2,800,000 Gross Profit -

HO 100,000
AR 2,700,000
-
OPEX 250k+ 156k + 60k 466,000 Gross Profit 1,077,500

Inv. in Branch 100,000 AR 3 50,000 Branch Reported N OPEX 80,000

7
500B 600k+240K-30K
-

d)
AP 1,400,000 AP N. From Own Operations
di) 1,100,000 297,500D

Inv. in Branch 150,000 cash 950,000

Closing Entry + Branch TRVE) AdjustedNI:
HO 150,000
Cash 1,550,000 sales 2,500,000 ReportedN 236,500

Ending Realized Allowance

e) OPEX 2) OPEX
250.000
Inv. 600,000 + Branch Inv. 10,000 246,500
600,000
Cash
-000 c
Cash HO 234,500 combined NI

#OPEX F)OPEX Beg. Inv. 650,000

240,000 156,000
Accu. Depre A
czu. Depre Purchases 1,500,000 Branch Inv. Allowance

Inv.
gi)
in Branch g)
OPEX shipment from 18 247,500 Beg. Balance 7,500
60,000 60.000
OPEX HO OPEX 466,000 CurrentAllowance 22,500

30,000
h)Cach
500,000
hi
HO
500,000
Total Allowance

Inv. in Branch cash -

Allowance, End. /Adj.
Total 600,000

I
outsider 380,000

at en HO(BP)
-
220,000

1. 10
Ending

HO
Inv, to be shown on Combined FS

20,000
Cost 200,000 x
10
Branch:

Realized Allowance
0 Fromoutsider 580,000

foro-
220K/1.10
Overstatement of Branch COS 300,000
From10 at cost

Understatemento fBranch N)
-
 i. At December 31, the inventories of the home office and the branch are P550,000 and
P600,000, respectively. Of the branch inventories on hand, P380,000 came from outside
purchases.

REQUIRED:
1.Journal entries to reflect the foregoing transactions on the books of the home and branch.

2. What is the branch reported net income (loss) for the year?

A. P246,500 B. P236,500 C. P176,500 D.

P186,500

3. What is the home office net income (loss) from its own operations?

A. P356,500 B. P345,500 C. P380,000 D.

P297,500

4. What is the combined net income of the home office and branch?

A. P496,500 B. P516,500 C. P544,000 D. 530,500

5. What is the total inventory in the combined statement of financial positions as of December
31, 2024?

A. P1,150,000 B. P930,000 C. P1,130,000

&
D. P770,000

Problem 3.The following selected transactions took place between the home office and its two
branches, MARIKINA Branch and ANTIPOLO Branch. Merchandise shipments to the branches are
billed at 20% above its cost.

a. Upon instruction of the home office, MARIKINA Branch effected a fund transfer of
P1,250,000 to ANTIPOLO Branch.

b. ANTIPOLO Branch paid P200,000 representing the traveling expenses of Mr. Lucio Tan,
Chief Finance Officer, when the latter attended the Southeast Asia regional business
conference in KYOTO. Of the amount paid, 50% was charged to the home office, 20% to
MARIKINA branch and the balance to ANTIPOLO Branch.

c. Home office shipped merchandise to MARIKINA branch with a total billed price of
P240,000. The home office paid freight of P5, 000 for the account of the receiving
branch.

d. Home office subsequently instructed MARIKINA branch to reship one-half of the goods to
ANTIPOLO Branch. Additional freight of P1,000 was paid by MARIKINA branch. Had the
goods been shipped directly from home office to ANTIPOLO Branch, the freight would
have been only P3,000.

6. Journal entries to record the above transactions on the books of the home office and its
two branches.

Problem 4. WILCOX BUILDERS operates a number of branches. On June 30,, 2024, its QUEZON
⑪
HOME Office Marikina Branch Antipolo Branch

a)Inv. in AB
9) HO a)
Cash
1,250,000 1,250,000 1,250,000
Inv. in MB cash HO

100,000 60,000
b)
Expenses b)Expenses b)
Expenses
40,000
Inv. in MB 40,000 HO H8 140,000

Inv. in AB 140,000 cash 200,000

Inv. in MB 245,000
ShipmentFrom HO 240,000
2) c)
shipment to MB 240x/1.20 200,000 FreightIn 5,000

Allowance for Mark-up 40,000 HO 245,000

Cash 5,000

d)Inv. in AB 123,000
d)HO 123,500
d)shipmentFrom Ho 120,000

LOSS 500
shipmentfrom Ho 120,000 in 3,000

10)
Inv. in MB 123,500 HO 123,000
Freighti n 2,500

shipment to MB cash
100,000

shipmentto AB

Freight
5,000/2
HO 1 MB 2,500

MB 7) AB 1,000

Total Freight paid 3,500

D AB

=
HO 3,000

Loss
AVE. branch shows a Home Office account a balance of P1,725,000 and the home office books
shows Investment in QUEZON AVE. Branch account of P1,616,000. An examination of the records
discloses the following information which may help in reconciling both accounts:
a. A P1,110,000 shipment, charged by the home office to QUEZON AVE. branch, was
actually sent to, and retained by, BICUTAN branch.

b. A P1,720,000 shipment intended for, and charged to, LIBIS Branch, was sent instead to
QUEZON AVE. Branch and retained by the latter.

c. A P2,000,000 emergency cash transfer from STO DOMINGO branch to TIMOG branch was
not taken up in the home office books.

d. A Home office customer erroneously paid his account amounting to P1,000,000 to

QUEZON AVE. branch. The accountant of the branch had already notified the home
office about it.
e. Home office was charged P25,000 for merchandise returned by QUEZON AVE. branch
but the home office recorded it as P35,000.

f. On June 30, 2023, Home office wired cash of P750,000 to QUEZON AVE. Branch (upon the
request of the latter) but was only credited to the branch account only after a couple of days.
However, the accountant of the home office had inadvertently debited this transaction to
Administrative Expenses.

g. The total shipments made by the Home to the branch amounted to P5,500,000 however the
records of the branch showed only P5,350,000. Shipments to the branch are billed at cost

h. The records of the branch showed total remittance of P4,005,000 but the cash receipts books
of the home office showed P4,505,000

i. Home office erroneously recorded QUEZON AVE. branch net loss of P312,500 as net income.

7. How much is the reconciled balance of the reciprocal accounts as of July 31,2023?

Problem 5. The discrepancies enumerated below were discovered in the inter-office account of
WENTWORTH TRADING CORPORATION with its SAN JUAN Branch and the corresponding account
carried on the latter’s books as of December 31, 2024.
a. Merchandise shipments of P412,500 which were made by the home office on
December 28, 2023 were received by the SAN JUAN branch on January 4, 2024.
b. The branch collected P1,200,000 of its own accounts and another P500,000 from a
home office customer who erroneously paid his account to this branch. All of these
collections were immediately deposited for the account of the home office.
Meanwhile, back at the home office, no entry had been made as of December 31,
2024.
c. A charged for labor by the home office of P75,000 was recorded twice by the
branch.

d. A charged of P5,500 was made by the home office for freight on merchandise, but
the amount was recorded by the Branch as P55,000.

e. The branch bought on account furniture worth P750,000. The records for the fixed
assets are maintained in the home office who had been accordingly notified
already.
f. The home office had incorrectly charged the branch the amount of P75,000 for
repairs cost. However, the branch had made no entry.
g. The home corrected the entry in (f) on January 3, 2025 and a credit memo was
inadvertently sent to the branch who subsequently made the corresponding entry
 on December 31, 2024 based on the credit memo.

The inter-office accounts were in balance as of January 1, 2024. The balance of the inter-office
account on the branch’s books as of December 31, 2024 was P1,050,000.

9. How much is the adjusted balance of the inter-office account as of December 31, 2024?
10. What is the unadjusted balance of the inter-office account on the books on the Home Office
as of December 31, 2024?

Problem 6. ABC BUILDERS INC. operates a branch in MALL OF ASIA. On July 31, 2024, the
Branch Current account had a balance of P1,825,500. In the process of reconciling the
reciprocal current accounts, the items that follow were noted:

a. The home office had billed the branch P4,250,000 for merchandise shipment which
were still in transit as of July 31.

b. A home office customer erroneously paid his account of P792,500 to the branch on July
31.

c. The branch has failed to recognize its P500,000 share in advertising expense paid by the
home office.

d. The branch reported a net income of P1,680,000 during the fiscal period then ended
but was recorded by the home office as P1,280,000.

11. Assuming that all other transactions related to the home office and its branch are correctly
recorded, how much is the adjusted balance of the reciprocal current accounts as of July 31,
2024?

Problem 7. Home office bills its branch for merchandise shipments at 25% above cost. The
following are some of the account balances appearing on the books of home office and its
branch as of December 31:

Home Office Books Books of the Branch

Inventory, Jan 1 P 780,000 P 150,000
Shipments to Branch 1,402,800
Purchases 1,900,000 220,000
Shipments from Home Office 1,300,000
Allowance for Overvaluation 275,000
Sales 1,750,000 1,300,000
Operating Expenses 440,000 180,000

Per physical count, the ending inventory of the branch is P650,000 including goods from outside
purchases of P155, 000; the ending inventory of the home office is P410, 000

COMPUTE:
12. How much is the amount of shipments in transit, if any, at cost?
13. How much of the branch beginning inventory came from outside purchases?
14. How much is the overstatement of branch cost of sales?
15. How much is the total ending inventory to be shown on the combined financial statements?
Problem 8. The account balances shown below were taken from the trial balances submitted to
ABC BAZAR by its BLUMENTRIT branch:

2023 2024

Petty cash P 10,000 P

10,000

Accounts receivable 400,000 350,000

Inventory - 112,000

Sales 750,000 900,000

Shipments from home (140% of cost) 560,000 700,000

Expenses 162,500 250,000

Accounts written off 6,000 7,500

All branch collections are remitted to the home office. All branch expenses are paid out of the
petty cash fund. When the petty cash fund is replenished, the branch debits appropriate
expense accounts and credits Home Office Current. The petty cash is counted every December
31, and its composition was as follows:

12/31/23 12/31/24

Currency and coins P2,350 P3,340

Expense vouchers 7,650 6,660

The branch inventory on December 31, 2024 was P84,000.

16. How much is the correct branch net income for 2024?

Problem 9. The Manila branch of the BERENSON Company is billed for merchandise by the home
office at 20% above cost. The branch in turn prices merchandise for sales purposes at 25% above
billed price. On February 16 all of the branch merchandise is destroyed by fire. No insurance
was maintained. Branch accounts show the following information:
 Merchandise inventory, January 1 (at billed price) P 3,205,000

Shipments from home office (Jan. 1 – Feb. 16)

2,500,000

Sales 5,725,000

Sales returns 150,000

Sales allowances 100,000

17. What was the cost of the merchandise destroyed by fire?

ADVANCED FINANCIAL ACCOUNTING REPORTING

#8
2024 Branch:

Sales 900,000 Expenses

COS:Beg. Inv. 112,000 HO

Shipment From HO 700,000 HO:

Ending Inventory (84,000) Inv. in Branch

COS atBP 728,000 cash

-
COS at cost 1.40 (520,000

Gross Profit 380,000

Expenses:Paid in Cash 250,000

AR Writz-OFF 7,500

Unreplenished 6,660

Vouchers (7,450) (256,510)

-490
-