CHAPTER # 9 & 10

ACCOUNTING FOR HOME OFFICE, BRANCH AND AGENCY

TITLE
TRANSACTIONS

B. DEVELOPMENTAL ACTIVITIES

INTRODUCTION
The branches of enterprises are not separate legal entities; they are separate economic and accounting entities
whose special features necessitate accounting procedure tailored for those features, such as the reciprocal accounts.
On the other hand, the sales agency is also not a separate business entity.
In this type of business set-up, one location referred to as the home office is usually the base of operations wherein
branches and agencies are maintained on business locations depending on the function and made of operation.

ACCOUNTING FOR AN AGENCY

An agency does not maintain its own separate accounting books, all of its transactions are recorded on the books of
the home office. The agency maintains a simple record (e.g. a logbook) to record its cash receipts and
disbursements, similarly to a petty cash system.
Pro-forma Journal Entries:
Agency Transactions Home Office books Dr. Cr.
Receipt of revolving fund from Cash –Agency X xx
home office Cash xx

Accounts receivable xx
Sales-Agency X xx
Orders sent by agency to
home office Cost of Sales-Agency X xx
Inventory xx

Cash xx
Accounts Receivable xx

Disbursement from the NO ENTRY

revolving fund

Replenishment of Revolving Various expenses xx

Fund Cash xx

Sales-Agency X xx
To determine the profit Cost of Sales xx
attributable to the agency, the Various Expenses-Agency xx
following closing entry shall be X
made: Income Summary- Agency xx
X
Note: Revolving fund held by the agency is accounted for similarly to a petty cash fund.

ACCOUNTING FOR BRANCH OPERATIONS

A branch is accounted for as a separate business unit, but subject to the control of the home office. The branch
maintains its own records and prepares its own financial statements. However, branch financial statements are
combined with the home office’s financial statements when preparing general purpose financial statements.
Transactions with outsiders are recorded in the usual manner.

Reciprocal Accounts (Interoffice or Intra-company accounts)

Transactions between the home office and the branch are recorded in intra-company accounts. These are
reciprocal accounts between the home office and the branch. The following are the reciprocal accounts in the home
office and branch books:

 Investment in Branch (Branch Current) – The home office maintains this account in its books to account
for its investments in the branch. (Normal balance: Debit)
o Increases when:
 The home office transfers an asset to branch.
 Branch Profit
o Decreases when:
  The home office receives an asset from the branch.
 Brach Loss
 Home Office Equity (Home Office Current) – The branch maintains this account in its books to account
for investment received from the home office. (Normal Balance: Credit)
o Increases when:
 The branch receives an asset from the home office.
 Branch Profit
o Decreases when:
 The branch transfer an asset to the home office
 Branch Loss

Pro-forma Journal Entries

HOME OFFICE BOOKS Dr. Cr. BRANCH BOOKS Dr. Cr.
Establishment of the Branch

Investment in xx Assets xx
Branch
Assets xx Home Office Equity xx

Recognition of Branch Income

Investment In xx Income xx
Branch Summary
Income Summary xx Home Office Equity xx

Recognition of Branch Loss

Income Summary xx Home xx
Office
Equity
Investment in Branch xx Income Summary xx

Merchandise Shipment to Branch @ COST

Investment to xx Shipment xx
Branch from Home
Office
Shipment to Branch xx Home Office Equity xx

Freight Charges on Merchandise Shipments

Investment in xx Freight-In xx
Branch
Cash xx Home Office Equity xx

Branch Plant Assets Purchased by the Home Office But Recorded in the books of Branch
Investment in xx Plant Asset xx
Branch
Cash xx Home Office Equity xx

Branch Purchases Plant Asset But Recorded by the Home Office

Plant Asset xx Home xx
Office
Equity
Investment in Branch xx Cash xx

Allocation of Expenses to Branch

Investment in xx Various xx
Branch Expenses
Various Expenses xx Home Office equity xx

ILLUSTRATION
VVL Company established a JK Branch on January 1, 2020. The following are the transactions of VVL and JK during
2020:
1. Home office establishes a branch for an initial investment of P1,000,000 in cash.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 1,000,000 Cash 1,000,000
 Cash 1,000,000 Home Office Equity 1,000,000

2. Branch acquires equipment for 400,000 to be carried in the branch books.

HOME OFFICE BOOKS BRANCH BOOKS
NO ENTRY Equipment 400,000
Cash 400,000

3. Branch acquires equipment for 200,000 to be carried in the home office books.
HOME OFFICE BOOKS BRANCH BOOKS
Equipment - Branch 200,000 Home Office Equity 200,000
Investment in 200,000 Cash 200,000
Branch

4. Subsequent Depreciation of equipment in No. 3 amounting 20,000.

HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 20,000 Depreciation Expense 20,000
Accumulated 20,000 Home Office 20,000
Depreciation- Equity
Branch

5. Home Office acquires furniture for 50,000 to be carried to the branch books.

HOME OFFICE BOOKS BRANCH BOOKS

Investment in Branch 50,000 Furniture 50,000
Cash 50,000 Home Office Equity 50,000

6. Subsequent depreciation of the furniture in No. 5 amounting 5,000.

HOME OFFICE BOOKS BRANCH BOOKS
Depreciation 5,000
NO ENTRY Expense
Accumulated Depreciation- 400,000
furniture

7. Home Office acquires furniture for 30,000 to be carried in the Home Office Books, but the possession and use of
the equipment is transferred to the branch.
HOME OFFICE BOOKS BRANCH BOOKS
Furniture-Branch 30,000
Cash 30,000 NO ENTRY

8. Subsequent Depreciation of the furniture in No. 7 amounting 3,000.

HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 3,000 Depreciation Expense 3,000
Accumulated 3,000 Home Office 3,000
Depreciation- Equity
Branch

9. Home Office Transfers inventory worth 150,000 to the branch. Freight paid by the Home Office is 10,000.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 150,000 Cash 150,000
Shipment to 150,000 Freight In 10,000
Branch
Cash 10,000 Home Office Equity 160,000

10. Home Office transfers inventory worth 80,000 to the branch. Freight paid by the branch is 6,000.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 80,000 Cash 80,000
Shipment to 80,000 Freight-in 6,000
Branch
Cash 6,000
Home Office Equity 80,000

11. Branch purchases inventory worth 40,000 on account from outside party. Freight paid by branch is 2,000.
HOME OFFICE BOOKS BRANCH BOOKS
Purchases 40,000
NO ENTRY Freight-in 2,000
Cash 2,000
Accounts Payable 60,000

12. Branch makes total sales of 500,000 on account.

 HOME OFFICE BOOKS BRANCH BOOKS
Accounts Receivable 500,000
NO ENTRY Sales 500,000

13. Branch collects 400,000 from accounts receivable.

HOME OFFICE BOOKS BRANCH BOOKS
Cash 400,000
NO ENTRY Accounts Receivable 400,000

14. Branch remits 300,000 cash collections to Home Office.

HOME OFFICE BOOKS BRANCH BOOKS
Cash 300,000 Home Office Equity 300,000
Investment in Branch 300,000 Cash 300,000

15. Branch incurs various operation expenses amounting to 100,000, ¼ of which remains unpaid.
HOME OFFICE BOOKS BRANCH BOOKS
Various 100,000
NO ENTRY Expenses
Accounts
Cash 75,000
Accrued Expenses 25,000

16. Home Office allocates 10,000 utilities expense and 4,000 general overhead costs to the branch.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 14,000 Utilities 10,000
Expense
Utilities 10,000 General 4,000
Expense Overhead
Expense
General 4,000 Home Office Equity 14,000
Overhead
Expense

17. To close the Branch’s nominal accounts to the Income Summary Account:
HOME OFFICE BOOKS BRANCH BOOKS
Sales 500,000
NO ENTRY Inventory 150,000
Shipment from Home 230,000
Office
Purchases 40,000
Freight-in 18,000
Depreciation Expense 68,000
Utilities Expense 10,000
General Overhead 4,000
Various Operating 100,000
Expenses
Income Summary 180,000

18. To close the branch’s profit to the reciprocal accounts:

HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch 180,000 Income Summary 180,000
Income 180,000 Home Office 180,000
Summary- Equity
Branch

COMBINED FINANCIAL STATEMENTS

Combined Financial Statements are prepared simply by:

 Adding together similar items of assets, liabilities, income and expenses; and
 Eliminating the reciprocal accounts.

Illustration:
The Trial Balance of VVL Co.’s Home Office and Branch are shown below:
 VVL Company
Trial Balance
December 31, 2020

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
Accumulated Depreciation-Equipment 72,000 40,000
Furniture 90,000 50,000
Accumulated Depreciation-Furniture 9,000 5,000
Accounts Payable 72,000 40,000
Accrued Expenses 45,000 25,000
Share Capital 2,000,000
Share Premium 500,000
Retained Earnings - beg. 206,200
Home Office Equity 827,000
Sales 900,000 500,000
Depreciation Expense 168,000 68,000
Utilities Expense 18,000 10,000
General Overhead Expense 7,200 4,000
Various Operating Expense 180,000 100,000
Totals 4,034,200 4,034,200 1,437,000 1,437,000

The home office and branch have ending inventories of 270,000 and 150,000, respectively.

Individual Financial Statements

Below is the individual financial position of the Home Office.

VVL Co.
Statement of Financial Position
As of December 31, 2020

ASSETS
Cash 1,100,000
Accounts Receivable 180,000
Inventory End. 270,000
Investment in Branch 827,000
Equipment 720,000
Accumulated Depreciation-Equipment - 72,000
Furniture 90,000
Accumulated Depreciation-Furniture - 9,000
Total Assets 3,106,000

LIABILITIES & EQUITY

Accounts Payable 72,000
Accrued Expenses 45,000
Share Capital 2,000,000
Share Premium 500,000
Retained Earnings (206.2K +282.8K) 489,000
Total Liabilities & Equity 3,106,000
Below is the individual financial position of the Branch.

VVL Co.
Income Statement
For the Year Ended December 31, 2020

Sales 900,000
Less: Cost of Sales:
Inventory, beg. 650,000
Purchases 72,000
Shipment to Branch - 230,000
Freight-in 22,000
Total Goods Avalable for Sale 514,000
Inventory End. - 270,000 244,000
Gross Profit 656,000
Less: Operating Expenses:
Depreciation Expense 168,000
Utilities Expense 18,000
General Overhead Expense 7,200
Various Operating Expense 180,000 373,200
Profit for the Period 282,800

Below is the individual income statement of the Home Office.

VVL Co.
Income Statement
For the Year Ended December 31, 2020

Sales 900,000
Less: Cost of Sales:
Inventory, beg. 650,000
Purchases 72,000
Shipment to Branch - 230,000
Freight-in 22,000
Total Goods Avalable for Sale 514,000
Inventory End. - 270,000 244,000
Gross Profit 656,000
Less: Operating Expenses:
Depreciation Expense 168,000
Utilities Expense 18,000
General Overhead Expense 7,200
Various Operating Expense 180,000 373,200
Profit for the Period 282,800

Below is the individual income statement of the branch.

Combined Statement of Financial Position and Income Statement:

The working paper for combined financial statements of VVL Co. is as follows:
 VVL Company
Working Paper for Combined Financial Statements
December 31, 2020

Home Office Branch Elimination Combined

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 1,100,000 417,000 1,517,000 -
Accounts Receivable 180,000 100,000 280,000 -
Inventory, beg. 650,000 650,000 -
Shipments from Home Office 230,000 230,000 230,000 -
Purchases 72,000 40,000 112,000 -
Freight-in 22,000 18,000 40,000 -
Shipments to Branch 230,000 230,000 - 230,000
Investment in Branch 827,000 827,000 827,000 -
Equipment 720,000 400,000 1,120,000 -
Accumulated Depreciation-Equipment 72,000 40,000 - 112,000
Furniture 90,000 50,000 140,000 -
Accumulated Depreciation-Furniture 9,000 5,000 - 14,000
Accounts Payable 72,000 40,000 - 112,000
Accrued Expenses 45,000 25,000 - 70,000
Share Capital 2,000,000 - 2,000,000
Share Premium 500,000 - 500,000
Retained Earnings - beg. 206,200 - 206,200
Home Office Equity 827,000 827,000 - 827,000
Sales 900,000 500,000 - 1,400,000
Depreciation Expense 168,000 68,000 236,000 -
Utilities Expense 18,000 10,000 28,000 -
General Overhead Expense 7,200 4,000 11,200 -
Various Operating Expense 180,000 100,000 280,000 -
Totals 4,034,200 4,034,200 1,437,000 1,437,000 1,057,000 1,057,000 5,471,200 5,471,200

The eliminating entries are as follows:

Home Office Equity 827,000
Investment in Branch 827000
To eliminate Reciprocal accounts in the balance sheet.

Shipment to Branch 827,000

Shipment from Home Office 827000
To eliminate Reciprocal accounts in the income statement.

Below is the combined Income Statement of VVL Co.:

VVL Co.
Combined Income Statement
For the Year Ended December 31, 2020

Sales 1,400,000
Less: Cost of Sales:
Inventory, beg. 650,000
Purchases 112,000
Freight-in 40,000
Total Goods Avalable for Sale 802,000
Inventory End. - 420,000 382,000
Gross Profit 1,018,000
Less: Operating Expenses:
Depreciation Expense 236,000
Utilities Expense 28,000
General Overhead Expense 11,200
Various Operating Expense 280,000 555,200
Profit for the Period 462,800

The following are the closing entries:

Sales 1,400,000
Inventory, End. 420,000
Inventory, Beg. 650,000
Purchases 112,000
Freight-in 40,000
Depreciation Expense 236,000
Utilities Expense 28,000
General Overhead Expense 11,200
Various Operating Expense 280,000
Income Summary 426,800
 Income Summary 426,800
Retained Earnings 426,800

The combined financial position is as follows:

VVL Co.
Combined Statement of Financial Position
As of December 31, 2020

ASSETS
Cash 1,517,000
Accounts Receivable 280,000
Inventory End. (270k + 150K) 420,000
Equipment 1,120,000
Accumulated Depreciation-Equipment - 112,000
Furniture 140,000
Accumulated Depreciation-Furniture - 14,000
Total Assets 3,351,000

LIABILITIES & EQUITY

Accounts Payable 112,000
Accrued Expenses 70,000
Share Capital 2,000,000
Share Premium 500,000
Retained Earnings (206.2k + 462.8K) 669,000
Total Liabilities & Equity 3,351,000

RECONCILIATION OF RECIPROCAL ACCOUNTS

The following data are to be considered in reconciling the reciprocal accounts:
 Debits in the Investment in Branch account without corresponding credits in the Home Office account.
 Credits in the Investment in Branch account without corresponding credits in the Home Office account.
 Debits in the Home Office account without corresponding credits in the Investment in Branch account.
 Credits in the Home Office account without corresponding credits in the Investment in Branch account.
 Bookkeeping and mechanical errors in either set of books.

Illustration: VLC Co. is currently preparing its combined financial statements. At December 31, 2020, the home
office shows a P36,450 balance in its Investment in Branch account while the branch shows a P29,540 balance in its
Home Office Equity account.

Additional information:

1. On December 30, the home office shipped merchandise to the branch in the amount of P20,000. The
shipment has not yet reached the branch as of December 31 and, therefore, no entry for the shipments was
made on the branch’s books. To reconcile, the following entry should be made in the books of the branch:
Shipment from Home Office 20,000
Home Office Equity 20,000

2. On December 28, an accounts receivable worth P5,000 of the branch was collected by the home office from
a branch customer. The collection was recorded by the home office. However, no entry has been made in
the books of the branch. To reconcile, the following entry should be made in the books of the branch:
Home Office Equity 5,000
Accounts Receivable 5,000

3. On December 29, the branch purchased office equipment for P8,000. Since assets used by the branch are
carried in the books of the home office records, the entry made by the branch for the purchase was debit to
Home Office Equity and a credit to Cash. No entry has been made by the home office, therefore, the
following entry should be made in the home office books:
Office Equipment - Branch 8,000
Investment in Branch 8,000
 4. On December 28, the branch collected for the home office an accounts receivable amounting to P6,000
from home office customer. The collection was correctly recorded by the branch. However, no entry has
been made by the home office, therefore, the following entry should be made in the home office books:
Investment in Branch 6,000
Accounts Receivable 6,000

5. A debit of P1,450 in the Investment in Branch account was erroneously recorded by the branch in the Home
Office account as P1,540, resulting to a difference of P90. Assume that the entry made by the home office
was correct. To reconcile, the following adjusting entry is to be made in the books of the branch:
Home Office Equity 90
Expenses 90

The statement of reconciliation of reciprocal accounts is as follows:

Investment in Home Office

Branch (Dr.) Equity (Cr.)
Balances Before Adjustments P 36,450 P 19,540
Additions:
(1) Merchandise in Transit 20,000
(4) Receivable of Home Office collected by Branch 6,000
Total 42,450 39,540
Deductions:
(2) Receivable of the Branch collected by Home (5,000)
Office
(3) Office equipment purchase by branch (8,000)
(5) Error made by the Branch (90)
ADJUSTED BALANCES P 34,460 P 34,460

SPECIAL PROBLEMS IN ACCOUNTING FOR BRANCH OPERATIONS

The following are the transactions between home office and branch which create special accounting problems:
 Merchandise shipments to branch billed at above cost
 Inter-branch transactions

A. Merchandise shipments to branch billed at above cost

The home office may prefer to bill merchandise at above costs, or cost plus arbitrary percentage, also known as
“billed price.” Under this method, branch manager is not given complete information concerning the actual costs of
merchandise shipped. Thus, upon receipt of the shipments, the branch records the charges that are listed on the
invoice accompanying the goods, which is at billed price.
When the goods shipped was billed at above cost, the branch profit will be understated by the amount exceeded the
actual costs of the goods. In the Home Office, the unrealized mark-up is credited in an allowance account
“Allowance for Overvaluation of Branch Inventory.”

Illustration:
1. Home Office transfers inventory worth P100,000 to the branch. Shipments to the branch are billed at 120%
of cost.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch (100K x 120%) 120,000 Shipments from 120,000
Home Office
Shipment to 100,000 Home Office Equity 120,000
Branch
Allowance for 20,000
Overvaluation

2. Home office transfers inventory worth P200,000 to the branch. Shipments to the branch are billed at 120%
of cost. The freight paid by the home office is P10,000.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch [(200K x 120%)+ 250,000 Shipments from 240,000
10K] Home Office
Shipment to 200,000 Freight-In 10,000
Branch
Allowance for 40,000 Home Office Equity 250,000
Overvaluation
Cash 10,000
 3. Home office transfers inventory worth of P80,000 to the branch. Shipments to the branch are billed at 120%
of cost. Freight of P6,000 was paid by the branch.
HOME OFFICE BOOKS BRANCH BOOKS
Investment in Branch (80K x 120%) 96,000 Shipments from 96,000
Home Office
Shipment to 80,000 Freight-In 6,000
Branch
Allowance for 16,000 Home Office Equity 96,000
Overvaluation
Cash 6,000

Individual profit of the branch

Assume that aside from the shipments from the home office, the branch purchases P40,000 worth of inventory from
outside party and the branch paid the freight of P2,000. Other information as follows: Sales, 500,000; Operating
expense, 100,000; and Ending Inventory, 250,000. The individual profit of the branch is computed as follows:
Sales 500,000
Less: Cost of Sales:
Inventory, beg. -
Shipments from Home Office 456,000
Freight-in 18,000
Purchases 40,000
Total Goods Available for Sale 514,000
Less: Inventory, end. 250,000 264,000
Gross Profit 236,000
Less: Operating Expenses 100,000
Individual Profit of Branch 136,000

True Profit of the Branch

Assume that the P250,000 ending inventory consists of P240,000 from shipments from the home office and P10,000
from outside suppliers. The true profit of the branch is computed as follows:

Sales 500,000
Less: Cost of Sales:
Inventory, beg. -
Shipments from Home Office @ COST (456K / 120%) 380,000
Freight-in 18,000
Purchases 40,000
Total Goods Available for Sale @ COST 438,000
Less: Inventory, end. @ COST [(240K/120%) +10K] 210,000 228,000
Gross Profit 272,000
Less: Operating Expenses 100,000
TRUE Profit of Branch 172,000
Alternatively, the true profit of branch may be computed as follows:
Individual Profit of Branch 136,000
Realized Profit 36,000
TRUE Profit of Branch 172,000

To compute for realized profit:

Allowance for Overvaluation, beg. 76,000

Less: Unrealized Mark-up on Ending Inventory (240k/120%x20%) 40,000
Realized Profit 36,000

B. Inter-branch Transactions

The inter-branch transactions include the following:

1. Inter-branch transfer of cash
2. Inter-branch transfer of merchandise

The transactions between the branches are treated as if the transfer went through the Home Office. The transacting
branches account for the transaction as if they are dealing with the Home Office rather than with each other.

Inter-branch transfer of cash:

Illustration: Assume that as instructed by the Home Office, Branch A sends cash of P10,000 to Branch B. The
entries to record this transfer on the Home Office books and the Branches books are:
HOME OFFICE BOOKS BRANCH A BOOKS BRANCH B BOOKS
Investment in 10,000 Home 10,000 Cash 10,000
Branch B Office
Investment in 10,000 Cash 10,000 Home 10,000
Branch A Office

Inter-branch Transfer of Merchandise:

Inter-branch transfers of merchandise are accounted for similarly with inter-branch transfer of cash. In the case of
inter-branch transfer of merchandise, the handling of freight poses a special problem.
A branch is properly charged for the freight on the shipments it receives. However, the transfer of merchandise from
one branch to another does not justify increasing the value of the inventory by the additional freight cost. The branch
should be charged only for the normal freight. The excess freight costs is absorbed by the Home Office and treated
as an operating expense.

Illustration: The Home Office transfers inventory worth P150,000 to Branch 1. Freight paid by the Home Office is
P10,000. Later on, the Home Office instructs Branch 1 to transfer the merchandise to Branch 2. Branch 1 pays freight
of P3,000. If the merchandise had been shipped directly from Home Office to Branch 2, the freight cost would have
been P11,000.
Journal Entries:
Home Office Books Branch 1 Books
Investment in Branch 1 160,000 Shipment from Home 150,000
Office
Cash 160,000 Freight in 10,000
Home Office 160,000
To record shipment to Branch 1.

Branch 1 Books Branch 2 Books

Home Office 163,000 Shipment from Home 150,000
Office
Shipment from Home 150,000 Freight in 11,000
Office
Freight in 10,000 Home Office 161,000
Cash 3,000
To record shipment to Branch 1.

Home Office Books

Shipment to Branch 2 150,000
Shipment to Branch 2 150,000
To record transfer of merchandise from Branch 1 to Branch 2.

Investment in Branch 2 161,000

Loss on Excessive Freight 2,000
Investment in Branch 1 163,000
To record the excess freight.

To compute for excess of freight cost:

Freight from Home Office to Branch 1 10,000
Freight from Branch 1 to Branch 2 3,000
Total freight on indirect routing 13,000
Less: Normal freight from Home Office to Branch 2 11,000
Excess Freight 2,000

C. CLOSURE ACTIVITIES

The following work exercises intend to evaluate what the learners have learned in this topic. Write your answers in
your portfolio journal.

I. MULTIPLE CHOICE THEORIES

A. General Procedures

1. If at the end of accounting period the balance of the investment in Branch ledger account in the accounting records
of the home office is P20,000 and the balance in the home office account in the accounting records of the branch
(after the branch recorded closing entries) is P25,500, the most likely explanation for the discrepancy of P5,500 is a
 a. remittance of cash to the branch not recorded by the home office
b. net income of branch not recorded by the home office
c. net loss of branch not recorded by the home office
d. collection by the home office of a branch note receivable not recorded by the branch

2. the home office account in the accounting records of a branch is best described as:
a. a revenue account
b. an equity account
c. deferred revenue account
d. none of the foregoing

3. In preparing combined financial statements, which of the following accounts are eliminated (brought to a zero
balance) in the combining process? (1) Branch income (loss) and (2) Home office capital
a. Yes; Yes
b. No; Yes
c. No; No
d. Yes; No

4. A debit to Income Summary ledger account and a credit to the Home Office account appear in:
a. the accounting records of the home office to record the net income of the home office
b. the accounting records of the home office to record the net income of the branch
c. the accounting records of the branch to record the net income of the branch
d. some other manner

5.A control feature in a decentralized accounting system is

a. the balance in the Investment in Branch account must equal the balance in the Home Office Capital account
b. the balance in the Investment in Branch account must equal the balance in the Home Office Capital account
less the branch the branch’s cumulative unremitted profits
c. the intra-company accounts are eliminated in preparing combined financial statements
d. the balance in the Investment in Branch account must equal the balance in the Branch income account

B. Special Procedures

1. The Allowance for Overvaluation of Inventories: Branch ledger account of the home office is debited
a. when the home office ships merchandise to the branch at a billed price that exceeds cost
b. in a journal entry to close the account at the end of an accounting period
c. when the branch’s ending inventory is recorded in the home office accounting records
d. in some other circumstances

2. A branch office is allowed to make sales, carry inventory for resale to customers, and incur normal operating
expense. The home office ships merchandise to the branch office at a cost plus a 20% markup. The home office
uses a loading account. If the loading account is used in its customary fashion, it will track:
a. unrealized inventory profit only
b. unrealized inventory profits and overall branch profits but not branch losses
c. unrealized inventory profits and overall branch profits and losses
d. Overall branch profit

3. The General Ledger entry to adjust the intercompany profit deferred account at the end of an accounting period.
a. is reversed in the following accounting period
b. is reversed in the combining process
c. results in an entry in the combining process that is essentially a reclassification entry
d. none of the above

4. In the year end general ledger closing procedures, which accounts are closed in arriving at Cost of Sales? (1)
Purchase Sent to Branch; (2) Purchase from Home Office
a. Yes; Yes
b. No; Yes
c. No; No
d. Yes; No
5. In preparing combined financial statements, which of the following accounts are eliminated in the combining
process? (1) Branch Income or Loss; (2) Purchases Sent to Branch
a. Yes; Yes
b. No; Yes
c. No; No
d. Yes; No
II. TRUE OR FALSE

A. General Procedures

1. Branch Fixed Assets can be carried on the home office’s books under a decentralized accounting system.
2. If branch fixed assets assets are recorded on the home office’s books, the depreciation expense would not
be charged to branch operations
3. Separate financial statements of home office and branch do not meet the needs of investors, creditors, or
other outside users of financial statements.
4. In a working paper for combined financial statements of home office and branch, the balance of Shipment to
Branch ledger account is eliminated against the balance of the investment in branch account.
5. The incremental profitability of a branch office may be hidden if the home office allocates too many fixed
costs to the branch office.
6. A major disadvantage of a centralized accounting system is that the profitability of branch operations cannot
be determined because branch operations are not accounted for in a separate general ledger.
7. Home office allocations to a branch are not required under current standards.
8. Income taxes can be allocated to a branch.
9. When inventory is received from the home office, a branch increases its home office accounts.
10. Reciprocal Home office and branch accounts are eliminated when home office and branch financial
statements are combined for external reporting.

B. Special Procedures

1. Closing entry prepared by a branch will adjust the loading account and record branch profit or loss in the
home office account.
2. Unrealized profits from transactions between a home office and its branch are eliminated in preparing
combined financial statements for the enterprise.
3. It is equally probable that a “loading” account could be charged with an unrealized inventory loss as it could
be charged with an unrealized inventory profit.
4. As a general rule, the “loading” account will be credited for the unrealized profit element of merchandise
shipped to the branches and debited for the amount of any realized inventory profit.
5. A mark-up of 16 2/3% on billed price is equal to a markup of 14 2/7% on cost of merchandise shipped to the
branch by the home office.
6. If the home office bills merchandise shipments to the branch at prices above home office costs, the net
income reported to the home office by the branch is overstated from a total company point of view.

Problem 1: The following transactions were entered in the branch current account of Makati Head Office for the year
2020
DEBIT CREDIT
Beg. Balance 459,258
Shipment to branch, 4/1/20 212,400
Cash forwarded, 6/1/20 15,000
Collection of AR, 9/1/20 33,300
Operating expenses charged to the
Branch12/31/20 2,880

 Shipment to the branch during the year were made at 20% above cost

 The balance of the allowance for overvaluation of branch inventory account was P21,300 at the beginning,
and the allowance was written down to P14,700 at year-end.

 On 12-10-20, the home office purchased a piece of equipment amounting to P36,000 for its branch in
Ortigas. The said equipment has a useful lifr of the five years and will be carried in the books of the branch,
but the home office recorded the purchased by debiting Equipment

 The branch recorded the depreciation of the equipment by debiting the Home Office current account and
crediting Accumulated Depreciation.

 Debit memo regarding the allocation of operating expenses to the Ortigas branch was received by the
branch on January 2, 2021.

 The Ortigas branch reported net income of P197,730

  It also remitted cash to the home office on 12-31-20 amounting to P33,000, which the home office received
and recorded on January 1, 2021

 The interoffice accounts were in agreement at the beginning of the year.

Compute for the following

a) How much is the unadjusted balance of the branch current account on 12-31-20 before necessary
closing entries were made?
b) What is the amount of adjustment in the allowance for overvaluation of Branch inventory account?
c) How much is the net income of Ortigas branch that will be reported in the combined income statement
of The Makati Company.
d) What is the amount of the Home Office Current account that will be reported in the books of Ortigas
Branch after closing entries are made?

Problem 2: FTC Co has a branch in Baguio and Davao. The reciprocal accounts between the home office and the
branches were in agreement at the beginning of 2020. However at 12-31-20, the following reciprocal balances are
found in the home office books:
Investment in Baguio P186,500
Investment in Davao 84,000
Data for reconciliation of the reciprocal accounts are as follows:
 On Dec. 29, 2020, the home office has instructed Baguio to transfer P74,000 cash to Davao. Baguio
recorded this transaction immediately. Upon receipt, Davao has recorded this transfer at P47,000. The
home office however has not yet recorded this interbranch transaction as of the end of the year.

 FTC has transferred goods costing P28,900 to Baguio branch and paid P2,500 of shipping cost on 12-16-
20. Baguio shipped all of these goods to Davao upon instruction of the home office on 12-30-20. Shipping
cost is P3,600 freight collect. Had the goods were shipped directly to the Davao, P5,000 of freight cost
should have been incurred. The inter branch shipment was not recorded by the branches and the home
office as well.

 Baguio has collected cash of P5,750 from Davao’s customer. This transaction is not yet recorded by Davao
and the home office.

 The home Office has already allocated P11,000 and P9,000 of administrative expenses to Baguio and
Davao respectively. The branches are not yet notified.

 Baguio remitted P14,300 cash to the home office on 12-12-20. The home office has failed to record the said
remittance.

 Davao returned goods costing P6,850 to the home office. The goods were shipped on 12-19 and received
on 12-24 but no entries have been made in the home office books.

Compute for the following:

a) Excess freight on inter-branch transfer of inventories
b) Adjusted balance of Investment In Baguio account
c) Adjusted balance of Investment in Davao account
d) Unadjusted balance of Home Office Current account in Baguio’s book
Unadjusted balance of home Office Current account in Davao’s books

Problem 3: The following information are extracted from the books of JJJ Company and its branch. The balances are
at 12-31-20 of the company’s operations
Home Office Branch
Sales P300,000
Shipment to branch P96,000
Shipment from home Office 120,000
Purchases 42,000
Expenses 76,000
Inventory, 01-01-20 28,000
Allowance for overvaluation of Branch inventory 27,920

The branch is billed by the home office at 25% mark-up on cost. The ending inventory includes merchandise shipped
and acquired from the home office in the amount of P29,000 and P9,200 acquired from outsiders for a total of
P38,200.

How much is the branch net income as far as the home office is concerned?

Problem 4: On December 31, 2020 the home office current account on the books of BBB Branch has a balance of
P2,275,000. In analyzing the activity in each of these accounts for December, you find the following differences.

 A P84,000 branch remittance to the home office initiated on December 21, 2020 was recorded twice by the
home office on December 26 and 28.
 The home office incurred P126,000 of advertising expenses and allocated 1/3 of this amount to the branch
on December 20. The branch recorded this transaction on December 22 amounting to P63,000
 Inventory costing P853,300 was sent to branch by the home office on December 15. The billing was at cost,
but the branch recorded the transaction at P903,700
 The home office erroneously recorded the branch net income at P243,075. The branch reported net income
of P261,975

The unadjusted balance of the Home office as of December 31, 2020?

Problem 5: KKL Company Inc. opened an agency in Tarlac in 2020 The following is a summary of the transactions
of the agency:
Sales order sent to home office P660,000
Sales orders filled by home office in 2020 558,000
Freight on shipment to agency 13,200
Collections, net of 2% discount 476,280
Selling expenses paid from the agency working fund 33,840
Administrative expenses charged to agency 5% of gross sales
Samples shipped to agency:
Cost P36,000
Inventory, 12-31-20 13,200

The company maintains its gross margin on agency gross sales at 30% excluding the freight cost on shipments to
agency.
a) How much is the cost of sales of the agency?
b) How much is the net income?

Problem 6: The following information are extracted from the books and records of RR Company and its branch. The
balances are at 12-31-13 of the company’s operations:

Home Office Branch

Sales P260,000
Shipment to Branch P78,000
Shipment from home Office 104,000
Purchases 39,000
Expenses 78,000
Inventory, January 1 2013 26,000
Allowance for overvaluation 31,200

However no shipments in transit between the home office and the branch were made. Both shipments accounts are
properly recorded. The ending inventory includes merchandise acquired from the home office in the amount of
P26,000 and P7,800 acquired from outsiders for a total of P33,800.
Compute for:
a) realized inventory profit of home office from sales made by the branch
b) the amount of branch merchandise beginning inventory that was acquired from home office

Problem 7: Heart Corporation operates a number of branches in the provinces. On 12-31-2020, its Davao branch
showed a Home office account balance of P54,700 and the Home Office showed an Investment in Davao branch
account balance of P51,100. The following information may help in reconciling both accounts.
 A P24,000 shipment charged by Home Office to Davao branch, was actually sent to and retained by cebu
branch.
  A P30,000 shipment, intended and charged to Aklan Branch was shipped to Davao branch and retained by
the latter.

 A P4,000 emergency cash transfer from Cebu branch was not taken un in the home office books.

 Home office collects a Davao branch account receivable of P7,200 and fail to notify the branch.

 Home office was charged . the merchandise for P2,400 for merchandise returned by Davao branch on 12-
30 the merchandise is in transit.

 Home office erroneously recorded Davao branch net income for 2020 at P32,550 . the branch income was
P25,350.

What is the adjusted balances of the Home office and Davao branch reciprocal accounts on 12-31-20?

IV. SYNTHESIS/ GENERALIZATION

CHAPTER SUMMARY:
 A sales agency is not a self-contained business but rather acts only on behalf of the home office. On the
other hand, a branch is a self-contained business which acts independently, but within the bounds of
company policy and subject to the control of the home office.
 Transactions between the home office and its branch are accounted for in reciprocal accounts, namely
“Investment in Branch” account and “ Home Office Equity” account.
 Transactions between the branch and an external party are recorded in the regular manner.
 Reciprocal accounts may need to be reconciled prior to the preparation of eliminating 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 other branches.
Transactions between branch and another branch are accounted for as if each of the transacting branches
is transacting with the home office.
 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 realized mark-up.
 The combined profit is equal to the individual profit of home office plus the true profit of the branch.
 Excess freight on inter-branch transfer of merchandise is charged as expense in home office books.
V. EVALUATION

The student’s performance will be evaluated as follows:

20% Attendance, Poll Questioning and Oral Exercises
20% Portfolio Journal for work exercises
20% Formative Examination (One online/Offline written quiz covering this specific topic)
40% Summative Examination (This topic is one of the topics included in the Online/Offline Written Examination)

VI. ASSIGNMENT/ AGREEMENT

Millan, Accounting for Special Transactions 2018e

Dayag, Advanced Financial Accounting and
Reporting 2019e
VII. REFERENCES
Dayag, Advanced Financial Accounting and
Reporting Reviewer
Guerrero, Advanced Accounting 2017e

END OF CHAPTER 9 &10