ACCTG 108 ACCOUNTING FOR BUSINESS COMBINATION

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HOME OFFICE, BRANCH AND AGENCY ACCOUNTING ACCOUNTING FOR AGENCIES

In pursuit of increased sales, companies extend their 1. Establishment of Petty Cash Fund
businesses into more distant areas. Selling activities are being Working Fund - Agency A xx
conducted at various locations under one and the same home Cash xx
office. The establishment of an outlying selling unit may take
the form of an agency or a branch office. 2.Shipment of Merchandise to Agency
Samples Inventory xx
Shipments to Agency A xx

LEARNING OBJECTIVES 3.Purchase of Agency Equipment

Equipment - Agency A xx
1. Define Agency and Branch Office Cash xx
2. Determine accounting procedures for Agencies
3. Determine accounting procedures for Branches 4.Payment of Salaries to Employees
4. Prepare Individual Financial Statements Salaries Expense - Agency A xx
5. Prepare Combined Financial Statements Cash xx
6. Reconcile Home Office and Branch Accounts
7. Identify Billing Methods for Merchandise shipped to 5.Filling-up of Orders by the Home Office
Branches Accounts Receivable xx
8. Account for Inter Branch Transactions Sales - Agency A xx

6.Payment of Expenses out of PCF

*No entry*
AGENCY AND BRANCH OFFICE
7.Adjusting Journal Entries
An agency is an organization in which:
a.To record Cost of Goods Sold
1. No Merchandise Inventory. It is established to Cost of Goods Sold - Agency A xx
display merchandise called samples. It does not stock Shipments to Agency A xx
merchandise to fill orders. All orders are to be
approved by the home office. b.To record Depreciation
Depreciation Expense - Agency A xx
2. No Separate Accounting Entity. It has no separate Accumulated Depreciation xx
accounting entity. Thus, all transactions are recorded
in the books of the home office. c.To replenish the working fund (PCF)
Expenses - Agency A xx
Cash Shortage/Overage xx
3. No Complete Set of Books. Although provided with a Cash xx
working fund under the imprest system, it does not
d.To adjust the Net Realizable Value of the
require a complete set of books but only a summary
samples
of working fund receipts and disbursements, and Advertising Expense xx
records of sales. Samples Inventory - Agency A xx

A branch is an organization in which: 8. Closing Entries

1. Has a Merchandise Inventory. It sells goods out of its a. To close the revenue account
own stocks, thus making sales directly to customers. Sales - Agency A xx
Income Summary - Agency A xx

2. Has a Separate Accounting Entity. It has a separate b. To close the CGS account
accounting system similar to the systems of Income Summary Account - Agency A xx
independent business and can engage in transactions Cost of Goods Sold - Agency A xx
as an independent business.
c.To close expense accounts
Income Summary Account - Agency A xx
Various Expense Accounts - Agency A xx

d. To close Agency Income Summary

Income Summary - Agency A xx
Income Summary xx
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NOTE: Shipments to Agency account is deducted from the PROBLEM II

Merchandise Inventory of the Home Office. In March 01, 2021, Register to Vote (RTV) Company established
an agency in Villa de Bacolor, sending its merchandise samples
HO Beginning Inventory xx costing 930,000 and a working fund of 1,000,000 to be
Purchases xx
maintained on the imprest basis. The agency transmitted to the
Shipments to Agency (xx)
home office sales orders that cost 8,250,000. However, the
HO Ending Inventory (xx)
home office was able to fill up only 80% of the orders. Total
HO Cost of Goods Sold xx
cash of 4,050,000 was collected from the customers. A home
office disbursement chargeable to the sales agency includes
Determining the Net Income of Agency the acquisition of furniture and fixtures for Villa de Bacolor,
1,550,000 to be depreciated at 18% per annum. The agency
Filled-up Sales xx paid expenses of 420,000 and received replenishment thereof
Cost of Goods Sold (xx) from the home office. The agency samples are good for fifteen
Gross Profit xx months. It was estimated that the gross profit in goods shipped
Expenses (xx) to bill agency sales orders averages 25%. How much is the net
Samples USED (xx) income of the agency in 2021?
Net Income xx

NOTE: Samples are only expensed if used.

PROBLEM I
Baguio as a Friend (BAAF) Company established several
agencies located in different locations within the city. In
September 2021, samples amounting to 75,000 were sent by
the home office to Baguio Agency. The net realizable value of
the samples amounted to 70,000. The agency uses a small
office for which the annual rent amounting to 600,000 is
payable at the beginning of the year. Goods costing 500,000
were sold during the month with a gross profit based on sales
of 20%. How much is the net income for the month of
September?
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ACCOUNTING FOR BRANCHES PRO-FORMA JOURNAL ENTRIES

The branch account system is maintained at the branch. The Home Office Books Branch Books
branch keeps the books of original entry and posts to ledger
accounts. Financial statements are prepared by the branch 1.To record transfer of Merchandise to Branch
periodically and are submitted to the home office. Investment in Branch Shipments from Home Office
Shipments to Branch Home Office Current

2.To record transfer of Cash to Branch

RECIPROCAL ACCOUNTS Investment in Branch Cash
Cash Home Office Current
1. General Accounts REAL OR PERMANENT ACCOUNT
3.To record sales of Branch
a. Investment in Branch or Branch Current
No Entry Accounts Receivable
-This is an asset account that is maintained
Sales
by the Home Office. It is debited for cash,
goods, and services transferred to the 4.To record collection from Branch’s Sales
branch and to record branch income. It is Cash Home Office Current
credited for remittances from the branch Investment in Branch Accounts Receivable
and to record branch losses.
5.To record payment of Branch’s Expenses
b. Home Office Current Depreciable Asset – Branch No Entry
-This is an equity account that is Cash
maintained by branch offices. It is credited
for cash, goods, and services received from Depreciable branch assets are normally carried in the books of
the home office and for profits resulting the home office.
from branch operations. It is debited for
remittances made by the branch and for 6.To record purchase of depreciable asset by the home office for
the branch
losses from branch’s operations.
Depreciable Asset – Branch No Entry
Cash
❖ Assets = Liabilities + Home Office Current
(Balance Sheet Approach)
7.To record purchase of equipment by the branch office
Depreciable Asset – Branch Home Office Current
Investment in Branch Cash
2. Specific Accounts NOMINAL OR TEMPORARY ACCOUNT
-zero out at the end of accounting period. 8.To record closing entries
a. Shipments to Branch Investment in Branch Income Summary
-This account is recorded in the books of Income Summary Home Office Current
the home office with a credit normal
balance. It is a reduction from Cost of
Goods Available for Sale (COGAS).

b. Shipments from Home Office

-This account is recorded in the books of
the branch office with a debit normal
balance. It increases the Cost of Goods
Available for Sale (COGAS).
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PROBLEM III PREPARATION OF SEPARATE AND COMBINED FINANCIAL

STATEMENTS
Sinoback Company established its first branch in Pampanga on
January 01, 2021. The following transactions in the branch Separate Financial Statements may be prepared for the home
office during 2021 are as follows: office so that management will be able to appraise the results
of its operations and its financial position. However, it is
• Received cash of 100,000 from the home office. important to emphasize that separate financial statements of
• Purchased equipment with a five-year life for 20,000 branches are prepared for internal use only. Though separate
cash. A company policy states that all fixed assets are statements offer significant information to home office and
to be maintained in the books of the home office. branch officials, such statements must be complied fully stating
• Received merchandise shipments from home office a company’s financial position and the results of its operations.
amounting to 32,000. In combining branch data with home office data, the
• Purchased merchandise from outside suppliers for elimination of reciprocal accounts is necessary.
8,000.
• Sold merchandise for 60,000 on account.
• Half of the receivable was collected by the home
WORKING PAPER ELIMINATION ENTRIES
office.
• Returned 2,000 of the merchandise acquired from These are not posted in the books of both home office and
the home office. branch offices. They are done merely to combine separate
• Paid 12,000 salaries; 2,000 utilities; 6,000 rentals; financial statements by eliminating reciprocal accounts.
and 4,000 miscellaneous.
• The remaining receivable was collected and remitted 1.Elimination of General Accounts
Home Office Current xx
to the home office.
Branch Current xx
• Salaries still payable at year-end were 2,000 and
depreciation expense for equipment was 4,000. 2.Elimination of Specific Accounts
• Inventory at year-end consisted of 2,000 acquired Shipment to Branch xx
from outside suppliers and 10,000 acquired from Shipments from Home Office xx
home office.

Requirement: Journalize the above transactions. Determine

the balance of Home Office Current, Branch Current, and the
Net Income of the Branch.
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Problem IV
Individual Income Statement HO BR
Sales 95,000 60,000
Cost of Goods Sold 75,000 26,000
Inventory, Beg 40,000 0
Purchases 90,000 8,000
Shipments to Branch 30,000
Shipments from HO 30,000
Inventory, End 25,000 12,000
Operating Expenses 10,000 30,000
Net Income - HO 10,000
Branch Income 4,000 4,000
Net Income 14,000

Individual Balance Sheet HO BR

Cash 105,000 18,000
Inventory 25,000 12,000
Non-current Asset 150,000
Accumulated Depreciation 10,000
Branch Current 30,000
Accounts Payable 60,000
Capital Stock 150,000
Retained Earnings 90,000
Home Office Current 30,000

Requirement: Prepare the Combined Financial Statements

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RECONCILIATION OF RECIPROCAL ACCOUNTS Requirement:

Ordinarily, the balances of the reciprocal accounts should 1. How much is the unadjusted balance of Branch
always be equal. However, they may not show identical Current?
balances on some occasions because certain interoffice data
that have been recorded by one office is not recorded in 2. How much is the unadjusted balance of Home Office
another. The possible are the factors for such differences: Current?

3. How much is the Net Income of the branch?

1. Due to Timing Differences
4. How much is the adjusted balance of the general
• Home Office Initiated. Adjust Branch’s reciprocal accounts after closing entries were
Book made?

• Branch Office Initiated. Adjust Home

Office’s Book

2. Due to Errors

• Home Office Errors. Adjust Home Office’s

Book

• Branch Office Errors. Adjust Branch Office’s

Book

PROBLEM V

• Jay n Jay Company established a branch in Pampanga

on April 01, 2021. Transactions of home office and
branch for the year are as follows:
• Transferred goods costing 750,000 and 60,000 cash
to the branch to finance its operations.
• On April 02, 2021, the home office purchased in cash
a furniture for the use of the branch amounting to
85,000. Records of fixed assets are kept in the books
of the home office. The branch debited the Furniture
and Fixture and credited the Home Office Current
account upon receipt of the asset. The asset has a
useful life of 5 years.
• Branch purchased a machine with a useful life of 3
years for 120,000 on July 01, 2021. A debit to Office
Equipment and credit to Cash was made by the
branch. The home office, on the other hand, debited
Office Equipment and credited Branch Account.
• The branch recorded depreciation by charging
Depreciation Expense and crediting Accumulated
Depreciation. Meanwhile, the home office prepared
the correct entries for the depreciation.
• Sales of the branch office, all on account, amounted
to 800,000 with a gross profit based on sales of 25%.
• 80% of the sales were collected during the year. 60%
of the collection was remitted to the head office. The
home office has not recorded the cash remittance.
• Branch’s cash expenses amount to 135,000. Of
which, 50,000 was paid by the home office on behalf
of the branch.
• Closing entries were not yet prepared.
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BILLING METHODS FOR MERCHANDISE SHIPPED TO BRANCH ALLOWANCE FOR OVERVALUATION is a contra asset account,
i.e., a contra Investment in Branch (Branch Current) Account.
There are three alternative methods available to the home Note that in this scenario, the Shipments to Branch will not be
office for billing merchandiseVshipped to its branches. The of the same amount with the Shipments from Home Office.
shipments may be:

1. At home office cost (at original cost)

2. At billed price (at original cost-plus mark-up based on
cost) ALLOWANCE FOR OVERVALUATION
3. At branch’s retail selling price (mark-up based on
billed price) Beginning Balance

+ Shipments from Current Year

Billing at a Price in Excess of Cost, at Billed Price (Original Cost- = COGAS of the HO (Unadjusted Balance)
plus Mark-up based on Cost) - Realized Profit (CGS Adjustments)
• Billed at 120% of cost - Billed Price is 120% (MU is = Ending Balance
20%)

• Billed at 120% above cost - Billed Price is 220% (MU

is 120%)

Billed Cost Allowance

Billing at above cost overstates the Cost of Goods Sold and
Price
understates the Net Income of the branch. The pro-forma
entries to record transactions for the home office and branch Beg Bal. xx xx xx
are the same as when the merchandise is shipped at cost,
except: +Shipments xx xx xx

=COGAS xxx xxx xxx ← Unadjusted Balance

Home Office Books Branch Books - End Bal. (xx) (xx) (xx) ← Adjusted Balance

1. To record transfer of Merchandise to Branch

=CGS xxx xxx xxx ← Realized Profit
Investment in Branch (at BP) Shipments from Home Office
Shipments to Branch Home Office Current
Allowance for Overvaluation
2. To record closing entries
Investment in Branch Income Summary
Income Summary Home Office Current

Allowance for Overvaluation

Income Summary

3.Working Paper Elimination Entries

Home Office Current Home Office Current
Investment in Branch Accounts Receivable

Allowance for Overvaluation

Merchandise Inventory
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PROBLEM VI PROBLEM VII

Novax Company have the following account balances on its In the year 2021, Astra Company shipped goods to its branch
home office books and its branch in the year 2021: with a mark-up of 120% above cost. The reciprocal account in
the income statement of the home office amounted to
Home Offfice Branch Offfice 237,500. The balance of the contra branch current account
Inventory, Jan 1 2,000,000 ? reports a balance of 375,000 before adjustment. The beginning
Shipments 900,000 990,000 inventory of the branch from the home office at cost is 360,000
Inventory Allowance 130,000 and from outsiders 93,000. The branch purchases goods from
outsiders during the year amounting 125,200. The ending
Inventory, Dec 31 300,000 220,000
inventory of the branch is reported in the combined balance
Sales 2,000,000 1,800,000 sheet as 345,000, 20% of which is purchased from outside
Operating Expense 400,000 150,000 suppliers.

Requirement: Journalize the shipment of merchandise at

Requirement: Prepare the entries when the merchandise is
billed price. Determine the mark-up, beginning inventory of
shipped at billed price. Determine the COGAS and the CGS for
the branch, net income of the branch, and the combined net
the year ended 2021 reported in branch books.
income to be presented in the published statements.
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INTER BRANCH TRANSACTION PROBLEM X

These involve at least two branches transacting between one Physer Company has the following transactions with its
another. These are recorded as if branches are transacting with branches, namely Wanshat Branch and Tushat Branch.
the home office. Loss on Inter Branch Transfer of Inventory, Merchandise shipments to the branches are billed at 25%
which arises due to freight cost, are reported as other above its cost.
expenses. Freight costs are to be included in the branch
inventory. Generally, the home office’s entry is just simple: • Home office shipped merchandise to Wanshat
costing 250,000; and cash of 150,000 to Tushat.
• Upon instruction from home office, Tushat effected
a fund transfer of 100,000 to Wanshat.
Investment in Branch - Branch A xx
• Tushat collected Wanshat’s accounts receivable of
Investment in Branch - Branch B xx 110,000 less 2% discount.
• Tushat paid 200,000 representing the travel
expenses of its CFO. Of the amount paid, 50% was
charged to the home office and 20% to Wanshat.
FORMULA TO COMPUTE THE LOSS ON INTER BRANCH
• Wanshat paid accounts payable of the home office
TRANSFER OF INVENTORY
and that of Tushat’s amounting to 30,000 and
Initial Freight xx 20,000, respectively.
Additional Freight xx • Home office shipped merchandise to Tushat with a
Should-be Freight (xx) total billed price of 200,000. The home office paid
LOSS xx freight of 5,000, while the receiving branch paid an
additional 500.
• Home office subsequently instructed Tushat to
Journal Entry in the Home Office’s Books reship ½ of the goods to Wanshat. Additional 1,000
freight was paid by Tushat. Had the goods been
Branch Current - (Receiving Branch ) xx
shipped directly from the home office to Wanshat,
Loss/ Other Expense xx the freight would have been only 3,000.

Branch Current - (Transferring Branch) xx

Requirement: Journalize the above transactions. Determine

the balances of the following

1. Branch Current - Wanshat

PROBLEM IX 2. Branch Current - Tushat
3. Loss on Inter Branch Transfer of Inventory
The following pertains to Sino Home Office’s transactions with
its branches:

• On October 01, 2021, Sino Home Office transferred

30,000 cash to Vac Branch.
• The following day, Vac Branch was authorized by Sino
Home Office to send 10,000 of Cash to Pharm Branch.
• On November 01, 2021, the home office shipped
goods costing 350,000 to Vac Branch. Freight costs of
5,000 is paid by the home office.
• Sino instructed Vac to transfer ½ of the goods to
Pharm. Vac paid freight of 3,000. Shipping cost of
4,000 should have been incurred had the goods been
shipped directly to Pharm.

Requirement: Journalize the above transactions. How much is

reported as other expenses related to inter branch transfer of
goods?