Since 1977

AFAR DE LEON/DE LEON/DE LEON

3004 – Home Office, Branches & Agency BATCH M A Y 2 0 2 1

LECTURE NOTES

Agencies and branches are established to decentralize flows are also not acceptable for general purposes.
operations or to expand into new markets. Agencies are These two different sets of financial statements are
simple extensions of the home office; branches, internal to each of the reporting entities, combined
generally, are with regulated autonomy to operate as financial statements must be prepared for the combined
an independent entity. entities (taken as one and the same) to meet the
requirements of general-purpose statements.
Because agencies do not maintain its own set of
accounting records, all its transactions are recorded in A branch and its home office represent two accounting
the books of the home office. If the home office would systems but just one accounting and reporting entity.
like to determine viabilities of the agencies, real and All entries in the accounting records of the branch are
nominal accounts for the agency are identified in the also entered, at least in summary form, in the
home office books to facilitate such determination. accounting records of the home office. The records of
Otherwise, the agency items are merged without the home office and the branch are linked by two
identification with those of the home office. reciprocal accounts; the Home Office Equity account in
the books of the Branch and the Investment in Branch
The branch has its own complete set of accounting account in the books of the Home Office. Because they
records, therefore all its transactions, including those are reciprocal, it means that the two accounts always
with the home office, are recorded in its books. It also have the same balance although the Investment in
presents its own set of financial statements: the income Branch is a debit account (as an asset in the books of
statement, the balance sheet, and the statement of the Home Office) and the Home Office is a credit
cash flows. But because the branch is but a part of the account (as an equity item in the books of the branch).
home office, therefore, these set of financial statements The two accounts frequently show different balances on
are not acceptable for general purposes. And since the a temporary basis due to errors and items in transit. A
home office is just also a part of the whole organization, very important aspect of the study of home office and
its own set of financial statements: the income branches is the reconciliation of the reciprocal balances.
statement, the balance sheet and the statement of cash

An illustration of journal entries recorded for interoffice transactions follow:

Transactions Home Office Books Branch Books

Transfer of cash from the home office Investment in branch x Cash x
Cash x Home office equity x
Transfer of cash from the branch Cash x Home Office Equity x
Investment in branch x Cash x
Transfer of mdse from HO at cost Investment in branch x Shipment from HO x
Shipment to branch x HO Equity x
Transfer of mdse from HO at above Investment in Branch x Shipment from HO x
cost Allowance for OV x HO Equity x
Shipment to branch x
Payment by HO of branch expenses Investment in branch x Expenses x
Cash x HO Equity x
Allocation of prev. paid branch exp Investment in branch x Expenses x
Expenses x HO Equity x
Transfer of Fixed asset from home Memo entry Memo entry
office to Branch
(Note: There will be no entry if all fixed assets are accounted in the books of
the home office); otherwise:
Investment in branch x Fixed Assets x
Accumulated depn x Acc Depn x
Fixed Assets x HO Equity x
To take-up branch Profit/(loss) Investment in branch x Income Summary x
Branch Income x HO Equity x
Branch loss x HO Equity x
Investment in branch x Income Summary x
To adjust the reported branch NI /NL) Allowance for Ovrvltn x No Entry
for realized allowance Branch Income x

Note: The adjusting entry to reflect the true net income or loss of the branch
from the standpoint of the home office is always favorable and only relevant
when billing policy is above cost:

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EXCEL PROFESSIONAL SERVICES, INC.

Detailed computation of realized allowance for 2. Adjust some items in the cost of sales section of the
overvaluation thru sales by the branch to outsiders during branch income statement to their true costs (as a
the period: consequence of the billing policy not equal to cost).
Billed Cost Price Mark-up on
Price Cost The working paper adjustment/elimination entries are as
Branch Beg Invty xx xx xx follows:
(from HO)) a. Billed at Cost b. Billed above cost
Current shipments xx xx xx HO Equity x HO Equity x
(from HO Investment in Branch x Investment in Branch x
Branch End Invty (xx) (xx) (xx) Accounts Payable x Accounts Payable x
(from HO) Accounts Receivable x Accounts Receivable x
Cost of Goods Sold xx xx xx Shipment to Branch x Shipment to Branch x
Shipment from Allowance for Ovrvltn x
Cost = Billed Price/100% + % mark-up on cost = Mark-up Home Office x Shipment from HO x
on cost/% mark-up on cost. The amount of allowance None Allownce for Ovrvltn x
considered realized will be the allowance carried by the Branch Beg Invty x
cost of goods sold. None Br Ending Invty (I/S) x
Branch End Invty (B/S) x
There are two pricing methods generally used by the home
office in billing the branch for merchandise transfers: When a company is composed of a home office and more
1. Billed at cost – the merchandise is transferred at cost, than one branch, the home office records include a
thus when the branch sells the merchandise, the entire separate investment in branch account and a separate
gross margin is included in the branch net income. allowance for overvaluation account for each branch.
2. Billed at cost plus markup – the merchandise is Separate worksheet adjustments are made for each
transferred at an amount between cost and the selling branch.
price. This intermediate pricing method allocates part
of the gross margin to the branch and the remainder When assets are transferred from one branch to another
to the home office. branch, the home office account on each branch’s records
are used to record the transfers. (Inter-branch receivables
Working paper adjustments and eliminations must be and payables are not created.) In essence, the transferring
determined in order to: branch reverses the entry to record the transfer from the
1. Eliminate inter-company balances from the combined home office and the receiving branch enters a transfer as if
statements to avoid redundancy, and it comes from the home office.

- done -

STRAIGHT PROBLEMS

Problem 1 (Branch was billed at cost) from the home office (there was no beginning
ROUNDHEAD CORPORATION, which prepares financial inventory).
reports at the end of the calendar year, established a
Requirements:
branch on March 1, 2020 in Malolos City. The following
1. Prepare journal entries in the books of the home office
transactions occurred during the formation of the branch
and in the books of the branch office for the above
and its operations through December 31, 2020.
transactions.
1. The Home Office sent P28,672 cash to the branch to
2. Prepare closing entries in the books of the branch
begin operations.
office to close its income statement accounts.
2. The Home Office shipped inventory to the branch.
3. Prepare adjusting entry in the books of the home
Billings totaled P61,440, which was the Home Office's
office to reflect the increase or decrease in the
cost. (Both the Home Office and the Branch use a
branch's net assets resulting from the branch
periodic inventory system.)
operations.
3. On July 1, 2020,the home office paid cash of P12,288
for merchandise display equipment to be used by the Problem 2 (Branch was billed at more than cost)
branch. (As a matter of company policy, branch fixed The following transactions pertain to an ALBANY COMPANY
assets are carried on the home office books). branch's second month's operations in June, 2020:
4. The branch purchased inventory costing P44,032 from 1. The HOME OFFICE sent P14,400 cash to the BRANCH.
outside vendors on account. 2. The HOME OFFICE shipped inventory costing P64,000
5. The branch had credit sales of P87,040 and cash sales to the BRANCH at a billed price of P80,000. (This
of P35,840. billing policy was also used in May of 2020.)
6. The branch collected P45,056 of its accounts 3. BRANCH inventory purchased from outside vendors
receivable. totalled P48,000.
7. The branch paid outside vendors P28,672.. 4. BRANCH sales on account were P169,600.
8. The branch incurred selling expenses of P15,360 and 5. The HOME OFFICE allocated P3,200 in advertising
general and administrative expenses of P12,288. expense to the BRANCH.
These expenses were paid in cash when they were 6. BRANCH collections on accounts receivable were
incurred and include the expense of leasing the P72,000.
branch's facilities. 7. BRANCH operating expenses of P28,000 were
9. The home office charged the branch P2,048 for its incurred, none of which were paid at month-end.
share of insurance. 8. The BRANCH remitted P22,400 to the HOME OFFICE.
10. Depreciation expense on the display equipment 9. The BRANCH's inventory balances follows:
acquired by the home office for the branch, thru 6/01/20 6/30/20
December 31, 2020, is P1,024. Acquired from other vendors P17,600 P19,200
11. The branch remitted P10,240 cash to the home office. Acquired from HOME OFFICE 24,000 32,000
12. The branch's physical inventory on December 31, Totals P41,600 P51,200
2020 is P 33,792, of which P 25,600 was acquired

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Requirements: 3. The branch remitted P25,600 cash to the home office
on December 31, 2020; the home office received and
1. Prepare journal entries in the books of the home recorded this remittance on January 4, 2021.
office and the branch office for these transactions,
assuming a periodic inventory system is used
Requirements:
2. Prepare the month-end closing entries for the branch
1. Prepare the year-end adjusting entries to bring the
3. Prepare the month-end adjusting entries for the home
intracompany accounts into agreement.
office relating to the branch's operations for the
2. Complete the following analysis of the BRANCH’s
month: (a) to take-up the reported branch net income
inventory
(RBNI) and (b) to adjust the RBNI to the true branch
net income (TBNI)
Transfers Transfers
Above cost __at cost__ Mark-up
Problem 3 Beginning
inventory:
The pre-closing trial balances of HATCH CORPORATION Acquired
and its TAYTAY BRANCH for the year ended December 31, from
2020, prior to adjusting and closing entries are as follows: vendors P P P
Acquired
Home Office Branch Office from home
Accounts Debit Credit Debit Credit office
Cash P 35,840 P P10,240 Add:
Accounts Purchases
receivable, (from vendors)
net 81,920 51,200 Shipments
Inventory, from office
January 1,
2019:
Acquired Total goods
from available for
vendors 235,520 51,200 sale
Acquired Less: Ending
from 20,480 inventory
home Acquired
office from
Deferred vendors
profit 25,600 Acquired
Fixed from home
assets, net 890,880 92,160
office
Investment
in branch 158,720
Cost of goods
Accounts sold
payable 226,304 46,080
Long-term 3. Prepare the following year-end adjusting entries to:
debt 409,600 a. Record the BRANCH income on the HOME OFFICE
Common books
stock 307,200 b. Adjust the DEFERRED PROFIT account to the
Retained 358,400
proper balance
Earnings,
January 1, 4. Prepare the year-end closing entries for the HOME
2019 OFFICE and the BRANCH.
Home 5. Prepare the following for 2020:
office a. An income statement and balance sheet for the
equity 117,760
BRANCH.
Sales 983,040 327,680
Purchases 819,200 122,880 b. An income statement and balance sheet for the
Shipments HOME OFFICE.
from home c. An income statement and balance sheet combined
office 92,160 for the HOME OFFICE and the BRANCH OFFICE.
Shipments
to branch 86,016 Problem 4
Operating On December 31, 2020 the INVESTMENT in BRANCH
expenses 174,080 51,200
account on the HOME OFFICE books of LEMON COMPANY
shows a balance of P192,000. The following facts are
_______ _______ ascertained:
Totals P2,396,160 P2,396,160 P 491,520 P491,520 1. Merchandise billed at P6,400 is in transit on December
31, 2020 from the HOME OFFICE to the BRANCH.
Inventory per physical count on December 31, 2020: 2. The BRANCH collected a HOME OFFICE account
From vendors P184,320 P 20,480 receivable for P2,560. The BRANCH did not notify the
From home office - 30,720 HOME OFFICE of the cash collection.
3. On December 30, the HOME OFFICE mailed a check of
P12,800 to the BRANCH but the bookkeeper charged
the check to General Expenses; the BRANCH has not
Additional information: received the check as of December 31, 2020.
1. Inventory transferred to the branch from the home 4. BRANCH profit for December was recorded by the
office is billed at 125% of cost. HOME OFFICE at P11,392 instead of P12,544.
2. The home office billed the branch P15,360 for 5. BRANCH returned supplies of P1,280 to the HOME
inventory it shipped to the branch on December 28, OFFICE but the HOME OFFICE has not yet recorded
2020; the branch received and recorded this shipment the receipt of the supplies.
on January 2, 2020.
Required:

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a) Compute the balance of the HOME OFFICE account on Inventory, Jan I P 36,000 P57,600
the BRANCH book as of December 31 before its Shipments from Home Office 336,000
adjustment. Purchases 1,080,000 360,000
b) Prepare a reconciliation statement to compute the Shipments to branch 288,000
adjusted balances on December 3, 2020. Allowance for overvaluation
branch inventory 79,200
Problem 5 Sales 1,440,000 864,000
The interoffice accounts between the main office of BLACK Operating Expenses 348,000 132,000
MELSIM COMPANY and its AYALA BRANCH in Makati were
adjusted to P232,800 as of December 31, 2020. The The ending inventory of the BRANCH of P86,400 includes
transactions between the HOME OFFICE and the BRANCH goods from outside purchases of P19,200; the ending
for 2020 were: inventory of the HOME OFFICE is P 180,000. Calculate:
a. Remittance by the BRANCH (P24,320 was still in 1. The amount of shipments in transit at cost at the end
transit as of December 31, 2020) P 227,520. of 2020.
b. Shipments to branch (includes goods worth P56,320 2. The overstatement of BRANCH cost of sales during
that are not yet received by the BRANCH as of 2020.
December 31, 2020) are P601,600. 3. The combined net income for the year 2020.
c. The HOME OFFICE has not yet informed the BRANCH
of its share in the advertising expense amounting to P
19,200. Problem 7
d. Accounts receivable of the BRANCH amounting to BRANCH A was authorized by its RUBBLE COMPANY Home
P38,400 was collected by HOME OFFICE, net ,of 4% Office to send cash of P1,920 that it can spare to BRANCH
discount. The BRANCH has not yet been notified. B. How is this transfer best recorded on the books of
e. The HOME OFFICE incorrectly credited the BRANCH by (a) BRANCH A
P 12,800 for the remittance of its CUBAO BRANCH. (b) BRANCH B and
The AYALA BRANCH made no entry. (c) the HOMEOFICE
f. The HOME OFFICE corrected the above entry on
January 5, 2021. However, the AYALA BRANCH Problem 8
inadvertently received a copy of this memo and The GOLDEN MONKEY CORPORATION has established
entered a credit in favor of the HOME OFFICE as of several branches that sell the products that it
December 31, 2020 manufactures. Manufactured units are billed to the
g. The BRANCH returned merchandise worth P 16,000 to branches at the manufacturing costs, the branches paying
the HOME OFFICE and was duly acknowledged by the the freight charges from the HOME OFFICE. On November
latter during the year. 1, the HOME OFFICE ships goods to AMER BRANCH
charging the branch P12,800. AMER BRANCH pays freight
Required: charges of P400. It is subsequently discovered that the
1. The unadjusted balance of the HOME OFFICE HOME OFFICE had shipped the goods to AMER BRANCH by
EQUITY account as of December 31, 2020. mistake and the HOME OFFICE directs AMER BRANCH to
2. The adjusted balance of the interoffice accounts forward all the goods to BALGAN BRANCH. Upon receiving
as of December 31, 2020. the goods, BALGAN BRANCH pays freight charges of
P192. If the shipment had been made directly from the
Problem 6
HOME OFFICE the freight BALGAN BRANCH would have
WHITE CLARET ENTEPRISES bills its BRANCH for
paid is P448.
merchandise shipment at 25% above cost. The following
are some of the account balances appearing on the books Give journal entries to record all of the foregoing
of the HOME OFFICE and its BRANCH as of December 31, transactions on the books of (1) GOLDEN MONKEY
2020. CORPORATION; (2) AMER BRANCH; and (3) BALGAN
Home Office Branch's BRANCH.
Books Books

MULTIPLE CHOICE

HULSEY CORPORATION has one branch office, named 1. If the adjusted balances for the BULLSTAG Home
BULLSTAG Branch. HULSEY is performing the end-of-the- Office Account and HULSEY’s Branch Account is
period reconciliation of its Branch account whose current P320,000, what unadjusted balance was listed in (1)
balance is P? and BULLSTAG’s Home Office account Hulsey’s Branch Account and (2) Bullstag’s Home
whose current balance is P?. The following items are Office Account?
unsettled at the end of the accounting period (you may a. (1) P326,560 and (2) P323,200.
assume that the item has been reflected in the accounts b. (1) P329,600 and (2) P317,280.
of the underlined entity): c. (1) P328,960 and (2) P330,240.
A. HULSEY has agreed to remove P480 of excess freight d. (1) P322,560 and (2) P320,480.
charges charged to BULLSTAG when HULSEY shipped
twice as much inventory as the branch office The SOLITARY branch of MULTIPLEX Company, at the
requested. end of its first quarter of operations, submitted the
B. BULLSTAG mailed a check for P7,040 to the Home following income statement:
Office as payment for merchandise shipments. The Sales P192,000
home office has not yet received the check. Cost of sales:
C. BULLSTAG returned defective merchandise to Shipments from home office P179,200
HULSEY. The merchandise was billed to the branch Local purchases 19,200
at P2,560 when its actual cost was P1,920. Total P198,400
D. Advertising expense attributable to the branch office Inventory at end 32,000 166,400
were paid for by HULSEY in the amount of P3,200. Gross margin on sales P 25,600
Expenses 22,400
Net income P 3,200

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EXCEL PROFESSIONAL SERVICES, INC.

Shipments to the branch were billed at 140% of cost. a. CEBU BRANCH receives all its merchandise from the
The branch inventory as at September 30 amounted to HEAD OFFICE. The HEAD OFFICE bills the goods at
P32,000 of which P4,224 was locally purchased. Markup cost plus 10% mark-up. At December 31, 2020 a
on local purchases, 20% over cost. Branch expenses shipment with a billing price of P3,200 was in transit
incurred by home office amounting to P1,600 were to the BRANCH. Freight on this shipment was P160
inadvertently omitted from the branch’s income which is to be treated as part of inventory.
statement. b. December 31, 2020 inventories, excluding the
2. On September 30, the branch inventory at cost and shipment in transit was:
net income realized by the home office from the Head Office, at cost 19,200
branch operations, respectively are: Cebu Branch, at billed value
(excluding freight of P332.80) 6,656
a. P24,064 and P46,464 5. Net income of the HEAD OFFICE was
b. P20,224 and P 3,200 a. P 6,400 c. P 12,800
c. P32,000 and P35,200 b. P 9,600 d. P 14,080
d. P24,064 and P44,864
6. True income of CEBU BRANCH was
A HOME OFFICE transfers inventory to its BRANCH at a a. P 6,701 c. P 7,981
20% markup on cost. During 2020, inventory costing b. P 7,341 d. P 8,621
the HOMEOFFICE P51,200 was transferred to the
BRANCH. At year-end, the HOME OFFICE adjusted its The following data were taken from the records of
Unrealized Intercompany Inventory Profit account SWEATER CORPORATION and its BULACAN BRANCH for
downward by P11,648. The BRANCH’s year-end balance 2020:
sheet shows P3,072 of inventory acquired from the Home Office Bulacan branch
HOME OFFICE. Sales P 339,200 P100,800
3. How much is the beginning inventory of the BRANCH Inventory, Jan. 1 36,800 14,240
at cost? Purchases 262,400
a. P 9,600 c. P 1,920 Shipment to branch 67,200
b. P 11,520 d. P 10,240 Shipment from
home office 80,640
SULUAN. INC. established a BRANCH in JOLO to Inventory, Dec. 31 45,600 18,720
distribute part of the goods purchased by the HOME Expenses 122,240 32,480
OFFICE. The HOME OFFICE prices inventory shipped to In 2020, the HOME OFFICE billed the BRANCH at 120%
the BRANCH at 20% above cost. The following account of cost which was lower by 5% than last year’s.
balances were taken from the ledger maintained by the 7. The combined net income of the HOME OFFICE and
HOME OFFICE and the BRANCH: the BRANCH for 2020 was:
Suluan,Inc. Jolo, Branch a. P30,928 c. P31,904
Sales P384,000 P 134,400 b. P31,088 d. P35,888
Beginning inventory 76,800 38,400
Purchases 320,000 - BLUE MAGIC, INC. has a BRANCH in BORACAY
Shipment to branch 83,200 - established on April 1, 2020. During the year 2020, the
Shipment from home BLUE MAGIC shipped merchandise to the BRANCH at
office 99,840 billed value of P80,000 which was 25% above cost. At
Operating expenses 46,080 23,040 the end of the year, the BRANCH reported sales of
Ending inventory 62,720 30,720 P128,000, operating expenses of P60,800, and a net
income from operations of P9,600.
All of the branch inventory is acquired from the HOME 8. The true income of the BRANCH was
OFFICE. a. P 9,600 c. P 11,520
4. On the basis of these account balances, the b. P 16,000 d. P 21,120
combined net income of the HOME OFICE and the
BRANCH is: SYSTEM CORPORATION operates a number of
a. P108,800 c. P177,920 BRANCHES in Metro Manila. On June 30, 2020, its STA.
b. P 44,800 d. P 84,480 CLARA BRANCH showed a HOME OFFICE account balance
of P17,504 and the HOME OFFICE books showed a STA,
BICOL COMPANY is engaged in merchandising both at its CLARA BRANCH account balance of P16,352. The
HEAD OFFICE in MAKATI and a BRANCH in CEBU. following information may help in reconciling both
Selected accounts in the trial balances of the BICOL accounts:
COMPANY and the CEBU BRANCH at December 31, 2020 1. A P7,680 shipment charged by HOME OFFICE to STA.
follow: CLARA BRANCH was actually sent to and retained by
Debit Home Office Branch STA. INEZ BRANCH.
Inventory, January P 14,720 P 7,392 2. A P9,600 shipment, intended and charged to STO.
Branch 37,312 DOMINGO BRANCH was shipped to STA. CLARA
Purchases 121,600 BRANCH and retained by the latter.
Shipments from Home 3. A P1,280 emergency cash transfer from STA. INEZ
Office 67,200 BRANCH was not taken up in the HOME OFICE
Freight in from Home Office 3,520 books.
Sundry expenses 32,000 16,000 4. HOME OFFICE collects a STA. CLARA BRANCH
Credit accounts receivable of P2,304 and fails to notify the
Home Office 34,112 BRANCH.
Sales 99,200 89,600 5. HOME OFFICE was charged for P768 for merchandise
Shipments to Branch 64,000 returned by STA. CLARA BRANCH on June 28. The
Allow. for overvaluation of merchandise is in transit.
branch inventory – Dec. 31 7,040 6. HOME OFFICE erroneously recorded STA. CLARA
BRANCH's net income for May, 2020 at P10,416. The
Additional information: BRANCH reported a net income of P8,112.

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EXCEL PROFESSIONAL SERVICES, INC.

of P38,400 at year-end. The BRANCH made sales of

9. What is the reconciled amount of the HOME OFFICE P187,200, paid expenses of P46,080 and remitted to the
and STA. CLARA BRANCH’s reciprocal accounts? HOME OFFICE all sales proceeds. The allowance for
a. P13,920 c. P17,504 overvaluation of branch inventory account on the HOME
b. P15,200 d.P12,896 OFFICE books showed a balance of P4,800 after
adjustment.
The LEGIT COMPANY established a BRANCH in MAKATI 10. Compute the: (1) BRANCH inventory on December
CITY on June 1, 2020. The BRANCH is to receive 31, 2020 at cost, and (2) the BRANCH net income as
substantially all merchandise from the HOME OFFICE. far as the HOME OFFICE is concerned:
During the remainder of 2020, shipments to the branch a. (1) P28,800; (2) P49,920
amounted to P115,200 which included a 20% mark-up b. (1) P33,600; (2) P49,920
on cost. The BRANCH purchased P28,800 additional c. (1) P33,280; (2) P35,520
merchandise for cash and reported unsold merchandise d. (1) P40,000; (2) P63,600

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