Advanced Financial Accounting and Reporting 1

HOME OFFICE AND BRANCH ACCOUNTING

Part 2: Special Topics - Home Office and Branch Accounting

Now that you've already learned the basics and nature of home office and branch accounting, it's time
for you to know the special topics that is usually asked in CPA Licensure Examinations which basically
includes reconciliation of reciprocal accounts and interbranch transfers of inventories.

RECONCILIATION OF RECIPROCAL ACCOUNTS

 We can recall that the reciprocal accounts refer to the "Investment in Branch" account in Home
Office's books and the "Home Office" account in branch's books, and also the principle that
these accounts must have equal balances.
 Now if for any reason these accounts do not balance, then, a reconciliation procedure must be
performed.
 Reconciling the reciprocal accounts is similar to bank reconciliation procedures.
 Reconciliation items can be broadly classified into the following:
a) Transfers in Transit
 At the time FS are prepared, there may be asset transfers between the home office and
the branch which are not yet recorded by the supposedly recepient.
 For example:
There may be shipments of inventory made by the HO which are not yet received and
recorded by the branch by the end of the reporting period. The adjusting entry would
be simply a debit to "Shipments from HO" and a credit to "Home Office" account.
b) Unrecorded Debit and Credit Memos
 A debit memo sent by the HO to the branch means that the home office has debited or
increased the investment in branch account. Therefore, the corresponding entry to be
made in the branch's books is a credit or increase in the home office account. The
opposite applies to a credit memo (e.g. when a Credit Memo is sent by the HO to the
branch, this means that the HO has credited or decreased the investment in branch
account. Therefore, the corresponding adjusting entry for this is to debit or decrease the
HO account.)
 For example:
When the HO collects an accounts receivable on behalf of the branch, the HO would
record this transaction as a debit to cash and a credit to the Investment in Branch
account. Therefore, to notify the branch of the transaction, the home office will send a
credit memo to the branch. The branch, in return, will record the credit memo received
as a debit to Home Office account and a credit to Accounts receivable account. (The
branch will no longer include a Debit to Cash account for this collection transaction
because it's clear in the problem that the HO has already collected the accounts on
behalf of the branch.)
  A debit memo sent by the branch to the HO means that the branch has debited or
decreased the Home Office account. Therefore, the corresponding entry to be made in
the home office's books is a credit or a decrease to the Investment in Branch account.
The opposite rules applies to a credit memo.
 For example:
When the branch returns damaged merchandise received from the home office, the
branch would record this transaction as a debit to "Home Office" account and a credit to
"Shipments from HO" account. Therefore, to notify the HO of this transaction, the
branch will send a debit memo to the HO. The HO, in return, will record the debit memo
as a debit to "Shipments to Branch" account and a credit to "Investment in Branch"
account.

Para madaling maintindihan ang concept ng Debit at Credit memo, ganito:

 Pag may nabasa kayong CREDIT MEMO FROM HO, it means na kinredit ni HO yung
Inv. in Branch account. Adjustment sa Books ni Branch - NEGATIVE
 Pag may nabasa kayong DEBIT MEMO FROM HO, it means na dinebit ni HO yung
Inv. in Branch account. Adjustment sa Books ni Branch - POSITIVE
 Pag may nabasa kayong CREDIT MEMO FROM BRANCH, it means kinredit ni Branch
yung Home Office account sa books nya. Adjustment sa Books ni HO - POSITIVE
 Pag may nabasa kayong DEBIT MEMO FROM BRANCH, it means dinebit ni Branch
yung Home Office account sa books nya. Adjustment sa Books ni HO - NEGATIVE

IMPORTANT NOTE: A LAG IN THE RECORDING OF DEBIT AND CREDIT MEMOS CAN
RESULT TO IMBALANCE IN THE RECIPROCAL ACCOUNTS ON CUT-OFF DATE.
c) Errors
Errors such as ommissions in recording, double recording, mathematical mistakes, and the
like can result to imbalance in reciprocal accounts.

Life Saving Tip when doing reconciliation:

Para hindi malito sa pag-rereconcile, tandaan lang 'to:
KUNG SINONG BOOKS ANG HINDI NAKAPAG-RECORD OR KUNG SINO ANG NAKAPAGRECORD NG
MALING AMOUNTS, DOON ANG ADJUSTMENTS. Now, the adjustment could either be a positive or a
negative adjustment, and it depends wholly on a given transaction. Kaya dapat, master nyo na kung
ano-anong transactions ang nakakaapekto sa recirpocal accounts pati na rin yung effect nila.

Halimbawa, si Branch ay may binalik na damaged goods kay HO at sinabing hindi pa natatanggap ni
HO yung binalik na damaged goods, masasabi nating, hindi pa narerecord ni HO ang nasabing
transaction. Kaya naman ang adjustment natin ay sa books ni HO, hindi sa books ni Branch.

Isa pang halimbawa, yung kanina, kinolekta ni HO ang accounts receivable ni Branch on branch's
behalf. Meaning, imbes na si Branch ang makakakolekta, si HO ang tumanggap ng bayad. Meaning,
nakapag-record na si HO sa books neto with regards to collection, and this could also mean, na hindi
pa ito narerecord ni Branch assuming na nadelay ang memo from HO. So ang adjustment natin ay sa
books ni Branch, hindi sa books ni HO.

Share ko lang:
Ang lumabas na problem sa HOBA sa Boards ay about reconciliation ng reciprocal accounts. Bale ang
pinanghawakan ko lang na rule ay yang life saving tip na yan. HAHAHA!

Illustration 1: Reconciliation - Adjusted Balance

ABC Co. is currently preparing its combined FS. At December 31, 20x1, the HO shows a P156,000 balance
in its "Investment in Branch" account while the branch shows a P70,200 balance in its "Home Office"
account. The following information has been gathered:
 The HO shipped merchandise worth P20,000 to the branch during December 20x1 which the
branch has received and recorded only in January 20x2.
 The HO collected P10,000 accounts receivable on behalf of the branch. The branch did not yet
received the credit memo sent by the HO.
 The branch returned damaged merchandise worth P30,000 to the HO. The HO did not yet
receive the debit memo sent by the branch.
 A remittance of cash collections amounting to P40,000 was not yet recorded by the HO.
 The HO allocated overhead cost of P5,000 to the branch which the branch has recorded twice.
 Freight charge of P12,000 paid by the HO for shipments of merchandise to the branch was
recorded by the branch as P1,200.
Requirement: Compute for the adjusted balances of the reciprocal accounts.

Solution and Analysis

First Adjustment:
Sabi sa problem, si HO daw ay nagtransfer ng inventory papunta kay Branch pero hindi pa natatanggap
at narerecord ni Branch. So sabi natin, kung sino ang di pa nakakapagrecord, dun ang adjustments. So
asjustment to sa books ni Branch.
Ngayon ang tanong, is it a positive adjustment or a negative adjustment? Unang tingnan yung
transaction - sabi sa first bullet, it is a shipment from the HO. Now, recall the journal entry in the books
of Branch with regards to this particular transaction. Kapag may shipment galing kay HO, ang entry sa
books ni Branch is: DR - Shipments from HO and a CR - Home Office.
Ngayong alam mo na ang effect sa Home Office account, malalaman mo na kung positive or negative ang
adjustment. Kapag ang Home Office account ay nasa credit, edi POSITIVE. Kapag naman nasa debit, edi
NEGATIVE.
Kaya naman, ang first adjustment natin ay POSITIVE ADJUSTMENT SA BOOKS NI BRANCH.
ADJUSTMENT NO. 1 - Books of the Branch
DR: Shipments fr. HO (P20,000) CR: Home Office (P20,000)

Second Adjustment:
Second transaction ang sabi, si HO daw ay kumolekta ng accounts receivable on behalf of the branch.
Ang meaning ng transaction na'to imbes na si Branch ang tumanggap, si HO na lang ang nagcollect ng
accounts receivable for convenience. Ang sabi pa sa transaction, hindi pa daw narereceive ni Branch
yung credit memo galing sa HO. This means, it is an adjustment sa books ni Branch. Now, is it a positive
or a negative adjustment? Ano ba ang entry ni HO upon collection? Edi DR - Cash in Bank and CR -
Investment in Branch. Kung ganyan ang entry ni HO, ang "should-be" entry sa books ni Branch ay DR -
Home Office and CR - Accounts Receivable.
Para mas madaling intindihin, kapag nag-DEBIT si HO ng Investment in Branch acct., ang consequence
sa books ni Branch is mag-CREDIT sya ng Home Office acct. AND VICE VERSA.
(kaya nga tinawag silang reciprocal accounts eh hahaha)

Kaya naman, ang second adjustment natin ay NEGATIVE ADJUSTMENT SA BOOKS NI BRANCH.
ADJUSTMENT NO. 2 - Books of the Branch
DR: Home Office (P10,000) CR: Accounts Receivable (P20,000)

Third Adjustment:
Yung third bullet ang sabi, nagsauli daw si Branch ng damaged merchandise sa HO. Pero hindi pa
natatanggap ni HO yung debit memo galing kay branch. So this is an adjustment sa books ni HO. Second
question, is it a positive or a negative adjustment? This transaction is a return of a shipments from HO.
So ang entry ni Branch dito is DR - Home Office and CR - Shipments from HO. At malamang at sa
malamang, ang entry dapat ni HO dito sa transaction na ito ay DR - Shipments to Branch and CR -
Investment in Branch. Binawasan ni Branch yung reciprocal account nya, edi bawasan din dapat ni HO
yung reciprocal account nya.

Kaya ang third adjustment ay NEGATIVE ADJUSTMENT SA BOOKS NI HO.

ADJUSTMENT NO. 2 - Books of the Home Office
DR: Shipments to Branch (P30,000) CR: Investment in Branch (P30,000)

Fourth Adjustment:
Yung transaction sa fourth bullet ay remittance ng cash collections ni Branch kay HO pero hindi pa daw
narerecord ni HO. So adjustment ito sa books ni HO. Second question, is it a positive or a negative
adjustment? Take note na this is a remittance from branch. So kung nagremit si Branch kay HO, dapat
magrecognize si HO ng cash receipt sa books nya, with a a consequent decrease sa Investment in Branch
account.
Kaya ang fourth adjustment ay NEGATIVE ADJUSTMENT SA BOOKS NI HO.
ADJUSTMENT NO. 2 - Books of the Home Office
DR: Cash in Bank (P40,000) CR: Investment in Branch (P40,000)

Fifth Adjustment:
Yung nasa fifth bullet is an example of an error adjustment. Ang sabi sa transaction, yung overhead cost
allocation from HO to the branch ay nirecord daw ni Branch ng dalawang beses. In short, na-doble ng
record si Branch sa books nya. So since si Branch ang may mali, sa books nya ang adjustments. Now, the
question is, is it a positive or a negative adjustment? Suriing mabuti ang sinasabi sa problem. Ang
account na affected dito ay expense account. Recall mo yung t-account ng Home Office account sa
books ni Branch. Yung expense allocation from the HO is recorded on the credit side of the Home Office
account. And considering this, mafifigure out natin na para tanggalin yung error, kailangang i-debit ni
Branch yung Home Office account nya.
Kaya ang fifth adjustment ay NEGATIVE ADJUSTMENT SA BOOKS NI BRANCH.
ADJUSTMENT NO. 5 - Books of the Branch
DR: Home Office (P5,000) CR: Overhead Expense (P5,000)

Sixth Adjustment:
Yung final bullet naman ay tumutukoy sa error about recording. Ang sabi, P12,000 daw talaga yung
amount pero nirecord ni Branch as P1,200. So kulang pa ng P10,800 si Branch sa books nya (P12,000 -
P1,200). So adjustment ito sa books ni Branch. Question, positive or negative adjustment? Ang account
involved dito ay Freight In (kasi freight charge sya arising from shipments ng merchandise). So since
kulang lang si Branch ng nirecord, edi dagdagan nya yung amount by debiting Freight In and crediting
Home Office account.

Kaya ang sixth adjustment ay POSITIVE ADJUSTMENT SA BOOKS NI BRANCH.

ADJUSTMENT NO. 6 - Books of the Branch
DR: Freight In (P10,800) CR: Home Office (P10,800)

To summarize the reconciliation procedure, here is the reconciliation schedule:

Books of: Home Office Branch
Account Title: Investment in Branch Home Office
Unadjusted Balances 156,000 70,200
(1) Shipment in Transit 20,000
(2) Collection of AR (10,000)
(3) Return of merchandise (30,000)
(4) Unrecorded remittance (40,000)
(5) Error in recording of cost (5,000)
(6) Mathematical error 10,800
Adjusted Balances 86,000 86,000
Illustration 2: Reconciliation - Unadjusted Balances
ABC Co. is currently preparing its combined FS. At December 31, 20x1, the HO shows a P182,000 balance
in its "Investment in Branch" account. The following information has been gathered during the
reconciliation process:
a. A credit memo sent by the HO to the branch amounting to P12,000 was not recorded by the
branch.
b. A debit memo sent by the HO to the branch amounting to P9,000 was not recorded by the
branch.
c. A credit memo sent by the branch to the HO amounting to P20,000 was recorded by the HO
twice.
 d. A debit memo sent by the branch to the HO amounting to P30,000 was recorded by the HO as
P3,000.
e. The branch sent by mistake a credit memo amounting to P7,000 to the HO. The HO did not
record it.
Requirement: Compute for the undadjusted balance of the "Home Office" account in the books of the
branch.

So bale, this is a variation of problem regarding reconciliation at lumabas yung gantong uri ng problem
during our boards nung October. Ang hinahanap ay unadjusted balance ng Home Office account. Ang
technique ko dyan, hahanapin ko muna yung adjusted balance ng Investment in Branch account since
sya lang ang may given na unadjusted balance, at saka ko iwowork-back yung adjustments sa books ng
branch. Parang sa bank reconciliation lang yung procedure.

Unang gawin ay i-adjust yung Investment in Branch account. Di ba maraming given na transactions? Ang
gawin mo lang, hanapin mo yung adjustments na applicable sa Investment in Branch account. Isa-isahin
nga natin yung transactions
Yung transaction (a), kaninong adjustment yan? Sabi hindi daw na-record ni Branch kaya kay Branch yan.
Set aside mo muna kasi ang hinahanap natin ay adjustments sa books ni HO.
Yung transaction (b), kaninong adjustment yan? Sabi hindi daw na-record ni Branch kaya naman kay
Branch din 'yan. Set aside muna.
Transaction (c), sabi nirecord daw ni HO pero dalawang beses. So error yan ni HO. At kung si HO ang may
mali, then, adjustment yan sa books ni HO. Kaya Transaction (C) is an adjustment to Investment in
Branch account sa books ni HO.
Next, yung transaction (d), nirecord pa rin daw ni HO pero, at a wrong amount. Kaya error ni HO, at dahil
error ni HO, sa books nya yan i-aadjust. Kaya Transaction (D) is an adjustment sa books ni HO.
Last transaction (e), si Branch ang may mistake so generally, it is an adjustment sa books ni Branch. Pero
notice the last sentence. Ang sabi, hindi daw nirecord ni HO. And with this, still, no adjustment required
kasi hindi naman nirecord ni HO. Pero what if, ang sabi ay nirecord daw ni HO yung memo na hindi
naman dapat sa kanya? Edi it will be a another adjustment sa books ni HO. (Oks? hahaha)

Ngayong nahimay-himay na natin ang bawat transactions, computin na natin ang adjusted balance ng
Investment in Branch account sa books ni HO.
Books of: Home Office Branch
Account Title: Investment in Branch Home Office
Unadjusted Balances 182,000 -?-
Adjustments to HO's books:
(c) CM recorded twice (20,000)
(d) DM recorded at wrong (27,000)
amount

Adjusted Balance 135,000

Ang nakuha natin ay adjusted Investment in Branch account balance, and general concept natin,
Investment in Branch SHOULD ALWAYS BE EQUAL TO Home Office account. And with this assumption,
we can say that the adjusted balance of Home Office account sa books ni Branch is also P135,000.

Ngayong nalaman na natin ang adjusted balances nila, it's time to finally work back all the adjustments
sa books ni Branch para makuha yung final requirement na unadjusted balance nito.
Books of: Home Office Branch
Account Title: Investment in Branch Home Office
Unadjusted Balances 182,000 -?-
Adjustments to HO's books:
(c) CM recorded twice (20,000)
(d) DM recorded at wrong amount (27,000)
Adjustments to Branch's books:
(a) Unrecorded CM from HO (12,000)
(b) Unrecorded DM from HO 9,000
(e) Erroneous CM sent to HO (7,000)
Adjusted Balance 135,000 135,000
By working it back (squeeze mo lang), makukuha mo na ang unadjusted balance mg Home Office
account sa books ni Branch ay P145,000.
SPECIAL NOTE: kapag naka enclose sa parentheses, meaning, credit adjustment. Kapag wala naman,
debit adjustment.
*Kapag na ssqueeze tayo, we just simply use their opposite signs. Alam nyo na yun pag-nagsqueeze
kayo.

Kaya ang final answer ay P145,000.

HOME OFFICE WITH SEVERAL BRANCHES

 As mentioned earlier, when an entity has more than one branch, separate investment accounts
for each of the branches shall be maintained in the home office books.
 Each branch shall maintain its own home office account and shall record its own transactions
with the home office.
 Transactions between a branch and the home office will not affect the records of the other
branches.
 However, errors may arise if a transaction between a certain branch and the HO was
erroneously recorded by the HO to another branch's investment account OR a certain branch
erroneously records a transaction of another branch with the HO.
Illustration 1: Several Branches - Unadjusted balance
ABC Co. has several branches. On December 31, 20x1, the "Home Office" account maintained by Alpha
Brancg has a balance of P145,000. The following information was determined:
a. The home office charged Alpha Branch for a P15,000 shipment which was actually sent to and
retained by Beta Branch. Alpha Branch was not notified of the intended shipment.
b. The home office charged Charlie Branch for a P16,000 shipment which was actually sent to
Alpha Branch. Alpha branch retained the shipment.
 c. The home office erroneously recorded a remittance for P5,000 from its Delta Branch as coming
from Alpha Branch.
d. Utilities expense of P4,000 that is allocable to Echo Branch was recorded by the HO in Alpha
Branch's account. Alpha branch has inappropriately recorded the related debit memo from the
home office.
Requirement: Compute for the unadjusted balance of the "Investment in Alpha Branch" account in the
Home Office's books

Solution:
Isa-isahin natin HAHAHA! Parang kanina lang sa Illustration 2 natin. The difference is that this involves
several branches.
LIFE-SAVING TIP: HUWAG MALITO HAHAHA!!!

Home Office's Books Branch's Books

Item (a)
Entry made: Entry made:
DR: Investment in ALPHA branch (P15,000) None
CR: Shipments to ALPHA branch (P15,000)
"Should be" entry: "Should be" entry:
DR: Investment in BETA branch (P15,000) None
CR: Shipments to BETA branch (P15,000)
Adjusting entry: Adjusting entry:
DR: Shipments to ALPHA Branch (P15,000) None
CR: Investment in ALPHA branch (P15,000)
DR: Investment in BETA branch (P15,000)
CR: Shipments to BETA branch (P15,000)
Comments:
 Ang sabi sa item a, nagship daw si HO kay Beta Branch pero ang ginamit nyang account ay Inv. in
Alpha Branch imbes na Inv. in Beta Branch. So error 'to ni HO kaya sa books nya ang
adjustments.
 Yung first adjusting entry is to eliminate yung error, and yung second entry naman is para ma-
establish yung tamang entry sa books ni HO.
 Sa books ng branch, walang adjusting entry kasi una, hindi alam ni Alpha Branch yung error ni
HO kaya di sya nagrecord kaya good yun, at pangalawa, since ni-retain ni Beta branch yung
goods, it means in-acknowledge nya yung shipment and make a correct entry for it.
 If ever na nanotify si Alpha Branch at nirecord nya ito as shipment from HO, ang adjustment sa
books ni Alpha Branch ay DR: Home Office at CR: Shipments from HO.

Home Office's Books Branch's Books

Item (b)
Entry made: Entry made:
DR: Investment in CHARLIE branch (P16,000) DR: Shipment from HO (P16,000)
Home Office's Books Branch's Books
CR: Shipments to CHARLIE branch (P16,000) CR: Home Office (P16,000)
"Should be" entry: "Should be" entry:
DR: Investment in ALPHA branch (P16,000) DR: Shipment from HO (P16,000)
CR: Shipments to ALPHA branch (P16,000) CR: Home Office (P16,000)
Adjusting entry: Adjusting entry:
DR: Shipments to CHARLIE Branch (P16,000) None
CR: Investment in CHARLIE branch (P16,000)

DR: Investment in ALPHA branch (P16,000)

CR: Shipments to ALPHA branch (P16,000)
Comments:
 Sabi sa item (b), nag-ship daw si HO kay Alpha branch and Alpha branch retained the shipment
pero imbes na Inv. in Alpha Branch ang gamitin ni HO, Inv. in Charlie Branch ang ginamit nya. So
ang adjustments ay sa books ni HO.
 Yung first adjusting entry is to eliminate yung error, and yung second entry naman is para ma-
establish yung tamang entry sa books ni HO.
 "Alpha branch retains the shipment" - this phrase means in-acknowledge at ni-record ni Alpha
Branch yung shipment.
 Yung sa books naman ng branch, no adjusting entry needed kasi tama naman yung ginawa
nyang entry.

Home Office's Books Branch's Books

Item (c)
Entry made: Entry made:
DR: Cash in Bank (P5,000) DR: Home Office (P5,000)
CR: Investment in ALPHA branch (P5,000) CR: Cash in Bank (P5,000)
"Should be" entry: "Should be" entry:
DR: Cash in Bank (P5,000) DR: Home Office (P5,000)
CR: Investment in DELTA branch (P5,000) CR: Cash in Bank (P5,000)
Adjusting entry: Adjusting entry:
DR: Investment in ALPHA Branch (P5,000) None
CR: Investment in DELTA branch (P5,,000)
Comments:
Sa Item (c), si Delta Branch daw ay nagremit kay HO pero imbes na sa Inv. in Delta Branch nya 'to i-
charge, sa Inv. in Alpha Branch nya na-charge ang remittance. Kaya ang adjustment ay sa books ni HO
kasi sya ang mali.

Home Office's Books Branch's Books

Item (d)
Entry made: Entry made:
Home Office's Books Branch's Books
DR: Investment in ALPHA branch (P4,000) DR: Utilities Expense (P4,000)
CR: Utilities Expense (P4,000) CR: Home Office (P4,000)
"Should be" entry: "Should be" entry:
DR: Investment in ECHO branch (P4,000) None
CR: Utilities Expense (P4,000)
Adjusting entry: Adjusting entry:
DR: Investment in ECHO Branch (P4,000) DR: Home Office (P4,000)
CR: Investment in ALPHA branch (P4,000) CR: Utilities Expense (P4,000)
Comments:
 Sa item (d), parehong may mali si HO at si Alpha Branch kaya may adjustments sa books nila.
 Ang mali ni HO, imbes na sa Inv. in Echo branch nya i-charge yung cost allocation, kay Inv. in
Alpha nya 'to chinarge.
 Ang mali ni Alpha Branch, imbes na hindi sya magrecord sa books nya regarding sa cost
allocation na'to ay nagrecord pa rin sya.

Ngayong naisa-isa na natin yung mga adjustments, gawin na natin yung reconciliation procedures. Ang
required ay unadjusted balance ng Investmeny in Alpha branch. Since ang given lang sa problem ay
unadjusted Home Office account sa books ni Alpha Branch, yun ang gagawin nating starting point. And
yung procedure is same lang sa Illustration 2 natin kanina - kunin muna natin ang adjusted balance then
saka i-work back yung adjustments sa investment account para makuha yung unadjusted investment
account.
Books of: Home Office Branch
Account Title: Investment in Branch Home Office
Unadjusted Balances -?- 145,000
Adjustments to Branch's books:
(d) Allocable expense to Echo (4,000)
Adjustments to HO's books:
(a) Shipment to Beta charged to (15,000)
Alpha
(b) Shipment to Alpha charged to 16,000
charged to Charlie
(c) Remittance fr. Delta credited to 5,000
Alpha
(d) Allocable expense to Echo (4,000)
Adjusted Balance 141,000 141,000
SPECIAL NOTE: kapag naka enclose sa parentheses, meaning, credit adjustment. Kapag wala naman,
debit adjustment.
Kaya ang final answer ay P139,000. (I-work back mo lang. Start ka sa adjusted balance)

Illustration 2: Several Branches - Adjusted Balance

ABC Co. has several branches. On December 31, 20x1, the "Investment in Branch 1" maintained by the
HO shows a balance of P100,000 while the "Home Office" account maintained by Branch 1 shows a
balance of P142,000. The following information was determined:
a. Branch 2 acquired equipment for P30,000 to be maintained in the books of the HO. This was
recorded by the HO as a transaction with Branch 1.
b. Branch 1 acquired equipment for P40,000 to be maintained in its books. This was not recorded
by the home office.
c. Branch 4 remitted cash collections of P10,000 to the HO which the HO failed to record.
d. The HO erroneously charged Branch 1 for a debit memo of P12,000 received from Branch 5.
e. Branch 1 reversed a previous debit memo from Branch 6 amounting to P6,000. The HO decided
that this charge is appropriately Branch 7's cost.
Requirement: Compute for the adjusted balances of the reciprocal accounts of the HO and Branch 1.

Solution:
Books of: Home Office Branch 1
Account Title: Investment in Branch 1 Home Office
Unadjusted Balances 100,000 142,000
(a) Equipment maintained in the 30,000 -
books of HO
(b) Equipment maintained in the - -
books of Branch 1
(c) Remittance by Branch 4 - -
(d) DM from Branch 5 12,000 -
(e) Inter-branch DM - -
Adjusted Balances 142,000 142,000
Comments:
 Item (a) is a transaction between HO and Branch 2. Pero chinarge ni HO yung account ni Branch
1 instead of Branch 2 kaya i-aaddback yung P30,000 sa Inv. in Branch 1.
Also recall that this is an acquisition by Branch 2 to be carried in the books of HO.
 Item (b) is a transaction between HO and Branch 1. It is an acquisition by Brancg 1 to be carried
in the branch's books so it is correct that no entry should be made in the books of HO. So, no
adjustments needed.
 Item (c) is a transaction between HO and Branch 4 with Branch 1 not getting involved. So no
adjustments required.
 Item (d) should be a transaction between the HO and Branch 5 regarding a debit memo sent by
Branch 5 to HO. But the HO mistakenly charged the account of Branch 1 instead of Branch 5.
Namali si HO ng account na dapat bawasan kaya add back sa account ni Branch 1.
 Item (e) is mainly a transaction between Branch 1 and Branch 6. So it does not affect the
reciprocal accounts of Branch 1 and the HO. No adjustments needed.
SPECIAL ACCOUNTING PROBLEMS IN BRANCH OPERATIONS
In addition to the general accounting procedure and reconciliations, the Home Office and Branch may
enter into some transactions that would create special accounting problems. Such transactions are the
following:
1. Merchandise shipments to branch billed at a price above cost
2. Inter-branch transactions
Although these transactions do not affect general purpose FS, they require some special accounting for
internal reporting purposes.

SHIPMENTS TO BRANCH BILLED AT A PRICE ABOVE COST

 Billings to the branch may be made at amounts above cost also known as the billed price.
Information on actual costs is withheld from the branch (hindi alam ni Branch yung actual cost
nung merchandise shipment). Thus, upon receipt of shipments, the branch records the
merchandise received at the billed prices, rather than at cost. (Si Branch, ang nirerecord nya is
not the actual cost. Ang nirerecord nya is yung cost plus yung mark up ni HO/cost na may patong
ni HO).
 It should be noted that a shipment to the branch, even at a billed price, is not a sale. Shipments
are recognized as sale only when they are sold to outside parties. Therefore, any markup on
shipments made to the branch must be eliminated when combined FS is prepared. This is
necessary to restate the COGS and ending inventory of the branch to their original costs.

Illustration:
Shipments at billed price (or at a price above cost)
Home office transfers inventory costing P100,000 to the branch. Shipments to the branch are billed at
120% above cost.
Home Office Books Branch Books
DR: Investment in Branch (P120,000)** DR: Shipments from HO (P120,000)
CR: Shipments to Branch (P100,000) CR: Home Office (P120,000)
CR: Allowance for Overvaluation (P20,000)
**P100,000×120%

 When shipments are billed above cost, the "Investment in Branch" and the "Home Office"
accounts are debited (credited) at billed prices.
 In the books of the HO, the mark up is credited to an allowance account. Another title that can
be used is "Allowance for Overvaluation".
 In the books of the branch, no allowance is recorded. This is because the branch is not made
aware of the markup (hindi alam ni Branch yung tungkol sa markup ni HO). Instead, the
"Shipments from HO" account is debited at billed prices.
 The difference between the "Shipments from HO" and "Shipments to Branch" accounts
represents the MARKUP ON SHIPMENT.
 When the markup % is not given, there are two ways of computing it:
Markup based on COST = Billings to branch by HO ÷ Shipments to branch
 Markup based on SALES = Unadjusted Allowance for markup ÷ Shipments to branch

Shipments at billed price - Freight paid by HO

Home office transfers inventory worth P200,000 to the branch. Shipments to the branch are billed at
120% above cost. Freight paid by the HO is P10,000.
Home Office Books Branch Books
DR: Investment in Branch (P250,000)** DR: Shipments from HO (P240,000)
CR: Shipments to Branch (P200,000) DR: Freight In (P10,000)
CR: Cash in Bank (P10,000) CR: Home Office (P250,000)
CR: Allowance for Overvaluation (P40,000)
**(P200,000 × 120%) + P10,000 (freight)

Shipments at billed price - Freight paid by Branch

Home office transfers inventory worth P80,000 to the branch. Shipments to the branch are billed at
120% above cost. Freight paid by the HO is P6,000.
Home Office Books Branch Books
DR: Investment in Branch (P96,000)** DR: Shipments from HO (P96,000)
CR: Shipments to Branch (P80,000) DR: Freight In (P6,000)
CR: Allowance for Overvaluation (P16,000) CR: Cash in Bank (P6,000)
CR: Home Office (P96,000)
**(P80,000 × 120%)

Purchases from Outside Parties

Branch purchases inventory worth of P40,000 on account from an outside party. Freight paid by the
branch is P2,000.
Home Office Books Branch Books
No entry DR: Purchases (P40,000)
DR: Freigt In (P2,000)
CR: Cash in Bank (P2,000)
CR: Accounts Payable (P40,000)

Revenue
Branch makes total sales of P500,000 on account.
Home Office Books Branch Books
No entry DR: Accounts Receivable (P500,000)
CR: Sales (P500,000)

Expenses
Branch incurs total expenses of P100,000, P20,000 of which were allocated by the HO to the branch.
 Home Office Books Branch Books
DR: Investment in Branch (P20,000) DR: Utilities Expense (P100,000)
CR: Utilities Expense (P20,000) CR: Cash (P80,000)
CR: Home Office (P20,000)

Individual Profit of the Branch

Assuming the the branch reports ending inventory of P250,000, inclusive of capitalized freight in. The
profit in the branch's individual income statement is computed as follows:

Branch's Individual Income Statement

For the year ended December 31, 20x1
Sales 500,000
Cost of Sales:
Inventory, beginning -0-
Shipments from HO - at billed price 456,000
(P120,000 + P240,000 + P96,000)
Freight In (P10,000 + P6,000 + P2,000) 18,000
Purchases 40,000
Total Goods Available for Sale 514,000
Inventory, ending (250,000) (264,000)
Individual Gross Profit of the Branch 236,000
Operating expenses (100,000)
Individual Profit of the Branch 136,000

True Profit of the Branch

The recently computed individual profit of the branch is not stated in the normal way because the
ending inventory and shipments from HO includes the markup element. That's why when making
general purpose FS, we eliminate the markup element by restating the shipments from HO to their
original costs
Now, assume that the branch's ending inventory of P250,000 consists of P240,000 shipments from HO
and P10,000 purchases from outside party. Insofar as the home office is concerned, the true branch
profit is computed as follows:
Sales 500,000
Cost of Sales:
Inventory, beginning -0-
Shipments from HO - at cost 380,000
(P120,000 + P240,000 + P96,000) ÷ 120%
Freight In (P10,000 + P6,000 + P2,000) 18,000
Purchases 40,000
Total Goods Available for Sale 438,000
Inventory, ending
- from shipments (P240,000÷120%) - at cost (200,000)
- from outside party (10,000) (228,000)
"True" Gross Profit of the Branch 272,000
Operating expenses (100,000)
"True" Profit of the Branch 172,000
Comments:
 Notice that when computing for True Branch Profit, we simply restate the shipments from HO to
its original costs (in short, tinatanggal natin yung markup element).
 Also, notice that ending inventory, when restating, usually is composed of shipments from HO
and purchases from outside parties. (in short, yung ending inventory, hinihiwalay natin sa
dalawang component - ending inventory from shipments at ending inventory from outside
purchases) Hinihiwalay natin para malaman kung alin ang kailangang i-restate sa original cost.
Yung ending inventory from outside purchases, hindi na natin irerestate kasi recorded at cost na
yan. Yun lang ending inventory from shipments ang nirerestate natin kasi sabi nga natin, may
element yan ng markup ni HO.

Alternative solution
Another way of computing the true gross profit is simply to add the realized mark up to the branch's
individual gross profit.

Total Markup (or Unadjusted Allowance for Overvaluation) 76,000

LESS: Unrealized markup in ending inventory (40,000)
Realized Markup 36,000
Individual profit of the Branch 136,000
ADD: Realized Markup 36,000
True Branch Profit 172,000

 Unadjusted Allowance for Overvaluation is equal to the total shipments from HO restated at
cost multiplied by the markup percentage.
In the example, the P76,000 unadjusted allowance for overvaluation resulted from Total
Shipments restated at cost of P380,000 (P456,000÷120%) multiplied by 20% markup percentage.
 Unrealized markup im ending inventory is equal to ending inventory from shipments restated
at cost multiplied by the markup percentage.
In this example, the P40,000 unrealized markup resulted from Ending Inventory from shipments
restated at cost of P200,000 (P240,000÷120%) multiplied by 20% markup percentage.
 Realized Markup represents the markup on the shipments that were sold. Since these are sold
to external parties, it would be proper to recognize the related realized markup in profit or loss
that's why it as added to the individual branch profit.

Combined Financial Statements - Shipments at billed price

 When combined FS are prepared, the markups on shipments are eliminated in order to restate
the cost of goods sold and ending inventory to ther original costs.
 This is done by eliminating the "Shipments to Branch" account, together with the related
"Allowance for overvaluation" account. And also, as we all know, we eliminate the reciprocal
accounts.

Illustation: Combined Financial Statement

The following information was taken from the books of the HO and its branch. Shipments to branch are
billed at 120% above cost.
Home Office's Books Branch's Books
DR (CR) DR (CR)
Cash 1,100,000 66,000
Accounts Receivable 180,000 100,000
Inventory, beginning 300,000 -
Shipments from HO 456,000
Purchases 1,200,000 40,000
Freight in 32,000 18,000
Shipments to Branch (380,000)
Investment in Branch 600,000
Allowance for Overvaluation (76,000)
Equipment 720,000 400,000
Accum. Depreciation - Equipment (72,000) (40,000)
Accounts Payable (72,000) (40,000)
Share Capital (2,000,000)
Retained Earnings, beginning (152,000)
Home Office (600,000)
Sales (1,600,000) (500,000)
Operating Expenses 220,000 100,000
Totals - -

Inventory, end
- From outside purchases 460,000 10,000
- From home office 240,000

Requirements:
1. Compute for the combined profit
2. Prepare the combined statement of financial position

Solutions:
Requirement 1: Computation of combined profit
Sales (P1,600,000 + P500,000) 2,100,000
Cost of Sales:
Inventory, beginning 300,000
Freight in (P32,000 + P18,000) 50,000
Purchases (P1,200,000 + P40,000) 1,240,000
Total Goods Available for Sale 1,590,000
Inventory, end
- from shipments (P240,000÷120%) (200,000)
- from outside purchases (P460,000 + P10,000) (470,000) (920,000)
Combined Gross Profit 1,180,000
Operating Expenses (P220,000 + P100,000) (320,000)
Combined Profit 860,000
Comments:
 The "shipments from HO" and "shipments to branch" accounts are simply ignored when
computing the combined total goods available for sale because it is eliminated.
 The unrealized markup in ending inventory is eliminated.
In checking the accuracy of our answer, we can use the long method - that is, computing the individual
profits of HO and Branch, amd adding thereon, the realized markup.
Individual Profit of the Branch:
Sales 500,000
Cost of Sales:
Inventory, beginning -0-
Shipments from HO - at billed price 456,000
(P120,000 + P240,000 + P96,000)
Freight In (P10,000 + P6,000 + P2,000) 18,000
Purchases 40,000
Total Goods Available for Sale 514,000
Inventory, ending (250,000) (264,000)
Individual Gross Profit of the Branch 236,000
Operating expenses (100,000)
Individual Profit of the Branch 136,000

Total Markup (or Unadjusted Allowance for Overvaluation) 76,000

LESS: Unrealized markup in ending inventory (40,000)
Realized Markup 36,000

Individual Profit of the HO:

Sales 1,600,000
Cost of Sales:
Inventory, beginning 300,000
Shipments to Branch - at cost (or exclusive of markup) (380,000)
Freight In 32,000
Purchases 1,200,000
Total Goods Available for Sale 1,152,000
Inventory, ending (460,000) (692,000)
Individual Gross Profit of the Home Office 908,000
Operating expenses (220,000)
Individual Profit of the Home Office 688,000

Combined Profit Computation:

Individual profit of Home Office 688,000
Individual profit of branch 136,000
Realized Markup 36,000
Combined Profit 860,000

Or we can compute combined profit by using the Individual Profit of HO and the True Branch Profit as
follows:
Individual profit of Home Office 688,000
True Branch Profit (see previous computations) 172,000
Combined Profit 860,000

Requirement 2: Combined Balance Sheet

Before we prepare the combined balance sheet, let us first provide the elimination entries and the
closing entries.

The elimination entries are as follows:

Elimination 1 DR: Home Office (P600,000)
CR: Investment in Branch (P600,000)
to eliminate reciprocal accounts
Elimination 2 DR: Shipments to Branch (P380,000)
DR: Allowance for Overvaluation (P76,000)
CR: Shipments from HO (P456,000)
to eliminate shipments accounts and the allowance account

The closing entries are as follows:

Closing Entry 1 DR: Sales (P2,100,000)
DR: Invetory - end (P670,000)
CR: Inventory - beg (P300,000)
CR: Purchases (P1,240,000)
CR: Freight in (P50,000)
CR: Operating Expenses (P320,000)
CR: Income Summary (P860,000)
to close profit to income summary account
Closing Entry 2 DR: Income Summary (P860,000)
CR: Retained Earnings (P860,000)
to close income summary account to retaines earnings

The combined balance sheet is prepared as follows:

ASSETS
Cash (P1,100,000+P66,000) P1,166,000
Accounts receivable (P180,000+P100,000) 280,000
Inventory 670,000
Equipment (P720,000+P400,000) 1,120,000
Accum. Depreciation (P72,000+P40,000) (112,000)
Total Assets P3,124,000
LIABILITIES AND EQUITY
Accounts payable (P72,000+P40,000) P112,000
Share capital 2,000,000
Retained Earnings (P152,000+P860,000) 1,012,000
Total Liabilities and Equity P3,124,000

- END OF PART 2 -
PROCEED TO THE NEXT MODULE FOR EXERCISES