Home office, Branch and Aq Accounting ~ Learning Objectives 1. Account for home office and branch transact home office’s and branch’s books. 2. Reconcile interoffice accounts. 3. Prepare individual and combined financial stat home office and its branch(es). . Introduction As a business flourishes, it may need to exter wider geographical area in order to generate are various ways to extend business operat through electronic commerce, mail order, personnel travel far away from the main o} business’ objectives are greater customer re delivery costs, establishing a new sales outl responsive to customers’ needs may achieve th Branch and Agency distinguished New sales outlets may be organized as sales sales agency is not a self-contained busi {@pombehalf of the home office. On the other business which acts indepe of company Policy and subject to ave office, The following further differentiate these tyCombined financial statements are 1. Adding together similar items of assets, “expenses, and” . ; 2. Eliminating reciprocal act Reciprocal accounts (Interoffice win ca 1y c Transactions of either the home office or the ranch yarties are recorded in the normal way. Thus, the p resriecording these transactions. ; However, for internal reporting Purposes, tran between a home office and its branch are recorded, accounts, namely: 96 1. “Investment in branch” account (or ‘Branch curr be The home office maintains this account account for its investments in the branch, _ Difference between the reciprocal accouy negative 12,000) = 15,000.The investment than the home office account by 15,000. The transactions are further analyzed as follo Home office books Item (a) eee “Should be” entry Investment in Ionian Branch. ..4K Utilities expense........... Entry made Investment in Dorian Branch...4K Utilities expense. sud Effect of error account is less than the “me Bo by 4,00 it in Tonian branch” is by P4000), ww AKfrome office ee {Debit memo not recorded by branch ‘credit posting for a debit memo e between the reciprocal 290.The investment account is by P4,200. tes:(e) A debit memo received from the home office ae office has debited (increased) the “Investmen account. Therefore, the branch should record the b as a credit (increase) to the “Home office” account, p c the credit as a debit (decrease) would create a Rego the difference between the reciprocal accounts. The “entries made” are provided below for your further ana Home office books Pemi@mm ee Entry made Investment in branch... Expense... Item ) Entry made Investment in branch. Expense... Item (o) Entry made Casi a Investment in branch... Item (d) Entry made Investment in branch... Some other acco Home office. ee solution ~ Another approach in sol simply post the debits and credits to the inves! office accounts a Tee s shown bel entries made’ above); low (amounts are |However, you are obligated to tutor little sister, home works, fetch her from school, cook dinner, do the laundry, and many more! Now, would it gives you a little markup on your allowance to your extra hard work? Yes, of course, rig 3) with the home office (you), the bra company (the mama). It should be noted that a shi billed price, is not a sale. Shipments when they are sold to external parties, 7 shipments made to the branch must be: financial statements are prepared. cost of goods sold and ending invert original costs. i Illustration: “Shipments at billed price 1. Home office transfers inventory Home office books Investment in branch.....120K* *(100,000 x 120%)"end. 3 goss profit of branch ee ing exPensS mul profit of branch rofit of the branch ; a that the branch’s ending inventory of P250,000 co 000 shipments from home office and 10,000 purchases fr pase party."In so far as the home office is concerned, of the branch is computed as follows: ott ales Cost of sales Jnventory, beg. Shipments from home office - at cost (456K + 120%) Freight-in Purchases Total goods available for sale Inventory, end. [(240K + 120%) + 10K] True gross profit of branch Operating expenses True profit of branch Notice that the true profit is comp the shipments from home office to their Allerative solution - Another way of 0 Moft is simply to add the “realized ual gross profit. Z — Unadjusted balance of allowance 49K + 16K) or {SK tal shipmentsora e! ed depreciation = ae mn ers ital ae aP anings ~ beg: se sales ating g expe! pet mses oils javentory: © end. From outside purchases From home office Requirements: 4, Compute for the combined profit. , Prepare the combined statement of financial’ Solution: Requirement (a): Sales (1.6M + 500K) Cost of sales Inventory, beg. Freight-in (32K + 18K) Purchases (1.2M + 40K) Total goods available for sale Inventory, end. [460K + 10K + (240K + 120%)] Gross profit Operating expenses (220K + 100K) Combined profit ‘ SNotes: "The “shipments to branch (from home ¢liminated (ignored) vie ; vailable for sale.“shipments at billed price.” If you are p| CPA board exams later on, I suggest that you. additional illustrations provided below. Altl be very thorough in presenting illustrations (including the other volumes of this book), {J numerous other requirements or problems that may be 9 the board exams. Hopefully the approaches to p illustrated would be of great help to you when ai answering questions during the board exams. You p noticed by now that no matter what the requi problem we still apply the same basic concepts. 7 countless variations in accounting problems but around the same basic principles. Only the pro sometimes we squeeze up, sometimes squeeze the middle, reconstruct some missing informatio everywhere, etc. © I guess what I'm trying to| have great mastery of the basic concepts, analysis, you will surely do great during the boar Illustration 1: Comprehensive problem The following information was taken from the Sales by branch Billings to branch by home office Operating expenses Ending inventory at billed price The following information was taken from the home office: ; Branch current account Shipments to branch _ Allowance for markup - Unadjusted . Revutenente: Compute for the following: Billing rate based on cost or MarkupF you have a cl During the board exams, if you i the accuracy of your answers, please by all means able to check the accuracy a surprised if you find your name among f topnotchers.S© Requirement (j): Branch current (or Investmen Individual profit of branch Branch current - adjusted t in branch) - unadjusted Notice that the “individual profit of branch,” rather true profit, is the amount closed to the “Branch “Investment in branch” account. This is because profit of branch” is also the amount closed to account. Remember that since information on withheld from the branch, there is no way for its “true profit.” Illustration 2: Allowance account and True prof t Shipments received from the home office are bill cost. During the year, the branch received 120,000 and returned damaged goods with’ 18,000. The branch has an ending inventory of price. The branch reported loss of P10,000 financial statements. Requirements: Compute for the following: a. Balance of the “allowance for markup” a adjustments. werk ve 0 GAYS b. True Profit of the branch to be taken up books. Solutions:the branch is P150,000. entries, Requirements: Compute for the following: a. Individual gross profit of the branch. : b. Ending inventory of the branch at cost and et billed Price, Solutions: Requirement (a); Allowance for markup : Beg. B Realized markup | di (squeeze) 135,000 180,000 ¢ End. Bal. 45,000 Individual gross profit of branch Realized markup True gross profit of branch Requirement (b): Unrealized markup Divide by: Ending inventory at cost (ending balance of allowane Unrealized ma rkup (ending balance of all Multiply by: Ending inventory at billed Price (or 150K at cost x 130%) Illustration 6: Closing entries The following closing entry at year-end,Income summary Home office jmentory, beg. _from outside purchases From home office Inventory, end. From outside purchases -From home office The “Allowance for markup” account in beginning and ending adjusted : respectively. Requirements: Compute for the current period. : >. True profit of the branjents: profit of the b rem Truei ; “lle price excluding freight-in Divide by: Billing rate ing freight-in. mae Pee fer on billed price (120K x 5%); (168K x 50%) From home office (at billed price, including freight-in) From outside purchases Total inventory at cost, including freight-in Requirement (c): Sales Beginning inventory at billed price, including freight Shipments from home office at billed price, excluding freight Freight on shipments from home Office (360K x 5%) Purchases from outside parties Total goods available for sale Ending inventory at billed rice, including freight i S Individual 8108s profit of branchtransfers of merchandise ’ transfers of merchandise are acc