APrE 04 01E – HOME OFFICE AND BRANCH ACCOUNTING

Definitions:
Agency – is an unincorporated entity authorized act merely as the local sales agent under the direct supervisionof thehome office.

Branch – an entity granted the power by the home office to engage in transactions as an independent business unit.
Note: branches are not separate legal entities, they are separate economic and accounting entities whose featuresnecessitates special
accounting procedures, such as reciprocal accounts. The home office and all its branches areonereporting entity, thus when the branch
maintains its own books, consolidation procedures similar to Parent-Subsidiaryrelationship are required.

Agency and Branch distinguished:

AGENCY BRANCH
1. Carries no stock of merchandise for sales,
1. Keeps stocks of merchandise for sale which are shipped
other than the samples of products carried. from home office or purchased fromoutside suppliers.
2. Operates under a working fund remitted to
2. May be allowed to maintain bank account andgiven
agency by home office (normally kept using
authority to deposit and withdraw funds fromsuch
imprest system) account.
3. Sales order are approved and shipped by home
3. Ships merchandise to customers and makes their own
office directly to customers. billings against customers/
4. Accounts receivable of agency are collected by
4. Branch collects their own accounts receivable.
home office.
5. Do not keep a complete set of books.
5. Normally keeps a complete set of books where branch
Recording of agency transactions are made in
transactions are recorded in detail.
the home office books.

Methods of Accounting for Agency

1. Agency profits are recorded and determined separately – accounts are kept in the home office books tosummarize agency transactions.
Accounts are identified by agency.
2. Agency profits are merged with regular profits of home office – agency transactions are entered into theregularaccounts in the home
office books.

Methods of Accounting for Branch

1. Records centralized at home office – no set of books are carried in the branch, all transactions completedbythebranch are recorded in
detail in the home office books based on periodic reports rendered by branch tohomeoffice.
2. Records maintained at both branch and home office – branch maintains a complete set of accounting bookswhere all branch transactions
are recorded. On the other hand, home office records in their own books all transactions of the branch based on periodic reports
rendered by the branch to home office.
3. Records centralized at branch – branch maintains a complete set of books where all branch transactions arerecorded. Home Office keeps
account of their investments in the branch through a “Branch Current” account.

Special Features in Branch Accounting

1. Inter-branch transactions – all inter-branch transactions should be cleared through the “Home Office Current”rather than through inter-
branch account.
2. Freight on inter-branch transfers of merchandise inventory – the recipient branch should not be chargedwithfreight on inter-branch
transfers of merchandise with an amount that is more than what the freight shouldhavebeen had the merchandise been shipped
directly from home office to the recipient branch. Any excess freightshould be absorbed by the Home Office and charged to “Loss on
inter-branch transfers of merchandise”.

Combined Statements
Preparation of combined statements would require adjustments and eliminations for the following: 1. Eliminate
“Home Office Current” account against “Branch Current” account.

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HOME OFFICE & BRANCH ACCOUNTING EXAMPLES Page2

2. Eliminate Inter-branch receivables and payables.

3. Eliminate “Merchandise Shipments to Branch” and “Allowance for Over-Valuation on Branch Merchandise” against“Shipments from
 Home Office”
4. Adjust beginning branch inventory to cost basis if carried at billed prices above cost. Allowance for
overvaluation of branch merchandise xxx
Branch inventory, beginning xxx
5. Adjust ending branch inventory to cost basis if carried at billed prices above cost. Branch inventory,
Income Statement xxx
Branch inventory, Balance Sheet xxx

Computation of Allowance for Over-Valuation on Branch Inventory

Billed Price Cost Allowance
Branch inventory, beg xxxx xxxx xxxx Add: Current shipment xxxx xxxx xxxx Total available xxxx xxxx xxxx Less:
Branch inventory, end (xxxx) (xxxx) (xxxx)
Cost of goods sold xxxx xxxx xxxx Cost is computed as = Billed price ÷ (100 % + % of allowance for
overvaluation)
Allowance for overvaluation = Billed price – cost
or Billed price ÷ (100 % + % of allowance for overvaluation) x % of allowance for overvaluation or Cost x % of allowance for
overvaluation

Problem 1 Journal Entries for Home Office and Branch Accounting ABC, Inc. operates a branch in Davao City. The following
are some of the transactions between the home officeandthe branch for the current year:
a) The home office sends a P500,000 check to the branch.
b) The home office pays branch expenses of P50,000.
c) Home office expenses of P35,000 are paid by the branch.
d) Shipments to branch are made at a billed price of P400,000 which includes a markup of 25%.
HO: COGS = Beg. MI, + Net Purchases– Shipments to Branch = TGAS M - End. Mi
Branch: COGS = Beg. MI, + Net Purchases + Shipments to Branch = TGAS M - End. Mi
e) The branch returns merchandise costing P50,000 to the home office.
f) The branch remitted P150,000 to the home office.
g) The branch collected accounts of the home office in the amount of P250,000.
Dr. Cash Cr. Cash
h) The home office collected accounts of the branch – P120,000.
i) Home office acquires branch furniture for P55,000 cash. Branch fixed assets are carried on home officebooks. j) 10% depreciation is
provided on the branch Furniture.
k) The branch pays expenses of P100,000 (P40,000 of which are expenses of the home office). l) The branch reports a
net loss of P65,000.

Required: Entries on the books of the home office and the branch.

Solution:
HOME OFFICE BOOKS BRANCH BOOKS
1. Branch 500,000 Cash 500,000
Cash 500,000 HO 500,000

2. Branch 50,000 Expenses 50,000

Cash 50,000 HO 50,000

3. Expenses 35,000 HO 35,000

Branch 35,000 Cash 35,000

4.

5.

6.

7.

8.

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HOME OFFICE & BRANCH ACCOUNTING EXAMPLES Page3
 9.

10.

11.

12.

13.

Problem 2 A Comprehensive Example

Separate balance sheets prepared from the ledger of DEF Corporation and its branch on December 31, 2020, andacombined
balance sheet prepared from the separate balance sheet are given below.
DEF Corporation
Balance Sheet – Home Office
December 31, 2020
Assets Liabilities and Stockholders’ Equity
Cash 25,000
Accounts Receivable 60,000
Liabilities
Merchandise Inventory 100,000 Accounts Payable 40,000Furniture and Fixtures 30,000
Less: Accumulated Depreciation 12,000 18,000
Branch 78,500
Stockholders’ Equity
Less: Allowance for Mark–up on Capital Stock 200,000
Branch Merchandise 5,000 36,500 236,500
Retained Earnings

276,500
Total Total 276,500

DEF Corporation
Balance Sheet – Branch
December 31, 2020
Assets Liabilities and Home Office Equity

Cash 10,000
Accounts Receivable 20,000 Accounts Payable 10,000Merchandise Inventory 45,000
Furniture and Fixtures 22,500 Home Office 78,500Less: Accumulated Depreciation 9,000 13,500
Total 88,500 Total 88,500

DEF Corporation
Combined Balance Sheet for Home Office and Branch
December 31, 2020
Assets Liabilities and Stockholders’ Equity

Cash 35,000 Liabilities

Accounts Receivable 80,000 Accounts Payable 50,000Merchandise Inventory 140,000 Stockholders’ Equity Furniture and Fixtures
276,500
52,500 Capital Stock 200,000 Less: Accumulated Depreciation 21,000 31,500 Retained Earnings 36,500 236,500Total Total
276,500
The branch inventory on December 31, 2020 was composed of goods acquired from both home office and outsiders: goods, costing
P20,000, were acquired from outsiders; the balance, P25,000, was acquired from the home officeandisstated at billed price, which is 25%
above cost.

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HOME OFFICE & BRANCH ACCOUNTING EXAMPLES Page4

Transactions of the home office and the branch during 2021 are listed below:
Home Office Branch
1. Purchases on account 220,000 25,0002. Goods shipped to branch by home office; cost, P48,000; billed price 25% above
cost, of P60,000
3. Sales on account 300,000 125,0004. Collections on account 305,000 115,0005. Payments on account 200,000 30,0006.
Payment of expenses 47,000 17,7507. Declaration and payment of dividends by home office 25,000 8. Remittances by
branch to home office 30,000
9. Depreciation for the year 3,000 2,25010. Ending Merchandise Inventory. The ending inventory of branch is
composed of P10,000 acquired from outsiders and P20,000 acquired from home office. 80,000 30,000
Requirements:
1. Prepare the journal entries required in the books of both the home office and the branch, including theclosingentries.
2. Prepare a working paper for the preparation of combined statements.

SOLUTION:
Requirement 1 – Journal entries:
HOME OFFICE BOOKS BRANCH BOOKS
1. Purchases 220,000 Purchases 25,000
Accounts Payable 220,000 Accounts Payable 25,000

2. Inv. In Branch 48,000 Shipments from Home Office 60,000

Shipments to Branch 48,000 Home Office 60,000

3. Accounts Receivable 300,000 Accounts Receivable 125,000

Sales 300,000 Sales 125,000

4. Cash 305,000 Cash 115,000

A/R 305,000 A/R 115,000

5. A/P 200,000 A/P 30,000

Cash 200,000 Cash 30,000

6. Expenses 47,000 Expenses 47,000

Cash 47,000 Cash 47,000

7. Dividends Declared 25,000

Cash Dividends Distributable 25,000

Dividends Payable 25,000

Cash 25,000

8. Cash 30,000 HO 30,000

Investment in Branch 30,000 Cash 30,000

9. Depreciation Exp. 3,000 Depreciation Exp. 3,000

Accum. Depreciation 3,000 Accum. Depreciation 3,000

10.

Summary of entries
Home Office Books Branch Books

Beg Bal + Beg Bal +

End. Bal End. Bal
Journal Entries Journal Entries

Debits 25,000 10,000

Cash

Accounts Receivable 60,000 20,000

Merchandise Inventory 1/1/2021 100,000 45,000

 Home Office Books Branch Books

Beg Bal + Beg Bal +

End. Bal End. Bal
Journal Entries Journal
Entries

Furniture and Fixtures 30,000 22,500

Branch 78,500

Purchases

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HOME OFFICE &
BRANCH Expenses including depreciation) ACCOUNTING
EXAMPLES Page5
Dividends

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Mdse. Inv. 12/31/2021 (B/S)

Working Paper Credits Adjustments

and Eliminations:
Allowance for Mark–up on Branch Mdse. 5,000
(a) The reciprocal
accounts Home Office and
Branch are Allowance for Depreciation of F & F 12,000 9,000 eliminated.

Accounts Payable 40,000 10,000

Home Office 78,500

(b) Account balances from
the transfer of merchandise
between offices are canceled:
Capital Stock 200,000

Retained earnings, 1/1/2021 36,500

Sales

Mdse. Shipments to Branch

(c) The original balance of
P5,000 in the Allowance for
Mark–up on Branch
Merchandise account is
Mdse. Inv. 12/31/2021 (I/S)

appliedtothebeginning inventory balance to reduce its cost:

(d) The ending inventory, both as balance sheet account and an income statement value is reduced to its actual cost.

Closing Entries:

1.

2.

3.

4.

5.
6.

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