MODULE 4 Home Office and Branch Accounting PPT PDF

Home Office & Branch
Accounting
1
Learning Objectives
1. Account for home office and branch transactions in each of the
home office’s and branch’s books.
2. Reconcile interoffice accounts.
3. Prepare individual and combined financial statements of the home
office and its branch(es).
2
Branch and Agency distinguished
A sales agency is not a self-contained business but rather acts only on

behalf of the home office.
A branch is a self-contained business which acts independently, but

within the bounds of company policy and subject to the control of the
home office.
3
Branch and Agency distinguished (cont.)
Sales Agency Branch
Displays merchandise and takes customers’ orders but Carries stocks of merchandise used to fill customers’
does not carry stock of merchandise to fill customers’ orders (or provided services similar to those provided
orders. by the home office.
Customers’ orders are sent to the home office for Grants credits in accordance with the company’s
approval of credit. Customers remit payments directly policies, makes normal warranties, fill customers’
to the home office. orders, and makes collections on sales.
Holds revolving cash fund provided by the home office Has its own assets and liabilities and generates its own
that is replenished when depleted. No other cash funds revenue and incurs its own expenses. Makes periodic
are held. remittances to home office subject to company policy.
Not a separate accounting entity. The only accounting A separate accounting entity for internal reporting. It
records maintained are cash receipts and cash maintains its own complete set of accounting records.
disbursements books necessarily to account for the
revolving fund. The main office maintains records of the Fro external reporting, the branch’s financial
sales made through the agency and the expenses it statements are combined with the home office’s
incurs. financial statements.
4
Branch and Agency distinguished (cont.)
Examples of sales agencies and branches:
Sales agency Branch
a. A booth located in a shopping mall a. A branch of Bank of Philippine Island

that displays miniature designs of located in a shopping mall.
houses and lots and condominium
units for a real estate business.
b. A booth located in a sidewalk offering internet b. Kuya Juan restaurant, Anonas Branch.
connection on behalf of an internet service provider.
5
Illustration: Accounting for agency
Agency transactions Home office books
Jan. 1 – Receipt of revolving fund from home office. Cash – Agency #1 1,000
Cash on hand 1,000
Jan. 1 – 31 – Orders sent by agency to home office. Accounts receivable 200

Sales – Agency #1 200
Cost of sales – Agency #1 120
Inventory 120
Collection by home office of agency sales. Cash on hand 200
Accounts receivable 200
Jan. 1 – 31 – Disbursements from the revolving fund.* No entry * Treated just like a petty cash fund.
Jan. 31 – Replenishment of revolving fund.* Various expenses 50

Cash on hand 50
To determine the profit attributable to the agency, the Sales – Agency #1 200
following closing entry shall be made: Cost of sales 120
Various expenses – Agency #1 50
Income summary – Agency #1 30
6
Accounting for Branch operations
A branch is accounted for as a separate business unit, but subject to the control of
the home office. The home office determines the degree of self-management
exercised by the branch.
The branch maintains its own records and prepares its own financial statements.
However, the branch’s financial statements are combined with the home office’s
financial statements when preparing general purpose financial statements.
Combined financial statements are prepared by:

1. Adding together similar items of assets, liabilities, income and expenses , and
2. Eliminating reciprocal accounts
7
Accounting for Branch operations (cont.)
Reciprocal accounts (interoffice or intra-company accounts)
Transactions of either the home office or the branch with external parties are
recorded in the normal way. Thus, the PFRS apply when recording these
transactions.
However, for internal reporting purposes, transactions between the home office
and its branch are recorded in reciprocal accounts, namely:
1. “Investment in branch” account (or “Branch current” account) – maintained by
the home office in its books to account for its investment in the branch.
2. “Home office” account (or “Home office current” account) – maintained by
branch office in its books to account for investments received from the home
office.
8
The “Investment in branch” account is an asset account in the home office’s

individual financial statements; while the “Home office” account is an equity
account in the branch’s individual financial statements. These accounts are
eliminated when combined financial statements are prepared.
A branch is treated as a separate accounting entity for internal reporting.

However, when preparing financial statements for external reporting, the home
office and its branch are viewed as a single reporting entity. Moreover, the branch
does not have a separate legal existence.
9
Home Office Books:
Investment in Branch
a. Assets transfer to branch xx
xx b. Assets received from branch
c. Profit of branch xx xx d. Loss of branch
e. Liabilities and expenses

incurred or paid by home
office on behalf of
branch xx
10
Branch Books:
Home office
b. Assets transfer to home

office xx
xx a. Assets received from home office
d. Loss xx xx c. Profit
e. Liabilities and expenses incurred

or paid by home office on behalf
xx of branch
11
Illustration: Accounting for Branch operations
Initial investment
1. Home office establishes a branch for an initial investment of P1,000,000 in cash.
Home office books Branch books
Investment in Branch 1M Cash 1M

Cash 1M Home office 1M
Property carried in branch books – Branch acquisition

2. Branch acquires equipment for P400,000 to be carried in the branch books

No entry Equipment 400K
Cash 400K
12
Illustration: Accounting for Branch operations (cont.)
Subsequent depreciation on the property
No entry Depreciation expense 40K
Accum. Depreciation 40K
Property carried in the home office books:

3. Branch acquires equipment for P200,000 to be carried in the home office
books.
Equipment – Branch 200K Home office 200K

Investment in branch 200K Cash 200K
Subsequent depreciation
Investment in branch 20K Depreciation expense 20K

Accum. Depr. – Branch 20K Home office 20K 13
Property carried in branch books – Home office acquisition
4. Home office acquires furniture for P50,000 to be carried in the branch books.
Investment in branch 50K Furniture 50K

Cash 50K Home office 50K
Subsequent depreciation of P5,000 on the above furniture is recorded as:

No entry Depreciation expense 5K
Accum. depr. – Furniture 5K
14
Property carried in home office books – Home office acquisition
5. Home office acquires furniture for P30,000 to be carried in the home office
books, but possession and use of the equipment is transferred to the branch.
Furniture – Branch 30K No entry

Cash 30K
Subsequent depreciation of P3,000 on the above furniture is recorded as:

Investment in branch 3K Depreciation expense 3K

Accum. depr. – Branch 3K Home office 3K
15
Transfer of inventories – freight paid by home office
6. Home office transfers inventory worth P150,000 to the branch. Freight paid by
the home office is P10,000.
Investment in branch 160K Shipments from home office 150K
Shipments to branch 150K Freight-in 10K
Transfer of inventories – freight paid by branch
7. Home office transfers inventory worth P80,000 to the branch. Freight paid by
the home office is P6,000.

Home office 80K
Cash 6K 16
Purchase of inventories – acquisition from outside parties
8. Branch purchases inventory worth P40,000 on account from outside party.
Freight paid by the branch is P2,000.
No entry Purchases 40K

Freight-in 2K
Accounts payable 40K
Cash 2K
Revenue
9. Branch makes total sales of P500,000 on account.
No entry Accounts receivable 500K

Sales 500K
17
Collection
10. Branch collects P400,000 from accounts receivable.

No entry Cash 400K
Accounts receivable 400K
Remittance to home office

11. Branch remits P300,000 cash collections to home office.

18
Allocation for expenses
12. Branch incurs various operating expenses amounting to P100,000, one-fourth
of which remains unpaid.
No entry Various operating expense

accounts 100K
Cash 75K
13. Home office allocates P10,000 utilities expense and P4,000 general overhead
costs to the branch.
Investment in branch 14K Utilities expense 10K
Utilities expense 10K Gen. & adm. Expeses 4K
General & adm. Exp. 4K Home office 14K 19
Individual financial statements
The trial balance of the branch as of this point is shown below:
Dr Cr
Cash 417,000
Accounts receivable 100,000
Shipments from home office 230,000
Purchases 40,000
Freight-in 18,000
Equipment 400,000
Accum. Depr. – equipment 40,000
Furniture 50,000
Accum. Depr. – furniture 5,000
Accounts payable 40,000
Accrued expenses 25,000
Home office 827,000
Sales 500,000
Depreciation expense 68,000
Utilities expense 10,000
General overhead expense 4,000
Various operating expense 100,000________________
Totals 1,437,000 1,437,000
20
Assuming the branch has ending inventory of P150,000, the branch’s individual
statement of profit or loss for the period is shown as:
Sales 500,000
Cost of goods sold:
Inventory, beginning -
Purchases 40,000
Freight-in 18,000
Total goods available for sale 288,000
Less: Inventory, end 150,000 (138,000)
Gross profit 362,000
Less: Operating expenses (breakdown) 182,000
Profit for the period 180,000
21
The closing entries are as follows:
14. To close the branch’s nominal accounts to the income summary account.
No entry Sales 500K

Inventory 150K
Shipments from home office 230K
Purchases 40K
Freight-in 18K
Depreciation expense 68K
Utilities expense 10K
General overhead expense 4K
Various operating expenses 100K
Income summary 180K
22
15. To close the branch’s profit to the reciprocal accounts.
Investment in branch 180K Income summary 180K

Income summary – branch 180K Home office 180K
To reconcile the reciprocal accounts:

Branch books Home office books
Home office Investment in branch
1,000,000 (1) (1) 1,000,000
(3) 200,000 20,000 (3) (3) 20,000 200,000 (3)
(11) 300,000 50,000 (4) (4) 50,000 300,000 (11)
3,000 (5) (5) 3,000
160,000 (6) (6) 160,000
80,000 (7) (7) 80,000
14,000 (13) (13) 14,000
180,000 (15) (15) 180,000______________
1,007,000 1,007,000
23
Individual statement of financial position – branch books
ASSETS
Cash 417,000
Inventory 150,000
Equipment 400,000
Accumulated depreciation – equipment ( 40,000)
Furniture 50,000
Accumulated depreciation – furniture ( 5,000)
Total assets 1,072,000
LIABILITIES AND EQUITY

Home office 1,007,000
Total liabilities and equity 1,072,000
24
Combined financial statements
The home office and the branch are viewed as a single reporting entity for external
reporting. Thus, the individual financial statements of the home office and the
branch need to be combined when preparing general purpose financial statements.
Combined financial statements are prepared simply by adding together similar

items of assets, liabilities, income and expenses, and eliminating the reciprocal
accounts.
25
Illustration: Combined financial statements
The trial balance of ABC Co.’s home office and branch are shown below:
ABC Co.
Trial Balance
December 31, 2020
Home office Branch
Dr. (Cr.) Dr. (Cr.)_______
Cash 1,100,000 417,000
Accounts receivable 180,000 100,000
Inventory, beg. 650,000 -
Purchases 72,000 40,000
Freight-in 22,000 18,000
Shipments to branch (230,000)
Investment in branch 827,000
Equipment 720,000 400,000
Accumulated depreciation – equipment ( 72,000) ( 40,000)
Furniture 90,000 50,000
Accumulated depreciation – furniture ( 9,000) ( 5,000)
Accounts payable ( 72,000) ( 40,000)
26
Illustration: Combined financial statements (cont.)
ABC Co.
Trial Balance
December 31, 2020
Home office Branch
Dr. (Cr.) Dr. (Cr.)_______
Accrued expenses ( 45,000) ( 25,000)
Share capital (2,000,000)
Share premium ( 500,000)
Retained earnings – beg. ( 206,200)
Home office (827,000)
Sales ( 900,000) (500,000)
Depreciation expense 168,000 68,000
Utilities expense 18,000 10,000
General overhead expense 7,200 4,000
Various operating expenses 180,000 100,000
The home office and the branch have ending inventories of P270,000 and P150,000, respectively.
Required: Prepare the combined

a. Statement of financial position; and
b. Statement of profit or loss
27
Solutions:
ABC Co.
Working paper for combined financial statements
December 31, 2020
Home Elimina-
office Branch tion Combined
Dr. (Cr.) Dr. (Cr.) Dr. (Cr.) Dr. (Cr.)_____
Cash 1,100,000 417,000 1,517,000
Accounts receivable 180,000 100,000 280,000
Inventory, beg. 650,000 650,000
Shipments from home office 230,000 (230,000)b
Purchases 72,000 40,000 112,000
Freight-in 22,000 18,000 40,000
Shipments to branch (230,000) 230,000b
Investment in branch 827,000 ( 827,000)a
Equipment 720,000 400,000 1,120,000
Accumulated depr. – equipment ( 72,000) ( 40,000) ( 112,000)
Furniture 90,000 50,000 140,000
Accumulated depr. – furniture ( 9,000) ( 5,000) ( 14,000)
28
ABC Co.
Working paper for combined financial statements
December 31, 2020
Home Elimina-
office Branch tion Combined
Dr. (Cr.) Dr. (Cr.) Dr. (Cr.) Dr. (Cr.)__
Accounts payable (72,000) (40,000) (112,000)
Accrued expenses (45,000) (25,000) ( 70,000)
Share capital (2,000,000) (2,000,000)
Share premium ( 500,000) ( 500,000)
Retained earnings – beg. ( 206,200) ( 206,200)
Home office (827,000) 827,000a -
Sales (900,000) (500,000) (1,400,000)
Depreciation expense 168,000 68,000 236,000
Utilities expense 18,000 10,000 28,000
General overhead expense 7,200 4,000 11,200
Various operating expenses 180,000 100,000 280,000
The elimination entries should be:

a) Home office 827,000 b) Shipments to branch 230,000
Investment in branch 827,000 Shipments from home office 230,000
29
Requirement a:
The combined statement of profit or loss is as follows:
ABC Co.
Statement of profit or loss
For the year ended December 31, 2020
Sales 1,400,000
Cost of goods sold:
Inventory, beginning 650,000
Purchases 112,000
Freight-in 40,000
Inventory, end (420,000)* ( 382,000)
Gross profit 1,018,000
Depreciation expense ( 236,000)
Utilities expense ( 28,000)
General overhead costs ( 11,200)
Various operating expenses ( 280,000)
30
The individual statement of profit or loss of the home office would have been as follows:
Sales 900,000
Cost of goods sold:
Inventory, beg. 650,000
Purchases 72,000
Freight-in 22,000
Inventory, end (270,000) (244,000)
Gross profit 656,000
Depreciation expense (168,000)
Utilities expense ( 18,000)
General overhead costs ( 7,200)
Various operating expenses (180,000)
31
Closing entries:
Dec. 31, 2020 Sales 1,400,000
Inventory, end 420,000
Purchases 112,000
Freight-in 40,000
Depreciation expense 236,000
Utilities expense 28,000
General overhead expense 11,200
Various operating expenses 280,000
Income summary 462,800
Dec. 31, 2020 Income summary 462,800

Retained earnings 462,800
32
Requirement b:
The combined statement of financial position is as follows:
ABC Co.
Statement of financial position
As of December 31, 2020
ASSETS
Cash 1,517,000
Inventory 420,000
Equipment 1,120,000
Accumulated depreciation – equipment ( 112,000)
Furniture 140,000
Accumulated depreciation – furniture ( 14,000)
Share capital 2,000,000
Share premium 500,000
33
Reconciliation of reciprocal accounts
As of any given point of time, the “Investment in branch” and the “Home office” accounts must have equal
balances. If these accounts do not balance, reconciliation procedures must be performed.
Reconciliation items are as follows:
a. Transfers in-transit – at the time financial statements are prepared, there may be asset transfers
between the home office and the branch which were not yet recorded by the supposedly recipient.
b. Unrecorded Debit and Credit memos –
A debit memo sent by the home office to the branch means that the home office debited (increased)
the “Investment in branch” account, while a debit memo sent by the branch to the home office means
that the branch has debited (decreased) the “Home office” account. A lag in the recording of debit ot
credit memos can result to imbalance of reciprocal accounts on cut-off date.
c. Errors – such as omissions in recording, double recording, mathematical mistakes, and the like can result
to imbalance in the reciprocal accounts.
34
Reconciliation of reciprocal accounts
Illustration 1: Reconciliation – Adjusted balance

ABC Co. is currently preparing its combined financial statements. At December 31, 2020, the home office
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:
a. The home office shipped merchandise worth P20,000 to the branch during December 2020 which the
latter has received and recorded only in January 2021.
b. The home office collected P10,000 accounts receivable on behalf of the branch. The branch did not yet
receive the credit memo sent by the home office.
c. The branch returned damaged merchandise worth P30,000 to the home office. The home office did
not yet receive the debit memo sent by the branch.
d. A remittance of cash collections amounting to P40,000 was not yet recorded by the home office.
e. The home office allocated overhead cost of P5,000 to the branch which the latter has recorded twice.
f. Freight charge of P12,000 paid by the home office for shipments of merchandise to the branch was
recorded by the latter as P1,200.
Required: Compute for the adjusted balances of the reciprocal accounts.

35
Reconciliation of reciprocal accounts (cont.)
Solution:_______________________________________________________________________________
Home office Branch
books books
Investment in
branch Home office_____
Unadjusted balances 156,000 70,200
a) Shipment in-transit 20,000
b) Collection of receivable ( 10,000)
c) Return of damaged merchandise ( 30,000)
d) Unrecorded remittance ( 40,000)
e) Allocation of cost recorded twice ( 5,000)
f) Mathematical mistake in recording 10,800_____
Adjusted balances 86,000 86,000_______
The compound adjusting entries are as follows:

Shipments to branch 30K Shipments from home office 20K
Cash 40K Freight-in 10.8K
Investment in branch 70K Accounts receivable 10K
Overhead expense 5K
Home office 15.8K
36
Illustration 2: Reconciliation – Unadjusted balance
ABC Co. is currently preparing its combined financial statements. At December 31, 2020, the home
office 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 home office to the branch amounting to P12,000 was not recorded
by the branch.
b. A debit memo sent by the home office to the branch amounting to P9,000 was not recorded by
the branch.
c. A credit memo sent by the branch to the home office amounting to P20,000 was recorded by
the home office twice.
d. A debit memo sent by the branch to the home office amounting to P30,000 was recorded by
the home office as P3,000.
e. The branch sent by mistake a credit memo amounting to P7,000 to the home office. The home
office did not record it.
Required: Compute for the unadjusted balance of the “Home office” account.
37
Solution:__________________________________________________________________________
(Home office books) (Branch books)
Investment in branch Home office
Unadjusted balances Start 182,000 145,000 Squeeze

a) Credit memo sent by HO (12,000)
b) Debit memo sent by HO 9,000
c) Credit memo from branch
recorded twice ( 20,000)
d) Debit memo from branch
recorded erroneously ( 27,000)
e) Erroneous credit memo sent
by branch (7,000) _________
Adjusted balances 135,000 135,000__________
38
Illustration 3: Reconciliation – Net adjustment
ABC Co. is currently preparing its combined financial statements for the year ended December 31, 2020. As
of this date, the “Investment in branch” account has a balance of P95,000 while the “Home office” account
has a balance of P132,000. The following information has been gathered:
a. The home office allocated unpaid utilities expenses amounting to P10,000 to the branch which the
branch did not record in full. Instead, the branch sent a wrong adjusting memo to the home office
reducing the charge by P2,500 and setting up a liability for the remaining amount.
b. The home office erroneously credited the branch for a return of shipment of merchandise worth
P25,000. The branch did not make any return of merchandise.
c. The branch mistakenly received a copy of the home office correcting entry for item (b) above dated
January 3, 2021 and entered a credit in favor of the home office on December 31, 2020.
d. The branch mistakenly sent the home office a debit memo amounting to P3,000 for an apparent
remittance of collections which did not happen. The home office did not record the debit memo.
Required:
a. Net adjustments to the “Investment in branch” and “Home office” accounts, and
b. Adjusted balances of the reciprocal accounts.
39
Solution:

Item (a)
Entry made: Entry made:
Investment in branch 10K Utilities expense 7.5K
Utilities expense 10K Utilities payable 7.5K
Should be: Should be:

Utilities expense 10K Home office 10K
Correcting entry: Correcting entry:

None Utilities payable 7.5K
Utilities expense 2.5K
Home office 10K
40
Item (b)

Shipments to branch 25K None
Investment in branch 25K

None None

Investment in branch 25K None
Shipments to branch 25K
41

Item ( c )
Correcting entry in item (b) above was recorded, but Entry made:
only on January 3, 2021. Shipments from home office 25K
Home office 25K
Should be:
None
Correcting entry:
Home office 25K
Shipments from home office 25K
42
Item (d)

None Home office 3K
Cash 3K

None None

None Cash 3K
Home office 3K
43
Investment in branch Home office
Dr. / (Cr.) (Dr.) / Cr._________
Unadjusted balance 95,000 132,000_______
(a) Allocated expense not recorded in full - 10,000

(b) Erroneous credit by home office 25,000 -
(c) Erroneous correcting entry - (25,000)
(d) Erroneous debit memo - 3,000______
Net adjustments – Requirement (a) 25,000 (12,000)_____
Adjusted balances – Requirement (b) 120,000 120,000_____
44
Home office with several branches
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 home
office was erroneously recorded by the home office to another branch’s investment
account or a branch erroneously records a transaction of another branch with the
home office.
45
Home office with several branches - Reconciliation of reciprocal
accounts
Illustration 1: Several branches – Unadjusted balance
ABC Co. has several branches. On December 31, 2020, the “Home office” account maintained by Alpha
Branch shows 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 Beta Branch
and retained by the latter. 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 home office in Alpha
Branch’s account. Alpha Branch has inappropriately recorded the related debit memo from the home
office.
Required: Compute for the unadjusted balance of the “Investment in Alpha branch” in the home office
books.
46
accounts
Solution
Item (a)

Investment in Alpha Branch 15K None
Shipments to Alpha Branch 15K

Investment in Beta Branch 15K None
Shipments to Beta Branch 15K

Shipments to Alpha Branch 15K None
Investment in Alpha Branch 15K
47
accounts (cont.)
Item (b)
Investment in Charlie Branch 16K Shipments from home office 16K
Shipments to Charlie Branch 16K Home office 16K

Investment in Alpha Branch 16K Shipments from home office 16K
Shipments to Alpha Branch 16K Home office 16K

Shipments to Charlie Branch 16K None
Investment in Charlie Branch 16K
Investment in Alpha Branch 16K

Shipments to Alpha Branch 16K 48
accounts (cont.)
Item ( c )

Investment in Alpha Branch 5K Cash 5K

Investment in Delta Branch 5K Cash 5K

Investment in Alpha Branch 5K None
Investment in Delta Branch 5K
49
accounts (cont.)
Item (d)

Investment in Alpha Branch 4K Utilities expense 4K

Investment in Echo Branch 4K None
Utilities expense 4K

Investment in Echo Branch 4K Home office 4K
Investment in Alpha Branch 4K Utilities expense 4K
50
Investment in Alpha Branch Home office_______
Unadjusted balances 139,000 Squeeze 145,000 Start
(a) Shipment to Beta charged to
Alpha ( 15,000) -
(b) Shipment to Alpha charged to
Charlie 16,000 -
(c ) Remittance from Delta credited
Alpha 5,000 -
(d) Allocable expense to Echo ( 4,000) (4,000)___________
Adjusted balances 141,000 141,000___________
51
accounts (cont.)
Illustration 2: Several branches – Adjusted balance
ABC Co. has several branches. On December 31, 2020, the “Investment in Branch One” maintained by the
home office shows a balance of P100,000 while the “Home office” account maintained by Branch One shows
a balance of P142,000. The following information was determined:
a. Branch Two acquired equipment for P30,000 to be maintained in the books of the home office. This was
recorded by the home office as a transaction with Branch One.
b. Branch One acquired equipment for P40,000 to be maintained in its books. This was not recorded by
the home office.
c. Branch Four remitted cash collections of P10,000 to the home office which the latter failed to record.
d. The home office erroneously charged Branch One for a debit memo of P12,000 received from Branch
Five.
e. Branch One reversed a previous debit memo from Branch Six amounting to P6,000. The home office
decided that this charge is appropriately Branch Seven’s cost.
Required: Compute for the adjusted balances of the reciprocal accounts of the home office and the Branch
One.
52
Solution:
One Home office_________
Unadjusted balances 100,000 142,000
(a) Equipment maintained in home office
books 30,000 -
(b) Equipment maintained in branch’s
books - -
( c) Remittance by Branch Four - -
(d) Debit memo from another branch 12,000 -
(e) Inter-branch debit memo - -_____________
Adjusted balances 142,000 142,000____________
53
Illustration 3.1: Difference between unadjusted reciprocal accounts.
Modes Co. has several branches. The following information was determined during its
reconciliation procedures for its reciprocal account with Ionian Branch.
a. Utilities expense of P4,000 that is properly allocable to Ionian Branch was recorded by the
home office in Dorian Branch’s account. Ionian Branch made the correct entry.
b. The home office recorded a cash remittance of P16,000 from Ionian Branch as coming from
Phrygian Branch.
c. A debit memo from the home office for P10,000 representing shipment of merchandise was
not recorded by the Ionian Branch.
d. The debit posting for a cash remittance to the home office amounting to P7,000 was not
recorded by the Ionian Branch.
e. The credit posting for a credit memo received from the home office representing collection by
the home office of the branch’s account receivable amounting to P5,000 was not recorded by
Ionian Branch.
Required: How much is the difference between the unadjusted “Investment in Ionian Branch” and
“Home office” accounts?
54
Solution:
The requirement of the problem is the difference between the unadjusted balances of the reciprocal account.
Instead of making corrections, our approach in solving this problem is simply to reperform the errors so that we
can derive their erroneous effects on the reciprocal accounts. We will be applying the “concept of equilibrium,”
i.e., for every debit, there is a corresponding credit.
Home office books Ionian Branch books

Investment in Ionian Branch Home office______
(a) Allocable expense not recorded by the
branch 4,000 4,000
(b) Cash remittance not recorded by home
office (16,000) (16,000)
(c ) Debit memo not recorded by branch 10,000 10,000
(d) Debit memo not recorded by branch ( 7,000) ( 7,000)
(e) Credit posting of a credit memo - -_____________
Totals 3,000 (12,000)___________
Difference between the reciprocal accounts = (3,000 minus negative 12,000) = 15,000. The investment account
is greater than the home office account by P15,000.
55
Item (a)

Investment in Dorian Branch 4K Utilities expense 4K

Investment in Ionian Branch 4K Utilities expense 4K
Effect of error
“Investment” account is less than the “Home office”
account by P4,000 (or “Investment in Ionian branch” is
understated by P4,000).
56
Item (b)
Investment in Dorian Branch 16K Cash 16K

Investment in Ionian Branch 16K Cash 16K
Effect of error
“Investment” account is greater than the “Home
office” account by P16,000 (or “Investment in Ionian
Branch” is overstated by P16,000).
57
Item (c )
Investment in Ionian Branch 10K None
Shipments to Ionian Branch 10K

Investment in Ionian Branch 10K Shipments from home office 10K
Shipments to Ionian Branch 10K Home office 10K
Effect of error
“Home office” account is less than the “Investment”
account by P10,000 (or “Home office” account is
understated by P10,000).
58
Item (d)
Cash 7K Home office 0
Investment in Ionian branch 7K Cash 7K

Investment in Ionian branch 7K Cash 7K
Effect of error
“Home office” account is greater than the
“Investment” account by P7,000 (or “Home office”
account is overstated by P7,000).
59
Item (e)
Investment in Ionian branch 5K Accounts receivable 0

Investment in Ionian branch 5K Accounts receivable 5K
Effect of error
No effect on the reciprocal accounts. Although,
accounts receivable in the branch books is overstated.
60
Illustration 3.2: Difference between unadjusted reciprocal accounts
The following information was determined during the reconciliation procedures for the reciprocal
accounts of a home office and its branch.
a. The credit posting for an expense allocated to the branch amounting to P6,800 was erroneously
recorded by the branch as P8,600.
b. The debit posting for an expense allocated to the branch amounting to P4,000 was erroneously
recorded by the branch as P5,000.
c. The debit posting for a cash remittance from the branch amounting to P7,000 was not recorded
by the home office.
d. The credit posting for a credit memo received from the branch amounting to P5,000 was
recorded twice by home office.
e. The credit posting for a debit memo received from the home office amounting to P3,000 was
recorded by the branch as a debit.
Required: How much is the difference between the unadjusted “Investment in branch” and “Home
office” accounts?
61
Investment in branch Home office_____
(a) Error on posting credit portion of allocated

expense 6,800 8,600
(b) Error on posting debit portion of allocated
expenses - -
(c ) Cash remittance not recorded by home office - -
(d) Debit memo not recorded by branch - -
(e) Credit posting for a debit memo 3,000 3,000
(3,000)
______________________________________________________________________
Totals 9,800 5,600__________
Difference between the reciprocal accounts = (9,800 – 5,600) = 4,200. The investment account is greater
than the home office account by P4,200.
62
Item (a)
Investment in branch 6.8K Expense 8.6K
Expense 6.8K Home office 8.6K
Item (b)
Investment in branch 4K Expense 5K
Expense 4K Home office 5K
Item (c )
Cash 0 Home office 7K
Item (d)
Investment in branch 5K Some other account 5K
Some other account 10K Home office 5K
Item ( e)
Investment in branch 3K Some other amount 3K
Some other account 3K Home office 3K
63
Alternative Investment in branch Home office
solution Dr. (Cr.) (Dr.) Cr.____
(a) Error on posting credit portion of

allocated expense 6,800 8,600
(b) Error on posting debit portion of
allocated expense 4,000 4,000
(c ) Cash remittance not recorded by home
office (7,000) (7,000)
(d) Debit memo not recorded by branch 5,000 5,000
(e) Credit posting for a debit memo 3,000 (3,000)_____
Totals 11,800 7,600______
Difference between the reciprocal accounts = (11,800 minus 7,600) = 4,200
64
Special Problems in Accounting for branch operations
Such transactions as:

1. Merchandise shipments to branch billed at a price above cost
2. Inter-branch transactions
Although these transactions do not affect general purpose financial statements,

they require some special accounting for internal purposes only.
65
Shipments to branch billed at above cost
Illustration:
Shipments at billed price
1. Home office transfers inventory worth P100,000 to the branch. Shipments to
the branchHome
are office
billedbooks
at 120% above cost. Branch books
Shipments to branch 100K Home office 120K
Allowance for markup 20K
Shipments at billed price – Freight paid by home office

2. Home office transfers inventory worth P200,000 to the branch. Shipments to the
branch are billed at 120% above cost. Freight paid by the home office is P10,000.
66
Allowance for markup 40K
Shipments to branch billed at above cost (cont.)
Shipments at billed price – Freight paid by branch
3. Home office transfers inventory worth P80,000 to the branch. Shipments to the branch are
billed at 120% above cost. Freight paid by the branch is P6,000.
Allowance for markup 16K Home office 96K
Cash 6K
Purchases from outside parties
4. Branch purchases inventory worth P40,000 on account from outside party. Freight paid by the
branch is P2,000.
No entry Purchases 40K

Freight-in 2K
Sales 2K 67
Shipments to branch billed at above cost (cont.)
Revenue
5. Branch makes total sales of P500,000 on account.
No entry Accounts receivable 500K

Sales 500K
Expenses
6. Branch incurs total expenses of P100,000, P20,000 of which were allocated by the home office
to the branch

Cash 80K
68
Individual profit of the branch
Assume the branch reports ending inventory of P250,000, inclusive of capitalized freight-in. The
profit in the branch’s individual statement of profit or loss is computed as follows:
Sales 500,000
Cost of sales:
Inventory beginning -
Shipments from home office (120K+240K+96K) 456,000
Freight-in (10K + 6K + 2K) 18,000
Purchases 40,000
Inventory, end (250,000) (264,000)
Individual gross profit of branch 236,000
Operating expenses (100,000)
Individual profit of branch 136,000
69
True profit of the branch
Assume that the branch’s ending inventory of P250,000 consists of P240,000 shipments from home office
and P10,000 purchases from outside party. In so far as the home office is concerned the “true profit” of
the branch is computed as follows:
Sales 500,000
Cost of sales:
Inventory, beg.
Shipments from home office – at cost 456K/120%) 380,000
Freight-in 18,000
Purchases 40,000
Inventory, end [(240K / 120%) + 10K] (210,000) (228,000)
True gross profit of branch 272,000
True profit of the branch 172,000
70
Alternative solution:
Another way of computing the “true gross profit” is simply to add the “realized markup” to the
branch’s individual gross profit.
Total markup (or unadjusted balance of allowance account)

(20K + 40K + 16K) or (456K total shipments from home office X20%/120%) 76,000
Less: Unrealized markup in ending inventory (40,000)
Realized markup 36,000

True profit of branch 172,000
71
Combined financial statements – Shipments at billed price
When combined financial statements are prepared, the markups on shipments are eliminated in
order to restate cost of goods sold and ending inventory to their original costs. This is performed by
eliminating the “shipments to branch (from home office)” accounts, together with the related
“allowance” account. The “Investment in branch” and “Home office” accounts are also eliminated.
72
Illustration: Combined financial statements
The following information was taken from the books of the home office and its branch. Shipments to branch are billed at 120% above
cost.________________________________________________________________________________
Home office Branch
Dr. (Cr.) Dr. (Cr.)_______
Cash 1,100,000 66,000
Accounts receivable 180,000 100,000
Inventory, beg. 300,000 -
Purchases 1,200,000 40,000
Freight-in 32,000 18,000
Allowance for markup ( 76,000)
Equipment 720,000 400,000
Accumulated depreciation – equipment ( 72,000) (40,000)
Accounts payable (72,000) (40,000)
Share capital (2,000,000)
Retained earnings – beg. (152,000)
Home office (600,000)
Sales (1,600,000) (500,000)
Operating expenses 220,000 100,000
Totals - -___
Inventory, end:
- From outside suppliers 460,000 10,000
- From home office 240,000
Required:
1. Compute for the combined profit
2. Prepare the combined statement of financial position
73
Solutions:
Requirement 1:
Sales (1.6M + 500K) 2,100,000
Cost of sales:
Freight-in (32K + 18K) 50,000
Purchases (1.2M + 40K) 1,240,000
Total goods available for sale 1,590,000
Inventory, end [460K + 10K + (240K / 120%)] ( 670,000) (920,000)
Gross profit 1,180,000
Operating expenses (220K + 100K) (320,000)
Combined profit 860,000
▪ The “shipments to branch (from home office)” accounts are eliminated (ignored) when computing the
combined total goods available for sale.
▪ The unrealized markup in ending inventory is eliminated.
74
Checking the accuracy = compute individual profits of the home office and the branch and adding thereon
the realized markup.
The individual profit of the home office is computed as follows:

Sales 1,600,000
Cost of sales
Freight-in 32,000
Purchases 1,200,000
Total goods available for sale 1,152,000
Inventory, end (460,000) (692,000)
Individual gross profit of home office 908,000
Individual profit of home office 688,000
75
The combined profit is computed as follows:
Individual profit from home office 688,000
Realized markup (previous computation) 36,000
Or
Individual profit of home office 688,000

True profit of branch (previous computation) 172,000
76
Requirement 2:
Elimination entries are as follows
12/31/16 Home office 600,000
Shipments to branch 380,000

Allowance for markup 76,000
Closing entries are as follows:

12/31/16 Sales 2,100,000
Inventory, end (previous compt.) 670,000
Purchases 1,240,000
Freight-in 50,000
Operating expenses 320,000

77
The combined statement of financial position is prepared as follows:
ASSETS
Cash (1.1M +66K) 1,166,000
Accounts receivable (180K + 100K) 280,000
Inventory [460K + 10K + (240K /120%)] 670,000
Equipment (720K + 400K) 1,120,000
Accumulated depreciation – equipment (72K + 40K) (112,000)

Accounts payable (72K + 40K) 112,000
Share capital 2,000,000
Retained earnings (152K + 860K) 1,012,000
78
Problem 1: Comprehensive problem
The following information was taken from the records of a branch:
Sales by the branch 700,000
Billings to branch by home office 625,000
Ending inventory at billed price 250,000
The following information was taken from the records of the home office:
Branch current account 650,000
Shipments to branch 500,000
Allowance for markup – Unadjusted 125,000
Required: Compute for the following:

a. Billing rate based on cost or markup percentage based on cost.
b. Sales to branch to be included in the combined financial statements
c. Realized markup
d. CGS of branch to be included in the combined financial statements
e. Ending inventory of branch to be included in the combined financial statements
f. Unrealized markup in ending inventory
g. Ending balance of the “allowance for markup” account before combining the financial statements
h. Individual profit of the branch
i. True profit of the branch
j. Adjusted balance of the branch current immediately prior to combining the financial statements.
79
Solutions:
Requirement (a):
Billing rate based on cost = Billings to branch by home office / Shipments to branch
= 625,000 / 500,000
= 125%
Markup percentage based on cost = Allowance for markup / Shipments to branch

= 125,000 / 500,000
= 25%
Requirement (b)
P700,000 - representing the sales by branch. Shipments to the branch, even at billed prices, are
not considered sales. Shipments are recognized as sales only when sold to external parties.
80
Requirement (c)
Total realized markup ( or unadjusted balance of allowance account)
or 625K x 25% / 125%) 125,000
Less: Unrealized markup in ending inventory (250K x 25% / 125%) ( 50,000)
Requirement (d)
Inventory, beg. (at cost) -
Shipments from home office (at cost) (625K / 125%) 500,000
Inventory, end (at cost) (250K / 125%) (200,000)
Cost of goods sold (at cost) 300,000
or
Inventory, beg. (at billed price) -
Shipments from home office (at billed price) 625,000
Inventory, end (at billed price) (250,000)
Cost of goods sold (at billed price) 375,000
Less: Realized markup ( 75,000)
Cost of goods sold (at cost) 300,000
“Realized markup” is also referred to as “realized gross profit.”

81
Requirement (e)
Inventory, end (at cost) = 250,000 / 125% = 200,000
Requirement (f)
Unrealized markup = 250,000 x 25%/125% = 50,000
Requirement (g)
Allowance for markup – unadjusted 125,000
Realized markup (75,000)
Allowance for markup – end 50,000
Ending balance of the “allowance” account represents the “unrealized markup” in ending inventory.
Requirement (h)
Sales 700,000
Cost of sales
Inventory, beg, -
Inventory, end (250,000) (375,000)
Individual gross profit of branch 325,000
82
Requirement (i)
Sales 700,000
Cost of sales
Inventory, beg
Shipments from home office – at cost (625K/125%) 500,000
Inventory, end – at cost (250K/125%) (200,000) (300,000)
True gross profit of branch 400,000
Check:
Add: Realized markup 75,000
Requirement (j)
Branch current (or Investment in branch) – unadjusted 650,000
Branch current – adjusted 875,000
83
Illustration 2: Allowance account and True profit
Shipments received from the home office are billed at 120% above cost. During the year, the
branch received shipments billed at 120,000 and returned damaged goods with billed price of
P18,000. The branch has an ending inventory of P30,000, at billed price. The branch reported loss
of P10,000 in its individual financial statements.
Required: Compute for the following
1. Balance of the “allowance for markup” account before year-end adjustments
2. True profit of the branch to be taken up in the home office books
84
Solutions:
Requirement 1:
Shipments from home office at billed price 120,000
Returns of damaged goods (18,000)
Total goods available for sale at billed price 102,000
Multiply by: 20%/120%
Total markup on goods available for sale or
(Balance of allowance account before year-end adjustments 17,000
Requirement 2:
Total markup on goods available for sale 17,000
Less: Unrealized markup in ending inventory (30K x 20%/120%) (5,000)
Loss on individual financial statements (10,000)

Add: Realized markup 12,000
True profit of the branch 2,000
85
Illustration 3: Markup based on billed price and Adjustment to allowance account
The home office bills shipments of merchandise to its branch at a markup of 20% on the billed
price. At the beginning of the period, the “Allowance for markup” account has a credit balance of
P4,000. During the period, the home office made shipments of goods worth P240,000 at cost. The
branch reported an ending inventory at P120,000 at billed price.
Required:
1. Compute for the realized markup
2. Determine the year-end adjustments to the allowance account to reflect the true profit of the
branch
86
Solutions:
Requirement 1:
Allowance account, beg. 4,000
Markup on shipments during the period [(240K /80%) – 240K] 60,000
Allowance account before year-end adjustments (or Total markup) 64,000
Less: Unrealized markup in ending inventory (120 x 20%) (24,000)
Requirement 2:
As markup are realized, the “allowance for markup” is also decreased. Thus, the year-end
adjustment to the allowance will involve a debit of P40,000, representing the realized markup.
87
To illustrate further, assume the following additional information:
Sales 500,000
The cost of goods sold (at cost) is computed as follows:

Inventory, beg. – at cost [(4K/20%) x 80%] 16,000
Shipments during the period – at cost 240,000
Inventory, end – at cost (120K x 80%) (96,000)
Cost of goods sold – at cost 160,000
The cost of goods sold at billed price is computed as follows:

Inventory, beg. – at billed price (4K/20%) 20,000
Shipments during the period – at billed price (240K/80%) 300,000
Total good available for sale 320,000
Inventory, end – at billed price (120,00)
Cost of goods sold – at billed price 200,000
88
The individual profit and true profit of the branch are computed as follows:
Individual True
Sales 500,000 500,000
Cost of goods sold (200,000) (160,000)
Operating expenses (100,000) (100,000)
Profit 200,000 240,000
The year-end entries in the books of the home office and branch are as follows
Sales 500K
Cost of goods sold 200K
Operating expenses 100K
Income summary 200K
Investment in branch 200K Income summary 200K
Allowance for markup 40K Home office 200K
Income summary – branch 240K
89
Inter-branch transactions
Inter-branch transfers of assets are accounted for “as if “ the assets transferred went through the
home office. The transacting branches account for the transaction “as if” they are dealing with the
home office rather than with each other.
Inter-branch transfers of cash

The home office instructs Branch #1 to transfer P10,000 cash to Branch #2. The entries on the
respective books of the home office and the transacting branch are as follows:
Home office books Branch #1 books Branch #2 books
Investment in Branch #2 10K Home office 10K Cash 10K

Investment in Branch #1 10K Cash 10K Home office 10K
90
Assume that later on, Branch #2 repays P8,000 to Branch #1. This will be recorded as follows:
Investment in Branch #1 8K Cash 8K Home office 8K

Investment in Branch #2 8k Home office 8K Cash 8K
Inter-branch transfers of merchandise

Inter-branch transfers of merchandise are accounted for similarly with inter-branch transfers of
cash. However, special problems may arise on the accounting for freight.
A branch is properly charged for the freight on the shipments it receives. However, a branch should
not be charged for excessive freight caused by indirect routing. The branch should be charged only
for the normal freight. The excess freight is charged as an expense in the home office books.
91
PAS 2 Inventories states that cost necessary in bringing the asset to its intended location form part
of the cost. The excess freight is not a necessary cost as it could have been avoided; therefore, it
should be charged as an expense.
Illustration 1: Excessive freight

1. Home office transfers inventory worth P150,000 to Branch #1. Freight paid by the home office
is P10,000.
Home office books Branch #1
Investment in Branch #1 160K Shipments from home office 150K

Shipments to Branch #1 150K Freight-in 10K
2. Later on, the home office instructs Branch #1 to transfer the merchandise to Branch #2. Branch
#1 pays freight for P3,000. If the merchandise had been shipped directly from the home office
to Branch #2, the freight cost would have been P11,000.
92
The excess freight is computed as follows:
Freight from home office to Branch #1 10,000
Freight from Branch #1 to Branch #2 3,000
Total freight on indirect routing 13,000
Normal freight from home office to Branch #2 ( 11,000)
Excess freight 2,000
Shipments to Branch #2 150K Home office 163K Shipments from

Shipments to Branch #1 150K Shipments from home office 150K
home office 150K Freight-in 11K
Freight-in 10K Home office 161K
Cash 3K
Investment in Branch #2 161K

Loss on excessive freight 2K
Investment in
93
Branch #1 163K
Illustration 2: Savings on freight
1. Home office transfers inventory worth P150,000 to Branch #1. Freight paid by the home office
is P10,000.
Home office books Branch #1 books

Investment in Branch #1 160K Shipments from home office 150K
Shipments to Branch #1 150K Freight-in 10K
2. Later on, the home office instructs Branch #1 to transfer the merchandise to Branch #2. Branch
#1 pays freight of P3,000. If the merchandise had been shipped directly from the home office
to Branch #2, the freight cost would have been P14,000.
Freight from home office to Branch #1 10,000
Freight from Branch #1 to Branch #2 3,000
Total freight on indirect routing 13,000
Normal freight from home office to Branch #2 (14,000)
Savings on freight (1,000)
94
Shipments to Branch #2 150K Home office 163K Shipments from home

Shipments to Branch #1 150K Shipments from Office 150K
home office 150K Freight-in 13K
Freight-in 10K Home office 163K
Cash 3K
Investment in Branch #2 163K

#1 163K
95

MODULE 4 Home Office and Branch Accounting PPT PDF

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Home Office & Branch

A sales agency is not a self-contained business but rather acts only on

A branch is a self-contained business which acts independently, but

Sales agency Branch

a. A booth located in a shopping mall a. A branch of Bank of Philippine Island

Jan. 1 – 31 – Orders sent by agency to home office. Accounts receivable 200

Jan. 31 – Replenishment of revolving fund.* Various expenses 50

Combined financial statements are prepared by:

The “Investment in branch” account is an asset account in the home office’s

A branch is treated as a separate accounting entity for internal reporting.

c. Profit of branch xx xx d. Loss of branch

e. Liabilities and expenses

b. Assets transfer to home

e. Liabilities and expenses incurred

Investment in Branch 1M Cash 1M

Property carried in branch books – Branch acquisition

Home office books Branch books

Property carried in the home office books:

Equipment – Branch 200K Home office 200K

Investment in branch 20K Depreciation expense 20K

Investment in branch 50K Furniture 50K

Subsequent depreciation of P5,000 on the above furniture is recorded as:

Home office books Branch books

Furniture – Branch 30K No entry

Subsequent depreciation of P3,000 on the above furniture is recorded as:

Investment in branch 3K Depreciation expense 3K

Investment in branch 80K Shipments from home office 80K

No entry Purchases 40K

Home office books Branch books

No entry Accounts receivable 500K

Home office books Branch books

Remittance to home office

Cash 300K Home office 300K

Home office books Branch books

No entry Various operating expense

Home office books Branch books

No entry Sales 500K

Investment in branch 180K Income summary 180K

To reconcile the reciprocal accounts:

LIABILITIES AND EQUITY

Combined financial statements are prepared simply by adding together similar

Required: Prepare the combined

The elimination entries should be:

Dec. 31, 2020 Income summary 462,800

Illustration 1: Reconciliation – Adjusted balance

Required: Compute for the adjusted balances of the reciprocal accounts.

The compound adjusting entries are as follows:

Unadjusted balances Start 182,000 145,000 Squeeze

Home office books Branch books

Should be: Should be:

Correcting entry: Correcting entry:

Home office books Branch books

Entry made: Entry made:

Should be: Should be:

Correcting entry: Correcting entry:

Home office books Branch books

Home office books Branch books

Entry made: Entry made:

Should be: Should be:

Correcting entry: Correcting entry:

(a) Allocated expense not recorded in full - 10,000

Net adjustments – Requirement (a) 25,000 (12,000)_____