ACC5116

ACCOUNTING FOR HOME OFFICE & BRANCH/AGENCY

Part I: Theory of Accounts

1. Which of the following statements regarding accounting for home office and branch is CORRECT?

a. The required balance of the Allowance for Overvaluation account is the mark-up in the total ending inventory of the branch.
b. The combined net income of the home office and its branches is presented in the separate Statement of Comprehensive Income of the Home office.

c. The income of the branch as far as the home office is concerned is debited to the Investment in Branch account in the separate books of the home office.
d. The home office ships merchandise to the branch at a mark-up based on cost, as a consequence the retained earnings of the branch in its separate books is understated.
2. Which of the following statements is CORRECT regarding accounting for home office and branch?
a. Assuming the home office ships merchandise to the branch at a mark-up based on cost, the account Shipments from Home Office in the published income statement is reported at billed price.

b. If the home office purchased equipment to be used by the branch but the record of the asset is being maintained by the home office for uniform depreciation policy, no entry is required on the part of the
branch.

c. The Allowance for overvaluation account must be debited in the separate books of the home office to adjust the results of operations of the branch whether it is a net income or net loss per branch books.
d. A credit memo received by the branch may be a notification from the home office about allocation of expenses incurred by the latter.
3. Which of the following statements is CORRECT regarding accounting for home office and branch?
a. The stockholders’ equity of each branch is eliminated through the working paper.

b. The accounts Shipments to Branch and Shipments from Home Office are eliminated in the working paper and closed in the separate books.
c. The account Allowance for Overvaluation in Branch Inventory account is debited in the working paper to make the ending inventory of the branch at cost.
d. A branch may debit an Investment in “another” Branch account for purposes of inter branch transactions.
Part II: Problem Solving

Reconciliation of Reciprocal Accounts

Problem 1: On January 1, 2020, SGP Company established a branch in a nearby city. At the close of the calendar year ended December 31, 2020, the Investment in Branch account on the books of the home

office had a balance of P66,000. The branch books reflected another amount thus the difference in the reciprocal accounts is due to the following data:
 Cash of P10,000 forwarded to the home office by the branch is in transit and has not been recorded on the home office books.

 Merchandise costing the home office P8,000 was transferred to the branch at a billing price of P9,000. The merchandise is in transit and has not been recorded on the branch books.

 Notification sent by the home office to the branch, informing the branch of P5,000 of operating expenses that the home office paid on behalf of the branch, has not been received by the branch and

thus has not been recorded by the branch.

 Cash of P2,000 received by the branch from the home office was erroneously recorded by the branch as P20,000.

 The branch purchased, for cash P15,000 of equipment for its use; fixed asset accounts of the branch are maintained at the home office. The home office is yet to be notified.

 The branch reported a net income of P89,000 but was recorded by the home office at P98,000.

Compute the unadjusted balance of Home Office Current account

a. 32,000 b. 36,000 c. 31,000 d. 27,000
SOLUTION:
HO books Branch Books

Investment in Branch Home Office Current

Unadjusted balances P 66,000 P 36,000
a. (10,000)
b. 9,000
c. 5,000
d. (18,000)
e. (15,000)
f. (14,000) (5,000)

Adjusted balances P 27,000 P 27,000

Reconciliation of Reciprocal Accounts
Problem 2: Springfield Clothing operates a branch in BGC. At close of the business on December 31, 2020, the capital account in the books of the BGC branch showed a normal balance of P2,784,300. The
interoffice accounts were in agreement at the beginning of the year. For purposes of reconciling the interoffice accounts, the following facts were ascertained:

a. On December 27, 2020, the BGC branch released a check for P13,500 to Fabric Warehouse Trading. The branch inadvertently recorded the transaction as a remittance to Springfield Clothing and sent a copy
of the debit memo to notify the home office. Springfield recorded this upon receiving the said memo on January 2, 2021.

b. Springfield Clothing allocated promotions and advertising expenses totaling P18,000 to the BGC branch. The home office erroneously charged the said expense to Eastwood branch. BGC branch was not yet
informed of the said allocation as of year-end.

c. A debit memo from Springfield Clothing for P20,700 regarding transfer of funds was recorded twice by the BGC branch by debiting its interoffice account.
d. Coat and Ties, a BGC branch customer, remitted P15,000 to Springfield Clothing. The home office recorded this as cash collection of its own receivable on December 28, 2020. Upon notification the

following day, the branch debited the amount to Receivable from the Home Office and credited its reciprocal account.
e. A P105,000 shipment, charged by the home office to the BGC branch, was actually sent to and retained by the Rockwell branch.
f. The home office failed to take up a P12,000 credit memo from the branch.
g. BGC branch store insurance premiums of P9,600 were paid by Springfield. The home office debited Insurance expenses and credited Cash in its books. The branch recorded the amount of P96,000 as a

liability.
h. Merchandise costing P39,000 was sent to the BGC branch by Springfield on December 12, 2020. The branch recognized a liability by crediting Accounts Payable upon the receipt of the inventory.

i. Freight charge of P12,600 on merchandise shipped to BGC branch was paid by Springfield and was recorded in the branch books as P1,260.
j. Elite Designs, a BGC branch customer, remitted P63,000 to Springfield. The home office recorded this cash collection on December 23, 2020. Upon receiving a notification, the BGC branch recorded the

transaction twice on December 27, 2020.

The unadjusted balance of the Investment in BGC branch account as of December 31, 2020 is:

a. P3,051,240 b. P2,962,140 c. P2,970,840 d. P3,075,240

SOLUTION:
HO books Branch Books
Investment in Branch Home Office Current
Unadjusted balances P 3,051,240 P 2,784,300
a. 13,500
b. 18,000 18,000
c. 62,100
d. (15,000) (30,000)
e. (105,000)
f. 12,000
g. 9,600 9,600
h. 39,000
i. 11,340
j. 63,000
Adjusted balances P 2,970,840 P 2,970,840

Agency Accounting
Problem 3: On October 1, 2020, the Greenbelt Main Office established a sales agency in Ortigas.
 The main office sent samples of its merchandise amounting to P8,400 and a working fund amounting to P72,000 to be maintained on the imprest basis.

 The samples sent were intended to last until June 1, 2021. During the first two months of operations, the agency transmitted to the home office sale of goods amounting to P364,500, but the home

office was not able to fill-up 25% of the said transmitted sales orders.
 Collections from customers amounted to P73,941, net of 2% sales discount.

 Payments made by the agency during October and November were as follows: annual rent of P57,600, advertising expense worth P5,600 and utilities amounting to P7,200.

 It also purchased equipment worth P9,000 which will be depreciated at 20% per annum.

 The gross profit rate on sales agency order is 20% of gross sales.

Net income of the agency for the two months ended November 30, 2020 is

a. P17,431
b. P28,366

c. P29,875
d. P26,866

SOLUTION:

Sales P 273,375 (364,500 x 75%)

Less: Sales discount (1,509) (73,941/98% x 2%)

Net sales P 271,866

Less: COGS (218,700) (80% of Gross Sales)

Gross Profit 53,166

Less: OPEX (2,100) Samples (8,400/8mos. = 1,050 x 2)
(9,600) Rent (57,600 x 2/12)
(5,600) Advertising

(7,200) Utilities
(300) Depreciation (9,000 x 20% x 2/12)

P 28,366
Agency Accounting

Problem 4: On June 1, 2020, Sta. Rosa, a home office established an agency in Tagaytay, sending samples costing P490,000 which are useful until the end of the second month of the second quarter of 2021 and
have a salvage value of 10% of cost. A working fund of P398,125 is to be maintained using the imprest basis. During 2020, the agency submitted to the home office sales order amounting to P4,134,375. Sales

per invoice were P3,215,625 which were duly approved by the home office. Collections during the year amounted to P1,717,021.25 net of 3% sales discount. The cost of merchandise sold during the year is
equal to 75% of the gross sales. Vouchers for expenses amounted to P214,375.

How much net income would be reported by the Tagaytay agency on December 31, 2020?
a. 279,177.50 b. 315,927.50 c. 508,865.00 d. (95,427.50)
SOLUTION:
Sales P 3,215,625

Sales Discount (53,103.75) (1,717,021.25/97% X 3%)

CGS (2,411,718.75) (3,215,625 X 75%)

Paid Vouchers (214,375)

Samples Expense (257,250) (490,000 X 90% X 7/12)

Net Income P 279,177.50

Billed Price

Problem 5. Arrow Modern Clothing, ships merchandise to its Greenbelt branch at a 40% markup based on cost during 2020, which was higher by 25% compared to the mark-up based on cost in prior year. In
2020, the separate Statement of Comprehensive Income of Greenbelt branch shows merchandise from Arrow Modern Clothing in the amount of P1,890,000. At year-end, Arrow Modern Clothing adjusted its
Loading in Branch Inventory account downward to P99,000. In the books of Arrow Modern Clothing, the Income Summary – Greenbelt branch was credited in the amount of P495,000 with a debit to the
Unrealized Mark-up account of the same amount.

Compute the inventory of Greenbelt branch at the beginning of 2020

a. 360,000 b. 346,500 c. 414,000 d. 247,500

SOLUTION:
Allowance for Overvaluation after adjustment P 99,000

Add: Realized Mark-up 495,000

Allowance for Overvaluation before adjustment 594,000

Deduct: Unrealized mark-up from shipment this year (540,000) (1,890,000/140%) x 40%
Unrealized mark-up from last year 54,000
P54,000 /15% * 115% = P414,000
Billed Price
Problem 6: Home office bills its branch for merchandise shipments at a mark-up of 30% based on cost. The following are some of the account balances on the books of home office and its branch as of
December 31, 2020:

Home Office Books Branch Books

Inventory, January 1 P 35,000 P 101,500

Shipments from Home Office 263,900

Purchases 1,575,000 350,000

Shipments to Branch 253,750

Branch Inventory Allowance 91,875

Sales 2,100,000 1,260,000

Operating Expenses 507,500 192,500
Per physical count, the ending inventory of the branch is P73,500 including goods from outside purchases of P48,475; the ending inventory of the home office is P210,000.
Compute for the ff:
1. Unrealized profit in the separate books of the home office on December 31, 2020;
2. Beginning inventory of the branch in 2020 that came from outside purchases;
3. Total goods available for sale of the branch
A. 21,000 ; 48,475 ; 715,400

B. 15,750 ; 33,250 ; 781,375

C. 21,000 ; 33,250 ; 781,375

D. 15,750 ; 48,475 ; 715,400

4. Total ending inventory to be shown on the published financial statements;
5. Combined net income for the year
A. 277,725 ; 957,950
B. 328,475 ; 942,725
C. 277,725 ; 942,725
D. 328,475 ; 957,950

SOLUTION:

STB P253,750 * 130% = 329,875 (SFHO) - 263,900 = P65,975 merchandise in transit

Billed Price Cost Mark-up

130% 100% 30%
Beginning Inventory 68,250 52,500 15,750
Shipments 329,875 253,750 76,125

Available for Sale 91,875 - before adjustment

Ending Inventory *91,000 70,000 21,000 - after adjustment

CGS 70,875 - realized mark-up

* P73,500 +65,975 - 48,475 = P91,000

Beginning Inventory per branch P101,500

Less: from Home Office (68,250) P 33,250

Beginning Inventory per branch P 101,500

SFHO 329,875
Purchases 350,000 P 781,375

Ending Inventory of HO P210,000

Ending Inventory of Branch (at cost) 70,000 + 48,475 = 118,475 P328,475

NI of HO NI of Branch
Sales P 2,100,000 P 1,260,000
CGS (1,146,250) (641,900)

OPEX (507,500) (192,500)

P 446,250 P 425,600

70,875
P 446,250 P 496,475 (True Income)

Combined Net Income P942,725

Billed Price

Problem 7: The following transactions were entered in the branch current account of The Fort Head Office for the year 2020:
Investment in Pasig Branch

Beg. Balance, 1/1/20 2,296,290 166,500 Collection of AR, 9/12/20

Shipments to branch, 4/1/20 1,062,000

Cash forwarded, 6/1/20 75,000

Operating expenses charged to the branch, 12/31/20 14,400
▪ Shipments to the branch during the year were made at a mark-up of 20% based on cost.
▪ The balance of the Allowance for Overvaluation of Branch Inventory account was P106,500 at the beginning, and the allowance was written down to P73,500 at year-end.
 ▪ On December 1, 2020, the home office purchased a piece of equipment amounting to P180,000 for its branch in Pasig. The said equipment has a useful life of five years and will be carried in the
books of the branch, but the home office recorded the purchase by debiting Equipment.

▪ The branch recorded the depreciation of the equipment by debiting the Home Office Current account and crediting Accumulated Depreciation.

▪ Debit memo regarding the allocation of operating expenses to the Pasig branch was received by the branch on January 2, 2021.
▪ The Pasig branch reported net income of P988,650.
▪ It also remitted cash to the home office on December 31, 2020 amounting to P165,000, which the home office received and recorded on January 1, 2021.

▪ The interoffice accounts were in agreement at the beginning of the year.

1. Compute the adjusted balance of the Investment in Pasig Branch account on December 31, 2020 before the necessary closing entries were made
a. 3,116,190 b. 3,328,590 c. 3,508,590 d. 3,296,190
2. Compute the amount of adjustment in the Allowance for Overvaluation of Branch Inventory account
a. 73,500 b. 210,000 c. 283,500 d. 245,400
3. Compute the net income of Pasig branch that will be reported in the published Statement of Comprehensive Income of The Fort Company
a. 971,250 b. 1,184,250 c. 1,181,250 d. 1,044,750
4. Compute the amount of the Home Office Current account that will be reported in the separate books of Pasig branch after closing entries are made
a. 4,283,340 b. 4,477,440 c. 4,281,840 d. 4,267,440

SOLUTION:
Investment in Pasig Branch
Unadjusted P 3,281,190
180,000 (bullet #3)

(165,000) (bullet #7)

Adjusted P 3,296,190 (before closing)

Allowance for Overvaluation

Beginning P 106,500

Add: Increase during the year 177,000 (1,062,000 / 120% * 20%)

Deduct: Required Balance (73,500)

Realized mark-up P 210,000

NI of Branch (unadjusted and understated) P 988,650
Less: Depreciation Expense (3,000) - 180,000/5 yrs. / 12 months
Less: Allocated expenses (14,400)
adjusted ; understated P 971,250
210,000

True Income of branch P 1,181,250

Investment in Branch/HOC (before closing) P 3,296,190

Add: Net Income per Branch 971,250

(after closing) P 4,267,440

Inter-Branch Transactions

Problem 8. On August 1, 2020, BGC, a home office established two branches: Ortigas branch and Ayala branch. BGC, transferred P1,400,000 worth of cash and P6,125,000 worth of merchandise to its Ortigas

branch. On August 15, BGC instructed Ortigas to transfer three-fourths of the merchandise and cash received to the Ayala branch. In addition, on October 6, 2020, shipments from BGC were received by
Ortigas branch amounting to P2,187,500 and the freight collect amounting to P113,750. Three-fifths of the said shipments were sold by the Ortigas branch to Cainta customers. On November 9, 2020, Upon

instruction of BGC, Ortigas branch transferred to Ayala branch half of the remaining immediate prior month shipments from BGC. The receiving branch paid additional freight in the amount of P43,750. Had the
merchandise been shipped from BGC directly to the Ayala branch, only P33,250 worth of freight would have been incurred.

Compute the balance of the Investment in Ayala branch account in the separate books of BGC
a. 6,060,250

b. 6,070,750
c. 6,123,250
d. 6,114,500
SOLUTION:

P1,400,000 + P6,125,000 = P7,525,000 * ¾ = P5,643,750

P2,187,500 *⅖ * ½ = 437,500 + 33,250 - 43,750 = 427,000 P6,070,750

Inter-Branch Transactions

Problem 9: Manila Company has a branch in Baguio and Davao. The reciprocal accounts between the home office and the branches were in agreement at the beginning of 2020. However at December
31, 2020, the following reciprocal balances are found in the home office books:

Investment in Baguio P186,500

Investment in Davao 84,000

Data for reconciliation of the reciprocal accounts are as follows:

 On December 29, 2020, the home office instructed Baguio to transfer P74,000 cash to Davao. Baguio recorded this transaction immediately. Upon receipt, Davao has recorded this

transfer at P47,000. The home office however has not yet recorded this inter branch transaction as of end of the year.
 Manila transferred goods costing P28,900 to Baguio branch and paid P2,500 of shipping cost on December 16, 2020. Baguio shipped all of these goods to Davao upon instruction of the

home office on December 30, 2020. Shipping cost is P3,600 freight collect. Had the goods been shipped directly to Davao, P5,000 of freight cost should have been incurred. The
interbranch shipment was not recorded by the branches and the home office as well.
  Baguio has collected cash of P5,750 from Davao’s customers. This transaction is not yet recorded by Davao and the home office.

 The home office has already allocated P11,000 and P9,000 of administrative expenses to Baguio and Davao respectively. The branches are not yet notified.

 Baguio remitted P14,300 cash to the home office on December 12, 2020. The home office has failed to record the said remittance.

 Davao returned goods costing P6,850 to the home office. The goods were shipped on December 19 and received on December 24 but no entries have been made in the home office

books.
Compute for the following:
1. Excess freight on inter branch transfer of inventories
a. P1,100

b. P2,500
c. P1,400

d. P3,600
2. Adjusted balance of Investment in Baguio account

a. P72,550
b. P66,800
c. P86,850
d. P103,950
3. Adjusted balance of Investment in Davao account
a. P181,450

b. P182,550
c. P175,700

d. P145,400
4. Unadjusted balance of Home Office Current account in Baguio’s books

a. P52,150
b. P87,200
c. P107,250
d. P92,950
5. Unadjusted balance of Home Office Current account in Davao’s books
a. P236,250

b. P122,000
c. P115,150

d. P84,850
SOLUTION:
Books of Home Office Books of Baguio Branch

Investment in Baguio Branch Home Office Current

Unadjusted P 186,500 Unadjusted P 92,950
5,750 11,000
(74,000) (31,400)

(31,400)
(14,300)

Adjusted P72,550 Adjusted P72,550

Books of Home Office Books of Davao Branch

Investment in Davao Home Office Current

Unadjusted P 84,000 Unadjusted P 115,150
74,000 27,000
30,300 30,300

(5,750) 9,000
(6,850) (5,750)

Adjusted P 175,700 Adjusted P175,700