ACCOUNTING LESSONS WITH BCV

ADVANCED FINANCIAL ACCOUNTING AND REPORTING (AFAR) SERIES

HOME OFFICE, BRANCH AND AGENCY ACCOUNTING

Problem 1: (Accounting for Agency)

Tarzan Company opens an agency in Cavite. The following transactions were occurred for month of January:
a) The home office sends a check for P100,000 to the agency as a working fund.
b) The home office shipped the following to the agency:
➢ Samples – P250,000
➢ Advertising materials – P50,000
c) The home office fills up sales orders sent by the agency for P2,200,000 worth of merchandise. The cost
of merchandise shipped is P1,320,000.
d) The agency collected from its customers P1,600,500, net of 3% discount.
e) The working fund is replenished for the following:
➢ Delivery charges – P10,000
➢ Repairs – P15,000
➢ Maintenance – P12,000
➢ Store supplies – P8,000
f) The agency exhausted ¾ of the samples and 60% of the advertising materials are still unused.

How much is the net income (loss) of the agency for the month of January?

Problem 2: (Home Office and Branch – General Procedures; Journal Entries; Basic Computation) [WITH
ANSWERS]
The EL HOMBRE Company located in Metro Manila, opened a branch on January 1, 2020 in Bulacan. The
transactions of the branch are summarized as follows:

a) Received cash of P75,000 from the home office.

b) Received merchandise in the amount of P120,000 from the home office.
c) Purchased merchandise on account from a local vendor in the amount of P25,000.
d) Sales on account amounted to P200,000.
e) Returned merchandise in the amount of P12,000 to the home office.
f) Collected P150,000 from sales on account.
g) The branch purchased equipment worth P25,000. It is the home office’s policy to maintain branch plant
asset records in the home office books.
h) Paid P10,000 on account for purchases in (c) above.
i) Incurred and paid the following expenditures during the year:
➢ Salaries – P16,000
➢ Rent – P10,000
➢ Utilities – P5,000
➢ Others operating expenses – P15,000
j) Received a journal voucher from the home office for the following charges:
➢ Depreciation – P3,000
➢ Rent – P4,000
➢ Insurance – P2,500
k) Remitted P70,000 to the home office.
l) A customer paid P8,000 directly to the home office. The home office is keeping the funds.
m) Closed the income summary accounts. The closing inventory amounted to P10,000.

1. Prepare all the necessary journal entries on the books of the home office and the branch.
2. Compute for the cost of goods sold of the branch for the year 2020.
3. Compute for the operating expenses of the branch for the year 2020.
4. Compute for the net income (loss) of the branch for the year ended 2020.

Problem 3: (Reconciliation of Intracompany accounts; Journal Entries; Adjustments; Unadjusted and

Adjusted balances)
At December 31, 2020, the home office shows a P156,000 balance in its “Branch Current” account. At the
beginning of 2020, the interoffice account were in agreement. After examining on a comparative basis the
interoffice account of Manheim Company, 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) A branch customer erroneously remitted payment in the amount of P10,000 to the home office. The home
office recorded this collection as a credit to accounts receivable. The branch was not notified of this
collection.
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 (c) The branch returned damaged merchandise worth P30,000 to the home office. The home office did not
yet received 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 utilities expense 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.
(g) The home office charged the branch P8,500 for interest on open account which the branch failed to take
up in full; instead, the branch sent to the home office a wrong adjusting memo, reducing the charge by
P2,000 and set up a liability for the net amount.
(h) The home office received P10,000 from the sale of a merchandise which it erroneously credited to the
branch; the branch did not charge the home office therewith.
(i) The branch acquired an equipment costing P15,000 for its own use. It is the home office’s policy to
maintain records of all its branch plant assets. The home office was not yet notified of the acquisition.
(j) The branch inadvertently received a copy of the Home office entry correcting item (h) and entered a credit
in favor of the home office as of December 31, 2020.
(k) The home office charged the branch depreciation expense of P1,500 related to the equipment that was
acquired in item (i). The branch recorded this by crediting accumulated depreciation.

1. What is the adjusted balance of the Branch current account on the home office books on
December 31, 2020?
2. What is the unadjusted balance of the home office current account on the branch books on
December 31, 2020?
3. What is the net adjustments to the branch current account and to the home office account,
respectively?

Problem 4: (Special Procedures: Different mark-up above costs; with outside purchases)
Financial data for Espeon Company of Manila and its Surigao branch for 2020 follow:

Manila Office Surigao branch

Sales P1,060,000 P315,000
Inventory, January 1 115,000 44,500
Purchases from outsiders 820,000 60,000
Shipments to Surigao branch 210,000
Shipments from Manila office 252,000
Inventory, December 31 142,500 58,500
Operating expenses 382,000 40,000

Records show that the Surigao branch was billed for merchandise shipments during 2019 at 25% above cost.
40% of the branch’s 2019 ending inventory came from outsiders while 70% of the branch’s 2020 ending inventory
came from home office. Espeon Company accounts for its inventories using FIFO.

Based on the above, determine the following:

1. Unadjusted Allowance for overvaluation on December 31, 2020.
2. Branch cost of goods sold for the year ended December 31, 2020.
3. Branch cost of goods sold for 2020 per GAAP.
4. Adjusted Allowance for overvaluation on December 31, 2020.
5. Branch inventory as of December 31, 2020.
6. Branch inventory as of December 31, 2020 insofar the home office is concerned.
7. Combined inventory as of December 31, 2020.
8. Combined cost of goods sold for the year 2020.
9. Branch net income (loss) for the year ended December 31, 2020.
10. True branch net income (loss) for 2020.
11. Overvaluation in branch cost of goods sold or undervaluation in branch net income.
12. Amount of profit (loss) that will be reported in the December 31, 2020 combined income statement
of Espeon Company.

Problem 5: (Special Procedures: Different mark-up above costs)

The Shew Company transferred merchandise during 2020 with a cost of P120,000. The Cainta branch debited
P156,000 upon receipt of this merchandise. The inventory of the Cainta branch on January 1, 2020 amounted
to P49,000. It is the policy of the entity to bill merchandise above its cost. The unrealized profit before adjustment
amounted to P50,000 while the post-closing allowance for overvaluation in branch inventory account amounted
to P30,000.

1. What is the percentage markup of the Shew Company in 2019?

2. What is the percentage markup of the Shew Company in 2020?
3. Compute for the cost of goods sold reported by the branch to the home office.
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 4. Compute for the ending inventory of the branch insofar the home office is concerned.

Problem 6: (Interbranch transfers of cash)

Mindoro branch is authorized by home office to transfer P20,000 cash to Palawan branch. Prepare the journal
entries in the books of the home office and the two branches for the above interbranch cash transfer.

Problem 7: (Interbranch transfers of merchandise; excess freight)

The Mesprit Company maintains branches that market the products that it produces. Merchandise is billed the
branches at cost, with the branches paying freight charges from the home office to the branch. On November
15, Tagaytay branch ships part of its stock to Rizal branch upon authorization by the home office. Originally,
Tagaytay branch had been billed for this merchandise at P1,600 and had paid freight charges of P350 on the
shipment from the home office. Rizal branch, upon receiving the merchandise, pays freight charges of P250 on
the shipment from Tagaytay branch. If the shipment had been made from the home office directly to Rizal branch,
the freight cost would have been P400.

REQUIRED: Prepare the journal entries in the books of the home office and the two branches for the interbranch
merchandise transfer and determine the following:
1. How much is the excess freight?
2. How much was debited to the home office current account in the books of Tagaytay branch to
reflect the interbranch transfer of merchandise?
3. How much was credited to the home office current account in the books of Rizal branch to reflect
the interbranch transfer of merchandise?
4. How much was debited to the branch current – Rizal in the home office books to reflect the
interbranch transfer of merchandise?
5. How much was credited to the branch current – Tagaytay in the home office books to reflect the
interbranch transfer of merchandise?

END OF HANDOUT

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