AFAR HOME OFFICE, AGENCY, AND BRANCH ACCOUNTING

Reciprocal accounts – Debit balance in one set of books = Credit balance in another set of books
Example: Accounts Receivable of seller (Dr.) = Accounts Payable of buyer (Cr.); Cash in Bank of depositor
(Dr.) = Deposit Liability of bank (Cr.)

In Home Office and Branch Accounting – Investment in Branch of home office (Dr.) = Home Office
Current of the branch (Cr.)

PROBLEM 1:
On January 1, 2022, ABC Company establishes its first branch in Bulacan. Separate books are to be
kept by the branch, and financial statements of the branch are to be submitted to the home office at
the end of each month. It is the policy of ABC Company to carry the depreciable assets of the
branch on the books of the home office. Transactions of the branch for the first month of
operations are as follows:
a) Received cash of P80,000 from the home office.

HO books Branch books

Debit Credit Debit Credit
Investment in Branch 80,000 Cash 80,000
Cash 80,000 Home Office Current 80,000

b) Purchased equipment with a five-year life for P40,000 cash. All depreciable assets acquired
during the period are depreciated for the full period in the year of acquisition and no
depreciation is recognized in the period of disposition.

Normal entry:
Equipment 40,000 – Home office
Cash 40,000 - Branch

HO books Branch books

Debit Credit Debit Credit
Equipment – Branch 40,000 Home Office Current 40,000
Investment in Branch 40,000 Cash 40,000

c) Received merchandise shipments from the home office. These merchandises cost the home
office P64,000 (billed price = P64,000 + 25% of cost = P64,000 x 125% = P80,000). The
home office paid for the freight charges amounting to P4,000.

HO books Branch books

Debit Credit Debit Credit
Investment in Branch 80,000 Shipments from home office/Inventory 80,000
Shipments to Branch/Inventory 64,000 Home Office Current 80,000
Allowance for Overvaluation 16,000

Normal entry:
Freight in/Inventory 4,000 - Branch
Cash 4,000 – Home Office
 HO books Branch books
Debit Credit Debit Credit
Investment in Branch 4,000 Freight-in/Inventory 4,000
Cash 4,000 Home Office Current 4,000

d) Purchased merchandise from outside suppliers for P8,000 cash.

Normal entry:
Purchases/Inventory 8,000 - Branch
Cash 8,000 - Branch

HO books Branch books

Debit Credit Debit Credit
No entry Purchases/Inventory 8,000
Cash 8,000

e) Sold merchandise for P90,000 cash.

Normal entry (periodic):
Cash 90,000 - Branch
Sales 90,000 – Branch

HO books Branch books

Debit Credit Debit Credit
No entry Cash 90,000
Sales 90,000

f) Paid the following expenses: salaries, P24,000; utilities, P4,000; rent, P12,000; miscellaneous,
P8,000.

HO books Branch books

Debit Credit Debit Credit
No entry Expenses 48,000
Cash 48,000

g) Remitted P60,000 to the home office.

HO books Branch books

Debit Credit Debit Credit
Cash 60,000 Home Office Current 60,000
Investment in Branch 60,000 Cash 60,000

Information pertinent to adjustment is as follows:

a) Salaries payable at month-end was P8,000.

HO books Branch books

Debit Credit Debit Credit
No entry Salaries Expense 8,000
Salaries Payable 8,000

b) Depreciation expense is to be recognized for the period.

Normal entry:
 Depreciation Expense 667 – the party who used the PPE - Branch
Accumulated Depreciation 667 – the party who recorded the cost - HO
(40,000 divide 5 years x 1/12)

HO books Branch books

Debit Credit Debit Credit
Investment in Branch 667 Depreciation Expense 667
Accumulated Depreciation 667 Home Office Current 667

c) Merchandise branch inventory at year-end amounted to P4,000 merchandise acquired from

outside suppliers and P20,000, excluding freight of P800, acquired from the home office.

HO books Branch books

Debit Credit Debit Credit
No entry Inventory, 1/31/2022 24,800
Income Summary 24,800

Assume that all inventory items shipped by the home office to the branch are billed at 25%
above cost.

REQUIRED:
1. Prepare all the necessary journal entries to record the above transactions in the books of the
home office and the branch.
2. How much is the reported net income of the branch?
Cost of Sales Computation:
Beginning Inventory 0
Purchases 8,000
Shipments from home office (at billed price) 80,000
Freight-in 4,000
Cost of goods available for sale 92,000
Ending inventory (24,800)
Cost of Sales reported by the branch 67,200

Sales 90,000
Cost of Sales (67,200)
Gross profit 22,800
Expenses (48,000 + 8,000 + 667) (56,667)
Net income reported by the branch (33,867)

Closing entries of the branch:

HO books Branch books
Debit Credit Debit Credit
Sales 90,000
Income Summary 58,667
Expenses 56,667
Purchases 8,000
Shipments from home office 80,000
Freight-in 4,000

Branch Loss 33,867 Home Office Current 33,867

Investment in Branch 33,867 Income Summary 33,867
Investment in Branch = carried at equity method (kung ano galaw ng equity, Home Office
Current, yun din galaw ng investment)

3. How much is the net income of the branch insofar as the home office (true branch net
income or the branch net income in the combined financial statements) is concerned?

Cost of Sales Computation – Branch:

At Billed Price At True Cost Mark-up
(from HO)
Beginning inventory
BI from home office 0 0 0 [A]
BI from outsiders 0 0
BI, capitalized freight and other costs 0 0
Purchases from outsiders 8,000 8,000
Shipments from home office 80,000 64,000 16,000
Freight-in of logistics company 4,000 4,000
Available for sale 92,000 76,000 16,000 [B]
Ending inventory
EI from home office (20,000) [C] (16,000) (4,000) [D]
EI from outsiders (4,000) (4,000)
EI, capitalized freight and other costs (800) (800)
Cost of Sales 67,200 [F] 55,200 [G] 12,000 [E]

[A] – beginning allowance for overvaluation

[B] – unadjusted allowance for overvaluation
[C] – includes 25% mark-up (125% of cost)
[D] – ending allowance for overvaluation
[E] – realized mark-up or adjustment in the allowance for overvaluation
[F] – cost of sales reported by the branch
[G] – true cost of sales in the combined financial statements
Allowance for overvaluation (AFOBI)
Beginning 0
CY shipments (item c) 16,000
Unadjusted 16,000
Adjustment 12,000
Ending 4,000

HO books Branch books

Debit Credit Debit Credit
Allowance for overvaluation 12,000 No entry
Branch loss 12,000

At billed price At true cost

Sales 90,000 90,000
Cost of sales (67,200) (55,200)
Gross profit 22,800 34,800
Expenses (56,667) (56,667)
Net income (33,867) (21,867)
Realized mark-up 12,000
True net income (21,867)
Net income at billed price = NI of branch in the separate financial statements
Net income at true cost = true net income of the branch

PROBLEM 2:
The unadjusted balance of the Investment in Branch account of X Company amounted to
P1,250,000 before considering the following items:
a) The home office collected a branch trade accounts receivable of P9,000. The branch was not
notified about the collection.
Home Office – aware of the transaction
Entry made (PC) Should be entry (PA)
Cash 9,000 Cash 9,000
Investment in Branch (9,000) Investment in Branch (9,000)

Branch – unaware of the transaction

Entry made (PC) Should be entry (PA)
No entry Home Office Current 9,000
Accounts Receivable (9,000)

PAJE:
Home Office Current 9,000
Accounts Receivable 9,000

b) Merchandise billed at P6,150 was shipped by the home office to the branch on December
30. The merchandise was still in transit as of December 31 and has not been recognized in
the books of the branch.

Home Office – aware of the transaction

Entry made (PC) Should be entry (PA)
Investment in Branch 6,150 Investment in Branch 6,150
Shipments to Branch (6,150) Shipments to Branch (6,150)

Branch – unaware of the transaction

Entry made (PC) Should be entry (PA)
No entry Shipments from HO 6,150
Home Office Current (6,150)

PAJE:
Shipments from HO 6,150
Home Office Current 6,150

c) The home office was charged P6,400 when the branch returned merchandise to the home
office on December 31. The merchandise is in transit (not yet received by HO and therefore,
HO is not aware if silent).
 Home office – not aware of the transaction
Entry made (PC) Should be entry (PA)
No entry Shipments to Branch 6,400
Investment in Branch (6,400)

PAJE:
Shipments to Branch 6,400
Investment in Branch 6,400

Branch – aware of the transaction

Entry made (PC) Should be entry (PA)
Home Office Current 6,400 Home Office Current 6,400
Shipments from HO (6,400) Shipments from HO (6,400)

d) The home office acquired a piece of furniture to be used by the branch for P8,700. The
furniture will be carried in the books of the branch. This was erroneously recorded by the
branch as P7,800.

HO
Entry made (PC) Should be entry (PA)
Investment in Branch 8,700 Investment in Branch 8,700
Cash (8,700) Cash (8,700)

Branch
Entry made (PC) Should be entry (PA)
Furniture and Fixtures 7,800 Furniture and Fixtures 8,700
Home Office Current (7,800) Home Office Current (8,700)

PAJE:
Furniture and Fixtures 900
Home Office Current 900

e) Salaries expense charged by the home office to the branch amounted to P4,500. This was
recorded twice by the branch.

HO
Entry made (PC) Should be entry (PA)
Investment in Branch 4,500 Investment in Branch 4,500
Salaries Payable (4,500) Salaries Payable (4,500)
 Branch
Entry made (PC) Should be entry (PA)
Salaries Expense 4,500 Salaries Expense 4,500
Home Office Current (4,500) Home Office Current (4,500)

Salaries Expense 4,500 No entry

Home Office Current (4,500)

PAJE:
Home Office Current 4,500
Salaries Expense 4,500

f) A charge amounting to P800 for freight on shipments of merchandise is made by the home
office (home office paid for the freight) but the amount was recorded by the branch as P80.

HO
Entry made (PC) Should be entry (PA)
Investment in Branch 800 Investment in Branch 800
Cash (800) Cash (800)

Branch
Entry made (PC) Should be entry (PA)
Freight in 80 Freight in 800
Home Office Current (80) Home Office Current (800)

PAJE:
Freight in 720
Home Office Current 720

g) The home office sold a fully depreciated equipment for P4,750 and erroneously credited the
proceeds to the branch; the branch did not charge the home office.

HO
Entry made (PC) Should be entry (PA)
Cash 4,750 Cash 4,750
Investment in Branch (4,750) Gain on sale (4,750)

PAJE:
Investment in Branch 4,750
Gain on sale 4,750

Branch
Entry made (PC) Should be entry (PA)
No entry No entry
h) A home office credit memo (issuer credited the reciprocal account; HO issued the memo
therefore HO credited the investment in branch; HO deducted the investment in branch)
representing a discount on merchandise for P800 was not recorded by the branch (branch
should also deduct the home office current).

HO
Entry made (PC) Should be entry (PA)
Shipments to Branch 800 Shipments to Branch 800
Investment in Branch (800) Investment in Branch (800)

Branch
Entry made (PC) Should be entry (PA)
No entry Home Office Current 800
Shipments from HO (800)

PAJE:
Home Office Current 800
Shipments from HO 800

i) The branch failed to take up a P7,000 debit memo from the home office (home office
debited/increase; therefore, the branch should also increase) representing share of the
branch in advertising expense.

HO
Entry made (PC) Should be entry (PA)
Investment in Branch 7,000 Investment in Branch 7,000
Advertising Expense (7,000) Advertising Expense (7,000)

Branch
Entry made (PC) Should be entry (PA)
No entry Advertising Expense 7,000
Home Office Current (7,000)

PAJE:
Advertising Expense 7,000
Home Office Current 7,000

j) The home office recorded branch net income of P84,000. The correct net income of the
branch should be P48,000.

HO
Entry made (PC) Should be entry (PA)
 Investment in Branch 84,000 Investment in Branch 48,000
Branch Income Summary (84,000) Branch Income Summary (48,000)

PAJE:
Branch Income Summary 36,000
Investment in Branch 36,000

Branch
Entry made (PC) Should be entry (PA)
Income Summary 48,000 Income Summary 48,000
Home Office Current (48,000) Home Office Current (48,000)

REQUIRED:
1. How much is the adjusted balance of the Investment in Branch account? 1,212,350
2. How much is the unadjusted balance of the Home Office Current account? 1,211,880

Investment in Branch Home Office Current

Unadjusted 1,250,000 1,211,880
Item a. (9,000)
Item b. 6,150
Item c. (6,400)
Item d. – PC (reverse) (7,800)
Item d. – PA (correct) 8,700
Item e. (4,500)
Item f. – PC (80)
Item f. – PA 800
Item g. 4,750
Item h. (800)
Item i. 7,000
Item j. – PC (reverse) (84,000)
Item j. – PA 48,000
Adjusted 1,212,350 1,212,350

PROBLEM 3:
The following information pertains to a home office and its branch:
Home Branch
Office
Inventory, beg.
From outside suppliers P 480,000 P
32,000
From home office, at 10% mark-up 132,000
Purchases from outside suppliers 1,200,000 320,000
Shipments to branch (at cost) 360,000
 Shipments from home office (at billed price) 416,000
Inventory, end (per physical count at year-end doesn’t include in
transit)
From outside suppliers 300,000 160,000
From home office 130,000

During the year, the home office bills its branch at 130% of cost. On December 31, the home office
sent additional merchandise to the branch which was still in transit as of year-end (unrecorded by
the branch).

REQUIRED:
1. How much is the shipment in transit at cost? 40,000
2. How much is the combined cost of goods sold? 1,552,000

Shipments to branch at cost 360,000

Multiply: (1+mark-up rate) x130%
Shipments from home office at billed price 468,000
Shipments from home office per branch (416,000)
Shipments in transit at billed price 52,000
Divide: (1+mark-up rate) 130%
Shipments in transit at cost 40,000

Ending inventory of branch from the home office per count 130,000
Shipments in transit at billed price 52,000
Ending inventory of the branch from the home office 182,000

Cost of sales of the branch

Billed Price True Cost Mark-up
Beginning inventory
From home office (10% mark-up) 132,000 120,000 12,000
From outsiders 32,000 32,000
Purchases 320,000 320,000
Shipments from home office (30% mark-up) 468,000 360,000 108,000
Available for sale 952,000 832,000 120,000
Ending inventory
From home office (30% mark-up) [max 468K billed price] (182,000) (140,000) (42,000)
From home office (10% mark-up) [excess over 468K] (0) (0) (0)
From outsiders (160,000) (160,000)
Cost of Sales 610,000 532,000 78,000
Cost of sales of the home office
Beginning inventory 480,000
Purchases 1,200,000
Shipments to branch (360,000)
COGAS 1,320,000
Ending inventory (300,000)
COGS 1,020,000

COGS of the home office 1,020,000

COGS of the branch (true cost) 532,000
Combined COGS 1,552,000

Interbranch transactions – for accounting purposes, we assume that it goes through the home office
(because a branch cannot have an investment in another branch)

Cash transfer from Branch 1 to Branch 2

Accounting: Branch 1 to HO; HO to Branch 2

HO Branch 1 Branch 2
Cash XX HOC XX
IIB1 (XX) Cash (XX)

IIB2 XX Cash XX
Cash (XX) HOC (XX)

Problem 4:
ABC Co. shipped merchandise costing P150,000 to Baguio (branch 1) branch and paid freight of
P10,000. Shortly afterward, the home office instructed Baguio branch to transfer this merchandise to
the Bicol (branch 2) branch (for accounting, Baguio to HO; HO to Bicol). Freight costs of P7,500
were paid by the Baguio branch to carry out the order. If the merchandise had been shipped directly
from the home office to Bicol branch, the freight cost could have been P12,500.

REQUIRED:
Prepare the entries to be made on the books of the home office and the two branches.
 HO Branch 1 Branch 2
IIB1 150,000 SFHO 150,000 No entry
Ship to B1 (150,000) HOC (150,000)

IIB1 10,000 Freight-in 10,000

Cash (10,000) HOC (10,000)

Ship to B1 150,000 HOC 150,000

IIB1 (150,000) SFHO (150,000)

IIB2 150,000 SFHO 150,000

Ship to B2 (150,000) HOC (150,000)

Loss 5,000 HOC 17,500 Freight-in 12,500

IIB2 12,500 Freight-in (10,000) HOC (12,500)
IIB1 (17,500) Cash (7,500)

Entry for the freight:

1. Original branch will derecognize the original freight due to inventory transfer
2. New branch/Receiving branch will recognize new freight (will be actual amount paid or
should be freight, whichever is lower)
3. Whoever paid for the additional freight will credit cash
4. HO will recognize the loss
5. Balancing, reciprocal accounts (HO will reciprocate)
 Actual amount paid (10,000 + 7,500) 17,500
Should be payment (12,500)
Overpayment/Loss to be recognized by the home office 5,000
NOTE: If underpayment or gain, ignore.