Ateneo de Zamboanga University

School of Management and Accountancy

Accountancy Department

INTEGRATIVE COURSES: ADVANCED FINANCIAL ACCOUNTING AND REPORTING

AFAR 2305: HOBA
S.Y. 2022-2023
CERVAS | CUMAYAO

HOME OFFICE, BRANCH & AGENCY

AFAR 2305
I. Agency Accounting
- The MAIN CONCERN of accounting problems on agency accounting is the computation of the agency net income
or loss for a particular period.
- It is important to differentiate an agency from a branch. The following are the key differences:

AGENCY BRANCH

Cash and sales books only; no

Financial records Complete set of financial statements and schedules
financial statements

Size of entity and human Relatively smaller; composed of a Relatively bigger; composed of managers, supervisors,
resource few sales agents and rank-and-file employees

All decisions are made by the home

Autonomy Operating decisions are delegated to the branch
office

Not considered to be a separate

Accounting entity Considered to be a distinct accounting entity
accounting entity

- Agency accounting is a relatively easier topic in Advanced Accounting since it is simply the extended application of
basic and financial accounting concepts to a sales agency.
- Important things to remember when solving agency accounting problems:
a. The gross sales of an agency is equal to the amount of sales that has been invoiced or filled by the home office.
Orders taken by the agency but not filled up by the home office are ignored.
b. When getting net sales, sales discounts may be obtained using the formula:
Sales discounts = cash collections, net of discounts / (100% - % discount) x % discount
c. The working fund of a sales agency is accounted for like a petty cash fund.
d. To get the cost of goods sold pertaining to agency sales, the cost ratio is multiplied by the GROSS SALES, not net
sales.
e. Samples inventory is not part of cost of goods sold. They are prepaid expenses and amortized systematically in the
passage of time.

Practice Problem – Agency Accounting:

Problem 1: On October 1, 2023, the Eastwood Main Office established a sales agency in Pasay City. The following information
is made available to you:
• The main office sent samples of its merchandise amounting to P42,000 and a working fund amounting to P360,000 was
established. The samples sent were intended to last until June 1, 2024.
• During the first two months of operations, the agency transmitted to the home office sale of goods costing P1,458,000, but
the home office was not able to fill-up 25% of the said transmitted sales orders.
• Collections from customers amounted to P369,705, net of 2% sales discount.
• Payments made by the agency during October and November were as follows: annual rent of P288,000, advertising
expense worth P28,000 and utilities amounting to P36,000.
• The agency also purchased an equipment worth P45,000 which will be depreciated at 20% per annum.
• The gross profit rate on sales agency order is 20% of sales.
Net income of the agency for the two months ended November 30, 2023, is:
A. P149,375 B. P134,330 C. P87,155 D. P141,830

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 Ateneo de Zamboanga University
School of Management and Accountancy
Accountancy Department

II. Home Office & Branch Accounting

- The MAIN CONCERN of accounting problems on home office and branch accounting is the preparation of the
COMBINED FINANCIAL STATEMENTS of the home office and its branches.
- Although branches are controlled by the home office, branches are considered to be separate entities with separate
books. However, for external reporting purposes, the home office and the branches are a single entity. The separate
financial statements of the home office and the branches are combined, and amounts are adjusted or eliminated to
comply with the appropriate financial reporting framework.
- The following are the common types of problems for home office and branch accounting:
1. Reconciliation of reciprocal accounts – reconciling the “Asset” account in the books of the home office and the
“Equity” account in the books of the branch.
2. Interoffice transfers of inventory at above cost – transfer of inventory from the home office to the branch at
above original cost.
3. Inter-branch transfers – transfers of inventory and other assets among branches.

A. Reconciliation of Reciprocal Accounts

- One way of understanding reciprocal accounts in home office and branch accounting is looking at the home office as
an “investor” and the branch as the “investee”. The investor recognizes an ‘investment account’ (an asset) in its books,
while the investee increases its equity account to recognize the ownership of the investor. Applying the accounting
equation, it follows that any movement in the asset account should have a corresponding increase or decrease in the
equity account. The same concept is applied in reciprocal accounts for home office and branches.
- When a home office establishes a branch, it transfers cash, inventory, and other assets to the latter. It is as if the home
office “invested” its assets in the branch. Thus, when the home office credits the assets transferred in its books, it debits
an investment account. The investment account is commonly labeled as “Investment in Branch X” or “Branch Current
– X”, where X is the name or location of the branch.
- Reciprocally, the branch records the assets received from the home office and credits an equity account. The equity
account is labeled as “Home office – Current”. This is the only equity account of the branches (i.e., no retained earnings,
share capital, APIC, etc.). Since equity represents ownership, the existence of the Home Office – Current account in the
books of the branch simply means that the home office ‘fully owns’ the branch. Profit or loss is also closed to this account.
- The accounting relationship of the Investment in Branch account in the books of the home office and the Home Office –
Current account in the books of the branch is further illustrated below:

Investment in Branch (Asset) Home Office – Current (Equity)

Dr. Cr. Dr. Cr.
(1) Asset transfers to (1) Asset transfers from (1) Assets transfers to Home (1) Asset transfers from Home
branch branch Office Office
(2) Net income of the (2) Net loss of the branch (2) Net loss of the branch (2) Net income of the branch
branch
(3) Allocation of expense (3) Allocation of income (3) Allocation of income from (3) Allocation of expense from
to branch to branch Home Office Home Office

- The illustration above simply means that the balance of the Investment in Branch/Branch Current (BC) and
Home Office – Current (HOC) accounts SHOULD BE EQUAL at any given point in time. However, due to (1) ERRORS
and (2) TIMING DIFFERENCES in recording, they are usually unequal. These errors and timing differences result to
what we call “reconciling items.” These items are identified to adjust the balances of the reciprocal accounts and,
ultimately, to equate them. The process is like preparing a bank reconciliation.

Practice problems – Reconciliation of Reciprocal Accounts

Problem 1: Good Buy Trading Co, operates a branch in Bacolod. At close of the business on December 31, 2023, the Home Office
account in the books of the Bacolod branch showed a credit balance of P2,784,300. The interoffice accounts agreed at the
beginning of the year. For purposes of reconciling the interoffice accounts, the following facts were ascertained:
a. On December 29, 2023, the branch sent a check for P13,500 to its suppliers. The branch erroneously recorded the
transaction as a remittance to the home office and sent a copy of the debit memo to the home office. The home office
recorded this upon receiving the debit memo on January 4, 2024.
b. The home office allocated promotions and insurance expense totaling P18,000 to Bacolod branch. The home office
inadvertently charged the said expense to Davao branch. Bacolod branch had not entered the allocation at year-end.
c. Home office debit memo for P20,700 regarding transfer of funds was recorded twice by the branch by debiting its reciprocal
account.
d. A branch customer remitted P15,000 to the home office. The home office recorded this as a cash collection of its own
receivable on December 23, 2023. Upon notification on the same year, the branch debited the amount to Receivable from
Home Office and credited its reciprocal account.
e. A P105,000 shipment, charged by home office to Bacolod branch, was actually sent to and retained by Leyte branch.
f. The home office failed to take up a P12,000 credit memo from the branch.
g. Branch insurance premiums of P9,600 was paid by the home office. The home office debited Insurance expense and credited
Cash in its books. The branch recorded the amount as a liability.
h. Inventory costing P39,000 was sent to the branch by the home office on December 12, 2023. 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 the branch was paid by the home office and was recorded in the
branch books as P1,260.
j. A branch customer remitted P63,000 to the home office. The home office recorded this cash collection on December 28,
2023. Upon receiving a credit memo, the branch recorded the transaction twice on December 30, 2023.
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 Ateneo de Zamboanga University
School of Management and Accountancy
Accountancy Department

The unadjusted balance of the branch current account as of December 31, 2023, is:
A. P2,970,840 B. P3,075,240 C. P3,051,240 D. P2,962,140

Problem 2: Tolomia Inc. operates a branch in Zamboanga City. At the end of the year, the investment account in the books of
the home office shows a balance of P600,000. The home office current account in the books of the branch shows a balance of
P385,680. The following reconciling items were discovered:
a. The branch made a profit of P40,400 for the month of December, but the home office erroneously recorded it as P44,720.
b. The branch has not received the cash in the amount of P100,000 sent by the home office. The home office debited “Other
expense” for this transfer.
c. The home office has billed the branch the amount of P150,000 for merchandise, which was in transit on December 31.
d. Supplies of P18,000 was returned by the branch to the home office. The home office failed to record the receipt of the
supplies.
e. The branch accounts receivable for P42,000 was collected by the home office. The home office failed to notify the branch.

What is the adjusted balance of the reciprocal accounts?

A. P593,680 B. P635,680 C. P677,680 D. P577,680

B. Interoffice Transfers of Inventory at Above Cost

- The MAIN CONCERN of accounting problems involving interoffice transfers of inventory at above cost is the
computation of the TRUE NET INCOME of the branch and the COMBINED NET INCOME after ELIMINATING ANY
OVERVALUATION OF COST OF GOODS SOLD (COGS).
- Remember that the UNDERLYING CONCEPT OF THE COMBINED FINANCIAL STATEMENTS is that the HOME OFFICE
and the BRANCH are viewed as a SINGLE ENTITY. To wit, all the transactions of the branch are also transactions of the
home office.
- It is a common practice for home offices to transfer inventory to its branches since the products and customers of the
two are identical. Although a branch may purchase inventory directly from third-party suppliers, majority of its
inventory comes from the home office’s stockroom.
- When inventory transfers are made AT COST, the computation of the combined COGS is the outright sum of the COGS
of the home office and the branch in their separate books (i.e., SIMPLY ADD THE TWO). This is because when the branch
sells the inventory to end customers, the branch’s cost of goods sold is the same amount that would have been recorded
by the home office had it sold the same inventory.
- However, when the home office bills inventory transfers at ABOVE ORIGINAL COST, something peculiar happens. First,
the home office records an allowance valuation account. This valuation account represents the mark-up on cost. On the
other end of the transfer, the branch records the receipt of the inventory in its separate books at its NEW COST (i.e.,
BILLED PRICE / cost + mark-up). This is illustrated in the pro-forma journal entries below:
Home office books Branch books

Branch-current xx Shipments from HO (@BP) xx

Shipments to branch (@cost) xx Home office - current xx
Allowance account xx Allowance account xx
- So, what now, you ask? Here is the thing. When the inventory is sold to end customers, the branch computes its cost
of goods sold USING THE BILLED PRICE. The result is a “hidden” overstatement of cost of goods sold and a
corresponding understatement of net income. Because of this, the computation of the combined cost of goods sold is
no longer a “simply add the two” procedure. There is a need to eliminate any overstatement of cost of goods sold to
compute the true net income of the branch and ultimately to properly compute the combined net income of the
branch and its home office.
- The following table is commonly used to facilitate your computation of the overstatement of cost of goods sold in the
books of the branch:

At Billed At True Mark-up Meaning of the line items in the

Price (BP) Cost (Allowance) “Mark-up” Column
Beg. inv. from HO xxx xxx xxx <- the beginning balance of the allowance account
in the books of the home office
Interoffice shipments _xxx_ _xxx_ _xxx_ <- the increase in the allowance account due to
interoffice shipments during the period
Available for sale xxx xxx xxx <- the UNADJUSTED value of the allowance
Ending inv. from HO _(xxx)_ _(xxx)_ _(xxx)_ <- the ADJUSTED value of the allowance
Cost of goods sold xxx xxx xxx <- the REALIZED allowance, which also represents
the overstatement of the branch’s COGS and
understatement of the branch’s net income

The table is founded on three fundamental concepts: (1) the COGS formula, (2) basic algebra, and (3) billed price less the true
cost is equal to the mark-up. Due to the mathematical relationships of the variables in the table above, the computation of
the overstatement of COGS becomes easier and more efficient. Just remember to back it up with your basic accounting
knowledge.

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 Ateneo de Zamboanga University
School of Management and Accountancy
Accountancy Department

Practice problems – Billings of Inventory at Above Cost

Problem 1: Home office bills its branch for merchandise shipments at 130% of cost. The following are some of the account
balances on the books of home office and its branch as of December 2023:
Home Office Books Branch Books
Inventory, January 1 P35,000 P101,500
Shipments from Home Office 263,900
Purchases 1,575,000 350,000
Shipments to Branch 253,750
Branch Inventory Allowance 91,875
Sales 2,000,000 1,360,000
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.

What is the (1) amount of the unrealized profit in the separate books of the home office on January 1, 2024; (2) the branch
beginning inventory in 2023 that came from outside purchases; and (3) the cost of goods available for sale of the branch?
A. P21,000; P48,475; P715,400
B. P15,750; P33,250; P781,375
C. P21,000; P33,250; P781,375
D. P15,750; P48,475; P715,400

What is the (1) total ending inventory to be shown in the combined financial statements and (2) the combined net income for
the year?
A. P277,725; P957,950
B. P328,475; P942,725
C. P277,725; P942,725
D. P328,475; P957,950

Problem 2: For the year 2023, Stark Co.’s home office ships goods to its branch in Winterfell at 120% above cost. The reciprocal
account in the income statement of the home office amounted to P237,500. The balance of the valuation account is P375,000
before adjustment. Of the beginning inventory of the branch, 93,000 came from outsiders while the remaining amount came
from the home office with a cost of P360,000. The branch purchased goods from its own suppliers during the year amounting to
P125,200. The ending inventory of the branch as reported in the combined statement of financial position is P345,000. The
branch income as reported in the combined financial statements and as reported in the branch’s books are P201,125 and
P120,750, respectively. How much is the cost of goods sold to be reported in the branch’s income statement for the year ended
December 31, 2023?
A. P790,500 B. P514,500 C. P551,075 D. P470,700

Problem 3: The home office transfers inventory to its branch at a 25% mark-up above cost during 2023. This was lower by 15%
compared to the mark-up on cost last year. In 2023, the reciprocal account in the income statement of the branch amounts to
P300,000. At year-end, the home office adjusted its valuation account downward to P16,000. The home office is aware that the
cost of goods sold of the branch in its separate books is overstated by P70,000.
What is the ending inventory per branch books at the end of 2022?
A. P91,000 B. P65,000 C. P80,000 D. P64,000

C. Inter-branch Transfers
- MAIN CONCERN: Computation of the balances of the reciprocal accounts after inter-branch transfers are made.
- Other than transfers between the home office and the branch, branches can also transfer assets (usually cash and
inventory) with each other per instruction of the home office. These transfers have corresponding increases or
decreases in the reciprocal accounts in the books of the home offices and the branches. To record these transfers, the
following pro-forma entries are made in the books of the transferor branch, transferee branch and the home office:

Branch A (Transferor Branch) Branch B (Transferee Branch) Home Office

HO-Current xxx Asset transferred xxx Branch current-B xxx
Asset transferred xxx HO-current xxx Branch current-A xxx

Note that the logic behind the journal entries above is to record the transfer AS IF the transfer is from the home office directly
to Branch B.
- What is ‘excess freight’? Excess freight may arise when total freight from inter-branch transfers of inventory differs
from the “what-should-have-been” freight had the transfer been made directly from the home office to the transferee
branch (i.e., the final branch recipient). In essence, it represents the opportunity cost or foregone savings of the home
office for not directly transferring the said inventory to the final branch recipient.
- The computation of excess freight is pretty much straightforward. To illustrate, assume that the home office transferred
inventory to Branch A. The freight for this transfer is P100. Afterwards, the home office instructed Branch A to transfer
the inventory to Branch B. The freight for this second transfer is P200. Had the goods been transferred directly from
the home office to Branch B, the freight would have been P250. Therefore, excess freight is P50 (i.e., P100+P200–P250
= P50).

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 Ateneo de Zamboanga University
School of Management and Accountancy
Accountancy Department

- The tricky part is in journalizing the inter-branch transfers of inventory with excess freight and identifying the balance
of the reciprocal accounts after the said transfers. To do this properly and efficiently, the following rules should be
remembered:
1. Who records the freight-in account? Freight-in is ALWAYS recorded by the one who RECEIVES the inventory, whether
he/she paid for the freight or not.
2. Who pays for the freight? The payment of freight depends on the freight terms. In inter-branch transfers, there are two
common freight terms:
a. Freight prepaid – the one who SENDS the inventory pays for the freight
b. Freight collect – the one who RECEIVES the inventory pays for the freight.
3. At what amount should the freight-in be recorded in the books of the final branch recipient? The amount of the
debit to freight-in that is recorded by the final branch recipient is the “SHOULD-HAVE-BEEN” freight had the transfer
been made directly from the home office.
4. At what amount should the reciprocal accounts be debited or credited? After journalizing the inventory transfer
along with the freight-in and its payment, the “balancing” debit or credit is the reciprocal account.

Practice problems – Inter-branch Transfers

Problem 1: Tywin Company has a branch in Casterly Rock and Kings Landing. The reciprocal accounts between the home office
and the branches agreed at the beginning of 2023. However, on December 31, 2023, the following balances are found in the
books of the home office:
Investment in Casterly Rock Branch – P186,500
Investment in Kings Landing Branch – P84,000
Data for reconciliation of the reciprocal accounts are as follows:
a. On December 29, 2023, the home office has instructed Casterly Rock to transfer P74,000 cash to Kings Landing. Casterly
Rock’s branch recorded this transaction immediately. Upon receipt, Kings Landing branch has recorded this transfer at
P47,000. The home office, however, has not yet recorded this inter-branch transaction as of the end of the year.
b. Tywin has transferred goods costing P28,900 to Casterly Rock and paid P2,500 shipping cost on December 16, 2023.
Casterly Rock shipped all these goods to Kings Landing upon instruction of the home office on December 30. Shipping cost
is P3,600 freight collect. Had the goods been shipped directly to Kings Landing from the home office, only P5,000 freight
cost will be incurred. The inter-branch shipment was not recorded by the branches and the home office as well.
c. Casterly Rock has collected cash of P5,750 from one of Kings Landing branch’s customers. This transaction is not yet
recorded by the latter and the home office.
d. The home office has already allocated P11,000 and P9,000 of expenses to Casterly Rock and Kings Landing, respectively.
The branches are not yet notified.
e. Casterly Rock remitted P14,300 cash to the home office on December 12, 2023. The home office failed to record this
remittance.
f. Kings Landing branch 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.
What is the unadjusted balance of the HO-Current account in Casterly Rock’s books and Kings Landing’s books, respectively?
A. P52,150 B. P87,200 C. P107,250 D. P92,950

What is the unadjusted balance of the HO-Current account in Kings Landing?

A. P236,250 B. P122,000 C. P115,150 D. P84,850

Problem 2: On September 1, 2023, Alabang Main Office established two branches: Ortigas and Makati branches. The following
transactions occurred for 2023:
a. The home office transferred P320,000 worth of cash and P1,400,000 worth of inventory to its Ortigas branch. The home
office transfers merchandise to its branch at a mark-up of 25% above cost.
b. The home office instructed Ortigas to transfer 75% of the goods and cash received to Makati.
c. In addition, on October 1, 2023, shipments from home office were received by Ortigas amounting to P500,000 at cost
and the branch paid freight costs amounting to P26,000.
d. 60% of the said shipments were sold to outsiders.
e. On November 1, 2023, Ortigas transferred 50% of the remaining October shipments from Alabang to Makati, with
Makati branch paying freight costs of P10,000.
f. Had the merchandise been shipped from Alabang to Makati City branch, only P7,600 worth of freight would have been
incurred.
How much is the balance of the Makati branch account on the Home Office books?
A. 1,675,100 B. 1,012,300 C. 1,387,600 D. 1,395,200

Problem 3: Diana Corporation has two branches to which merchandise is transferred at cost plus 20%, plus freight charges. On
November 30, 2023, Diana shipped merchandise that cost P5,500 to its Cebu branch, and the P200 shipping charge was paid by
Diana. On December 15, 2023, the Ilocos branch encountered an inventory shortage, and the Cebu branch shipped the
merchandise to the Ilocos branch at a freight cost of P160 paid by the Cebu branch. Shipping charges from the home office to
the Ilocos branch would have been P175. If the merchandise is unsold at year end, at what amount will the inventory be recorded
in the (1) books of the branch and (2) consolidated books?
A. P6,775; P5,675 B. P6,575; P5,475 C. P6,930; P5,500 D. P6,950; P5,850

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