Advanced Financial Accounting and Reporting WJGuzman

Home Office and Branch Accounting

Sales Agency – contractual arrangement under which an agent acquires the right to negotiate sale of a
principal’s goods or services, usually in exchange for commission or fee computed as a percentage of
sales generated.

Accounting System for Sales Agencies – home office keeps the records of sales agents. Sales agency
neither keeps a complete set of books nor uses a double-entry system of accounts. An imprest system is
usually adopted by the home office for the working funds of the sales agency. A working fund for sales
agency expenses is provided by the home office and replenished when exhausted.

Branch Office – a location, other than the main office, where business is conducted.

Branch Accounting – an accounting system in which separate accounts are maintained for each branch
of a corporate entity or organization. The primary objectives of branch accounting are better accountability
and control, since profitability and efficiency can be closely tracked at the branch level. Even though the
home office and each branch maintain separate books, all accounts are combined for external reporting
so that the external financial statements will represent the company as a single economic enterprise.
Certain elimination is necessary.

Sales Agency vs Branch Office

Sales Agency
usually carries a line of samples or displays
merchandise but not carry stocks of it
orders are taken from customers and sent to the
home office for approval of credit
accounting is maintained by the home office
Branch Office
normally carries stock of merchandise either
shipped from home office or bought from outsiders
functions in most respect as an independent
business unit
home office and branch maintain separate
accounting systems

Reciprocal (Intracompany) Accounts – transactions between the home office and a branch are
recorded in intracompany accounts. These accounts are reciprocal accounts between the home office
and the branch. When the books of both the home office and branch are completely up to date, the
balance in a reciprocal account on the home office books will be equal but opposite that of the related
reciprocal account on the branch books.

The reciprocal account on the books of the home office often is called Investment in Branch or Branch
Current, while the reciprocal account on the branch books may be labelled Home Office or Home Office
Current. When a company has several branches, a separate investment account for each branch is
maintained on the home office books.

The reciprocal nature of the Investment in Branch and the Home Office accounts, and the way in which
they are affected by various transactions, can be shown as follows:

(Home Office Books) (Branch Books)

Investment in Branch Home Office
XX Asset transfers from HO to Branch XX
XX Asset transfers from Branch to HO XX
XX Collection by Branch of HO receivable XX
XX Collection by HO of Branch receivable XX
XX Payment by HO of Branch payable XX
XX Payment by Branch of HO payable XX
XX Branch expenses paid by HO XX
XX HO expense paid by Branch XX
XX Branch profit XX
XX Branch loss XX
Problem 1
After examining a comparative basis the interoffice account of the ABC Co. with its Branch and the similar
account carried on the latter’s books, the following discrepancies at the close of the business on March
31, 2016 were seen:
a. A charge for labor by the Home Office, P500 was recorded twice by the branch.
b. A charge of P895 was made by the Home Office for freight on merchandise, but the amount was
recorded by Branch as P89.50.
c. A charge of P980 was made by the Home Office for freight on merchandise, but the amount was
recorded by Branch as P890.
d. A credit by the Home Office for P350 (merchandise allowances) was taken up by the Branch as
P400.
e. The Home Office charged the Branch P425 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 P100 and set up a liability for the net amount.
f. The Home Office received P5,000, from the sale of a truck which it erroneously credited to the
Branch; the Branch did not charge the Home Office therewith.
g. The Branch by mistake sent the Home Office a debit note for P370 representing its proportion of
a bill for repairs of truck; the Home Office did not record it.
h. The Branch inadvertently received a copy of the Home Office entry dated March 19, 2016
correcting item (f) and entered a credit in favor of the Home Office as of March 31, 2016.

At March 31, 2016, the unadjusted balance of the Branch current account on the Home Office books
showed P175,520. At the beginning of the year, the interoffice accounts were in balance.

1. How much is the adjusted balance of the reciprocal accounts on March 31, 2016?
2. How much is the unadjusted balance of the Home Office current account in the branch books
on March 31, 2016?

Problem 2
XYZ Co. bills its branch for merchandise at 140% of cost. At the end of its first month, the branch
submitted among other things, the following data:
Merchandise from Home Office (at billed price) 98,000
Merchandise purchased locally by Branch 40,000
Inventory, Dec. 31 of which P7,000 are of local purchase 28,000
Net Sales for the month 180,000

1. How much is the branch inventory at cost?

2. How much is the gross profit of the Branch as far as the Home Office is concerned?

Problem 3
RTQ Co. decided to open a branch in Manila. Shipments of merchandise to branch totaled P54,000 which
included a 20% mark-up on cost. All accounting records are to be kept at the home office. The branch
submitted the following report summarizing its operations for the period ended December 31, 2016.
Sales on account 74,000
Sales on cash basis 22,000
Collection of account 60,000
Expenses paid 38,000
Expenses unpaid 12,000
Purchase of merchandise for cash 26,000
Inventory on hand, December 31, 2016; 80% from home office 30,000
Remittance to home office 55,000

1. How much is the branch inventory at cost?

2. How much is the profit (loss) of the Branch as far as the Home Office is concerned?

Problem 4
UNSTABLE Co. is currently preparing its combined financial statements. At December 31, 2016, the
Home Office shows a P728,000 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 P48,000 was not recorded by
the branch.
b. A debit memo sent by the Home Office to the Branch amounting to P36,000 was not recorded by
the branch.
c. A credit memo sent by the Branch to the Home Office amounting to P80,000 was recorded by the
Home Office twice.
d. A debit memo sent by the Branch to the Home Office amounting to P120,000 was recorded by
the Home Office as P12,000.
e. The Branch sent by mistake a credit memo amounting to P28,000 to the Home Office. The Home
Office did not record it.

How much is the unadjusted balance of the “Home Office” account?

Problem 5
JM Co. operates a branch in Davao. There are shipments in transit from home office of the branch. The
home office ships merchandise to the branch at 125% of cost in the year 2016. Profit and loss data for the
home office and branch for 2016 follows:
Home Office Branch
Sales 250,000 75,000
Purchase from outsiders 200,000 15,000
Shipments to Branch:
Cost to Home Office 30,000
Billing Price to Branch 32,500
Expenses 40,000 10,000
Inventories, January 1, 2016
Home Office: acquired from outsiders, at cost 80,000
Branch: acquired from outsiders, at cost 7,500
Acquired from Home Office at billing price
which averaged 20% above cost 24,000
Inventories, December 31, 2016
Home Office: acquired from outsiders, at cost 55,000
Branch: acquired from outsiders, at cost 5,500
Acquired from Home Office, in 2016, at billed
price (physical count) 21,000

1. How much is the amount of merchandise in transit at billed price?

2. How much is the combined cost of goods sold?

Problem 6
The following information was taken from the records of a branch:
Sales by Branch 450,000
Billings to Branch by Home Office 300,000
Total Inventory Available to be sold 530,000
Operating expenses 40,000
Ending Inventory at Billed Price 180,000

The following information was taken from the records of the Home Office:
Branch Current Account 800,000
Shipments to Branch 250,000
Allowance for Markup – Unadjusted 80,000

1. What is the current billing rate based on cost?

2. How much is the Sales of Branch to be included in the combined financial statements?
3. How much is the realized markup of the branch?
4. How much is the Cost of Goods Sold of the Branch to be included in the combined financial
statements?
5. How much is the Ending Inventory of the Branch to be included in the combined financial
statements?
6. How much is the unrealized markup in ending inventory?
7. How much is the ending balance of the “Allowance for Markup” account before combining the
financial statements?
8. How much is the individual profit of the branch?
9. How much is the true profit of the branch?
10. How much is the adjusted balance of the branch current account immediately prior to
combining the financial statements?

Problem 7
During 2016 goods were shipped to a branch at 20% above cost. The reciprocal account in the income
statement of the branch amounted to P276,000. The balance of the contra investment in branch account
reports a balance of P60,000 before adjustment. The beginning inventory of the branch is P100,000 and
including inventory purchased from outsider amounting P30,000. The branch purchased goods from
outsiders during the year amounting to P91,200. The ending inventory of the branch as reported in the
combined statement of financial position is P320,000, 25% of which are purchased from outside
suppliers.

1. How much is the cost of goods sold to be reported in the branch’s income statement for the
year ended December 31, 2016?
2. How much is the adjusted balance of allowance for mark-up for the year ended December 31,
2016?