ACP 312 – ACCOUNTING FOR BUSINESS COMBINATION

HANDOUT 1.0: ACCOUNTING FOR HOME OFFICE, BRANCH, AND AGENCY TRANSACTIONS

INTRODUCTION
As a business grows, it may need to extend its operations to a wider geographical area in order to generate more profits.
An example would be establishing a new sales outlet in another country or place.

AGENCY vs. BRANCH

New sales outlet may be put up as sales agencies or branches. A new sales agency is not an independent business but
rather acts only on behalf of the home office. On the other hand, a branch is an independent business which acts
independently but within the bounds of company policy and subject to the control of the home office. A branch does not
have a separate legal existence.

The following further differentiates the branch and agency from each other:
AGENCY BRANCH
1. Displays merchandise and takes customers’ orders but 1. Carries stock of merchandise used to fill customer
does not carry stock of merchandise to fill customers’ orders (or provides services similar to those provided
orders. by the home office).
2. Customers’ orders are sent to the home office for 2. Grants credit in accordance with the company’s
approval of credit. Customers remit payments directly policies, makes normal warranties, fill customer’s
to the home office. orders, and makes collections on sales.
3. Holds revolving cash fund provided by the home office 3. Has its own assets and liabilities and generates its own
that is replenished when depleted. No other cash funds revenues and incurs its own expenses. Makes periodic
are held. remittances to home office subject to company policy.
4. Not a separate accounting entity. The only accounting 4. A separate accounting entity for internal reporting. It
records maintained are cash receipts and cash maintains its own complete set of accounting records.
disbursements books necessary to account for the For external reporting, the branch’s financial
revolving fund. The home or main office maintains statements are combined with the home office’s
records of sales made through the agency and the financial statements.
expenses it incurs.
EXAMPLES: EXAMPLES:
1. A booth located in a mall that displays miniature 1. A branch of Jollibee located in a mall.
designs of houses and lots and condominium units 2. A branch of BPI located at Timog Ave.
for a real estate company.
2. A booth located on a sidewalk offering internet
connection on behalf of an internet service
provider (ISP). Interested customers apply directly
to the ISP’s office.

ACCOUNTING FOR AGENCY

Since an agency does not maintain its own separate accounting books, all of its transactions are recorded in the books of
the main office. The agency maintains a simple record (e.g., a log book) to record its cash receipts and cash disbursements,
similarly to a petty cash system.

PROBLEM 1 – Journalizing Agency Transactions; Determination of Agency’s Net Income (Loss)

Assume that Anton Trading established a sales agency, the Junior Agency.

1. Establishment of a petty cash fund, P10,000

2. Shipped merchandise to agency for use as samples, P4,000
3. Purchase of agency equipment, P20,000
4. Payment of salaries to agency employees, P5,000
5. Sales orders from agency are filled and customers are billed, P100,000 and goods are delivered by the home office
(with a cost of P60,000)
6. The following expenses were incurred out of working fund:
• Utilities P2,000
• Advertising expense P3,000
• Depreciation expense, P500
• Other expenses P4,000
7. Remaining samples, P300
8. Fund is replenished at the end of the period.

REQUIRED:
1. Prepare the necessary journal entries.
2. Determine the net income(loss) of the agency.

PROBLEM 2 – Comprehensive: Determination of Agency’s Net Income (Loss)

Tarzan Company opens an agency in Cavite. The following transactions were occurred for month of January:
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(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:
1. Samples – P250,000
2. 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 30% discount.
(e) The working fund is replenished for the following:
1. Delivery charges – P10,000
2. Repairs – P15,000
3. Maintenance – P12,000
4. Store supplies – P8,000
(f) The agency exhausted 3/4 of the samples and 60% of the advertising materials are still unused.

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

INTRODUCTION TO ACCOUNTING FOR BRANCH OPERATIONS

A branch is accounted for as a separate entity but subject to the control of the home office. The home office and its branch
usually maintain separate accounting systems. Each records its transactions with outside parties in its own accounting
system in the usual manner. In addition, both the home office and the branch must record transactions with one another in
their respective accounting systems. This is called inter-office transactions. Even though the home office and each branch
maintain separate books, prepares their own financial statements, all accounts are combined for external financial reporting,
so that the financial statements will represent the company as a single economic entity.

INTRACOMPANY ACCOUNTS
Transactions with outside parties are recorded in the usual manner. Transactions between the home office and a branch
are recorded in intra-company accounts. These are also known as reciprocal accounts between the home office and the
branch.

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

ACCOUNTING FOR BRANCH PLANT ASSETS

The procedures to be used in accounting for branch plant assets will depend on whether the branch plant asset records are
maintained in the:
(1) Branch books, or
(2) Home office books

APPORTIONMENT OF EXPENSES
Branch expenses incurred and paid by the branch are recorded in the books of the branch in the usual manner. Similarly,
home office expenses incurred and paid by the home office are also recorded in the books of the home office in the usual
manner.

However, the home office may allocate expenses to a branch and vice-versa. These allocated expenses might be of several
types:
(a) Expenses incurred by the branch but paid for by the home office.
(b) Expenses incurred by the home office but paid for by the branch.
(c) Allocations of expenses incurred by the home office (e.g., general expenses)

Journal entries:
HOME OFFICE BOOKS BRANCH BOOKS
(a) Investment in branch XX Expense XX
Cash XX Home office current XX

(b) Expense XX Home office current XX

Investment in branch XX Cash XX

(c) Investment in branch XX Expense XX

Expense XX Home office current XX

PROBLEM 3 – Individual Financial Statements (General Procedures; Journal Entries; Basic Computation)

On January 1, 2024, the Manila Company establishes its first branch in Bulacan. Separate books are to be kept by the branch,
and financial statements are to be submitted to the home office at the end of each month. Merchandise is to be billed at cost.
Transactions for the year are as follows:

1. Home office establishes a branch for an initial investment of P1,000,000 in cash.

2. Branch acquires equipment for P400,000 to be carried in the branch books (P40,000 is the annual depreciation).
3. Branch acquires equipment for P200,000 to be carried in the home office books (P20,000 is the annual
depreciation).

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4. Home office acquires furniture for P50,000 to be carried in the branch books (P5,000 is the annual depreciation).
5. Home office acquires furniture for P30,000 to be carried in the home office books, but the branch maintains physical
possession and use (P3,000 is the annual depreciation).
6. Home office transfers inventory worth P150,000 to the branch. Home office pays freight of P10,000.
7. Home office transfers inventory worth P80,000 to the branch. Branch pays freight of P6,000.
8. Branch purchases inventory worth P40,000 on account from a supplier. Branch pays freight of P2,000.
9. Branch makes total sales of P500,000 on account.
10. Branch collects P400,000 from accounts receivable.
11. Branch remits P300,000 cash collection to home office.
12. Branch incurs salaries expense of P100,000, one-fourth of which remains unpaid.
13. Home office allocates P10,000 utilities expense and P4,000 advertising expense to the branch.
14. The branch has an ending inventory of P150,000.

REQUIRED:
a. Prepare the necessary journal entries.
b. Prepare individual financial statements.
✓ Income statement
✓ Balance sheet

PROBLEM 4 – Combined Financial Statements

The trial balances of ABC Co.’s home office and branch are shown below:
ABC Company
Trial Balance
December 31, 2023
Home Office Branch
Dr. (Cr.) Dr. (Cr.)
Cash 1,100,000 417,000
Accounts receivable 180,000 100,000
Inventory, beg. 650,000 -
Shipments from home office 230,000
Purchases 72,000 40,000
Freight-in 22,000 18,000
Shipments to branch (230,000)
Investment in branch 827,000
Equipment 720,000 400,000
Accum. dep’n – equipment (72,000) (40,000)
Furniture 90,000 50,000
Accum. Dep’n – furniture (9,000) (5,000)
Accounts payable (72,000) (40,000)
Salaries payable (45,000) (25,000)
Share capital (2,000,000)
Share premium (500,000)
Retained earnings – beg. (206,200)
Home office (827,000)
Sales (900,000) (500,000)
Depreciation expense 168,000 68,000
Salaries expense 180,000 100,000
Utilities expense 18,000 10,000
Advertising expense 7,200 4,000

The home office and the branch have ending inventories of P270,000 and P150,000, respectively.

REQUIRED:
Prepare the combined statement of financial position and combined statement of profit or loss.

RECONCILIATION OF RECIPROCAL ACCOUNTS

1. The Investment in Branch account (in the home office books) and the Home Office Current account (in the
branch books) are reciprocal accounts and theoretically, should be equal at the end of the accounting period.
However, this scenario seldom exists in practice because of different factors such as:
(a) Bookkeeping errors
(b) Mathematical errors
(c) Timing differences in recording transactions
2. The reciprocal accounts must be brought into agreement before the preparation of combined financial
statements.

PROBLEM 5 – RECONCILIATION OF ACCOUNTS (ADJUSTED BALANCE)

ABC Co. is preparing its 2023 financial statements. The balances of the reciprocal accounts on Dec. 31, 2023 are as follows:
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Investment in branch account P156,000

Home office account P70,200

The following information has been gathered:

a. A P20,000 inventory shipment from the home office in December 2023 was recorded by the branch only in January
2024.
b. The home office collected P10,000 accounts receivable on behalf of the branch but the branch is not yet notified.
c. The branch returned damaged merchandise worth P30,000 but the home office has not yet received the shipment.
d. The home office failed to record a P40,000 cash remittance from the branch.
e. The branch recorded twice a P5,000 allocation of overhead cost from the home office.
f. A P12,000 freight paid by the home office for inventory shipment to the branch was recorded by the branch as
P1,200.

REQUIRED:
Compute for the adjusted balances of the reciprocal accounts.

PROBLEM 6 – RECONCILIATION OF ACCOUNTS (UNADJUSTED BALANCE)

The unadjusted balance of the “Investment in Branch” account of the home office is P182,000. Relevant information follows:
a. The branch did not record a P12,000 credit memo from the home office.
b. The branch did not record a P9,000 debit memo from the home office.
c. The home office erroneously recorded twice a P20,000 credit memo from the branch.
d. The home office recorded a P30,000 debit memo from the branch as P3,000.
e. The branch sent by mistake a P7,000 credit memo to the home office. The home office did not record it.

REQUIRED: Compute for the unadjusted balance of the “Home Office” account.

PROBLEM 7 – RECONCILIATION OF ACCOUNTS (NET ADJUSTMENT)

ABC Co. has the following account balances on December 31, 2023:

Investment in branch account P95,000

Home office account P132,000

The following information has been gathered:

a. The home office allocated P10,000 utilities expense to the branch which the branch did not record in full. Instead,
the branch sent a wrong adjusting memo to the home office reducing the charge by P2,500 and setting up a liability
for the remaining amount.
b. The home office erroneously credited the branch for a return of shipment of merchandise worth P25,000. The
branch did not make any return of merchandise.
c. The branch mistakenly received a copy of the home office correcting entry for item (b) above dated January 3, 2024
and entered a credit in favor of the home office on December 31, 2023 as a year-end adjusting entry.
d. The branch mistakenly sent the home office a P3,000 debit memo for an apparent remittance of collections which
did not happen. The home office did not record the debit memo.

REQUIRED:
a. Net adjustments to the “Investment in Branch” and “Home office” accounts
b. Adjusted balances of the reciprocal accounts.

SPECIAL INTRACOMPANY TRANSACTIONS

The following are special intra-company transactions:
1. Merchandise shipments to the branch at a price in excess of cost (or at billed price)
2. Interbranch transfers
a. Inter-branch transfers of cash
b. Inter-branch transfers of merchandise

ACCOUNTING FOR MERCHANDISE SHIPMENTS TO BRANCH AT BILLED PRICE

✓ Under this scenario, merchandise shipped to branch are billed at cost plus certain mark-up. This is termed as
billed price.
✓ This is usually done in practice by the home office for internal control purposes.
✓ When billings to the branch is at a price in excess of cost, the consequence will be as follows:
(a) The profits determined by the branch will be understated.
(b) The inventories reported by the branch will be overstated.

PROBLEM 8 – Individual Financial Statements

Consider the following transactions of the home office and branch:

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1. Home office ships to the branch inventory costing P100,000 and bills the branch 120% of the cost.
2. Home office ships to the branch inventory costing P200,000 and bills the branch 120% of the cost. Home office
pays freight of P10,000.
3. Home office ships to the branch inventory costing P80,000 and bills the branch 120% of the cost. Branch pays
freight of P6,000.
4. Branch purchases inventory from a supplier for P40,000, on account. Branch pays freight of P2,000.
5. Branch makes total sales of P500,000 on account.
6. Branch incurs utilities expense of P100,000, P20,000 of which were allocated from the home office.
7. The branch has an ending inventory of P250,000, inclusive of freight.

REQUIRED:
a. Prepare journal entries.
b. Prepare individual income statement showing:
- Branch net income in so far as branch is concern
- Branch net income in so far as home office is concern (true branch net income)

PROBLEM 9 – Commonly Asked Questions

Consider the following data:

BRANCH BOOKS HOME OFFICE BOOKS
Sales 700,000 Branch current account 650,000
Billings from home office 625,000 Shipments to branch 500,000
Operating expenses 100,000 Allowance for overvaluation 125,000
Ending inventory at billed price 250,000

REQUIRED:
Answer the following questions:
1. What is the billing rate based on cost?
2. What is the markup percentage based on cost?
3. How much is the unrealized markup in ending inventory?
4. How much is the realized markup?
5. How much ending inventory of the branch is included in the combined financial statements?
6. How much sales of the branch are included in the combined financial statements?
7. How much cost of goods sold of the branch is included in the combined financial statements?
8. What is the adjusted balance of the “allowance for markup” account?
9. How much is the individual profit of the branch?
10. How much is the true profit of the branch?
11. How much is the adjusted balance of the branch current account?
12. How much is the balance of the “Home Office” account that is presented in the combined financial statements?

PROBLEM 10 – Special Intra-company transactions: With Goods In Transit

Selected accounts from the December 31, 2023 trial balance of Mike Corporation and its branch follow:
Home office Branch
Inventory, Jan. 1 P 46,000 P 23,100
Branch current 116,600
Purchases 380,000
Shipments from office 209,000
Freight-in 10,450
Expenses 104,000 58,100
Home office current (106,600)
Sales (310,000) (280,000)
Shipments to branch (200,000)
Branch merchandise markup (22,000)

The home office billed its branch at 110% above cost. Freight cost, typically 5% of the billing price is inventoriable. Merchandise
on hand at year-end were: home office P64,000 at cost; branch P33,000 ay billing price.

REQUIRED:
Answer the following questions:
1. Compute for the cost of goods sold of the branch for the year just ended.
2. Compute for the true branch cost of goods sold for the year just ended.
3. Compute for the ending inventory of the branch for the year just ended.
4. Compute for the true branch ending inventory on December 31.
5. What is the adjusted balance of the unrealized profit account on the home office books on December 31?
6. How much is the overvaluation of COGS or undervaluation of branch net income?
PROBLEM 11 – Special Procedures: Different mark-up above costs; with outside purchases

Financial data for Espeon Company of Manila and its Surigao branch for 2023 follow:

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MANILA OFFICE SURIGAO BRANCH

Sales P1,060,000 P 315,000
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 expense 382,000 40,000
Records show that the Surigao branch was billed for merchandise shipments during 2022 at 25% above cost. 40% of the
branch’s 2022 ending inventory came from outsiders while 70% of the branch’s 2023 ending inventory came from home office.

REQUIRED:
Based on the above, determine the following:
1. Unadjusted allowance for overvaluation on December 31, 2023.
2. Branch cost of goods sold for the year ended December 31, 2023.
3. Branch cost of goods sold for 2023 per GAAP.
4. Adjusted allowance for overvaluation on December 31, 2023.
5. Branch inventory as of December 31, 2023.
6. Branch inventory as of December 31, 2023 insofar the home office is concerned.
7. Combined inventory as of December 31, 2023.
8. Combined cost of goods sold for the year 2023.
9. Branch net income (loss) for the year ended December 31, 2023.
10. True branch net income (loss) for 2023.
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, 2023 combined income statement of Espeon Company.

INTERBRANCH TRANSFERS
Branch activities are limited to transactions with the home office and with outside parties. Occasionally, the home office may
instruct one branch to transfer cash or other assets to another branch. In this case, the branch will clear such inter-branch
transfers through its Home Office Current account.

ACCOUNTING FOR EXCESS FREIGHT OR INTERBRANCH TRANSFER OF MERCHANDISE

Freight on goods received by a branch directly from home office is properly included in the cost of branch inventory but the
transfer of merchandise from one branch to another does not justify increasing the value of inventory because of indirect
routing. Excess freight costs should be treated by the home office as an expense.
✓ Excess freight costs arising from such inter-branch shipments generally is a result of management inefficiency and
therefore, should not be included in the cost of branch inventories.

PROBLEM 12 – Inter-branch transfers of merchandise

The home office instructs Branch Uno to transfer P10,000 cash to Branch Dos.

Required:
Prepare the necessary journal entry.

PROBLEM 13 – Inter-branch transfers of merchandise

Consider the following transactions:

1. Home office transfers inventory worth P150,000 to Branch Uno. Home office pays freight of P10,000.
2. Later on, the home office instructs Branch Uno to transfer the merchandise to Branch Dos. Branch Uno pays freight
of P3,000. If the merchandise had been shipped directly from the home office to Branch Dos, the freight cost would
have been P11,000.

Required:
Prepare the necessary journal entries.

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