BALIUAG UNIVERSITY

College of Business Administration and Accountancy

Advanced Financial Accounting & Reporting
_____________________________________________________________________________________________
Module 1: Home Office, Branch & Agency LVC

Accounting for Home Office, Branch and Agency

✓ Functions, operations and accounting

Home Office Branch Agency
• The main business unit that • A business segment of the • A business segment of the
establishes several business home office that carries its own home office that merely takes
segments (branches and merchandise, makes sales, customer orders and carries no
agencies) in different approves customers’ credit, stocks other than samples.
geographical location. makes collections from its • Operates under the direct
• Supervise and controls the customers, and remits cash supervision of the home office
operations of the business received. and has limited functions.
segments under its name. • Has more independence and • Does not maintain separate
• Maintains the accounting wider operation than agency. accounting records and does
records of the company as a • Maintains its separate not prepares its own financial
whole and prepares the accounting records and statements.
combined financial statements prepares its separate financial • Agency fund is accounted in an
of the company. statements for submission to imprest system by the home
home office. office.

✓ Accounting for branch

• Reciprocal accounts
- The home office maintains an “Investment in Branch” account while the branch maintains a “Home Office
Current” account. Investment in Branch is similar to an asset and Home Office Current is similar to an
equity account.
- If periodic method is use the home office used “Shipments to Branch” account to record transfer of
merchandise to branch. The branch records the goods received from home office using “Shipments from
Home Office” account. If perpetual method is used, the transfer is merely recorded in the inventory
account.
- Reciprocal accounts are eliminated at the end of the reporting period.

• Shipments above cost

- Home office used an allowance for overvaluation account to record the mark-up on shipments.
- This mark-up is typically undisclosed to branch so the branch continues to record shipments at billed price.
- This overvaluation in the inventory of branch results in the overstatement of its cost of sales and
consequently, understatement of net income.
- The home office adjust the reported net income of the branch to reflect the realized profit in the
overvaluation of inventories.

• Reconciliation of reciprocal accounts

- Home office typically prepares a reconciliation statement to bring into agreement the reciprocal accounts
maintain by the home office and its branch.

• Combined financial statements

- At the end of the reporting period, the home office consolidates the separate financial statements
prepared by the home office and its branches.

✓ Journal entries
• Record the following transactions in the books of the home office and its branch.
1. The home office sent equipment to branch. Branch maintains its own PPE accounts, P50,000
2. The home office sent equipment to branch. Branch does not maintains it own PPE accounts, P50,000.
3. Home office allocates P10,000 of its recorded expenses to branch.
4. Branch collected P10,000 receivable of home office. The account is subject to a P500 term discount.
5. Home office shipped P50,000 worth of inventories to branch and mark-up of 20% on cost was charged to
the branch.
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Module 1: Home Office, Branch & Agency LVC
6. The home office paid P2,000 of the branch expenses.
7. Branch sold merchandise for P60,000.
8. Branch remitted P15,000 cash to home office.
9. Branch returned 20% of the shipments received from home office.
10. Branch computed P2,000 depreciation on equipment in no. 1.
11. Branch computed P2,000 depreciation on equipment in no. 2.
12. Assume that branch reported P25,000 net income. Realized profit on over valuation is P4,000.
13. Assume that branch reported P20,000 net loss. Realized profit on over valuation is P4,000.

✓ Reconciliation statement
At the end of the year, the reciprocal accounts maintained by home office and branch were not in agreement. The
Home Office Current account was lower than the Investment in Branch account by P32,580. Investment in branch
account had a balance of P150,000. The following transactions were noted by the company’s accountant:
a. The HO has billed the branch the amount of P37,500 merchandise, which was in transit on December 31.
b. A home office accounts receivable for P10,500 was collected by the branch. Such collection was not duly
reported.
c. The branch returned office supplies of P4,500. HO failed to reflect the receipt of supplies in its books.
d. Branch earned a profit of P10,100 for the year but HO recorded an amount of P11,180.
e. Cash of P25,000 sent by HO to branch was still in transit at year end. HO charged the cash outflow as
administrative expense.

✓ Overvaluation of inventories
Part 1. The trial balanc0e for home office and branch of ABC Corporation has the following selected
unadjusted balances:
HO Branch
Allowance for Overvaluation 36,000 -
Shipments account 80,000 96,000
Purchases 190,000 25,000
Inventory, January 1 175,000 150,000
Inventory, December 31 (P16,000 from vendors) 140,000 100,000

Determine the following:

1. Mark up rate (%)
2. Beginning inventory in the combined income statement
3. Shipment accounts in the combined income statement
4. Ending balance of Allowance for Overvaluation
5. Ending inventory in the combined income statement
6. Cost of goods sold in the combined income statement
7. Realized profit in the Allowance for overvaluation

Part 2. All the inventories of branch are from HO. The allowance for overvaluation account has P25,000
beginning balance and P32,500 ending balance. The branch reported P250,000 cost of sales and recorded
P312,500 inventories received from HO. HO billed the branch at 125% of cost. Determine the following:
8. The amount of returned shipments as recorded by branch
9. The amount of understatement in branch reported net income
10. The beginning inventory of branch in its own books
11. The ending inventory of branch as far as HO is concerned

Part 3. HO uses 40% mark up on its shipments. All inventories of branch are from HO. The branch has a
beginning inventory of P140,000 in its records. Shipments to branch in HO books amounted to P350,000.
Realized profit from overvaluation of shipments amounted to P128,000. Determine the following:
12. Cost of goods sold in branch own income statement
13. Ending inventory of branch in the combined income statement
14. Ending balance of the Allowance for overvaluation of inventory
15. Shipments from HO in the combined income statement

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Module 1: Home Office, Branch & Agency LVC
❖ Multiple Choice Questions
1. A business unit that usually carries a line of samples or displays merchandise but does not carry stocks of it.
A. Sales Agency C. Affiliate
B. Branch D. Subsidiary
2. The home office must maintain distinct revenue and expense accounts in the name of the sales agency if
A. There are more than one agency.
B. Sales agency net income is determined separately.
C. Sales agency contributes substantial revenues to the company.
D. Majority of the customers come from the particular sales agency.
3. All assets transferred by the home office to its branch is recorded in the home office books by debiting
A. Investment in Branch C. Particular asset account
B. Home Office D. Branch Asset
4. Which of the following statements is incorrect regarding reciprocal accounts of home office and branch?
A. Home Office account is considered as an asset account of the branch.
B. Investment in Branch account is considered as an asset account of the home office.
C. Reciprocal accounts are eliminated at the end of the accounting period.
D. Reciprocal accounts have opposite normal balance.
5. Returned merchandise by the branch to the home office is recorded by the home office by crediting
A. Shipments to Branch C. Home Office
B. Shipments from Home Office D. Investment in Branch
6. In which case will the branch debit its Home Office account
A. Receipt of fixed asset from home office
B. Notice of expense apportionment from home office
C. Return on merchandise shipped by vendor
D. Collection of branch receivables by the home office
7. The home office will debit its Investment in Branch account in the following cases, except
A. Recording of branch reported net income
B. Shipment of merchandise to branch with mark up above cost
C. Branch purchase of its own fixed asset. Fixed asset record is maintained by home office.
D. Collection of home office receivable by the branch.
8. Home office shipped its merchandise to branch for a margin of 30% above cost. The mark up is recorded by the
home office as
A. Credited to Shipment to Branch account
B. Credited to Allowance for over valuation account
C. Credited to Investment in branch account
D. None of the foregoing
9. Allocated expenses from the home office will be recorded by the branch as debit to
A. Investment in Branch C. Shipments from Home Office
B. Expense account D. Home Office
10. Which elimination entry is correct?
A. Debit Home Office & credit Investment in Branch
B. Debit Investment in Branch & credit Home Office
C. Debit Shipments from Home Office & credit Shipments to Branch
D. Debit Shipments to Branch & credit Home Office
11. An enterprise uses a branch accounting system in which it establishes separate formal accounting systems for
its home office operations and its branch office operations. Which of the following statements about this
arrangement is false?
A. The home office account on the books of a branch office represents the equity interest of the home office
in the net assets of the branch.
B. The branch office account on the books of the home office represents the equity interest of the branch
office in the net assets of the home office.
C. The home office and branch office accounts are reciprocal accounts that must be eliminated in the
preparation of the enterprise’s financial statements that are presented in accordance with GAAP.
D. Unrealized profit from internal transfers between the home office and a branch must be eliminated in the
preparation of the enterprise’s financial statements that are presented in accordance with GAAP.
12. VERDI, Inc. has several branches. Goods costing P10,000 were transferred by the head office to Cebu Branch
with the latter paying P600 for freight cost. Subsequently, the head office authorized Cebu Branch to transfer
the goods to Davao Branch for which the latter was billed for the P10,000 cost of the goods and freight charge
of P200 for the transfer. If the head office had shipped the goods directly to Davao Branch, the freight charge
would have been P700. The P100 difference in freight cost would be disposed of as follows:
A. Considered as savings. C. Charged to Davao Branch.
B. Charged to Cebu Branch. D. Charged to the Head Office.

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Module 1: Home Office, Branch & Agency LVC
13. Following is the income statement of XYZ Branch in Cebu City for the six month period ending June 30,
Year 1:
Sales P620,000
Cost of sales
Shipment from H.O. P550,000
Purchases __50,000
Total P600,000
Less: Inventory, June 30
From H.O. P75,000
From Purchases 10,000
Total P 85,000
Cost of sales P515,000
Gross profit on sales P105,000
Expenses P 85,000
Net profit P 20,000
The Home office ships merchandise to, and bills, the Branch office at 125% of cost. The rent of the Branch
office for 6 months, at a monthly rate of P1,000, was paid by the Home Office.
1. The Home office net profit from its Branch office in Cebu City, for the 6 months ending June 30, Year 1
is
a. P125,000
b. P124,000
c. P139,000
d. P109,000
2. The inventory of the Branch office in Cebu City, at cost, as of June 30, Year 1 is
a. P85,000
b. P70,000
c. P60,000
d. P75,000
14. At December 31, Year 2, the following journal entry was made to prepare the Cebu City branch books for
the next accounting period:
Sales 32,000
Inventory 4,840
Inventory 3,960
Shipments from main store 17,600
Expenses 10,480
Main store 4,800
The home office billed its branch at 110% of cost. All branch inventories are from home office.
1. What was the actual branch income for Year 2?
a. P4,800
b. P6,320
c. P6,480
d. P6,840
2. If the main store has P11,200 worth of inventory on hand at the end of Year 2, the total inventory that
should appear on the combine sheet at December 31, Year 2 is
a. P15,160
b. P15,600
c. P16,040
d. P17,200
15. The following were found in your examination of the inter-plant accounts between the Home Office and
Butuan Branch:
a. Transfer of fixed assets from Home Office in the amount of P53,960 was not booked by the Butuan
Branch.
b. P10,000 covering marketing expenses of the Davao Branch was charged by Home Office to the Butuan
Branch.
c. Butuan Branch recorded a debit note on inventory transfers from Home Office of P75,000 twice.
d. Home Office recorded a cash transfer of P65,700 from the Butuan Branch as coming from the Davao
Branch.
e. Butuan Branch reversed a previous debit memo from Cagayan de Oro Branch amounting to P10,500,
which Home Office decided is appropriately Davao Branch’s cost.
f. Butuan Branch recorded a debit memo from Home Office of P4,650 as P4,560.

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Module 1: Home Office, Branch & Agency LVC

1. The net adjustment in the Home Office books that is related to the Butuan Branch Current account is
a. P75,700
b. P65,700
c. P86,200
d. P94,820
2. The net adjustment in Butuan Branch’s books related to the Home Office account is
a. P33,335
b. P31,450
c. P20,950
d. P10,450
3. Before the above discrepancies were given effect, the balance in the Home Office books of the Butuan
Branch Current account was P165,920. The unadjusted balance in Butuan Branch’s books of its Home
Office Current account must be
a. P92,336
b. P98,230
c. P104,500
d. P111,170
4. The adjusted balance of the reciprocal account is
a. P84,807
b. P90,220
c. P99,200
d. P109,120
16. GOODWIN, Inc. opens a sales agency in Davao City, and a working fund for P20,000 is established on the
imprest basis. The first payment from the fund is P3,000 for rent. This transaction should be recorded by
the Home Office as follows:
a. No entry
b. Rent 3,000
Cash 3,000
c. Davao Agency 3,000
Cash 3,000
d. Davao Agency 3,000
Working Fund 3,000
17. TROPICAL Corp. bills its branch for merchandise shipments at 125% cost. As of cut-date on December 31,
the following data are available:
Mdse. from H.O Outside Purchse Total
Billing Price
December 1 P300,000 P120,000 P420,000
Dec. additions P450,000 P360,000 P810,000
December 31 P420,000 P150,000 P570,000
The branch returned merchandise to the home office at P15,000 billed priced. As a result of branch sales
for the month of December, the portion of the allowance for overvaluation that was realized as income
was
a. P63,000
b. P66,000
c. P84,000
d. P87,500
18. VIRTUOSO Co. has a sales agency in Cebu. Agency revenues and expenses are recorded in separate agency
accounts, with the operating results of both the agency and the home office generated at each month-
end. For the month of October, the home office paid P10,000 for advertising costs on behalf of the agency
and recorded this as follows:
a. Cebu agency 10,000
Cash 10,000
b. Advertising expenses 10,000
Cash 10,000
c. Accounts receivable-Cebu agency 10,000
Cash 10,000
d. Advertising expenses-Cebu agency 10,000
Cash 10,000

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Module 1: Home Office, Branch & Agency LVC
19. Before adjustment, certain accounts for the home office and for the branch of CORONA Co. show the
following balances as at December 31, Year 2 (differences in the shipments accounts result from the
home office policy of billing merchandise shipments to the branch at 20% above cost):
H/Office Branch
Allowance for overvaluation of branch
merchandise P180,000
Shipments to branch P400,000
Purchases (from outside sources) P125,000
Shipments from home office P480,000
Merchandise inventory, Dec. 1 P750,000
The portion of the December 1 branch inventory represented by goods acquired from sources other than
the home office was
a. P90,000
b. P100,000
c. P125,000
d. P150,000
20. ZEBRA Co. established an agency in 5th Avenue, Kalookan City. For May, Year 1, the first month of
operation, agency transactions were summarized as follows:
Receipts from sales P350,000
Disbursements for
Purchases P400,000
Rent 20,000
Advertising supplies 10,000
Salaries and commissions 70,000
Other Expenses 5,000
At the end of May, Year 1, the agency had P100,000 of receivables and P50,000 of payables. Also, there
were P90,000 of unsold merchandise and P6,000 of unused advertising supplies on hand.
The 5th Avenue agency was conceived as an experiment and it is the intention of management to close it if
its operation prove to be unprofitable. Thus, the agency should be
a. Reviewed due to its break-even performance.
b. Continued as there was a profit of P25,000.
c. Closed due to an operational loss of P9,000.
d. Closed due to an operational loss of P155,000.
21. MANILA Sales Co. established a branch in Baguio City early last year to which it shipped merchandise
before the branch opening with a billing price of P300,000. During the year, the home office billed the
branch a total of P120,000 for additional shipments of merchandise. Some defective merchandise were
shipped back by the branch and was given credit for P7,500 on the return. The branch also made
purchases of merchandise totaling P72,500 from outside suppliers. At the end of the year, a physical
count disclosed a branch ending inventory of P185,000 which included P20,000 of merchandise acquired
from outside suppliers. If merchandise shipments from home office were billed at 20% above cost, what
was the total cost of merchandise available for sale, net of returns, at the branch during the year?
a. P300,000
b. P343,750
c. P412,500
d. P416,250
22. The Binondo branch of CHINA FOOD PRODUCTS receives merchandise from the home office billed at
120% of cost and, in addition, also makes purchases from outside sources. Below are excerpts from the
records of the home office and the branch for the month just ended:
Home Office:
Cr.: Shipments to branch P 850,000
Cr.: allowance for overvaluation of branch merchandise P 370,000
Binondo Branch:
Dr.: Beginning inventory P1,440,000
Dr.: Shipments from home office P1,020,000
Dr.: Purchases P 410,000
Month-end branch inventory
From outsiders, at cost P 290,000
From home office, at billing price P1,170,000
The total cost of goods sold by the Binondo Branch during the month just ended, net allowance for
overvaluation, amounted to

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Module 1: Home Office, Branch & Agency LVC
a. P1,040,000
b. P1,215,000
c. P1,235,000
d. P1,410,000
23. EVER Co. has a branch in Davao City established on October 1, Year 1. The home office shipped
merchandise to the branch with a billed price of P125,000 which was 25% above cost. On October 31,
Year 1, the branch reported a net income from its operation of P5,000 and an ending inventory of P25,000
at billed price. What was the true net income of the branch?
a. P5,000
b. P20,000
c. P25,000
d. P30,000
24. FORTUNE Marketing Co. opened a branch in Dagupan City at the beginning of Year 1. The branch extends
credit, makes collections, pays expenses from cash receipts, and acquires goods exclusively from the
home office. During Year 1, good shipped by the home office to the branch, at a billing price of 125% of
cost, amounted to P104,000 of which P12,500 remained in the branch’s year-end inventory. Other branch
transactions Year 1 were as follows: sales, all on credit, P117,430; expenses, of which P1,500 are unpaid at
year-end, P20,000; collections on accounts, after deducting discounts of P1,480, P84,000; and, total
remittances to the home office, P62,500. As far as the home office is concerned, the operations of the
branch in Year 1 resulted in a
a. P4,450 net income.
b. P9,950 net loss.
c. P18,300 net income.
d. P22,750 net income.
25. KAYUMANGGI Marketing operates a branch in Makati, Metro Manila. On October 31, Year 2, the Branch
Current account had a balance of P300,000. In the process of reconciling current accounts, the items that
follow were noted:
(a) The home office had billed the branch P75,00 for merchandise shipment still in transit as of October
31.
(b) A home office customer’s account for P21,000 collected by the branch on October 26 has not been
reported to the home office.
(c) The branch has failed to recognize its 5,000 share of advertising expense paid for by the home office.
(d) The branch reported a net income of P43,500 during the fiscal period then ended; this was
erroneously taken up as P45,500 by the home office.
Assuming that all the other transactions related to the home office and its branch are correctly recorded,
the adjusted balance of the reciprocal current accounts as of October 31, Year 2 was
a. P300,000
b. P314,000
c. P319,000
d. P323,000
26. Selected accounts from the December 31, Year 2 trial balances of FIVE Star Co. and its branch follow:
Five Star Branch
Inventory Jan. 1 P 46,000 P 23,100
Branch Current 116,600 ----
Purchases 380,000 ----
Shipments from home 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 (23,000) ----
As of December 31, Year 2, a shipment with a billing price of P11,000 was in transit to the branch. Freight
cost, typically 5% of the billing price, is inventoriable. Merchandise on hand at year-and were: at home
office, P64,000 at cost; at the branch, P33,000 at billing price.
1. As far as the home office is concerned, the branch’s net income for the year ended December 31, Year
2 was
a. P12,350
b. P14,000
c. P31,350

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Module 1: Home Office, Branch & Agency LVC
d. P33,000
2. Net income of the combined operation was
a. P29,000 c. P58,000
b. P36,000 d. P77,000
27. VICTORY Ventures operates a branch in Cebu City. Selected accounts taken from the May 31, Year 2
statements of VICTORY and its branch follow:
Head Office Branch
Sales P380,000 P353,000
Shipments to branch 150,000 ----
Branch merchandise markup 39,500 ----
Inventory, June 1, Year 1 24,000 16,000
Purchases 300,000 60,000
Shipments from home office ---- 187,500
Inventory, May 31, Year 2 28,000 20,700
The branch ending inventory included items costing P8,700 that were acquired from outside suppliers.
The realized markup on branch merchandise that would be recognized by the home office is
a. P36,000 c. P37,100
b. P36,700 d. P37,500
28. FIESTA Trading operates a number of branches. On October 31, Year 3, its Sta. Cruz branch shows a home
office account balance of P27,350, and the home office shows a Sta. Cruz branch account balance of
P25,550. An examination of the records discloses the following information which may help in reconciling
both accounts:
- A P12,000 shipment, charged by the home office to Sta. Cruz branch, was actually send to, and
retained by San Miguel branch.
- A P15,000 shipment intended for, and charged to, Quaipo branch, was send instead to Sta. Cruz
branch and retained by the latter.
- P2,000 emergency cash transfer from Binondo branch to Tondo branch was not taken up in the home
office books.
- Home office collected a Sta. Cruz branch receivable but failed to notify the branch, P3,600.
- Home Office was charged P1,200vfor merchandise returned by Sta. Cruz Branch on October 30; these
are transit.
- Home Office erroneously recorded Sta. Cruz Branch’s net income as P16,275; Sta. Cruz Branch
reported P12,675.
The reconciled balance of the Home Office and Sta. Cruz Branch current reciprocal account is
a. P20,150 c. P23,750
b. P21,750 d. P27,350
29. FILIPINAS Corp., a Bicol-based agricultural corporation, has a newly opened branch in Lucena City to which
its ships merchandise at 140% of cost. In the first year, Lucena branch submitted these data:
Net sales P325,000
Merchandise received from the home office 175,000
Merchandise received from outside sources 140,000
Operating expenses 20,000
Merchandise inventory (including P10,000 acquired from 45,000
outside sources)
What is the Lucena branch net income to be reported in the year-end combined income statement?
a. P35,000 c. P75,000
b. P55,000 d. P95,000
30. LIBERTAD INC., ESTABLISHED ITS FIRST BRANCH ON May 1, Year 1. During the first month of operation,
the home office shipped merchandise to the branch worth P138,000 which included a markup of 15% of
cost. Sales for cash were P80,000 while sales on account were P250,000. At month’s end, the branch
reported operating expenses of P38,000 and a closing inventory of P23,000 at billed price. As far as the
home office is concerned, the true branch net income for May Year 1 is
a. P82,000 c. P177,000
b. P147,000 d. P192,000

“Stay true to yourself, yet always be open to learn. Work hard, and never give up on your dreams, even when
nobody else believes they can come true but you.” Phillip Sweet

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