branches and agencies

PRACTICAL ACCOUNTING PROBLEMS II

2.0 Accounting for Branches 2.1 Transactions in the books of home office and the branch 2.2 Reconciliation of reciprocal accounts 2.3 Individual and combined financial statements

2.4 Accounting for agency transactions2.5 Special transactions like unrealized profit in branch beginning inventory,

transactions between branches, use of perpetual inventory system, etc.

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SUMMARY OF STUDY OBJECTIVES AND KEY TERMS

1. Companies often expand into new marketing territories (an effort to increase its sales and income) through internal growth by establishing branch offices that operate within the firm. In other words, a branch office operates at a location separate from the firm's principal office, called the home office, but a branch is not a separate legal entity. The rise of national and regional chain-store operations and suburban shopping centers has contributed significantly to the number of branch operations.

2. When a separate office is established to provide a sales outlet, it most often takes the organizational form of either a sales agency or a branch office. Sales agencies usually take orders that are filled by the home office. They usually have little autonomy, do not stock merchandise, and do not have separate accounting systems. Branches vary in the degree of autonomy. Most branches have greater autonomy than sales agencies do. They usually do stock merchandise and frequently have their own accounting systems.

3. Transactions with external parties are recorded in the normal manner. Transactions between the home office and a branch also are treated in the normal manner except they 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 the branch are completely up to date, the balance in an intracompany account on the home office books will be equal but opposite that of the related intracompany account on the branch books.

4. The Home Office Equity account on the books of the branch is reciprocal to the Investment in Branch account on the home office books. Both accounts are increased by asset transfers from the home office to the branch and by branch profits. Both accounts are decreased by asset transfers from the branch to the home office and by branch losses.

5. A branch office's books consist of a self-balancing set of accounts, similar to the books of a separate company. However, a Home Office Equity account replaces the owners' equity accounts found on the books of separate companies. The Home Office account indicates the home office's equity in the branch.

6. Neither sales agencies nor branches are separate legal or accounting entities; they do not prepare separate external accounting reports. While companies often prepare separate accounting reports for the home office and each branch for internal use, the external accounting reports must reflect the activities and position of the company as a whole. The accounts of the home office and branches are combined to prepare financial statements for external reporting.

7. A workpaper normally is used to facilitate the process of combining home office and branch accounts. In addition, certain account balances must be eliminated or changed so that the results reflect a single company. The reciprocal Home Office Equity and Investment in Branch accounts are eliminated, and the amounts reported as cost of goods sold and ending inventory are adjusted for any intracompany profit recorded by the home office on shipments of merchandise to its branches.

OTHER KEY TERMS

Shipments from Home office Reciprocal accounts Unrealized intercompany Shipments to Branch Transfer price inventory profit

PRACTICAL 2, Branches and Agencies

Problems

1. On January 1, the Best Company opened a new branch in a neighboring city. A summary of transactions for the home office and the branch for the year and the balance sheet for the home office on January 1 are as follows:

Home Office Transactions a. Transfers of cash to branch, P42,500.b. Transfers of merchandise to branch (billed at cost), P50,200.c. Sales on account, P105,000.d. Purchases on account, P122,500.e. Collections on account, P113,600.f. Payments on account, P124,000.g. Expenses paid, P26,600.h. Cash received from branch, P53,400.i. Dividends paid, P10,000.

Adjusting data on December 31:Depreciation for year, P1,180.Merchandise inventory, P48,500.Prepaid expenses, P2,050.Accrued expenses, P1,350.

Branch Transactionsa. Cash received from home office, P42,500.b. Merchandise received from home office, P50,200.c. Sales on account, P66,000.d. Purchases on account, P22,500.e. Collections on account deposited to the credit of the home office, P53,400.f. Payments on account, P12,250.g. Purchase of furniture and fixtures for cash, P8,000.h. Expenses paid, P18,000.

Adjusting data on December 31:Depreciation, P650.Merchandise inventory, P23,500.Prepaid expenses, P750.Accrued expenses, P300.

Balance Sheet Assets Liabilities and Stockholders' Equity

Cash P 59,300 Accrued expenses P 1,250Accounts receivable 27,650 Accounts payable 22,800Merchandise inventory 40,120 Capital stock, P20 par 50,000Prepaid expenses 1,800 Retained earnings 70,420Furniture and fixtures

P20,000Less accumulated depreciation

4,400 15,600 Total liabilities and .

Total assets P144,470 stockholders' equity P144,470

Required: 1. Prepare journal entries to record the foregoing transactions for (a) the branch and (b)

the home office.2. Prepare the journal entries to adjust and close the books for (a) the branch and (b) the

home office. 3. Prepare individual statements for the branch and for the home office. 4. Prepare working papers for combined statements5. Prepare combined statements for home office and branch.


2. The Investment in Branch account on the home office books of the Territory Co. and the Home Office Equity account on the branch books on January 31, are as follows:

Investment in Branch .

Jan. 1

Balance 62,815 Jan. 15 Remittance 10,600

5

Shipments: 100 @ P37.85 3,785 22 Returns 410

12

Shipments: 200 @ P37.85 200 @ 44.95 16,560

15

Advertising chargeable to branch

600

20

Shipments 4,400

Home Office Equity .

Jan.13

Remittance 10,600 Jan. 1 Balance 62,815

18

Returns 410 8

Shipments 3,785

22

Understatement of depreciation in prior year 540

16 20

ShipmentsCollection of home

16,650

31

Remittance 16,000 office account 750

Required: 1. Prepare a statement reconciling the reciprocal accounts as of January 31.2. Prepare the necessary entries for the books of the home office as well as for the

branch before combined statements can be prepared.

3. The general ledger trial balances at December 31, for Manila Sales Company and its Quezon City Branch Office are as follows:

Home BranchCash 40,000 8,000Accounts Receivable 31,000 12,000Inventory-Home Office, January 1 70,000 --Inventory-Branch Office, January 1 -- 15,000Property, Plant, and Equipment 120,000 --Accumulated Depreciation ( 30,000) --Investment in Branch 20,000 --Accounts Payable ( 36,000) (14,500)Accrued Expenses ( 14,000) ( 2,500)Home Office Equity -- ( 8,000)Common Stock, P10 par ( 50,000) --Retained Earnings, January 1 ( 45,000) --Sales (440,000) (95,000)Purchases 290,000 24,000Shipments from Home Office -- 45,000Operating Expenses 44,000 16,000

An audit disclosed the following:a. On December 23, the branch office manager purchased P5,000 of furniture and fixtures

but failed to notify the home office. The bookkeeper, knowing that all plant assets are carried on the home office books, recorded the proper entry on the branch office records. It is the company's policy not to take any depreciation on assets acquired in the last half of the year.


b. On December 27, a branch office customer erroneously paid an account of P2,000 to the home office. The bookkeeper made the entry on the home office books but did not notify the branch office.

c. On December 30, the branch office remitted cash of P5,000, which was received by the home office in January.

d. On December 31, the branch office erroneously recorded the December allocated expense from the home office as P500 instead of P1,500.

e. On December 31, the home office shipped merchandise billed at P3,000 to the branch office. The merchandise was received in January.

f. Depreciation for the year, not yet recorded, is P8,000 on home office assets and P4,000 on branch assets.

g. The entire beginning inventory of the branch office had been purchased from the home office. Home office current shipments to the branch were purchased by the home office in the current year. The physical inventories at December 31, excluding the shipment in transit, are: Home Office, P55,000 (at cost); Branch Office, P20,000 (comprised of P18,000 from the home office and P2,000 from outside vendors).

h. The home office consistently bills shipments to the branch office at 25% above cost. The sales account is billed for the invoice price.

Required: 1. Prepare a statement reconciling the reciprocal accounts as of December 31.2. Prepare the necessary entries for the books of the home office as well as for

the branch before combined statements can be prepared.3. Determine:

4. Inventory of Branch at cost5. Combined inventory at cost6. Net income of home office from own operations7. Net income of branch8. Net income of branch as far as the home office is concerned

9. The combined income for Manila Sales Company and its Quezon City Branch.

Disregard income taxes.

4. The Mindanao Co. operates a branch in Cagayan. Operating data for the home office and the branch for the year follow:

Home Office BranchSales P256,000 P 78,500Purchases from outsiders 210,000 20,000Shipments to Branch: Cost to Home Office Billing price to Branch

30,000

40,000Operating Expenses 60,000 12,500Inventories, January 1: Acquired from outsiders at cost Acquired from home office at billed price which averaged 22.5% above cost

80,000

7,500

24,500Inventories, December 31: Acquired from outsiders at cost Acquired from home office at current year's billed

price

55,000 5,500

26,000

Required: Prepare individual and combined income statement.

5. On April 1 of the current year, the Domestic Company establishes an organization to act as a sales agency. The following assets are sent to the agency on April 1:

A working fund to be operated under the imprest system

P1,000

Samples from the merchandise stock 5,000Advertising materials and literature 1,250

During April the agency submits sales on account of P17,600 that are approved by the home office; cost of merchandise shipped in filling orders is P10,500. Home office disbursements chargeable to the agency are as follows:

Furniture and fixtures for agency P2,400Salaries and commissions 1,750Rent 800


On April 30 the agency working fund is replenished. Paid expense vouchers submitted by the agency are as follows:

Advertising expense P 325Miscellaneous expense 600

The following information is used in adjusting the agency accounts on April 30:· Agency samples will be useful until December 31; at that time it is believed they

will have a salvage value of 40% of cost.· Approximately 2/5 of the advertising materials and literature remain on hand.· Furniture and fixtures are to be depreciated on a 5-year basis.· The agency manager is to receive a bonus of 5% of all sales above P10,000 a

month, the bonus to be paid by the home office at quarterly intervals.

Required:1. Prepare the journal entries on the home office books to record the

transactions and to adjust and close the accounts kept with the agency.2. Prepare a statement summarizing agency activities for April.

12. Multiple Choice and Questions (Phil. CPA Board Examination)

October 1988Trial balances for the home office and the branch of the Toby Company show the following accounts before adjustment, on December 31, 1987. The home office policy of billing the branch for merchandise is 20% above cost.

Home Office

Branch

Unrealized intercompany inventory profit P10,800Shipments to branch 24,000Purchases (outsiders) P 7,500Shipments from home office 28,800Merchandise inventory, December 1, 1987

45,000

1. What part of the branch inventory as of December 1, 1987 represent purchases from outsiders and what part represent goods acquired from the home office?

Outsiders Home Office Outsiders Home Office( P12,000 P33,000 (c) P15,000 P30,000( P16,500 P28,500 (d) P 9,000 P36,000

May 1989The Mahiyain Manufacturing Co. of Quezon City opened a branch at Davao City on January 1, 1988, to expand the market of its product. Merchandise shipped during 1988 to the Davao branch totalled P104,000, and this included a profit of 25% based on cost. At the end of the


year, the inventory was P12,500, at billed price. The branch extend credit, makes collections and pay expenses from cash received. The company applied the periodic inventory method. Other transactions affecting the branch are as follows: Sales on account P117,000; expenses P20,000, of which P1,300 were unpaid on December 31, 1988; cash received from customers' accounts, P84,000, after allowing cash discounts of P1,480; cash remitted to the home office during the year P65,000.

2. In the book of the branch, the income or loss was:(a) P19,300; (b) P8,300; (c) P4,020; (d) (P6,220); (e) None of these.

3. In so far as the home office is concern, the true income or loss of the branch operation was:

(a) P24,300; (b) P22,320; (c) (P18,300); (d) P24,320; (e) None of these.

October 1989The Neneng Corporation established its San Pedro branch in March, 1988. During the first year of operation the home office shipped to the branch merchandise which had cost P120,000. Three-fourth of this merchandise was sold by the branch for P141,000. Operating expenses of the branch amounted to P27,000 during 1988.

4. How much is the net income the branch will report if merchandise is billed to the branch at 25% above cost?(a) P1,500; (b) P8,000; (c) P800; (d) P1,200; (e) None of these.

The Chibas Regal, owns the Royal Crown in Quezon City. There is a branch in Davao City. During 1988, the home office shipped supplies costing P120,000 to the branch at a billed price of 20% above cost. The inventories of supplies at the branch were as follows: Jan. 1, 1988, P90,000; December 31, 1988, P108,000. The home office holds inventories of P160,500 which include P10,500 held on consignment. Both locations use the periodic inventory method.

5. How much is the inventories in a combined balance sheet as of December 31, 1988?(a) P270,000; (b) P210,000; (c) P300,000; (d) P240,000; (e) None of these.

May 1990The Goldie Bunch Co. has a branch in Davao City on July 3, 1988. During 1988 the home office shipped goods to the branch at billed price totalling P250,000, which was 25% above cost. The branch on December 31, 1988 showed an inventory of P50,000 at billed price. A net profit of P66,000 for 1988 operations was reported by the branch.

6. How much is the true net profit of the branch?

The home office bills its Cebu branch at 125% of cost. During the year 1988, goods costing P300,000 were shipped to the branch. The account entitled "Allowance for Valuation of Branch inventory" has a balance of P14,000 at the end of the year after adjustment.

7. How much is the amount of ending inventory at billed price?

8. How much of ending inventory at cost?

October 1990The following account balances were taken from the books of Goldielock Co. and its Davao branch on December 31, 1989. Book of Davao Branch: Sales, P1,200,000; Shipments from home office, P720,000; Expenses, P400,000. Book of Goldielock Co: Allowance for overvaluation of branch inventory, P145,000. All merchandise of the branch came from the


home office. The inventories of the branch at billed price are as follows: January 1, 1989, P150,000 and December 31, 1989, P168,000.

9. Compute the percentage of profit on cost that the home office use to bill merchandise shipped to branch.

10. How much is the adjusted profit of Davao branch?

The Rose Company of Manila established a branch in Cebu. During 1989, the home office shipped supplies costing P80,000 to the branch at a billed price of 20 percent above cost. The inventories of supplies at the branch were as follows: January 1, 1989, P60,000; December 31, 1989, P72,000. The home office holds inventories of P107,000 which include P7,000 held on consignment. Home office and branch use the periodic inventory method.

11. How much is the inventories in a combined balance sheet at December 31, 1989?

October 1991The National Home Company ships and bills its Provincial branch merchandise at cost. The branch carries its own accounts receivable, makes its own collections the pays its expenses. The transactions in 1990 are reflected in the branch trial balance as follows:

Debit CreditCash P 11,900National Home Co. Current P 90,000Shipment from National Home Co. 120,000Accounts Receivable 62,500Expenses 8,100Sales . 112,500

P202,500 P202,500

Branch inventory, December 31, 1990, P30,000.

12. How much is the net profit of Branch?(a) P22,500; (b) P14,400; (c) P21,900; (d) Not given.

13. The Branch current account in the home office books should be:(a) P134,400; (b) P90,000; (c) P104,400; (d) Not given.

On December 31, 1990, the following are data in the records of the branch in Angeles City of Big and Small Company:

Petty Cash P 4,500Accounts Receivable, Dec. 31, 1990 88,800Merchandise Inventory, Dec. 31, 1989 75,500Accounts Receivable, Dec. 31, 1989 85,200Merchandise Inventory, Dec. 31, 1990 81,000Sales 272,700Sales Return 4,800Accounts Receivable written off 2,000Shipments from home office 220,500Expenses (Paid by home office) 22,500


14. If all cash collections in 1990 were remitted to the home office, the remittance amounted to:(a) P262,300; (b) P266,800; (c) P264,300; (d) P267,100

May 1992Following is the Income Statement of XYZ Branch in Cebu City for the six months period ending June 30, 1991:

Sales P620,000Cost of Sales:Shipments from Home Office P550,000Branch purchases 50,000 Total P600,000Inventory, June 30:From Home Office P 75,000Branch purchases 10,000 85,000Cost of Sales 515,000Gross Profit P105,000Less Expenses 85,000Net Profit P 20,000

The Head Office ships merchandise and bills the Branch Office at 125% of cost. The rent of the Branch Office for six (6) months at P1,000 per month was paid by the Home Office.

15. The Head Office net profit in its Branch Office in Cebu City for the six (6) months ending June 30, 1991:(a) P125,000; (b) P124,000; (c) P139,000; (d) P109,000.

16. The inventory of the XYZ Branch Office as of June 30, 1991 at cost is:(a) P85,000; (b) P70,000; (c) P60,000; (d) P75,000.

October 1992J. C. Penny, Philippines has two merchandise outlets, its main store in Manila and its Cebu City branch. For control purposes, all purchases are made by the main store and shipped to the Cebu City branch at cost plus 10%. On January 1, 1992, the inventories of the main store in Manila and the Cebu City branch are P13,600 and P3,960, respectively. During 1992, the main store purchased merchandise costing P40,000 and shipped 40% of it to the Cebu City branch. At December 31, 1992, the following journal entry to prepare the books for the next accounting period was prepared:

Sales 32,000Inventory 4,840 Inventory 3,960 Shipments from main store 17,600 Expenses 10,480 Main store 4,800

17. What was the actual branch income for 1992 on a cost basis assuming the use of the

provisions of the statement of financial accounting standards?(a) P4,800; (b) P6,320; (c) P6,480; (d) P6,840.


18. If the main store has P11,200 worth of inventory unsold at the end of 1992, the inventory of the main store and the branch that should appear on the combined balance sheet as at December 31, 1992 is:(a) P15,160; (b) P15,600; (c) P16,040; (d) P17,200.

May 1993Selected balances from the Amorsolo Company's Branches A and B are as follows:

Branch A Branch BInventory, Jan. 1, 1992 P 21,000 P19,000Imprest branch fund 2,000 1,500Inventory, Dec. 31, 1992 19,000 12,000Accounts receivable, Jan. 1, 1992 55,000 43,500Accounts receivable, Dec. 31,

1992 70,000 53,500

Merchandise from Home Office 61,000 47,000Cash collections 85,000 70,000Sales 100,000 80,000Cash expenses 21,000 14,300

All sales, collections, and expenses are handled at the branch. All cash received from sales and collections are sent directly to the Home Office. Expenses are paid by the branch from the imprest fund and immediately reimbursed by the Home Office and credited to the Home Office account. All expenses paid by the branch are recorded in the branch books.

19. The net profit of Branch A is:(a) P16,000; (b) P21,000; (c) P15,000; (d) P18,000.

20. The balance of the Home Office account of Branch A on January 1, 1992 is:(a) P80,000; (b) P64,000; (c) P78,000; (d) P75,000.

21. The balance of the Home Office account of Branch B on January 1, 1992 is:(a) P80,000; (b) P64,000; (c) P78,000; (d) P95,000.

22. The balance of the Branch current account of Branch B on December 31, 1992 is:(a) P70,000; (b) P64,000; (c) P67,000; (d) P65,000.

23. The entry in Branch B records to update the reciprocal account Home Office current on December 31, 1992 is:a.

Dr. -

Home Office / Cr. -

Profit and Loss

b.

Dr. -

Profit and Loss / Cr. -

Branch Current

c.

Dr. -

Branch Current / Cr. -

Profit and Loss

d. Profit and Loss / Cr. -

Home Office Current


Dr. -

October 1993The following were found in your examination of the interplant accounts between the Home Office and the Butuan Branch:

a. Transfer of fixed assets from Home Office amounting to P53,960 was not booked by the branch.b. P10,000 covering marketing expense of another branch was charged by Home Office to Butuan.c. Butuan recorded a debit note on inventory transfers from Home Office of P75,000 twice.d. Home office recorded cash transfer of P65,700 from Butuan branch as coming from Davao

branch.e. Butuan reversed a previous debit memo from Cagayan de Oro branch amounting to P10,500.

Home office decided that this charge is appropriately Davao branch's cost.f. Butuan recorded a debit memo from Home office of P4,650 as P4,560.

24. The net adjustment in the Home Office books related to the Butuan Branch current account is:(a) P75,700; (b) P65,700; (c) P86,200; (d) P94,820.

25. The net adjustment in Butuan's books related to the Home Office account is:(a) P33,335; (b) P31,450; (c) P20,950; (d) P10,450.

26. Before the above discrepancies were given effect, the balance in the Home Office books of its Butuan branch current account was a debit balance of p165,920. the unadjusted balance in the Butuan branch books of its home office current account must be:(a) P92,336; (b) P98,230; (c) P104,500 (d) P111,170.

27. The adjusted balance of the reciprocal accounts is:(a) P84,807; (b) P90,220; (c) P99,200; (d) P109,120.

branches and agencies

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