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Set up by Home Office as EXTENSIONS Have no Juridical Personality Has autonomy to transact on its own. Has Separate Books; -At the end of the period, Branch has to prepare SEPARATE FS. Branch’s Separate FS cannot be used for External Use because it is incomplete. For it to be use for external use, it must be combined with the Separate FS of the HO. Approves credit application of customers as well as delivers the goods to customers Maintains LARGE stock of Inventory Set up by Home Office as EXTENSIONS Have no Juridical Personality Has no autonomy to transact on its own; what they do is GET ORDERS from customers to be SENT to HO. HO will be the one delivers the goods to customers. Has No Separate Books ; transactions are recorded by the HO. HO can record Agency’s transactions in 2 ways:
- Separate by using Special Accounts (Sales – Agency , AR – Agency)
- Not Separate No Separate FS (nakahalo na sa HO) Maintains Working Fund (Petty Cash Fund) used to record petty expenses and day-to-day transactions of agency; maintained under IMPREST SYSTEM Maintains SAMPLE inventory only HOME OFFICE, BRANCH AND AGENCY ACCOUNTING BRANCH ACCOUNTING Home Office and Branch maintains RECIPROCAL ACCOUNTS in BS & IS. BALANCE SHEET HOME OFFICE BOOKS Reciprocal Account: Investment in Branch / Branch Current Account Asset Account (Normal Bal = Dr)
BRANCH BOOKS
Reciprocal Account: Home Office Account Capital Account (Normal Bal = Cr) MUST BE EQUAL ; NOT EQUAL = RECONCILIATION INCOME STATEMENT HOME OFFICE BOOKS Reciprocal Account: Shipment to Branch Nominal Account (Normal Bal = Cr)
BRANCH BOOKS
Reciprocal Account: Shipment from the Home Office Nominal Account (Normal Bal = Dr) Beginning Balance = Zero ; Must be CLOSED at the end of the period At the end of the period, Home Office shall combine the FS prepared by the Branch and Home Office, wherein:
- All the RECIPROCAL Accounts are ELIMINATED by preparing a Working Paper as a guide. Working Paper Elimination Entry (WPEE): BALANCE SHEET: Home Office Account xx Investment on Branch xx
INCOME STATEMENT
Shipment to Branch xx Shipment from the Home Office xx Must equal to 0 on the Combined FS after elimination PROBLEM 1: At the end of the year the Investment in Bacolod account of the home office is P300,500. However, there are transactions discovered to have errors. a. Bacolod branch bought equipment on June 1, 2020 costing P63,800 for the home office’s use and the policy is to record the asset in Bacolod’s books. During that time the home office recorded the equipment and credited its reciprocal account of its Bacolod branch If NOT EQUAL, RECONCILE -- The one who failed to record shall be the one to reconcile. -- The one who commit the errors shall be the one to make adjustments.
- Timing of Recording
- Clerical Errors
- Transposition - Slide Errors
- Wrong Posting. - Double Posting
b. The policy of the company regarding the equipment’s depreciation is that it has a life of 8yrs with no salvage value and the straight-line method should be used. No entry has been made by the home office and branch c. The home office ships merchandise to Bacolod amounting to P96,700. Bacolod recorded the transaction as P97, d. Bacolod pays the home office’s creditors in the amount of P32,400 and sends a debit memo to the home office. Upon receipt of the debit memo, the home office debited its reciprocal account in the amount of P23,400 twice.
1. What is the unadjusted balance of the home office current account in the books of Bacolod at the end of the year? a. 379,600 b. 252,000 c. 286,000 d. 315, 2. What is the net adjustment of the investment in Bacolod account at the end of the year? a. 20,052 debit b. 20,052 credit c. 19,387.5 debit d. 19,387.5 credit 3. What is the net adjustment of the home office current account in the books of Bacolod branch at the end of the year? a. 4,887.5 debit b. 4,887.5 credit c. 5,552 debit d. 5,552 credit SOLUTION: HOME OFFICE BOOKS BRANCH BOOKS Unadjusted Balance 300,500 286, a) Equipment 63, b) Depreciation (4,652) (4,652) c) Shipment (900) d) Debit Memo – BB (79,200) Adjusted Balance 280,448 280, MADE SHOULD BE ADJUSTING ENTRY a) HOB Equipment 63, Invest. 63, Memo Entry only in HOB to signify its use Invest 63, Equipment 63, b) BB No Entry HOB No Entry
BB:
Dep’n Exp 4, Acc. Dep. 4, [(63,800 / 8yrs) x 7mos/12mos] Since si HO ang gumamit, BB should allocate the DE to HO account Home Office 4, Dep’n Exp. 4, HOB: (Upon receipt of Memo of the allocation) Dep’n Exp 4, Investment in Branch 4, c) BB Ship. from HO 97, Home Office 97, Ship. from HO 96, Home Office 96, Home Office 900 Ship. from HO 900 d) HOB Inv. in Branch 46, A/P 46,
A/P 32,
Inv. in Branch 32,
A/P 79,
Inv. in Branch 79, RULES IN ISSUING MEMOS Issued by the HOME OFFICE – Inv in Branch (Dr) Debit Memo: Increase Investment in Branch (Dr) Increase Home Office Account in BB (Cr) Credit Memo: Decrease Investment in Branch (Cr) Decrease Home Office Account in BB (Dr) Issued by the BRANCH – HO Acc (Cr) Debit Memo: Decrease Home Office Account in BB (Dr) Decrease Investment in Branch (Cr) Credit Memo: Increase Home Office Account in BB (Dr) Increase Investment in Branch (Cr) PROBLEM 2: A) Miles Company established a branch in Ayala by sending merchandise costing P924,500 and effecting a fund transfer of P400, cash on January 1, 2020. B) The branch purchased computer equipment costing P420,000 on April 1. As per agreement, the home office will maintain all the property, plant and equipment records. C) Ayala branch collected P56,000 worth of Ortigas branch’s receivable on August 4. Cash remittance to the home was P250,000 on September 28. 1 2 3 = 20,052 = 5,
Shipment from HO @ BILLED PRICE Investment in Branch @ BILLED PRICE Branch Inventory (Shipment to & Shipment From) Not Equal (Overstated) Effect: BI & EI overstated
- COGS Overstated
- NI understated Adjust for Combined FS HOME OFFICE BOOKS BRANCH BOOKS ASSUME: Net Income of BB = 20, Inv. In Branch 20, Branch Income 20, Income Summary 20, Home Office 20, understated, si HOB mag aadjust All inventories are sold Allow. for Overvaluation of Branch Inventory 10, Branch Income 10,
- “How much Net Income of Branch?” ang isasagot mo is 20,000 yung POV nya
- “What is the true Net Income of the Branch as far as the HO is concerned?” ang isasagot is 30,000 [20k NI + 10k OV] In preparing a Combined FS, Home Office will prepare Working Paper Elimination Entries (WPEE) for reciprocal accounts and the allowances: Home Office & Investment in Branch Home Office xx Investment in Branch xx Shipment to & Shipment from & Allowances Shipment to Branch xx (Cost) Allowance for Overvaluation of BI xx (Mark-Up) Shipment from HO xx (Billed Price) Beginning Inventory (Overstated) Allowance for Overvaluation of BI xx Beginning Inventory xx (Overvaluation Amount) Ending Inventory Ending Inventory (Income Statement) xx Ending Inventory (Balance Sheet) xx (Overvaluation Amount) PRESENTATION OF BRANCH’S COGS & NET INCOME Beginning Inventory (from HO @ BP + from Outside @ Cost) xx Overstated
- Net Purchases (from Outside @ Cost) xx
- Shipment from HO (from HO @ BP) xx TGAS per Branch Books xx Overstated
- Ending Inventory (from HO @ BP + from Outside @ Cost) (xx) Overstated COGS xx Overstated Sales xx
- COGS (xx) Overstated Gross Profit xx Understated
- Operating Expenses (xx) NET INCOME per BB
- Realized Gross Profit from Allowances xx Understated xx TRUE NET INCOME presented in Combined FS xx Correct Valuation HOW TO GET THE REALIZED GP FROM ALLOWANCES? BILLED PRICE - COST = ALLOWANCE HO & Branch Transactions only; outside transactions not included Beginning Inventory - = xx
- Net Purch. (Ship from & to) (from HO) - (to) = xx TGAS per Branch Books - = xx Before Adj.
- Ending Inventory - = (xx) After Adj. COGS - = xx RGP / Overstatement of COGS PROBLEM 3: The home office transfers merchandise to Manila branch at a mark-up of 25% above cost during the year 2022, and 30% mark-up above cost during the previous year. In 2022, the reciprocal account in the income statement of the branch is P1,487,500. The account Unrealized Branch Inventory Profit has a balance of P84,000 at the end of the previous year. There were no inventory beginning from outside purchases in 2022, however purchases were made during 2022 at P76,000. The ending inventory reported by the branch in 2022 was P1,650,500. At the end of 2022, an additional profit of P54,000 was realized from the Unrealized Branch Inventory Profit account.
- What is the cost of goods sold of the branch in the combined financial statements? a. 180,000 b. 223,000 c. 234,000 d. 203,
- What is the cost of goods available for sale of the branch at cost? a. 1,927,500 b. 1,470,000 c. 1,546,000 d. 1,851,
- What is the ending inventory of the branch in the combined financial statements? a. 1,323,000 b. 1,343,000 c. 1,310,000 d. 1,290,
- Note : In preparing the Combined FS, COGS must be at COST, therefore all inventory items at BILLED PRICE must be adjusted to COST. BILLED PRICE - COST = ALLOWANCE Beginning Inventory (130%) 364,000 ******** - (100%) 280,000 ******* = (30%) 84,
- Shipment (125%) 1,487,500 - (100%) 1,190,000 ***** = (25%) 297,500 ****** TGAS per Branch Books - = 381,500 ^ Before Adj.
- Ending Inventory 1,617,500 ‘’ - 1,290,000 ‘ = (327,500) ^^ After Adj. COGS - = 54,000 RGP
- 1,487,500 / 125% = 1,190,000 **** 280,000 x 130% = 364, ** 1,190,000 x 25% = 297,500 ^ 84,000 + 297,500 = 381, *** 84,000 / 30% = 280,000 ^^ 381,500 – 54,000 = 327, ALLOWANCE = COST - BILLED PRICE Shipment 297,500 ****** = 1,190,000 *** -** 1,487,
- Beginning Inventory (30%) 30,000 ^^^ = (100%) 100,000 ^^^^ - (130%) 130,000 ^^^^^ Ending inventory 327,500 ^^ = 1,290,000 ‘ - 1,617,500 ‘’ ^^^ 327,500 – 297,500 = 30,000 ‘ 1,190,000 + 100,000 = 1,290, ^^^^ 30,000 / 30% = 100,000 ‘’ 1,487,500 + 130,000 = 1,617, Beginning Inventory @ COST (from HO 280,000 + from Outside 0 ) 280,000 Overstated
- Net Purchases (from Outside @ Cost) 76,
- Shipment from HO @ Cost 1,190, TGAS per Branch Books 1,546,000 Overstated
- Ending Inventory (from HO 1,290,000 + from Outside 33,000) (1,323,000) Overstated COGS 223,000 Overstated ^^^^^ 100,000 x 130% = 130, COMBINED NET INCOME COMPUTATION
- Compute for Net Income per Book
- Compute for COGS per Book
- Adjust the Realized Gross Profit using the template for HO and Branch only [ BP – Cost = Allowance]
- Combine Net Income per HOB & True Net Income per Branch Book HOME OFFICE BOOKS BRANCH BOOKS Sales xx Sales xx
- COGS (xx) - COGS (xx) Gross Profit xx Gross Profit xx
- OPEX (xx) - OPEX (xx) Net Income per HOB xx Net Income per BB xx under
- Realized Gross Profit xx TRUE NET INCOME per BB xx adjusted HOME OFFICE BOOKS BRANCH BOOKS Beginning Inventory xx Beginning Inventory (HO @ BP + O @ COST) xx
- Net Purchases xx + Net Purchases (O @ COST) xx 2 3 1 Ending Inventory (from HO @ BP) Ending Inventory (from Outside @ Cost)
Total Ending Inventory 1,650,
- OPEX
Depreciation [40,000 * 18% * 1/12] (600) Salaries Exp. (21,600) Rent Exp. [36,000 * 1/12] (3,000) Other Expenses [Expenses under Imprest System] (17,925) Expired Samples [36,000 * 85% / 4mos from Aug 1 – Dec 1] (7,650) NET INCOME OF AGENCY 91,
