ADVANCE FINANCIAL ACCOUNTING AND REPORTING (AFAR) E.

A ISIP
HOME OFFICE, BRANCH AND AGENCY TRANSACTIONS

AGENCY TRANSACTIONS
Characteristics of Sales Agency:
a. Do not have its own set of books and financial statement.
b. Part of a business that displays merchandise and take customer’s order.
c. Do not maintain inventory.
d. Do not pass on customer credit.

Accounting for Home Office and Agency Transactions

Accounting for sales agencies are similar to petty cash system, only cash receipt and
disbursement are usually managed by sales agencies, while for other related transactions
are managed by the home office.

Normal transactions of sales agencies recorded by home office:

Transactions Journal entry in Home Office Books
1. Setting up working fund. Dr. Working Fund/Capital – Sales Agency
Cr. Cash

2. Transfer of inventory for sample and Dr. Shipment to Sales Agency

display. Cr. Merchandise Inventory

3. Purchase of fixed assets for agency use. Dr. Fixes Assets – Sales Agency
Cr. Cash

4. Received sales order from agency. Dr. Accounts Receivables

Cr. Sales – Sales Agency

5. Recognition of Cost of Sales of agency Dr. Cost of Goods Sold – Sales Agency
sales Cr. Merchandise Inventory

6. Replenishment of working fund by the Dr. Expenses – Agency

agency. Cr. Cash

7. Recognition of Depreciation Expense for Dr. Depreciation Expense – Sales Agency

assets used by agency. Cr. Accum. Depreciation – Sales Agency

8. Allocation of decline in value of sample Dr. Loss in Inventory Write Down

inventory. Cr. Shipments to Sales Agency

9. Allocation of expenses to agency Dr. Expenses – Agency

Cr. Cash/AP

Transmittal of sales order by sales agency

Not all order transmitted by the agency are accounted as sales in the home office. In
certain situation, such as when stocks are insufficient, only a percentage of the orders
are being catered by the home office. Hence, the sales recorded should be based on the
orders provided by the home office.

Identification of Sales and Gross Profit (also applies to branch accounting)

1. If the order is transmitted based on cost,
a. Gross profit is based on sales
Formula: Sales = Sales Order / COS Ratio (1-GP Rate)

b. Gross profit is based on cost

Formula: Sales = Sales Order x (1 + GR Rate)

2. If the order is transmitted based on sales,

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 a. Gross profit is based on sales,
Formula: Gross Profit = Sales order x GP Rate

b. Gross Profit is based on cost,

Formula: Gross Profit = Sales order – (Sales Order / (1 + GR Rate))

BRANCH TRANSACTIONS
Characteristics of Branch Operations
a. Treated as an individual related entity from the home office.
b. Maintains its own set books and financial statements
c. The equity account is not in a form of stocks but a reciprocal account.
d. Has the right to transact its own operation within the policies set by the home
office.

Accounting for Home office and Branch Transactions

Branch offices are similar to those on a consolidation. This means that only inter
home – branch office transactions are reconciled, other individual home and branch office
transactions are recorded in the usual accounting procedures.

Pro-forma entries
a. Transfer of Cash
Home Office Books Home Office Books
Dr. Investment in Branch Dr. Cash
Cr. Cash Cr. Home Office

Note: Simply reverse if the branch transferred cash to home office.

b. Accounts Receivable
A/R of H.O collected by Branch with discount
Home Office Books Home Office Books
Dr. Investment in Branch Dr. Cash
Dr. Sales Discount Cr. Home Office
Cr. Accounts Receivable

A/R of Branch collected by H.O with discount

Home Office Books Home Office Books
Dr. Cash Dr. Home Office
Cr. Investment in Branch Dr. Sales Discount
Cr. Accounts receivable

Note: Simple removed the discount account if without discount.

c. Inventory
Without mark-up
Home Office Books Home Office Books
Dr. Investment in Branch Dr. Shipment from home office
Cr. Shipment to branch Cr. Home Office

With mark up
Home Office Books Home Office Books
Dr. Investment in Branch Dr. Shipment from home office
Cr. Shipment to branch Cr. Home Office
Cr. Allowance for Overvaluation

Note: For returned merchandised, simple reverse the entry. Allowance for
overvaluation also term as unrealized profit in branch inventory.

d. Fixed Assets
Purchased by H.O, recorded by branch
Home Office Books Home Office Books

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 Dr. Investment in Branch Dr. Fixed Assets
Cr. Cash Cr. Home Office

Dr. Depreciation Expense

Cr. Accum. Depreciation

Purchased by branch, recorded by branch

Home Office Books Home Office Books
No journal entry. Dr. Fixed Assets
Cr. Cash

Dr. Depreciation Expense

Cr. Accum. Depreciation

Purchased by H.O for branch use, recorded by H.O

Home Office Books Home Office Books
Dr. Fixed Assets No journal entry.
Cr. Cash

Dr. Investment in Branch Dr. Depreciation Expense

Cr. Accum. Depreciation Cr. Home Office

e. Allocation of Expense
Home Office Books Home Office Books
Dr. Investment in Branch Dr. Expense Account
Cr. Expense Account Cr. Home Office

f. Recording of Branch Income

Home Office Books Home Office Books
Dr. Investment in Branch Dr. Income Summary
Cr. Branch Income Cr. Home Office

g. Inter-branch transactions
Transfer of Cash
Home Office Books Branch (A) Books Branch (B) Books
Dr. Investment in A Dr. Cash Dr. H.O
Cr. Investment in B Cr. H.O Cr. Cash

Transfer of Shipments
Home Office Books Branch (A) Books Branch (B) Books
Dr. Investment in A Dr. Shipment from H.O
Cr. Shipment to A Dr. Freight In No Entry.
Cr. Allowance for OV Cr. H.O
Cr. Cash (if FP)
Dr. Investment in B Dr. H.O Dr. Shipment from H.O
Dr. Freight Expense Cr. Shipment from H.O Dr. Freight In
Cr. Investment in A Cr. Freight In Cr. Home office
Cr. Cash (if FC)

Note:
Shipment from home office – same amount for Branch (A) and (B).
Freight In credited by Branch (A) – should be prorated based on the shipped
merchandise to another branch.
Cash – either Freight Prepaid (FP) (Branch A) or Freight Collect (FC) (Branch B)
Freight In debited by Branch (B) – must be the “should be freight in” as if the
merchandise came from H.O.
H.O – balancing figure in the entry.

COGS TABLE – Branch Books

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 At Billed
At Cost Overvaluation
Price
Beg. Inventory
- From Outside XX (same) -
- From H.O XX XX XX
Add:
- Purchases (Outside) XX (same) -
- Shipments from H.O XX XX XX
- Shipments in Transit XX XX XX
- Freight In XX (same) -
XX
Total Goods Available for Sale XX XX
(unrealized)
Ending Inventory
- From Outside XX (same) -
- From H.O XX XX XX
- Shipment in Transit XX XX XX
- Freight In (End Inv. portion) XX (same) -
XX
Cost of Goods sold XX XX
(realized)

Computation of Branch True Net Income

Net income reported by branch XX

Less: Unrecorded expenses (dep’n + unallocated exp) XX
Correct net income per branch record XX
Add: Realized gross profit on inventory overvaluation XX
Branch True Net Income XX

1. Sakura Trading Co. operates a branch in Cebu City. At the close of the business on
December 31, 2017, the home office account in the books of Cebu Branch showed a
credit balance of P928,100. The interoffice accounts were in agreement at the
beginning of year. For purposes of reconciling the interoffice accounts, the
following facts are ascertained:
a.) Freight charges of P4,200 on merchandise shipped to the branch was paid by
the home office and was recorded in the branch as P420.
b.) Home office debit memo for P6,900 was recorded twice by the branch by debiting
the Home Office Current Account.
c.) The branch failed to take up a P4,000 debit memo from home office.
d.) Branch store insurance premiums of P3,200 were paid by the home office. The
home office debited insurance expense and credited cash in its books. The
branch recorded the amount of P32,000 as a liability.
e.) A branch customer remitted P5,000 to the home office. The home office recorded
this as a cash collection of its own receivable on December 23, 2017. Upon
notification on the same year, the branch debited the amount to receivable
from home office and credited to home office current.
f.) A P35,000 shipments, charged by home office to Cebu Branch, was actually
sent to and retained by Cabanatuan Branch.
g.) On December 27, 2017, the branch sent a check for P4,500 to its suppliers.
The branch erroneously recorded the transaction as remittance to the home
office and sent a copy of the debit memo to the home office. The home office
recorded this upon receiving the debit memo on January 2, 2018.
h.) The home office allocated advertising and rent expense totaling P6,000 to
Cebu Branch. The home office charged the said expense to Caloocan Branch by
mistake. Cebu branch had not entered the allocation at year-end.
i.) Inventory costing P13,000 was sent to the branch by home office on December
12, 2017. The branch recognized a liability by crediting accounts payable
upon the receipt of the inventory.
j.) A branch customer remitted P21,000 to the home office. The home office
recorded this cash collection on December 21, 2017. Upon receiving a credit
memo, the branch recorded the transaction twice on December 23, 2017.

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 The unadjusted balance of the branch current account as of December 31, 2017 is:
a. P 994,280
b. P 1,018,180
c. P 1,025,080
d. P 987,380

2. On July 1, 2017, Kimstore Enterprise Corp., well-known for its sales of gadget for
a low price, established a sales agency in Divisoria to collect orders via online
thru COD term. Samples were sent by Kimstore amounting to P14,000 and a working
fund amounting to P120,000 to be maintained on the imprest basis. The samples sent
will be fully impaired and worthless on March 1, 2018. During the first two months
of operations, the agency transmitted to the home office sale of goods costing
P486,000 but the home office was not able to fill-up 25% of the said transmitted
sales order. Collection from customers amounted to P123,235, net of 2% sales
discount. Payments made by the agency during July and August were as follows:
Annual Rent of P96,000, advertising expense worth P25,000, and utilities amounting
to P30,000. It also purchased an equipment worth P30,000 which will be depreciated
at 20% per annum. The gross profit rate on sales agency order is 25% of sales.

Net income of the agency for the two months ended August 31, 2017 is
a. 43,235
b. 43,485
c. 47,985
d. 44,485

3. Toyota Motors Philippines Inc. opened a sales agency in SM Baliwag on January 1,

2017. The following is summary of the transactions of the sales agency:

Trade Discount 1.5% and 2.5%

Invoice Price P 214,000,000
Freight on shipment to agency 3,500,000
Collections, 20% of which were
able to avail 5% discount 140,125,000
Selling expenses paid from the agency fund 7,500,000
Administrative expenses allocated to the agency 4% of net sales

Samples shipped to the agency amounting to P 11,000,000 are to be properly

depreciate to tis carrying amount of P 9,539,000 as of December 31, 2017. Remaining
receivables are estimated to be 95% collectible. The company’s gross profit based
on invoice price is 30% excluding freight cost on shipments to agency.

What is the net income of the agency for 2017?

a. 38,143,000
b. 41,643,000
c. 38,489,000
d. 39,618,000

4. During 2017, goods shipped to the branch at 120% above cost. The reciprocal account
in the income statement of the home office amounted to P237,500. The balance of
the contra branch current account reports a balance of P 375,000 before adjustment.
The beginning inventory of the branch from the home office at cost is P 360,000
and from outsiders, P 93,000. The branch purchased goods from the outsiders during
the year amounting to P 125,200.

If the ending inventory of the branch as reported in the combined statement of

financial position is P 345,000, 20% of which are purchased from outside suppliers.
How much is the cost of goods sold to be reported in the branch’s income statement
for the year ended December 31, 2017?
a. 514,500
b. 431,700

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 c. 790,500
d. 470,700

Home office bills branch for merchandise shipments at 30% above cost. The following
are some of the account balances on the books of home office and its branch as of
December 31, 2017:
H.O Books Branch Books
Inventory, Jan. 1 P 5,000 P 14,500
Shipment from home office 37,500
Purchases 225,000 -
Shipments to Branch 36,250 -
Branch Inventory Allowance 13,125 -
Sales 300,000 180,000
Operating Expenses 72,500 27,500

Per physical count, the ending inventory of the branch is P10,500 including goods
from outside purchases of P 6,925; the ending inventory of the home office is P
30,000.

5. The amount of the unrealized profit in the separate books of the home office on
January 1, 2018 is
a. 3,000
b. 1,750
c. 2,250
d. 4,250

6. The branch beginning inventory in 2017 that came from outside purchases is
a. 6,925
b. 4,750
c. 2,250
d. 4,250

7. Cost of goods available for the sale of the branch is

a. 102,200
b. 111,625
c. 112,825
d. 101,250

8. The total ending inventory to be shown on the combined financial statements is

a. 39,675
b. 35,325
c. 46,925
d. 40,365

9. Combined net income for 2017 is

a. 136,850
b. 135,480
c. 143,375
d. 134,675

Globe Telecom Inc. has a branch in Baguio and Davao. The reciprocal accounts
between the home office and the branches were in agreement at the beginning of
2017. However, at December 31, 2017, the following reciprocal balances are found
in the home office books:

Investment in Baguio P 186,500 Investment in Davao P 84,000

Date for reconciliation of the reciprocal accounts are as follows:

 On December 29, 2017, the home office has instructed Baguio to transfer
P74,000 cash to Davao. Baguio recorded this transaction immediately. Upon
receipt, Davao has recorded this transfer at P47,000. The home office

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 however has not yet recorded this inter-branch transaction as of the end of
the year.
 Globe has transferred goods costing P28,900 to Baguio branch and paid P2,500
of shipping cost on December 16, 2017. Baguio shipped all of these goods to
Davao upon instruction of the home office on December 30, 2017. The shipping
cost is P3,600 freight collect. Had the goods were shipped directly to
Davao, P5,000 of the freight cost should have been incurred. The inter-
branch shipment was not recorded by the branches and the home office as
well.
 Baguio has collected cash of P5,750 from Davao’s customer. This transaction
is not yet recorded by Davao and the home office.
 The home office has already allocated P11,000 and P9,000 of administrative
expenses to Baguio and Davao, respectively. The branches are not yet
notified.
 Baguio remitted P14,300 cash to the home office on December 12, 2017. The
home office has failed to record the said remittance.
 Davao returned goods costing P6,850 to the home office. The goods were
shipped on December 19 and received on December 24 but no entries have been
made in the home office books.

10. The unadjusted balance of Home Office current account in Baguio’s books is
a. 52,150
b. 87,200
c. 107,250
d. 92,950

11. The unadjusted balance of Home Office current account in Davao’s books is
a. 236,250
b. 122,000
c. 115,150
d. 84,850

On September 1, 2017, Ayala Malls Main Office established two branches: Ortigas
and Makati branches.

 The home office transferred P480,000 worth of rash and P2,100,000 worth of
inventory to its Ortigas branch. The home office transfers merchandise to
its branch at a mark-up of 25% above cost.

 The home office instructed Ortigas to transfer 75% of the goods and cash
received to. Makati.

 In addition, on October 1, 2017, shipments from home office were received by

Ortigas amounting to P750, 000 at cost and the branch paid freight costs
amounting to P39,000.

 60% of the said shipments were sold to outsiders.

 On November 1, 2017, Ortigas transferred 50% of the remaining October

shipments from Alabang to Makati, with Makati branch paying freight costs of
P15,000.

 Had the merchandise been shipped from Alabang to Makati City branch, only
P11,400 worth of freight would have been incurred

12. How much is the balance of the Makati branch account on the Home Office books?
a. 2,081,400
b. 2,092,800
c. 2,512,650
d. 1,518,450

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 The following transactions were entered in the branch current account of The Fort
Head Office for the year 2017:

Branch Current –Rockwell

Beg. Balance, 1/1/17 2,296,290 166,500 Collection of AR, 9/12/17
Shipments to branch, 4/1/17 1,062,000
Cash forwarded, 6/1/17 75,000
Operating expenses charged to the
branch, 12/31/17 14,400

 Shipments to the branch during the year were made at 20% above cost.

 The balance of the Allowance for Overvaluation of Branch Inventory account was
P106,500 at the beginning, and the allowance was written down to P73,500 at year-
end.

 On December 10, 2017, the home office purchased a piece of equipment amounting to
P180,000 for its branch in Rockwell. The said equipment has a useful life of five
years and will be carried in the books of the branch, but the home office recorded
the purchase by debiting Equipment.

 The branch recorded the depreciation of the equipment by debiting the Home Office
Current amount and crediting Accumulated Depreciation.

 Debit memo regarding the allocation of operating expenses to the Rockwell branch
was received by the branch on January 2, 2018.

 The Rockwell branch reported net income of P988,650.

 It also remitted cash to the home office on December 31, 2017 amounting to P165,000,
which the home office received and recorded on January 2, 2018. The interoffice
accounts were in agreement at the beginning of the year.

13. How much is-the net income of Rockwell branch that will be reported in the combined
income statement of The Fort Company?
a. P971,250
b. P1,195,650
c. P1,181,250
d. P1,044,750

14. What is the amount of the Home Office Current account that will be reported in
the books of Rockwell branch after closing entries are made?
a. P4,283,340
b. P4,477,440
c. P4,281,840
d. P4,267,440

Rustans Trading Co. operates a branch in Cebu City. On December 31, 2017, the
Home Office Current account in the branch books showed a credit balance of
P261,456. The interoffice accounts were in agreement at the beginning of the
year. For purposes of reconciling the interoffice accounts, the following facts
were determined:

 Cebu City branch paid P16,250 representing registration and seminar fee of
the senior vice president for finance of the company, when the vice president
attended a convention. Of the amount paid, 40% was charged to Rustans Trading,
20% to Cebu, and the remaining amount to Rustans’ other branch located in
Davao City. Cebu branch recorded a receivable from the home office at the
said amount and credited Cash. Rustans Trading was not yet notified of the
said event.

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  Total general expenses were P43,27S. Rustans Trading allocated 2/5 of the
expenses to Cebu City branch. The branch erroneously debited 2/5 of the
allocated amount to its reciprocal account twice.

 Rustans Trading transferred inventory costing P22,500 to Cebu branch and the
branch paid the corresponding freight of P1,250. Cebu branch was instructed
by Rustans to transfer 3/4 of the said inventories to Davao branch and to
shoulder the freight costing P1,750. Cebu branch made the transfer on its
books but it recorded the transfer at 1/4 of the original inventories and
credited the payment for freight at P175 by mistake.

 Cebu City branch recorded a machinery costing P10,616 which it purchased for
its own use on December 31, 2017. The machinery will be recorded in the books
of the home office. Rustans Trading recorded the memo received from the
branch by debiting its reciprocal account and crediting liability account to
Cebu branch in the amount P10,661.
15. What is the unadjusted balance of the investment in Cebu Branch account on Dec.
31, 2017?
a. P290,267
b. P283,131
c. P293,517
d. P300,441

16. An extension of the home office which acts on its own operation and requires
another registration in the Bureau of Internal Revenue and local government is
a. Sales Agency
b. Branch
c. Franchise
d. Subsidiary

17. In an inter-branch transfer of inventory, the excess over the freight in paid by
the branches over the should be cost of transporting the item directly by home
office to its branch is treated as
a. Part of the cost of goods sold computation of home office
b. Reported as inventory cost of the final receiving branch.
c. Reported as inventory cost of the first receiving branch.
d. Selling expense by the home office.

18. The system used for accounting the working fund for sales agency transaction is
the same accounting treatment for
a. Petty cash fund
b. Accounts Receivable
c. Prepayments
d. Cash in bank

19. When the home office current account is higher than the adjusted branch current
account, the difference is due to
a. Failure of the branch to record cash remittance from home office.
b. Branch’s twice recording of received shipment from home office.
c. Home office failure to notify the branch for payment of branch liability.
d. Failure of the branch to issue debit memo for return inventory to the home
office.

20. Compensation paid by the home office to its sales agency is reported as
a. Inventoriable cost
b. Selling Expense
c. Direct labor
d. Overhead Expense
---------------------------------------END-------------------------------------------

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