ADVANCED ACCOUNTING
Module 4: Home Office, Branch and Agency Accounting
Module 4.1: Agency Accounting
Focus notes:
 The MAIN CONCERN of accounting problems on agency accounting is the computation of the
agency net income or loss for a particular period.
 It is important to differentiate an agency from a branch. The following are the key differences:
AGENCY
BRANCH
Financial records
Cash and sales books only;
no financial statements
Complete set of financial
statements and schedules
Size of entity and human
resource
Relatively smaller;
composed of a few sales
agents
Relatively bigger;
composed of managers,
supervisors, and rank-andfile employees
Autonomy
All decisions are made by
the home office
Operating decisions are
delegated to the branch
Accounting entity
Not considered to be a
separate accounting entity
Considered to be a distinct
accounting entity
 Agency accounting is a relatively easier topic in Advanced Accounting since it is simply the extended
application of basic and financial accounting concepts to a sales agency.
 Important things to remember when solving agency accounting problems:
a. The gross sales of an agency is equal to the amount of sales that has been invoiced or filled by the
home office. Orders taken by the agency but not filled up by the home office are ignored.
b. When getting net sales, sales discounts may be obtained using the formula:
Sales discounts = cash collections, net of discounts / (100% - % of discount) x % of discount
c. The working fund of a sales agency is accounted for like a petty cash fund.
d. To get the cost of goods sold pertaining to agency sales, the cost ratio is multiplied by the GROSS
SALES, not net sales.
e. Samples inventory is not part of cost of goods sold. They are prepaid expenses and amortized
systematically in the passage of time.
Practice Problem – Agency Accounting:
Problem 1: On October 1, 2015, the Eastwood Main Office established a sales agency in Pasay City. The
following information is made available to you:
 The main office sent samples of its merchandise amounting to P42,000 and a working fund amounting
to P360,000 was established. The samples sent were intended to last until June 1, 2016.
 During the first two months of operations, the agency transmitted to the home office sale of goods
costing P1,458,000, but the home office were not able to fill-up 25% of the said transmitted sales
orders.
 Collections from customers amounted to P369,705, net of 2% sales discount.
 Payments made by the agency during October and November were as follows: annual rent of P288,000,
advertising expense worth P28,000 and utilities amounting to P36,000.
 The agency also purchased an equipment worth P45,000 which will be depreciated at 20% per annum.
 The gross profit rate on sales agency order is 20% of sales.
Net income of the agency for the two months ended November 30, 2015 is:
A. P149,375
B. P134,330
C. P87,155
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
D. P141,830
Module 4.2: Home Office and Branch Accounting
Module 4.2.1: Introduction
 The MAIN CONCERN of accounting problems on home office and branch accounting is the
preparation of the COMBINED FINANCIAL STATEMENTS of the home office and its branches.
 Although branches are controlled by the home office, branches are considered to be separate entities
with separate books. However, for external reporting purposes, the home office and the branches are
considered to be a single entity. The separate financial statements of the home office and the branches
are combined and amounts are adjusted or eliminated to comply with the appropriate financial
reporting framework.
 The following are the common types of problems for home office and branch accounting:
1. Reconciliation of reciprocal accounts – reconciling the “Asset” account in the books of the
home office and the “Equity” account in the books of the branch.
2. Interoffice transfers of inventory at above cost – transfer of inventory from the home office to
the branch at above original cost.
3. Inter-branch transfers – transfers of inventory and other assets among branches.
Module 4.2.2: Reconciliation of Reciprocal Accounts
Focus notes:
 One way of understanding reciprocal accounts in home office and branch accounting is looking at the
home office as an “investor” and the branch as the “investee”. The investor recognizes an ‘investment
account’ (an asset) in its books, while the investee increases its equity account to recognize the
ownership of the investor. Applying the accounting equation, it follows that any movement in the asset
account should have a corresponding increase or decrease in the equity account. The same concept is
applied in reciprocal accounts for home office and branches.
 When a home office establishes a branch, it transfers cash, inventory and other assets to the latter. It is
as if the home office “invested” its assets in the branch. Thus, when the home office credits the assets
transferred in its books, it debits an investment account. The investment account is commonly labeled as
“Investment in Branch X” or “Branch Current – X”, where X is the name or location of the branch.
Reciprocally, the branch records the assets received from the home office and credits an equity account.
The equity account is labeled as “Home office – Current”. This is the only equity account of the
branches (i.e. no retained earnings, share capital, APIC, etc.). Since equity represents ownership, the
existence of the Home Office – Current account in the books of the branch simply means that the home
office ‘fully owns’ the branch. Profit or loss is also closed to this account.
The accounting relationship of the Investment in Branch account in the books of the home office and the
Home Office – Current account in the books of the branch are further illustrated below:
Investment in Branch (Asset)
Dr.
Cr.
Home Office – Current (Equity)
Dr.
Cr.
(1) Asset transfers to branch
(1) Asset transfers from
branch
(1) Assets transfers to
Home Office
(1) Asset transfers from
Home Office
(2) Net income of the branch
(2) Net loss of the branch
(2) Net loss of the
branch
(2) Net income of the
branch
(3) Allocation of expense to
branch
(3) Allocation of income to
branch
(3) Allocation of
income from Home
Office
(3) Allocation of expense
from Home Office
The illustration above simply means that the balance of the Investment in Branch/Branch
Current (BC) and Home Office – Current (HOC) accounts SHOULD BE EQUAL at any given point in
time. However, due to (1) ERRORS and (2) TIMING DIFFERENCES in recording, they are usually
unequal. These errors and timing differences result to what we call “reconciling items”. These items are
identified to adjust the balances of the reciprocal accounts and, ultimately, to equate them. The process
is similar to preparing a bank reconciliation.
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
 Reconciling items exist for one or more of the following scenarios:
1. The BC account is debited, but no corresponding credit is made in the HOC account.
Example: Inventory is transferred to the branch, but the inventory is still in transit or is not
recorded by the branch.
2. The BC account is credited, but no corresponding debit is made in the HOC account.
Example: Inventory from the home office is returned by the branch, but the branch failed to
record the transaction.
3. The HOC account is debited, but no corresponding credit is made in the BC account.
Example: Cash is remitted by the branch to the home office, but the home office has not yet
recorded or received the remittance.
4. The HOC account is credited, but no corresponding debit is made in the BC account.
Example: The branch already recorded its net income, but the home office was not notified.
 Debit and Credit Memos – Every time you encounter debit and credit memos in your computation,
think of it this way: Whoever issued the memo is the one who debits or credits the reciprocal account
in his or her books and is trying to notify the other party about it.
 The following table is useful to facilitate your reconciliation:
Unadjusted balance
Reconciling item #1
Reconciling item #2
Reconciling item #3
Adjusted balance
BC
Xxx
Xxx
_(xxx)_
xxx
HOC
xxx
xxx
_(xxx)_
Xxx
Practice problems – Reconciliation of Reciprocal Accounts
Problem 1: Good Buy Trading Co, operates a branch in Bacolod. At close of the business on December 31,
2015, the Home Office account in the books of the Bacolod branch showed a credit balance of P2,784,300.
The interoffice accounts were in agreement at the beginning of the year. For purposes of reconciling the
interoffice accounts, the following facts were ascertained:
a. On December 29, 2015, the branch sent a check for P13,500 to its suppliers. The branch
erroneously recorded the transaction as a 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
4, 2016.
b. The home office allocated promotions and insurance expense totalling P18,000 to Bacolod branch.
The home office inadvertently charged the said expense to Davao branch. Bacolod branch had not
entered the allocation at year-end.
c. Home office debit memo for P20,700 regarding transfer of funds was recorded twice by the branch
by debiting its reciprocal account.
d. A branch customer remitted P15,000 to the home office. The home office recorded this as a cash
collection of its own receivable on December 23, 2015. Upon notification on the same year, the
branch debited the amount to Receivable from Home Office and credited its reciprocal account.
e. A P105,000 shipment, charged by home office to Bacolod branch, was actually sent to and retained
by Leyte branch.
f. The home office failed to take up a P12,000 credit memo from the branch.
g. Branch insurance premiums of P9,600 were paid by the home office. The home office debited
Insurance expense and credited Cash in its books. The branch recorded the amount as a liability.
h. Inventory costing P39,000 was sent to the branch by the home office on December 12, 2015. The
branch recognized a liability by crediting Accounts Payable upon the receipt of the inventory.
i. Freight charge of P12,600 on merchandise shipped to the branch was paid by the home office and
was recorded in the branch books as P1,260.
j. A branch customer remitted P63,000 to the home office. The home office recorded this cash
collection on December 28, 2015. Upon receiving a credit memo, the branch recorded the
transaction twice on December 30, 2015.
The unadjusted balance of the branch current account as of December 31, 2015 is:
A. P2,970,840
B. P3,075,240
C. P3,051,240
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
D. P2,962,140
Problem 2: Tolomia Inc. operates a branch in Zamboanga City. At the end of the year, the investment
account in the books of the home office shows a balance of P600,000. The home office current account in
the books of the branch shows a balance of P385,680. The following reconciling items were discovered:
a. The branch made a profit of P40,400 for the month of December, but the home office erroneously
recorded it as P44,720.
b. The branch has not received the cash in the amount of P100,000 sent by the home office. The home
office debited “Other expense” for this transfer.
c. The home office has billed the branch the amount of P150,000 for merchandise, which was in
transit on December 31.
d. Supplies of P18,000 was returned by the branch to the home office. The home office failed to record
the receipt of the supplies.
e. The branch accounts receivable for P42,000 was collected by the home office. The home office
failed to notify the branch.
What is the adjusted balance of the reciprocal accounts?
A. P593,680
B. P635,680
C. P677,680
D. P577,680
Module 4.2.3: Interoffice Transfers of Inventory at Above Cost
Focus notes:
 The MAIN CONCERN of accounting problems involving interoffice transfers of inventory at above
cost is the computation of the TRUE NET INCOME of the branch and the COMBINED NET INCOME
after ELIMINATING ANY OVERVALUATION OF COST OF GOODS SOLD (COGS).
 Remember that the UNDERLYING CONCEPT OF THE COMBINED FINANCIAL STATEMENTS is that the
HOME OFFICE and the BRANCH are viewed as a SINGLE ENTITY. To wit, all the transactions of the
branch are also transactions of the home office.
 It is a common practice for home offices to transfer inventory to its branches since the products and
customers of the two are identical. Although a branch may purchase inventory directly from third-party
suppliers, majority of its inventory comes from the home office’s stockroom.
When inventory transfers are made AT COST, the computation of the combined COGS is the outright sum
of the COGS of the home office and the branch in their separate books (i.e. SIMPLY ADD THE TWO). This
is because when the branch sells the inventory to end customers, the branch’s cost of goods sold is the
same amount that would have been recorded by the home office had it sold the same inventory.
However, when the home office bills inventory transfers at ABOVE ORIGINAL COST, something peculiar
happens. First, the home office records an allowance valuation account. This valuation account
represents the mark-up on cost. On the other end of the transfer, the branch records the receipt of the
inventory in its separate books at its NEW COST (i.e. BILLED PRICE / cost + mark-up). This is illustrated
in the pro-forma journal entries below:
Home office books
Branch-current
Shipments to branch (@cost)
Allowance account
Branch books
xx
xx
xx
Shipments from HO (@BP)
Home office - current
Allowance account
xx
xx
xx
 So what now, you ask? Here’s the thing. When the inventory is sold to end customers, the branch
computes its cost of goods sold USING THE BILLED PRICE. The result is a “hidden” overstatement of cost
of goods sold and a corresponding understatement of net income. Because of this, the computation of
the combined cost of goods sold is no longer a “simply add the two” procedure. There is a need to
eliminate any overstatement of cost of goods sold to compute the true net income of the branch and
ultimately to properly compute the combined net income of the branch and its home office.
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
 The following table is commonly used to facilitate your computation of the overstatement of cost of
goods sold in the books of the branch:
At Billed
Price (BP)
At True
Cost
xxx
xxx
Mark-up
(Allowance
)
xxx
Interoffice shipments
_xxx_
_xxx_
_xxx_
Available for sale
Ending inv. from HO
Cost of goods sold
xxx
_(xxx)_
xxx
xxx
_(xxx)_
xxx
xxx
_(xxx)_
xxx
Beg. inv. from HO
Meaning of the line items in the
“Mark-up” Column
<- the beginning balance of the allowance
account in the books of the home office
<- the increase in the allowance account due
to interoffice shipments during the period
<- the UNADJUSTED value of the allowance
<- the ADJUSTED value of the allowance
<- the REALIZED allowance, which also
represents the overstatement of the
branch’s COGS and understatement of the
branch’s net income
The table is founded on three fundamental concepts: (1) the COGS formula, (2) basic algebra, and (3)
billed price less the true cost is equal to the mark-up. Due to the mathematical relationships of the
variables in the table above, the computation of the overstatement of COGS becomes easier and more
efficient. Just remember to back it up with your basic accounting knowledge.
Practice problems – Billings of Inventory at Above Cost
Problem 1: Home office bills its branch for merchandise shipments at 130% of cost. The following are
some of the account balances on the books of home office and its branch as of December 2015:
Inventory, January 1
Shipments from Home Office
Purchases
Shipments to Branch
Branch Inventory Allowance
Sales
Operating Expenses
Home Office Books
P35,000
1,575,000
253,750
91,875
2,000,000
507,500
Branch Books
P101,500
263,900
350,000
1,360,000
192,500
Per physical count, the ending inventory of the branch is P73,500 including goods from outside purchases
of P48,475; the ending inventory of the home office is P210,000.
What is the (1) amount of the unrealized profit in the separate books of the home office on January 1, 2016;
(2) the branch beginning inventory in 2015 that came from outside purchases; and (3) the cost of goods
available for sale of the branch?
A. P21,000 ; P48,475 ; P715,400
B. P15,750 ; P33,250 ; P781,375
C. P21,000 ; P33,250 ; P781,375
D. P15,750 ; P48,475 ; P715,400
What is the (1) total ending inventory to be shown in the combined financial statements and (2) the
combined net income for the year?
A. P277,725 ; P957,950
B. P328,475 ; P942,725
C. P277,725 ; P942,725
D. P328,475 ; P957,950
Problexm 2: For the year 2015, Stark Co.’s home office ships goods to its branch in Winterfell at 120%
above cost. The reciprocal account in the income statement of the home office amounted to P237,500. The
balance of the valuation account is P375,000 before adjustment. Of the beginning inventory of the branch,
93,000 came from outsiders while the remaining amount came from the home office with a cost of
P360,000. The branch purchased goods from its own suppliers during the year amounting to P125,200. The
ending inventory of the branch as reported in the combined statement of financial position is P345,000.
The branch income as reported in the combined financial statements and as reported in the branch’s books
are P201,125 and P120,750, respectively. How much is the cost of goods sold to be reported in the branch’s
income statement for the year ended December 31, 2015?
A. P790,500
B. P514,500
C. P551,075
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
D. P470,700
Problem 3: The home office transfers inventory to its branch at a 25% mark-up above cost during 2015.
This was lower by 15% compared to the mark-up on cost last year. In 2015, the reciprocal account in the
income statement of the branch amounts to P300,000. At year-end, the home office adjusted its valuation
account downward to P16,000. The home office is aware that the cost of goods sold of the branch in its
separate books is overstated by P70,000.
What is the ending inventory per branch books at the end of 2014?
A. P91,000
B. P65,000
C. P80,000
D. P64,000
Module 4.2.4: Inter-branch Transfers
Focus notes:
 MAIN CONCERN: Computation of the balances of the reciprocal accounts after inter-branch transfers
are made.
 Other than transfers between the home office and the branch, branches can also transfer assets (usually
cash and inventory) with each other per instruction of the home office. These transfers have
corresponding increases or decreases in the reciprocal accounts in the books of the home offices and the
branches. To record these transfers, the following pro-forma entries are made in the books of the
transferor branch, transferee branch and the home office:
Branch A (Transferor Branch)
HO-Current
Asset transferred
xxx
xxx
Branch B (Transferee Branch)
Asset transferred
HO-current
xxx
xxx
Home Office
Branch current-B
xxx
Branch current-A
xxx
Note that the logic behind the journal entries above is to record the transfer AS IF the transfer is from
the home office directly to Branch B.
 What is ‘excess freight’? Excess freight may arise when total freight from inter-branch transfers of
inventory differs from the “what-should-have-been” freight had the transfer been made directly from the
home office to the transferee branch (i.e. the final branch recipient). In essence, it represents the
opportunity cost or foregone savings of the home office for not directly transferring the said inventory
to the final branch recipient.
The computation of excess freight is pretty much straightforward. To illustrate, assume that the home
office transferred inventory to Branch A. The freight for this transfer is P100. Afterwards, the home
office instructed Branch A to transfer the inventory to Branch B. The freight for this second transfer is
P200. Had the goods been transferred directly from the home office to Branch B, the freight would have
been P250. Therefore, excess freight is P50 (i.e. P100+P200–P250 = P50).
The tricky part is in journalizing the inter-branch transfers of inventory with excess freight and
identifying the balance of the reciprocal accounts after the said transfers. To do this properly and
efficiently, the following rules should be remembered:
1. Who records the freight-in account? Freight-in is ALWAYS recorded by the one who RECEIVES the
inventory, whether he/she paid for the freight or not.
2. Who pays for the freight? The payment of freight depends on the freight terms. In inter-branch
transfers, there are two common freight terms:
a. Freight prepaid – the one who SENDS the inventory pays for the freight
b. Freight collect – the one who RECEIVES the inventory pays for the freight.
3. At what amount should the freight-in be recorded in the books of the final branch recipient?
The amount of the debit to freight-in that is recorded by the final branch recipient is the “SHOULDHAVE-BEEN” freight had the transfer been made directly from the home office.
4. At what amount should the reciprocal accounts be debited or credited? After journalizing the
inventory transfer along with the freight-in and its payment, the “balancing” debit or credit is the
reciprocal account.
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
Practice problems – Inter-branch Transfers
Problem 1: Tywin Company has a branch in Casterly Rock and Kings Landing. The reciprocal accounts
between the home office and the branches were in agreement at the beginning of 2015. However, at
December 31, 2015, the following balances are found in the books of the home office:
Investment in Casterly Rock Branch – P186,500
Investment in Kings Landing Branch – P84,000
Data for reconciliation of the reciprocal accounts are as follows:
a. On December 29, 2015, the home office has instructed Casterly Rock to transfer P74,000 cash to
Kings Landing. Casterly Rock’s branch recorded this transaction immediately. Upon receipt, Kings
Landing branch has recorded this transfer at P47,000. The home office, however, has not yet
recorded this inter-branch transaction as of the end of the year.
b. Tywin has transferred goods costing P28,900 to Casterly Rock and paid P2,500 shipping cost on
December 16, 2015. Casterly Rock shipped all of these goods to Kings Landing upon instruction of
the home office on December 30. Shipping cost is P3,600 freight collect. Had the goods been
shipped directly to Kings Landing from the home office, only P5,000 freight cost will be incurred.
The inter-branch shipment was not recorded by the branches and the home office as well.
c. Casterly Rock has collected cash of P5,750 from one of Kings Landing branch’s customers. This
transaction is not yet recorded by the latter and the home office.
d. The home office has already allocated P11,000 and P9,000 of expenses to Casterly Rock and Kings
Landing, respectively. The branches are not yet notified.
e. Casterly Rock remitted P14,300 cash to the home office on December 12, 2015. The home office
failed to record this remittance.
f. Kings Landing branch 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.
What is the unadjusted balance of the HO-Current account in Casterly Rock’s books and Kings Landing’s
books, respectively?
A. P52,150
B. P87,200
C. P107,250
D. P92,950
What is the unadjusted balance of the HO-Current account in Kings Landing?
A. P236,250
B. P122,000
C. P115,150
D. P84,850
Problem 2: On September 1, 2015, Alabang Main Office established two branches: Ortigas and Makati
branches. The following transactions occurred for 2015:
a. The home office transferred P320,000 worth of cash and P1,400,000 worth of inventory to its
Ortigas branch. The home office transfers merchandise to its branch at a mark-up of 25% above
cost.
b. The home office instructed Ortigas to transfer 75% of the goods and cash received to Makati.
c. In addition, on October 1, 2015, shipments from home office were received by Ortigas amounting to
P500,000 at cost and the branch paid freight costs amounting to P26,000.
d. 60% of the said shipments were sold to outsiders.
e. On November 1, 2015, Ortigas transferred 50% of the remaining October shipments from Alabang
to Makati, with Makati branch paying freight costs of P10,000.
f. Had the merchandise been shipped from Alabang to Makati City branch, only P7,600 worth of
freight would have been incurred.
How much is the balance of the Makati branch account on the Home Office books?
A. 1,675,100
B. 1,012,300
C. 1,387,600
D. 1,395,200
Problem 3: Diana Corporation has two branches to which merchandise is transferred at cost plus 20%,
plus freight charges. On November 30, 2015, Diana shipped merchandise that cost P5,500 to its Cebu
branch, and the P200 shipping charge was paid by Diana. On December 15, 2015, the Ilocos branch
encountered an inventory shortage, and the Cebu branch shipped the merchandise to the Ilocos branch at a
freight cost of P160 paid by the Cebu branch. Shipping charges from the home office to the Ilocos branch
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
would have been P175. If the merchandise is unsold at year end, at what amount will the inventory be
recorded in the (1) books of the branch and (2) consolidated books?
A. P6,775; P5,675
B. P6,575; P5,475
C. P6,930; P5,500
ADVACC (Acctg 630) – MODULE 4: HOME OFFICE, BRANCH AND AGENCY ACCOUNTING
Ateneo de Zamboanga University – School of Management and Accountancy
D. P6,950; P5,850