1810 AFAR Home Office Branch and Agency Transaction

ADVANCE FINANCIAL ACCOUNTING AND REPORTING (AFAR) HOME OFFICE, BRANCH AND AGENCY TRANSACTIONS

E.A ISIP

AGENCY TRANSACTIONS Characteristics 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 Accounting for Home Office and Agency Transactions T ransactions Accounting for sales agencies are similar to petty cash system, only cash receipt and disbursement disbursement are usually managed by b y sales agencies, while for other related transactions transactions are managed by the home office. Normal transactio transactions ns of sales agencies recorded by home office: Transactions 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 display.

Dr. Shipment to Sales Agency Cr. Merchandise Merchandi se Inventory

3. Purchase of fixed 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 sales

Dr. Cost of Goods Sold – Sales Agency Cr. Merchandise Inventory

6. Replenishment of working fund by the agency.

Dr. Expenses – Agency Cr. Cash

7. Recognition Recognition of Depreciation Depreciation Expense for assets used by agency.

Dr. Depreciation Expense – Sales Agency Cr. Accum. Depreciation – Sales Agency

8. Allocation Allocation of decline in value of sample inventory.

Dr. Loss in Inventory Write Down Cr. Shipments to Sales Agency

9. Allocation Allocation of expenses to agency

Dr. Expenses – Agency Cr. Cash/AP

Transmittal Transmittal of sales order by sales s ales 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 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 = Sales Order x (1 + GR Rate) 2. If the order is transmitted based on sales, AFAR - 1810

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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 o rder – (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 indi vidual home and branch office transactions are recorded in the usual accounting procedures. Pro-forma entries a. Transfer of Cash Home Office Books Dr. Investment in Branch Cr. Cash

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

Home Office Books Dr. Shipment from home office Cr. Home Office

Home Office Books Dr. Shipment from home office Cr. Home Office

Note: For returned merchandised, simple reverse the entry. overvaluation also term as unrealized profit in branch inventory. d. Fixed Assets Purchased by H.O, recorded by branch Home Office Books

Allowance

for

Home Office Books AFAR - 1810

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Dr. Investment in Branch Cr. Cash

Dr. Fixed Assets Cr. Home Office Dr. Depreciation Expense Cr. Accum. Depreciation

Purchased by branch, recorded by branch Home Office Books No journal entry.

Home Office Books 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 Cr. Accum. Depreciation

Dr. Depreciation Expense Cr. Home Office

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

Home Office Books Dr. Expense Account Cr. Home Office

f. Recording of Branch Income Home Office Books Dr. Investment in Branch Cr. Branch Income

Home Office Books Dr. Income Summary Cr. Home Office

g. Inter-branch transactions Transfer of Cash Home Office Books Dr. Investment in A Cr. Investment in B Transfer of Shipments Home Office Books Dr. Investment in A Cr. Shipment to A Cr. Allowance for OV Cr. Cash (if FP) Dr. Investment in B Dr. Freight Expense Cr. Investment in A

Branch (A) Books Dr. Cash Cr. H.O

Branch (A) Books Dr. Shipment from H.O Dr. Freight In Cr. H.O Dr. H.O Cr. Shipment from H.O Cr. Freight In

Branch (B) Books Dr. H.O Cr. Cash

Branch (B) Books No Entry.

Dr. Shipment from H.O Dr. 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 Price

At Cost

Overvaluation

Inventory From Outside From H.O

XX XX

(same) XX

XX

Purchases (Outside) Shipments from H.O Shipments in Transit Freight In

XX XX XX XX

(same) XX XX (same)

Total Goods Available for Sale

XX

XX

XX XX XX (unrealized)

Ending Inventory - From Outside - From H.O - Shipment in Transit - Freight In (End Inv. portion)

XX XX XX XX

(same) XX XX (same)

Cost of Goods sold

XX

XX

Beg. Add: -

XX XX XX (realized)

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

XX XX XX XX 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. AFAR - 1810

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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 Invoice Price Freight on shipment to agency Collections, 20% of which were able to avail 5% discount Selling expenses paid from the agency fund Administrative expenses allocated to the agency

1.5% and 2.5% P 214,000,000 3,500,000 140,125,000 7,500,000 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 a gency 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 AFAR - 1810

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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 interbranch 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. 

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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 AFAR - 1810

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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 

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Shipments to the branch during the year were made at 20% above c ost. 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 yearend. 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 f ive 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. AFAR - 1810

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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 i t 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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