HOME OFFICE AND BRANCH ACCOUNTING

♦The company missed to record a receipt of payment from a customer on account. What would be the
entry?

Dr Cash Cr Accounts Receivable

♦ The company recorded a receipt of payment of a customer on account, amounting to P980 as P9,800.
What would be the correcting entry?

Dr Accounts Receivable 8820 Cr Cash

♦ The company recorded a credit sale amounting to P10,000 twice. What would be the correcting entry?

Dr Sales 10,000 Cr Accounts Receivable

♦The company missed to record the purchase on account of inventories amounting to P8,000. Said
inventories has been received already. What would be the correcting entry?

Dr Purchases/Inventory Cr Accounts Payable

♦The company recorded the payment to a supplier with a debit to Cash 4,500, and a credit to Accounts
Payable. What would be the correcting entry?

Dr Accounts Payable 9,000 Cr Cash 9000

♦The company recorded a purchase return with a debit to Accounts Receivable 1,500 and a credit to
Purchase Returns. What would be the correcting entry?

Dr Accounts Payable 1,500 Cr Accounts Receivable 1,500

Sample Problem 1 – Reconciliation

Let’s start with the second sentence: On December 31, 2013, the Cebu branch in the home office books
showed a debit balance of P3,132,660.

Whose books is this? Home office. The account? Investment in Cebu branch.

Are you following? Good.

Next sentence: The interoffice were in agreement at the beginning of the year. This only meant that we
don’t have to worry about prior period errors or something (transactions in a previous period that might
affect the unadjusted balance of the accounts.

Next: For purposes of reconciling the interoffice accounts, the following facts were given: It is the policy
of the home office to bill its branches at 20% above cost. This provides us with information about the
billed price, cost, and the allowance for overvaluation.

Still able to follow? Cool.

First bullet: Shipments from home office to Cebu branch costing P435,000 were in transit as of year-end.
Cebu branch recorded the said transfer twice at cost: one on December 31, 2013 and the other on
January 1, 2014.

The cost is P435,000. The billed price would be P435,000 x 120% = P522,000. The allowance for
overvaluation is P104,400. Unfortunately, we don’t need these. Why? The home office upon shipment
recorded this transaction (if no statement about such fact is made, the assumption is that the home
office did record it). Next, the branch also recorded this transaction. In fact, the branch recorded it
twice. But one is made in the current year (correctly) while the second one is made in 2014 (a different
accounting period, incorrectly). As such, the correction should be made on the 2014 books. None on the
2013 books. Got it?

Cool. Second bullet: The home office allocated to the Cebu branch ¾ of the rent expenses it paid for the
year ended 2013. The rent expense was P144,000. The home office sent a debit memo to Cebu branch
for the allocated amount, but the branch recorded the said debit memo by debiting the home office-
current account and crediting rent payable.

The home office recorded this transaction correctly. The branch, however, made a mistake. Here’s the
deal: The Home Office sent a debit memo. That debit memo means the issuer made the debit (Home
office debited the Investment in Branch account). The receiver should then record a credit. The branch,
however, debited the Home Office – Current account, instead of crediting it. Since this is allocation of
expense, the debited account by the branch should be rent expense. So, the correction would be to
Debit the Rent Expense P144,000 x ¾ = 108,000. Another debit to Rent Payable P108,000 (to remove the
earlier record). The credit would be to Home Office – Current, P216,000. It was erroneously debited, so
we should credit it for P108,000. And then, to record it correctly, we should credit if for P108,000. Thus,
the total amount of adjustment to Home Office – Current account is P216,000. Following? Go on and
take a break to absorb that.
Third bullet: The branch wrote-off uncollectible accounts amounting to P60,720. The allowance for
doubtful accounts is maintained in the books of the home office. The home office recorded the write-off
as a write-off of its own accounts receivable.

In this transaction, it is the Home Office who committed the error. The HO wrote-off its own accounts
receivable, instead of the branch’s accounts receivable. Originally, the HO debited Allowance for Bad
debts and credited Accounts Receivable. It should have been a debit to Allowance for Bad debts and a
credit to Investment in Branch account. So, the correcting entry would be a debit to Accounts Receivable
(to reverse the error) and a credit to Investment in Branch account (to deduct the write-off from the
correct account). Got that? Cool.

Last bullet: The branch collected accounts receivable from home office’s customers amounting to
P317,520, net of 2% cash discount. The branch treated the said transaction as if it was a collection from
its own customers .The home office was not yet notified of the said collection.

In this case, the branch made an error in recording the transaction. The home office was not yet
notified, so it has not recorded the transaction.

To correct the branch’s error, let us first see their original entry (the incorrect one). The branch debited
Cash and credited Accounts Receivable. It is not their receivable, but the Home Office’s receivable, so
they shouldn’t have credited Accounts Receivable. In our correction, we have to debit Accounts
Receivable and credit the Home Office – Current account. We use the Home Office – Current account, it
would be treated as if the HO gave cash to the branch.

And for HO to record the transaction, it would be a debit to Investment in Branch and a credit to
Accounts Receivable.

So, to use our reconciling table (sort of).

Sometimes, they provide the transactions that occurred and the ledger of the reciprocal accounts
(Home Office – Current and Investment in Branch accounts). Sometimes, they only provide one ledger of
these accounts. You can use the ledger to determine whether the transaction was recorded properly or
not. Upon determining the correctness or incorrectness of the recording, you can then reflect the
adjustments using our reconciling format (yung mahiwagang table).

Shall we use it then? Here we go. We’d also rather you answer our questions first, before you scroll
down to check the correct answers.

So, in Problem 2, we are given the transactions and the HO-Current account ledger.

First sentence. Metro Company has established a branch in Tacloban by sending goods costing P184,900
and P80,000 cash on July 1, 2013.

Did the branch record the transaction correctly? (Look at the ledger and see if these are recorded there.)

Yes. It was reflected as credits to the Home Office – Current account.

We are then told that some transactions were not recorded or recorded incorrectly. Let’s go over them
one by one.
First bullet: The home office acquired computer equipment amounting to P420,000 for the branch on
August 1, 2013. As per agreement, the branch will keep all the property, plant and equipment records.

Was it recorded correctly by the branch?

No. It was reflected as a debit to the Home Office – Current account. It should have been credited. The
HO purchased equipment for the use of the branch. The branch should have recorded it as debit to PPE
and credit to HO-Current.

To correct this, our adjustment to HO-Current account would be a credit amounting to P840,000.
(P420,000 to reverse the error and P420,000 to record it correctly.)

Third bullet: Goods costing P320,000 were shipped from the home office to branch on November 9,
2013.

Was it recorded by the branch correctly?

No. There was a transposition error in the recording of the amount. (No. That’s not a typo. Heck, my
students are quick to assume that it’s a typo error. I was like… remember, don’t assume unless
otherwise stated. Kung ano yung nakalagay sa problem, yun talaga yun. Pwedeng recording error muna
ang i-assume bago typo error? Kapag hindi nyo makuha yung right answer, paki-sabi sa akin, i-try natin
assuming typo error sya. Pero bago yun, i-try nyo muna na recording error sya.)

Right? So, instead of P320,000, it was recorded as P230,000. Understated by P90,000. To correct this,
what would be your entry?

Debit Shipments from Home Office 90,000, Credit Home Office – Current account.

Did you get that right? Cool.

Next bullet: Additional cash amounting to P53,000 was transferred to the branch on December 2. 1013.

Was it recorded by the branch correctly?

No. Again, that’s not a typo error. Instead of recording 53,000, it was recorded as 50,300. What would
be the adjustment?

Debit Cash 2,700, Credit Home Office – Current.

It was another understatement to the HO-Current account, so we credit the account.

Are you getting the hang of it?

Next bullet: A branch customer has incorrectly paid P25,000 cash to the home office on December 16,
2013.

Though the branch customer incorrectly paid P25,000 to the HO, it is a valid transaction. It just needs to
be recorded properly and the branch notified.
So, was it recorded by the branch? If so, was it recorded properly?

Looking at the ledger, it wasn’t recorded by the branch. So, what would be the entry to record the
transaction?

Debit Home Office – Current 25,000, Credit Accounts Receivable. Since the money (cash) was received
by the Home Office, it would be treated as a remittance to the HO, therefore reducing their equity in the
branch. So, we debit the HO-Current account.

Last bullet: The home office incurred P65,000 of advertising cost and P96,000 of salaries. Tacloban
branch is to shoulder 30% and 20% of these expenses, respectively.

Get the share of the branch and see if they recorded it. Did they?

P65,000 x 30% = P19,500 share in advertising.

P96,000 x 20% = P19,200 share in salaries.

These weren’t recorded by the branch. So, to record, what would be the entries?

Debit Advertising expense P19,500

Debit Salaries expense P19,200

Credit Home Office – Current P38,700.

The HO already paid the expenses, so it’s treated as an addition to the equity provided to the branch.

Ready to fill-out our reconciling form? Yeah, I want to call it that. Reconciling form. Nothing special, but
it will do.
For the Home Office Books, we can safely assume that all the recorded transactions by the branch
involving the home office, are yet to be adjusted by the HO.

These include the Collection of HO’s AR (113,600), the return of goods to HO (49,000), and the cash
remittance to HO (78,000).
The billed price is composed of the Cost + Allowance for Overvaluation.

The Allowance is technically the same as our Gross profit. A pity they choose to use another term for
Home Office and Branch Accounting, but here we are.

The Allowance for Overvaluation is based on the markup rate given, or whatever basis the Home Office
used to compute for the billed price.

In our problem, the markup is 125% above cost. Meaning, the cost is 100% and the markup is 125%. The
billed price is therefore 225% of cost. Another complication they invented, really.

And so… for the beginning inventory of P1,800,000, this amount is 225%. If we divide P1,800,000 by
225%, we will get the cost of P800,000. The allowance is the difference of P1,000,000. For the shipments
from HO during the period, the given amount of P9,000,000 is the cost. It was stated that it was the cost.
As such, to get the allowance, we multiply P9,000,000 x 125% = P11,250,000. This is the allowance. If the
problem happens to ask for the billed price of the shipments from HO, the answer would be (P9,000,000
+ P11,250,000) = P20,250,000. Some problems do ask for the billed price, so we just showed you how it
could be done. Another way to do it, is to simply multiply P9,000,000 by 225%, and you will also get
P20,250,000.

When the problem says “before closing”, it meant before adjustment. The home office records
allowance for overvaluation for every shipment to the branch. And it is adjusted at the end of the period
to reflect those that were sold, and those that remain in inventory.
So, for the above problem:

Let’s add the beginning inventory and the shipments during the year. The amount would be in billed
price, so using the mark up rate, we can compute for the cost as well as the allowance for overvaluation.

That would be: 30,000 + 180,000 = 210,000 billed price

210,000 / 120% = 175,000 cost

175,000 x 20% = 35,000 allowance for overvaluation

As easy as that, right? Just be mindful if the given is at cost, or at billed price.

Okay, some problems use “Intracompany Inventory Profit”. This is our Allowance for Overvaluation.

Again, we are given an amount before closing (before adjustment), so this includes the beginning
inventory and the shipments for the period.

Since the given is the Allowance for Overvaluation, and the Shipments form Home Office, we have to
compute first for the Allowance related to the Shipments from Home Office.

That would be: 300,000 / 125% = 240,000 cost

240,000 x 25% = 60,000 allowance for overvaluation

Since the total is 66,000, we deduct the allowance related to the shipments to get the allowance related
to the beginning inventory.

That would be:66,000 – 60,000 = 6,000

And then, to get the cost of the beginning inventory:

6,000 / 25% = 24,000.