UM Digos College

Department of Accounting Education

Bachelor of Science in Accountancy

Physically Distanced but Academically Engaged

Self-Instructional Manual (SIM) for Self-Directed Learning

(SDL)

Course/Subject: ACP 312 – Accounting for Business Combination

Name of Teacher: April Kate F. Valisno, CPA

THIS SIM/ SDL MANUAL IS A DRAFT VERSION ONLY; NOT

FOR REPRODUCTION AND DISTRIBUTION OUTSIDE OF ITS
INTENDED USE. THIS IS INTENDED ONLY FOR THE USE OF
THE STUDENTS WHO ARE OFFICIALLY ENROLLED IN THE
COURSE/SUBJECT. EXPECT REVISIONS OF THE MANUAL.
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Roxas Extension, Digos City
Telefax: (082)553-2914

Table of Contents
Page

Part 1. Quality Assurance Policies and Course Outline Policies ................... 1

Course Outcomes .................................................................................... 4
Facilitator’s Voice .................................................................................... 4

Part 2. Week 1-3

ULOa........................................................................................................... 5
Metalanguage .................................................................................... 5
Essential Knowledge ......................................................................... 5
Self-Help ............................................................................................... 7
Let’s Check ............................................................................................... 8
Let’s Analyze .................................................................................... 9
Nutshell ............................................................................................... 9

ULOb ......................................................................................................... 12
Metalanguage .................................................................................... 12
Essential Knowledge ......................................................................... 12
Self-Help ............................................................................................... 18
Let’s Check ............................................................................................... 19
Let’s Analyze .................................................................................... 20
Nutshell ............................................................................................... 21

ULOc ......................................................................................................... 23
Metalanguage .................................................................................... 23
Essential Knowledge ......................................................................... 23
Self-Help ............................................................................................... 27
Let’s Check ............................................................................................... 28
Let’s Analyze .................................................................................... 28
Nutshell ............................................................................................... 31

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Roxas Extension, Digos City
Telefax: (082)553-2914

Course Outline: ACP 312 – Accounting for Business Combination

Course Coordinator: April Kate F. Valisno

Email: aprilkateafernandez@gmail.com
Student Consultation: Done online (LMS) or traditional contact
(calls, texts, emails)
Mobile: 09125002858
Phone: (082) 553-2914
Effectivity Date: August 2020
Mode of Delivery: Blended (On-Line with face to face or virtual
sessions)
Time Frame: 54 Hours
Student Workload: Expected Self-Directed Learning
Requisites: ACP 311
Credit: 3 units
Attendance Requirements: A minimum of 95% attendance is required at all
scheduled virtual or face to face sessions.

Course Outline Policy

Areas of Concern Details

Contact and Non-contact This 3-unit course self-instructional manual is
Hours designed for blended learning mode of
instructional delivery with scheduled face to face
or virtual sessions. The expected number of hours
will be 54 including the face to face or virtual
sessions. The face to face sessions shall include
the summative assessment tasks (exams) since
this course is crucial in the licensure examination
for accountants.
Assessment Task Submission Submission of assessment tasks shall be on 3rd,
5th, 7th and 9th week of the term. The assessment
paper shall be attached with a cover page
indicating the title of the assessment task (if the
task is performance), the name of the course
coordinator, date of submission and name of the
student. The document should be emailed to the
course coordinator. It is also expected that you
already paid your tuition and other fees before the
submission of the assessment task.

If the assessment task is done in real time through

the features in the Quipper Learning Management
System, the schedule shall be arranged ahead of
time by the course coordinator.

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Since this course is included in the licensure

examination for accountants, you will be required
to take the Multiple-Choice Question exam inside
the University. This should be scheduled ahead of
time by your course coordinator. This is non-
negotiable for all licensure-based programs.
Turnitin Submission To ensure honesty and authenticity, all
(if necessary) assessment tasks are required to be submitted
through Turnitin with a maximum similarity index
of 30% allowed. This means that if your paper
goes beyond 30%, the students will either opt to
redo her/his paper or explain in writing addressed
to the course coordinator the reasons for the
similarity. In addition, if the paper has reached
more than 30% similarity index, the student may
be called for a disciplinary action in accordance
with the University’s OPM on Intellectual and
Academic Honesty.

Please note that academic dishonesty such as

cheating and commissioning other students or
people to complete the task for you have severe
punishments (reprimand, warning, expulsion).
Penalties for Late The score for an assessment item submitted after
Assignments/Assessments the designated time on the due date, without an
approved extension of time, will be reduced by 5%
of the possible maximum score for that
assessment item for each day or part day that the
assessment item is late.

However, if the late submission of assessment

paper has a valid reason, a letter of explanation
should be submitted and approved by the course
coordinator. If necessary, you will also be required
to present/attach evidences.
Return of Assignments/ Assessment tasks will be returned to you two (2)
Assessments weeks after the submission. This will be returned
by email or via Quipper portal.

For group assessment tasks, the course

coordinator will require some or few of the
students for online or virtual sessions to ask
clarificatory questions to validate the originality of
the assessment task submitted and to ensure that
all the group members are involved.
Assignment Resubmission You should request in writing addressed to the
course coordinator his/her intention to resubmit an
assessment task. The resubmission is premised
on the student’s failure to comply with the
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similarity index and other reasonable grounds

such as academic literacy standards or other
reasonable circumstances e.g. illness, accidents
financial constraints.
Re-marking of Assessment You should request in writing addressed to the
Papers and Appeal program coordinator your intention to appeal or
contest the score given to an assessment task.
The letter should explicitly explain the
reasons/points to contest the grade. The program
coordinator shall communicate with the students
on the approval and disapproval of the request.

If disapproved by the course coordinator, you can

elevate your case to the program head or the dean
with the original letter of request. The final
decision will come from the dean of the college.
Grading System All culled from Quipper sessions and traditional
contact
Course discussions/exercises – 40%
1st formative assessment – 10%
2nd formative assessment – 10%
3rd formative assessment – 10%

All culled from on-campus/onsite sessions (TBA):

Final exam – 30%

Submission of the final grades shall follow the

usual University system and procedures.
Preferred Referencing Style Depends on the discipline; if uncertain or
inadequate, use the general practice of the APA
6th Edition.
Student Communication You are required to create an email account which
is a requirement to access the Quipper portal.
Then, the course coordinator shall enroll the
students to have access to the materials and
resources of the course. All communication
formats: chat, submission of assessment tasks,
requests etc. shall be through the portal and other
university recognized platforms.

You can also meet the course coordinator in

person through the scheduled face to face
sessions to raise your issues and concerns.

For students who have not created their student

email, please contact the course coordinator or
program head.

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Telefax: (082)553-2914

Contact Details of the Dean Eduard L. Pulvera, MSIS

Email: eduardpulvera@umdigoscollege.edu.ph
Phone: 09295288740
Contact Details of the Program Jeaneth P. Tormis, CPA, MBA
Head Email: tormis.jeaneth@yahoo.com
Phone: 09097231679
Students with Special Needs Students with special needs shall communicate
with the course coordinator about the nature of his
or her special needs. Depending on the nature of
the need, the course coordinator with the approval
of the program coordinator may provide
alternative assessment tasks or extension of the
deadline of submission of assessment tasks.
However, the alternative assessment tasks should
still be in the service of achieving the desired
course learning outcomes.

Course Information – see/download course syllabus in the Quipper

CC’s Voice: Hello prospective accountant! Welcome to this course ACP 312:
Accounting for Business Combination. This course is a continuation of
Accounting for Special Transactions. It deals mainly with consolidation
and mergers, parent-subsidiary relationships, and consolidated
statements, including foreign subsidiaries. It also deals with accounting
for intercompany transactions and its presentation in the consolidated
financial statements.

CO Aside from recording business transactions through journal entries, you

will also need to understand the accounting practices and method in
recording transactions when it comes to business combinations. You will
be tasked to compute for accounting problems and present necessary
financial statements and financial reports. You will be studying mergers
and consolidation mainly in this course. Thus, you are expected to read
in advance the nature of business combinations.

Let us begin!

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Big Picture
Week 1-3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected to:
a. Distinguish agency and branch transactions;
b. Account for branch and home office transactions and prepare financial
statements;
c. Account for special procedures of branch and home office.

Big Picture in Focus: ULOa. Understand the entries to record agency

and branch transactions

Metalanguage

To be able to understand more fully the terms in this section, the most essential
terms relevant to finance and to demonstrate ULOa will be defined to establish a
common frame of reference as to how the texts work in a business setting. You will
encounter these terms as we go through the study of financial management. Please
refer to these definitions in case you will encounter trouble in understanding
educational concepts.

1. Agency. An agency is an organization established to display merchandise or

samples of merchandise only. Advertising materials and samples of the merchandise
offerings are provided by the home office.
2. Branch. A branch is an organization that sells goods out of a stock that it maintains
and make sales to customers.
3. Home office. This refers to the main office or main headquarters of the business
entity.

Essential Knowledge

To perform the aforesaid big picture (unit learning outcomes) for the first three
(3) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the university’s
library e.g. ebrary, search.proquest.com etc.

A. Agency and Branch Distinguished

An agency is an organization:
1. That does not stack up merchandise.
2. Sends customer orders to the home office for approval. If the sales price and
the credit terms are acceptable, the home office now fills the customer orders
and ships the goods.

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3. It is normally provided with a working fund that is to be used for the

transactions such as payment of expenses. The imprest system is often
adopted for the control of agency cash.
4. It has no separate accounting or business entity. The home office may
bear the responsibility for maintaining the accounts that arise from sales,
billing of customers, and receiving of cash payment from customers.
5. Its transactions are recorded in the books of the home office either at:
a. Separate records from the home office transaction, or
b. No separate records from the home office transaction.

In contrast, a branch is an organization:

1. That possesses the authority to engage in transactions as an
independent business;
2. That makes sales to customers, verifies customer credit, collects
receivables from customers, pays expenses, and performs other functions
normally associated with the operations of a separate business enterprise;
and
3. That has a separate accounting system similar to the systems of an
independent business except in the way the equity section is accounted for.

B. Accounting for Agency

The typical agency does not require a complete set of books. Ordinarily, the
working fund receipts and disbursements of an agency are summarized and,
accompanied by supporting evidence in the form of paid vouchers, are sent to the
home office. When the local manager or salespeople are to be paid according to the
volume of sales completed, sales records supply this information.

The following are pro-forma entries to record agency transactions:

1. Establishment of petty cash fund 7. End of the year adjustments:
Working fund – Agency xx a. Cost of goods sold – Agency xx
Cash xx Shipments to agency xx
2. Shipped merchandise to agency for use b. Depreciation expense for equipment:
as samples Depreciation expense – Agency xx
Samples inventory – Agency xx Acc. Dep. – equip. – Agency xx
Shipments to Agency xx c. Replenishment of agency’s working
fund:
3. Purchase of agency equipment Expenses – Agency xx
Equipment – Agency xx Cash xx
Cash xx

4. Payment of salaries to employees of 8. Closing entries:

agency a. To close sales revenue account:
Salaries expense – Agency xx Sales xx
Cash xx Income summary – Agency xx
5. Sales orders form agency are filled and b. To close cost of goods sold account:
customers are billed, and goods are Income summary – Agency xx
delivered by the home office Cost of goods sold – Agency xx
Accounts receivable xx c. To close expenses account:

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Sales – Agency xx Income summary – Agency xx

6. No entry required for expense if imprest Expenses – Agency xx
fund system is used d. To close the Agency income summary
to General Income Summary
Income summary – Agency xx
Income Summary xx

C. Accounting for Branches

Although a branch office operates as a business unit, it is still under the control
of the home office. The degree of control by the home office to the branch is
determined by the home office. However, outside of this jurisdiction, a branch
manager may be given complete authority, with effectiveness of management and
control judged on the basis of the branch financial reports. Other procedures to be
observed by the branch are as follows:
1. Other accounts of the branch such as cash, merchandise and such other
assets needed may be supplied by the home office to the branch.
2. The branch may purchase merchandise from outsiders for certain local needs
for goods that are not available from the home office.
3. The branch ships merchandise, bills its customers, makes collections on
accounts and deposits the sums in its own bank account.

At the end of the accounting period, the home office adjusts and closes the branch
accounts to determine the branch net income.

Records Maintained at the Branch

Generally, the branch accounting system is maintained at the branch. The
branch keeps the books of original entry and posts to ledger records. Financial
statements are prepared by the branch periodically and are submitted to the home
office. Statements that are submitted by the branch are usually verified by the
company's inter auditors.

Self-Help: You can also refer to the sources below to help you further
understand the lesson:

Burand, C. (2017). 10 agency accounting tips to keep in mind. Insurance

Journal, Retrieved
from https://www.proquest.com/docview/2023358931?accountid=31259

Dayag, A. (2015). Advance financial accounting Volume 2 (2016 ed.). Lajara

Publishing House

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Telefax: (082)553-2914

Let’s Check

Activity 1. Choose the best answer.

A company has an external sales agency. The company allows the sales agency to
incur and pay for all its expense and approved asset purchases. The company has
never transferred any tangible assets to the agency and created the agency by simply
establishing an agency working capital fund of 225,000. Whenever the sales agency
needs more working capital it transmits the receipts for what it has spent back the main
office which then sends cash back to the agency to cover the remitted items. Small
amounts of merchandise inventory are sent to the agency for display and
demonstration purposes. These items are transferred at cost.

1. An operation such as the one described above most closely resembles a(n):
a. Voucher system
b. Petty Cash system
c. Accounts Receivable subsidiary ledger
d. Accounts Payable subsidiary ledger

2. The primary advantages of the system described is that it:

a. Is adequate for effective control over agency expenses
b. Is adequate for measuring the contribution of agency operations to enterprise
income
c. It is simple to establish and maintain
d. It provides a basis for determining if agency operations are being performed
efficiently

3. Which of the following statements most correctly describes the types of

information that a sales agency would have to collect for the home office to properly
determine the sales agency's profitability?
a. Only agency sales, operating expenses, and cost of sales
b. Only agency sales and operating expenses
c. Only agency sales, cost of sales, operating expenses, and the actual or
average amount of fixed assets located at the agency locations.
d. Only agency sales, operating expenses, and the ending balances of accounts
receivable.

4. Which of the following statements correctly describes the relationship between the
accounting used for o sales agency when compared to the accounting systems used
for a branch office:
a. The sales agency accounting system cannot be set up to measure the
profitability of the sales agency but the branch accounting system can be set
up to measure the profitability of the branch
b. The sales agency accounting system can be set up to measure the
profitability of the sales agency but the branch accounting system cannot be
set up to measure the profitability of the branch
c. The accounting system of the sales agency is not usually considered a
separate segment of company's entire accounting system but the accounting

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system of the branch office is usually considered a separate segment of the

company's entire accounting system
d. None of the above

5. In preparing the financial statements of the home office and its various
branches:
a. Nonreciprocal accounts are eliminated but reciprocal accounts are
combined
b. Both reciprocal and nonreciprocal accounts are eliminated
c. Both reciprocal and nonreciprocal accounts are combined
d. Reciprocal accounts are eliminated and nonreciprocal accounts are
combined

Let’s Analyze
Activity 1. Accounting for Agency Transactions

The following are transaction in relation to an agency of a home office:

a. The transfer of P5,000 to an agency to establish a working fund.
b. Receipt of sales orders from the agency, P50,000.
c. Collections of agency accounts by the home office, P35,000.
d. Home office disbursements representing agency expenses, P4,500.
e. Replenishment of the agency working fund upon receipt of expense vouchers
for P2,250.
f. Cost of goods sold identified with agency sales, P36,000.

Required:
1. Prepare entries on the home office books to record the above transactions.
2. Determine the net income identified with the agency.

In a Nutshell

Activity 1. Understanding the characteristics of a sales agency and branch office can
help you in your future role as accountant in recording business transactions whether
for sales agency or branch office. Based from the definition of the most essential terms in
the course and the learning exercises that you have done, please feel free to write your
arguments or lessons learned below. I have indicated my arguments or lessons learned.

1. A sales agency can maintain its own record of transactions or it can maintain its
record with the home office. Either way, at every end of the period, the records of the
sales agency are summed up with the records of the home office.

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Your Turn

2.

3.

4.

5.

6.

7.

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8.

9.

10.

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Big Picture in Focus: ULOb. Account for branch and home office
transactions and prepare financial statements

Metalanguage

The most essential terms below are operationally defined for you to have a better
understanding of this section in the course.

1. Investment in Branch. Also known as Branch Current account. This is the account
title maintained by the home office for branch transactions. This is a noncurrent asset
account of the branch in the home office books.
2. Home office account. This is the account title maintained in the books of the branch
for from home office transactions. This is a quasi-ownership account equity that shows
the net investment by the home office in the books of the branch. This serves as an
equity account of the home office in the branch books.
3. Reciprocal account. Both the branch office account and the home office account
are reciprocal accounts. Meaning, when one is debited, the other is credited; and so
forth.
4. Shipments to branch. This account is used when the home office transfers
merchandise to a branch. At the end of the period, the balance of Shipment to Branch
will be subtracted from the Goods available for sale.
5. Shipments from home office. When the branch receives the merchandise from
the home office, this account is used to record the transaction. This account is added
together with purchases from outsiders and beginning inventory to determine the
Goods available for sale.

Essential Knowledge

In continuation of accounting for branches, it is best to understand that the branch

office account and the home office account are reciprocal accounts.

Home Office Current Account

Remittances made by the branch to Cash, goods or services received
the home office from the home office
Losses from operations Profits resulting from branch operations

Investment in Branch
Cash, goods or services transferred Remittances from the branch or other
to the branch assets received from the branch
Branch income Branch losses

When the branch closes its books at the end of every accounting period, the
Branch Income Summary account is closed to Income Summary Account which will
be eventually disposed to the Home Office Current account.

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Property, Plant and Equipment

Depreciable branch assets are normally carried on the home office books.
This procedure may be followed when depreciation rates are to be uniformly applied
to certain groups of assets, whether used by the home office or the branch, and
when insurance policies are to be acquired by the home office for all assets.
Pro-forma entries:

1. Equipment is purchased by home office for the branch

Home office books: Branch books:
Equipment – Branch xx No entry required
Cash or Accounts Payable xx

2. Equipment is purchased by the branch

Home office books: Branch books:
Equipment – Branch xx Home office current xx
Branch Current xx Cash or Accounts Payable xx
(Investment in Branch)

Expenses by the Home Office but Charged to Branch

Certain expenses relating to the branch operations are sometimes paid by the
home office. Branches are notified by the home office of expenses incurred in their
behalf and such charges are recorded on the branch books so that branch income
statements may provide complete summaries of the operations of the separate sales
organizations.

The following guidelines should strictly be followed:

1. Certain items can be directly identified with individual branches and are
immediately charged to the branches. Such items include insurance and taxes
paid by the home office on assets for the branch.
2. Other charges resulting in benefits that are not directly identified with certain
branches, such as advertising for the different lines being sold, may be
summarized on the books of the home office and charged periodically to the
branch using equitable basis.
3. When a home office does not sell to customers but acts solely in a supervisory
capacity, it may be desirable to charge all of its expenses to branches.
Expenses that are not directly identified with branches may be combined and
distributed in total as an indirect charge. When charges reported on home
office books taken up on the branch books, home office accounts should be
reduced by amounts transferred.
4. The home office may charge the individual branches for interest and rent on
working capital and the properties and equipment transferred to the branches.
When such charges are made, the branch recognizes these charges as
expense items, while the home office reports corresponding revenue.

Illustration 1. Assume that on January 2020 the Digos Company establishes its first
branch in Davao. Separate books are to be kept by the branch, and financial
statements are to be submitted to the home office at the end of each month.
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Merchandise is to be billed cost. Depreciable assets are to be carried on the books of

the home office. Both the office and the branch books use the periodic inventory
method. Transactions during 2020 for the month of branch operations are as follows:

1. Received cash of P40,000 from the home office.

2. Purchased equipment with a five-year life for P 20,000 cash.
3. Received merchandise shipments from home office at P32,000 home office
cost.
4. Purchased merchandise from outside suppliers for P8,000 cash.
5. Sold merchandise for P60,000 cash.
6. Returned P2,000 of the merchandise acquired from home office.
7. Paid expenses as follows:
Salaries; P12,000
Utilities, P2,000
Rent expense, P6,000
Miscellaneous expenses, P4,000
8. Remitted P30,000 to the home office.
9. Salaries payable at year-end were P2,000 and depreciation of equipment for
the year was P4,000.
10. Merchandise branch inventory at year-end consisted of P2,000 merchandise
acquired from outside suppliers and P 10,000 acquired from home office.
Home office: sales, P95,000; beginning inventory, P40,000; purchases, P90,000;
ending inventory, P25,000.

The following are journal entries to record the transactions and related year-end
events:
Journal and Adjusting entries – Home Office and Branch
Home Office Books Branch Books
1. Branch Current 40,000 Cash 40,000
Cash 40,000 Home office current 40,000
2. Equipment – Branch 20,000 Home office current 20,000
Branch Current 20,000 Cash 20,000
3. Branch Current 32,000 Shipments from home office 32,000
Shipment to branch at cost 32,000 Home Office Current 32,000
4. Purchases 8,000
Cash 8,000
5. Cash 60,000
Sales 60,000
6. Shipment to branch at cost 2,000 Home office current 2,000
Branch Current 2,000 Shipments from home office 2,000
7. Salaries expense 12,000
Utilities expense 2,000
Rent expense 6,000
Miscellaneous exp 4,000
Cash 24,000
8. Cash 30,000 Home office current 30,000
Branch Current 30,000 Cash 30,000
Adjusting entries: Salaries expense 2,000

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a. Salaries Payable 2,000

b. Branch Current 4,000 Depreciation expense 4,000
Acc. Dep. – Equip – Branch 4,000 Home office current 4,000

After the above entries have been posted, the reciprocal Branch Current
account in the books of the home office will show a debit balance of P24,000 and the
Home Office Current account in the books of the branch will show a credit balance
before income summary accounts are closed. The balance of the accounts is
determined as follows:

Home Office books:

Branch Current
Cash sent to branch 40,000 Equipment acquired by branch 20,000
Shipment to branch 32,000 Shipment returns 2,000
Depreciation charged to branch 4,000 Remittance 30,000
76,000 52,000
Balance 24,000

Branch books:
Home Office Current
Equipment acquired by branch 20,000 Cash sent to branch 40,000
Shipment returns 2,000 Shipment from home office 32,000
Remittance 30,000 Depreciation charged by
home office 4,000
52,000 76,000
Balance 24,000

The related closing journal entries on the books of the home office and the branch are
given below:

Home Office books Branch books

a. Sales 95,000 Sales 60,000
Shipments to branch 30,000 MI, End 12,000
Merchandise inventory, end 25,000 Purchases 8,000
MI, Beginning 40,000 Shipments from home office 30,000
Purchases 90,000 Salaries expense 14,000
*Expenses 10,000 Utilities expense 2,000
Income Summary 10,000 Rent expense 6,000
Depreciation expense 4,000
Miscellaneous expense 4,000
Income Summary 4,000
b. Branch Current 4,000 Income summary 4,000
Branch income summary 4,000 Home office current 4,000
c. Branch income summary 4,000
Income summary 4,000
d. Income summary 14,000
Retained earnings 14,000

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*figures are assumed

Preparation of Branch and Home Office Statements

The entity may prepare separate financial statements for the home office and
for the branch so that the management will be able to evaluate the results of its
operations and its financial position. However, it is important to note that the
prepared separate financial statements of the branch are for internal use only. They
do not meet the needs of investors or other external users of financial statements.

 A separate balance sheet and income statement should be prepared for a

branch so that management of the entity may assess the operations and
financial position of the branch. The branch normally prepares a balance
sheet and an income statement at the end of the fiscal period.
 The Home Office account is treated as substitute for the capital accounts on
the balance sheet. Shipments from Home Office account is added to the
beginning inventory to show the merchandise available for sale by the branch.
 The home office also prepares statements to show its financial position and
operating results.
 The branch investment accounts appear as an asset, i.e. an investment
account on the home office balance sheet.
 Branch balance sheets may be attached as schedules in support of the
branch balances. Shipments to Branch are a deduction from merchandise
available for sale.
 The individual branch earnings may be shown on the home office income
statement immediately, after operating results of the home office.
 The branch income statements may be attached to the home office income
statement as scheduled offering the detail to support the net amounts
reported on the statement.

Preparation of Combined Statements for Home Office and Branches

Though separate statements offer significant information to home office and branch
officials, such statements must be complied fully stating a company's financial
position and its operations.
 The financial position of the business unit in its entirety is fully presented only
when individual asset and liability accounts of the various branches are
substituted for the branch investment balances and combined with the home
office items.
 Operating results for the business as a whole are fully presented only when
individual revenue and expense items of the various branches are substituted
for the branch net income or loss and combined with the home office data.

Stockholders, creditors, and taxing authorities require combined statements. These

parties normally have little or no interest in the separate status and operating results
of individual departments or branches of a business.

In combining branch data with home office data, the elimination of certain reciprocal
interoffice items is necessary:

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Telefax: (082)553-2914

1. In preparing a combined balance sheet, the home office account and the
branch account are eliminated, since these accounts are without significance
when the related units are recognized as a single entity.
2. In preparing a combined 'income statement, their accounts Shipments from
Home Office and Shipments to Branch are eliminated, since these balances
summarize interoffice transfers that are not significant when the related units
are reported as a single entity.
3. Other interoffice revenue and expense items are also eliminated so that the
combined statement may report only the results of transactions with outsiders.

Reconciliation of Reciprocal Accounts

Theoretically, the balances of the reciprocal accounts, i.e. the Branch Current
account (Investment in Branch) and the Home Office Current account, should always
be equal. On the other hand, it may not show identical reciprocal balances on one
occasion because of certain interoffice data that have been recorded by one office
but not by the other.

The home office, for example, debits the branch immediately upon the
shipments of merchandise to the branch. The branch, however, does not credit the
home office account until it receives the merchandise, which may be several days
after shipment by the home office. The fact that the reciprocal account balances are
not identical is of no concern during the fiscal period.

Illustration 2. Assume the following data for home office and branch accounting
records of Red Company and Blue Branch on December 31, 2020:

Home Office books:

Branch Current
Nov 30 Balance 31,250 Dec 5 Cash received from branch 10,000
Dec 31 Depreciation charge 2,000 Dec 18 Collection of branch trade
to branch receivable 500
Dec 31 Shipments to branch 4,000
37,250 10,500
Balance 26,750

Branch books:
Home Office Current
Dec 4 Cash sent to home office 10,000 Nov 30 Balance 31,250
Dec 28 Acquired equipment 1,500 Dec 31 Collection of home office
trade receivable 1,000
Dec 31 Depreciation charged by
home office 200
11,500 32,450
Balance 20,950

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Roxas Extension, Digos City
Telefax: (082)553-2914

Comparison of the two reciprocal ledger accounts above discloses five reconciling
items to be corrected as follows:
1. Depreciation expense 1,800
Home office account 1,800

2. Shipments from Home Office – in transit 4,000

Home Office Current 4,000

3. Home Office Current 500

Accounts receivable 500

4. Equipment – Blue Branch 1,500

Branch Current 1,500

5. Branch Current 1,000

Accounts receivable 1,000

The effect of the end-of-period adjusting journal entries to update the reciprocal
accounts, is shown in the reconciliation below:

Red Company – Home Office and Blue Branch

Reconciliation of Reciprocal Accounts
December 31, 2020

Self-Help: You can also refer to the sources below to help you further
understand the lesson:
Investment in branch network, agency banking enhances access to financial
services. (2019, Nov 26). AllAfrica.Com Retrieved from
https://www.proquest.com/docview/2318547982?accountid=31259

Dayag, A. (2015). Advance financial accounting Volume 2 (2016 ed.). Lajara

Publishing House
18
 UM DIGOS COLLEGE
Roxas Extension, Digos City
Telefax: (082)553-2914

Let’s Check

Activity 1. Accounting for Home Office and Branch Transactions

On January 1, 2020, the Bread Company opened a new branch in a neighboring city.
A summary of transactions for the home office and the branch for 2020 and the
balance sheet for the home office on January 1 are as follows:
The home office transactions:
a. Transfer of cash to branch, P42,500
b. Transfer of merchandise to branch (billed at cost), P50,200.
c. Soles on account, P105,000.
d. Purchases on account, PI122,500
e. Collections on account, P113,600
f. Payments on account, P124,000
g. Expenses paid, P26,600
h. Cash received from branch, P53,400
i. Dividends paid, P 10,000.
j. Adjusting data on December 31: depreciation for year, P1,180; merchandise
inventory, P48,500; prepaid expenses, P2,050 and accrued expenses,
P1,350.

Branch transactions:
a. Cash received from home office, P42,500
b. Merchandise received from home office, P50,200.
c. Sales on account, P66,000.
d. Purchases on account, P22,500
e. Cash collections on account deposited to the credit of the home office,
P53,400.
f. Payments on account, P12,250.
g. Purchase of furniture and fixtures for cash, P8,000.
h. Expenses paid, P18,000.
i. Adjusting data on December 31: depreciation, P650; merchandise inventory,
P23.500; prepaid expenses, P750 and accrued expenses, P300.

A balance sheet on December 31, showed the following balances:

Assets Liabilities and Equity
Cash 59,300 Accrued expense 1,250
Accounts receivable 27,650 Accounts payable 22,800
Merchandise Inventory 40,120 Common stock, P20 par 50,000
Prepaid expense 1,800 Retained earnings 70,420
Furniture and fixtures 20,000
Accum. Depreciation (4,400)
Total assets 144,470 Total liabilities and equity 144,740

Required:
1. Prepare journal entries to record the foregoing transactions for (a) the branch
and (b) the home office.
2. Prepare individual statements for the branch and for the home office.
3. Prepare combined statements for the branch and the home office

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Roxas Extension, Digos City
Telefax: (082)553-2914

4. Prepare the journal entries to adjust and close the books at the end of the
period for (a) the branch and (b) the home office.

Let’s Analyze

Activity 1. Reconciliation of Reciprocal Accounts

Comparison between the interoffice account of the Wash Wholesale Company with
its suburban branch and the corresponding account carried on the latter's books
shows the following discrepancies at the close of business on September 30,2020:
a. A debit of P870 (Office Furniture) on the home office books is recorded by
branch as P780.
b. A credit for P300 (Merchandise Allowances) by the home office is recorded
the branch as P350.
c. The home office charges the branch P325 for interest on open account, the
branch fails to take up in full; instead, the branch sends to the home office an
incorrect adjusting memo, reducing the charge by P75, and sets up a liability
for the net amount.
d. A labor charge by the home office, P433, is recorded twice by the branch.
e. A charge of P785 for freight on merchandise is made by the home office, but
amount is recorded by the branch as P78.50.
f. The branch incorrectly sends the home office a debit note for P293,
representing its proportion of a bill for truck repairs; the home office does not
record it.
g. The home office receives P475 from the sale of a truck, which it erroneously
credits to the branch; the branch does not charge the home office therewith.
h. The branch accidentally receives a copy of the home office entry dated
October 10, 2020, correcting item (g), and records a credit in favor of the
home office as of September 30, 2020.

The balance of the branch account on the home office books shows P 131,690
receivable from the branch at September 30, 2020. The interoffice accounts were in
balance at the beginning of the year.

Required:
1. Determine the balance of the home office account on the branch books before
adjustment.
2. Determine the correct amount of the interoffice balance.
3. Reconcile the amount of P 131,690 on the home office books with the
adjusted balance of the reciprocal accounts.
4. Prepare the journal entry or entries necessary to adjust the branch books.

In a Nutshell

Activity 1. Understanding journal entries for accounting for home and branch can help
you in your future role as an accountant. Based from the definition of the most essential

20
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Roxas Extension, Digos City
Telefax: (082)553-2914

terms in the course and the learning exercises that you have done, please feel free to
write your arguments or lessons learned below. I have indicated my arguments or
lessons learned.

1. Understanding the nature of reciprocity of home office and branch account will help
you in recording intercompany transactions. Finding the adjusted balance would also
be easier especially in dealing with erroneous recording of transactions.

Your Turn

2.

3.

4.

5.

6.

7.

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 UM DIGOS COLLEGE
Roxas Extension, Digos City
Telefax: (082)553-2914

8.

9.

10.

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Roxas Extension, Digos City
Telefax: (082)553-2914

Big Picture in Focus: ULOc. Account for special procedures of

branch and home office

Metalanguage

The most essential terms below are operationally defined for you to have a better
understanding of this section in the course.

1. At billed price. A merchandise is said to be at billed price if the cost of the

merchandise is added a certain percentage of gross profit, such as 115% of cost.
1.1 When merchandise is billed at a branch at a price above home office cost,
the net income reported by the branch is understated and the ending inventory
is overstated for the enterprise as a whole.
1.2 Adjustments must be made by the home office to eliminate the excess of
billed prices over cost (intercompany profits) in the preparation of combined
financial statements for the home office and branch.
2. Allowance for Overvaluation of Branch Inventory. This is the difference between
the merchandise at cost and its billed price. This represents the gross profit.
2.1 This account is recognized in the separate balance sheet of the home office
as an offset against the branch account in arriving at the actual Investment in
Branch. It is deducted from inventory on the combined balance sheet.
2.2 When the goods are sold, the account is reduced to recognize the
proportionate gross profit.

Essential Knowledge

A. Accounting for Billing at a Price in Excess of Cost (Original Cost Plus Mark-
up based on Cost)

Assume the same transactions on Illustration 1 (in the previous unit) except that the
home office billed merchandise shipments to the branch at 25% above cost. The
entries to record the transactions for the home office and the branch will be the same
with those presented in Illustration 2-1 except for entries (nos. 3 and 6) showing
shipments of merchandise from the home office to the branch recorded as follows:

Home Office books Branch books

3. Shipment from home office to branch Shipments from home office
Branch Current (at billed price) 40,000 (at billed price) 40,000
Shipment to branch (at cost) 32,000 Home office current 40,000
Allow. for overvaluation of branch
Inventory 8,000
6. Shipment returns to home office Home office current 2,500
Shipment to branch (at cost) 2,000 Shipment from home office
Allow. for overvaluation of (at billed price) 2,500
branch inventory 500
Branch Current 2,500

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Roxas Extension, Digos City
Telefax: (082)553-2914

After posting these entries to the ledger, the Home Office Current and Branch Current
will both have a P31,500 balance.

Assume that at the end of 2020, the branch reports its ending inventory of P14,500
[2,000 at cost + (10,000 cost x 125%)]. The closing entries on the books of the home
office and the branch on year-end are shown as follows:

Home Office books Branch books

a. Sales 95,000 Sales 60,000
Shipments to branch 30,000 MI, End 14,500
Merchandise inventory, end 25,000 Income Summary 1,000
MI, Beginning 40,000 Purchases 8,000
Purchases 90,000 Shipments from home office 37,500
*Expenses 10,000 Salaries expense 14,000
Income Summary 10,000 Utilities expense 2,000
Rent expense 6,000
Depreciation expense 4,000
Miscellaneous expense 4,000
b. Branch income summary 1,000 Home office current 1,000
Branch Current 1,000 Income summary 1,000

c. Allow. for overvaluation of

branch inventory 1,000
Branch income summary 1,000
d. Branch Income summary 4,000
Income Summary 4,000
e. Income summary 14,000
Retained earnings 14,000
*figures are assumed

The branch records and reports its net loss from own operations amounting to P1,000.
But, in addition to the amount of net loss reported, the home office recognizes the
realized profit on sales made by the branch of merchandise billed above cost amount
to P5,000.

Balance of allow. for overvaluation of branch inventory account before

adjustment of realized profit [(40,000-2,500) x 25/125] 7,500
Less: Overvaluation of branch ending inventory (allowance after
Adjustment of realized profit on branch sales) (12,500 x 25/125) 2,500
Realized profit on sales made by branch/Overvaluation of Cost of Goods Sold
(adjustments to reflect true branch net income) 5,000

Combined Statements when Goods Are Billed at Amounts Other Than Cost (Billing
at a Price in Excess of Cost, at Billed Price (Original Cost plus Mark-up based on
Cost)

 Reciprocal account balances of the home office and branch are eliminated
and balance sheet data are then combined. Reciprocal interoffice revenue
and expense balances are eliminated and income statement data are
combined.

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Roxas Extension, Digos City
Telefax: (082)553-2914

 When goods are billed to a branch at amounts other than cost, special
problems are encountered in the preparation of combined financial
statements. The ending inventory on the branch balance sheet reported at an
amount other than cost must be restated in terms of cost in preparing the
combined balance sheet. The beginning and the ending inventory balances
on the branch income statement reported at amounts other than cost must be
restated in terms of cost in preparing the combined income statement.
 When the preparation of combined statements calls for the restatement of real
and nominal accounts as well as e the elimination of reciprocal accounts, it is
generally desirable to develop such summaries through the preparation of
work sheets that includes both balance sheet and income statement data.

Worksheet to Prepare Combined Income Statement and Balance Sheet

The entries that appear in the working paper as elimination entries do not
appear on the books of the home office and branch books. They are entries only to
prepare the combined financial statements for external purposes.

Accounting for Working Paper Eliminating Entries

Assume the same transactions during of Digos Company as presented in

Illustration 1 except that the home office bills shipment to the branch at 25% above
cost. The entries presented in the said Illustration will be the same except for entries
(nos. 3 and 6) showing shipment to the branch and shipment returns.

1. The reciprocal accounts Home office Current and Branch Current account are
cancelled by the following elimination entry:
Home Office Current 31,500
Branch Current 31,500

2. Account balances resulting from the transfer of merchandise between offices are
cancelled by the following elimination entry:
Shipments to branch (at cost) 30,000
Allow. For overvaluation of branch inventory 7,500
Shipments from home office (at billed price) 37,500

3. The ending inventory, which is carried at billed price in the balance sheet and in
the income statement, is reduced by P2,500 to its actual cost by the following
elimination entry:
Merchandise inventory, end (IS) 2,500
Merchandise inventory, end (BS) 2,500

4. The amount of realized profit from sales in beginning inventory to reduce it to cost
by the following elimination entry:
Allow. For overvaluation of branch inventory xx
Merchandise inventory, beg (IS) xx

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Roxas Extension, Digos City
Telefax: (082)553-2914

Transactions between Branches

There may be instances that merchandise or other items are transferred from
one branch to another. Generally, a branch does not recognize a reciprocal ledger
account with another branch in its books, but it records the transfer in the Home
Office ledger account.

Inter-branch Transfers of Cash

Normally, branch activities are limited to transactions with the home office and
with outsiders. On certain occurrences, though, the home office may authorize the
transfer of certain assets from one branch to another. Instead of opening special
accounts with member branches, branches will normally clear such transfers through
the home account. The purpose of such is to prevent a branch to have an open
account with another branch.

Inter-branch Transfers of Merchandise

When merchandise is supplied by the home office to its branches, it may
become necessary in certain instances for the home office to authorize the transfer
of goods one branch to another. Inter-branch transfers of merchandise, like inter-
branch transfers of cash, are normally cleared through the Home Office Current
account rather than through special accounts with member branches.

Freight Cost on Shipments

The cost of shipping merchandise to its final sale location can be a significant
element in the cost of merchandise inventoried and sold. Accordingly, between home
office and branch locations, transportation costs on products shipped should be
included in the branch inventory and cost of goods sold accounts.
 The amount of transportation costs included in inventory account at a branch
is limited to the cost of shipping merchandise directly from the home office to
its current location.
 Excess transportation costs are recognized as expenses in the books of the
home office. Since excessive transportation costs represent management
inefficiencies, they are not considered normal operating or freight expenses.
 If excess freight results from a mistake in an order for goods by a branch from
some other branch failure, the charge should be borne by the branch and
reported on its books. In some cases, if branch managers are authorized to
order transfers of merchandise between branches, the excess transportation
costs are recognized as expense to the branches.

Illustration. Home office ships goods to Branch 3, billing the branch for the goods
at P1,500 plus freight charges incurred for P200. At a subsequent date, the home
office authorizes the transfer of these goods to Branch 4. Branch 3 pays the freight
charge on the transfer for P150. If the shipment had been made by the home office
directly to Branch 4, the freight charge would have been P220.

26
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Roxas Extension, Digos City
Telefax: (082)553-2914

Home office books Branch 3 books Branch 4 books

1. Branch 3 1,700 Shipments from home office 1,500
Shipment to branch 3 1,500 Freight in 200
Cash 200 Home office current 1,700
2. Branch 4 1,720 Home office current 1,850 Shipments from HO 1,500
Excess freight 130 Shipments from home office 1,500 Freight in 220
Branch 3 1,850 Freight in 200 Home office current 1,720
Cash 150

Shipments to Branch 3 1,500

Shipments to Branch 4 1,500

In preparing the income statement for the home office, the excess freight charge
may be reported as a subtraction from the summary of branch earnings in the lower
section of the statement.

Self-Help: You can also refer to the sources below to help you further
understand the lesson:

Investment in branch network, agency banking enhances access to financial

services. (2019,
Nov 26). AllAfrica.Com Retrieved from
https://www.proquest.com/docview/2318547982?accountid=31259

Dayag, A. (2015). Advance financial accounting Volume 2 (2016 ed.). Lajara

Publishing House

27
 UM DIGOS COLLEGE
Roxas Extension, Digos City
Telefax: (082)553-2914

Let’s Check
Activity 1. Special Procedures Shipments with Unrealized Intercompany Inventory
Profit / Deferred Profit

Planet Company operates a main store at its home office and a branch store in another
city. The branch purchases most of its merchandise from the home office at 10%
above home office cost. All merchandise acquired from other suppliers is accounted
for by the branch at original cost. At September 30, 2020, the records of the branch
indicated following:

September Sales P140,000

Inventory, September 1 35,200* (50% from outside suppliers)
Shipments from home office 55,000 (at billed price)
Purchases from outsiders 24,000
Selling expenses 8,000
General expenses 32,000
Inventory, September 30 30,000 (P8,000 from outside suppliers)
Merchandise acquired from the home office is inventoried at billed prices.

Required:
1. Give the journal entries on the home office and branch books to record the
shipments.
2. Prepare the income statement for the branch.
3. Prepare all necessary entries on the home office books at September 30, 2020 to
adjust the home office records for the branch operations for September.

Let’s Analyze
Activity 1. Choose the best answer.

1. A home office ships inventory costing P40,000 to its branch at a transfer price of
50,000. The markup percentage (rounded) using the branch's cost basis is
a. 0.20
b. 0.25
c. 25
d. 20

2. In 2020, a home office shipped inventory costing P400,000 to its newly established
branch at a transfer price of P480,000. In the branch's year-end closing entries, the
branch charged -P360,000 of this inventory to Cost of Sales. The adjusted general
ledger balance in the Intracompany Profit Deferred account at year-end should be
a. 3,333
b. P10,000
c. P20,000
d. P30,000

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Telefax: (082)553-2914

3. For the year ended 12/31 /2020, the adjusted financial statements of a home office
and its branch show net income of P700,000 and P100,000, respectively. At the end
of 2019, the home office adjusted the Intracompany Profit Deferred account by
debiting it for P40,000, leaving a balance of P 10,000. The combined net income for
2020 is
a. P660,000
b. P690,000
c. P700,000
d. P800,000

In the year ended 12/31 /20, selected line items from the home office and branch of
the combining statement worksheet follow:
Home Office Branch
Cost of Sales P (500,000) P (100,000)
Branch Income 50,000
Net Income 180,000 30,000
Intercompany Profit Deferred 6,000

4. What amount would be reported in the combined column for Cost of Sales?
a. 570,000
b. 580,000
c. 594,000
d. 600,000
e. 620,000

5. What is the combined net income as reported in the combined column?

a. 150,000
b. 160,000
c. 180,000
d. 204,000

Pangasinan Branch of Malate Company, at the end of its first quarter operations
submitted the following income statement:

Sales 300,000
Cost of sales
Shipments from home office 280,000
Local purchases 30,000
Total 310,000
Inventory, end 50,000 260,000
Gross profit on sales 40,000
Expenses 35,000
Net income 5,000

Shipments to the branch were billed at 140% of cost. The branch inventory on
September 30 amounted to P50,000 of which P6,600 was locally purchased. Mark
up on local purchases, 20% over cost. Branch expenses incurred by Head Office
amounted to P2,500 not yet recorded by the branch.

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Roxas Extension, Digos City
Telefax: (082)553-2914

6. Compute the branch ending inventory that should be presented in the income
statement:
a. 36,500
b. 37,600
c. 43,400
d. 50,000

7. The true branch income

a. 70,100
b. 5,000
c. 2,500
d. None of the above

8. In 2020, a home office shipped inventory costing P60,000 to its branch for P90,000.
At the end of 2020, the branch reported P30,000 of this inventory in its balance sheet.
The amount of unrealized intracompany profit at the end of 2020 is
a. 10,000
b. 15,000
c. 25,000
d. 30,000

Summary adjusted trial balance for the home office and branch of TJ Corporation on
December 31, 2020 are as follows:
Debits: Home Office Branch
Other assets 539,000 165,000
Inventories, beg 50,000 45,000
Branch 200,000 -
Purchases 500,000 -
Shipments form home office - 240,000
Expenses 120,000 50,000
Dividends 100,000 -
Total 1,500,000 500,000

Credits:
Other liabilities 90,000 25,000
Capital Stock 500,000 -
Retained earnings 100,000 -
Home office - 175,000
Unrealized profit in branch inventory 10,000 -
Sales 537,500 300,000
Shipments to branch 200,000 -
Branch profit 62,500 -
Total 1,500,000 500,000
Additional information:
a. The home office ships merchandise to its branch at 120% of home office cost.
b. Inventories at December 31, 2020 are P70,000 for the home office and
P60,000 for the branch. The branch inventory is at transfer prices.

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Telefax: (082)553-2914

9. Compute the combined:

Net income Cost of Goods Sold
a. 370,000 480,000
b. 200,000 480,000
c. 132,500 467,500
d. 200,000 467,500

In a Nutshell

Activity 1. Accounting for overvaluation of merchandise and intercompany

transactions between home office and branch have been discussed in this unit. Based
from the definition of the most essential terms in the course and the learning exercises that
you have done, please feel free to write your arguments or lessons learned below. I have
indicated my arguments or lessons learned.

1. In analyzing intercompany transactions between a home office and branch, it is

important to remember that they are of one company. Thus, elimination entries are
needed in order that the combine statements will reflect the operations of both as a
whole.

Your Turn

2.

3.

4.

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 UM DIGOS COLLEGE
Roxas Extension, Digos City
Telefax: (082)553-2914

5.

6.

7.

8.

9.

10.

32