CHAPTER 4

ACCOUNTING FOR BRANCHES;

COMBINED FINANCIAL STATEMENTS
HIGHLIGHTS OF THE CHAPTER
1. A branch is a unit of a business enterprise located some distance from the home office. A branch
generally caries a stock of merchandise obtained from the home office, makes sales, approves
customers credit, and makes collections on trade accounts receivable.
2. The merchandise of a branch may be obtained exclusively from the home office, or a portion may
be purchased from outside suppliers. The cash receipts of the branch may be deposited in a bank
account of the home office; branch expenses then are paid from an imprest cash fund provided by
the home office. The imprest cash fund is replenished periodically by the home office. Alternatively,
a branch may maintain its on bank account.
!. "ertain units or segments of a business enterprise may be operated as divisions. A division may
consist of either a series of branches or one or more corporations. #hen a segment is operated as a
corporation, it is knon as a subsidiary of the parent company.
$. "osts of organi%ing a ne branch and operating losses during the initial period of operations
should be recogni%ed as expenses, not as deferred charges, per A&"'A SOP 98-5.
(. The accounting records for branches may be centralized in the home office or may be
decentralized so that each branch maintains a complete set of accounting records. &f the
accounting records are centrali%ed in the home office, each branch prepares daily reports and
documents that are used as sources for )ournal entries in the accounting records of the home office.
&f a branch maintains its on accounting records, some transactions or events relating to the
branch may be recorded by the home office. 'eriodic financial statements are provided by the
branch to the home office so that combined statements may be prepared.
*. The accounting records of a branch include a +ome ,ffice ledger account that is credited for assets
and services provided by the home office, and for branch net income. The +ome ,ffice account is
debited for any assets and services provided by the branch to the home office or to other branches,
and for branch net losses. The +ome ,ffice account thus is an onership e-uity.type account
representing the net investment of the home office in the branch.
/. A home office maintains a reciprocal ledger account, &nvestment in 0ranch, hich is debited for
the assets and other services provided to a branch, and for net income of the branch; it is credited
for the assets and services received from the branch, and for branch net losses.
1. A home office generally charges its branches for expenses 2such as insurance, interest, property
taxes, advertising, and depreciation3 incurred for the benefit of the branch. 4uch expenses must be
allocated to branch operations to measure the profitability of each branch.
5. 6erchandise shipped by a home office to branches may be billed at home office cost, at home
office cost plus a markup, or at branch retail selling price. A shipment of merchandise to a branch
is not a sale. 0illing at home office cost attributes the entire gross profit on merchandise sold by a
branch to the branch. #hen merchandise is billed at a price above home office cost 2or at branch
retail selling price3, the valuation assigned to branch inventory at the end of the accounting period
must be reduced to cost hen combined financial statements are prepared.
17. &f merchandise is billed to a branch at a price above home office cost and the perpetual inventory
system is used, the home office debits &nvestment in 0ranch for the billed price of the merchandise,
credits &nventories for the cost of the merchandise, and credits Alloance for ,vervaluation of
&nventories8 0ranch for the excess of the billed price over cost. The branch debits &nventories and
credits +ome ,ffice at billed prices of merchandise; sales by the branch are debited to "ost of
9oods 4old and credited to &nventories at billed prices.
11. A separate income statement and balance sheet for each branch may be prepared for use by
enterprise management. The income statement has no unusual features if merchandise is billed to a
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branch at home office cost. +oever, if merchandise is billed at a price above cost, the branch trial
balance must be ad)usted by the home office so that cost of the merchandise sold by the branch is
stated at cost to the home office.
12. A combined balance sheet for home office and branch shos the financial position of the business
enterprise as a single entity. &n the orking paper for combined financial statements, the assets and
liabilities of the branch are substituted for the &nvestment in 0ranch ledger account included in the
ad)usted trial balance of the home office. This is accomplished by elimination of the balances of the
+ome ,ffice and &nvestment in 0ranch reciprocal ledger accounts.
1!. &f a home office and branch use the periodic inventory system, the home office debits &nvestment
in 0ranch for the billed price of the merchandise shipped, credits 4hipments to 0ranch for the home
office cost of the merchandise shipped, and credits any excess of billed price over cost to
Alloance for ,vervaluation of &nventories8 0ranch. The branch debits 4hipments from +ome
,ffice and credits +ome ,ffice at billed price. At the end of the accounting period, the home office
reduces 2debits3 Alloance for ,vervaluation of &nventories8 0ranch for the amount of
overvaluation applicable to the branchs cost of goods sold and credits the amount of the reduction
to the :eali%ed 9ross 'rofit8 0ranch 4ales ledger account.
1$. At the end of an accounting period, the balance of the &nvestment in 0ranch ledger account may not
agree ith the balance of the +ome ,ffice account. &n such cases the reciprocal ledger accounts
must be reconciled and brought up to date before combined financial statements are prepared.
1(. &f the home office operates more than one branch, certain transactions, such as merchandise
shipments, may take place beteen branches. 4uch interbranch transactions usually are cleared
through the +ome ,ffice ledger account. ;or example, if Arlo 0ranch ships merchandise ith a
cost of <$77 to 0oone 0ranch and the periodic inventory system is used, the folloing )ournal
entries 2explanations omitted3 are re-uired8
ccounting records of rlo !ranch"
+ome ,ffice $77
4hipments from +ome ,ffice $77
ccounting records of !oone !ranch"
4hipments from +ome ,ffice $77
+ome ,ffice $77
ccounting records of home office"
&nvestment in 0oone 0ranch $77
&nvestment in Arlo 0ranch $77
1*. The transfer of merchandise from one branch to another does not )ustify increasing the carrying
amount of inventories by the additional freight costs incurred because of the indirect routing.
=xcess freight costs incurred as a result of such transfers are recogni%ed as operating expenses of
the home office because the home office makes the decision to transfer the merchandise.
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QUESTIONS
#rue or $alse
;or each of the folloing statements, circle the # or the $ to indicate hether the statement is true or false.
# $ 1. &n a centrali%ed accounting system for branches, the branch accounting records are maintained
by the home office.
# $ 2. 0oth the +ome ,ffice ledger account and the &nvestment in 0ranch account are displayed in
the combined financial statements for the home office and the branch.
# $ !. The combined net income for the home office and branches ould be the same hen the home
office bills merchandise to branches at home office cost as hen the home office bills branches
at amounts above home office cost.
# $ $. &n most cases, a branch is operated more as a cost center than as a profit center.
# $ (. A branch imprest cash fund is displayed under the heading &nvestments in the combined
balance sheet of the home office and the branch.
# $ *. The &nvestment in 0ranch ledger account is displayed as a noncurrent asset in the separate
balance sheet of the home office, and the +ome ,ffice account is displayed as a long.term
liability in the separate balance sheet of the branch.
# $ /. The fiscal year for the home office must coincide ith the fiscal year for the branch to facilitate
the preparation of combined financial statements.
# $ 1. A net loss reported by a branch is recorded by the home office by a debit to the &nvestment in
0ranch ledger account.
# $ 5. &f branch trade accounts receivable are carried in the home office accounting records, doubtful
accounts expense of the branch is recorded by the home office by a debit to 0ranch >oss and a
credit to &nvestment in 0ranch.
# $ 17. &f merchandise is billed to a branch at a price above home office cost, the net income reported
to the home office by the branch is overstated.
# $ 11. 4eparate financial statements for an enterprises home office and branches generally are
prepared for use by creditors and government agencies.
# $ 12. &n a orking paper for combined financial statements of a home office and branches, the
balance of the 4hipments to 0ranch ledger account is eliminated against the balance of the
+ome ,ffice account.
# $ 1!. &n a separate balance sheet for a home office, the balance of the Alloance for ,vervaluation
of &nventories8 0ranch ledger account is deducted from the balance of the &nvestment in 0ranch
ledger account.
# $ 1$. The beginning inventories of a branch are reduced to home office cost in the orking paper for
combined financial statements by a debit to Alloance for ,vervaluation of &nventories8
0ranch and a credit to beginning inventories hen the periodic inventory system is used.
# $ 1(. The perpetual inventory system is impractical for a home office ith many branches.
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# $ 1*. &f a remittance of cash by a branch has not been recorded by the home office, the balance of the
branchs +ome ,ffice ledger account exceeds the balance of the home offices &nvestment in
0ranch account.
# $ 1/. ;reight costs on merchandise shipments from "ody 0ranch to ?ana 0ranch in excess of
normal freight costs from the home office to ?ana 0ranch should be recogni%ed as operating
expenses of ?ana 0ranch.
# $ 11. &f a ne branch is expected to be profitable starting ith the second year of operations, a loss
incurred by the ne branch in the first year should be deferred and recogni%ed as expense over
a period of three to five years.
Completion Statement
;ill in the necessary ords or amounts to complete the folloing statements.
1. A @@@@@@@@@@@@@@@@@@@@ is a unit of a business enterprise that sells merchandise at a location
some distance from the @@@@@@@ @@@@@@@@@@@@@@@@@@@@. A branch generally is operated as a
@@@@@@@@@@@@@@@@@@@@ of the home office; hoever, a @@@@@@@@@@@@@@@@@@@@ may be
organi%ed as a subsidiary corporation.
2. The +ome ,ffice ledger account and the &nvestment in 0ranch ledger account are
@@@@@@@@@@@@@@@ ledger accounts hose balances must be @@@@@@@@@@@@@@@ hen
@@@@@@@@@@@@@@@ financial statements for the home office and branch are prepared.
!. &f a home office bills merchandise to branches at a price above home office cost, the markup on the
unsold merchandise is not @@@@@@@@@@@@@@@@@@@@ and is eliminated for combined financial
statements for the home office and its branches.
$. &f the Aorco 0ranch remits cash to the home office of >epore "ompany and a decentrali%ed
accounting system is used, the Aorco 0ranch debits the @@@@@@@@@@ @@@@@@@@@@ ledger account
and credits "ash; the home office debits "ash and credits the @@@@@@@@@@@@@@@@@@@@ @@@@@@@
@@@@@@@@@@@@@@@@@@@@ account.
(. 4ome operating expenses incurred by the home office relate to branch operations and are
@@@@@@@@@@@@@@@ to the branch by a debit to the @@@@@@@@@@@@@@@@@@@@ @@@@@@@
@@@@@@@@@@@@@@@@@@@@ ledger account and a credit to the @@@@@@@@@@@@@@@@@@@@
@@@@@@@@@@@@@@@@@@@@ account in the accounting records of the home office.
*. &f shipments of merchandise by a home office to branches are billed at !! 1B!C above home office
cost, @@@@@@@C of the amount of the ending inventories of the branch is reported in the Alloance
@@@@@@@ @@@@@@@@@@@@@@@@@@@@ @@@@@@@ @@@@@@@@@@@@@@@@@@@@8 @@@@@@@@@@@@@@@@@@@@
ledger account in the accounting records of the home office.
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M!ltiple C"oi#e
"hoose the best anser for each of the folloing -uestions and enter the identifying letter in the space
provided.
@@@@ 1. &n accounting for branch transactions, it is improper for the home office to8
a. "redit cash received from a branch to the &nvestment in 0ranch ledger account.
b. 6aintain "ommon 4tock and :etained =arnings ledger accounts for only the home office.
c. ?ebit shipments of merchandise to the branch from the home office to the &nvestment in
0ranch ledger account.
d. "redit shipments of merchandise to the branch to the 4ales ledger account.
@@@@ 2. The +ome ,ffice ledger account in the accounting records of the Tahoe 0ranch had a credit
balance of <12,777 at the end of April, and the &nvestment in 0ranch account in the accounting
records of the home office had a debit balance of <1(,777. The most likely reason for the
discrepancy in the to ledger account balances is8
a. 6erchandise shipped by the home office to the branch had not been recorded by the
branch.
b. The home office had not recorded the branch net income for April.
c. The branch had )ust collected home office trade accounts receivable in the amount of
<!,777.
d. The branch had not yet recorded the home office net income for April.
@@@@ !. Dayhak "ompany has numerous branches in the state of Eansas. The home office purchases
merchandise and makes shipments to branches from a central arehouse at the re-uest of
branch managers. #hich of the folloing ould be an improper accounting practiceF
a. The &nvestment in 0ranch ledger account is debited in the accounting records of the home
office hen merchandise is shipped to a branch, and the 4hipments to 0ranch account is
credited 2assume use of the periodic inventory system3.
b. The home office debits Trade Accounts :eceivable and credits 4ales hen merchandise is
shipped to a branch.
c. "ash received from a branch is credited to the &nvestment in 0ranch ledger account by the
home office.
d. ,nly the home office maintains a "ommon 4tock ledger account and a :etained =arnings
account.
@@@@ $. Aeither the 'almer 0ranch nor the home office of :upert "ompany had completed any
intracompany transactions during the last half of 6ay, yet the credit balance of the branchs
+ome ,ffice ledger account on 6ay !1 as larger than the debit balance of the home offices
&nvestment in 'almer 0ranch account. The most likely reason for this discrepancy is8
a. The home office reported a net loss for the month of 6ay.
b. The branch reported a net loss for the month of 6ay.
c. The branch returned merchandise to the home office.
d. The branch reported a net income for the month of 6ay.
@@@@ (. #hich of the folloing ledger accounts is displayed in the combined financial statements for a
home office and branchF
a. 4hipments to 0ranch
b. +ome ,ffice
c. ?ividends ?eclared
d. Alloance for ,vervaluation of &nventories8 0ranch
@@@@ *. The home office of &rby "ompany bills merchandise to branches at 2(C above home office cost.
&nformation taken from the accounting records of Eipp 0ranch is as follos8
0eginning inventories 2at billed prices3 <1/,777
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4hipments from home office 2at billed prices3 $2,(77
=nding inventories 2at billed prices3 27,777
Aet loss for accounting period 1,(77
The net income or net loss of Eipp 0ranch, based on home office cost of branch merchandise,
is8
a. </,577 net income
b. <5,$77 net loss
c. <*,$77 net income
d. </,777 net income
e. 4ome other amount
SHORT E$ERCISES
1. 0elo is a partial list of ledger accounts of the Gista 0ranch of 4antee "ompany, folloed by a
series of transactions. 0y placing the appropriate account number in the space provided, indicate
the accounts that are debited and credited in the accounting records of the branch to record each
transaction. The branch uses the perpetual inventory system.
1 "ash * 4ales
2 Trade Accounts :eceivable / "ost of 9oods 4old
! &nventories 1 ,perating =xpenses
$ Trade Accounts 'ayable 5 &ncome 4ummary
( +ome ,ffice 17 All other ledger accounts
#ransactions
%ista
!ranch
ledger
accounts
debited
%ista
!ranch
ledger
accounts
credited
a. :eceived cash from home office.
b. :ecogni%ed operating expenses 2paid in cash3 for the accounting
period.
c. 4ales ere made on account for the accounting period; recogni%ed cost
of goods sold for the period.
d. "ollections on trade accounts receivable ere made.
e. 'ayments by branch to suppliers ere made.
f. 0ranch remitted cash to home office.
g. :evenue and expense ledger accounts ere closed at the end of the
accounting period. 2'repare a )ournal entry and assume that total
revenue exceeds total expenses.3
h. "losed &ncome 4ummary ledger account and notified home office that
a net income as earned in the latest accounting period.
2. The home office of Huilly "ompany bills >eone 0ranch at 2(C above home office cost for all
merchandise shipped to the branch. ?uring Danuary, 2772, the home office shipped merchandise to
the branch at a billed price of <2$,777. The branch inventories on Danuary 1 and Danuary !1, 2772,
ere as follos8
&an. ' &an. ('
6erchandise received from home
office 2at billed prices3 <2/,*77 <!2,777
6erchandise purchased from 12,$77 12,777
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outsiders
Total branch inventories <$7,777 <$$,777
The home office uses the periodic inventory system.
&n the space belo, prepare all )ournal entries 2including ad)ustments3 in the accounting records of
the home office for Danuary, 2772 to record the foregoing information.
)uilly *ompany +ome Office
&ournal ,ntries
2772
!. The &nvestment in 4ubble 0ranch ledger account of the home office of ?arcy "ompany and the
+ome ,ffice account of the branch for the month of Danuary, 2772, are belo and on page $$.
-nvestment in Subble !ranch
0alance, Dan. 1
4hipment of
merchandise
=xpenses
allocated to
branch
*1,777
*,277
1,1(7
"ash received
from branch
"ollection of
branch note
receivable
$,(77
2,777
+ome Office
"ash remitted to
home office
6erchandise
returned to home
office
$,(77
15(
0alance, Dan. 1
4hipment of
merchandise
"ollection of
home office trade
account receivable
*1,777
*,277
117
a. "omplete the reconciliation of the reciprocal accounts in the space belo.
-nvestment in Subble
!ranch ledger account
.in home office
accounting records/
+ome Office ledger
account .in branch
accounting records/
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Study Guide $!
0alances prior to ad)ustment < <
Add8
>ess8
Ad)usted balances < <
b. &n the spaces belo, prepare a single )ournal entry for both the home office and the branch to
bring each set of accounting records up to date 2assume that both use the perpetual inventory
system3.
0arcy *ompany +ome Office
&ournal ,ntry
2772
Dan. !1
Subble !ranch
&ournal ,ntry
2772
Dan. !1
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CASE
&n your audit of the financial statements of #allis "ompany, hich has a single branch in &oa, for the
fiscal year ended Danuary !1, 2772, you revie the folloing home office ledger account8
llo1ance for Overvaluation of -nventories" -o1a !ranch
0ate ,2planation 0ebit *redit !alance
2772
Dan. 2 4hipment of merchandise costing <17,777 at a 27C markup
on billed price, to stock the branch for its opening. 2,777 2,777 cr
1* 4hipment of merchandise costing <$7,777 at a 27C markup
on billed price, to replenish the branch inventories. 1,777
17,777
cr
!1 :eduction of balance by unreali%ed markup in the branchs
ending inventories of <!,777 at billed prices. *77 5,$77 cr
a. ?escribe the errors in the )ournal entries posted to the foregoing ledger account.
b. ?escribe, but do not prepare, the )ournal entry re-uired to correct the foregoing ledger account
on Danuary !1, 2772.
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Study Guide $(
SOLUTIONS TO QUESTIONS% SHORT E$ERCISES% AND CASE& CHAPTER 4
)3,S#-O4S
#rue or $alse
1. T 2. ; !. T $. ; (. ; *. ; /. T 1. ; 5. ; 17. ; 11. ; 12. ; 1!. T 1$. T 1(. ; 1*. ;
1/. ; 11. ;
*ompletion Statements
1. 0ranch, home office, profit center, division. 2. :eciprocal, eliminated, combined. !. :eali%ed. $.
+ome ,ffice, &nvestment in 0ranch. (. Allocated, &nvestment in 0ranch, ,perating =xpenses. *.
2(C, for ,vervaluation of &nventories8 0ranch.
5ultiple *hoice
1. d 2. a !. b $. d (. c *. c I2<!5,(77 x 7.273 J <1,(77 K <*,$77L
S+O6# ,7,6*-S,S
1.
#ransactions
%ista
!ranch
ledger
accounts
debited
%ista
!ranch
ledger
accounts
credited
a. :eceived cash from home office. 1 (
b. :ecogni%ed operating expenses 2paid in cash3 for the accounting period. 1 1
c. 4ales ere made on account for the accounting period; recogni%ed cost of
goods sold for the period. 2, / *, !
d. "ollections on trade accounts receivable ere made. 1 2
e. 'ayments by branch to suppliers ere made. $ 1
f. 0ranch remitted cash to home office. ( 1
g. :evenue and expense ledger accounts ere closed at the end of the
accounting period. 2'repare a )ournal entry and assume that total revenue
exceeds total expenses.3 * /, 1, 5
h. "losed &ncome 4ummary ledger account and notified home office that a net
income as earned in the latest accounting period. 5 (
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2. )uilly *ompany +ome Office
&ournal ,ntries
2772 &nvestment in >eone 0ranch 2$,777
4hipments to >eone 0ranch 15,277
Alloance for ,vervaluation of &nventories8 >eone 0ranch $,177
To record shipments to branch at 2(C above home office cost.
Alloance for ,vervaluation of &nventories8 >eone 0ranch !,527
:eali%ed 9ross 'rofit8 >eone 0ranch 4ales !,527
To reduce alloance amount by hich ending inventories exceed
home office cost.
!illed
price *ost 5ar8up9
0eginning inventories <2/,*77 <22,717 < (,(27
Add8 4hipments from home office 2$,777 15,277 $,177
Available for sale <(1,*77 <$1,217 <17,!27
>ess8 =nding inventories 2!2,777 3 22(,*77 3
2*,$773
"ost of goods sold <15,*77 <1(,*17 < !,527
MA markup of 2(C on cost is e-ual to a markup of 27C on billed price.
!. a. -nvestment in Subble
!ranch ledger account
.in home office
accounting records/
+ome Office ledger
account .in branch
accounting records/
0alances prior to ad)ustment <*1,1(7 <*2,*1(
Add8 "ollection of home office
trade account receivable
by branch 117
=xpenses allocated to branch
by home office 1,1(7
>ess8 6erchandise returned to
home office by branch 215(3
"ollection of branch note
receivable by home office 22,7773
Ad)usted balances <*1,1!( <*1,1!(
b. 0arcy *ompany +ome Office
&ournal ,ntry
2772
Dan. !1 &nventories 15(
Trade Accounts :eceivable 117
&nvestment in 4ubble 0ranch 1(
To ad)ust &nvestment in 4ubble 0ranch ledger account.
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Study Guide $/
Subble !ranch
&ournal ,ntry
2772
Dan. !1 ,perating =xpenses 1,1(7
+ome ,ffice 1(7
Aotes :eceivable 2,777
To ad)ust +ome ,ffice ledger account.
*S,
a. The to credits to the Alloance for ,vervaluation of &nventories8 &oa 0ranch are of
incorrect amount. A 27C markup on billed price is a 2(C markup on home office cost;
therefore, the Danuary 2, 2772, credit should be <2,(77 2<17,777 x 7.2( K <2,(773, and the
Danuary 1* credit should be <17,777 2<$7,777 x 7.2( K <17,7773. The Danuary !1 )ournal
entry should be a debit of <11,577, or 27C of branch cost of goods sold of <(5,(77 2<17,777
N <2,(77 N <$7,777 N <17,777 J <!,777 K <(5,(773.
b. The ending balance of the Alloance for ,vervaluation of &nventories8 &oa 0ranch should be
<*77 2<!,777 x 7.27 K <*773. Therefore, the Danuary !1, 2772, )ournal entry to correct the
balance of that account is a debit to &nvestment in &oa 0ranch, <2,(77 2the aggregate
understatement of the billed prices of the to merchandise shipments to the branch8 <(77 N
<2,777 K <2,(773; a debit to Alloance for ,vervaluation of &nventories8 &oa 0ranch, <1,177
2<5,$77 J <*77 K <1,1773; and a credit to :eali%ed 9ross 'rofit8 &oa 0ranch 4ales, <11,!77
2<11,577 J <*77 K <11,!773.
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