Chapter 4

Accounting for Branches and Combined Financial Statements
ACCT 501

Objectives of this Chapter 

To learn the accounting and reporting for segments (i.e., branches and division) of a business entity.

Accounting for Branches

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Branches and Divisions 

Branches and divisions are separate economic and accounting entities from their home office. However, they are not separate legal entities from their home office.

Accounting for Branches

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This unit carries merchandise obtained from the home office. and remits cash received.Branches and Divisions (contd.)  Branch: a business unit located at some distance from the home office. makes collections from its customers. approves customers¶ credit. makes sales. Accounting for Branches 4 .

Accounting for Branches 5 .Branches and Divisions (contd..e. subsidiary company) is similar to that of branches.)  Divisions: a segment of a business entity which generally has more autonomy than a branch. Accounting for a division not operated as a separate corporation (i.

Accounting for Branches 6 .Branches and Divisions (contd.)  Divisions: Accounting for a division operated as a separate corporation is different from that of branches and will be discussed in latter chapters (611). Consolidated financial statements are required for these business organizations.

all start-up costs. including costs associated with organizing a branch or division should be expensed in the accounting period in which the costs are incurred. Accounting for Branches 7 .Start-up Costs of Opening New Branches  Based on Statement of Position 98-5 (SOP 98-5) ³Reporting on the Costs of Start-up Activities´.

The branch does not maintain a complete set of accounting records. Accounting for Branches 8 .Accounting System for a Branch  Two alternative systems: 1. The home office serves only as an accounting and control center for the branches.

The branch maintains a complete set of accounting records consisting of journal entries and ledger accounts.Accounting System for a Branch (contd. Financial statements are prepared by the branch account and forwarded to the home office. Accounting for Branches 9 .) 2.

Accounting for Branches 10 .)  This chapter focuses on the second system that the branch maintains its own accounting records.Accounting System for a Branch (contd.

merchandise or other assets provided by the home office to the branch.Reciprocal Ledger Accounts Used by the Branch and Home Office  Home Office Ledger Account: This account is used by the branch to account for all transactions with the home office. merchandise. It is debited for all cash. Accounting for Branches 11 . or other assets sent by the branch to the home office or to other branches. It is credited for all cash.

the balance of Income Summary account of a branch is closed to the Home Office account. Accounting for Branches 12 . At the end of a period.Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.)  Home Office Ledger Account: This account represents the net investment by the home office in the branch.

)  Investment in Branch Ledger Account: This account is a reciprocal ledger account (to Home Office account) used by the home office to account for any transactions with the branches.Reciprocal Ledger Accounts Used by the Branch and Home Office (contd. merchandise and services provided to the branch by the home office and for the net income reported by the branch. It is debited for cash. Accounting for Branches 13 .

or other assets received from the branch.Reciprocal Ledger Accounts Used by the Branch and Home Office (contd. Accounting for Branches 14 .)  Investment in Branch Ledger Account: It is credited for cash. and for net losses reported by the branch.

Acquisition of Plant Assets Used in Branch  If a plant asset is acquired by the home office for a branch¶s usage and the accounting record for the plant asset is maintained by the home office. the accounting treatments are: Accounting for Branches 15 .

credit cash or a liability account.Acquisition of Plant Assets Used in Branch (contd. For the branch: no entry.  Accounting for Branches 16 .)  For the home office: debit a plant asset account: branch.

Acquisition of Plant Assets Used in Branch (contd.)  If a plant asset is acquired by a branch for its usage but the accounting record for this plant asset is maintained by the home office. the accounting treatments are: Accounting for Branches 17 .

 Accounting for Branches 18 .Acquisition of Plant Assets Used in Branch (contd. and credit Investment in Branch account.)  For the branch: debit Home Office and credit cash or a liability account. For the home office: debit a plant asset account: branch.

and arrange for advertising that benefits all branches. Accounting for Branches 19  . The home office may pay some taxes on behalf of branches.Expense Incurred by Home Office and Allocated to Branches  The home office may acquire plant assets and insurance for these assets. These plant assets are carried in the home office accounting record but used by branches.

expense for the plant assets purchased by home office but used by branches. These expenses include depr.)  These expenses are usually allocated to branches in determining net income of branches.Expense Incurred by Home Office and Allocated to Branches (contd. Accounting for Branches 20  .

Accounting for Branches 21 . b. For the home office: debit Investment in Branch account. the accounting treatments are: a.Expense Incurred by Home Office and Allocated to Branches (contd. credit Home Office account. credit expense account. For the branch: debit expense account.)  If the home office chooses to allocate these expenses to branches.

the home office may charge each branch interest on the capital invested in each branch. In additional. Accounting for Branches 22  .Interest Charged by the Home office on the Capital Invested in Branches  When the home office serves only as an accounting and control center without any sales. most or all of its expenses may be allocated to the branches.

Interest Charged by the Home office on the Capital Invested in Branches (contd. Accounting for Branches 23 .)  Such interest revenue recognized by the home office should be offset with the interest expense recognized by the branches in the combined financial statements.

and c. billed at the branch¶s retail selling price.Alternative Methods of Billing Merchandise Shipments to Branches  Three alternative methods are available to the home office in billing the merchandise shipped to the branches: a. b. billed at the home office cost. Accounting for Branches 24 . billed at a percentage above the home office cost.

Billed at the home office cost:  Strength: widely used because of its simplicity Weakness: attributes all gross profits of the business to the branches.  Accounting for Branches 25 .

Accounting for Branches 26 . Weakness: the net income reported by the branch may be understated and the ending inventories at branch are overstated for the enterprise as a whole.Billed at a percentage above home office cost:   Strength: is able to allocate a reasonable gross profit to the home office.

Accounting for Branches 27 . for the combined financial statement.)  Thus. the home office must eliminate the excess of billed prices over cost (intracompany profits).Billed at a percentage above home office cost: (contd.

Weakness: no gross profit assigned to the branches and the branch¶s net loss will equal its operating expenses.Billed at branch retail selling prices:  Strength: to increase the internal control over inventories at branches.  Accounting for Branches 28 .

Separate Financial Statements for Branch and for Home Office (for internal use only)   Separate financial statements for branches should be prepared so that management can evaluate the performance of each branch. Accounting for Branches 29 . The branch¶s financial statements may be revised by the home office to include the allocated expenses incurred by the home office.

)  Also. Accounting for Branches 30 . the financial statements of branches should be revised to eliminate any intracompany profits on merchandise shipments or interest charge on capital investments.Separate Financial Statements for Branch and for Home Office (for internal use only) (contd.

A four-column work sheet paper is used to facilitate the preparation of the combined financial statement. Thus. Accounting for Branches 31 . the home office and branches are a single business entity.Combined financial Statements for Home Office and Branch (for external use)    For investors. combined financial statements should be prepared for external users.

Any intracompany profits or losses. Reciprocal ledger accounts b.   Accounting for Branches 32 .Combined financial Statements for Home Office and Branch (for external use)(contd.)  In preparing the combined financial statements. the following accounts should be eliminated: a.

 Accounting for Branches 33 .Combined financial Statements for Home Office and Branch (for external use)(contd. The rest of accounts are just summed together for the combined financial statements. Any receivables and payables between the home office and the branch (or between two branches).)  c.

Combined financial Statements for Home Office and Branch (for external use)(contd.)  Example I (textbook p131-p135) : Journal entries for operations of a branch when merchandise is billed at the cost of the home office with a perpetual inventory system. Accounting for Branches 34 .

) Example I: (contd.Combined financial Statements for Home Office and Branch (for external use)(contd. Equipment used at the branch is carried in the home office records. Both the home office and the branch use the perpetual inventory system. Accounting for Branches 35 .)   Assume that Smaldino Company bills merchandise to Mason Branch at home office cost and that Mason Branch maintains complete accounting records and prepares financial statements.

Transactions and events during the first year (1999) of operations of Mason Branch are summarized below (start-up costs are disregarded): Accounting for Branches 36 . incurred by the home office on behalf of the branch. such as advertising and insurance. are billed to the branch.)   Expenses.) Example I: (contd.Combined financial Statements for Home Office and Branch (for external use)(contd.

Equipment was acquired by Mason Branch for $500. (Other plant assets for Mason Branch generally are acquired by the home office. to be carried in the home office accounting records.Combined financial Statements for Home Office and Branch (for external use)(contd. Merchandise with a home office cost of $60.) Accounting for Branches 37 .000 was shipped by the home office to Mason Branch. 2. Cash of $1. 3.000 was forwarded by the home office to Mason Branch.) 1.) Example I: (contd.

000. the branch¶s cost of the merchandise sold was $45.) 4. 5. 6.000. Payments for operating expenses by mason Branch totaled $20.000.000. Collections of trade accounts receivable by Mason Branch amounted to $62. Accounting for Branches 38 .Combined financial Statements for Home Office and Branch (for external use)(contd. Credit sales by Mason Branch amounted to $80.) Example I: (contd.

500 was remitted by Mason Branch to the home office.) 7.Combined financial Statements for Home Office and Branch (for external use)(contd.) Example I: (contd. Cash of $37. 8.000. Operating expenses incurred by the home office and charged to Mason Branch totaled $3. Accounting for Branches 39 .

Investment in Mason Branch 1.000 Cash 1.000 Home Office 1.Combined financial Statements for Home Office and Branch (for external use)(contd.000 Accounting for Branches 40 .) Example I: (contd.)  These transactions and events are recorded by the home office and by Mason Branch as follows: Home Office Accounting Records Journal Entries: 1.000 Mason Branch Accounting Records Journal Entries: Cash 1.

Equipment: Mason Home Office 500 Branch 500 Investment in Mason Cash Branch 500 500 Accounting for Branches 41 .000 Inventories 60.000 Home Office 60.000 Mason Branch Accounting Records Journal Entries: Inventories 60.Combined financial Statements for Home Office and Branch (for external use)(contd.000 3.) Home Office Accounting Records Journal Entries: 2. Investment in Mason Branch 60.) Example I: (contd.

000 45.000 Sales Inventories 80.) Example I: (contd.000 Cost of Goods Sold 45.000 Accounting for Branches 42 .) Home Office Accounting Records Journal Entries: 4. None Mason Branch Accounting Records Journal Entries: Trade Accounts Receivable 80.Combined financial Statements for Home Office and Branch (for external use)(contd.

000 Cash Accounting for Branches 62.) Home Office Accounting Records Journal Entries: 5. None Mason Branch Accounting Records Journal Entries: Cash 62.000 43 . None Trade Account Receivable Operating Expenses 20.000 20.Combined financial Statements for Home Office and Branch (for external use)(contd.) Example I: (contd.000 6.

500 Investment in Mason Branch 37. Investment in Mason Branch 3.000 Operating Expenses 3. Cash 37.500 Mason Branch Accounting Records Journal Entries: Home Office 37.) Example I: (contd.) Home Office Accounting Records Journal Entries: 7.000 Operating Expenses 3.500 8.000 Home Office 3.500 Cash 37.000 Accounting for Branches 44 .Combined financial Statements for Home Office and Branch (for external use)(contd.

000 dr 26.000 Equipment acquired by branch.) Example I: (contd. carried in home 500 office accounting records 37.500 dr 23.)  Two Reciprocal Ledger Accounts (prior to adjusting and closing entries): Balance 1.500 Cash received from branch Operating expenses billed to branch 3.Combined financial Statements for Home Office and Branch (for external use)(contd.000 dr 61.000 dr 45 .000 Accounting for Branches 60.000 1999 Cash sent to branch Merchandise billed to branch at home office cost 60.000 dr Investment in Mason Branch Date Explanation Debit Credit 1.

000 26.) Example I: (contd.000 1.000 61.000 cr home office 500 60.500 cr Equipment acquired 37.000 cr Cash sent to home office Operating expenses billed 3.500 23.000 cr by home office Accounting for Branches 46 .Combined financial Statements for Home Office and Branch (for external use)(contd.000 cr office Merchandise received from 60.) Home Office Date 1999  Explanation Debit Credit Balance Cash received from home 1.

Working Paper for Combined financial Statements--Example I 

The following working paper for combined financial statements serves three purposes: 1) to eliminate any intracompany profits or losses, 2) to eliminate the reciprocal accounts, & 3) to combine ledger accounts balances of home office and branches.
Accounting for Branches 47

Working Paper for Combined financial Statements--Example I (contd.) 

Assume that the Mason Branch¶s ending inventories of $15,000 at the end of 1999 had been verified, the following work sheet is based on the transactions and events illustrated on pages 40-44. With additional assumed data for the home office trial balance.

Accounting for Branches

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Working Paper for Combined financial Statements--Example I (contd.)   

All the year-end adjusting entries (except the home office entries on page 60) had been made. The working paper begins with the adjusted trial balance of the home office and Mason Branch. Income taxes are ignored in this illustration.
Accounting for Branches 49

For Year Ended December 31.1999 (Perpetual Inventory System: Billing at Cost) Accounting for Branches 50 .)  SMALDNO COMPANY Working paper for combined Financial Statements of Home office and Mason Branch.Working Paper for Combined financial Statements--Example I (contd.

000 12.000 87.000) 235.000) 45.) Adjusted Trial Balances Home Office Dr (Cr) Income Statement Sales Cost of goods sold Operating expenses Net Income (to statement of retained earnings below) Totals (400.000 -0Accounting for Branches Mason Branch Dr(Cr) Eliminations Combined Dr (Cr) Dr (Cr) (48.000 23.000 -051 .000 -0(80.000 113.000 75.000 90.000) 280.Working Paper for Combined financial Statements--Example I (contd.

Dec.000) (12.31. (70.000 Retained earnings.) Adjusted Trial Balances Statement of Retained Home Mason Eliminations Combined Earnings Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) Retained earnings.000) 1.Working Paper for Combined financial Statements--Example I (contd.000) (87.000) above) Dividends declared 40.000 -052 .000) (70.1999 (to balance sheet below) Totals Accounting for Branches 117.000 40. 1999 Net(income) (from incomes statement (75. Jan.

000) Accounting for Branches 18.000 150.000 150.000) 57.000 (a) (26.Working Paper for Combined financial Statements--Example I (contd.) Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch Equipment Accumulated depreciation of equipment Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) 25.000 26.000 15.000 (10.000 60.000) 53 .000 45.000 (10.000 30.000 39.000 5.

000) Retained earnings (from statement of retained earnings (117.000) Home Office (26.) Trade accounts payable (20.000) above) Totals -0-0-0-0- (a) To eliminate reciprocal ledger account balances * the elimination appears in the working paper only Accounting for Branches 54 .000) (150.000) (a) (26.Working Paper for Combined financial Statements--Example I (contd.) Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Balance Sheet Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) (contd.000) Common stock.000) (20. $10 par (150.

000 280.000 $ 200.000 113.Combined Financial Statements -Example I SMALDINO COMPANY Income Statement For Year Ended December 31.80 55 .000 $ 5.000 $ 87. 1999 Sales Cost of goods sold Gross margin on sales Operating expenses Net Income Basic earnings per share of common stock Accounting for Branches $ 480.

000 $ 117.67 per share) Retained earnings.000 87. end of year $ 70.) SMALDINO COMPANY Statement of Retained Earnings For Year Ended December 31.Combined Financial Statements -Example I (contd. beginning of year Add: Net income Subtotal Less: Dividends ($2.000 $ 157.000 Accounting for Branches 56 .000 40. 1999 Retained earnings.

Combined Financial Statements -Example I (contd.000 Inventories 60.000 Equipment $150.) SMALDINO COMPANY Balance Sheet December 31.000 Accounting for Branches 57 .000 Total assets $287.000 140.000 Trade accounts receivable (net) 57. 1999 Assets Cash $ 30.000 Less: Accumulated depreciation 10.

December 31.000 117.).Combined Financial Statements -Example I (contd.000 58 .000 shares authorized. 15.) SMALDINO COMPANY Balance Sheet (contd. 1999 Liabilities & Stockholders¶ Equity Liabilities Trade accounts payable Stockholders¶ equity Common stock. issued.000 267.000 $287.000 $150. and outstanding Retained earnings Total liabilities & stockholders¶ equity Accounting for Branches $20. $10 par.

000 Cost of Goods Sold 45.000 Accounting for Branches 59 .Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/1999 (perpetual inventory system): Home Office Accounting Records Adjusting and Closing Entries: None Mason Branch Accounting Records Closing Entries: Sales 80.000 Income Summary 12.000 Operating Expenses 23.

Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/1999 (perpetual inventory system): (contd.) Home Office Accounting Records Adjusting and Closing Entries: Investment in Mason Branch 12.000 Income Summary 12.000 Income: Mason Branch 12.000 Home Office 12.000 None Accounting for Branches 60 .000 Mason Branch Accounting Records Closing Entries: Income Summary 12.000 Income: Mason Branch 12.

Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost   Similar information as in the previous example. except that the home office bills merchandise shipped to Mason branch at 50% markup of the cost. Thus. the shipment of merchandise costing $60.000 will be recorded at the home office and branch as follows: Accounting for Branches 61 .

Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd.000 Home Office 90.000 Home Office Accounting Records Journal Entries: Investment in Mason Branch 90.000 Inventories 60.)  Journal entries for shipments to branch at prices above home office cost (perpetual inventory system): Mason Branch Accounting Records Journal Entries: Inventories 90.000 Accounting for Branches 62 .000 Allowance for Overvaluation of Inventories: Mason Branch 30.

000 due to the inventory mark up of $30.000.000. Accounting for Branches 63 .Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd. the balances of both the Investment in Mason Branch account and Home Office account will be $56.)  Thus. instead of $26.

000 Available for sale $90.000 $30.) SMALDINO COMPANY Flow of Merchandise for Mason Branch During 1999 Billed Home Markup (50% of Price Office Cost.000 from home office $90.500 $45.500 15.000 $22.500 Accounting for Branches 64 .500 Cost of goods sold $67.000 7.Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd.000 $30.33 1/3 % of Cost Billed Price) Beginning inventories Add: Shipments $60.000 $60.000 Less: Ending inventories 22.

Working Paper for Example II  SMALDNO COMPANY Working paper for combined Financial Statements of Home office and Mason Branch For Year Ended December 31.1999 (Perpetual Inventory System: Billing above Cost) Accounting for Branches 65 .

500 87.500) 28.000 90.000 (b) 22.000 -0(80.000 (10.500) -0Accounting for Branches Mason Branch Dr(Cr) Eliminations Combined Dr (Cr) Dr (Cr) (48.000) 235.000 -066 .000) 67.000) (a) (22.500 23.) Adjusted Trial Balances Home Office Dr (Cr) Income Statement Sales Cost of goods sold Operating expenses Net Income(loss) (to statement of retained earnings below) Totals (400.000 75.000 113.Working Paper for Example II (contd.

1999 Net(income) loss (from incomes statement (75.000 Dividends declared 40. (70.1999 (to balance sheet below) Totals Accounting for Branches 117.000) above) 40.000 -067 .) Adjusted Trial Balances Statement of Retained Home Mason Eliminations Combined Earnings Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) Retained earnings.000) (10.000) 1.500) (87.31.000) (70.Working Paper for Example II (contd. Dec.500) (b) (22. Jan.000 Retained earnings.

000 60.000 (a) 30. 500 (a) (7.000) 150.000 45.000 Accounting for Branches 68 .Working Paper for Example II (contd.000 22.500) (c) (56.000 5.000 150.) Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch Allowance for overvaluation of inventories: Mason Branch Equipment Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) 25.000 (30.000 56.000 18.000 30.000) 57.000 39.

000) (150.) Accumulated depreciation of inventories: Mason Branch Trade accounts payable Home Office Common stock.000) (20.) Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) Balance Sheet (contd.000) -0- -0Accounting for Branches -0- -069 .000) (10.000) (117.000) (20.Working Paper for Example II (contd. $10 par Retained earnings(from statement of retained earnings above) Totals (10.000) (56.000) (c) (56.000) (150.

500 23.000 10.000 Sales Income Summary Cost of Goods Sold Operating Expenses To close revenue and expense ledger accounts Accounting for Branches 70 .500 67.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost)  Branch Closing Entries--The closing entries for the branch at the end of 1999 are as follows: 80.

) Home Office Income Summary To close the net loss in the Income Summary account to the Home Office account 10.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.500 Accounting for Branches 71 .500 10.

500 (net loss decreases Home Office credit balance).500 = $45. $56.)   After the closing entries.000-net loss of $10. Note: Home Office balance prior to the closing entries equals $56.000.500.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. Accounting for Branches 72 . the Home Office ledger account should have a balance of $45.

) Home Office Adjusting and Closing Entries Income: Mason Branch 10.500 Investment in Mason 10.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.500 Branch To record net loss reported by branch Accounting for Branches 73 .

500 Realized Gross Profit: Mason Branch Sales 22. Accounting for Branches 74 .) Allowance for Overvaluation of Inventories: Mason Branch 22.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.500 To reduce allowance to amount by which ending inventories of branch exceed cost.) Home Office Adjusting and Closing Entries (contd.

) Home Office Adjusting and Closing Entries (contd.) Accounting for Branches 75 .) Realize Gross Profit: Mason 22.500 Income Summary 12.500 Branch Sales Income: Mason Branch 10.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.000 To close branch net loss and realized gross profit to Income Summary ledger account (Income tax effects are disregarded.

500.10. ** $30. the account balance for the following accounts is: Investment in Mason Branch Allowance for Overvaluation of Inventories: Mason Branch Realized Gross Profit: Mason Branch Income: Mason Branch =45. $56.500(debit)* =7.500(credit)** =0 =0 * Balance prior to the above entries equals $56.500 (net loss of the branch reduces the debit balance of the Investment account) = $45.)  After posting the above entries.500.000.000-22. Accounting for Branches 76 .500 = $7.000.Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.

e.)  Similar working paper eliminations as on page 66-69 will be prepared for the following year (i..Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. year 2000) when continuing with the perpetual inventory system with a price markup. Accounting for Branches 77 .

Accounting for Branches 78 . inventory account cannot be used for the shipments of merchandise between the home office and the branch. Accounts such as ³Shipments to Mason Branch´ (used by the home office) and ³Shipments from Home Office´ (used by the branch) are used.Periodic Inventory System   Textbook (p141-p144): When a periodic inventory system is adopted.

Periodic Inventory System (contd.000 due to a 50% markup by the home office).) Example:  Example: Continue with the Smaldino Company for a second year of operations (2000) but using the periodic inventory system for both the home office and Mason Branch. The beginning inventories for 2000 were carried by Mason Branch at $22.500 (home office cost is $15. Accounting for Branches 79 .

500.000 and Mason was billed at $120. Mason Branch sold $150.000.) Example: (contd. The journal entries to record the shipments and sales at a price above home office cost under the periodic inventory system are as follows: Accounting for Branches 80 .000 merchandise that was billed at $112.Periodic Inventory System (contd. During 2000. the home office shipped merchandise to Mason Branch that cost $80.)    Assume that during 2000.

) Home Office Accounting Records Journal Entries: Investment in Mason Branch 90.000 Shipments to Mason Branch 80.000 .000 Home Office 120.) Example: (contd.000 None Cash (or Trade Accounts Receivable) 150.000 Sales 150.000 Allowance for Overvaluation of Inventories: Mason Branch 40.Periodic Inventory System (contd.000 Accounting for Branches 81 Mason Branch Accounting Records Journal Entries: Shipments from Home Office 120.

000) Cost of goods sold $112.000 from home office Available for sale $142.500 Add: Shipments 120.000 40. The flow of merchandise for Mason Branch of year 2000 summarized below: SMALDINO COMPANY Flow of Merchandise for Mason Branch During 2000 Home Markup (50% of Billed Office Cost.)  The branch inventories at the end of 2000 amounted to $30.000) (20.500 Less: Ending inventories (30.500 $95.000 80.000.500 Accounting for Branches 82 .) Example: (contd.000 $37.500 $75.33 1/3 % of Price Cost Billed Price) Beginning inventories $22.000 $7.000) (10.000 $47.500 $15.Periodic Inventory System (contd.

000 dr to Accounting for Branches 83 branch Date 2000 .000 52.) Example: (contd.500 dr Cash received from branch Operating expenses billed 4.500dr % of billed price 113.500 dr Merchandise billed to branch at markup of 50% above home office cost. or 33 1/3 120.000 165.)  The activities for the branch for 2000 are reflected in the following two home office ledger accounts and the reciprocal Home Office ledger account of the branch: Investment in Mason Branch Explanation Debit Credit Balance Balance. Dec.Periodic Inventory System (contd. 1999 45.500 57. 31.

500 cr Accounting for Branches 84 .) Allowance for Overvaluation of Inventories: Mason Branch Date Explanation 2000 Balance. Dec. 1999 Makeup on merchandise shipped to branch during 2000 (50% of cost) Debit Credit Balance 7.000 47.500 cr 40.Periodic Inventory System (contd. 31.) Example: (contd.

Dec.000 165.Periodic Inventory System (contd.) Home Office Date Explanation 2000 Balance.000 4.500 cr 57.500 cr 113. 1999 Merchandise receivable from home office Cash sent to home office Operating expenses billed by Home  Debit Credit Balance 45. 31.500 cr 120.500 Accounting for Branches 52.000 cr 85 .) Example: (contd.

000) 45.000 Accounting for Branches 86 .) Example: (contd. Dec.000 400.Periodic Inventory System (contd.500 (b) (7.000 400.000) (150.000) 22.000 Income Statement Sales Inventories.500) 60. 31.000) (650.000 (80.)  The working paper for combined financial statements under the periodic inventory system is as follows: Adjusted Trial Balances Eliminations Combined Home Mason Office Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) (500. 1999 Purchases Shipments to Mason Branch (a) 80.

500 10.000 (90.) Income Statement (contd. 31.000 -0Eliminations Combined Dr (Cr) (a) 80.500 -0Dr (Cr) (d) 37. Dec.2000 Operating expenses Net Income( to statement of retained earnings below) Totals Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Dr (Cr) 120.000 (70.) Shipments from home office Inventories.500 132.000) 120.Periodic Inventory System (contd.000) 27.000) 147.000 -0(30.) Example: (contd.000 (c) 10.000 85.500 Accounting for Branches 87 .

31. 1999 Net Income (from income statement above) Dividends declared Retained earnings. Dec.000 Eliminations Combined Dr (Cr) Dr (Cr) (117.500) (132.) Example: (contd.000) 27.000) (85. 2000 (to balance sheet below) Totals Accounting for Branches Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Dr (Cr) (117.Periodic Inventory System (contd.000 85.000) (d) (37. Dec.000 (10.000) 60.000 189.500) 60.500 -088 . 31.) Statement of Retained Earnings Retained earnings.500 10.

) Example: (contd.000 90.000) Accounting for Branches 89 92.000) (a) 40.Periodic Inventory System (contd. Dec.000 28.000 70.500 (e) (57.000 64.000 9.500) 57.000 (b) 7. 2000 Allowance for overvaluation of inventories : Mason Branch Investment in Mason Branch Adjusted Trial Balances Eliminations Combined Home Mason Office Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) 30.000 30.000 (47.000 39. 31.000 (c) (10.) Balance Sheet Cash Trade accounts receivable (net) Inventories.000 .

) Example: (contd.000 (15.500) (189.000) (e) 57.000 (150.000 158.) Equipment Accumulated depreciation of equipment Trade Account payable Home office Common stock.Periodic Inventory System (contd.000) (24.) Balance Sheet (contd.000) (15.500) -0-0Accounting for Branches -0- -090 . $10 par Retained earnings (from statement of retained earnings above) Totals Adjusted Trial Balances Elimination Combined Home Mason s Office Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) 158.000) (24.500) (57.000) (150.

) (a) To eliminate reciprocal ledger accounts for merchandise shipments. (b) To reduce beginning inventories of branch to cost (c) To reduce ending inventories of branch to cost.) Example: (contd.Periodic Inventory System (contd. Accounting for Branches 91 . (e) To eliminate reciprocal ledger account balances. (d) To increase income of home office by portion of merchandise markup that was realized by branch sales.

000 Accounting for Branches 92 .000 112.000 (1)Inventory (ending) Cost of Goods Sold Inventory (beg.Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):  Branch Closing Entries: 30.500* 22.000-30.) Shipments from Home Office CGS=22.500+120.500 120.

000 CGS 112.000 10.500 Income Summary 10.Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.500 Operating expenses 27.000 10.000 Accounting for Branches 93 (3) Income Summary Home Office .) (2)Sales 150.

500 Accounting for Branches 94 .000 (2) Allowance for Overvaluation of Inventories 37.000 Income: Mason Branch 10.Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.500 Realized Gross Profit : Mason Branch 37.)  Home Office Adjusting (1 and 2) and Closing Entries (3) : (1) Investment in Branch 10.

500 Accounting for Branches 95 .500 10.Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.) (3) Realized Gross Profit Income: Mason Branch Income Summary 37.000 47.

)  Balances of Investment in Mason Branch. Allowance for Overvaluation of Inventories. Income: Mason Branch and Home Office accounts after the above adjusting and closing entries are: Accounting for Branches 96 .Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd. Realized Gross Profit.

000 (dr.000 (cr.000+10.)  Investment in Mason Branch = $67.) (57.500 -37.) (47.000) Allowance for Overvaluation of Inventories = $10.Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.500)  Accounting for Branches 97 .

000-10.500.000 (cr.500) Income: Mason Branch = $0 (10.) (57.000+10.)  Realized Gross Profit = $0 (37.000) Home Office (a reciprocal account of Investment) = $67.000) Accounting for Branches 98   .Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.37.

This is because some transactions may have been recorded by the home office but not the branch office. Accounting for Branches 99 . the balance of the Investment in Branch ledger account in the records of the home office may be different from that of the Home Office ledger account of the branch.Reconciliation of Reciprocal Ledger Accounts   At the end of an accounting period.

)  Example (textbook p145): Assume that the home office and branch accounting records of Mercer Company contain the following data on 12/31/99: Accounting for Branches 100 .Reconciliation of Reciprocal Ledger Accounts (contd.

500 dr 41. 10 Cash received from branch 27 Collection of branch trade accounts receivable 29 Merchandise shipped to branch 8.000 42. 30 Balance Dec.500 dr 20.000 1.500 dr 1999 Nov.000 Accounting for Branches 49.500 dr 101 .) Investment in Arvin Branch (in accounting records of Home office) Date Explanation Debit Credit Balance 62.Reconciliation of Reciprocal Ledger Accounts (contd.

000 Accounting for Branches 1999 Nov.000 2.500 cr 102 .500 cr 41.Reconciliation of Reciprocal Ledger Accounts (contd. 30 Balance Dec. 7 Cash sent to home office 28 Acquired equipment 30 Collection of home office trade accounts receivable 42.500 cr 20.) Home Office (in accounting records of Arvin Branch) Date Explanation Debit Credit Balance 62.000 3.500 cr 39.

)  The following adjusting entries are recorded prior to the preparation of the working paper for the combined financial statements (assuming a perpetual inventory system) Accounting for Branches 103 .Reconciliation of Reciprocal Ledger Accounts (contd.

Reconciliation of Reciprocal Ledger Accounts (contd.) 

For Arvin Branch: 1,000 1,000 8,000 8,000
Accounting for Branches 104

1.Home Office Trade Accounts Receivable 2.Inventory Home Office

Reconciliation of Reciprocal Ledger Accounts (contd.) 

For Mercer Home Office:

1.Equipment: Arvin Brach 3,000 Investment in Branch: Arvin 2.Investment in Branch: Arvin 2,000 Trade Accounts Receivable
Accounting for Branches

3,000

2,000
105

Reconciliation of Reciprocal Ledger Accounts (contd.) 

The balance of Investment in Branch: Arvin ledger account at the home office equals: $ 49,500 3,000 + 2,000 $ 48,500 (dr.) (cr.) (dr.) (dr.)

Accounting for Branches

106

) Accounting for Branches 107 .) (dr.000 + 8.)   After posting the above adjusting entries: The balance of Home Office ledger account at Arvin Branch equals: $ 41.Reconciliation of Reciprocal Ledger Accounts (contd.) (cr.500 1.) (cr.000 $ 48.500 (cr.

Transactions between Branches    When it is necessary to transfer merchandise or assets from one branch to another branch. Accounting for Branches 108 . The home office will transfer the inventory (or assets) from investment in one branch to another branch. Any excess freight costs incurred for the transfer between branches should be expensed. Home Office Ledger account is used by the branches.

000 to Katti Branch and paid freight costs of $500. Katti paid $400 for the transfer. A week later. If the merchandise had been shipped directly from the home office to Danddi. the home office instructed Katti Branch to transfer this merchandise to Danddi Branch. Accounting for Branches 109 . the freight costs would have been $600.Transactions between Branches (contd.)  Example: (textbook p146-148) The home office shipped merchandise costing $8.

600 Excess Freight Expense 300 Investment in Katti Branch Accounting for Branches 8.500 Inventory 8.) Journal entries for these transactions are: In Accounting Records of Home Office: Investment in Katti Branch 8.900 110 .Transactions between Branches (contd.000 Cash 500  Investment in Danddi Branch 8.

000 Home Office 8.500  Home Office Inventories Freight-in Cash 8.Transactions between Branches (contd.) In Accounting Records of Katti Branch: Freight In (or Inventory) 500 Inventories 8.000 500 400 111 Accounting for Branches .900 8.

000 Freight-in (or Inventories) 600 Home Office 8.600 Accounting for Branches 112 .Transactions between Branches (contd.)  In Accounting Records of Danddi Branch: Inventories 8.

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