Answers To Questions Q11-1: Irwin/Mcgraw-Hill 8 The Mcgraw-Hill Companies, Inc., 1999

ACCOUNTING FOR BRANCH OPERATIONS
ANSWERS TO QUESTIONS
Q11-1 A sales agency usually is limited to activities such as taking orders and
arranging for delivery of goods and merchandise on behalf of the home office. Branch
offices typically provide more complete service to their customers. For example, a
branch office is likely to stock and sell merchandise, provide credit and collection
functions, engage in local advertising, and participate in business activities on a basis
more comparable to those of the home office.
Q11-2 The home office typically maintains the primary accounting records when a
sales agency is involved. As a result, a sale of merchandise or a collection of accounts
receivable is recorded in the accounts maintained by the home office. A relatively
complete accounting system is likely to be provided by a branch.
Q11-3 Branches are established to carry out activities of the home office in outlying
locations. Although the branches are separate operating entities, they are not separate
legal entities and generally report directly to the home office.
Q11-4 Sales agencies and branches are especially useful in areas such as retailing and
manufacturing. In a large community, several retail locations may be needed to have a
store within reasonable driving distance of the targeted number of customers. Because
they are under the control of the home office, sales agencies and branches make it
possible to have the desired level of continuity between locations in features such as the
product line carried and store layout. Manufacturing companies often find it efficient to
produce their products in several geographic locations to reduce transportation costs and
to adapt the product to the characteristics of a particular market.
Q11-5 Investors are concerned with the overall profitability of the company.
However, in order to be successful, company management must be able to expand in
those markets that are profitable and abandon or find ways of improving profitability in
those areas that are not as profitable. If the records of all branches and sales agencies
were merged, the ability of management to use accounting information in arriving at its
decisions would be significantly hampered.
Irwin/McGraw-Hill
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8 The McGraw-Hill Companies, Inc., 1999
Q11-6 A very simple accounting system is likely to be employed by a sales agency.
Commonly, little decision making power is given to the agency manager and there is no
need for a more complex system. On the other hand, branch managers typically are given
greater autonomy and therefore require an accounting system that will assist them in
making operating decisions and provide timely information on past operating results. As
the level of autonomy increases, the need for a more complex accounting system
generally becomes greater as well.
Q11-7 Intracompany accounts are established when there are transactions between the
home office and a branch or between branches. The two most commonly used
intracompany accounts are the Investment in Branch account recorded on the books of
the home office to show its net contribution of assets to the branch and the Home Office
account recorded on the books of the branch to reflect the net assets received from the
home office by the branch.
Q11-8 The term reciprocal relationship generally refers to equal and offsetting
intracompany account balances on the books of the home office and one or more
branches. These balances on the books of the home office are helpful in identifying the
net amount of investment in each of the branches.
Q11-9 All transactions between the home office and a particular branch that change
the net amount invested by the home office are treated as adjustments to the Investment
in Branch account on the books of the home office. A transfer of equipment, inventory,
or other items to a branch will cause the account balance to increase, while a transfer of
cash to the home office will cause the balance to decrease.
Q11-10 The branch will increase or decrease the Home Office account balance
whenever a transaction with the home office results in a change in the net assets provided
by the home office. A transfer of equipment, inventory, or other items from the home
office will cause the account balance to increase, while a transfer of cash to the home
office will cause the balance to decrease.
Q11-11 Branch income is recognized on the books of the home office at the end of the
period. The home office's Investment in Branch account is increased by the amount of
branch income recognized and decreased by the amount of any loss recognized.
Q11-12 Freight charges incurred in transporting inventory from the home office to a
branch become part of the cost of the branch inventory. Such charges are a normal part
of the total cost of acquiring inventory and should be deferred on intracompany
purchases as well as on purchases from outside vendors.
Irwin/McGraw-Hill
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Q11-13 A transfer price is the dollar amount used in accounting for an intracompany
exchange of goods and services. While transfer prices often are based on cost, other
pricing mechanisms sometimes are used when branch operations are treated as separate
profit centers or a particular type of transfer is being encouraged or discouraged. A
careful review of items transferred may be needed in computing a branch's income or the
value of inventory or other assets held when the transfers are not recorded at the seller's
cost.
Q11-14 An intracompany profit occurs when an item is transferred between the home
office and a branch or between branches at a price greater than the seller's cost. All
unrealized intracompany profits must be excluded from the income reported by the
company as a whole.
Q11-15 When transfers are made at cost, the selling unit has little incentive to
participate in the transaction even though the overall company may benefit substantially.
For example, a retail company may be able to concentrate its purchases for a particular
type of merchandise in the home office or one of the branches and realize major cost
savings. By granting the purchaser an opportunity to report some profit on an
intracompany transfer, there may be more incentive for them to serve in that capacity.
Q11-16 In general, the revenue and expenses of the branches and those of the home
office are added together to form the income statement for the company as a whole. The
assets and liabilities of these units typically are combined in preparing the balance sheet
for the entity as a whole. To the extent that there are intracompany transfers included in
the income statement data and intracompany account balances are included in the balance
sheet accounts, the financial statements for the company as a whole will be distorted if
these amounts are not removed. For example, the Investment in Branch and Home Office
account balances and any unrealized profit on intracompany transfers must be eliminated
in preparing financial statements for the company as a whole.
Irwin/McGraw-Hill
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SOLUTIONS TO CASES
C11-1 Contrasting Sales Agency and Branch Accounting Systems
Primary responsibility for the accounting system maintained by Bailey Products, Inc.,
rests with the home office. All records relating to sales, collections, shipping costs and
other activities should be recorded at the home office because of the way in which the
company is organized. While the sales agency may find it necessary to maintain a copy
of each receipt for customer payments and the orders taken at the sales agency in order to
provide for the delivery of merchandise and answer customer inquiries, the accounting
records should be at the home office.
Accounting records maintained at the sales agencies should be minimal. For example,
salary checks for employees working at the sales agencies should be generated at the
home office. A record of hours worked can be maintained at the sales agency and a daily
or weekly report submitted to the home office. If employees are compensated on a
commission basis, the employee responsible for each sale can be designated on the sales
order when it is transmitted to the home office, and the amount of sales accumulated by
each employee each pay period can be computed at the home office.
In the case of Chesapeake Distributors, Inc., a very different accounting system is

appropriate. Branch managers have responsibility for inventory control, credit extension
and collection, deliveries, and other operating decisions. The need for continuous access
to information on receivables, payables, and other accounts by the employees in each
branch justifies separate accounting systems for each of the branches.
In the latter case, the home office records will not include information on individual
inventory items held or transactions conducted by each of the branches. The accounting
records of Chesapeake Distributors, Inc. and its branches should be established so that it
is possible to determine the amount of unrealized profit on intracompany sales at the end
of each period. Unlike the sales agency situation, property and equipment held by each
branch is likely to be recorded by the branch due to the apparent size of each of these
offices. The number of employees also may be sufficient to justify separate salary and
payroll activities in each of the branches.
Irwin/McGraw-Hill
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C11-2 Comparison of Branch and Subsidiary Accounting
a. As separate corporations, each of the subsidiaries of Nieminsky Corporation have

their own separate accounting systems. The three manufacturing plants of Banks
Manufacturing, Inc., while not separately incorporated, are treated as profit centers and
would appear to require their own accounting systems as well. The branches and
subsidiaries bear similar responsibilities with regard to production and sale of product
and collection of receivables. Similar accounting systems would appear to be appropriate
for these activities.
The units are dissimilar as well. The accounting systems of the subsidiaries must include
their purchasing activities, while the branches purchase all raw materials from the home
office and will need only an inventory and home office account. Items included in
buildings and equipment also may be accounted for differently in branches versus
subsidiaries. In addition, subsidiaries often accrue income tax expense and file separate
tax returns. As part of the company as a whole, branches normally are not expected to
deal with tax matters.
b. Consolidated financial statements for Nieminsky Corporation appear to be

somewhat easier to prepare than the statements for Banks Manufacturing. Banks
Manufacturing has sold raw materials and equipment to its branches at amounts in excess
of cost. There is, therefore, a need to remove the effects of the intracompany sales,
including the elimination of unrealized profits. On the other hand, there is no indication
of transactions between the subsidiaries of Nieminsky.
The equity balances of both the subsidiaries and branch offices must be eliminated in
preparing external accounting reports. In preparing the consolidated statements for
Nieminsky Corporation, the investment income and investment accounts reported by the
parent are eliminated along with the stockholders' equity balances reported by the
subsidiaries. For the statements of Banks Manufacturing, the Investment in Branch and
Branch Income accounts on the books of the home office are eliminated along with the
Home Office balance reported on the books of the branch. In both situations, like
accounts of the related organizational units are added together.
Irwin/McGraw-Hill
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C11-3 Expanding through Branches
The answers to the first two parts of this case can be obtained from the websites of the
companies discussed: www.nationsbank.com; www.agedwards.com; and
www.edwardjones.com; and from articles discussing the bank mergers and the brokerage
firms. Information also can be obtained directly from the companies. In some cases, the
numbers obtained are approximations.
a. With the acquisition of Barnett Banks and Boatmen's Bancshares, NationsBank

increased its banking network by about 1,100 branches to approximately 3,000 branches
in early 1998.
b. In 1997, A. G. Edwards had 569 offices and just over 6,000 brokers. By contrast,
Edward Jones had over 3,700 brokers, most in one-person offices. The strategy of
Edward Jones is to gain geographic coverage with its brokers, including having brokers
in small towns or neighborhoods where larger brokerage firms do not establish offices.
The largest brokerage firms tend to concentrate brokers in a relatively small number of
large offices. A. G. Edwards falls between the largest brokerage firms and Edward Jones
in its strategy. Its offices tend to be larger than those of Edward Jones, but smaller and
more widespread than those of larger brokerage firms.
c. Many banks have increased their numbers of branches for several reasons. In some
states, restrictive laws and regulations have been relaxed, permitting an increase in
branch banking. In addition, because of changes in banking laws, banks now often offer
more services than they did a few years ago, and, to meet competition and serve a larger
segment of the population, they frequently establish more branches. This allows them to
move into new geographic areas and to provide more convenient service, thus
maintaining or expanding customer bases. In some cases, the number of branch banks
may have declined, often because less profitable branches are closed following bank
mergers or because some banks have chosen to emphasize commercial rather than
consumer banking.
Irwin/McGraw-Hill
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SOLUTIONS TO EXERCISES
E11-1 Establishing a Branch
Journal entries recorded by home office:
H(1) Investment in New Jersey Branch 230,000

Cash 80,000
Inventory 150,000
Transfer cash and inventory to
New Jersey branch.
H(2) Equipment 120,000

Cash 120,000
Purchase of equipment for
New Jersey branch.
Investment in New Jersey Branch 120,000

Equipment 120,000
Transfer of equipment to
New Jersey branch.
H(3) No entry
H(4) Investment in New Jersey Branch 1,300

Cash 1,300
Cost of shipping inventory and
equipment to New Jersey branch.
H(5) No entry
Irwin/McGraw-Hill
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E11-1 (continued)
Journal entries recorded by branch:
B(1) Cash 80,000

Inventory 150,000
Home Office 230,000
Transfer of cash and inventory
from home office.
B(2) Equipment 120,000

Home Office 120,000
Transfer of equipment from home office.
B(3) Inventory 35,000

Accounts Payable 35,000
Purchase of inventory.
B(4) Inventory 300

Equipment 1,000
Home Office 1,300
Cost of transferring items from home
office.
B(5) Buildings 50,000

Cash 50,000
Purchase of warehouse.
Irwin/McGraw-Hill
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E11-2 Recording Branch Activities
H(1) Investment in Branch 180,000

Inventory 120,000
Unrealized Intracompany Profit 60,000
Transfer of inventory to branch, billed
in excess of cost.
H(2) Unrealized Intracompany Profit 50,000

Realized Profit on Branch Shipments 50,000
Recognize portion of intracompany profit
realized: $60,000 - $10,000
H(3) No entry

Advertising Expense 20,000
Depreciation Expense 35,000
Utility Expense 12,000
Apportion expenses to branch.
H(5) Cash 180,000

Investment in Branch 180,000
Cash remittance from branch.
Irwin/McGraw-Hill
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E11-2 (continued)

Cash 80,000
B(2) Inventory──From Home Office 180,000

Home Office 180,000
Transfer of inventory from home office.
B(3) Accounts Receivable 326,000

Sales 326,000
Record sales of inventory:
$240,000 + $86,000
Cost of Goods Sold 230,000

Inventory──From Home Office 150,000
Inventory 80,000
Record cost of inventory sold.
B(4) Advertising Expense 20,000

Utility Expense 12,000
Home Office 67,000
Expenses apportioned by home office.
B(5) Cash 235,000

Accounts Receivable 235,000
Record collections on account.
Home Office 180,000

Cash 180,000
Cash remittance to home office.
E11-3 Investment in Operating Division
Transfer of cash $1,000,000

Transfer of inventory 450,000
Income of division 55,000
Payment on inventory transfer (290,000)
Balance in Investment in Western Division at year-end $1,215,000
Irwin/McGraw-Hill
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E11-4 Determining Income Statement Amounts
a. Journal entries recorded by home office:
H(1) Inventory 30,000


Inventory 20,000
in excess of cost.
H(3) Cash 11,000

Sales 11,000
Record sale of inventory to Separate
Company.
H(4) Cost of Goods Sold 6,000

Inventory 6,000
Record cost of inventory sold to
Separate Company.

realized: $25,000 x .70

Home Office 45,000

Sales 58,000
Record sale of inventory.
B(3) Cost of Goods Sold 31,500

Record cost of inventory sold:
$45,000 x .70
Irwin/McGraw-Hill
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E11-4 (continued)
b. (1) Cost of goods sold by branch = $31,500
(2) Sales reported by branch = $58,000
(3) Cost of goods sold for Bean Corporation as a whole:

Recorded by home office $ 6,000
Recorded by branch $31,500
Less: Realized intracompany profit
recorded by home office (17,500) 14,000
Cost of goods sold for company as a whole $20,000
(4) Sales for Bean Corporation as a whole:

Total sales recorded by Bean Corporation $11,000
Total sales recorded by branch 58,000
Total sales for company as a whole $69,000
Irwin/McGraw-Hill
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E11-5 Inventory Transfers
H(1) Finished Goods Inventory 200,000

Work-In-Process 200,000
Cost of inventory completed.

Inventory 200,000
in excess of cost.

realized: $80,000 x .25

Home Office 280,000

Sales 105,000

b. Eliminating entries:
E(1) Realized Profit on Branch Shipments 20,000

Eliminate home office profit from
cost of goods sold.
E(2) Unrealized Intracompany Profit 60,000

Eliminate unrealized intracompany
profit from inventory.
Irwin/McGraw-Hill
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E(3) Inventory 150,000
Reclassify inventory from home office:
$280,000 - $70,000 - $60,000
Irwin/McGraw-Hill
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E11-6 Inventory Transfers in Consecutive Years

Recognize portion of 19X6 intracompany
profit realized in 19X7: $60,000 x .55

Inventory 150,000
in excess of cost.

Recognize portion of 19X7 intracompany
profit realized in 19X7: $75,000 x 1/3

Sales 295,000

$300,000 x .55

Home Office 225,000

Sales 140,000

$225,000 x 1/3
Irwin/McGraw-Hill
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Eliminate home office profit from cost of
goods sold: $33,000 + $25,000
Irwin/McGraw-Hill
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E11-6 (continued)

profit from inventory: $75,000 - $25,000

$225,000 - $75,000 - $50,000
E11-7 Sale of Land Transferred to Branch
H(1) Investment in New York City Branch 410,000

Cash 40,000
Inventory 120,000
Unrealized Intracompany Profit
on Inventory 60,000
Land 150,000
Unrealized Intracompany Profit on Land 40,000
Transfer of assets to New York City
branch.

Inventory 200,000
Unrealized Intracompany Profit
on Inventory 80,000
Transfer of inventory to New York City
branch, billed in excess of cost.
H(3) Unrealized Intracompany Profit on Inventory 60,000

Recognize profit on intracompany
inventory transfer on January 1, 19X3.
H(4) Unrealized Intracompany Profit on Inventory 40,000

Recognize profit on intracompany inventory
transfers during 19X3:
$80,000 [($320,000 - $180,000) / $280,000]
Irwin/McGraw-Hill
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H(5) Unrealized Intracompany Profit on Land 40,000
Realized Profit on Land Sale to Branch 40,000
Recognize profit on sale of land to branch.

New York City Branch Income 65,000
Record income from New York City branch.
Irwin/McGraw-Hill
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E11-7 (continued)
E(1) Home Office, Preclosing Balance 690,000

New York City Branch Income 65,000
Investment in New York City Branch 755,000
Eliminate intracompany accounts:
$690,000 = $410,000 + $280,000

Eliminate home office profit from cost
of goods sold.
E(3) Unrealized Intracompany Profit on Inventory 40,000

inventory profit.

Reclassify inventory from home office.
E(5) Realized Profit on Land Sale to Branch 40,000

Loss on Sale of Land 25,000
Gain on Sale of Land 15,000
Establish gain on sale of land for
company as a whole.
Irwin/McGraw-Hill
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E11-8 Branch Fixed Assets
a. Assets accounted for by the home office
H(1) Equipment──San Bernardino Branch 124,000

Investment in San Bernardino Branch 124,000
Record purchase of equipment by branch.
H(2) Equipment──San Bernardino Branch 2,000

Record freight charges for branch equipment.
H(3) Accounts Payable 2,000

Cash 2,000
Record payment of freight charges.
H(4) Fixtures──San Bernardino Branch 35,000

Record purchase of fixtures for branch.

Cash 35,000
Record payment of account.
H(6) Depreciation Expense 17,600

Accumulated Depreciation──Branch Equipment 12,600
Accumulated Depreciation──Branch Fixtures 5,000
Record depreciation of branch assets:
$12,600 = $126,000 / 10
$5,000 = $35,000 / 7
B(1) Home Office 124,000

Record purchase of equipment.
B(2) Accounts Payable 124,000

Cash 124,000
Irwin/McGraw-Hill
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E11-8 (continued)
b. Assets accounted for by the branch
H(1) Investment in San Bernardino Branch 2,000

Record freight charges for branch equipment.

Cash 2,000
H(3) Investment in San Bernardino Branch 35,000

Record purchase of fixtures for branch.

Cash 35,000

Record purchase of equipment.

Home Office 2,000
Record freight charges paid by home office.

Cash 124,000
B(4) Fixtures 35,000

Home Office 35,000
B(5) Depreciation Expense 17,600

Accumulated Depreciation──Equipment 12,600
Accumulated Depreciation──Fixtures 5,000
Record depreciation of fixed assets:
$12,600 = $126,000 / 10
$5,000 = $35,000 / 7
Irwin/McGraw-Hill
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Irwin/McGraw-Hill
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E11-9 Adjusting and Closing Entries
a.

Recognize intracompany profit:
($96,000 - $80,000) x .70
H(2) Investment in Kansas City Branch 453,000

Kansas City Branch Income 453,000
Record Kansas City branch income.
H(3) Kansas City Branch Income 453,000

Income Summary 453,000
Close branch income to income summary.
Journal entries recorded by Kansas City branch:
B(1) Income Summary 453,000

Home Office 453,000
Close income summary.
b. The Kansas City branch's remaining inventory purchased from the home office
would be reported at $24,000 ($80,000 x .30) in Liz-Mark's balance sheet at the end of
19X9.
Irwin/McGraw-Hill
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E11-10* Transfers between Branches
H(1) Investment in Dullesville Branch 90,000

Cash 40,000
Land 50,000
Transfer of cash and land to
Dullesville branch.
H(2) Investment in Dullesville Branch 190,000

Investment in Brandenburg Branch 190,000
Transfer of inventory and equipment from
Brandenburg branch to Dullesville branch.
Journal entry recorded by Brandenburg branch:

Inventory 70,000
Equipment 120,000
Transfer of inventory and equipment
to Dullesville branch.
Journal entries recorded by Dullesville Branch:
B(1) Cash 40,000

Land 50,000
Home Office 90,000
Transfer of cash and land from home
office.

Equipment 120,000
Home Office 190,000
Transfer of inventory and equipment
from Brandenburg branch.

Cash 22,000
Irwin/McGraw-Hill
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SOLUTIONS TO PROBLEMS
P11-11 Creation of a Branch Operation
a. Journal entries recorded by branch:
B(1) Cash 200,000

Automobile Inventory 350,000
Home Office 550,000
Transfer of cash and automobiles
from home office.
B(2) Automobile Inventory 400,000

Record purchase of automobile inventory.

Sales 650,000
Record sales for period.

Record cost of automobiles sold.
B(5) Cash 600,000

B(6) Advertising Expense 40,000

Sales Commissions 65,000
Other Expenses 45,000
Cash 150,000
Record other costs incurred.

Home Office 120,000
Cash 490,000
Record cash disbursement to home
office and to creditors.
Closing entries:
B(8) Sales 650,000

Sales Commission 65,000
Irwin/McGraw-Hill
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Close revenue and expense accounts.

Home Office 75,000
Irwin/McGraw-Hill
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P11-11 (continued)
b. Mason City Branch

Income Statement
Year Ended December 31,19X3
Sales $650,000
Cost of Goods Sold $425,000
Sales Commissions 65,000
Total Expenses 575,000
Net Income $ 75,000
c. Mason City Branch

Balance Sheet
December 31, 19X3
Cash $160,000 Accounts Payable $ 30,000

Accounts Receivable 50,000 Home Office 505,000
$535,000 $535,000
P11-12 Inventory Sold to Branch
a. Eliminating entries:
E(1) Home Office 305,000

Investment in Branch 305,000
Eliminate intracompany accounts.

profit from inventory.

Irwin/McGraw-Hill
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P11-12 (continued)
b. Plastic Products Corporation

Balance Sheet
December 31, 19X6
Cash $ 90,000
Inventory 288,000
Total Current Assets $ 548,000
Land 120,000
Buildings and Equipment $800,000
Less: Accumulated Depreciation (360,000) 440,000
Total Assets $1,108,000
Accounts Payable $ 78,000

Bonds Payable 300,000
Notes Payable 100,000
Total Liabilities $ 478,000
Common Stock $200,000
Retained Earnings 430,000
Total Stockholders' Equity 630,000
Total Liabilities and Stockholders' Equity $l,108,000
P11-13 Asset Transfers to Multiple Branches

Investment in Silverton Branch 395,000

Investment in Durango Branch 260,000
E(3) Unrealized Intracompany Profit──Silverton

Branch 20,000
Unrealized Intracompany Profit──Durango
Branch 16,000
Eliminate unrealized intracompany profit
from inventory.
Irwin/McGraw-Hill
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Irwin/McGraw-Hill
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P11-13 (continued)
E(5) Unrealized Intracompany Profit──Silverton

Branch 40,000
Equipment 40,000
on equipment: $75,000 - $35,000
b. Gold Company
Balance Sheet Workpaper
December 31, 19X4
Silver- Du-
Home ton rango Eliminations
Item Office Branch Branch Debit Credit Combined
Cash 81,000 20,000 15,000 116,000
Accts. Receivable 100,000 40,000 25,000 165,000
Inventory 260,000 50,000 44,000 (4) 90,000 444,000
Inventory──From
Home Office 70,000 56,000 (3) 36,000
(4) 90,000
Land 70,000 30,000 20,000 120,000
Buildings and
Equipment 700,000 350,000 200,000 (5) 40,000 1,210,000
Investment in:
Silverton Br. 395,000 (1)395,000
Durango Br. 260,000 (2)260,000
Debits 1,866,000 560,000 360,000 2,055,000
Accum. Deprec. 280,000 120,000 80,000 480,000

Accounts Payable 110,000 45,000 20,000 175,000
Bonds Payable 400,000 400,000
Common Stock 300,000 300,000
Retained Earnings 700,000 700,000
Home Office 395,000 260,000 (1)395,000
(2)260,000
Unrealized Profit:
Silverton Br. 60,000 (3) 20,000
(5) 40,000
Durango Br. 16,000 (3) 16,000
Credits 1,866,000 560,000 360,000 821,000 821,000 2,055,000
Irwin/McGraw-Hill
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P11-13 (continued)
Gold Company
Balance Sheet
December 31, 19X4
Cash $ 116,000
Inventory 444,000
Land 120,000
Buildings and Equipment $1,210,000

Common Stock $ 300,000
Total Stockholders' Equity 1,000,000
Total Liabilities and Stockholders' Equity $1,575,000
Irwin/McGraw-Hill
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P11-14 Sale of Depreciable Assets to Branch

Investment in Edgarville Branch 350,000

from inventory: .60($70,000 - $45,000)

$45,000 x .60
E(4) Buildings and Equipment 40,000

Accumulated Depreciation 68,000
on buildings and equipment:
$40,000 = $240,000 - $200,000
$28,000 = $40,000 - ($4,000 x 3 years)
$68,000 = [($240,000 / 15) x 8 years]
- [($200,000 / 10) x 3 years]
b. Expando Corporation
Balance Sheet
December 31, 19X9
Cash $ 90,000
Inventory 255,000
Total Current Assets $515,000
Land 70,000
Buildings and Equipment $640,000
Total Assets $857,000

Common Stock $100,000
Irwin/McGraw-Hill
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Total Stockholders' Equity 440,000
Total Liabilities and Stockholders' Equity $857,000
Irwin/McGraw-Hill
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P11-15 Trial Balance with Intracompany Land Transfer
Alpine Company
Financial Statement Workpaper
December 31, 19X4
Home Resort Eliminations

Item Office Branch Debit Credit Combined
Sales 300,000 150,000 450,000

Resort Branch Income 20,000 (1) 20,000
Credits 320,000 150,000 450,000
Cost of Goods Sold 170,000 105,000 275,000
Depreciation Expense 25,000 15,000 40,000
Other Expenses 60,000 10,000 70,000
Debits (255,000)(130,000) (385,000)
Net Income,
carry forward 65,000 20,000 20,000 65,000
Ret. Earnings, Jan. 1 380,000 380,000

Home Office,
preclosing balance 320,000 (1)320,000
Net Income, from above 65,000 20,000 20,000 65,000
445,000 340,000 445,000
Dividends Declared (30,000) (30,000)
Ret. Earnings, Dec. 31,
carry forward 415,000 340,000 340,000 415,000
Cash 50,000 60,000 110,000

Accounts Receivable 80,000 40,000 120,000
Inventory 110,000 70,000 180,000
Land 60,000 80,000 (2) 24,000 116,000
Buildings and Equipment 370,000 240,000 610,000
Investment in Resort
Branch 340,000 (1)340,000
Debits 1,010,000 490,000 1,136,000
Accum. Depreciation 130,000 60,000 190,000

Accounts Payable 91,000 90,000 181,000
Common Stock 150,000 150,000
Ret. Earnings (and Home
Office), from above 415,000 340,000 340,000 415,000
Unrealized
Intracompany Profit 24,000 (2) 24,000
Credits 1,010,000 490,000 364,000 364,000 1,136,000
Irwin/McGraw-Hill
- 590 -
P11-16 Journal Entries for Branch Operations
H(1) Investment in Oceanport Branch 180,000

Cash 100,000
Inventory 56,000
Transfer of cash and inventory to
Oceanport branch.

Recognize portion of intracompany
profit realized: $24,000 x .75

Purchase inventory.
H(4) Accounts Receivable 460,000

Sales 460,000
Record sales of inventory.

Inventory 320,000
H(6) Cash 375,000

H(7) Cash 65,000

Investment in Oceanport Branch 65,000
Cash remittance from Oceanport branch.
H(8) Dividends Declared 15,000

Cash 15,000
Record dividends paid in 19X2.

Other Operating Expenses 55,000
Cash 55,000
Record depreciation and other expenses.
Irwin/McGraw-Hill
- 591 -
H(10) Investment in Oceanport Branch 24,000
Oceanport Branch Income 24,000
Record income from Oceanport branch.
Irwin/McGraw-Hill
- 592 -
P11-16 (continued)
H(11) Sales 460,000

Oceanport Branch Income 24,000
H(12) Income Summary 92,000

H(13) Retained Earnings 15,000

Dividends Declared 15,000
Close dividends declared.
b. Journal entries recorded by branch:
B(1) Cash 100,000

Home Office 180,000
Transfer of cash and inventory
from home office.

Cash 50,000

Sales 200,000

Inventory 60,000
B(5) Cash 170,000

Irwin/McGraw-Hill
- 593 -
Cash 65,000
B(7) Rent Expense 36,000

Cash 76,000
Record rent and other expenses.
Irwin/McGraw-Hill
- 594 -
P11-16 (continued)
B(8) Sales 200,000

Rent Expense 36,000

Home Office 24,000
c. Retained Earnings, January 1, 19X2 $110,000

Net income──19X2 92,000
$202,000
Dividends Declared (15,000)
Retained Earnings, December 31, 19X2 $187,000
Irwin/McGraw-Hill
- 595 -
P11-17 Trial Balance with Inventory Profits
a. Dependable Appliance Corporation

December 31, 19X5
New
Home York Eliminations
Sales 300,000 200,000 500,000

New York Branch Income 30,000 (1) 30,000
Realized Intracompany
Profit 24,000 (2) 24,000
Credits 354,000 200,000 500,000
Cost of Goods Sold 240,000 120,000 (2) 24,000 336,000
Other Expenses 20,000 35,000 55,000
Debits (290,000)(170,000) (436,000)
Net Income,
carry forward 64,000 30,000 54,000 24,000 64,000
Ret. Earnings, Jan. 1 460,000 460,000

Home Office,
Net Income, from above 64,000 30,000 54,000 24,000 64,000
524,000 430,000 524,000
carry forward 504,000 430,000 454,000 24,000 504,000
Cash 60,000 55,000 115,000

Inventory 110,000 80,000 (3) 6,000 184,000
Land 80,000 40,000 120,000
Buildings and Equipment 700,000 400,000 1,100,000
Investment in New
York Branch 430,000 (1)430,000
Debits 1,450,000 615,000 1,629,000

Common Stock 200,000 200,000
Office), from above 504,000 430,000 454,000 24,000 504,000
Irwin/McGraw-Hill
- 596 -
Unrealized
Credits 1,450,000 615,000 460,000 460,000 1,629,000
Irwin/McGraw-Hill
- 597 -
P11-17 (continued)
b. Dependable Appliance Corporation

Income Statement
Year Ended December 31, 19X5
Sales $500,000
Net Income $ 64,000
Dependable Appliance Corporation

Balance Sheet
December 31, 19X5
Cash $ 115,000
Inventory 184,000
Land 120,000

Irwin/McGraw-Hill
- 598 -
P11-18 Workpaper for Home Office and Multiple Branches
a. Transactions recorded by home office and branches:
Journal entries recorded by Denton branch:

Cash 3,000
Home Office 23,000
Transfer of cash and equipment from
home office.

Home Office 140,000

Sales 136,000

Inventory 102,000
$136,000 x .75
B(5) Operating Expense 13,000

Record operating expenses.
B(6) Cash 125,000

Collections on account.

Cash 12,000
Payment on accounts payable.
B(8) Cash 35,000

Record loan payable.

Record depreciation expense.
Irwin/McGraw-Hill
- 599 -
Cash 135,000
Irwin/McGraw-Hill
- 600 -
P11-18 (continued)
Journal entries recorded by Houston branch:

Cash 5,000
Home Office 25,000
Transfer of cash and equipment from
home office.

Home Office 150,000

Sales 152,000

Inventory 114,000
$152,000 x .75
B(5) Operating Expenses 11,000

B(6) Cash 138,000

Collections on account.

Cash 9,000
Payments on accounts payable.
B(8) Cash 40,000

Record loan payable.


Cash 151,000
Irwin/McGraw-Hill
- 601 -
P11-18 (continued)
H(1) Equipment 40,000

Record equipment purchase.
H(2) Investment in Denton Branch 23,000

Investment in Houston Branch 25,000
Equipment 40,000
Cash 8,000
Transfer equipment and cash to branches.
H(3) Accounts Receivable 175,000

Sales 175,000

Inventory 105,000
$105,000 = $175,000 x .60

Inventory 232,000
Transfer of inventory to branches,
billed in excess of cost:
$232,000 = $290,000 x .80
$58,000 = $290,000 x .20

$341,000 = $105,000 + $232,000
+ $45,000 - $41,000
H(7) Operating Expenses 85,000

H(8) Cash 172,000

Record collections on account:
$172,000 = $25,000 + $175,000 - $28,000
Irwin/McGraw-Hill
- 602 -
Cash 464,000
Payment on accounts payable.
$464,000 = $18,000 + $40,000 + $341,000
+ $85,000 - $20,000
Irwin/McGraw-Hill
- 603 -
P11-18 (continued)

H(11) Cash 286,000

Investment in Denton Branch 135,000
Cash remittances from branches.

Denton Branch Income 17,000
Record income from Denton branch.
H(13) Investment in Houston Branch 23,000

Houston Branch Income 23,000
Record income from Houston branch.

Recognize portion of intracompany
profit realization:
$43,200 = ($102,000 + 114,000) x .20
Irwin/McGraw-Hill
- 604 -
P11-18 (continued)
b. Ortegren Sales Company

December 31, 19X1
Home Denton Houston Eliminations Com-

Item Office Branch Branch Debit Credit bined
Sales 175,000 136,000 152,000 463,000
Denton Branch Income 17,000 (1) 17,000
Houston Branch Income 23,000 (2) 23,000
Realized Profit on
Branch Shipments 43,200 (3) 43,200
Credits 258,200 136,000 152,000 463,000
Cost of Goods Sold 105,000 102,000 114,000 (3) 43,200 277,800
Depreciation Expense 7,000 4,000 4,000 15,000
Operating Expenses 85,000 13,000 11,000 109,000
Debits (197,000)(119,000)(129,000) (401,800)
Net Income,
carry forward 61,200 17,000 23,000 83,200 43,200 61,200
Ret. Earnings, Jan. 1 59,000 59,000

Home Office,
preclosing balance 28,000 24,000 (1) 28,000
(2) 24,000
Net Income, from above 61,200 17,000 23,000 83,200 43,200 61,200
Retained Earnings,
carry forward 120,200 45,000 47,000 135,200 43,200 120,200
Cash 6,000 16,000 23,000 45,000

Accounts Receivable 28,000 11,000 14,000 53,000
Inventory 45,000 38,000 36,000 (4) 14,800 104,200
Land 52,000 52,000
Buildings & Equipment 90,000 20,000 20,000 130,000
Investment in:
Denton Branch 45,000 (1) 45,000
Houston Branch 47,000 (2) 47,000
Debits 313,000 85,000 93,000 384,200
Accum. Depreciation 28,000 4,000 4,000 36,000

Notes Payable 30,000 35,000 40,000 105,000
Common Stock 100,000 100,000
Ret. Earnings (& Home
Office), from above 120,200 45,000 47,000 135,200 43,200 120,200
Irwin/McGraw-Hill
- 605 -
Unrealized
Credits 313,000 85,000 93,000 150,000 150,000 384,200
(1) Eliminate intracompany accounts with Denton Branch.

(2) Eliminate intracompany accounts with Houston Branch.
(3) Eliminate home office profit from cost of goods sold.
(4) Eliminate unrealized intracompany profit from inventory.
Irwin/McGraw-Hill
- 606 -
P11-19 Comprehensive Workpaper
a. Adjusted and corrected trial balance:
Martin Products Company

Adjusted Trial Balance
December 31
Martin Home Office Philadelphia Branch

Item Debit Credit Debit Credit
Cash $ 80,000 $ 35,000

Accounts Receivable 95,000 52,000
Inventory 210,000 90,000
Loan to Philadelphia Branch 10,000
Land 220,000 150,000
Buildings and Equipment 2,100,000 290,000
1
Investment in Philadelphia Branch 500,000
Dividends Declared 25,000
Cost of Goods Sold 1,160,000 310,000
2
Depreciation Expense 88,000 42,000 3
Other Expenses 317,000 4 93,000 5
Accumulated Depreciation $ 555,000 $ 40,000
Accounts Payable 85,000 67,000
Payable to Home Office 10,000
Common Stock 1,000,000
Home Office 435,000 6
Unrealized Intracompany Profit 15,000 7
Unrealized Gain on Land Transfer 90,000
Sales Revenue 1,880,000 510,000
Other Income 25,000
Realized Intracompany Profit 60,000 8
Philadelphia Branch Income 65,0009
$4,805,000 $4,805,000 $1,062,000 $1,062,000
1
$500,000 = $500,000 + $3,000 +$2,000 - $5,000
2
$88,000 = $90,000 - $2,000
3
$42,000 = $40,000 + $2,000
4
$317,000 = $320,000 - $3,000
Irwin/McGraw-Hill
- 607 -
5
$93,000 = $90,000 + $3,000
6
$435,000 = $430,000 + $2,000 + $3,000
7
$15,000 = $50,000 - $35,000
8
$60,000 = ($300,000 - $225,000) - ($50,000 - $35,000)
9
$65,000 = $70,000 - $2,000 - $3,000
Irwin/McGraw-Hill
- 608 -
b. Workpaper for preparation of Martin Products Company financial statements:
Martin Products Company

December 31
Home Eliminations
Sales Revenue 1,880,000 510,000 2,390,000

Philadelphia Branch Income 65,000 (1) 65,000
Other Income 25,000 (5) 22,000 3,000
Profit 60,000 (3) 60,000
Credits 2,030,000 510,000 2,393,000
Cost of Goods Sold 1,160,000 310,000 (3) 60,000 1,410,000
Other Expenses 317,000 93,000 (5) 22,000 388,000
Debits 1,565,000 445,000 1,928,000
Net Income, carry forward 465,000 65,000 147,000 82,000 465,000
Retained Earnings, Jan. 1 630,000 630,000

Home Office,
1,095,000 500,000 1,095,000
Dividends Declared 25,000 25,000
Retained Earnings,
Dec. 31, carry forward 1,070,000 500,000 582,000 82,000 1,070,000
Cash 80,000 35,000 115,000

Inventory 210,000 90,000 (4) 15,000 285,000
Loan to Branch 10,000 (6) 10,000
Land 220,000 150,000 (2) 90,000 280,000
Buildings and Equipment 2,100,000 290,000 2,390,000
Investment in
Philadelphia Branch 500,000 (1)500,000
Debits 3,215,000 617,000 3,217,000
Accumulated Depreciation 555,000 40,000 595,000

Payable to Home Office 10,000 (6) 10,000
Common Stock 1,000,000 1,000,000
Irwin/McGraw-Hill
- 609 -
Retained Earnings and
Home Office, from above 1,070,000 500,000 582,000 82,000 1,070,000
Unrealized Intracompany
Profit 15,000 (4) 15,000
Unrealized Gain on Land
Transfer 90,000 (2) 90,000
Credits 3,215,000 617,000 697,000 697,000 3,217,000
Irwin/McGraw-Hill
- 610 -
P11-20* Trial Balance with Beginning Inventory Profit
Reliable Products Corporation

December 31, 19X2
Home Eliminations
Sales 500,000 250,000 750,000

Branch Income 30,000 (1) 30,000
Realized Profit on
Branch Shipments 45,000 (2) 20,000
(3) 25,000
Credits 575,000 250,000 750,000
Cost of Goods Sold 410,000 170,000 (2) 20,000
(3) 25,000 535,000
Other Expenses 50,000 30,000 80,000
Debits (490,000)(220,000) (665,000)
Net Income,
carry forward 85,000 30,000 75,000 45,000 85,000
Ret. Earnings, Jan. 1 390,000 390,000

Home Office,
475,000 310,000 475,000
carry forward 450,000 310,000 355,000 45,000 450,000
Irwin/McGraw-Hill
- 611 -
P11-20* (continued)
Home Eliminations
Cash 70,000 60,000 130,000

Inventory 150,000 55,000 (5) 30,000 235,000
Inventory──From
Home Office 45,000 (4) 15,000
(5) 30,000
Land 85,000 50,000 135,000
Buildings and Equipment 600,000 400,000 1,000,000
Investment in
Retail Branch 310,000 (1)310,000
Debits 1,295,000 700,000 1,670,000

Notes Payable 200,000 200,000
Common Stock 100,000 100,000
Office), from above 450,000 310,000 355,000 45,000 450,000
Profit 15,000 (4) 15,000
Credits 1,295,000 700,000 400,000 400,000 1,670,000
(1) Eliminate intracompany accounts.

(2) Eliminate beginning unrealized intracompany inventory profit.
(3) Eliminate home office profit from cost of goods sold.
(4) Eliminate unrealized intracompany profit at year-end.
(5) Reclassify inventory from home office.
Irwin/McGraw-Hill
- 612 -
P11-21* Multiple Branches with Transfers
a. Stewart Corporation
December 31, 19X5
Meakin- River-
Home burg dale Eliminations
Item Office Branch Branch Debit Credit Combined
Sales 400,000 250,000 180,000 830,000

Meakinburg Br. Income 30,000 (1) 30,000
Riverdale Br. Income 15,000 (2) 15,000
Profit 5,000 (3) 5,000
Credits 450,000 250,000 180,000 830,000
Cost of Goods Sold 310,000 170,000 130,000 (3) 5,000 605,000
Depreciation Expense 30,000 20,000 15,000 65,000
Other Expenses 50,000 30,000 20,000 100,000
Debits (390,000)(220,000)(165,000) (770,000)
Net Income,
carry forward 60,000 30,000 15,000 50,000 5,000 60,000
Ret. Earnings, Jan. 1 437,000 437,000

Home Office,
preclosing balance 280,000 210,000 (1)280,000
(2)210,000
Net Income, from above 60,000 30,000 15,000 50,000 5,000 60,000
497,000 310,000 225,000 497,000
Retained Earnings,
carry forward 481,000 310,000 225,000 540,000 5,000 481,000
Cash 54,000 60,000 20,000 134,000

Accounts Receivable 100,000 90,000 40,000 230,000
Inventory 150,000 100,000 80,000 330,000
Land 60,000 50,000 20,000 130,000
Buildings & Equipment 600,000 400,000 300,000 (4) 20,000 1,280,000
Investment in:
Meakinburg Branch 310,000 (1)310,000
Riverdale Branch 225,000 (2)225,000
Debits 1,499,000 700,000 460,000 2,104,000
Accum. Depreciation 370,000 170,000 125,000 665,000

Irwin/McGraw-Hill
- 613 -
Notes Payable 200,000 100,000 300,000
Common Stock 100,000 100,000
Ret. Earnings (& Home
Office), from above 481,000 310,000 225,000 540,000 5,000 481,000
Profit 20,000 (4) 20,000
Credits 1,499,000 700,000 460,000 560,000 560,000 2,104,000
Irwin/McGraw-Hill
- 614 -
P11-21* (continued)
Explanation of Elimination Entries:
(1) Eliminate intracompany accounts with Meakinburg Branch.

(2) Eliminate intracompany accounts with Riverdale branch.
(3) Eliminate intracompany profit from cost of goods sold.
(4) Eliminate unrealized intracompany profit from equipment transfer.
b. Stewart Corporation
Income Statement
Year Ended December 31, 19X5
Sales $830,000
Net Income $ 60,000
Stewart Corporation
Balance Sheet
December 31, 19X5
Cash $ 134,000
Inventory 330,000
Land 130,000

Irwin/McGraw-Hill
- 615 -
(Page Intentionally Left Blank)
Irwin/McGraw-Hill
- 616 -

Answers To Questions Q11-1: Irwin/Mcgraw-Hill 8 The Mcgraw-Hill Companies, Inc., 1999

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ACCOUNTING FOR BRANCH OPERATIONS

C11-1 Contrasting Sales Agency and Branch Accounting Systems

In the case of Chesapeake Distributors, Inc., a very different accounting system is

a. As separate corporations, each of the subsidiaries of Nieminsky Corporation have

b. Consolidated financial statements for Nieminsky Corporation appear to be

a. With the acquisition of Barnett Banks and Boatmen's Bancshares, NationsBank

E11-1 Establishing a Branch

Journal entries recorded by home office:

H(1) Investment in New Jersey Branch 230,000

H(2) Equipment 120,000

Investment in New Jersey Branch 120,000

H(4) Investment in New Jersey Branch 1,300

Journal entries recorded by branch:

B(1) Cash 80,000

B(2) Equipment 120,000

B(3) Inventory 35,000

B(4) Inventory 300

B(5) Buildings 50,000

Journal entries recorded by home office:

H(1) Investment in Branch 180,000

H(2) Unrealized Intracompany Profit 50,000

H(4) Investment in Branch 67,000

H(5) Cash 180,000

Journal entries recorded by branch:

B(1) Inventory 80,000

B(2) Inventory──From Home Office 180,000

B(3) Accounts Receivable 326,000

Cost of Goods Sold 230,000

B(4) Advertising Expense 20,000

B(5) Cash 235,000

Home Office 180,000

E11-3 Investment in Operating Division

Transfer of cash $1,000,000

a. Journal entries recorded by home office:

H(1) Inventory 30,000

H(2) Investment in Branch 45,000

H(3) Cash 11,000

H(4) Cost of Goods Sold 6,000

H(5) Unrealized Intracompany Profit 17,500

Journal entries recorded by branch:

B(1) Inventory──From Home Office 45,000

B(2) Accounts Receivable 58,000

B(3) Cost of Goods Sold 31,500

b. (1) Cost of goods sold by branch = $31,500

(2) Sales reported by branch = $58,000

(3) Cost of goods sold for Bean Corporation as a whole:

(4) Sales for Bean Corporation as a whole:

a. Journal entries recorded by home office:

H(1) Finished Goods Inventory 200,000

H(2) Investment in Branch 280,000

H(3) Unrealized Intracompany Profit 20,000

Journal entries recorded by branch:

B(1) Inventory──From Home Office 280,000

B(2) Accounts Receivable 105,000

B(3) Cost of Goods Sold 70,000

E(1) Realized Profit on Branch Shipments 20,000

E(2) Unrealized Intracompany Profit 60,000

a. Journal entries recorded by home office:

H(1) Unrealized Intracompany Profit 33,000

H(2) Investment in Branch 225,000

H(3) Unrealized Intracompany Profit 25,000

Journal entries recorded by branch:

B(1) Accounts Receivable 295,000