ACCOUNTING FOR BRANCHES

The Transactions between the Home Office and the Branch

Journal entries

Transaction The Home Office The Branch

1- Sending cash Investment in Branch Cash
from the Home office to the Branch Cash Home office
2- Sending merchandise(inventory) Investment in Branch Inventory
from the Home office to the Branch Inventory Home office
3- Sending merchandise(inventory) Investment in Branch Inventory
from the Home office to the Branch Inventory Home office
with a mark-up Allowance for
overvaluation
of inventory
4- Allocating operating expenses Investment in Branch Operating expenses
incurred by H.O and charged it to the operating expenses Home office
Branch
5- Acquisition of equipment (assets) by Equipment : Branch … Home office
Branch Investment in Branch Cash

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6- Sending cash from Cash Home office
the Branch to the home office Investment in Branch Cash

7- Payment of Accounts Payable of Investment in Branch Accounts payable

Cash Home office
branch by the home office
8- collection of notes receivable of the Investment in Branch Cash
Notes receivable
home office by the branch Home office
Interest revenue
9- Collection of accounts receivable of Cash Home office
branch by the home office Investment in Branch Accounts Receivable
10- The Branch sales Cash /Accounts Receivable
Sales

Cost of goods sold of the branch Cost of goods sold

Inventory
11- The Branch expenses Operating expenses
Cash

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12- the branch net income None Sales
Cost of goods sold
Operating expenses
Income Summary
Investment in Branch Income summary
Income: …..branch Home office
13-Adjusting the allowance for Allowance for overvaluation
overvaluation of inventory of inventory
Realized gross profit
14- closing the realized gross profit and Income: …..branch
the branch net income
Realized gross profit
Income summary

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 Ex. 1
Prepare journal entries in the accounting records of the home
office and the Stars Branch of Moon Company to record each
of the following transactions:

a. Home office transferred cash of $ 5000 and merchandise at

home office cost of $ 10000 to the branch .both the home
office and the branch use the perpetual inventory system.

b. The Home office allocated operating expenses of $ 1500 to the

Branch.

c. The Branch acquired equipment for $ 3000, to be carried in the

Home office accounting records.

d. Stars Branch informed the home office that it had collected $

416 on a note receivable to the home office. Principle amount
of the note was $ 400.

e. Stars Branch made sales of $ 12500, terms 2/10, n/30, and

incurred operating expenses of $ 2500. The cost of goods sold
was $ 8000 and the operating expenses were paid in cash.

f. Stars Branch had a net income of $ 500.

Answer

The journal entries:

The Home Office The Branch
a- Investment in Branch 5000 Cash 5000
1)
Cash 5000 Home office 5000
(Cash sent to the branch) (Cash received from the home office)

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a- Investment in Branch 10000 Inventory 10000
2)
Inventory 10000 Home office 10000
(inventory sent to the branch) (inventory received from the branch )
b) Investment in Branch 1500 operating expenses 1500

operating expenses 1500 Home office 1500

(operating expenses allocated to the branch) (operating expenses allocated to the
branch)
c) Equipment :Stars Branch 3000 Home office 3000

Investment In Branch 3000 Cash 3000

(Acquisition of equipment by the Branch) (Acquisition of equipment by the Branch)
d) Investment in Branch 416 Cash 416

Notes Receivable 400 Home office 416

Interest revenue 16
(collecting notes receivable by the branch) (collecting notes receivable by the branch)

e) Accounts receivable 12500

Sales 12500
( recording sales)
e) Cost of goods sold 8000
Inventory 8000
(recording cost of goods sold)
e) Operating expenses 2500
Cash 2500
(recording operating expenses paid)
Sales 12,500
Cost of goods sold 8,000
Operating expenses 4,000
Income Summary 500
f) Investment in branch 500 Income summary 500
Income : Stars Branch 500 Home office 500
(recording net income of the branch) (closing net income of the branch)

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 Ex. 2
Among the journal entries of the home office of Marwa
Corporation for the month of January 2007 were the following:

Jan 2 Investment in Magy Branch 100000

Inventories 80000
Allowance for overvaluation 20000
of inventories
( to record merchandise shipped to branch)
Jan 18 Equipment :Magy Branch 500000
Investment in Magy Branch 500000
(to record acquisition of equipment by branch
for cash)
Jan 31 Investment in Magy Branch 8000
Operating expenses 8000
(to record allocation of operating expenses to
branch)

Required:
Prepare related journal entries for the Magy branch of Marwa
Corporation; the branch uses the perpetual inventory system.

Answer

Jan. 2 Inventory 100000

Home office 100000
( merchandise received from H.O)
Jan. Home office 500000
18 cash 500000
(equipment acquired by the branch)
Jan. Operating expenses 8000
31 Home office 8000
(operating expenses allocated by H.O)

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Exercises
(1) On September 1, 2003, Western Company established the Eastern
branch. Separate accounting records were set up for the branch. Both the
home office and the Eastern Branch use the perpetual inventory system.
Among the intracompany transactions were the following:

sept.1 Home office mailed a check for $ 50,000 to the branch. The
check was received by the branch on September 3.
sept.4 Home office shipped merchandise costing $ 95,000 to the
branch at a billed price of $ 125000. the branch received the
merchandise on September 8.
sept.11 The Branch acquired a truck for $ 34,200. the Home office
maintains the plant assets of the branch in its accounting
records.

Required:
Prepare journal entries (omit explanations) for these transactions in the
accounting records of the Home office and the Eastern Branch.
=====================================

(2) Among the journal entries of the home office of Ahmed Company for the
month ended August 31, 2007 were the following:

Aug. 6 Investment in Adly Branch 10000

Cash 10000
( to record payment of accounts payable of branch)
Aug. 9 Cash 6000
Investment in Adly Branch 6000
(to record collection of trade accounts receivable of branch
Aug.22 Equipment:Adly Branch 20000
Investment in Adly Branch 20000
(to record branch acquisition of equipment for cash, to be
carried in home office accounting records)

Required:
Prepare related journal entries for the Adly branch of Ahmed Company.

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 The relation between cost, markup, and bill price

Cost+ markup= bill price

Ex 1

Home office shipped merchandise costing $ 60000 to the branch,

billed at a markup of 20% on billed price

Required: Journal entries in the accounting records of the home

office and the branch

Answer

Cost Markup Bill price

% 80 20 100
Shipments from H.O 60000 ? ?

Bill price = 60000 × 100 = 75000

80

Mark up = 60000 × 20 = 15000 or 75000 – 60000

80
Home office Branch
Investment in branch 75000 Inventory 75000

Inventory 60000
Allowance for 15000 Home office 75000
overvaluation of
Inventory
(merchandise shipped to branch) (merchandise received
from the branch)

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 Ex 2

On May 31, 2006, Elamal Branch (the only branch) of Jasmine Company
reported a net income of $ 80,000 for may 2006 and a $ 240,000
ending inventory at billed price of merchandise received from the home
office at 25% markup on billed price. Prior to adjustment, the may 31,
2006 balance of the home office allowance for overvaluation of
inventories: Elamal branch was $ 200,000 credit

Required:
Prepare journal entries (omit explanation) on may 31,
2006, for the home office of Jasmine company.

Answer
Cost Markup Bill price
% 75 25 100
Ending inventory ? ? 240000

- Markup of ending inventory = 240000 × 25 = 60000

100

Realized gross profit = 200,000 – 60,000 = 140,000

Journal entries:

Investment in branch 80,000

income :Elamal branch 80,000
allowance for overvaluation of inventory 140,000
realized gross profit 140,000
income :Elamal branch 80,000
realized gross profit 140,000
income summary 220,000

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 Ex 3
The flow of merchandise from the home office of Olympic company to
its A1 branch during April 2006 may be analyzed as follows:

Olympic Company
Flow of merchandise for A1 branch
For month ended April 30, 2006

Billed price cost markup

Beginning inventories 180000 150000 30000
Add: Shipments from H.O 540000 450000 90000
Goods available for sale 720000 600000 120000
Less: Ending inventories 120000 100000 20000
Goods sold 600000 500000 100000

Required:
Reconstruct a three-column ledger account Allowance for
overvaluation of inventories: A1 branch for the home office of
Olympic company, beginning with the March 31, 2006
balance, $ 30,000 credit

Answer
Allowance for overvaluation of inventory

Date Explanation Debit Credit balance

Mar.31 30000 cr
Apr.16 Merchandise 90000 120000 cr
shipped to branch
Apr.30 Realized gross 100000 20000 cr
profit

Ex 4
The home office of Nancy Company ships merchandise to the
Farieda branch at a billed price that includes a markup on
home office cost of 25%. The inventories ledger account of
the branch, under the perpetual inventory system, showed a
December 31,2005 debit balance ,$ 120,000 ;a debit for a

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 shipment received January 16,2006 $ 500,000 , total credits
for goods sold during January 2006 $ 520,000 and January
31,2006 debit balance $ 100,000 (all amounts are home
office billed price).
Required:
(1) Prepare a working paper for the home office to analyze
the flow of merchandise to Farieda branch during
January 2006.
(2) Reconstruct a three column ledger account Allowance
for overvaluation of inventories: Farieda branch
(3) Prepare a journal entry to adjust the allowance for
overvaluation of inventories on Jan, 31.

Answer
(1)

cost markup Billed price

% 100 25 125
Beginning inventories 96000 24000 120000
Add: Shipments from H.O 400000 100000 500000
Goods available for sale 496000 124000 620000
Less: Ending inventory 80000 20000 10000
Goods sold 416000 104000 520000

(2) Allowance for overvaluation of inventory

Date Explanation Debit Credit balance

Jan.1 24000 cr
Jan.16 Merchandise 100000 124000 cr
shipped to branch
Jan.31 Realized gross 104000 20000 cr
profit

(3)
Jan.31 allowance for overvaluation of inventory 104000
realized gross profit 104000

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 Ex 5

Tillman Textile Company has a single branch in Toledo. On March 1,

2003, the home office accounting records included an allowance for
overvaluation of inventories: Toledo branch ledger account with a credit
balance of $ 32,000. During March, merchandise costing $ 36,000 was
shipped to the Toledo branch and billed at a price representing a 40%
markup on the billed price. On March 31, the branch prepared an income
statement indicating a net loss of $ 11,500 for March and ending
inventories at billed price of $ 25,000.
Required:
a) Prepare a working paper to compute the home office cost of
the branch inventories on March 1, assuming a uniform
markup on all shipments to the branch.
b) Prepare journal entries for the home office of Tillman Textile
Company on March,31 2014, for the foregoing facts

Answer
(a)

cost markup Bill price

% 60 40 100
Beginning inventories ? 32000
Shipments from H.O 36000 ?
Ending inventory ? 25000

Cost of beginning inventory (March 1) = 32000 × 60 = 48000

40
(b) markup of shipments from H.O = 36000 × 40 = 24000
60

markup of ending inventory = 25000 × 40 = 10000

100
 Realized gross profit = markup of + markup of - markup of
beginning shipments ending
inventory from H.O inventory
32000 + 24000 - 10000 = 46000

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Mar.31 Income: Toledo Branch 11,500
Investment in Toledo Branch 11,500
Mar.31 allowance for overvaluation of 46000
inventory 46000
realized gross profit

Mar.31 Realized Gross Profit: Toledo Branch 46,000

Income: Toledo Branch 11,500
Income Summary 34,500
Exercises
(1) On January 31, 2003, the unadjusted credit balance of the
allowance for overvaluation of inventories: Vermont avenue branch
of the home office of Sea Company was $ 80,000. The branch
reported a net income of $ 60,000 for January 2003 and an ending
inventory on January 31, 2003, of $ 81,000, at billed prices that
included a markup on home office cost of 50%.

Instructions:
Prepare journal entries (omit explanations) for the home office of
sea company on January 31, 2003, for the foregoing facts.

(2) The home office of Sun Company, which uses the perpetual
inventory system, bills shipments of merchandise to the moon branch
at a markup of 25% on the billed price. On august 31,2006 the credit
balance of the home office allowance for over valuation of
inventories: moon branch ledger account was $ 60,000.on September
17,2006 the home office shipped merchandise to the branch at a
billed price of $ 400,000.the branch reported an ending inventory at
billed price of $ 160,000 on September 30,2006.

Required:
Prepare journal entries involving the allowance for overvaluation of
inventories: moon branch on September 17 and 30, 2006.show
supporting computations in the explanations for the entries.

(3) The home office of Nahla Company, bills its only branch at a
markup of 25% above home office cost for all merchandise shipped
to the Marwa branch. During 2006 the home office shipped

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merchandise to the branch at a billed price of $ 30,000.Marwa branch
inventories for 2006 were as follows:

Jan.1 Dec .31

From home office(at billed price) 15000 19500
Purchased from outsiders 6800 8670
Required
Prepare journal entries (including adjusting entries) for the
home office of Nahla Company for 2006.

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