Preparation of combined financial statements

At the end of the reporting period, it is necessary to combine the assets, liabilities, revenues, and expenses of
the individual branches with like accounts of the home office. Before the accounts are combined, transactions
between the branch and home office must be eliminated as follow:-

1- On the balance sheet: eliminate the reciprocal accounts (investment in branch account & home office
account), these 2 accounts should have equal but opposite balances (if not equal we will know how to
adjust it later), then the individual assets & liabilities of the branch are added to the like accounts of the
home office.
2- On the income statements: the debit balance in the shipments from home office account is eliminated
with the credit balance in shipments to branch account & unrealized profit in shipment to branch
account. In addition any intercompany mark-up is removed from the amounts reported for the beginning
and ending inventories. Finally, the revenue and expense accounts of the branch are added to the
respective home office accounts.

Example: refer to example in page 3

Workpaper entries in general journal form

Unrealized profit 1400

Beginning inventory 1400
To reduce the branch beginning inventory to cost (7000$)

Shipments to branch 30000

Unrealized profit 6000
Shipments from home office 36000
To eliminate intercompany transfer of inventory and unrealized profit
recorded on books of home office

Ending inventory (income statement) 1200

Inventory (balance sheet) 1200
To reduces ending inventory to cost in both B/S & I/S

Home office A/C 32400

Investment in branch A/C 32400
To eliminate reciprocal accounts
 Combined statements Workpaper

Item Trial balances Eliminations Combined

H.O Branch DR CR balances
Income statement:
Sales 100000 60000 160000
Beginning inventory 20000 8400 1400 27000
Purchases 95000 6000 101000
Shipments from H.O 0 - 36000 36000 0 -
115000 50400 128000
Shipments to branch 30000 0 30000 0
Ending inventory 25000 7200 1200 31000
Cost of goods sold 60000 43200 97000
Other expenses 25000 10000 . . . 35000
Net income to retained earnings 15000 6800 31200 37400 28000
Retained earnings statements:
Beg. Retained earnings 57000 0 57000
Net income from above 15000 6800 31200 37400 28000
Dividends declared (10000) 0 - . . . . (10000)
Ending retained earnings to B/S 62000 6800 31200 37400 75000
Balance sheet:
Cash 33000 14000 47000
A/R 20000 25000 45000
Inventory 25000 7200 1200 31000
Investment in branch 32400 0 32400 0
Plant & equipment-home office (net) 75000 0 75000
Plant & equipment-branch (net) 24000 0 24000
Other assets 30000 0 30000
Total 239400 46200 252000
Current liabilities 20000 7000 27000
Long term notes payable 50000 0 50000
Home office 0 32400 32400 0
Unrealized profit 7400 0 7400(1400+6000) 0
Capital stock 100000 0 100000
Retained earnings from above 62000 6800 31200 37400 75000
Total liabilities & equity 239400 46200 71000 71000 252000

Combined financial statements for home office & branch

Income statement

Sales 160000
(-) cost of goods sold:
Beginning inventory 27000
+ Purchases 101000
Goods available for sales 128000
(-) ending inventory (31000) 97000
Gross profit 63000
(-) operating expenses 35000
Net income 28000
 Retained earnings statement

Beginning retained earnings 57000

Add: net income 28000
Less: dividends (10000)
Ending retained earnings 75000

Balance sheet

Cash 47000 Liabilities:

A/R 45000 Current liabilities 27000
Inventory 31000 Long term N/P 50000
Plant & equipment (net) 99000 Total liabilities 77000
Other assets 30000 Stockholders’ equity:
Capital stock 100000
Retained earnings 75000
Total stockholders’ equity 175000
Total assets 252000 Total liabilities & equity 252000

Under perpetual system:

Workpaper entries in general journal form

Unrealized profit 7400

Cost of goods sold 6200
Inventory (balance sheet) 1200

Home office A/C 32400

Investment in branch A/C 32400

Combined statements Workpaper

Item Trial balances Eliminations Combined

H.O Branch DR CR balances
Income statement:
Sales 100000 60000 160000
Cost of goods sold 60000 43200 6200 97000
Other expenses 25000 10000 . . 35000
Net income to retained earnings 15000 6800 6200 28000
Retained earnings statements:
Beg. Retained earnings 57000 0 57000
Net income from above 15000 6800 6200 28000
Dividends declared (10000) 0 - . . (10000)
Ending retained earnings to B/S 62000 6800 6200 75000
Balance sheet:
Cash 33000 14000 47000
A/R 20000 25000 45000
Inventory 25000 7200 1200 31000
Investment in branch 32400 0 32400 0
Plant & equipment-home office (net) 75000 0 75000
Plant & equipment-branch (net) 24000 0 24000
Other assets 30000 0 30000
Total 239400 46200 252000
Current liabilities 20000 7000 27000
Long term notes payable 50000 0 50000
Home office 0 32400 32400 0
Unrealized profit 7400 0 7400(1400+6000) 0
Capital stock 100000 0 100000
Retained earnings from above 62000 6800 6200 75000
Total liabilities & equity 239400 46200 39800 39800 252000

Combined financial statements for home office & branch

Income statement

Sales 160000
(-) cost of goods sold: 97000
Gross profit 63000
(-) operating expenses 35000
Net income 28000

Retained earnings statement

Beginning retained earnings 57000

Add: net income 28000
Less: dividends (10000)
Ending retained earnings 75000

Balance sheet

Cash 47000 Liabilities:

A/R 45000 Current liabilities 27000
Inventory 31000 Long term N/P 50000
Plant & equipment (net) 99000 Total liabilities 77000
Other assets 30000 Stockholders’ equity:
Capital stock 100000
Retained earnings 75000
Total stockholders’ equity 175000
Total assets 252000 Total liabilities & equity 252000
Establishing reciprocal balances (if the balance in the reciprocal accounts not equal):

The balance of the investment in branch account & home office account must be equal; however these
accounts may not be in balance because of two reasons:

1- Errors that have been made in recording the reciprocal transactions.

2- Transactions that have been recorded be either the home office or branch, but not both. For example,
cash or inventory that have been transferred from one side and recorded in its accounts but the other
side did not recorded it until receiving the cash or inventory.

Example: a review of the year-end transactions reveals that the following transactions have not been
recorded in one reciprocal account:

1- Inventory at billed price of 5000$ was shipped by the home office to branch #1 on December 27 and
received by the branch on January 10.
2- Branch #1 transferred cash of 6000$ to the home office on December 30. The payment was received
by the home office on January 4.

The Workpaper adjusting entries will be as follow:

Shipments from home office 5000

Inventory (balance sheet) 5000
Home office 5000
Inventory (income statement) 5000
To record shipment of inventory to branch #1 in transit at year-
end and not included in the ending inventory
Cash 6000
Investment in branch 6000
To recognize transfer of cash by branch