Accounting For Branches and Combined FS

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.
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.
Branches and Divisions (contd.)
Branch: a business unit located at

some distance from the home office.
This unit carries merchandise
obtained from the home office, makes
sales, approves customers credit,
makes collections from its customers,
and remits cash received.
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.e., subsidiary
company) is similar to that of
branches.
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.
Start-up Costs of Opening New

Branches
Based on Statement of Position 98-5

(SOP 98-5) Reporting on the Costs
of Start-up Activities, 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 System for a Branch
Two alternative systems:

1. The branch does not maintain a
complete set of accounting
records. The home office serves
only as an accounting and control
center for the branches.
Accounting System for a Branch (contd.)

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

system that the branch maintains its
own accounting records.
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. It is
credited for all cash, merchandise or other
assets provided by the home office to the
branch. It is debited for all cash,
merchandise, or other assets sent by the
branch to the home office or to other
branches.

and Home Office (contd.)
Home Office Ledger Account:

This account represents the net
investment by the home office in the
branch. At the end of a period, the
balance of Income Summary account
of a branch is closed to the Home
Office account.

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. It is debited for cash,
merchandise and services provided to the
branch by the home office and for the net
income reported by the branch.

Investment in Branch Ledger Account:

It is credited for cash, or other assets
received from the branch, 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 branchs usage
and the accounting record for the
plant asset is maintained by the
home office, the accounting
treatments are:

Branch (contd.)
For the home office: debit a plant

asset account: branch, credit
cash or a liability account.
For the branch: no entry.

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:

Branch (contd.)
For the branch: debit Home Office

and credit cash or a liability account.
For the home office: debit a plant
asset account: branch, and credit
Investment in Branch account.
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.
The home office may pay some taxes on
behalf of branches, and arrange for
advertising that benefits all branches.

and Allocated to Branches (contd.)
These expenses are usually allocated

to branches in determining net income
of branches.
These expenses include depr. expense
for the plant assets purchased by
home office but used by branches.

and Allocated to Branches (contd.)
If the home office chooses to allocate these
expenses to branches, the accounting
treatments are:
a. For the home office: debit Investment

in Branch account, credit expense
account.
b.
For the branch: debit expense account,
credit Home Office account.
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.
In additional, the home office may charge
each branch interest on the capital invested
in each branch.
Interest Charged by the Home office on

the Capital Invested in Branches (contd.)
Such interest revenue recognized by

the home office should be offset with
the interest expense recognized by the
branches in the combined financial
statements.
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. billed at the home office cost,
b. billed at a percentage above the home
office cost, and
c. billed at the branchs retail selling
price.
Billed at the home office cost:
Strength: widely used because of its

simplicity
Weakness: attributes all gross profits
of the business to the branches.
Billed at a percentage above home

office cost:
Strength: is able to allocate a

reasonable gross profit to the home
office.
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: (contd.)
Thus, for the combined financial

statement, the home office must
eliminate the excess of billed prices
over cost (intracompany profits).
Billed at branch retail selling prices:
Strength: to increase the internal

control over inventories at branches.
Weakness: no gross profit assigned to
the branches and the branchs net loss
will equal its operating expenses.
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.
The branchs financial statements may
be revised by the home office to include
the allocated expenses incurred by the
home office.
Separate Financial Statements for Branch and

for Home Office (for internal use only) (contd.)
Also, the financial statements of

branches should be revised to
eliminate any intracompany profits on
merchandise shipments or interest
charge on capital investments.
Combined financial Statements for Home

Office and Branch (for external use)
For investors, the home office and

branches are a single business entity.
Thus, combined financial statements
should be prepared for external users.
A four-column work sheet paper is
used to facilitate the preparation of the
combined financial statement.

Office and Branch (for external use)(contd.)
In preparing the combined financial

statements, the following accounts
should be eliminated:
a. Reciprocal ledger accounts
b. Any intracompany profits or losses.

c. Any receivables and payables

between the home office and the
branch (or between two branches).
The rest of accounts are just summed
together for the combined financial
statements.

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.
Combined financial Statements for Home Office and Branch

(for external use)(contd.)
Example I: (contd.)
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.
Both the home office and the branch
use the perpetual inventory system.
Equipment used at the branch is carried
in the home office records.

Example I: (contd.)
Expenses, such as advertising and

insurance, incurred by the home office
on behalf of the branch, are billed to
the branch.
Transactions and events during the
first year (1999) of operations of
Mason Branch are summarized below
(start-up costs are disregarded):

Example I: (contd.)
1. Cash of $1,000 was forwarded by the

home office to Mason Branch.
2. Merchandise with a home office cost of
$60,000 was shipped by the home office to
Mason Branch.
3. Equipment was acquired by Mason Branch
for $500, to be carried in the home office
accounting records. (Other plant assets for
Mason Branch generally are acquired by
the home office.)

Example I: (contd.)
4. Credit sales by Mason Branch amounted

to $80,000; the branchs cost of the
merchandise sold was $45,000.
5. Collections of trade accounts receivable by
Mason Branch amounted to $62,000.
6. Payments for operating expenses by
mason Branch totaled $20,000.

Example I: (contd.)
7. Cash of $37,500 was remitted by Mason

Branch to the home office.
8. Operating expenses incurred by the home
office and charged to Mason Branch
totaled $3,000.

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:
Mason Branch Accounting

1.Investment in Mason
Branch
1,000
Cash
Cash
1,000
1,000
Home Office 1,000

Example I: (contd.)

2. Investment in Mason
Branch
60,000
Inventories
Inventories
60,000
3. Equipment: Mason
Branch
500
Investment in Mason
Branch
500
60,000
Home Office 60,000

Home Office 500
Cash
500

Example I: (contd.)

4. None
Trade Accounts
Receivable
80,000
Cost of Goods Sold 45,000

Sales
Inventories
80,000
45,000

Example I: (contd.)

5. None
Cash
6. None
62,000
Trade
Account
Receivable
62,000
Operating
Expenses 20,000
Cash
20,000

Example I: (contd.)

7. Cash
Home Office 37,500
37,500
Investment in Mason
Branch
37,500
8. Investment in Mason
Branch 3,000
Operating
Expenses 3,000
Cash
37,500
Operating
Expenses 3,000
Home Office 3,000

Example I: (contd.)
Two Reciprocal Ledger Accounts (prior to adjusting and

closing entries):
Investment in Mason Branch
Date
1999
Explanation
Debit
Credit
Balance
Cash sent to branch

1,000
1,000 dr
Merchandise billed to
branch at home office cost 60,000
61,000 dr
Equipment acquired by
branch, carried in home
office accounting records
500 60,500 dr
Cash received from branch
37,500 23,000 dr
Operating expenses billed
to branch
3,000
26,000 dr

Example I: (contd.)
Home Office
Date
1999
Explanation
Debit
Credit
Balance
Cash received from home

office
1,000 1,000 cr
Merchandise received from
home office
60,000 61,000 cr
Equipment acquired
500
60,500 cr
Cash sent to home office
37,500
23,000 cr
Operating expenses billed
by home office
3,000 26,000 cr
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.

Statements--Example I (contd.)
Assume that the Mason Branchs

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.

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.

SMALDNO COMPANY
Working paper for combined Financial

Statements of Home office and Mason
Branch.
For Year Ended December 31,1999
(Perpetual Inventory System: Billing at
Cost)

Adjusted Trial Balances
Home
Office
Mason
Branch
Eliminations
Combined
Dr (Cr)
Dr(Cr)
Dr (Cr)
Dr (Cr)
(400,000)
(80,000)
(48,000)
Cost of goods sold
235,000
45,000
280,000
Operating expenses
90,000
23,000
113,000
Net Income (to

statement of retained
earnings below)
75,000
12,000
87,000
-0-
-0-
-0-
Income Statement
Sales
Totals

Statement of Retained Home Office

Earnings
Dr (Cr)
Retained earnings, Jan.

1, 1999
(70,000)
Net(income) (from
incomes statement
above)
(75,000)
Dividends declared
40,000
Retained earnings,
Dec.31,1999 (to balance
sheet below)
Totals
Mason
Branch
Dr(Cr)
Eliminations Combined
Dr (Cr)
Dr (Cr)
(70,000)
(12,000)
(87,000)
40,000
117,000
-0-

Home Office
Mason
Branch
Dr (Cr)
Dr(Cr)
Cash
25,000
5,000
30,000
Trade accounts
receivable (net)
39,000
18,000
57,000
Inventories
45,000
15,000
60,000
Investment in Mason
Branch
26,000
Balance Sheet
Equipment
Accumulated
depreciation of
equipment
Dr (Cr)
Dr (Cr)
(a) (26,000)
150,000
150,000
(10,000)
(10,000)

Balance Sheet (contd.)

Trade accounts payable
Home Office
Mason
Branch
Dr (Cr)
Dr(Cr)
Dr (Cr)
(20,000)
Home Office
Common stock, $10 par
(20,000)
(26,000)
(a) (26,000)
(150,000)
(150,000)
Retained earnings (from

earnings above)
Totals
Dr (Cr)
(117,000)
-0-
-0-
(a) To eliminate reciprocal ledger account balances

* the elimination appears in the working paper only
-0-
-0-
Combined Financial Statements -Example I

SMALDINO COMPANY
Income Statement
For Year Ended December 31, 1999
Sales
$ 480,000
Cost of goods sold
280,000
Gross margin on sales

Operating expenses
$ 200,000
113,000
Net Income
$ 87,000
Basic earnings per share of common

stock
5.80
Combined Financial Statements -Example I (contd.)

SMALDINO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 1999
Retained earnings, beginning of year
Add: Net income
Subtotal
Less: Dividends ($2.67 per share)
Retained earnings, end of year
70,000
87,000
$ 157,000
40,000
$ 117,000

SMALDINO COMPANY
Balance Sheet
December 31, 1999
Assets
Cash
Trade accounts receivable (net)
Inventories
Equipment
Less: Accumulated depreciation
Total assets
$ 30,000
57,000
60,000
$150,000
10,000
140,000
$287,000

SMALDINO COMPANY
Balance Sheet (contd.), December 31, 1999
Liabilities & Stockholders Equity
Liabilities
$20,000
Stockholders equity
Common stock, $10 par,
15,000 shares authorized, issued,
and outstanding
Retained earnings
Total liabilities & stockholders
equity
$150,000
117,000
267,000
$287,000
Home Office Adjusting and Closing Entries and

Branch Closing Entries Performed on 12/31/1999
(perpetual inventory system):
Records Adjusting and
Closing Entries:
None

Records Closing Entries:
Sales
80,000
Cost of Goods
Sold
45,000
Operating
Expenses
23,000
Income
Summary
12,000
Home Office Adjusting and Closing Entries and

Branch Closing Entries Performed on 12/31/1999
(perpetual inventory system): (contd.)
Records Adjusting and
Closing Entries:
Investment in Mason
Branch
12,000

Records Closing Entries:
Income
Summary
Income: Mason
Branch
12,000
Income: Mason
Branch
12,000
Income
Summary
12,000
12,000
Home Office 12,000

None
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:

above Home Office Cost (contd.)
Journal entries for shipments to branch at

prices above home office cost (perpetual
inventory system):
Investment in Mason
Branch
90,000
Inventories
60,000
Allowance for
Overvaluation of
Inventories: Mason
Branch
30,000

Inventories
90,000
Home Office 90,000

Thus, the balances of both the
account and Home Office account
will be $56,000, instead of $26,000
due to the inventory mark up of
$30,000.

SMALDINO COMPANY
Flow of Merchandise for Mason Branch During 1999
Billed
Price
Home
Office
Cost
Markup (50% of
Cost;33 1/3 % of
Billed Price)
Beginning
inventories
Add: Shipments
from home office
Available for sale

Less: Ending
inventories
Cost of goods
sold
$90,000
$60,000
$30,000
$90,000
$60,000
$30,000
22,500
15,000
7,500
$67,500
$45,000
$22,500
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)
Working Paper for Example II (contd.)

Home
Office
Mason
Branch
Eliminations
Combined
Dr (Cr)
Dr(Cr)
Dr (Cr)
Dr (Cr)
(400,000)
(80,000)
Cost of goods sold
235,000
67,500
Operating expenses
90,000
23,000
Net Income(loss) (to

earnings below)
75,000
(10,500)
-0-
-0-
Income Statement
Sales
Totals
(48,000)
(a) (22,500)
28,000
113,000
(b) 22,500
87,000
-0-

Statement of Retained Home Office

Earnings
Dr (Cr)
Retained earnings, Jan.

1, 1999
(70,000)
Net(income) loss (from

incomes statement
above)
(75,000)
Dividends declared
Retained earnings,
Dec.31,1999 (to balance
sheet below)
Totals
40,000
Mason
Branch
Dr(Cr)
Dr (Cr)
Dr (Cr)
(70,000)
(10,500)
(b) (22,500)
(87,000)
40,000
117,000
-0-

Home Office
Mason
Branch
Dr (Cr)
Dr(Cr)
Cash
25,000
5,000
30,000
Trade accounts
receivable (net)
39,000
18,000
57,000
Inventories
45,000
22, 500
Investment in Mason
Branch
56,000
(c) (56,000)
(30,000)
(a) 30,000
Balance Sheet
Dr (Cr)
(a) (7,500)
Dr (Cr)
60,000
Allowance for overvaluation of inventories:

Mason Branch
Equipment
150,000
150,000

Balance Sheet (contd.)

Accumulated depreciation
of inventories: Mason
Branch
Home Office
Mason
Branch
Dr (Cr)
Dr(Cr)
Dr (Cr)
(10,000)
(20,000)
(20,000)
(56,000)
(c) (56,000)
(150,000)
(150,000)
Retained earnings(from
earnings above)
Totals
Dr (Cr)
(10,000)
Home Office
(117,000)
-0-
-0-
-0-
-0-
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:
Sales
Income Summary
Cost of Goods Sold
Operating Expenses
To close revenue and
expense ledger accounts
80,000
10,500
67,500
23,000

above the cost) (contd.)
Home Office
Income Summary
To close the net loss in the
Income Summary account to
the Home Office account
10,500
10,500

After the closing entries, the Home Office
ledger account should have a balance of
$45,500.
Note: Home Office balance prior to the
closing entries equals $56,000. $56,000net loss of $10,500 = $45,500 (net loss
decreases Home Office credit balance).

Home Office Adjusting and Closing Entries
Income: Mason Branch

10,500
Investment in Mason
10,500
Branch
To record net loss reported by
branch

Home Office Adjusting and Closing Entries (contd.)
Allowance for Overvaluation

of Inventories: Mason Branch 22,500
Realized Gross Profit:
Mason Branch Sales
22,500
To reduce allowance to
amount by which ending
inventories of branch exceed
cost.

Home Office Adjusting and Closing Entries (contd.)
Realize Gross Profit: Mason

Branch Sales
Income Summary
To close branch net loss and
realized gross profit to
Income Summary ledger
account (Income tax effects
are disregarded.)
22,500
10,500
12,000

After posting the above entries, the account

balance for the following accounts is:
Allowance for Overvaluation of
Inventories: Mason Branch
=45,500(debit)*
=7,500(credit)**
Realized Gross Profit: Mason

Branch
=0
=0
* Balance prior to the above entries equals $56,000. $56,000- 10,500

(net loss of the branch reduces the debit balance of the Investment
account) = $45,500.
** $30,000-22,500 = $7,500.

Similar working paper eliminations as
on page 66-69 will be prepared for the
following year (i.e., year 2000) when
continuing with the perpetual inventory
system with a price markup.
Periodic Inventory System
Textbook (p141-p144):
When a periodic inventory system is
adopted, inventory account cannot be
used for the shipments of merchandise
between the home office and the branch.
Accounts such as Shipments to Mason
Branch (used by the home office) and
Shipments from Home Office (used by
the branch) are used.
Example:
Periodic Inventory System (contd.)
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 $15,000 due to a 50% markup
by the home office).
Example: (contd.)
Assume that during 2000, the home office

shipped merchandise to Mason Branch that
cost $80,000 and Mason was billed at
$120,000.
During 2000, Mason Branch sold $150,000
merchandise that was billed at $112,500.
The journal entries to record the shipments and
sales at a price above home office cost under
the periodic inventory system are as follows:
Example: (contd.)
Investment in Mason
Branch
90,000

Shipments from Home
Office
120,000
Home Office 120,000
Shipments to Mason
Branch
80,000
Allowance for
Overvaluation of
Inventories: Mason
Branch
40,000
None
Cash (or Trade Accounts

Receivable) 150,000
Example: (contd.)
The branch inventories at the end of 2000 amounted to $30,000. The flow of merchandise for Mason Branch of year
2000 summarized below:
SMALDINO COMPANY
Flow of Merchandise for Mason Branch During 2000
Billed
Price
Beginning
inventories
$22,500
Home
Office Cost
$15,000
Markup (50% of
Cost;33 1/3 % of
Billed Price)
$7,500
Add: Shipments
from home office
120,000
80,000
40,000
Available for sale
$142,500
$95,000
$47,500
Less: Ending
inventories
(30,000)
(20,000)
(10,000)
Cost of goods
sold
$112,500
$75,000
$37,500
Example: (contd.)
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:
Date
Explanation
Debit
Credit
Balance
2000 Balance, Dec. 31, 1999
45,500 dr
Merchandise billed to branch
at markup of 50% above
home office cost, or 33 1/3
% of billed price
120,000
165,500dr
Cash received from branch
113,000 52,500 dr
Operating expenses billed to
branch
4,500
57,000 dr
Example: (contd.)
Allowance for Overvaluation of Inventories:

Mason Branch
Date
Explanation
2000 Balance, Dec. 31,
1999
Makeup on
merchandise
shipped to branch
during 2000 (50% of
cost)
Debit
Credit
Balance
7,500 cr
40,000 47,500 cr
Example: (contd.)
Home Office
Date
Explanation
2000 Balance, Dec. 31,
1999
Merchandise
receivable from
home office
Debit
Cash sent to home

office
113,000
Operating expenses
billed by Home office
Credit
Balance
45,500 cr
120,000 165,500 cr
52,500 cr
4,500
57,000 cr
Example: (contd.)
The working paper for combined financial

statements under the periodic inventory
system is as follows:
Income Statement
Sales
Inventories, Dec. 31,
1999
Purchases
Home
Office
Mason
Branch
Dr (Cr)
Dr (Cr)
(500,000)
(150,000)
45,000
22,500
400,000
Dr (Cr)
Dr (Cr)
(650,000)
(b) (7,500)
60,000
400,000
Example: (contd.)

Income Statement
(contd.)
Home
Office
Mason
Branch
Dr (Cr)
Dr (Cr)
Shipments from home

office
Dr (Cr)
120,000
(a) 80,000
(c) 10,000
Inventories, Dec.
31,2000
(70,000)
(30,000)
Operating expenses
120,000
27,500
Net Income( to
earnings below)
85,000
10,000
Dr (Cr)
(90,000)
147,500
(d) 37,500
132,500
Example: (contd.)
Statement of
Retained Earnings

Home
Office
Mason
Branch
Dr (Cr)
Dr (Cr)
Dr (Cr)
Dr (Cr)
Retained earnings,
Dec. 31, 1999
(117,000)
Net Income (from

income statement
above)
(85,000)
(10,000)
Dividends declared
60,000
27,500
60,000
Retained earnings,
Dec. 31, 2000 (to
balance sheet below)
85,000
10,000
189,500
(117,000)
(d) (37,500)
(132,500)
Example: (contd.)

Balance Sheet
Home
Office
Mason
Branch
Dr (Cr)
Dr (Cr)
Dr (Cr)
Dr (Cr)
Cash
30,000
9,000
39,000
Trade accounts
receivable (net)
64,000
28,000
92,000
Inventories, Dec. 31,

2000
70,000
30,000
Allowance for
overvaluation of
inventories : Mason
Branch
(47,500)
(c) (10,000)
(a) 40,000
(b) 7,500
90,000
Example: (contd.)

Balance Sheet
(contd.)
Home
Office
Mason
Branch
Dr (Cr)
Dr (Cr)
Elimination Combined
s
Dr (Cr)
Dr (Cr)
Equipment
158,000
158,000
Accumulated
depreciation of
equipment
(15,000)
(15,000)
Trade Account payable
(24,500)
(24,500)
Home office
(57,000)
(150,000)
(e) 57,000
(150,000)
Example: (contd.)
(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.
(d) To increase income of home office by
portion of merchandise markup that was
realized by branch sales.
(e) To eliminate reciprocal ledger account
balances.
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:
(1)Inventory (ending)
30,000
Cost of Goods Sold 112,500*
Inventory (beg.) 22,500
Shipments from
Home Office
120,000
CGS=22,500+120,000-30,000

above the cost and using a periodic inventory system):(contd.)
(2)Sales
150,000
CGS
112,500
Operating expenses
27,500
Income Summary
10,000
(3) Income Summary

Home Office
10,000
10,000

Home Office Adjusting (1 and 2) and

Closing Entries (3) :
(1) Investment in Branch 10,000

Income: Mason Branch10,000
(2) Allowance for Overvaluation
of Inventories
37,500
Realized Gross Profit :
Mason Branch
37,500

(3) Realized Gross Profit

Income Summary
37,500
10,000
47,500

Balances of Investment in Mason

Branch, Allowance for Overvaluation of
Inventories, Realized Gross Profit,
Income: Mason Branch and Home
Office accounts after the above
adjusting and closing entries are:


=
$67,000
(dr.)
(57,000+10,000)
Allowance for Overvaluation of
Inventories
= $10,000
(cr.) (47,500 -37,500)

Realized Gross Profit

= $0 (37,500- 37,500)
= $0 (10,000-10,000)
Home Office (a reciprocal account of
Investment)
= $67,000 (cr.) (57,000+10,000)
Reconciliation of Reciprocal Ledger

Accounts
At the end of an accounting period, 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.
This is because some transactions may
have been recorded by the home office
but not the branch office.

Accounts (contd.)
Example (textbook p145): Assume

that the home office and branch
accounting records of Mercer
Company contain the following data
on 12/31/99:

Accounts (contd.)
Investment in Arvin Branch
(in accounting records of Home office)
Date
Explanation
Debit
Credit
Balance
1999
Nov. 30 Balance
62,500 dr
Dec. 10 Cash received from

branch
27 Collection of branch
trade accounts
receivable
29 Merchandise
shipped to branch
8,000
20,000
42,500 dr
1,000
41,500 dr
49,500 dr

Accounts (contd.)
Home Office
(in accounting records of Arvin Branch)
Date
Explanation
Debit
Credit
Balance
1999
Nov. 30 Balance
Dec. 7
Cash sent to home

office
28 Acquired equipment
30 Collection of home
office trade accounts
receivable
62,500 cr
20,000
42,500 cr
3,000
39,500 cr
2,000
41,500 cr

Accounts (contd.)
The following adjusting entries are

recorded prior to the preparation of the
working paper for the combined
financial statements (assuming a
perpetual inventory system)

Accounts (contd.)
For Arvin Branch:
1.Home Office
Trade Accounts
Receivable
1,000
2.Inventory
Home Office
8,000
1,000
8,000

Accounts (contd.)
For Mercer Home Office:
1.Equipment: Arvin Brach

3,000
Investment in Branch:
Arvin
3,000
2.Investment in Branch: Arvin 2,000

Trade Accounts Receivable
2,000

Accounts (contd.)
The balance of Investment in Branch: Arvin

ledger account at the home office equals:
$ 49,500
3,000
(cr.)
+
2,000
(dr.)
$ 48,500
(dr.)
(dr.)

Accounts (contd.)
After posting the above adjusting entries:

The balance of Home Office ledger account
at Arvin Branch equals:
$ 41,500
- 1,000
+ 8,000
$ 48,500
(dr.)
(cr.)
(cr.)
(cr.)
Transactions between Branches
When it is necessary to transfer

merchandise or assets from one branch to
another branch, Home Office Ledger
account is used by the branches.
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.

(contd.)
Example: (textbook p146-148)
The home office shipped merchandise costing

$8,000 to Katti Branch and paid freight costs
of $500.
A week later, the home office instructed Katti
Branch to transfer this merchandise to Danddi
Branch. Katti paid $400 for the transfer.
If the merchandise had been shipped directly
from the home office to Danddi, the freight
costs would have been $600.

(contd.)
Journal entries for these transactions are:
In Accounting Records of Home Office:
Investment in Katti Branch
8,500
Inventory 8,000
Cash
500
Investment in Danddi Branch

Freight Expense
300
in Katti
8,900
8,600
Excess
Investment
Branch

(contd.)
In Accounting Records of Katti Branch:
Freight In (or Inventory)
500
Inventories
8,000
Home Office
8,500
Home Office
Inventories
Freight-in
Cash
8,900
8,000
500
400

(contd.)
In Accounting Records of Danddi
Branch:
Inventories
8,000
Freight-in (or Inventories) 600
Home Office
8,600

Accounting For Branches and Combined FS

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Accounting For Branches and Combined FS

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Chapter 4

Accounting for Branches and

Objectives of this Chapter

To learn the accounting and

Branches and Divisions

Branches and divisions are separate

Branches and Divisions (contd.)

Branch: a business unit located at

Branches and Divisions (contd.)

Divisions: a segment of a business

Branches and Divisions (contd.)

Divisions: Accounting for a division

Start-up Costs of Opening New

Based on Statement of Position 98-5

Accounting System for a Branch

Two alternative systems:

Accounting System for a Branch (contd.)

Accounting System for a Branch (contd.)

This chapter focuses on the second

Reciprocal Ledger Accounts Used by the Branch

Home Office Ledger Account:

Reciprocal Ledger Accounts Used by the Branch

Home Office Ledger Account:

Reciprocal Ledger Accounts Used by the Branch

Investment in Branch Ledger Account:

Reciprocal Ledger Accounts Used by the Branch

Investment in Branch Ledger Account:

Acquisition of Plant Assets Used in

If a plant asset is acquired by the

Acquisition of Plant Assets Used in

For the home office: debit a plant

Acquisition of Plant Assets Used in

If a plant asset is acquired by a

Acquisition of Plant Assets Used in

For the branch: debit Home Office

Expense Incurred by Home Office

The home office may acquire plant assets

Expense Incurred by Home Office

These expenses are usually allocated

Expense Incurred by Home Office

a. For the home office: debit Investment

Interest Charged by the Home office on

When the home office serves only as an

Interest Charged by the Home office on

Such interest revenue recognized by

Alternative Methods of Billing

Three alternative methods are available to

Billed at the home office cost:

Strength: widely used because of its

Billed at a percentage above home

Strength: is able to allocate a

Billed at a percentage above home

Thus, for the combined financial

Billed at branch retail selling prices:

Strength: to increase the internal

Separate Financial Statements for Branch and

Separate financial statements for

Separate Financial Statements for Branch and

Also, the financial statements of

Combined financial Statements for Home

For investors, the home office and

Combined financial Statements for Home

In preparing the combined financial