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Chapter 4

Accounting for Branches and Combined Financial Statements


ACCT 501

Objectives of this Chapter


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

Accounting for Branches

Branches and Divisions


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

Accounting for Branches

Branches and Divisions (contd.)


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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.
Accounting for Branches 4

Branches and Divisions (contd.)


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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.
Accounting for Branches 5

Branches and Divisions (contd.)


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Divisions: Accounting for a division operated as a separate corporation is different from that of branches and will be discussed in latter chapters (6-11). Consolidated financial statements are required for these business organizations.

Accounting for Branches

Start-up Costs of Opening New Branches


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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 for Branches 7

Accounting System for a Branch


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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 for 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 for Branches

Accounting System for a Branch (contd.)


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This chapter focuses on the second system that the branch maintains its own accounting records.

Accounting for Branches

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Reciprocal Ledger Accounts Used by the Branch and Home Office


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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.
Accounting for Branches 11

Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.) s 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.
Accounting for Branches 12

Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.)
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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.
Accounting for Branches 13

Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.)
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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.

Accounting for Branches

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Acquisition of Plant Assets Used in Branch


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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:
Accounting for Branches 15

Acquisition of Plant Assets Used in Branch (contd.)


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For the home office: debit a plant asset account: branch, credit cash or a liability account. For the branch: no entry.

Accounting for Branches

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Acquisition of Plant Assets Used in Branch (contd.)


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If a plant asset is acquired by a branch for its usage but the accounting record for this plant asset is maintained by the home office, the accounting treatments are:
Accounting for Branches 17

Acquisition of Plant Assets Used in Branch (contd.)


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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.

Accounting for Branches

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Expense Incurred by Home Office and Allocated to Branches


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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.

Accounting for Branches

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Expense Incurred by Home Office and Allocated to Branches (contd.) These expenses are usually allocated
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to branches in determining net income of branches.


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These expenses include depr. expense for the plant assets purchased by home office but used by branches.
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Expense Incurred by Home Office and Allocated to Branches (contd.) chooses to allocate these expenses If the home office
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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.

Accounting for Branches

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Interest Charged by the Home office on the Capital Invested in Branches


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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.
Accounting for Branches 22

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

Accounting for Branches

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Alternative Methods of Billing Merchandise Shipments to Branches


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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.
Accounting for Branches 24

Billed at the home office cost:


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Strength: widely used because of its simplicity Weakness: attributes all gross profits of the business to the branches.

Accounting for Branches

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Billed at a percentage above home office cost:


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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.

Accounting for Branches

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Billed at a percentage above home office cost: (contd.)


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Thus, for the combined financial statement, the home office must eliminate the excess of billed prices over cost (intracompany profits).

Accounting for Branches

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Billed at branch retail selling prices:


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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.

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Separate Financial Statements for Branch and for Home Office (for internal use only)
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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.
Accounting for Branches 29

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

Accounting for Branches

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Combined financial Statements for Home Office and Branch (for external use)
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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.

Accounting for Branches

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

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Combined financial Statements for Home Office and Branch (for external use) (contd.)
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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.
Accounting for Branches 33

Combined financial Statements for Home Office and Branch (for external use) (contd.)
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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.

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
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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.
Accounting for Branches 35

Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
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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):
Accounting for Branches 36

Combined financial Statements for Home Office and Branch (for external use)(contd.)

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.)
Accounting for Branches 37

Combined financial Statements for Home Office and Branch (for external use)(contd.)

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.

Accounting for Branches

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

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.

Accounting for Branches

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
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These transactions and events are recorded by the home office and by Mason Branch as follows:
Mason Branch Accounting Records Journal Entries: Cash 1,000 Home Office 1,000

Home Office Accounting Records Journal Entries: 1.Investment in Mason Branch 1,000 Cash 1,000

Accounting for Branches

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
Home Office Accounting Records Journal Entries: 2. Investment in Mason Branch 60,000 Inventories 60,000 Inventories

Mason Branch Accounting Records Journal Entries: 60,000

Home Office 60,000

3. Equipment: Mason Home Office 500 Branch 500 Investment in Mason Cash Branch 500

500

Accounting for Branches

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
Home Office Accounting Records Journal Entries: 4. None

Mason Branch Accounting Records Journal Entries: Trade Accounts Receivable 80,000 Cost of Goods Sold 45,000 Sales Inventories 80,000 45,000

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
Home Office Accounting Records Journal Entries: 5. None Cash

Mason Branch Accounting Records Journal Entries: 62,000 Trade Account Receivable

62,000

6. None

Operating Expenses 20,000 Cash


Accounting for Branches

20,000
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Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
Home Office Accounting Records Journal Entries: 7. Cash 37,500

Mason Branch Accounting Records Journal Entries: Home Office 37,500 Cash 37,500

Investment in Mason Branch 37,500 8. Investment in Mason Branch 3,000 Operating Expenses 3,000

Operating Expenses 3,000 Home Office 3,000

Accounting for Branches

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Combined financial Statements for Home Office and Branch (for external use)(contd.)

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


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closing entries):

Investment in Mason Branch

Date Explanation 1999 sCash sent to branch sMerchandise billed to branch at home office cost sEquipment acquired by branch, carried in home office accounting records sCash received from branch sOperating expenses billed to branch

Debit Credit 1,000 60,000

Balance 1,000 dr 61,000 dr

500 60,500 dr 37,500 23,000 dr 3,000 26,000 dr


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Accounting for Branches

Combined financial Statements for Home Office and Branch (for external use)(contd.)

Example I: (contd.)
Home Office
Date Explanation 1999 sCash received from home office sMerchandise received from home office sEquipment acquired sCash sent to home office sOperating expenses billed by home office Debit

Credit 1,000

Balance 1,000 cr

60,000 61,000 cr 500 60,500 cr 37,500 23,000 cr 3,000 26,000 cr


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Accounting for Branches

Working Paper for Combined financial Statements--Example I


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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.

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

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.

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

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

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


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Working paper for combined Financial Statements of Home office and Mason Branch. For Year Ended December 31,1999 (Perpetual Inventory System: Billing at Cost)
Accounting for Branches 50

Working Paper for Combined financial Statements--Example I (contd.) Adjusted Trial Balances
Home Office Dr (Cr) Income Statement Sales Cost of goods sold Operating expenses
Net Income (to statement of retained earnings below) Totals

Mason Branch Dr(Cr) (80,000) 45,000 23,000 12,000 -0-

Eliminations Combined Dr (Cr) Dr (Cr)

(400,000) 235,000 90,000 75,000 -0-

(48,000) 280,000 113,000 87,000 -051

Accounting for Branches

Working Paper for Combined financial Statements--Example I (contd.) Adjusted Trial Balances
Statement of Retained Earnings Retained earnings, Jan. 1, 1999 Net(income) (from incomes statement above) Dividends declared Retained earnings, Dec.31,1999 (to balance sheet below) Totals
Accounting for Branches

Home Office Dr (Cr) (70,000)

Mason Branch Dr(Cr)

Eliminations Combined Dr (Cr) Dr (Cr) (70,000)

(75,000) 40,000

(12,000)

(87,000) 40,000 117,000 -052

Working Paper for Combined financial Statements--Example I (contd.) Adjusted Trial Balances
Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch Equipment Accumulated depreciation of equipment
Home Office Dr (Cr) 25,000
39,000

Mason Branch Dr(Cr) 5,000

Eliminations Combined Dr (Cr) Dr (Cr) 30,000


57,000

18,000 15,000
(a) (26,000)

45,000
26,000

60,000

150,000 (10,000)
Accounting for Branches

150,000 (10,000)
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Working Paper for Combined financial Statements--Example I (contd.) Adjusted Trial Balances
Balance Sheet (contd.)
Trade accounts payable

Home Office Dr (Cr) (20,000)

Mason Branch Dr(Cr)

Eliminations Combined Dr (Cr) (a) (26,000) (150,000) Dr (Cr) (20,000)

Home Office Common stock, $10 par Retained earnings (from statement of retained earnings above) Totals

(26,000) (150,000)

(117,000) -0-0-

-0-

-0-

(a) To eliminate reciprocal ledger account balances * the elimination appears in the working paper only
Accounting for Branches 54

Combined Financial Statements -- Example I


SMALDINO COMPANY Income Statement For Year Ended December 31, 1999
Sales Cost of goods sold Gross margin on sales Operating expenses Net Income Basic earnings per share of common stock
Accounting for Branches

$ 480,000 280,000 $ 200,000 113,000 $ 87,000


$ 5.80

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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

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Combined Financial Statements -- Example I (contd.)


SMALDINO COMPANY Balance Sheet December 31, 1999
Assets

Cash $ 30,000 Trade accounts receivable (net) 57,000 Inventories 60,000 Equipment $150,000 Less: Accumulated depreciation 10,000 140,000 Total assets $287,000
Accounting for Branches 57

Combined Financial Statements -- Example I (contd.) SMALDINO COMPANY


Balance Sheet (contd.), December 31, 1999
Liabilities & Stockholders Equity

Liabilities Trade accounts payable Stockholders equity


Common stock, $10 par, 15,000 shares authorized, issued, and outstanding Retained earnings Total liabilities & stockholders equity
Accounting for Branches

$20,000

$150,000 117,000

267,000
$287,000
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Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/1999 (perpetual inventory system):
Home Office Accounting Records Adjusting and Closing Entries: None Mason Branch Accounting Records Closing Entries: Sales 80,000 Cost of Goods Sold 45,000 Operating Expenses 23,000 Income Summary 12,000

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

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Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost s Similar information as in the previous example, except that the home office bills merchandise shipped to Mason branch at 50% markup of the cost. s Thus, the shipment of merchandise costing $60,000 will be recorded at the home office and branch as follows:

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Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)
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Journal entries for shipments to branch at prices above home office cost (perpetual inventory system):

Home Office Accounting Records Journal Entries: Investment in Mason Branch 90,000 Inventories 60,000 Allowance for Overvaluation of Inventories: Mason Branch 30,000

Mason Branch Accounting Records Journal Entries: Inventories 90,000 Home Office 90,000

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Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd.) s Thus, the balances of both the Investment in Mason Branch account and Home Office account will be $56,000, instead of $26,000 due to the inventory mark up of $30,000.

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Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)
SMALDINO COMPANY Flow of Merchandise for Mason Branch During 1999 Home Markup (50% of Billed Office Cost;33 1/3 % of Price Cost Billed Price) Beginning inventories
Add: Shipments from home office
$90,000

$60,000

$30,000

Available for sale $90,000 Less: Ending inventories 22,500 Cost of goods sold $67,500

$60,000 15,000 $45,000


Accounting for Branches

$30,000 7,500 $22,500


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Working Paper for Example II


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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)
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Working Paper for Example II (contd.)


Adjusted Trial Balances Home Office Dr (Cr) Income Statement Sales Cost of goods sold Operating expenses
Net Income(loss) (to statement of retained earnings below) Totals

Mason Branch Dr(Cr) (80,000) 67,500 23,000 (10,500) -0-

Eliminations Combined Dr (Cr) Dr (Cr)

(400,000) 235,000 90,000 75,000 -0-

(48,000) (a) (22,500) 28,000 113,000 (b) 22,500 87,000 -066

Accounting for Branches

Working Paper for Example II (contd.)


Statement of Retained Earnings Retained earnings, Jan. 1, 1999 Net(income) loss (from incomes statement above) Dividends declared Retained earnings, Dec.31,1999 (to balance sheet below) Totals
Accounting for Branches

Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) (70,000) (70,000)

(75,000) 40,000

(10,500)

(b) (22,500)

(87,000) 40,000 117,000 -067

Working Paper for Example II (contd.)


Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch
Allowance for overvaluation of inventories: Mason Branch

Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) 25,000 5,000 30,000
39,000

18,000 22, 500


(a) (7,500)
(c) (56,000)

57,000

45,000
56,000

60,000

(30,000)
Equipment

(a) 30,000
150,000
Accounting for Branches 68

150,000

Working Paper for Example II (contd.)


Balance Sheet (contd.)
Accumulated depreciation of inventories: Mason Branch
Trade accounts payable

Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)

(10,000)

(10,000)

(20,000) (56,000) (150,000) (c) (56,000)

(20,000) (150,000) (117,000)

Home Office Common stock, $10 par Retained earnings(from statement of retained earnings above) Totals

-0-

-0Accounting for Branches

-0-

-069

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost)
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Branch Closing Entries--The closing entries for the branch at the end of 1999 are as follows: 80,000 10,500

Sales Income Summary Cost of Goods Sold Operating Expenses To close revenue and expense ledger accounts

67,500 23,000

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Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at 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

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Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
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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. $56,000-net loss of $10,500 = $45,500 (net loss decreases Home Office credit balance).

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

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Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
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.
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Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
Home Office Adjusting and Closing Entries (contd.)

Realize Gross Profit: Mason 22,500 Branch Sales Income: Mason Branch 10,500 Income Summary 12,000 To close branch net loss and realized gross profit to Income Summary ledger account (Income tax effects are disregarded.)
Accounting for Branches 75

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
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After posting the above entries, the account balance for the following accounts is:
=45,500(debit)* =7,500(credit)** =0 =0

Investment in Mason Branch Allowance for Overvaluation of Inventories: Mason Branch Realized Gross Profit: Mason Branch Income: Mason Branch

* 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. Accounting for Branches

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Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) s 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.

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Periodic Inventory System


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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.
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System (contd.)

Periodic Inventory

Example:
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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).
Accounting for Branches 79

System (contd.)

Periodic Inventory

Example: (contd.)
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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:

Accounting for Branches

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System (contd.)

Periodic Inventory

Example: (contd.)
Home Office Accounting Records Journal Entries: Investment in Mason Branch 90,000 Shipments to Mason Branch 80,000 Allowance for Overvaluation of Inventories: Mason Branch 40,000 None Cash (or Trade Accounts Receivable) 150,000 Sales 150,000
Accounting for Branches 81

Mason Branch Accounting Records Journal Entries: Shipments from Home Office 120,000 Home Office 120,000

System (contd.)
s

Periodic Inventory

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 Add: Shipments from home office

Home Office Cost

Markup (50% of Cost;33 1/3 % of Billed Price)


$7,500
40,000

$22,500
120,000

$15,000
80,000

Available for sale


Less: Ending inventories Cost of goods sold

$142,500

$95,000
(20,000) $75,000
Accounting for Branches

$47,500
(10,000) $37,500
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(30,000) $112,500

System (contd.)
s

Periodic Inventory

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: Investment in Mason Branch
Explanation Debit Credit Balance Date

200 sBalance, Dec. 31, 45,500 0 1999 dr sMerchandise billed to branch at markup of 50% 120,000 above 113,00 165,500 home office cost, or dr 0 33 1/3 52,500 4,500 Accounting for Branches 83 % of billed price

System (contd.)

Periodic Inventory

Example: (contd.)
Allowance for Overvaluation of Inventories: Mason Branch
Date Explanation 2000 sBalance, Dec. 31, 1999 sMakeup on merchandise shipped to branch during 2000 (50% of cost) Debit Credit Balance 7,500 cr

40,000 47,500 cr
Accounting for Branches 84

System (contd.)

Periodic Inventory

Example: (contd.)
Home Office
Date Explanation Debit Credit Balance 45,500 cr 120,00 165,500 0 cr 113,00
Accounting for Branches

200 sBalance, Dec. 0 31, 1999 sMerchandise receivable from home office Cash sent to home
s

52,500
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System (contd.)

Periodic Inventory

Example: (contd.)
s

The working paper for combined financial statements under the periodic inventory system is as follows:
Adjusted Trial Balances Home Office Mason Branch Dr (Cr) Dr (Cr) (150,000) 22,500 (b) (7,500) Eliminations Combined Dr (Cr) Dr (Cr) (650,000) 60,000 400,000
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Income Statement

Sales Inventories, Dec. 31, 1999 Purchases Shipments to Mason Branch

(500,000) 45,000 400,000

Accounting for Branches

System (contd.)

Periodic Inventory

Example: (contd.)
Income Statement (contd.) Adjusted Trial Balances Home Office Mason Branch Dr (Cr) Dr (Cr) Eliminations Combined Dr (Cr) Dr (Cr)

Shipments from home office Inventories, Dec. 31,2000 Operating expenses Net Income( to statement of retained earnings below) Totals (70,000) 120,000 85,000 -0-

120,000 (30,000) 27,500

(a) 80,000 (c) 10,000 (90,000) 147,500 132,500 -0- 87

10,000 (d) 37,500 Accounting for Branches -0-

System (contd.)

Periodic Inventory

Example: (contd.)
Adjusted Trial Balances Statement of Retained Home Office Mason Earnings Branch Dr (Cr) Retained earnings, Dec. 31, 1999 Net Income (from income statement above) Dividends declared Retained earnings, Dec. 31, 2000 (to balance sheet below) Totals Dr (Cr) Eliminations Combined Dr (Cr) Dr (Cr)

(117,000) (85,000) 60,000 85,000 (10,000) 27,500 10,000


Accounting for Branches

(117,000) (d) (37,500) (132,500) 60,000 189,500 -0- 88

System (contd.)

Periodic Inventory

Example: (contd.)
Balance Sheet Adjusted Trial Balances Home Office Mason Branch Dr (Cr) Cash Trade accounts receivable (net) Inventories, Dec. 31, 2000 Allowance for overvaluation of inventories : Mason Branch Investment in Mason Branch 30,000 64,000 70,000 Dr (Cr) 9,000 28,000 30,000 (c) (10,000) (a) 40,000 (b) 7,500
Accounting for Branches 89

Eliminations Combined Dr (Cr) Dr (Cr) 39,000 92,000 90,000

(47,500)

System (contd.)

Periodic Inventory

Example: (contd.)
Balance Sheet (contd.) Adjusted Trial Balances Eliminations Combined Home Office Mason Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)

Equipment Accumulated depreciation of equipment Trade Account payable Home office Common stock, $10 par Retained earnings (from statement of retained

158,000 (15,000) (24,500) (57,000) (150,000)


Accounting for Branches

158,000 (15,000) (24,500) (e) 57,000 (150,000)


90

System (contd.)

Periodic Inventory

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.
Accounting for Branches 91

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):
s

Branch Closing Entries:

(1)Inventory (ending) Cost of Goods Sold Inventory (beg.) Shipments from Home Office

30,000 112,500* 22,500 120,000

CGS=22,500+120,000-30,000
Accounting for Branches 92

Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)

(2)Sales

150,000 CGS 112,500 Operating expenses 27,500 Income Summary 10,000 10,000 10,000
Accounting for Branches 93

(3) Income Summary Home Office

Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.) s

Home Office Adjusting (1 and 2) and Closing Entries (3) :

(1) Investment in Branch 10,000 Income: Mason Branch 10,000 (2) Allowance for Overvaluation of Inventories 37,500 Realized Gross Profit : Mason Branch 37,500
Accounting for Branches 94

Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)

(3) Realized Gross Profit Income: Mason Branch Income Summary

37,500 10,000 47,500

Accounting for Branches

95

Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)
s

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:

Accounting for Branches

96

Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)
s

Investment in Mason Branch = $67,000 (dr.) (57,000+10,000) Allowance for Overvaluation of Inventories = $10,000 (cr.) (47,500 -37,500)
Accounting for Branches 97

above the cost and using a periodic inventory system):(contd.) s Realized Gross Profit = $0 (37,500- 37,500)
s

Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at

Income: Mason Branch = $0 (10,000-10,000) Home Office (a reciprocal account of Investment) = $67,000 (cr.) (57,000+10,000)

Accounting for Branches

98

Reconciliation of Reciprocal Ledger Accounts


s

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.

Accounting for Branches

99

Reconciliation of Reciprocal Ledger Accounts (contd.)


s

Example (textbook p145): Assume that the home office and branch accounting records of Mercer Company contain the following data on 12/31/99:

Accounting for Branches

100

Reconciliation of Reciprocal Ledger Accounts (contd.) Investment in Arvin Branch


Date Explanation Debit 1999 Nov. 30 Balance Dec. 10 Cash received from branch 27 Collection of branch trade accounts receivable 29 Merchandise shipped to branch 8,000
Accounting for Branches

(in accounting records of Home office)


Credit Balance 62,500 dr 20,000 1,000 42,500 dr 41,500 dr 49,500 dr
101

Reconciliation of Reciprocal Ledger Accounts Home Office (contd.)


Date Explanation Debit 1999 Nov. 30 Balance Dec. 7 Cash sent to home office 28 Acquired equipment 30 Collection of home office trade accounts receivable

(in accounting records of Arvin Branch)


Credit Balance 62,500 cr 20,000 3,000 2,000
Accounting for Branches

42,500 cr 39,500 cr 41,500 cr


102

Reconciliation of Reciprocal Ledger Accounts (contd.)


s

The following adjusting entries are recorded prior to the preparation of the working paper for the combined financial statements (assuming a perpetual inventory system)

Accounting for Branches

103

Reconciliation of Reciprocal Ledger Accounts (contd.)


s

For Arvin Branch:

1.Home Office 1,000 Trade Accounts Receivable 2.Inventory 8,000 Home Office 8,000

1,000

Accounting for Branches

104

Reconciliation of Reciprocal Ledger Accounts (contd.)


s

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

Accounting for Branches

105

Reconciliation of Reciprocal Ledger Accounts (contd.)


s

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

Accounting for Branches

106

Reconciliation of Reciprocal Ledger Accounts (contd.)


s s

After posting the above adjusting entries: The balance of Home Office ledger account at Arvin Branch equals: $ 41,500 - 1,000 (dr.) + 8,000 (cr.) $ 48,500 (cr.) (cr.)

Accounting for Branches

107

Transactions between Branches


s

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.
Accounting for Branches 108

Transactions between Branches (contd.)


s

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.
Accounting for Branches 109

Transactions between Branches (contd.)


Journal entries for these transactions are: sIn Accounting Records of Home Office: Investment in Katti Branch 8,500 8,000 Cash 500
s

Inventory

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

Accounting for Branches

110

Transactions between Branches (contd.)


In Accounting Records of Katti Branch: Freight In (or Inventory) 500 Inventories 8,000 Home Office 8,500
s

Home Office

Inventories Freight-in Cash

8,900

8,000 500 400


111

Accounting for Branches

Transactions between Branches (contd.)


s

In Accounting Records of Danddi Branch:

Inventories 8,000 Freight-in (or Inventories) 600 Home Office

8,600

Accounting for Branches

112