Branches Latest Chapter

Chapter 2
Accounting for Consignment Sales ,

Branches and Head office Combined
Financial Statements
1
CONSIGNMENTS
 Consignment is a transfer of merchandise from

owner(Consignor/Principal) to another person who
acts as a sales agent.
 Consignor/Principal is the owner of the goods with
whom the title of ownership to the goods remain.
 Consignee is the sales agent who has physical
possession of the goods, but has no title of
ownership on them.(commission agent).
2
RIGHTS OF CONSIGNEE
 To receive compensation for merchandise sold on

behalf of the consignor.
 To receive re-imbursements for expenses incurred in
connection which the consignment.
 To sell consigned merchandise on credit, unless the
consignor specifically prohibits him/her.
 To make usual warrants as to the quality of the
consigned merchandise and obligate the consignor to
such warrants.
3
THE DUTIES OF THE CONSIGNEE
 To give reasonable care and protection to the
consigned merchandise.
 To maintain separate record and segregate
consignment receivables, sales and inventory from its
own.
 To exercise care in extending credit on sale of
consigned goods, and be diligent on setting up selling
prices, and collecting consignment receivables.
 To render complete reports on sales of consigned
goods and make appropriate and timely payments to
consignor.
4
Illustrative example :
• Assume that Jafar Book Center(consignor) and
AAU Book Center(consignee) have has signed
consignment contract. Jafar shipped 100 copies of
books purchased at birr 200 each on consignment
to AAU Book Center to be sold at 300 Birr each.
• The consignee [AAU] is to receive reimbursements
for freight costs of Birr 1,000 and commission of 25%
of the sales price. Having sold all the books , the
consignee sent the following sales report together
with a bank slip for the amounts due.
5
AAU Book Center--Addis Ababa
Account : Sales
Date: September 30, 2022
Sales Report for Jafar Book Center --Addis Ababa

Sales: 100 books @ Birr 300 Birr 30,000.00
Less: Freight cost 1,000.00
Commission 25% of 30,000 7,500.00
8,500.00
Balance [Amount to be remitted]
21,500.00
Required: Record the following transactions on the book of AAU Book Center and
Jafar Book Center
a. Receipts of Books by consignee(AAU)

b. Payment of Freight charges by consignee
c. Sales of 100 Books at Birr 300 each
d. Remittance to consignor, amount due
6
Solution
AAU Book Center Jafar Book Center

a. . No Entry( Memo) Consigned Inventories 20,000
Inventories 20,000
b. A/R- Jafar 1,000 Consigned Inventories 1,000
Cash 1,000 A/P- AAU 1,000
C. Cash 30,000 No Record until sales report and

Commission Income 7,500 remittance by AAU
A/P- Jafar
d. A/P- Jafar 22,500
22,500 Cash 21,500
A/R- Jafar 1,000 A/P- AAU 1,000
Commission Expense 7,500
Cash 21,500 Consignment Sales ………..30,000
CGS-Consignment 21,000
Consigned Inventories 21,000
7
Branches and Head Office

Branches are separate economic
and accounting entities from their
home office.

However, they are not separate legal
entities from their home office.
8
Branches (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.
9
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.
10
Accounting System for a Branch (contd.)
2. The branch maintains a complete

set of accounting records
• Branch maintains its own journal

entries and ledger accounts.
• Financial statements are prepared
by the branch account and
forwarded to the home office.
11
Accounting System for a Branch (contd.)

This chapter focuses on the second
system that the branch maintains its
own accounting records.
12
Accounting for branches- Reciprocal 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.
13
Used by the Branch and Home Office(contd.)

Home Office 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.
14

Investment in Branch Account:
 This account is a reciprocal 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.
15

Investment in Branch Account:
It is credited for cash, or other assets received
from the branch, and for net losses reported by
the branch.
16
Acquisition of Plant Assets Used in
Branch

If a plant asset is acquired by the home office
for a branch’s usage and the record for the
plant asset is maintained by the home office,
the accounting treatments are:

For the home office: debit a plant asset
account: branch, credit cash or a liability
account.

For the branch: no entry.
17
Plant Assets Used in Branch (contd.)

If a plant asset is acquired by a branch, but the
accounting record for this plant asset is
maintained by the home office, the accounting
treatments are:

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. 18
Expense Incurred by Home Office and
Allocated to Branches

The home office may pay some taxes,
insurance or advertising on behalf of branches
or for the benefits all branches.

These expenses include depreciation expense
for the plant assets purchased by home office
but used by branches

These expenses are usually allocated to
branches in determining net income of
branches. 19
Expense Incurred by Home Office 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.
20
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 branch’s retail selling
price.
21

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 mark up(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 . Thus, for the combined financial statement, the
home office must eliminate the excess of billed prices over
cost (intracompany profits).
22
Billing 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 branch’s net loss will
equal its operating expenses.
23
Separate Financial Statements for Branch and for
Home Office (for internal use only)

Separate financial statements of branches and
head office are prepared and presented to
management for performance evaluation
purpose.

Separate financial statement doesn't serve
external users

However, to prepare financial statements for
external users , branches financial statement
should be revised to eliminate any intercompany
profits on merchandise shipments.
24
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.
25
Combined financial Statements of Home
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.
26
Example I:

Assume Ethiopian Pharmaceutical Supply Agency(EPSA)
bills merchandise to Adama Branch at home office cost

Adama 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.

Expenses, such as advertising and insurance, incurred by the
home office on behalf of the branch, are allocated to the
branch.

Transactions and events during the first year (2000) of
operations of Adama Branch are summarized below
27
Example I: (contd.)
1. Cash of Br.1,000 was transferred from the home
office to Adama Branch.
2. Merchandise with a home office cost of Br.60,000
was shipped by the home office to Adama Branch.
3. Equipment was acquired by Adama Branch
forBr.500, to be carried in the home office
accounting records. (Other plant assets for Adama
Branch generally are acquired by the home office.)
4. Credit sales by Adama Branch amounted to
Br.80,000; the branch’s cost of the merchandise sold
was Br.45,000.
28
)
Example I: (contd.)
5. Collections of trade accounts receivable by
Adama Branch amounted toBr.62,000.
6. Payments for operating expenses by Adama
Branch totaledBr.20,000.
7. Cash ofBr.37,500 was remitted by Adama Branch
to the home office.
8. Operating expenses incurred by the home office
and charged to Adama Branch totaledBr.3,000.
29
.)
Example I: (contd.)
Required:

Record the above transactions on the book of
adama branch and on the book of head office too
when the transaction is between the two:
Home Office Book Adama Branch Book

1.Investment in Adama Branch 1,000 Cash 1,000
Cash 1,000 Home Office 1,000
2. Investment in Adama Branch 60,000 Inventories 60,000
Inventories 60,000 Home Office 60,000
30
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
3. Equipment: Adama Branch 500 Home Office 500

Investment in Adama Branch 500 Cash 500
4. None Accounts Receivable 80,000

Cost of Goods Sold 45,000
Sales 80,000
Inventories 45,000
31
Example I: (contd.)
5. None Cash 62,000
Account Receivable 62,000
6. None Operating Expenses 20,000
Cash 20,000
7. Cash 37,500 Home Office 37,500

Investment 37,500 Cash 37,500
8. Investment 3,000 Operating Expenses 3,000
Ope. Expenses 3,000 Home Office 3,000
32
Example I: (contd.)

Two Reciprocal Ledger Accounts (prior to adjusting(for
investment) and closing entries( for Home office):
Investment in Adama Branch
Date Explanation Debit Credit Balance
2000 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
33
Example I: (contd.)
Home Office
2000 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
34
Separate and Combined Financial Statement
 There are three accountants engaged in preparing
Separate and Combined Financial Statements
Assume : Ato Abebe is branch accountant
Ato Kebede is head office unit accountant
Ato Kassa is General Accountant of EPSA
1. Separate F.S of branch ( by Ato Abebe)
2. Separate F.S of Head office Unit( Ato Kebede)
3. Combined F.S of head office unit and Branch(Ato Kassa)
35
Prepare Separate Financial
Statement for adama branch and
pass closing entries for temporary
accounts
Prepared by Ato Abebe( Branch Accountant).
And then the soft copy and hard copy of the F.S
will be sent to Ato Kassa For Combined F.S
36
Example I - Separate Financial Statements of
branch
EPSA-Adama Branch
Income Statement
For Year Ended December 31, 2000
Sales Br 80,000
Cost of goods sold 45,000
Gross margin on sales 35,000
Operating expenses 23,000
Net Income Br 12,000
37
branch
EPSA-Adama Branch
Statement of Home office
Home office , beginning of year 0

Add: Home office during 2000 26,000
Net income
12,000
Home office, end of year 38,000
38
branch
EPSA-Adama Branch
Balance Sheet
December 31, 2000
Cash Br.5,000
Accounts receivable 18,000
Inventories 45,000
Total assets Br.38,000
liability 0
Home office Br.38,000
Liability and Home office Br.38,000
39
Branch Closing Entries After its separate financial statement
Adama Branch Book
Sales 80,000
Operating Expenses 23,000
Income Summary 12,000

Home Office 12,000
Now home office ledger shows updated ending balance of home
office account 38,000 ( 26,000 by 8 transaction + 12,000 closing)
40
Prepare Separate Financial
Statement for Head Office Unit
and pass closing entries for
temporary accounts
Prepared by Ato Kebede ( H.O Unit Accountant).

The copy( soft copy and hard copy) of the F.S
will be sent to Ato Kassa For Combined F.S
41
Home Office Adjusting entry for profit reported by branch
 Since Home Office account has been increased( from

26,000 to 38,000) by branch profit during closing entry,
Investment in branch should also be adjusted by branch profit
so that both reciprocal account will have the same 38,000
balance ( equity method of accounting)
Thus , adjusting entry for branch profit will be:
Home Office Book
Investment in Adama Branch 12,000
Branch Income: Adama 12,000
42
The next separate financial
statement of Head office is given
43
Example I- separate financial statement of Head
office
EPSA –Head Office
Income Statement
Sales Br 400,000
Separate Net Income Br 75,000
Add: Branch income (adjustment) 12,000
Total Net income Br 87,000
44
Example I- separate financial statement of
Head office
EPSA- Head Office
Statement of Retained Earnings
Retained earnings, beginning of year Br. 70,000

Add: Net income 87,000
Subtotal 157,000
Less: Dividends 40,000
Retained earnings, end of year 117,000
45
office
EPSA-Head Office
Balance Sheet
December 31, 2000
Assets
Cash Br. 25,000
Trade accounts receivable (net) 39,000
Inventories 45,000
Investment in branch 38,000
Equipment 150,000
Less: Accu. depreciation 10,000 140,000
Total assets 287,000
46
Head office
Liabilities & Equity
Liabilities
Trade accounts payable 20,000
Equity
State Capital 150,000
Retained earnings 117,000 267,000
Total liabilities & equity 287,000
47
Closing Entries- on the book of head office
Closing entry on Head office book

Sales 400,000
Branch Income –Adama 12,000
Income summery 87,000

Retained earning 87,000
48
Important Notes
 Since head office adjusts Investment in branch
account by branch profit( equity method) , Head
office unit net income is equal to combined net
income of head office and branch
 Since retained earning and dividend accounts are
not branch accounts, Head office equity is equal
to combined equity of head office unit and
branch.
49
Combined Financial Statement
for external reporting
Prepared by Ato Kassa( EPSA General

accountant) after receiving Separate F.S
from branch and Head office Unit
50
Important notes on combined financial
statement
This report is prepared by general accountant of the
firm who is not accountant of head office or branch
Combined report is prepared using work sheet
 and hence, it doesn’t require closing entries
Closing entries are made only for separate F.S and
hence, they are made by branch and H.O unit

accountants
51
statement
The following are eliminated from separate financial
statements
1. any intercompany profits or losses
a. branch Income/loss: if not eliminated , there will be
double counting in combined F.S( branch income(on
H.O report) and Revenue less expense (on branch
income statement)
b. Allowance( H.O mark up and it exists if billing is
made at mark up)
2. the reciprocal accounts, &
3. any intracompany receivables and payables , if any
52
Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Home Adama
Office Branch Eliminations Combined
Income Statement
Sales (400,000) (80,000) (480,000)
Cost of goods sold 235,000 45,000 280,000
Operating expenses 90,000 23,000 113,000

Net Income 87,000
(separate) 75,000 12,000
Branch Income
12,000 -0- (12,000) -0-
87,000 12,000 (12,000) 87,000
Total
53
Statement of Retained Home Adama Eliminations Combined
Earnings Office Branch
Retained earnings, Jan. (70,000) (70,000)

1, 2000
Net(income) (from
incomes statement (75,000) (12,000) (87,000)
above)
Dividends declared 40,000 40,000
Retained earnings,
Dec.31,2000 (to 117,000
balance sheet below) 117,000
Totals -0-
54
Home Adama Eliminations Combined
Balance Sheet Office Branch
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 branch 38,000 (a) (38,000)
Equipment 150,000 150,000

Accumulated
depreciation (10,000) (10,000)
55
(contd.) Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Trade accounts payable (20,000) (20,000)
Home Office (38,000) (a) (38,000)
State Capital (150,000) (150,000)
Retained earnings
(from statement of
retained earnings
above) (117,000) (117,000)
Totals -0- -0- -0- -0-
(a) To eliminate reciprocal ledger account balances
* the elimination appears in the working paper only
56
Combined Financial Statements --
Example I
EPSA
Income Statement
Sales Br 480,000
57
Example I (contd.)
EPSA
Retained earnings, beginning of year Br 70,000

Subtotal 157,000
58
Example I (contd.)
EPSA
Balance Sheet
December 31, 2000
Assets
Cash 30,000
Inventories 60,000
Equipment 150,000
Less: Accumulated depreciation 10,000 140,000
59
Example I (contd.)
EPSA
Balance Sheet (contd.), December 31, 2000
Liabilities & Stockholders’ Equity
Liabilities
Equity
60
Example II : Billing of
Merchandise to Branches at
Prices above Home Office Cost
61
Example II : Billing of Merchandise to Branches at

Assume the previous example, except that the
home office bills merchandise shipped to
Adama branch at 50% markup of the cost.

All the transaction will be same , except
transaction 2 and 4 as follows:
62
Required:
Record the above transactions on the book of adama
branch and head office when the transaction is
between the two:

2. Investment in Branch 90,000 Inventories 90,000

Inventories 60,000 Home Office 90,000
Allowance(unrealized GP) 30,000
63
Example II : Billing of Merchandise to Branches at Prices above
Home Office Cost

Sales 80,000
Inventories 67,500
64
5. None Cash 62,000
Cash 20,000

65`\
[;
Example II: (contd.)

Two Reciprocal Ledger Accounts (prior to adjusting
and closing entries):
2000 Cash sent to branch 1,000 1,000 dr




66
Example I I: (contd.)
Home Office
office 1,000 1,000 cr


67

Before closing of branch temporary accounts and
adjusting by H.O for branch net income, the balances
Investment and Home Office account will be
Br.56,000, instead of Br.26,000 due to the inventory
mark up of Br.30,000.

The two will have a Br 45,500 balances instead of
38,000 after closing and adjustment .
68
Example II : Separate Financial
Statement
Prepare Separate income

statement and balance sheet for
adama branch- by summering the
8 transactions
ACCT 501
Example II - Separate Financial Statements of
branch
EPSA-Adama Branch
Income Statement
Sales Br 80,000
Net loss (Br 10,500)
70
Example II - Separate Financial Statements of
branch
EPSA-Adama Branch

Net loss (10,500)
71
Example II - Separate Financial Statements
of branch
EPSA-Adama Branch
Balance Sheet
December 31, 2000
Cash Br.5,000
Inventories 22,500
liability 0
72
Branch Closing Entries After its separate financial statement
–Example -II
Adama Branch Book
Sales 80,000
Home Office 10,500

73
Branch Closing Entries

After the closing entries, the Home Office ledger
account will have a balance of Br.45,500.

Note: Home Office balance prior to the closing
entries equalsBr.56,000.

56,000-net loss of 10,500 =Br.45,500 (net loss
decreases Home Office credit balance).
74
EXAMPLE -II
Separate Financial Statements

of Head Office
75
Head office Adjusting
Investment is adjusted for branch net income/loss

Head office unrealized GP( allowance) is adjusted
for merchandise sold by branch as it can only be
realized when the branch sells those merchandise to
third party
Therefore:
Mark up on branch CGS is the realized GP of head office
( realized allowance portion)
The balance of allowance ( still the unrealized GP) is
always mark up on ending inventory of branch
Check the next slide for detail
76
Allowance( head office unrealized GP )
EPSA
Flow of Merchandise for Adama Branch During 2000
Billed Home Allowance
Price Office
Cost
Beginning inventories
Add: Shipments
from home office Br90,000 Br60,000 Br30,000
Available for sale Br90,000 Br60,000 Br30,000
Less: Ending
inventories 22,500 15,000 7,500
Cost of goods
sold Br67,500 Br45,000 Br22,500
77
Head office Adjusting Entry
Home Office Book
1. Branch Loss 10,500
2. Allowance 22,500
Realized Gross profit 22,500
 Both branch loss and realized GP are reported in H.O
income statement
 Therefore, the branch income reported by the head office
will be: loss of 10,500+ realized GP of 22,500 = 12,000

income
 Allowance balance = 7,500(30,000-22,500)
78
Example II- separate financial statement of
Head office- Billing at Mark up
EPSA –Head Office
Income Statement
Sales Br 400,000
Add: Branch loss (adjustment) (10,500)
Realized gross profit (adjustment) 22,500 12,000
79
Head office
EPSA- Head Office
Retained earnings, beginning of year Br. 70,000

Subtotal 157,000
80
office
EPSA-Head Office
Balance Sheet
December 31, 2000
Assets
Cash Br. 25,000
Inventories 45,000
Allowance (7,500)
Equipment 150,000
81
Head office
Liabilities
Equity
82
Home Office Closing Entries- on the book of head office

Sales 400,000
Realized GP 22,500
Branch Loss 10,500

83
Home office Adjusting and Closing Entries (contd.)

After posting the above entries, the account
balance for the following accounts is:
Investment in Adama Branch =45,500(debit)*
Allowance for Overvaluation of =7,500(credit)**
Inventories: Adama Branch
* Balance prior to the above entries equalsBr.56,000. Br.56,000- 10,500

(net loss of the branch reduces the debit balance of the Investment
account) =Br.45,500.
**Br.30,000-22,500 =Br.7,500. 84
Combined Financial Report-
Example -II
85
statement
 The following are eliminated from separate financial

statements
1) branch income/loss
2) Eliminate Allowance and adjust branch ending
inventory to actual cost
3) Eliminate realized GP and adjust branch CGS to
actual cost
4) Eliminate the reciprocal accounts,
5) Eliminate any intracompany receivables and
payables
86
Elimination entry for combined financial statement
1) Allowance (H.O)…….7,500
Ending inventory (Branch)…….7,500
2) Realized GP(H.O) 22,500

CGS(branch)……..22,500
3. Home office(branch) 45,500

investment in branch(H.O) 45,500
87
Working Paper for Example II (contd.)
Home Adama
Office Branch Eliminations Combined
Income Statement
Sales (400,000) (80,000) (480,000)
Cost of goods sold 235,000 67,500 (2) (22,500) 280,000
Operating expenses 90,000 23,000 113,000
Branch loss 10,500 (10,500)
Realized GP (22,500)
(2) 22,500
Net Income(loss) 87,000 (10,500) (10,500)
87,000
88


1, 2000
Net(income) loss (from
incomes statement
above) (87,000) 10,500 (10,500) (87,000)
Retained earnings,
Dec.31,2000 (to 117,000
89
Dr (Cr) Dr(Cr) 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 (1) (7,500) 60,000
Investment in Branch 45,500 (3) (45,500)
Allowance (7,500) (1) 7,500
Equipment 150,000 150,000

Accumulated
depreciation (10,000) (10,000)
90
Home Office (45,500) (3) 45,500
State Capital (150,000) (150,000)
Retained earnings(from
statement of retained
earnings above) (117,000) (117,000)
Totals -0- -0- -0- -0-

91
Example II
EPSA
Income Statement
Sales Br 480,000
92
Example II (contd.)
EPSA
Retained earnings, beginning of year Br 70,000

Subtotal 157,000
93
Example II (contd.)
EPSA
Balance Sheet
December 31, 2000
Assets
Cash 30,000
Inventories 60,000
Equipment 150,000
94
Example I (contd.)
EPSA
Balance Sheet (contd.), December 31, 2000
Liabilities & Stockholders’ Equity
Liabilities
Equity
95
Combined Financial Statements
 Combined financial statement for external reporting

is the same under all the three methods of billing.
 But separate financial report of head office and
branch are different under the three billing methods
96
Periodic Inventory System
 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 Branch” (used by
the home office) and “Shipments from Home Office”
(used by the branch) are used.
97
Example III- Record the 8 EPSA transactions
under Periodic system- Billing at Home
Office Cost
98
Example III: (contd.)

2. Investment in Adama Branch 60,000 Shipment from H.O 60,000
Shipment to branch 60,000 Home Office 60,000
99


Sales 80,000
100
5. None Cash 62,000
Cash 20,000

101

2000 
Cash sent to branch 1,000 1,000 dr




102
Home Office
office 1,000 1,000 cr


103
Example III Cont…
Prepare Separate income

statement and balance sheet for
adama branch
ACCT 501
Periodic System-Branch CGS
Beginning Inventory 0
Add: Shipments from home office 60,000
Goods Available for sale 60,000
Less : Ending Inventory (15,000)
Cost of goods Sold 45,000
105
Periodic system - Separate Financial
Statements of branch
EPSA-Adama Branch
Income Statement
Sales Br 80,000
106
Example III - Separate Financial Statements of
branch
EPSA-Adama Branch

Net income
12,000
107
Example III - Separate Financial Statements of branch
EPSA-Adama Branch
Balance Sheet
December 31, 2000
Cash Br.5,000
Inventories 45,000
liability 0
108
Branch Closing Entries:
1. Inventory (ending) 15,000

Income Summery 45,000
Shipments from Home Office 60,000
Beginning Inventory 0
( to adjust inventory balance and close shipment from H.O account)
2. Sales 80,000
Income Summary 57,0 00
3. Income Summary 12,000
Home Office 12,000
109
Example III- separate financial
statement of Head office
110
Head Office Adjusting entry for profit reported by branch
 Since Home Office account has been increased( from

26,000 to 38,000) by branch profit during closing entry,
Investment in branch should also be adjusted by branch profit
so that both reciprocal account will have the same 38,000
balance
Thus , adjusting entry by branch profit will be:
Home Office Book
Branch Income: Adama 12,000
111
Periodic System-Head Office CGS
Beginning Inventory 40,00
Add: Purchase 300,000
Goods Available for sale 340,000
Less : Shipments to branch (60,000)
Ending Inventory (45,000)
Cost of goods Sold 235,000
 Assume out 340,000 H.O goods available for sale : 40,000 is
beginning inventory and 300,000 is purchase during 2000
 235,000=beg inv +purchase-60,000-45,000
• Beg inv +Purchase(GAFS) = 235,000+105,000= 340,000
112
office
EPSA –Head Office
Income Statement
Sales Br 400,000
Add: Branch income (adjustment) 12,000
113
office
EPSA-Head Office
Balance Sheet
December 31, 2000
Assets
Cash Br. 25,000
Inventories 45,000
Equipment 150,000
Less: Accu. depreciation 10,000 140,000
114
Head office
Liabilities
Equity
115
Closing Entries- on the book of head office

Ending Inventory (adjustment) 45,000
Sales 400,000
Shipment to branch 60,000
Branch Income –Adama 12,000
Beginning Inventory (adjustment) 40,000
Purchase 300,000

116
Periodic Inventory System (contd.)
Eliminations for combined F.S
 Eliminate shipment accounts
Shipment to branch 60,000
Shipment from H.O 60,000
 Eliminate reciprocal ledger account
balances.
Home office 38,000
Investment 38,000
 Eliminate branch income to avoid double
counting
117
Statements– Periodic system (cont.
Home Adama
Income Statement Office Branch Eliminations Combined
Sales (400,000) (80,000) (480,000)
Beginning Inventory 40,000 40,000
Purchase 300,000 300,000
Shipment to branch (60,000) 60,000

Shipment from H.O 60,000 (60,000)
Ending Inventory (45,000) (15,000) (60,000)
Operating expense 90,000 23,000 (113,000)
Add: Branch Income(adj) 12,000 (12,000)
Net income 87,000 12,000 (12,000) 87,000
118
Statements-- Periodic System (cont
1, 2000
Net(income) (from
incomes statement (87,000) (12,000) (87,000)
above) 12,000
Retained earnings,
Dec.31,2000 (to 117,000
Totals -0-
119
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 Adama
Branch 38,000 (a) (38,000)
Equipment 150,000 150,000
Accumulated
depreciation of (10,000) (10,000)
equipment
120
Home Office (38,000) (a) (38,000)
State Capital (150,000) (150,000)
Retained earnings
(from statement of
retained earnings
above) (117,000) (117,000)
Totals -0- -0- -0- -0-
(a) To eliminate reciprocal ledger account balances
* the elimination appears in the working paper only
121
Record the 8- transactions under 50% mark up
•
and Periodic Inventory system

•Prepare separate income statement, statement
of change in home office and balance sheet for

adama branch.
•Pass closing entry for adama branch
INDIVIDUAL ASSIGNMENT-1
122
Reconciliation of Reciprocal Accounts
At the end of an accounting period, the balance of

the Investment in Branch account in the records
of the home office may be different from that of the
Home Office account of the branch.
This is because some transactions may have been
recorded by the home office but not the branch
office and vise versa or because of error
At the end of each period the reciprocal account
balances must be brought into agreement before
combined financial statements are prepared
123

Example Assume that the home office and
branch accounting records of Mercy Company
contain the following data on 12/31/00
124
(contd.)
Investment in Branch
(in accounting records of Home office)
2000
Nov. 30 Balance 62,500 dr
Dec. 10 Cash received from
branch 20,000 42,500 dr
27 Collection of branch
accounts receivable 1,000 41,500 dr
by H.O in its behalf
29 Merchandise shipped
125
(contd.)
Home Office
(in accounting records of Branch)
2000
Nov. 30 Balance 62,500 cr
Dec. 7 Cash sent to home
office 20,000 42,500 cr
28 Acquired equipment 3,000 39,500 cr
30 Collection of head
office accounts 2,000 41,500 cr
receivable by branch
in its behalf
126
Reconciliation of Reciprocal Ledger
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)
127
Accounts (contd.)

For Branch:
1.Home Office 1,000

Accounts Receivable
1,000
2.Inventory 8,000
Home Office
8,000
128
Accounts (contd.)

For Home Office:
1.Equipment: Brach 3,000

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

Accounts Receivable 2,000
129
Accounts (contd.)

The balance of Investment in Branch
account at the home office equals:
Br. 49,500 (dr.)

- 3,000 (cr.)
+ 2,000 (dr.)
Br. 48,500 (dr.)
130
(contd.)

After posting the above adjusting
entries:

The balance of Home Office account at
Branch equals:
Br. 41,500 (cr.)

- 1,000 (dr.)
+ 8,000 (cr.)
Br. 48,500 (cr.)
131
Transactions between Branches
Occasionally, operations require that
merchandise or other assets be transferred
from one branch to another.
Usually, a branch does not carry a reciprocal
ledger account with another branch.
On receipt of the inventories, the branch
debits inventories and credits Home Office
132
.
Home office records the transfer between
branches by a debit to Investment in
recipient branch and credit to Investment in
delivering branch.
Excess freight costs are recognized as
expenses of the home office.
133
Transactions between Branches (contd.)
Example:
1) The home office in Addis shipped
merchandise costing birr 8,000 to Dukem
2) A week later, the home office instructed
Dukem Branch to transfer this merchandise to
Sabata Branch.
134
(contd.)

Journal entries for these transactions are:

In Accounting Records of Home Office:
1)
Investment in Dukem Branch 8,000
Inventory 8,000
2)
Investment in Sabata Branch 8,000
Investment in Dukem Branch 8,000
135
(contd.)

In Accounting Records of Dukem Branch:
1)
Inventories 8,000
Home Office 8,000
2)
Home Office 8,000
Inventories 8,000
136
(contd.)
In Accounting Records of Sabata

Branch:
Inventories 8,000
Home Office 8,000
137
End
138

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Chapter 2

Accounting for Consignment Sales ,

 Consignment is a transfer of merchandise from

 To receive compensation for merchandise sold on

Sales Report for Jafar Book Center --Addis Ababa

a. Receipts of Books by consignee(AAU)

AAU Book Center Jafar Book Center

C. Cash 30,000 No Record until sales report and

2. The branch maintains a complete

• Branch maintains its own journal

b. For the branch: debit expense account,

Billing at branch retail( selling) prices:

Home Office Book Adama Branch Book

2. Investment in Adama Branch 60,000 Inventories 60,000

Inventories 60,000 Home Office 60,000

3. Equipment: Adama Branch 500 Home Office 500

4. None Accounts Receivable 80,000

7. Cash 37,500 Home Office 37,500

office 1,000 1,000 cr

home office 60,000 61,000 cr

by home office 3,000 26,000 cr

Home office , beginning of year 0

Adama Branch Book

Income Summary 12,000

Prepared by Ato Kebede ( H.O Unit Accountant).

 Since Home Office account has been increased( from

Investment in Adama Branch 12,000

Branch Income: Adama 12,000

Retained earnings, beginning of year Br. 70,000

Total liabilities & equity 287,000

Closing entry on Head office book

Income summery 87,000

Prepared by Ato Kassa( EPSA General

 and hence, it doesn’t require closing entries

Closing entries are made only for separate F.S and

hence, they are made by branch and H.O unit

Sales (400,000) (80,000) (480,000)

Cost of goods sold 235,000 45,000 280,000

Operating expenses 90,000 23,000 113,000

Retained earnings, Jan. (70,000) (70,000)

Cash 25,000 5,000 30,000

Equipment 150,000 150,000

Retained earnings, beginning of year Br 70,000

Home Office Book Adama Branch Book

2. Investment in Branch 90,000 Inventories 90,000

Home Office Book Adama Branch Book

3. Equipment: Adama Branch 500 Home Office 500

Investment in Adama Branch 500 Cash 500

4. None Accounts Receivable 80,000

7. Cash 37,500 Home Office 37,500

office 1,000 1,000 cr

home office 90,000 61,000 cr

by home office 3,000 56,000 cr

Prepare Separate income

Home office , beginning of year 0

Adama Branch Book

Home Office 10,500

Separate Financial Statements

Investment is adjusted for branch net income/loss

will be: loss of 10,500+ realized GP of 22,500 = 12,000

Retained earnings, beginning of year Br. 70,000

Total liabilities & equity 287,000

Closing entry on Head office book

Income summery 87,000