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.
Accounting for Branches
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.
Accounting for Branches 4
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 accounting and control the branches.
only as an center for
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.
10
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.
Reciprocal Ledger Accounts Used by the Branch 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.
14
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:
Acquisition of Plant Assets Used in Branch (contd.)
For the home office: debit a plant asset account: branch, credit cash or a liability account.
For the branch: no entry.
16
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:
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 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.
Expense Incurred by Home Office 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.
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.
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.
23
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.
25
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.
26
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).
27
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.
28
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.
30
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.
31
Combined financial Statements for 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.
32
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.
33
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.
34
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.
38
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.
39
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:
1.Investment in Mason Branch 1,000 Cash 1,000
Mason Branch Accounting Records Journal Entries:

Cash 1,000
Home Office 1,000
40
Example I: (contd.)
Home Office Accounting Records Journal Entries: 2. Investment in Mason Branch 60,000 Inventories 60,000
Mason Branch Accounting Records Journal Entries: Inventories 60,000
Home Office 60,000
3. Equipment: Mason Home Office 500 Branch 500 Investment in Mason Cash Branch 500
500
41
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
42
Example I: (contd.)
Home Office Accounting Records Journal Entries: 5. None
Mason Branch Accounting Records Journal Entries: Cash 62,000
6. None
Trade Account Receivable Operating Expenses 20,000 Cash

62,000
20,000
43
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
44
Example I: (contd.)
Two Reciprocal Ledger Accounts (prior to adjusting and closing entries):

Balance 1,000 dr 61,000 dr
Investment in Mason Branch Date Explanation Debit Credit 1999 Cash sent to branch 1,000 Merchandise billed to branch at home office cost 60,000 Equipment acquired by branch, carried in home office accounting records 500 Cash received from branch 37,500 Operating expenses billed to branch 3,000
60,500 dr 23,000 dr
26,000 dr
45
Example I: (contd.)
Date 1999
Home Office
Explanation Debit Credit Cash received from home office 1,000 Merchandise received from home office 60,000 Equipment acquired 500 Cash sent to home office 37,500 Operating expenses billed by home office 3,000
Balance 1,000 cr 61,000 cr 60,500 cr 23,000 cr 26,000 cr

46
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.
Working Paper for Combined financial 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.
48
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 Dr (Cr) Income Statement Sales Cost of goods sold Operating expenses Net Income (to statement of retained earnings below) Totals (400,000) 235,000 90,000 75,000 -0(80,000) 45,000 23,000 12,000 -0Accounting for Branches
Mason Branch Dr(Cr)
Eliminations Combined Dr (Cr) Dr (Cr)
(48,000) 280,000 113,000 87,000 -051

Adjusted Trial Balances Home Mason Statement of Retained Eliminations Combined Office Branch Earnings Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) Retained earnings, Jan. (70,000) (70,000) 1, 1999 Net(income) (from incomes statement (75,000) (12,000) (87,000) above) Dividends declared 40,000 40,000
Retained earnings, Dec.31,1999 (to balance sheet below) Totals

117,000 -052

Balance Sheet Cash 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 45,000 18,000 15,000 57,000 60,000
Trade accounts receivable (net)

Inventories Investment in Mason Branch Equipment Accumulated depreciation of equipment
26,000 150,000
(10,000)
(a) (26,000)
150,000 (10,000)

Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Balance Sheet Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) (contd.) Trade accounts payable (20,000) (20,000)
Home Office Common stock, $10 par Retained earnings (from statement of retained earnings above)
Totals
(26,000)
(150,000)
(a) (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
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
$ 480,000 280,000 $ 200,000 113,000 $ 87,000

$ 5.80
55
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 $
56

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

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
$20,000
$150,000 117,000
267,000 $287,000
58
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
59
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
60
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:
61
Example II (textbook p136-p141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)
Journal entries for shipments to branch at prices above home office cost (perpetual inventory system):
Mason Branch Accounting Records Journal Entries: Inventories 90,000 Home Office 90,000
Home Office Accounting Records Journal Entries: Investment in Mason Branch 90,000 Inventories 60,000
Allowance for Overvaluation of Inventories: Mason Branch 30,000
62
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.
63
SMALDINO COMPANY Flow of Merchandise for Mason Branch During 1999 Billed Home Markup (50% of Price Office Cost;33 1/3 % of Cost Billed Price) Beginning inventories Add: Shipments $60,000 $30,000 $90,000 from home office $60,000 $30,000 Available for sale $90,000 Less: Ending inventories 22,500 15,000 7,500 Cost of goods sold $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.)

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 (400,000) 235,000 90,000 75,000 -0(80,000) 67,500 23,000 (10,500) -0Accounting for Branches
Mason Branch Dr(Cr)
Eliminations Combined Dr (Cr) Dr (Cr)
(48,000) (a) (22,500) 28,000 113,000 (b) 22,500 87,000 -066

Adjusted Trial Balances Home Mason Statement of Retained Eliminations Combined Office Branch Earnings Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr) Retained earnings, Jan. (70,000) (70,000) 1, 1999 Net(income) loss (from incomes statement (75,000) (10,500) (b) (22,500) (87,000) above) Dividends declared 40,000 40,000
Retained earnings, Dec.31,1999 (to balance sheet below) Totals

117,000 -067

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 45,000 56,000 18,000 22, 500 (a) (7,500) (c) (56,000) 57,000 60,000
Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch Allowance for overvaluation of inventories: Mason Branch Equipment
(30,000)
150,000
(a) 30,000 150,000


Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Balance Sheet (contd.) Accumulated depreciation of inventories: Mason Branch Trade accounts payable Home Office Common stock, $10 par Retained earnings(from statement of retained earnings above) Totals
(10,000) (20,000) (56,000) (150,000) (c) (56,000)
(10,000) (20,000) (150,000) (117,000)
-0-
-0Accounting for Branches
-0-
-069
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
70
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
71
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).
Home Office Adjusting and Closing Entries Income: Mason Branch 10,500 Investment in Mason 10,500 Branch To record net loss reported by branch
73
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 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.)
After posting the above entries, the account balance for the following accounts is:
Investment in Mason Branch Allowance for Overvaluation of Inventories: Mason Branch Realized Gross Profit: Mason Branch Income: Mason Branch =45,500(debit)* =7,500(credit)** =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. Accounting for Branches
76
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.
77
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.)
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
Mason Branch Accounting Records Journal Entries: Shipments from Home Office 120,000 Home Office 120,000
Cash (or Trade Accounts Receivable) 150,000 Sales 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 Home Markup (50% of Billed Office Cost;33 1/3 % of Price Cost Billed Price) Beginning inventories $22,500 $15,000 $7,500 Add: Shipments 120,000 80,000 40,000 from home office 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
82
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 Balance, Dec. 31, 1999 Merchandise billed to branch at markup of 50% above home office cost, or 33 1/3 % of billed price Cash received from branch Operating expenses billed to branch Debit Credit Balance 45,500 dr
Date 2000
120,000
4,500
165,500dr 113,000 52,500 dr

57,000 dr
83
Example: (contd.)
Date Explanation 2000 Balance, Dec. 31, 1999 Makeup on merchandise shipped to branch during 2000 (50% of cost)
Allowance for Overvaluation of Inventories: Mason Branch

Debit Credit Balance 7,500 cr
40,000 47,500 cr
Example: (contd.)
Date Explanation 2000 Balance, Dec. 31, 1999 Merchandise receivable from home office
Home Office
Debit Credit Balance 45,500 cr
120,000 165,500 cr
Cash sent to home office 113,000 Operating expenses billed by Home office
52,500 cr 4,500 57,000 cr

85
Example: (contd.)
The working paper for combined financial statements under the periodic inventory system is as follows:
Adjusted Trial Balances Eliminations Combined Home Mason Office Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) (500,000) (150,000) (650,000) 45,000 400,000 (80,000) 22,500 (b) (7,500) 60,000 400,000
Income Statement Sales Inventories, Dec. 31, 1999 Purchases Shipments to Mason Branch
(a) 80,000
Example: (contd.)
Income Statement (contd.) Shipments from home office Inventories, Dec. 31,2000 Operating expenses Net Income( to statement of retained earnings below)
Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Dr (Cr) 120,000 (70,000) 120,000 (30,000) 27,500
Eliminations Combined Dr (Cr) (a) 80,000 (c) 10,000 (90,000) 147,500 Dr (Cr)
Totals
85,000 -0-
10,000 -0-
(d) 37,500
132,500 -0-
87
Example: (contd.)
Statement of Retained Earnings Retained earnings, Dec. 31, 1999 Net Income (from income statement above) Dividends declared Retained earnings, Dec. 31, 2000 (to balance sheet below) Totals
Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Dr (Cr) (117,000)
Eliminations Combined Dr (Cr) Dr (Cr) (117,000)
(85,000) 60,000
(10,000) 27,500
(d) (37,500)
(132,500) 60,000
85,000
10,000
189,500 -088
Example: (contd.)
Balance Sheet Cash Trade accounts receivable (net) Inventories, Dec. 31, 2000 Allowance for overvaluation of inventories : Mason Branch Investment in Mason Branch
Adjusted Trial Balances Eliminations Combined Home Mason Office Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) 30,000 9,000 39,000
64,000
70,000
28,000
30,000 (c) (10,000)
92,000
90,000
(47,500) 57,000
(a) 40,000 (b) 7,500 (e) (57,000)

Example: (contd.)
Balance Sheet (contd.) Equipment Accumulated depreciation of equipment Trade Account payable Home office Common stock, $10 par Retained earnings (from statement of retained earnings above) Totals
Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Dr (Cr) 158,000
Elimination Combined s Dr (Cr) Dr (Cr) 158,000
(15,000) (24,500) (57,000) (150,000) (e) 57,000
(15,000) (24,500) (150,000)
(189,500)
-0-0Accounting for Branches
-0-
-090
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) 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
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
(3) Income Summary Home Office
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
(3) Realized Gross Profit Income: Mason Branch Income Summary
37,500 10,000 47,500
95
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:
96
Investment in Mason Branch = $67,000 (dr.) (57,000+10,000)

Allowance for Overvaluation of Inventories = $10,000 (cr.) (47,500 -37,500)
97
Realized Gross Profit = $0 (37,500- 37,500) Income: Mason Branch = $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.
Reconciliation of Reciprocal Ledger 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:
100

Investment in Arvin Branch (in accounting records of Home office)
Date Explanation Debit Credit Balance
62,500 dr 20,000 1,000 42,500 dr 41,500 dr
1999 Nov. 30 Balance Dec. 10 Cash received from branch 27 Collection of branch trade accounts receivable 29 Merchandise shipped to branch
8,000
49,500 dr
101

Home Office (in accounting records of Arvin Branch)
Date Explanation Debit Credit Balance 62,500 cr 20,000 3,000 2,000
1999 Nov. 30 Balance Dec. 7 Cash sent to home office 28 Acquired equipment 30 Collection of home office trade accounts receivable
42,500 cr 39,500 cr 41,500 cr

102
The following adjusting entries are recorded prior to the preparation of the working paper for the combined financial statements (assuming a perpetual inventory system)
103
For Arvin Branch:
1.Home Office Trade Accounts Receivable

2.Inventory Home Office
1,000
1,000 8,000 8,000
104
For Mercer Home Office:
1.Equipment: Arvin Brach 3,000 Investment in Branch: Arvin

2.Investment in Branch: Arvin 2,000 Trade Accounts Receivable
3,000
2,000
105
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.)
106

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 (cr.) (dr.) (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.
Transactions between Branches (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.

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 8,600 Excess Freight Expense 300 Investment in Katti Branch
8,900
110

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

8,000 500 400

111
In Accounting Records of Danddi Branch:
Inventories 8,000 Freight-in (or Inventories) 600 Home Office
8,600
112

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 Combined Financial Statements

Objectives of this Chapter

Accounting for Branches

Branches and Divisions

Accounting for Branches

Branches and Divisions (contd.)

Branches and Divisions (contd.)

Branches and Divisions (contd.)

Start-up Costs of Opening New Branches

Accounting System for a Branch

The home office serves accounting and control the branches.

only as an center for

Accounting for Branches

Accounting System for a Branch (contd.)

Accounting for Branches

Accounting System for a Branch (contd.)

Accounting for Branches

Reciprocal Ledger Accounts Used by the Branch and Home Office

Investment in Branch Ledger Account:

Accounting for Branches

Acquisition of Plant Assets Used in Branch

Acquisition of Plant Assets Used in Branch (contd.)

Accounting for Branches

Acquisition of Plant Assets Used in Branch (contd.)

Acquisition of Plant Assets Used in Branch (contd.)

Accounting for Branches

Expense Incurred by Home Office and Allocated to Branches

Expense Incurred by Home Office and Allocated to Branches (contd.)

Expense Incurred by Home Office and Allocated to Branches (contd.)

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

Accounting for Branches

Alternative Methods of Billing Merchandise Shipments to Branches

Billed at the home office cost:

Accounting for Branches

Billed at a percentage above home office cost:

Accounting for Branches

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

Accounting for Branches

Billed at branch retail selling prices:

Accounting for Branches

Accounting for Branches

Accounting for Branches

b. Any intracompany profits or losses.

Accounting for Branches

Accounting for Branches

Accounting for Branches

Accounting for Branches

Accounting for Branches

Mason Branch Accounting Records Journal Entries:

Home Office 1,000

Accounting for Branches

Mason Branch Accounting Records Journal Entries: Inventories 60,000

Home Office 60,000

Accounting for Branches

Accounting for Branches

Mason Branch Accounting Records Journal Entries: Cash 62,000

Trade Account Receivable Operating Expenses 20,000 Cash

Operating Expenses 3,000 Home Office 3,000

Accounting for Branches

Two Reciprocal Ledger Accounts (prior to adjusting and closing entries):

Balance 1,000 cr 61,000 cr 60,500 cr 23,000 cr 26,000 cr