Accounting for Branches and Combined FS

ACCT 501

Chapter 4

Accounting for Branches and Combined Financial Statements

Accounting for Branches 2

Objectives of this Chapter

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


Branches and Divisions

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


Branches and Divisions (contd.)

Branch: a business unit located at some distance from the home office. This unit carries merchandise obtained from the home office, makes sales, approves customers’ credit, makes collections from its customers, and remits cash received.



Divisions: a segment of a business entity which generally has more autonomy than a branch. Accounting for a division not operated as a separate corporation (i.e., subsidiary company) is similar to that of branches.



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


Start-up Costs of Opening New Branches

Based on Statement of Position 98-5 (SOP 98-5) “Reporting on the Costs of Start-up Activities”, all start-up costs, including costs associated with organizing a branch or division should be expensed in the accounting period in which the costs are incurred.


Accounting System for a Branch

Two alternative systems:

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


Accounting System for a Branch (contd.)

2. The branch maintains a complete set of accounting records consisting of journal entries and ledger accounts. Financial statements are prepared by the branch account and forwarded to the home office.


Accounting System for a Branch (contd.)

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


Reciprocal Ledger Accounts Used by the Branch and Home Office

Home Office Ledger Account:

This account is used by the branch to account for all transactions with the home office. It is credited for all cash, merchandise or other assets provided by the home office to the branch. It is debited for all cash, merchandise, or other assets sent by the branch to the home office or to other branches.


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.


Acquisition of Plant Assets Used in Branch

If a plant asset is acquired by the home office for a branch’s 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.



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.


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.


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.


Billed at the home office cost:

Strength: widely used because of its simplicity

Weakness: attributes all gross profits of the business to the branches.


Billed at a percentage above home office cost: Strength: is able to allocate a

reasonable gross profit to the home office.

Weakness: the net income reported by the branch may be understated and the ending inventories at branch are overstated for the enterprise as a whole.


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

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


Billed at branch retail selling prices:

Strength: to increase the internal control over inventories at branches.

Weakness: no gross profit assigned to the branches and the branch’s net loss will equal its operating expenses.


Separate Financial Statements for Branch and for Home Office (for internal use only)

Separate financial statements for branches should be prepared so that management can evaluate the performance of each branch.

The branch’s financial statements may be revised by the home office to include the allocated expenses incurred by the home office.


Separate Financial Statements for Branch and for Home Office (for internal use only) (contd.)

Also, the financial statements of branches should be revised to eliminate any intracompany profits on merchandise shipments or interest charge on capital investments.


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

For investors, the home office and branches are a single business entity.

Thus, combined financial statements should be prepared for external users.

A four-column work sheet paper is used to facilitate the preparation of the combined financial statement.


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.



c. Any receivables and payables between the home office and the branch (or between two branches).

The rest of accounts are just summed

together for the combined financial statements.



Example I (textbook p131-p135) : Journal entries for operations of a branch when merchandise is billed at the cost of the home office with a perpetual inventory system.



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 branch’s cost of the merchandise sold was $45,000.

5. Collections of trade accounts receivable by Mason Branch amounted to $62,000.

6. Payments for operating expenses by mason Branch totaled $20,000.



Example I: (contd.)

7. Cash of $37,500 was remitted by Mason Branch to the home office.

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



Example I: (contd.) These transactions and events are

recorded by the home office and by Mason Branch as follows:

Home Office Accounting Records Journal Entries:

Mason Branch Accounting Records Journal Entries:

1.Investment in Mason Branch 1,000

Cash 1,000

Cash 1,000

Home Office 1,000



Example I: (contd.)



2. Investment in Mason

Branch 60,000

Inventories 60,000

Inventories 60,000 Home Office 60,000

3. Equipment: Mason

Branch 500

Home Office 500

Investment in Mason

Branch 500

Cash 500



Example I: (contd.)



4. None Trade Accounts

Receivable 80,000Cost of Goods Sold 45,000

Sales 80,000

Inventories 45,000



Example I: (contd.)



5. None Cash 62,000

Trade

Account

Receivable 62,0006. None Operating

Expenses 20,000

Cash 20,000



Example I: (contd.)



7. Cash 37,500 Home Office 37,500

Investment in Mason

Branch 37,500

Cash 37,500

8. Investment in Mason

Branch 3,000

Operating

Expenses 3,000

Operating

Expenses 3,000

Home Office 3,000



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

closing entries):Investment in Mason Branch

Date Explanation Debit Credit Balance

1999 Cash sent to branchMerchandise billed to branch at home office costEquipment acquired by branch, carried in home office accounting recordsCash received from branchOperating expenses billed to branch

1,000

60,000

3,000

50037,500

1,000 dr

61,000 dr

60,500 dr23,000 dr

26,000 dr



Example I: (contd.)Home Office

Date Explanation Debit Credit Balance1999 Cash received from home

officeMerchandise received from

home officeEquipment acquiredCash sent to home officeOperating expenses billed

by home office

500

37,500

1,000

60,000

3,000

1,000 cr

61,000 cr

60,500 cr

23,000 cr

26,000 cr


Working Paper for Combined financial Statements--Example I The following working paper for combined

financial statements serves three purposes:

1) to eliminate any intracompany profits or losses,

2) to eliminate the reciprocal accounts, &

3) to combine ledger accounts balances of home office and branches.


Working Paper for Combined financial Statements--Example I (contd.) Assume that the Mason Branch’s

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.


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


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


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

-0--0--0-Totals

87,00012,00075,000

Net Income (to statement of retained earnings below)

113,00023,00090,000Operating expenses

280,00045,000235,000Cost of goods sold

(48,000)(80,000)(400,000)Sales

Income Statement

Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)

Mason Branch

Home Office CombinedEliminations

Adjusted Trial Balances



-0-Totals

117,000

Retained earnings, Dec.31,1999 (to balance sheet below)

40,00040,000Dividends declared

(87,000)(12,000)(75,000)

Net(income) (from incomes statement above)

(70,000)(70,000)Retained earnings, Jan. 1, 1999


Mason Branch

Home Office

CombinedEliminations


Statement of Retained Earnings



(10,000)(10,000)

Accumulated depreciation of equipment

(a) (26,000)26,000

Investment in Mason Branch

60,00015,00045,000Inventories

57,00018,00039,000

Trade accounts receivable (net)

30,0005,00025,000Cash


Mason Branch

Home Office



Balance Sheet

Equipment 150,000 150,000



-0--0--0--0-Totals

(117,000)

Retained earnings (from statement of retained earnings above)

(150,000)(150,000)Common stock, $10 par

(a) (26,000)(26,000)Home Office

(20,000)(20,000)Trade accounts payable


Mason Branch

Home Office



Balance Sheet (contd.)

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


Combined Financial Statements -- Example I

SMALDINO COMPANYIncome Statement

For Year Ended December 31, 1999

$ 5.80

Basic earnings per share of common stock

$ 87,000Net Income113,000Operating expenses

$ 200,000Gross margin on sales280,000Cost of goods sold

$ 480,000Sales


Combined Financial Statements -- Example I (contd.)

SMALDINO COMPANYStatement of Retained Earnings

For Year Ended December 31, 1999

$ 117,000Retained earnings, end of year40,000Less: Dividends ($2.67 per share)

$ 157,000Subtotal87,000Add: Net income

$ 70,000Retained earnings, beginning of year



SMALDINO COMPANYBalance Sheet

December 31, 1999

$287,000Total assets

140,00010,000Less: Accumulated depreciation

$150,000Equipment

60,000Inventories

57,000Trade accounts receivable (net)

$ 30,000CashAssets



SMALDINO COMPANYBalance Sheet (contd.), December 31, 1999

$287,000Total liabilities & stockholders’

equity

267,000117,000 Retained earnings $150,000

Common stock, $10 par, 15,000 shares authorized, issued, and outstanding

Stockholders’ equity

$20,000 Trade accounts payable

LiabilitiesLiabilities & Stockholders’ Equity


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:

Mason Branch Accounting Records Closing Entries:

None Sales 80,000

Cost of Goods Sold 45,000Operating Expenses 23,000Income Summary 12,000


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:

Mason Branch Accounting Records Closing Entries:

Investment in Mason

Branch 12,000

Income

Summary 12,000Income: Mason

Branch 12,000

Home Office 12,000

Income: Mason

Branch 12,000

None

Income Summary 12,000


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:


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):Home Office Accounting Records Journal Entries:


Investment in Mason Branch 90,000 Inventories 90,000

Inventories 60,000 Home Office 90,000Allowance for Overvaluation of Inventories: Mason Branch 30,000


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.

Example II (textbook p136-p141):Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)


SMALDINO COMPANYFlow of Merchandise for Mason Branch During 1999

Example II (textbook p136-p141):Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)

$22,500$45,000$67,500Cost of goods sold

7,50015,00022,500Less: Ending inventories

$30,000$60,000$90,000

Add: Shipments from home office

$30,000$60,000$90,000

Beginning inventories

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

Home Office Cost

Billed Price

Available for sale


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.)

-0--0--0-Totals

87,000(b) 22,500(10,500)75,000

Net Income(loss) (to statement of retained earnings below)

113,00023,00090,000Operating expenses

28,000(a) (22,500)67,500235,000Cost of goods sold

(48,000)(80,000)(400,000)Sales

Income Statement


Mason Branch

Home Office CombinedEliminations




-0-Totals

117,000

Retained earnings, Dec.31,1999 (to balance sheet below)

40,00040,000Dividends declared

(87,000)(10,500)(75,000)

Net(income) loss (from incomes statement above)

(70,000)(70,000)Retained earnings, Jan. 1, 1999


Mason Branch

Home Office




(b) (22,500)



150,000150,000Equipment

(c) (56,000)56,000


60,000(a) (7,500)22, 50045,000Inventories

57,00018,00039,000

Trade accounts receivable (net)

30,0005,00025,000Cash


Mason Branch

Home Office



Balance Sheet

Allowance for overvaluation of inventories: Mason Branch

(30,000) (a) 30,000



-0--0--0--0-Totals

(117,000)

Retained earnings(from statement of retained earnings above)

(150,000)(150,000)Common stock, $10 par

(c) (56,000)(56,000)Home Office

(10,000)(10,000)

Trade accounts payable


Mason Branch

Home Office



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

(20,000) (20,000)


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 80,000


Cost of Goods Sold 67,500

Operating Expenses 23,000

To close revenue and expense ledger accounts


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

Home Office 10,500


To close the net loss in the Income Summary account to the Home Office account


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


10,500

To record net loss reported by branch



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.)



Home Office Adjusting and Closing Entries (contd.)

Realize Gross Profit: Mason Branch Sales

22,500



To close branch net loss and realized gross profit to Income Summary ledger account (Income tax effects are disregarded.)


Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) After posting the above entries, the account

balance for the following accounts is:

Investment in Mason Branch =45,500(debit)*

Allowance for Overvaluation of Inventories: Mason Branch

=7,500(credit)**

Realized Gross Profit: Mason Branch

= 0

Income: Mason Branch = 0

* Balance prior to the above entries equals $56,000. $56,000- 10,500 (net loss of the branch reduces the debit balance of the Investment account) = $45,500.

** $30,000-22,500 = $7,500.



Similar working paper eliminations as on page 66-69 will be prepared for the following year (i.e., year 2000) when continuing with the perpetual inventory system with a price markup.


Periodic Inventory System

Textbook (p141-p144):When a periodic inventory system is adopted, inventory account cannot be used for the shipments of merchandise between the home office and the branch.

Accounts such as “Shipments to Mason Branch” (used by the home office) and “Shipments from Home Office” (used by the branch) are used.


Periodic Inventory System (contd.)

Example: 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 from Home Office 120,000

Home Office 120,000Shipments to Mason Branch 80,000Allowance for Overvaluation of Inventories: Mason Branch 40,000

None Cash (or Trade Accounts Receivable) 150,000

Sales 150,000


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 COMPANYFlow of Merchandise for Mason Branch During 2000


Example: (contd.)

Available for sale

$37,500$75,000$112,500Cost of goods sold

(10,000)(20,000)(30,000)Less: Ending inventories

$47,500$95,000$142,500

Add: Shipments from home office

40,00080,000120,000

Beginning inventories

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

Home Office Cost

Billed Price

$22,500 $15,000 $7,500



Example: (contd.) The activities for the branch for 2000 are reflected

in the following two home office ledger accounts and the reciprocal Home Office ledger account of the branch: Investment in Mason Branch

Date Explanation Debit Credit Balance2000 Balance, Dec. 31, 1999

Merchandise billed to branch at markup of 50% above home office cost, or 33 1/3 % of billed priceCash received from branchOperating expenses billed to branch

120,000

4,500

113,000

45,500 dr

165,500dr52,500 dr

57,000 dr



Example: (contd.)Allowance for Overvaluation of Inventories:

Mason BranchDate Explanation Debit Credit Balance2000 Balance, Dec. 31,

19997,500 cr

Makeup on merchandise shipped to branch during 2000 (50% of cost) 40,000 47,500 cr



Example: (contd.)Home Office

Date Explanation Debit Credit Balance2000 Balance, Dec. 31,

1999 45,500 crMerchandise receivable from home office 120,000 165,500 crCash sent to home office 113,000 52,500 crOperating expenses billed by Home office 4,500 57,000 cr



Example: (contd.) The working paper for combined financial

statements under the periodic inventory system is as follows:

Income Statement

Adjusted Trial BalancesEliminations CombinedHome

OfficeMason Branch

Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)

Sales (500,000) (150,000) (650,000)

Inventories, Dec. 31, 1999 45,000 22,500 (b) (7,500) 60,000Purchases 400,000 400,000

Shipments to Mason Branch (80,000) (a) 80,000



Example: (contd.)

Income Statement(contd.)


OfficeMason Branch


Shipments from home office 120,000 (a) 80,000Inventories, Dec. 31,2000 (70,000) (30,000) (c) 10,000 (90,000)Operating expenses 120,000 27,500 147,500

Net Income( to statement of retained earnings below) 85,000 10,000 (d) 37,500 132,500

Totals -0- -0- -0-



Example: (contd.)



OfficeMason Branch


Retained earnings, Dec. 31, 1999 (117,000) (117,000)Net Income (from income statement above) (85,000) (10,000) (d) (37,500) (132,500)Dividends declared 60,000 27,500 60,000

Retained earnings, Dec. 31, 2000 (to balance sheet below) 85,000 10,000 189,500

Totals -0-



Example: (contd.)

Balance Sheet


OfficeMason Branch


Cash 30,000 9,000 39,000

Trade accounts receivable (net) 64,000 28,000 92,000Inventories, Dec. 31, 2000 70,000 30,000 (c) (10,000) 90,000Allowance for overvaluation of inventories : Mason Branch

(47,500)(a) 40,000

(b) 7,500Investment in Mason Branch 57,000 (e) (57,000)



Example: (contd.)

Balance Sheet(contd.)

Adjusted Trial BalancesElimination

sCombinedHome

OfficeMason Branch


Equipment 158,000 158,000

Accumulated depreciation of equipment (15,000) (15,000)Trade Account payable (24,500) (24,500)

Home office (57,000) (e) 57,000

Common stock, $10 par (150,000) (150,000)

Retained earnings (from statement of retained earnings above) (189,500)

Totals -0- -0- -0- -0-



Example: (contd.)

(a) To eliminate reciprocal ledger accounts for merchandise shipments.

(b) To reduce beginning inventories of branch to cost

(c) To reduce ending inventories of branch to cost.

(d) To increase income of home office by portion of merchandise markup that

was realized by branch sales.(e) To eliminate reciprocal ledger account

balances.


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

Branch Closing Entries:

(1)Inventory (ending) 30,000 Cost of Goods Sold 112,500*

Inventory (beg.) 22,500Shipments from Home Office 120,000

CGS=22,500+120,000-30,000


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


(3) Income Summary 10,000

Home Office 10,000



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

(1) Investment in Branch 10,000Income: Mason Branch 10,000

(2) Allowance for Overvaluation of Inventories 37,500

Realized Gross Profit : Mason Branch 37,500



(3) Realized Gross Profit 37,500





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



Investment in Mason Branch = $67,000 (dr.) (57,000+10,000)

Allowance for Overvaluation of

Inventories

= $10,000 (cr.) (47,500 -37,500)



Realized Gross Profit = $0 (37,500- 37,500)

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:



Date Explanation Debit Credit Balance1999

Nov. 30 Balance 62,500 dr

Dec. 10 Cash received from branch 20,000 42,500 dr

27 Collection of branch trade accounts receivable

1,000 41,500 dr

29 Merchandise shipped to branch 8,000 49,500 dr

Investment in Arvin Branch (in accounting records of Home office)



Date Explanation Debit Credit Balance

1999

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 home office trade accounts receivable

2,000 41,500 cr

Home Office (in accounting records of Arvin Branch)


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)


Reconciliation of Reciprocal Ledger Accounts (contd.) For Arvin Branch: 1.Home Office 1,000 Trade Accounts

Receivable 1,000 2.Inventory 8,000

Home Office 8,000


Reconciliation of Reciprocal Ledger Accounts (contd.) For Mercer Home Office: 1.Equipment: Arvin Brach 3,000 Investment in Branch:

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

Trade Accounts Receivable 2,000


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

ledger account at the home office equals:

$ 49,500 (dr.)

- 3,000 (cr.)

+ 2,000 (dr.)

$ 48,500 (dr.)


Reconciliation of Reciprocal Ledger Accounts (contd.) After posting the above adjusting

entries: The balance of Home Office ledger account

at Arvin Branch equals:

$ 41,500 (cr.)- 1,000 (dr.)+ 8,000 (cr.) $ 48,500 (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.


Transactions between Branches (contd.)Journal entries for these transactions are:In Accounting Records of Home Office: Investment in Katti Branch 8,500

Inventory 8,000 Cash 500

Investment in Danddi Branch 8,600 Excess Freight Expense 300

Investment in Katti Branch 8,900


Transactions between Branches (contd.)

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

Home Office 8,500

Home Office 8,900 Inventories 8,000

Freight-in 500 Cash 400


Transactions between Branches (contd.)

In Accounting Records of Danddi Branch:

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

Home Office 8,600

Accounting for Branches and Combined FS

Documents

Transcript of Accounting for Branches and Combined FS