accounting for branches and Combined FS(2)_(0).pptx
1. Accounting for Branches and
Combined Financial Statements
Chapter 2
1
Accounting for Branches
2. 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.
3. Accounting for Branches 3
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.
4. Accounting for Branches 4
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.
5. Accounting for Branches 5
Branches and Divisions (contd.)
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.
6. Accounting for Branches 6
Branches and Divisions (contd.)
Divisions: Accounting for a division
operated as a separate corporation is
different from that of branches which
requires consolidated financial
statements .
7. Accounting for Branches 7
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.
8. Accounting for Branches 8
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.
9. Accounting for Branches 9
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.
10. Accounting for Branches 10
Accounting System for a Branch (contd.)
This chapter focuses on the second
system that the branch maintains its
own accounting records.
11. Accounting for Branches 11
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.
12. Accounting for Branches 12
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.
13. Accounting for Branches 13
Reciprocal Ledger Accounts Used by the
Branch and Home Office (contd.)
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.
14. Accounting for Branches 14
Reciprocal Ledger Accounts Used by the
Branch and Home Office (contd.)
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.
15. Accounting for Branches 15
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:
16. Accounting for Branches 16
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.
17. Accounting for Branches 17
Acquisition of Plant Assets Used in
Branch (contd.)
If a plant asset is acquired by a
branch for its usage but the
accounting record for this plant
asset is maintained by the home
office, the accounting treatments
are:
18. Accounting for Branches 18
Acquisition of Plant Assets Used in
Branch (contd.)
For the branch: debit Home Office
and credit cash or a liability account.
For the home office: debit a plant
asset account: branch, and credit
Investment in Branch account.
19. Accounting for Branches 19
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.
20. Accounting for Branches 20
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.
21. Accounting for Branches 21
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.
22. Accounting for Branches 22
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.
23. Accounting for Branches 23
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.
24. Accounting for Branches 24
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.
25. Accounting for Branches 25
Billed at the home office cost:
Strength: widely used because of its
simplicity
Weakness: attributes all gross profits
of the business to the branches.
26. Accounting for Branches 26
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.
27. Accounting for Branches 27
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).
28. Accounting for Branches 28
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.
29. Accounting for Branches 29
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.
30. Accounting for Branches 30
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.
31. Accounting for Branches 31
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.
32. Accounting for Branches 32
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.
33. Accounting for Branches 33
Combined financial Statements for Home
Office and Branch (for external use)(contd.)
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.
34. Accounting for Branches 34
Combined financial Statements for Home
Office and Branch (for external use)(contd.)
Example I: Journal entries for
operations of a branch when
merchandise is billed at the cost of the
home office with a perpetual inventory
system.
35. Accounting for Branches 35
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Assume that Ethiopian Pharmaceutical
Agency(EPSA) bills merchandise to
Adama Branch at home office cost
and that 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.
36. Accounting for Branches 36
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
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 (2000) of operations of
Adama Branch are summarized below
(start-up costs are disregarded):
37. Accounting for Branches 37
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
1. Cash of $1,000 was forwarded by the
home office to Adama Branch.
2. Merchandise with a home office cost of
$60,000 was shipped by the home office to
Adama Branch.
3. Equipment was acquired by Adama Branch
for $500, to be carried in the home office
accounting records. (Other plant assets for
Adama Branch generally are acquired by
the home office.)
38. Accounting for Branches 38
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
4. Credit sales by Adama Branch amounted
to $80,000; the branch’s cost of the
merchandise sold was $45,000.
5. Collections of trade accounts receivable by
Adama Branch amounted to $62,000.
6. Payments for operating expenses by
Adama Branch totaled $20,000.
39. Accounting for Branches 39
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
7. Cash of $37,500 was remitted by Adama
Branch to the home office.
8. Operating expenses incurred by the home
office and charged to Adama Branch
totaled $3,000.
40. Accounting for Branches 40
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
These transactions and events are
recorded by the home office and by Adama
Branch as follows:
Home Office Accounting
Records Journal Entries:
Adama Branch Accounting
Records Journal Entries:
1.Investment in Adama
Branch 1,000
Cash 1,000
Cash 1,000 Home Office 1,000
41. Accounting for Branches 41
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting
Records Journal Entries:
Adama Branch Accounting
Records Journal Entries:
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
Investment in Adama
Branch 500
Cash 500
42. Accounting for Branches 42
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting
Records Journal Entries:
Adama Branch Accounting
Records Journal Entries:
4. None Trade Accounts
Receivable 80,000
Cost of Goods Sold 45,000
Sales 80,000
Inventories 45,000
43. Accounting for Branches 43
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting
Records Journal Entries:
Adama Branch Accounting
Records Journal Entries:
5. None Cash 62,000
Trade
Account
Receivable 62,000
6. None Operating
Expenses 20,000
Cash 20,000
44. Accounting for Branches 44
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting
Records Journal Entries:
Adama Branch Accounting
Records Journal Entries:
7. Cash 37,500 Home Office 37,500
Investment in Adama
Branch 37,500
Cash 37,500
8. Investment in Adama
Branch 3,000
Operating
Expenses 3,000
Operating
Expenses 3,000
Home Office 3,000
45. Accounting for Branches 45
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Two Reciprocal Ledger Accounts (prior to adjusting
and closing entries):
Investment in Adama Branch
Date Explanation Debit Credit Balance
2000 Cash sent to branch
Merchandise billed to
branch at home office cost
Equipment acquired by
branch, carried in home
office accounting records
Cash received from branch
Operating expenses billed
to branch
1,000
60,000
3,000
500
37,500
1,000 dr
61,000 dr
60,500 dr
23,000 dr
26,000 dr
46. Accounting for Branches 46
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office
Date Explanation Debit Credit Balance
2000 Cash received from home
office
Merchandise received from
home office
Equipment acquired
Cash sent to home office
Operating 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
47. Accounting for Branches 47
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.
48. Accounting for Branches 48
Working Paper for Combined financial
Statements--Example I (contd.)
Assume that the Adama Branch’s
ending inventories of $15,000 at the
end of 2000 had been verified, the
following work sheet is based on the
transactions and With additional
assumed data for the home office trial
balance.
49. Accounting for Branches 49
Working Paper for Combined financial
Statements--Example I (contd.)
All the year-end adjusting entries
except the home office entries had
been made.
The working paper begins with the
adjusted trial balance of the home office
and Adama Branch.
Income taxes are ignored in this
illustration.
50. Accounting for Branches 50
Working Paper for Combined financial
Statements--Example I (contd.)
EPSA working paper for combined
Financial Statements of Home office
and Adama Branch.
For Year Ended December 31,2000
(Perpetual Inventory System: Billing at
Cost)
51. Accounting for Branches 51
Working Paper for Combined financial
Statements--Example I (contd.)
-0-
-0-
-0-
Totals
87,000
12,000
75,000
Net Income (to
statement of retained
earnings below)
113,000
23,000
90,000
Operating expenses
280,000
45,000
235,000
Cost of goods sold
(480,000)
(80,000)
(400,000)
Sales
Income Statement
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office Combined
Eliminations
Adjusted Trial Balances
52. Accounting for Branches 52
Working Paper for Combined financial
Statements--Example I (contd.)
-0-
Totals
117,000
Retained earnings,
Dec.31,2000 (to
balance sheet below)
40,000
40,000
Dividends declared
(87,000)
(12,000)
(75,000)
Net(income) (from
incomes statement
above)
(70,000)
(70,000)
Retained earnings, Jan.
1, 2000
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office
Combined
Eliminations
Adjusted Trial Balances
Statement of Retained
Earnings
53. Accounting for Branches 53
Working Paper for Combined financial
Statements--Example I (contd.)
(10,000)
(10,000)
Accumulated
depreciation of
equipment
(a) (26,000)
26,000
Investment in Adama
Branch
60,000
15,000
45,000
Inventories
57,000
18,000
39,000
Trade accounts
receivable (net)
30,000
5,000
25,000
Cash
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office
Combined
Eliminations
Adjusted Trial Balances
Balance Sheet
Equipment 150,000 150,000
54. Accounting for Branches 54
Working Paper for Combined financial
Statements--Example I (contd.)
-0-
-0-
-0-
-0-
Totals
(117,000)
Retained earnings
(from statement of
retained earnings
above)
(150,000)
(150,000)
State Capital
(a) (26,000)
(26,000)
Home Office
(20,000)
(20,000)
Trade accounts payable
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office
Combined
Eliminations
Adjusted Trial Balances
Balance Sheet
(contd.)
(a) To eliminate reciprocal ledger account balances
* the elimination appears in the working paper only
55. Accounting for Branches 55
Combined Financial Statements --
Example I
EPSA
Income Statement
For Year Ended December 31, 2000
$ 87,000
Net Income
113,000
Operating expenses
$ 200,000
Gross margin on sales
280,000
Cost of goods sold
$ 480,000
Sales
56. Accounting for Branches 56
Combined Financial Statements --
Example I (contd.)
EPSA
Statement of Retained Earnings
For Year Ended December 31, 2000
$ 117,000
Retained earnings, end of year
40,000
Less: Dividends
$ 157,000
Subtotal
87,000
Add: Net income
$ 70,000
Retained earnings, beginning of year
57. Accounting for Branches 57
Combined Financial Statements --
Example I (contd.)
EPSA
Balance Sheet
December 31, 2000
$287,000
Total assets
140,000
10,000
Less: Accumulated depreciation
$150,000
Equipment
60,000
Inventories
57,000
Trade accounts receivable (net)
$ 30,000
Cash
Assets
58. Accounting for Branches 58
Combined Financial Statements --
Example I (contd.)
EPSA
Balance Sheet (contd.), December 31, 2000
$287,000
Total liabilities & stockholders’
equity
267,000
117,000
Retained earnings
$150,000
State Capital
Equity
$20,000
Trade accounts payable
Liabilities
Liabilities & Stockholders’ Equity
59. Accounting for Branches 59
Home Office Adjusting and Closing Entries and
Branch Closing Entries Performed on 12/31/2000
(perpetual inventory system):
Home Office Accounting
Records Adjusting and Closing
Entries:
Adama Branch Accounting
Records Closing Entries:
None Sales 80,000
Cost of Goods
Sold 45,000
Operating
Expenses 23,000
Income
Summary 12,000
60. Accounting for Branches 60
Home Office Adjusting and Closing Entries and
Branch Closing Entries Performed on 12/31/2000
(perpetual inventory system): (contd.)
Home Office Accounting
Records Adjusting and
Closing Entries:
Adama Branch Accounting
Records Closing Entries:
Investment in Adama
Branch 12,000
Income
Summary 12,000
Income: Adama
Branch 12,000
Home Office 12,000
Income: Adama
Branch 12,000
None
Income
Summary 12,000
61. Accounting for Branches 61
Example II :
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 Adama
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:
62. Accounting for Branches 62
Example II
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:
Adama Branch Accounting
Records Journal Entries:
Investment in Adama
Branch 90,000 Inventories 90,000
Inventories 60,000 Home Office 90,000
Allowance for
Overvaluation of
Inventories: Adama
Branch 30,000
63. Accounting for Branches 63
Thus, the balances of both the
Investment in Adama Branch
account and Home Office account
will be $56,000, instead of $26,000
due to the inventory mark up of
$30,000.
Billing of Merchandise to Branches at Prices
above Home Office Cost (contd.)
64. Accounting for Branches 64
EPSA
Flow of Merchandise for Adama Branch During 2000
Billing of Merchandise to Branches at Prices
above Home Office Cost (contd.)
$22,500
$45,000
$67,500
Cost of goods
sold
7,500
15,000
22,500
Less: 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
65. Accounting for Branches 65
Working Paper for Example II
EPSA
Working paper for combined Financial
Statements of Home office and Adama
Branch
For Year Ended December 31,2000
(Perpetual Inventory System: Billing
above Cost)
66. Accounting for Branches 66
Working Paper for Example II (contd.)
-0-
-0-
-0-
Totals
87,000
(b) 22,500
(10,500)
75,000
Net Income(loss)
113,000
23,000
90,000
Operating expenses
280,000
(a) (22,500)
67,500
235,000
Cost of goods sold
(480,000)
(80,000)
(400,000)
Sales
Income Statement
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office Combined
Eliminations
Adjusted Trial Balances
67. Accounting for Branches 67
Working Paper for Example II (contd.)
-0-
Totals
117,000
Retained earnings,
Dec.31,2000 (to
balance sheet below)
40,000
40,000
Dividends declared
(87,000)
10,500
(75,000)
Net(income) loss (from
incomes statement
above)
(70,000)
(70,000)
Retained earnings, Jan.
1, 2000
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office
Combined
Eliminations
Adjusted Trial Balances
Statement of Retained
Earnings
(b) (22,500)
68. Accounting for Branches 68
Working Paper for Example II (contd.)
150,000
150,000
Equipment
(c) (56,000)
56,000
Investment in Adama
Branch
60,000
(a) (7,500)
22, 500
45,000
Inventories
57,000
18,000
39,000
Trade accounts
receivable (net)
30,000
5,000
25,000
Cash
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office
Combined
Eliminations
Adjusted Trial Balances
Balance Sheet
Allowance for
overvaluation of
inventories: Adama
Branch (30,000) (a) 30,000
69. Accounting for Branches 69
Working Paper for Example II (contd.)
-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
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Adama
Branch
Home
Office
Combined
Eliminations
Adjusted Trial Balances
Balance Sheet
(contd.)
Accumulated
depreciation
(20,000) (20,000)
70. Accounting for Branches 70
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 2000 are
as follows:
Sales 80,000
Income Summary 10,500
Cost of Goods Sold 67,500
Operating Expenses 23,000
To close revenue and
expense ledger accounts
71. Accounting for Branches 71
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
Home Office 10,500
Income Summary 10,500
To close the net loss in the
Income Summary account to
the Home Office account
72. Accounting for Branches 72
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).
73. Accounting for Branches 73
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
Home Office Adjusting and Closing Entries
Income: Adama Branch 10,500
Investment in Adama
Branch
10,500
To record net loss reported by
branch
74. Accounting for Branches 74
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
Allowance for Overvaluation
of Inventories: Adama Branch 22,500
Realized Gross Profit:
Adama Branch Sales 22,500
To reduce allowance to
amount by which ending
inventories of branch exceed
cost.
Home Office Adjusting and Closing Entries
(contd.)
75. Accounting for Branches 75
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
Home Office Adjusting and Closing Entries
(contd.)
Realize Gross Profit: Adama
Branch Sales
22,500
Income: Adama Branch 10,500
Income Summary 12,000
To close branch net loss and
realized gross profit to Income
Summary ledger account .
76. Accounting for Branches 76
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 Adama Branch =45,500(debit)*
Allowance for Overvaluation of
Inventories: Adama Branch
=7,500(credit)**
Realized Gross Profit: Adama
Branch
= 0
Income: Adama 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.
77. Accounting for Branches 77
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
Similar working paper eliminations will
be prepared for the following year (i.e.,
year 2000) when continuing with the
perpetual inventory system with a price
markup.
78. Accounting for Branches 78
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
Adama Branch” (used by the home
office) and “Shipments from Home
Office” (used by the branch) are used.
79. Accounting for Branches 79
Periodic Inventory System (contd.)
Example:
Example:
Continue with the EPSA Company for a
second year of operations (2000) but using
the periodic inventory system for both the
home office and Adama Branch.
The beginning inventories for 2000 were
carried by Adama Branch at $22,500 (home
office cost is $15,000 due to a 50% markup
by the home office).
80. Accounting for Branches 80
Periodic Inventory System (contd.)
Example: (contd.)
Assume that during 2000, the home office
shipped merchandise to Adama Branch that
cost $80,000 and Adama was billed at
$120,000.
During 2000, Adama 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:
81. Accounting for Branches 81
Periodic Inventory System (contd.)
Example: (contd.)
Home Office Accounting
Records Journal Entries:
Adama Branch Accounting
Records Journal Entries:
Investment in Adama
Branch 90,000
Shipments from Home
Office 120,000
Home Office 120,000
Shipments to Adama
Branch 80,000
Allowance for
Overvaluation of
Inventories: Adama
Branch 40,000
None Cash (or Trade Accounts
Receivable) 150,000
Sales 150,000
82. Accounting for Branches 82
The branch inventories at the end of 2000 amounted to
$30,000. The flow of merchandise for Adama Branch of year
2000 summarized below:
EPSA COMPANY
Flow of Merchandise for Adama Branch During 2000
Periodic Inventory System (contd.)
Example: (contd.)
Available for sale
$37,500
$75,000
$112,500
Cost of goods
sold
(10,000)
(20,000)
(30,000)
Less: Ending
inventories
$47,500
$95,000
$142,500
Add: Shipments
from home office 40,000
80,000
120,000
Beginning
inventories
Markup (50% of
Cost;33 1/3 % of
Billed Price)
Home
Office
Cost
Billed
Price
$22,500 $15,000 $7,500
83. Accounting for Branches 83
Periodic Inventory System (contd.)
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 Adama Branch
Date Explanation Debit Credit Balance
2000 Balance, Dec. 31, 2000
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
120,000
4,500
113,000
45,500 dr
165,500dr
52,500 dr
57,000 dr
84. Accounting for Branches 84
Periodic Inventory System (contd.)
Example: (contd.)
Allowance for Overvaluation of Inventories:
Adama Branch
Date Explanation Debit Credit Balance
2000 Balance, Dec. 31,
2000
7,500 cr
Makeup on
merchandise
shipped to branch
during 2000 (50% of
cost) 40,000 47,500 cr
85. Accounting for Branches 85
Periodic Inventory System (contd.)
Example: (contd.)
Home Office
Date Explanation Debit Credit Balance
2000 Balance, Dec. 31,
2000 45,500 cr
Merchandise
receivable from
home office 120,000 165,500 cr
Cash sent to home
office 113,000 52,500 cr
Operating expenses
billed by Home office 4,500 57,000 cr
86. Accounting for Branches 86
Periodic Inventory System (contd.)
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.
87. Accounting for Branches 87
Periodic Inventory System (contd.)
Example: (contd.)
The working paper for combined financial
statements under the periodic inventory
system is as follows:
Income Statement
Adjusted Trial Balances
Eliminations Combined
Home
Office
Adama
Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Sales (500,000) (150,000) (650,000)
Inventories, Dec. 31,
2000 45,000 22,500 (b) (7,500) 60,000
Purchases 400,000 400,000
Shipments to Adama
Branch (80,000) (a) 80,000
88. Accounting for Branches 88
Periodic Inventory System (contd.)
Example: (contd.)
Income Statement
(contd.)
Adjusted Trial Balances
Eliminations Combined
Home
Office
Adama
Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Shipments from home
office 120,000 (a)(120,000)
Inventories, 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-
89. Accounting for Branches 89
Periodic Inventory System (contd.)
Example: (contd.)
Statement of
Retained Earnings
Adjusted Trial Balances
Eliminations Combined
Home
Office
Adama
Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Retained earnings,
Dec. 31, 2000 (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-
90. Accounting for Branches 90
Periodic Inventory System (contd.)
Example: (contd.)
Balance Sheet
Adjusted Trial Balances
Eliminations Combined
Home
Office
Adama
Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Cash 30,000 9,000 39,000
Trade accounts
receivable (net) 64,000 28,000 92,000
Inventories, Dec. 31,
2000 70,000 30,000 (c) (10,000) 90,000
Allowance for
overvaluation of
inventories : Adama
Branch (47,500)
(a) 40,000
(b) 7,500
Investment in Adama
Branch 57,000 (e) (57,000)
91. Accounting for Branches 91
Periodic Inventory System (contd.)
Example: (contd.)
Balance Sheet
(contd.)
Adjusted Trial Balances
Elimination
s
Combined
Home
Office
Adama
Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Equipment 158,000 158,000
Accumulated
depreciation of
equipment (15,000) (15,000)
Trade Account payable (24,500) (24,500)
Home office (57,000) (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-
92. Accounting for Branches 92
Periodic Inventory System (contd.)
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.
93. Accounting for Branches 93
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
Branch Closing Entries:
(1)Inventory (ending) 30,000
Cost of Goods Sold 112,500*
Inventory (beg.) 22,500
Shipments from
Home Office 120,000
CGS=22,500+120,000-30,000
94. Accounting for Branches 94
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)
(2)Sales 150,000
CGS 112,500
Operating expenses 27,500
Income Summary 10,000
(3) Income Summary 10,000
Home Office 10,000
95. Accounting for Branches 95
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)
Home Office Adjusting (1 and 2) and
Closing Entries (3) :
(1) Investment in Branch 10,000
Income: Adama Branch 10,000
(2) Allowance for Overvaluation
of Inventories 37,500
Realized Gross Profit :
Adama Branch 37,500
96. Accounting for Branches 96
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):(contd.)
(3) Realized Gross Profit 37,500
Income: Adama Branch 10,000
Income Summary 47,500
97. Accounting for Branches 97
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.)
Balances of Investment in Adama
Branch, Allowance for Overvaluation of
Inventories, Realized Gross Profit,
Income: Adama Branch and Home
Office accounts after the above
adjusting and closing entries are:
98. Accounting for Branches 98
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.)
Investment in Adama Branch
= $67,000 (dr.) (57,000+10,000)
Allowance for Overvaluation of
Inventories
= $10,000 (cr.) (47,500 -37,500)
99. Accounting for Branches 99
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.)
Realized Gross Profit
= $0 (37,500- 37,500)
Income: Adama Branch
= $0 (10,000-10,000)
Home Office (a reciprocal account of
Investment)
= $67,000 (cr.) (57,000+10,000)
100. Accounting for Branches 100
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.
101. Accounting for Branches 101
Reconciliation of Reciprocal Ledger
Accounts (contd.)
Example Assume that the home
office and branch accounting
records of Mercer Company
contain the following data on
12/31/00
102. Accounting for Branches 102
Reconciliation of Reciprocal
Accounts (contd.)
Date Explanation Debit Credit Balance
2000
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 Branch
(in accounting records of Home office)
103. Accounting for Branches 103
Reconciliation of Reciprocal
Accounts (contd.)
Date Explanation Debit Credit Balance
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 home
office trade accounts
receivable
2,000 41,500 cr
Home Office
(in accounting records of Branch)
104. Accounting for Branches 104
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)
105. Accounting for Branches 105
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
106. Accounting for Branches 106
Reconciliation of Reciprocal Ledger
Accounts (contd.)
For Mercer Home Office:
1.Equipment: Brach 3,000
Investment in Branch:
3,000
2.Investment in Branch: 2,000
Trade Accounts Receivable 2,000
107. Accounting for Branches 107
Reconciliation of Reciprocal Ledger
Accounts (contd.)
The balance of Investment in Branch
account at the home office equals:
$ 49,500 (dr.)
- 3,000 (cr.)
+ 2,000 (dr.)
$ 48,500 (dr.)
108. Accounting for Branches 108
Reconciliation of Reciprocal
Accounts (contd.)
After posting the above adjusting
entries:
The balance of Home Office account at
Branch equals:
$ 41,500 (cr.)
- 1,000 (dr.)
+ 8,000 (cr.)
$ 48,500 (cr.)
109. Accounting for Branches 109
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.
110. Accounting for Branches 110
Transactions between Branches
(contd.)
Example:
1) The home office in Addis shipped
merchandise costing birr 8,000 to Dukem
Branch and paid freight costs of birr 500.
2) A week later, the home office instructed
Dukem Branch to transfer this merchandise
to Sabata Branch. Dukem paid birr 400 for
the transfer. If the merchandise had been
shipped directly from the home office to
Sabata, the freight costs would have been
birr 600.
111. Accounting for Branches 111
Transactions between Branches
(contd.)
Journal entries for these transactions are:
In Accounting Records of Home Office:
1)
Investment in Dukem Branch 8,500
Inventory 8,000
Cash 500
2)
Investment in Sabata Branch 8,600
Excess Freight Expense 300
Investment in Dukem Branch 8,900
112. Accounting for Branches 112
Transactions between Branches
(contd.)
In Accounting Records of Dukem Branch:
1)
Inventories 8,500
Home Office 8,500
2)
Home Office 8,900
Inventories 8,500
Cash 400
113. Accounting for Branches 113
Transactions between Branches
(contd.)
In Accounting Records of Sabata
Branch:
Inventories 8,600
Home Office 8,600