Accounting for Branches and Combined Financial Statements.ppt

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.

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:

Branch (contd.)
 For the home office: debit a plant
asset account: branch, credit
cash or a liability account.
 For the branch: no entry.

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:

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.

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.

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.

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.

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.

Combined financial Statements for Home Office and Branch
(for external use)(contd.)
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
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 80,000
Cost of Goods Sold 45,000
Sales 80,000
Inventories 45,000

Example I: (contd.)
5. None Cash 62,000
Trade
Account
Receivable 62,000
6. 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 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

Example I: (contd.)
Home Office
1999 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

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.

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.

 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)

-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
(48,000)
(80,000)
(400,000)
Sales
Income Statement
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Mason
Branch
Home
Office Combined
Eliminations
Adjusted Trial Balances

-0-
Totals
117,000
Retained earnings,
Dec.31,1999 (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, 1999
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Mason
Branch
Home
Office
Combined
Eliminations
Statement of Retained
Earnings

(10,000)
(10,000)
Accumulated
depreciation of
equipment
(a) (26,000)
26,000
Investment in Mason
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)
Mason
Branch
Home
Office
Combined
Eliminations
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
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Mason
Branch
Home
Office
Combined
Eliminations
Balance Sheet
(contd.)
(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
$ 5.80
Basic earnings per share of common
stock
$ 87,000
Net Income
113,000
Operating expenses
$ 200,000
Gross margin on sales
280,000
Cost of goods sold
$ 480,000
Sales

Example I (contd.)
SMALDINO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 1999
$ 117,000
Retained earnings, end of year
40,000
Less: Dividends ($2.67 per share)
$ 157,000
Subtotal
87,000
Add: Net income
$ 70,000
Retained earnings, beginning of year

Example I (contd.)
SMALDINO COMPANY
Balance Sheet
December 31, 1999
$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

Example I (contd.)
SMALDINO COMPANY
Balance Sheet (contd.), December 31, 1999
$287,000
Total liabilities & stockholders’
equity
267,000
117,000
Retained earnings
$150,000
Common stock, $10 par,
15,000 shares authorized, issued,
and outstanding
Stockholders’ equity
$20,000
Liabilities
Liabilities & Stockholders’ Equity

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

Home Office Adjusting and Closing Entries and
Branch Closing Entries Performed on 12/31/1999
(perpetual inventory system): (contd.)
Records Adjusting and
Closing Entries:
Records Closing Entries:
Investment in Mason
Branch 12,000
Income
Summary 12,000
Income: 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:

above Home Office Cost (contd.)
 Journal entries for shipments to branch at
prices above home office cost (perpetual
inventory system):
Investment in Mason
Branch 90,000 Inventories 90,000
Inventories 60,000 Home Office 90,000
Allowance 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.

SMALDINO COMPANY
Flow of Merchandise for Mason Branch During 1999
$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

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
earnings below)
113,000
23,000
90,000
Operating expenses
28,000
(a) (22,500)
67,500
235,000
Cost of goods sold
(48,000)
(80,000)
(400,000)
Sales
Income Statement
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Mason
Branch
Home
Office Combined
Eliminations

-0-
Totals
117,000
Retained earnings,
Dec.31,1999 (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, 1999
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Mason
Branch
Home
Office
Combined
Eliminations
Statement of Retained
Earnings
(b) (22,500)

150,000
150,000
Equipment
(c) (56,000)
56,000
Investment in Mason
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)
Mason
Branch
Home
Office
Combined
Eliminations
Balance Sheet
Allowance for
overvaluation of
inventories: Mason
Branch (30,000) (a) 30,000

-0-
-0-
-0-
-0-
Totals
(117,000)
Retained earnings(from
earnings above)
(150,000)
(150,000)
Common stock, $10 par
(c) (56,000)
(56,000)
Home Office
(10,000)
(10,000)
Dr (Cr)
Dr (Cr)
Dr(Cr)
Dr (Cr)
Mason
Branch
Home
Office
Combined
Eliminations
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
Income Summary 10,500
Cost of Goods Sold 67,500
Operating Expenses 23,000
To close revenue and
expense ledger accounts

above the cost) (contd.)
Home Office 10,500
To close the net loss in the
Income Summary account to
the Home Office account

 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
Branch
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.
(contd.)

(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.)

 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.)
Investment in Mason
Branch 90,000
Shipments from Home
Office 120,000
Home Office 120,000
Shipments to Mason
Branch 80,000
Allowance for
Overvaluation of
Inventories: Mason
Branch 40,000
None Cash (or Trade Accounts
Receivable) 150,000
Sales 150,000

 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
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

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
2000 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
120,000
4,500
113,000
45,500 dr
165,500dr
52,500 dr
57,000 dr

Example: (contd.)
Allowance for Overvaluation of Inventories:
Mason Branch
2000 Balance, Dec. 31,
1999
7,500 cr
Makeup on
merchandise
shipped to branch
during 2000 (50% of
cost) 40,000 47,500 cr

Example: (contd.)
Home Office
2000 Balance, Dec. 31,
1999 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

Example: (contd.)
 The working paper for combined financial
statements under the periodic inventory
system is as follows:
Income Statement
Eliminations Combined
Home
Office
Mason
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) 60,000
Purchases 400,000 400,000
Shipments to Mason
Branch (80,000) (a) 80,000

Example: (contd.)
Income Statement
(contd.)
Home
Office
Mason
Branch
Shipments from home
office 120,000 (a) 80,000
Inventories, Dec.
31,2000 (70,000) (30,000) (c) 10,000 (90,000)
Operating expenses 120,000 27,500 147,500
Net Income( to
earnings below) 85,000 10,000 (d) 37,500 132,500
Totals -0- -0- -0-

Example: (contd.)
Statement of
Retained Earnings
Home
Office
Mason
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
Home
Office
Mason
Branch
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 : Mason
Branch (47,500)
(a) 40,000
(b) 7,500
Investment in Mason
Branch 57,000 (e) (57,000)

Example: (contd.)
Balance Sheet
(contd.)
Elimination
s
Combined
Home
Office
Mason
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.) 22,500
Shipments from
Home Office 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
(3) Income Summary 10,000
Home Office 10,000

 Home Office Adjusting (1 and 2) and
Closing Entries (3) :
(1) Investment in 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.

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:

Accounts (contd.)
1999
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)

Accounts (contd.)
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)

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)

Accounts (contd.)
 For Arvin Branch:
1.Home Office 1,000
Trade Accounts
Receivable 1,000
2.Inventory 8,000
Home Office 8,000

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

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.)

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.

(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.

(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

(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

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

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