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11
Corporations in
Financial Difficulty
Not-for-Profit and
Governmental Entities
Partnerships
Multinational
ACCOUNTING FOR
BRANCH OPERATIONS
One route to corporate expansion is the external approach of acquiring other companies in business combinations, as discussed in Chapter 1. Another approach to
expansion is through internal growth. While such growth can occur at a single location, companies often expand by establishing additional locations. For example,
Wal-Mart's phenomenal growth would have been impossible had the company not
established many new stores at various locations throughout much of the country.
When operations are conducted at more than a single location, the different
locations may be referred to as sales agencies, branches, plants, or by numerous
other terms. Unfortunately, terminology referring to multiple operating locations is
not standardized. In addition, many different approaches are taken in establishing
internal accounting and reporting systems for companies operating through outlying
locations.
Entities
Multi-Corporate
Entities
Branch Operations
Additional
Consolidation Issues
Intercorporate
Transfers
Consolidation
Procedures
Consolidation
Concepts
Intercorporate
Investments
Business
Combinations
606
Chapter 11
expanding through extensive networks of branch banks. Some manufacturing companies also conduct business through a comparable system of operating locations, usually
referred to as ''plants." For example, General Motors operates assembly plants at many
different sites, including locations in or near Detroit, St. Louis, Los Angeles, and
Nashville.
There typically is little management decision making in a sales agency; decisions
are made at the home office, and the agency conducts routine operations. The degree
of management decision making in branches usually is greater than in sales agencies
but differs considerably from company to company.
While one branch manager may be permitted few choices, other branch managers
may operate with relative independence from the home office. The manager of an automobile assembly plant, for example, may have no discretion over the quantity and type
of units produced and little discretion in the choice of vendors. On the other hand, the
manager of a branch grocery store may have considerable discretion in the types and
quantities of products to stock and in the choice of vendors. In some banks, loans may
be approved by branch management, at least up to a certain limit, while in other banks,
all loans must be approved by a centralized loan committee. In large department store
chains, branch stores normally are required to stock certain items chosen by the home
office, but local management has a choice of other items from a large number specified
by central management. In some cases, local management may be free to make purchases entirely on its own.
607
FIGUKE
Transactions
Rent land for sales facility.
50,000
80,000
21,000
16,000
50,000
117,000
2,500
31,000
Accounts Receivable
Sales-San Diego Agency
88,000
56,000
employees.
Fill sales orders from sales agency.
2,500
135,000
135,000
1,100
800
2,000
1,400
2,700
8,000
31,000
88,000
56,000
420
1,200
750
2,370
25,000
14,500
1,900
25,000
14,500
1,900
by external parties directly to the home office. For example, the utility companies providing gas, electricity, water, and phone service to the agency might bill the home
office directly.
The home office normally accounts for the assets, revenues, and expenses of each
agency separately. This allows the home office to maintain control over the assets and
provides information for assessing the performance of each agency.
As an example of home office accounting for a sales agency, assume that Carver
Enterprises, a manufacturer of modular structures and partitions based in Atlanta,
establishes a sales agency in San Diego. The journal entries to record typical sales
agency transactions on the home office books are illustrated in Figure 11-1. Note that
the entries are recorded in the same way as if the home office had engaged in the transactions except that the assets, revenues, and expenses are specifically designated as
relating to the San Diego branch.
608
Chapter 11
Intracompany Accounts
Transactions with external parties are recorded in the normal manner. Transactions
between the home office and a branch also are treated in the normal manner except that
they are recorded in intracompany accounts. These accounts are redprocal accounts
between the home office and the branch. When the books of both the home office and
the branch are completely up to date, the balance in an intracompany account on the
home office books will be equal but opposite that of the related intracompany account
on the branch books. For example, if an intracompany account on the home office
books has a $10,000 debit balance, the related intracompany account on the branch
books should have a credit balance of the same amount.
The intracompany account on the books of the home office often is called Investment in Branch, while the reciprocal account on the branch books may be labeled
Home Office. When a company has more than one branch, a separate investment
account for each branch is maintained on the home office books.
The balance of the Investment in Branch account indicates the extent of the home
office's investment in a particular branch through contributions of cash and the transfer of assets to the branch. The procedures employed by the home office in accounting
for its investment in a branch are similar to a parent's application of the equity method
in accounting for its investment in a subsidiary. The reciprocal Home Office account
on the books of the branch represents the home office's equity in the branch, and the
balance is shown in place of owners' equity in the separate :financial statements of the
branch prepared for internal reporting purposes.
The balances of the two reciprocal accounts are adjusted for the same transactions.
The account balances are increased for asset transfers from the home office to the
branch and reduced for asset transfers from the branch to the home office. Adjustments
to the accounts also are made for profits and losses of the branch, with branch profits
609
leading to an increase in the account balances and branch losses leading to a decrease.
Note that increases in the home office's Investment in Branch account are accomplished with debit entries and decreases with credit entries. The opposite is true with
respect to the branch's Home Office account.
The reciprocal nature of the Investment in Branch and the Home Office
accounts, and the way in which they are affected by various transactions, can be
shown as follows:
Investment in Branch
(Home Office Books)
xxxx
xxxx
xxxx
Home Office
(Branch Books)
Asset transfers to branch
Asset transfers from branch
Branch income
Branch loss
xxxx
xxxx
xxxx
xxxx
xxxx
Establishment ofBranch
When a company establishes a branch, the transfer of assets to the branch is recorded
by the home office in the Investment in Branch account. Similarly, the branch records
the transfer with an entry to the Home Office account. To illustrate, assume that Jensen
Corporation of St. Paul, Minnesota, establishes a branch in Mayfield, Texas. The home
office transfers to the branch $20,000 in cash, new office equipment that costs $5,000,
and new store equipment with a cost of $30,000. The home office records the transfer
with the following entry:
H(l)
55,000
20,000
5,000
30,000
20,000
5,000
30,000
55,000
Note that after both the home office and the branch have recorded the transfer, the
Investment in Mayfield Branch account on the home office books and the Home
Office account on the branch books have reciprocal balances of $55,000. A separate
balance sheet prepared for the Mayfield branch immediately after the transfer appears
as follows:
610
Chapter 11
Assets:
Cash
Office Equipment
Store Equipment
$20,000
5,000
30,000
Home Office:
Total
$55,000
Total
Liabilities:
While branch financial statements may be prepared for internal reporting purposes, external accounting reports reflect the activities and position of the company as
a whole. The accounts of the home office and its branches are combined in preparing
external accounting reports to reflect the single enterprise consisting of the home office
and its branches. Classification of the fuvestment in Mayfield Branch account and the
Home Office account is not an issue because both accounts are eliminated in preparing
financial statements for external use.
63,000
63,000
Upon receiving a report of Mayfield's income for the period, the home office records
the following entry:
H(4) Investment in Mayfield Branch
Mayfield Branch Income
Record Mayfield branch income.
63,000
63,000
611
for the company as a whole, the Investment in Mayfield Branch account, the Home
Office account, and the Mayfield Branch Income account all must be eliminated.
Inventory
Cash (or Accounts Payable)
Record purchase of inventory from external party.
5,000
5,000
No entry with respect to this transaction is made on the books of the home office.
When inventory is transferred from the home office to a branch, both the home
office and the branch must record the transfer. The dollar amount assigned to the
inventory that is transferred is referred to as a transfer price. Merchandise is transferred from the home office to a branch either at the original cost to the home office or
at some amount in excess of that cost.
Merchandise Billed at Cost. Merchandise transferred from the home office and
billed to the branch is recorded by the branch in the same way as inventory purchased
from external parties, except the credit is to the Home Office account. The transfer of
inventory is treated by both the home office and the branch in the same way as the transfer of any other asset, assuming a perpetual inventory system is used. Thus, the journal
entries to record a transfer of inventory at cost are similar to entries H(l) and B(2).
To see this, assume that Jensen's home office transfers inventory with a cost of
$8,000 to its Mayfield branch. The transfer is recorded on the home office books with
the following entry:
H(6)
8,000
8,000
The branch records the merchandise as an asset in the same inventory account used to
record purchases from external parties and also recognizes the home office's increased
equity in its net assets with the following entry:
B(7)
Inventory
Home Office
Transfer of inventory from home office.
8,000
8,000
No profit is recognized by the home office on the transfer. The full amount of the profit
is recognized by the branch when it sells the inventory to external parties.
612
Chapter 11
8,100
8,000
100
Inventory
Home Office
Transfer of inventory from home office.
8,100
8,100
15,000
12,000
3,000
The $3,000 intracompany profit is unrealized because the inventory has not been sold
to an external party. Recognition of the profit is deferred until the branch sells the merchandise externally.
613
The branch records receipt of the shipment with the following entry:
B(l 1)
15,000
15,000
Home Office
Transfer of inventory from home office.
lbis entry records the inventory at the cost to the branch without separately recognizing the intracompany profit included in the transfer price. A separate inventory account
is established in this case to facilitate eliminating the unrealized intracompany profit
when external accounting reports are prepared for the company as a whole. When such
reports are prepared while the inventory is still on hand, work:paper entries are needed
to eliminate the Unrealized Intracompany Profit balance against the Inventory-From
Home Office account. Thus the $3,000 unrealized intracompany profit is eliminated,
and the inventory is reported at its $12,000 original cost to the company.
When the branch sells the inventory acquired from the home office, it recognizes
a profit for the difference between the external selling price and the transfer price from
the home office. Once the inventory has been sold externally, the home office recognizes the intracompany profit that it previously had deferred. For example, if the Mayfield branch sold 80 percent of the inventory transferred from the home office, the
intracompany profit would be recognized by the home office with the following entry:
H(12)
2,400
2,400
$3,000 x .80
lbis entry is appropriate if, for internal reporting purposes, the intracompany profit is
to be attributed to the Mayfield branch.
Alternatively, the company may feel that the intracompany profit should be allocated to the home office for services that it has provided. In that case, the intracompany
profit is recognized with the following entry on the books of the home office in place
of entry H(12):
H(12a) Unrealized Intracompany Profit
Realized Profit on Branch Shipments
Recognim intracompany profit:
$3,000 x .80
2,400
2,400
30,000
30,000
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Chapter 11
Store Equipment
Home Office
Record pUIChase of equipment by home office.
30,000
30,000
Some companies account for branch fixed assets on the books of the home office
rather than on the books of the branch. This may provide the home office with better
control over branch fixed assets and may facilitate the computation of depreciation for
the company as a whole. For example, a company might establish depreciation policies
to be applied to all fixed assets within the company. Some companies use group or
composite depreciation methods, which may be applied most easily on a companywide
basis.
When branch fixed assets are recorded only on the home office books, no entry is
needed on the books of the branch if the home office makes the purchase. For example,
if Jensen's home office purchases $30,000 of store equipment for the Mayfield branch,
and the equipment is recorded on the books of the home office rather than the branch,
the home office records the purchase as follows:
H(15)
30,000
30,000
Home Office
Cash
Purchase of equipment.
30,000
30,000
30,000
30,000
Because the branch purchases an asset that is carried on the home office books, the balances of both the Home Office account and the Investment in Mayfield Branch account
are reduced. The transaction is treated as if the branch had purchased equipment for the
home office.
Apportionment of Expenses
Branch expenses incurred and paid by the branch are recorded directly on the books of
the branch. However, the home office may elect to assign expenses to a branch. These
assigned expenses might be of several types:
1. Expenses incurred by the branch but paid by the home office; for example,
inventory purchased from external parties by the branch and billed to the
home office.
615
2. Expenses incurred by the home office on behalf of the branch; for example,
depreciation on branch equipment carried on the home office books, or the cost
of an advertising campaign for the branch commissioned by the home office.
3. Allocations of costs incurred by the home office; for example, a portion of the
cost of a general advertising campaign, or a portion of the general home
office overhead.
In some cases, these costs might be apportioned against branch income and
recorded only on the books of the home office. Often, however, the branch to which
the costs are apportioned is notified of the apportioned amounts and records the
expenses on its own books. In this way, the income computed by the branch on its
books includes all expenses deemed related to the branch.
As an illustration of the treatment of apportioned home office costs, assume that
Jensen's home office incurs the following costs assigned to its Mayfield branch:
$14,000
3,000
18,000
$35,000
Jensen's home office already has recorded these expenses in the normal manner, as if
they related to the home office. Periodically, the home office notifies the branch of the
apportioned expenses. The home office records the following entry upon notifying the
Mayfield branch of the $35,000 of apportioned expenses:
H(18)
35,000
14,000
3,000
18,000
Upon notification of the expenses by the home office, the branch records the expenses
as follows:
B(19)
Utilities Expense
Depreciation Expense
General Overhead Expense
Home Office
Record expenses apportioned from home office.
14,000
3,000
18,000
35,000
Without these entries, the home office income would be understated and the branch
income overstated. While omission of these entries has no effect on the income of the
company as a whole, the separate income amounts of the home office and branch may
be important for internal reporting purposes.
616
Chapter 11
office and its branches as a single entity; the reporting entity is the company as a
whole. Therefore, in the preparation of the company's financial statements, the
accounts of the home office and its branches are combined. Intracompany or reciprocal account balances must be eliminated because they relate to activities within the
company rather than activities between the company and external parties.
In the preparation of fmancial statements for the company as a whole, a workpaper
normally is used to facilitate combining the accounts of the home office and its
branches and eliminating the intracompany accounts. If a complete set of statements is
prepared, a three-part workpaper similar to that illustrated in the consolidations chapters might be used to combine the accounts of the home office and branch. The workpaper is comparable to the consolidation workpaper except that the branch's Home
Office account replaces the subsidiary's stockholders' equity in the workpaper. As in
the preparation of consolidated financial statements, all eliminations are made in the
workpaper and not on the separate books of the units being combined.
As an illustration of the basic workpaper entries needed to prepare external fmancial statements for a company with branch operations, assume the following with
respect to Jensen Corporation's fiscal year ending December 31, 19Xl:
1. Jensen establishes a branch in Mayfield and immediately transfers cash,
office equipment, and store equipment with a total value of $55,000 to the
branch, as recorded in entry H(l). Later in the year, Jensen transfers inventory
costing $12,000 to the branch and bills it $15,000, as recorded in entry H(lO).
Jensen reports a balance of $70,000 in its Investment in Mayfield Branch at
December 31, 19Xl, before closing entries are recorded.
2. The Mayfield branch reports a profit of $63,000 for 19Xl.
3. The balance in Jensen's Investment in Mayfield Branch account and
Mayfield's Home Office account are increased to $133,000 on December 31,
19Xl, as follows:
$ 70,000
63,000
$133,000
$1,400
1,600
$3,000
617
Shipments. The Unrealized lntracompany Profit account is reduced accordingly, leaving it with a year-end balance of $1,600.
In the December 31, 19Xl, workpaper used to prepare Jensen Corporation's financial statements, the following entries are needed:
E(20)
E(21)
E(22)
E(23)
63,000
70,000
133,000
1,400
1,600
Inventory
Inventory-From Home Office
Reclassify inventory from home office:
$8,000 - $1,600
6,400
1,400
1,600
6,400
63,000
63,000
The second part of entry E(20) eliminates the remaining balance of the investment
account against the reciprocal preclosing balance of the branch's Home Office
account:
E(20b) Home Office, pre.closing balance
Investment in Mayfield Branch
70,000
70,000
This part of the entry eliminates the balances that would have been in the two reciprocal
accounts if there had been no branch income. The debit to the preclosing balance of the
618
Chapter 11
619
had been transferred from the home office had cost the home office $15,000
and been billed to the branch at $20,000.
The journal entries to record the 19Xl activities on the books of Ulmer's home office
and the Florida branch are shown in Figure 11-2.
The work.paper to prepare financial statements for Ulmer Inc. for 19Xl appears in
Figure 11-3. The first two columns of the work.paper are the account balances from the
books of the home office and the Florida branch. The next two columns are for the
work.paper entries needed to eliminate or adjust account balances so they reflect the
position and activities of the home office and the branch as a single entity. The final
column shows the totals for each account item, where each total consists of the balance
from the home office books plus the balance from the branch books, with the sum
increased or decreased by any amounts in the elimination columns. The amounts in the
last column are those that appear in the financial statements for the company as a
whole.
The following eliminating entries are needed in the work.paper presented in Figure 11-3 for the preparation of Ulmer's 19Xl financial statements:
E(24)
E(25)
E(26)
E(27)
32,000
170,000
202,000
35,000
35,000
5,000
5,000
15,000
15,000
There are several important points to note regarding the work.paper illustrated in Figure 11-3:
1. The work.paper is divided into three sections, one each for the income
statement, the retained earnings statement, and the balance sheet. The entire
last line of the income statement section of the workpaper carries down to the
retained earnings section; the entire last line of the retained earnings section
carries down to the balance sheet section.
2. Because the home office records the income of the Florida branch on its
books, the total income of the home office in the first column is equal to the
total income of the company in the last column.
3. The home office's Florida Branch Income and its Investment in Florida
Branch are eliminated in entry E(24) along with the Florida branch's
preclosing balance of the Home Office account. The remainder of the Home
Office account (the change resulting from the branch's current-period
income) is eliminated by the carrydown totals from the income statement
portion of the work.paper.
FIGURE
11-2
30,000
100,000
Cash
F.quipment
Home Office
Transfer of cash and equipment from home office.
260,000
Invent.ory
Accounts Payable
Purchase of invent.ory.
130,000
Cash
F.quipment
Transfer of cash and equipment to Florida branch.
(b) Inventory
Accounts Payable
Purchase of inventory.
260,000
110,000
130,000
50,000
50,000
110,000
Accounts Receivable
Sales
Record sales of invent.ory.
200,000
128,000
Cash
Accounts Receivable
Record collections on account.
158,000
480,000
Home Office
Cash
Cash remittance to home office.
70,000
70,000
Operating Expenses
Accounts Payable
Record 19Xl operating expenses.
34,000
70,000
40,000
Inventory
30,000
100,000
110,000
500,000
500,000
254,000
Cash
Accounts Receivable
Record collections on account.
480,000
(e) Cash
Investment in Florida Branch
Cash remittance from Florida branch.
254,000
70,000
133,000
133,000
200,000
38,000
90,000
158,000
70,000
34,000
390,000
50,000
30,000
35,000
390,000
Accounts Payable
Cash
Record payments on account.
77,000
Depreciation Expense
Accumulated Depreciation
Record 19Xl depreciation.
6,000
77,000
50,000
30,000
6,000
35,000
Oosing enlries:
~
......
32,000
Sales
Florida Branch Income
Realiz.ed Profit on Branch Shipments
Cost of Goods Sold
Operating Expenses
Depreciation Expense
Income Summary
Close revenue and expense accounts.
Income Summary
Retained Earnings
Close income summary.
Retained Earnings
Dividends Declared
Close dividends declared.
500,000
32,000
35,000
32,000
254,000
133,000
30,000
150,000
150,000
150,000
50,000
50,000
Sales
Cost of Goods Sold
Operating Expenses
Depreciation Expense
Income Summary
Close revenue and expense accounts.
Income Summary
Home Office
Close income summary.
200,000
128,000
34,000
6,000
32,000
32,000
32,000
622
Chapter 11
FIGURE 11-3 December 31, 19X1, Workpaper for Ulmer, Inc., Combined Home Office and Branch
Financial Statements
Eliminatiom
Home
Office
Florida
Branch
Sales
Florida Branch Income
Realized Profit on Branch Shipments
500,000
32,000
35,000
200,000
Credits
567,000
--200,000
254,000
30,000
133,000
128,000
6,000
34,000
Item
Debits
{417,000)
{168,000)
150,000
32,000
285,000
150,000
Dividends Declared
435,000
{50,000)
Debit
Credit
Combined
700,000
(24)
(25)
32,000
35,000
700,000
(25)
35,000
347,000
36,000
167,000
{550,000)
67,000
35,000
150,000
285,000
170,000
32,000
(24)
170,000
67,000
35,000
202,000
150,000
435,000
{50,000)
---
385,000
Cash
Accounts Receivable
Inventory
Inventory-From Home Office
47,000
75,000
52,000
105,000
545,000
202,000
Land
Buildings and Equipment
Investment in Florida Branch
Debits
41,000
42,000
12,000
20,000
237,000
(27)
35,000
385,000
88,000
117,000
79,000
15,000
(26)
(27)
5,000
15,000
105,000
645,000
100,000
(24)
---
202,000
1,026,000
215,000
1,034,000
105,000
31,000
500,000
6,000
7,000
111,000
38,000
500,000
Accumulated Depreciation
Accounts Payable
Common Stock
Retained Earnings (and Home Office),
from above
Unrealized Intracompany Profit
385,000
5,000
1,026,000
Credits
202,000
202,000
--215,000
(26)
237,000
5,000
35,000
385,000
257,000
257,000
1,034,000
Elimination entries:
(24) Eliminate intru:ompany accmmts.
(25) Eliminate home office profit from cost of goods sold.
(26) Eliminate umealized intracompany profit from inventory.
(27) Reclassify inventory from home office.
4. The branch's Home Office account replaces retained earnings in the branch's
trial balance for the retained earnings and balance sheet sections of the
work:paper.
5. The $5,000 of Unrealized Intracompany Profit from the home office's trial
balance is eliminated by entry E(26), and the carrying amount of the branch's
inventory is reduced to the original cost to the company (home office).
623
Additional Considerations
TransactWns between Branches
Branches sometimes transfer assets or services from one to another. While there are
several ways of accounting for such transfers, a commonly used approach is to treat the
transfers as if they went through the home office. The branches involved in an interbranch transfer generally account for the transfer as if they are dealing with the home
office rather than with another branch. For example, if Jensen Corporation's Mayfield
branch transfers $5,000 of cash and inventory costing $10,000 to the Fairmont branch,
the Mayfield branch records the following entry:
B(28)
Home Office
Cash
15,000
5,000
10,000
Inventory
Transfer of cash and inventory to Fairmont branch.
The Fairmont branch records the transfer with the following entry:
B(29)
Cash
Inventory
5,000
10,000
15,000
Home Office
15,000
15,000
624
Chapter 11
FIGURE 11-4
$700,000
(347,000)
Gross Margin
Expenses:
Depreciation
Other Expenses
$353,000
$ 36,000
(203,000)
167,000
$150,000
Net Income
Ulmer, Inc.
Retained Earninp Statement
For the Year 19XI
Retained Earnings, Jamuiry 1, 19Xl
Netlncome, 19Xl
Less: Dividends
$285,000
150,000
(50,000)
$385,000
Ulmer, Inc.
Balance Sheet
December 31, 19Xl
Assets:
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated
Depreciation
$ 88,000
Liabilities:
Accounts Payable
$ 38,000
117,000
79,000
105,000
$645,000
(111,000}
Total Assets
Stockholders' Equity:
Common Stock
Retained Earnings
Total Liabilities and Equity
$500,000
385,000
885,000
$923,000
home office reduces its Unrealized Intracompany Profit account and increases its Realized Profit on Branch Shipments account (assuming the intracompany profit is to be
attributed to the home office). When financial statements are prepared for the company
as a whole, the balance of the Realized Profit on Branch Shipments account is eliminated against cost of goods sold and any remaining unrealized intracompany profits are
eliminated against the carrying amount of the inventory.
625
operations are sales agencies and branches. Sales agencies usually take orders that are filled
by the home office. They usually have little autonomy, do not stock merchandise, and do
not have separate accounting systems.
Branches vary in the degree of autonomy. Most branches have greater autonomy than
sales agencies. They usually do stock merchandise and frequently have their own accounting systems.
A branch office's books consist of a self-balancing set of accounts, similar to the books
of a separate company. However, a Home Office account replaces the owners' equity
accounts found on the books of separate companies. The Home Office account indicates
the home office's equity in the branch.
The Home Office account on the books of the branch is reciprocal to the Investment in
Branch account on the home office books. Both accounts are increased by asset transfers
from the home office to the branch and by branch profits. Both accounts are decreased by
asset transfers from the branch to the home office and by branch losses.
While companies often prepare separate accounting reports for the home office and
each branch for internal use, the external accounting reports must reflect the activities and
position of the company as a whole. The accounts of the home office and the branches are
combined to prepare financial statements for external reporting. A workpaper normally is
used to facilitate the process of combining home office and branch accounts. In addition,
certain account balances must be eliminated or changed so that the results reflect a single
company. The reciprocal Home Office and Investment in Branch accounts are eliminated,
and the amounts reported as cost of goods sold and ending inventory are adjusted for any
intracompany profit recorded by the home office on shipments of merchandise to its
branches.
Branch office
Home office
Intracompany accounts
Intracompany profit
Reciprocal accounts
Sales agency
Transfer price
Questions
Qll-1
Qll-2
Qll-3
Qll-4
Qll-5
Qll-(;
Qll-7
Qll~
626
Chapter 11
Qll-9
Qll-10
Qll-11
Qll-12
Qll-13
Qll-14
Qll-15
Qll-16
What items are recorded in the home office's Investment in Branch account?
What causes the balance in this account to change?
What items are recorded in a branch's Home Office account? What causes the
balance in this account to change?
When is branch income recognized on the books of the home office? How is
the home office's Investment in Branch account affected by the income
recognition?
What is the accounting treatment for freight charges incurred in shipping
inventory from the home office to a branch? Why?
What is a transfer price? Of what significance are transfer prices in accounting
for branch operations?
What is intracompany profit? How is unrealized intracompany profit treated
for external reporting purposes?
Why might a home office transfer inventory to a branch office and bill the
branch for an amount higher than cost?
Why are certain account balances eliminated or adjusted in combining home
office and branch accounts for external reporting purposes?
Cases
Cl-1
Required
Describe the main elements of the accounting system that you would expect to be used by
Bailey Products. Compare that accounting system with the one that you would expect to
be used by Chesapeake Distributors. Indicate why you would expect each of the
differences to exist.
Cll-2
627
Required
a. What similarities would you expect to find in the accounting systems of Nieminsky
and Banks? What differences would you expect?
b. Compare the process of preparing consolidated financial statements for Nieminsky
with the process of preparing Banks's external accounting reports.
Cll-3
Required
a. In 1997, NationsBank. Corporation acquired Barnett Banks in Florida and Boatmen's
Bancshares Inc. in Missouri. Approximately how many branches did NationsBank
add to its network with these acquisitions?
b. A.G. Edwards and Edward Jones are two St. Louis-based brokerage firms that are the
largest based outside of New York. Nationwide, how many A.G. Edwards offices are
there? How many Edward Jones offices are there? Nationwide, how many registered
representatives (brokers) are there at each of the two firms? From this information.
what can you conclude about Edward Jones's strategy?
c. Contact a local bank in your area that has multiple branches but serves only your
region of the country. How many branches does it have currently? How many
branches did it have five years ago? If the number has changed, what do you think
has led to the change?
Exercises
E11-1
Establishing a Branch
Di.versified Industries operated primarily in the western United States. WlBhing to expand
its sales and operations into the eastern part of the country, Diversified established a
separate branch in New Jersey in 19X2. The New Jersey branch maintained its own
accounting records. The following transactions occurred during 19X2:
1. Cash of $80,000 and inventory costing $150,000 were transferred to the newly
established branch.
2. Equipment was purchased for $120,000 by Diversified Industries and given to the
branch. The equipment was recorded in the records of the branch.
3. The branch purchased additional inventory for $35,000 on account.
628
Chapter 11
4. It cost $300 to ship the inventory and $1,000 to ship the equipment to the branch.
Freight charges were paid by the home office.
5. The branch used $50,000 of its cash to purchase a small warehouse to store the
inventory acquired from the home office.
Required
Prepare the journal entries recorded by the home office of Diversified Industries and by
the New Jersey branch for each of the transactions.
Ell-2
Required
Prepare the journal entries recorded by Sunshine Products' home office and branch on
each of the transactions.
Ell-3
Required
Compute the balance in the Investment in Western Division account on the books of
Major Manufacturing's head office at the end of the first year of the division's operations.
Ell-4
629
Required
a. Give the journal entries recorded by Bean's home office and branch during 19X2
related to inventory transactions.
b. Determine:
(1) Cost of goods sold recorded by the branch for 19X2.
(2) Sales recorded by the branch for 19X2.
(3) Cost of goods sold for Bean Corporation as a whole for 19X2.
(4) Sales for Bean Corporation as a whole for 19X2.
Ell-5
Inventory Transfers
Short Products Corporation, a manufacturer of electronics gear, established a separate
branch in another city in 19X6. During 19X6, Short produced inventory for $200,000 and
sold it to the branch for $280,000. The branch sold 25 percent of the inventory in 19X6
for $105,000 and 75 percent in 19X7 for $350,000. Both Short and its branch used
perpetual inventory systems.
Required
a. Give all journal entries related to the inventory transfers during 19X6 recorded on the
books of Short Products Corporation's (1) home office and (2) branch.
b. Give the eliminating entries needed on December 31, 19X6, to remove the effects of
Ell-6
Required
a. Prepare the journal entries to be recorded during 19X7 by Flash Electronics' (1) home
office and (2) branch with regard to the inventory transactions.
b. Give the eliminating entries needed on December 31, 19X7, to remove the effects of
Ell-7
630
Chapter 11
The branch purchases all its inventory from the home office. During 19X3,
Amalgamated Wholesalers purchased additional inventory for $200,000 and sold it to the
branch for $280,000. Both the home office and the branch use a fifo cost flow assumption
for inventory.
In 19X3, the branch decided not to build on the land transferred from the home office
and sold it for $165,000. An income statement prepared by the branch for 19X3 contained
the following items:
Sales
Cost of Goods Sold
Rent Expense
Loss on Sale of Land
Contribution to Profit'!
$450,000
$320,000
40,000
25,000
(385,000)
$ 65,000
Required
a. Give the entries to be recorded on the books of the home office of Amalgamated
Wholesalers during 19X3 related to its investment in the branch.
b. Give the workpaper eliminating entries needed for December 31, 19X3, to prepare
financial statements for Amalgamated Wholesalers.
Ell-8
Required
a. Present all journal entries with respect to the equipment and fixtures needed on the
books of both the home office and the branch, assuming these assets are accounted for
by the home office. Assume depreciation expense on branch assets is not apportioned
to the branch.
b. Present all journal entries with respect to the equipment and fixtures needed on the
books of both the home office and the branch, assuming these assets are accounted for
by the branch.
Ell-9
631
19X9, the Kansas City branch reports to the home office that it had total sales of
$975,000 for the year, total expenses of $522,000, and that it had sold 70 percent of the
inventory purchased from the home office; all revenue and expense accounts of the
branch have been closed to Income Summary.
Required
a. Present all remaining adjusting and closing entries relating to the branch that should
be made on the books of Liz-Mark's home office and the Kansas City branch at the
end of 19X9.
b. At what amount should the Kansas City branch's remaining inventory that was
purchased from the home office be reported in Liz-Mark's balance sheet at the end
of 19X9?
Ell-10*
Required
Record the journal entries for the home office and each branch for 19X5.
Problems
Pll-11
Required
a. Record each of the transactions on the books of the branch.
b. Prepare an income statement for the branch for 19X3.
c. Prepare a balance sheet as of December 31, 19X3, for the branch.
Pll-12
632
Chapter 11
Home
Office
Item
Branch
$ 20,000
Cash
Accounts Receivable
Inventory
Inventory-From Home Office
Land
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Branch
$ 70,000
110,000
200,000
Total Assets
$995,000
Accounts Payable
Bonds Payable
Notes Payable
Co=on Stock
Ret.ained Earnings
Home Office
Unrealiz.ed Intracompany Profit
$ 53,000
300,000
12,000
---
$995,000
$430,000
50,000
500,000
(240,000)
305,000
60,000
68,000
32,000
70,000
300,000
(120,000)
--$430,000
=
$ 25,000
100,000
200,000
430,000
305,000
During the year, Plastic Products Corporation shipped $50,000 of inventory to the branch
and billed it $80,000. The branch resold 60 percent of the inventory before the end of the
period.
Required
a. Give the eliminating entries needed to prepare a balance sheet for Plastic Products
Corporation as of December 31, 19X6.
b. Prepare a December 31, 19X6, balance sheet for Plastic Products Corporation.
Pll-13
Item
Home
Office
Silverton
Branch
Durango
Branch
81,000
100,000
260,000
$ 20,000
40,000
50,000
70,000
30,000
350,000
(120,000)
$ 15,000
25,000
44,000
56,000
20,000
200,000
(80,000}
$440,000
$280,000
Cash
Accounts Receivable
Inventory
Inventory-From Home Office
Land
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Silverton Branch
Investment in Durango Branch
Total Assets
$1,586,000
70,000
700,000
(280,000)
395,000
260,000
633
Accounts Payable
Bonds Payable
Co=onStock
Retained Earnings
Home Office
Unreali7.ed lntracompany Profits:
Silverton Branch
Durango Branch
$ 110,000
400,000
300,000
700,000
$1,586,000
$ 45,000
$ 20,000
395,000
260,000
$440,000
--$280,000
60,000
161000
The home office sells inventory to the branches at a constant markup. During 19X4, Gold
Products Company transferred $200,000 of inventory to the Silverton branch and billed
the branch for $280,000. Gold Products also transferred inventory costing $60,000 to the
Durango branch and billed the branch for $84,000. In addition, Gold Products purchased
equipment on December 31, 19X4, for $35,000 and immediately sold it to the branch in
Silverton for $75,000.
Required
a. Give the eliminating entries needed to prepare a December 31, 19X4, balance sheet
for Gold Products Company.
b. Prepare a balance sheet workpaper and a balance sheet for Gold Products Company as
a whole as of December 31, 19X4.
Pll-14
Home
Item
Cash
Accounts Receivable
Inventory
Inventory-From Home Office
Land
Buildings and Equipment
Less: Accumulated Depreciation
Investment in Edgarville Branch
Total Assets
Office
$ 50,000
90,000
150,000
30,000
400,000
(240,000)
350,000
$830,000
Edgarville
Branch
$ 40,000
80,000
78,000
42,000
40,000
200,000
(60,000)
$420,000
634
Chapter 11
Accounts Payable
Bonds Payable
Notes Payable
Co=onStock
Retained Earnings
Home Office
Unrealiz.ed Intracompany Profit
$ 47,000
300,000
$830,000
$ 5,000
65,000
100,000
340,000
350,000
43,000
Required
a. Give the workpaper eliminating entries needed to prepare a balance sheet for Expando
Corporation as of December 31, 19X9.
b. Prepare a December 31, 19X9, balance sheet for Expando Corporation.
Pll-15
Home Office
Item
Debit
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Investment in Resort Branch
Cost of Goods Sold
Depreciation Expense
Other Expenses
Dividends Declared
Accumulated Depreciation
Accounts Payable
Bonds Payable
Co=onStock
Retained Earnings
Home Office
Unreafued lntracompany Profit
Sales
Resort Branch Income
Totals
$1,295,000
Resort Branch
Credit
50,000
80,000
110,000
60,000
370,000
340,000
170,000
25,000
60,000
30,000
Debit
Credit
$ 60,000
40,000
70,000
80,000
240,000
105,000
15,000
10,000
$ 130,000
91,000
200,000
150,000
380,000
$ 60,000
90,000
320,000
24,000
300,000
20,000
$1,295,000
150,000
$620,000
$620,000
The Resort branch conducts all its operations separately from those of Alpine's home
office. In 19X2, the Resort branch paid $44,000 to the home office for land that Alpine
had purchased for $20,000 several years earlier.
Required
Complete a December 31, 19X4, workpaper for the preparation of financial statements
for Alpine Company.
635
Pll-16
Shoreline Corporation
Balance Sheet
December 31, 19Xl
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Less: Accumulated Depreciation
Total Assets
$160,000
120,000
210,000
80,000
400,000
(160,000)
$810,000
Accounts Payable
Bonds Payable
Common Stock
Additional Capital
Retained Earnings
$ 30,000
400,000
200,000
70,000
110,000
$810,000
Required
a. Present the journal entries that would appear on the books of Shoreline's home office
for 19X2. Include closing entries.
b. Present the journal entries that would appear on the books of Shoreline's Oceanport
branch office for 19X2. Include closing entries.
c. Compute the balance of Shoreline's retained earnings as of December 31, 19X2.
Pll-17
636
Chapter 11
Home Office
Item
Debit
Cash
Accounts Receivable
Inventory
Land
Builitings and Equipment
Investment in New York Branch
Dividends Declared
Cost of Goods Sold
Depreciation Expense
Other Expenses
Accumulated Depreciation
Accounts Payable
Bonds Payable
Common Stock
Home Office
Retained Earnings
Unrealized Intracompany Profit
Sales
New York Branch Income
Realized Int:racompany Profit
Tutals
$1,760,000
60,000
70,000
110,000
80,000
700,000
430,000
20,000
240,000
30,000
20,000
Debit
Credit
$ 55,000
40,000
80,000
40,000
400,000
120,000
15,000
35,000
$ 350,000
90,000
300,000
200,000
$165,000
20,000
400,000
460,000
6,000
300,000
30,000
241000
$1,760,000
200,000
$785,000
$785,000
Required
a. Prepare and complete a workpaper as of December 31, 19X5, to develop financial
statements for Dependable Appliance Corporation.
b. Prepare a 19X5 income statement and balance sheet for Dependable Appliance
Corporation.
Pll-18
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Accumulated Depreciation
Accounts Payable
Notes Payable
Common Stock
Retained Earnings
$ 20,000
25,000
41,000
52,000
90,000
Total
$228,000
$ 21,000
18,000
30,000
100,000
591000
$228,000
637
At the beginning of the year, the company establishes branches in Denton and Houston.
The company uses a perpetual inventory system. The following transactions occur during
the year:
1. The home office purchases equipment on account for $40,000 and immediately
transfers half to each of the two branches at cost.
2. The home office transfers cash of $3,000 to the Denton branch and $5,000 to the
Houston branch.
3. The company sells inventory to unrelated parties at a 40 percent gross profit and
transfers inventory to its branches at a 20 percent gross profit. During the year, the
home office has sales of $175,000 to unrelated parties and transfers inventory to the
Denton branch at a $140,000 price and to the Houston branch at a $150,000 price.
4. The branches sell their inventory, all acquired from the home office, at a 25 percent
gross profit. During the year, the Denton branch has sales of $136,000, and the
Houston branch has sales of $152,000.
5. Operating expenses during the year, excluding cost of goods sold and depreciation,
total $85,000 for the home office, $13,000 for the Denton branch, and $11,000 for the
Houston branch.
6. Selected balance sheet accounts at the end of the year are as follows:
Accounts Receivable
Inventory
Accounts Payable
Notes Payable
Accumulated Depreciation
Home
Office
Denton
Houston
Branch
Branch
$28,000
45,000
20,000
30,000
28,000
$11,000
38,000
1,000
35,000
4,000
$14,000
36,000
2,000
40,000
4,000
7. During the year, the Denton branch transfers $135,000 of cash to the home office and
the Houston branch transfers $151,000.
Required
a. Record the transactions for the year on the books of ( 1) the Denton branch, (2) the
Houston branch, and (3) the home office (include recognition of branch income).
b. Present a workpaper with the appropriate eliminations for the preparation of annual
financial statements for Ortegren Sales Company.
PU-19
Comprehensive Workpaper
Martin Products Company recently established a branch in Philadelphia. The branch was
established in a newly constructed building. The land on which the building was
constructed had been purchased by Martin some years ago at a cost of $60,000; it was
transferred to the branch at its current value of approximately $150,000, and an
unrealized gain was recorded by the home office. During the year, the home office
shipped $225,000 of inventory to the branch and billed it for $300,000. At the end of the
year, the branch continued to hold $50,000 of transferred inventory that had cost Martin
$35,000; the transferred inventory not on hand at the end of the period all had been sold
by the branch at normal prices and was included in sales revenue, with the cost to the
638
Chapter 11
branch included in cost of goods sold. The home office provided advisory services to the
branch during the year for which it charged the branch $22,000; these fees were
recognized as Other Income by the home office and Other Expenses by the branch. Near
the end of the current year, the home office made a short-term loan to the branch, with the
full amount expected to be repaid (without interest) on February 1 of the next year. A
trial balance for the home office and branch as of the end of the year is as follows:
Philadelphia Branch
Debit
Cash
Accounts Receivable
Inventory
Loan to Philadelphia Bran.ch
Land
Buildings and Equipment
Investment in Philadelphia Bran.ch
Dividends Declared
Cost of Goods Sold
Depreciation Expense
Other Expenses
Accumulated Depreciation
Accounts Payable
Payable to Home Office
Bonds Payable
Common Stock
Home Office
Retained Earnings
Unrealiz.ed IDtracompany Profit
Unrealiz.ed Gain on Land Transfer
Sales Revenue
Other Income
Philadelphia Branch Income
Totals
$4,810,000
Credit
Debit
80,000
95,000
210,000
10,000
220,000
2,100,000
500,000
25,000
1,160,000
90,000
320,000
Credit
35,000
52,000
90,000
150,000
290,000
310,000
40,000
90,000
$
555,000
85,000
40,000
67,000
10,000
400,000
1,000,000
430,000
630,000
75,000
90,000
1,880,000
25,000
70,000
$4,810,000
510,000
$1,057,000
$1,057,000
The trial balance was prepared after all appropriate adjusting entries were made except
for the allocation of shared expenses incurred by the home office. The company
determines that $2,000 of depreciation expense and $3,000 of other expenses should be
allocated to the Philadelphia branch. In addition, the branch did not report to the home
office the amount of transferred inventory resold during the period until after the trial
balance was prepared.
Required
a. Present a new trial balance that reflects the allocation of shared expenses to the
Philadelphia branch and the resale of inventory transferred to the branch from the
home office. The home office recognizes the profit on shipments to the branch and
does not include it in the branch's income.
b. Prepare and complete a workpaper to develop financial statements for Martin
Products Company.
639
Pll-20*
Home Office
Item
Debit
Cash
$ 70,000
80,000
Accounts Receivable
150,000
Inventory
Inventory-From Home Office
Land
85,000
600,000
Buildings and Equipment
Investment in Branch
310,000
Cost of Goods Sold
410,000
30,000
Depreciation Expense
Other Expenses
50,000
Dividends Declared
25,000
Accumulated Depreciation
Accounts Payable
Bonds Payable
Notes Payable
Common Stock
Retained Earnings
Home Office Balance
Unrealized lntracompany Profit
Sales
Branch Income
Realized Profit on Branch Shipments
Totals
$1,810,000
Branch
Credit
Debit
Credit
$ 60,000
90,000
55,000
45,000
50,000
400,000
170,000
20,000
30,000
$ 370,000
60,000
300,000
$170,000
20,000
200,000
100,000
390,000
280,000
15,000
500,000
30,000
45,000
$1,810,000
250,000
$920,000
$920,000
During 19Xl, Reliable Products shipped inventory costing $90,000 to its branch and
billed the branch $150,000. At the end of the period, inventory that included
intracompany profit of $20,000 remained unsold. During 19X2, Reliable Products
shipped $80,000 of inventory to its branch and billed the branch for $120,000. The
branch sold all the inventory held over from 19Xl in 19X2. At the end of 19X2, the
branch still held some of the inventory transferred from the home office during the year.
Required
Develop and complete a workpaper for the preparation of 19X2 financial statements for
Reliable Products Corporation.
Pll-21*
640
Chapter 11
Home
Office
Item
Meakinburg
Branch
Riverdale
Branch
Cash
Accounts Receivable
Inventory
Land
Buildings and Equipment
Investment in Meakinburg Branch
Investment in Riverdale Branch
Cost of Goods Sold
Depreciation Expense
Other Expenses
Dividends Declared
54,000
100,000
150,000
60,000
600,000
310,000
225,000
310,000
30,000
50,000
16,000
$ 60,000
90,000
100,000
50,000
400,000
$ 20,000
40,000
80,000
20,000
300,000
170,000
20,000
30,000
130,000
15,000
20,000
Total Debits
$1,905,000
$920,000
$625,000
Accumulated Depreciation
Accounts Payable
Bonds Payable
Notes Payable
Common Stock
Home Office
Retained Earnings
Unreafued Intracompany Profit
Sales
Meakinburg Branch Income
Riverdale Branch Income
Realized Intracompany Profit
$ 370,000
28,000
500,000
$170,000
20,000
$125,000
10,000
200,000
100,000
280,000
210,000
250,000
180,000
Total Credits
$1,905,000
$920,000
$625,000
100,000
437,000
20,000
400,000
30,000
15,000
5,000
During 19X5, the Meakinburg branch purchased inventory for $13,000 and sold it to
the Riverdale branch for $18,000. The Riverdale branch resold all this inventory before
December 31, 19X5. On December 31, 19X5, Stewart Corporation purchased
equipment for $100,000 and immediately transferred it to the Meakinburg branch for a
payment of $120,000. There were no other transactions between the home office and
the branches in 19X5.
Required
a. Develop and complete a workpaper for the preparation of Stewart Corporation's 19X5
financial statements.
b Present Stewart Corporation's 19X5 income statement and balance sheet.