CHAPTER 4

ACCOUNTING FOR BRANCHES;

COMBINED FINANCIAL STATEMENTS

The title of each problem is followed by the estimated time in minutes required for completion and by a
difficulty rating. The time estimates are applicable for students using the partially filled-in working papers.

Pr. 4–1 Hartman, Inc. (20 minutes, easy)

Journal entries for home office and branch to record shipments of merchandise, payment of
freight costs, ending inventories under the periodic inventory system, and other year-end
adjustments.
Pr. 4–2 Lobo Company (20 minutes, easy)
Reconciliation of reciprocal ledger accounts for home office and branch; journal entries to
bring accounting records up to date.
Pr. 4–3 Styler Corporation (30 minutes, easy)
A branch obtains merchandise from the home office at billed prices above home office cost.
Branch inventories are damaged by fire. Compute the loss from the fire and recognize the loss
in the accounting records of both the branch and the home office.
Pr. 4–4 Yugo Company (30 minutes, easy)
Determine unadjusted balance of the Home Office account in branch accounting records,
prepare journal entries to bring home office and branch accounting records up to date, and
reconcile reciprocal ledger accounts at year-end. Periodic inventory system is used.
Pr. 4–5 Trudie Company (40 minutes, easy)
Journal entries for home office and branch when merchandise is billed to branch at prices
above home office cost. Different sets of journal entries under perpetual and periodic inventory
systems.
Pr. 4–6 Kosti-Marian Company (60 minutes, medium)
Preparation of year-end journal entries and a working paper for home office and branch with
emphasis on the reconciliation of cash records and the handling of inventories under the
periodic inventory system. Home office bills merchandise to the branch at prices above home
office cost.
Pr. 4–7 Solis Company (30 minutes, medium)
Given the trial balances of the home office and the branch, prepare adjusting and closing
entries and a working paper for combined financial statements. Perpetual inventory system is
used by both home office and branch.
Pr. 4–8 Calco Corporation (50 minutes, medium)
Journal entries to bring home office and branch accounting records up to date. Working paper
to summarize operations for year. Both home office and branch office use the periodic
inventory system.
Pr. 4–9 Kreshek Company (60 minutes, medium)
Reconciliation of home office and branch ledger accounts when errors have been made by both
offices and certain transactions have been recorded by only one office. Adjusting entries in both
sets of accounting records. Both home office and branch use the perpetual inventory system.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 147
Pr. 4–10 Arnie’s (60 minutes, strong)
Preparation of year-end journal entries and a working paper for combined financial statement
of home office and branch under the perpetual inventory system. Closing entries for home
office.

ANSWERS TO REVIEW QUESTIONS

1. The transactions to be accounted for by the branch generally should include only controllable
expenses for which the branch manager is responsible. For example, depreciation of plant assets
usually follows policies set by the home office and is not subject to control by the branch manager.
This situation suggests that both the branch plant assets records and the related depreciation
records should be maintained by the home office.
2. The Home Office ledger account in the branch accounting records is reciprocal to the Investment
in Branch account in the home office accounting records. These two accounts show the same thing
the net assets of the branchfrom two different points of view. The Home Office account
maintained by the branch has a credit balance and may be considered quasi-ownership equity; the
Investment in Branch account maintained by the home office has a debit balance and is a
noncurrent asset that reflects the net investment in the branch by the home office.
Another pair of reciprocal ledger accounts is used to record shipments of merchandise from the
home office to the branch when the periodic inventory system is used. In the home office
accounting records, the account is Shipments to Branch (a Purchases valuation account) and has a
credit balance; in the branch accounting records, the account is Shipments from Home Office (a
purchases-type account) and has a debit balance.
Reciprocal ledger accounts should be reconciled and brought up to date at the end of each
accounting period. The reciprocal accounts are eliminated in the preparation of combined financial
statements of the home office and the branch.
3. For a home office to bill merchandise shipments to its branches at or above home office cost is
acceptable. If branches are billed at amounts above home office cost, the home office eliminates the
excess of billed prices over cost when the account balances of the home office and the branch are
combined in the preparation of combined financial statements. To the extent that the merchandise
has been sold by the branches before financial statements are prepared, the "excess" will have been
realized, and the combined net income will be the same as if the merchandise had been billed at
home office cost. Merchandise not sold is valued at cost in the combined balance sheet. Alternative
methods for billing merchandise to branches are acceptable because they give the same results in
the combined financial statements when appropriate eliminations are made.
4. The separate financial statements prepared by individual branches and by the home office indicate
the operating results and financial position of each unit of Jesse Corporation. The statements are
used to evaluate the performance of branch managers and suggest the most appropriate areas for
expansion or closure of branches. The combined financial statements serve the needs of managers
in the analysis of operating results and financial position of the enterprise as a whole. Combined
financial statements also are more appropriate for use by outsiders such as stockholders and
creditors.
5. To record the acquisition of equipment to be carried in the home office, Slauson Branch debits
Home Office and credits Cash for $17,000. The home office debits Equipment: Slauson Branch
and credits Investment in Slauson Branch for $17,000.
6. A home office's Allowance for Overvaluation of Inventories: Branch ledger account is used to
reduce to cost the component of the balance of the Investment in Branch ledger account represented
by shipments of merchandise to the branch at a markup over home office cost. When such a
shipment is made, the allowance account is credited for the excess of billed price over home office
cost of the shipment. At the end of an accounting period, the home office prepares a journal entry
debiting the allowance account and crediting Realized Gross Profit: Branch Sales for the amount of
the markup realized by the branch through sales of merchandise to outsiders. Thus, the end-of-

The McGraw-Hill Companies, Inc., 2006

148 Modern Advanced Accounting, 10/e
 period adjusted balance of the allowance account represents unrealized markup in the branch's
ending inventories acquired from the home office.
7. The factors that would cause the reciprocal ledger accounts to be out of balance may be classified
into the following groups:
(1) Intracompany transactions between home office and branch, such as shipments of merchandise
or cash transfers by the home office to the branch, recorded by the home office but not
recorded by the branch.
(2) Intracompany transactions between branch and home office, such as transfers of cash by the
branch to the home office, recorded by the branch but not recorded by the home office.
(3) Errors made by the home office or the branch (or both) in recording intracompany
transactions.
8. Ford Branch of Ralph Company should debit the Home Office ledger account and credit the
Inventories account. Gates Branch should not absorb more freight costs than if the goods had been
shipped directly from the home office. Normal freight costs of shipping merchandise to branches
are added to the carrying amount of inventories, but excess freight costs are losses from poor
planning and are recognized as expenses of the home office.

SOLUTIONS TO EXERCISES
Ex. 4–1 1. c 8. a
2. b 9. a
3. c 10. d
4. a 11. d
5. c 12. a (.20 ÷ 1.20 = 16 2/3%)
6. c 13. b
7. a
Ex. 4–2 a. Journal entries in accounting records of home office:
2005
Sept. 1 Investment in San Marino Branch 10,000
Cash 10,000
2 Investment in San Marino Branch 75,000
Inventories 60,000
Allowance for Overvaluation of Inventories:
San Marino Branch ($60,000 x 0.25) 15,000
3 Equipment: San Marino Branch 3,000
Investment in San Marino Branch 3,000
b. Journal entries in accounting records of San Marino Branch:
2005
Sept. 1 Cash 10,000
Home Office 10,000
2 Inventories [$60,000 ÷ (1.00 – 0.20)] 75,000
Home Office 75,000
3 Home Office 3,000
Cash 3,000

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 149
Ex. 4–3 a. Journal entries in accounting records of home office:
2005
Sept. 1 Investment in Eastern Branch 50,000
Cash 50,000
4 Investment in Eastern Branch 125,000
Shipments to Eastern Branch 95,000
Allowance for Overvaluation of
Inventories: Eastern Branch 30,000
11 Equipment: Eastern Branch 34,200
Investment in Eastern Branch 34,200
b. Journal entries in accounting records of Eastern Branch:
2005
Sept. 3 Cash 50,000
Home Office 50,000
8 Shipments from Home Office 125,000
Home Office 125,000
11 Home Office 34,200
Cash 34,200
Ex. 4–4 Journal entries for Wilshire Branch of Watt Corporation:
2005
Jan. 2 Inventories 100,000
Home Office 100,000
To record merchandise shipped by home office.
18 Home Office 5,000
Cash 5,000
To records acquisition of equipment to be carried in
home office accounting records.
31 Operating Expenses 8,000
Home Office 8,000
To records operating expenses allocated by home office.
Ex. 4–5 Journal entries for home office of Usc Company:
2005
Jan. 10 Investment in Hoover Street Branch 60,000
Inventories ($60,000 x 0.80) 48,000
Allowance for Overvaluation of Inventories:
Hoover Street Branch ($60,000 x 0.20) 12,000
To record shipment of merchandise to branch at a
markup of 20% of billed price.
25 Investment in Hoover Street Branch 25,000
Trade Accounts Receivable 25,000
To record collection of trade account receivable by branch.
31 Investment in Hoover Street Branch 18,000
Operating Expenses 18,000
To record operating expenses allocated to branch.

The McGraw-Hill Companies, Inc., 2006

150 Modern Advanced Accounting, 10/e
Ex. 4–6 Journal entries for Lido Branch of Turbo Company:
2005
Aug. 6 Trade Accounts Payable 10,000
Home Office 10,000
14 Home Office 6,000
Trade Accounts Receivable 6,000
22 Home Office 20,000
Cash 20,000
Ex. 4–7 Journal entries for home office of Wardell Company:
a. Investment in Branch 15,000
Cash 5,000
Inventories 10,000
b. Investment in Branch 1,500
Operating Expenses 1,500
c. Investment in Branch 416
Notes Receivable 400
Interest Revenue 16
d. No journal entry required
e. Investment in Branch 500
Income: Branch 500
Journal entries for Exeter Branch of Wardell Company:
a. Cash 5,000
Inventories 10,000
Home Office 15,000
b. Operating Expenses 1,500
Home Office 1,500
c. Cash 416
Home Office 416
d. Trade Accounts Receivable 12,500
Operating Expenses 2,500
Cost of Goods Sold 8,000
Sales 12,500
Cash 2,500
Inventories 8,000
e. Income Summary 500
Home Office 500
Ex. 4–8 Journal entry on Dec. 31, 2005, for Davis Branch of Leland Company:
Home Office 20,000
Accumulated Depreciation of Equipment 750
Equipment 20,000
Depreciation Expense 750
To correct accounting for equipment acquired and depreciation
expense
Journal entry on Dec. 31, 2005, for home office of Leland Company:
Depreciation Expense: Davis Branch 750
Equipment: Davis Branch 20,000
Accumulated Depreciation of Equipment: Davis Branch 750
The McGraw-Hill Companies, Inc., 2006
Solutions Manual, Chapter 4 151
 Investment in Davis Branch 20,000
To record equipment acquired by Davis Branch and related
depreciation.
Ex. 4–9 FIGUEROA COMPANY
Flow of Merchandise for Nine-Zero Branch
For Month Ended January 31, 2005
Billed Cost Markup
Price
Beginning inventories $120,000 $ 96,000 $ 24,000
Add: Shipment from home office 500,000 400,000 100,000
Available for sale $620,000 $496,000 $124,000
Less: Ending inventories 100,000 80,000 20,000
Cost of goods sold $520,000 $416,000 $104,000
Ex. 4–10 Allowance for Overvaluation of Inventories: 32 Branch
Date Explanation Debit Credit Balance
2005
Mar. 31 Balance 30,000 cr
Apr. 16 Shipment to branch 90,000 120,000 cr
30 Realized gross profit on branch sales 100,000 20,000 cr
Ex. 4–11 Journal entries for home office of Trapp Company, May 31, 2005:
Investment in Portland Street Branch 80,000
Income: Portland Street Branch 80,000
Allowance for Overvaluation of Inventories:
Portland Street Branch ($200,000 – $60,000) 140,000
Realized Gross Profit: Portland Street Branch Sales 140,000
Income: Portland Street Branch 80,000
Realized Gross Profit: Portland Street Branch Sales 140,000
Income Summary 220,000
Ex. 4–12 a. $48,000 ($80,000 – $32,000). The billed price equals $32,000 ÷ 0.40, or $80,000.
b. Allowance for Overvaluation of Inventories: Toledo Branch 46,000
Realized Gross Profit: Toledo Branch Sales 46,000
To adjust allowance account in the accounting records of
home office, as follows:
Balance, Mar. 1, 2005 $32,000
Increase during March ($60,000 – $36,000) 24,000
Balance before adjustment $56,000
Less: Balance, Mar. 31, 2005
($25,000 x 0.40) 10,000
Required reduction in allowance account $46,000

The McGraw-Hill Companies, Inc., 2006

152 Modern Advanced Accounting, 10/e
Ex. 4–13 Journal entries for home office of Glendale Company:
2005
Sept. 17 Investment in Montrose Branch 400,000
Inventories 300,000
Allowance for Overvaluation of Inventories:
Montrose Branch 100,000
To record shipment of merchandise to branch at a
markup of 25% on billed price, as follows:
Markup ($400,000 x 0.25 = $100,000)
Cost ($400,000 x 0.75 = $300,000)
30 Allowance for Overvaluation of Inventories: Montrose
Branch 120,000
Realized Gross Profit: Montrose Branch Sales 120,000
To recognize as realized gross profit the markup of
merchandise applicable to goods sold by branch during
September, 2005, as follows:
[($60,000 + $100,000) – ($160,000 x 0.25) = $120,000]
Ex. 4–14 Journal entries for home office of Searl Company, Jan. 31, 2005:
Investment in Vermont Avenue Branch 60,000
Income: Vermont Avenue Branch 60,000
Allowance for Overvaluation of Inventories:
Vermont Avenue Branch ($80,000 – $27,000) 53,000
Realized Gross Profit: Vermont Avenue Branch Sales 53,000
Income: Vermont Avenue Branch 60,000
Realized Gross Profit: Vermont Avenue Branch Sales 53,000
Income Summary 113,000
Ex. 4–15 Journal entries in accounting records of home office of Gomez Company for 2005:
Investment in Perez Branch 30,000
Shipments to Perez Branch 24,000
Allowance for Overvaluation of Inventories: Perez Branch 6,000
To record shipments to branch at a markup of 25% above cost.

Allowance for Overvaluation of Inventories: Perez Branch 5,100

Realized Gross Profit: Perez Branch Sales 5,100
To adjust allowance account as follows:
Balance, Jan. 1, 2005 ($15,000 x 0.20) (A 25% markup
on cost is equal to a 20% markup on billed price.) $3,000
Increase during 2005 ($30,000 x 0.20) 6,000
Balance before adjustment $9,000
Less: Balance, Dec. 31, 2005 ($19,500 x 0.20) 3,900
Required reduction in allowance account $5,100

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 153
Ex. 4–16 a. Computation of estimated cost of merchandise destroyed by fire at branch of Samore,
Inc., Jan. 28, 2005:
Inventories, Jan. 1, 2005 (billed price) $15,600
Add: Shipments from home office, Jan. 1 to Jan. 28 (billed price) 71,500
Merchandise available for sale, Jan. 1 to Jan. 28 (billed price) $87,100
Billed price of net merchandise sold: [($51,840 – $3,220) ÷ 1.10] 44,200
Estimated inventories, Jan. 28, 2005 (billed price) $42,900
Less: Inventories not damaged ($7,150 ÷ 1.10) 6,500
Estimated inventories destroyed (billed price) $36,400
Less: Valuation in excess of cost ($36,400 x 3/13*) 8,400
Estimated cost of merchandise destroyed by fire, Jan. 28, 2005 $28,000
*A 30% markup on cost is equal to a 3/13 markup on billed price.
b. Journal entry to record loss in accounting records of branch, Jan.
28, 2005:
Loss from Fire 36,400
Inventories 36,400
To record estimated carrying amount of merchandise destroyed by fire.
Ex. 4–17 a. Journal entry for the home office of Argos Company:
2005
May 31 Cash in Transit 10,000
Investment in Troy Branch 10,000
b. Journal entries for Troy Branch of Argos Company:
2005
May 31 Inventories in Transit 280,000
Home Office 280,000
31 Home Office 50,000
Trade Accounts Receivable 50,000

CASES
Case 4–1 Although the appropriate interpretation of Lewis Hanson's contract with Longo Company probably
requires a legal opinion, logic suggests that neither Hanson's view nor the Longo controller's view is
appropriate. Absent any provision in Hanson's contract to the contrary, the method used by the
branch accountant to measure net income of Santee Branch during its operating phase should be
applied to Santee's last operating period. The resultant net loss precludes a bonus to Hanson, but
"tinkering" with the measurement of branch net income appears unsupportable with respect to both
Hanson's suggestion and the Longo controller's suggestion.
Case 4–2 Before deciding on an answer to the case, it is appropriate to consider the following
pronouncements of the Financial Accounting Standards Board in Statement of Financial
Accounting Concepts No. 6, “Elements of Financial Statements” (CON 6); Statement of
Financial Accounting Standards No. 5, “Accounting for Contingencies” (FAS 5); Statement
of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”
Assets are probable future economic benefits obtained or controlled by a particular entity as a
result of past transactions or events. (CON 6, para. 25)
Contingencies that might result in gains [contingent assets] usually are not reflected in the
accounts since to do so might be to recognize revenue prior to its realization. (FAS 5, para. 17a)
Expenses are outflows or other using up of assets or incurrences of liabilities (or a combination of
both) from delivering or producing goods, rendering services, or carrying out other activities that
constitute the entity's ongoing major or central operations. (CON 6, para. 81)
Losses are decreases in equity (net assets) from peripheral or incidental transactions of an
entity and from all other transactions and other events and circumstances affecting the entity
except those that result from expenses or distributions to owners. (CON 6, para. 83)
The McGraw-Hill Companies, Inc., 2006
154 Modern Advanced Accounting, 10/e
 Costs of internally developing, maintaining, or restoring intangible assets (including goodwill)
that are not specifically identifiable, that have indeterminate lives, or that are inherent in a
continuing business and related to an entity as a whole, shall be recognized as an expense when
incurred. (FAS 142, para. 10)
Given the foregoing definitions, there is no support for Fortunato Company's deferral of pre-operating
costs incurred for the new branch. Apart from the costs of testing the manufacturing equipment,
which may be capitalized as part of the cost of the equipment, all remaining start-up costs should be
recognized either as expenses or as losses. Because of the uncertainty as to when, if ever, regulatory
agency approval for the branch's production and sale of products will be obtained, the probable
criterion for the recognition of an asset is not met. Given such uncertainty, Robert Engle's
characterization of the pre-operating costs as contingent assets is appropriate; they are not to be
recognized until realized. The costs incurred other than for testing equipment, research, and
development, do not qualify as expenses because they do not result from delivering or producing
goods. Thus, recognition of such costs as losses appears to be an appropriate course of action for
Fortunato Company.
Case 4–3 Kevin Carter's dilemma is a difficult one. The cost-benefit aspects of any course of action he selects
must be considered. However, the current practice for “plugging” differences between reciprocal
ledger accounts of the home office and branches of Oilers, Inc., should be forbidden at once. At the
same time, an independent audit of Oilers' financial statements would be prohibitively expensive,
given the chaotic state of the accounting records. Adjusting the 14 branches' Home Office ledger
account balances to agree with the home office's reciprocal account balances is the least costly
alternative; if it is accompanied by strong measures to ensure future monthly reconciliations of the
reciprocal account balances, it might suffice. However, Carter might elect to select one of the 14
branches for a detailed analysis of differences between the reciprocal ledger account balances; such a
course of action might disclose a pattern of recurring errors common to other branches and facilitate
discovery of most, if not all, of the reconciling items.
Case 4–4 TO: The Board of Directors, Windsor Company
FROM: ___________________________________________, Controller
DATE: ________________________
SUBJECT: Separate Financial Statements for Southwark Branch
You have asked my opinion as to whether separate financial statements for Southwark Branch
may be prepared for its prospective purchaser. My review of professional literature leads me to
conclude that the statements may be prepared. In reaching my conclusion, I considered the
following:
AICPA Professional Standards, Volume 2;
Section ET92.04 Definition of financial statements
Section AR100.04 Definition of financial statements
Statement of Financial Accounting Concepts No. 1, “Objectives of Financial Reporting by
Business Enterprises,” par. 6 Most frequently provided financial statements (CON 1)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 155
 Statement of Financial Accounting Concepts No. 6, “Elements of Financial Statements,”
par. 24 Nature of accounting entity (CON 6)
Statement of Financial Accounting Standards No. 57, “Related Party Disclosures,” par. 2
Disclosure of material related party transactions (FAS 57)
I have concluded that Southwark Branch is an accounting entity, as described in CON 6. Based on
the references in ET92.04, AR100.04, and CON 1, I believe that a statement of assets and liabilities;
a statement of revenues, expenses, and changes in net assets; and a statement of cash flows are
appropriate for Southwark Branch. Because the branch is a segment of Windsor Company, I do not
believe a statement of financial position (balance sheet), an income statement, and a statement of
owner's equity are appropriate for it. Thus, the question you raised regarding an equity section of a
balance sheet is moot. The statement of assets and liabilities would have total liabilities of Southwark
Branch subtracted from its total assets, with a “bottom line” of net assets, which would carry the
after-closing balance of the branch's Home Office ledger account. The unrealized intracompany
markup above cost in the branch's ending inventory would be disclosed in a note to Southwark
Branch's financial statements that describes the intracompany transactions with the home office of
Windsor Company in accordance with FAS 57.
Please inform me if I can be of further service.
Case 4–5 a. Lola Branch should have prepared a journal entry to recognize the $2,640 liability incurred
under the installment contract, with related debits to Home Office for the cash price of the
equipment ($2,400) and to Discount on Installment Contract Payable for the interest portion of
the contract. Monthly payments of $110 should have been applied to reduce the installment
contract liability, and an appropriate amount of interest expense applied to reduce the discount
by the interest method. The sale of the office equipment required recognition of a $900 loss
($2,400 – $1,500 = $900); an accompanying entry should have recorded the payoff of the
balance of the installment contract, $2,090 [$2,640 – ($110 x 5) = $2,090]; the forgiveness of
$150 of the unamortized discount on the contract, with the remaining discount recognized as
interest expense; and the recognition of a liability to the branch manager for his $440 ($2,090 –
$150 – $1,500 = $440) payment of the balance of the installment contract in excess of the
$1,500 sales proceeds of the office equipment.
b. The home office of Langley, Inc., should have prepared journal entries as follows:
(1) Recognize Lola Branch's acquisition of the office equipment with a debit to Office
Equipment: Lola Branch and a credit to Investment in Lola Branch, $2,400.
(2) Recognize depreciation for five months on the equipment with debits to Depreciation
Expense: Lola Branch and credits to Accumulated Depreciation of Office Equipment:
Lola Branch, $20 each ($2,400 x 0.10 x 1/12 = $20).
(3) Reverse entry (1) when Lola Branch disposed of the office equipment.
c. Correcting journal entry, Dec. 31, 2005, in accounting records of Lola Branch:
Interest Expense ($240 – $150) 90
Loss on Disposal of Office Equipment 900
Miscellaneous Expense ($110 x 5) 550
Payable to Manager of Lola Branch 440
To record interest expense from installment contract transaction, loss
on disposal of equipment, and liability to branch manager for
personal funds used to pay off installment contract.

The McGraw-Hill Companies, Inc., 2006

156 Modern Advanced Accounting, 10/e
 d. Correcting journal entries, Dec. 31, 2005, in accounting records of home office:
Office Equipment: Lola Branch 2,400
Depreciation Expense: Lola Branch 100
Office Equipment: Lola Branch 2,400
Accumulated Depreciation of Office Equipment: Lola Branch 100
To record acquisition of equipment by branch, depreciation for five
months, and subsequent disposal (loss on disposal will be included
in net income or loss reported by Lola Branch to home office).
Accumulated Depreciation of Office Equipment: Lola Branch 100
Investment in Lola Branch 100
To write off accumulated depreciation of equipment disposed of by branch.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 157
20 Minutes, Easy
Hartman, Inc. Pr. 4–1
Hartman, Inc.
Reno Branch
Journal Entries
Shipments from Home Office ($300,000 x 1.20) 3 6 0 0 0 0
Freight In 1 5 0 0 0
Home Office 3 7 5 0 0 0
To record merchandise received from home office
and freight costs of $15,000.

Cash 4 5 0 0 0 0
Sales 4 5 0 0 0 0
To record sales for 2005.

Operation Expenses 9 6 0 0 0
Cash 9 6 0 0 0
To record payment of expenses.

Inventories, Dec. 31, 2005 [$72,000 + ($15,000 x 1/5)] 7 5 0 0 0

Sales 4 5 0 0 0 0
Shipments from Home Office 3 6 0 0 0 0
Freight In 1 5 0 0 0
Operating Expenses 9 6 0 0 0
Income Summary 5 4 0 0 0
To record ending inventories and to close revenue and
expense ledger accounts. Ending inventories include
one-fifth of $15,000 freight costs, because
merchandise on hand equals one-fifth of the year’s
shipments ($72,000 ÷ $360,000 = 1/5).

Income Summary 5 4 0 0 0
Home Office 5 4 0 0 0
To close Income Summary ledger account.

Hartman, Inc.
Home Office
Journal Entries
Investment in Reno Branch 3 7 5 0 0 0
Shipments to Branch 3 0 0 0 0 0
Allowance for Overvaluation of Inventories
Reno Branch ($300,000 x 0.20) 6 0 0 0 0
Cash 1 5 0 0 0
To record shipment to branch of merchandise with
cost of $300,000 and payment of $15,000 freight costs.

Investment in Reno Branch 5 4 0 0 0

Income : Reno Branch 5 4 0 0 0
To record net income reported by branch.

Allowance for Overvaluation of Inventories: Reno Branch 4 8 0 0 0

Realized Gross Profit: Reno Branch Sales 4 8 0 0 0
To reduce allowance to amount by which ending
inventories are in excess of cost: $60,000 – ($72,000 x
1/6) = $48,000.

The McGraw-Hill Companies, Inc., 2006

158 Modern Advanced Accounting, 10/e
20 Minutes, Easy
Lobo Company Pr. 4–2
a. Lobo Company
Home Office and Wade Branch
Reconciliation of Reciprocal Accounts
January 31, 2005
Investment in Home Office
Wade Branch ledger account
ledger account (in Wade
(in home office Branch
accounting accounting
records) records)
Balances before adjustments $ 4 8 5 0 0 dr $ 3 5 7 0 0 cr
Add: Shipment of merchandise to branch 6 0 0 0
Payment of branch trade accounts payable
by home office 2 0 0 0
Less: Acquisition of furniture (carried in accounting
records of home office) ( 1 2 0 0 )
Collection of branch trade accounts
receivable ( 1 1 0 0 )
Return of merchandise to home office ( 2 2 0 0 )
Remittance of cash by branch ( 2 5 0 0 )
Balances after adjustments $ 4 2 6 0 0 dr $ 4 2 6 0 0 cr

b. (1) Lobo Company

Journal Entries in Accounting Records of Home Office
20 05
Jan 31 Furniture: Wade Branch 1 2 0 0
Investment in Wade Branch 1 2 0 0
To record acquisition of furniture by branch.

31 Cash in Transit 2 5 0 0
Inventories in Transit 2 2 0 0
Investment in Wade Branch 4 7 0 0
To record cash and merchandise in transit from branch.

b. (2) Lobo Company

Journal Entries in Accounting Records of Wade Branch
20 05
Jan 31 Inventories in Transit 6 0 0 0
Home Office 6 0 0 0
To record shipment of merchandise in transit from
home office.

31 Home Office 1 1 0 0
Trade Accounts Receivable 1 1 0 0
To record collection of branch trade accounts
receivable by home office.

31 Trade Accounts Payable 2 0 0 0

Home Office 2 0 0 0
To record payment of branch trade accounts payable
by home office.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 159
30 Minutes, Easy
Styler Corporation Pr. 4–3
Styler Corporation
Data Relating to Merchandise at Branch
January 1 through March 10, 2005
Billed Selling
prices, prices, 110%
Home office 120% of home of billed
cost office cost prices
Beginning inventories, Jan 1 $ 1 5 0 0 0 $ 1 8 0 0 0 $ 1 9 8 0 0
Add: Shipments from home office 4 8 0 0 0 5 7 6 0 0 6 3 3 6 0
Goods available for sale $ 6 3 0 0 0 $ 7 5 6 0 0 $ 8 3 1 6 0
Net sales by branch 3 4 0 0 0 4 0 8 0 0 4 4 8 8 0
Inventories on date of fire, Mar. 10 $ 2 9 0 0 0 $ 3 4 8 0 0 $ 3 8 2 8 0
Inventories after fire, Mar. 10 1 2 5 0 0 1 5 0 0 0 1 6 5 0 0
Loss from fire, Mar. 10 $ 1 6 5 0 0 $ 1 9 8 0 0 $ 2 1 7 8 0

a. Styler Corporation
Journal Entries in Accounting Records of Branch
March 10, 2005
Loss from Fire 1 9 8 0 0
Inventories 1 9 8 0 0
To record loss of merchandise in fire, at prices billed to branch by home
office.

Home Office 1 9 8 0 0
Loss from Fire 1 9 8 0 0
To close Loss from Fire ledger account.

b. Styler Corporation
Journal Entries in Accounting Records of Home Office
March 10, 2005
Loss from Fire: Branch 1 6 5 0 0
Allowance for Overvaluation of Branch Inventories 3 3 0 0
Investment in Branch 1 9 8 0 0
To record loss of merchandise at branch and to adjust allowance
account by excess of billed prices of merchandise destroyed over cost
to home office.

The McGraw-Hill Companies, Inc., 2006

160 Modern Advanced Accounting, 10/e
30 Minutes, Easy
Yugo Company Pr. 4–4
a. Yugo Company
Computation of Unadjusted Balance of Home Office Account
December 31, 2005
Balance of investment in Ryble Branch ledger account
of home office, before adjustment $ 5 5 5 0 0
Add: Collection by branch of home office trade
accounts receivable 5 6 0
Subtotal $ 5 6 0 6 0
Less: Merchandise in transit to branch $ 5 8 0 0
Error in recording branch net income
($840 – $480) 3 6 0
Supplies returned by branch to home office 2 2 0 6 3 8 0
Balance of Home Office ledger account of Ryble Branch
before adjustments $ 4 9 6 8 0

b. Yugo Company
Journal Entries in Accounting Records of Home Office
December 31, 2005
(1) No journal entry required.

(2) Investment in Ryble Branch 5 6 0

Trade Accounts Receivable 5 6 0
To record collection by branch of home office trade
accounts receivable.

(3) Investment in Ryble Branch 2 0 0 0

Charitable Contributions 2 0 0 0
To correct accounts for improper journal entry to
record remittance of cash to branch.

(4) Income: Ryble Branch 3 6 0

Investment in Ryble Branch 3 6 0
To correct accounts for error in recording branch
net income ($840 – $480 = $360).

(5) Inventory of Supplies 2 2 0

Investment in Ryble Branch 2 2 0
To record receipt of supplies from branch.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 161
Yugo Company (concluded) Pr. 4–4
c. Yugo Company
Journal Entries in Accounting Records of Ryble Branch
December 31, 2005
(1) Shipments from Home Office in Transit 5 8 0 0
Home Office 5 8 0 0
To record merchandise in transit from home office.

(2) No journal entry required.

(3) Cash in Transit 2 0 0 0

Home Office 2 0 0 0
To record remittance of cash from home office.

(4) No journal entry required.

(5) No journal entry required.

d. Yugo Company
Reconciliation of Reciprocal Ledger Accounts
December 31, 2005
Investment in
Ryble Branch Home Office
(In home office (in Ryble Branch
accounting accounting
records) records)
Balances before adjustments (see a) $ 5 5 5 0 0 dr $ 4 9 6 8 0 cr
Add: Shipment of merchandise in transit to branch 5 8 0 0
Collection by branch of home office trade accounts receivable 5 6 0
Correction of journal entry to record remittance of cash to branch 2 0 0 0 2 0 0 0
Less: Correction of home office accounts for error in recording net income
reported by branch ( 3 6 0 )
Shipment of supplies by branch to home office ( 2 2 0 )
Balances after adjustments $ 5 7 4 8 0 dr $ 5 7 4 8 0 cr

The McGraw-Hill Companies, Inc., 2006

162 Modern Advanced Accounting, 10/e
40 Minutes, Easy
Trudie Company Pr. 4–5
a. Trudie Company
Journal Entries for First Year of Operations
(Perpetual Inventory System)
(1) In accounting records of Savoy Branch:

Inventories ($110,000 x 1.40) 1 5 4 0 0 0

Home Office 1 5 4 0 0 0
To record merchandise received from home office.

Cash 8 0 0 0 0
Cost of Goods Sold 7 0 0 0 0
Sales 8 0 0 0 0
Inventories 7 0 0 0 0
To record sales and cost of goods sold, determined on
basis of prices billed to branch by home office.

Operating Expenses 1 6 5 0 0
Cash 1 6 5 0 0
To record operating expenses.

Cost of Goods Sold [($154,000 – $70,000) – $82,460] 1 5 4 0

Inventories 1 5 4 0
To adjust ending inventories at billed price to conform
to physical count.

Sales 8 0 0 0 0
Income Summary 8 0 4 0
Cost of Goods Sold ($70,000 + $1,540) 7 1 5 4 0
Operating Expenses 1 6 5 0 0
To close revenue and expense ledger accounts.

Home Office 8 0 4 0
Income Summary 8 0 4 0
To close net loss for year.

(2) In accounting records of home office:

Investment in Savoy Branch 1 5 4 0 0 0

Inventories 1 1 0 0 0 0
Allowance for Overvaluation of Inventories:
Savoy Branch ($110,000 x 0.40) 4 4 0 0 0
To read merchandise shipped to Savoy Branch, billed
at 40% above cost.

Income: Savoy Branch 8 0 4 0

Investment in Savoy Branch 8 0 4 0
To record net loss for year reported by Savoy Branch.

(Continued on page 164)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 163
Trudie Company (continued) Pr. 4–5
Trudie Company
Journal Entries for First Year of Operations (concluded)
(Perpetual Inventory System)
Allowance for Overvaluation of Inventories:
Savoy Branch 2 0 4 4 0
Realized Gross Profit: Savoy Branch Sales 2 0 4 4 0
To reduce allowance to amount by which ending
inventories exceed cost, computed as follows:
Balance of allowance before adjustment $44,000
Required balance after adjustment:
$82,460 x 2/7 (a markup of 2/5 on cost is
equivalent to a markup of 2/7 on billed price) 23,560
Required reduction of allowance $20,440

Realized Gross Profit: Savoy Branch Sales 2 0 4 4 0

Income Summary 1 2 4 0 0
Income: Savoy Branch 8 0 4 0
To close branch net loss and realized gross profit
account. (Income tax effects are disregarded.)

b. Trudie Company
Journal Entries for First Year of Operations
(Periodic Inventory System)
(1) In accounting records of Savoy Branch:

Shipments from Home Office ($110,000 x 1.40) 1 5 4 0 0 0

Home Office 1 5 4 0 0 0
To record merchandise received from home office.

Cash 8 0 0 0 0
Sales 8 0 0 0 0
To record sales.

Operating Expenses 1 6 5 0 0
Cash 1 6 5 0 0
To record operating expenses.

Sales 8 0 0 0 0
Inventories (end of first year) 8 2 4 6 0
Income Summary 8 0 4 0
Shipments from Home Office 1 5 4 0 0 0
Operating Expenses 1 6 5 0 0
To record ending inventories and to close revenue
and expense accounts.

Home Office 8 0 4 0
Income Summary 8 0 4 0
To close net loss for year.

(Continued on page 165)

Trudie Company (concluded) Pr. 4–5

The McGraw-Hill Companies, Inc., 2006

164 Modern Advanced Accounting, 10/e
 Trudie Company
Journal Entries for First Year of Operations (concluded)
(Periodic Inventory System)
(2) In accounting records of home office:

Investment in Savoy Branch 1 5 4 0 0 0

Shipments to Branch 1 1 0 0 0 0
Allowance for Overvaluation of Inventories:
Savoy Branch ($110,000 x 0.40) 4 4 0 0 0
To record merchandise shipped to Savoy Branch,
billed at 40% above cost.

Income: Savoy Branch 8 0 4 0

Investment in Savoy Branch 8 0 4 0
To record net loss for year reported by Savoy Branch.

Allowance for Overvaluation of Inventories: Savoy

Branch 2 0 4 4 0
Realized Gross Profit: Savoy Branch Sales 2 0 4 4 0
To reduce allowance to amount by which ending
inventories exceed cost (see part a).

Realized Gross Profit: Savoy Branch Sales 2 0 4 4 0

Income Summary 1 2 4 0 0
Income: Savoy Branch 8 0 4 0
To close branch net loss and realized gross profit
account. (Income tax effects are disregarded.)

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 165
60 Minutes, Medium
Kosti-Marian Company Pr. 4–6
a. Kosti–Marian Company
Journal Entries in Accounting Records of Home Office

20 05
Dec. 31 Cash 1 7 0 0
Investment in Branch 1 7 0 0
To record cash deposits by branch not entered in
accounting records of home office:
Dec. 30, 2005 $1,100
Dec. 31, 2005 600
Total cash deposits not recorded $1,700

31 Shipments to Branch 1 0 0 0 0
Allowance for Overvaluation of Branch
Inventories 1 0 0 0 0
To record intracompany markup on merchandise
shipments to branch: $110,000 – ($110,000 ÷ 1.1)
= $10,000

b. Kosti-Marian Company
Journal Entries in Accounting Records of Branch

20 05
Dec. 31 Cash in Transit 1 8 0 0
Home Office 1 8 0 0
To record reimbursement check mailed by home
office; the check is in transit.

31 Shipments from Home Office in Transit 5 5 0 0

Home Office 5 5 0 0
To record shipment of merchandise in transit.

31 Freight-in from Home Office 2 7 5

Current Liabilities 2 7 5
To record freight on shipment in transit ($5,500 x 0.05
= $275).

The McGraw-Hill Companies, Inc., 2006

166 Modern Advanced Accounting, 10/e
Kosti-Marian Company (concluded) Pr. 4–6
c. Kosti-Marian Company
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2005
(Periodic Inventory System: Billings above Cost)
Adjusted trial balances
Home office Branch Eliminations Combined
dr (cr) dr (cr) dr (cr) dr (cr)
Income statement
Sales ( 1 6 9 0 0 0 ) ( 1 4 4 7 0 0 ) ( 3 1 3 7 0 0 )
Inventories, Jan. 1, 2005 2 3 0 0 0 1 1 5 5 0 (b) ( 1 0 0 0 ) 3 3 5 5 0
Purchases 1 9 0 0 0 0 1 9 0 0 0 0
Shipments to branch ( 1 0 0 0 0 0 ) (a) 1 0 0 0 0 0
Shipments from home office 1 1 0 0 0 0 (a)( 1 1 0 0 0 0 )
Freight-in from home office 5 5 0 0 5 5 0 0
Inventories, Dec. 31, 2005 ( 3 0 0 0 0 ) ( 1 6 1 7 0 )* (c) 1 4 0 0 ( 4 4 7 7 0 )
Operating expenses 4 2 0 0 0 2 4 3 0 0 6 6 3 0 0
Net income (to statement of
retained earnings below) 4 4 0 0 0 9 5 2 0 (d) 9 6 0 0 6 3 1 2 0
S
Totals - 0 - - 0 - - 0 -

Statement of retained earnings

Retained earnings, Jan. 1, 2005 ( 3 4 0 0 0 ) ( 3 4 0 0 0 )
Net (income) (from income
statement above) ( 4 4 0 0 0 ) ( 9 5 2 0 ) (d) ( 9 6 0 0 ) ( 6 3 1 2 0 )
Dividends declared 1 5 0 0 0 1 5 0 0 0
Retained earnings, Dec. 31, 2005
(to balance sheet below) 8 2 1 2 0
Totals - 0 -

Balance sheet
Cash 2 3 7 0 0 1 1 9 7 5 3 5 6 7 5
Inventories, Dec. 31, 2005 3 0 0 0 0 1 6 1 7 0 (c) ( 1 4 0 0 ) 4 4 7 7 0
Investment in branch 5 8 3 0 0 (e) ( 5 8 3 0 0 )
Allowance for overvaluation
of branch inventories ( 1 1 0 0 0 ) (a) 1 0 0 0 0
(b) 1 0 0 0
Other assets (net) 1 9 7 0 0 0 4 8 4 5 0 2 4 5 4 5 0
Current liabilities ( 3 5 0 0 0 ) ( 8 7 7 5 ) ( 4 3 7 7 5 )
Common stock, $2.50 par ( 2 0 0 0 0 0 ) ( 2 0 0 0 0 0 )
Retained earnings (from
statement of retained
earnings above) ( 8 2 1 2 0 )
Home office ( 5 8 3 0 0 ) (e) 5 8 3 0 0
Totals - 0 - - 0 - - 0 - - 0 -

* ($9,900 + $5,500) x 1.05 = $16,170.

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

(b) To reduce beginning inventories of branch to cost: $11,000 – ($11,000 ÷ 1.1) = $1,000.
(c) To reduce ending inventories of branch of cost: $15,400 – ($15,400 ÷ 1.1) = $1,400.
(d) To increase net income of home office by portion of merchandise markup that was realized:
$11,000 – $1,400 = $9,600.
(e) To eliminate reciprocal ledger account balances.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 167
30 Minutes, Medium
Solis Company Pr. 4–7
a. Solis Company
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2005
(Periodic Inventory System: Billings at Cost)
Adjusted trial balances
Home office Branch Eliminations Combined
dr (cr) dr (cr) dr (cr) dr (cr)
Income statement
Sales ( 3 9 4 0 0 0 ) ( 1 0 1 1 0 0 ) ( 4 9 5 1 0 0 )
Cost of goods sold 2 0 0 5 0 0 8 5 8 0 0 2 8 6 3 0 0
Operating expenses 6 9 5 0 0 2 1 9 0 0 9 1 4 0 0
Net income (loss) (to
statement of retained
earnings below) 1 2 4 0 0 0 ( 6 6 0 0 ) 1 1 7 4 0 0
Totals - 0 - - 0 - - 0 -

Statement of retained earnings

Retained earnings, Dec. 31, 05 ( 2 5 0 0 0 ) ( 2 5 0 0 0 )
Net (income) loss (from
income statement above) ( 1 2 4 0 0 0 ) 6 6 0 0 ( 1 1 7 4 0 0 )
Dividends declared 3 0 0 0 0 3 0 0 0 0
Retained earnings, Dec. 31, 05
(to balance sheet below) 1 1 2 4 0 0
Totals - 0 -

Balance sheet
Cash 4 6 0 0 0 1 4 6 0 0 6 0 6 0 0
Notes receivable 7 0 0 0 7 0 0 0
Trade accounts receivable
(net) 8 0 4 0 0 3 7 3 0 0 1 1 7 7 0 0
Inventories 9 5 8 0 0 2 4 2 0 0 1 2 0 0 0 0
Investment in branch 8 2 7 0 0 (a) ( 8 2 7 0 0 )
Furniture and equipment
(net) 4 8 1 0 0 4 8 1 0 0
Trade accounts payable ( 4 1 0 0 0 ) ( 4 1 0 0 0 )
Common stock, $2 par ( 2 0 0 0 0 0 ) ( 2 0 0 0 0 0 )
Retained earnings (from
statement of retained
earnings above) ( 1 1 2 4 0 0 )
Home Office ( 8 2 7 0 0 ) (a) 8 2 7 0 0
Totals - 0 - - 0 - - 0 - - 0 -

(a) To eliminate reciprocal ledger account balances.

The McGraw-Hill Companies, Inc., 2006

168 Modern Advanced Accounting, 10/e
Solis Company (concluded) Pr. 4–7
b. Solis Company
Closing Entries for Branch

20 05
Dec. 31 Sales 1 0 1 1 0 0
Income Summary 6 6 0 0
Cost of Goods Sold 8 5 8 0 0
Operating Expenses 2 1 9 0 0
To close revenue and expense ledger accounts.

31 Home Office 6 6 0 0
Income Summary 6 6 0 0
To transfer net loss to Home Office ledger account.

c. Solis Company
Adjusting and Closing Entries for Home Office

20 05
Dec. 31 Loss: Branch 6 6 0 0
Investment in Branch 6 6 0 0
To record net loss reported by branch.

31 Sales 3 9 4 0 0 0
Cost of Goods Sold 2 0 0 5 0 0
Operating Expenses 6 9 5 0 0
Loss: Branch 6 6 0 0
Income Summary 1 1 7 4 0 0
To close revenue and expense ledger accounts.

31 Income Summary 1 1 7 4 0 0
Retained Earnings 1 1 7 4 0 0
To close combined net income to Retained Earnings
ledger account.

50 Minutes, Medium
The McGraw-Hill Companies, Inc., 2006
Solutions Manual, Chapter 4 169
Calco Corporation Pr. 4–8
a. Calco Corporation
Journal Entries in Accounting Records of Home Office

20 05
Dec. 31 Equipment: Branch 5 0 0
Investment in Branch 5 0 0
To record acquisition of equipment by branch.

31 Cash in Transit 5 0 0 0
Investment in Branch 5 0 0 0
To record cash in transit from branch.

31 Sales 4 8 0 0 0
Shipments to Branch 4 0 0 0 0
Investment in Branch 8 0 0 0
To eliminate shipments to branch from sales ($45,000
+ $3,000 = $48,000) and to record shipments at cost
($48,000 ÷ 1.2 = $40,000).

31 Inventories, Dec. 31, 2005 6 0 0 0 0

Income Summary 6 0 0 0 0
To record ending inventories.

b. Calco Corporation
Journal Entries in Accounting Records of Branch

20 05
Dec. 31 Home Office 2 0 0 0
Trade Accounts Receivable 2 0 0 0
To record collection of trade accounts receivable by
home office.

31 Operating Expenses 4 5 0 0
Home Office 4 5 0 0
To correct amount of expenses allocated to branch by
home office ($5,000 – $500 = $4,500).

31 Shipments from Home Office in Transit 3 0 0 0

Home Office 3 0 0 0
To record shipment in transit from home office.

31 Home Office 8 0 0 0
Shipments from Home Office 8 0 0 0
To eliminate intracompany markup on merchandise
received from home office ($48,000 x 1/6 = $8,000).

31 Inventories, Dec. 31, 2005 1 9 5 0 0

Income Summary 1 9 5 0 0
To record ending inventories [($18,000 + $3,000) x 5/6
= $17,500; $2,000 + $17,500 = $19,500].

The McGraw-Hill Companies, Inc., 2006

170 Modern Advanced Accounting, 10/e
Calco Corporation (concluded) Pr. 4–8
c. Calco Corporation
Working Paper to Summarize Operations
For Year Ended December 31, 2005
Revenue and Expenses Home Office Branch Combined
Sales $ 4 0 2 0 0 0 (1) $ 1 0 0 0 0 0 $ 5 0 2 0 0 0

Cost of goods sold:

Inventories, Jan. 1, 2005 (at cost) $ 7 0 0 0 0 $ 1 5 0 0 0 $ 8 5 0 0 0
Purchases 2 9 0 0 0 0 2 4 0 0 0 3 1 4 0 0 0
Shipments to branch (at cost) ( 4 0 0 0 0 ) 4 0 0 0 0
Cost of goods available for sale $ 3 2 0 0 0 0 $ 7 9 0 0 0 $ 3 9 9 0 0 0
Less: Inventories, Dec 31, 2005 6 0 0 0 0 1 9 5 0 0 (2) 7 9 5 0 0
Cost of goods sold $ 2 6 0 0 0 0 $ 5 9 5 0 0 $ 3 1 9 5 0 0

Gross margin on sales $ 1 4 2 0 0 0 $ 4 0 5 0 0 $ 1 8 2 5 0 0

Operating expenses 5 5 0 0 0 2 0 5 0 0 (3) 7 5 5 0 0

Net income $ 8 7 0 0 0 $ 2 0 0 0 0 $ 1 0 7 0 0 0

(1) $450,000 – $48,000 = $402,000.

(2) ($18,000 + $3,000) x 5/6 = $17,500;
(3)
$2,000 + $17,500 = $19,500.
(3) $16,000 + $4,500 = $20,500.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 171
60 Minutes, Medium
Kreshek Company Pr. 4–9
a. Kreshek Company
Reconciliation of Investment in Lee Branch Ledger Account and Home Office Account
For Quarter Ended April 30, 2005
Investment in Lee
Branch ledger account Home Office ledger account
(home office accounting (branch accounting
records) records)
Debit Credit Debit Credit
Balances before adjustments $ 1 3 3 9 7 0 $ 1 4 3 0 4 0
Add:
Transposition error in recording
shipment from home office
($7,840 recorded as $7,480) 3 6 0
Collection by branch of home
office trade accounts
receivable 3 5 0 3 5 0
Shipment delivered to branch
on Feb. 14 not recorded (but
should be) as payable by
home office 2 7 5 0
Corrected branch net income
($13,710 – $360 – $1,200 –
$250 = $11,900) 1 1 9 0 0
Operating expenses charge–
able to branch, $1,200, and
loss on disposal of branch
equipment, $250 1 4 5 0

Less:
Reduction in preliminary net
income recorded in Home
Office ledger account:
Operating expenses not
recorded $ 1 2 0 0
Understatement of shipments
from home office ($7,840 –
$7,480) 3 6 0
Loss on disposal of branch
equipment 2 5 0
Repair bill paid by branch for
home office $ 3 7 5
Excess merchandise returned
by branch to home office not
recorded by home office 5 2 0 5
Subtotals $ 1 4 8 9 7 0 $ 5 5 8 0 $ 1 8 1 0 $ 1 4 5 2 0 0
Balances after adjustments 1 4 3 3 9 0 1 4 3 3 9 0
Totals $ 1 4 8 9 7 0 $ 1 4 8 9 7 0 $ 1 4 5 2 0 0 $ 1 4 5 2 0 0

The McGraw-Hill Companies, Inc., 2006

172 Modern Advanced Accounting, 10/e
Kreshek Company (continued) Pr. 4–9
b. Kreshek Company
Correcting Entries in Accounting Records of Lee Branch

20 05
Apr 30 Cost of Goods Sold 3 6 0
Home Office 3 6 0
To correct error in recording amount of merchandise
received from home office on Feb. 8, 2005
[($49.00 – $46.75) x 160 = $360].

30 Trade Accounts Receivable 3 5 0

Home Office 3 5 0
To record collection of trade accounts receivable of
home office previously recorded in error as collection
of branch trade accounts receivable.

30 Operating Expenses 1 2 0 0
Loss on Disposal of Equipment 2 5 0
Home Office 1 4 5 0
To record operating expenses allocated to branch by
home office and loss reported on disposal of branch
equipment.

30 Home Office 1 8 1 0
Income Summary 1 8 1 0
To correct preliminary net income recorded for quarter
ended Apr. 30, 2005: $1,200 + $360 + $250 = $1,810.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 173
Kreshek Company (concluded) Pr. 4–9
c. Kreshek Company
Correcting Entries in Accounting Records of Home Office

20 05
Apr 30 Investment in Branch 3 5 0
Trade Accounts Receivable 3 5 0
To record collection by branch of home office trade
accounts receivable.

30 Investment in Branch 2 7 5 0
Trade Accounts Payable 2 7 5 0
To record liability for merchandise received by branch
on Feb. 14, 2005.

30 Investment in Branch 1 1 9 0 0
Income: Branch 1 1 9 0 0
To record net income of branch for quarter ended
Apr. 30, 2005: $13,710 – $1,810 = $11,900.
A

30 Repairs Expense (or Trade Accounts Payable, if

previously recorded) 3 7 5
Investment in Branch 3 7 5
To record repair bill paid by branch on Apr. 29, 2005.

30 Inventories in Transit 5 2 0 5
Investment in Branch 5 2 0 5
To record excess merchandise returned to home
office by branch on Apr. 30, 2005.

The McGraw-Hill Companies, Inc., 2006

174 Modern Advanced Accounting, 10/e
60 Minutes, Strong
Arnie’s Pr. 4–10
a. Arnie’s
Journal Entries in Accounting Records of Home Office

20 05
Dec. 31 Arnold Nance, Capital 1 2 0 0
Allowance for Overvaluation of Inventories:
Vida Branch 1 2 0 0
To establish allowance for overvaluation of
beginning inventories of branch
[$6,000 – ($6,000 ÷ 1.25) = $1,200].

31 Sales 1 0 5 0 0 0
Cost of Goods Sold 8 4 0 0 0
Allowance for Overvaluation of Inventories:
Vida Branch 2 1 0 0 0
To correct journal entries for shipments of
merchandise to branch ($105,000 ÷ 1.25 = $84,000).

31 Cash in Transit 1 0 0 0 0
Investment in Branch 1 0 0 0 0
To record cash in transit from branch:
Dec. 30, 2005 $ 3,000
Dec. 31, 2005 7,000
Total cash in transit $10,000

b. Arnie’s
Journal Entries in Accounting Records of Vida Branch

20 05
Dec. 31 Operating Expenses 1 2 0 0 0
Home Office 1 2 0 0 0
To record expense allocated to branch by the home
office.

31 Cash in Transit 3 0 0 0
Home Office 3 0 0 0
To record cash in transit from home office.

31 Inventories in Transit 1 0 0 0 0
Home Office 1 0 0 0 0
To record shipment of merchandise in transit from
home office, determined as follows:
Inventories, Jan. 1, 2005 $ 6,000
Shipments from home office 105,000
Subtotal $111,000
Less: Cost of goods sold per
branch accounting
records $93,000
Inventories, Dec. 31,
2005, per branch
accounting records 8,000 101,000
Shipment of merchandise in
transit from home office $ 10,000

Arnie’s (continued) Pr. 4–10

The McGraw-Hill Companies, Inc., 2006
Solutions Manual, Chapter 4 175
c. Arnie’s
Working Paper for Combined Financial Statements of Home Office and Branch
For Year Ended December 31, 2005
(Period Inventory System: Billings above Cost)
Adjusted trial balances
Home office Vida Branch Eliminations Combined
dr (cr) dr (cr) dr (cr) dr (cr)
Income statement
Sales ( 2 8 5 0 0 0 ) ( 1 6 0 0 0 0 ) ( 4 4 5 0 0 0 )
Cost of goods sold 1 6 6 0 0 0 9 3 0 0 0 (a) ( 1 8 6 0 0 ) 2 4 0 4 0 0
Operating expenses 7 0 0 0 0 4 8 0 0 0 1 1 8 0 0 0
Net income (to statement of
proprietor’s capital below) 4 9 0 0 0 1 9 0 0 0 (b) 1 8 6 0 0 8 6 6 0 0
Totals - 0 - - 0 - - 0 -

Statement of proprietor’s capital

Arnold Nance, capital Jan. 1, 05 ( 1 9 0 8 0 0 ) ( 1 9 0 8 0 0 )
Net (income) (from
income statement above) ( 4 9 0 0 0 ) ( 1 9 0 0 0 ) (b) ( 1 8 6 0 0 ) ( 8 6 6 0 0 )
Arnold Nance, drawing 5 0 0 0 0 5 0 0 0 0
Arnold Nance, capital Dec. 31,
2005 (to balance sheet below) 2 2 7 4 0 0
Totals - 0 -

Balance sheet
Cash 4 1 0 0 0 1 6 0 0 0 5 7 0 0 0
Trade accounts receivable (net) 2 0 0 0 0 2 2 0 0 0 4 2 0 0 0
Inventories 4 0 0 0 0 1 8 0 0 0 (a) ( 3 6 0 0 ) 5 4 4 0 0
Investment in Vida Branch 3 5 0 0 0 (c) ( 3 5 0 0 0 )
Allowance for overvaluation of
inventories: Vida Branch ( 2 2 2 0 0 ) (a) 2 2 2 0 0
Equipment (net) 1 5 0 0 0 0 1 5 0 0 0 0
Trade accounts payable ( 2 3 0 0 0 ) ( 2 3 0 0 0 )
Accrued liabilities ( 2 0 0 0 ) ( 2 0 0 0 )
Note payable, due 2008 ( 5 1 0 0 0 ) ( 5 1 0 0 0 )
Home office ( 3 5 0 0 0 ) (c) 3 5 0 0 0
Arnold Nance, capital (from
statement of proprietor’s
capital above) ( 2 2 7 4 0 0 )
Totals - 0 - - 0 - - 0 - - 0 -

(a) To reduce ending inventories ($18,000 x 0.20 = $3,600) and cost of goods sold ($93,000 x 0.20 = $18,600) of
branch to cost, and to eliminate balance of Allowance for Overvaluation of Inventories: Vida Branch ledger account.
(b) To increase net income of home office by portion of merchandise markup that was realized by branch sales.
(c) To eliminate reciprocal ledger account balances.

The McGraw-Hill Companies, Inc., 2006

176 Modern Advanced Accounting, 10/e
Arnie’s (concluded) Pr. 4–10
d. Arnie’s
Adjusting and Closing Entries in Accounting Records of Home Office

20 05
Dec 31 Investment in Vida Branch 1 9 0 0 0
Income: Vida Branch 1 9 0 0 0
To record net income reported by branch.

31 Allowance for Overvaluation of Inventories: Vida

Branch 1 8 6 0 0
Realized Gross Profit: Vida Branch Sales 1 8 6 0 0
To reduce allowance to amount by which ending
inventories of branch exceed cost.

31 Income: Vida Branch 1 9 0 0 0

Realized Gross Profit: Vida Branch Sales 1 8 6 0 0
Sales 2 8 5 0 0 0
Cost of Goods Sold 1 6 6 0 0 0
Operating Expenses 7 0 0 0 0
Income Summary 8 6 6 0 0
To close revenue and expense accounts.

31 Income Summary 8 6 6 0 0
Arnold Nance, Capital 8 6 6 0 0
To close Income Summary ledger account (net income
for year) to proprietor’s capital account.

31 Arnold Nance, Capital 5 0 0 0 0

Arnold Nance, Drawing 5 0 0 0 0
To close proprietor’s drawing ledger account to
proprietor’s capital account.

The McGraw-Hill Companies, Inc., 2006

Solutions Manual, Chapter 4 177