Вы находитесь на странице: 1из 112

Chapter 4

Accounting for Branches and


Combined Financial Statements

ACCT 501
Objectives of this Chapter

 To learn the accounting and


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

Accounting for Branches


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

Accounting for Branches


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

Accounting for Branches


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

Accounting for Branches


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

Accounting for Branches


Start-up Costs of Opening New
Branches
 Based on Statement of Position 98-5
(SOP 98-5) “Reporting on the Costs
of Start-up Activities”, all start-up
costs, including costs associated with
organizing a branch or division
should be expensed in the
accounting period in which the costs
are incurred.
Accounting for Branches
Accounting System for a Branch
 Two alternative systems:
1. The branch does not maintain a
complete set of accounting
records. The home office serves
only as an accounting and control
center for the branches.

Accounting for Branches


Accounting System for a Branch (contd.)

2. The branch maintains a complete


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

Accounting for Branches


Accounting System for a Branch (contd.)

 This chapter focuses on the second


system that the branch maintains its
own accounting records.

Accounting for Branches


Reciprocal Ledger Accounts Used by the
Branch and Home Office
 Home Office Ledger Account:

This account is used by the branch to account


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

Accounting for Branches


Reciprocal Ledger Accounts Used by the
Branch and Home Office (contd.)
 Home Office Ledger Account:

This account represents the net


investment by the home office in the
branch. At the end of a period, the
balance of Income Summary account
of a branch is closed to the Home
Office account.

Accounting for Branches


Reciprocal Ledger Accounts Used by the
Branch and Home Office (contd.)
 Investment in Branch Ledger Account:

This account is a reciprocal ledger account


(to Home Office account) used by the home
office to account for any transactions with the
branches. It is debited for cash,
merchandise and services provided to the
branch by the home office and for the net
income reported by the branch.

Accounting for Branches


Reciprocal Ledger Accounts Used by the
Branch and Home Office (contd.)
 Investment in Branch Ledger Account:
It is credited for cash, or other assets
received from the branch, and for net
losses reported by the branch.

Accounting for Branches


Acquisition of Plant Assets Used in
Branch
 If a plant asset is acquired by the
home office for a branch’s usage
and the accounting record for the
plant asset is maintained by the
home office, the accounting
treatments are:

Accounting for Branches


Acquisition of Plant Assets Used in
Branch (contd.)
 For the home office: debit a plant
asset account: branch, credit
cash or a liability account.

 For the branch: no entry.

Accounting for Branches


Acquisition of Plant Assets Used in
Branch (contd.)
 If a plant asset is acquired by a
branch for its usage but the
accounting record for this plant
asset is maintained by the home
office, the accounting treatments
are:

Accounting for Branches


Acquisition of Plant Assets Used in
Branch (contd.)
 For the branch: debit Home Office
and credit cash or a liability account.

 For the home office: debit a plant


asset account: branch, and credit
Investment in Branch account.

Accounting for Branches


Expense Incurred by Home Office
and Allocated to Branches
 The home office may acquire plant assets
and insurance for these assets. These
plant assets are carried in the home office
accounting record but used by branches.

 The home office may pay some taxes on


behalf of branches, and arrange for
advertising that benefits all branches.

Accounting for Branches


Expense Incurred by Home Office
and Allocated to Branches (contd.)
 These expenses are usually allocated
to branches in determining net income
of branches.

 These expenses include depr. expense


for the plant assets purchased by
home office but used by branches.

Accounting for Branches


Expense Incurred by Home Office
and Allocated to Branches (contd.)
If the home office chooses to allocate these
expenses to branches, the accounting
treatments are:

a. For the home office: debit Investment


in Branch account, credit expense
account. b.
For the branch: debit expense account,
credit Home Office account.

Accounting for Branches


Interest Charged by the Home office on
the Capital Invested in Branches
 When the home office serves only as an
accounting and control center without any
sales, most or all of its expenses may be
allocated to the branches.

 In additional, the home office may charge


each branch interest on the capital invested
in each branch.

Accounting for Branches


Interest Charged by the Home office on
the Capital Invested in Branches
(contd.)
 Such interest revenue recognized by
the home office should be offset with
the interest expense recognized by the
branches in the combined financial
statements.

Accounting for Branches


Alternative Methods of Billing
Merchandise Shipments to Branches
 Three alternative methods are available to
the home office in billing the merchandise
shipped to the branches:
a. billed at the home office cost,
b. billed at a percentage above the home
office cost, and
c. billed at the branch’s retail selling
price.

Accounting for Branches


Billed at the home office cost:
 Strength: widely used because of its
simplicity

 Weakness: attributes all gross profits


of the business to the branches.

Accounting for Branches


Billed at a percentage above home
office cost:
 Strength: is able to allocate a
reasonable gross profit to the home
office.
 Weakness: the net income reported by
the branch may be understated and the
ending inventories at branch are
overstated for the enterprise as a
whole.

Accounting for Branches


Billed at a percentage above home
office cost: (contd.)
 Thus, for the combined financial
statement, the home office must
eliminate the excess of billed prices
over cost (intracompany profits).

Accounting for Branches


Billed at branch retail selling
prices:
 Strength: to increase the internal
control over inventories at branches.

 Weakness: no gross profit assigned to


the branches and the branch’s net loss
will equal its operating expenses.

Accounting for Branches


Separate Financial Statements for Branch and
for Home Office (for internal use only)
 Separate financial statements for
branches should be prepared so that
management can evaluate the
performance of each branch.
 The branch’s financial statements may
be revised by the home office to include
the allocated expenses incurred by the
home office.

Accounting for Branches


Separate Financial Statements for Branch and
for Home Office (for internal use only) (contd.)
 Also, the financial statements of
branches should be revised to
eliminate any intracompany profits on
merchandise shipments or interest
charge on capital investments.

Accounting for Branches


Combined financial Statements for Home
Office and Branch (for external use)
 For investors, the home office and
branches are a single business entity.
 Thus, combined financial statements
should be prepared for external users.
 A four-column work sheet paper is
used to facilitate the preparation of the
combined financial statement.

Accounting for Branches


Combined financial Statements for Home
Office and Branch (for external use)
(contd.)
 In preparing the combined financial
statements, the following accounts
should be eliminated:
 a. Reciprocal ledger accounts
 b. Any intracompany profits or losses.

Accounting for Branches


Combined financial Statements for Home
Office and Branch (for external use)
(contd.)
 c. Any receivables and payables
between the home office and the
branch (or between two branches).

 The rest of accounts are just summed


together for the combined financial
statements.

Accounting for Branches


Combined financial Statements for Home
Office and Branch (for external use)
(contd.)
 Example I (textbook p131-p135) :
Journal entries for operations of a
branch when merchandise is billed at
the cost of the home office with a
perpetual inventory system.

Accounting for Branches


Combined financial Statements for Home Office and
Branch
(for external use )
(contd.)
Example I: (contd.)
 Assume that Smaldino Company bills
merchandise to Mason Branch at home
office cost and that Mason Branch
maintains complete accounting records
and prepares financial statements.
 Both the home office and the branch
use the perpetual inventory system.
Equipment used at the branch is carried
in the home office records.

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
 Expenses, such as advertising and
insurance, incurred by the home office
on behalf of the branch, are billed to
the branch.
 Transactions and events during the
first year (1999) of operations of
Mason Branch are summarized below
(start-up costs are disregarded):

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
1. Cash of $1,000 was forwarded by the
home office to Mason Branch.
2. Merchandise with a home office cost of
$60,000 was shipped by the home office to
Mason Branch.
3. Equipment was acquired by Mason Branch
for $500, to be carried in the home office
accounting records. (Other plant assets for
Mason Branch generally are acquired by
the home office.)

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
4. Credit sales by Mason Branch amounted to
$80,000; the branch’s cost of the
merchandise sold was $45,000.
5. Collections of trade accounts receivable by
Mason Branch amounted to $62,000.
6. Payments for operating expenses by
mason Branch totaled $20,000.

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
7. Cash of $37,500 was remitted by Mason
Branch to the home office.
8. Operating expenses incurred by the home
office and charged to Mason Branch
totaled $3,000.

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
 These transactions and events are
recorded by the home office and by Mason
Branch as follows:

Home Office Accounting Mason Branch Accounting


Records Journal Entries: Records Journal Entries:
1.Investment in Mason Cash 1,000
Branch 1,000
Cash 1,000 Home Office 1,000

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
Home Office Accounting Mason Branch Accounting
Records Journal Entries: Records Journal Entries:
2. Investment in Mason Inventories 60,000
Branch 60,000
Inventories 60,000 Home Office 60,000
3. Equipment: Mason Home Office 500
Branch 500
Investment in Mason Cash 500
Branch 500

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
Home Office Accounting Mason Branch Accounting
Records Journal Entries: Records Journal Entries:
4. None Trade Accounts
Receivable 80,000
Cost of Goods Sold 45,000
Sales 80,000
Inventories 45,000

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
Home Office Accounting Mason Branch Accounting
Records Journal Entries: Records Journal Entries:
5. None Cash 62,000
Trade
Account
Receivable 62,000
6. None Operating
Expenses 20,000
Cash 20,000

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
Home Office Accounting Mason Branch Accounting
Records Journal Entries: Records Journal Entries:
7. Cash 37,500 Home Office 37,500
Investment in Mason Cash 37,500
Branch 37,500
8. Investment in Mason Operating
Branch 3,000 Expenses 3,000
Operating Home Office 3,000
Expenses 3,000

Accounting for Branches


Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
 Two Reciprocal Ledger Accounts (prior to adjusting and
closing entries):
Investment in Mason Branch

Date Explanation Debit Credit Balance


1999 Cash sent to branch 1,000 1,000 dr
Merchandise billed to

branch at home office cost 60,000 61,000 dr


Equipment acquired by

branch, carried in home


office accounting records 500 60,500 dr
Cash received from branch 37,500 23,000 dr
Operating expenses billed

to branch 3,000 26,000 dr


Accounting for Branches
Combined financial Statements for Home Office and Branch
(for external use )
(contd.)
Example I: (contd.)
Home Office
Date Explanation Debit Credit Balance
1999 Cash received from home
office 1,000 1,000 cr
Merchandise received from

home office 60,000 61,000 cr


Equipment acquired 500 60,500 cr
Cash sent to home office 37,500 23,000 cr
Operating expenses billed

by home office 3,000 26,000 cr

Accounting for Branches


Working Paper for Combined financial
Statements--Example I
The following working paper for combined
financial statements serves three purposes:
1) to eliminate any intracompany profits
or losses,
2) to eliminate the reciprocal accounts, &
3) to combine ledger accounts balances
of home office and branches.

Accounting for Branches


Working Paper for Combined financial
Statements--Example I (contd.)
 Assume that the Mason Branch’s
ending inventories of $15,000 at the
end of 1999 had been verified, the
following work sheet is based on the
transactions and events illustrated on
pages 40-44. With additional assumed
data for the home office trial balance.

Accounting for Branches


Working Paper for Combined financial
Statements--Example I (contd.)
 All the year-end adjusting entries
(except the home office entries on page
60) had been made.
 The working paper begins with the
adjusted trial balance of the home office
and Mason Branch.
 Income taxes are ignored in this
illustration.
Accounting for Branches
Working Paper for Combined financial
Statements--Example I (contd.)
 SMALDNO COMPANY
Working paper for combined Financial
Statements of Home office and Mason
Branch.
For Year Ended December 31,1999
(Perpetual Inventory System: Billing at
Cost)

Accounting for Branches


Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Home Mason
Office Branch Eliminations Combined
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales (400,000) (80,000) (48,000)
Cost of goods sold 235,000 45,000 280,000
Operating expenses 90,000 23,000 113,000
Net Income (to
statement of retained
75,000 12,000 87,000
earnings below)
Totals -0- -0- -0-

Accounting for Branches


Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Statement of Retained Home Office Mason Eliminations Combined
Earnings Branch
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Retained earnings, Jan. (70,000) (70,000)
1, 1999
Net(income) (from
incomes statement
(75,000) (12,000) (87,000)
above)
Dividends declared 40,000 40,000
Retained earnings,
Dec.31,1999 (to balance
117,000
sheet below)
Totals -0-
Accounting for Branches
Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Home Office Mason Eliminations Combined
Branch
Balance Sheet
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Cash 25,000 5,000 30,000
Trade accounts
receivable (net) 39,000 18,000 57,000

Inventories 45,000 15,000 60,000


Investment in Mason
Branch 26,000 (a) (26,000)
Equipment 150,000 150,000
Accumulated
depreciation of
(10,000) (10,000)
equipment
Accounting for Branches
Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Home Office Mason Eliminations Combined
Balance Sheet (contd.) Branch
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Trade accounts payable (20,000) (20,000)
Home Office (26,000) (a) (26,000)
Common stock, $10 par (150,000) (150,000)
Retained earnings (from
statement of retained
earnings above)
(117,000)
Totals -0- -0- -0- -0-
(a) To eliminate reciprocal ledger account balances
* the elimination appears in the working paper only
Accounting for Branches
Combined Financial Statements --
Example I
SMALDINO COMPANY
Income Statement
For Year Ended December 31, 1999
Sales $ 480,000
Cost of goods sold 280,000
Gross margin on sales $ 200,000
Operating expenses 113,000
Net Income $ 87,000
Basic earnings per share of common
stock $ 5.80

Accounting for Branches


Combined Financial Statements --
Example I (contd.)
SMALDINO COMPANY
Statement of Retained Earnings
For Year Ended December 31, 1999

Retained earnings, beginning of year $ 70,000


Add: Net income 87,000
Subtotal $ 157,000
Less: Dividends ($2.67 per share) 40,000
Retained earnings, end of year $ 117,000

Accounting for Branches


Combined Financial Statements --
Example I (contd.)
SMALDINO COMPANY
Balance Sheet
December 31, 1999
Assets
Cash $ 30,000
Trade accounts receivable (net) 57,000
Inventories 60,000
Equipment $150,000
Less: Accumulated depreciation 10,000 140,000
Total assets $287,000
Accounting for Branches
Combined Financial Statements --
Example I (contd.)
SMALDINO COMPANY
Balance Sheet (contd.), December 31, 1999
Liabilities & Stockholders’ Equity
Liabilities
Trade accounts payable $20,000
Stockholders’ equity
Common stock, $10 par,
15,000 shares authorized, issued,
and outstanding $150,000
Retained earnings 117,000 267,000
Total liabilities & stockholders’
equity $287,000
Accounting for Branches
Home Office Adjusting and Closing Entries and
Branch Closing Entries Performed on 12/31/1999
(perpetual inventory system):

Home Office Accounting Mason Branch Accounting


Records Adjusting and Records Closing Entries:
Closing Entries:
None Sales 80,000
Cost of Goods
Sold 45,000
Operating
Expenses 23,000
Income
Summary 12,000

Accounting for Branches


Home Office Adjusting and Closing Entries and
Branch Closing Entries Performed on 12/31/1999
(perpetual inventory system): (contd.)

Home Office Accounting Mason Branch Accounting


Records Adjusting and Records Closing Entries:
Closing Entries:
Investment in Mason Income
Branch 12,000 Summary 12,000
Income: Mason Home Office 12,000
Branch 12,000
Income: Mason None
Branch 12,000
Income
Summary 12,000
Accounting for Branches
Example II (textbook p136-p141):
Billing of Merchandise to Branches at Prices
above Home Office Cost
 Similar information as in the previous
example, except that the home office
bills merchandise shipped to Mason
branch at 50% markup of the cost.
 Thus, the shipment of merchandise
costing $60,000 will be recorded at the
home office and branch as follows:

Accounting for Branches


Example II (textbook p136-p141):
Billing of Merchandise to Branches at Prices
above Home Office Cost (contd.)
 Journal entries for shipments to branch at
prices above home office cost (perpetual
inventory system):
Home Office Accounting Mason Branch Accounting
Records Journal Entries: Records Journal Entries:
Investment in Mason
Branch 90,000 Inventories 90,000
Inventories 60,000 Home Office 90,000
Allowance for
Overvaluation of
Inventories: Mason
Branch 30,000
Accounting for Branches
Example II (textbook p136-p141):
Billing of Merchandise to Branches at Prices
above Home Office Cost (contd.)
 Thus, the balances of both the
Investment in Mason Branch
account and Home Office account
will be $56,000, instead of $26,000
due to the inventory mark up of
$30,000.

Accounting for Branches


Example II (textbook p136-p141):
Billing of Merchandise to Branches at Prices
above Home Office Cost (contd.)
SMALDINO COMPANY
Flow of Merchandise for Mason Branch During 1999
Billed Home Markup (50% of
Price Office Cost;33 1/3 % of
Cost Billed Price)
Beginning
inventories
Add: Shipments $60,000 $30,000
$90,000
from home office
Available for sale $90,000 $60,000 $30,000
Less: Ending
inventories 22,500 15,000 7,500
Cost of goods
sold $67,500 $45,000 $22,500
Accounting for Branches
Working Paper for Example II

 SMALDNO COMPANY
Working paper for combined Financial
Statements of Home office and Mason
Branch
For Year Ended December 31,1999
(Perpetual Inventory System: Billing
above Cost)

Accounting for Branches


Working Paper for Example II (contd.)
Adjusted Trial Balances
Home Mason
Office Branch Eliminations Combined
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales (400,000) (80,000) (48,000)
Cost of goods sold 235,000 67,500 (a) (22,500) 28,000
Operating expenses 90,000 23,000 113,000
Net Income(loss) (to
statement of retained
75,000 (10,500) (b) 22,500 87,000
earnings below)
Totals -0- -0- -0-

Accounting for Branches


Working Paper for Example II (contd.)

Adjusted Trial Balances


Statement of Retained Home Office Mason Eliminations Combined
Earnings Branch
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Retained earnings, Jan. (70,000) (70,000)
1, 1999
Net(income) loss (from
incomes statement (b) (22,500)
(75,000) (10,500) (87,000)
above)
Dividends declared 40,000 40,000
Retained earnings,
Dec.31,1999 (to balance
117,000
sheet below)
Totals -0-
Accounting for Branches
Working Paper for Example II (contd.)
Adjusted Trial Balances
Home Office Mason Eliminations Combined
Branch
Balance Sheet
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Cash 25,000 5,000 30,000
Trade accounts
receivable (net) 39,000 18,000 57,000

Inventories 45,000 22, 500 (a) (7,500) 60,000


Investment in Mason
Branch 56,000 (c) (56,000)
Allowance for overvaluation of inventories:
Mason Branch

(30,000) (a) 30,000


Equipment 150,000 150,000

Accounting for Branches


Working Paper for Example II (contd.)
Adjusted Trial Balances
Home Office Mason Eliminations Combined
Branch
Balance Sheet (contd.)
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Accumulated depreciation
of inventories: Mason
Branch
(10,000) (10,000)
Trade accounts payable (20,000) (20,000)
Home Office (56,000) (c) (56,000)
Common stock, $10 par (150,000) (150,000)
Retained earnings(from
statement of retained
(117,000)
earnings above)
Totals -0- -0- -0- -0-
Accounting for Branches
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost)
 Branch Closing Entries--The closing
entries for the branch at the end of 1999 are
as follows:

Sales 80,000
Income Summary 10,500
Cost of Goods Sold 67,500
Operating Expenses 23,000

To close revenue and


expense ledger accounts
Accounting for Branches
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)

Home Office 10,500


Income Summary 10,500

To close the net loss in the


Income Summary account to
the Home Office account

Accounting for Branches


Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
 After the closing entries, the Home Office
ledger account should have a balance of
$45,500.
 Note: Home Office balance prior to the
closing entries equals $56,000. $56,000-
net loss of $10,500 = $45,500 (net loss
decreases Home Office credit balance).

Accounting for Branches


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

Income: Mason Branch 10,500


Investment in Mason 10,500
Branch
To record net loss reported by
branch

Accounting for Branches


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

Allowance for Overvaluation


of Inventories: Mason Branch 22,500
Realized Gross Profit:
Mason Branch Sales 22,500

To reduce allowance to
amount by which ending
inventories of branch exceed
cost.
Accounting for Branches
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
Home Office Adjusting and Closing Entries (contd.)

Realize Gross Profit: Mason 22,500


Branch Sales
Income: Mason Branch 10,500
Income Summary 12,000
To close branch net loss and
realized gross profit to
Income Summary ledger
account (Income tax effects
are disregarded.)
Accounting for Branches
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
 After posting the above entries, the account
balance for the following accounts is:
Investment in Mason Branch =45,500(debit)*
Allowance for Overvaluation of =7,500(credit)**
Inventories: Mason Branch
Realized Gross Profit: Mason =0
Branch
Income: Mason Branch =0
* Balance prior to the above entries equals $56,000. $56,000- 10,500
(net loss of the branch reduces the debit balance of the Investment
account) = $45,500.
** $30,000-22,500 = $7,500. Accounting for Branches
Branch Closing Entries and Home office
Adjusting and Closing Entries (when billing at
above the cost) (contd.)
 Similar working paper eliminations as
on page 66-69 will be prepared for the
following year (i.e., year 2000) when
continuing with the perpetual inventory
system with a price markup.

Accounting for Branches


Periodic Inventory System
 Textbook (p141-p144):
When a periodic inventory system is
adopted, inventory account cannot be
used for the shipments of merchandise
between the home office and the branch.
 Accounts such as “Shipments to Mason
Branch” (used by the home office) and
“Shipments from Home Office” (used by
the branch) are used.

Accounting for Branches


Periodic Inventory System (contd.)
Example:
 Example:
Continue with the Smaldino Company for a
second year of operations (2000) but using
the periodic inventory system for both the
home office and Mason Branch.
The beginning inventories for 2000 were
carried by Mason Branch at $22,500 (home
office cost is $15,000 due to a 50% markup
by the home office).

Accounting for Branches


Periodic Inventory System (contd.)
Example: (contd.)
 Assume that during 2000, the home office
shipped merchandise to Mason Branch that
cost $80,000 and Mason was billed at
$120,000.
 During 2000, Mason Branch sold $150,000
merchandise that was billed at $112,500.
 The journal entries to record the shipments and
sales at a price above home office cost under
the periodic inventory system are as follows:

Accounting for Branches


Periodic Inventory System (contd.)
Example: (contd.)
Home Office Accounting Mason Branch Accounting
Records Journal Entries: Records Journal Entries:
Investment in Mason Shipments from Home
Branch 90,000 Office 120,000
Home Office 120,000
Shipments to Mason
Branch 80,000
Allowance for
Overvaluation of
Inventories: Mason
Branch 40,000
None Cash (or Trade Accounts
Receivable) 150,000
Accounting for Branches
Periodic Inventory System (contd.)
Example: (contd.)
 The branch inventories at the end of 2000 amounted to $30,000. The flow of merchandise for Mason Branch of year
2000 summarized below:
SMALDINO COMPANY
Flow of Merchandise for Mason Branch During 2000

Home Markup (50% of


Billed Office Cost Cost;33 1/3 % of
Price Billed Price)
Beginning
inventories $22,500 $15,000 $7,500
Add: Shipments 120,000 80,000 40,000
from home office
Available for sale $142,500 $95,000 $47,500
Less: Ending
inventories (30,000) (20,000) (10,000)
Cost of goods
sold $112,500 $75,000 $37,500
Accounting for Branches
Periodic Inventory System (contd.)
Example: (contd.)
 The activities for the branch for 2000 are reflected in
the following two home office ledger accounts and the
reciprocal Home Office ledger account of the branch:
Investment in Mason Branch
Date Explanation Debit Credit Balance
2000 Balance, Dec. 31, 1999 45,500 dr
Merchandise billed to branch

at markup of 50% above


home office cost, or 33 1/3
% of billed price 120,000 165,500dr
Cash received from branch 113,000 52,500 dr
Operating expenses billed to

branch 4,500 57,000 dr


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

Accounting for Branches


Periodic Inventory System (contd.)
Example: (contd.)
Home Office
Date Explanation Debit Credit Balance
2000 Balance, Dec. 31,
1999 45,500 cr
Merchandise

receivable from
home office 120,000 165,500 cr
Cash sent to home
office 113,000 52,500 cr
Operating expenses

billed by Home Accounting


office for Branches4,500 57,000 cr
Periodic Inventory System (contd.)
Example: (contd.)
 The working paper for combined financial
statements under the periodic inventory
system is as follows:
Adjusted Trial Balances
Eliminations Combined
Income Statement Home Mason
Office Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)

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


Inventories, Dec. 31,
1999 45,000 22,500 (b) (7,500) 60,000
Purchases 400,000 400,000
Accounting for Branches
Periodic Inventory System (contd.)
Example: (contd.)
Adjusted Trial Balances
Eliminations Combined
Income Statement Home Mason
Office Branch
(contd.)
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)

Shipments from home


office 120,000 (a) 80,000
Inventories, Dec.
31,2000 (70,000) (30,000) (c) 10,000 (90,000)
Operating expenses 120,000 27,500 147,500
Net Income( to
statement of retained
earnings below) Accounting
85,000 for Branches
10,000 (d) 37,500 132,500
Periodic Inventory System (contd.)
Example: (contd.)
Adjusted Trial Balances
Statement of Eliminations Combined
Retained Earnings Home Mason
Office Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)

Retained earnings,
Dec. 31, 1999 (117,000) (117,000)
Net Income (from
income statement
above) (85,000) (10,000) (d) (37,500) (132,500)
Dividends declared 60,000 27,500 60,000
Retained earnings,
Dec. 31, 2000 (to
balance sheet below) 85,000 10,000 189,500
Accounting for Branches
Periodic Inventory System (contd.)
Example: (contd.)
Adjusted Trial Balances
Eliminations Combined
Balance Sheet Home Mason
Office Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)

Cash 30,000 9,000 39,000


Trade accounts
receivable (net) 64,000 28,000 92,000
Inventories, Dec. 31,
2000 70,000 30,000 (c) (10,000) 90,000
Allowance for
overvaluation of
inventories : Mason (a) 40,000
Branch (47,500) (b) 7,500
Accounting for Branches
Periodic Inventory System (contd.)
Example: (contd.)
Adjusted Trial Balances
Elimination Combined
Balance Sheet Home Mason s
Office Branch
(contd.)

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

Equipment 158,000 158,000


Accumulated
depreciation of
equipment (15,000) (15,000)
Trade Account payable (24,500) (24,500)
Home office (57,000) (e) 57,000
Common stock, $10 par (150,000) (150,000)
Accounting for Branches
Periodic Inventory System (contd.)
Example: (contd.)
(a) To eliminate reciprocal ledger accounts
for merchandise shipments.
(b) To reduce beginning inventories of
branch to cost
(c) To reduce ending inventories of branch to
cost.
(d) To increase income of home office by
portion of merchandise markup that was
realized by branch sales.
(e) To eliminate reciprocal ledger account
balances.
Accounting for Branches
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
 Branch Closing Entries:

(1)Inventory (ending) 30,000


Cost of Goods Sold 112,500*
Inventory (beg.) 22,500
Shipments from
Home Office 120,000

CGS=22,500+120,000-30,000
Accounting for Branches
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
(contd.)
(2)Sales 150,000
CGS 112,500
Operating expenses 27,500
Income Summary 10,000

(3) Income Summary 10,000


Home Office 10,000

Accounting for Branches


Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
(contd.)
 Home Office Adjusting (1 and 2) and
Closing Entries (3) :

(1) Investment in Branch 10,000


Income: Mason Branch10,000

(2) Allowance for Overvaluation


of Inventories 37,500
Realized Gross Profit :
Mason Branch 37,500
Accounting for Branches
Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
(contd.)
(3) Realized Gross Profit 37,500
Income: Mason Branch 10,000
Income Summary 47,500

Accounting for Branches


Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
(contd.)
 Balances of Investment in Mason
Branch, Allowance for Overvaluation of
Inventories, Realized Gross Profit,
Income: Mason Branch and Home
Office accounts after the above
adjusting and closing entries are:

Accounting for Branches


Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
(contd.)
 Investment in Mason Branch
= $67,000 (dr.)
(57,000+10,000)

 Allowance for Overvaluation of


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

Accounting for Branches


Branch Closing Entries and Home Office Adjusting
and Closing entries for the home office (with billing at
above the cost and using a periodic inventory system):
(contd.)
 Realized Gross Profit
= $0 (37,500- 37,500)

 Income: Mason Branch


= $0 (10,000-10,000)

 Home Office (a reciprocal account of


Investment)
= $67,000 (cr.) (57,000+10,000)
Accounting for Branches
Reconciliation of Reciprocal
Ledger Accounts
 At the end of an accounting period, the
balance of the Investment in Branch
ledger account in the records of the
home office may be different from that
of the Home Office ledger account of
the branch.
 This is because some transactions may
have been recorded by the home office
but not the branch office.

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
 Example (textbook p145): Assume
that the home office and branch
accounting records of Mercer
Company contain the following
data on 12/31/99:

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
Investment in Arvin Branch
(in accounting records of Home office)
Date Explanation Debit Credit Balance
1999
Nov. 30 Balance 62,500 dr
Dec. 10 Cash received from
branch 20,000 42,500 dr
27 Collection of branch
trade accounts 1,000 41,500 dr
receivable
29 Merchandise
shipped to branch 8,000 49,500 dr
Accounting for Branches
Reconciliation of Reciprocal
Ledger Accounts (contd.)
Home Office
(in accounting records of Arvin Branch)
Date Explanation Debit Credit Balance
1999
Nov. 30 Balance 62,500 cr
Dec. 7 Cash sent to home
office 20,000 42,500 cr
28 Acquired equipment 3,000 39,500 cr
30 Collection of home
office trade accounts 2,000 41,500 cr
receivable

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
 The following adjusting entries are
recorded prior to the preparation of the
working paper for the combined
financial statements (assuming a
perpetual inventory system)

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
 For Arvin Branch:

1.Home Office 1,000


Trade Accounts
Receivable 1,000

2.Inventory 8,000
Home Office 8,000

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
 For Mercer Home Office:

1.Equipment: Arvin Brach 3,000


Investment in Branch:
Arvin 3,000

2.Investment in Branch: Arvin 2,000


Trade Accounts Receivable 2,000

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
 The balance of Investment in Branch: Arvin
ledger account at the home office equals:

$ 49,500 (dr.)
- 3,000 (cr.)
+ 2,000 (dr.)
$ 48,500 (dr.)

Accounting for Branches


Reconciliation of Reciprocal
Ledger Accounts (contd.)
 After posting the above adjusting entries:
 The balance of Home Office ledger account
at Arvin Branch equals:

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

Accounting for Branches


Transactions between Branches
 When it is necessary to transfer
merchandise or assets from one branch to
another branch, Home Office Ledger
account is used by the branches.
 The home office will transfer the inventory
(or assets) from investment in one branch to
another branch.
 Any excess freight costs incurred for the
transfer between branches should be
expensed.

Accounting for Branches


Transactions between Branches
(contd.)
 Example: (textbook p146-148)
The home office shipped merchandise costing
$8,000 to Katti Branch and paid freight costs
of $500.
A week later, the home office instructed Katti
Branch to transfer this merchandise to Danddi
Branch. Katti paid $400 for the transfer.
If the merchandise had been shipped directly
from the home office to Danddi, the freight
costs would have been $600.

Accounting for Branches


Transactions between Branches
(contd.)
Journal entries for these transactions are:
In Accounting Records of Home Office:

Investment in Katti Branch 8,500


Inventory 8,000 Cash
500

Investment in Danddi Branch 8,600 Excess


Freight Expense 300 Investment
in Katti Branch
8,900

Accounting for Branches


Transactions between Branches
(contd.)
In Accounting Records of Katti Branch:
Freight In (or Inventory) 500
Inventories 8,000
Home Office 8,500

Home Office 8,900


Inventories 8,000
Freight-in 500
Cash 400

Accounting for Branches


Transactions between Branches
(contd.)
In Accounting Records of Danddi

Branch:

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

Accounting for Branches