chapter 4
DESCRIPTION
Chapter 4. Accounting for Branches and Combined Financial Statements. Objectives of this Chapter. To learn the accounting and reporting for segments (i.e., branches and division) of a business entity. Branches and Divisions. - PowerPoint PPT PresentationTRANSCRIPT
ACCT 501
Chapter 4
Accounting for Branches and Combined Financial Statements
Accounting for Branches 2
Objectives of this Chapter
To learn the accounting and reporting for segments (i.e., branches and division) of a business entity.
Accounting for Branches 3
Branches and Divisions
Branches and divisions are separate economic and accounting entities from their home office. However, they are not separate legal entities from their home office.
Accounting for Branches 4
Branches and Divisions (contd.)
Branch: a business unit located at some distance from the home office. This unit carries merchandise obtained from the home office, makes sales, approves customers’ credit, makes collections from its customers, and remits cash received.
Accounting for Branches 5
Branches and Divisions (contd.)
Divisions: a segment of a business entity which generally has more autonomy than a branch. Accounting for a division not operated as a separate corporation (i.e., subsidiary company) is similar to that of branches.
Accounting for Branches 6
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 7
Start-up Costs of Opening New Branches
Based on Statement of Position 98-5 (SOP 98-5) “Reporting on the Costs of Start-up Activities”, all start-up costs, including costs associated with organizing a branch or division should be expensed in the accounting period in which the costs are incurred.
Accounting for Branches 8
Accounting System for a Branch
Two alternative systems:
1. The branch does not maintain a complete set of accounting records. The home office serves only as an accounting and control center for the branches.
Accounting for Branches 9
Accounting System for a Branch (contd.)
2. The branch maintains a complete set of accounting records consisting of journal entries and ledger accounts. Financial statements are prepared by the branch account and forwarded to the home office.
Accounting for Branches 10
Accounting System for a Branch (contd.)
This chapter focuses on the second system that the branch maintains its own accounting records.
Accounting for Branches 11
Reciprocal Ledger Accounts Used by the Branch and Home Office
Home Office Ledger Account:
This account is used by the branch to account for all transactions with the home office. It is credited for all cash, merchandise or other assets provided by the home office to the branch. It is debited for all cash, merchandise, or other assets sent by the branch to the home office or to other branches.
Accounting for Branches 12
Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.)
Home Office Ledger Account:
This account represents the net investment by the home office in the branch. At the end of a period, the balance of Income Summary account of a branch is closed to the Home Office account.
Accounting for Branches 13
Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.)
Investment in Branch Ledger Account:
This account is a reciprocal ledger account (to Home Office account) used by the home office to account for any transactions with the branches. It is debited for cash, merchandise and services provided to the branch by the home office and for the net income reported by the branch.
Accounting for Branches 14
Reciprocal Ledger Accounts Used by the Branch and Home Office (contd.)
Investment in Branch Ledger Account:
It is credited for cash, or other assets received from the branch, and for net losses reported by the branch.
Accounting for Branches 15
Acquisition of Plant Assets Used in Branch
If a plant asset is acquired by the home office for a branch’s usage and the accounting record for the plant asset is maintained by the home office, the accounting treatments are:
Accounting for Branches 16
Acquisition of Plant Assets Used in Branch (contd.)
For the home office: debit a plant asset account: branch, credit cash or a liability account.
For the branch: no entry.
Accounting for Branches 17
Acquisition of Plant Assets Used in Branch (contd.)
If a plant asset is acquired by a branch for its usage but the accounting record for this plant asset is maintained by the home office, the accounting treatments are:
Accounting for Branches 18
Acquisition of Plant Assets Used in Branch (contd.)
For the branch: debit Home Office and credit cash or a liability account.
For the home office: debit a plant asset account: branch, and credit Investment in Branch account.
Accounting for Branches 19
Expense Incurred by Home Office and Allocated to Branches The home office may acquire plant assets
and insurance for these assets. These plant assets are carried in the home office accounting record but used by branches.
The home office may pay some taxes on behalf of branches, and arrange for advertising that benefits all branches.
Accounting for Branches 20
Expense Incurred by Home Office and Allocated to Branches (contd.) These expenses are usually allocated
to branches in determining net income of branches.
These expenses include depr. expense for the plant assets purchased by home office but used by branches.
Accounting for Branches 21
Expense Incurred by Home Office and Allocated to Branches (contd.)
If the home office chooses to allocate these expenses to branches, the accounting treatments are:
a. For the home office: debit Investment in Branch account, credit expense account. b. For the branch: debit expense account, credit Home Office account.
Accounting for Branches 22
Interest Charged by the Home office on the Capital Invested in Branches
When the home office serves only as an
accounting and control center without any
sales, most or all of its expenses may be
allocated to the branches.
In additional, the home office may charge
each branch interest on the capital invested
in each branch.
Accounting for Branches 23
Interest Charged by the Home office on the Capital Invested in Branches (contd.)
Such interest revenue recognized by
the home office should be offset with
the interest expense recognized by the
branches in the combined financial
statements.
Accounting for Branches 24
Alternative Methods of Billing Merchandise Shipments to Branches Three alternative methods are available to
the home office in billing the merchandise shipped to the branches:
a. billed at the home office cost,
b. billed at a percentage above the home office cost, and
c. billed at the branch’s retail selling price.
Accounting for Branches 25
Billed at the home office cost:
Strength: widely used because of its simplicity
Weakness: attributes all gross profits of the business to the branches.
Accounting for Branches 26
Billed at a percentage above home office cost: Strength: is able to allocate a
reasonable gross profit to the home office.
Weakness: the net income reported by the branch may be understated and the ending inventories at branch are overstated for the enterprise as a whole.
Accounting for Branches 27
Billed at a percentage above home office cost: (contd.)
Thus, for the combined financial statement, the home office must eliminate the excess of billed prices over cost (intracompany profits).
Accounting for Branches 28
Billed at branch retail selling prices:
Strength: to increase the internal control over inventories at branches.
Weakness: no gross profit assigned to the branches and the branch’s net loss will equal its operating expenses.
Accounting for Branches 29
Separate Financial Statements for Branch and for Home Office (for internal use only)
Separate financial statements for branches should be prepared so that management can evaluate the performance of each branch.
The branch’s financial statements may be revised by the home office to include the allocated expenses incurred by the home office.
Accounting for Branches 30
Separate Financial Statements for Branch and for Home Office (for internal use only) (contd.)
Also, the financial statements of branches should be revised to eliminate any intracompany profits on merchandise shipments or interest charge on capital investments.
Accounting for Branches 31
Combined financial Statements for Home Office and Branch (for external use)
For investors, the home office and branches are a single business entity.
Thus, combined financial statements should be prepared for external users.
A four-column work sheet paper is used to facilitate the preparation of the combined financial statement.
Accounting for Branches 32
Combined financial Statements for Home Office and Branch (for external use)(contd.)
In preparing the combined financial statements, the following accounts should be eliminated:
a. Reciprocal ledger accounts
b. Any intracompany profits or losses.
Accounting for Branches 33
Combined financial Statements for Home Office and Branch (for external use)(contd.)
c. Any receivables and payables between the home office and the branch (or between two branches).
The rest of accounts are just summed
together for the combined financial statements.
Accounting for Branches 34
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 35
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 36
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.) Expenses, such as advertising and
insurance, incurred by the home office on behalf of the branch, are billed to the branch.
Transactions and events during the first year (1999) of operations of Mason Branch are summarized below (start-up costs are disregarded):
Accounting for Branches 37
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.)1. Cash of $1,000 was forwarded by the
home office to 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 38
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 39
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 40
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.) These transactions and events are
recorded by the home office and by Mason Branch as follows:
Home Office Accounting Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
1.Investment in Mason Branch 1,000
Cash 1,000
Cash 1,000
Home Office 1,000
Accounting for Branches 41
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.)
Home Office Accounting Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
2. Investment in Mason
Branch 60,000
Inventories 60,000
Inventories 60,000 Home Office 60,000
3. Equipment: Mason
Branch 500
Home Office 500
Investment in Mason
Branch 500
Cash 500
Accounting for Branches 42
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.)
Home Office Accounting Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
4. None Trade Accounts
Receivable 80,000Cost of Goods Sold 45,000
Sales 80,000
Inventories 45,000
Accounting for Branches 43
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.)
Home Office Accounting Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
5. None Cash 62,000
Trade
Account
Receivable 62,0006. None Operating
Expenses 20,000
Cash 20,000
Accounting for Branches 44
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.)
Home Office Accounting Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
7. Cash 37,500 Home Office 37,500
Investment in Mason
Branch 37,500
Cash 37,500
8. Investment in Mason
Branch 3,000
Operating
Expenses 3,000
Operating
Expenses 3,000
Home Office 3,000
Accounting for Branches 45
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.) Two Reciprocal Ledger Accounts (prior to adjusting and
closing entries):Investment in Mason Branch
Date Explanation Debit Credit Balance
1999 Cash sent to branchMerchandise billed to branch at home office costEquipment acquired by branch, carried in home office accounting recordsCash received from branchOperating expenses billed to branch
1,000
60,000
3,000
50037,500
1,000 dr
61,000 dr
60,500 dr23,000 dr
26,000 dr
Accounting for Branches 46
Combined financial Statements for Home Office and Branch (for external use)(contd.)
Example I: (contd.)Home Office
Date Explanation Debit Credit Balance1999 Cash received from home
officeMerchandise received from
home officeEquipment acquiredCash sent to home officeOperating expenses billed
by home office
500
37,500
1,000
60,000
3,000
1,000 cr
61,000 cr
60,500 cr
23,000 cr
26,000 cr
Accounting for Branches 47
Working Paper for Combined financial Statements--Example I The following working paper for combined
financial statements serves three purposes:
1) to eliminate any intracompany profits or losses,
2) to eliminate the reciprocal accounts, &
3) to combine ledger accounts balances of home office and branches.
Accounting for Branches 48
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 49
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 50
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 51
Working Paper for Combined financial Statements--Example I (contd.)
-0--0--0-Totals
87,00012,00075,000
Net Income (to statement of retained earnings below)
113,00023,00090,000Operating expenses
280,00045,000235,000Cost of goods sold
(48,000)(80,000)(400,000)Sales
Income Statement
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office CombinedEliminations
Adjusted Trial Balances
Accounting for Branches 52
Working Paper for Combined financial Statements--Example I (contd.)
-0-Totals
117,000
Retained earnings, Dec.31,1999 (to balance sheet below)
40,00040,000Dividends declared
(87,000)(12,000)(75,000)
Net(income) (from incomes statement above)
(70,000)(70,000)Retained earnings, Jan. 1, 1999
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office
CombinedEliminations
Adjusted Trial Balances
Statement of Retained Earnings
Accounting for Branches 53
Working Paper for Combined financial Statements--Example I (contd.)
(10,000)(10,000)
Accumulated depreciation of equipment
(a) (26,000)26,000
Investment in Mason Branch
60,00015,00045,000Inventories
57,00018,00039,000
Trade accounts receivable (net)
30,0005,00025,000Cash
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office
CombinedEliminations
Adjusted Trial Balances
Balance Sheet
Equipment 150,000 150,000
Accounting for Branches 54
Working Paper for Combined financial Statements--Example I (contd.)
-0--0--0--0-Totals
(117,000)
Retained earnings (from statement of retained earnings above)
(150,000)(150,000)Common stock, $10 par
(a) (26,000)(26,000)Home Office
(20,000)(20,000)Trade accounts payable
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office
CombinedEliminations
Adjusted Trial Balances
Balance Sheet (contd.)
(a) To eliminate reciprocal ledger account balances* the elimination appears in the working paper only
Accounting for Branches 55
Combined Financial Statements -- Example I
SMALDINO COMPANYIncome Statement
For Year Ended December 31, 1999
$ 5.80
Basic earnings per share of common stock
$ 87,000Net Income113,000Operating expenses
$ 200,000Gross margin on sales280,000Cost of goods sold
$ 480,000Sales
Accounting for Branches 56
Combined Financial Statements -- Example I (contd.)
SMALDINO COMPANYStatement of Retained Earnings
For Year Ended December 31, 1999
$ 117,000Retained earnings, end of year40,000Less: Dividends ($2.67 per share)
$ 157,000Subtotal87,000Add: Net income
$ 70,000Retained earnings, beginning of year
Accounting for Branches 57
Combined Financial Statements -- Example I (contd.)
SMALDINO COMPANYBalance Sheet
December 31, 1999
$287,000Total assets
140,00010,000Less: Accumulated depreciation
$150,000Equipment
60,000Inventories
57,000Trade accounts receivable (net)
$ 30,000CashAssets
Accounting for Branches 58
Combined Financial Statements -- Example I (contd.)
SMALDINO COMPANYBalance Sheet (contd.), December 31, 1999
$287,000Total liabilities & stockholders’
equity
267,000117,000 Retained earnings $150,000
Common stock, $10 par, 15,000 shares authorized, issued, and outstanding
Stockholders’ equity
$20,000 Trade accounts payable
LiabilitiesLiabilities & Stockholders’ Equity
Accounting for Branches 59
Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/1999 (perpetual inventory system):
Home Office Accounting Records Adjusting and
Closing Entries:
Mason Branch Accounting Records Closing Entries:
None Sales 80,000
Cost of Goods Sold 45,000Operating Expenses 23,000Income Summary 12,000
Accounting for Branches 60
Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/1999 (perpetual inventory system): (contd.)
Home Office Accounting Records Adjusting and
Closing Entries:
Mason Branch Accounting Records Closing Entries:
Investment in Mason
Branch 12,000
Income
Summary 12,000Income: Mason
Branch 12,000
Home Office 12,000
Income: Mason
Branch 12,000
None
Income Summary 12,000
Accounting for Branches 61
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 62
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 Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
Investment in Mason Branch 90,000 Inventories 90,000
Inventories 60,000 Home Office 90,000Allowance for Overvaluation of Inventories: Mason Branch 30,000
Accounting for Branches 63
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.
Example II (textbook p136-p141):Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)
Accounting for Branches 64
SMALDINO COMPANYFlow of Merchandise for Mason Branch During 1999
Example II (textbook p136-p141):Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)
$22,500$45,000$67,500Cost of goods sold
7,50015,00022,500Less: Ending inventories
$30,000$60,000$90,000
Add: Shipments from home office
$30,000$60,000$90,000
Beginning inventories
Markup (50% of Cost;33 1/3 % of Billed Price)
Home Office Cost
Billed Price
Available for sale
Accounting for Branches 65
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 66
Working Paper for Example II (contd.)
-0--0--0-Totals
87,000(b) 22,500(10,500)75,000
Net Income(loss) (to statement of retained earnings below)
113,00023,00090,000Operating expenses
28,000(a) (22,500)67,500235,000Cost of goods sold
(48,000)(80,000)(400,000)Sales
Income Statement
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office CombinedEliminations
Adjusted Trial Balances
Accounting for Branches 67
Working Paper for Example II (contd.)
-0-Totals
117,000
Retained earnings, Dec.31,1999 (to balance sheet below)
40,00040,000Dividends declared
(87,000)(10,500)(75,000)
Net(income) loss (from incomes statement above)
(70,000)(70,000)Retained earnings, Jan. 1, 1999
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office
CombinedEliminations
Adjusted Trial Balances
Statement of Retained Earnings
(b) (22,500)
Accounting for Branches 68
Working Paper for Example II (contd.)
150,000150,000Equipment
(c) (56,000)56,000
Investment in Mason Branch
60,000(a) (7,500)22, 50045,000Inventories
57,00018,00039,000
Trade accounts receivable (net)
30,0005,00025,000Cash
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office
CombinedEliminations
Adjusted Trial Balances
Balance Sheet
Allowance for overvaluation of inventories: Mason Branch
(30,000) (a) 30,000
Accounting for Branches 69
Working Paper for Example II (contd.)
-0--0--0--0-Totals
(117,000)
Retained earnings(from statement of retained earnings above)
(150,000)(150,000)Common stock, $10 par
(c) (56,000)(56,000)Home Office
(10,000)(10,000)
Trade accounts payable
Dr (Cr)Dr (Cr)Dr(Cr)Dr (Cr)
Mason Branch
Home Office
CombinedEliminations
Adjusted Trial Balances
Balance Sheet (contd.)Accumulated depreciation of inventories: Mason Branch
(20,000) (20,000)
Accounting for Branches 70
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) Branch Closing Entries--The closing
entries for the branch at the end of 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 71
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
Home Office 10,500
Income Summary 10,500
To close the net loss in the Income Summary account to the Home Office account
Accounting for Branches 72
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) After the closing entries, the Home Office
ledger account should have a balance of $45,500.
Note: Home Office balance prior to the closing entries equals $56,000. $56,000-net loss of $10,500 = $45,500 (net loss decreases Home Office credit balance).
Accounting for Branches 73
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
Home Office Adjusting and Closing Entries
Income: Mason Branch 10,500
Investment in Mason Branch
10,500
To record net loss reported by branch
Accounting for Branches 74
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
Allowance for Overvaluation of Inventories: 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.
Home Office Adjusting and Closing Entries (contd.)
Accounting for Branches 75
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
Home Office Adjusting and Closing Entries (contd.)
Realize Gross Profit: Mason Branch Sales
22,500
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 76
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) After posting the above entries, the account
balance for the following accounts is:
Investment in Mason Branch =45,500(debit)*
Allowance for Overvaluation of Inventories: Mason Branch
=7,500(credit)**
Realized Gross Profit: Mason Branch
= 0
Income: Mason Branch = 0
* Balance prior to the above entries equals $56,000. $56,000- 10,500 (net loss of the branch reduces the debit balance of the Investment account) = $45,500.
** $30,000-22,500 = $7,500.
Accounting for Branches 77
Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.)
Similar working paper eliminations 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 78
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 79
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 80
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 81
Periodic Inventory System (contd.)
Example: (contd.)Home Office Accounting Records Journal Entries:
Mason Branch Accounting Records Journal Entries:
Investment in Mason Branch 90,000
Shipments from Home Office 120,000
Home Office 120,000Shipments to Mason Branch 80,000Allowance for Overvaluation of Inventories: Mason Branch 40,000
None Cash (or Trade Accounts Receivable) 150,000
Sales 150,000
Accounting for Branches 82
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 COMPANYFlow of Merchandise for Mason Branch During 2000
Periodic Inventory System (contd.)
Example: (contd.)
Available for sale
$37,500$75,000$112,500Cost of goods sold
(10,000)(20,000)(30,000)Less: Ending inventories
$47,500$95,000$142,500
Add: Shipments from home office
40,00080,000120,000
Beginning inventories
Markup (50% of Cost;33 1/3 % of Billed Price)
Home Office Cost
Billed Price
$22,500 $15,000 $7,500
Accounting for Branches 83
Periodic Inventory System (contd.)
Example: (contd.) The activities for the branch for 2000 are reflected
in the following two home office ledger accounts and the reciprocal Home Office ledger account of the branch: Investment in Mason Branch
Date Explanation Debit Credit Balance2000 Balance, Dec. 31, 1999
Merchandise billed to branch at markup of 50% above home office cost, or 33 1/3 % of billed priceCash received from branchOperating expenses billed to branch
120,000
4,500
113,000
45,500 dr
165,500dr52,500 dr
57,000 dr
Accounting for Branches 84
Periodic Inventory System (contd.)
Example: (contd.)Allowance for Overvaluation of Inventories:
Mason BranchDate Explanation Debit Credit Balance2000 Balance, Dec. 31,
19997,500 cr
Makeup on merchandise shipped to branch during 2000 (50% of cost) 40,000 47,500 cr
Accounting for Branches 85
Periodic Inventory System (contd.)
Example: (contd.)Home Office
Date Explanation Debit Credit Balance2000 Balance, Dec. 31,
1999 45,500 crMerchandise receivable from home office 120,000 165,500 crCash sent to home office 113,000 52,500 crOperating expenses billed by Home office 4,500 57,000 cr
Accounting for Branches 86
Periodic Inventory System (contd.)
Example: (contd.) The working paper for combined financial
statements under the periodic inventory system is as follows:
Income Statement
Adjusted Trial BalancesEliminations CombinedHome
OfficeMason 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) 60,000Purchases 400,000 400,000
Shipments to Mason Branch (80,000) (a) 80,000
Accounting for Branches 87
Periodic Inventory System (contd.)
Example: (contd.)
Income Statement(contd.)
Adjusted Trial BalancesEliminations CombinedHome
OfficeMason Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Shipments from home office 120,000 (a) 80,000Inventories, Dec. 31,2000 (70,000) (30,000) (c) 10,000 (90,000)Operating expenses 120,000 27,500 147,500
Net Income( to statement of retained earnings below) 85,000 10,000 (d) 37,500 132,500
Totals -0- -0- -0-
Accounting for Branches 88
Periodic Inventory System (contd.)
Example: (contd.)
Statement of Retained Earnings
Adjusted Trial BalancesEliminations CombinedHome
OfficeMason 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
Totals -0-
Accounting for Branches 89
Periodic Inventory System (contd.)
Example: (contd.)
Balance Sheet
Adjusted Trial BalancesEliminations CombinedHome
OfficeMason Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Cash 30,000 9,000 39,000
Trade accounts receivable (net) 64,000 28,000 92,000Inventories, Dec. 31, 2000 70,000 30,000 (c) (10,000) 90,000Allowance for overvaluation of inventories : Mason Branch
(47,500)(a) 40,000
(b) 7,500Investment in Mason Branch 57,000 (e) (57,000)
Accounting for Branches 90
Periodic Inventory System (contd.)
Example: (contd.)
Balance Sheet(contd.)
Adjusted Trial BalancesElimination
sCombinedHome
OfficeMason Branch
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
Equipment 158,000 158,000
Accumulated depreciation of equipment (15,000) (15,000)Trade Account payable (24,500) (24,500)
Home office (57,000) (e) 57,000
Common stock, $10 par (150,000) (150,000)
Retained earnings (from statement of retained earnings above) (189,500)
Totals -0- -0- -0- -0-
Accounting for Branches 91
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 92
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.) 22,500Shipments from Home Office 120,000
CGS=22,500+120,000-30,000
Accounting for Branches 93
Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(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 94
Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.)
Home Office Adjusting (1 and 2) and Closing Entries (3) :
(1) Investment in Branch 10,000Income: Mason Branch 10,000
(2) Allowance for Overvaluation of Inventories 37,500
Realized Gross Profit : Mason Branch 37,500
Accounting for Branches 95
Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.)
(3) Realized Gross Profit 37,500
Income: Mason Branch 10,000
Income Summary 47,500
Accounting for Branches 96
Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.)
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 97
Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.)
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 98
Branch Closing Entries and Home Office Adjusting and Closing entries for the home office (with billing at above the cost and using a periodic inventory system):(contd.)
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 99
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 100
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 101
Reconciliation of Reciprocal Ledger Accounts (contd.)
Date Explanation Debit Credit Balance1999
Nov. 30 Balance 62,500 dr
Dec. 10 Cash received from branch 20,000 42,500 dr
27 Collection of branch trade accounts receivable
1,000 41,500 dr
29 Merchandise shipped to branch 8,000 49,500 dr
Investment in Arvin Branch (in accounting records of Home office)
Accounting for Branches 102
Reconciliation of Reciprocal Ledger Accounts (contd.)
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 receivable
2,000 41,500 cr
Home Office (in accounting records of Arvin Branch)
Accounting for Branches 103
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 104
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 105
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 106
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 107
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 108
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 109
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 110
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 111
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 112
Transactions between Branches (contd.)
In Accounting Records of Danddi Branch:
Inventories 8,000 Freight-in (or Inventories) 600
Home Office 8,600