chapter04(1) advanced accounting larson reference answers

CHAPTER 4ACCOUNTING 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., 2006Solutions 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 thingthe net assets of the branchfrom 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

The McGraw-Hill Companies, Inc., 2006148 Modern Advanced Accounting, 10/e

for the amount of the markup realized by the branch through sales of merchandise to outsiders. Thus, the end-of-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 EXERCISESEx. 4–1 1. c 8. a

2. b 9. a3. c 10. d4. a 11. d5. c 12. a (.20 1.20 = 16 2/3%)6. c 13. b7. a

Ex. 4–2 a. Journal entries in accounting records of home office:

2005Sept. 1 Investment in San Marino Branch 10,000

Cash 10,000

2 Investment in San Marino Branch 75,000Inventories 60,000Allowance for Overvaluation of Inventories:San Marino Branch ($60,000 x 0.25) 15,000

3 Equipment: San Marino Branch 3,000Investment in San Marino Branch 3,000

b. Journal entries in accounting records of San Marino Branch:2005Sept. 1 Cash 10,000

Home Office 10,000

2 Inventories [$60,000 (1.00 – 0.20)] 75,000Home Office 75,000

3 Home Office 3,000Cash 3,000


Ex. 4–3 a. Journal entries in accounting records of home office:

2005Sept. 1 Investment in Eastern Branch 50,000

Cash 50,000

4 Investment in Eastern Branch 125,000Shipments to Eastern Branch 95,000Allowance for Overvaluation ofInventories: Eastern Branch 30,000

11 Equipment: Eastern Branch 34,200Investment in Eastern Branch 34,200

b. Journal entries in accounting records of Eastern Branch:2005Sept. 3 Cash 50,000

Home Office 50,000

8 Shipments from Home Office 125,000Home Office 125,000


Ex. 4–4 Journal entries for Wilshire Branch of Watt Corporation:

2005Jan. 2 Inventories 100,000

Home Office 100,000To record merchandise shipped by home office.


To records acquisition of equipment to be carried in home office accounting records.

31 Operating Expenses 8,000Home Office 8,000

To records operating expenses allocated by home office.

Ex. 4–5 Journal entries for home office of Usc Company:

2005Jan. 10 Investment in Hoover Street Branch 60,000

Inventories ($60,000 x 0.80) 48,000Allowance 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 25,000Trade Accounts Receivable 25,000

To record collection of trade account receivable by branch.

31 Investment in Hoover Street Branch 18,000Operating Expenses 18,000

To record operating expenses allocated to branch.


Ex. 4–6 Journal entries for Lido Branch of Turbo Company:2005Aug. 6 Trade Accounts Payable 10,000

Home Office 10,000

14 Home Office 6,000Trade Accounts Receivable 6,000


Ex. 4–7 Journal entries for home office of Wardell Company:a. Investment in Branch 15,000

Cash 5,000Inventories 10,000

b. Investment in Branch 1,500Operating Expenses 1,500

c. Investment in Branch 416Notes Receivable 400Interest Revenue 16

d. No journal entry required

e. Investment in Branch 500Income: Branch 500

Journal entries for Exeter Branch of Wardell Company:a. Cash 5,000

Inventories 10,000Home Office 15,000

b. Operating Expenses 1,500Home Office 1,500

c. Cash 416Home Office 416

d. Trade Accounts Receivable 12,500Operating Expenses 2,500Cost of Goods Sold 8,000

Sales 12,500Cash 2,500Inventories 8,000

e. Income Summary 500Home Office 500

Ex. 4–8 Journal entry on Dec. 31, 2005, for Davis Branch of Leland Company:

Home Office 20,000Accumulated Depreciation of Equipment 750

Equipment 20,000Depreciation 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 20,000Accumulated Depreciation of Equipment: Davis Branch 750Investment in Davis Branch 20,000

To record equipment acquired by Davis Branch and related depreciation.

Ex. 4–9 FIGUEROA COMPANYFlow of Merchandise for Nine-Zero Branch

For Month Ended January 31, 2005

Billed Price

Cost Markup

Beginning inventories $120,000 $ 96,000 $ 24,000Add: Shipment from home office 500,000 400,000 100,000

Available for sale $620,000 $496,000 $124,000Less: Ending inventories 100,000 80,000 20,000Cost of goods sold $520,000 $416,000 $104,000

Ex. 4–10 Allowance for Overvaluation of Inventories: 32 Branch

Date Explanation Debit Credit Balance2005Mar. 31 Balance 30,000 crApr. 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 80,000Income: 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 80,000Realized 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 46,000Realized Gross Profit: Toledo Branch Sales 46,000

To adjust allowance account in the accounting records of home office, as follows:Balance, Mar. 1, 2005 $32,000Increase during March ($60,000 – $36,000) 24,000Balance before adjustment $56,000Less: Balance, Mar. 31, 2005 ($25,000 x 0.40) 10,000Required reduction in allowance account $46,000


Ex. 4–13 Journal entries for home office of Glendale Company:2005Sept. 17 Investment in Montrose Branch 400,000

Inventories 300,000Allowance for Overvaluation of Inventories:

Montrose Branch 100,000To 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 120,000To 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 60,000Income: 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 60,000Realized 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 30,000Shipments to Perez Branch 24,000Allowance 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 5,100Realized 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.) $3,000Increase during 2005 ($30,000 x 0.20) 6,000Balance before adjustment $9,000Less: Balance, Dec. 31, 2005 ($19,500 x 0.20) 3,900Required reduction in allowance account $5,100


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) $15,600Add: Shipments from home office, Jan. 1 to Jan. 28 (billed price) 71,500Merchandise available for sale, Jan. 1 to Jan. 28 (billed price) $87,100Billed price of net merchandise sold: [($51,840 – $3,220)

1.10] 44,200

Estimated inventories, Jan. 28, 2005 (billed price) $42,900Less: Inventories not damaged ($7,150 1.10) 6,500Estimated inventories destroyed (billed price) $36,400Less: Valuation in excess of cost ($36,400 x 3/13*) 8,400Estimated 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 36,400Inventories 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:2005May 31 Cash in Transit 10,000

Investment in Troy Branch 10,000b. Journal entries for Troy Branch of Argos Company:

2005May 31 Inventories in Transit 280,000

Home Office 280,000

31 Home Office 50,000Trade Accounts Receivable 50,000

CASESCase 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)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 CompanyFROM: ___________________________________________, ControllerDATE: ________________________SUBJECT: Separate Financial Statements for Southwark BranchYou 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 statementsSection 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)


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) 90Loss on Disposal of Office Equipment 900

Miscellaneous Expense ($110 x 5) 550Payable 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.


d. Correcting journal entries, Dec. 31, 2005, in accounting records of home office:Office Equipment: Lola Branch 2,400Depreciation Expense: Lola Branch 100

Office Equipment: Lola Branch 2,400Accumulated 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 100Investment in Lola Branch 100

To write off accumulated depreciation of equipment disposed of by branch.


20 Minutes, EasyHartman, Inc. Pr. 4–1

Hartman, Inc.Reno Branch

Journal EntriesShipments from Home Office ($300,000 x 1.20) 3 6 0 0 0 0Freight In 1 5 0 0 0

Home Office 3 7 5 0 0 0To record merchandise received from home officeand freight costs of $15,000.

Cash 4 5 0 0 0 0Sales 4 5 0 0 0 0

To record sales for 2005.

Operation Expenses 9 6 0 0 0Cash 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 0Sales 4 5 0 0 0 0

Shipments from Home Office 3 6 0 0 0 0Freight In 1 5 0 0 0Operating Expenses 9 6 0 0 0Income Summary 5 4 0 0 0

To record ending inventories and to close revenue andexpense ledger accounts. Ending inventories includeone-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 0Home Office 5 4 0 0 0

To close Income Summary ledger account.

Hartman, Inc.Home Office

Journal EntriesInvestment in Reno Branch 3 7 5 0 0 0

Shipments to Branch 3 0 0 0 0 0Allowance for Overvaluation of Inventories Reno Branch ($300,000 x 0.20) 6 0 0 0 0Cash 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 0Income : 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 0Realized Gross Profit: Reno Branch Sales 4 8 0 0 0

To reduce allowance to amount by which endinginventories are in excess of cost: $60,000 – ($72,000 x1/6) = $48,000.


20 Minutes, EasyLobo Company Pr. 4–2

a. Lobo CompanyHome Office and Wade Branch

Reconciliation of Reciprocal AccountsJanuary 31, 2005

Investment in Home OfficeWade Branch ledger account

ledger account (in Wade(in home office Branch

accounting accountingrecords) records)

Balances before adjustments $ 4 8 5 0 0 dr $ 3 5 7 0 0 crAdd: 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 CompanyJournal Entries in Accounting Records of Home Office

20 05Jan 31 Furniture: Wade Branch 1 2 0 0

Investment in Wade Branch 1 2 0 0To record acquisition of furniture by branch.

31 Cash in Transit 2 5 0 0Inventories in Transit 2 2 0 0

Investment in Wade Branch 4 7 0 0To record cash and merchandise in transit from branch.

b. (2) Lobo CompanyJournal Entries in Accounting Records of Wade Branch

20 05Jan 31 Inventories in Transit 6 0 0 0

Home Office 6 0 0 0To record shipment of merchandise in transit from home office.

31 Home Office 1 1 0 0Trade Accounts Receivable 1 1 0 0

To record collection of branch trade accounts receivable by home office.

31 Trade Accounts Payable 2 0 0 0Home Office 2 0 0 0

To record payment of branch trade accounts payableby home office.


30 Minutes, EasyStyler Corporation Pr. 4–3

Styler CorporationData Relating to Merchandise at Branch

January 1 through March 10, 2005Billed Selling prices, prices, 110%

Home office 120% of home of billedcost office cost prices

Beginning inventories, Jan 1 $ 1 5 0 0 0 $ 1 8 0 0 0 $ 1 9 8 0 0Add: 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 0Net sales by branch 3 4 0 0 0 4 0 8 0 0 4 4 8 8 0Inventories on date of fire, Mar. 10 $ 2 9 0 0 0 $ 3 4 8 0 0 $ 3 8 2 8 0Inventories after fire, Mar. 10 1 2 5 0 0 1 5 0 0 0 1 6 5 0 0Loss from fire, Mar. 10 $ 1 6 5 0 0 $ 1 9 8 0 0 $ 2 1 7 8 0

a. Styler CorporationJournal Entries in Accounting Records of Branch

March 10, 2005Loss from Fire 1 9 8 0 0

Inventories 1 9 8 0 0To record loss of merchandise in fire, at prices billed to branch by home office.

Home Office 1 9 8 0 0Loss from Fire 1 9 8 0 0

To close Loss from Fire ledger account.

b. Styler CorporationJournal Entries in Accounting Records of Home Office

March 10, 2005Loss from Fire: Branch 1 6 5 0 0Allowance for Overvaluation of Branch Inventories 3 3 0 0

Investment in Branch 1 9 8 0 0To record loss of merchandise at branch and to adjust allowance account by excess of billed prices of merchandise destroyed over costto home office.


30 Minutes, EasyYugo Company Pr. 4–4

a. Yugo CompanyComputation of Unadjusted Balance of Home Office Account

December 31, 2005Balance of investment in Ryble Branch ledger account of home office, before adjustment $ 5 5 5 0 0Add: Collection by branch of home office trade accounts receivable 5 6 0 Subtotal $ 5 6 0 6 0Less: 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 0Balance of Home Office ledger account of Ryble Branch before adjustments $ 4 9 6 8 0

b. Yugo CompanyJournal Entries in Accounting Records of Home Office

December 31, 2005(1) No journal entry required.

(2) Investment in Ryble Branch 5 6 0Trade Accounts Receivable 5 6 0

To record collection by branch of home office tradeaccounts receivable.

(3) Investment in Ryble Branch 2 0 0 0Charitable 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 0Investment in Ryble Branch 3 6 0

To correct accounts for error in recording branchnet income ($840 – $480 = $360).

(5) Inventory of Supplies 2 2 0Investment in Ryble Branch 2 2 0

To record receipt of supplies from branch.


Yugo Company (concluded) Pr. 4–4

c. Yugo CompanyJournal 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 0To record merchandise in transit from home office.

(2) No journal entry required.

(3) Cash in Transit 2 0 0 0Home Office 2 0 0 0

To record remittance of cash from home office.



d. Yugo CompanyReconciliation of Reciprocal Ledger Accounts

December 31, 2005Investment inRyble Branch Home Office

(In home office (in Ryble Branchaccounting accounting

records) records)Balances before adjustments (see a) $ 5 5 5 0 0 dr $ 4 9 6 8 0 crAdd: Shipment of merchandise in transit to branch 5 8 0 0

Collection by branch of home office trade accounts receivable 5 6 0Correction 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


40 Minutes, EasyTrudie Company Pr. 4–5

a. Trudie CompanyJournal 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 0Home Office 1 5 4 0 0 0

To record merchandise received from home office.

Cash 8 0 0 0 0Cost of Goods Sold 7 0 0 0 0

Sales 8 0 0 0 0Inventories 7 0 0 0 0

To record sales and cost of goods sold, determined onbasis of prices billed to branch by home office.

Operating Expenses 1 6 5 0 0Cash 1 6 5 0 0

To record operating expenses.

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

To adjust ending inventories at billed price to conformto physical count.

Sales 8 0 0 0 0Income Summary 8 0 4 0

Cost of Goods Sold ($70,000 + $1,540) 7 1 5 4 0Operating Expenses 1 6 5 0 0

To close revenue and expense ledger accounts.

Home Office 8 0 4 0Income 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 0Inventories 1 1 0 0 0 0Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) 4 4 0 0 0

To read merchandise shipped to Savoy Branch, billedat 40% above cost.

Income: Savoy Branch 8 0 4 0Investment in Savoy Branch 8 0 4 0

To record net loss for year reported by Savoy Branch.

(Continued on page 164)


Trudie Company (continued) Pr. 4–5

Trudie CompanyJournal 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 0To reduce allowance to amount by which ending inventories exceed cost, computed as follows:

Balance of allowance before adjustment $44,000Required 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) 23,560Required 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 profitaccount. (Income tax effects are disregarded.)

b. Trudie CompanyJournal 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 0Home Office 1 5 4 0 0 0

To record merchandise received from home office.

Cash 8 0 0 0 0Sales 8 0 0 0 0

To record sales.

Operating Expenses 1 6 5 0 0Cash 1 6 5 0 0

To record operating expenses.

Sales 8 0 0 0 0Inventories (end of first year) 8 2 4 6 0Income Summary 8 0 4 0

Shipments from Home Office 1 5 4 0 0 0Operating Expenses 1 6 5 0 0

To record ending inventories and to close revenue and expense accounts.

Home Office 8 0 4 0Income Summary 8 0 4 0

To close net loss for year.

(Continued on page 165)


Trudie Company (concluded) Pr. 4–5

Trudie CompanyJournal 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 0Shipments to Branch 1 1 0 0 0 0Allowance 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 0Investment 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 0To reduce allowance to amount by which ending inventories exceed cost (see part a).

Realized Gross Profit: Savoy Branch Sales 2 0 4 4 0Income Summary 1 2 4 0 0Income: Savoy Branch 8 0 4 0

To close branch net loss and realized gross profitaccount. (Income tax effects are disregarded.)


60 Minutes, MediumKosti-Marian Company Pr. 4–6

a. Kosti–Marian CompanyJournal Entries in Accounting Records of Home Office

20 05Dec. 31 Cash 1 7 0 0

Investment in Branch 1 7 0 0To 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 0Allowance for Overvaluation of Branch

Inventories 1 0 0 0 0To record intracompany markup on merchandiseshipments to branch: $110,000 – ($110,000 1.1) = $10,000

b. Kosti-Marian CompanyJournal Entries in Accounting Records of Branch

20 05Dec. 31 Cash in Transit 1 8 0 0

Home Office 1 8 0 0To record reimbursement check mailed by home office; the check is in transit.

31 Shipments from Home Office in Transit 5 5 0 0Home Office 5 5 0 0

To record shipment of merchandise in transit.

31 Freight-in from Home Office 2 7 5Current Liabilities 2 7 5

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


Kosti-Marian Company (concluded) Pr. 4–6c. Kosti-Marian Company

Working Paper for Combined Financial Statements of Home Office and BranchFor Year Ended December 31, 2005

(Periodic Inventory System: Billings above Cost)Adjusted trial balances

Home office Branch Eliminations Combineddr (cr) dr (cr) dr (cr) dr (cr)

Income statementSales ( 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 0Purchases 1 9 0 0 0 0 1 9 0 0 0 0Shipments to branch ( 1 0 0 0 0 0 ) (a) 1 0 0 0 0 0Shipments 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 0Inventories, 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 0Net income (to statement of retained earnings below) 4 4 0 0 0 9 5 2 0 (d) 9 6 0 0

S6 3 1 2 0

Totals - 0 - - 0 - - 0 -

Statement of retained earningsRetained 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 0Retained earnings, Dec. 31, 2005 (to balance sheet below) 8 2 1 2 0 Totals - 0 -

Balance sheetCash 2 3 7 0 0 1 1 9 7 5 3 5 6 7 5Inventories, Dec. 31, 2005 3 0 0 0 0 1 6 1 7 0 (c) ( 1 4 0 0 ) 4 4 7 7 0Investment 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 0Other assets (net) 1 9 7 0 0 0 4 8 4 5 0 2 4 5 4 5 0Current 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.


30 Minutes, MediumSolis Company Pr. 4–7

a. Solis CompanyWorking Paper for Combined Financial Statements of Home Office and Branch

For Year Ended December 31, 2005(Periodic Inventory System: Billings at Cost)

Adjusted trial balancesHome 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 0Operating expenses 6 9 5 0 0 2 1 9 0 0 9 1 4 0 0Net 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 earningsRetained 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 0Retained earnings, Dec. 31, 05 (to balance sheet below) 1 1 2 4 0 0 Totals - 0 -

Balance sheetCash 4 6 0 0 0 1 4 6 0 0 6 0 6 0 0Notes receivable 7 0 0 0 7 0 0 0Trade accounts receivable (net) 8 0 4 0 0 3 7 3 0 0 1 1 7 7 0 0Inventories 9 5 8 0 0 2 4 2 0 0 1 2 0 0 0 0Investment 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 0Trade 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.


Solis Company (concluded) Pr. 4–7

b. Solis CompanyClosing Entries for Branch

20 05Dec. 31 Sales 1 0 1 1 0 0

Income Summary 6 6 0 0Cost of Goods Sold 8 5 8 0 0Operating Expenses 2 1 9 0 0


31 Home Office 6 6 0 0Income Summary 6 6 0 0

To transfer net loss to Home Office ledger account.

c. Solis CompanyAdjusting and Closing Entries for Home Office

20 05Dec. 31 Loss: Branch 6 6 0 0

Investment in Branch 6 6 0 0To record net loss reported by branch.

31 Sales 3 9 4 0 0 0Cost of Goods Sold 2 0 0 5 0 0Operating Expenses 6 9 5 0 0Loss: Branch 6 6 0 0Income Summary 1 1 7 4 0 0


31 Income Summary 1 1 7 4 0 0Retained Earnings 1 1 7 4 0 0

To close combined net income to Retained Earningsledger account.


50 Minutes, MediumCalco Corporation Pr. 4–8

a. Calco CorporationJournal Entries in Accounting Records of Home Office

20 05Dec. 31 Equipment: Branch 5 0 0

Investment in Branch 5 0 0To record acquisition of equipment by branch.

31 Cash in Transit 5 0 0 0Investment in Branch 5 0 0 0

To record cash in transit from branch.

31 Sales 4 8 0 0 0Shipments to Branch 4 0 0 0 0Investment 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 0Income Summary 6 0 0 0 0

To record ending inventories.

b. Calco Corporation Journal Entries in Accounting Records of Branch

20 05Dec. 31 Home Office 2 0 0 0

Trade Accounts Receivable 2 0 0 0To record collection of trade accounts receivable byhome office.

31 Operating Expenses 4 5 0 0Home Office 4 5 0 0

To correct amount of expenses allocated to branch byhome office ($5,000 – $500 = $4,500).

31 Shipments from Home Office in Transit 3 0 0 0Home Office 3 0 0 0

To record shipment in transit from home office.

31 Home Office 8 0 0 0Shipments from Home Office 8 0 0 0

To eliminate intracompany markup on merchandisereceived from home office ($48,000 x 1/6 = $8,000).

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


Calco Corporation (concluded) Pr. 4–8

c. Calco CorporationWorking Paper to Summarize Operations

For Year Ended December 31, 2005Revenue 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 0Purchases 2 9 0 0 0 0 2 4 0 0 0 3 1 4 0 0 0Shipments 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 0Less: 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 0Operating 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.


60 Minutes, MediumKreshek Company Pr. 4–9

a. Kreshek CompanyReconciliation of Investment in Lee Branch Ledger Account and Home Office Account

For Quarter Ended April 30, 2005Investment 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 0Add:

Transposition error in recording shipment from home office ($7,840 recorded as $7,480) 3 6 0Collection by branch of home office trade accounts receivable 3 5 0 3 5 0Shipment delivered to branch on Feb. 14 not recorded (but should be) as payable by home office 2 7 5 0Corrected branch net income ($13,710 – $360 – $1,200 – $250 = $11,900) 1 1 9 0 0Operating 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 0Repair bill paid by branch for home office $ 3 7 5Excess 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


Kreshek Company (continued) Pr. 4–9

b. Kreshek CompanyCorrecting Entries in Accounting Records of Lee Branch

20 05Apr 30 Cost of Goods Sold 3 6 0

Home Office 3 6 0To correct error in recording amount of merchandisereceived from home office on Feb. 8, 2005[($49.00 – $46.75) x 160 = $360].

30 Trade Accounts Receivable 3 5 0Home Office 3 5 0

To record collection of trade accounts receivable ofhome office previously recorded in error as collectionof branch trade accounts receivable.

30 Operating Expenses 1 2 0 0Loss on Disposal of Equipment 2 5 0

Home Office 1 4 5 0To record operating expenses allocated to branch byhome office and loss reported on disposal of branchequipment.

30 Home Office 1 8 1 0Income Summary 1 8 1 0

To correct preliminary net income recorded for quarterended Apr. 30, 2005: $1,200 + $360 + $250 = $1,810.


Kreshek Company (concluded) Pr. 4–9

c. Kreshek CompanyCorrecting Entries in Accounting Records of Home Office

20 05Apr 30 Investment in Branch 3 5 0

Trade Accounts Receivable 3 5 0To record collection by branch of home office tradeaccounts receivable.

30 Investment in Branch 2 7 5 0Trade Accounts Payable 2 7 5 0

To record liability for merchandise received by branchon Feb. 14, 2005.

30 Investment in Branch 1 1 9 0 0Income: 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 5To record repair bill paid by branch on Apr. 29, 2005.

30 Inventories in Transit 5 2 0 5Investment in Branch 5 2 0 5

To record excess merchandise returned to homeoffice by branch on Apr. 30, 2005.


60 Minutes, StrongArnie’s Pr. 4–10a. Arnie’s

Journal Entries in Accounting Records of Home Office

20 05Dec. 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 0Cost of Goods Sold 8 4 0 0 0Allowance 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 0Investment in Branch 1 0 0 0 0

To record cash in transit from branch:Dec. 30, 2005 $ 3,000Dec. 31, 2005 7,000 Total cash in transit $10,000

b. Arnie’sJournal Entries in Accounting Records of Vida Branch

20 05Dec. 31 Operating Expenses 1 2 0 0 0

Home Office 1 2 0 0 0To record expense allocated to branch by the homeoffice.

31 Cash in Transit 3 0 0 0Home Office 3 0 0 0

To record cash in transit from home office.

31 Inventories in Transit 1 0 0 0 0Home Office 1 0 0 0 0

To record shipment of merchandise in transit from home office, determined as follows:

Inventories, Jan. 1, 2005 $ 6,000Shipments from home office 105,000 Subtotal $111,000Less: Cost of goods sold per branch accounting records $93,000 Inventories, Dec. 31,

2005, per branchaccounting records 8,000 101,000

Shipment of merchandise in transit from home office $ 10,000


Arnie’s (continued) Pr. 4–10

c. Arnie’sWorking Paper for Combined Financial Statements of Home Office and Branch

For Year Ended December 31, 2005(Period Inventory System: Billings above Cost)

Adjusted trial balancesHome 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 0Operating expenses 7 0 0 0 0 4 8 0 0 0 1 1 8 0 0 0Net 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 capitalArnold 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 0Arnold Nance, capital Dec. 31, 2005 (to balance sheet below) 2 2 7 4 0 0 Totals - 0 -

Balance sheetCash 4 1 0 0 0 1 6 0 0 0 5 7 0 0 0Trade accounts receivable (net) 2 0 0 0 0 2 2 0 0 0 4 2 0 0 0Inventories 4 0 0 0 0 1 8 0 0 0 (a) ( 3 6 0 0 ) 5 4 4 0 0Investment 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 0Equipment (net) 1 5 0 0 0 0 1 5 0 0 0 0Trade 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 0Arnold 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) ofbranch 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.


Arnie’s (concluded) Pr. 4–10

d. Arnie’sAdjusting 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 0To record net income reported by branch.

31 Allowance for Overvaluation of Inventories: Vida Branch 1 8 6 0 0Realized Gross Profit: Vida Branch Sales 1 8 6 0 0

To reduce allowance to amount by which endinginventories of branch exceed cost.

31 Income: Vida Branch 1 9 0 0 0Realized Gross Profit: Vida Branch Sales 1 8 6 0 0Sales 2 8 5 0 0 0

Cost of Goods Sold 1 6 6 0 0 0Operating Expenses 7 0 0 0 0Income Summary 8 6 6 0 0

To close revenue and expense accounts.

31 Income Summary 8 6 6 0 0Arnold Nance, Capital 8 6 6 0 0

To close Income Summary ledger account (net incomefor year) to proprietor’s capital account.

31 Arnold Nance, Capital 5 0 0 0 0Arnold Nance, Drawing 5 0 0 0 0

To close proprietor’s drawing ledger account to proprietor’s capital account.


chapter04(1) advanced accounting larson reference answers

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