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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

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Chapter 4 l.jpg

Chapter 4

Accounting for Branches and Combined Financial Statements


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Objectives of this Chapter

  • To learn the accounting and reporting for segments (i.e., branches and division) of a business entity.

Accounting for Branches


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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


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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


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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


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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


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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


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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


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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


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Accounting System for a Branch (contd.)

  • This chapter focuses on the second system that the branch maintains its own accounting records.

Accounting for Branches


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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


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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:

Accounting for Branches


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Combined financial Statements for Home Office and Branch (for external use)(contd.)Example I: (contd.)

Accounting for Branches


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Combined financial Statements for Home Office and Branch (for external use)(contd.)Example I: (contd.)

Accounting for Branches


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Combined financial Statements for Home Office and Branch (for external use)(contd.)Example I: (contd.)

Accounting for Branches


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Combined financial Statements for Home Office and Branch (for external use)(contd.)Example I: (contd.)

Accounting for Branches


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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

Accounting for Branches


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Combined financial Statements for Home Office and Branch (for external use)(contd.)Example I: (contd.)

  • Home Office

Accounting for Branches


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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


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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


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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


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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


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Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

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 earnings below)

75,000

12,000

87,000

Totals

-0-

-0-

-0-

Working Paper for Combined financial Statements--Example I (contd.)

Accounting for Branches


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Statement of Retained Earnings

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

Dr (Cr)

Dr(Cr)

Dr (Cr)

Dr (Cr)

Retained earnings, Jan. 1, 1999

(70,000)

(70,000)

Net(income) (from incomes statement above)

(75,000)

(12,000)

(87,000)

Dividends declared

40,000

40,000

Retained earnings, Dec.31,1999 (to balance sheet below)

117,000

Totals

-0-

Working Paper for Combined financial Statements--Example I (contd.)

Accounting for Branches


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Balance Sheet

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

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 equipment

(10,000)

(10,000)

Working Paper for Combined financial Statements--Example I (contd.)

Accounting for Branches


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Balance Sheet (contd.)

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason 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-

Working Paper for Combined financial Statements--Example I (contd.)

  • (a) To eliminate reciprocal ledger account balances

  • * the elimination appears in the working paper only

Accounting for Branches


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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

Combined Financial Statements -- Example I

  • SMALDINO COMPANY

  • Income Statement

  • For Year Ended December 31, 1999

Accounting for Branches


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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

Combined Financial Statements -- Example I (contd.)

  • SMALDINO COMPANY

  • Statement of Retained Earnings

  • For Year Ended December 31, 1999

Accounting for Branches


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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

Combined Financial Statements -- Example I (contd.)

  • SMALDINO COMPANY

  • Balance Sheet

  • December 31, 1999

Accounting for Branches


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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

Combined Financial Statements -- Example I (contd.)

  • SMALDINO COMPANY

  • Balance Sheet (contd.), December 31, 1999

Accounting for Branches


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

Accounting for Branches


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

Accounting for Branches


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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


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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):

Accounting for Branches


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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


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Billed Price

Home Office Cost

Markup (50% of Cost;33 1/3 % of Billed Price)

Beginning

inventories

$60,000

$30,000

$90,000

Add: Shipments

from home office

$60,000

$30,000

$90,000

Available for sale

Less: Ending

inventories

22,500

15,000

7,500

Cost of goods

sold

$67,500

$45,000

$22,500

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

Accounting for Branches


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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 l.jpg

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

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 earnings below)

75,000

(10,500)

(b) 22,500

87,000

Totals

-0-

-0-

-0-

Working Paper for Example II (contd.)

Accounting for Branches


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Statement of Retained Earnings

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

Dr (Cr)

Dr(Cr)

Dr (Cr)

Dr (Cr)

Retained earnings, Jan. 1, 1999

(70,000)

(70,000)

(b) (22,500)

Net(income) loss (from incomes statement above)

(75,000)

(10,500)

(87,000)

Dividends declared

40,000

40,000

Retained earnings, Dec.31,1999 (to balance sheet below)

117,000

Totals

-0-

Working Paper for Example II (contd.)

Accounting for Branches


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Balance Sheet

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

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

60,000

(a) (7,500)

Investment in Mason Branch

56,000

(c) (56,000)

(a) 30,000

Allowance for overvaluation of inventories: Mason Branch

(30,000)

150,000

150,000

Equipment

Working Paper for Example II (contd.)

Accounting for Branches


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Balance Sheet (contd.)

Adjusted Trial Balances

Eliminations

Combined

Home Office

Mason Branch

Dr (Cr)

Dr(Cr)

Dr (Cr)

Dr (Cr)

(10,000)

(10,000)

Accumulated depreciation of inventories: Mason Branch

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 earnings above)

(117,000)

Totals

-0-

-0-

-0-

-0-

Working Paper for Example II (contd.)

Accounting for Branches


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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:

Accounting for Branches


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

Accounting for Branches


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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


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

  • Home Office Adjusting and Closing Entries

Accounting for Branches


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

  • Home Office Adjusting and Closing Entries(contd.)

Accounting for Branches


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

  • Home Office Adjusting and Closing Entries(contd.)

Accounting for Branches


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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:

*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


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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


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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


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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


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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


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Periodic Inventory System (contd.)Example: (contd.)

Accounting for Branches


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Home Office Cost

Markup (50% of Cost;33 1/3 % of Billed Price)

Billed Price

Beginning

inventories

$22,500

$15,000

$7,500

120,000

80,000

40,000

Add: Shipments

from home office

$95,000

$47,500

Available for sale

$142,500

Less: Ending

inventories

(30,000)

(20,000)

(10,000)

Cost of goods

sold

$112,500

$75,000

$37,500

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

Accounting for Branches


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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

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

  • Allowance for Overvaluation of Inventories: Mason Branch

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

  • Home Office

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

  • The working paper for combined financial statements under the periodic inventory system is as follows:

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

Accounting for Branches


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Periodic Inventory System (contd.)Example: (contd.)

Accounting for Branches


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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


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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 Sold112,500*

  • Inventory (beg.)22,500

  • Shipments from

  • Home Office120,000

  • CGS=22,500+120,000-30,000 

Accounting for Branches


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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)Sales150,000

  • CGS112,500

  • Operating expenses 27,500

  • Income Summary 10,000

  • (3) Income Summary10,000

  • Home Office 10,000

Accounting for Branches


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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 Branch10,000

  • Income: Mason Branch10,000

  • (2) Allowance for Overvaluation of Inventories37,500

  • Realized Gross Profit : Mason Branch37,500

Accounting for Branches


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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 Profit37,500

  • Income: Mason Branch10,000

  • Income Summary47,500

Accounting for Branches


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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


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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


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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


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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


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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


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Reconciliation of Reciprocal Ledger Accounts (contd.)

  • Investment in Arvin Branch

  • (in accounting records of Home office)

Accounting for Branches


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Reconciliation of Reciprocal Ledger Accounts (contd.)

  • Home Office

  • (in accounting records of Arvin Branch)

Accounting for Branches


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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


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Reconciliation of Reciprocal Ledger Accounts (contd.)

  • For Arvin Branch:

  • 1.Home Office1,000

  •  Trade Accounts Receivable1,000

  • 2.Inventory8,000

  • Home Office8,000

Accounting for Branches


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Reconciliation of Reciprocal Ledger Accounts (contd.)

  • For Mercer Home Office:

  • 1.Equipment: Arvin Brach3,000

  •  Investment in Branch: Arvin3,000

  • 2.Investment in Branch: Arvin2,000

  • Trade Accounts Receivable2,000

Accounting for Branches


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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


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    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


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    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


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    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


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    Transactions between Branches (contd.)

    • Journal entries for these transactions are:

    • In Accounting Records of Home Office:

    •  Investment in Katti Branch 8,500 Inventory8,000 Cash 500

    • Investment in Danddi Branch 8,600 Excess Freight Expense 300 Investment in Katti Branch8,900

    Accounting for Branches


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    Transactions between Branches (contd.)

    • In Accounting Records of Katti Branch:

    • Freight In (or Inventory) 500 Inventories8,000 Home Office8,500

    • Home Office8,900 Inventories8,000 Freight-in 500 Cash 400

    Accounting for Branches


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    Transactions between Branches (contd.)

    • In Accounting Records of Danddi Branch:

    • Inventories8,000 Freight-in (or Inventories) 600 Home Office8,600

    Accounting for Branches


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