Chapter 4 Accounting for Branches and Combined Financial

Chapter 4 Accounting for Branches and Combined Financial Statements ACCT 501

Objectives of this Chapter n To learn the accounting and reporting for segments (i. e. , branches and division) of a business entity. Accounting for Branches 2

Branches and Divisions n 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 3

Branches and Divisions (contd. ) n 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 4

Branches and Divisions (contd. ) n 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 5

Branches and Divisions (contd. ) n Divisions: Accounting for a division operated as a separate corporation is different from that of branches and will be discussed in latter chapters (611). Consolidated financial statements are required for these business organizations. Accounting for Branches 6

Start-up Costs of Opening New Branches n 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 7

Accounting System for a Branch n 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 8

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 9

Accounting System for a Branch (contd. ) n This chapter focuses on the second system that the branch maintains its own accounting records. Accounting for Branches 10

Reciprocal Ledger Accounts Used by the Branch and Home Office n 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 11

Reciprocal Ledger Accounts Used by the Branch and Home Office (contd. ) n 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 12

Reciprocal Ledger Accounts Used by the Branch and Home Office (contd. ) n 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 13

Reciprocal Ledger Accounts Used by the Branch and Home Office (contd. ) n 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 14

Acquisition of Plant Assets Used in Branch n 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 15

Acquisition of Plant Assets Used in Branch (contd. ) n n For the home office: debit a plant asset account: branch, credit cash or a liability account. For the branch: no entry. Accounting for Branches 16

Acquisition of Plant Assets Used in Branch (contd. ) n 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 17

Acquisition of Plant Assets Used in Branch (contd. ) n n 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 18

Expense Incurred by Home Office and Allocated to Branches n n 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 19

Expense Incurred by Home Office and Allocated to Branches (contd. ) n n 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 20

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: n 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 21

Interest Charged by the Home office on the Capital Invested in Branches n n 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 22

Interest Charged by the Home office on the Capital Invested in Branches (contd. ) n 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 23

Alternative Methods of Billing Merchandise Shipments to Branches n 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 24

Billed at the home office cost: n n Strength: widely used because of its simplicity Weakness: attributes all gross profits of the business to the branches. Accounting for Branches 25

Billed at a percentage above home office cost: n n 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 26

Billed at a percentage above home office cost: (contd. ) n Thus, for the combined financial statement, the home office must eliminate the excess of billed prices over cost (intracompany profits). Accounting for Branches 27

Billed at branch retail selling prices: n n 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 28

Separate Financial Statements for Branch and for Home Office (for internal use only) n n 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 29

Separate Financial Statements for Branch and for Home Office (for internal use only) (contd. ) n 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 30

Combined financial Statements for Home Office and Branch (for external use) n n n 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 31

Combined financial Statements for Home Office and Branch (for external use)(contd. ) n In preparing the combined financial statements, the following accounts should be eliminated: n a. Reciprocal ledger accounts n b. Any intracompany profits or losses. Accounting for Branches 32

Combined financial Statements for Home Office and Branch (for external use)(contd. ) n c. Any receivables and payables between the home office and the branch (or between two branches). n The rest of accounts are just summed together for the combined financial statements. Accounting for Branches 33

Combined financial Statements for Home Office and Branch (for external use)(contd. ) n Example I (textbook p 131 -p 135) : 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 34

Combined financial Statements for Home Office and Branch (for external use)(contd. ) Example I: (contd. ) n n 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 35

Combined financial Statements for Home Office and Branch (for external use)(contd. ) Example I: (contd. ) n n 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 36

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 37

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 38

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 39

Combined financial Statements for Home Office and Branch (for external use)(contd. ) Example I: (contd. ) n 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. 1. Investment in Cash 1, 000 Mason 2. Branch 1, 000 Cash 1, 000 Home Office 1, 000 Accounting for Branches 40

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 Home Office 60, 000 3. Equipment: Mason Home Office 500 Branch 500 Investment in Mason Cash Branch 500 Accounting for Branches 500 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: 4. None Trade Accounts Receivable 80, 000 Cost of Goods Sold 45, 000 Sales Inventories Accounting for Branches 80, 000 45, 000 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: 5. None Cash 6. None 62, 000 Trade Account Receivable 62, 000 Operating Expenses 20, 000 Cash 20, 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: 7. Cash Home Office 37, 500 Investment in Mason Branch 37, 500 8. Investment in Mason Branch 3, 000 Operating Expenses 3, 000 Cash 37, 500 Operating Expenses 3, 000 Home Office 3, 000 Accounting for Branches 44

Combined financial Statements for Home Office and Branch (for external use)(contd. ) Example I: (contd. ) Two Reciprocal Ledger Accounts (prior to adjusting n and closing entries): Investment in Mason Branch Date Explanation Debit Credit 1999 n. Cash sent to branch 1, 000 n. Merchandise billed to branch at home office cost 60, 000 n. Equipment acquired by branch, carried in home office accounting records 500 n. Cash received from 37, 500 branch n. Operating expenses billed 3, 000 to branch Accounting for Branches Balance 1, 000 dr 60, 500 dr 23, 000 dr 26, 000 dr 45

Combined financial Statements for Home Office and Branch (for external use)(contd. ) Example I: (contd. ) Home Office Date 1999 Explanation n. Cash received from home office n. Merchandise received from home office n. Equipment acquired n. Cash sent to home office n. Operating expenses billed by home office Debit Credit Balance 1, 000 cr 60, 000 61, 000 cr 500 60, 500 cr 37, 500 23, 000 cr Accounting for Branches 3, 000 26, 000 cr 46

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. n Accounting for Branches 47

Working Paper for Combined financial Statements--Example I (contd. ) n 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 48

Working Paper for Combined financial Statements--Example I (contd. ) n n n 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 49

Working Paper for Combined financial Statements--Example I (contd. ) n 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 50

Working Paper for Combined financial Statements--Example I (contd. ) Adjusted Trial Balances Home Office Mason Branch Dr (Cr) Dr(Cr) (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) Totals 75, 000 12, 000 87, 000 -0 - -0 - Eliminations Combined Dr (Cr) Income Statement Sales Accounting for Branches 51

Working Paper for Combined financial Statements--Example I (contd. ) Adjusted Trial Balances Home Mason Eliminations Combined Statement of Retained Office Branch Earnings Dr (Cr) Dr (Cr) Retained earnings, Jan. (70, 000) 1, 1999 Net(income) (from incomes statement (75, 000) (12, 000) (87, 000) above) Dividends declared 40, 000 Retained earnings, Dec. 31, 1999 (to balance sheet below) Totals 117, 000 -0 Accounting for Branches 52

Working Paper for Combined financial Statements--Example I (contd. ) Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch Equipment Accumulated depreciation of equipment Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr (Cr) 25, 000 30, 000 39, 000 18, 000 57, 000 45, 000 15, 000 60, 000 26, 000 150, 000 (a) (26, 000) 150, 000 (10, 000) Accounting for Branches 53

Working Paper for Combined financial Statements--Example I (contd. ) Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Balance Sheet Dr (Cr) Dr (Cr) (contd. ) Trade accounts payable (20, 000) Home Office Common stock, $10 par (150, 000) Retained earnings (from statement of retained earnings above) Totals -0 - (26, 000) (a) (26, 000) (150, 000) (117, 000) -0 - (a) To eliminate reciprocal ledger account balances * the elimination appears in the working paper only Accounting for Branches -0 - 54

Combined Financial Statements -- Example I SMALDINO COMPANY Income Statement For Year Ended December 31, 1999 Sales Cost of goods sold Gross margin on sales Operating expenses Net Income Basic earnings per share of common stock Accounting for Branches $ 480, 000 280, 000 $ 200, 000 113, 000 $ 87, 000 $ 5. 80 55

Combined Financial Statements -- Example I (contd. ) SMALDINO COMPANY Statement of Retained Earnings For Year Ended December 31, 1999 Retained earnings, beginning of year Add: Net income Subtotal Less: Dividends ($2. 67 per share) Retained earnings, end of year Accounting for Branches $ 70, 000 87, 000 $ 157, 000 40, 000 $ 117, 000 56

Combined Financial Statements -- Example I (contd. ) SMALDINO COMPANY Balance Sheet December 31, 1999 Assets Cash $ 30, 000 Trade accounts receivable (net) 57, 000 Inventories 60, 000 Equipment $150, 000 Less: Accumulated depreciation 10, 000 140, 000 Total assets $287, 000 Accounting for Branches 57

Combined Financial Statements -- Example I (contd. ) SMALDINO COMPANY Balance Sheet (contd. ), December 31, 1999 Liabilities & Stockholders’ Equity Liabilities Trade accounts payable $20, 000 Stockholders’ equity Common stock, $10 par, 15, 000 shares authorized, issued, and outstanding Retained earnings $150, 000 117, 000 Total liabilities & stockholders’ equity Accounting for Branches 267, 000 $287, 000 58

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: None Mason Branch Accounting Records Closing Entries: Sales 80, 000 Cost of Goods Sold 45, 000 Operating Expenses 23, 000 Income Summary 12, 000 Accounting for Branches 59

Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/1999 (perpetual inventory system): (contd. ) Home Office Accounting Mason Branch Accounting Records Adjusting and Records Closing Entries: Investment in Mason Income Branch 12, 000 Summary 12, 000 Income: Mason Home Office 12, 000 Branch 12, 000 Income: Mason None Branch 12, 000 Income Summary 12, 000 Accounting for Branches 60

Example II (textbook p 136 -p 141): Billing of Merchandise to Branches at Prices above Home Office Cost n n 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 61

Example II (textbook p 136 -p 141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd. ) n Journal entries for shipments to branch at prices above home office cost (perpetual inventory system): Home Office Accounting Records Journal Entries: Investment in Mason Branch 90, 000 Inventories 60, 000 Mason Branch Accounting Records Journal Entries: Inventories 90, 000 Home Office 90, 000 Allowance for Overvaluation of Inventories: Mason Branch 30, 000 Accounting for Branches 62

Example II (textbook p 136 -p 141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd. ) n 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 63

Example II (textbook p 136 -p 141): Billing of Merchandise to Branches at Prices above Home Office Cost (contd. ) SMALDINO COMPANY Flow of Merchandise for Mason Branch During 1999 Billed Home Markup (50% of Price Office Cost; 33 1/3 % of Cost Billed Price) Beginning inventories Add: Shipments $60, 000 $30, 000 $90, 000 from home office $60, 000 $30, 000 Available for sale $90, 000 Less: Ending inventories 22, 500 15, 000 7, 500 Cost of goods sold $67, 500 $45, 000 $22, 500 Accounting for Branches 64

Working Paper for Example II n 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 65

Working Paper for Example II (contd. ) Adjusted Trial Balances Home Office Mason Branch Dr (Cr) Dr(Cr) (400, 000) (80, 000) Cost of goods sold 235, 000 67, 500 Operating expenses 90, 000 23, 000 Net Income(loss) (to statement of retained earnings below) Totals 75, 000 (10, 500) -0 - Eliminations Combined Dr (Cr) Income Statement Sales (48, 000) (a) (22, 500) 28, 000 113, 000 (b) 22, 500 Accounting for Branches 87, 000 -066

Working Paper for Example II (contd. ) Adjusted Trial Balances Home Mason Eliminations Combined Statement of Retained Office Branch Earnings Dr (Cr) Dr (Cr) Retained earnings, Jan. (70, 000) 1, 1999 Net(income) loss (from incomes statement (75, 000) (10, 500) (b) (22, 500) (87, 000) above) Dividends declared 40, 000 Retained earnings, Dec. 31, 1999 (to balance sheet below) Totals 117, 000 -0 Accounting for Branches 67

Working Paper for Example II (contd. ) Balance Sheet Cash Trade accounts receivable (net) Inventories Investment in Mason Branch Allowance for overvaluation of inventories: Mason Branch Equipment Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr (Cr) 25, 000 30, 000 39, 000 18, 000 45, 000 22, 500 57, 000 (a) (7, 500) 56, 000 (c) (56, 000) (30, 000) (a) 30, 000 150, 000 60, 000 150, 000 Accounting for Branches 68

Working Paper for Example II (contd. ) Balance Sheet (contd. ) Accumulated depreciation of inventories: Mason Branch Trade accounts payable Home Office Common stock, $10 par Retained earnings(from statement of retained earnings above) Totals Adjusted Trial Balances Home Mason Eliminations Combined Office Branch Dr (Cr) Dr (Cr) (10, 000) (20, 000) (56, 000) (c) (56, 000) (150, 000) (117, 000) -0 - -0 Accounting for Branches -0 - -069

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) n Branch Closing Entries--The closing entries for the branch at the end of 1999 are as follows: Sales Income Summary Cost of Goods Sold Operating Expenses 80, 000 10, 500 67, 500 23, 000 To close revenue and expense ledger accounts Accounting for Branches 70

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) Home Office Income Summary 10, 500 To close the net loss in the Income Summary account to the Home Office account Accounting for Branches 71

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) n n 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 -net loss of $10, 500 = $45, 500 (net loss decreases Home Office credit balance). Accounting for Branches 72

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) Home Office Adjusting and Closing Entries Income: Mason Branch 10, 500 Investment in Mason 10, 500 Branch To record net loss reported by branch Accounting for Branches 73

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) Home Office Adjusting and Closing Entries (contd. ) Allowance for Overvaluation of Inventories: Mason Branch 22, 500 Realized Gross Profit: Mason Branch Sales 22, 500 To reduce allowance to amount by which ending inventories of branch exceed cost. Accounting for Branches 74

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) Home Office Adjusting and Closing Entries (contd. ) Realize Gross Profit: Mason 22, 500 Branch Sales Income: Mason Branch 10, 500 Income Summary 12, 000 To close branch net loss and realized gross profit to Income Summary ledger account (Income tax effects are disregarded. ) Accounting for Branches 75

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) n 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 Realized Gross Profit: Mason Branch Income: Mason Branch =7, 500(credit)** = 0 * Balance prior to the above entries equals $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 76

Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd. ) n 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 77

Periodic Inventory System n n Textbook (p 141 -p 144): 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 78

(contd. ) Periodic Inventory System 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). n Accounting for Branches 79

(contd. ) Periodic Inventory System Example: (contd. ) n n n 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 80

(contd. ) Periodic Inventory System Example: (contd. ) Home Office Accounting Records Journal Entries: Investment in Mason Branch 90, 000 Shipments to Mason Branch 80, 000 Allowance for Overvaluation of Inventories: Mason Branch 40, 000 None Mason Branch Accounting Records Journal Entries: Shipments from Home Office 120, 000 Home Office 120, 000 Cash (or Trade Accounts Receivable) 150, 000 Sales 150, 000 Accounting for Branches 81

(contd. ) Periodic Inventory System Example: (contd. ) The branch inventories at the end of 2000 amounted to $30, 000. The flow of merchandise for Mason Branch of year 2000 summarized below: SMALDINO COMPANY Flow of Merchandise for Mason Branch During 2000 Home Markup (50% of Billed Office Cost; 33 1/3 % of Price Cost Billed Price) Beginning inventories $7, 500 $22, 500 $15, 000 Add: Shipments 120, 000 80, 000 40, 000 from home office Available for sale $142, 500 $95, 000 $47, 500 Less: Ending inventories (30, 000) (20, 000) (10, 000) Cost of goods sold $112, 500 $75, 000 $37, 500 n Accounting for Branches 82

(contd. ) Periodic Inventory System Example: (contd. ) n 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 Dat Explanation Debit Credit Balance e 200 n. Balance, Dec. 31, 45, 500 0 1999 dr n. Merchandise billed to branch at markup of 50% 120, 000 above 165, 500 113, 00 home office cost, or 33 dr 0 1/3 52, 500 4, 500 Accounting for Branches 83 % of billed price

(contd. ) Periodic Inventory System Example: (contd. ) Allowance for Overvaluation of Inventories: Mason Branch Date Explanation 2000 n. Balance, Dec. 31, 1999 n. Makeup on merchandise shipped to branch during 2000 (50% of cost) Debit Credit Balance 7, 500 cr 40, 000 47, 500 cr Accounting for Branches 84

Periodic Inventory System (contd. ) Example: (contd. ) Home Office Dat Explanation e 200 n. Balance, Dec. 0 31, 1999 n. Merchandise receivable from home office Cash sent to home Debit Credit Balance 45, 500 cr 120, 00 165, 500 0 cr n 113, 00 Accounting for Branches 52, 500 cr 85

(contd. ) Periodic Inventory System Example: (contd. ) n The working paper for combined financial statements under the periodic inventory system is as follows: Income Statement Sales Inventories, Dec. 31, 1999 Purchases Shipments to Mason Branch Adjusted Trial Balances Eliminations Combined Home Mason Office Branch Dr (Cr) (500, 000) (150, 000) (650, 000) 45, 000 400, 000 (80, 000) 22, 500 (b) (7, 500) 60, 000 400, 000 (a) 80, 000 Accounting for Branches 86

(contd. ) Periodic Inventory System Example: (contd. ) Income Statement (contd. ) Shipments from home office Inventories, Dec. 31, 2000 Operating expenses Net Income( to statement of retained earnings below) Totals Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Eliminations Combined Dr (Cr) 120, 000 (a) 80, 000 (70, 000) 120, 000 (30, 000) 27, 500 (c) 10, 000 (90, 000) 147, 500 85, 000 -0 - 10, 000 -0 - (d) 37, 500 132, 500 -0 - Accounting for Branches 87

(contd. ) Periodic Inventory System Example: (contd. ) Statement of Retained Earnings Retained earnings, Dec. 31, 1999 Net Income (from income statement above) Dividends declared Retained earnings, Dec. 31, 2000 (to balance sheet below) Adjusted Trial Balances Home Mason Office Branch Dr (Cr) Eliminations Combined Dr (Cr) (117, 000) (85, 000) 60, 000 (10, 000) 27, 500 85, 000 10, 000 (d) (37, 500) Totals Accounting for Branches (132, 500) 60, 000 189, 500 -088

(contd. ) Periodic Inventory System Example: (contd. ) Balance Sheet Cash Trade accounts receivable (net) Inventories, Dec. 31, 2000 Allowance for overvaluation of inventories : Mason Branch Investment in Mason Branch Adjusted Trial Balances Eliminations Combined Home Mason Office Branch Dr (Cr) 30, 000 9, 000 39, 000 64, 000 28, 000 70, 000 30, 000 (47, 500) 57, 000 92, 000 (c) (10, 000) 90, 000 (a) 40, 000 (b) 7, 500 (e) (57, 000) Accounting for Branches 89

Periodic Inventory System (contd. ) Example: (contd. ) Balance Sheet (contd. ) Equipment Accumulated depreciation of equipment Trade Account payable Home office Common stock, $10 par Retained earnings (from statement of retained earnings above) Totals Adjusted Trial Balances Home Mason Office Branch Dr (Cr) 158, 000 Elimination Combined s Dr (Cr) (15, 000) (24, 500) (57, 000) (e) 57, 000 (150, 000) -0 - Dr (Cr) 158, 000 (150, 000) -0 Accounting for Branches -0 - (189, 500) -090

(contd. ) Periodic Inventory System 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 91

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): n Branch Closing Entries: (1)Inventory (ending) 30, 000 Cost of Goods Sold 112, 500* Inventory (beg. ) 22, 500 Shipments from Home Office 120, 000 CGS=22, 500+120, 000 -30, 000 Accounting for Branches 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): (contd. ) (2)Sales 150, 000 CGS 112, 500 Operating expenses 27, 500 Income Summary 10, 000 (3) Income Summary Home Office 10, 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. ) n Home Office Adjusting (1 and 2) and Closing Entries (3) : (1) Investment in Branch 10, 000 Income: Mason Branch 10, 000 (2) Allowance for Overvaluation of Inventories 37, 500 Realized Gross Profit : Mason Branch 37, 500 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. ) (3) Realized Gross Profit Income: Mason Branch Income Summary 37, 500 10, 000 47, 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. ) n 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 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. ) n Investment in Mason Branch = $67, 000 (dr. ) (57, 000+10, 000) Allowance for Overvaluation of Inventories = $10, 000 (cr. ) (47, 500 -37, 500) n 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. ) n Realized Gross Profit = $0 (37, 500 - 37, 500) n Income: Mason Branch = $0 (10, 000 -10, 000) n Home Office (a reciprocal account of Investment) = $67, 000 (cr. ) (57, 000+10, 000) Accounting for Branches 98

Reconciliation of Reciprocal Ledger Accounts n n 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 99

Reconciliation of Reciprocal Ledger Accounts (contd. ) n Example (textbook p 145): Assume that the home office and branch accounting records of Mercer Company contain the following data on 12/31/99: Accounting for Branches 100

Reconciliation of Reciprocal Ledger Accounts (contd. ) Investment in Arvin Branch (in accounting records of Home office) Date Explanation Debit 1999 Nov. 30 Balance Dec. 10 Cash received from branch 27 Collection of branch trade accounts receivable 29 Merchandise shipped to branch Credit Balance 62, 500 dr 20, 000 42, 500 dr 1, 000 41, 500 dr 8, 000 Accounting for Branches 49, 500 dr 101

Reconciliation of Reciprocal Ledger Accounts (contd. ) Home Office (in accounting records of Arvin Branch) Date Explanation 1999 Nov. 30 Balance Dec. 7 Cash sent to home office 28 Acquired equipment 30 Collection of home office trade accounts receivable Debit Credit Balance 62, 500 cr 20, 000 3, 000 42, 500 cr 39, 500 cr 2, 000 Accounting for Branches 41, 500 cr 102

Reconciliation of Reciprocal Ledger Accounts (contd. ) n 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 103

Reconciliation of Reciprocal Ledger Accounts (contd. ) n For Arvin Branch: 1. Home Office Trade Accounts Receivable 2. Inventory Home Office 1, 000 8, 000 Accounting for Branches 8, 000 104

Reconciliation of Reciprocal Ledger Accounts (contd. ) n For Mercer Home Office: 1. Equipment: Arvin Brach 3, 000 Investment in Branch: Arvin 2. Investment in Branch: Arvin 2, 000 Trade Accounts Receivable Accounting for Branches 3, 000 2, 000 105

Reconciliation of Reciprocal Ledger Accounts (contd. ) n The balance of Investment in Branch: Arvin ledger account at the home office equals: $ 49, 500 3, 000 + 2, 000 $ 48, 500 (dr. ) (cr. ) (dr. ) Accounting for Branches 106

Reconciliation of Reciprocal Ledger Accounts (contd. ) n n After posting the above adjusting entries: The balance of Home Office ledger account at Arvin Branch equals: $ 41, 500 1, 000 + 8, 000 $ 48, 500 (cr. ) (dr. ) (cr. ) Accounting for Branches 107

Transactions between Branches n n n 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 108

Transactions between Branches (contd. ) n Example: (textbook p 146 -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 109

Transactions between Branches (contd. ) Journal entries for these transactions are: n. In Accounting Records of Home Office: Investment in Katti Branch 8, 500 Inventory 8, 000 Cash 500 n Investment in Danddi Branch 8, 600 Excess Freight Expense 300 Investment in Katti Branch 8, 900 Accounting for Branches 110

Transactions between Branches (contd. ) In Accounting Records of Katti Branch: Freight In (or Inventory) 500 Inventories 8, 000 Home Office 8, 500 n Home Office Inventories Freight-in Cash 8, 900 Accounting for Branches 8, 000 500 400 111

Transactions between Branches (contd. ) In Accounting Records of Danddi Branch: Inventories 8, 000 Freight-in (or Inventories) 600 Home Office 8, 600 n Accounting for Branches 112