Scenario 1: Transfer Cash
🏠 Home Office
Dr. Branch xx
Cr. Cash xx
🏡 Branch
Dr. Cash xx
Cr. Home Office xx
Scenario 2: Transfer Inventory
🏠 Home Office
Dr. Branch xx
Cr. STB xx
🏡 Branch
Dr. SFHO xx
Cr. Home Office xx
Scenario 3:
During the year, HO purchased inventory for $100.
Income Statement - HO
Sales
Less: Cost of Goods Sold
Beginning Inventory
+ Purchases
- STB
100
20
∴ Net Purchases sold by HO = $100-$20 = $80
⭐ Summary on Working Paper → Help you prepare Combined Financial Statements!
Cost
Cost + Markup
Cost + Markup & “Home Office ≠ Branch”
Example 1
Example 2
Example 3
record adjusting entries (to make HO = B)
1. Eliminate HO & B
1. Eliminate HO & B
1. Eliminate HO & B
2. Eliminate STB & SFHO
2. Eliminate STB & SFHO
[& Unrealized Markup]
2. Eliminate STB & SFHO
[& Unrealized Markup]
3. Adjust BIB →Eliminate MU
3. Adjust BIB →Eliminate MU
4. Adjust EIB →Eliminate MU
4. Adjust EIB →Eliminate MU
5. Adjust NPB → Add Realized MU
Realized MU = COGSB x MU / BP
5. Adjust NPB → Add Realized MU
6. Other Adjusting Entries
Data 2: MU Policy
Cost 100
MP 50
BP 150
From Data 1 and Data 2:
1. SFHO = ? recorded at BP
BP
150
?
=
=
MU
50
30,000
∴ SFHO = 90,000
2. STB = ? recorded at COST
COST
100
?
=
=
MU
50
30,000
∴ ST B = 60,000
3. COGSB = ? (received from HO)
BP
150
?
=
=
MU
50
20,000
∴ COG SB = 60,000
4. EIB = ? (from HO only)
BP
150
?
=
=
MU
50
10,000
∴ EIB = 30,000
5. BIB = ?
BP
150
?
=
=
MU
50
0
∴ EIB = 0
Explanations: (for the table below)
1. Eliminate HO and Branch accounts
2. Eliminate SFHO, STB and Unrealized Profit
3. Adjust EIB
4. Adjust NPB
Branch I/S
3
Home Office I/S
20
Itself 75
17
Branch 17
Profit 92
Scenario: HO pays insurance expenses at $10,000.
HO allocates some parts ($2,000) of insurance expenses to Branch.
🏠 Home Office
🏡 Branch
Dr. Insurance Exp. 10,000
Cr. Cash 10,000
Dr. Branch 2,000
Dr. Insurance Exp. 2,000
Cr. Insurance Exp. 2,000
Cr. Home Office 2,000
Investment
Investment
320,000
75,000
355,000
Purchase 300,000
40,000
Income 50,000
Dec 31, x1 320,000
Dividend 30,000
Item NO.
Explanations
1
Branch: record shipment in transit
2
Branch: update EIB
3
HO: record expenses paid by branch
— check the balances of Home Office and Branch —
4
Eliminate Home Office and Branch accounts (1st pair)
5
Eliminate Shipment to Branch and Shipment From Home Office (2nd pair)
including Unrealized Profit, which is a result of markup
[⭐ for only the amount incurred during the period]
In this example:
$100 of Unrealized Profit remains as a result of the beginning balance of markups
— after eliminating all interoffice accounts, try combing all accounts —
6
Adjust BIB → Eliminate MU
Adjust EIB → Eliminate MU
Calculations
EIB = 540 → Suppliers 100 (no MU) + HO 400 (with MU)
EIB (from HO) 440 + In-transit 550 = 990 @BP
MU
10
?
∴ M U = 90
=
=
BP
110
990
🧮
7
Adjust NPB → Add Realized Profit (MU)
Calculations
MU
10
CO G SB ×
= [1,100 + 5,500 − 990] ×
= 510
BP
110
COGSB = BIB (from HO) + SFHO - EIB (from HO) ← only inventory received from HO
1,100+4,950-440 = 5,610 (fluke)
🧮
8
Why not include “purchases” into COGS?
markups only exist in Shipment From Home Office
therefore, in the calculation of realized MU, we only consider SFHO and exclude "purchases”
🧨
9
Adjust NPHO to reflect the charges of additional expenses (item NO. 3)
⭐ Closing Entries
1. Temporary Accounts [Balance = 0]
Revenue
Income
Summary
Expenses
Retained
Earnings
🧨 journal entries to close revenue and expense accounts
2. Permanent Accounts
Assets
Liabilities
Ending
Balances
Carry Forward
to the next period
Equity
🧨 Combined Income Statement
Sales
Cost of Goods Sold
Beginning Inventory
Add: Purchases
Less: Ending Inventory
Gross Profit
Expenses
Net Profit
480,000
80,000
260,000
340,000
65,000
275,000
205,000
113,000
92,000
Dividends
DEPRECIATION EXPENSE — recorded by the one who uses the assets
ACCUMULATED DEPRECIATION — recorded by the one who records the assets
Scenario 1
HO BOOK
HO purchases and records the equipment.
HO sends the equipment to Branch for use.
Dr. Equipment
Dr. Branch
Cr. Cash
Cr. Accumulated Depreciation
Dr. Depreciation Expense
Branch BOOK
Scenario 2
-
Branch purchases and records the equipment.
HO BOOK
Dr. Equipment
Branch BOOK
Scenario 3
HO BOOK
Cr. Cash
Dr. Depreciation Expense
Cr. Accumulated Depreciation
HO purchases the equipment.
Branch uses and records the equipment.
Dr. Branch
Cr. Cash
Dr. Equipment
Branch BOOK
Cr. Home Office
Cr. Home Office
Dr. Depreciation Expense
Cr. Accumulated Depreciation