Chapter 4 Accounting for Branches; Combined Financial Statements
True/False Questions
1. An expense item allocated by the home office to a branch is recorded by the branch by
a debit to an expense ledger account and a credit to the Home Office account.
Answer: True
2. The balance of the Allowance for Overvaluation of Inventories: Branch ledger account
is deducted from the balance of the Investment in Branch account in the separate
balance sheet of the home office.
Answer: True
3. If the home office bills shipments of merchandise to the branch at 25% above home
office cost and the adjusted balance of the Allowance for Overvaluation of
Inventories: Branch ledger account is $20,400, the amount of branch inventories at
billed prices is $81,600.
Answer: False
4. A debit to the Home Office ledger account and a credit to the Trade Accounts
Receivable account in the accounting records of a branch indicates that the home
office collected accounts receivable of the branch.
Answer: True
5. If branch managers are responsible for ordering merchandise from the home office,
any excess freight costs incurred as a result of interbranch shipments are absorbed by
the appropriate branch rather than by the home office.
Answer: True
6. Start-up costs incurred by a branch in the initial months of operations are appropriately
deferred and amortized in subsequent profitable accounting periods.
Answer: False
7. If the home office carries branch equipment in its accounting records, an acquisition of
equipment by the branch is recorded in the home office accounting records by a debit
to the Investment in Branch ledger account and a credit to the Equipment: Branch
account.
Answer: False
Larsen, Modern Advanced Accounting, Tenth Edition
39
Chapter 4 Accounting for Branches; Combined Financial Statements
8. Separate financial statements of home office and branch do not meet the needs of
investors, creditors, or other outside users of financial statements.
Answer: True
9. In a working paper for combined financial statements of home office and branch, the
balance of the Shipments to Branch ledger account is eliminated against the balance of
the Investment in Branch account.
Answer: False
10. Freight costs on merchandise shipped, as directed by the home office, by Westside
Branch to Eastside Branch in excess of normal freight costs from the home office to
Eastside Branch are recognized as operating expenses of the home office.
Answer: True
11. A markup of 16 2/3% on billed price is equal to a markup of 14 2/7% on cost of
merchandise shipped to the branch by the home office.
Answer: False
12. If the perpetual inventory system is used by both the home office and the branch, the
reciprocal ledger accounts used by the branch are the Home Office and Shipments
from Home Office accounts.
Answer: False
13. If the home office bills merchandise shipments to the branch at prices above home
office cost, the net income reported to the home office by the branch is overstated
from a total company point of view.
Answer: False
14. In a combined balance sheet for home office and branch, the balance of the Allowance
for Overvaluation of Inventories: Branch ledger account is deducted from the balance
of the Investment in Branch account.
Answer: False
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Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
Multiple Choice Questions
15. The Shipments to Branch ledger account in the accounting records of the home office
of a business enterprise:
A) Is an asset valuation account
B) Indicates that the home office uses the periodic inventory system
C) Is adjusted at the end of the accounting period to equal the unrealized profit in the
branch's ending inventories
D) Is not displayed in the home office's separate financial statements
Answer: B
16. The Allowance for Overvaluation of Inventories: Branch ledger account of the home
office is debited:
A) When the home office ships merchandise to the branch at a billed price that
exceeds cost
B) In a journal entry to close the account at the end of an accounting period
C) When the branch's ending inventory is recorded in the home office accounting
records
D) In some other circumstances
Answer: D
17. The Western Branch of Rivas Company reported a net income of $60,000 for the
month of January. The appropriate journal entry (explanation omitted) for the home
office of Rivas Company is:
A) Income Summary
60,000
Income: Western Branch
60,000
B) Income: Western Branch
60,000
Income Summary
60,000
C) Investment in Western Branch
60,000
Income: Western Branch
60,000
D) Investment in Western Branch
60,000
Income Summary
60,000
Answer: C
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Chapter 4 Accounting for Branches; Combined Financial Statements
18. Both a home office and a branch use the periodic inventory system. If at the end of an
accounting period the balance of the branch's Home Office ledger account does not
agree with the balance of the home office's Investment in Branch account because of a
shipment of merchandise in transit from the home office to the branch:
A) The home office debits Investment in Branch and credits Shipments in Transit to
Branch.
B) The branch debits Home Office and credits Shipments in Transit from Home
Office.
C) The home office debits Shipments in Transit to Branch and credits Investment in
Branch.
D) The branch debits Shipments in Transit from Home Office and credits Home
Office.
Answer: D
19. Among the journal entries (explanation omitted) in the accounting records of the home
office of Price Company was the following:
Office Equipment: Lang Branch
Investment in Lang Branch
12,500
12,500
This journal entry indicates that:
A) The home office acquired office equipment for the branch
B) The home office shipped office equipment to the branch
C) The branch acquired office equipment, which is carried in the accounting records
of the home office
D) None of the foregoing occurred
Answer: C
20. The Income: Branch ledger account is maintained in the accounting records of:
A) The home office only
B) The branch only
C) Both the home office and the branch
D) Neither the home office nor the branch
Answer: A
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Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
21. If at the end of an accounting period the balance of the Investment in Branch ledger
account in the accounting records of the home office is $20,000 and the balance of the
Home Office account in the accounting records of the branch (after the branch
recorded closing entries) is $25,500, the most likely explanation for the discrepancy of
$5,500 is a:
A) Remittance of cash to the branch not recorded by the home office
B) Net income of branch not recorded by the home office
C) Net loss of branch not recorded by the home office
D) Collection by the home office of a branch note receivable not recorded by the
branch
Answer: B
22. The Home Office ledger account in the accounting records of a branch is best
described as:
A) A revenue account
B) An equity account
C) A deferred revenue account
D) A liability account
E) None of the foregoing
Answer: B
23. The following journal entry (explanation omitted) appeared in the accounting records
of Marty Corporation's only branch:
Operating Expenses
Home Office
600,000
600,000
The journal entry indicates that:
A) The branch incurred operating expenses for the benefit of the home office
B) The home office incurred operating expenses for the benefit of the branch
C) The branch paid the home office for services rendered to the branch
D) None of the foregoing occurred
Answer: B
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Chapter 4 Accounting for Branches; Combined Financial Statements
24. In a working paper for combined financial statements of home office and branch, the
branch's net income is included in:
A) The debit column of the branch income statement section and the credit column of
the branch statement of retained earnings section
B) The credit column of the branch income statement section and the debit column of
the branch statement of retained earnings section
C) The debit column of the branch income statement section and the credit column of
the home office statement of retained earnings section
D) Some other manner
Answer: A
25. A debit to the Income Summary ledger account and a credit to the Home Office
account appear in:
A) The accounting records of the home office to record the net income of the home
office
B) The accounting records of the home office to record the net income of the branch
C) The accounting records of the branch to record the net income of the branch
D) Some other manner
Answer: C
26. The following journal entry (explanation omitted) appeared in the accounting records
of the home office of Silversmith Company:
Investment in Seaside Branch
Operating Expenses
8,980
8,980
This journal entry indicates that:
A) The branch incurred operating expenses for the benefit of the home office
B) The home office incurred operating expenses for the benefit of the branch
C) The branch paid the home office for services rendered to the branch
D) None of the foregoing occurred
Answer: B
27. If both the home office and the branch of a business enterprise use the periodic
inventory system, the home office's Shipments to Branch ledger account:
A) Is a valuation account for the home office's Investment in Branch account
B) Always should have the same balance as the branch's Shipments from Home
Office account
C) Is a revenue account
D) Is a valuation account for the home office's Purchases account
Answer: D
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Chapter 4 Accounting for Branches; Combined Financial Statements
28. If both the home office and the branch of a business enterprise use the perpetual
inventory system, a Shipments to Branch ledger account appears in the accounting
records of:
A) The home office only
B) The branch only
C) Both the home office and the branch
D) Neither the home office nor the branch
Answer: D
29. On January 31, 2006, the home office of Wall Company collected a trade account
receivable of Doris Branch. The accounting for this transaction by Wall Company
should include a:
A) Credit to Trade Accounts Receivable: Doris Branch in the accounting records of
the home office
B) Debit to Cash in Transit in the accounting records of Doris Branch
C) Credit to Investment in Doris Branch in the accounting records of the home office
D) Debit to Receivable from Home Office in the accounting records of Doris Branch
Answer: C
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Chapter 4 Accounting for Branches; Combined Financial Statements
Problems
30. Closing entries for the Columbia Branch of Carolina Company on January 31, 2006,
the end of a fiscal year, were as follows:
Inventories, Jan. 31, 2006
Sales
Inventories, Jan. 31, 2005
Shipments from Home Office
Operating Expenses
Income Summary
To record ending inventories and to close beginning
inventories, revenue, and expense ledger accounts.
Income Summary
Home Office
To close Income Summary ledger account.
60,000
300,000
45,000
240,000
55,000
20,000
20,000
20,000
Columbia Branch receives all its merchandise from the home office of Carolina
Company at a markup of 20% on billed price.
Prepare journal entries for the home office of Carolina Company on January 31, 2006,
to record the operating results of the Columbia Branch. Show any supporting
computations in the explanations for the entries.
Answer:
2006
Jan. 31 Investment in Columbia Branch
20,000
Income: Columbia Branch
To record net income reported by Columbia Branch.
31 Allowance for Overvaluation
of Inventories: Columbia Branch
45,000
Realized Gross Profit: Columbia Branch Sales
To recognize as realized the markup on merchandise
applicable to goods sold by Columbia Branch
[($45,000 + $240,000 – $60,000) x 0.20 = $45,000].
31 Income: Columbia Branch
Realized Gross Profit: Columbia Branch Sales
Income Summary
To close Columbia Branch net income and realized
gross profit to Income Summary ledger account.
46
20,000
45,000
20,000
45,000
65,000
Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
31. On June 30, 2006, the unadjusted credit balance of the Allowance for Overvaluation of
Inventories: Cyprus Branch ledger account in the accounting records of the home
office of Wilmington Company was $60,000. The home office of Wilmington ships
merchandise to the branch at a markup of 20% on home office cost. For the fiscal year
ended June 30, 2006, the branch had reported a net loss (based on billed prices of
merchandise shipped from home office) of $18,400 and ending inventories (all
received from home office) of $132,000 at billed prices.
Prepare journal entries for the home office of Wilmington Company on June 30, 2006,
to record the foregoing information.
Answer:
2006
June 30 Income: Cyprus Branch
Investment in Cyprus Branch
To record net loss reported by branch.
30
30
18,400
18,400
Allowance for Overvaluation of Inventories:
Cyprus Branch
38,000
Realized Gross Profit: Cyprus Branch Sales
To recognize as realized the markup on merchandise
applicable to good sold by branch [$60,000 –
($132,000 x 1/6) = $38,000].
Realized Gross Profit: Cyprus Branch Sales
Income: Cyprus Branch
Income Summary
To close branch net loss and realized gross
profit to Income Summary ledger account.
38,000
38,000
18,400
19,600
32. On June 4, 2006, Victoria Company opened its first branch. Separate accounting
records were established for the branch. Both the home office and the branch used the
perpetual inventory system. Among the intracompany transactions were the following:
June
4 Home office mailed a check for $40,000 to the branch. The check was
received by the branch on June 7.
6 Home office shipped merchandise costing $101,300 to the branch at a
billed price of $130,000. The branch received the merchandise on June
9.
10 The branch acquired a truck for $18,000. The home office maintains the
plant assets of the branch in its accounting records. The home office was
notified on June 10 that the acquisition was made.
Prepare journal entries for the foregoing intracompany transactions in the accounting
records of (a) the home office, and (b) the branch of Victoria Company.
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Chapter 4 Accounting for Branches; Combined Financial Statements
Answer:
a.
Journal entries in accounting records of Home Office:
2006
June 4 Investment in Branch
Cash
To record remittance to branch.
6 Investment in Branch
Inventories
Allowance for Overvaluation of Inventories:
Branch
To record shipment of merchandise to branch.
10 Trucks: Branch
Investment in Branch
To record acquisition of truck by branch.
b.
Journal entries in accounting records of branch:
2006
June 7 Cash
Home Office
To record receipt of cash from home office.
40,000
40,000
130,000
101,300
28,700
18,000
18,000
40,000
40,000
9 Inventories
130,000
Home Office
To record receipt of merchandise from home office.
10 Home Office
Cash
To record acquisition of truck, to be carried in
accounting records of home office.
48
130,000
18,000
18,000
Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
33. On October 5, 2006, Brentwood Company established the Palisades Branch.
Following are the initial transactions between the home office and Palisades Branch:
Oct. 5 Home office sent $5,000 to the branch for an imprest cash account.
8 Home office shipped merchandise costing $80,000 to the branch,
billed at a markup of 20% of home office cost.
10 Branch acquired store fixtures for $3,000 cash and a note payable of
$10,000; both the fixtures and the note payable will be carried in the
accounting records of the home office.
Both the home office and the Palisades Branch use the perpetual inventory system.
Prepare journal entries for the foregoing transactions in the accounting records of the
(a) home office, and (b) Palisades Branch of Brentwood Company.
Answer:
a.
Journal entries in accounting records of home office:
2006
Oct. 5 Investment in Palisades Branch
Cash
To record remittance for imprest cash account for
branch.
8
10
5,000
5,000
Investment in Palisades Branch
Inventories
Allowance for Overvaluation of Inventories:
Palisades Branch ($80,000 x 0.20)
To record shipment of merchandise to branch.
96,000
Store Fixtures: Palisades Branch
Investment in Palisades Branch
Notes Payable
To record acquisition of store fixtures by branch.
13,000
Larsen, Modern Advanced Accounting, Tenth Edition
80,000
16,000
3,000
10,000
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Chapter 4 Accounting for Branches; Combined Financial Statements
b.
Journal entries in accounting records of branch:
2006
Oct. 5 Cash
Home Office
To record receipt of cash from home office.
8
10
Inventories
Home Office
To record receipt of merchandise from home office.
5,000
5,000
96,000
Home Office
3,000
Cash
To record acquisition of store fixtures, to be carried in
accounting records of home office.
96,000
3,000
34. For the fiscal year ended August 31, 2006, the South Bay Branch of Torrance
Company reported a net income of $60,000. Inventories of South Bay Branch on
August 31, 2006, in the amount of $125,000 had been billed to the branch by the home
office of Torrance Company at a markup of 25% above home office cost. On August
31, 2006, prior to adjustment, the Allowance for Overvaluation of Inventories: South
Bay Branch ledger account had a credit balance of $75,000 in the accounting records
of the home office.
Prepare August 31, 2006, journal entries for the home office of Torrance Company to
record the South Bay Branch's operating results for the year ended that date.
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Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
Answer:
2006
Aug. 31 Investment in South Bay Branch
60,000
Income: South Bay Branch
To record net income reported by South Bay Branch.
31 Allowance for Overvaluation of Inventories:
South Bay Branch ($75,000 – $25,000)
Realized Gross Profit: South Bay Branch Sales
To recognize as realized the markup on merchandise
applicable to goods sold by South Bay Branch.
31 Income: South Bay Branch
Realized Gross Profit: South Bay Branch Sales
Income Summary
To close South Bay Branch net income and realized
gross profit to Income Summary ledger account.
60,000
50,000
50,000
60,000
50,000
110,000
35. Newfoundland, Inc., has a branch in Boston. On April 1, 2006, the accounting records
of the home office of Newfoundland had a ledger account, Allowance for
Overvaluation of Inventories: Boston Branch, with a credit balance of $36,600. During
April, merchandise costing $110,000 was shipped to the Boston Branch and billed at
20% above home office cost. The branch reported a net income of $9,600 for April,
and branch inventories on April 30 were $162,000 at billed prices.
a. Prepare a working paper to compute the cost of the branch inventories on April 1,
2006, assuming a uniform markup on all shipments of merchandise to the branch.
b. Prepare a home office journal entry to adjust the Allowance for Overvaluation of
Inventories: Boston Branch ledger account on April 30, 2006.
Answer:
a. $183,000 ($36,600 ÷ 0.20 = $183,000) cost of branch inventories, Apr. 1, 2006.
b.
Allowance for Overvaluation of Inventories:
Boston Branch
Realized Gross Profit: Boston Branch Sales
To adjust allowance account as follows:
Balance, Apr. 1, 2006
Increase during April ($110,000 x 0.20)
Balance before adjustment
Less: Balance required, April 30, 2006: $162,000
x 1/6 (1/5 markup on cost is equal to 1/6 markup
on billed price)
Required reduction of Allowance ledger account
Larsen, Modern Advanced Accounting, Tenth Edition
31,600
31,600
$36,600
22,000
$58,600
27,000
$31,600
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Chapter 4 Accounting for Branches; Combined Financial Statements
36. The home office of Carnival Company bills its only branch at 30% above home office
cost for all merchandise shipped to the branch. During 2006, the home office shipped
merchandise to the branch at billed prices of $104,000. Branch inventories for 2006
were as follows:
Jan. 1
Dec. 31
From home office (at billed prices)
$32,500
$44,200
From outside suppliers
34,000
41,200
The home office uses the perpetual inventory system.
Prepare journal entries (including adjusting entries) for the home office of Carnival
Company for 2006 to reflect the foregoing information.
Answer:
Investment in Branch
Inventories
Allowance for Overvaluation of Inventories: Branch
To record shipment of merchandise to branch billed at 30%
above cost.
104,000
Allowance for Overvaluation of Inventories: Branch
Realized Gross Profit: Branch Sales
To adjust Allowance account as follows:
80,000
24,000
21,300
21,300
Balance, Jan. 1, 2006 [$32,500 x 3/13 (a 30% markup on cost
equals a 3/13 markup on billed prices)]
7,500
Increase during Year 2006 ($104,000 x 3/13)
24,000
Balance before adjustment
$31,500
Less: Balance required, Dec. 31, 2006 ($44,200 x 3/13)
10,200
Required reduction of Allowance ledger account balance
$21,300
37. The following ledger account was in the accounting records of the County Branch of
City Company on December 31, 2006:
Date
2006
Jan.
1
Mar. 10
31
June 6
Oct. 10
Dec. 20
31
Home Office
Explanation
Balance
Cash remitted to home office
Merchandise returned to home office
Merchandise received from home office
Supplies received from home office
Acquisition of fixtures
Net income
Debit
Credit
10,000
2,650
14,400
2,600
9,250
7,770
Balance
40,000 cr
30,000 cr
27,350 cr
41,750 cr
44,350 cr
35,100 cr
42,870 cr
The home office of City Company used the perpetual inventory system, and billed the
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Chapter 4 Accounting for Branches; Combined Financial Statements
branch for merchandise shipments at 25% above home office cost.
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53
Chapter 4 Accounting for Branches; Combined Financial Statements
Prepare journal entries to record the above indicated transactions and events in the
accounting records of the home office of City Company. Adjusting entries are not
required.
Answer:
2006
Mar. 10 Cash
Investment in County Branch
To record cash remitted by branch.
31 Inventories
Allowance for Overvaluation of Inventories:
County Branch
Investment in County Branch
To record merchandise returned by branch. Cost of
merchandise: $2,650 x 0.80 = $2,120.
10,000
10,000
2,120
530
2,650
June 6 Investment in County Branch
14,400
Allowance for Overvaluation of Inventories:
County Branch
Inventories
To record shipment of merchandise to branch. Cost of
merchandise: $14,400 x 0.80 = $11,520.
Oct. 10 Investment in County Branch
Inventory of Supplies
To record shipment of supplies to branch.
2,600
Dec. 20 Fixtures: County Branch
Investment in County Branch
To record acquisition of fixtures by branch.
9,250
31 Investment in County Branch
Income: County Branch
To record net income reported by branch.
54
2,880
11,520
2,600
9,250
7,770
7,770
Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
38. Included in the accounting records of the home office and the only branch,
respectively, of Socrates Company were the following ledger accounts for June, 2006:
Date
2006
May 31
June 6
20
26
30
Date
2006
May 31
June 8
18
27
30
Investment in Plato Branch
Explanation
Debit
Balance
Shipment of merchandise
Receipt of cash
Collection of branch trade account
receivable
Shipment of merchandise
Home Office
Explanation
Balance
Receipt of merchandise
Payment of cash
Acquisition of office equipment
Payment of cash
Credit
Balance
11,500
9,000
51,000 dr
81,500 dr
70,000 dr
61,000 dr
30,500
24,000
Debit
85,000 dr
Credit
30,500
11,500
14,500
22,000
Balance
51,000 cr
81,500 cr
70,000 cr
55,500 cr
33,500 cr
a. Prepare a working paper to reconcile the reciprocal ledger accounts to corrected
balances.
b. Prepare journal entries on June 30, 2006, for the (1) home office, and (2) Plato
Branch of Socrates Company. The branch uses the perpetual inventory system.
Answer:
a.
SOCRATES COMPANY
Home Office and Plato Branch
Reconciliation of Reciprocal Ledger Accounts
June 30, 2006
Investment in
Plato Branch Home Office
Ledger
Ledger
Account
Account
Balances prior to adjustment
$85,000 dr
$33,500 cr
Add: Merchandise shipped to branch
24,000
Less: Acquisition of office equipment by branch
(carried in accounting records of home office) (14,500)
Collection of branch trade accounts receivable
(9,000)
Payment of cash by branch
(22,000)
_______
Adjusted balances
$48,500 dr
$48,500 cr
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Chapter 4 Accounting for Branches; Combined Financial Statements
b. (1)
Accounting records of home office:
Office Equipment: Plato Branch
14,500
Investment in Plato Branch
To record acquisition of office equipment by branch.
Cash in Transit
Investment in Plato Branch
To record cash in transit from branch.
(2)
56
22,000
22,000
Accounting records of branch:
Home Office
9,000
Trade Accounts Receivable
To record collection by home office of branch accounts
receivable.
Inventories in Transit
Home Office
To record shipment of merchandise in transit from
home office.
14,500
9,000
24,000
24,000
Larsen, Modern Advanced Accounting, Tenth Edition
Chapter 4 Accounting for Branches; Combined Financial Statements
Case
39. As a CPA and audit manager of Royal & Percy, LLP, you have been requested by John
James, president of James Company, a nonpublic enterprise, to write a memo to James
Company's accounting staff explaining the purpose of the Allowance for
Overvaluation of Inventories: Post Street Branch ledger account and the typical
journal entries in the account. James Company has just established Post Street Branch,
its first branch, and is planning for the home office to ship merchandise to the branch
at a markup of 20% above home office cost.
Write the memo requested by John James.
Answer:
Allowance for Overvaluation of Inventories:
Post Street Branch ledger account
Purpose and Typical Journal Entries
The purpose of the Allowance for Overvaluation of Inventories: Post Street Branch
ledger accounting in the accounting records of the home office of James Company is
to maintain a record of unrealized intracompany profit in the inventories of the Post
Street Branch, so that inventories and pre-tax income will not be overstated in the
combined financial statements of the home office and Post Street Branch of James
Company. Typical journal entries in the account are credits for the unrealized markup
over home office cost in the billed price of merchandise shipped to the branch, and an
end-of-period debit to reduce the credit balance of the account to the amount of the
unrealized intracompany profit in the branch's ending inventories. To illustrate,
assume that the home office of James Company shipped merchandise with a home
office cost of $120,000 to Post Street Branch at a markup of 20% on home office cost.
The home office would prepare the following journal entry under the perpetual
inventory system used by James Company (explanation omitted):
Investment in Post Street Branch ($120,000 x 1.20)
Inventories
Allowance for Overvaluation of Inventories:
Post Street Branch ($120,000 x 0.20)
144,000
120,000
24,000
Assuming no other shipments of merchandise to the branch by the home office during
the relevant accounting period and an ending inventory of the branch at billed prices
of $60,000, the home office would prepare the following end-of-period adjusting entry
(explanation omitted):
Allowance for Overvaluation of Inventories:
Post Street Branch [$24,000 – ($60,000 x 1/6)]
Realized Gross Profit: Post Street Branch Sales
14,000
14,000
The foregoing journal entry would leave a balance of $10,000 ($24,000 – $14,000 =
$10,000) in the allowance account, equal to the $10,000 unrealized intracompany
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Chapter 4 Accounting for Branches; Combined Financial Statements
profit in the branch's ending inventory.
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Larsen, Modern Advanced Accounting, Tenth Edition