Chapter 4
Accounting for Branches and
Combined Financial Statements
ACCT 501
Objectives of this Chapter

To learn the accounting and
reporting for segments (i.e.,
branches and division) of a
business entity.
Accounting for Branches
2
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
3
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
4
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
5
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 (611). Consolidated financial
statements are required for these
business organizations.
Accounting for Branches
6
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
7
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
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.)

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

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.)

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.)

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.)

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

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.)


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.)

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.)


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


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.)


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:

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


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.)

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

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:


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:


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.)

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:


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)


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.)

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)



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.)

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
32
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
33
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
34
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
35
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
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.)

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.Investment in Mason
Branch
1,000
Cash
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
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
Operating
Expenses 20,000
Cash
Accounting for Branches
62,000
20,000
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
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
and closing entries):
Investment in Mason Branch
Date
Explanation
Debit Credit
1999 Cash sent to branch
1,000
Merchandise billed to
branch at home office cost 60,000
Equipment acquired by
branch, carried in home
office accounting records
500
Cash received from branch
37,500
Operating expenses billed
to branch
3,000
Accounting for Branches
Balance
1,000 dr
61,000 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
Debit Credit
Cash received from home
office
1,000
Merchandise received from
home office
60,000
Equipment acquired
500
Cash sent to home office
37,500
Operating expenses billed
by home office
3,000
Accounting for Branches
Balance
1,000 cr
61,000 cr
60,500 cr
23,000 cr
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.

Accounting for Branches
47
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
48
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
49
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
50
Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Home
Office
Dr (Cr)
Mason
Branch
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-
-0-
Eliminations Combined
Dr (Cr)
Dr (Cr)
Income Statement
Sales
Accounting for Branches
51
Working Paper for Combined financial
Statements--Example I (contd.)
Adjusted Trial Balances
Home
Mason
Statement of Retained
Eliminations Combined
Office
Branch
Earnings
Dr (Cr)
Dr(Cr)
Dr (Cr)
Dr (Cr)
Retained earnings, Jan.
(70,000)
(70,000)
1, 1999
Net(income) (from
incomes statement
(75,000)
(12,000)
(87,000)
above)
Dividends declared
40,000
40,000
Retained earnings,
Dec.31,1999 (to
balance sheet below)
Totals
117,000
-0Accounting 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)
Dr (Cr)
Dr (Cr)
25,000
5,000
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)
(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)
Dr (Cr)
Dr (Cr)
(contd.)
Trade accounts payable
(20,000)
(20,000)
Home Office
Common stock, $10 par
Retained earnings
(from statement of
retained earnings
above)
Totals
(26,000)
(a) (26,000)
(150,000)
(150,000)
(117,000)
-0-
-0-
-0-
-0-
(a) To eliminate reciprocal ledger account balances
* the elimination appears in the working paper only
Accounting for Branches
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
Records Adjusting and
Closing Entries:
Investment in Mason
Branch
12,000
Income: Mason
Branch
12,000
Income: Mason
Branch
12,000
Income
Summary 12,000
Mason Branch Accounting
Records Closing Entries:
Income
Summary 12,000
Home Office 12,000
None
Accounting for Branches
60
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
61
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):
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 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
63
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
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

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
Dr (Cr)
Mason
Branch
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-
-0-
Eliminations Combined
Dr (Cr)
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
Statement of Retained
Eliminations Combined
Office
Branch
Earnings
Dr (Cr)
Dr(Cr)
Dr (Cr)
Dr (Cr)
Retained earnings, Jan.
(70,000)
(70,000)
1, 1999
Net(income) loss (from
incomes statement
(75,000)
(10,500) (b) (22,500) (87,000)
above)
Dividends declared
40,000
40,000
Retained earnings,
Dec.31,1999 (to
balance sheet below)
Totals
117,000
-0Accounting 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)
Dr (Cr)
Dr (Cr)
25,000
5,000
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)
Dr (Cr)
Dr (Cr)
(10,000)
(10,000)
(20,000)
(20,000)
(56,000)
(c) (56,000)
(150,000)
(150,000)
(117,000)
-0-
-0Accounting for Branches
-0-
-069
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:
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
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.)


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
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.)

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
=0
* 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
76
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
77
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
78
Example:

Periodic Inventory System (contd.)
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
79
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
80
Periodic Inventory System (contd.)
Example: (contd.)
Home Office Accounting
Records Journal Entries:
Investment in Mason
Branch
90,000
Mason Branch Accounting
Records Journal Entries:
Shipments from Home
Office
120,000
Home Office 120,000
Shipments to Mason
Branch
80,000
Allowance for
Overvaluation of
Inventories: Mason
Branch
40,000
None
Cash (or Trade Accounts
Receivable) 150,000
Sales
150,000
Accounting for Branches
81
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
Home
Markup (50% of
Billed
Office
Cost;33 1/3 % of
Price
Cost
Billed Price)
Beginning
inventories
$22,500
$15,000
$7,500
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
Accounting for Branches
82
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
Date
2000
Explanation
Balance, Dec. 31, 1999
Merchandise billed to branch
at markup of 50% above
home office cost, or 33 1/3
% of billed price
Cash received from branch
Operating expenses billed to
branch
Debit
Credit
120,000
165,500dr
113,000 52,500 dr
4,500
57,000 dr
Accounting for Branches
Balance
45,500 dr
83
Periodic Inventory System (contd.)
Example: (contd.)
Allowance for Overvaluation of Inventories:
Mason Branch
Date
Explanation
2000 Balance, Dec. 31,
1999
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
Date
Explanation
2000 Balance, Dec. 31,
1999
Merchandise
receivable from
home office
Debit
Credit
Balance
45,500 cr
120,000 165,500 cr
Cash sent to home
office
113,000
Operating expenses
billed by Home office

52,500 cr
4,500
Accounting for Branches
57,000 cr
85
Periodic Inventory System (contd.)
Example: (contd.)

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)
Dr (Cr)
Dr (Cr)
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
Periodic Inventory System (contd.)
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)
Dr (Cr)
Eliminations Combined
Dr (Cr)
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
Periodic Inventory System (contd.)
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)
Dr (Cr)
Eliminations Combined
Dr (Cr)
(117,000)
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
Periodic Inventory System (contd.)
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)
Dr (Cr)
Dr (Cr)
Dr (Cr)
30,000
9,000
39,000
64,000
28,000
70,000
30,000
92,000
(c) (10,000)
(47,500)
(a) 40,000
(b) 7,500
57,000
(e) (57,000)
Accounting for Branches
90,000
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)
Dr (Cr)
158,000
Elimination Combined
s
Dr (Cr)
(15,000)
(24,500)
Dr (Cr)
158,000
(15,000)
(24,500)
(57,000)
(e) 57,000
(150,000)
(150,000)
(189,500)
-0-
-0Accounting for Branches
-0-
-090
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
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):

Branch Closing Entries:
(1)Inventory (ending)
Cost of Goods Sold
Inventory (beg.)
Shipments from
Home Office
30,000
112,500*
22,500
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
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.)

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.)

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.)


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
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.)



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
98
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
99
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
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.)

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.)

For Arvin Branch:
1.Home Office
Trade Accounts
Receivable
1,000
2.Inventory
Home Office
8,000
1,000
8,000
Accounting for Branches
104
Reconciliation of Reciprocal Ledger
Accounts (contd.)

For Mercer Home Office:
1.Equipment: Arvin Brach
3,000
Investment in Branch:
Arvin
3,000
2.Investment in Branch: Arvin 2,000
Trade Accounts Receivable
2,000
Accounting for Branches
105
Reconciliation of Reciprocal Ledger
Accounts (contd.)

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.)
(dr.)
Accounting for Branches
106
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
1,000
+
8,000
$ 48,500
(cr.)
(dr.)
(cr.)
(cr.)
Accounting for Branches
107
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
108
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
109
Transactions between Branches
(contd.)
Journal entries for these transactions are:
In Accounting Records of Home Office:
Investment in Katti Branch
8,500
Inventory
8,000
Cash
500

Investment in Danddi Branch 8,600
Excess Freight Expense
300
Investment in Katti
Branch
Accounting for Branches
8,900
110
Transactions between Branches
(contd.)
In Accounting Records of Katti Branch:
Freight In (or Inventory)
500
Inventories
8,000
Home Office
8,500

Home Office
8,900
Inventories
Freight-in
Cash
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
Accounting for Branches
8,600
112