Chapter 1] Home Office And Branch RC at Ye General Procedures In their effort to generate more sales, business firms usually widen the geographical area they cover. Their services are available in more areas through their travelling salesmen or by shipments on consigment, Frequently however, better results are achieved with new sales outlets established at strategic locations. The creation of these outlets develops business in distant areas or improves the company’s share of existing markets through more effective and efficient contact with the customers. Selling activities are undertaken by the different sales offices at the direction of the home office. Hence, customers need not deal with the far away head office but with the nearest operating sales unit. The desired goods, services and information are made more readily availabe to customers The new sales outlets may be organized as sales agencies or branches. Regardless of which form of operation is used, the financial statements of each separate unit are combined with those of the controlling unit to come up with financial statements of the economic entity as a whole Sales Agency and Branch Di inguished While both the sales agency and the branch office are vehicles for enlargingsales volume, they exhibit a number of significant operational differences. A sales agency usually carries line of samples or displays merchandise but doesshot tarry stocks of it. Orders are taken from customers and sent to the home office for approval of credit. The ‘home office then ships the merchandise directly to the customers. The receivable accounts are maintained in the home office which also performs the collection fiction. A working fund for sales agency expenses is provided by the home office and replenished when exhausted. No other cash is handled by the sales agency. 451452 Chapter) On the other hand, branch office normally Carries stocks of merchandise, which may be obtained solely from the home office or a portion may be purchased from outside suppliers. The branch makes the usual warranties with respect to quality, makes collections of accounts receivable, and functions in most respect as an independent business unit, Abranch may be restricted until it isa little more than a sales agency. A sales agency may be expanded until it resembles a branch. The accounting procedures discussed in this chapter are for strictly defined sales agencies and brar:zhes. ACCOUNTING SYSTEM FOR SALES AGENCIES. The accounting process for the operation of a sales agency does not introduce any new accounting problem because a sales agency is simply an extension of existing sales territories. A sales agency neither keeps a complete set of books nor uses a double- entry system of accounts. Ordinarily, a record of sales to customers and a list of cash payments supported by vouchers are sufficient. An imprest system is usually-adopted > by the home office for the working fund of the sales agency. che entries made by the home officedepend on whether sales agency net income is determined separately or not separately. If the home office wants to determine the net income of each of its sales agencies separately, it must maintain in the general ledger distinct revenue and expense accounts in the name of the sales agency. For example, Sales — Sales Agency, Rent Expense — Sales Agency. The cost of goods sold of each agency must also be determine. If the perpetual inventory system i used, shipments to customers of the sales agencies are debited to Cost of Goods Sold —Sales Agency and credited'to Merchandise Inventory. On the other hand, if the periodic inventory system is maintained, shipments to sales agency customers are recorded by debiting Cost of Goods Sold — Sales Ageney and crediting Shipments of Merchandise ~ Sales Agency. ‘At the end of the accounting period, the account Shipments of Merchandise —Sales Agency is deducted from the total of beginning inventory and purchases to determine the cost of goods available for sale by the home office for its own operations. If the home office electsnotto determine separately the sales agency net income, the transactions of the sales agency are recorded in the home office’s own revenue and expense accounts. Upon closing the books, the Income Summary account shows the results of both operations. When the home office transfers fixed assets to the sales agencies, the home office debits aan appropriate asset account identified with the sales agency (For example, Furniture and Fixtures ~ Sales Agency) and credits the appropriate asset account.Home Office And Branch Aecounting ~ General Procedures 453 Illustrative Entries ‘Assume a Manila Trader, Inc. established a sales agency in Cebu. The revenues and coer of the home office are recorded separately from those of the sales agency. loreover, operating results of the sales agency and the home office are determined separately at the end ofeach accounting period. The accounting entries prepared by Manila Trader, Inc. as a result of the establishment of Cebu Agency and the subsequent activities are shown in Illustraiton 11-1. Assume that the home office uses the’periodic inventory system. Mlustration 11-1 Transactions Home Office Books 1. Aworking fund of P10,000 is Working Fund-Cebu Agency 10,000 established Cash 10,000 2. Shipped merchandise to ‘Samples Inventory-Cebu Cebu Agency for use as samples, Agency’ 2,000 2,000. ‘Shipments to Agency 2,000 3 sales orders from Cebu Accounts Receivable 90,000 Agency, P90,000. Sales-Cebu Agency 90,000 4. Cost of goods sold identified Cost of Sales-Cebu Agency 60,000 with agency sales, P60,000. ‘Shipments to Agency 60,000 5, Replenishment of working fund Various expense accounts- ofthe agency, P8,000. Cebu Agency 8,000 Cash 8,000 6. Close revenue and expense Sales-Cebu Agency 90,000 accounts of the agency Cost of Sales-Cebu Agency 60,000 Various expense accounts- Cebu Agency 8,000 Cebu Agency Income 22,000 2 ‘Agency income to Cebu Agency Income 22,000 Chase Ca Income Summary 22,000 Income Summary account. From the above entries, assets, revenues, and expen the home office computes the income o it can be seen how the books of the home office. The home office specifically. e Ta snses as relating to the sales agency. ‘At the end of the period, ei f the agency to evaluate its operation. the operations of the sales agency are esignate all454 Chapter! ACCOUNTING FOR BRANCH OPERATIONS Normally, the home office and the branch maintain separate accounting systems. Each maintains a full set of books with a complete self-balancing set of accounts. Each records its transactions with outside parties in its own accounting system in the usual manner. In addition, both the hor the branch must record transactions with one another (inter-office transactions) in their respective accounting systems. Even though the home office and each branch maintain separate books, all accounts are combined for external reporting so that the external financial statements w ill represent the company asa single economic enterprise. As to the preparation of combined financial statements, by just adding together the balances of the accounts in each accounting system will not result in the presentation ofa single economic entity. Certain elimination is necessary. Reciprocal (Intracompany) Accounts ‘Transactions with outside parties are recorded in the usual manner. Transactions between the home office and a branch are recorded in intracompany accounts, These accounts are reciprocal accounts between the home office and the branch. When the books of both the home office and the branch arecompletely up to date, the balance in a reciprocal account on the home office books will be uit opposite that of the related reciprocal account on the bratich books. For example, ifa reciprocal account on the home office books has a P50,000 debit balance, the related reciprocal account on the branch books should have a credit balance of the same amount. The reciprocal account on the books of the home office often is called Investmentin Branch or Branch Current, while the reciprocal account on the branch books may be labeled Home Office or Home Office Current. When a company has several branches, separate investment account for each branch ismaintained on the home office books. ‘The balance of the Investment in Branch account shows the extent of the home office’s investment in a particular branch. The reciprocal Home Office account on the books of. the branch represents the home oflice’s equity in the branch and the balance is shown in place of owner’s equity in the separate financial statements of the branch. The balances of the two reciprocal accounts: sara isied for the same inter-company transactions. The account balances are ine! for asset transfers from the home office to the branch and decreased for asset transfers from the branch to the home office. Adjustments to the accounts are also made for profits and losses of the branch, vt profits increasing the account balances and branch losses leading to a coe a that increases in the home office’s Investment in Branch account are “complished with debit entries and decreases with credit entries. The opposite is true with respect to the Branch’s Home Office account.Home Office And Branch Accounting — General Procedures ve. The reciprocal nature of the Investment in Branch and the Home Office accounts, and the way in which they are affected by various transactions, can be shown as follows: (Home Office Books) (Branch Books) Home Office Investment in Branch 2K Asset transfers to branch XXX XXX XXX Asset transfers fom branch XXX Branch profit XXX XXX Branch loss XXX Establishment of Branch When a company establishes a branch, the transfer of a by the home office in the Investment in Bran the transfer with an entry to the Home Office accot Corporation of Makati, establishes a branch in Cebu. The home office transfers to the branch P100,000 in cash, new office equipment that cost P20,000. The home office records the transfer with the following entry: H(1)_ Investment in Cebu Branch 120,000 100,000 Cash Office Equipment 20,000 foumal entries are numbered consecutively throughout the chapter so that each ‘ed. Those entries made on the home office books are designated in this hile those on the branch books are identified with B. Note: J entry is identifi chapter by H, w! Cebu branch records the transfer of assets from the home office with the following entry: BQ) Cash 100,000 Office Equipment 20,000 Home Office 120,000 Note that after both the home office and the branch have recorded the transfer, the Investment jin Cebu Branch account on the home office books and the Home Office account on the branch books have reciprocal balances of P120,000.456 Chapteri} Recognition of Branch Income or Loss Income for each branch is computed periodically in the normal manner. Branches eldom) compute income taxes on individual income or record income tax expense on their books. Because the home office and its branches are separate legal entities, income taxes are computed for the company as a whole. All of the branch’s revenue and expense accounts are closed to its Income Summary account in the usual manner. The balance of the Income Summary account represents the branch’s income or loss, and is closed to the Home Office account. The Home Office account serves in place of retained earnings and other owners’ equity accounts on the books of the branch. When the branch income or loss is reported to the home office, an entry is made on the home office books to recognize the income or loss of the ich. For example, assume there isa credit balance of P60,000 in the Cebu branch’s Income Summary account at the end of the Cebu branch: BG) Income Summary 60,000 Home Office 60,000 Close income summary. Upon receiving a report of Cebu branch’s income for the period, the home office records the followingentry: H(4) Investment in Cebu Branch 60,000 Cebu Branch Income 60,000 Record Cebu branch income. These entries maintain the reciprocal relationship of the Investment in Cebu Branch. account and the Home Office account. Merchandise Shipments to a Branch Merchandise sold by the branch may be obtained éntirely from the home office ort may be allowed to acquire some merchandise from outside parties. Purchases of merchandise from outsiders are recorded in the normal manner. Cebu branch purchases P10,000 of merchandise from outside parties, and the branch uses a periodic inventory system, the branch records the transaction as follows: BOS) Purchases 10,000 Cash or Accounts Payable 10,000 Record purchase of merchandise from outsidersHome Office And Branch Accou i ting ~ General Procedures “ Under the perpetual i When merchandise a ony stem Inventory accountis debited instead of Purchases, the branch must record the cones from the home toa branch, both the home office and branch eitherat the original fer. Merchandise is transferred from the home office toa “cost. In this chapter gf ne cot! the home office or at some amount in excess of that £08 Preronly the merchandise transfer at original cost will be discussed. eee ee at Cost. Both the home office and the branch treat the transfer that AMG's home offen nya the transfer of any other asset, To illustrate, assume hanchand the rece transfers merchandise with a cost of P80,000 to its Cebu h use periodic i : 0 the home office books with the ‘Ellowi ie ony system. The transfer is recorded on H(6) Investment in Cebu Branch 80,000 Shipments to Branch : Transfer of merchandise to Cebu branch. 80,000 The balance of the Shipments to Branch account is subtracted from the total of beginning inventory and purchases in the computation of the home office's cost of goods sold for the period. This reduces the total goods available for sale and avoids an overstatement of cost of goods sold. ‘The branch records the merchandise received with the following entry: B(7) Shipments from Home Office 80,000 Home Office 80,000 Transfer of merchandise fiom home office. The Shipments from Home Office account on the branch books is inch computation of the branch's cost of goods sold as an addition to purchases; itincreases > the branch's total goods available for sale. The home office's Shipments to Branch account and the branch's Shipments from Home Office account are nominal accounts and therefore closed at the end of the period to Income Summary account together with the other revenue and expense accounts. es on Merchandise Shipments. Freight costs incurred in shipping Freight Chargé merchandise from the home office toa branch become part of the cost of the branch ‘ume that AMG's home office pays P5.000 to transport inventory. For example, ass' 80,000 of merchandise tot office with the following entry: H(8)_ Investment in Cebu Branch 85,000 Shipments to Branch 50,000 he Cebu branch. The transfer is recorded by the home Cash S Transfer of merchandise to Cebu branch.458 Chaptert ae ee ern ae uisld Cebu branch records the transfer as follows: BQ) Shipments from Home Office 80,000 Freight-In 5,000 ‘Home Office 85,000 Transfer of merchandise from home office. Accounting for Branch Plant Assets ‘The procedures to be used in accounting for branch plant assets will depend on whether branch plant assets are recorded in the branch books or in the home office books. Ifbranch plant assets are recorded in the books of the branch, and plant assets are purchased by the home office for the branch, an entry is required on the books ofboth the home office and the branch. Asan illustration of this, assume that the home office purchases P30,000 of office equipment for its Cebu branch. The home office records the purchase with the following entry: H(10) Investment in Cebu Branch 30,000 Cash 30,000 Purchase of equipment for Cebu branch. The purchase is recorded by the branch with the following entry: BUI) Office Equipment 30,000 Home Office 30,000 Purchase of equipment by the home office. If branch plant assets are recorded in the books of the home office rather than on the books of the branch, no entry is needed on the books of the branch if the ome offie makes thepurchase? For example, if the home office purchases P30,000 of office equipment for the Cebu branch, the home office records the purchase as follows: H(12) Office Equipment - Cebu Branch 30,000 Cash 30,000 Purchase of equipment for Cebu branch. No entry is recorded on the books of the branch.Home Office And Branch Ace inch Accounting — General Procedures eae On the other hand, i ms = aatheborepme ns ‘lant assets that are recorded on the Books example, assume ieee are needed by both the home office and the branch. As an by the branch. The brane eran Purchases P30,000 of office equipment to be used ranch records the purchase with the following entry: B(12) Home Ofice 30,000 Cash : 0,000 Purchase of equipment. : The home office records the purchase as follows: H(13) Office Equipment - Cebu Branch 30,000 Investment in Branch 201000 Purchase of branch equipment by Cebu branch ‘When the branch purchases an asset that is carried on the home office books. the balance of both the reciprocal accounts is redtged, The transaction is treated as ifthe branch had purchased equipment for he home office. Apportionment of Expenses Branch expenses incurred and paid by the branch are recorded directly on the books of the branch in the usual manner, However, the home office may allocate expenses to a branch. These allocated expenses might be of several types: a. Expenses incurred by the branch but paid by the home office. b. Expenses incurred by the home office on behalf of the branch; for example, depreciation on branch equipment carried on the home office books. ¢. Allocations of expenses incured by the home office: for example, aportion of the cost of general advertising. Illustration Asan illustration of the treatment of the allocated home office expenses to the branch, assume that the home office incurs the following expenses assigned to its: Cebu branch: itilities expense (expenses incurred by Cebu branch and billed to home office account) P15,000 Depreciation expense (on Cebu branch fixed assets carried on home office books) 5000 ‘Advertising expense (allocated to Cebu branch) 10,000 Total 30,000 ene ee) ie ee460 Chapterty ‘The home office already has recorded these expenses in the usual manner, asifthey are related to the home office. Periodically, the home office notifies the branch of the allocated expenses. The home office records the following entry upon notifying the branch of the P30,000 of allocated expenses: 30,000 H(I4) Investment in Cebu Branch Utilities Expense tO Déprecaition Expense 008 Advertising Expense Allocated expenses to Cebu branch, Upon notification of the expenses by the home office, the branch, records the expenses as follows: B(IS) Utilities Expense 15,000 Depreciation Expense 5,000 Advertising Expense 10000 oa Home Office Allocated expenses from the home office. Without these entries, the home office income would be understated and the branch income overstated. PREPARATION OF COMBINED FINANCIAL STATEMENTS In the preparation of combined financial statements for the company, the accounts of the home office and its branches are combined. Reciprocal or intracompany account balances must be eliminated becausse they relate to activities within the company rather than activities between the company and outside parties. To facilitate the preparation of combined financial statements, a working paper normally is used to combine the accounts of the home office and its branches, and to eliminate the reciprocal accounts. All eliminations are only made in the working paper, not on the separate books of the units being combined. Illustration As anillustration of the basic working elimination entries needed to prepare combined financial statements for a company with branch operations, assume the following balances of the reciprocal accounts on December 31, 201 6 after adjusting and closing entries have been prepared: Investment in Branch P295,000 Home Office 295,000 Shipments to Branch 85,000 85,000 Shipments from Home OfficeHome Offic To facilitate the preparation of comb; working paper is to be used, T needed: The fol ce And Bra inch Accounting. General Procedures 7 ined financial statements on December 31, 2016, lowing working paper elimination entries (E) are E(16) Home Office 295,000 Investment in Branch ee Eliminate reciprocal accounts, E(I7) Shipments to Branch 00) Shipments from Home Office 5 85,000 Eliminate shipments of merchandise. These entries do not appear on the books of either the home office or the branch. A working paper for combining the accounts of a home office and a branch is illustrated in the next section, ACCOUNTING FOR BRANCH OPERATIONS ILLUSTRATED Asacomprehensive illustration of accounting for branch operations, assume that MCG, Inc. of Quezon City, a distributor of computer equipment, establishes a branch sales office in Cebu City. Both the home office and the branch use the periodic inventory system. Branch fixed assets are recorded on the home office books. Transactions during 2016, the first year of branch operations, are summarized below: a. b © a e rae Cash is sent to Cebu branch, P10,000. Merchandise is shipped to the branch at cost, P100,000. Store equipment is purchased by the branch and carried in the home office books, 5,000. Credit sales: Home office, P450,000. Branch, P120,000. Collection of accounts receivable: Home office, P500,000. Branch, P110,000. Operating expenses paid: Home office, P76,000. Branch, P30,000. Cash remittance by Cebu branch to home office, P50,000. Operating expenses charged by home office to branch, P6,000.462 Chapter} ‘The journal entries to record the 2016 transactions on the books of MCG’s home - office and the Cebu branch are shown in Ilustration 11-2. Thenecessary closing entries on December 31, 2016 are presented in Illustration 11-3. In the journal entries recording inter-office transactions, take note the reciprocal relationship of the reciprocal accounts, Mlustration 11-2 Cebu Branch Books Home Office Books (a) Investment in Cebu Branch — 10,000 Cash 10,000 Cot 40,000 Home Office 10,000 Transfer of cash to Cebu Transfer of cash from Branch home office. (6) Investment 9 Cebu Branch 100,000 Shipment from HO 100.000 ‘Shipment to branch 100.000 Home Office 100,000 Transfer of merchandise Transfer of merchandise to branch From home office (6) Store Equipment ~ Cebu Home Office 5.000 Branch 5.000 Cash 5.000 Investment in Cebu Office equipment purchase Branch 5,000 ty the home office Store equipment purchase Jor the branch, (a) Accounts Recetvable 450,000 Accounts Receivable 430,000 ‘Sales 430,000 Sales 450,000 Sates of merchandise Sale of merchandise (e) Cash 500,000 Cash 110,000 “decounts Receivabie. 500,000 “Accounts Receivable 110,000 Collections on account Collections on account @ Operating Expenses 76,000 Operating Expenses 30,000 Cash 76,000 Cash 30,000 Operating expenses paid. Operaiing expenses paid (g)Cash 50,000 Home Office 50,000 Timvestient in Cebu Cash 50,000 Branch $0,000 Cash remittance (0 home Cash remittance from office Cebu branch (n) Invesiment in Cebu Branch 6,000 Operating Expenses 6,000 6,000 Home Office 6,000 Operating Expenses Operating expenses Operating expenses allocated to Cebu branch. allocated by the home office. offHome Office And Branch Accounting —General Proceds eneral Procedures 463 Closing Entri to PA0,000. The cosines that the branch inventory on December 31, 2016 amounts 'g entries on the books of the Cebu branch and the home office are presented below: Mlustration 11-3 Home 01 Office Books Cebu Branch Books 1) Sates , Income Summary fea Sales: ¥20,000 Ciara 450,000 oltre Simmary 120,000 (2) Income Summary ae icc 290, Income Summary 460,000 Inventory, 12/31 90,000 Inventory, 123 40,000 Shipments to Branch 100,000. ‘Shipment from HO 100,000 ieawentrons “U7 0,000 Close cost of sales. Purchases soainoe Close of cost of sales )income Summary 70,000 Income Summary 36,000 Operating Expenses 70,000 Operating Expenses 36,000 Close operating expenses. Close operating expenses (A) Investment in Cebu Branch 24,000 Income Summary 24,000 Cebu Branch income 24,000 Home Office 24,000 Record income from Cebu Close income summary. branch (5)Cebu Branch Income 24,000 Income Summary 24,000 Close Cebu branch income (6) Income Summary 114,000 114,000 Retained Earnings Close income summary. Note: Some of the amounts in closing entry (2) are assumed.464 Chapter? After the entries in Illustrations 11-2 and 11-3 have been posted, the Investment in Cebu Branch account on the books of the home office will have a debit balance of 85,000. The balance of the account is determined as follows: Mlustration 11-4; (Home Office Books) Investment in Cebu Branch Cash sent to branch P 10000 Equipment purchased by branch recorded on : home office books P 5,000 Merchandise shipped to Cash received from Cebu Cebu branch 100,000 branch 50,000 Operating expenses charged to Cebu branch 6.000 Cebu branch income 24,000 Balance forwarded 85,000 140,000 Balance P 85,000 On the other hand, the Home Office account on the books of the branch will have a credit balance of P85,000 , determined as follows: (Branch Books) Home Office Equipment purchased, recorded Cash received from home in home office books 5.000 office P10,000 Cash sent to home office 50,000 Merchandise received from home office 100,000 Operating expenses charged by home office 6,000 Balance forwarded Netincome 24000 Balance 85,000Home Office And Branch ich Accounting ~ General Procedures seh Separate Financial Statements Normally, the brancl : the we office ai neepe red its own financial statements so that the management of the branch, The homecya evaluate the operating results and financial position of ‘gus citeleiareyt sere also prepares its own finacial statements so that it may tly the results of its own operation and its own financial position. Based on the data in Ilustration 11-2. separal i -2, 11-3 and 11-4, the separate financial statements for the branch and the home office are presented below and in the next page. Ilustration 11-5 Financial Statements—Cebu branch: MCG Company—Cebu Branch ‘Statement of Financial Position December 31, 2016 Assets Cash P 35,000 Accounts receivable 10,000 Inventory 40,000 Total P 85,000 Liabilities and Equity Home Office 85,000 MCG Company~Cebu Branch Statement of Comprehensive Income For the Year Ended December 31, 2016 Sales P120,000 Cost of sales: Shipment from home office 100,000 Inventory, December 31 40,000 60,000 Gross income 60,000 Operating expenses 36,000 P 24,000 Comprehensive Income466 Chapter!) Financial Statements — Home Office: MCG Company—Home Office ‘Statement of Financial Position December 31, 2016 Assets — P 54,000, Accounts receivable co Inventory 20mm Store equipment Less: Accumulated depreciation LOO Store equipment ~ Cebu branch Spot Investment in branch — Total Liabilities and Equity ‘Accounts payable Resin) Capital stock 200,000 84,000 Retained earnings Total MCG Company — Home Office Statement of Comprehensive Income For the Year Ended December 31,2016 Sales 450,000 Cost of sales: Inventory, January I P 80,000 Purchases 400,000 Merchandise available for sale 480,000 Shipments to branch 100,000 Merchandise available for own sale 380,000 Inventory, December 31 90,000 290,000 Gross income 160,000 Operating expenses 70,000 Net income from own operation 90,000 Cebu branch income 24,000 114,000 Comprehensive incomeHome Office And Branch Account ting - General Procedures 457 Combined Financial Statements Ca nance of the home office and the branch are prepared to show ie eer ass transactions ofthe business entity with ouside. To achive this, ETS tote be eliminated. To facilitate the preparation of combined aaa, the tral beh arene. Two formats of working paper may abut ee ince working paper and the three-section working paper. In 1 for branch operations the tral balance working paper is normally used. The other format will be used in parent-subsidiary accountit The combined statements workin; i i ¢ paper using the trial balance approach for MCG Company for 2016 appears in lustation 11-6. “ The following elimination entries are required in the working paper: Fl) Home Office 85,000 Investment in Cebu Branch 85,000 Eliminate Home Office account against Investment in Branch account EQ) Shipments to Branch 100,000 he 100,000 Shipments from Home Office Eliminate Shipments to Branch and Shipments from Home Office accounts ‘The following points should be noted in the working paper: 1, Accounts having debit balances are first listed followed by accounts with credit balances. Beginning inventories are reported in the adjusted trial balances as debits; these are to be recognized in arriving at cost of sales. Ending inventories are presented as debits so that they may be recognized as assets in the preparation of the balance ae Accordingly, they are also presented under the eredits so that they may be recognized asdeductions: from cost of merchandise available for sale in arriving at the ited under the credits should be the beginning cost of sales. Retained earnings present balance. 2. The Home Office account is eliminated agai (elimination entry no. 1) 3.Shipments to Branch account is eliminated against the Shipments from Home Office account (elimination entry no. 2). ed financial statements for MCG Company prepared from the working tration 11-6 are shown in Illustration 11-7. inst the Investment in Branch account The combin paper in lusChapter 468 ‘syuauucys asypuryouous Yo sjunodse 2p OL (9) “sjunoase je2oudtoe4 ay) ‘uo s9pun pourejurew Mou auP syo0g 991450 21t04 oL () yours. ap pus 201yo auoy ayy jo yuauidinbsy ax Soares Toorerrd [ oTanEr [oo OEs yh Sees a) Goer bao 000'SLE__| 000°68r | 000°00L _| O00'98s__| O00"I9Id 000°19 1d eae ‘00008 O00 | 0006 Sy 00°18 td 000001 (9) ooo'oesa ooor0et ‘ 00°04 000°0L | Avenues “sBuyuzeo par a90"00 00°00 sed 001d " 00019 d () | 00019 A 000's8, 000's8 aiqes WINODdy 800% a 00" awaudba pue ate) ~ wontroaup pas 000°0E1 000°06 d| (gy fo ve s4ts3oq1 000°901 00 $64 ‘ ‘00002 sostodys Rusodg, oo0'001 4) ny 1 5 000'00r o-ad coorooy | “0 aHou HoH sods abe 20019 4 ) eo 000" = 00'0 oe 9 ones 000'rS a] 2 x 2 “@ 0 "G weung |e a Po nawams Peau al 2m (Pogues mete oDUp8 pg a a 9107 *1¢ 4aquis29q papug sk9Q 104 Wwroueury pauyquiog soy sadeg Burys0A4 Auvdwwoy DOW syuauay S11 wonpasnyHome Office And Br: '¢ Office And Branch Accounting - General Procedures = Combined Financial Statements Illustrated The el combined statements are easily prepared using the data found in the working paper. The combined statements of MCG Company are presented below: Mlustration 11-7 MCGCompany ‘Combined Statement of C1 For Year Ended December 31,2016 Sales 570,000 Cost of goods sold: Inventory, January 1 P 80,000 Add Purchases 400,000 Cost of goods available for sale 480,000 Inventory, December 31 130,000 350,000 Gross profit 220,000 Operating expenses 106,000 Comprehensive income 114,000 MCGCompany Combined Statement of Financial Position December 31, 2016 Assets Cash P 89,000 Accounts receivable 70,000 Inventory, December 31 130,000 Store equipment + 200,000 Less Accumulated depreciation 20,000 _ 180,000, Total Assets PA69,000 Liabilities and Stockholders" Equity Liabilities: 85,000 ‘Accounts payable Stockholders’ equity: Capital stock, P100 par value 200,000 Retained earnings 184,000 _ 384,000 Total Liabilities and Stockholders’ Equity 469,000470 Chapter} RECONCILIATION OF RECIPROCALACCOUNTS The Investment in Branch account on the home office books and the Home Office account on the branch books are reciprocal accounts and theoretically, should have the same balance at the end of the accounting period. However, this condition seldom» €xistsin practice because of bookkeeping or mechanical errors such as. duplication of entries, slides and transpositions on either set of books that have occured, or certain transactions may already have been recorded by one office and not yet by the other, or there isa time lag between the recording of the same transaction on’ the home office and branch books. The home office, for example, debits Investment in Branch account immediately upon the shipment of merchandise to the branch. The branch, on the other hand, credits Home Office account only at a later time when the merchandise are received, which may be several days after the shipment by the home office. Another example of a transaction which causes different balances in the two accounts is the remittance of cash by the branch to the home office. Entry on the branch books of the cash remittance is not recorded by the home office while the cash is still in transit The lack of agreement between the reciprocal accounts poses no problem during the accounting period. However, at the end of the accounting period, the reciprocal accounts must be brought into agreement before combined financial statements are prepared. ‘The data to be considered in reconciling the two accounts may be classified as follows: Debits in the Investment in Branch account without corresponding credits in the Home Office account. Credits in the Investment in Branch account without corresponding debits in the Home Office account. Debits in the Home Office account without corresponding credits in the Investment 1. w in Branch account. Credits in the Home Office account without corresponding debits in the Investment in Branch account. 5. Bookkeeping or mechanical errors on either set of books.Home Office And Branch 4 ich Accounting ~ General Procedures 471 Se tome sie thet 3 pets Teconciling account balancesat, year-end, assume following data on December 31,2016 records of Sweet Company contain the Investment in Branch (Home Office Books) Nov. 30 Balance 50,000 | Dee. 9 Cash recived from ec. 1 Expenses paid chara branch 30,000 i vane chargeable ; 28 Collection of branch iheniier econ 450 accounts restvable 5,000 Late 20,000 Balance forwarded 36,450 P71,450 71,450 Balance, December 31 eas oe Home Office (Branch Books) Dec, & Cash sent to home Nov. 30 Balance 50,000 oitice 30,000 29 Purchased office Abe panes 1540 equipment 8,000 28 Callection of home office Balance forwarded 19,540 accounts receivable 6,000 757.540 Blane, December 31 Pi9,s40 ‘Ananalysis of the accounts shows the existence of five reconcilling items, which are discussed below. 1. Adebit of P20,000 in the Investment Branch account without a corresponding credit in the Home Office account. home office shipped merchandise to the branch in the amount of P20,000. The shipment has not yet reached the branch as of December 31 ments appears on its books. The required and, therefore, no entry for the ship pears adjustment at year-end fortis type of reconcilingitem will bean entry on the branch books as follows: On December 30, the ‘Shipments from Home Office ~In Transit 20,000 Home Office 20,000Chapter 1) Mite TE Gin ee es The account Shipments from Home Office In Transit is tied to the Income Summary account. In the preparation ft t fom soe Onne for the branch, the P20,000 balance inthe account Shipments" a6 ice Tn Transit is added to the balance ofthe account Shipments from Home Oflcs, The total of these two accounts is now equal to the amount shown a the home office records as its shipments to branch. Therefore, the two reciprocal accounts can now be eliminated for the purpose of preparing acombined statement, ust add to its inventory Inaddition, the branch in determining its ending invento! ventor onhand the P20,000 worth of merchandise in transit. lot of merchandise will appear in the branch statement of financial position and will also be a part of the total inventory in the combined financial statements. 2. Acredit of P5,000 in the Investment Branch accout debit in the Home Office account. 's receivable of the branch was collected by the ‘omer. The collection was recorded by the home ‘urrent account. No entry has ntry is required on the branch int without a corresponding On December 28, an account: home office from a branch cust office by a debit to Cash and a credit to Branch C\ been made by the branch, therefore, the following books: Home Office 5,000 Accounts Receivable 5,000 3. Adebit of P8.000 in the Home Office account without a corresponding credit in the Investment in Branch account. OnDecember29, the branch purchased office equipment for P8,000. Since assets used by the branch ate carried in the home office records, the entry made by the branch for the purchase was a debit to Home Office and a credit to Cash. No entry has been made by the home offic, therefore, the following entry should be made in the home office books: Office Equipment - Branch 8,000 Investment in Branch 8,000 4, Acredit of P6,000 in the Home office account without a corresponding debit in the investment in branch account. On December 28, the branch collected for the home office an accounts receivable amounting to P6,000 from a home office customer. The collection was recorded by the branch by a debit to Cash and a credit to Home Office account.Home Off ice And Branch Accounting ~ General Procedures ” wo entry has been made by ing entry is required on the home office fe dices office; therefore, the following Investment in branch 000 Accounts receivable oe A debit of P1,450 in the Investment in Branch account was erroneously recorded by the branch in the Home Office account as P1,540, resulting to a difference of P90 (P1,540— P 1,450). The home office entry is assumed to be correct. The following enry is required on the books ofthe branch: Home Office 90 Expenses 90, The effect of these five end-of-period adjusting entries is to bring the reciprocal accounts into agreement, as shown by the following reconciliation statement. Illustration 11-8 ‘Sweet Company— Home Office and Branch Reconciliation of Reciprocal Accounts December 31,2016 (Home Office Books) (Branch Books) Invesiment in Branch Home Office Account Account Balances before adjustments P36,450 (Dr) PI9.540 (Cr) Additions: (I) Merchandise shipped to branch still in transit 20,000 (4) Receivable of home office collected by branch 6,000 Total 42.450 30,540 Deductions: Q) Receivable of branch collected by home office (5,000) @) Office equipment purchased by branch ( 8,000) (5) _ Error made by branch in recording expenses Adjusted balances P34,450_(Dr)