Home office and

Branch
Accounting –
Special
Procedures
Closing Entries
Home Office Books Branch Books
Sales 550,000

Shipment to Branch 120,000 Sales 228,000

Merchandise Inventory,12/31/16 110,000 Merchandise Inventory,12/31/16 65,000

Merchandise Inventory,1/1/16 90,000 Merchandise Inventory,1/1/16 52,000

Purchases 500,000 Shipment from Home Office 156,000

Operating Expenses 95,000 Operating Expenses 45,000

Income Summary 95,000 Income Summary 40,000

To adjust the ending inventory and to close the beginning inventory and the nominal accounts

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 Home Office Books Branch Books
Investment in Branch 40,000 Income Summary 40,000

Branch Income Summary 40,000 Home Office 40,000

To record the net income reported by the branch. To close the Income Summary account to the Home Office.

Allowance for 33,000

Overvaluation
of Branch Inventory
Branch Income 33,000
To recognize as realized profit the mark-up of merchandise
applicable to goods sold by the branch during 2016.

Branch Income 73,000

Income Summary 73,000

To close branch income (as adjusted) to the general Income

Summary account

Income Summary 168,000

Retained Earnings 168,000

To close the general Income Summary to Retained Earnings

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 A review of the closing entries on the home office books pertaining branch operations for the second year reveals
the following:

1. Closing entry (2) records the branch net income (loss) reported by the branch.
2. Closing entry (3) records the realized profit on sales made by the branch of
merchandise billed above cost, computed as follows:

Approach A

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 A review of the closing entries on the home office books pertaining branch operations for the second year reveals
the following:

1. Closing entry (2) records the branch net income (loss) reported by the branch.
2. Closing entry (3) records the realized profit on sales made by the branch of
merchandise billed above cost, computed as follows:

Approach B

Balance of Allowance for Overvaluation of Branch Inventory account P48,000

Less: Overvaluation of Branch ending inventory:
Billed Price P65,000
Cost (65,000 – 130%) 50,000 15,000
Realized profit P33,000

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After the closing entry has been posted, the Allowance for Overvaluation of Branch
Inventory account will appear as follows:

Allowance for Overvaluation of Branch Inventory

Realization of 30 % mark –up Balance, December 31, 2015 P12,000
P33,000
on merchandise sold by branch
Balance forwarded Mark-up on merchandise shipped
15,000 36,000
to branch during 2016

P48,000
3. Closing entry (4) closes the branch net income insofarBalance,
as the home office is concerned
December 31, 2016 of P73,000 P15,000
(P40,000+ P33,000) to the general Income Summary account.
P48,000
Working papers for the succeeding years when billings to branch are in excess of cost are prepared with procedures and principles
similar to those for the second year.
Elimination entries and closing entries for the second year are similar to those for the succeeding years.
Hence, reference to the working papers for the second year facilitates the preparation of the working papers for any of the following
years.

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Combined
Financial
Statements
After the preparation of the working
paper, combined statement of
comprehensive income and
combined statement of financial
position can now be prepared by
referring to the last four columns of
the working paper.
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Illustration 12 -5

MCG, INC.
Combined Statement of CI
Year Ended December 31,2016
Sales
Cost of Sales: 778,000
Merchandise Inventory, P130,000
Jan.1
Purchases 500,000
Merchandise available for 630,000
sale
LESS: Merchandise inventory, December 31 160,000 470,000
Gross profit 308,000
Operating expenses 140,000
Net income 168,000

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Illustration 12 -5

MCG, INC.
Combined Statement of Financial Position
December 31,2016
Assets
Cash P136,000
Accounts receivable 115,000
Merchandise inventory 160,000
Plant and equipment P240,000
Less: Accumulated depreciation 35,000 205,000
Total Assets P616,000
Liabilities and Stockholders Equity
Liabilities:
Accounts payable P44,000
Stockholder’s Equity
Retained eanings 200,000
Capital stock, P100 par 372,000 572,000
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Total Liabilities and Stockholders Equity P616,000
Modification
of Entries-
Perpetual
Inventories
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 If the home office and the branch maintain the perpetual inventory system, the use of the
accounts Shipments to Branch and Shipments from Home Office is unnecessary.

The shipment of merchandise to branch is recorded by the home office by :

Investment in Branch account (billed price) XX
Merchandise Inventory account (actual cost ) XX
Allowance for Overvaluation of Branch inventory XX
account

Upon receipt of the merchandise:

Merchandise Inventory account XX
Home Office account (billed price) XX

At the
When a sale end ofbythe
is made theaccounting
branch: period, the home office reduces its Allowance for
Overvaluation
Cost ofofGoods
BranchSold
Inventory
accountto bring the amount of overvaluation
XX to relate only to the
ending inventory. Merchandise
The corresponding credit
Inventory is to Branch Income accountXX
account

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TRANSACTION
S BETWEEN
BRANCHES
(1) Interbranch transfers of cash, and
(2) interbranch transfers of
merchandise.

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(1) Interbranch transfers of cash

Normally, branch activities are limited to transactions with the home office and with
outsiders. Occasionally though, the home office may instruct one branch to transfer
cash to another branch. instead of using special accounts with the other branches, a
branch will clear such transfer through its Home Office account

Illustration. Assume that as instructed by the home office, Branch A sends cash of P10,000 to Branch B.

Home office books Branch A books

Investment in Branch B 10,000 Cash 10,000

Investment in Branch A 10,000 Home office 10,000

Branch A books
This procedure does not require settlement between the
Home office 10,000 branches; extent of the
accountability of a branch insofar as affiliated units are
Cash 10,000 concerned, is summarized in one
account, the Home Office account
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(1) Interbranch transfers of merchandise

In some instances, the home office may find it necessary to authorize the transfer of merchandise
from one branch to another. Like interbranch transfers of cash, branches should not carry an account with
another branch but should clear the transfer through its Home Office account.

for interbranch transfers of merchandise, the handling of freight charges poses a special problem.
Freight on goods received by the branch directly from home office are properly included in the cost of
branch inventory, but the transfer of merchandise from one branch to another does not justify increasing
the inventory value by the additional freight costs incurred because of indirect routing.

excess freight cost should be absorbed by the home office and treated as an operating expense.

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(2) Interbranch transfers of merchandise

Illustration. The home office shipped merchandise costing P12,000 to Branch X and paid freight of P800. Shortly
afterward, the home office instructed Branch X to transfer this merchandise to Branch Y. Freight costs of P600 were
paid by Branch X to carry out the order. If the merchandise had been shipped directly from the home office to Branch
Y, the freight cost could have been P1,000.

Home office books Investment in Branch Y 13,000

Investment in Branch X 12,800 Interbranch Freight expense 400

Shipments to Branch X 12,000 Investment in Branch X 13,400

Cash 800
To record the shipment of merchandise from Branch X
to Branch Y.
To record the shipment of merchandise to Branch X and
the payment of freight cost of P800 incurred on the
shipment

Shipments to Branch X 12,800

Shipments to Branch Y 12,000

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(2) Interbranch transfers of merchandise

Illustration. The home office shipped merchandise costing P12,000 to Branch X and paid freight of P800. Shortly
afterward, the home office instructed Branch X to transfer this merchandise to Branch Y. Freight costs of P600 were
paid by Branch X to carry out the order. If the merchandise had been shipped directly from the home office to Branch
Y, the freight cost could have been P1,000.

Branch X books Home office 13,400

Shipments from Home Office 12,000 Shipments from Home Office 12,000

Freight In 800 Freight In 800

Home office 12,800 Cash 600

To record the receipt of merchandise from home office To record the transfer of merchandise to Branch Y upon
with freight paid in advance by the home office. instruction of home office, and the payment of P600
freight cost

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(2) Interbranch transfers of merchandise

Illustration. The home office shipped merchandise costing P12,000 to Branch X and paid freight of P800. Shortly
afterward, the home office instructed Branch X to transfer this merchandise to Branch Y. Freight costs of P600 were
paid by Branch X to carry out the order. If the merchandise had been shipped directly from the home office to Branch
Y, the freight cost could have been P1,000.

Branch Y books

Shipments from Home Office 12,000

Freight In 1,000 The excess freight cost arising from such

Home office 13,000 shipments generally is a result of
inefficient planning of original shipments
To record the receipt of merchandise and, therefore, should not be included in
transferred from Branch X as per order of
home office, and the normal freight
inventories.
cost billed by home office

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