Professional Documents
Culture Documents
Advance Ch2
Advance Ch2
Advance Ch2
1
Branches and Divisions
2
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.
3
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.
4
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.
Consolidated financial statements are
required for these business
organizations.
5
Start-up Costs of Opening New Branches
6
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.
7
Accounting System for a Branch (contd.)
8
Accounting System for a Branch (contd.)
Distinct features of decentralized accounting
system [i.e. branch maintains its own
accounting records.]
1. Reciprocal [intracompany] ledger accounts
2. Acquisition of plant assets
3. Allocation [apportionment] of home office
expenses
4. Billing merchandise shipments
5. Consolidation of financial statements
9
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.
10
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.
11
Reciprocal Ledger Accounts Used by the Branch
and Home Office (contd.)
Branch
2
14
Acquisition of Plant Assets Used in Branch
15
Acquisition of Plant Assets Used in Branch
(contd.)
For the home office:
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:
17
Acquisition of Plant Assets Used in Branch
(contd.)
For the branch:
Home Office………………………xxx
Cash or a liability a/c……..…………..xxx
For the home office:
18
Branch Fixed Assets
H. Office
H. Office Accounted
H. Office
Branch
Fixed Purchase
Asset
H. Office
Branch Accounted
Branch
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 addition, the home office may charge
each branch interest on the capital
invested in each branch.
23
Interest Charged by the Home office on the Capital
Invested in Branches (contd.)
24
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.
25
Alternative Methods of Billing Merchandise
Shipments to Branches
Home Office
Investments in branch………………………. xxx
Inventories/ Shipments to branch ………………......xxx
Allowance for overvaluation of inventories-branch..xxx
Branch Office
Inventories/Shipments from HO……………. xxx
Home Office……………………………………….....xxx
26
Billed at the home office cost:
Strength: widely used because of its
simplicity
27
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.
28
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).
29
Billed at branch retail selling prices:
Strength: to increase the internal
control over inventories at branches.
30
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.
31
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.
32
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.
33
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.
34
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.
35
Accounting System for a Branch (contd.)
Decentralized Accounting for Branches
36
Combined financial Statements for Home
Office and Branch (for external use)(contd.)
Example I: Journal entries for
operations of a branch when
merchandise is billed at the cost of the
home office with a perpetual inventory
system.
37
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Assume that A Company bills
merchandise to Mason Branch at
home office cost and that M 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.
38
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 (2015) of operations of M
Branch are summarized below (start-
up costs are disregarded):
39
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 M Branch.
2. Merchandise with a home office cost of
$60,000 was shipped by the home office to
M Branch.
3. Equipment was acquired by M Branch for
$500, to be carried in the home office
accounting records. (Other plant assets for
M Branch generally are acquired by the
home office.)
40
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
4. Credit sales by M Branch amounted to
$80,000; the branch’s cost of the
merchandise sold was $45,000.
5. Collections of trade accounts receivable by
M Branch amounted to $62,000.
6. Payments for operating expenses by M
Branch totaled $20,000.
41
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
7. Cash of $37,500 was remitted by M Branch
to the home office.
8. Operating expenses incurred by the home
office and charged to M Branch totaled
$3,000.
42
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 M
Branch as follows:
43
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting M Branch Accounting
Records Journal Entries: Records Journal Entries:
2. Investment in Mason Inventories 60,000
Branch 60,000
Inventories 60,000 Home Office 60,000
3. Equipment: Mason Home Office 500
Branch 500
Investment in Mason Cash 500
Branch 500
44
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting M Branch Accounting Records
Records Journal Entries: Journal Entries:
4. None Trade Accounts
Receivable 80,000
Cost of Goods Sold 45,000
Sales 80,000
Inventories 45,000
45
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting M Branch Accounting Records
Records Journal Entries: Journal Entries:
5. None Cash 62,000
Trade
Account
Receivable 62,000
6. None Operating
Expenses 20,000
Cash 20,000
46
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office Accounting M Branch Accounting Records
Records Journal Entries: Journal Entries:
7. Cash 37,500 Home Office 37,500
Investment in Mason Cash 37,500
Branch 37,500
8. Investment in Mason Operating
Branch 3,000 Expenses 3,000
Operating Home Office 3,000
Expenses 3,000
47
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 M Branch
Date Explanation Debit Credit Balance
1999 Cash sent to branch 1,000 1,000 dr
Merchandise billed to
48
Combined financial Statements for Home Office and Branch
(for external use)(contd.)
Example I: (contd.)
Home Office
Date Explanation Debit Credit Balance
1999 Cash received from home
49
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.
50
Working Paper for Combined financial Statements--
Example I (contd.)
Assume that the M Branch’s ending
inventories of $15,000 at the end of
2015 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.
51
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 M Branch.
Income taxes are ignored in this
illustration.
52
Working Paper for Combined financial Statements--
Example I (contd.)
A COMPANY
Working paper for combined Financial
Statements of Home office and M Branch.
For Year Ended December 31,2015
(Perpetual Inventory System: Billing at Cost)
53
Working Paper for Combined financial Statements--
Example I (contd.)
Adjusted Trial Balances
Home Mason
Office Branch Eliminations Combined
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales (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 75,000 12,000 87,000
earnings below)
Totals -0- -0- -0-
54
Working Paper for Combined financial Statements--
Example I (contd.)
Adjusted Trial Balances
Statement of Retained Home Mason Eliminations Combined
Earnings Office Branch
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Retained earnings, Jan. (70,000) (70,000)
1, 2015
Net(income) (from
incomes statement (75,000) (12,000) (87,000)
above)
Dividends declared 40,000 40,000
Retained earnings,
Dec.31,2015 (to 117,000
balance sheet below)
Totals -0-
55
Working Paper for Combined financial Statements--
Example I (contd.)
Adjusted Trial Balances
Home M Branch Eliminations Combined
Balance Sheet Office
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Cash 25,000 5,000 30,000
Trade accounts
receivable (net) 39,000 18,000 57,000
Inventories 45,000 15,000 60,000
Investment in Mason
Branch 26,000 (a) (26,000)
Equipment 150,000 150,000
Accumulated
depreciation of (10,000) (10,000)
equipment
56
Working Paper for Combined financial Statements--
Example I (contd.)
Adjusted Trial Balances
Home M Branch Eliminations Combined
Balance Sheet Office
(contd.) Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Trade accounts payable (20,000) (20,000)
Home Office (26,000) (a) (26,000)
Common stock, $10 par (150,000) (150,000)
Retained earnings
(from statement of
retained earnings
above) (117,000)
Totals -0- -0- -0- -0-
(a) To eliminate reciprocal ledger account balances
* the elimination appears in the working paper only
57
Combined Financial Statements -- Example I
A COMPANY
Income Statement
For Year Ended December 31, 2015
Sales $ 480,000
Cost of goods sold 280,000
Gross margin on sales $ 200,000
Operating expenses 113,000
Net Income $ 87,000
Basic earnings per share of common
stock $
5.80
58
Combined Financial Statements -- Example I
(contd.)
A COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2015
59
Combined Financial Statements -- Example I
(contd.)
A COMPANY
Balance Sheet
December 31, 2015
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
60
Combined Financial Statements -- Example I
(contd.)
A COMPANY
Balance Sheet (contd.), December 31, 2015
Liabilities & Stockholders’ Equity
Liabilities
Trade accounts payable $20,000
Stockholders’ equity
Common stock, $10 par,
15,000 shares authorized, issued,
and outstanding $150,000
Retained earnings 117,000 267,000
Total liabilities & stockholders’
equity $287,000
61
Home Office Adjusting and Closing Entries and Branch
Closing Entries Performed on 12/31/2015 (perpetual
inventory system):
62
Home Office Adjusting and Closing Entries and Branch
Closing Entries Performed on 12/31/2015 (perpetual
inventory system): (contd.)
63
Example II: 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 M 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:
64
Example II: 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 M Branch Accounting
Records Journal Entries: Records Journal Entries:
Investment in Mason
Branch 90,000 Inventories 90,000
Inventories 60,000 Home Office 90,000
Allowance for
Overvaluation of
Inventories: Mason
Branch 30,000
65
Example II: Billing of Merchandise to Branches at
Prices above Home Office Cost (contd.)
Thus, the balances of both the
Investment in M Branch account
and Home Office account will be
$56,000, instead of $26,000 due to
the inventory mark up of $30,000.
66
Example II: Billing of Merchandise to Branches at
Prices above Home Office Cost (contd.)
A COMPANY
Flow of Merchandise for Mason Branch During 2015
Billed Home Markup (50% of
Price Office Cost;33 1/3 % of
Cost Billed Price)
Beginning
inventories
Add: Shipments
from home office $90,000 $60,000 $30,000
Available for sale $90,000 $60,000 $30,000
Less: Ending
inventories 22,500 15,000 7,500
Cost of goods
sold $67,500 $45,000 $22,500
67
Working Paper for Example II
A COMPANY
Working paper for combined Financial
Statements of Home office and M Branch
For Year Ended December 31,2015
(Perpetual Inventory System: Billing above
Cost)
68
Working Paper for Example II (contd.)
Adjusted Trial Balances
Home M Branch
Office Eliminations Combined
Dr (Cr) Dr(Cr) Dr (Cr) Dr (Cr)
Income Statement
Sales (400,000) (80,000) (48,000)
Cost of goods sold 235,000 67,500 (a) (22,500) 28,000
Operating expenses 90,000 23,000 113,000
Net Income(loss) (to
statement of retained 75,000 (10,500) (b) 22,500 87,000
earnings below)
Totals -0- -0- -0-
69
Working Paper for Example II (contd.)
Sales 80,000
Income Summary 10,500
Cost of Goods Sold 67,500
Operating Expenses 23,000
74
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).
75
Branch Closing Entries and Home office Adjusting
and Closing Entries (when billing at above the cost)
(contd.)
Home Office Adjusting and Closing Entries
76
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: M Branch 22,500
Realized Gross Profit:
M Branch Sales 22,500
To reduce allowance to
amount by which ending
inventories of branch exceed
cost.
77
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: M 22,500
Branch Sales
Income: M 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.)
78
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 M Branch =45,500(debit)*
Allowance for Overvaluation of =7,500(credit)**
Inventories: M Branch
Realized Gross Profit: M Branch =0
Income: M Branch =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. 79
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 2016) when
continuing with the perpetual inventory
system with a price markup.
80
Combined Financial Statements -- Example II
A COMPANY
Income Statement
For Year Ended December 31, 2015
Sales $ 480,000
Cost of goods sold 280,000
Gross margin on sales $ 200,000
Operating expenses 113,000
Net Income $ 87,000
Basic earnings per share of common
stock $
5.80
81
Combined Financial Statements -- Example I
I(contd.)
A COMPANY
Statement of Retained Earnings
For Year Ended December 31, 2015
82
Combined Financial Statements -- Example II
(contd.)
A COMPANY
Balance Sheet
December 31, 2015
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
83
Combined Financial Statements -- Example II
(contd.)
A COMPANY
Balance Sheet (contd.), December 31, 2015
Liabilities & Stockholders’ Equity
Liabilities
Trade accounts payable $20,000
Stockholders’ equity
Common stock, $10 par,
15,000 shares authorized, issued,
and outstanding $150,000
Retained earnings 117,000 267,000
Total liabilities & stockholders’
equity $287,000
84
Periodic Inventory System
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 M
Branch” (used by the home office) and
“Shipments from Home Office” (used by
the branch) are used.
85
Periodic Inventory System (contd.)
Example:
Example:
Continue with the A Company for a second
year of operations (2016) but using the
periodic inventory system for both the home
office and M Branch.
The beginning inventories for 2016 were
carried by M Branch at $22,500 (home office
cost is $15,000 due to a 50% markup by the
home office).
86
Periodic Inventory System (contd.)
Example: (contd.)
Assume that during 2016, the home office
shipped merchandise to M Branch that cost
$80,000 and M was billed at $120,000.
During 2016, M 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:
87
Periodic Inventory System (contd.)
Example: (contd.)
Home Office Accounting M Branch Accounting
Records Journal Entries: Records Journal Entries:
Investment in M Shipments from Home
Branch 120,000 Office 120,000
Home Office 120,000
Shipments to M
Branch 80,000
Allowance for
Overvaluation of
Inventories: M
Branch 40,000
None Cash (or Trade Accounts
Receivable) 150,000
Sales 150,000
88
Periodic Inventory System (contd.)
Example: (contd.)
The branch inventories at the end of 2016 amounted to
$30,000. The flow of merchandise for M Branch of year
2016 summarized below:
A COMPANY
Flow of Merchandise for Mason Branch During 2016
Billed Home Markup (50% of
Price Office Cost;33 1/3 % of
Cost Billed Price)
Beginning
inventories $22,500 $15,000 $7,500
Add: Shipments
from home office 120,000 80,000 40,000
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 $37,50089
Periodic Inventory System (contd.)
Example: (contd.)
The activities for the branch for 2016 are reflected
in the following two home office ledger accounts
and the reciprocal Home Office ledger account of
the branch: Investment in M Branch
Date Explanation Debit Credit Balance
2016 Balance, Dec. 31, 2015 45,500 dr
Merchandise billed to branch
merchandise
shipped to branch
during 2016 (50% of
cost) 40,000 47,500 cr
91
Periodic Inventory System (contd.)
Example: (contd.)
Home Office
Date Explanation Debit Credit Balance
2016 Balance, Dec. 31,
2015 45,500 cr
Merchandise
receivable from
home office 120,000 165,500 cr
Cash sent to home
office 113,000 52,500 cr
Operating expenses
Retained earnings,
Dec. 31, 2015 (117,000) (117,000)
Net Income (from
income statement
above) (85,000) (10,000) (d) (37,500) (132,500)
Dividends declared 60,000 27,500 60,000
Retained earnings,
Dec. 31, 2016 (to
balance sheet below) 85,000 10,000 189,500
Totals -0- 95
Periodic Inventory System (contd.)
Example: (contd.)
Adjusted Trial Balances
Home M Branch Eliminations Combined
Balance Sheet Office
Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr)
(2)Sales 150,000
CGS 112,500
Operating expenses 27,500
Income Summary 10,000
100
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) :
102
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.)
103
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 M Branch
= $67,000 (dr.)
(57,000+10,000)
Allowance for Overvaluation of
Inventories
= $10,000 (cr.) (47,500 -37,500)
104
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: M Branch
= $0 (10,000-10,000)
Home Office (a reciprocal account of
Investment)
= $67,000 (cr.) (57,000+10,000)
105
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.
106
Reconciliation of Reciprocal Ledger Accounts
(contd.)
Example: Assume that the home office
and branch accounting records of
Mercer Company contain the following
data on 12/31/15:
107
Reconciliation of Reciprocal Ledger Accounts
(contd.)
Investment in Arvin Branch
(in accounting records of Home office)
Date Explanation Debit Credit Balance
2015
Nov. 30 Balance 62,500 dr
Dec. 10 Cash received from
branch 20,000 42,500 dr
27 Collection of branch
trade accounts 1,000 41,500 dr
receivable
29 Merchandise
shipped to branch 8,000 49,500 dr
108
Reconciliation of Reciprocal Ledger Accounts
(contd.)
Home Office
(in accounting records of Arvin Branch)
Date Explanation Debit Credit Balance
2015
Nov. 30 Balance 62,500 cr
Dec. 7 Cash sent to home
office 20,000 42,500 cr
28 Acquired equipment 3,000 39,500 cr
30 Collection of home
office trade accounts 2,000 41,500 cr
receivable
109
Mercer Co.-HO & Arvin Branch
Reconciliation of Reciprocal Ledger Accounts
December 31, 20X1
Home Investment in
Office Branch
(Branch (HO Books)
Books)
Balances Before Adjustments Br.41,500 Br.49,500
Add: Shipments in Transit 8,000
Collection of HO A/R @ Branch 2,000
Less: Collection of Branch A/R @ HO
(1,000)
Purchase of Equipment to be (3,000)
accounted @HO
Adjusted Balances 48,500 Br.48,500
111
Reconciliation of Reciprocal Ledger Accounts
(contd.)
For Arvin Branch:
1.Home Office 1,000
Trade Accounts
Receivable 1,000
2.Inventory 8,000
Home Office 8,000
112
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
113
Reconciliation of Reciprocal Ledger Accounts
(contd.)
The balance of Investment in Branch: Arvin
ledger account at the home office equals:
$ 49,500 (dr.)
- 3,000 (cr.)
+ 2,000 (dr.)
$ 48,500 (dr.)
114
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 (cr.)
- 1,000 (dr.)
+ 8,000 (cr.)
$ 48,500 (cr.)
115
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.
116
Transactions between Branches (contd.)
Example:
The home office shipped merchandise
costing $8,000 to K Branch and paid freight
costs of $500.
A week later, the home office instructed K
Branch to transfer this merchandise to D
Branch. K paid $400 for the transfer.
If the merchandise had been shipped directly
from the home office to D, the freight costs
would have been $600.
117
Transactions between Branches (contd.)
Journal entries for these transactions are:
In Accounting Records of Home Office:
Investment in K Branch 8,500
Inventory 8,000
Cash 500
118
Interbranch Transactions (contd.)
. Freight cost=$500
Home K
Office Branch
Dandii Branch
120
Transactions between Branches (contd.)
121
Freight Costs on Merchandise Shipments to Branch
122
Freight Costs on Merchandise Shipments to Branch
124
Freight Costs on Merchandise Shipments & Inter
Branch Transactions
126
Freight Costs on Merchandise Shipments & Inter
Branch Transactions