accounting for branches and Combined FS(2)_(0).pptx

Accounting

1. Accounting for Branches and Combined Financial Statements Chapter 2 1 Accounting for Branches

2. Accounting for Branches 2 Objectives of this Chapter To learn the accounting and reporting for segments (i.e., branches and division) of a business entity.

3. Accounting for Branches 3 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.

4. Accounting for Branches 4 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.

5. Accounting for Branches 5 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.  

6. Accounting for Branches 6 Branches and Divisions (contd.) Divisions: Accounting for a division operated as a separate corporation is different from that of branches which requires consolidated financial statements .

7. Accounting for Branches 7 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.

8. Accounting for Branches 8 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.

9. Accounting for Branches 9 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.  

10. Accounting for Branches 10 Accounting System for a Branch (contd.) This chapter focuses on the second system that the branch maintains its own accounting records.

11. Accounting for Branches 11 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.

12. Accounting for Branches 12 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.

13. Accounting for Branches 13 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.

14. Accounting for Branches 14 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.

15. Accounting for Branches 15 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:

16. Accounting for Branches 16 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.

17. Accounting for Branches 17 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:

18. Accounting for Branches 18 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.

19. Accounting for Branches 19 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.

20. Accounting for Branches 20 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.

21. Accounting for Branches 21 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.

22. Accounting for Branches 22 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.

23. Accounting for Branches 23 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.

24. Accounting for Branches 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. Accounting for Branches 25 Billed at the home office cost: Strength: widely used because of its simplicity Weakness: attributes all gross profits of the business to the branches.

26. Accounting for Branches 26 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.

27. Accounting for Branches 27 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).

28. Accounting for Branches 28 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.

29. Accounting for Branches 29 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.

30. Accounting for Branches 30 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.

31. Accounting for Branches 31 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.

32. Accounting for Branches 32 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.  

33. Accounting for Branches 33 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.

34. Accounting for Branches 34 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.

35. Accounting for Branches 35 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) Assume that Ethiopian Pharmaceutical Agency(EPSA) bills merchandise to Adama Branch at home office cost and that Adama 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.

36. Accounting for Branches 36 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 (2000) of operations of Adama Branch are summarized below (start-up costs are disregarded):

37. Accounting for Branches 37 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 Adama Branch. 2. Merchandise with a home office cost of $60,000 was shipped by the home office to Adama Branch. 3. Equipment was acquired by Adama Branch for $500, to be carried in the home office accounting records. (Other plant assets for Adama Branch generally are acquired by the home office.)

38. Accounting for Branches 38 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) 4. Credit sales by Adama Branch amounted to $80,000; the branch’s cost of the merchandise sold was $45,000. 5. Collections of trade accounts receivable by Adama Branch amounted to $62,000. 6. Payments for operating expenses by Adama Branch totaled $20,000.

39. Accounting for Branches 39 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) 7. Cash of $37,500 was remitted by Adama Branch to the home office. 8. Operating expenses incurred by the home office and charged to Adama Branch totaled $3,000.

40. Accounting for Branches 40 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 Adama Branch as follows: Home Office Accounting Records Journal Entries: Adama Branch Accounting Records Journal Entries: 1.Investment in Adama Branch 1,000 Cash 1,000 Cash 1,000 Home Office 1,000

41. Accounting for Branches 41 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) Home Office Accounting Records Journal Entries: Adama Branch Accounting Records Journal Entries: 2. Investment in Adama Branch 60,000 Inventories 60,000 Inventories 60,000 Home Office 60,000 3. Equipment: Adama Branch 500 Home Office 500 Investment in Adama Branch 500 Cash 500

42. Accounting for Branches 42 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) Home Office Accounting Records Journal Entries: Adama Branch Accounting Records Journal Entries: 4. None Trade Accounts Receivable 80,000 Cost of Goods Sold 45,000 Sales 80,000 Inventories 45,000

43. Accounting for Branches 43 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) Home Office Accounting Records Journal Entries: Adama Branch Accounting Records Journal Entries: 5. None Cash 62,000 Trade Account Receivable 62,000 6. None Operating Expenses 20,000 Cash 20,000

44. Accounting for Branches 44 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) Home Office Accounting Records Journal Entries: Adama Branch Accounting Records Journal Entries: 7. Cash 37,500 Home Office 37,500 Investment in Adama Branch 37,500 Cash 37,500 8. Investment in Adama Branch 3,000 Operating Expenses 3,000 Operating Expenses 3,000 Home Office 3,000

45. Accounting for Branches 45 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 Adama Branch Date Explanation Debit Credit Balance 2000 Cash sent to branch Merchandise billed to branch at home office cost Equipment acquired by branch, carried in home office accounting records Cash received from branch Operating expenses billed to branch 1,000 60,000 3,000 500 37,500 1,000 dr 61,000 dr 60,500 dr 23,000 dr 26,000 dr

46. Accounting for Branches 46 Combined financial Statements for Home Office and Branch (for external use )(contd.) Example I: (contd.) Home Office Date Explanation Debit Credit Balance 2000 Cash received from home office Merchandise received from home office Equipment acquired Cash sent to home office Operating expenses billed by home office 500 37,500 1,000 60,000 3,000 1,000 cr 61,000 cr 60,500 cr 23,000 cr 26,000 cr

47. Accounting for Branches 47 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.  

48. Accounting for Branches 48 Working Paper for Combined financial Statements--Example I (contd.) Assume that the Adama Branch’s ending inventories of $15,000 at the end of 2000 had been verified, the following work sheet is based on the transactions and With additional assumed data for the home office trial balance.

49. Accounting for Branches 49 Working Paper for Combined financial Statements--Example I (contd.) All the year-end adjusting entries except the home office entries had been made. The working paper begins with the adjusted trial balance of the home office and Adama Branch. Income taxes are ignored in this illustration.

50. Accounting for Branches 50 Working Paper for Combined financial Statements--Example I (contd.) EPSA w orking paper for combined Financial Statements of Home office and Adama Branch. For Year Ended December 31,2000 (Perpetual Inventory System: Billing at Cost )

51. Accounting for Branches 51 Working Paper for Combined financial Statements--Example I (contd.) -0- -0- -0- Totals 87,000 12,000 75,000 Net Income (to statement of retained earnings below) 113,000 23,000 90,000 Operating expenses 280,000 45,000 235,000 Cost of goods sold ( 480,000 ) (80,000) (400,000) Sales Income Statement Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances

52. Accounting for Branches 52 Working Paper for Combined financial Statements--Example I (contd.) -0- Totals 117,000 Retained earnings, Dec.31,2000 (to balance sheet below) 40,000 40,000 Dividends declared (87,000) (12,000) (75,000) Net(income) (from incomes statement above) (70,000) (70,000) Retained earnings, Jan. 1, 2000 Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances Statement of Retained Earnings

53. Accounting for Branches 53 Working Paper for Combined financial Statements--Example I (contd.) (10,000) (10,000) Accumulated depreciation of equipment (a) (26,000) 26,000 Investment in Adama Branch 60,000 15,000 45,000 Inventories 57,000 18,000 39,000 Trade accounts receivable (net) 30,000 5 ,000 25, 000 Cash Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances Balance Sheet Equipment 150,000 150,000

54. Accounting for Branches 54 Working Paper for Combined financial Statements--Example I (contd.) -0- -0- -0- -0- Totals (117,000) Retained earnings (from statement of retained earnings above) (150,000) (150,000) State Capital (a) (26,000) (26,000) Home Office (20,000) (20,000) Trade accounts payable Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances Balance Sheet (contd.) (a) To eliminate reciprocal ledger account balances * the elimination appears in the working paper only

55. Accounting for Branches 55 Combined Financial Statements -- Example I EPSA Income Statement For Year Ended December 31, 2000 $ 87,000 Net Income 113,000 Operating expenses $ 200,000 Gross margin on sales 280,000 Cost of goods sold $ 480,000 Sales

56. Accounting for Branches 56 Combined Financial Statements -- Example I (contd.) EPSA Statement of Retained Earnings For Year Ended December 31, 2000 $ 117,000 Retained earnings, end of year 40,000 Less: Dividends $ 157,000 Subtotal 87,000 Add: Net income $ 70,000 Retained earnings, beginning of year

57. Accounting for Branches 57 Combined Financial Statements -- Example I (contd.) EPSA Balance Sheet December 31, 2000 $287,000 Total assets 140,000 10,000 Less: Accumulated depreciation $150,000 Equipment 60,000 Inventories 57,000 Trade accounts receivable (net) $ 30,000 Cash Assets

58. Accounting for Branches 58 Combined Financial Statements -- Example I (contd.) EPSA Balance Sheet (contd.), December 31, 2000 $287,000 Total liabilities & stockholders’ equity 267,000 117,000 Retained earnings $150,000 State Capital Equity $20,000 Trade accounts payable Liabilities Liabilities & Stockholders’ Equity

59. Accounting for Branches 59 Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/2000 (perpetual inventory system): Home Office Accounting Records Adjusting and Closing Entries: Adama Branch Accounting Records Closing Entries: None Sales 80,000 Cost of Goods Sold 45,000 Operating Expenses 23,000 Income Summary 12,000

60. Accounting for Branches 60 Home Office Adjusting and Closing Entries and Branch Closing Entries Performed on 12/31/2000 (perpetual inventory system): (contd.) Home Office Accounting Records Adjusting and Closing Entries: Adama Branch Accounting Records Closing Entries: Investment in Adama Branch 12,000 Income Summary 12,000 Income: Adama Branch 12,000 Home Office 12,000 Income: Adama Branch 12,000 None Income Summary 12,000

61. Accounting for Branches 61 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 Adama 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:

62. Accounting for Branches 62 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 Records Journal Entries: Adama Branch Accounting Records Journal Entries: Investment in Adama Branch 90,000 Inventories 90,000 Inventories 60,000 Home Office 90,000 Allowance for Overvaluation of Inventories: Adama Branch 30,000

63. Accounting for Branches 63 Thus, the balances of both the Investment in Adama Branch account and Home Office account will be $56,000, instead of $26,000 due to the inventory mark up of $30,000. Billing of Merchandise to Branches at Prices above Home Office Cost (contd.)

64. Accounting for Branches 64 EPSA Flow of Merchandise for Adama Branch During 2000 Billing of Merchandise to Branches at Prices above Home Office Cost (contd.) $22,500 $45,000 $67,500 Cost of goods sold 7,500 15,000 22,500 Less: Ending inventories $30,000 $60,000 $90,000 Add: Shipments from home office $30,000 $60,000 $90,000 Beginning inventories Markup (50% of Cost;33 1/3 % of Billed Price) Home Office Cost Billed Price Available for sale

65. Accounting for Branches 65 Working Paper for Example II EPSA Working paper for combined Financial Statements of Home office and Adama Branch For Year Ended December 31,2000 (Perpetual Inventory System: Billing above Cost )

66. Accounting for Branches 66 Working Paper for Example II (contd.) -0- -0- -0- Totals 87,000 (b) 22,500 (10,500) 75,000 Net Income(loss ) 113,000 23,000 90,000 Operating expenses 280,000 (a) (22,500) 67,500 235,000 Cost of goods sold ( 480,000 ) (80,000) (400,000) Sales Income Statement Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances

67. Accounting for Branches 67 Working Paper for Example II (contd.) -0- Totals 117,000 Retained earnings, Dec.31,2000 (to balance sheet below) 40,000 40,000 Dividends declared (87,000) 10,500 (75,000) Net(income) loss (from incomes statement above) (70,000) (70,000) Retained earnings, Jan. 1, 2000 Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances Statement of Retained Earnings (b) (22,500)

68. Accounting for Branches 68 Working Paper for Example II (contd.) 150,000 150,000 Equipment (c) (56,000) 56,000 Investment in Adama Branch 60,000 (a) (7,500) 22, 500 45,000 Inventories 57,000 18,000 39,000 Trade accounts receivable (net) 30,000 5 ,000 25, 000 Cash Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances Balance Sheet Allowance for overvaluation of inventories: Adama Branch (30,000) (a) 30,000

69. Accounting for Branches 69 Working Paper for Example II (contd.) -0- -0- -0- -0- Totals (117,000) Retained earnings(from statement of retained earnings above) (150,000) (150,000) Common stock, $10 par (c) 56,000 (56,000) Home Office ( 10,000) ( 10,000) Trade accounts payable Dr (Cr) Dr (Cr) Dr(Cr) Dr (Cr) Adama Branch Home Office Combined Eliminations Adjusted Trial Balances Balance Sheet (contd.) Accumulated depreciation (20,000) (20,000)

70. Accounting for Branches 70 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 2000 are as follows: Sales 80,000 Income Summary 10,500 Cost of Goods Sold 67,500 Operating Expenses 23,000 To close revenue and expense ledger accounts

71. Accounting for Branches 71 Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) Home Office 10,500 Income Summary 10,500 To close the net loss in the Income Summary account to the Home Office account

72. Accounting for Branches 72 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).  

73. 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 Income: Adama Branch 10,500 Investment in Adama Branch 10,500 To record net loss reported by branch

74. Accounting for Branches 74 Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) Allowance for Overvaluation of Inventories: Adama Branch 22,500 Realized Gross Profit: Adama Branch Sales 22,500 To reduce allowance to amount by which ending inventories of branch exceed cost. Home Office Adjusting and Closing Entries (contd.)

75. Accounting for Branches 75 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: Adama Branch Sales 22,500 Income: Adama Branch 10,500 Income Summary 12,000 To close branch net loss and realized gross profit to Income Summary ledger account .

76. Accounting for Branches 76 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 Adama Branch =45,500(debit)* Allowance for Overvaluation of Inventories: Adama Branch =7,500(credit)** Realized Gross Profit: Adama Branch = 0 Income: Adama 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.

77. Accounting for Branches 77 Branch Closing Entries and Home office Adjusting and Closing Entries (when billing at above the cost) (contd.) Similar working paper eliminations will be prepared for the following year (i.e., year 2000) when continuing with the perpetual inventory system with a price markup.

78. Accounting for Branches 78 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 Adama Branch” (used by the home office) and “Shipments from Home Office” (used by the branch) are used.

79. Accounting for Branches 79 Periodic Inventory System (contd.) Example: Example: Continue with the EPSA Company for a second year of operations (2000) but using the periodic inventory system for both the home office and Adama Branch. The beginning inventories for 2000 were carried by Adama Branch at $22,500 (home office cost is $15,000 due to a 50% markup by the home office).

80. Accounting for Branches 80 Periodic Inventory System (contd.) Example: ( contd.) Assume that during 2000, the home office shipped merchandise to Adama Branch that cost $80,000 and Adama was billed at $120,000. During 2000, Adama 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:

81. Accounting for Branches 81 Periodic Inventory System (contd.) Example: ( contd.) Home Office Accounting Records Journal Entries: Adama Branch Accounting Records Journal Entries: Investment in Adama Branch 90,000 Shipments from Home Office 120,000 Home Office 120,000 Shipments to Adama Branch 80,000 Allowance for Overvaluation of Inventories: Adama Branch 40,000 None Cash (or Trade Accounts Receivable) 150,000 Sales 150,000

82. Accounting for Branches 82 The branch inventories at the end of 2000 amounted to $30,000. The flow of merchandise for Adama Branch of year 2000 summarized below: EPSA COMPANY Flow of Merchandise for Adama Branch During 2000 Periodic Inventory System (contd.) Example: ( contd.) Available for sale $37,500 $75,000 $112,500 Cost of goods sold (10,000) (20,000) (30,000) Less: Ending inventories $47,500 $95,000 $142,500 Add: Shipments from home office 40,000 80,000 120,000 Beginning inventories Markup (50% of Cost;33 1/3 % of Billed Price) Home Office Cost Billed Price $22,500 $15,000 $7,500

83. Accounting for Branches 83 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 Adama Branch Date Explanation Debit Credit Balance 2000 Balance, Dec. 31, 2000 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 120,000 4,500 113,000 45,500 dr 165,500dr 52,500 dr 57,000 dr

84. Accounting for Branches 84 Periodic Inventory System (contd.) Example: ( contd.) Allowance for Overvaluation of Inventories: Adama Branch Date Explanation Debit Credit Balance 2000 Balance, Dec. 31, 2000 7,500 cr Makeup on merchandise shipped to branch during 2000 (50% of cost) 40,000 47,500 cr

85. Accounting for Branches 85 Periodic Inventory System (contd.) Example: ( contd.) Home Office Date Explanation Debit Credit Balance 2000 Balance, Dec. 31, 2000 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 billed by Home office 4,500 57,000 cr

86. Accounting for Branches 86 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.

87. Accounting for Branches 87 Periodic Inventory System (contd.) Example: ( contd.) The working paper for combined financial statements under the periodic inventory system is as follows: Income Statement Adjusted Trial Balances Eliminations Combined Home Office Adama Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) Sales (500,000) (150,000) (650,000) Inventories, Dec. 31, 2000 45,000 22,500 (b) (7,500) 60,000 Purchases 400,000 400,000 Shipments to Adama Branch (80,000) (a) 80,000

88. Accounting for Branches 88 Periodic Inventory System (contd.) Example: ( contd.) Income Statement (contd.) Adjusted Trial Balances Eliminations Combined Home Office Adama Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) Shipments from home office 120,000 (a)(120,000) Inventories, Dec. 31,2000 (70,000) (30,000) (c) 10,000 (90,000) Operating expenses 120,000 27,500 147,500 Net Income( to statement of retained earnings below) 85,000 10,000 (d) 37,500 132,500 Totals -0- -0- -0-

89. Accounting for Branches 89 Periodic Inventory System (contd.) Example: ( contd.) Statement of Retained Earnings Adjusted Trial Balances Eliminations Combined Home Office Adama Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) Retained earnings, Dec. 31, 2000 (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, 2000 (to balance sheet below) 85,000 10,000 189,500 Totals -0-

90. Accounting for Branches 90 Periodic Inventory System (contd.) Example: ( contd.) Balance Sheet Adjusted Trial Balances Eliminations Combined Home Office Adama Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) Cash 30,000 9,000 39,000 Trade accounts receivable (net) 64,000 28,000 92,000 Inventories, Dec. 31, 2000 70,000 30,000 (c) (10,000) 90,000 Allowance for overvaluation of inventories : Adama Branch (47,500) (a) 40,000 (b) 7,500 Investment in Adama Branch 57 , 000 (e) (57,000)

91. Accounting for Branches 91 Periodic Inventory System (contd.) Example: ( contd.) Balance Sheet (contd.) Adjusted Trial Balances Eliminations Combined Home Office Adama Branch Dr (Cr) Dr (Cr) Dr (Cr) Dr (Cr) Equipment 158,000 158,000 Accumulated depreciation of equipment (15,000) (15,000) Trade Account payable (24,500) (24,500) Home office (57,000) (e) 57,000 Common stock, $10 par (150,000) (150,000) Retained earnings (from statement of retained earnings above) (189,500) Totals -0- -0- -0- -0-

92. Accounting for Branches 92 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.

93. 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): Branch Closing Entries: (1)Inventory (ending) 30,000 Cost of Goods Sold 112,500* Inventory (beg.) 22,500 Shipments from Home Office 120,000   CGS=22,500+120,000-30,000 

94. 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.) (2)Sales 150,000 CGS 112,500 Operating expenses 27,500 Income Summary 10,000 (3) Income Summary 10,000 Home Office 10,000

95. 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.) Home Office Adjusting (1 and 2) and Closing Entries (3) : (1) Investment in Branch 10,000 Income: Adama Branch 10,000 (2) Allowance for Overvaluation of Inventories 37,500 Realized Gross Profit : Adama Branch 37,500

96. 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.) (3) Realized Gross Profit 37,500 Income: Adama Branch 10,000 Income Summary 47,500

97. 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.) Balances of Investment in Adama Branch, Allowance for Overvaluation of Inventories, Realized Gross Profit, Income: Adama Branch and Home Office accounts after the above adjusting and closing entries are:

98. Accounting for Branches 98 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 Adama Branch = $67,000 (dr.) (57,000+10,000)   Allowance for Overvaluation of Inventories = $10,000 (cr.) (47,500 -37,500)

99. Accounting for Branches 99 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: Adama Branch = $0 (10,000-10,000)   Home Office (a reciprocal account of Investment) = $67,000 (cr.) (57,000+10,000) 

100. Accounting for Branches 100 Reconciliation of Reciprocal Accounts At the end of an accounting period, the balance of the Investment in Branch account in the records of the home office may be different from that of the Home Office account of the branch. This is because some transactions may have been recorded by the home office but not the branch office.

101. Accounting for Branches 101 Reconciliation of Reciprocal Ledger Accounts (contd.) Example Assume that the home office and branch accounting records of Mercer Company contain the following data on 12/31/00

102. Accounting for Branches 102 Reconciliation of Reciprocal Accounts (contd.) Date Explanation Debit Credit Balance 2000 Nov. 30 Balance 62,500 dr Dec. 10 Cash received from branch 20,000 42,500 dr 27 Collection of branch trade accounts receivable 1,000 41,500 dr 29 Merchandise shipped to branch 8,000 49,500 dr Investment in Branch (in accounting records of Home office)

103. Accounting for Branches 103 Reconciliation of Reciprocal Accounts (contd.) Date Explanation Debit Credit Balance 2000 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 receivable 2,000 41,500 cr Home Office (in accounting records of Branch)

104. Accounting for Branches 104 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)  

105. Accounting for Branches 105 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

106. Accounting for Branches 106 Reconciliation of Reciprocal Ledger Accounts (contd.) For Mercer Home Office:   1.Equipment: Brach 3,000   Investment in Branch: 3,000   2.Investment in Branch: 2,000 Trade Accounts Receivable 2,000

107. Accounting for Branches 107 Reconciliation of Reciprocal Ledger Accounts (contd.) The balance of Investment in Branch account at the home office equals: $ 49,500 (dr.) - 3,000 (cr.) + 2,000 (dr.) $ 48,500 (dr.) 

108. Accounting for Branches 108 Reconciliation of Reciprocal Accounts (contd.) After posting the above adjusting entries:   The balance of Home Office account at Branch equals: $ 41,500 (cr.) - 1,000 (dr.) + 8,000 (cr.) $ 48,500 (cr.) 

109. Accounting for Branches 109 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.

110. Accounting for Branches 110 Transactions between Branches (contd.) Example:   The home office in Addis shipped merchandise costing birr 8,000 to Dukem Branch and paid freight costs of birr 500 . A week later, the home office instructed Dukem Branch to transfer this merchandise to Sabata Branch . Dukem paid birr 400 for the transfer. If the merchandise had been shipped directly from the home office to Sabata , the freight costs would have been birr 600 .

111. Accounting for Branches 111 Transactions between Branches (contd.) Journal entries for these transactions are: In Accounting Records of Home Office : 1) Investment in Dukem Branch 8,500 Inventory 8,000 Cash 500 2) Investment in Sabata Branch 8,600 Excess Freight Expense 300 Investment in Dukem Branch 8,900

112. Accounting for Branches 112 Transactions between Branches (contd.) In Accounting Records of Dukem Branch:   1) Inventories 8,500 Home Office 8,500 2) Home Office 8,900 Inventories 8,500 Cash 400

113. Accounting for Branches 113 Transactions between Branches (contd.) In Accounting Records of Sabata Branch:   Inventories 8,600 Home Office 8,600