Advanced FA II, Chapter Two.pdf111111111

acc

1. 2-1
Accounting for Sales
Agency, Branch, and
Division
10/2/2024 1
Chapter Two
By: MengstD.

2. 2-2
1.SalesAgency(የሽያጭኤጀንሲ/ወኪል):
•Salesagencyisatermappliedtoabusiness
unitthatperformsonlyasmallportionof
thefunctionsassociatedwithabranch.
•Asalesagencyusuallycarriessamplesof
productsbutdoesnothaveaninventory
ofmerchandiseandusuallylesserdegreeof
autonomy.
10/2/2024 2

3. 2-3
2. Branch (ቅርንጫፍ):
•Asabusinessenterprisegrows,itmayestablishone
ormorebranchestomarketitsproductsoveralarge
territory.
•ThetermBranchisusedtodescribeabusinessunit
locatedatsomedistancefromtheHomeOffice.
•Branchesareseparateeconomicandaccounting
entitiesfromtheirhomeoffice.
•However,theyarenotseparatelegalentitiesfrom
theirhomeoffice.
10/2/2024
3

4. 2-4
•Itis100%ownedbytheHO.
•Branchesmay
carrymerchandiseobtainedfromHomeOffice,
makesales,approvecustomers’credit,and
makecollectionsfromitscustomers,and
remitscashreceived.
•Abranchmayobtainmerchandisesolelyfromthe
homeoffice,oraportionmaybepurchasedfrom
outsidesuppliers.
10/2/2024
4

5. 2-5
Thecashreceiptsofthebranchmaybedeposited
inabankaccountbelongingtothehomeoffice.
Branchexpensesarepaidfromanimprestcash
fundorbankaccountprovidedbyhomeoffice.
Astheimprestedcashfundisdepleted,the
branchmustsubmitalistofcashpayments
supportedwithvouchersinordertoget
replenishmentfromhomeoffice.
10/2/2024
5

6. 2-6
TheuseofanimprestcashfundgivestheHome
Officeconsiderablecontroloverthecash
transactionsofthebranch.
However,itiscommonpracticeforalargebranch
tomaintainitsownbankaccounts.
Extentofautonomyandresponsibilityofa
branchvaries,evenamongdifferentbranchesof
thesamebusinessenterprise.
10/2/2024
6

7. 2-7
3.Division(ክፍል):
•Divisionisabusinesssegmentorabusiness
enterprisewhichgenerallyhasmoreautonomy
thanabranch.
•Divisionmaybeorganizedasseparatecompany
ormaynotbeaseparatecompany.
•Ifthedivisionisnotaseparatecompany,the
accountingproceduresarethesameasBranch.
•Ifthedivisionisaseparatecompany(subsidiary
company),thefinancialaccountingrequires
consolidation,whichwillbediscussedinlater
topics.ItwillserveasSistercompany.
10/2/2024 7

8. 2-8
Differences between Sales Agency, Branch and Division
Characteristics Sales Agency Branch Division
DegreeofAutonomy
TransactionsApproval
Low
Principal
Moderate
Branch
High
Division
AccountingEntity No Yes Yes
LegalEntity No No Possible
EconomicEntity No Yes Possible
10/2/2024 8

9. 2-9
10/2/2024 9
Accounting System for Sales
Agency

10. 2-10
Accounting System for Sales Agency
10/2/2024 10
Salesagencyissometimesappliedtoabusiness
unitthatperformsonlyasmallportionofthe
functionsassociatedbranch.
Asalesagencyusuallycarriessamplesofproducts
butdoesnothaveaninventoryofmerchandise.
Ordersaretakenfromcustomersandtransmitted
totheHomeOffice.
TheHomeOfficeapprovesthecustomers’credit
andshipsthemerchandisedirectlytocustomers.
Thesalesagency’sreceivablesaremaintainedby
theHomeOffice.

11. 2-11
Accounting System for Sales Agency
10/2/2024 11
TheHomeOfficealsoperformscollection
function.
Animpressedcashfundgenerallyismaintainedat
thesalesagencyforthepaymentofoperating
expenses.
Asalesagencythatdoesnotcarryaninventoryof
merchandise,maintainreceivables,ormake
collectionshasnoneedforacompletesetof
accounting.

12. 2-12
Illustration
10/2/2024 12
JournalEntriesmadebyHomeOfficetoRecordSales
Agency’sTransaction.Thesalesagencyisnamed
LakeviewAgency.
Home office
To record merchandise shipped to sales agency for
use as samples
Inventory of samples: Lakeview agency……….. 1500
Inventories……………………………………………… 1500
To establish Impressed (advance) cash fund for sales
agency
Imperestcash fund: Lakeview agency ------------1000
Cash -------------------------------------------1000

13. 2-13
Illustration
10/2/2024 13
To record sales made by sales agency
Trade account receivables……………………………………… 50000
Sale Lakeview agency----------------------------50000
To record cost of merchandise sold by sales agency
Cost of Goods Sold: Lakeview Agency------------35000
Inventories ------------------------------------35000
To replenish imprestcash fund which represents several
checks sent to agent
Operating Expenses: Lakeview Agency-----------10000
Cash --------------------------------------10000

14. 2-14
10/2/2024 14
Accounting system for Branch
Operation

15. 2-15
Start-Up Costs of Opening New Branches
10/2/2024
15
Theestablishmentofabranchoftenrequiresthe
incurringofconsiderablecostsbeforesignificant
revenuemaybegenerated.
Operatinglossesinthefirstfewmonthsarelikely.
Somebusinesseswouldcapitalize&amortizesuch
start-upcostsonthegroundsthatsuchcostsare
necessarytosuccessfuloperationatanew
location.
However,itisnotallowedinIFRS.

16. 2-16
Start-Up Costs of Opening New Branches
10/2/2024 16
InIFRS(IAS38)start-upcostinconnectionwiththe
openingofabranchisrecognizedasexpensesofthe
accountingperiodinwhichthecostsareincurred.
Thedecisionshouldbebasedontheprinciplethatnet
incomeismeasuredbymatchingexpiredcostswith
realizedrevenue.
Coststhatbenefitfutureaccountingperiodsare
deferredandallocatedtothoseperiods.

17. 2-17
Accounting System for aBranch
10/2/2024 17
Twoalternativesystems:
1.Thebranchdoesnotmaintaina
completesetofaccountingrecords.
•Thehomeofficeservesonly as an
accountingandcontrolcenterforthe
branches(Dependentbranches).

18. 2-18
Accounting System for aBranch
10/2/2024 18
2. The branch maintains a complete set of
accounting records (Independent branches)
•Branchmaintainsitsownjournalentries,ledger
andchartofaccountssimilartothoseofan
independentbusinessenterprise.
•Financialstatementsarepreparedbythebranch
accountantandforwardedtothehomeoffice.
•Thenumberandtypesofledgeraccounts,the
internalcontrolstructure,theformandcontentof
thefinancialstatements,andtheaccountingpolicies
generallyareprescribedbytheHomeOffice.

19. 2-19
Accounting System for aBranch
10/2/2024 19
Thischapterfocusesonthesecondsystemthatthe
branchmaintainsitsownaccountingrecords.
Transactionsrecordedbyabranchshouldincludeall
controllableexpensesandrevenueforwhichthe
branchmanagerisresponsible.

20. 2-20
Accounting System for aBranch
10/2/2024 20
•Ifthebranchmanagerhasresponsibilityoverall
branchassets,liabilities,revenue,andexpenses,the
branchaccountingrecordsshouldreflectthis
responsibility.
•Expensessuchasdepreciationoftenarenotsubjectto
controlbyabranchmanager;thereforeboththe
branchplantassetsandtherelateddepreciation
ledgeraccountsgenerallyaremaintainedbytheHome
Office.

21. 2-21
Accounting for Branch –Reciprocal (intra company)
ledger Accounts Used by the Branch and Home
Office
10/2/2024 21
Theaccountingrecordsmaintainedbyabranch
includeaHomeOfficeledgeraccount*
•H.Oreflectsallactivityb/nthebranchand
homeoffice
–ItisCr.forallmerchandise,cashorother
assetsprovidedbythehomeoffice;
–H.OisDr.forallcash,merchandise,orother
assetssentbythebranchtothehomeofficeor
theotherbranches.

22. 2-22
Accounting for Branch –Reciprocal ledger Accounts
Used by the Branch and Home Office
10/2/2024 22
•H.Oledgeraccountisaquasi-ownershipequity
accountrepresentsthenetinvestmentbythehome
officeinthebranch.
•Attheendofanaccountingperiodwhenthebranch
closesitsaccountingrecords,theI/Summaryaccount
isclosedtotheH.Oaccount.
•Anetincomeincreasesthecreditbalanceofthe
HomeOfficeaccount;anetlossdecreases(debit)this
balance.

23. 2-23
Accounting for Branch –Reciprocal ledger Accounts
Used by the Branch and Home Office
10/2/2024 23
Inthehomeofficeaccountingrecords,areciprocalledger
accountwithatitlesuchasInvestmentinBranchis
maintained.
•Itisnon-currentassetaccount
–Dr.forcashmerchandise,andservicesprovidedtothe
branch,andfortheNIreportedbythebranch.
–Cr.forthecashorotherassetsreceivedfromthe
branch,andfornetlossesreportedbythebranch.
ThustheInvestmentinBranchaccountreflectstheequity
methodofaccounting.
Aseparateinvestmentaccountgenerallyismaintainedby
theH.Oforeachbranch.

24. 2-24
Accounting for Branch –Reciprocal ledger Accounts
Used by the Branch and Home Office
10/2/2024 24

25. 2-25
Accounting for branch
10/2/2024 25
•ReciprocalLedgerAccounts/(H.O/Inv’tinBranch)
•ExpensesIncurredByHomeOfficeAndAllocated
ToBranches
•AlternativeMethodOfBillingMerchandise
ShipmentsToBranches
•@Cost@RSP @COST+Marigin
•SeparateFSForBranch&ForHomeOffice
•CombinedFSForHomeOfficeandBranch

26. 2-26
Acquisition of Plant Assets Used in Branch
10/2/2024 26
•Somebusinessenterprisesfollowapolicyof
notifyingeachbranchofexpensesincurred
bytheHomeOfficeonthebranch’sbehalf.
•Plantassetslocatedatabranchgenerally
arecarriedintheHomeOfficeaccounting
records.

27. 2-27
Acquisition of Plant Assets Used in Branch
10/2/2024 27
Ifaplantassetisacquiredbythehome
officeforabranch’susageandtherecord
fortheplantassetismaintainedbythe
homeoffice,theaccountingtreatments
are:
Forthehomeoffice:debitaplantasset
account:branch,creditcashoraliability
account.
Forthebranch:noentry.

28. 2-28
Acquisition of Plant Assets Used in Branch
10/2/2024 28
Ifaplantassetisacquiredbyabranch,
buttheaccountingrecordforthisplant
assetismaintainedbythehomeoffice,the
accountingtreatmentsare:
Forthebranch:debitHomeOfficeand
creditcashoraliabilityaccount.
Forthehomeoffice:debitaplantasset
account:branch,andcreditInvestmentin
Branchaccount.

29. 2-29
Expense Incurred by Home Office and Allocated to
Branches
10/2/2024 29
Thehomeofficemaypaysometaxes,insuranceor
advertisingonbehalfofbranchesorforthe
benefitsofallbranches.
Theseexpensesincludedepreciationexpensefor
theplantassetspurchasedbyhomeofficebut
usedbybranches.
Theseexpensesareusuallyallocatedtobranches
indeterminingnetincomeofbranches.

30. 2-30
Expense Incurred by Home Office and Allocated to
Branches
10/2/2024 30
Ifthehomeofficechoosestoallocatetheseexpensesto
branches,theaccountingtreatmentsare:
a.Forthehomeoffice:debitInvestmentinBranchaccount,
creditanappropriateexpenseaccount.
b.Forthebranch:debitexpenseaccount,creditHomeOffice
account.
IftheH.Odoesnotmakesalesandservesonlyas
accountingcenterthenmostorallofitsexpensesmaybe
allocatedtobranches

31. 2-31
Expense Incurred by Home Office and Allocated to
Branches
10/2/2024 31
•H.Omaychargeeachbranchinterestonthecapital
investedinthatbranch.
•Interestexpenserecognizedbythebrancheswould
beoffsetbyinterestrevenuerecognizedbythe
H.O.
•Amountswouldbenettedandwouldnotbe
displayedinthecombinedincomestatement.

32. 2-32
Alternative Methods of Billing Merchandise
Shipments to Branches
ThreealternativemethodsareavailabletotheHome
Officeforbillingmerchandiseshippedtoitsbranches.
Theshipmentsmaybebilled:
1.AtHomeOfficecost,
2.AtapercentageaboveHomeOfficecost,or
3.Atthebranch’sretailsellingprice
Shipmentofmerchandisetoabranchdoesnot
constituteasaleb/cownershiptitlehasnotchanged.
10/2/2024 32

33. 2-33
Billing shipments to a branch at Home
Office cost
Strength:thisisthesimplestprocedureandis
widelyused.Itavoidsthecomplicationof
unrealizedgrossprofitininventoriesandpermits
thefinancialstatementsofbranchestogivea
meaningfulpictureofoperations.
Weakness:billingmerchandisetobranchesat
HomeOfficecostattributesallgrossprofitsof
theenterprisetothebranches,
Underthesecircumstances,HomeOfficecostmay
bethemostrealisticbasisforbillingshipmentto
branches.
10/2/2024 33

34. 2-34
Billing shipments at a percentage above Home
Office cost or at mark up (such as 110% of cost)
Strength:thismaybeintendedtoallocatea
reasonablegrossprofittotheHomeOffice.
Weakness:whenmerchandiseisbilledtoabranch
atapriceaboveHomeOfficecost:
thenetincomereportedbythebranchis
understatedand;
theendinginventoriesareover-statedforthe
enterpriseasawhole.
10/2/2024 34

35. 2-35
•Thus,adjustmentsmustbemadebythe
HomeOfficetoeliminatetheexcessof
billedpricesovercost(intracompanyprofits)
inthepreparationofcombinedfinancial
statementsfortheHomeOfficeandthe
branch.
10/2/2024 35

36. 2-36
Billing shipments to a branch at branch
retail selling prices
•Strength:thismaybebasedonadesiretostrengthen
internalcontroloverinventories.
•Ifthephysicalinventoriestakenperiodicallyatthebranch
donotagreewiththeamountsthuscomputed,anerroror
theftmaybeindicatedandshouldbeinvestigatedpromptly.
•Weakness:nogrossprofitassignedtothebranchesandthe
branch’snetlosswillequalitsoperatingexpenses.
10/2/2024 36

37. 2-37
Separate Financial Statements for Branch and for
Home Office( for internal use only)
•Aseparateincomestatementandbalancesheet
shouldbepreparedforabranchsomanagement
oftheenterprisemayreviewtheoperating
resultsandfinancialpositionofthebranch.
•However,itisimportanttoemphasizethat
separatefinancialstatementsoftheHome
Officeandofthebrancharepreparedfor
internaluseonly;theydonotmeettheneedsof
investorsorotherexternalusersoffinancial
statements.
10/2/2024 37

38. 2-38
SeparateFinancial Statements for Branch and for
Home Office ( for internal use only)
•Separatefinancialstatementdoesn'tserve
externalusers
•However,topreparefinancialstatements
forexternalusers,branchesfinancial
statementshouldberevisedtoeliminate
anyintercompanyprofitsonmerchandise
shipments.
10/2/2024 38

39. 2-39
SeparateFinancial Statements for Branch and for
Home Office ( for internal use only)
•The branch statements of financial position will
have H.O Ledger Account instead of Ownership
Equity Account.
•TheseparateF/st.preparedbybranchwillbe
revisedbyH.Otoincludeexpensesincurredby
theH.Oforbranch&toshowtheresultsof
branchoperationsaftereliminationofanyintra-
co.profitsonmerchandiseshipments.
•SeparateFSalsomaybepreparedfortheH.O,
sothattheresultsofitsoperationsandits
financialpositioncanbeappraised.
10/2/2024 39

40. 2-40
Combined financial Statements for Home Office
and Branch (for external use)
•Forinvestors,thehomeofficeand
branchesareasinglebusinessentity.
•Thus,combinedfinancialstatements
shouldbepreparedforexternalusers.
•Afour-columnworksheetpaperisused
tofacilitatethepreparationofthe
combinedfinancialstatement.
10/2/2024 40

41. 2-41
Combined financial Statements for Home Office
and Branch (for external use)
In preparing the combined financial statements,
the following accounts should be eliminated:
a.Reciprocal ledger accounts
b.Any intra company profits or losses.
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.
10/2/2024 41

42. 2-42
CombinedFinancial Statements for Home Office
and Branch
•Abalancesheetfordistributionto
creditors,stockholders,andgovernment
agenciesmustshowthefinancialpositionof
abusinessenterprisehavingbranchesasa
singleentity.
•Aconvenientstartingpointinthe
preparationofacombinedbalancesheet
consistsoftheadjustedtrialbalancesof
theHomeOfficeandtheBranch.
10/2/2024 42

43. 2-43
•Similaraccountsarecombinedtoproduceasingle
totalamountforcash,tradeaccountsreceivable,
andotherassetsandliabilitiesoftheenterpriseas
awhole.
•Inthepreparationofacombinedbalancesheet,
reciprocalledgeraccountsareeliminatedbecause
theyhavenosignificancewhenthebranchand
HomeOfficereportasasingleentity.
10/2/2024 43

44. 2-44
10/2/2024 44
Combined Financial Statements for Home Office and Branch

45. 2-45
10/2/2024 45
Working Paper for Combined FS
•Tocombineledgera/cbalancesforlike
revenue,expenses,assetsandliabilities
•Toeliminateanyintra-co.profits/losses&Inter
Co.Receivables/payables
•Toeliminatethereciprocalaccounts
•Anyeliminationhereisnotjournalized

46. 2-46
10/2/2024 46
1.CashofBr10,000wasforwardedtobranchbytheH.O.
2.MerchandisewithaH.OcostofBirr300,000,wasshipped
toBranch
3.EquipmentwasacquiredbybranchforBirr4,000tobe
carriedintheH.Oacctrecords(otherPPEsforbranchesare
acquiredbytheH.O).
4.TheH.OshippedEquipmentsofBr5,000toB-DarBranch.
5.Cr.salesbybranchamtdtoBr250,000tovariousorgns;
theCGSwasBr175,000
6.CashsalesbybranchamtdtoBr100,000;(CGSBr70,000).
Illustrative Journal Entries for Operations of a
Branch

47. 2-47
10/2/2024 47
Cont…….
7.BranchcollectedBr200,000fromsalesmadeonA/c
8.BranchpaidoperatingexpensestotaledBr30,000
9.BranchremittedortransferredcashofBr270,000to
theH.O.
10.Op.exp.incurredbytheH.O&chargedtobranch
totalBr4,000
11.TheH.OcollectedA/RofBr10,000ofBranch.
12.BahirDarBranchpaidA/PofBr5,000oftheHome
Office.
Required:Recordtheabovetransactionsinthebooksofthe
homeofficeandthebranch.

48. 2-48
10/2/2024 48
Cont…….

49. 2-49
10/2/2024 49
Cont…….

50. 2-50
10/2/2024 50
Closing Entries
BRANCH
Sales 350,000
CGS 245,000
OP. Expenses 34,000
Income Summary 71,000
Income summary 71,000
H.O 71,000
H.O
1)Inv’tin B.D Branch 71,000
Income-BD Branch 71,000
2) Income: BD Branch 71,000
RE 71,000

51. 2-51
•AssumethatSmaldinoCompanybillsmerchandiseto
MasonBranchathomeofficecost.
•ThatMasonBranchmaintainscompleteaccounting
recordsandpreparesfinancialstatements.
•Boththehomeofficeandthebranchusetheperpetual
inventorysystem.
•Equipmentusedatthebranchiscarriedinthehome
officeaccountingrecords.
•Expenses,suchasadvertisingandinsurance,incurred
bythehomeofficeonbehalfofthebranch,are
allocatedtothebranch.
•Transactions and events during the first year (2005) of
operations of Mason Branch are summarized below
(start-up costs are disregarded):
10/2/2024 51
Example 2 on Branch Operation

52. 2-52
1.Cashof$1,000wasforwardedbythehomeofficetoMason
Branch.
2.Merchandisewithahomeofficecostof$60,000wasshippedby
thehomeofficetoMasonBranch.
3.EquipmentwasacquiredbyMasonBranchfor$500,tobe
carriedinthehomeofficeac-countingrecords.(Otherplant
assetsforMasonBranchgenerallyareacquiredbythehome
office.)
4.CreditsalesbyMasonBranchamountedto$80,000;the
branch’scostofthemerchandisesoldwas$45,000.
5.CollectionsoftradeaccountsreceivablebyMasonBranch
amountedto$62,000.
6.PaymentsforoperatingexpensesbyMasonBranchtotaled
$20,000.
7.Cashof$37,500wasremittedbyMasonBranchtothehome
office.
8.Operatingexpensesincurredbythehomeofficeandchargedto
MasonBranchtotaled$3,000.
10/2/2024
52

53. 2-53
10/2/2024
53

54. 2-54
10/2/2024
54
Ifabranchobtainsmerchandisefromoutsidersaswellas
fromthehomeoffice,themerchandiseacquiredfromthe
homeofficemayberecordedinaseparateInventories
fromHomeOfficeledgeraccount.
Inthehomeofficeaccountingrecords,theInvestmentin
MasonBranchledgeraccounthasadebitbalanceof
$26,000[beforetheaccountingrecordsareclosedandthe
branchnetincomeof$12,000($80,000-$45,000-
$20,000-$3,000=$12,000)istransferredtothe
InvestmentinMasonBranchledgeraccount],asillustrated
onthenextslide.

55. 2-55
10/2/2024
55
IntheaccountingrecordsofMasonBranch,theHomeOfficeledger
accounthasacreditbalanceof$26,000(beforetheaccountingrecords
areclosedandthenetincomeof$12,000istransferredtotheHome
Officeaccount),asshownbelow:

56. 2-56
10/2/2024
56

57. 2-57
10/2/2024
57
•Aworkingpaperforcombinedfinancialstatements
hasthreepurposes:(1)tocombineledgeraccount
balancesforlikerevenue,expenses,assets,and
liabilities,(2)toeliminateanyintracompanyprofits
orlosses,and(3)toeliminatethereciprocalaccounts.
•Assumethattheperpetualinventoriesof$15,000
($60,000-$45,000=$15,000)attheendof2005
forMasonBranchhadbeenverifiedbyaphysical
count.
Working Paper for Combined Financial Statements

58. 2-58
10/2/2024
58
•Notethatthe$26,000debitbalanceoftheInvestmentin
MasonBranchledgeraccountandthe$26,000credit
balanceoftheHomeOfficeaccountarethebalances
beforetherespectiveaccountingrecordsareclosed,that
is,beforethe$12,000netincomeofMasonBranchis
enteredinthesetworeciprocalaccounts.
•IntheEliminationscolumn,elimination(a)offsetsthe
balanceoftheInvestmentinMasonBranchaccount
againstthebalanceoftheHomeOfficeaccount.
•Thiseliminationappearsintheworkingpaperonly;itis
notenteredintheaccountingrecordsofeitherthehome
officeorMasonBranchbecauseitsonlypurposeisto
facilitatethepreparationofcombinedfinancial
statements.
•Thefollowingworkingpaperprovidestheinformationfor
thecombinedfinancialstatementsofSmaldinoCompany.

59. 2-59
10/2/2024
59

60. 2-60
10/2/2024
60

61. 2-61
10/2/2024
61

62. 2-62
10/2/2024
62

63. 2-63
10/2/2024 63
Home Office Adjusting and Closing Entries and Branch
Closing Entries
•Thehomeoffice’sequity-methodadjustingand
closingentriesforbranchoperatingresultsand
thebranch’sclosingentriesonDecember31,
2005,areasfollows:

64. 2-64
10/2/2024 64

65. 2-65
10/2/2024 65
•Asstatedpreviously,thehomeofficesofsome
businessenterprisesbillmerchandiseshippedto
branchesathomeofficecostplusamarkuppercentage
(oralternativelyatbranchretailsellingprices).
•Becauseboththesemethodsinvolvesimilar
modificationsofaccountingprocedures,asingle
exampleillustratesthekeypointsinvolved,usingthe
illustrationforSmaldinoCompanyaboveandwithone
changedassumption:thehomeofficebillsmerchandise
shippedtoMasonBranchatamarkupof50%above
homeofficecost,or331/3%ofbilledprice.
Billing of Merchandise to Branches at Prices
above Home Office Cost

66. 2-66
10/2/2024 66
•Underthisassumption,thejournalentriesforthe
firstyear’seventsandtransactionsbythehomeoffice
andMasonBrancharethesameasthosepresented
above,exceptforthejournalentriesforshipmentsof
merchandisefromthehomeofficetoMasonBranch.
•Theseshipments($60,000cost+50%markuponcost
=$90,000)arerecordedundertheperpetualinventory
systemasfollows:
Billing of Merchandise to Branches at Prices
above Home Office Cost

67. 2-67
10/2/2024
67
Billing of Merchandise to Branches at Prices
above Home Office Cost
•Intheaccountingrecordsofthehomeoffice,the
InvestmentinMasonBranchledgeraccountbelownowhas
adebitbalanceof$56,000beforetheaccountingrecords
areclosedandthebranchnetincomeorlossisenteredin
theInvestmentinMasonBranchaccount.

68. 2-68
10/2/2024
68
Billing of Merchandise to Branches at Prices
above Home Office Cost
•Thisaccountis$30,000largerthanthe$26,000
balanceinthepriorillustration.Theincrease
representsthe50%markupovercost($60,000)
ofthemerchandiseshippedtoMasonBranch.

69. 2-69
10/2/2024
69
Cont……….
•IntheaccountingrecordsofMasonBranch,theHome
Officeledgeraccountnowhasacreditbalanceof$56,000,
beforetheaccountingrecordsareclosedandthebranchnet
incomeorlossisenteredintheHomeOfficeaccount,as
illustratedbelow.

70. 2-70
10/2/2024
70
Cont………..
•MasonBranchrecordedthemerchandisereceivedfromthehome
officeatbilledpricesof$90,000;thehomeofficerecordedthe
shipmentbycreditsof$60,000toInventoriesand$30,000to
AllowanceforOvervaluationofInventories:MasonBranch.
•Useoftheallowanceaccountenablesthehomeofficetomaintaina
recordofthecostofmerchandiseshippedtoMasonBranchaswellas
theamountoftheunrealizedgrossprofitontheshipments.
•Attheendoftheaccountingperiod,MasonBranchreportsits
inventories(atbilledprices)at$22,500.Thecostoftheseinventories
is$15,000($22,500/1.50=$15,000).
•Inthehomeofficeaccountingrecords,therequiredbalanceofthe
AllowanceforOvervaluationofInventories:MasonBranchledger
accountis$7,500($22,500$15,000$7,500);thus,thisaccount
balancemustbereducedfromitspresentamountof$30,000to
$7,500.

71. 2-71
10/2/2024
71
Cont………..
•Thereasonforthisreductionisthatthe50%markupofbilled
pricesovercosthasbecomerealizedgrossprofittothehome
officewithrespecttothemerchandisesoldbythebranch.
•Consequently,attheendoftheyearthehomeofficereducesits
allowanceforovervaluationofthebranchinventoriestothe
$7,500excessvaluationcontainedintheendinginventories.
•Thedebitadjustmentof$22,500intheallowanceaccountis
offsetbyacredittotheRealizedGrossProfit:MasonBranch
Salesaccount,becauseitrepresentsadditionalgrossprofitof
thehomeofficeresultingfromsalesbythebranch.
•Thesemattersareillustratedinthehomeofficeend-of-period
adjustingandclosingentriesbelow.

72. 2-72
10/2/2024
72
Working Paper When Billings to Branches Are at
Prices above Cost
•Whenahomeofficebillsmerchandiseshipmentsto
branchesatpricesabovehomeofficecost,preparationof
theworkingpaperforcombinedfinancialstatementsis
facilitatedbyananalysisoftheflowofmerchandisetoa
branch,suchasthefollowingforMasonBranchof
SmaldinoCompany:

73. 2-73
10/2/2024
73
Cont……….
•TheMarkupcolumnintheforegoinganalysisprovidesthe
informationneededfortheEliminationscolumninthe
workingpaperforcombinedfinancialstatementsbelow.

74. 2-74
10/2/2024
74
Cont……….

75. 2-75
10/2/2024
75
Cont……….
•Theforegoingworkingpaperdiffersfromthe
workingpaperonslide60bytheinclusionofan
eliminationtorestatetheendinginventoriesofthe
branchtocost.Also,theincomereportedbythe
homeofficeisadjustedbythe$22,500of
merchandisemarkupthatwasrealizedasaresult
ofsalesbythebranch.
•Asstatedonslide58,theamountsinthe
Eliminationscolumnappearonlyintheworking
paper.Theamountsrepresentamechanicalstepto
aidinthepreparationofcombinedfinancial
statementsandarenotenteredintheaccounting
recordsofeitherthehomeofficeorthebranch.

76. 2-76
10/2/2024
76
Cont……….
CombinedFinancialStatements
•BecausetheamountsintheCombinedcolumnoftheworking
paperabovearethesameasintheworkingpaperprepared
whenthemerchandiseshipmentstothebranchwerebilled
athomeofficecost,thecombinedfinancialstatementsare
identicaltothoseillustratedonslide63.

77. 2-77
10/2/2024
77
Cont……….
•Aftertheforegoingjournalentrieshavebeenposted,theledger
accountsinthehomeofficegeneralledgerusedtorecordbranch
operationsareasfollows.

78. 2-78
10/2/2024
78
Cont……….

79. 2-79
10/2/2024
79
Cont……….
•Intheseparatebalancesheetforthehomeoffice,the$7,500
creditbalanceoftheAllowanceofOvervaluationof
Inventories:MasonBranchledgeraccountisdeductedfrom
the$45,500debitbalanceoftheInvestmentinMason
Branchaccount,thusreducingthecarryingamountofthe
investmentaccounttoacostbasiswithrespecttoshipments
ofmerchandisetothebranch.
•Intheseparateincomestatementforthehomeoffice,the
$22,500realizedgrossprofitonMasonBranchsalesmaybe
displayedfollowinggrossmarginonsales,$165,000
($400,000sales-$235,000costofgoodssold=$165,000).
Theclosingentriesforthebranchattheendof2005areas
follows:

80. 2-80
10/2/2024
80
Cont……….

81. 2-81
Transactions between Branches
Efficientoperationsmayonoccasion
requirethatmerchandiseorotherassetsbe
transferredfromonebranchtoanother,
HomeOfficeLedgeraccountisusedbythe
branches.
•Forexample,ifArbaMinchBranchships
merchandisetoJinkaBranch:
ArbaMinchBranchdebitsHomeOfficeand
creditsInventories.
Onreceiptofthemerchandise,
JinkaBranchdebitsInventoriesandcredits
HomeOffice.
10/2/2024 81

82. 2-82
TheHomeofficewilltransfertheinventory(or
assets)frominvestmentinonebranchtoanother
branch.
TheHomeOfficerecordsthetransferbetween
branchesbyadebittoInvestmentin
recipient/JinkaBranchandacredittoInvestment
indelivering/ArbaMinchBranch.
Anyexcessfreightcostsincurredforthe
transferofmerchandisebetweenbranchesshould
beexpenseofthehomeoffice.
10/2/2024 82

83. 2-83
Illustration:Excessfreightcostsoninter-branch
transfersofmerchandise.
TheHomeofficeinAddisAbabashippedmerchandise
costingBirr8,000toArbaMinchBranchandpaidfreight
costsofBirr500.
Aweeklater,theHomeofficeinstructedArbaMinch
BranchtotransferthismerchandisetoJinkaBranch.
FreightcostsofBirr400werepaidbyArba
Minchbranchtocarryoutthisorder.
10/2/2024 83

84. 2-84
Ifthemerchandisehadbeenshippeddirectly
fromthehomeofficetoJinka,thefreightcosts
wouldhavebeenBirr600.
AssumethattheH.O&itsbranchesuseperpetual
inventorysystem.
Makeallthenecessaryjournalentriesinthe
accountingrecordsofHomeoffice,AMBranch
andJinkaBranch.
10/2/2024 84

85. 2-85
Home Office
Investment in Arba Minch Branch 8,500
Inventories 8,000
Cash 500
To record shipment and payment of freight costs
Investment in Jinka Branch 8,600
Excess Freight Expense* 300
Investment in Arba Minch Branch 8,900
TorecordtransferofmerchandisefromAMtoJK
underinstructionoftheHomeOffice.
10/2/2024 85

86. 2-86
Arba Minch Branch
Inventories (8000+500)8,500
Home Office 8,500
To record receipt of merchandise plus freight cost
Home Office 8,900
Inventories 8,500
Cash 400
To record transfer of merchandise to Jinka Branch
10/2/2024 86

87. 2-87
Jinka Branch
Inventories 8,600
HomeOffice 8,600
10/2/2024 87

88. 2-88
End of This Chapter
10/2/2024 88