Chapter 3: Accounting for

Branches
 Accounting for Branches
• Branch – It is described as a business unit located at some
distance from the home office, which carries merchandize from
the home office, makes sales, approves customers’ credit, and
makes collections from its customers.
• Cash receipts of branches are deposited in a bank account
belonging to the home office; the expenses are paid from an
imprest cash fund or a bank account provided by the home office.
• The use of imprest cash fund gives the home office considerable
control over the cash transactions of the branch. However,
branches normally use bank accounts.
• Branches have less autonomy and responsibility while divisions
have more autonomy than branches. Both branches and
divisions are not accounted as a separate corporations.
 Accounting for Branches
• A branch may maintain a complete set of accounting records but
report to the home office. The number and types of accounting
records and systems are generally determined by the home
office.
• The accounting records maintained by a branch include a Home
Office ledger account that is credited for all merchandize, cash,
or other assets provided by the home office; it is debited for all
cash, merchandize, or other assets sent by the branch to the
home office or to other branches.
• The accounting records maintained by a home office include a
reciprocal ledger account titled as Investment in Branch.
• Separate investment accounts are generally maintained by the
home office to each branch with a name and identification
number.
 Accounting for Branches
• There are certain accounts, belonging to the branches, which are
maintained by the home office such as depreciation, taxes, insurance,
etc. however, the home office allocates such amounts from the
accounts belonging to the branches to the branches.
• Three alternative methods are available to the home office for billing
merchandize shipped to its branches. They may be billed:
– At home office cost
– At a percentage above home office cost
– At the branch’s retail selling price
• Separate financial statements are prepared by the home office and
branches. However, the separate financial statements are prepared for
internal use only.
• A combined financial statement, aimed to use by the creditors,
stockholders, and government agencies, are prepared by making
adjustments and reconciliation of accounts among the home office and
branches
 Accounting for Branches
Example 1: On September 1, 2015, Barako Company established a
branch in Burao. Following are the first three transactions between
the home office and Burao branch of Barako Company:
Sept 1 Home office sent $10,000 to the branch for an
imprest bank account.
Sept 2 Home office shipped merchandize costing $60,000 to
the branch, billed at a markup of 20% on billed price Sept 3
Branch acquired office equipment of $3,000 to be carried
in the home office accounting records.
Both the home office and the Burao branch of Barako Company use
perpetual inventory system.

a) Prepare journal entries for the foregoing transactions in the

accounting records of both Home Office and Burao branch
 Accounting for Branches
Example 2: On September 1, 2015, Galbeed Company established
Bari branch. Separate accounting records were set up for the
branch. Both the home office and the Bari branch use periodic
inventory system. Among the intercompany transactions were the
following:
Sept 1 Home office mailed a check for $50,000 to the
branch. The check was received by the branch on
September 2
Sept 4 Home office shipped merchandize costing $95,000 to
the branch at a billed price of $125,000. The branch
received the merchandize on September 8.
Sept 11 The branch acquired a truck for $34,200. The home
office maintains the plant assets of the branch in its
accounting records.
a) Prepare journal entries for Home office and branch
 Accounting for Branches
Example 3: The home office of Farid Company ships merchandize
to the Berbera branch at a billed price that includes a markup on
home office cost of 25%. The inventories ledger account of the
branch, under perpetual inventory system, show a December 31,
2014, debit balance, $120,000; a debit for a shipment received
January 16, 2015, $500,000; total credits for goods sold during
January 2015, $520,000; a January 31, 2015, debit balance,
$100,000 (all amounts are home office billed prices)

a) Prepare a working paper for the home office of Farid Company

to analyze the flow of merchandize to Berbera branch during
January 2015.
 Accounting for Branches
Example 4: Prepare journal entries in the accounting records of both
the home office and the Gabiley branch of Wayel Company to
record each of the following transactions:
a) Home office transferred cash of $5,000 and merchandize (at
home office cost) of $10,000 to the branch. Both use perpetual
inventory system.
b) Home office allocated operating expenses of $1,500 to the
branch
c) Gabiley branch informed the home office that it had collected
$416 on a note payable to the home office. Principal amount of
the note was $400.
d) Gabiley branch made sales of $12,500, terms 2/10, n/30, and
incurred operating expenses of $2,500. the cost of goods sold
was $8000, and the operating expenses were paid in cash
 Accounting for Branches
Example 5: Included in the accounting records of the home office
and Wade Branch, respectively, of Lobo Company were the
following ledger accounts for the month of January 2015:
 Accounting for Branches
a) Prepare a working paper to reconcile the reciprocal ledger accounts of
Lobo Company’s home office and Wade Branch to the corrected
balances on January 31, 2015.
b) Prepare journal entries on January 31, 2015, for the (1) home office
and (2) Wade Branch of Lobo Company to bring the accounting
records up to date. Both the home office and the branch use the
perpetual inventory system.
 Accounting for Branches
Combined Financial Statements
Perpetual Inventory System – Above Cost
Journal Entries – Eliminations
1. Reciprocal Ledger
a) Home Office xxx
Investment in Branch xxx
2. Inter-merchandize flow
b) Allowance for overvaluation xxx
Ending inventories xxx
Cost of goods sold xxx
3. Realized Gross Profit
c) Net income (in IS) xxx
Net income (in RE) xxx
 Accounting for Branches
Periodic Inventory System – Above Cost
Journal Entries – Eliminations
1. Reciprocal Ledger
a) Home Office xxx
Investment in Branch xxx
2. Inter-merchandize flow
b) Allowance for overvaluation xxx
Beginning inventories xxx
c) Allowance for overvaluation xxx
Shipments to branch xxx
Shipments from home office xxx
d) Ending inventories (in IS) xxx
Ending inventories (in BS) xxx
3. Realized Gross Profit
e) Net income (in IS) xxx
Net income (in RE) xxx
 Accounting for Branches
Example 6: Alla Amin Company carries on merchandising operations
at both a home office and a branch. The adjusted trial balances of the
home office and the branch are shown below:
Adjusted Trial Balance
Home office Branch
Cash $23,700 $11,975
Inventories – Jan 31, $30,000 $16,170
Investment in Branch $58,300
Allowance for overvaluation ($11,000)
Other assets $197,000 $48,450
Current liabilities ($35,000) ($8,775)
Common stock ($200,000)
Retained Earning – Jan 1 ($34,000)
Dividend declared $15,000
Home office ($58,300)
 Accounting for Branches
Sales ($169,000) ($144,700)
Cost of goods sold $83,000 $104,830
Operating expenses $42,000 $30,350
Total -0- -0-
Merchandize was billed at a markup of 10%
a) Prepare a working paper for combined financial statement by
making any adjustments and eliminations required (both home
office and branch use perpetual inventory system)
 Accounting for Branches
Example 7: Alla Amin Company carries on merchandising operations
at both a home office and a branch. The adjusted trial balances of the
home office and the branch are shown below:
Adjusted Trial Balance
Home office Branch
Cash $23,700 $11,975
Inventories – Jan 31, $30,000 $16,170
Investment in Branch $58,300
Allowance for overvaluation ($11,000)
Other assets $197,000 $48,450
Current liabilities ($35,000) ($8,775)
Common stock ($200,000)
Retained Earning – Jan 1 ($34,000)
Dividend declared $15,000
Home office ($58,300)
 Accounting for Branches
Sales ($169,000) ($144,700)
Inventories – Jan 1 $23,000 $11,000
Purchases $190,000
Shipments to branch ($100,000)
Shipments from home office $110,000
Inventories – Jan 31 ($30,000) ($16,170)
Operating expenses $42,000 $30,350
Total -0- -0-
Merchandize was billed at a markup of 10%
a) Prepare a working paper for combined financial statement by
making any adjustments and eliminations required (both home
office and branch use periodic inventory system)
 Accounting for Branches
Example 8: You are making an audit for the year ended December
31, 2005, of the financial statements of Kosti-Marian Company,
which carries on merchandising operations at both a home office
and a branch. The unadjusted trial balances of the home office and
the branch are shown below:
 Accounting for Branches
The audit for the year ended December 31, 2005, disclosed the following:
1. The branch deposits all cash receipts in a local bank for the account of
the home office. The audit working papers for the cash cutoff include
the following:

2. The branch pays operating expenses incurred locally from an imprest

cash account that is maintained with a balance of $2,000. Checks are
drawn once a week on the imprest cash account, and the home office
is notified of the amount needed to replenish the account. On
December 31, 2005, a $1,800 reimbursement check was in transit
from the home office to the branch.
 Accounting for Branches
3. The branch received all its merchandise from the home office. The
home office bills the merchandise shipments at a markup of 10%
above home office cost. On December 31, 2005, a shipment with a
billed price of $5,500 was in transit to the branch. Freight costs of
common carriers typically are 5% of billed price. Freight costs are
considered to be inventoriable costs. Both the home office and the
branch use the periodic inventory system.
4. Beginning inventories in the trial balance are shown at the respective
costs to the home office and to the branch. The physical inventories on
December 31, 2005, were as follows:

a) Prepare a working paper for combined financial statements of Kosti-

Marian Company by making any adjusting entries