1. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-1 Accounting for Branch Operation 11 Electronic Presentation by Rangga Handika University of Indonesia Baker / Lembke / King

2. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-2 What is branch ? Branch Office usually has more autonomy and provides a greater range of services than a sales agency does, although the degree differs with the individual company. For some companies the branches perform their own credit function, while for other companies credit is handled by the home office. Sales Agency is a unit acting on behalf of the home office. The agency may display and demonstrate sample merchandise, take orders, and arrange for delivery

3. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-3 Intracompany Accounts Accounting for Branch Operation Transaction between the home office and a branch also are treated in the normal manner that they are recorded in intracompany accounts. These accounts are reciprocal accounts between the home office and the branch.

4. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-4 Intracompany Accounts Accounting for Branch Operation Investment in branch ( Home Office Books ) Home Office ( Branch Books ) Asset transfers to branch Asset transfer from branch Branch income Branch loss x x x

5. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-5 Establishment of Branch Accounting for Branch Operation A home office transfers to branch $ 20,000 in cash, new office equipment that costs $ 5,000 and new store equipment with a cost of $ 30,000 Home office’s entries : Investment in Branch 55,000 Cash20,000 Office equipment 5,000 Store equipment 30,000 Branch office’s entries : Cash 20,000 Office equipment 5,000 Store equipment 30,000 Home Office55,000

6. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-6 Recognition of Branch Income Accounting for Branch Operation The branch’s Income Summary has credit balance of $ 63,000 at the end of the period. Home office’s entries : Investment in Branch 63,000 Branch Income 63,000 Branch office’s entries : Income Summary 63,000 Home Office 63,000

7. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-7 Merchandise shipment to a Branch Accounting for Branch Operation The branch purchases $ 5,000 of merchandise from an Independent wholesaler, and the branch uses a perpetual Inventory system. Home office’s entries : NO ENTRY Branch office’s entries : Inventory 5,000 Cash 5,000 ( or Accounts Payable )

8. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-8 Merchandise Billed at cost Accounting for Branch Operation Home office transfers inventory with a cost of $ 8,000 to the branch. Home office’s entries : Investment in Branch8,000 Inventory 8,000 Branch office’s entries : Inventory 8,000 Home Office 8,000

9. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-9 Merchandise Billed at cost Accounting for Branch Operation Home office transfers inventory with a cost of $ 8,000 to the branch. Furthermore, a freight cost has incurred and been paid by Home Office for $ 100 Home office’s entries : Investment in Branch8,100 Inventory 8,000 Cash 100 Branch office’s entries : Inventory 8,100 Home Office 8,100

10. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-10 Merchandise Billed in excess of cost Accounting for Branch Operation Home office ships a merchandise costing $ 12,000 and bills to the branch for $ 15,000. Home office’s entries : Investment in Branch15,000 Inventory 12,000 Unrealized Inventory Profit 3,000 Branch office’s entries : Inventory – from HO 15,000 Home Office 15,000

11. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-11 Merchandise Billed in excess of cost Accounting for Branch Operation The unrealized profit will be recognized when the branch has sold the inventory externally. For instance, the branch has sold 80% externally... Home office’s entries : Unrealized Inventory Profit 2,400 Realized Profit 2,400 Branch office’s entries : NO ENTRY ( Just looks like normal sale entries )

12. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-12 Branch Fixed Assets Accounting for Branch Operation Home Office purchases $ 30,000 store equipment for branch. Home office’s entries : Investment in Branch 30,000 Cash 30,000 Branch office’s entries : Store Equipment 30,000 Home Office 30,000

13. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-13 Branch Fixed Assets Accounting for Branch Operation Home Office purchases $ 30,000 store equipment for branch. However, the equipment is recorded on the home office books. Home office’s entries : Store Equipment – Branch 30,000 Cash 30,000 Branch office’s entries : NO ENTRY

14. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-14 Branch Fixed Assets Accounting for Branch Operation Branch purchases $ 30,000 of store equipment to be used by branch but carried on the home office books. Home office’s entries : Store Equipment – Branch 30,000 Investment in Branch 30,000 Branch office’s entries : Home Office 30,000 Cash 30,000

15. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-15 Apportionment of expenses Accounting for Branch Operation Home office incurs the costs assigned to its branch as follows : Utilities expenses $ 14,000 ; Depreciation expenses $ 3,000 and General overhead $ 18,000 Home office’s entries : Investment in Branch 35,000 Utilities exp 14,000 Depreciation exp 3,000 General Overhead exp 18,000 Branch office’s entries : Utilities exp 14,000 Depreciation exp 3,000 General Overhead exp 18,000 Home Office 35,000

16. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-16 Eliminating Entries Accounting for Branch Operation Eliminating entries needed are : ( E1 ) Branch Income63,000 Home Office, pre-closing balance70,000 Investment in Branch133,000 ( E2 ) Realized profit on Branch Shipments1,400 COGS1,400 ( E3 ) Unrealized intracompany profit1,600 Inventory – from Home Office1,600 ( E4 ) Inventory6,400 Inventory – from Home Office6,400

17. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-17 Transactions between branches Accounting for Branch Operation Branch A transfers $ 5,000 cash and $ 10,000 cost of inventory to Branch B Branch A’s entries : Home Office15,000 Cash 5,000 Inventory10,000 Branch B’s entries : Cash 5,000 Inventory 10,000 Home Office 15,000 Home Office’s entries : Investment in Branch B15,000 Investment in Branch A15,000

18. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-18 Unrealized profit in beginning Branch Inventory Accounting for Branch Operation Intracompany profits included in a branch’s beginning inventory are recognized on the home office books as being realized whenever the merchandise is sold externally by branch. In the period in which the branch sells the inventory to external parties, the home office reduces its Unrealized Intracompany Profit account and increases its Realized Profit on Branch Shipment account.

19. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-19 Unrealized profit in beginning Branch Inventory Accounting for Branch Operation When financial statements are prepared for the company as a whole, the balance of the Realized Profit on Branch Shipment account is eliminated against COGS and any remaining Unrealized Intracompany Profits are eliminated against the carrying amount of the inventory

20. McGraw-Hill/ Irwin Copyright © 2002 by The McGraw-Hill Companies, Inc. All rights reserved. 11-20 Accounting for Branch Operations The End