P2 GUERRERO CH7 Harvard University HARVARD 216

Chapter 7 Home Office and Branch Accounting Companies may increase their volume of sales by establishing sales outlets in various areas. These sales outlets may be a branch or an agency. When a company operates a branch, the branch must maintain accounting records to facilitate its reporting responsibility to the home office. Problems dealing with Home Office and Branch Accounting appear in almost every CPA examination. Candidates should be familiar with the problems involving the following: 1. Uses of the reciprocal accounts. 2. Preparation of a Reconciliation Statement. 3. Billing of Merchandise by Home Office to Branch above cost. 4. Preparation of Combined Financial Statements. Uses of the Reciprocal Accounts In recording inter-office transactions, two reciprocal accounts are used, namely, the Investment in Branch (Branch Current) account used by the home office which is classified as an asset; and the Home Office (HO Current account) used by the branch which is classified as a liability. The reciprocal nature of the Investment in Branch and the Home Office accounts and the way in which they are affected by various inter-office transactions are shown below: (Home Office Books) Investment in Branch (Branch Books) Home Office xx Assets transfer to branch xx xx Assets transfer from branch xx xx Branch profit xx xx Branch loss xx Preparation of Reconciliation Statement The balances of the two reciprocal accounts should at all times equal. If the balances of the reciprocal accounts are not equal before the preparation of separate statement of financial position, a reconciliation statement is to be prepared. This is done to determine the causes of the inequality between the two accounts. The accounts are then adjusted to determine their adjusted balances. The following are the usual causes that the candidate should take note: 1. Transactions have been recorded by the branch but not by the home office.2. Transactions have been recorded by the home office but not by the branch. 3. Errors in recording have occurred in one or both books. 4. Transactions have not yet been recorded on either set of books. Billing of Merchandise by Home office to Branch above Cost Merchandise shipped to branch by the home office may be billed at an amount above cost. Under this method of billing, the profit recognized by the branch will be less that its actual profit, because its cost of goods sold is overstated insofar as the home office is concerned. The problems involving billing of merchandise to branch above cost are the following 1. Computation of branch at inventory at cost. 2. Computation of the actual or true branch profit insofar as the home office is concerned. Computation of Branch Inventory at Cost Candidates should use the following formula: a. If branch are all acquired from the home office, the formula is: Branch inventory acquired from home office at billed price Pxx Divide by billing percentage of cost % Branch inventory at cost Pxx b. If branch inventory includes merchandise acquired from outsiders, the formula is: Branch inventory acquired from home office at cost: Merchandise at billed price Pxx Divide by billing percentage of cost % Pxx Add: inventory acquired from outsiders xx Branch inventory at cost xx Computation of Actual Branch Profit insofar as Home Office is Concerned The actual or true branch insofar as the home office is concerned is computed as follows: Branch profit (loss) as reported Pxx Add: Overvaluation of branch cost of goods sold (Schedule 1) xx Actual branch profit insofar as home office is concerned Pxx Schedule 1