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Advance Accounting Vol. 2
1. Home Office and Branch Accounting –General Procedures
2. Home Office and Branch Accounting – Special Problems
3. Business Combinations
4. Consolidated Balance Sheet – Date of Acquisition
5. Consolidated Financial Statements
Advance Accounting Vol. 2
6. Intercompany Profit Transactions –Inventories
7. Intercompany Gain Transactions – Plant Assets
8. Accounting For Foreign Currency Transactions
9. Translation of Foreign Entity Statements
Advance Accounting Vol. 2
1. Home Office and Branch Accounting –General Procedures
Accounting for Sales Agency
1. Determine NOT Separately the Net Income
2. Determine Separately the Net Income
Advance Accounting Vol. 2
1. Sales Agency - Determine NOT Separately the Net Income
The transactions of the Sales agency arerecorded in the Home Office's own revenueand expense accounts.
When the Home Office transfers fixed assetsto Sales Agency.
Transactions Home Office Books (Entries)
Working Fund Established Working Fund - Sales Agency xx
Cash xx
Shipped Merchandise to Agency as Samples Inventory - Agency xx
samples Shipments TO Agency xx
Filled Sales orders from Agency Accounts Receivable xx
Sales - Agency xx
Cost of Inventory Identified COGS - Agency xx
Shipments TO Agency xx
[ if Periodic]
COGS - Agency xx
Merchandise Inventory xx
[ if Perpetual]
Replenishment of Working Fund Various Expense Accounts xx
Cash xx
To Close Revenue and Expense Sales - Agency xx
COGS - Agency xx
Various Expense Accounts xx
Income - Agency xx
To close Income Summary Account Agency Income xx
Income Summary xx
Advance Accounting Vol. 2Observation
At the end of accounting period, the account Shipments of Merchandise - Agency is deducted from the total of Beginning Inventory and Purchases to determine the GAS by the home office for its operations.
Sales Agency neither keeps a complete set of books nor uses a double entry systems accounts. An ImprestSystem is usually adopted by the Home Office for the working fund of the sales agency.
THEY MAINTAIN SAMPLES INVENTORY
Advance Accounting Vol. 2Accounting for Branch
Asset/ Expense to Branch
(Investment)
xx Asset/ Expense from Branch xx
(Withdrawal)
Branch Profit
xx Branch Loss xx
Home Office Books
Investment in Branch Home Office
Branch Books
xx xx
xx xx
Investment in Branch xx Cash xx
Cash xx PPE xx
PPE xx Home Office xx
Advance Accounting Vol. 2TRANSACTIONS
Established of Branch
Recognition of Branch Income or Loss
Investment in Branch xx Income Summary xx
Branch income xx Home Office xx
Purchases xx
NO ENTRY Accounts Payable xx
Advance Accounting Vol. 2Merchandise Shipments to a Branch:
From Outside Parties:
From Home Office Billed at Cost with Freight Charges:
Investment in Branch xx Shipments from HO xx
Shipments to Branch xx Freight-In xx
Cash xx Home Office xx
PPE - Branch xx NO ENTRY
Cash xx
Investment in Branch xx PPE xx
Cash xx Home Office xx
Advance Accounting Vol. 2Branch PPE
Case A: Plant Assets are recorded in the books of the Branch but purchased by the Home Office for the Branch
Case B: Plant Assets are recorded in the books of the Home Office but purchased by the Home Office for the Branch
PPE - Branch xx Home Office xx
Investment in Branch xx Cash xx
Advance Accounting Vol. 2Case C: Plant Asset are recorded in the books of the
Home Office but purchased by the Branch for the Branch
Advance Accounting Vol. 2Observation
1. Freight Costs incurred in shipping merchandise from the HO to Branch become part of the cost of the branch inventory.
2. Shipments to Branch is subtracted from the total of beginning inventory and purchases in the computation of home office's COGS for the period.
3. Shipments from Home Office account on the branch books is included in the computation of the branch's COGS as an addition to purchases.
Advance Accounting Vol. 2Observation
4. The HO Shipments to Branch and branch Shipments from HO account are nominal accounts and therefore closed at the end of the period to Income Summary account together with the revenue and expense accounts.
Advance Accounting Vol. 2TRANSACTIONS
Apportionment of Expenses:Utilities Expenses (Expenses incurred by branch and billed to HO
account)
Depreciation Expenses (Branch Plant Assets carried on HO books)
Advertising Expenses (Allocated to Branch)
Investment in Branch xx Utilities Expenses xx
Utilities Expenses xx Depreciation Expenses xx
Depreciation Expenses xx Advertising Expenses xx
Advertising Expenses xx Home Office xx
Advance Accounting Vol. 2Observation
Not Only Assets can be transferred BUT ALSO the allocated expenses.
Elimination Entries:Reciprocal Accounts: Home Office xx
Investment in Branch xx
Shipments of Merchandise Shipments TO Branch xx
Shipments FROM ho xx
RECONCILIATION OF RECIPROCAL ACCOUNTS (Common Errors)
Balances Before Adjustments xx xx
Additions:
(1) Merchandise Shipped to Branch
STILL IN TRANSIT xx
(4) Receivable of HO collected by
Branch xx
Total xx xx
Deductions:
(2) Receivable of Branch collected
by Home Office (xx)
(3) Office Equipment purchased by
the branch (xx)
(5) Errormade by branch in recording
expenses. xx
Adjusted Balances xx xxMUST BE EQUAL
Investment in Branch Home Office
Advance Accounting Vol. 22. SPECIAL PROBLEMS - BRANCH ACCOUNTING
1. Merchandise Shipments to Branch at price in excess of cost, @ billed price
2. Inter-branch Transfers of Cash
3. Inter-branch transfer of Merchandise.
Advance Accounting Vol. 22. SPECIAL PROBLEMS - BRANCH ACCOUNTING
1. Merchandise Shipments to Branch at price in excess of cost, @ billed price
When billings to the branch exceed cost, the profits determined by the branch will be less than actual profits.
Inventories reported by the branch are overstated in as much as they were valued based on the billed price, NOT THEIR COST.
Advance Accounting Vol. 2
Investment in Branch xx Shipments from HO xx
Shipments to Branch xx Home Office xx
Allowance for Overvaluation xx
of Branch Inventory
To Close:
Allowance for Overvaluation
of Branch Inventory xx NO ENTRY
Branch Income xx
Home Office Books Branch Books
Investment in Branch Home Office
Advance Accounting Vol. 2
FORMULA:
Approach A
REALIZED PROFIT= Cost of Goods Sold by Branch Balance of Allowance for
Good Available for Sale Overvaluation of Branch Inventory
(acquired from HO) (Unrealized Profit)
X
Advance Accounting Vol. 2
Approach B
Balance of Allowance for Overvaluation
of Branch Inventory Account(Unrealized Profit) xx
Less: Overvaluation of Ending Inventory(Branch)
Billed Price xx
Cost [Billed Price / (1+ Mark Up %)] (xx) (xx)
Realized Profit xx
Advance Accounting Vol. 2Observation
Home Office records the overvaluation.
Allowance for Overvaluation of Branch Inventory is also called Unrealized Profit in Branch Inventory.
Branch Income is NOT CLOSE to Investment in Branch; might result to unbalanced amount.
Only the reported income or loss of branch is closed to Investment in Branch.
Allowance for Overvaluation will remain until the shipment is shifted is reshipped or sold by the branch to outsiders. (Unrealized → Realized Profit)
Advance Accounting Vol. 2Elimination Entries:
Reciprocal Accounts: Home Office xx
Investment in Branch xx
Transfer of Merchandise between Home Office & Branch
Shipments TO Branch xx
Allowance for Overvaluation
of Branch Inventory xx
Shipments FROM ho xx
To carry the Inventory (Branch) @ Cost
Inventory End (Income Statement) xx
Inventory End (Balance Sheet) xx
Advance Accounting Vol. 2Observation
On the 1st year, the elimination of the intercompany shipments requires the complete elimination of Unrealized Profit account, because there's NO Beginning Inventory.
Advance Accounting Vol. 2TREATMENT OF BEGGINNING BILLED ABOVE COST
Table in bringing the cost of inventory @ COST
BILLED PRICE COST OVERVALUATION
Beg. Inventory xx xx xx
Add: Shipments from Home Office xx xx xx
Available For Sale xx xx xx Unrealized Profit
Less: Ending Inventory (xx) (xx) (xx)
Cost of Goods Sold xx xx xx Realized Profit
Advance Accounting Vol. 2
Approach A
(GAS @ Billed Price - Ending Invty @ Billed Price)
REALIZED PROFIT= Cost of Goods Sold by Branch Balance of Allowance for
Good Available for Sale Overvaluation of Branch Inventory
(acquired from HO) (Unrealized Profit)
(Beg. Inventory @ Billed Price +
Shipments from HO @ Billed Price)
X
Advance Accounting Vol. 2
Approach B
GAS Overvaluation xx
Less: Overvaluation of Ending Inventory(Branch)
Billed Price of Ending Inventory xx
Cost of Ending Inventory (xx) (xx)
Realized Profit xx
Advance Accounting Vol. 2Observation
Realized Profit is the amount that Branch Net Income is Understated
Concern means TRUE
Advance Accounting Vol. 2TRANSACTIONS BETWEEN BRANCHES
Inter-branch Transfers of Cash
Accounting Rule: The Branch will clear such transfer through its Home Office Account
Transactions:
Home Office Branch A Books Branch B Books
Investment in
Branch B xx Home Office xx Cash xx
Investment in Cash xx Home Office xx
Branch A xx
Advance Accounting Vol. 2Inter-branch Transfers of MerchandiseAccounting Rule: Branches SHOULD NOT CARRY an account with another
branch but should be clear the transfer through its Home Office account.
Freight on Goods received by the branch directly from HO are properly included in the cost of branch inventory, but the transfer of merchandise from one branch to another does not justify increasing the inventory valueby the additional freight costs incurred because of the indirect routing
Excess freight costs should be absorbed by the Home Office and treated as Expense.
Advance Accounting Vol. 2Explanation to the Accounting Rule:
Recording as an expense the excess freight cost on merchandise transferred from one branch to another is a manifestation of the accounting principle that losses should be given prompt recognition.
The excess freight cost arising from such shipments generally is a result of inefficient planning of original shipments and therefore should not be included in inventories.
Transactions:
Home Office Branch X Books Branch Y Books
Shipment of Merchandise
Investment in Shipments from HO xx Shipments from HO xx
Branch X xx Freight-In xx Freight-In xx
Shipment to Home Office xx Home Office xx
Branch X xx
Cash (freight) xx
Order to Transfer
Shipment to xx Home Office xx
Branch X Shipments from HO xx
Shipment to xx Freight-In xx
Branch Y Cash xx
Investment in Brach Y xx
Interbranch Freight Expense xx
Investment in Brach Y xx
Advance Accounting Vol. 2Branch True Income Statement (T-account)
Branch Beg. Inventory Sales xx
at Billed Price xx
Branch Ending Inventory
Purchases from Outsiders xx at Billed Price xx
Shipments from HO Branch Beg. Inventory
at Billed Price xx [Unrealized Profit] xx
Operating Expenses xx Shipments from HO
Freight-In xx [Unrealized profit] xx
Branch End Inventory xx
[Unrealized Profit]
TRUE LOSS TRUE PROFIT
Investment in Branch
Advance Accounting Vol. 2
Sales xx
Beginning Inventory xx Ending Inventory xx
Purchases xx Shipments to Branch xx
Freight-In xx Branch Income xx
Operating Expenses xx
Branch Loss xx
COMBINED LOSS COMBINED INCOME
HOME OFFICE
Advance Accounting Vol. 2NOTE:
BILLED PRICE:
Shipments FROM Home Office
Shipments TO Branch
Realization of % mark-up xx Beginning Balance xx
on merchandise sold by branch (Mark-up on Beg. Inventory)
(mark up beg. & shipment from
HO inventories) Mark-up on merchandise xx
shipped to branch during
current year.
Ending Balance xx
(mark-up on ending inventory)
Allowance for Overvaluation of Branch Inventory