2023

Chapter Two:
Accounting for Sales Agencies and principal; Branches operation.

Sales Agency
Sales agency is a term applied to a business unit that performs only a small portion of the
functions associated branch. A sales agency usually carries samples of products but does not have
an inventory of merchandise and usually lesser degree of autonomy.
Branch:-
The term Branch is used to describe a business unit located at some distance from the Home
Office. Branches are economic and accounting entities. However, branches are not legal entity.
Branches may merchandise obtained from Home Office, make sales, approve customers’ credit,
and make collections from its customers.
Division:
Division is a business segment or a business enterprise which generally has more autonomy than a
branch. Division may be as separate company or may not be a separate company. If the division is
not a separate company, the accounting procedures are the same as Branch.
If the division is a separate company (subsidiary)company), the financial accounting requires
consolidation.
Differences between Sales Agency, Branch and Division
Sale agency Branch Division
Degree of autonomy Low Moderate High
Accounting entity No Yes Yes
Legal entity No No Possible
Economic entity No No Possible
Accounting System for Sales Agency
 Sales agency is sometimes applied to a business unit that performs only a small portion of
the functions associated branch.
 A sales agency usually carries samples of products but does not have an inventory of
merchandise
 Orders are taken from customers and transmitted to the Home Office

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 The Home Office approves the customers’ credit and ships the merchandise directly to
customers.
 The sales agency’s receivables are maintained by the Home Office
 The Home Office also performs collection function
 An impressed cash fund generally is maintained at sales agency for the payment of
operating expenses.
 A sales agency that does not carry an inventory of merchandise, maintain receivables, or
make collections has no need for a complete set of accounting
Illustration 2.1: Journal Entries made by Home Office to Record Sales Agency’s Transaction.
The sales agency is named Lakeview Agency
Home office
To record merchandise shipped to sales agency for use as samples
Inventory of simples: Lakeview agency………………………….. 1500
Inventories’………………………………………………………………1500
To establish Impressed (advance) cash fund for sales agency
Imperest cash fund: Lakeview agency -----------------------------------------1000
Cash ---------------------------------------------------------------------------------1000
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 imprest cash fund which represents several checks sent to agent
Operating Expenses: Lakeview Agency---------------------------------------------------10000
Cash ---------------------------------------------------------------------------------------------------10000
Accounting System for Branch and Division
As a business enterprise grows; it may establish one or more branches to market its products over
a large territory.
The term Branch is used to describe a business unit located at some distance from the Home
Office.

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The branch carries merchandise obtained from the Home Office, makes sales, approves
customers’ credit, and makes collections from its customers. A branch may obtain merchandise
solely from the Home Office, or a portion may be purchased from outside suppliers. The cash
receipts of the branch often are deposited in a bank account belonging to Home Office; the branch
expenses then are paid from an imprested cash fund or a bank account provided by the Home
Office.
As the imprested cash fund is depleted, the branch submits a list of cash payments supported by
vouchers and receives a check for a transfer from the Home Office to replenish the fund.
The use of an imprest cash fund gives the Home Office considerable control over the cash
transactions of the branch. However, it is common practice for a large branch to maintain its own
bank accounts. The extent of autonomy and responsibility of a branch varies, even among
different branches of the same business enterprise. A segment of a business enterprise also may be
operated as division, which generally has more autonomy than a branch.
The accounting procedures for a division not organized as Separate Corporation (subsidiary
company) are similar to those used for branches.
When a business segment is operated as a separate corporation, consolidated financial statements
generally are required.
Start-Up Costs of Opening New Branches
The establishment of a branch often requires the incurring of considerable costs before significant
revenue may be generated. Operating losses in the first few months are likely. In the past, some
business enterprises would capitalized and amortize such start-up costs on the grounds that such
costs are necessary to successful operation at a new location. However, most enterprise
recognized start-up costs in connection with the opening of a branch as expenses of the
accounting period in which the costs are incurred. The decision should be based on the principle
that net income is measured by matching expired costs with realized revenue. Costs that benefit
future accounting periods are deferred and allocated to those periods. Seldom is there complete
certainty that a new branch will achieve a profitable level of operations in later years. In
recognition of this fact, in 1998 the AICPA Accounting Standards Executive Committee issued
Statement of Position 98-5 (SOP 98-5), “Reporting on the Costs of Start-Up Activities,” which
required expensing of all start-up costs, including those associated with organizing a new entity
such as a branch or division.

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Accounting System for a Branch and Home Office

The accounting system of one business enterprise having branches may provide for a complete set
of accounting records at each branch. A branch may maintain a complete set of accounting
records consisting of journals, ledgers, and a chart of accounts similar to those of an independent
business enterprise. Financial statements are prepared by the branch accountant and forwarded to
the Home Office. The number and types of ledger accounts, the internal control structure, the
form and content of the financial statements, and the accounting policies generally are prescribed
by the Home Office.
This section focuses on a branch operation that maintains a complete set of accounting records.
Transactions recorded by a branch should include all controllable expenses and revenue for which
the branch manager is responsible. If the branch manager has responsibility over all branch assets,
liabilities, revenue, and expenses, the branch accounting records should reflect this responsibility.
Expenses such as depreciation often are not subject to control by a branch manager; therefore
both the branch plant assets and the related depreciation ledger accounts generally are maintained
by the Home Office.
Reciprocal Ledger Accounts
 The accounting records maintained by a branch include a Home Office ledger account.
Home Office account is credited for all merchandise, cash, or other assets provided by the
home Office;
 Home Office account is debited for all cash, merchandise, or other assets sent by the
branch to the home office or to other branches.
 The Home Office account is a quasi-ownership equity account that shows the net
investment by the Home Office in the branch.
At the end of an accounting period when the branch closes it accounting records, the Income
Summery account is closed to the Home Office account. A net income increases the credit
balance of the Home Office account; a net loss decreases this balance.
In the Home Office accounting records, a reciprocal ledger account with a title such as
Investment in branch is maintained.
Investment in Branch is a non-current asset account, which is debited for cash, merchandise, and
services provided to the branch by the Home Office, and for net income reported by the branch.

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Investment in Branch is credited for cash or other assets received from the branch, and for net
losses reported by the branch.
Thus, the Investment in Branch account reflects the equity method of accounting. A separate
investment account generally is maintained by the Home Office for each branch.
If there is only one branch, the account title is likely to be Investment in Branch; if there are
numerous branches, each account title includes a name or number to identify each branch.
Expenses Incurred by Home Office and Allocated to Branches
Some business enterprises follow a policy of notifying each branch of expenses incurred by the
Home Office on the branch’s behalf.
Plant assets located at a branch generally are carried in the Home Office accounting records. If a
plant asset is acquired by the Home Office for the branch, the journal entry for the acquisition is a
debit to an appropriate asset account such as Equipment: Branch and a credit to Cash or an
appropriate liability account.
If the branch acquires a plant asset, it debits the Home Office ledger account and credits Cash or
an appropriate liability account. The Home Office debits an asset account such as Equipment:
Branch and credits Investment in Branch.
The Home Office also usually acquires insurance, pays property and other taxes, and arranges for
advertising that benefits all branches. Clearly, such expenses as depreciation, property taxes,
insurance, and advertising must be considered in determining the profitability of a branch.
A policy decision must be made as to whether these expense data are to be retained at the Home
Office or are to be reported to the branches so that the income statement prepared for each branch
will give a complete picture of its operations.
An expense incurred by the Home Office and allocated to a branch is recorded by the Home
Office by a debit to Investment in Branch and a Credit to an appropriate expense ledger
account; the branch debits an expense account and credits Home Office.
If the Home Office does not make sales, but functions only as an accounting and control center,
most or all of its expenses may be allocated to the branches. To facilitate comparison of the
operating results of the various branches, the Home Office may charge each branch interest on the
capital invested in that branch. Such interest expense recognized by the branches would be offset
by interest revenue recognized by the Home Office and would not be displayed in the combined
income statement of the business enterprise as a whole.

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Alternative Methods of Billing Merchandise Shipments to Branches

1. Billing shipments to a branch at Home Office cost
This is the simplest procedure and is widely used. It avoids the complication of unrealized gross
profit in inventories and permits the financial statements of branches to give a meaningful picture
of operations. However, billing merchandise to branches at Home Office cost attributes all gross
profits of the enterprise to the branches, even though some of the merchandise may be
manufactured by the Home Office. Under these circumstances, Home Office cost may be the most
realistic basis for billing shipment to branches.
2. Billing shipments at a percentage above Home Office cost (such as 110% of cost)
This may be intended to allocate a reasonable gross profit to the Home Office. When merchandise
is billed to a branch at a price above Home Office cost, the net income reported by the branch is
understated and the ending inventories are over-stated for the enterprise as a whole.
Adjustments must be made by the Home Office to eliminate the excess of billed prices over cost
(intercompany profits) in the preparation of combined financial statements for the Home Office
and the branch.
3. Billing shipments to a branch at branch retail selling prices
This may be based on a desire to strengthen internal control over inventories. The inventories
ledger account of the branch shows the merchandise received and sold at retail selling prices.
Consequently, the account will show the ending inventories that should be on hand at retail prices.
The Home Office record of shipments to a branch, when considered along with sales reported by
the branch, provides a perpetual inventory stated at selling prices. If the physical inventories taken
periodically at the branch do not agree with the amounts thus computed, an error or theft may be
indicated and should be investigated promptly.
2.8 Separate Financial Statements for Branch and for Home Office
a separate income statement and balance sheet should be prepared for a branch so management of
the enterprise may review the operating results and financial position of the branch. The branch’s
income statement has no usual features if merchandise is billed to the branch at Home Office cost.
However, if merchandise is billed to the branch at branch retail selling prices, the branch’s
income statement will show a net loss approximating the amount of operating expenses. The only
unusual aspect of the balance sheet for a branch is use of the Home Office ledger account in lieu
of the ownership equity accounts for a separate business enterprise. The separate financial

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statements prepared for a branch may be revised at the Home Office to include expenses incurred
by the Home Office allocable to the branch and to show the results of branch operations after
elimination of any intra-company profits on merchandise shipments.
Separate financial statements also may be prepared for the Home Office so that management will
be able to appraise the results of its operations and its financial position. However, it is important
to emphasize that separate financial statements of the Home Office and of the branch are prepared
for internal use only; they do not meet the needs of investors or other external users of financial
statements.
Combined Financial Statements for Home Office and Branch
A balance sheet for distribution to creditors, stockholders, and government agencies must show
the financial position of a business enterprise having branches as a single entity. A convenient
starting point in the preparation of a combined balance sheet consists of the adjusted trial balances
of the Home Office and the
Branch.
The assets and liabilities of the branch are substituted for the Investment in Branch ledger
account included in the Home Office trial balance. Similar accounts are combined to produce a
single total amount for cash, trade accounts receivable, and other assets and liabilities of the
enterprise as a whole.
In the preparation of a combined balance sheet, reciprocal ledger accounts are eliminated
because they have no significance when the branch and Home Office report as a single entity.
The balance of the Home Office account is offset against the balance of the Investment in Branch
account; also,
Any receivables and payables between the Home Office and the branch (or between two
branches) are eliminated.
The operating results of the enterprise (the Home Office and all branches) are shown by an
income statement in which the revenue and expenses of the branches are combined with
corresponding revenue and expenses for the Home Office. Any intra-company profits or losses
are eliminated.

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Illustration 2.2: Assume JIMMA TRADING Company bills merchandise to AGARO Branch
at Home Office cost and that AGARO Branch maintains complete accounting records and
prepares financial statements. Both the Home Office and the branch use the perpetual inventory
system. Equipment used at the branch is carried in the Home Office accounting records. Certain
expenses, such as advertising and insurance, incurred by the Home Office on behalf of the branch,
are billed to the branch. Transactions and events during the first year (2005) of operations of
AGARO Branch are summarized below (start-up costs are disregarded)
1. Cash of Br 1,000 was forwarded by the Home Office to AGARO Branch.
2. Merchandise with a Home Office cost of Br 60,000 was shipped by the Home Office to
AGARO Branch.
3. Equipment was acquired by AGARO Branch for Br 500, to be carried in the Home Office
accounting records. (Other plant assets for AGARO Branch generally are acquired by the
Home Office.)
4. Credit sales by AGARO Branch amounted to Br 80,000; the branch’s cost of the
merchandise sold was Br 45,000.
5. Collections of trade accounts receivable by AGARO Branch amounted to Br 62,000.
6. Payments for operating expenses by AGARO Branch totaled Br 20,000.
7. Cash of Br 37,500 was remitted by AGARO Branch to the Home Office.
8. Operating expenses incurred by the Home Office and charged to AGARO Branch totaled Br
3,000.
REQUIRED
A. prepare journal entries on the book of Home Office and AGARO Branch
B. Find the balance of home office ledger account
C. Find the balance of Investment in AGARO Branch ledger account.
D. Net income of AGARO branch
Working Paper for Combined Financial Statements
A working paper for combined financial statements has three purposes:
 To combine ledger account balances for like revenue, expenses, assets, and liabilities,
 To eliminate any intra-company profits or losses, and
 To eliminate the reciprocal accounts

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Assume that the perpetual inventories of Br 15,000 (Br 60,000 – Br 45,000 = Br 15,000) at the
end of 2005 for
AGARO Branch had been verified by a physical count.
The working paper for JIMMA TRADING Company is based on the transactions and events
shown in the above illustration and additional assumed data for the Home Office trial balance.
All the routine year-end adjusting entries are assumed to have been made, and the working paper
is begun with the adjusted trial balances of the Home Office and AGARO Branch.
Income taxes are disregarded in this illustration.
The following working paper provides the information for the combined financial statements
(excluding a statement of cash flows) of JIMMA TRADING Company below.

JIMMA TRADING COMPANY

WORKING PAPER FOR COMBINED FINANCIAL STATEMENTS OF HO ANDAGARO
BRANCHFOR YEAR ENDED DECEMBER 31, 2005(PERPETUAL INVENTORY SYSTEM:
BILLINGS AT COST)
INCOME STATEMENT Adjust trial balance Elimination Combination
Home office Branch Dr/Cr Dr/Cr Dr/Cr
Dr/Cr
Sales (400000) (80000) 480000
Cost of goods sold 235000 45000 280000
Operating expense 90000 23000 113000
Net income 75000 12000 87000
Total -0- -0- -0- -0-
Statement of retain earnings
Retained Earnings, Jan.1, 70000 70000
2005
Net Income from above (75000) (12000) 87000
Dividends Declared 40000 40000
Retained Earnings, 117000
Dec.31,2005
Totals -0- -0- -0- -0-

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Balance sheet
Cash 25000 5000 30000
Trade account receivable 39000 18000 57000
Inventories 45000 15000 60000
Investment in AGARO 26000 a(26000)
branch
Equipment 150000 150000
Accumulate depreciation (10000) (10000)
Trade account receivable (20000) (20000)
Home office (26000) a(26000)
Common stock Br 10 par (150000) 150000
Retain earnings above 117000
Total -0- -0- -0-
a) Eliminate reciprocal ledger account balance
b) Combined income statement
JIMMA TRADING COMPANYCombined Income Statement For Year Ended December
31, 2005
Sales --------------------------------------------------------------------------------------4800000
Cost of goods sold----------------------------------------------------------------------280000
Gross margin on sale -------------------------------------------------------------------200000
Operating expenses---------------------------------------------------------------------1130000
Net income --------------------------------------------------------------------------------87000
Basic earnings per share of common stock--------------------------------------------------------5.8

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C) Statement of retained earnings

JIMMA TRADING COMPANY Combined Income Statement For Year Ended December
31, 2005
Retained earnings begging of year ------------------------------------------------------------70000
Add.net income -----------------------------------------------------------------------------------87000
Subtotal ---------------------------------------------------------------------------------------------157000
Less dividend (2.67)-------------------------------------------------------------------------------40000
Retained earn of year -------------------------------------------------------------------------Br 117000
D) Balance sheet
JIMMA TRADING COMPANY Balance SheetDecember 31, 2005
Asset
Cash ---------------------------------------------------------------------------------------------- 3000
Trade account receivables ------------------------------------------------------------------- 57000
Inventories ------------------------------------------------------------------------------------ 60000
Equipment -------------------------------------------------------------------------------------- 150000
Less: accumulation depreciation ----------------------------------------------(10000)=140000
Total assets ---------------------------------------------------------------------------------------- 287000
Liability and stock holder equity
Liability
Trade account payable --------------------------------------------------------------------------- 20000
Stock holder equity
Common stock bir 10 par 15000 share authorized issued and outstanding---------------150000
Retain earnings -----------------------------------------------------------------------------117000(267000)
Total liability and stock holders ------------------------------------------------------------287000
2.10 billing of merchandise to branches at price above home office cost
Allowance for over valuations (AFOV)
Head office sells merchandise to branches more than selling price. This additional profit which is
earned by the head office from the shipment of merchandise to the branch is known as allowance
for over valuation.

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AFOV% age=AFOV x 100

COST price
AFOV = Billed price x AFOV % age
Billed % age
 Billed price means cost price plus AFOV
 Billed % means cost % plus AFOV % age
Particular Billed Cost price AFOV
March. Inv. Opening (branch) XX XX XX
Add march. Sent to branch XX XX XX
Less march. Returned by branch (XX) (XX) (XX)
Unadjusted AFOV XX XX XX
Less march. Inventory ending XXX XXX XXX
( branch)
GENERAL ENTERIES
HEAD FFICE BOOK BRANCH BOOK
1. Purchase merchandise on account by head office
Purchase-----------------------xx
A/payable ----------------------------------xx No entry
2. Head office remitted cash to branch
Investment in branch---------------------------xx Cash ----------------------------------------xx
Cash --------------------------------------------xx Home/headoffice…………………………xx
3. Head office sent goods to branch at above home office cost
Investment in branch -------------------------xx Merch.inve.--------------------------xx
Merch .inventories --------------------------------xx Head office -------------------------xx
AFOV……………………………………..XX
4. Head office transferred cash to branch for salary expenses of branch
Investment in branch ------------------------------xx Salary expense ---------------------xx
Cash -------------------------------------------------xx Head office -----------------------------xx
5. Head office paid liability of branch
Investment in branch ------------------xx A/payable -------------------------------xx

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Cash ----------------------------------------xx Head office ------------------------------xx

6. Head office received cash from the customers of the branch
Cash…………………………………… xx Head office …………………….xx
investment in branch………………………Xx A/Receivables………………………… xx
7. Branch purchase merchandise on account
No entry Purchase------------------------------xx
a/payable …………………………xx
8. Merchandise sold for cash by branch
No entry Cash …………………………….xx
sales ……………………………………..xx
9. Branch sold merchandise on account
No entry A/Receivables…………….xx
sales …………………………….xx
10. Branch purchase furniture for cash
No entry Furniture……………….. xx
cash ……………………………………xx
11. Branch paid the liability of head office
A/payables…………………………… xx Head office……………………xx
invt. In branch…………………………………Xx cash ……………………………………xx
12. Branch received the receivables of head office
In vt.in branch ……………xx cash……………………….. xx
A/receivables …………………………xx Head office …………………….xx
13. Branch returned goods to head office at billed price
Merch. Inventory returned……….. xx Head office…………………xx
AFOV……………………………….………xx Merch. Inventory returned ………xx
invt. In branch………………………………xx
14. Branch paid the rent expense of head office
Rent exp……………………………Xx Head office…………………………xx
invt in branch ………………………xx cash ……………………………….xx

15. Branch reported a net profit to head office

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Invt. In branch …………………xx Expense & revenue summary ………..xx

profit& loss account ………………xx head office……………………………xx
16. Branch reported a net loss to head office
Profit& loss account …………….xx Head office
invt in branch …………………………xx ……………………………………xx
exp. & rev. summary ………………….xx

Home Office Adjusting and Closing Entries and Branch Closing Entries
Home office’s equity methods adjusting and closing entries for branch operating results and the
branch closing entries on dec.31,2oo5 are shown below (explanations for the entries are omitted )
Head office accounting records AGARO Branch accounting records
Adjusting and closing entries Closing entries
None Sales ---------------------------------80000
Cost of goods sold ………………..45000
Operating expenses ………………23000
Income summary………………….12000
Investment in AGARO Branch ………12000 Income summary …………………..12000
Income AGARO Branch……………..12000 Home office…………………………12000
Income AGARO Branch ……………….12000 No entry
Income summary …………………12000

Using the illustration for Jimma Trading company one changed assumption the home office bill
merchandise shipped to AGARO Branch at a markup of 50% under this assumption the journal
entries for the first year’s events and transaction by the home office a Agaro branch are the same
as those presented on the journal entries
For shipment of merchandise from the home office to Agaro branch. This shipments (Br.6000
cost +50% Markup on cost =Br 90000) are recorded under the perpetual inventories system as
follows.

Home accounting records Agaro branch account

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Investment in AGARO branch ……….9000 Inv………………..9000

Inventories ………………………………6000 head office……9000
AFOVI……………………………………3000
Investment in Agaro branch
Date Explanation Debit Credit Balance
2005 Cash sent to branch 1000 1000
Merchandise billed to 9000 91000
branch at 50% over cost
Equipment acquired by 500 90500
branch, carried in HO
Cash received from branch 37000 53000
Operating expenses billed to 3000 56000
branch

In accounting records of AGARO branch, the home office ledger now has a credit balance of
56000 before the accounting records are closed and the branch net income or loss in inter the
home office account as illustrated as below.
Home office Accounting
Date Explanation Debit Credit Balance
2005 Cash received from the office 1000 1000
Merchandise received from 90000 91000
Home Office
Equipment Acquired 500 90500
Cash Sent to Home Office 37000 53000
Operating expenses billed by 3000 56000
Home Office

AGARO Branch recorded the merchandise received from the Home Office at billed prices of Br
90,000; the Home Office recorded the shipment by credits of Br 60,000 to Inventories and Br 30,000 to

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Allowance for Overvaluation of Inventories (AFOVI): AGARO Branch. Use of the allowance account
enables the Home Office to maintain a record of the cost of merchandise shipped to AGARO Branch
as well as the amount of the unrealized gross profit on the shipments.
At the end of the accounting period, AGARO Branch reports its inventories (at billed prices) at Br
22,500. The cost of these inventories is Br 15,000 (Br 22,500/1.50 = Br 15,000).
In the Home Office accounting records the required balance of the Allowance for Overvaluation of
Inventories: AGARO Branch ledger account is Br7500 (Br 22,500 – Br 15,000 = Br 7,500); thus, this
account balance must be reduced from its present amount of Br 30,000 to Br 7,500. The reason for this
reduction is that the 50% markup of billed prices over cost has become realized gross profit to the
Home Office with respect to the merchandise sold by the branch Consequently, and the process of
increase price b/n whole seller and retailer at the end of the year the Home Office reduces its
allowance for overvaluation of the branch inventories to the Br 7,500 excess valuation contained in the
ending inventories. The debit adjustment of B 22,500 in the allowance account is offset by a credit to
the Realized Gross Profit: AGARO Branch Sale account, because it represents additional gross profit
of the Home Office resulting from sales by the branch. Working Paper When Billings to Branches
Are at Prices above Cost When a Home Office bills merchandise shipments to branches at prices
above Home Office cost, preparation of the working paper for combined financial statements is
facilitated by any analysis of the flow of merchandise to a branch, such as the following for AGARO
Branch of JIMMA TRADING Company:

JIMMA TRADING COMPANY Flow of Merchandise for AGARO Branch During 2005
Billed price Ho cost Mark up%50 of cost
Beginning inventories -0- -0- -0-
+ shipments from home office Br 90000 Br 60000 30000
Available for sale Br 90000 Br.60000 30000
Less :end inventories 22500 15000 75000
Cost of goods sold Br 67000 45000 22500
The foregoing analysis provides in the Markup column the information needed for the
Eliminations column in the working paper for combined financial statements below.

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JIMMA TRADING COMPANY

WORKING PAPER FOR COMBINED FINANCIAL STATEMENTS OF HO ANDAGARO BRANCHFOR YEAR ENDED
DECEMBER 31, 2005(PERPETUAL INVENTORY SYSTEM: BILLINGS AT COST)

INCOME STATEMENT Adjust trial balance Elimination Combination

Home office Branch Dr/Cr Dr/Cr Dr/Cr
Dr/Cr
Sales (400000) (80000) 480000
Cost of goods sold 235000 45000 a22500 280000
Operating expense 90000 23000 113000
Net income 75000 10500 b22500 87000
Total -0- -0- -0- -0-
Statement of retain earnings
Retained Earnings, Jan.1, 2005 70000 70000
Net Income from above (75000) a(10500) b22500 87000
Dividends Declared 40000 40000
Retained Earnings, 117000
Dec.31,2005
Totals -0- -0- -0- -0-
Balance sheet
Cash 25000 5000 30000
Trade account receivable 39000 18000 57000
Inventories 45000 22500 a)75000 60000
AFOVI (30000) a)30000
Investment in AGARO branch 26000 c(56000)
Equipment 150000 150000
Accumulate depreciation (10000) (10000)
Trade account receivable (20000) (20000)
Home office (56000) c)56000
Common stock Br 10 par (150000) 150000
Retain earnings above 117000
Total -0- -0- -0- -0-

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Eliminating journal entries.

a) To reduce ending inventories and cost of goods sold of branch to cost, and to eliminate
unadjusted balance
of Allowance of Overvaluation of Inventories: AGARO Branch ledger account.
AFOV--------------------------------------------------30000
Cost of goods sold ………………………………225000
Inventories …………………………………………7500
b) To increase income of Home Office by portion of merchandise markup that was realized by
branch sales.
Unrealized Gross Profit…………………………………..22500
Realized Income: AGARO Branch…………………………22500
c) To eliminate reciprocal ledger account balances
Home Office ……………………………………….. 56000
Investment in AGARO Branch……………………………..56000
The working paper above differs from the working paper when merchandise shipped at Home
Office cost bythe inclusion of an elimination to restate the ending inventories of the branch to
cost. Also, the incomereported by the Home Office is adjusted by the Br 22,500 of merchandise
markup that was realized as a result of sales by the branch. This amount in the Eliminations
column appears only in the working paper. Theamounts represent a mechanical step to aid the
preparation of combined financial statements and are notentered in the accounting records of
either the Home Office or the branch.

Combined Financial Statements

Because the amounts in the Combined column of the working paper are the same as in the
working paper prepared when the merchandise shipments to the branch were billed at Home
Office cost, the combined
financial statements are identical to those illustrated when merchandise is shipped at Home
Office cost.
Illustration
Jima trading company opened a branch at AGARO on July 1/2004. The following information of
AGARO branch & head office for the year ended 30 June, 2005.

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a) Merchandise purchased on account by the head office 300,000 br.

b) Cash received by the branch from the head office
c) Good received by the branch from the head office br. 295,200 (costing br.246000)
d) Head office paid the liability of branch br. 30000.
e) Head office received from the customers of the branch br. 50,000
f) Goods purchased by branch for cash br. 15,800 and on account br. 35000
g) Sale by branch for cash br. 64000 and on account 215000.
h) Salaries expenses of branch paid by the head office br. 62200
i) Branch paid the liability of the head office br. 19000
j) Collection on account by branch from customers of head office br. 182,100
k) Cash sent to head office br. 152000 by branch.
l) Defective goods returned by branch to head office at billed price of br. 6000.
M) Branch paid the rent expense of the head office br. 13000
n) Furniture sent to branch by head office br. 10000.
o) Branch reported a net profit of br. 3000 to the head office.
p) Merchandise inventory on 30 June 2005 at branch br. 55200 (billed price).
Required:- make entries in the book of head office as well as in branch.
Transactions between Branches Efficient operations may on occasion require that merchandise
or other assets be transferred from one branch to another. Generally, a branch does not carry a
reciprocal ledger account with another branch but records the transfer in the Home Office ledger
account. For example, if MODJO Branch ships merchandise to ADAMA Branch, MODJO
Branch debits Home Office and credits Inventories (assuming that the perpetual inventory system
is used). On receipt of the merchandise, ADAMA Branch debits Inventories and credits Home
Office. The Home Office records the transfer between branches by a debit to Investment in
ADAMA Branch and acredit to Investment in MODJO Branch.
The transfer of merchandise from one to another does not justify increasing the carrying amount
of inventories by the freight costs incurred because of the indirect routing. The amount of freight
costs properly included in inventories at a branch is limited to the cost of shipping the
merchandise directly from the Home Office to itspresent location. Excess freight costs are
recognized as expenses of the Home Office.
Illustration 2.4:To illustrate the accounting for excess freight costs on inter-branch transfers of

By abebe k. ( msc) accounting 4 rd

 2023

merchandise, assume the following for excess freight costs on inter branch transfers of
merchandise, assume the following data.
The Home Office shipped merchandise costing Br 6,000 to Dana Branch and paid freight costs of
Br 400.Subsequently, the Home Office instructed Dana Branch to transfer this merchandise to
Evan Branch. Freight costs of Br 300 were paid by Dana Branch to carry out this order. If the
merchandise had been shipped directly from the Home Office to Evan Branch, the freight costs
would have been Br 500. The journal entries required in the three sets of accounting records
(assuming that the perpetual inventory system is used) as follows:
In the Accounting Records of Home Office:
Investment in Dana Branch……………………………..6000
Freight-In……………………………………………….400
Home Office……………………………………………..6400
To record shipment of merchandise and payment of freight costs
Investment in Evan Branch……………………………………...6500
EInvestment in Dana Branch…………………………………………200
Excess Freight Cost–Inter branch Transfer Expense………………….6700
To record transfer of merchandise from Dana Branch to Evan Branch under instruction of Home
OfficeInter branch freight of Br 300 paid by Dana Branch caused total freight costs on this
merchandise to exceeddirect shipment cost by Br 200 (Br 400 + Br 300 – Br 500 = Br 200).
2. In the Accounting Records of Dana Branch:
Investment in Dana Branch……………………………..6000
Freight-In……………………………………………….400
Home Office……………………………………………..6400
To record receipt of merchandise from Home Office with freight costs paid in advance by Home
Office
Home office ………………………………………………6700
Inventories ……………………………………………………..6000
Freight in…………………………………………………………400
Cash ………………………………………………………………….3000
To record transfer of merchandise to Evan Branch under instruction of Home Office and payment
of freight costs of Br 300.

By abebe k. ( msc) accounting 4 rd