Practical accounting 2 vol 2

Practical Accounting 2

Advance Financial Accounting Vol. 2

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


6. Intercompany Profit Transactions –Inventories

7. Intercompany Gain Transactions – Plant Assets

8. Accounting For Foreign Currency Transactions

9. Translation of Foreign Entity Statements


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


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.


1. Sales Agency - Determine Separately the Net Income

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


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.


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


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


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.


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



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


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


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


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


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


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


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


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

End Of Home and Branch Accounting

Practical accounting 2 vol 2

Business

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