Chapter 04 Modern Advanced ing 6w6919
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CHAPTER 4 ING FOR BRANCHES; COMBINED FINANCIAL STATEMENTS The title of each problem is followed by the estimated time in minutes required for completion and by a difficulty rating. The time estimates are applicable for students using the partially filled-in working papers. Pr. 4–1
Pr. 4–2
Pr. 4–3
Pr. 4–4
Pr. 4–5
Pr. 4–6
Pr. 4–7
Pr. 4–8
Pr. 4–9
Hartman, Inc. (20 minutes, easy) Journal entries for home office and branch to record shipments of merchandise, payment of freight costs, ending inventories under the periodic inventory system, and other year-end adjustments. Lobo Company (20 minutes, easy) Reconciliation of reciprocal ledger s for home office and branch; journal entries to bring ing records up to date. Styler Corporation (30 minutes, easy) A branch obtains merchandise from the home office at billed prices above home office cost. Branch inventories are damaged by fire. Compute the loss from the fire and recognize the loss in the ing records of both the branch and the home office. Yugo Company (30 minutes, easy) Determine unadjusted balance of the Home Office in branch ing records, prepare journal entries to bring home office and branch ing records up to date, and reconcile reciprocal ledger s at year-end. Periodic inventory system is used. Trudie Company (40 minutes, easy) Journal entries for home office and branch when merchandise is billed to branch at prices above home office cost. Different sets of journal entries under perpetual and periodic inventory systems. Kosti-Marian Company (60 minutes, medium) Preparation of year-end journal entries and a working paper for home office and branch with emphasis on the reconciliation of cash records and the handling of inventories under the periodic inventory system. Home office bills merchandise to the branch at prices above home office cost. Solis Company (30 minutes, medium) Given the trial balances of the home office and the branch, prepare adjusting and closing entries and a working paper for combined financial statements. Perpetual inventory system is used by both home office and branch. Calco Corporation (50 minutes, medium) Journal entries to bring home office and branch ing records up to date. Working paper to summarize operations for year. Both home office and branch office use the periodic inventory system. Kreshek Company (60 minutes, medium) Reconciliation of home office and branch ledger s when errors have been made by both offices and certain transactions have been recorded by only one office. Adjusting entries in both sets of ing records. Both home office and branch use the perpetual inventory system.
Solutions Manual, Chapter 4
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Pr. 4–10
Arnie’s (60 minutes, strong) Preparation of year-end journal entries and a working paper for combined financial statement of home office and branch under the perpetual inventory system. Closing entries for home office.
ANSWERS TO REVIEW QUESTIONS 1.
2.
3.
4.
5.
6.
The transactions to be ed for by the branch generally should include only controllable expenses for which the branch manager is responsible. For example, depreciation of plant assets usually follows policies set by the home office and is not subject to control by the branch manager. This situation suggests that both the branch plant assets records and the related depreciation records should be maintained by the home office. The Home Office ledger in the branch ing records is reciprocal to the Investment in Branch in the home office ing records. These two s show the same thing the net assets of the branchfrom two different points of view. The Home Office maintained by the branch has a credit balance and may be considered quasi-ownership equity; the Investment in Branch maintained by the home office has a debit balance and is a noncurrent asset that reflects the net investment in the branch by the home office. Another pair of reciprocal ledger s is used to record shipments of merchandise from the home office to the branch when the periodic inventory system is used. In the home office ing records, the is Shipments to Branch (a Purchases valuation ) and has a credit balance; in the branch ing records, the is Shipments from Home Office (a purchases-type ) and has a debit balance. Reciprocal ledger s should be reconciled and brought up to date at the end of each ing period. The reciprocal s are eliminated in the preparation of combined financial statements of the home office and the branch. For a home office to bill merchandise shipments to its branches at or above home office cost is acceptable. If branches are billed at amounts above home office cost, the home office eliminates the excess of billed prices over cost when the balances of the home office and the branch are combined in the preparation of combined financial statements. To the extent that the merchandise has been sold by the branches before financial statements are prepared, the "excess" will have been realized, and the combined net income will be the same as if the merchandise had been billed at home office cost. Merchandise not sold is valued at cost in the combined balance sheet. Alternative methods for billing merchandise to branches are acceptable because they give the same results in the combined financial statements when appropriate eliminations are made. The separate financial statements prepared by individual branches and by the home office indicate the operating results and financial position of each unit of Jesse Corporation. The statements are used to evaluate the performance of branch managers and suggest the most appropriate areas for expansion or closure of branches. The combined financial statements serve the needs of managers in the analysis of operating results and financial position of the enterprise as a whole. Combined financial statements also are more appropriate for use by outsiders such as stockholders and creditors. To record the acquisition of equipment to be carried in the home office, Slauson Branch debits Home Office and credits Cash for $17,000. The home office debits Equipment: Slauson Branch and credits Investment in Slauson Branch for $17,000. A home office's Allowance for Overvaluation of Inventories: Branch ledger is used to reduce to cost the component of the balance of the Investment in Branch ledger represented by shipments of merchandise to the branch at a markup over home office cost. When such a shipment is made, the allowance is credited for the excess of billed price over home office cost of the shipment. At the end of an ing period, the home office prepares a journal entry debiting the allowance and crediting Realized Gross Profit: Branch Sales for the amount of the markup realized by the branch through sales of merchandise to outsiders. Thus, the end-of-
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7.
8.
period adjusted balance of the allowance represents unrealized markup in the branch's ending inventories acquired from the home office. The factors that would cause the reciprocal ledger s to be out of balance may be classified into the following groups: (1) Intracompany transactions between home office and branch, such as shipments of merchandise or cash transfers by the home office to the branch, recorded by the home office but not recorded by the branch. (2) Intracompany transactions between branch and home office, such as transfers of cash by the branch to the home office, recorded by the branch but not recorded by the home office. (3) Errors made by the home office or the branch (or both) in recording intracompany transactions. Ford Branch of Ralph Company should debit the Home Office ledger and credit the Inventories . Gates Branch should not absorb more freight costs than if the goods had been shipped directly from the home office. Normal freight costs of shipping merchandise to branches are added to the carrying amount of inventories, but excess freight costs are losses from poor planning and are recognized as expenses of the home office.
SOLUTIONS TO EXERCISES Ex. 4–1
1. 2. 3. 4. 5. 6. 7.
c b c a c c a
8. a 9. a 10. d 11. d 12. a (.20 ÷ 1.20 = 16 2/3%) 13. b
Ex. 4–2
a. Journal entries in ing records of home office: 2005 Sept. 1 2
Investment in San Marino Branch Cash
10,000
Investment in San Marino Branch Inventories Allowance for Overvaluation of Inventories: San Marino Branch ($60,000 x 0.25)
75,000
3
10,000
Equipment: San Marino Branch Investment in San Marino Branch b. Journal entries in ing records of San Marino Branch: 2005 Sept. 1 Cash Home Office 2
Inventories [$60,000 ÷ (1.00 – 0.20)] Home Office
3
Home Office Cash
Solutions Manual, Chapter 4
60,000 15,000 3,000 3,000
10,000 75,000
10,000 75,000
3,000 3,000
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Ex. 4–3
a. Journal entries in ing records of home office: 2005 Sept.
1 Investment in Eastern Branch Cash
50,000 50,000
4 Investment in Eastern Branch Shipments to Eastern Branch Allowance for Overvaluation of Inventories: Eastern Branch
125,000 95,000 30,000
11 Equipment: Eastern Branch Investment in Eastern Branch b. Journal entries in ing records of Eastern Branch: 2005 Sept. 3 Cash Home Office
34,200 34,200
50,000 50,000
8 Shipments from Home Office Home Office
125,000 125,000
11 Home Office Cash Ex. 4–4
34,200 34,200
Journal entries for Wilshire Branch of Watt Corporation: 2005 Jan. 2 Inventories Home Office To record merchandise shipped by home office.
Ex. 4–5
100,000 100,000
18 Home Office Cash To records acquisition of equipment to be carried in home office ing records.
5,000
31 Operating Expenses Home Office To records operating expenses allocated by home office.
8,000
5,000
8,000
Journal entries for home office of Usc Company: 2005 Jan. 10 Investment in Hoover Street Branch Inventories ($60,000 x 0.80) Allowance for Overvaluation of Inventories: Hoover Street Branch ($60,000 x 0.20) To record shipment of merchandise to branch at a markup of 20% of billed price.
60,000 48,000 12,000
25 Investment in Hoover Street Branch 25,000 Trade s Receivable To record collection of trade receivable by branch.
25,000
31 Investment in Hoover Street Branch Operating Expenses To record operating expenses allocated to branch.
18,000
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18,000
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Ex. 4–6
Journal entries for Lido Branch of Turbo Company: 2005 Aug. 6 Trade s Payable Home Office 14 22
Ex. 4–7
10,000 10,000
Home Office Trade s Receivable
6,000 6,000
Home Office Cash
20,000 20,000
Journal entries for home office of Wardell Company: a. Investment in Branch Cash Inventories
15,000 5,000 10,000
b. Investment in Branch Operating Expenses
1,500 1,500
c. Investment in Branch Notes Receivable Interest Revenue
416 400 16
d. No journal entry required e. Investment in Branch Income: Branch Journal entries for Exeter Branch of Wardell Company: a. Cash Inventories Home Office b. Operating Expenses Home Office
500 500 5,000 10,000 15,000 1,500 1,500
c. Cash
416 Home Office
416
d. Trade s Receivable Operating Expenses Cost of Goods Sold Sales Cash Inventories
12,500 2,500 8,000 12,500 2,500 8,000
e. Income Summary Home Office Ex. 4–8
500 500
Journal entry on Dec. 31, 2005, for Davis Branch of Leland Company: Home Office Accumulated Depreciation of Equipment Equipment Depreciation Expense To correct ing for equipment acquired and depreciation expense Journal entry on Dec. 31, 2005, for home office of Leland Company: Depreciation Expense: Davis Branch Equipment: Davis Branch Accumulated Depreciation of Equipment: Davis Branch
Solutions Manual, Chapter 4
20,000 750 20,000 750
750 20,000 750
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Investment in Davis Branch To record equipment acquired by Davis Branch and related depreciation. Ex. 4–9
FIGUEROA COMPANY Flow of Merchandise for Nine-Zero Branch For Month Ended January 31, 2005
Beginning inventories Add: Shipment from home office Available for sale Less: Ending inventories Cost of goods sold Ex. 4–10
Billed Price $120,000 500,000 $620,000 100,000 $520,000
Cost $ 96,000 400,000 $496,000 80,000 $416,000
Explanation Balance Shipment to branch Realized gross profit on branch sales
Debit
$ 24,000 100,000 $124,000 20,000 $104,000 Credit 90,000
100,000
Balance 30,000 cr 120,000 cr 20,000 cr
Journal entries for home office of Trapp Company, May 31, 2005: Investment in Portland Street Branch Income: Portland Street Branch
80,000 80,000
Allowance for Overvaluation of Inventories: Portland Street Branch ($200,000 – $60,000) Realized Gross Profit: Portland Street Branch Sales
140,000 140,000
Income: Portland Street Branch Realized Gross Profit: Portland Street Branch Sales Income Summary Ex. 4–12
Markup
Allowance for Overvaluation of Inventories: 32 Branch Date 2005 Mar. 31 Apr. 16 30
Ex. 4–11
20,000
80,000 140,000 220,000
a. $48,000 ($80,000 – $32,000). The billed price equals $32,000 ÷ 0.40, or $80,000. b. Allowance for Overvaluation of Inventories: Toledo Branch Realized Gross Profit: Toledo Branch Sales To adjust allowance in the ing records of home office, as follows: Balance, Mar. 1, 2005 $32,000 Increase during March ($60,000 – $36,000) 24,000 Balance before adjustment $56,000 Less: Balance, Mar. 31, 2005 ($25,000 x 0.40) 10,000 Required reduction in allowance $46,000
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46,000 46,000
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Ex. 4–13
Journal entries for home office of Glendale Company: 2005 Sept. 17 Investment in Montrose Branch Inventories Allowance for Overvaluation of Inventories: Montrose Branch To record shipment of merchandise to branch at a markup of 25% on billed price, as follows: Markup ($400,000 x 0.25 = $100,000) Cost ($400,000 x 0.75 = $300,000) 30
Ex. 4–14
Allowance for Overvaluation of Inventories: Montrose Branch Realized Gross Profit: Montrose Branch Sales To recognize as realized gross profit the markup of merchandise applicable to goods sold by branch during September, 2005, as follows: [($60,000 + $100,000) – ($160,000 x 0.25) = $120,000]
300,000 100,000
120,000 120,000
Journal entries for home office of Searl Company, Jan. 31, 2005: Investment in Vermont Avenue Branch Income: Vermont Avenue Branch
60,000 60,000
Allowance for Overvaluation of Inventories: Vermont Avenue Branch ($80,000 – $27,000) Realized Gross Profit: Vermont Avenue Branch Sales Income: Vermont Avenue Branch Realized Gross Profit: Vermont Avenue Branch Sales Income Summary Ex. 4–15
400,000
53,000 53,000 60,000 53,000 113,000
Journal entries in ing records of home office of Gomez Company for 2005: Investment in Perez Branch Shipments to Perez Branch Allowance for Overvaluation of Inventories: Perez Branch To record shipments to branch at a markup of 25% above cost. Allowance for Overvaluation of Inventories: Perez Branch Realized Gross Profit: Perez Branch Sales To adjust allowance as follows: Balance, Jan. 1, 2005 ($15,000 x 0.20) (A 25% markup on cost is equal to a 20% markup on billed price.) Increase during 2005 ($30,000 x 0.20) Balance before adjustment Less: Balance, Dec. 31, 2005 ($19,500 x 0.20) Required reduction in allowance
Solutions Manual, Chapter 4
30,000 24,000 6,000 5,100 5,100
$3,000 6,000 $9,000 3,900 $5,100
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Ex. 4–16
a. Computation of estimated cost of merchandise destroyed by fire at branch of Samore, Inc., Jan. 28, 2005: Inventories, Jan. 1, 2005 (billed price) $15,600 Add: Shipments from home office, Jan. 1 to Jan. 28 (billed price) 71,500 Merchandise available for sale, Jan. 1 to Jan. 28 (billed price) $87,100 Billed price of net merchandise sold: [($51,840 – $3,220) ÷ 1.10] 44,200 Estimated inventories, Jan. 28, 2005 (billed price) $42,900 Less: Inventories not damaged ($7,150 ÷ 1.10) 6,500 Estimated inventories destroyed (billed price) $36,400 Less: Valuation in excess of cost ($36,400 x 3/13*) 8,400 Estimated cost of merchandise destroyed by fire, Jan. 28, 2005 $28,000 *A 30% markup on cost is equal to a 3/13 markup on billed price. b. Journal entry to record loss in ing records of branch, Jan. 28, 2005: Loss from Fire Inventories To record estimated carrying amount of merchandise destroyed by fire.
Ex. 4–17
a. Journal entry for the home office of Argos Company: 2005 May 31 Cash in Transit Investment in Troy Branch b. Journal entries for Troy Branch of Argos Company: 2005 May 31 31
Inventories in Transit Home Office Home Office Trade s Receivable
36,400
36,400
10,000 10,000
280,000 280,000 50,000 50,000
CASES Case 4–1
Case 4–2
Although the appropriate interpretation of Lewis Hanson's contract with Longo Company probably requires a legal opinion, logic suggests that neither Hanson's view nor the Longo controller's view is appropriate. Absent any provision in Hanson's contract to the contrary, the method used by the branch ant to measure net income of Santee Branch during its operating phase should be applied to Santee's last operating period. The resultant net loss precludes a bonus to Hanson, but "tinkering" with the measurement of branch net income appears unable with respect to both Hanson's suggestion and the Longo controller's suggestion. Before deciding on an answer to the case, it is appropriate to consider the following pronouncements of the Financial ing Standards Board in Statement of Financial ing Concepts No. 6, “Elements of Financial Statements” (CON 6); Statement of Financial ing Standards No. 5, “ing for Contingencies” (FAS 5); Statement of Financial ing Standards No. 142, “Goodwill and Other Intangible Assets.” Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. (CON 6, para. 25) Contingencies that might result in gains [contingent assets] usually are not reflected in the s since to do so might be to recognize revenue prior to its realization. (FAS 5, para. 17a) Expenses are outflows or other u of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. (CON 6, para. 81) Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners. (CON 6, para. 83)
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Case 4–3
Case 4–4
Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred. (FAS 142, para. 10) Given the foregoing definitions, there is no for Fortunato Company's deferral of pre-operating costs incurred for the new branch. Apart from the costs of testing the manufacturing equipment, which may be capitalized as part of the cost of the equipment, all remaining start-up costs should be recognized either as expenses or as losses. Because of the uncertainty as to when, if ever, regulatory agency approval for the branch's production and sale of products will be obtained, the probable criterion for the recognition of an asset is not met. Given such uncertainty, Robert Engle's characterization of the pre-operating costs as contingent assets is appropriate; they are not to be recognized until realized. The costs incurred other than for testing equipment, research, and development, do not qualify as expenses because they do not result from delivering or producing goods. Thus, recognition of such costs as losses appears to be an appropriate course of action for Fortunato Company. Kevin Carter's dilemma is a difficult one. The cost-benefit aspects of any course of action he selects must be considered. However, the current practice for “plugging” differences between reciprocal ledger s of the home office and branches of Oilers, Inc., should be forbidden at once. At the same time, an independent audit of Oilers' financial statements would be prohibitively expensive, given the chaotic state of the ing records. Adjusting the 14 branches' Home Office ledger balances to agree with the home office's reciprocal balances is the least costly alternative; if it is accompanied by strong measures to ensure future monthly reconciliations of the reciprocal balances, it might suffice. However, Carter might elect to select one of the 14 branches for a detailed analysis of differences between the reciprocal ledger balances; such a course of action might disclose a pattern of recurring errors common to other branches and facilitate discovery of most, if not all, of the reconciling items. TO: The Board of Directors, Windsor Company FROM: ___________________________________________, Controller DATE: ________________________ SUBJECT: Separate Financial Statements for Southwark Branch You have asked my opinion as to whether separate financial statements for Southwark Branch may be prepared for its prospective purchaser. My review of professional literature leads me to conclude that the statements may be prepared. In reaching my conclusion, I considered the following: AIA Professional Standards, Volume 2; Section ET92.04 Definition of financial statements Section AR100.04 Definition of financial statements Statement of Financial ing Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises,” par. 6 Most frequently provided financial statements (CON 1)
Solutions Manual, Chapter 4
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Case 4–5
Statement of Financial ing Concepts No. 6, “Elements of Financial Statements,” par. 24 Nature of ing entity (CON 6) Statement of Financial ing Standards No. 57, “Related Party Disclosures,” par. 2 Disclosure of material related party transactions (FAS 57) I have concluded that Southwark Branch is an ing entity, as described in CON 6. Based on the references in ET92.04, AR100.04, and CON 1, I believe that a statement of assets and liabilities; a statement of revenues, expenses, and changes in net assets; and a statement of cash flows are appropriate for Southwark Branch. Because the branch is a segment of Windsor Company, I do not believe a statement of financial position (balance sheet), an income statement, and a statement of owner's equity are appropriate for it. Thus, the question you raised regarding an equity section of a balance sheet is moot. The statement of assets and liabilities would have total liabilities of Southwark Branch subtracted from its total assets, with a “bottom line” of net assets, which would carry the after-closing balance of the branch's Home Office ledger . The unrealized intracompany markup above cost in the branch's ending inventory would be disclosed in a note to Southwark Branch's financial statements that describes the intracompany transactions with the home office of Windsor Company in accordance with FAS 57. Please inform me if I can be of further service. a. Lola Branch should have prepared a journal entry to recognize the $2,640 liability incurred under the installment contract, with related debits to Home Office for the cash price of the equipment ($2,400) and to Discount on Installment Contract Payable for the interest portion of the contract. Monthly payments of $110 should have been applied to reduce the installment contract liability, and an appropriate amount of interest expense applied to reduce the discount by the interest method. The sale of the office equipment required recognition of a $900 loss ($2,400 – $1,500 = $900); an accompanying entry should have recorded the payoff of the balance of the installment contract, $2,090 [$2,640 – ($110 x 5) = $2,090]; the forgiveness of $150 of the unamortized discount on the contract, with the remaining discount recognized as interest expense; and the recognition of a liability to the branch manager for his $440 ($2,090 – $150 – $1,500 = $440) payment of the balance of the installment contract in excess of the $1,500 sales proceeds of the office equipment. b. The home office of Langley, Inc., should have prepared journal entries as follows: (1) Recognize Lola Branch's acquisition of the office equipment with a debit to Office Equipment: Lola Branch and a credit to Investment in Lola Branch, $2,400. (2) Recognize depreciation for five months on the equipment with debits to Depreciation Expense: Lola Branch and credits to Accumulated Depreciation of Office Equipment: Lola Branch, $20 each ($2,400 x 0.10 x 1/12 = $20). (3) Reverse entry (1) when Lola Branch disposed of the office equipment. c. Correcting journal entry, Dec. 31, 2005, in ing records of Lola Branch: Interest Expense ($240 – $150) 90 Loss on Disposal of Office Equipment 900 Miscellaneous Expense ($110 x 5) 550 Payable to Manager of Lola Branch 440 To record interest expense from installment contract transaction, loss on disposal of equipment, and liability to branch manager for personal funds used to pay off installment contract.
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d. Correcting journal entries, Dec. 31, 2005, in ing records of home office: Office Equipment: Lola Branch 2,400 Depreciation Expense: Lola Branch 100 Office Equipment: Lola Branch Accumulated Depreciation of Office Equipment: Lola Branch To record acquisition of equipment by branch, depreciation for five months, and subsequent disposal (loss on disposal will be included in net income or loss reported by Lola Branch to home office). Accumulated Depreciation of Office Equipment: Lola Branch Investment in Lola Branch To write off accumulated depreciation of equipment disposed of by branch.
Solutions Manual, Chapter 4
2,400 100
100 100
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20 Minutes, Easy Hartman, Inc.
Pr. 4–1 Hartman, Inc. Reno Branch Journal Entries
Shipments from Home Office ($300,000 x 1.20) Freight In Home Office To record merchandise received from home office and freight costs of $15,000.
3 6 0 0 0 0 1 5 0 0 0
Cash
4 5 0 0 0 0
3 7 5 0 0 0
Sales To record sales for 2005.
4 5 0 0 0 0
Operation Expenses Cash To record payment of expenses.
9 6 0 0 0 9 6 0 0 0
Inventories, Dec. 31, 2005 [$72,000 + ($15,000 x 1/5)] Sales Shipments from Home Office Freight In Operating Expenses Income Summary To record ending inventories and to close revenue and expense ledger s. Ending inventories include one-fifth of $15,000 freight costs, because merchandise on hand equals one-fifth of the year’s shipments ($72,000 ÷ $360,000 = 1/5). Income Summary Home Office To close Income Summary ledger .
7 5 0 0 0 4 5 0 0 0 0 3 6 1 9 5
0 5 6 4
0 0 0 0
0 0 0 0
0 0 0 0
5 4 0 0 0 5 4 0 0 0
Hartman, Inc. Home Office Journal Entries Investment in Reno Branch Shipments to Branch Allowance for Overvaluation of Inventories Reno Branch ($300,000 x 0.20) Cash To record shipment to branch of merchandise with cost of $300,000 and payment of $15,000 freight costs.
3 7 5 0 0 0 3 0 0 0 0 0 6 0 0 0 0 1 5 0 0 0
Investment in Reno Branch Income : Reno Branch To record net income reported by branch.
5 4 0 0 0
Allowance for Overvaluation of Inventories: Reno Branch
4 8 0 0 0
Realized Gross Profit: Reno Branch Sales To reduce allowance to amount by which ending inventories are in excess of cost: $60,000 – ($72,000 x 1/6) = $48,000.
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5 4 0 0 0
4 8 0 0 0
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20 Minutes, Easy Lobo Company
Pr. 4–2
a.
Lobo Company Home Office and Wade Branch Reconciliation of Reciprocal s January 31, 2005
b.
Investment in Wade Branch ledger (in home office ing records)
Home Office ledger (in Wade Branch ing records)
Balances before adjustments Add: Shipment of merchandise to branch Payment of branch trade s payable by home office Less: Acquisition of furniture (carried in ing records of home office) Collection of branch trade s receivable Return of merchandise to home office Remittance of cash by branch
$ 4 8 5 0 0 dr
$ 3 5 7 0 0 cr 6 0 0 0
Balances after adjustments
$ 4 2 6 0 0 dr
(1)
2 0 0 0 ( 1 2 0 0 ) ( 1 1 0 0 ) ( 2 2 0 0 ) ( 2 5 0 0 ) $ 4 2 6 0 0 cr
Lobo Company Journal Entries in ing Records of Home Office
20 05 Jan 31 Furniture: Wade Branch Investment in Wade Branch To record acquisition of furniture by branch. 31 Cash in Transit Inventories in Transit Investment in Wade Branch To record cash and merchandise in transit from branch.
b.
(2)
1 2 0 0 1 2 0 0
2 5 0 0 2 2 0 0 4 7 0 0
Lobo Company Journal Entries in ing Records of Wade Branch
20 05 Jan 31 Inventories in Transit Home Office To record shipment of merchandise in transit from home office.
6 0 0 0 6 0 0 0
31 Home Office Trade s Receivable To record collection of branch trade s receivable by home office.
1 1 0 0
31 Trade s Payable Home Office To record payment of branch trade s payable by home office.
2 0 0 0
Solutions Manual, Chapter 4
1 1 0 0
2 0 0 0
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30 Minutes, Easy Styler Corporation
Pr. 4–3 Styler Corporation Data Relating to Merchandise at Branch January 1 through March 10, 2005 Billed
Selling
prices,
prices, 110%
Home office
120% of home
of billed
cost
office cost
prices
Beginning inventories, Jan 1 Add: Shipments from home office
$ 1 5 0 0 0 4 8 0 0 0
$ 1 8 0 0 0 5 7 6 0 0
$ 1 9 8 0 0 6 3 3 6 0
Goods available for sale Net sales by branch
$ 6 3 0 0 0 3 4 0 0 0
$ 7 5 6 0 0 4 0 8 0 0
$ 8 3 1 6 0 4 4 8 8 0
Inventories on date of fire, Mar. 10 Inventories after fire, Mar. 10
$ 2 9 0 0 0 1 2 5 0 0
$ 3 4 8 0 0 1 5 0 0 0
$ 3 8 2 8 0 1 6 5 0 0
Loss from fire, Mar. 10
$ 1 6 5 0 0
$ 1 9 8 0 0
$ 2 1 7 8 0
a.
Styler Corporation Journal Entries in ing Records of Branch March 10, 2005
Loss from Fire Inventories To record loss of merchandise in fire, at prices billed to branch by home office.
1 9 8 0 0
Home Office Loss from Fire To close Loss from Fire ledger .
1 9 8 0 0
b.
1 9 8 0 0
1 9 8 0 0
Styler Corporation Journal Entries in ing Records of Home Office March 10, 2005
Loss from Fire: Branch Allowance for Overvaluation of Branch Inventories Investment in Branch To record loss of merchandise at branch and to adjust allowance by excess of billed prices of merchandise destroyed over cost to home office.
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1 6 5 0 0 3 3 0 0 1 9 8 0 0
Modern Advanced ing, 10/e
30 Minutes, Easy Yugo Company
Pr. 4–4
a.
Yugo Company Computation of Unadjusted Balance of Home Office December 31, 2005 Balance of investment in Ryble Branch ledger of home office, before adjustment Add: Collection by branch of home office trade s receivable Subtotal Less: Merchandise in transit to branch Error in recording branch net income ($840 – $480) Supplies returned by branch to home office
$ 5 5 5 0 0 5 6 0 $ 5 6 0 6 0 $ 5 8 0 0 3 6 0 2 2 0
Balance of Home Office ledger of Ryble Branch before adjustments
b.
6 3 8 0 $ 4 9 6 8 0
Yugo Company Journal Entries in ing Records of Home Office December 31, 2005 (1) No journal entry required. (2) Investment in Ryble Branch Trade s Receivable To record collection by branch of home office trade s receivable.
5 6 0 5 6 0
(3) Investment in Ryble Branch Charitable Contributions To correct s for improper journal entry to record remittance of cash to branch.
2 0 0 0
(4) Income: Ryble Branch Investment in Ryble Branch To correct s for error in recording branch net income ($840 – $480 = $360).
3 6 0
(5)
2 2 0
Inventory of Supplies Investment in Ryble Branch To record receipt of supplies from branch.
Solutions Manual, Chapter 4
2 0 0 0
3 6 0
2 2 0
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Yugo Company (concluded)
Pr. 4–4
c.
Yugo Company Journal Entries in ing Records of Ryble Branch December 31, 2005 (1) Shipments from Home Office in Transit Home Office To record merchandise in transit from home office.
5 8 0 0 5 8 0 0
(2) No journal entry required. (3) Cash in Transit Home Office To record remittance of cash from home office.
2 0 0 0 2 0 0 0
(4) No journal entry required. (5) No journal entry required.
d.
Yugo Company Reconciliation of Reciprocal Ledger s December 31, 2005 Investment in Ryble Branch (In home office ing records)
Home Office (in Ryble Branch ing records)
Balances before adjustments (see a) Add: Shipment of merchandise in transit to branch Collection by branch of home office trade s receivable Correction of journal entry to record remittance of cash to branch Less: Correction of home office s for error in recording net income reported by branch Shipment of supplies by branch to home office
$ 5 5 5 0 0 dr
Balances after adjustments
$ 5 7 4 8 0
The McGraw-Hill Companies, Inc., 2006 162
5 6 0 2 0 0 0
$ 4 9 6 8 0 5 8 0 0
cr
2 0 0 0
( 3 6 0 ) ( 2 2 0 ) dr
$ 5 7 4 8 0
cr
Modern Advanced ing, 10/e
40 Minutes, Easy Trudie Company
Pr. 4–5
a.
Trudie Company Journal Entries for First Year of Operations (Perpetual Inventory System) (1) In ing records of Savoy Branch: Inventories ($110,000 x 1.40) Home Office To record merchandise received from home office.
1 5 4 0 0 0 1 5 4 0 0 0
Cash Cost of Goods Sold Sales Inventories To record sales and cost of goods sold, determined on basis of prices billed to branch by home office.
8 0 0 0 0 7 0 0 0 0
Operating Expenses Cash To record operating expenses.
1 6 5 0 0
Cost of Goods Sold [($154,000 – $70,000) – $82,460] Inventories To adjust ending inventories at billed price to conform to physical count. Sales Income Summary Cost of Goods Sold ($70,000 + $1,540) Operating Expenses To close revenue and expense ledger s. Home Office Income Summary To close net loss for year.
8 0 0 0 0 7 0 0 0 0
1 6 5 0 0
1 5 4 0 1 5 4 0
8 0 0 0 0 8 0 4 0 7 1 5 4 0 1 6 5 0 0
8 0 4 0 8 0 4 0
(2) In ing records of home office: Investment in Savoy Branch Inventories Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) To read merchandise shipped to Savoy Branch, billed at 40% above cost.
1 5 4 0 0 0
Income: Savoy Branch Investment in Savoy Branch To record net loss for year reported by Savoy Branch.
8 0 4 0
1 1 0 0 0 0 4 4 0 0 0
8 0 4 0
(Continued on page 164)
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 163
Trudie Company (continued)
Pr. 4–5 Trudie Company
Journal Entries for First Year of Operations (concluded) (Perpetual Inventory System) Allowance for Overvaluation of Inventories: Savoy Branch Realized Gross Profit: Savoy Branch Sales To reduce allowance to amount by which ending inventories exceed cost, computed as follows: Balance of allowance before adjustment $44,000 Required balance after adjustment: $82,460 x 2/7 (a markup of 2/5 on cost is equivalent to a markup of 2/7 on billed price) 23,560 Required reduction of allowance $20,440 Realized Gross Profit: Savoy Branch Sales Income Summary Income: Savoy Branch To close branch net loss and realized gross profit . (Income tax effects are disregarded.)
b.
2 0 4 4 0 2 0 4 4 0
2 0 4 4 0 1 2 4 0 0 8 0 4 0
Trudie Company Journal Entries for First Year of Operations (Periodic Inventory System) (1) In ing records of Savoy Branch: Shipments from Home Office ($110,000 x 1.40) Home Office To record merchandise received from home office. Cash
1 5 4 0 0 0 1 5 4 0 0 0
8 0 0 0 0
Sales To record sales.
8 0 0 0 0
Operating Expenses Cash To record operating expenses.
1 6 5 0 0
Sales Inventories (end of first year) Income Summary Shipments from Home Office Operating Expenses To record ending inventories and to close revenue and expense s.
8 0 0 0 0 8 2 4 6 0 8 0 4 0
Home Office Income Summary To close net loss for year.
1 6 5 0 0
1 5 4 0 0 0 1 6 5 0 0
8 0 4 0 8 0 4 0
(Continued on page 165)
Trudie Company (concluded)
The McGraw-Hill Companies, Inc., 2006 164
Pr. 4–5
Modern Advanced ing, 10/e
Trudie Company Journal Entries for First Year of Operations (concluded) (Periodic Inventory System) (2) In ing records of home office: Investment in Savoy Branch Shipments to Branch Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) To record merchandise shipped to Savoy Branch, billed at 40% above cost. Income: Savoy Branch Investment in Savoy Branch To record net loss for year reported by Savoy Branch. Allowance for Overvaluation of Inventories: Savoy Branch Realized Gross Profit: Savoy Branch Sales To reduce allowance to amount by which ending inventories exceed cost (see part a). Realized Gross Profit: Savoy Branch Sales Income Summary Income: Savoy Branch To close branch net loss and realized gross profit . (Income tax effects are disregarded.)
Solutions Manual, Chapter 4
1 5 4 0 0 0 1 1 0 0 0 0 4 4 0 0 0
8 0 4 0 8 0 4 0
2 0 4 4 0 2 0 4 4 0
2 0 4 4 0 1 2 4 0 0 8 0 4 0
The McGraw-Hill Companies, Inc., 2006 165
60 Minutes, Medium Kosti-Marian Company
Pr. 4–6
a.
Kosti–Marian Company Journal Entries in ing Records of Home Office
20 05 Dec. 31 Cash
1 7 0 0
Investment in Branch To record cash deposits by branch not entered in ing records of home office: Dec. 30, 2005
1 7 0 0
$1,100
Dec. 31, 2005
600
Total cash deposits not recorded
$1,700
31 Shipments to Branch Allowance for Overvaluation of Branch Inventories To record intracompany markup on merchandise shipments to branch: $110,000 – ($110,000 ÷ 1.1) = $10,000
b.
1 0 0 0 0 1 0 0 0 0
Kosti-Marian Company Journal Entries in ing Records of Branch
20 05 Dec. 31 Cash in Transit Home Office To record reimbursement check mailed by home office; the check is in transit. 31 Shipments from Home Office in Transit Home Office To record shipment of merchandise in transit. 31 Freight-in from Home Office Current Liabilities To record freight on shipment in transit ($5,500 x 0.05 = $275).
The McGraw-Hill Companies, Inc., 2006 166
1 8 0 0 1 8 0 0
5 5 0 0 5 5 0 0
2 7 5 2 7 5
Modern Advanced ing, 10/e
Kosti-Marian Company (concluded) c.
Pr. 4–6
Kosti-Marian Company Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Periodic Inventory System: Billings above Cost) Adjusted trial balances
Income statement Sales Inventories, Jan. 1, 2005 Purchases Shipments to branch Shipments from home office Freight-in from home office Inventories, Dec. 31, 2005 Operating expenses Net income (to statement of retained earnings below) Totals
Home office
Branch
Eliminations
Combined
dr (cr)
dr (cr)
dr (cr)
dr (cr)
( 1 6 2 1 9 ( 1 0
9 3 0 0
0 0 0 0
0 0 0 0
0 ) 0 0 0 )
( 3 0 0 0 0 ) 4 2 0 0 0 4 4 0 0 0 - 0 -
( 1 4 4 7 0 0 ) 1 1 5 5 0
1 1 0 5 ( 1 6 2 4
0 5 1 3
0 0 7 0
(b)
( 1 0 0 0 )
(a) 1 0 0 0 0 0 0 (a)( 1 1 0 0 0 0 ) 0 0 )* (c) 1 4 0 0 0
9 5 2 0
(d)
- 0 -
9 6 0 0 S
( 3 1 3 7 0 0 ) 3 3 5 5 0 1 9 0 0 0 0
5 5 0 0 ( 4 4 7 7 0 ) 6 6 3 0 0 6 3 1 2 0 - 0 -
Statement of retained earnings Retained earnings, Jan. 1, 2005
( 3 4 0 0 0 )
Net (income) (from income statement above) Dividends declared
( 4 4 0 0 0 ) 1 5 0 0 0
( 3 4 0 0 0 ) ( 9 5 2 0 ) (d)
( 9 6 0 0 )
( 6 3 1 2 0 ) 1 5 0 0 0
Retained earnings, Dec. 31, 2005
(to balance sheet below)
8 2 1 2 0
Totals Balance sheet Cash Inventories, Dec. 31, 2005 Investment in branch Allowance for overvaluation of branch inventories Other assets (net) Current liabilities Common stock, $2.50 par Retained earnings (from statement of retained earnings above) Home office Totals
- 0 -
2 3 7 0 0 3 0 0 0 0 5 8 3 0 0
1 1 9 7 5 1 6 1 7 0
(c) ( 1 4 0 0 ) (e) ( 5 8 3 0 0 )
( 1 1 0 0 0 ) 1 9 7 0 0 0 ( 3 5 0 0 0 ) ( 2 0 0 0 0 0 )
(a) (b)
3 5 6 7 5 4 4 7 7 0
1 0 0 0 0 1 0 0 0
4 8 4 5 0 ( 8 7 7 5 )
2 4 5 4 5 0 ( 4 3 7 7 5 ) ( 2 0 0 0 0 0 )
( 8 2 1 2 0 ) ( 5 8 3 0 0 ) - 0 -
(e)
- 0 -
5 8 3 0 0 - 0 -
- 0 -
* ($9,900 + $5,500) x 1.05 = $16,170. (a) (b) (c) (d) (e)
To eliminate reciprocal ledger s for merchandise shipments. To reduce beginning inventories of branch to cost: $11,000 – ($11,000 ÷ 1.1) = $1,000. To reduce ending inventories of branch of cost: $15,400 – ($15,400 ÷ 1.1) = $1,400. To increase net income of home office by portion of merchandise markup that was realized: $11,000 – $1,400 = $9,600. To eliminate reciprocal ledger balances.
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 167
30 Minutes, Medium
Solis Company
Pr. 4–7
a.
Solis Company Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Periodic Inventory System: Billings at Cost) Adjusted trial balances
Income statement Sales Cost of goods sold Operating expenses Net income (loss) (to statement of retained earnings below) Totals Statement of retained earnings Retained earnings, Dec. 31, 05 Net (income) loss (from income statement above) Dividends declared Retained earnings, Dec. 31, 05 (to balance sheet below)
Home office
Branch
Eliminations
Combined
dr (cr)
dr (cr)
dr (cr)
dr (cr)
( 3 9 4 0 0 0 ) 2 0 0 5 0 0 6 9 5 0 0
( 1 0 1 1 0 0 ) 8 5 8 0 0 2 1 9 0 0
1 2 4 0 0 0 - 0 -
( 4 9 5 1 0 0 ) 2 8 6 3 0 0 9 1 4 0 0
( 6 6 0 0 )
1 1 7 4 0 0
- 0 -
- 0 -
( 2 5 0 0 0 ) ( 1 2 4 0 0 0 ) 3 0 0 0 0
( 2 5 0 0 0 ) 6 6 0 0
( 1 1 7 4 0 0 ) 3 0 0 0 0 1 1 2 4 0 0
Totals Balance sheet Cash Notes receivable Trade s receivable (net) Inventories Investment in branch Furniture and equipment (net) Trade s payable Common stock, $2 par Retained earnings (from statement of retained earnings above) Home Office Totals
(a)
- 0 -
4 6 0 0 0 7 0 0 0
1 4 6 0 0
6 0 6 0 0 7 0 0 0
8 0 4 0 0 9 5 8 0 0 8 2 7 0 0
3 7 3 0 0 2 4 2 0 0
1 1 7 7 0 0 1 2 0 0 0 0 (a) ( 8 2 7 0 0 )
4 8 1 0 0 ( 4 1 0 0 0 ) ( 2 0 0 0 0 0 )
4 8 1 0 0 ( 4 1 0 0 0 ) ( 2 0 0 0 0 0 )
( 1 1 2 4 0 0 ) ( 8 2 7 0 0 ) - 0 -
- 0 -
(a)
8 2 7 0 0 - 0 -
- 0 -
To eliminate reciprocal ledger balances.
The McGraw-Hill Companies, Inc., 2006 168
Modern Advanced ing, 10/e
Solis Company (concluded)
Pr. 4–7
b.
Solis Company Closing Entries for Branch
20 05 Dec. 31 Sales Income Summary Cost of Goods Sold Operating Expenses To close revenue and expense ledger s. 31 Home Office Income Summary To transfer net loss to Home Office ledger .
c.
1 0 1 1 0 0 6 6 0 0 8 5 8 0 0 2 1 9 0 0
6 6 0 0 6 6 0 0
Solis Company Adjusting and Closing Entries for Home Office
20 05 Dec. 31 Loss: Branch Investment in Branch To record net loss reported by branch. 31 Sales
6 6 0 0 6 6 0 0
3 9 4 0 0 0
Cost of Goods Sold Operating Expenses Loss: Branch Income Summary To close revenue and expense ledger s. 31 Income Summary Retained Earnings To close combined net income to Retained Earnings ledger .
2 0 0 5 6 9 5 6 6 1 1 7 4
0 0 0 0
0 0 0 0
1 1 7 4 0 0 1 1 7 4 0 0
50 Minutes, Medium
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 169
Calco Corporation
Pr. 4–8
a.
Calco Corporation Journal Entries in ing Records of Home Office
20 05 Dec. 31 Equipment: Branch Investment in Branch To record acquisition of equipment by branch. 31 Cash in Transit Investment in Branch To record cash in transit from branch.
5 0 0 5 0 0
5 0 0 0 5 0 0 0
31 Sales
4 8 0 0 0
Shipments to Branch Investment in Branch To eliminate shipments to branch from sales ($45,000 + $3,000 = $48,000) and to record shipments at cost ($48,000 ÷ 1.2 = $40,000). 31 Inventories, Dec. 31, 2005 Income Summary To record ending inventories.
b.
4 0 0 0 0 8 0 0 0
6 0 0 0 0 6 0 0 0 0
Calco Corporation Journal Entries in ing Records of Branch
20 05 Dec. 31 Home Office Trade s Receivable To record collection of trade s receivable by home office.
2 0 0 0 2 0 0 0
31 Operating Expenses Home Office To correct amount of expenses allocated to branch by home office ($5,000 – $500 = $4,500).
4 5 0 0
31 Shipments from Home Office in Transit Home Office To record shipment in transit from home office.
3 0 0 0
31 Home Office Shipments from Home Office To eliminate intracompany markup on merchandise received from home office ($48,000 x 1/6 = $8,000).
8 0 0 0
31 Inventories, Dec. 31, 2005 Income Summary To record ending inventories [($18,000 + $3,000) x 5/6 = $17,500; $2,000 + $17,500 = $19,500].
The McGraw-Hill Companies, Inc., 2006 170
4 5 0 0
3 0 0 0
8 0 0 0
1 9 5 0 0 1 9 5 0 0
Modern Advanced ing, 10/e
Calco Corporation (concluded) c.
Pr. 4–8 Calco Corporation Working Paper to Summarize Operations For Year Ended December 31, 2005
Revenue and Expenses Sales
Home Office
Branch
Combined
$ 4 0 2 0 0 0 (1)
$ 1 0 0 0 0 0
$ 5 0 2 0 0 0
$
$
1 5 0 0 0 2 4 0 0 0 4 0 0 0 0
$
$ 3 2 0 0 0 0 6 0 0 0 0
$
7 9 0 0 0 1 9 5 0 0 (2)
$ 3 9 9 0 0 0 7 9 5 0 0
$ 2 6 0 0 0 0
$
5 9 5 0 0
$ 3 1 9 5 0 0
Gross margin on sales Operating expenses
$ 1 4 2 0 0 0 5 5 0 0 0
$
4 0 5 0 0 2 0 5 0 0 (3)
$ 1 8 2 5 0 0 7 5 5 0 0
Net income
$
$
2 0 0 0 0
$ 1 0 7 0 0 0
Cost of goods sold: Inventories, Jan. 1, 2005 (at cost) Purchases Shipments to branch (at cost) Cost of goods available for sale Less: Inventories, Dec 31, 2005 Cost of goods sold
(1) (2) (3) (3)
7 0 0 0 0 2 9 0 0 0 0 ( 4 0 0 0 0 )
8 7 0 0 0
8 5 0 0 0 3 1 4 0 0 0
$450,000 – $48,000 = $402,000. ($18,000 + $3,000) x 5/6 = $17,500; $2,000 + $17,500 = $19,500. $16,000 + $4,500 = $20,500.
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 171
60 Minutes, Medium
Kreshek Company
Pr. 4–9
a.
Kreshek Company Reconciliation of Investment in Lee Branch Ledger and Home Office For Quarter Ended April 30, 2005 Investment in Lee Branch ledger
Home Office ledger
(home office ing
(branch ing
records) Debit Balances before adjustments Add: Transposition error in recording shipment from home office ($7,840 recorded as $7,480) Collection by branch of home office trade s receivable Shipment delivered to branch on Feb. 14 not recorded (but should be) as payable by home office Corrected branch net income ($13,710 – $360 – $1,200 – $250 = $11,900) Operating expenses charge– able to branch, $1,200, and loss on disposal of branch equipment, $250
Totals
Debit
$ 1 3 3 9 7 0
Credit $ 1 4 3 0 4 0
3 6 0
3 5 0
3 5 0
2 7 5 0
1 1 9 0 0
1 4 5 0
Less: Reduction in preliminary net income recorded in Home Office ledger : Operating expenses not recorded Understatement of shipments from home office ($7,840 – $7,480) Loss on disposal of branch equipment Repair bill paid by branch for home office Excess merchandise returned by branch to home office not recorded by home office Subtotals Balances after adjustments
records) Credit
$
1 2 0 0
3 6 0 2 5 0 $
3 7 5
5 2 0 5 $ 1 4 8 9 7 0
$
$ 1 4 8 9 7 0
$ 1 4 8 9 7 0
The McGraw-Hill Companies, Inc., 2006 172
5 5 8 0 1 4 3 3 9 0
$
1 8 1 0 1 4 3 3 9 0
$ 1 4 5 2 0 0
$ 1 4 5 2 0 0
$ 1 4 5 2 0 0
Modern Advanced ing, 10/e
Kreshek Company (continued) b.
Pr. 4–9 Kreshek Company
Correcting Entries in ing Records of Lee Branch 20 05 Apr 30 Cost of Goods Sold Home Office To correct error in recording amount of merchandise received from home office on Feb. 8, 2005 [($49.00 – $46.75) x 160 = $360].
3 6 0 3 6 0
30 Trade s Receivable Home Office To record collection of trade s receivable of home office previously recorded in error as collection of branch trade s receivable.
3 5 0
30 Operating Expenses Loss on Disposal of Equipment Home Office To record operating expenses allocated to branch by home office and loss reported on disposal of branch equipment.
1 2 0 0 2 5 0
30 Home Office Income Summary To correct preliminary net income recorded for quarter ended Apr. 30, 2005: $1,200 + $360 + $250 = $1,810.
1 8 1 0
Solutions Manual, Chapter 4
3 5 0
1 4 5 0
1 8 1 0
The McGraw-Hill Companies, Inc., 2006 173
Kreshek Company (concluded) c.
Pr. 4–9 Kreshek Company
Correcting Entries in ing Records of Home Office 20 05 Apr 30 Investment in Branch Trade s Receivable To record collection by branch of home office trade s receivable. 30 Investment in Branch Trade s Payable To record liability for merchandise received by branch on Feb. 14, 2005. 30 Investment in Branch Income: Branch To record net income of branch for quarter ended Apr. 30, 2005: $13,710 – $1,810 = $11,900. A 30 Repairs Expense (or Trade s Payable, if previously recorded) Investment in Branch To record repair bill paid by branch on Apr. 29, 2005. 30
Inventories in Transit Investment in Branch To record excess merchandise returned to home office by branch on Apr. 30, 2005.
The McGraw-Hill Companies, Inc., 2006 174
3 5 0 3 5 0
2 7 5 0 2 7 5 0
1 1 9 0 0 1 1 9 0 0
3 7 5 3 7 5
5 2 0 5 5 2 0 5
Modern Advanced ing, 10/e
60 Minutes, Strong Arnie’s a.
Pr. 4–10 Arnie’s Journal Entries in ing Records of Home Office
20 05 Dec. 31 Arnold Nance, Capital Allowance for Overvaluation of Inventories: Vida Branch To establish allowance for overvaluation of beginning inventories of branch [$6,000 – ($6,000 ÷ 1.25) = $1,200]. 31 Sales
1 2 0 0 1 2 0 0
1 0 5 0 0 0
Cost of Goods Sold Allowance for Overvaluation of Inventories: Vida Branch To correct journal entries for shipments of merchandise to branch ($105,000 ÷ 1.25 = $84,000). 31 Cash in Transit Investment in Branch To record cash in transit from branch: Dec. 30, 2005 Dec. 31, 2005 Total cash in transit
b.
8 4 0 0 0 2 1 0 0 0
1 0 0 0 0 1 0 0 0 0 $ 3,000 7,000 $10,000
Arnie’s Journal Entries in ing Records of Vida Branch
20 05 Dec. 31 Operating Expenses Home Office To record expense allocated to branch by the home office. 31 Cash in Transit Home Office To record cash in transit from home office. 31 Inventories in Transit Home Office To record shipment of merchandise in transit from home office, determined as follows: Inventories, Jan. 1, 2005 $ 6,000 Shipments from home office 105,000 Subtotal $111,000 Less: Cost of goods sold per branch ing records $93,000 Inventories, Dec. 31, 2005, per branch ing records 8,000 101,000 Shipment of merchandise in transit from home office $ 10,000
Arnie’s (continued)
Solutions Manual, Chapter 4
1 2 0 0 0 1 2 0 0 0
3 0 0 0 3 0 0 0
1 0 0 0 0 1 0 0 0 0
Pr. 4–10
The McGraw-Hill Companies, Inc., 2006 175
c.
Arnie’s Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Period Inventory System: Billings above Cost) Adjusted trial balances
Income statement Sales Cost of goods sold Operating expenses Net income (to statement of proprietor’s capital below)
Home office
Vida Branch
Eliminations
Combined
dr (cr)
dr (cr)
dr (cr)
dr (cr)
( 2 8 5 0 0 0 ) 1 6 6 0 0 0 7 0 0 0 0
( 1 6 0 0 0 0 ) 9 3 0 0 0 4 8 0 0 0
(a) ( 1 8 6 0 0 )
( 4 4 5 0 0 0 ) 2 4 0 4 0 0 1 1 8 0 0 0
4 9 0 0 0
1 9 0 0 0
- 0 -
- 0 -
Totals Statement of proprietor’s capital Arnold Nance, capital Jan. 1, 05 Net (income) (from income statement above) Arnold Nance, drawing Arnold Nance, capital Dec. 31, 2005 (to balance sheet below)
(b)
1 8 6 0 0
- 0 -
( 1 9 0 8 0 0 ) ( 4 9 0 0 0 ) 5 0 0 0 0
8 6 6 0 0
( 1 9 0 8 0 0 ) ( 1 9 0 0 0 )
(b) ( 1 8 6 0 0 )
( 8 6 6 0 0 ) 5 0 0 0 0 2 2 7 4 0 0
Totals Balance sheet Cash Trade s receivable (net) Inventories Investment in Vida Branch Allowance for overvaluation of inventories: Vida Branch Equipment (net) Trade s payable Accrued liabilities Note payable, due 2008 Home office Arnold Nance, capital (from statement of proprietor’s capital above) Totals (a) (b) (c)
- 0 -
4 2 4 3
1 0 0 5
0 0 0 0
0 0 0 0
0 0 0 0
1 6 0 0 0 2 2 0 0 0 1 8 0 0 0
( 2 2 2 0 0 ) 1 5 0 0 0 0 ( 2 3 0 0 0 )
(a) ( 3 6 0 0 ) (c) ( 3 5 0 0 0 ) (a)
2 2 2 0 0 1 5 0 ( 2 3 ( 2 ( 5 1
( 2 0 0 0 ) ( 5 1 0 0 0 ) ( 3 5 0 0 0 )
5 7 0 0 0 4 2 0 0 0 5 4 4 0 0
(c)
0 0 0 0
0 0 0 0
0 0 ) 0 ) 0 )
3 5 0 0 0
( 2 2 7 4 0 0 ) - 0 -
- 0 -
- 0 -
- 0 -
To reduce ending inventories ($18,000 x 0.20 = $3,600) and cost of goods sold ($93,000 x 0.20 = $18,600) of branch to cost, and to eliminate balance of Allowance for Overvaluation of Inventories: Vida Branch ledger . To increase net income of home office by portion of merchandise markup that was realized by branch sales. To eliminate reciprocal ledger balances.
The McGraw-Hill Companies, Inc., 2006 176
Modern Advanced ing, 10/e
Arnie’s (concluded) d.
Pr. 4–10 Arnie’s
Adjusting and Closing Entries in ing Records of Home Office 20 05 Dec 31 Investment in Vida Branch Income: Vida Branch To record net income reported by branch. 31 Allowance for Overvaluation of Inventories: Vida Branch Realized Gross Profit: Vida Branch Sales To reduce allowance to amount by which ending inventories of branch exceed cost. 31 Income: Vida Branch Realized Gross Profit: Vida Branch Sales Sales
1 9 0 0 0 1 9 0 0 0
1 8 6 0 0 1 8 6 0 0
1 9 0 0 0 1 8 6 0 0 2 8 5 0 0 0
Cost of Goods Sold Operating Expenses Income Summary To close revenue and expense s.
1 6 6 0 0 0 7 0 0 0 0 8 6 6 0 0
31 Income Summary Arnold Nance, Capital To close Income Summary ledger (net income for year) to proprietor’s capital .
8 6 6 0 0
31 Arnold Nance, Capital Arnold Nance, Drawing To close proprietor’s drawing ledger to proprietor’s capital .
5 0 0 0 0
Solutions Manual, Chapter 4
8 6 6 0 0
5 0 0 0 0
The McGraw-Hill Companies, Inc., 2006 177
Pr. 4–2
Pr. 4–3
Pr. 4–4
Pr. 4–5
Pr. 4–6
Pr. 4–7
Pr. 4–8
Pr. 4–9
Hartman, Inc. (20 minutes, easy) Journal entries for home office and branch to record shipments of merchandise, payment of freight costs, ending inventories under the periodic inventory system, and other year-end adjustments. Lobo Company (20 minutes, easy) Reconciliation of reciprocal ledger s for home office and branch; journal entries to bring ing records up to date. Styler Corporation (30 minutes, easy) A branch obtains merchandise from the home office at billed prices above home office cost. Branch inventories are damaged by fire. Compute the loss from the fire and recognize the loss in the ing records of both the branch and the home office. Yugo Company (30 minutes, easy) Determine unadjusted balance of the Home Office in branch ing records, prepare journal entries to bring home office and branch ing records up to date, and reconcile reciprocal ledger s at year-end. Periodic inventory system is used. Trudie Company (40 minutes, easy) Journal entries for home office and branch when merchandise is billed to branch at prices above home office cost. Different sets of journal entries under perpetual and periodic inventory systems. Kosti-Marian Company (60 minutes, medium) Preparation of year-end journal entries and a working paper for home office and branch with emphasis on the reconciliation of cash records and the handling of inventories under the periodic inventory system. Home office bills merchandise to the branch at prices above home office cost. Solis Company (30 minutes, medium) Given the trial balances of the home office and the branch, prepare adjusting and closing entries and a working paper for combined financial statements. Perpetual inventory system is used by both home office and branch. Calco Corporation (50 minutes, medium) Journal entries to bring home office and branch ing records up to date. Working paper to summarize operations for year. Both home office and branch office use the periodic inventory system. Kreshek Company (60 minutes, medium) Reconciliation of home office and branch ledger s when errors have been made by both offices and certain transactions have been recorded by only one office. Adjusting entries in both sets of ing records. Both home office and branch use the perpetual inventory system.
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 147
Pr. 4–10
Arnie’s (60 minutes, strong) Preparation of year-end journal entries and a working paper for combined financial statement of home office and branch under the perpetual inventory system. Closing entries for home office.
ANSWERS TO REVIEW QUESTIONS 1.
2.
3.
4.
5.
6.
The transactions to be ed for by the branch generally should include only controllable expenses for which the branch manager is responsible. For example, depreciation of plant assets usually follows policies set by the home office and is not subject to control by the branch manager. This situation suggests that both the branch plant assets records and the related depreciation records should be maintained by the home office. The Home Office ledger in the branch ing records is reciprocal to the Investment in Branch in the home office ing records. These two s show the same thing the net assets of the branchfrom two different points of view. The Home Office maintained by the branch has a credit balance and may be considered quasi-ownership equity; the Investment in Branch maintained by the home office has a debit balance and is a noncurrent asset that reflects the net investment in the branch by the home office. Another pair of reciprocal ledger s is used to record shipments of merchandise from the home office to the branch when the periodic inventory system is used. In the home office ing records, the is Shipments to Branch (a Purchases valuation ) and has a credit balance; in the branch ing records, the is Shipments from Home Office (a purchases-type ) and has a debit balance. Reciprocal ledger s should be reconciled and brought up to date at the end of each ing period. The reciprocal s are eliminated in the preparation of combined financial statements of the home office and the branch. For a home office to bill merchandise shipments to its branches at or above home office cost is acceptable. If branches are billed at amounts above home office cost, the home office eliminates the excess of billed prices over cost when the balances of the home office and the branch are combined in the preparation of combined financial statements. To the extent that the merchandise has been sold by the branches before financial statements are prepared, the "excess" will have been realized, and the combined net income will be the same as if the merchandise had been billed at home office cost. Merchandise not sold is valued at cost in the combined balance sheet. Alternative methods for billing merchandise to branches are acceptable because they give the same results in the combined financial statements when appropriate eliminations are made. The separate financial statements prepared by individual branches and by the home office indicate the operating results and financial position of each unit of Jesse Corporation. The statements are used to evaluate the performance of branch managers and suggest the most appropriate areas for expansion or closure of branches. The combined financial statements serve the needs of managers in the analysis of operating results and financial position of the enterprise as a whole. Combined financial statements also are more appropriate for use by outsiders such as stockholders and creditors. To record the acquisition of equipment to be carried in the home office, Slauson Branch debits Home Office and credits Cash for $17,000. The home office debits Equipment: Slauson Branch and credits Investment in Slauson Branch for $17,000. A home office's Allowance for Overvaluation of Inventories: Branch ledger is used to reduce to cost the component of the balance of the Investment in Branch ledger represented by shipments of merchandise to the branch at a markup over home office cost. When such a shipment is made, the allowance is credited for the excess of billed price over home office cost of the shipment. At the end of an ing period, the home office prepares a journal entry debiting the allowance and crediting Realized Gross Profit: Branch Sales for the amount of the markup realized by the branch through sales of merchandise to outsiders. Thus, the end-of-
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Modern Advanced ing, 10/e
7.
8.
period adjusted balance of the allowance represents unrealized markup in the branch's ending inventories acquired from the home office. The factors that would cause the reciprocal ledger s to be out of balance may be classified into the following groups: (1) Intracompany transactions between home office and branch, such as shipments of merchandise or cash transfers by the home office to the branch, recorded by the home office but not recorded by the branch. (2) Intracompany transactions between branch and home office, such as transfers of cash by the branch to the home office, recorded by the branch but not recorded by the home office. (3) Errors made by the home office or the branch (or both) in recording intracompany transactions. Ford Branch of Ralph Company should debit the Home Office ledger and credit the Inventories . Gates Branch should not absorb more freight costs than if the goods had been shipped directly from the home office. Normal freight costs of shipping merchandise to branches are added to the carrying amount of inventories, but excess freight costs are losses from poor planning and are recognized as expenses of the home office.
SOLUTIONS TO EXERCISES Ex. 4–1
1. 2. 3. 4. 5. 6. 7.
c b c a c c a
8. a 9. a 10. d 11. d 12. a (.20 ÷ 1.20 = 16 2/3%) 13. b
Ex. 4–2
a. Journal entries in ing records of home office: 2005 Sept. 1 2
Investment in San Marino Branch Cash
10,000
Investment in San Marino Branch Inventories Allowance for Overvaluation of Inventories: San Marino Branch ($60,000 x 0.25)
75,000
3
10,000
Equipment: San Marino Branch Investment in San Marino Branch b. Journal entries in ing records of San Marino Branch: 2005 Sept. 1 Cash Home Office 2
Inventories [$60,000 ÷ (1.00 – 0.20)] Home Office
3
Home Office Cash
Solutions Manual, Chapter 4
60,000 15,000 3,000 3,000
10,000 75,000
10,000 75,000
3,000 3,000
The McGraw-Hill Companies, Inc., 2006 149
Ex. 4–3
a. Journal entries in ing records of home office: 2005 Sept.
1 Investment in Eastern Branch Cash
50,000 50,000
4 Investment in Eastern Branch Shipments to Eastern Branch Allowance for Overvaluation of Inventories: Eastern Branch
125,000 95,000 30,000
11 Equipment: Eastern Branch Investment in Eastern Branch b. Journal entries in ing records of Eastern Branch: 2005 Sept. 3 Cash Home Office
34,200 34,200
50,000 50,000
8 Shipments from Home Office Home Office
125,000 125,000
11 Home Office Cash Ex. 4–4
34,200 34,200
Journal entries for Wilshire Branch of Watt Corporation: 2005 Jan. 2 Inventories Home Office To record merchandise shipped by home office.
Ex. 4–5
100,000 100,000
18 Home Office Cash To records acquisition of equipment to be carried in home office ing records.
5,000
31 Operating Expenses Home Office To records operating expenses allocated by home office.
8,000
5,000
8,000
Journal entries for home office of Usc Company: 2005 Jan. 10 Investment in Hoover Street Branch Inventories ($60,000 x 0.80) Allowance for Overvaluation of Inventories: Hoover Street Branch ($60,000 x 0.20) To record shipment of merchandise to branch at a markup of 20% of billed price.
60,000 48,000 12,000
25 Investment in Hoover Street Branch 25,000 Trade s Receivable To record collection of trade receivable by branch.
25,000
31 Investment in Hoover Street Branch Operating Expenses To record operating expenses allocated to branch.
18,000
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18,000
Modern Advanced ing, 10/e
Ex. 4–6
Journal entries for Lido Branch of Turbo Company: 2005 Aug. 6 Trade s Payable Home Office 14 22
Ex. 4–7
10,000 10,000
Home Office Trade s Receivable
6,000 6,000
Home Office Cash
20,000 20,000
Journal entries for home office of Wardell Company: a. Investment in Branch Cash Inventories
15,000 5,000 10,000
b. Investment in Branch Operating Expenses
1,500 1,500
c. Investment in Branch Notes Receivable Interest Revenue
416 400 16
d. No journal entry required e. Investment in Branch Income: Branch Journal entries for Exeter Branch of Wardell Company: a. Cash Inventories Home Office b. Operating Expenses Home Office
500 500 5,000 10,000 15,000 1,500 1,500
c. Cash
416 Home Office
416
d. Trade s Receivable Operating Expenses Cost of Goods Sold Sales Cash Inventories
12,500 2,500 8,000 12,500 2,500 8,000
e. Income Summary Home Office Ex. 4–8
500 500
Journal entry on Dec. 31, 2005, for Davis Branch of Leland Company: Home Office Accumulated Depreciation of Equipment Equipment Depreciation Expense To correct ing for equipment acquired and depreciation expense Journal entry on Dec. 31, 2005, for home office of Leland Company: Depreciation Expense: Davis Branch Equipment: Davis Branch Accumulated Depreciation of Equipment: Davis Branch
Solutions Manual, Chapter 4
20,000 750 20,000 750
750 20,000 750
The McGraw-Hill Companies, Inc., 2006 151
Investment in Davis Branch To record equipment acquired by Davis Branch and related depreciation. Ex. 4–9
FIGUEROA COMPANY Flow of Merchandise for Nine-Zero Branch For Month Ended January 31, 2005
Beginning inventories Add: Shipment from home office Available for sale Less: Ending inventories Cost of goods sold Ex. 4–10
Billed Price $120,000 500,000 $620,000 100,000 $520,000
Cost $ 96,000 400,000 $496,000 80,000 $416,000
Explanation Balance Shipment to branch Realized gross profit on branch sales
Debit
$ 24,000 100,000 $124,000 20,000 $104,000 Credit 90,000
100,000
Balance 30,000 cr 120,000 cr 20,000 cr
Journal entries for home office of Trapp Company, May 31, 2005: Investment in Portland Street Branch Income: Portland Street Branch
80,000 80,000
Allowance for Overvaluation of Inventories: Portland Street Branch ($200,000 – $60,000) Realized Gross Profit: Portland Street Branch Sales
140,000 140,000
Income: Portland Street Branch Realized Gross Profit: Portland Street Branch Sales Income Summary Ex. 4–12
Markup
Allowance for Overvaluation of Inventories: 32 Branch Date 2005 Mar. 31 Apr. 16 30
Ex. 4–11
20,000
80,000 140,000 220,000
a. $48,000 ($80,000 – $32,000). The billed price equals $32,000 ÷ 0.40, or $80,000. b. Allowance for Overvaluation of Inventories: Toledo Branch Realized Gross Profit: Toledo Branch Sales To adjust allowance in the ing records of home office, as follows: Balance, Mar. 1, 2005 $32,000 Increase during March ($60,000 – $36,000) 24,000 Balance before adjustment $56,000 Less: Balance, Mar. 31, 2005 ($25,000 x 0.40) 10,000 Required reduction in allowance $46,000
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46,000 46,000
Modern Advanced ing, 10/e
Ex. 4–13
Journal entries for home office of Glendale Company: 2005 Sept. 17 Investment in Montrose Branch Inventories Allowance for Overvaluation of Inventories: Montrose Branch To record shipment of merchandise to branch at a markup of 25% on billed price, as follows: Markup ($400,000 x 0.25 = $100,000) Cost ($400,000 x 0.75 = $300,000) 30
Ex. 4–14
Allowance for Overvaluation of Inventories: Montrose Branch Realized Gross Profit: Montrose Branch Sales To recognize as realized gross profit the markup of merchandise applicable to goods sold by branch during September, 2005, as follows: [($60,000 + $100,000) – ($160,000 x 0.25) = $120,000]
300,000 100,000
120,000 120,000
Journal entries for home office of Searl Company, Jan. 31, 2005: Investment in Vermont Avenue Branch Income: Vermont Avenue Branch
60,000 60,000
Allowance for Overvaluation of Inventories: Vermont Avenue Branch ($80,000 – $27,000) Realized Gross Profit: Vermont Avenue Branch Sales Income: Vermont Avenue Branch Realized Gross Profit: Vermont Avenue Branch Sales Income Summary Ex. 4–15
400,000
53,000 53,000 60,000 53,000 113,000
Journal entries in ing records of home office of Gomez Company for 2005: Investment in Perez Branch Shipments to Perez Branch Allowance for Overvaluation of Inventories: Perez Branch To record shipments to branch at a markup of 25% above cost. Allowance for Overvaluation of Inventories: Perez Branch Realized Gross Profit: Perez Branch Sales To adjust allowance as follows: Balance, Jan. 1, 2005 ($15,000 x 0.20) (A 25% markup on cost is equal to a 20% markup on billed price.) Increase during 2005 ($30,000 x 0.20) Balance before adjustment Less: Balance, Dec. 31, 2005 ($19,500 x 0.20) Required reduction in allowance
Solutions Manual, Chapter 4
30,000 24,000 6,000 5,100 5,100
$3,000 6,000 $9,000 3,900 $5,100
The McGraw-Hill Companies, Inc., 2006 153
Ex. 4–16
a. Computation of estimated cost of merchandise destroyed by fire at branch of Samore, Inc., Jan. 28, 2005: Inventories, Jan. 1, 2005 (billed price) $15,600 Add: Shipments from home office, Jan. 1 to Jan. 28 (billed price) 71,500 Merchandise available for sale, Jan. 1 to Jan. 28 (billed price) $87,100 Billed price of net merchandise sold: [($51,840 – $3,220) ÷ 1.10] 44,200 Estimated inventories, Jan. 28, 2005 (billed price) $42,900 Less: Inventories not damaged ($7,150 ÷ 1.10) 6,500 Estimated inventories destroyed (billed price) $36,400 Less: Valuation in excess of cost ($36,400 x 3/13*) 8,400 Estimated cost of merchandise destroyed by fire, Jan. 28, 2005 $28,000 *A 30% markup on cost is equal to a 3/13 markup on billed price. b. Journal entry to record loss in ing records of branch, Jan. 28, 2005: Loss from Fire Inventories To record estimated carrying amount of merchandise destroyed by fire.
Ex. 4–17
a. Journal entry for the home office of Argos Company: 2005 May 31 Cash in Transit Investment in Troy Branch b. Journal entries for Troy Branch of Argos Company: 2005 May 31 31
Inventories in Transit Home Office Home Office Trade s Receivable
36,400
36,400
10,000 10,000
280,000 280,000 50,000 50,000
CASES Case 4–1
Case 4–2
Although the appropriate interpretation of Lewis Hanson's contract with Longo Company probably requires a legal opinion, logic suggests that neither Hanson's view nor the Longo controller's view is appropriate. Absent any provision in Hanson's contract to the contrary, the method used by the branch ant to measure net income of Santee Branch during its operating phase should be applied to Santee's last operating period. The resultant net loss precludes a bonus to Hanson, but "tinkering" with the measurement of branch net income appears unable with respect to both Hanson's suggestion and the Longo controller's suggestion. Before deciding on an answer to the case, it is appropriate to consider the following pronouncements of the Financial ing Standards Board in Statement of Financial ing Concepts No. 6, “Elements of Financial Statements” (CON 6); Statement of Financial ing Standards No. 5, “ing for Contingencies” (FAS 5); Statement of Financial ing Standards No. 142, “Goodwill and Other Intangible Assets.” Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. (CON 6, para. 25) Contingencies that might result in gains [contingent assets] usually are not reflected in the s since to do so might be to recognize revenue prior to its realization. (FAS 5, para. 17a) Expenses are outflows or other u of assets or incurrences of liabilities (or a combination of both) from delivering or producing goods, rendering services, or carrying out other activities that constitute the entity's ongoing major or central operations. (CON 6, para. 81) Losses are decreases in equity (net assets) from peripheral or incidental transactions of an entity and from all other transactions and other events and circumstances affecting the entity except those that result from expenses or distributions to owners. (CON 6, para. 83)
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Case 4–3
Case 4–4
Costs of internally developing, maintaining, or restoring intangible assets (including goodwill) that are not specifically identifiable, that have indeterminate lives, or that are inherent in a continuing business and related to an entity as a whole, shall be recognized as an expense when incurred. (FAS 142, para. 10) Given the foregoing definitions, there is no for Fortunato Company's deferral of pre-operating costs incurred for the new branch. Apart from the costs of testing the manufacturing equipment, which may be capitalized as part of the cost of the equipment, all remaining start-up costs should be recognized either as expenses or as losses. Because of the uncertainty as to when, if ever, regulatory agency approval for the branch's production and sale of products will be obtained, the probable criterion for the recognition of an asset is not met. Given such uncertainty, Robert Engle's characterization of the pre-operating costs as contingent assets is appropriate; they are not to be recognized until realized. The costs incurred other than for testing equipment, research, and development, do not qualify as expenses because they do not result from delivering or producing goods. Thus, recognition of such costs as losses appears to be an appropriate course of action for Fortunato Company. Kevin Carter's dilemma is a difficult one. The cost-benefit aspects of any course of action he selects must be considered. However, the current practice for “plugging” differences between reciprocal ledger s of the home office and branches of Oilers, Inc., should be forbidden at once. At the same time, an independent audit of Oilers' financial statements would be prohibitively expensive, given the chaotic state of the ing records. Adjusting the 14 branches' Home Office ledger balances to agree with the home office's reciprocal balances is the least costly alternative; if it is accompanied by strong measures to ensure future monthly reconciliations of the reciprocal balances, it might suffice. However, Carter might elect to select one of the 14 branches for a detailed analysis of differences between the reciprocal ledger balances; such a course of action might disclose a pattern of recurring errors common to other branches and facilitate discovery of most, if not all, of the reconciling items. TO: The Board of Directors, Windsor Company FROM: ___________________________________________, Controller DATE: ________________________ SUBJECT: Separate Financial Statements for Southwark Branch You have asked my opinion as to whether separate financial statements for Southwark Branch may be prepared for its prospective purchaser. My review of professional literature leads me to conclude that the statements may be prepared. In reaching my conclusion, I considered the following: AIA Professional Standards, Volume 2; Section ET92.04 Definition of financial statements Section AR100.04 Definition of financial statements Statement of Financial ing Concepts No. 1, “Objectives of Financial Reporting by Business Enterprises,” par. 6 Most frequently provided financial statements (CON 1)
Solutions Manual, Chapter 4
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Case 4–5
Statement of Financial ing Concepts No. 6, “Elements of Financial Statements,” par. 24 Nature of ing entity (CON 6) Statement of Financial ing Standards No. 57, “Related Party Disclosures,” par. 2 Disclosure of material related party transactions (FAS 57) I have concluded that Southwark Branch is an ing entity, as described in CON 6. Based on the references in ET92.04, AR100.04, and CON 1, I believe that a statement of assets and liabilities; a statement of revenues, expenses, and changes in net assets; and a statement of cash flows are appropriate for Southwark Branch. Because the branch is a segment of Windsor Company, I do not believe a statement of financial position (balance sheet), an income statement, and a statement of owner's equity are appropriate for it. Thus, the question you raised regarding an equity section of a balance sheet is moot. The statement of assets and liabilities would have total liabilities of Southwark Branch subtracted from its total assets, with a “bottom line” of net assets, which would carry the after-closing balance of the branch's Home Office ledger . The unrealized intracompany markup above cost in the branch's ending inventory would be disclosed in a note to Southwark Branch's financial statements that describes the intracompany transactions with the home office of Windsor Company in accordance with FAS 57. Please inform me if I can be of further service. a. Lola Branch should have prepared a journal entry to recognize the $2,640 liability incurred under the installment contract, with related debits to Home Office for the cash price of the equipment ($2,400) and to Discount on Installment Contract Payable for the interest portion of the contract. Monthly payments of $110 should have been applied to reduce the installment contract liability, and an appropriate amount of interest expense applied to reduce the discount by the interest method. The sale of the office equipment required recognition of a $900 loss ($2,400 – $1,500 = $900); an accompanying entry should have recorded the payoff of the balance of the installment contract, $2,090 [$2,640 – ($110 x 5) = $2,090]; the forgiveness of $150 of the unamortized discount on the contract, with the remaining discount recognized as interest expense; and the recognition of a liability to the branch manager for his $440 ($2,090 – $150 – $1,500 = $440) payment of the balance of the installment contract in excess of the $1,500 sales proceeds of the office equipment. b. The home office of Langley, Inc., should have prepared journal entries as follows: (1) Recognize Lola Branch's acquisition of the office equipment with a debit to Office Equipment: Lola Branch and a credit to Investment in Lola Branch, $2,400. (2) Recognize depreciation for five months on the equipment with debits to Depreciation Expense: Lola Branch and credits to Accumulated Depreciation of Office Equipment: Lola Branch, $20 each ($2,400 x 0.10 x 1/12 = $20). (3) Reverse entry (1) when Lola Branch disposed of the office equipment. c. Correcting journal entry, Dec. 31, 2005, in ing records of Lola Branch: Interest Expense ($240 – $150) 90 Loss on Disposal of Office Equipment 900 Miscellaneous Expense ($110 x 5) 550 Payable to Manager of Lola Branch 440 To record interest expense from installment contract transaction, loss on disposal of equipment, and liability to branch manager for personal funds used to pay off installment contract.
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d. Correcting journal entries, Dec. 31, 2005, in ing records of home office: Office Equipment: Lola Branch 2,400 Depreciation Expense: Lola Branch 100 Office Equipment: Lola Branch Accumulated Depreciation of Office Equipment: Lola Branch To record acquisition of equipment by branch, depreciation for five months, and subsequent disposal (loss on disposal will be included in net income or loss reported by Lola Branch to home office). Accumulated Depreciation of Office Equipment: Lola Branch Investment in Lola Branch To write off accumulated depreciation of equipment disposed of by branch.
Solutions Manual, Chapter 4
2,400 100
100 100
The McGraw-Hill Companies, Inc., 2006 157
20 Minutes, Easy Hartman, Inc.
Pr. 4–1 Hartman, Inc. Reno Branch Journal Entries
Shipments from Home Office ($300,000 x 1.20) Freight In Home Office To record merchandise received from home office and freight costs of $15,000.
3 6 0 0 0 0 1 5 0 0 0
Cash
4 5 0 0 0 0
3 7 5 0 0 0
Sales To record sales for 2005.
4 5 0 0 0 0
Operation Expenses Cash To record payment of expenses.
9 6 0 0 0 9 6 0 0 0
Inventories, Dec. 31, 2005 [$72,000 + ($15,000 x 1/5)] Sales Shipments from Home Office Freight In Operating Expenses Income Summary To record ending inventories and to close revenue and expense ledger s. Ending inventories include one-fifth of $15,000 freight costs, because merchandise on hand equals one-fifth of the year’s shipments ($72,000 ÷ $360,000 = 1/5). Income Summary Home Office To close Income Summary ledger .
7 5 0 0 0 4 5 0 0 0 0 3 6 1 9 5
0 5 6 4
0 0 0 0
0 0 0 0
0 0 0 0
5 4 0 0 0 5 4 0 0 0
Hartman, Inc. Home Office Journal Entries Investment in Reno Branch Shipments to Branch Allowance for Overvaluation of Inventories Reno Branch ($300,000 x 0.20) Cash To record shipment to branch of merchandise with cost of $300,000 and payment of $15,000 freight costs.
3 7 5 0 0 0 3 0 0 0 0 0 6 0 0 0 0 1 5 0 0 0
Investment in Reno Branch Income : Reno Branch To record net income reported by branch.
5 4 0 0 0
Allowance for Overvaluation of Inventories: Reno Branch
4 8 0 0 0
Realized Gross Profit: Reno Branch Sales To reduce allowance to amount by which ending inventories are in excess of cost: $60,000 – ($72,000 x 1/6) = $48,000.
The McGraw-Hill Companies, Inc., 2006 158
5 4 0 0 0
4 8 0 0 0
Modern Advanced ing, 10/e
20 Minutes, Easy Lobo Company
Pr. 4–2
a.
Lobo Company Home Office and Wade Branch Reconciliation of Reciprocal s January 31, 2005
b.
Investment in Wade Branch ledger (in home office ing records)
Home Office ledger (in Wade Branch ing records)
Balances before adjustments Add: Shipment of merchandise to branch Payment of branch trade s payable by home office Less: Acquisition of furniture (carried in ing records of home office) Collection of branch trade s receivable Return of merchandise to home office Remittance of cash by branch
$ 4 8 5 0 0 dr
$ 3 5 7 0 0 cr 6 0 0 0
Balances after adjustments
$ 4 2 6 0 0 dr
(1)
2 0 0 0 ( 1 2 0 0 ) ( 1 1 0 0 ) ( 2 2 0 0 ) ( 2 5 0 0 ) $ 4 2 6 0 0 cr
Lobo Company Journal Entries in ing Records of Home Office
20 05 Jan 31 Furniture: Wade Branch Investment in Wade Branch To record acquisition of furniture by branch. 31 Cash in Transit Inventories in Transit Investment in Wade Branch To record cash and merchandise in transit from branch.
b.
(2)
1 2 0 0 1 2 0 0
2 5 0 0 2 2 0 0 4 7 0 0
Lobo Company Journal Entries in ing Records of Wade Branch
20 05 Jan 31 Inventories in Transit Home Office To record shipment of merchandise in transit from home office.
6 0 0 0 6 0 0 0
31 Home Office Trade s Receivable To record collection of branch trade s receivable by home office.
1 1 0 0
31 Trade s Payable Home Office To record payment of branch trade s payable by home office.
2 0 0 0
Solutions Manual, Chapter 4
1 1 0 0
2 0 0 0
The McGraw-Hill Companies, Inc., 2006 159
30 Minutes, Easy Styler Corporation
Pr. 4–3 Styler Corporation Data Relating to Merchandise at Branch January 1 through March 10, 2005 Billed
Selling
prices,
prices, 110%
Home office
120% of home
of billed
cost
office cost
prices
Beginning inventories, Jan 1 Add: Shipments from home office
$ 1 5 0 0 0 4 8 0 0 0
$ 1 8 0 0 0 5 7 6 0 0
$ 1 9 8 0 0 6 3 3 6 0
Goods available for sale Net sales by branch
$ 6 3 0 0 0 3 4 0 0 0
$ 7 5 6 0 0 4 0 8 0 0
$ 8 3 1 6 0 4 4 8 8 0
Inventories on date of fire, Mar. 10 Inventories after fire, Mar. 10
$ 2 9 0 0 0 1 2 5 0 0
$ 3 4 8 0 0 1 5 0 0 0
$ 3 8 2 8 0 1 6 5 0 0
Loss from fire, Mar. 10
$ 1 6 5 0 0
$ 1 9 8 0 0
$ 2 1 7 8 0
a.
Styler Corporation Journal Entries in ing Records of Branch March 10, 2005
Loss from Fire Inventories To record loss of merchandise in fire, at prices billed to branch by home office.
1 9 8 0 0
Home Office Loss from Fire To close Loss from Fire ledger .
1 9 8 0 0
b.
1 9 8 0 0
1 9 8 0 0
Styler Corporation Journal Entries in ing Records of Home Office March 10, 2005
Loss from Fire: Branch Allowance for Overvaluation of Branch Inventories Investment in Branch To record loss of merchandise at branch and to adjust allowance by excess of billed prices of merchandise destroyed over cost to home office.
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1 6 5 0 0 3 3 0 0 1 9 8 0 0
Modern Advanced ing, 10/e
30 Minutes, Easy Yugo Company
Pr. 4–4
a.
Yugo Company Computation of Unadjusted Balance of Home Office December 31, 2005 Balance of investment in Ryble Branch ledger of home office, before adjustment Add: Collection by branch of home office trade s receivable Subtotal Less: Merchandise in transit to branch Error in recording branch net income ($840 – $480) Supplies returned by branch to home office
$ 5 5 5 0 0 5 6 0 $ 5 6 0 6 0 $ 5 8 0 0 3 6 0 2 2 0
Balance of Home Office ledger of Ryble Branch before adjustments
b.
6 3 8 0 $ 4 9 6 8 0
Yugo Company Journal Entries in ing Records of Home Office December 31, 2005 (1) No journal entry required. (2) Investment in Ryble Branch Trade s Receivable To record collection by branch of home office trade s receivable.
5 6 0 5 6 0
(3) Investment in Ryble Branch Charitable Contributions To correct s for improper journal entry to record remittance of cash to branch.
2 0 0 0
(4) Income: Ryble Branch Investment in Ryble Branch To correct s for error in recording branch net income ($840 – $480 = $360).
3 6 0
(5)
2 2 0
Inventory of Supplies Investment in Ryble Branch To record receipt of supplies from branch.
Solutions Manual, Chapter 4
2 0 0 0
3 6 0
2 2 0
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Yugo Company (concluded)
Pr. 4–4
c.
Yugo Company Journal Entries in ing Records of Ryble Branch December 31, 2005 (1) Shipments from Home Office in Transit Home Office To record merchandise in transit from home office.
5 8 0 0 5 8 0 0
(2) No journal entry required. (3) Cash in Transit Home Office To record remittance of cash from home office.
2 0 0 0 2 0 0 0
(4) No journal entry required. (5) No journal entry required.
d.
Yugo Company Reconciliation of Reciprocal Ledger s December 31, 2005 Investment in Ryble Branch (In home office ing records)
Home Office (in Ryble Branch ing records)
Balances before adjustments (see a) Add: Shipment of merchandise in transit to branch Collection by branch of home office trade s receivable Correction of journal entry to record remittance of cash to branch Less: Correction of home office s for error in recording net income reported by branch Shipment of supplies by branch to home office
$ 5 5 5 0 0 dr
Balances after adjustments
$ 5 7 4 8 0
The McGraw-Hill Companies, Inc., 2006 162
5 6 0 2 0 0 0
$ 4 9 6 8 0 5 8 0 0
cr
2 0 0 0
( 3 6 0 ) ( 2 2 0 ) dr
$ 5 7 4 8 0
cr
Modern Advanced ing, 10/e
40 Minutes, Easy Trudie Company
Pr. 4–5
a.
Trudie Company Journal Entries for First Year of Operations (Perpetual Inventory System) (1) In ing records of Savoy Branch: Inventories ($110,000 x 1.40) Home Office To record merchandise received from home office.
1 5 4 0 0 0 1 5 4 0 0 0
Cash Cost of Goods Sold Sales Inventories To record sales and cost of goods sold, determined on basis of prices billed to branch by home office.
8 0 0 0 0 7 0 0 0 0
Operating Expenses Cash To record operating expenses.
1 6 5 0 0
Cost of Goods Sold [($154,000 – $70,000) – $82,460] Inventories To adjust ending inventories at billed price to conform to physical count. Sales Income Summary Cost of Goods Sold ($70,000 + $1,540) Operating Expenses To close revenue and expense ledger s. Home Office Income Summary To close net loss for year.
8 0 0 0 0 7 0 0 0 0
1 6 5 0 0
1 5 4 0 1 5 4 0
8 0 0 0 0 8 0 4 0 7 1 5 4 0 1 6 5 0 0
8 0 4 0 8 0 4 0
(2) In ing records of home office: Investment in Savoy Branch Inventories Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) To read merchandise shipped to Savoy Branch, billed at 40% above cost.
1 5 4 0 0 0
Income: Savoy Branch Investment in Savoy Branch To record net loss for year reported by Savoy Branch.
8 0 4 0
1 1 0 0 0 0 4 4 0 0 0
8 0 4 0
(Continued on page 164)
Solutions Manual, Chapter 4
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Trudie Company (continued)
Pr. 4–5 Trudie Company
Journal Entries for First Year of Operations (concluded) (Perpetual Inventory System) Allowance for Overvaluation of Inventories: Savoy Branch Realized Gross Profit: Savoy Branch Sales To reduce allowance to amount by which ending inventories exceed cost, computed as follows: Balance of allowance before adjustment $44,000 Required balance after adjustment: $82,460 x 2/7 (a markup of 2/5 on cost is equivalent to a markup of 2/7 on billed price) 23,560 Required reduction of allowance $20,440 Realized Gross Profit: Savoy Branch Sales Income Summary Income: Savoy Branch To close branch net loss and realized gross profit . (Income tax effects are disregarded.)
b.
2 0 4 4 0 2 0 4 4 0
2 0 4 4 0 1 2 4 0 0 8 0 4 0
Trudie Company Journal Entries for First Year of Operations (Periodic Inventory System) (1) In ing records of Savoy Branch: Shipments from Home Office ($110,000 x 1.40) Home Office To record merchandise received from home office. Cash
1 5 4 0 0 0 1 5 4 0 0 0
8 0 0 0 0
Sales To record sales.
8 0 0 0 0
Operating Expenses Cash To record operating expenses.
1 6 5 0 0
Sales Inventories (end of first year) Income Summary Shipments from Home Office Operating Expenses To record ending inventories and to close revenue and expense s.
8 0 0 0 0 8 2 4 6 0 8 0 4 0
Home Office Income Summary To close net loss for year.
1 6 5 0 0
1 5 4 0 0 0 1 6 5 0 0
8 0 4 0 8 0 4 0
(Continued on page 165)
Trudie Company (concluded)
The McGraw-Hill Companies, Inc., 2006 164
Pr. 4–5
Modern Advanced ing, 10/e
Trudie Company Journal Entries for First Year of Operations (concluded) (Periodic Inventory System) (2) In ing records of home office: Investment in Savoy Branch Shipments to Branch Allowance for Overvaluation of Inventories: Savoy Branch ($110,000 x 0.40) To record merchandise shipped to Savoy Branch, billed at 40% above cost. Income: Savoy Branch Investment in Savoy Branch To record net loss for year reported by Savoy Branch. Allowance for Overvaluation of Inventories: Savoy Branch Realized Gross Profit: Savoy Branch Sales To reduce allowance to amount by which ending inventories exceed cost (see part a). Realized Gross Profit: Savoy Branch Sales Income Summary Income: Savoy Branch To close branch net loss and realized gross profit . (Income tax effects are disregarded.)
Solutions Manual, Chapter 4
1 5 4 0 0 0 1 1 0 0 0 0 4 4 0 0 0
8 0 4 0 8 0 4 0
2 0 4 4 0 2 0 4 4 0
2 0 4 4 0 1 2 4 0 0 8 0 4 0
The McGraw-Hill Companies, Inc., 2006 165
60 Minutes, Medium Kosti-Marian Company
Pr. 4–6
a.
Kosti–Marian Company Journal Entries in ing Records of Home Office
20 05 Dec. 31 Cash
1 7 0 0
Investment in Branch To record cash deposits by branch not entered in ing records of home office: Dec. 30, 2005
1 7 0 0
$1,100
Dec. 31, 2005
600
Total cash deposits not recorded
$1,700
31 Shipments to Branch Allowance for Overvaluation of Branch Inventories To record intracompany markup on merchandise shipments to branch: $110,000 – ($110,000 ÷ 1.1) = $10,000
b.
1 0 0 0 0 1 0 0 0 0
Kosti-Marian Company Journal Entries in ing Records of Branch
20 05 Dec. 31 Cash in Transit Home Office To record reimbursement check mailed by home office; the check is in transit. 31 Shipments from Home Office in Transit Home Office To record shipment of merchandise in transit. 31 Freight-in from Home Office Current Liabilities To record freight on shipment in transit ($5,500 x 0.05 = $275).
The McGraw-Hill Companies, Inc., 2006 166
1 8 0 0 1 8 0 0
5 5 0 0 5 5 0 0
2 7 5 2 7 5
Modern Advanced ing, 10/e
Kosti-Marian Company (concluded) c.
Pr. 4–6
Kosti-Marian Company Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Periodic Inventory System: Billings above Cost) Adjusted trial balances
Income statement Sales Inventories, Jan. 1, 2005 Purchases Shipments to branch Shipments from home office Freight-in from home office Inventories, Dec. 31, 2005 Operating expenses Net income (to statement of retained earnings below) Totals
Home office
Branch
Eliminations
Combined
dr (cr)
dr (cr)
dr (cr)
dr (cr)
( 1 6 2 1 9 ( 1 0
9 3 0 0
0 0 0 0
0 0 0 0
0 ) 0 0 0 )
( 3 0 0 0 0 ) 4 2 0 0 0 4 4 0 0 0 - 0 -
( 1 4 4 7 0 0 ) 1 1 5 5 0
1 1 0 5 ( 1 6 2 4
0 5 1 3
0 0 7 0
(b)
( 1 0 0 0 )
(a) 1 0 0 0 0 0 0 (a)( 1 1 0 0 0 0 ) 0 0 )* (c) 1 4 0 0 0
9 5 2 0
(d)
- 0 -
9 6 0 0 S
( 3 1 3 7 0 0 ) 3 3 5 5 0 1 9 0 0 0 0
5 5 0 0 ( 4 4 7 7 0 ) 6 6 3 0 0 6 3 1 2 0 - 0 -
Statement of retained earnings Retained earnings, Jan. 1, 2005
( 3 4 0 0 0 )
Net (income) (from income statement above) Dividends declared
( 4 4 0 0 0 ) 1 5 0 0 0
( 3 4 0 0 0 ) ( 9 5 2 0 ) (d)
( 9 6 0 0 )
( 6 3 1 2 0 ) 1 5 0 0 0
Retained earnings, Dec. 31, 2005
(to balance sheet below)
8 2 1 2 0
Totals Balance sheet Cash Inventories, Dec. 31, 2005 Investment in branch Allowance for overvaluation of branch inventories Other assets (net) Current liabilities Common stock, $2.50 par Retained earnings (from statement of retained earnings above) Home office Totals
- 0 -
2 3 7 0 0 3 0 0 0 0 5 8 3 0 0
1 1 9 7 5 1 6 1 7 0
(c) ( 1 4 0 0 ) (e) ( 5 8 3 0 0 )
( 1 1 0 0 0 ) 1 9 7 0 0 0 ( 3 5 0 0 0 ) ( 2 0 0 0 0 0 )
(a) (b)
3 5 6 7 5 4 4 7 7 0
1 0 0 0 0 1 0 0 0
4 8 4 5 0 ( 8 7 7 5 )
2 4 5 4 5 0 ( 4 3 7 7 5 ) ( 2 0 0 0 0 0 )
( 8 2 1 2 0 ) ( 5 8 3 0 0 ) - 0 -
(e)
- 0 -
5 8 3 0 0 - 0 -
- 0 -
* ($9,900 + $5,500) x 1.05 = $16,170. (a) (b) (c) (d) (e)
To eliminate reciprocal ledger s for merchandise shipments. To reduce beginning inventories of branch to cost: $11,000 – ($11,000 ÷ 1.1) = $1,000. To reduce ending inventories of branch of cost: $15,400 – ($15,400 ÷ 1.1) = $1,400. To increase net income of home office by portion of merchandise markup that was realized: $11,000 – $1,400 = $9,600. To eliminate reciprocal ledger balances.
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 167
30 Minutes, Medium
Solis Company
Pr. 4–7
a.
Solis Company Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Periodic Inventory System: Billings at Cost) Adjusted trial balances
Income statement Sales Cost of goods sold Operating expenses Net income (loss) (to statement of retained earnings below) Totals Statement of retained earnings Retained earnings, Dec. 31, 05 Net (income) loss (from income statement above) Dividends declared Retained earnings, Dec. 31, 05 (to balance sheet below)
Home office
Branch
Eliminations
Combined
dr (cr)
dr (cr)
dr (cr)
dr (cr)
( 3 9 4 0 0 0 ) 2 0 0 5 0 0 6 9 5 0 0
( 1 0 1 1 0 0 ) 8 5 8 0 0 2 1 9 0 0
1 2 4 0 0 0 - 0 -
( 4 9 5 1 0 0 ) 2 8 6 3 0 0 9 1 4 0 0
( 6 6 0 0 )
1 1 7 4 0 0
- 0 -
- 0 -
( 2 5 0 0 0 ) ( 1 2 4 0 0 0 ) 3 0 0 0 0
( 2 5 0 0 0 ) 6 6 0 0
( 1 1 7 4 0 0 ) 3 0 0 0 0 1 1 2 4 0 0
Totals Balance sheet Cash Notes receivable Trade s receivable (net) Inventories Investment in branch Furniture and equipment (net) Trade s payable Common stock, $2 par Retained earnings (from statement of retained earnings above) Home Office Totals
(a)
- 0 -
4 6 0 0 0 7 0 0 0
1 4 6 0 0
6 0 6 0 0 7 0 0 0
8 0 4 0 0 9 5 8 0 0 8 2 7 0 0
3 7 3 0 0 2 4 2 0 0
1 1 7 7 0 0 1 2 0 0 0 0 (a) ( 8 2 7 0 0 )
4 8 1 0 0 ( 4 1 0 0 0 ) ( 2 0 0 0 0 0 )
4 8 1 0 0 ( 4 1 0 0 0 ) ( 2 0 0 0 0 0 )
( 1 1 2 4 0 0 ) ( 8 2 7 0 0 ) - 0 -
- 0 -
(a)
8 2 7 0 0 - 0 -
- 0 -
To eliminate reciprocal ledger balances.
The McGraw-Hill Companies, Inc., 2006 168
Modern Advanced ing, 10/e
Solis Company (concluded)
Pr. 4–7
b.
Solis Company Closing Entries for Branch
20 05 Dec. 31 Sales Income Summary Cost of Goods Sold Operating Expenses To close revenue and expense ledger s. 31 Home Office Income Summary To transfer net loss to Home Office ledger .
c.
1 0 1 1 0 0 6 6 0 0 8 5 8 0 0 2 1 9 0 0
6 6 0 0 6 6 0 0
Solis Company Adjusting and Closing Entries for Home Office
20 05 Dec. 31 Loss: Branch Investment in Branch To record net loss reported by branch. 31 Sales
6 6 0 0 6 6 0 0
3 9 4 0 0 0
Cost of Goods Sold Operating Expenses Loss: Branch Income Summary To close revenue and expense ledger s. 31 Income Summary Retained Earnings To close combined net income to Retained Earnings ledger .
2 0 0 5 6 9 5 6 6 1 1 7 4
0 0 0 0
0 0 0 0
1 1 7 4 0 0 1 1 7 4 0 0
50 Minutes, Medium
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 169
Calco Corporation
Pr. 4–8
a.
Calco Corporation Journal Entries in ing Records of Home Office
20 05 Dec. 31 Equipment: Branch Investment in Branch To record acquisition of equipment by branch. 31 Cash in Transit Investment in Branch To record cash in transit from branch.
5 0 0 5 0 0
5 0 0 0 5 0 0 0
31 Sales
4 8 0 0 0
Shipments to Branch Investment in Branch To eliminate shipments to branch from sales ($45,000 + $3,000 = $48,000) and to record shipments at cost ($48,000 ÷ 1.2 = $40,000). 31 Inventories, Dec. 31, 2005 Income Summary To record ending inventories.
b.
4 0 0 0 0 8 0 0 0
6 0 0 0 0 6 0 0 0 0
Calco Corporation Journal Entries in ing Records of Branch
20 05 Dec. 31 Home Office Trade s Receivable To record collection of trade s receivable by home office.
2 0 0 0 2 0 0 0
31 Operating Expenses Home Office To correct amount of expenses allocated to branch by home office ($5,000 – $500 = $4,500).
4 5 0 0
31 Shipments from Home Office in Transit Home Office To record shipment in transit from home office.
3 0 0 0
31 Home Office Shipments from Home Office To eliminate intracompany markup on merchandise received from home office ($48,000 x 1/6 = $8,000).
8 0 0 0
31 Inventories, Dec. 31, 2005 Income Summary To record ending inventories [($18,000 + $3,000) x 5/6 = $17,500; $2,000 + $17,500 = $19,500].
The McGraw-Hill Companies, Inc., 2006 170
4 5 0 0
3 0 0 0
8 0 0 0
1 9 5 0 0 1 9 5 0 0
Modern Advanced ing, 10/e
Calco Corporation (concluded) c.
Pr. 4–8 Calco Corporation Working Paper to Summarize Operations For Year Ended December 31, 2005
Revenue and Expenses Sales
Home Office
Branch
Combined
$ 4 0 2 0 0 0 (1)
$ 1 0 0 0 0 0
$ 5 0 2 0 0 0
$
$
1 5 0 0 0 2 4 0 0 0 4 0 0 0 0
$
$ 3 2 0 0 0 0 6 0 0 0 0
$
7 9 0 0 0 1 9 5 0 0 (2)
$ 3 9 9 0 0 0 7 9 5 0 0
$ 2 6 0 0 0 0
$
5 9 5 0 0
$ 3 1 9 5 0 0
Gross margin on sales Operating expenses
$ 1 4 2 0 0 0 5 5 0 0 0
$
4 0 5 0 0 2 0 5 0 0 (3)
$ 1 8 2 5 0 0 7 5 5 0 0
Net income
$
$
2 0 0 0 0
$ 1 0 7 0 0 0
Cost of goods sold: Inventories, Jan. 1, 2005 (at cost) Purchases Shipments to branch (at cost) Cost of goods available for sale Less: Inventories, Dec 31, 2005 Cost of goods sold
(1) (2) (3) (3)
7 0 0 0 0 2 9 0 0 0 0 ( 4 0 0 0 0 )
8 7 0 0 0
8 5 0 0 0 3 1 4 0 0 0
$450,000 – $48,000 = $402,000. ($18,000 + $3,000) x 5/6 = $17,500; $2,000 + $17,500 = $19,500. $16,000 + $4,500 = $20,500.
Solutions Manual, Chapter 4
The McGraw-Hill Companies, Inc., 2006 171
60 Minutes, Medium
Kreshek Company
Pr. 4–9
a.
Kreshek Company Reconciliation of Investment in Lee Branch Ledger and Home Office For Quarter Ended April 30, 2005 Investment in Lee Branch ledger
Home Office ledger
(home office ing
(branch ing
records) Debit Balances before adjustments Add: Transposition error in recording shipment from home office ($7,840 recorded as $7,480) Collection by branch of home office trade s receivable Shipment delivered to branch on Feb. 14 not recorded (but should be) as payable by home office Corrected branch net income ($13,710 – $360 – $1,200 – $250 = $11,900) Operating expenses charge– able to branch, $1,200, and loss on disposal of branch equipment, $250
Totals
Debit
$ 1 3 3 9 7 0
Credit $ 1 4 3 0 4 0
3 6 0
3 5 0
3 5 0
2 7 5 0
1 1 9 0 0
1 4 5 0
Less: Reduction in preliminary net income recorded in Home Office ledger : Operating expenses not recorded Understatement of shipments from home office ($7,840 – $7,480) Loss on disposal of branch equipment Repair bill paid by branch for home office Excess merchandise returned by branch to home office not recorded by home office Subtotals Balances after adjustments
records) Credit
$
1 2 0 0
3 6 0 2 5 0 $
3 7 5
5 2 0 5 $ 1 4 8 9 7 0
$
$ 1 4 8 9 7 0
$ 1 4 8 9 7 0
The McGraw-Hill Companies, Inc., 2006 172
5 5 8 0 1 4 3 3 9 0
$
1 8 1 0 1 4 3 3 9 0
$ 1 4 5 2 0 0
$ 1 4 5 2 0 0
$ 1 4 5 2 0 0
Modern Advanced ing, 10/e
Kreshek Company (continued) b.
Pr. 4–9 Kreshek Company
Correcting Entries in ing Records of Lee Branch 20 05 Apr 30 Cost of Goods Sold Home Office To correct error in recording amount of merchandise received from home office on Feb. 8, 2005 [($49.00 – $46.75) x 160 = $360].
3 6 0 3 6 0
30 Trade s Receivable Home Office To record collection of trade s receivable of home office previously recorded in error as collection of branch trade s receivable.
3 5 0
30 Operating Expenses Loss on Disposal of Equipment Home Office To record operating expenses allocated to branch by home office and loss reported on disposal of branch equipment.
1 2 0 0 2 5 0
30 Home Office Income Summary To correct preliminary net income recorded for quarter ended Apr. 30, 2005: $1,200 + $360 + $250 = $1,810.
1 8 1 0
Solutions Manual, Chapter 4
3 5 0
1 4 5 0
1 8 1 0
The McGraw-Hill Companies, Inc., 2006 173
Kreshek Company (concluded) c.
Pr. 4–9 Kreshek Company
Correcting Entries in ing Records of Home Office 20 05 Apr 30 Investment in Branch Trade s Receivable To record collection by branch of home office trade s receivable. 30 Investment in Branch Trade s Payable To record liability for merchandise received by branch on Feb. 14, 2005. 30 Investment in Branch Income: Branch To record net income of branch for quarter ended Apr. 30, 2005: $13,710 – $1,810 = $11,900. A 30 Repairs Expense (or Trade s Payable, if previously recorded) Investment in Branch To record repair bill paid by branch on Apr. 29, 2005. 30
Inventories in Transit Investment in Branch To record excess merchandise returned to home office by branch on Apr. 30, 2005.
The McGraw-Hill Companies, Inc., 2006 174
3 5 0 3 5 0
2 7 5 0 2 7 5 0
1 1 9 0 0 1 1 9 0 0
3 7 5 3 7 5
5 2 0 5 5 2 0 5
Modern Advanced ing, 10/e
60 Minutes, Strong Arnie’s a.
Pr. 4–10 Arnie’s Journal Entries in ing Records of Home Office
20 05 Dec. 31 Arnold Nance, Capital Allowance for Overvaluation of Inventories: Vida Branch To establish allowance for overvaluation of beginning inventories of branch [$6,000 – ($6,000 ÷ 1.25) = $1,200]. 31 Sales
1 2 0 0 1 2 0 0
1 0 5 0 0 0
Cost of Goods Sold Allowance for Overvaluation of Inventories: Vida Branch To correct journal entries for shipments of merchandise to branch ($105,000 ÷ 1.25 = $84,000). 31 Cash in Transit Investment in Branch To record cash in transit from branch: Dec. 30, 2005 Dec. 31, 2005 Total cash in transit
b.
8 4 0 0 0 2 1 0 0 0
1 0 0 0 0 1 0 0 0 0 $ 3,000 7,000 $10,000
Arnie’s Journal Entries in ing Records of Vida Branch
20 05 Dec. 31 Operating Expenses Home Office To record expense allocated to branch by the home office. 31 Cash in Transit Home Office To record cash in transit from home office. 31 Inventories in Transit Home Office To record shipment of merchandise in transit from home office, determined as follows: Inventories, Jan. 1, 2005 $ 6,000 Shipments from home office 105,000 Subtotal $111,000 Less: Cost of goods sold per branch ing records $93,000 Inventories, Dec. 31, 2005, per branch ing records 8,000 101,000 Shipment of merchandise in transit from home office $ 10,000
Arnie’s (continued)
Solutions Manual, Chapter 4
1 2 0 0 0 1 2 0 0 0
3 0 0 0 3 0 0 0
1 0 0 0 0 1 0 0 0 0
Pr. 4–10
The McGraw-Hill Companies, Inc., 2006 175
c.
Arnie’s Working Paper for Combined Financial Statements of Home Office and Branch For Year Ended December 31, 2005 (Period Inventory System: Billings above Cost) Adjusted trial balances
Income statement Sales Cost of goods sold Operating expenses Net income (to statement of proprietor’s capital below)
Home office
Vida Branch
Eliminations
Combined
dr (cr)
dr (cr)
dr (cr)
dr (cr)
( 2 8 5 0 0 0 ) 1 6 6 0 0 0 7 0 0 0 0
( 1 6 0 0 0 0 ) 9 3 0 0 0 4 8 0 0 0
(a) ( 1 8 6 0 0 )
( 4 4 5 0 0 0 ) 2 4 0 4 0 0 1 1 8 0 0 0
4 9 0 0 0
1 9 0 0 0
- 0 -
- 0 -
Totals Statement of proprietor’s capital Arnold Nance, capital Jan. 1, 05 Net (income) (from income statement above) Arnold Nance, drawing Arnold Nance, capital Dec. 31, 2005 (to balance sheet below)
(b)
1 8 6 0 0
- 0 -
( 1 9 0 8 0 0 ) ( 4 9 0 0 0 ) 5 0 0 0 0
8 6 6 0 0
( 1 9 0 8 0 0 ) ( 1 9 0 0 0 )
(b) ( 1 8 6 0 0 )
( 8 6 6 0 0 ) 5 0 0 0 0 2 2 7 4 0 0
Totals Balance sheet Cash Trade s receivable (net) Inventories Investment in Vida Branch Allowance for overvaluation of inventories: Vida Branch Equipment (net) Trade s payable Accrued liabilities Note payable, due 2008 Home office Arnold Nance, capital (from statement of proprietor’s capital above) Totals (a) (b) (c)
- 0 -
4 2 4 3
1 0 0 5
0 0 0 0
0 0 0 0
0 0 0 0
1 6 0 0 0 2 2 0 0 0 1 8 0 0 0
( 2 2 2 0 0 ) 1 5 0 0 0 0 ( 2 3 0 0 0 )
(a) ( 3 6 0 0 ) (c) ( 3 5 0 0 0 ) (a)
2 2 2 0 0 1 5 0 ( 2 3 ( 2 ( 5 1
( 2 0 0 0 ) ( 5 1 0 0 0 ) ( 3 5 0 0 0 )
5 7 0 0 0 4 2 0 0 0 5 4 4 0 0
(c)
0 0 0 0
0 0 0 0
0 0 ) 0 ) 0 )
3 5 0 0 0
( 2 2 7 4 0 0 ) - 0 -
- 0 -
- 0 -
- 0 -
To reduce ending inventories ($18,000 x 0.20 = $3,600) and cost of goods sold ($93,000 x 0.20 = $18,600) of branch to cost, and to eliminate balance of Allowance for Overvaluation of Inventories: Vida Branch ledger . To increase net income of home office by portion of merchandise markup that was realized by branch sales. To eliminate reciprocal ledger balances.
The McGraw-Hill Companies, Inc., 2006 176
Modern Advanced ing, 10/e
Arnie’s (concluded) d.
Pr. 4–10 Arnie’s
Adjusting and Closing Entries in ing Records of Home Office 20 05 Dec 31 Investment in Vida Branch Income: Vida Branch To record net income reported by branch. 31 Allowance for Overvaluation of Inventories: Vida Branch Realized Gross Profit: Vida Branch Sales To reduce allowance to amount by which ending inventories of branch exceed cost. 31 Income: Vida Branch Realized Gross Profit: Vida Branch Sales Sales
1 9 0 0 0 1 9 0 0 0
1 8 6 0 0 1 8 6 0 0
1 9 0 0 0 1 8 6 0 0 2 8 5 0 0 0
Cost of Goods Sold Operating Expenses Income Summary To close revenue and expense s.
1 6 6 0 0 0 7 0 0 0 0 8 6 6 0 0
31 Income Summary Arnold Nance, Capital To close Income Summary ledger (net income for year) to proprietor’s capital .
8 6 6 0 0
31 Arnold Nance, Capital Arnold Nance, Drawing To close proprietor’s drawing ledger to proprietor’s capital .
5 0 0 0 0
Solutions Manual, Chapter 4
8 6 6 0 0
5 0 0 0 0
The McGraw-Hill Companies, Inc., 2006 177
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