Deck 4: Accounting for Branches; Combined Financial Statements

Question 1

An expense item allocated by the home office to a branch is recorded by the branch by a debit to an expense ledger account and a credit to the Home Office account.

Answer 1

True

Question 2

The balance of the Allowance for Overvaluation of Inventories: Branch ledger account is deducted from the balance of the Investment in Branch account in the separate balance sheet of the home office.

Answer 2

True

Question 3

If the home office bills shipments of merchandise to the branch at 25% above home office cost and the adjusted balance of the Allowance for Overvaluation of Inventories: Branch ledger account is $20,400, the amount of branch inventories at billed prices is $81,600.

Answer 3

False

Question 4

A debit to the Home Office ledger account and a credit to the Trade Accounts Receivable account in the accounting records of a branch indicates that the home office collected accounts receivable of the branch.

Question 5

If branch managers are responsible for ordering merchandise from the home office, any excess freight costs incurred as a result of interbranch shipments are absorbed by the appropriate branch rather than by the home office.

Question 6

Start-up costs incurred by a branch in the initial months of operations are appropriately deferred and amortized in subsequent profitable accounting periods.

Question 7

If the home office carries branch equipment in its accounting records, an acquisition of equipment by the branch is recorded in the home office accounting records by a debit to the Investment in Branch ledger account and a credit to the Equipment: Branch account.

Question 8

Separate financial statements of home office and branch do not meet the needs of investors, creditors, or other outside users of financial statements.

Question 9

In a working paper for combined financial statements of home office and branch, the balance of the Shipments to Branch ledger account is eliminated against the balance of the Investment in Branch account.

Question 10

Freight costs on merchandise shipped, as directed by the home office, by Westside Branch to Eastside Branch in excess of normal freight costs from the home office to Eastside Branch are recognized as operating expenses of the home office.

Question 11

A markup of 16 2/3% on billed price is equal to a markup of 14 2/7% on cost of merchandise shipped to the branch by the home office.

Question 12

If the perpetual inventory system is used by both the home office and the branch, the reciprocal ledger accounts used by the branch are the Home Office and Shipments from Home Office accounts.

Question 13

If the home office bills merchandise shipments to the branch at prices above home office cost, the net income reported to the home office by the branch is overstated from a total company point of view.

Question 14

In a combined balance sheet for home office and branch, the balance of the Allowance for Overvaluation of Inventories: Branch ledger account is deducted from the balance of the Investment in Branch account.

Question 15

The Shipments to Branch ledger account in the accounting records of the home office of a business enterprise:

A) Is an asset valuation account
B) Indicates that the home office uses the periodic inventory system
C) Is adjusted at the end of the accounting period to equal the unrealized profit in the branch's ending inventories
D) Is not displayed in the home office's separate financial statements

Question 16

The Allowance for Overvaluation of Inventories: Branch ledger account of the home office is debited:

A) When the home office ships merchandise to the branch at a billed price that exceeds cost
B) In a journal entry to close the account at the end of an accounting period
C) When the branch's ending inventory is recorded in the home office accounting records
D) In some other circumstances

Question 17

The Western Branch of Rivas Company reported a net income of $60,000 for the month of January. The appropriate journal entry (explanation omitted) for the home office of Rivas Company is:

A)
B)
C)
D)

Question 18

Both a home office and a branch use the periodic inventory system. If at the end of an accounting period the balance of the branch's Home Office ledger account does not agree with the balance of the home office's Investment in Branch account because of a shipment of merchandise in transit from the home office to the branch:

A) The home office debits Investment in Branch and credits Shipments in Transit to Branch.
B) The branch debits Home Office and credits Shipments in Transit from Home Office.
C) The home office debits Shipments in Transit to Branch and credits Investment in Branch.
D) The branch debits Shipments in Transit from Home Office and credits Home Office.

Question 19

Among the journal entries (explanation omitted) in the accounting records of the home office of Price Company was the following:
This journal entry indicates that:

A) The home office acquired office equipment for the branch
B) The home office shipped office equipment to the branch
C) The branch acquired office equipment, which is carried in the accounting records of the home office
D) None of the foregoing occurred

Question 20

The Income: Branch ledger account is maintained in the accounting records of:

A) The home office only
B) The branch only
C) Both the home office and the branch
D) Neither the home office nor the branch

Question 21

If at the end of an accounting period the balance of the Investment in Branch ledger account in the accounting records of the home office is $20,000 and the balance of the Home Office account in the accounting records of the branch (after the branch recorded closing entries) is $25,500, the most likely explanation for the discrepancy of $5,500 is a:

A) Remittance of cash to the branch not recorded by the home office
B) Net income of branch not recorded by the home office
C) Net loss of branch not recorded by the home office
D) Collection by the home office of a branch note receivable not recorded by the branch

Question 22

The Home Office ledger account in the accounting records of a branch is best described as:

A) A revenue account
B) An equity account
C) A deferred revenue account
D) A liability account
E) None of the foregoing

Question 23

The following journal entry (explanation omitted) appeared in the accounting records of Marty Corporation's only branch:
The journal entry indicates that:

A) The branch incurred operating expenses for the benefit of the home office
B) The home office incurred operating expenses for the benefit of the branch
C) The branch paid the home office for services rendered to the branch
D) None of the foregoing occurred

Question 24

In a working paper for combined financial statements of home office and branch, the branch's net income is included in:

A) The debit column of the branch income statement section and the credit column of the branch statement of retained earnings section
B) The credit column of the branch income statement section and the debit column of the branch statement of retained earnings section
C) The debit column of the branch income statement section and the credit column of the home office statement of retained earnings section
D) Some other manner

Question 25

A debit to the Income Summary ledger account and a credit to the Home Office account appear in:

A) The accounting records of the home office to record the net income of the home office
B) The accounting records of the home office to record the net income of the branch
C) The accounting records of the branch to record the net income of the branch
D) Some other manner

Question 26

The following journal entry (explanation omitted) appeared in the accounting records of the home office of Silversmith Company:
This journal entry indicates that:

A) The branch incurred operating expenses for the benefit of the home office
B) The home office incurred operating expenses for the benefit of the branch
C) The branch paid the home office for services rendered to the branch
D) None of the foregoing occurred

Question 27

If both the home office and the branch of a business enterprise use the periodic inventory system, the home office's Shipments to Branch ledger account:

A) Is a valuation account for the home office's Investment in Branch account
B) Always should have the same balance as the branch's Shipments from Home Office account
C) Is a revenue account
D) Is a valuation account for the home office's Purchases account

Question 28

If both the home office and the branch of a business enterprise use the perpetual inventory system, a Shipments to Branch ledger account appears in the accounting records of:

A) The home office only
B) The branch only
C) Both the home office and the branch
D) Neither the home office nor the branch

Question 29

On January 31, 2006, the home office of Wall Company collected a trade account receivable of Doris Branch. The accounting for this transaction by Wall Company should include a:

A) Credit to Trade Accounts Receivable: Doris Branch in the accounting records of the home office
B) Debit to Cash in Transit in the accounting records of Doris Branch
C) Credit to Investment in Doris Branch in the accounting records of the home office
D) Debit to Receivable from Home Office in the accounting records of Doris Branch

Question 30

Closing entries for the Columbia Branch of Carolina Company on January 31, 2006, the end of a fiscal year, were as follows:
Columbia Branch receives all its merchandise from the home office of Carolina Company at a markup of 20% on billed price.
Prepare journal entries for the home office of Carolina Company on January 31, 2006, to record the operating results of the Columbia Branch. Show any supporting computations in the explanations for the entries.

Question 31

On June 30, 2006, the unadjusted credit balance of the Allowance for Overvaluation of Inventories: Cyprus Branch ledger account in the accounting records of the home office of Wilmington Company was $60,000. The home office of Wilmington ships merchandise to the branch at a markup of 20% on home office cost. For the fiscal year ended June 30, 2006, the branch had reported a net loss (based on billed prices of merchandise shipped from home office) of $18,400 and ending inventories (all received from home office) of $132,000 at billed prices.
Prepare journal entries for the home office of Wilmington Company on June 30, 2006, to record the foregoing information.

Question 32

On June 4, 2006, Victoria Company opened its first branch. Separate accounting records were established for the branch. Both the home office and the branch used the perpetual inventory system. Among the intracompany transactions were the following:
Prepare journal entries for the foregoing intracompany transactions in the accounting records of (a) the home office, and (b) the branch of Victoria Company.

Question 33

On October 5, 2006, Brentwood Company established the Palisades Branch. Following are the initial transactions between the home office and Palisades Branch:

Both the home office and the Palisades Branch use the perpetual inventory system.
Prepare journal entries for the foregoing transactions in the accounting records of the (a) home office, and (b) Palisades Branch of Brentwood Company.

Question 34

For the fiscal year ended August 31, 2006, the South Bay Branch of Torrance Company reported a net income of $60,000. Inventories of South Bay Branch on August 31, 2006, in the amount of $125,000 had been billed to the branch by the home office of Torrance Company at a markup of 25% above home office cost. On August 31, 2006, prior to adjustment, the Allowance for Overvaluation of Inventories: South Bay Branch ledger account had a credit balance of $75,000 in the accounting records of the home office.
Prepare August 31, 2006, journal entries for the home office of Torrance Company to record the South Bay Branch's operating results for the year ended that date.

Question 35

Newfoundland, Inc., has a branch in Boston. On April 1, 2006, the accounting records of the home office of Newfoundland had a ledger account, Allowance for Overvaluation of Inventories: Boston Branch, with a credit balance of $36,600. During April, merchandise costing $110,000 was shipped to the Boston Branch and billed at 20% above home office cost. The branch reported a net income of $9,600 for April, and branch inventories on April 30 were $162,000 at billed prices.
a. Prepare a working paper to compute the cost of the branch inventories on April 1, 2006, assuming a uniform markup on all shipments of merchandise to the branch.
b. Prepare a home office journal entry to adjust the Allowance for Overvaluation of Inventories: Boston Branch ledger account on April 30, 2006.

Question 36

The home office of Carnival Company bills its only branch at 30% above home office cost for all merchandise shipped to the branch. During 2006, the home office shipped merchandise to the branch at billed prices of $104,000. Branch inventories for 2006 were as follows:
Prepare journal entries (including adjusting entries) for the home office of Carnival Company for 2006 to reflect the foregoing information.

Question 37

The following ledger account was in the accounting records of the County Branch of City Company on December 31, 2006:
The home office of City Company used the perpetual inventory system, and billed the branch for merchandise shipments at 25% above home office cost.
Prepare journal entries to record the above indicated transactions and events in the accounting records of the home office of City Company. Adjusting entries are not required.

Question 38

Included in the accounting records of the home office and the only branch, respectively, of Socrates Company were the following ledger accounts for June, 2006:
a. Prepare a working paper to reconcile the reciprocal ledger accounts to corrected balances.
b. Prepare journal entries on June 30, 2006, for the (1) home office, and (2) Plato Branch of Socrates Company. The branch uses the perpetual inventory system.

Question 39

As a CPA and audit manager of Royal & Percy, LLP, you have been requested by John James, president of James Company, a nonpublic enterprise, to write a memo to James Company's accounting staff explaining the purpose of the Allowance for Overvaluation of Inventories: Post Street Branch ledger account and the typical journal entries in the account. James Company has just established Post Street Branch, its first branch, and is planning for the home office to ship merchandise to the branch at a markup of 20% above home office cost.
Write the memo requested by John James.