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.

Accepted Answer

When the home office allocates an expense item to a branch, the branch records this transaction by debiting the relevant expense ledger account to recognize the expense and crediting the Home Office account to reflect the obligation or transfer of funds from the home office to cover this expense.

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.

Accepted Answer

The Allowance for Overvaluation of Inventories: Branch ledger account is a contra-asset account that reduces the carrying value of the Investment in Branch account. This is done to reflect the fact that the inventory held by the branch may be overvalued.

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.

Accepted Answer

The adjusted balance of the Allowance for Overvaluation of Inventories: Branch ledger account represents the overvaluation above cost, which is 25% in this case. To find the branch inventories at billed prices, you divide the overvaluation ($20,400) by the overvaluation rate (25% or 0.25), which gives $81,600. However, this calculation is incorrect because $20,400 is 25% of the cost, not the total billed price. The correct calculation to find the cost is $20,400 / 0.25 = $81,600 (cost), and to find the billed price, you add the overvaluation to the cost: $81,600 (cost) + $20,400 (overvaluation) = $102,000 (billed price).

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.

Accepted Answer

This transaction shows that the home office has collected money on behalf of the branch, reducing the branch's accounts receivable and increasing the funds accounted for by the home office.

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.

Accepted Answer

This is because the responsibility for managing inventory, including ordering merchandise, lies with the branch managers. Therefore, any additional costs incurred due to their decisions, such as excess freight costs from interbranch shipments, would logically be absorbed by the branch responsible for the order, not the home office. This aligns with principles of accountability and cost management within decentralized operations.

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.

Accepted Answer

Start-up costs should be expensed as incurred according to accounting standards, such as US GAAP and IFRS, rather than deferred and amortized.

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.

Accepted Answer

When the home office carries branch equipment in its accounting records, an acquisition of equipment by the branch is typically recorded by a debit to the Equipment account (to reflect the addition of the asset) and a credit to Cash or Accounts Payable (depending on how the purchase is financed), not by debiting Investment in Branch and crediting Equipment: Branch.

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.

Accepted Answer

Separate financial statements of the home office and branch might not provide a complete or unified view of the financial position and performance of the entire entity, which is what investors, creditors, or other outside users typically need for making informed decisions.

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.

Accepted Answer

The balance of the Shipments to Branch ledger account is typically eliminated against the Branch Inventory account, not the Investment in Branch account, to reflect the cost of inventory sent to the branch. The Investment in Branch account reflects the home office's investment in the branch, not the shipments of inventory.

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.

Accepted Answer

Freight costs that exceed normal expenses due to specific instructions from the home office are considered operating expenses of the home office, as they are incurred based on the home office's directives.

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.

Accepted Answer

A markup of 16 2/3% on the billed price is not equivalent to a markup of 14 2/7% on the cost because the base for calculating the percentage is different in each case.

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.

Accepted Answer

In a perpetual inventory system, the reciprocal accounts typically used by the branch are "Home Office" and "Inventory Shipments from Home Office," not "Shipments from Home Office." The latter might be used for recording the cost of goods sent, but the key account for tracking inventory under a perpetual system is "Inventory Shipments from Home Office."

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.

Accepted Answer

The net income reported to the home office by the branch would not be overstated from a total company point of view because intercompany transactions, such as merchandise shipments billed above cost, are eliminated in consolidation. The overall net income of the company remains unaffected by the internal pricing strategies between the home office and its branch.

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.

Accepted Answer

In a combined balance sheet for home office and branch, the balance of the Allowance for Overvaluation of Inventories: Branch ledger account is typically deducted from the inventory account, not the Investment in Branch account. This adjustment ensures that the inventory is reported at its correct valuation.

Question 15

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

Accepted Answer

The answer of The Shipments to Branch ledger account in...

Question 16

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

Accepted Answer

The answer of The Allowance for Overvaluation of Inventories: Branch...

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:

Accepted Answer

The answer of The Western Branch of Rivas Company reported...

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:

Accepted Answer

The correct adjustment is for the branch to recognize the shipment in transit by debiting Shipments in Transit from Home Office and crediting Home Office, reflecting the increase in assets (inventory) and the liability to the 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:

Accepted Answer

The answer of Among the journal entries (explanation omitted) in...

Question 20

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

Accepted Answer

The answer of The Income: Branch ledger account is maintained...

Quiz 4: Accounting for Branches; Combined Financial Statements