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Detailed computation of realized allowance for overvaluation thru sales by the branch to outsiders during the
period:
Cost = ( Billed Price/100% + % mark-up on cost ) or Mark-up on cost/% mark-up on cost. The amount of
allowance considered realized will be the allowance carried by the cost of goods sold.
There are two pricing methods generally used by the allocates part of the gross margin to the branch and
home office in billing the branch for merchandise the remainder to the home office.
transfers:
Working paper adjustments and eliminations must be
1. Billed at cost the merchandise is transferred at determined in order to:
cost, thus when the branch sells the merchandise,
the entire gross margin is included in the branch 1. Eliminate inter-company balances from the
net income. combined statements to avoid redundancy, and
2. Adjust some items in the cost of sales section of
2. Billed at cost plus markup the merchandise is the branch income statement to their true costs (as
transferred at an amount between cost and the a consequence of the billing policy not equal to
selling price. This intermediate pricing method cost).
The working paper adjustment/elimination entries are as follows:
When a company is composed of a home office and more than one branch, the home office records include a
separate investment in branch account and a separate allowance for overvaluation account for each branch.
Separate worksheet adjustments are made for each branch.
When assets are transferred from one branch to another branch, the home office account on each branchs records
are used to record the transfers. (Inter-branch receivables and payables are not created.) In essence, the
transferring branch reverses the entry to record the transfer from the home office and the receiving branch enters
a transfer as if it comes from the home office.
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