Week 3: Branch Accounts

A branch is any establishment carrying on either the same or substantially the same activity as
that carried on by the head office of the company. E.g., Textbook Centre has its branches over
the country. Each branch is treated as a separate profit centre and hence the profit or loss of
each branch is computed separately. The head office of the firm has to keep strict control over
various activities of each branch and ensure its smooth functioning.
1. Operating arrangements
There are two ways of accounting for branch transactions:
a) The head office maintains the financial accounts of all its branches along with those of
its own operations (central accounting)
b) Branches individually maintain their own financial accounts and periodically submit
certain information to head office to enable the preparation of accounts for business as
a whole (decentralised accounting)
In all the above, three different bases are recognised on which head office may transfer goods
to its branches: at cost price (to head office); at cost price plus a predetermined (fixed)
percentage (mark-up); or at selling price (by branch).
Types of branches
The branches can be divided into the following categories.
a) Dependent branches
Dependent branches are those branches which are not keeping full system accounting.
The following are key features of branch accounting:
✓ The dependent branches are not allowed to make any purchases and they sell goods
received from the head office.
✓ goods are supplied by the head office to such branches either at cost price or invoice
price.
✓ All the major expenses are supplied by the head office.
✓ Normally the goods are sold for both cash or credit.
b) Independent branches
Independent branches are those branches with full system accounting. They are allowed to
purchase goods from the open market and also supply to the head office, if necessary. They
can pay their expenses from the cash realised and can have a bank account in their own name.
c) Foreign Branches
When a branch is located out of the home country, it is called a foreign branch. Foreign
branches keep their accounts with foreign currency. They can either be dependent or
independent branches.
Preparation of books of account:
Dependent Branches:
Dependent branches do not keep complete set of books. The head office is responsible to keep
books of account for dependent branches. The following are the key methods adopted by head
office to keep branch accounts.
1. Debtors System: is used for small branches. Under this system, the head office opens
a branch account for each branch in which it records all transactions relating to the
branch. Under this method, the goods may be invoiced to branch at cost or invoice
price.
a) In case goods sent at cost price:
Journal entries are as follows:
Dr. (sh.) Cr. (sh.)
1. When goods are sent to branch.
Branch a/c xx
Goods sent to branch a/c xx
Being goods sent to branch
2. Cash sent to branch.
Branch a/c xx
Cash a/c xx
Being cash sent to branch
3. When goods are returned to head office by branch
Goods sent to branch a/c xx
Branch a/c xx
Being goods returned by branch
4. When cash is received from branch
Cash/bank a/c xx
Branch a/c xx
Being cash received from branch
5. Closing goods sent to branch a/c
Goods sent to branch a/c xx
Purchases a/c xx
Being balance of stock transferred to purchases
6. In case of profit
Branch a/c xx
Income statement xx
Being transfer of profit to income statement
7. In case of loss
Income statement xx
Branch a/c xx
Being transfer of loss to the income statement
Example:
XYZ Ltd operates a branch at Nairobi. The following information relates to Nairobi branch for
the year ended 31 December 2020.
Sh.
Opening balances as at 1 January 2020:
Branch inventory at cost 550,000
Branch debtors 400,000
Closing balances as ta 31 December 2020:
Branch inventory at cost 700,000
Transactions for the year:
Goods sent by head office to branch at cost 6,000,000
Goods returned by branch to head office at cost 150,000
Cash sales 2,500,000
Credit sales 7,000,000
Good stolen at branch at cost 50,000
Cash sales stolen at branch (included in other sales) 35,000
Returns from branch debtors (at selling price) 300,000
Cash received from branch debtors 6,300,000
Discount allowed to debtors 120,000
Bad debts written off 75,000
Expenses of branch paid by head office 780,000
Required:
i. Branch inventory a/c
ii. Goods sent to branch a/c
iii. Branch debtors a/c
iv. Branch income statement
Solution
Branch stock a/c
Sh. Sh.
Bal b/d 550,000 Goods returned to head office 150,000
Goods sent to branch 600,000 Cash sales 2,500,000
Debtors 300,000 Debtors – sales 7,000,000
Income statement Goods stolen 50,000
Gross profit 3,550,000 Bal c/d 7,000,000
10,400,000 10,400,000
Goods sent to branch a/c
Sh. Sh.
Branch stock 150,000 Branch stock a/c 6,000,000
Purchases 585,000
6,000,000 6,000,000
Branch debtors a/c
Sh. Sh.
Balance b/d 400,000 Branch stock 300,000
Branch 7,000,000 Cash 6,300,000
Discount allowed 120,000
Bad debts 75,000
Bal b/d 605,000
7,400,000 7,400,000
 Goods stolen a/c
Sh. Sh.
Branch stolen 50,000 Profit and loss 50,000
50,000 50,000

Cash stolen a/c

Sh. Sh.
Branch stock 35,000 Profit and loss 35,000
35,000 35,000

Branch income statement

Sh. Sh.
Sales – Cash sales 2,500,000
Credit sales 7,000,000
Less: Returns inwards (300,000) 6,700,000
Total sales 9,200,000
Less: Cost of sales
Opening stock 550,000
Add: Goods sent to branch 6,000,000
Less: Returns to head office (150,000) 5,850,000
Good available for sale 6,400,000
Less: Goods stolen (50,000)
Closing stock (700,000)
Cost of sales 5,650,000 (5,650,000)
Gross profit 3,550,000
Less: Expenses
Goods stolen 50,000
Cash stolen 35,000
Bad debts 75,000
Discount allowed 120,000
Branch expenses 780,000 (1,060,000)
Branch profit 2,490,000

b) In case goods are sent at invoice price:

When goods are sent at invoice price (which is higher than the cost price) it is necessary to
make adjustments for the amount of difference between the cost price and invoice price.

Dr. (sh.) Cr. (sh.)

1. For adjustment of the difference between cost price & invoice
price in opening stock:
Adjustment for goods sent to branch a/c xx
Branch a/c xx
Being adjustment for difference between invoice and cost price
2. For adjustment of the difference between cost price & invoice
price in closing stock:
Branch a/c xx
Adjustment for goods sent to branch a/c xx
Being adjustment for difference between invoice and cost price
 2. Stock and debtor system: under this system, the head office does not open any branch
account. The following ledger accounts are opened:
✓ Branch stock a/c
✓ Branch debtors a/c
✓ Branch expenses a/c
✓ Branch adjustment/mark-up a/c
✓ Branch income statement
At the accounting year, head office prepares the branch adjustment account and the branch
income statement. This system is used only when goods are involved at selling price which the
branch is not allowed to vary.

The journal entries are made by head office:

Dr. (sh.) Cr. (sh.)
1. When goods are sent to branch at invoice price.
Branch a/c xx
Goods sent to branch a/c xx
Being goods sent to branch
2. When goods are returned to head office by branch at invoice
price.
Goods sent to branch a/c xx
Branch a/c xx
Being goods returned by branch
3. Sale of goods by branch
a. Cash sale
Cash a/c xx
Branch stock a/c xx
Being cash sales at branch
b. Credit sale
Branch debtors a/c xx
Branch stock a/c xx
Being credit sales at branch
4. When cash is received from branch debtors.
Cash a/c xx
Branch debtors a/c xx
Being cash received from branch debtors
5. Sales returns
Branch stock a/c xx
Branch debtors a/c xx
Being sales returns from branch debtors
6. When there are discounts allowed and bad debts.
Branch expense a/c xx
Branch debtors a/c xx
Being expense on branch debtors
7. Payment of branch expenses
Branch expense a/c xx
Cash a/c xx
Being branch expenses paid by head office
8. If there is shortage/loss of stock
 Branch adjustment/mark-up a/c (with difference between cost and
invoice price) xx
Branch income statement (with cost of storage) xx
Branch stock a/c xx
Being loss in stock at branch
9. For surplus of stock at branch
Branch a/c xx
Branch adjustment/mark-up a/c (with difference between cost xx
and invoice price)
Branch income statement (with storage) xx
Being surplus in stock at branch
10. For adjustment of the difference between cost price and
invoice price in opening stock:
Stock reserve a/c xx
Branch a/c xx
Being adjustment for difference between invoice and cost price
11. For adjustment of the difference between cost price and
invoice price in closing stock:
Branch a/c xx
Stock reserve a/c xx
Being adjustment for difference between invoice and cost price
12. For adjustment of difference between invoice and cost
price on net goods sent to branch:
Goods sent to branch a/c xx
Branch adjustment/mark-up a/c xx
Being adjustment for difference between invoice and cost price
13. Branch expenses are transferred to branch adjustment a/c:
Branch adjustment/mark-up a/c xx
Branch expenses a/c xx
Being expenses transferred
14. Closing of goods sent to branch a/c:
Goods sent to branch a/c xx
Income statement xx
Being closing of goods sent to branch
15. Transfer of balance of branch adjustment a/c to income
statement.
In case of profit:
Branch adjustment/mark-up a/c xx
Income statement xx
Being transfer of profit to the income statement
In case of loss:
Income statement xx
Branch adjustment/mark-up a/c xx
Being transfer of loss to the income statement

Example:
ABC Ltd deals in furniture goods. The head office is in Nakuru and there are five branches in
main town of Kenya. All purchases are made by the head office and goods are charges to
branches at cost plus 25%. The following information relates to Machakos Branch for the year
ended 31 December 2020:
 Sh.
Opening balances 1 January 2020
Branch inventory (invoice price) 300,000
Branch debtors 450,000
Closing balances 31 December 2020
Branch inventory (invoice price) 250,000
Transactions for the year
Goods sent by head office to branch (invoice price) 2,500,000
Goods returned by branch to head office (invoice price) 200,000
Cash sales 800,000
Credit sales 2,700,000
Return from customers to the branch 100,000
Discount allowed 30,000
Bad debts written off 20,000
Branch expenses 500,000
Goods stolen at branch 30,000
Cash sales stolen at branch (not included in other sales) 15,000
Cash received from debtors 2,450,000
Required:
i. Branch inventory a/c
ii. Branch adjustment/mark-up a/c
iii. Goods sent to branch a/c
iv. Branch debtors a/c
v. Branch income statement

Solution:
Invoice price = cost + profit
125% = 100% + 25%
Mark-up = profit/cost = 25/100 = ¼
Margin = profit/selling price = 25/125 = 1/5
Profit = mark-up x cost
Profit = margin x selling price

Goods sent to branch a/c

Sh. Sh.
Returns to head office (200k-40k) 160,000 Branch stock 2,000,000
Purchases 1,840,000
2,000,000 2,000,000

Branch inventory a/c

Sh. Sh.
Balance b/d 300,000 Returns to head office 200,000
Goods sent 2,500,000 Cash sales 800,000
Debtors – returns 100,000 Debtors – sales 2,700,000
Goods stolen 30,000
Cash stolen 15,000
Balance mark-up 1,095,000 Closing stock 250,00
3,995,000 3,995,000
 Branch mark-up a/c
Sh. Sh.
Returns to h/o by branch 40,000 Balance b/d (1/5 x 300,000) 60,000
Goods stolen (1/5x30,000) 6,000 Branch stock (1/5 x 2,500,000) 500,000
Gross profit 1,559,000 Branch stock 1,095,000
Balance c/d (1/5 x 250,000) 50,000
1,655,000 1,655,000

Branch debtors a/c

Sh. Sh.
Balance b/d 450,000 Returns 100,000
Credit sales 2,700,000 Discount allowed 30,000
Bad debts 20,000
Cash 2,450,000
Balance c/d 550,000
1,655,000 1,655,000

Goods stolen a/c

Sh. Sh.
Branch stolen 24,000 Profit and loss 24,000

Cash stolen a/c

Sh. Sh.
Branch stock 15,000 Profit and loss 15,000

ABC Ltd
Machakos Branch Income Statement for the year ended 31 December 2020
Sales – Cash sales 800,000
Cash sales stolen 15,000
Credit sales 2,700,000
Less: Returns inwards (100,000) 2,600,000
Total sales 3,415,000
Less: Cost of sales at cost
Opening stock(300,000-60,000) 240,000
Goods sent (2,500,000-50,000)=2,000,000
Less: Returns (200,000-40,000)=(160,000) (1,840,000)
Goods available for sale 2,080,000
Less: Goods stolen (30,000-60,000) (24,000)
Closing stock (250,000-50,000) (200,000)
Cost of sales 1,856,000 (1,856,000)
Gross profit 1,559,000
Less: Expenses
Goods stolen 24,000
Cash stolen 15,000
Discount allowed 30,000
Bad debts 20,000
Branch expenses 500,000
Profit 970,000
3. Final Accounts System: The head office prepares income statement to find out profit or
loss of each branch and branch a/c to find out the amount due to or due from that branch.
The branch a/c acts as a personal account.
The profit or loss of a dependent branch can also be worked out by preparing a memorandum
branch income statement. This a/c is prepared on the basis of cost of goods sent to the branch
(not the invoice price). Besides the branch income statement, the head office maintains the
branch a/c. Under this system, the branch a/c is in the nature of a personal a/c which shows
only the mutual transactions between the head office and the branch, the balance of branch
account, therefore, represents the net assets of the branch.

Example:
Coop Ltd has a branch at Nanyuki to which goods are sent at cost plus 25%. The branch keeps
its own sales ledger and remits all cash received to the head office every day. All expenses are
paid by the head office. The transactions for the branch during the year ending 31 December
2020 were as follows:
Sh.’000 Sh.’000
Stock – 1/1/2020 11,000 Returns inward 500
Debtors – 1/1/2020 100 Cheques sent to branch:
Petty cash – 1/1/2020 100 Rent 600
Cash sales 2,650 Wages 200
Credit sales 23,950 Salary and other expenses 900
Goods sent to branch 20,000 Stock – 31/12/2020 13,000
Collection on ledger a/c 21,000 Debtors – 31/12/2020 2,000
Goods returned to head office 300 Petty cash-31/12/2020 125
including misc. income
sh.25,000 not remitted
Bad debts 300
Allowance to customers 250
Required:
i. Nanyuki branch a/c as at 31 December 2020
ii. Nanyuki branch income statement for the year ended 31 December 2020

Solution:
Workings:
1. Opening stock at cost:
Cost plus mark-up = 125% - sh.11,000,000
Therefore, stock at cost – 100/125 x sh.11,000,000 = sh.8,800,000
2. Goods sent to branch at cost:
Cost plus mark-up = 125% - sh,20,000,000
Therefore, goods sent to branch at cost – 100/125 x sh.20,000,000 = sh.16,000,000
3. Returns to head office at cost:
Cost plus mark-up = 125% - sh.300,000
Therefore, goods returned to head office at cost – 100/125 x sh.300,000 =sh.240,000
4. Closing stock at cost:
Cost plus mark-up = 125% - sh.13,000,000
Therefore, stock at cost – 100/125 x sh.13,000,000 = sh.10,400,000
 i. Branch a/c
Nanyuki branch a/c as at 31/12/2020
Sh.’000 Sh.’000
Balance b/d Cash received from debtors 21,000
Stock (working 1) 8,800 Cash sales 2,650
Debtors 100 Returns to head office (working 3) 240
Petty cash 100 Balance c/d
Goods sent to branch (working2) 16,000 Stock (working 4) 10,400
To bank a/c Debtors 2,000
Rent 600 Petty cash 125
Wages 200
Salary & other expenses 900
Income statement (balancing fig) 9,715
36,415 36,415

ii. Branch income statement

Nanyuki branch income statement for the year ended 31 December 2020
Sh.’000 Sh.’000
Cash sales 2,650
Credit sales 23,950
Less: Returns inward (500)
Net sales 26,100
Less: cost of sales
Opening stock 8,800
Add: goods sent to branch 16,000
Less: goods returned to head office (240)
Less: closing stock (10,400) (14,160)
Gross profit 11,940
Add: Misc. income not remitted 25
Total income 11,965
Less: expenses
Bad debts (300)
Allowances (250)
Rent (600)
Wages (200)
Salary and other expenses (900) (2,250)
Net profit 9,715

4. Wholesale branch system: Manufacturers may sell goods to the consumers either through
the wholesalers and approved stockbrokers or through their branches. In order to know
whether self-retailing through branch is more profitable than wholesaling, it is necessary to
make a distinction between profit due to wholesale and profit due to retail business of the
branch. Wholesale price is always less than retail price.
Wholesale price = cost plus profit hence in the books of the head office, branch stock a/c shall
be maintained at wholesale price. At the end of accounting period, the problem arises only
when goods received from the head office remains unsold at branch, because it includes a
part of profit which has been charged by the head office. To calculate the proportion of profit,
the value of unsold goods shall be reduced from the wholesale price to cost price.
End of accounting year entries to be made are:
 Dr. Income statement xx
Cr. Stock reserve a/c xx
(Reserve created for the difference in the wholesale price and cost price of branch
closing stock).

Example:
K Ltd submits the following particulars regarding the branch transactions of its Umoja Branch
for the year ended 31 March 2021:
Head office Branch
Sh.’000 Sh.’000
Stock on 1/4/2020 72,000 28,800
Goods purchased during the year 418,000 0
Indirect expenses 21,800 3,900
Goods sent to branch at invoice price 129,600 0
Sales 378,000 145,800
Goods received by branch 0 129,600
Goods sold to regional stockists 79,200 0
Goods are invoiced to branch and regional stockists at 20% below the list price. The list price
is calculated at 80% above the cost. Goods are sold to the customers at the list price by both
the head office and the branch.

Required: income statement of the head office and the branch for the year ended 31 March
2021

Solution:
Workings:
List price = cost + 80% = 180%
Sales to branch and regional stockists is 20% below the list price:
Therefore, 20% below list price = 180% - (20%x180%) = 180% - 36% = 144%
1. Closing stock at head office:
Sh.’000
Opening stock 72,000
Add purchases 418,000
490,000
Less cost of goods sold
Sold to customers 378,000 x 100%/180% (210,000)
Sent to branch 129,600 x 100%144% (90,000)
Sold to regional stockists 79,200 x 100%/144% (55,000)
Closing stock 135,000
2. Unrealised profit on branch opening stock
28,800,000 x 44/144 = 8,800,000
3. Closing stock at Umoja branch
Sh.’000
Opening stock 28,800
Add: goods sent by head office 129,600
158,400
Less: cost of goods sold
Sold to customers 145,800 x 144%/180% (116,640)
Closing stock 41,760
 4. Unrealised profit on branch closing stock
41,760,000 x 44/144 = 12,760,000

In the books of the head office:

Income statement for the year ended 31 March 2021
Sh.’000 Sh.’000
Sales 378,000
Sales to regional stockists 79,200
Goods sent to branch 129,600
Total sales 586,800
Less: cost of sales
Opening stock 72,000
Add: purchases 418,000
Less closing stock (working 1) (135,000) (355,000)
Gross profit 231,800
Add: unrealised profit on branch opening stock (working 2) 8,800
Total income 240,600
Less: Expenses
Indirect expenses (21,800)
Less: unrealised profit on branch opening stock (working 4) (12,760)
Net profit 206,040

In the books of Umoja Branch:

Income statement for the year ended 31 March 2021
Sh.’000 Sh.’000
Sales 145,800
Less cost of sales
Opening stock 28,800
Add goods sent by head office 129,600
Less closing stock (working 3) (41,760) (116,640)
Gross profit 29,160
Less expenses
Indirect expenses (3,900)
Net profit 25,260
Independent Branches:
The branches maintain comprehensive account books for recording their transactions. A
separate trial balance of each branch can be prepared. The head office maintains one ledger a/c
for each branch, wherein all transactions between the head office and the branches are recorded.
The head office a/c in branch books and branch a/c in head office books should tie up whereby
completeness of recording of transactions can be ensured.

Transactions between branch and head office:

Books of the head office:
Sh. Sh.
1. Goods sent to branch at invoice price
Branch current a/c xx
Goods sent to branch a/c xx
2. Goods returned to head office
Goods sent to branch a/c xx
Branch current a/c xx
3. Cash received from branch
Cash xx
Branch current a/c xx
4. Cash remitted to branch
Branch current a/c xx
Cash xx
5. Branch expense paid by head office
Branch current a/c xx
Cash xx
6. Head office expense paid by branch
Income statement xx
Branch current a/c xx
7. Branch creditors paid by head office
Branch current a/c xx
Cash xx
8. Head office creditor paid by branch
Creditors a/c xx
Branch current a/c xx
9. Branch debtor paying direct to head office
Cash xx
Branch current a/c xx
10. Head office debtor paying direct to branch
Branch current a/c xx
Debtor a/c xx
11. At the end of accounting period the branch profit/loss should be
transferred to head office books
Branch current a/c xx
Head office income statement xx
Books of the branch:
Sh. Sh.
1. Goods received from head office
Goods received a/c xx
Head office current a/c xx
2. Returns of goods to head office
Head office current a/c xx
Goods received a/c xx
3. Cash remitted to head office
Head office current a/c xx
Cash xx
4. Cash remitted to branch
Branch current a/c xx
Cash xx
5. Cash received from head office
Income statement xx
Head office current a/c xx
6. Branch expense paid by branch
Income statement xx
Head office current a/c xx
7. Branch creditors paid by head office
Creditors a/c xx
Head office current a/c xx
8. Head office creditor paid by branch
Head office current a/c xx
Cash xx
9. Branch debtor paying direct to head office
Head office current a/c xx
Debtors a/c xx
10. Head office debtor paying direct to branch
Cash/bank a/c xx
Head office current a/c xx
11. At the end of accounting period the branch profit/loss
should be transferred to head office books
Income statement xx
Head office current a/c xx

Adjustment and reconciliation of branch and head office a/cs

If the branch and head office accounts do not tally, they must be reconciled before preparation
of the final accounts of the business.
Reasons of disagreement:
✓ Goods dispatched by head office not received by the branch. The goods may be in transit
or loss in transit.
✓ Goods returned by the branch to head office may have been received by the head office.
The goods may be in transit or loss in transit.
✓ Sum remitted by head office to branch or vice versa remaining in transit on the closing
date.
✓ Receipt of income or payment or expenses relating to the branch transacted by the head
office or vice versa hence not recorded at the respective ends wherein they are normally
to be recorded.

These errors should be corrected as follows:

Goods in transit: should be recorded in either the branch books or the head office books but
not in both books.
Dr Cr
If recorded in branch books:
Goods in transit a/c xx
Head office current a/c xx
If recorded in head office books
Goods in transit a/c xx
Branch current a/c xx

Cash in transit: should be recorded in either the branch books or head office books but not
in both books.
Dr Cr
If recorded in branch books:
Cash in transit a/c xx
Head office current a/c xx
If recorded in head office books
Cash in transit a/c xx
Branch current a/c xx
The head office may have a policy of maintaining the fixed assets ledger such that all fixed
assets in the head office and in the branch are recorded in the head office books.
In this scenario:
Dr Cr
If branch acquires a fixed asset
Head office a/c xx
Cashbook (cash/bank a/c) creditors (credit a/c) xx
(in the branch books)
If recorded in head office books
Asset a/c xx
Branch current a/c xx
With the depreciation expense on fixed assets
Dr Cr
In the books of the branch
Depreciation expense a/c / income statement xx
Head office current a/c xx
If recorded in head office books
Branch current a/c xx
Provision for depreciation a/c xx
Example:
The below trial balance was extracted from the books of Jiji Ltd with respect to its operations
at the head office in Nyeri and Nyahururu branch as at 30 April 2018
Head office (Nyeri) sh.’000 Nyahuru banch sh.’000
Cash & bank balances 31,000 31,000
Trade receivables 20,000 22,000
Inventories 40,000 8,000
Investment in branch 45,000 2,000
Property & equipment 150,000
Accounts payable 23,000
Capital 192,000
Drawings 50,000
Current account 10,000
Sales 390,000 210,000
Cost of sales 250,000 143,000
Operating expenses 70,000 36,000
8% bond 51,000
656,000 656,000 222,000 222,000
Additional information:
1. Head office transfer goods to Nyahururu branch at cost plus 25% mark-up. During the year,
the head office transferred goods valued at sh.105million. The inventory at the branch
includes goods at transfer value of sh. 4.2million received from the head office.
2. Goods sent by the head office at a value of sh.18million were damaged in an accident. The
insurance company accepted liability in respect to 60% of the original cost of goods only.
The only entry made in the books was to record the goods being transferred to the branch.
3. Cash remittances by the branch to the head office amounting to sh. 3million had not been
received or recorded by 30 April 2018.
4. 15% of the operating expenses of the head office should be allocated to the branch. Trade
receivables of the head office include the branch current a/c.
5. Investment in the branch represents the cost paid to acquire the branch. The identifiable net
assets at the date of acquisition comprised:
Property & equipment 35,000
Inventories 8,000
The fixed assets register is maintained by the head office. The inventory on the date of
acquisition of the branch have since been sold. However, the sale was not recorded by the
branch.
6. Depreciation on property and equipment should be provided at the rate of 15% p.a. of the
book value.
7. Goodwill on acquisition of the branch is impaired by 20%.
8. The inventory at the head office includes slow moving items with a cost of sh.7.2million
which are estimated to have a net realisable value of 75% of the cost.
Required:
i. Journal entries to record the transactions relating to notes 1 to 8 of the additional
information.
ii. Statement of comprehensive income for the head office, branch and cobined business for
the year ended 30 April 2018.
Solution:
i. Journal entries
✓ Nyeri Head Office
Dr. ‘000 Cr. ‘000
1. Goods sent to branch (sales) 18,000
Branch current a/c (debtors) 18,000
(Being damaged goods sent to Nyahururu branch)
2. Insurance company (14,400x60%) 8,640
Stock loss expense 5,760
Cost of sales 14,400
(Being cost of goods damaged recoverable from
insurance company)
3. Bank/cash 3,000
Branch current a/c (debtors) 3,000
(Being cash in transit from Nyahururu branch)
4. Branch current a/c (debtors) 10,500
Operating expenses 10,500
(Being 15% operating expenses of the head office
to be met by Nyahururu branch)
5. Branch property & equipment 35,000
Branch current a/c (debtors) 8,000
Goodwill 2,000
Investment in branch 45,000
(Being investment in Nyahururu branch)
6. Branch current a/c (debtors) 5,250
Accumulated depreciation (15%x35,000) 5,250
(Being depreciation of assets of Nayhururu branch)
7. Branch current a/c (debtors) 400
Goodwill (20% x 2,000) 400
(being impairment of goodwill arisng in acquisition
of Nyahururu branch)
8. Income statement 1,800
Stock 1,800
(being loss in net realisation value of slow-moving
stock)

✓ Nyahururu branch books

Dr. ‘000 Cr. ‘000
1. Operating expenses 10,500
Head office current a/c (debtors) 10,500
(Being 15% operating expenses of the head office
chargeable to branch)
2. Cost of sales (purchased stock) 8,000
Head office current a/c 8,000
(Being inventory at hand on acquisition of the
branch)
3. Depreciation expenses 5,250
Head office current a/c 5,250
(Being depreciation of property & equipment)
 4. Impairment loss on Goodwill 400
Head office current a/c 400
(being impairment of goodwill by 20%)

ii. Statement of comprehensive income for the year ended 30 April 2018.
Nyeri Nyahururu Adjusted Combined
Sh.’000 Sh.’000 Sh.’000 Sh.’000
Sales (390,000-18,000) 372,000 210,000 (105,000) 477,000
Cost of sales (250,000-14,400)+1,800 (237,400) (151,000) (105,00) (388,400)
Gross profit 134,600 59,000 0 193,600
Unrealized profit (W1) (840) 0 840
Operating expenses (70,000) (36,000) 0 (106,000)
Stock loss expenses (5,760) 0 0 (5,760)
Depreciation expense (22,500) (5,250) (27,750)
Impairment loss on goodwill 0 (400) (400)
35,500 17,350 840 53,690
Workings 1 (W1): unrealised profit on Nyahururu branch inventory
Cost + mark-up = 125%
125% = sh.4,200,00
100% = 100/125 x sh.4,200,000 = sh.3,360,000
The unrealised profit = sh.4,200,00 – sh.3,3360,000 = sh.840,000

Financial statements of independent branches:

Independent branches prepare trial balances from which the financial statements will be
prepared. A consolidated financial statement will be prepared for the business as a whole. The
final accounts are similar to other businesses except:
a. Goods sent to branch: they are reported as values by the head office but are not included
in the sales of the enterprise as a whole.
b. Goods received from head office: they form part of goods available for sale in the branch
but should be excluded in the goods available for sale for the business as a whole.
c. Goods in transit: they are not part of the closing stock of neither the head office nor the
branch but are part of closing stock of the enterprise as whole or combined business.
d. Provision for unrealised profit: unrealised profit arises where the head office sends goods
to the branch at cost plus profit and the goods remains in the stock of the branch at the
end of the period. Profits held up in closing stock is considered unrealised until the goods
are sold by the branch. The unrealised profit on closing stock should be provided for:
Dr. Head office income statement xxx
Cr. Branch current a/c xxx
e. Current account: branch current a/c balance represents the head office investment in the
branch, thus should be carried as an asset of the head office but not for the business as a
whole. Head office current a/c balance represents the amount the branch owes the head
office thus should he carried as a liability of the branch but not the business as a whole.

Example:
Lima Ltd commenced business on 1 April 2019. The head office of the firm is Nairobi with a
branch in Kajiado. The branch is managed by a salaried manager. Lima Ltd acquires home
decorations and packages them according to customer orders. The packaging is a feature of the
firm’ marketing strategy and costs 10% of the cost price of the goods. The goods are sold at a
profit of 12% of the selling price. Packaged toys are sent to Limuru branch selling price less
6%. The following trial balance was extracted by the firm as at 31 March 2020:
Head office sh.’000 Branch office sh.’000
Capital 1,000,000
Fixtures in Nairobi 160,000
Purchase of packaging material 440,000
Purchase of home decorations 4,000,000
Sales 2,800,000 1,500,000
Goods sent to branch 1,598,000 1,569,000
Expenses 400,000 40,000
Trade receivables 280,000 150,000
Trade payables 400,000 40,000
Head office current a/c 281,040
Branch office current a/c 360,000
Bank balance 158,000 62,000
5,798,000 5,798,000 1,821,040 1,821,040

Additional information:
1. Packaged goods whose selling price to public was sh.28,960,000 were dispatched by the
head office to Limuru branch on 30th March 2020 and were received on 2 April 2020.
2. Limuru branch had sent cash amounting to sh.50,00,000 to the head office on 31st March
2020. The cash was not received until 3rd April 2020.
3. An annual stocktake on 31st March 2020 revealed the following:
✓ Home decorations which cost the head office sh.10,00,000 were considered obsolete.
✓ Packaging material at the head office which cost sh.5,000,000 was spoilt.
✓ The Limuru branch stocktake revealed a stock shortage of sh.13,000,000 being the
invoice price by the head office to the branch.
4. Provision it to be made for a bonus to the Limuru branch manager at 10% of the net profit.
5. Fixtures are to be depreciated at 20% p.a. on straight line basis.

Required:
a. Lima Ltd head office, branch and combined income statements for the year ended 31
March 2020.
b. Lima Ltd head office, branch and combined statements of financial statements as at 31
March 2020.

Solution:
Workings:
W1. Depreciation on fixtures & fittings: 20%x160,000=32,000
W2. Branch current a/c (sh.’000)
Balance b/d 360,000 Goods in transit 28,960
Head office profit & loss 33,636 Cash in transit 50,000
0 Balance c/d 314,676
393,636 393,636
W3. Head office current a/c (sh.’000)
Balance c/d 314,676 Balance b/d 281,040
0 Branch profit 33,636
314,676 314,676
a. Combined income statements for the year ended 31 March 2020
Lima Ltd
Income statement for the year ended 31 March 2020
Head office Branch Combined
Sh.’000 Sh.’000 Sh.’000
Sales 2,800,00 1,500,000 4,300,000
Add: Goods sent to branch 1,598,00
4,398,000 1,500,000 4,300,000
Cost of sales
Purchases 4,000,000 4,000,000
Add: packaging cost 440,000 440,000
Add: goods from head office 1,569,040
4,440,000 1,569,040 4,440,000
Less: closing stock (465,000) (146,040) (628,830)
Less: goods spoilt (5,000) (5,000)
Less: absolute home decorations (10,000) (10,000)
Less: shortages (13,000) (12,170)
3,960,000 1,410,000 3,784,000
Gross profit 438,000 90,000 516,000
Less expenses
Provision of unrealised profit (11,170)
Goods spoilt (5,000) (5,000)
Obsolete home decorations (10,000) (10,000)
Shortages (13,000) (12,170)
Depreciation expense (32,000) (32,000)
Expenses (400,000) (40,000) (440,000)
Net profit before bonus (20,170) 37,000 16,830
Bonus (3,364) (3,364)
Net profit (20,170) 33,636 13,466
Branch profit 33,636 (33,636)
Net profit 13,466
 b. Combined statement of financial position
Lima Ltd
Statement of financial position as at 31 March 2020
Head office Branch Combined
Sh.’000 Sh.’000 Sh.’000
Fixed assets
Fixtures 128,000 128,000
Branch current a/c 314,676
Less: prov. For unrealised profit (11,170)
303,506
431,506 128,000
Current assets
Stocks 465,000 146,040 628,830
Goods in transit 28,960
Debtors 280,000 150,000 430,000
Bank 158,000 62,000 220,000
Cash in transit 50,000 50,000
981,960 358,040 1,328,830
Total assets 1,413,466 358,040 1,456,830
Capital & Liabilities.
Capital & reserves
Capital 1,000,000 1,000,000
Net profit 13,466 13,466
1,013,466 1,013,466
Liabilities
Head office current a/c 314,676
Creditors 400,000 40,000 440,000
Bonus owing 3,364 3,364
400,000 358,040 443,364
1,413,466 358,040 1,456,830