Langley, Inc., operates a number of branches as well as a home office. Each branch stocks a complete line of merchandise obtained almost entirely from the home office. The branches also handle their billing, approve customer credit, and make cash collections.

Each branch has its own bank account, and each maintains accounting records. However, all plant assets at the branches are carried in the accounting records of the home office and are depreciated in those records by the straight-line method at 10% a year, with no residual value.

On July 1, 2005, the manager of Lola Branch acquired office equipment. The equipment had a cash price of $2,400 but was acquired on the installment plan with no down payment and 24 monthly payments of $110 beginning August 1, 2005. No journal entry was made for this transaction by the branch until August 1, when the first monthly payment was recorded by a debit to Miscellaneous Expense. The same journal entry was made in each of the four remaining months of 2005.

On December 2, 2005, the branch manager became aware that equipment could be acquired by the branches only with prior approval by the home office. Regardless of whether the home office or the branches acquired plant assets, such assets were to be carried in the accounting records of the home office, but any gain or loss on the disposal of equipment was to be recognized in the accounting records of the branches. To avoid criticism, the manager of the Lola Branch immediately disposed of the office equipment acquired July 1 by sale for $1,500 cash to an independent store. The manager then paid the balance due on the installment contract using a personal check and the $1,500 check received from sale of the equipment. In consideration of the advance payment of the remaining installments on December 3, 2005, the equipment dealer agreed to a $150 reduction in the $240 interest portion of the contract. No journal entry was prepared for the sale of the equipment or the settlement of the liability.

Assume that you are a CPA engaged to audit the financial statements of Langley, Inc.

During your visit to Lola Branch you analyze the Miscellaneous Expense ledger account and investigate the five monthly debits of $110. This investigation discloses the acquisition and subsequent disposal of the office equipment. After some hesitation, the branch manager gives you a full explanation of the events.

Instructions

a. Describe (do not prepare) the journal entries that should have been made by Lola Branch for the foregoing transactions and events.

b. Describe (do not prepare) the journal entries that should have been made by the home office of Langley, Inc., for the foregoing transactions and events.

c. Prepare a single journal entry for Lola Branch on December 31, 2005, to correct its accounting records.

d. Prepare a single journal entry for the home office of Langley, Inc., on December 31, 2005, to correct its accounting records.