¥ ; N (.' Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/completeaccountiOOanderich COMPLETE ACCOUNTING COURSE—PART I By A. E. ANDERSEN, B.B.A. , C.P.A. Of Andersen, DeLany & Co., Certified Public Accountants, Chicago, New York, Milwaukee; Professor of Accounting, Northwestern University D. HIMMELBLAU, B.A. , B.B.A. , C.P.A. Associate Professor of Accounting, Northwestern University E. L. KOHLER, M.A. , C.P.A. Instructor in Accounting, Northwestern University New York THE RONALD PRESS COMPANY 1919 Copyright. 1917, The Ronald Press Company V x^ oint venture as follows: Smith & Greer, for merchandise $5,000.00 Freight 420.00 Insurance 60.00 $5,480.00 (4) Plant & Co. and Edwards & Co. — Joint Account 100.00 To — Commissions Earned (or Profit on Joint Venture) To take credit for 2% commission on invoice • of merchandise. (5) Cash 3,200.00 To — Plant & Co. and Edwards & Co. — Joint Account To record receipt of first draft for nez pro- ceeds. 100.00 3,200.00 Copyright, 1917, The Ronald Press Company 1-12-5 (6) Edwards & Co. $3,000.00 To — Cash 13,000.00 Paid note of Edwards & Co. (7) Cash 3,100.00 To — Plant * Co. and Edwards 4 Co. — Joint Account 3,100.00 To record receipt of second draft. (8) Plant & Co. and Edwards & Co. — Joint Account 720.00 To — Edwards & Co. 360.00 Profit on Joint Venture 360.00 To close out joint account and distribute the profits thereof as per agreement. (9) Edwards & Co. 1,500.00 To — Cash 1,500.00 Sent Edwards & Co. check to close their ac- count. Solution to Problem 9 ADJUSTING ENTRIES (1) Purchases — Silks $2,145.00 Rent 150.00 Unexpired Insurance 220.00 To — Accounts Payable $2,515.00 To set up accounts payable not yet recorded. (2) Taxes 200.00 ^ To — Taxes Accrued 200.00 To set up taxes accruing during October. f (3) Interest Paid 140.00 To — Interest Accrued on Notes Payable 140.00 To t£ike up interest accrued and not recorded on October 31. (4) Insurance Expired 135.00 To — Insurance Unexpired 135.00 To write off insurance expired. Copyright, 1917, The Ronald Press Company CLOSING ENTRIES (5) Silks — Trading Account Linens — Trading Account To — Inventory — Silks Invent ory — Linens To close out inventories on November 1, 1916. $18,140.00 22,900.00 1-12-6 $18,140.00 22,900.00 (6) Inventory — Silks 19,475.00 Inventory — Linens 8,460.00 To — Silks — Trading Account 19,475.00 Linens — Trading Account 8,460.00 To set up inventories on October 31, 1917, as per total of inventory sheets. (7) Silks—Trading Account 64,078.00 To — Purchases — Silks Freight-In — Silks Allowances and Returns — Silks To treinsfer accounts. (8) Linens — Trading Account 52,612.00 To — Purchases — Linens Freight-Out — Linens Allowances and Returns — Linens Discounts on Sales — Linens To transfer accounts. (9) Sales—Silks 82,476.00 Sales— Linens 85,144.00 To— Silks— Trading Account 82,476.00 Linens — Trading Account 85,144.00 To transfer sales accounts to trading. Silks— Trading Account 19,733.00 Linens — Trading Account 18,092.00 To— Profit and Loss 37,825.00 « To transfer gross profit from trading. 59,310.00 1,798.00 2,970.00 44,462.00 1,520.00 2,515.00 4,115.00 (11) Profit and Loss To — Rent Taxes Salaries Insurance Expired Heating and Lighting Interest Paid To close out expense accounts. 21,445.00 1,800.00 2,400.00 11,675.00 1,315.00 3,540.00 715.00 Copyright, 1917, The Ronald Press Company 1-12-7 (12) Profit and Loss $16,380.00 To — Partners' Drawing Accounts (in detail) $16,380.00 To close out net profits for year. ANSWERS TO QUESTIONS Answer to Question 25 — -December 31, 1917- Membership Dues Unearned $7,172.50 To — Membership Dues Earned $7,172.50 To close out deferred credit at beginning of period (January 1, 1917). (2) Membership Dues Earned 7,600.00 To — Membership Dues Unearned 7,600.00 To set up deferred credit to income at December 31, 1917, on account of prepaid membership dues as follows: Dues billed April 1, 1917--% $1,525.00 Dues billed July 1, 1917—^/4 1,275.00 Dues billed October 1, 1917—% 4,800.00 Total as above $7,600.00 \ The Membership Dues Earned account will now stand with a net credit of $23,372.50, which represents the income from dues applicable to the year 1917. Answer to Question 26 — (a) April 6, 1917, counting the date of issue and omitting the due date or vice versa. (b) April 7, 1917. (c) The practice varies as between banks. If the 360-day year is used Bore interest will be collected than from the use of the 365-day year. Where the interest runs for a month or number of months, the ratio applying is the number of months to twelve. For instance, under the Illinois statute in com- puting the legal rate of interest on notes and bills which run "for any number of days less than a month, a day shall be considered a thirtieth part of a month, and interest or discount shall be computed for such fractional parts of a month upon the ratio which such number of days shall bear to thirty." Copyright, 1917, The Ronald Press Company 1-12-8 BILLS OF EXCHANGE DEFINITION — "A bill of exchange is an unconditional order in writing, ad- dressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand, or at a fixed or deter- minable future time, a sum certain in money, to order or to bearer." (Uniform Negotiable Instruments Act.) There are FOREIGN and INLAND bills of exchange, the most common illustration of the latter class being the ordinary commercial draft.. A CHECK is also "a bill of exchange drawn on a bank, payable on de- mand." PARTIES — There are four parties concerned in a bill of exchange: the DRAWER or MAKER, the DRAWEE, the ACCEPTOR, and the PAYEE. The drawer and payee are often the same party, while the drawee and acceptor are usually the same party. An acceptor other than the payee is an ACCOMMODATION ACCEPTOR. ACCOUNTING FOR DRAFTS — Checks are treated as cash. Drafts are handled in various ways, depending on whether they are sight or time drafts, and if sight drafts, whether banks are willing to accept them as cash. 1. SIGHT DRAFTS — Ordinary sight drafts are handled as cash by the payee, while of course the drawee pays cash as soon as he is notified by the bank of the draft. "Collection" drafts and sometimes other sight drafts may not be accepted as cash by banks. If such is the case, the bank acts as a collection agent and a memorandum only of the fact is kept by the payee. When the bank sends notice that payment has been received, cash is debited and the account of the drawee credited, any expenses of collection being charged to a "Collec- tion Expense" or similar account. If the drawer is not also the payee, no cash will be received by the former and on his records he will debit the account of the payee: -June 6, 1917- Payee $1,000.00 To — Drawee $1,000.00 To record the payment by the drawee of our draft dated June 1, 1917, in favor of the payee. 2. TIME DRAFTS — Time drafts must first be ACCEPTED, that is, the drawee must agree to pay and must signify his intention to do so by writing the ac- ceptance on the face of the draft, and thereby becoming the ACCEPTOR. Or the paper must be accepted by a party other than the drawee, in which case such party is called an accommodation acceptor. No entries are made on the books of any of the parties until acceptance is made, but as soon as a time draft is accepted it should be treated as a note receivable by the payee and as a note payable' by the drawee, since the instrument, when accepted, is in effect a two-party agreement. The accommodation acceptor treats the draft as a con- tingent liability. On the books of both drawee and payee, the manner of handling "acceptances" is precisely the same as the manner of handling promis- sory notes. If the drawer is not also the payee he may follow the same treat- ment as suggested in the discussion of paid sight drafts, i.e., credit the drawee's account and debit the payee's account when he is notified of the ac- ceptance, as illustrated in the preceding paragraph. Copyright, 1917, The Ronald Press Company 1-12-9 Acceptances may be discounted and treated as discounted promissory notes on the books of the payee. Ordinarily it is unnecessary to distinguish on the books or on financial statements between "notes* and "bills" receivable or payable. The term "notes receivable" or "notes payable" generally covers both. INVENTORIES In the ordinary trading business three factors enter into the gross profit which is arrived at as follows: SALES DEDUCT — Cost of Sales made up of Inventory at beginning of period Add — P*ur chases Deduct — Inventory at end of period Balance— GROSS PROFIT Merchandise when received is charged at cost and when sold is credited at selling price. Consequently the first factor, sales, and the second factor, purchases, can be readily obtained from the books. To obtain the third factor, inventory, it is necessary (1) to take a physical inventory of the stock on hand, or (2) to keep a perpetual inventory. Taking a physical inventory refers to the actual listing of the stock on hand at a certain date so as to show quantity, unit price, and amount. In taking inventory the following points should be given attention. 1. Physical inventories are taken when the stock is low, the date usually marking the close of a season. 2. Inventories are usually taken by persons employed in the department under the direction of the head of the department. Occasionally outside parties are called in either to "take" the inventory or to check same as soon as taken by the employees. 3. Strict instructions should be given to the inventory-takers as to the method to be followed and the precautions to be observed. Written instruc- tions are preferable. 4. The inventory sheets when handed out should be numbered so as to insure the return of all sheets. 5. Wherever possible, it is desirable to issue the sheets in advance emd to list the description of the goods, location, etc. Usually provision is made for designating damaged, shop-worn, and obsolete goods. On the day as of which inventory is taken, the data previously recorded would be checked and the quantity and price inserted. Sometimes the pricing is done in the office. Copyright, 1917, The Ronald Press Company 1-12-10 6. The extensions, footings, and recapitulations should be performed in the office and checked by some person other than the one making the calcula- tions in the first place. 7. Each inventory sheet should bear the signatures of those taking the in- ventory (caller and lister) so that responsibility for errors can be defi- nitely placed. 8. In order to avoid confusion with new goods being received and goods being sold, it is important that the inventory be taken in the shortest pos- sible time. 9. Goods sold after the close of the fiscal period, but delivered before inventory-taking, should be included as inventory at cost. 10. Consignments- inward still on hand should be separated from the inven- tory of purchased goods. Such goods will be listed on separate sheets and must be excluded from the inventory totals. 11. The invoices for all goods taken into stock should be entered on the general books before closing. The inventory which is credited to the Trading account should include only merchandise on hand, bills for which have been charged to Purchases account. Goods in transit will be taken up by the fol- lowing entry: Merchandise in Transit | To Accounts Payable or Unaudited Invoices $ To take up goods in transit at This entry will be reversed at the beginning of the next fiscal period. 12. Prices are based on the rule of "cost or market, whichever is the lower at the inventory date." In determining cost it is proper to add freight-in, cartage-inward, and import duties. Trade discounts, quantity dis- coirnts, rebates, and other allowances should be deducted. PERPETUAL INVENTORIES — The object of a perpetual or "going" inventory is to show the amount of merchandise on hand at any date. A perpetual inventory bears the same relation to merchandise that a cash record bears to cash. Re- ceipts and issues may be listed as to (1) quantities only, (2) prices only, or (3) both. The price basis is generally cost, although in some cases selling price is used, the all-important point being that both receipts and issues are priced on the same basis. Physical inventories are taken periodically to check the accuracy of the perpetual inventory. The expense of keeping records of this kind however, may be far in excess of the benefits derived and they are not as cpmmon in trading concerns as in manufacturing enterprises, where they are essential for cost data. The advantages of a perpetual inventory are: 1. To enable monthly profits to be ascertained. 2. To furnish the purchasing department with the data necessary to keep stocks on hand between a minimum and a maximum limit. 3. To keep a check on physical inventories with the object of ascer- taining losses from theft, shrinkage, shortages, etc. Copyright, 1917, The Ronald Press Company 1-12-11 The perpetual inventory controlling account is usually supported by a stock ledger containing a card or sheet for each class of merchandise. The charges are entered from the creditors' invoices and the credits from the duplicate sales invoices, individually or in summary totals. The stock ledger accounts are adjusted to the physical inventory at the close of each fiscal period. Perpetual inventories will be referred to again in connection with the accounts of a manufacturing business. ESTIMATED INVENTORIES — If perpetual inventories cannot be had, it is feasible in some cases to approximate the amount of the inventory with sub- stantial accuracy. The most common method is illustrated below and is re- ferred to as the "gross profit" method. -A- .NET SALES (actual) $20,000.00 D3DUCT--Gross Profit (based on estimated percentage of net sales, say 40^) 8,000.00 BALANCE—ESTIMATED COST OF SALES $12,000.00 -B- INVENTORY at beginning of period $ 5,000.00 ADD~Purchases (actual) 16,000.00 $21,000.00 DEDUCT— Estimated Cost of Sales (as above) 12,000.00 Balance— ESTIMATED INVENTORY at close of period $ 9,000.00 The estimated inventory at the close of the period is verified by taking a physical inventory. The foregoing method may be used to advantage where the ratio of gross profit to sales varies but little from month to month. Where the ratio fluctuates, the result is apt to be erroneous. REFERENCES : Bays (AmericEin Commercial Law Series, Vol. II) Cole, pages 118-120 Dickinson, pages 93-99 Esquerre, pages 165-172 Oilman, pages 167-178 Copyright, 1917, The Ronald Press Company 1-13-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 13 POINTS INVOLVED IN CLOSING BOOKS Problem 12 The trial balance following is from the ledger of John Hand, real estate and insurance agent : TRIAL BALANCE, DECEMBER 31, 1917 John Hand — Capital Account, January 1, 1917 John Hand — Drawing Account Apartment House North Park Subdivision Personal Ledger Cash Mortgage Payable Aetna Insurance Company Continental Insurance Company Oriental Casualty Company North Park Subdivision Sales Apartment House Rent Apartment House Expense Commission on Rentals Commission on Real Estate Sales Commission on Insurance Office Expenses Office Rent Advertising Interest on Mortgage Commission Paid Sub-Agents on Subdivision Sales $ 2,100.00 60,000.00 21,000.00 500.00 1,900.00 1,100.00 600.00 400.00 900.00 2,000.00 $24,500.00 1,800.00 30,000.00 150.00 50.00 200.00 19,200.00 8,000.00 800.00 4,600.00 1,200.00 190,500.00 $90,500.00 Hand owns the apartment house on which the $30,000 mortgage applies. All rent thereon is credited to Apartment House Rent account, and all expenses are charged to Apartment House Expense account. Rent accrued and not paid Decem- ber 31, 1917, amounts to $400 and is collectible. There is also $900 interest accrued and due on the mortgage but not paid. Neither of these items appears on the books as yet. Hand also owns the North Park Subdivision. The original cost and the cost of all subsequent improvements have been charged to North Park Subdivision account. There are 21 lots of equal value; 11 of these have been sold and the sales price credited to North Park Subdivision Sales account. Copyright, 1917, The Ronald Press Company 1-13-2 The amounts due insurance companies are on premiums collected but not yet remitted. The entry in the cash book on the collection of a premium is as follows: Cash $60.00 To — Aetna Insurance Company $48.00 Commission on Insurance 12.00 The personal ledger is a card ledger containing both debtors* and cred- itors' accounts. The debtors amount to $600 and the creditors to $2,400. You are required to submit: (a) Balance sheet as of December 31, 1917. (b) Statement of profit and loss for year ending December 31, 1917. (c) Journal entries to close the ledger at December 31, 1917. MISCELLANEOUS QUESTIONS Question 30 — How would you proceed to locate errors in a trial balance? Outline the various tests you would make. Question 31 — The firm of A and B has for several years valued its mer- chandise inventory on the basis of sales prices. If the stock of merchandise at the close of each of these periods was approximately of the same kind and value, what effect would this procedure have on the successive balance sheets prepared? On the successive statements of profit and loss? Question 32 — The firm of C and D on June 30, 1917, in taking its annual inventory discovered that whereas the merchandise on hand cost $50,000, not more than $30,000 could be realized therefrom at that date on account of a sudden fall in the market price. Purchases during the year amounted to $150,000, the value (at cost) of the opening inventory was $40,000, and the sales for the period were $155,000. The firm figures that a gross profit of $15,000 has been made on the goods sold, but this figure will be turned into £ gross loss of $5,000 if in the cost of sales statement the closing inventory is taken at the realizable value of $30,000. What should be done under the circumstances? WORK TO BE DONE IN THE PRACTICE SET Having made the adjusting entries called for in 1-12-3, post the books of original entry and submit a trial balance. Copyright, 1917, The Ronald Press Company 1-13-3 Solution to Problem 10 A. R. MILES & CO. BALANCE SHEET, OCTOBER 31, 1917 ASSETS CURRENT ASSETS: Cash $14,759.69 Accounts Re- ceivable 10,209.48 $24,969.17 PREPAID EXPENSE: Insurance CAPITAL ASSETS: Furniture and Fixtures 586.00 2,000.00 $27,555.17 LIABILITIES CURRENT LIABILITIES: Accounts Pay- able $ $125.40 Due on Con- signment not closed out 1,490.68 $1,616.08 CAPITAL ACCOUNT: Balance, Oct. 1, 1917 $25,442.61 Profits for October 496.48 25,939.09 $27,555.17 A. R. MILES & CO. STATEMENT OF PROFIT AND LOSS MONTH ENDING OCTOBER 31, 1917 Commissions Earned $1,570.02 Operating Expenses: Salaries $575.00 Rent 200.00 Insurance 65.00 General Expense 233.54 1,073.54 Net Profit (as above) $ 496.48 Copyright, 1917, The Ronald Press Company 1-13-4 POINTS INVOLVED IN CLOSING BOOKS METHOD — Four methods of closing the books of a trading concern have al- ready been illustrated: 1. Where a Merchandise account and Profit and Loss account are kept (there being no separate inventory account), the inventory at the end of the period is credited direct to the Merchandise account, and the balance, representing gross profit, is carried to the Profit and Loss account together with all other nominal accounts ; the net profit is then carried to the respective draw- ing accounts ; and the excess of the net profits over the drawings is carried to the capital accounts. (See 1-5-5.) 2. If the merchandise inventory is carried in a separate ledger account, it is necessary to transfer the opening inventory from the Inventory account to the Merchandise account. The closing inventory when taken upon the books will be charged to the Inventory account at the same time that the credit is made to the Merchandise account. (See 1-6-4.) 3. Where the Merchandise account is subdivided into its elements of Inven-- tory. Purchases, Sales, etc., one method of procedure is to open up a Cost of Sales account, into which the opening inventory, closing inventory, and pur- chases are carried. The balance is the cost of merchandise sold, which may be carried to (a) Sales account, or (b) Trading account, or (c) to the Profit and Loss account. (See 1-10-5.) Sales would be transferred to Trading account in case (b) and to Profit and Loss account in case (c). 4. Where the Merchandise account is subdivided into its elements of Inven- tory, Purchases, Sales, etc., a common method of procedure is to open up a Trading account into which all these merchandise accounts are transferred. The balance will be gross profit from trading to be carried to Profit and Loss, similar to the balance of Merchandise account in method 1. (See 1-12-6.) A fifth method is sometimes used: all nominal accounts are closed by a single journal entry into the proprietor's drawing account, no Trading account or Profit and Loss account appearing on the ledger. In this instance, the proprietor would depend, for an analysis of his profits during any given period or for a comparison between profits of successive periods, not on the financial records themselves but on the financial statements prepared at the end of each period. There is also no distinction drawn between items making up cost of sales and items which compose operating expenses, etc. The method is disfavored by accountants generally. CLEARING ACCOUNTS — The Trading account. Cost of Sales account, and Profit and Loss account are often called CLEARING ACCOUNTS, inasmuch as they are opened and closed only at the end of each accounting period and serve to clear various elements of profits from particular nominal accounts to others. CLASSIFICATION OF ENTRIES — Since new types of entries have arisen in con- nection with closing the books, it is desirable to outline them here more fully. 1. ENTRIES FOR TRANSACTIONS. These are the entries made during the period concerning the relations of the business to outsiders: purchases, sales, pay- ments on accounts, expenses, etc. 2. ADJUSTING ENTRIES. A distinction should be made between adjusting and closing entries. The former precede and are made for the purpose of restating certain assets and liabilities for balance sheet purposes. Copyright, 1917, The Ronald Press Company 1-13-5 3. CLOSING ENTRIES. Closing entries are the entries necessary at the end of an accounting period for the purpose of transferring the nominal accounts, 4. REVERSING ENTRIES. The term "reversing entries" refers particularly to entries that may be made at the beginning of a fiscal period which reverse certain entries made at the end of the period just closed. Thus, Inventory of Miscellaneous Supplies account may be written back to the expense accounts, the inventories of which it represents ; likewise Interest Accrued on Notes Re- ceivable in the second method outlined (see 1-10-8 to 9) ; sometimes Merchan- dise Inventory is closed back into Merchandise account. 5. CORRECTING ENTRIES. When it is necessary to alter accounts because of errors in recording transactions referring thereto, the entries required are termed "correcting" entries. The last four classes of entries record no transactions, their purpose being to put the accounts on a proper accounting basis. "CLOSING THE BOOKS* — This term may refer to one of three things: 1. Closing the nominal accounts at the end of an accounting period* 2. Closing a set of accounts to be transferred to another ledger. 3. Closing out the accounts of a liquidated or defunct business or of a business whose accounts are transferred to another business. REASON FOR CLOSING THE BOOKS AT THE END OF A FISCAL PERIOD Nominal accounts have been referred to as subdivisions of the proprietor- ship accounts. They are kept during a fiscal period for the purpose of dis- closing the sources and details of the profits and expenses during that period. They serve also the purpose of showing the increases or decreases of proprietorship; but this increase may be indicated as well by single entry where no nominal accounts are kept. WHAT REMAINS ON BOOKS AFTER CLOSING— Only real accounts, i.e., balance sheet accounts, remain on the books after closing, the valuation of which is arrived at as follows: 1. Capital assets at their cost less accrued depreciation (the subject of depreciation will be taken up later). 2. Current assets at not more than their realizable value, (i.e., realizable value to the "going concern"). 3. Prepaid expenses benefiting future periods, at cost. 4. Liabilities on the basis of items ACCRUED (no matter whether due or not) . 5. The proprietor's account represents the difference between the as- sets and liabilities thus arrived at. The purpose of this brief summary of balance sheet accounts is to remind the student that the term VALUE in Accounting as applied to real accounts has a meaning entirely distinct from the same term as used in other sciences. The value of a business on a liquidating basis would differ from the value of the same business as a going concern ; while both may differ from the value (net worth or proprietor's account) appearing on the firm's books. REFERENCES : Cole, Chapter V Gilman, Chapter IV Copyright, 1917, The Ronald Press Company 1-14-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 14 GENERAL REVIEW QUESTIONS (For oral quiz) Question 33 — Distinguish between single and double entry. Question 34 — Give the entries necessary to change a set of books from single entry to double entry. Question 35 — How would you determine the profit or loss for a given period, (a) from single entry books ; (b) from double entry books? Question 36 — Distinguish between capital and revenue expenditures and give illustrations of each. Why is so much stress laid on the correct classifica- tion of expenditures? Question 57 — What are the objections to the "Merchandise" account? In your opinion, what is the best method of recording the information usually contained in the Merchandise account? Question 38 — What is a petty cash fund? You are instructed to set aside $100 as a petty cash fund; give the entries to be made. Question 39 — Without using amounts, submit a specimen balance sheet such as you would prepare for a partnership engaged in an industrial line of busi- ness. Question 40 — Distinguish between trade and cash discounts. Show several methods of entering them on the books. Question 41 — Distinguish between interest, cash discount, and bank dis- count. Question 42 — Give the entries you would make in case a note which had been given you by a customer is dishonored. Question 43 — What are the advantages of having Purchases and Sales ac- counts in subsidiary ledgers, and what is the best method of checking the ac- curacy of the postings to these accounts? Question 44— What is the best method of handling C. 0. D. shipments where the consignee does not have a regular ledger account? . . • — : c . ■ . Question 45 — Define a note. Give the parties to a note. Copyright, 1917, 'jJie Ronald Press Company 1-14-2 Question 46 — Define a bill of exchange. Give the parties to such an in- strument . Question 47 — Distinguish between the following instruments: (a) Note (b) Bill of Exchange (c) Sight Draft (d) Time Draft (e) Bank Draft (f) Check Question 48 — Give the required entries to be made when: (a) Our note is given to a creditor in payment of what we owe. (b) A note is received from a customer in payment of his account. (c) When (b) is dishonored at maturity. Question 49 — Give the entries required when we discount: (a) A note which we have received from a customer. (b) Our own note. Question 50 — Give the required entries: (a) When you accept a time draft drawn upon you by a creditor, (b) When you draw a time draft on a customer, which he accepts. (c) When you draw a sight draft on a customer. Question 51 — What is a controlling account? Give the items which would appear in the customers' and creditors' controlling accounts, respectively. Question 52 — Draw up a partnership agreement, incorporating such features as you deem desirable for a proper guide to the partners. Question 55 — Where articles of partnership do not state the proportion of profits each partner is to receive, on what basis are they divided? Question 54 — If the profits are to be divided on the basis of amount of capital and length of time invested, how would you ascertain what proportion of the profits each partner is entitled to? Question 55 — What is the distinguishing feature between a consignment and a sale? Give several reasons for making consignments. Question 56 — What are capital assets; current assets; floating assets; liquid assets; quick assets; fixed assets? Give examples of each. What dif- ference, if any, is there between them? What" are capital liabilities; fixed liabilities; current liabilities; floating liabilities ? Give examples and state what difference, if any, there Is between them. Question 57 — On what basis should an inventory be valued? Give your rea- sons. Copyright, 1917, The Ronald Press Con^pany 1-14-3 WORK TO BE DONE IN THE PRACTICE SET The merchandise inventory at the beginning of the period (March 1) was di- vided as between automobiles ^8,000, and accessories and supplies $2,890, -On April 30, the inventory was composed of automobiles $30,000 and accessories and supplies $5,890. Prepare and submit a balance sheet and statement of profits and income (report form) , covering the two months ending April 30, and close the books. Solution to Assignment 1-13-2 SCHEDULE OF CUSTOMERS LEDGER ACCOUNTS C. 0. D. ( 110.00 E. T. Adams 14,000.00 Barnhart and Co. 12,312.00 Frank Rice 7,120.00 George Wilson 2,000.00 Total per Customers Ledger Accounts in General Ledger $35,542.00 SCHEDULE OF CREDITORS LEDGER ACCOUNTS New York Auto Supply Co. $29,500.00 Well-Built Auto Co. 5,000.00 Star Auto Co. 1,580.00 Total per Creditors Ledger Accounts in General Ledger $36,080.00 Copyright, 1917, The Ronald Press Company 1-14-4 MILLER BROS.— TRIAL BALANCE, APRIL 30, 19— Warehouse and Office Fixtures $ 1,450.00 Delivery Equipment 1,750.00 Inventory of Merchandise 10,890.00 Consignment Stock Outward 3,200.00 Miscellaneous Supplies 300.00 Advances on Consignments-Inward 1,100.00 Customers Ledger 35,542.00 Notes Receivable 10,100.00 Cash 3,676.84 Petty Cash Fund 100.00 Unexpired Insurance 50.00 Rent Paid in Advance 200.00 Creditors Ledger Notes Payable Bank Loan Notes Receivable Discounted Taxes Accrued Interest Accrued on Notes Payable Fred Miller — Capital Account Aug. Miller — Capital Account Fred Miller — Drawing Account " 210.00 Auto Sales Auto Return Sales 2,000.00 Auto Rebates and Allowances on Sales 200.00 Auto Freight-Out 85.00 Accessories and Supplies Sales Accessories and Supplies Return Sales 1,710.00 Accessories and Supplies Rebates and Allowances on Sales 10.00 Accessories and Supplies Freight-Out 100.00 Profits on Consignments-Outward Earnings on Consignments- Inward Discount on Purchases Interest Received Auto Purchases 47,800.00 Auto Freight-In 500.00 Accessories and Supplies Purchases 55,570.00 Accessories and Supplies Freight-In 360.00 Accessories and Supplies Return Purchases Rent 200.00 Taxes 200.00 Insurance Expense 10.00 Office Salaries and Expenses 5,495.00 General Expense 162.00 Delivery Expenses 878.00 Advertising 5,150.00 Salesmen's Salaries and Commissions 10,840.00 Salesmen's Traveling Expenses 300.00 Miscellaneous Selling Expenses 1,544.00 Interest Paid 178.00 Discount on Sales 504.00 $36,080.00 10,000.00 3,000.00 10,000.00 200.00 36.00 15,000.00 15,000.00 42,312.00 60,165.00 3,200.00 2,820.00 864.50 87.34 3,600.00 $202,364.84 $202,364.84 Copyright, 1917, The Ronald Press Company 1-14-5 Solution to Problem 11 X Z COMPANY METHOD OF ESTIMATING INVENTORIES AT SEPTEMBER 30, 1917 GROSS SALES $44,500.00 LESS — Freight-Out $1,200.00 Allowances 2,360.00 3,560.00 NET SALES $40,940.00 DEDUCT — Estimated Gross Profit of 35% of Net Sales 14,329.00 Balance — ESTIMATED COST OF SALES $26,611.00 Inventory at January 1, 1917 $ 6,100.00 ADD — Purchases $28,450.00 Freight-In 895.00 $29,345.00 Less — Discount on Purchases 960.00 28,385.00 Total Merchandise Cost $34,485.00 DEDUCT — Estimated Cost of Sales 26,611.00 Balance— ESTIMATED INVENTORY at September 30, 1917 $ 7,874.00 ANSWERS TO QUESTIONS Answer to Question 27 — (a) Enter the cash in the cash receipts book, at the same time crediting the departmental sales accoionts in the general ledger. (b) Enter the cash in the cash receipts books, which is to be posted to Cash Sales account in the customers ledger. At the same time make an entry in the sales book debiting "Cash Sales" account in the customers ledger, cred- iting the proper department as in the case of a "charge" sale. (c) Same as No. 2, except that instead of carrying a customers ledger ac- count for Cash Sales, the items of cash sales in the cash book and cash sales in the sales book are merely checked against each other. Separate columns may be provided in the cash receipts book and sales book for cash sales, the totals of which are posted to the credit and debit, re- spectively, of a Cash Sales account in the general ledger. Answer to Question 28 — (a-l) C. 0. D. sales may be handled as cash sales — only a memorandum rec- ord being kept of C. 0. D. 's as they are forwarded to the customer and no credit being taken for the sale until the cash has been received. (a-2) Charge C. 0. D. sales to a C. 0. D. account in the customers ledger which is then credited as the cash is received. (a-3) Charge directly to the customer's account. (b) Rather than open up a separate account for such customers, a single ledger page in the customers ledger may be headed "Sundry Customers" and such items posted thereto. When one of these customers pays his account, the credit should be entered in the space directly opposite the charge. Copyright, 1917, The Ronald Press Company 1-14-6 Answer to Question 29 — Selling expenses are those ex^ienses of a business which are incurred in selling the product manufactured or purchased, and usually are represented by: Salesmen's Salaries and Commissions Traveling Expenses of Salesmen Samples Distributed Advertising Salaries of Sales Management Salaries and Expenses of Credit Department Sales Office Expenses Freight allowances in the nature of "special inducements" to secure cus- tomers may be treated as a selling expense ; but if such item represents a regular yearly allowance and is not the result of a special advertising cam- paign, etc., it is treated as a deduction from gross sales. Trade discounts are always deductions from gross sales. General and administrative expenses are those expenses of a business In- curred in its general administration, such as: Officers' Salaries Office Salaries Office Expenses — Stationery and Supplies, etc. Telephone and Telegraph Legal Expenses Traveling Expenses of Officers Heat and Light — Office Repairs to Office Building Repairs to Furniture and Fixtures Taxes Insurance Copyright, 1917, The Ronald Press Company 1-15-1 COMPLETE ACCOUNTING COURSE— PART I Lecture 15 ANSWERS TO GENERAL REVIEW QUESTIONS Solution to Problem 12 JOHN HAND BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Apartment House CURRENT ASSETS: North Park Sub- division $10,000.00 Accounts Re- ceivable 600.00 $60,000.00 CAPITAL AND LIABILITIES CAPITAL ACCOUNT: Balance, January 1, 1917 $24,500.00 Profit for year as below Drawings 15,400.00 $39,900.00 2,100.00 Rents Un- Balance, December 31, collected 400.00 1917 $37,800.00 Cash m 500.00 11,500.00 MORTGAGE 30,000.00 $71,500.00 CURRENT LIABILITIES: Accounts Payable $2,400.00 Due Insurance Cos. 400.00 Interest Ac- crued 900.00 3,700.00 $71,500.00 Copyright, 1917, The Ronald Press Company 1-15-2 JOHN HAND STATEMENT OF INCOME AND EXPENDITURES YEAR ENDING DECEMBER 31, 1917 INCOME : Apartment House Rent $ 8,400.00 Deduct — Apartment House Expense 1,900.00 $ 6,500.00 Sales of North Park Subdivision Lots $19,200.00 Deduct — Cost of Lots Sold $11,000.00 Commissions Paid Subagents 2,000.00 13,000.00 6,200.00 Commission on Real Estate Sales 4,600.00 Commission on Insurance 1,200.00 Commission on Rentals 800.00 TOTAL INCOME $19,300.00 EXPENDITURES: Office Expenses $1,100.00 Office Rent 600.00 Advertising 400.00 2,100.00 NET INCOME before deducting Interest $17,200.00 DEDUCT — Interest on Mortgage 1,800.00 SURPLUS NET INCOME (as above) $15,400.00 JOURNAL ENTRIES TO CLOSE LEDGER, DECEMBER 31, 1917 (1) Rent Unpaid $ 400.00 To — Apartment House Rent $ 400.00 To record rent due and unpaid. (2) Interest on Mortgage 900.00 To — Interest Accrued on Mortgage 900.00 To take up interest accrued and unpaid. (3) Apartment House Rent 1,900.00 To — Apartment House Expense 1,900.00 To transfer apartment house expense to rent account (the latter account now shows the income from the apartment house.) . (4) North Park Subdivision Sales 13,000.00 To — North Park Subdivision 11,000.00 Commissions Paid Subagents 2,000.00 To transfer cost of subdivision sales. Copyright, 1917, The Ronald Press Company 1-15-3 (5) Apartment House Rent North Park Subdivision Sales Commission on Rentals Commission on Real Estate Sales Commission on Insurance To — Profit and Loss To transfer income to Profit and Loss. $ 6,500.00 6,200.00 800.00 4,600.00 1,200.00 $19,300.00 (6) Profit and Loss 3,900.00 To — Office Expenses Office Rent Advertising Interest on Mortgage To transfer expense account to Profit and Loss. 1,100.00 600.00 400.00 1,800.00 (7) Profit and Loss To — John Hand — Drawing Account To close out net income for year. 15,400.00 15,400.00 (8) John Hand — Drawing Account To — John Hand — Capital Account To close out balance of Drawing account. 13,300.00 13,300.00 ANSWERS TO QUESTIONS Answer to Question 30 — 1. Check the footings of the trial balance. 2. Check transfer of balances from ledger to trial balance. 3. If the diffence is "1" in any column it is probably an error In footing. 4. Ascertain whether any account appearing in the trial balance has been closed out during the month. 5. Ascertain whether an item equal to one-half the discrepancy has been posted to the wrong side of the ledger. 6. Look for an error in posting caused by a transposition or trans- placement of figures (divide the difference by 9 or a multiple thereof). 7. Check footings of ledger accounts and books of original entry. 8. These tests having been made, it is likely that the error arises from an item not posted or posted incorrectly. If it seems nec- essary to review the postings for the period, it is usually pref- erable to check or call back the postings from the ledger into the books of original entry. Answer to Question 31 — The effect of this procedure on the balance sheet has been to overstate continuously the assets and net worth. If the value of the inventory remained practically the same from year to year, the profits for any one year would be substantially correct. Copyright, 1917, The Ronald Press Company 1-15-4 Answer to Question 32 — The cost price will be placed on the inventory- sheets and the total inventory thus arrived at carried as a credit to the Trading account and as a debit to the Inventory account in the usual way. If the fall in market price would affect the probable selling price, it would be desirable to set up a "Reserve for Estimated Shrinkage in Value of Inven- tories" by debiting Profit and Loss and crediting the reserve account for the estimated decrease in value. The operation of a reserve account will be shown later. It may be stated here, however, that on the balance sheet the reserve will be deducted from the cost value of the inventory, while the same amount charged to Profit and Loss will be shown on the statement of profits and in- come as an extraordinary loss for the period (deducted from Net Profits) and will not be confused with gross profits, which in the example cited will be shown as $15,000. ANSWERS TO GENERAL REVIEW QUESTIONS Answer to Question 33 — In single entry only the debit or credit, i.e., only one posting, is made for each transaction. In double entry there must be a DEBIT FOR EVERY CREDIT and two postings must be made in the ledger for every transaction in order to balance the books. In single entry, a trial balance cannot be drawn off to prove the accuracy of the work as in the case of double entry. In single entry, record is kept usually of only the personal accounts ; in double entry a record is kept of every element of the business. Answer to Question 34 — Prepare a statement of the assets and liabilities ascertained from all sources available. Then make a journal entry — Assets (in detail) $ To — Liabilities (in detail) $ Capital Account or make two entries, viz.: Assets (in detail) To — Capital Account — Capital Account To — Liabilities (in detail) The balance in the capital account represents the net worth of the proprietor. Answer to Question 35— (a) By the asset and liability method. A schedule of assets and liabili- ties at the end of the period is prepared from all available sources. The difference between them is the net worth or net insolvency at that date. A similar statement prepared as of the beginning of the period will show the net worth or net insolvency at that time. Any change in the conditions as shown by these statements must have been caused either by: 1. Money put in or withdrawn by the proprietor. 2. Profits or losses made by the business. Copyright, 1917, The Ronald Press Company 1-15-5 The following form can be used to ascertain the net profit or loss for any- period: NET WORTH at the end of the period NET WORTH at the beginning of the period Balance — being increase or decrease in Net Worth ADD — Drawings DEDUCT — Additional Capital Contributed Balance~NET PROFIT OR LOSS for the period (b) To find the net profit or loss from a double entry set of books, as- certain: 1. Inventory of merchandise on hand, supplies, etc., at "cost or mar- ket, whichever is the lower." 2. Unexpired insurance. 3. Prepaid rent. 4. Interest accrued on notes receivable ; also on notes payable and bonds outstanding. 5. Make due provision for uncollectible accounts. 6. Make proper allowance for depreciation of capital assets. When the inventories have been prepared and all accrued income and ex- penses are ascertained, make journal entries to record same in the books. Now close all the nominal accounts into the Profit and Loss account. Transfer the balance in the Profit and Loss account to the Drawing account of the proprietor, in case of a single proprietorship; to the Drawing accounts of the partners in the proportion stipulated by their articles of copartnership, in case of a partnership; to the Surplus account, in case of a corporation. Then close the Drawing accounts into the Capital accounts in the case of both single proprietorship and partnership. Answer to Question 36 — Capital expenditures are those incurred in the ac- quisition of assets of a permanent nature or additions thereto, not intended for sale; such as buildings, fixtures, etc. They must be for the purpose of increasing the earning capacity of the business and not mere replacements of old assets worn out. Revenue expenditures are those incurred in the operation of a business In connection with the earning of revenue, or to maintain the capital assets in a state of efficiency, such as labor, material, salaries, etc. Copyright, 1917, The Ronald Press Company 1-15-6 The distinction between capital and revenue expenditures is very impor- tant. The former is an asset; the latter an expense. To classify a revenue expenditure item as a capital expenditure will affect the profits by an amount equal to the item wrongly classified. For instance, if a purchase of $100 is made to replace a worn-out typewriter, and the purchase is charged to the fix- ture account, the profits are overstated $100, because the assets are in- creased $100 and the expenses are reduced $100. The reverse proposition is also true. If an additional typewriter is purchased and charged to expense instead of fixtures, the profits are understated $100, because the assets are $100 less than they should be and the expenses are $100 greater than they should be. In order to ascertain the TRUE profit for any period, the classi- fication of expenditures as between capital and revenue must be correct. Answer to Question 37 — When a single merchandise account is kept, return sales, being charged to it, are mixed with the purchases; and return pur- chases, being credited to it, are mixed with the sales. If these items are numerous, it is quite difficult to determine the NET PURCHASES and NET SALES for a period. This is due to the fact that the purchases are debited at cost and return sales debited at selling price. Conversely, sales are credited at selling price, and return purchases are credited at cost. Therefore, separate accounts should be opened for purchases, to which would be credited all re- turns; and another should be opened for sales, to which would be charged all returns. In fact, separate accounts are usually kept for return purchases, return sales, and allowances on sales so that every element connected with sales and purchases will be properly classified. Answer to Question 38 — A petty cash fund is a certain amount of cash set aside to pay small expense items. This is done in order that all the entries on the cash book may be represented by a check, and all receipts may be daily deposited intact in the bank. When the fund is nearly depleted, a check for the amount disbursed is given to the petty cashier on surrender of all vouch- ers supporting such disbursements. Thus, the petty cashier should at any time have on hand either cash or vouchers for the full amount of the fund. The best method of showing same on the books is to open a Petty Cash Fund account in the ledger, charging thereto $100 set aside for this purpose and crediting cash. When a check is given to reimburse the fund, the proper ex- pense accounts are charged and cash credited in the cash book. Thus no change need be made in the ledger account unless the fund is increased or decreased. Copyright, 1917, The Ronald Press Company 1-15-7 Answer to Question 39 — JONES AND BROWN BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Real Estate Plant and Equipment Total Capital Assets J CAPITAL AND LIABILITIES CAPITAL: Jones $ Brown '• . CURRENT ASSETS: Inventories Customers' Accounts Notes Re- ceivable Cash in Bank and on Hand Total Capital CURRENT LIABILITIES: Notes Pay. $ Accounts Pay. Total Current Assets Total All Assets Total Current Lia- bilities Total Capital & Liabilities An alternative method is to show the assets in the order of their liquid- ity, and the liabilities in the order in which they will be met. JONES AND BROWN BALANCE SHEET, DECEMBER 31, 1917 ASSETS CURRENT ASSETS: Cash in Bank and on Hand Notes Re- ceivable Customers* Accounts Inventory CAPITAL AND LIABILITIES CURRENT LIABILITIES: Accounts Payable ^ Notes Pay- able Total Current Lia- bilities Total Current Assets CAPITAL ASSETS: Real Estate $• Plant & Equip- ment CAPITAL: Jones Brown Total Capital Assets Total All Assets Total Capital Total Capital & Liabilities Copyright, 1917, The Ronald Press Company 1-15-8 Answer to Question 40 — A trade discount is a deduction from the list price of an article and is usually deducted from the face of the invoice and the NET selling price charged to the customer. No record is ordinarily kept of trade discounts. In some businesses fluctuations in market prices are adjusted through the amount of trade discount allowed. This is done by establishing a list price (often the price at which the article is retailed) which is higher than any possible market price. Any increase or decrease of the net price at which it is to be sold is made by an adjustment of the trade discount allowed. This method allows of discrimination between customers by giving some an additional per cent without others being aware of it. It saves reprinting of catalogues, as price changes can be made through a circular stating the change in the dis- counts allowed. In calculating trade discounts, each additional per cent is calculated on the net amount left after previous discounts are deducted. If the list price is $100 with 10, 40, 7, and 5 off, 10% is deducted from $100, then 40% is de- ducted from $100 less $10 or $90, making this discount $36, not $40. The others are treated similarly, so that the net selling price is $47.71. The cash discount is a premium for the prompt payment of a debt and is al- lowed at the time of payment. Cash discounts are shown on the books. Dis- count on sales and discount on purchases are usually kept separate. There are several methods of entering cash discounts in the original books of entry: 1. The net amount of cash received or paid is entered in the cash book and the discount charged or credited, as the case may be, through the journal. Where the discounts are numerous, it necessitates a large amount of clerical work in making the entries and posting them to the ledgers. 2. The total amount which should have been received or paid is entered in the cash book and the discount treated as a receipt in case of creditors and a disbursement in case of customers. The objection to this is that two entries are made, and two postings are required the same as in No. 1. 3. A columnar cash book is used and the actual cash received or paid is entered in the first column, and the discount entered in the next column. Un- der this method, discount on sales is on the receipt side of the cash book and discount on purchases on the disbursement side. This is done to avoid rewrit- ing of the names of creditors and customers. Another advantage is that the cash and discount may easily be compared. The objection is that two postings are required, one for the cash item and the second for the discount. 4. Where a columnar cash book is used, the best method is to enter the total amount which should have been received in one column, the discount al- lowed in a second column, and the net cash received in a third column. The total of 'the cash and discount columns is equal to the total of the first column. A similar treatment is adopted for payments to creditors. Its advan- tages are: (a) Only one posting need be made to customers' or creditors' ac- counts. (b) The discount may be compared with the total sale or purchase from which it was deducted. Copyright, 1917, The Ronald Press Company 1-15-9 Answer to Question 41 — Interest is a sum paid or received for the use of money, while a cash discount is an allowance for the prompt payment of a debt within a certain time. Bank discount is the equivalent of interest, being the amount charged by the bank for the loan represented by the note discounted. Answer to Question 42-- Party from whom received Z To — Notes Receivable $ Protest Fees Note of due not paid and protested. Answer to Question 43 — The work of posting can thus be divided among sev- eral ledger clerks. By the use of controlling accounts on the general ledger the accuracy of each subsidiary ledger can be checked individually. These controlling accounts being summaries of the details in the subsidiary ledger, the general ledger keeper is enabled to prepare financial statements without waiting to obtain trial balances of the subsidiary ledgers. Answer to Question 44 — Open an account in the sales ledger headed "C. 0. D. Sales" and give one line to each sale. As the sale is made, enter the name of the purchaser in the explanation column. When the money is received, credit C. 0. D. Sales from the cash book, entering the credit on the same line as the original debit. The open items in the account represent the balance therein, 1917 Jan. 1 John Jones " 6 Alfred Tonty 1 78.50 Jan. 9 Alfred Tonty C-3 $78.50 ■ 9 Richard Ford Answer to Question 45 — A note is a written promise by one party (called the maker) to another (called the payee) to pay a certain sum of money on demand or at a certain future time. The parties are the maker, payee, and indorser. Answer to Question 46 — A bill of exchange is a written order by one party (called the maker or drawer) on another party (called the drawee) to pay to a third party (called the payee) a certain sum of money at sight or at some fu- ture time. The parties are the drawer, drawee, and payee, indorser, and ac- ceptor. Answer to Question 47 — (a) A note is a PROMISE by one party to pay a second party. (b) A bill of exchange is an ORDER by one party, directing a second party to pay a third party according to the tenor of the order, (c) A sight draft is a bill of exchange which is payable on present- ment to the drawee by the payee, (d) A time draft is a bill of exchange which is payable at a certain time after presentment to the drawee and acceptance by him, (e) A bank draft is a sight draft drawn by one bank on another bank, (f) A check is a bill of exchange drawn on a bank, payable on demand. Copyright, 1917, The Ronald Press Company C. 0, D, SALES 1917 1 125.00 1 78.50 Jan. 9 3 72.23 Answer to Question 48 — (a) Creditor $ To — Notes Payable Our note No on account. (b) Notes Receivable To — Customer Note No signed by indorsed by (c) Customer To — Notes Receivable (face of the note) Protest Fees (cash paid for protest) Note of received December 31, 1917, due January 31, 1918. Answer to Question 49 — (a) Cash Interest Paid To — Notes Receivable Discounted Note of John Doe received July 8, 1917, due September 8, 1917, discounted at City National Bank, 5%. (b) Cash Interest Paid To — Notes Payable Discounted our note at Q% at City National Bank. Answer to Question 50 — (a) John Doe To — Notes Payable Accepted draft of John Doe due January 10, 1918. (b) Notes Receivable To — Richard Roe Richard Roe accepted our draft due January 8, 1918. (c) Cash To — Customer Drew sight draft. Copyright, 1917, The Ronald Press Company 1-15-10 1-15-11 Answer to Question 51 — A controlling account is an account kept in the general ledger, consisting of a summary of the items which have been posted in a detail ledger. CUSTOMERS CONTROLLING ACCOUNT Total of opening balances per last trial balance Return sales and allowances Sales Cash Received Dishonored notes, checks, etc. , ' Notes Interest Accounts charged off Other journal debits Other journal credits Cash debits (if any) Total of closing balances CREDITORS CONTROLLING ACCOUNT Cash payments Total of opening balances Notes per last trial balance Returns and allowances Purchases Other journal debits Interest Total of closing balances Other journal credits Cash credits (if any) Answer to Question 52— Articles of partnership entered into this 1st day of January, 1917, by and between John Doe, party of the first part, and Richard Roe, party of the second part, witnesseth: 1. The said party of the first part and the party of the second part here- by agree to form a partnership for the purpose of conducting a wholesale dry goods business in the City of Chicago, State of Illinois. 2. The name of said partnership shall be Doe and Roe. 3. Said partnership shall begin on the first day of January, 1917, and continue for five years thereafter, unless sooner terminated by death of either partner or by mutual agreement. 4. Each party shall invest the sum of Twenty-Five Thousand Dollars ($25,- 000) to be paid in in cash on or before the first day of February, 1917. In case either party shall fail to pay same in full, interest shall be charged on any deficiency at the rate of 5% per annum, or the partnership may be terminated at the option of the other party to this agreement. 5. Each party hereto shall be entitled to draw an amount not to exceed $200 per month. Interest at the rate of 6% per annum shall be charged on any excess withdrawals made with the consent of the other party. In case with- drawals are made without such consent, the partnership may be terminated at the option of the other party. 6. Profits shall be divided two-thirds (2/3) to the party of the first part and one-third (1/3) to the party of the second part. 7. In the case of the death of either party the estate of the said de- ceased shall be entitled to such as his capital account appears in the balance sheet at the close of the last fiscal period, together with interest at 6% per annum thereon until the date of his death. In addition thereto he shall re- ceive as good-will, an amount equal to two times his share of the average profits of the three last completed years. The amount due said deceased shall be payable in three annual instalments and be evidenced by notes issued by the surviving partner. Copyright, 1917, The Ronald Press Company 1-15-12 8. At the close of each fiscal year the accounts of this partnership shall be audited by a Certified Public Accountant, and the balance sheet signed by each partner after due inspection. Such auditor shall be appointed by mutual consent. In case no agreement can be reached, the party of the first part shall appoint the auditor the first year and the party of the second part shall appoint the auditor the second year. 9. In case of disagreement as to any of the provisions of this agreement, same shall be referred to a board of arbitrators to consist of one member ap- pointed by the party of the first part, one member by the party of the second part, and a third to be chosen by the two members already appointed. 10. It is mutually agreed that neither party will indorse any note or be- come surety for any person without the written consent of the other party. In Witness Whereof, we have hereunto set our hands and seals in duplicate this first day of January, 1917. Signed, sealed, and delivered in the (Seal) presence of — (Party of the first part) ( Seal ) - (Party of the second part) Answer to Question 55 — Profits or losses are shared equally unless some other basis is specifically provided by the partnership agreement. Answer to Question 54 — The average investment of each partner during the period under consideration should be determined, and the profits divided in proportion to this average investment. The modus operandi may be illustrated as follows: SMITH'S CAPITAL ACCOUNT 1917 January 1 Invested $10,000.00 which remained 3 months $30,000.00 April 1 " 2,000.00 Balance $12,000.00 " " 3 " 36,000.00 July 1 Invested 3,000.00 Balance $15,000.00 " " 2 " 30,000.00 September 1 Invested 4,000.00 Balance $19,000.00 " n 1 n 19,000.00 October 1 Drew 2,000.00 Balance $17,000.00 " " 2 " 34,000.00 December 1 Drew 3,000.00 Balance $14,000.00 " « i » 14,000.00 12 " $163,000.00 Smith therefore had an average investment of $163,000 for one month, or $13,583.33 for the year. Copyright, 1917, The Ronald Press Company 1917 BROWN'S CAPITAL ACCOUNT January 1 Invested $20,000.00 which remained 6 months July 1 Drew 3,000.00 Balance $17,000.00 September 1 Drew 4,000.00 December 1 Balance $13,000.00 Invested 3,000.00 Balance $16,000.00 1 12 1-15-13 $120,000.00 34,000.00 39,000.00 16,000.00 $209,000.00 Brown therefore had an average investment of $209,000 for one month or $17,416.67 for the year. Smith's average investment (as above) $163,000.00 Brown's " " ( " " ) 209,000.00 Total $372,000.00 Therefore Smith is entitled to 163/372 and Brown to 209/372 of the $22,500 profits, or $9,858.87 and $12,641.13 respectively. The following method of ascertaining the average investment gives the same results: 1917 SMITH'S CAPITAL ACCOUNT January 1 Invested $10,000.00 for 12 months $120,000.00 April 1 ■ 2,000.00 " 9 " 18,000.00 July 1 " 3,000.00 " 6 " 18,000.00 September 1 " 4,000.00 " 4 » 16,000.00 Total invested for one month October 1 Drew out $2,000.00 for 3 months December 1 " 3,000.00 "1 * Total drawn out for one month Average investment for one month 1917 BROWN'S CAPITAL ACCOUNT January 1 Invested $20,000.00 for 12 months December 1 ■ 3,000.00 " 1 * Total invested for one month July 1 Drew out $3,000.00 for 6 months September 1 " 4,000.00 "4 " Total drawn out for one month Average investment for one month $ 6,000.00 3,000.00 $240,000.00 3,000.00 $ 18,000.00 16,000.00 $172,000.00 9,000.00 $163,000.00 $243,000.00 34,000.00 $209,000.00 Copyright, 1917, The Ronald Press Company 1-15-14 Answer to Question 55 — In a sale, the title to the goods passes to the purchaser at the time of sale. In a consignment, title remains in the con- signor until the goods are sold by the consignee, even though the goods are temporarily in the possession of the consignee. Where a sale is made the seller has a civil claim for the purchase price. He must wait until the claim is due according to the terms of the sale before any collection can be made. If the purchaser should become bankrupt in the meantime, he will receive such proportion of the assets as the total of his claim bears to the total of all unsecured claims. Where goods are consigned, they are still the property of the consignor. He is entitled to the value thereof immediately when they are sold and can recall the goods when he pleases or transfer them to another con- signee. If the consignee should become bankrupt, he is entitled to the actual goods and does not have to share the value thereof with other creditors. If the consignee does not remit when the goods are disposed of, the consignee is criminally liable for conversion. Where goods are sold, the seller must as- certain the purchaser's ability to pay; where the goods are consigned, the consignor is concerned only with the honesty of the consignee. On the other hand, the consignor may be willing to sell but the consignee may not be willing to buy, because he doubts his ability to pay for same when due, or that the goods are salable, although he is willing to give them a trial. If he purchases outright, he must pay whether the goods have been sold or not. If he receives them on consignment, he pays when the goods are dis- posed of and the consignor takes the risk of their salability. Answer to Question 56 — Capital assets are those of a permanent nature, with which the business is being conducted, such as real estate, machinery, etc. Current assets are those in which the business is dealing, or the result of the conversion of such assets. Examples are inventories, accounts receiv- able, cash, etc. Floating assets are the same as current assets. Fixed as- sets are the same as capital assets. Liquid assets are those which can easily be converted into cash, such as marketable stocks and bonds, notes, accounts, etc. Sometimes the inventory is a liquid asset. Liquid assets are often called quick assets. Capital liabilities are the more or less permanent contributions to the operation of a business; such as partners' investment, or stock issued, or long-time mortgage obligations. Current liabilities are those which must be met within a short period of time, such as notes payable, accounts payable, etc. Fixed liabilities are the same as capital liabilities. Floating lia- bilities are the same as current liabilities. Answer to Question 57 — Inventories should be valued at "cost or market, whichever is the lower." The reason for this is that no profits can be an- ticipated, but all losses must be provided for. If purchases have been made on a falling market, it is not conservative to place a higher value on an in- ventory item than the price at which the same thing can be duplicated in the open market. It may seem inconsistent to advocate a somewhat different prin- ciple when purchases have been made on a rising market and where goods cannot be duplicated, except at a higher price. In this case, however, the conserva- tive course is to carry the items at cost and thus do away with the objection- able practice of anticipating profit. No profit is earned until a sale is made to a solvent debtor. Duty and freight paid may be added. Copyright, 1917, The Ronald Press Company 1-15-15 "A practice which deserves condemnation is that of pricing finished goods at sales prices, less an estimated cost of delivery. This anticipates the en- tire profit on such sales, for it cannot be said that a profit is ever earned iintil delivery has been made and a cause of action established against a sol- vent debtor. The fact that goods may be made up on the order of a responsi- ble purchaser in no way alters the principle. Until delivery has been made and the goods accepted, the sales contract is not complete. It is not uncom- mon for orders to be cancelled or goods refused for so many reasons that they cannot be enumerated here. Therefore, no conservative manufacturer or other business man considers that any profit is earned on undelivered goods." (Mont- gomery — Auditing) Discussing the same point, A. Lowes Dickinson says: "Perhaps one of the most difficult questions which accountants have to decide is the correct enumeration and valuation of stocks on hand. The theory governing the valua- tion of this asset is that, inasmuch as no profits can be realized until the goods are actually sold, it is not safe to take credit for any profit thereon until a sale has been effected; that therefore it should be carried forward at the exact cost and no profit thereon brought into the accounts of the fiscal period. On the other hand, it may be found that the prices both of the raw materials and the finished product have at the close of the fiscal period fallen below their cost, and while it is impossible to say until the goods have been sold whether any loss will ultimately be sustained thereon, at any rate there is a possibility thereof. It is therefore conservative to set aside a sufficient reserve out of profits which have been realized on goods already sold to provide for the accruing loss on those which remain on hand. Hence the general rule for valuation of stocks on hand, namely, 'cost or mar- ket, whichever is the lower,* has been evolved and is adopted by the most con- servative commercial institutions." Copyright, 1917, The Ronald Press Company 1-15-16 Solution to Assignment 1-14-5 Exhibit A MILLER BROS. BALANCE SHEET, APRIL 30, 19— ASSETS CAPITAL ASSETS: Delivery Equipment $ 1,750.00 Warehouse and Office Fixtures 1,450.00 $ 3,200.00 CURRENT ASSETS: Inventory of Merchandise Consignments Miscellaneous Supplies Advances on Consignments-Inward Customers* Accounts Notes Receivable Less — Notes Receivable Discounted Cash Petty Cash Fund PREPAID EXPENSES: Unexpired Insurance Rent Paid in Advance $35,890.00 3,200.00 $39,090.00 300.00 1,100.00 35,542.00 100.00 3,776.84 $10,100.00 10,000.00 $ 3,676.84 100.00 79,908.84 $ 50.00 200.00 250.00 $83,358.84 LIABILITIES AND CAPITAL CAPITAL ACCOUNTS: Fred Miller: Balance, March 1, 19 — $15,000.00 Profit for March and April 2,835.23 $17,835.23 Less — Withdrawals 210.00 $17,625.23 August Miller: Balance, March 1, 19 — $15,000.00 Profit for March and April 1,417.61 16,417.61 CURRENT LIABILITIES: Accounts Payable $36,080.00 Notes Payable 10,000.00 Bank Loan 3,000.00 Taxes Accrued 200.00 Interest Accrued on Notes Payable 36.00 49,316.00 $83,358.84 Copyright, 1917, The Ronald Press Company 1-15-17 Exhibit B MILLER BROS. STATEMENT OF PROFIT AND LOSS TWO MONTHS ENDING APRIL 30, 19— ACCESSORIES GROSS SALES LESS — Return Sales Allowances on Sales Freight-Out Total Deductions from Sales NET SALES Cost of Sales (Exhibit C) GROSS PROFITS FROM SALES ADD— GROSS PROFITS ON CONSIGNMENTS: Consignments-Outward Consignments-Inward GROSS PROFITS FROM OPERATION SELLING AND ADMINISTRATIVE EXPENSES: Salesmen's Salaries and Commissions Salesmen's Traveling Expenses Miscellaneous Selling Expenses Delivery Expenses Advertising Insurance Expense Office Salaries and Expenses General Expenses Rent Taxes NET PROFITS FROM OPERATION MISCELLANEOUS INCOME: Interest Received Discounts on Purchases LESS — Interest paid Discounts on Sales SURPLUS NET PROFITS (carried to Exhibit A) To be divided as follows: Fred Miller 2/3 August Miller 1/3 AUTOS $42,312.00 AND SUPPLIES $60,165.00 TOGETHER $102,477.00 $ 2,000.00 200.00 85.00 $ 1,710.00 10.00 100.00 $ 3,710.00 210.00 1^5.00 $ 2,285.00 $ 1,820.00 $ 4,105.00 $40,027.00 26,300.00 $58,345.00 49,330.00 $ 98,372.00 75,630.00 $13,727.00 $ 9,015.00 $ 22,742.00 $ 3,200.00 2,820.00 6,020.00 $10,840.00 300.00 1,544.00 878.00 5,150.00 10.00 5,495.00 162.00 200.00 200.00 $ 28,762.00 24,779.00 $ 87.34 864.50 $ 3,983.00 951.84 $ 178.00 504.00 $ 4,934.84 682.00 Lhibit A) $ 2,835.23 1,417.61 $ 4,252.84 $ 4,252.84 Copyright, 1917, The Ronald Press Company 1-15-18 Exhibit C MILLER BROS. STATEMENT SHOWING COST OF SALES TWO MONTHS ENDING APRIL 30, 19— ACCESSORIES AUTOS AND SUPPLIES TOGETHER PURCHASES $47,800.00 $55,570.00 $103,370.00 Freight-In 500.00 360.00 860.00 $48,300.00 $55,930.00 $104,230.00 LESS — Return Purchases 3,600.00 3,600.00 NET PURCHASES $48,300.00 $52,330.00 $100,630.00 LESS — Increase in Inventories 22,000.00 3,000.00 25,000.00 COST OF SALES (carried to Exhibit B) $26,300.00 $49,330.00 $ 75,630.00 Copirright, 1917, The Ronald Press Company I-16-L COMPLETE ACCOUNTING COURSE— PART I Lecture 16 CORPORATIONS; VENDOR'S PROCEDURE UPON SALE OF SINGLE PROPRIETORSHIP OR PART- NERSHIP TO CORPORATION Problem 13 The following is the balance sheet of Smith & Williams at December 31, 1917: SMITH & WILLIAMS BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Real Estate Furniture & Fixtures J6,000.00 1,790.00 CAPITAL AND LIABILITIES CAPITAL: Fred Smith $20,000.00 Amos Williams 15,000.00 Total Capital Assets $ 7,790.00 CURRENT ASSETS: Merchandise $6,713.00 Accounts Re- ceivable 8,552.00 Notes Receivable 9,009.00 Cash in Bank $6,790.24 Cash on Hand 43.76 6,834.00 Total Capital CURRENT LIABILITIES: "Notes Payable $ 2, 000. CO V Accounts Pay- able 1,898.00 $35,000.00 Total Current Liabili- ties 3,898.00 Total Current Assets Total All Assets 31,108.00 $38,898.00 >^ Total Capital and Lia- bilities $38,898.00 v: The Grocers' Company was organized under the laws of the state of Maine with an authorized capital stock of $75,000 divided into 750 shares, par value $100 each. Smith and Williams transfer their net assets and good-will in ex- change for $50,000 payable in stock. Prepare the entries necessary to wind up the books of the partnership. Copyright, 1917, The Ronald Press Company 1-16-2 MISCELLANEOUS QUESTIONS Question 58 — Outline the essential differences between a partnership and a corporation. Question 59 — If, in Problem 13, the Grocers' Company paid $30,000 in stock for the net assets of Smith & Williams, what disposition would you make on the books of the firm of the difference between book value and purchase price? Question 60 — What are some of the reasons why a corporation might wish to pay less (measured in terms of par value of capital stock given in exchange) than the book value of the net assets taken over from a firm? Question 61 — What is your understanding of the terms "vendor" and "ven- dee"? Illustrate their use. WORK TO BE DONE IN THE PRACTICE SET The business having proven profitable. Miller Bros, decide to expand their selling organization and to engage also in the manufacture of motor cars. To secure the necessary capital they organize a corporation in conjunction with P. J. Kirkwood. At a meeting of the organizers Mr. Kirkwood, who was in charge of the legal work, reports as follows: The Miller Motor Car Co. is to be incorporated under the laws of the state of New Jersey, with an authorized capital stock of $200,000, divided into 7% preferred stock $100,000 and common stock $100,000. He also reports that he has secured the following subscriptions: 7% PREFERRED STOCK COMMON STOCK Trad Miller 250 shares Fred Miller 366 shares August Miller 250 n August Miller 134 n P. J. Kirkwood 150 n P. J. Kirkwood 100 n B. F. Goodrich Co. 120 • S. K. Stevenson 100 N A. J. Smallton 130 n Fred Higgins 150 N S. K. Stevenson 100 R N Frank Holloway 150 II 1,000 1,000 Fred Miller submitted a proposition from Miller Bros, offering to transfer by bill of sale, the net assets and good-will (which is valued at $66,000) of Miller Bros, in consideration of $100,000 to be paid in the stock of the Miller Motor Car Co., as follows: 7% Preferred Stock 500 shares Common Stock 500 " In event the adjusted balance sheet of Miller Bros, shall show net assets in excess of or below the said $100,000, such excess or deficit shall be ad- justed by a payment of cash to or by the company, as the case may be. The proposition was accepted, the transfer effected, and stock certifi- cates issued, Fred Miller instructs you to make the entries required to transfer the net assets to the Miller Motor Car Co. in accordance with the foregoing agreement. Preliminary thereto it will be necessary to set up on the books of Miller Bros, the asset of good-will. Copyright, 1917, The Ronald Press Company 1-16-3 CORPORATIONS DEFINITION — A corporation is an artificial person created by law for cer- tain purposes which are stated in its charter. It is an organization of per- sons specially authorized by law to act as one person. It must be borne in mind that it is an artificial entity, separate and distinct from smy of its stockholders. " DISTINGUISHED FROM A PARTNERSHIP — A partnership is a contract relation be- tween two or more individuals. The law recognizes only the individuals, and the relation binds only the partners themselves. A corporation, as such, is distinct from its stockholders ; the law recognizes the corporation, not the stockholders. This distinction is illustrated in the case of title to real estate. A partnership, as such, cannot buy or sell real estate, for the law does not recognize it. One of the partners must buy or sell it on behalf of the firm. In the case of a corporation, all of its stockholders together could not buy or sell its real estate, for the law does not recognize them. The corporation, as a corporation, must buy or sell. KINDS — Corporations are divided into two broad classes: public and. pri- vate. The former is composed of municipal corporations (cities and villages) and quasi-municipal corporations (counties and subdivisions of the state). Private corporations consist of stock and non-stock corporations, the former made up of all corporations organized for profit (including public utilities or "quasi-public" corporations), the latter of clubs, fraternal organizations, mutual societies, charitable institutions, etc. FORMATION — In the United States corporations must be organized under the laws of a state, territory, or the federal government. These laws differ ma- terially in some instances and offer various advantages and disadvantages to businesses incorporated under them. Corporations carrying on their main op- erations in one state may be incorporated, because of more favorable laws, in another. The "charter" of a corporation consists of a document filed by the promot- ers of the corporation (called commissioners) with the secretary of state or other designated officer, setting out certain points required by law which usually are: 1. Name 2. Object 3. Kinds of stocks, amounts and numbers of shares 4. Place of business 5. Life of corporation 6. Names of incorporators (commissioners) The charter having been approved by the secretary of state a "certificate of complete organization" is issued to the commissioners. Copyright, 1917, The Ronald Press Company 1-16-4 ADVANTAGES OF INCORPORATION — The chief advantages of incorporation are: ABILITY TO SECURE GREATER CAPITAL — Many enterprises will not be floated by a single individual because he may be unwilling to risk his entire property under a partnership organization or in a joint-stock company. Corporate or- ganization offers £in attractive investment both for the small capitalist and for the larger capitalist. The former can invest small amounts while the latter can divide the risk of his investments over a wider field without the attendant problems of management. PERMANENCE. A partnership is automatically dissolved by the death or re- tirement of one of the partners unless otherwise provided in the partnership agreement. A corporation exists for the term stated in the charter unless sooner dissolved by vote of the stockholders. It is independent of the death of any of its owners, or any change in the list of stockholders. IMPROVED ORGANIZATION. The authority to be exercised by the various offi- cers and board of directors is much more clearly defined in the corporate or- ganization than in the partnership. Business may be done only with duly qualified officers ; no stockholder, as such, has power to transact business with outsiders. TRANSFERABILITY. A partner cannot dispose of his interest without the consent of the other partners nor can he pledge his interest as security. The holder of corporation shares can sell them whenever and to whom he pleases and can also pledge them as security. LIMITED LIABILITY. The liability of a stockholder (except in special cases) is limited to the amount of his original investment as indicated by the par value of the shares he holds, v;hile that of a partner extends to his en- tire private fortune. DISADVANTAGES OF INCORPORATION — Some of the disadvantages of incorporation are: LIMITED CREDIT. A corporation may find itself embarrassed after its or- ganization, in that creditors, though willing to extend credit to the old firm with its unlimited liability, may hesitate to extend the same credit to the new organization with its liability limited to the investment of its owners, and in many cases the officers as individuals are required by creditors to indorse the company notes. RESTRICTED POWERS. The charter of a corporation definitely limits its powers, and the consent of the state must be obtained for any change therein. Thus, in Illinois, a corporation cannot deal in real estate nor can it pur- chase shares of another corporation. The present tendency is to form corpora- tions with broad powers and the importance of this restriction is lessening, GOVERNMENTAL SUPERVISION. The increasing control by state and federal boards over private corporations is a factor to be considered in some cases. The burdens imposed by the government in the way of reports, fees, taxes, and supervision in general may prove burdensome. Copyright, 1917, The Ronald Press Company 1-16-5 STOCKHOLDERS — Stockholders are the owners of the corporation, correspond- ing to the partners in a partnership. Their relation to the business is very different, however, from that of partners since they take no active part (ex- cept as directors or officers) in its operation. Their evidence of ownership is the "shares" or stock of the corporation which may be transferred at the will of the owner. Stockholders have the right, at common law, to make the by-laws of the corporation, and to elect a board of directors who are respon- sible to the stockholders for the manner in which the corporation is operated. The by-laws of a corporation may be originated or changed by the board of directors without consent of the stockholders where such authority is granted to the board by the laws of the state, or by the charter or by action of the stockholders. BOARD OF DIRECTORS — Directors are in general responsible for the direction and management of the corporation's affairs. Their powers and duties are out- lined by the by-laws. Officers are appointed by them and the directors must pass upon all transactions of the business outside the scope of authority of the officers. OFFICERS — The number of officers, their titles and responsibilities vary in different kinds of corporations. Their combined duties are to operate the corporation in accordance with the provisions contained in the charter and by- laws and with the powers delegated to them by the board of directors. BY-LAWS — In order that the organization may be well defined and the rela- tions, duties, and rights of officers clearly understood, by-laws are enacted containing a definite statement of these matters. The following points are usually covered: 1. When and where annual meeting of stockholders will be held 2. Number of directors, when they are to be elected, and place of their meetings 3. Officers and their duties 4. Salaries 5. Depositories 6. Provisions governing transfer of stock 7. Seal VENDOR'S PROCEDURE UPON SALE OF SINGLE PROPRIETORSHIP OR PARTNERSHIP TO CORPORATION The procedure to be followed in case the net assets of a single proprie- torship are transferred to a partnership has been shown in 1-8-3. The pro- cedure to be followed in case the sale had been made to a corporation would clepend somewhat on the manner in which the transaction was effected. General- ly, a formal bill of sale is prepared which specifies the assets to be trans- ferred, the liabilities to be assurilSd, the valuations upon which the sale is made, and the manner in which payment is to be made by the vendor. The more common cases to be dealt with are: 1. Assets transferred at a different valuation from that appearing on the books of the vendor. 2. Assets trcinsferred at a lump sum valuation which includes good- will. Copyright, 1917, The Ronald Press Company 1-16-6 CASE 1 — The assets may be sold at a greater or less valuation than the book figures. The first step is to adjust the book figures to the new valua- tions, the contra debit or credit being made to Profit and Loss account inas- much as this is a realized profit or loss. The assets as revalued are then transferred to the vendee and entry made for the consideration received. (1) Various Assets (in detail) $ To — Profit and Loss $ To adjust the book figures to the valuations set out in bill of sale dated (Note: Losses upon various assets would be credited to the asset accounts and charged to Profit and Loss.) (2) Vendee — To — Assets (in detail) To record transfer of assets to as per bill of sale dated (3) Liabilities (in detail) To — Vendee To record assiimption of liabilities by Vendee. (4) Cash, Stock, or Other Consideration To — ^^Vendee To record receipt of payment in full for net assets transferred, (5) Capital Account To — Cash, Stock, or Other Consideration To record distribution of assets on hand. CASE 2 — Where the net assets are sold for a lump sum which is in excess of ■the book valuation, and such excess cannot be attributed to any one or more of the assets disposed of, it is evident that an intangible asset, which may be called Good-will, has also been sold. This frequently occurs where the sale covers not merely the book assets but also the business as a going concern. Assuming the net assets in Case 1 were $30,000, and that the Vendee paid |40,- 000 for the business as a going concern, the first entry to be made would be: Good-will $10,000.00 .To — Profit and Loss (or direct to Capital Account) $10,000.00 To take up good-will realized on sale of business to JJntries 2, 3, 4, and 5 would then be made as in Case 1, Copyright, 1917, The Ronald Press Company 1-16-7 If the vendor does not deem it advisable to show the character of the con- sideration received, entries (4) and (5) may be combined, thus: Capital Account $• To — Vendee To close Vendee's account. Payment for net assets made directly to REFERENCES : Bentley, "Science of Accounts," pages 31-36 Oilman, pages 284-294 Greendlinger and Schulze, pages, 230-251 Copyright, 1917, The Ronald Press Company 1-17-1 C OMPLETE ACCOUNTING COURSE — PART I Lecture 17 CAPITAL STOCK Problem 14 ' Referring to Problem 13, prepare the necessary journal entries to open the books of the Grocers* Company. MISCELLANEOUS QUESTIONS Question 62 — James Brown, William Harper, and Charles Edwards have formed the American Motor Truck Co., with an authorized capital stock of $100,000. Brown subscribes for 500 shares. Harper and Edwards for 250 shares each, cash to be paid in full on allotment. The subscriptions are made January 1, 1917, allotments March 1, 1917. Prepare the necessary entries to record the above facts. . Question 63 — Suppose in the above case Brown, Harper, and Edwards had each subscribed for 250 shares, the balance remaining unissued. What entries would you make? Question 64 — Assume in the case cited in Question 63 that instead of cash being paid in full on allotment, only 50% of the par value is to be paid in cash on allotment, balance to be paid when called for. Wherein would the entries differ? Question 65 — Assuming the facts in Question 62, if Brown, Harper, and Edwards on March 2, 1917, donated 30 shares each to the corporation for the purpose of raising working capital, what entries would be required, the do- nated stock having been disposed of by the corporation at $90 per share on March 15, 1917? Question 66 — What is the difference between "capital" and "capital stock" of a corporation? Explain in detail. WORK TO BE DONE IN THE PRACTICE SET Referring to 1-16-2, prepare the opening entries to be made on the books of the Millor Motor Car Co. : (a) To record the subscriptions, (b) To record the assets purchased. (c) To record the liabilities assumed. (d) To record the payment for the net assets purchased. Copyright, 1917, The Ronald Press Company Solution to Assignment 1-16-2 ENTRIES REQUIRED ON BOOKS OF MILLER BROS. TO RECORD SALE OF NET ASSETS TO THE MILLER MOTOR CAR CO. 1-17-2 (1) Good-will To — Fred Miller — Capital Account August Miller — Capital Account To set up value of good-will on sale of net assets to Miller Motor Car Co. $ 66,000.00 44,000.00 22,000.00 (2) Miller Motor Car. Co., Vendee 159,316.00 To — Good-will 66,000.00 Delivery Equipment 1,750.00 Warehouse & Office Fixtures 1,450.00 Inventories of Merchandise 35,890.00 Miscellaneous Supplies 300.00 Customers Ledger 35,542.00 Notes Receivable 10,100.00 Advances on Consignments- Inward 1,100.00 Consignment Stock Outward 3,200.00 Cash 3,634.00 Petty Cash Fund 100.00 Unexpired Insurance 50.00 Rent Paid in Advance 200.00 To record the transfer of assets in accord- ance with bill of sale dated April 29, 19—. (3) Creditors Ledger 36,080.00 Notes Payable 10,000.00 Notes Receivable Discounted 10,000.00 Taxes Accrued 200.00 Interest Accrued on Notes Payable 36.00 Bank Loan 3,000.00 To — Miller Motor Car Co., Vendee 59,316.00 To record the liabilities assumed by Miller Motor Car Co., per bill of sale. (4) Miller Motor Car Co. — Common Stock Miller Motor Car Co. — Preferred Stock To — Miller Motor Car Co. , Vendee To record receipt of payment in full for net assets trgmsferred per bill of sale. 50,000.00 50,000.00 100,000.00 Copyright, 1917, The Ronald Press Company 1-17-3 (5) Fred Miller—Capital Account $61,625.23 August Miller — Capital Account 38,417.61 To — Miller Motor Car Co.— Common Stock $50,000.00 Miller Motor Car Co. — Preferred Stock 50,000.00 Cash 42.84 To distribute assets on hand as follows: FRED MILLER AUGUST MILLER TOGETHER 7% Preferred Stock $25,000.00 $25,000.00 $50,000.00 Common Stock 36,600.00 13,400.00 50,000.00 Cash 25.23 17.61 42.84 $61,625.23 $38,417.61 $100,042.84 Copyright, 1917, The Ronald Press Company 1-17-4 CAPITAL STOCK DEFINITION OF CAPITAL STOCK — "Capital Stock" signifies the sum total of certificates of ownership of a corporation expressed in number of shares or in the aggregate "par value" of shares. VALUE — The PAR VALUE of a share of stock is the amount appearing on its face and is known also as its "nominal" value. Thus, a corporation when organ- ized is authorized to issue a limited number of shares of a stated par value. In certain states the par value must not exceed specified limits ; in Illinois the par value must not be less than $10 per share nor greater than $100 per share. In a few states, notably New York, shares may be issued without par value under certain conditions. The BOOK VALUE of capital stock is the net work of the corporation "per books" (Capital Stock and Surplus). MARKET VALUE of stock is the price which it will yield when sold on the market. No two of these three values need be alike. KINDS OF CAPITAL STOCK — There are two general classes of capital stock: 1. COMMON STOCK. Common stock is the ordinary stock of a corporation, having no special privileges. When the stock of a corporation is all of one kind, it is common stock. 2. PREFERRED STOCK. Stock issued under conditions whereby it is entitled to special privileges: for instance, to receive a specified dividend to be paid out of profits before any dividend can be paid on common stock. Pre- ferred stock may be cumulative or non-cumulative, voting or non-voting, and, in case of liquidation, preferred as to assets over common stock or not pre- ferred as to assets. If preferred stock is cumulative, the specified dividend for each year during which the stock is outstanding must be paid before common stock may receive a dividend. Since preferred stocks vary greatly, the face of each stock certificate should plainly indicate its character. In case this information is absent, or obscure, it has been held that "preferred stock" is cumulative as to profits but not preferred as to assets in case of liquidation. There may be several classes of preferred stock in the same corporation, such as "First Preferred," "Second Preferred," etc. PAYMENT FOR CAPITAL STOCK ISSUED — Stock may be paid for in either one or all of three ways: (1) by cash; (2) by property transfers; and (3) by labor or service. SUBSCRIPTIONS — Stock subscriptions are enforceable promises in writing to pay on a certain agreed date or dates or to pay upon "call" or demand an amount usually equaling the par value of a certain number of shares. Only after a certain number of shares have been subscribed for and a certain amount paid in (in cash, property, or services) can the corporation, as such, com- mence business. In Illinois, the law requires that the entire amount of capi- tal stock authorized must be fully subscribed for and at least one-half paid in before the commencement of operations. Allotment takes place when the subscribers to capital stock are determined upon. Allotment may precede, or be concomitant with, the final payment of subscriptions. Copyright, 1917, The Ronald Press Company 1-17-5 Some states allow the forfeiture of subscriptions past due, the subscriber having been duly notified. In most states the law holds that no portion of the amount already paid in need be refunded unless a subsequent sale of the stock representing the subscription yields a sum in excess of the amount due from the delinquent subscriber. ACCOUNTING FOR CAPITAL STOCK 1. WHEN ORIGINALLY ISSUED OR SUBSEQUENTLY TRANSFERRED — (a) SUBSCRIPTION BOOK. The subscription book is a book of original or memorandum entry in which are recorded the names and addresses of the sub- scribers and the number and par value of the shares subscribed by each. A separate subscription book is kept for each class of capital stock. (b) SUBSCRIPTION OR INSTALMENT LEDGER. An account is kept for each sub- scriber, showing as debits the amount of the subscriptions and credits for the payments when made. The Subscriptions account in the general ledger will con- trol this subsidiary ledger. When the stock is paid there will be no further use for this ledger. (c) STOCK CERTIFICATE BOOK. The stock certificate book is a bound record containing perforated sheets one or more of which are filled out with the name of the stockholder and the number of shares the certificate represents. The certificates are removed at the time of issue and sent to the stockholders as evidence of their proprietorship in the corporation. A stub for each cer- tificate remains in the book ; cancelled certificates are pasted to the corre- sponding stub. The stock outstanding will be represented, therefore, by the "open" stubs in the stock certificate book. The stock certificate book is kept by the secretary. Where the amount of work is heavy, a "Transfer Agent" (usually a trust company) is appointed. (d) STOCK LEDGER. In most states the law requires that the capital stock outstanding shall be detailed in a record called a stock ledger. This in any case is necessary where the subscribers are at all numerous. The stock ledger, in effect, is a recapitulation of the stock certificate book. An ac- count is kept with each stockholder. This account is credited for the amount of stock (par value) issued to him and debited for any transfers shown by the transfer book, at which time a credit is made to the transferee's account. The balance of each account shows the par value of the stockholder's holdings and forms the basis for computing the dividends to be distributed. Separate stock ledgers are kept for each class of stock. Where the amount of work involved is large, a "Registrar" (usually a trust company) is ap- pointed. (e) TRANSFER BOOK. The transfer of shares requires merely an adjustment between the accounts in the stock ledger. The transfer book is a journal con- taining the original entries necessary to adjust the accounts and to record the following information: (1) Date of transfer (2) Kind of stock transferred (3) Numbers of certificates surrendered (4) Numbers of certificates issued in exchange (5) Number of shares (6) N£une of transferrer (7) Name of transferee Copyright, 1917, The Ronald Press Company 1-17-6 2. WHEN ORIGINALLY UNISSUED OR ISSUED AND SUBSEQUENTLY ACQUIRED — It is necessary to distinguish carefully the terms used in connection with the shares of the corporation which have been reacquired or never issued: (a) TREASURY STOCK. Stock which has been fully paid for and has been re- acquired by the corporation, through purchase or gift, is known as TREASURY STOCK. On the balance sheet it appears either as an asset (if intended to be resold within a short period of time) plainly labeled and standing between capital and current assets, or deducted (at par) from the capital stock au- thorized in order to bring out the amount of stock "issued and outstanding." DONATED STOCK (treasury stock acquired through gift) may be distinguished by a separate caption, if desired. (b) UNISSUED STOCK. Unissued stock refers to stock authorized but as yet unissued. It is merely a ledger account which allows the total authorized issue to be shown on the general ledger. On the balance sheet it must be de- ducted from the authorized issue. (c) UNSUBSCRIBED STOCK. Unsubscribed stock differs from unissued stock in that the latter may have been subscribed for but for some reason never issued. The two terms, however, are generally synonymous. On the balance sheet they should be deducted from the authorized capital stock, and are never under any circumstances shown as an asset. OPENING THE BOOKS OF A CORPORATION The entries to be made to open the books of a corporation depend upon: 1. The facts in the case, 2. Limiting provisions in the statutes of the state in which the com- pany is organized. CASE 1 — A corporation is capitalized at $100,000, all stock fully sub- scribed for and the subscriptions paid in full in cash: (a) Subscriptions $100,000.00 To — Capital Stock $100,000.00 To record the authorized issue and sub- scriptions therefor. (b) Cash 100,000.00 To — Subscriptions 100,000.00 To record receipt of payment in full. CASE 2 — A corporation is capitalized at $100,000, of which $50,000 has been subscribed for, the subscriber paying one-half in cash and one-half in notes: (a) Subscriptions $ 50,000.00 Unsubscribed Stock • 50,000.00 To — Capital Stock $100,000.00 To record authorized capital stock and amount subscribed for. Copyright, 1917, The Ronald Press Company 1-17-7 (b) Cash $25,000.00 To—Subscriptions 125,000.00 One-half total subscriptions paid in cash. (c) Notes Receivable 25,000.00 To— Subscriptions 25,000.00 One-half total subscriptions paid in notes. CASE 3 — The Lawndale Manufacturing Co. is organized with a capital stock of $400,000, divided into |20Q,000 1% preferred stock and $200,000 common stock, par value $100 per share. The company buys the net assets of Richards & Harlem, per balance sheet given below, for $400,000, to be paid for in 200 shares of preferred stock and 200 shares of common stock: RICHARDS & HARLEM BALANCE SHEET, JANUARY 1, 1917 Plant, Machinery, and Tools $200,000.00 Richards — Capital Account $100,000.00 Inventories 50,000.00 Harlem — Capital Account 125,000.00 Other Current Assets 50,000.00 Accounts Payable 75,000.00 $300,000.00 $300,000.00 ENTRIES ON THE BOOKS OF THE CORPORATION THE LAWNDALE MANUFACTURING CO. Organized under the laws of THE STATE OF MAINE With an Authorized Capital Stock of $400,000.00 divided equally into 7% Preferred Stock and Common Stock. Par value of Shares $100.00 each (a) Unissued 7% Preferred Stock $200,000.00 Unissued Common Stock 200,000.00 To — 1% Preferred Stock Authorized $200,000.00 Common Stock Authorized 200,000.00 To record the authorized capital. (1)) Plant, Machinery, and Tools 200,000.00 Good-will 175,000.00 Inventories 50,000.00 Other Current Assets 50,000.00 To — Richards k Harlem, Vendor 475,000.00 To record the purchase of the assets of Richards & Harlem, per bill of sale dated January 1, 1917. See resolution of Di- rectors (minute book, page ). Copyright, 1917, The Ronald Press Company 1-17-8 (c) Richards & Harlem, Vendor $ 75,000.00 To — Accounts Payable $ 75,000.00 To record assumption of the liabilities of Richards & Harlem. (d) Richards & Harlem, Vendor 400,000.00 To — Unissued 7% Preferred Stock 200,000.00 Unissued Common Stock 200,000.00 To record payment in full for net assets acquired. CASE 4 — In Case 3 if the stock had all been subscribed for and the prop- erty received in payment of the subscriptions, entry (a) would be: Subscriptions — 7% Preferred Stock ^200,000.00 Subscriptions — Common Stock 200,000.00 To — 7% Preferred Stock $200,000.00 Common Stock 200,000.00 To record authorized capital and subscrip- tions thereto. and entry (d) recording the payment for net assets acquired would be: Richards & Harlem, Vendor $400,000.00 To — Subscriptions — 7% Preferred Stock $200,000.00 Subscriptions — Common Stock 200,000.00 To record payment of subscriptions in full. See resolution of Board of Directors, minute book, page — . CASE 5 — If, in Case 3, the agreed purchase price was 100 shares of pre- ferred stock and 100 shares of common stock, the entries from (b) on would be: (b) Plant, Machinery, and Tools $200,000.00 Inventories 50,000.00 Other Current Assets 50,000.00 To— Richards & Harlem, Vendor $300,000.00 To record purchase, etc. (c) Richard & Harlem, Vendor 75,000.00^ To— Accounts Payable ' 75,000.00 To record assumption, etc. (d) Richards & Harlem, Vendor $225,000.00 To— Unissued Preferred Stock 100,000.00 Unissued Common Stock 100,000.00 Capital Surplus 25,000.00 To record settlement in full for net assets acquired. Copyright, 1917, The Ronald Press Company 1-17-9 CASE 6 — In order to raise working capital, the stockholders donate 200 shares of the 7% preferred stock to be sold on the market for cash and these shares are subsequently disposed of at $80 per share. Donated (or Treasury) Stock $20,000.00 To — Capital Surplus $20,000.00 200 shares of 7% preferred stock donated to be sold for cash to provide working capital. Cash 16,000.00 Capital Surplus 4,000.00 To — Donated Stock 20,000.00 200 shares of preferred stock donated sold at $80 per share. The Capital Surplus appearing in the last two cases represents the excess of assets over liabilities and capital stock. It is obvious that a business cannot start operations on the purchase of its assets, nor with a profit made up of donations from its stockholders. On the balance sheet Capital Surplus is set out as a separate item between capital and current liabilities or fol- lowing current liabilities. Capital Surplus is referred to later in a discus- sion of surplus. REFERENCES : Bennett, Chapter XIII Dickinson, pages 127-133 Esquerre, Chapter IV Oilman, pages 303-323 Hatfield, Chapters VIII-IX Klein, pages 115-132, 138-145 Montgomery, pages 133-134, 137 Copyright, 1917, The Ronald Press Company 1-18-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 18 BONDS; VOUCHER SYSTEM Problem 15 The following balance sheet was prepared by the bookkeeper of the Johnson Shoe Co. : JOHNSON SHOE COMPANY BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Plant and Equip- ment $300,000 Good-will 50,000 $350,000 LIABILITIES CAPITAL STOCK: Authori25ed Issue CURRENT LIABILITIES: $250,000 CURRENT ASSETS: Capital Stock Unissued $ Capital Stock Repurchased Inventories of — Raw Materials Unfinished Goods Finished Stock Stationery & Supplies Accounts Receivable Cash 15,000 10,000 25,000 3,000 12,000 1,000 44,000 10,000 120, ,000 (due Jan. 1, 1918) Accounts Payable Bank Loans SURPLUS : Balance, Jan. 1, 1917 Profits for year $100,000 40,000 50,000 $20,000 10,000 $470, ,000 30,000 $470,000 $150,000 first mortgage 5% bonds were authorized and disposed of for cash at par on December 31, 1917. The purpose of the issue was to pay off the mortgage and bank loans, the former being due on the following day, as indi- cated, and the latter on various dates in January. Assuming the method of stating surplus to be correct, rearrange the bal- ance sheet to give expression to the issue of bonds and receipt of cash and to whatever other adjustments you may think necessary to display properly the fincmcial condition of the business on December 31, 1917. MISCELLANEOUS QUESTIONS Question 67 — A certain issue of bonds is entitled: "Forty-year Convertible Five Per Cent Gold Coupon Bonds.* Explain the significance of the terms used. Copyright, 1917, The Ronald Press Company 1-18-2 Question 68 — Outline the nature of postings to the Vouchers Payable ac- count under the following situations: (a) Where the amount column in the voucher register contains the amount appearing on the invoice before deducting the cash dis- count. (b) Where the amount column in the voucher register contains the amount of the invoice less cash discount. Question 69 — Explain how the voucher register serves the double purpose of both book of original and of final entry. Question 70 — (a) Give, in journal entry form (a journal entry need not be made when actually posting, however), the monthly postings from the voucher record of the Miller Motor Car Co., using imaginary figures and omitting some of the distribution columns. (b) Supposing the register to contain a special coliimn for accounts pay- able, how would the above entry be modified? WORK TO BE DONE IN THE PRACTICE SET Record the entries opening the books of the Miller Motor Car Co., post, and submit a balance sheet of the new corporation at May 1. MILLER MOTOR CAR CO. SCHEDULE OF ACCOUNTS EFFECTIVE MAY 1 ACCOUNT 101 Land 306 102 Buildings 102R Reserve for Depreciation of 308 Buildings 309 103 Machinery, Tools, and Equipment 321 103R Reserve for Depreciation of 322 Machinery, Tools, and Equipment 326 104 Office and Warehouse Fixtures 326D 104R Reserve for Depreciation of 327 Office and Warehouse Fixtures 105 Delivery Equipment 328R 105R Reserve for Depreciation of De- 329R livery Equipment 351 151 Good-will 352 201 Investments 356 251 Subscriptions — 7% Preferred Stock 401 252 Subscriptions — Common Stock 402 271 Sinking Fund Assets 403 301 Inventory of Automobiles 302 Inventory of Work in Progress 451 303 Inventory of Raw Materials 501 304 Inventory of Finished Parts 502 ACCOUNT Inventory of Miscellaneous Supplies Consignment Stock Outward Advances on Consignment-Inward Fred Miller — Personal Account Customers* Accounts Notes Receivable Notes Receivable Discounted Accrued Interest on Notes Receivable Reserve for Bad Debts Reserve for Discounts Cash in Bank Petty Cash Fund Advances to Salesmen Unexpired Insurance Rent Paid in Advance Prepaid Interest on Notes Payable Discount on Common Stock Capital Stock — 7% Preferred Capital Stock — Common Copyright, 1917, The Ronald Press Company 502U Unissued Common Stock 911 551 5% First Mortgage Bonds 921 551U Unissued 5% First Mortgage Bonds 922 561 6% First Mortgage Bonds 923 601 Notes Payable 924 611 Bank Loan 925 621 Audited Vouchers 926 631 Dividends Payable — Common Stock 632 Dividends Payable — Preferred Stock 927 651 Accrued Interest on Notes Payable 928 652 Accrued Bond Interest 929 653 Accrued Taxes 941 654 Accrued Pay-roll 942 661 Miller Bros., Vendor 943 662 Babcock Bros., Vendor 944 663 Best Automobile Co., Vendor 945 701 Sinking Fund Reserve 946 711 Surplus 947 801 Sales — Automobiles 801A Allowances on Sales — Automobiles 961 802 Sales — Finished Parts 802A Allowances on Sales — Finished 962 Parts 963 802D Discounts on Sales — Finished 964 Parts 965 851 Automobiles — Cost of Sales 969 852 Finished Parts — Cost of Sales 981 881 Discount on Purchases 982 882 Interest Received 991 886 Consignment Earnings 992 901 Purchases of Raw Material 996 902 Purchases of Finished Parts 999 1-18-3 Direct Labor Indirect Labor Repairs — Plant and Equipment Heat, Light, and Power Royalties Shop Supplies Depreciation on Buildings, Machinery, Tools, and Equip. Insurance Taxes Miscellaneous Factory Expenses Salesmen's Salaries Salesmen's Traveling Expenses Advertising Freight-Out Delivery Equipment Maintenance Depreciation of Delivery Equip. Miscellaneous Selling Expenses (including Rent) Depreciation of Office and Ware- house Fixtures Office Salaries Salaries of Officers Stationery and Printing Bad Debts Miscellaneous General Expenses Bond Interest Other Interest Paid Trading Account — Automobiles Trading Account — Finished Parts Profit and Loss Dividends 322A District #1 322B District #2 322C District #3 322D District #4 CUSTOMERS LEDGER 322E District #5 322F District #6 322G District #7 322H District #8 1-account pages 991-2; 996-9 2-account pages 251-2, 271; 309-321; 322-6; 601-611; 621-631 3-account pages, balance The following books of account will be kept: 1. Six-coliamn Journal (Form 4) 2. Sales Book (Form 5) 3. Return Sales Book (Form 6) 4. Record of Audited Vouchers (Forms 8 and 8-a) 5. Record of Cash Receipts (Form 11) 6. Record of Checks Drawn (Form 12) 7. Ledger pages (Forms 13, 14, and 15) In addition there may be assumed to exist a stores ledger and other cost records which the student will not keep and which will be explained later. Copyright, 1917, The Ronald Press Company 1-18-4 SUMMARY OF TRANSACirONS MAY 1 The board of directors has issued a call for 50% of the unpaid preferred stock subscriptions to be paid in cash today. Receive in response thereto — P. J. Kirkwood $ 7,500.00 B. F. Goodrich Co. 6,000.00 A. J. Smallton 6,500.00 S. K. Stevenson 5,000.00 125,000.00 In this connection an instalment ledger may be kept and the detail items posted thereto. (Credit "Subscriptions — 7% Preferred Stock" in cash book for $25,000.) MAY 2 In the corporation work the purchase register and creditors ledger will not be used, the audited voucher record replacing them. Accounts formerly carried in the creditors ledger will be transferred to the audited voucher record, as follows: DISCOUNT SUNDRY GENERAL NO. DATE NAME DETAIL AMOUNT ON PURCH. ACCOUNTS LEDGER 1 May 1 N. Y. Auto Sup. Co. Taken over $29,500.00 $ Audited $29,500.00 from Vouchers Miller Brothers 2 " Weil-Built Auto Co. 4,850.00 150.00 " 5,000.00 3 " Star Auto Co. 1,580.00 " 1,580.00 (It is assumed that the proper voucher will be made immediately for each purchase whether for cash or on account. All vouchers should be entered in the audited voucher record and the payment recorded in the cash book. No dis- bursement can be made except by voucher properly prepared. It is the intention of the company to have sufficient cash on hand to take advantage of all possible cash discounts. Therefore, in entering purchases on the voucher record, the NET amount of the invoice should be entered in the "Amount" column; the cash discount should be entered in the "Discount on Pur- chases" column; and the TOTAL amount of the bill should be charged to the proper accounts in the distribution coliimns. Thus at any time the total of the "Amount" and "Discount" columns will be equal to the total of all distri- bution columns.) Send check to District Manager #1 for salesmen's traveling expenses, per reports, $168. (Voucher #4 made and check #1 issued.) Receive from District #1 $110 for C. 0. D. shipment to John Lange of April 8. (For- sales purposes the country has been divided into sales districts. In the sales ledger an account will be kept with each district to which all sales therein will be charged and returns credited per the district managers' re- ports. Charges and credits will be the totals of these reports instead of each individual item as would be the case in actual practice, thus condensing the clerical work. Accounts now on books are in District #1.) Send check to Weil-Built Automobile Co. for $5,000, less the 3% discount allowed by them. Copyright, 1917, The Ronald Press Company 1-18-5 MAY 3 The board of directors has authorized the purchase of the Babcock Bros, automobile plant for $175,000, payable as follows: $5,000 down at date of signing the contract May 3; 2 notes for $10,000 each, due May 31 and June 30 respectively, with interest at 6% per annum; balance to be paid in bonds of this company. By resolution duly carried at a stockholders' meeting a bond issue of $150,000 is authorized, to consist of a serial issue of 15 first mortgage gold bonds for $10,000 each, maturing yearly during 15 years, with interest at 5%, payable November 1 and May 1 (journal). The board has ap- praised the land at $25,000, buildings $50,000; machinery, tools, etc., $100,- 000. A voucher is made for $5,000 and check issued. The 15 bonds are issued in favor of Babcock Bros., and also the two notes. Sold the 2 automobiles of the Midland Motor Co. for $1,500 each to George Heck (District No. 1 account). Sent the following account sales with check for the net proceeds: ACCOUNT SALES SALES $3,000.00 DEDUCT— Commission $ 300.00 Freight 100.00 Advances 1,000.00 1,400.00 NET PROCEEDS remitted $1,600.00 5,025.00 N 2% 15 R N 30 1,687.50 n 2% 10 n n 30 1,927.80 n 2% 10 n n 30 1,836.00 n 2% 10 N N 60 MAY 4 Received the following shipments: Stahl Steel Works, Raw Material $3,286.85 terms 1% 10 days, net 30 days Automobile Accessories Mfg. Co. Finished Parts B. F. Goodrich Co., Finished Parts Standard Wheel Co., Finished Parts Washed Coal Co., Heat, Light, and Power 1,836.00 It may be assumed that vouchers have been made on receipt of goods. They should, therefore, be entered at once in the voucher register. MAY 5 Babcock Bros, have offered to accept $19,850 as full payment of their notes due May 31 and June 30 respectively. A special meeting of the board is called and by resolution the treasurer is authorized to accept same. Where- upon the board authorizes the treasurer to pay the amount by check and issues a call for 50% on the preferred stock and 20% on the common stock, to be paid in cash May 8. (No entry on the general books until cash is received.) The sales for the week per district managers' reports are: DISTRICT CARS FINISHED PARTS 1 $795.65 3 541.20 4 $6,000.00 286.75 Jeunes Garage Co. , being unable to sell the two automobiles consigned to them on April 17, returned them. (Debit Inventory of Automobiles account.) Copyright, 1917, The Ronald Press Company 1-18-6 MAY 7 A voucher check is issued to order of "Pay-roll" veek ending May 5, as follows: Direct Labor Indirect Labor Repairs — Plant and Equipment Heat, Light, and Power Salesmen's Salaries Office Salaries for the total pay-roll. $2,871.46 1,313.89 1,082.75 126.00 385.00 87.50 $5,866.60 Also pay freight bills rendered by Penn. R. R. Co. amounting to $331.26, of which $98.43 is chargeable to Raw Materials and $232.83 to Finished Parts, Solution to Assignment 1-17-1 ENTRIES TO OPEN THE BOOKS OF MILLER MOTOR CAR CO. MILLER MOTOR CAR CO. ' Organized under the laws of THE STATE OF NEW JERSEY With an Authorized Capital Stock of $200,000.00 divided into 1,000 Shares of 7% Preferred Stock and 1,000 Shares Common Stock, Par Value $100.00 (1) Subscriptions — 7% Preferred Stock To — 7% Preferred Stock To record subscriptions as follows: $100,000.00 $100,000.00 Fred Miller August Miller P. J. Kirkwood Co. B. F. Goodrich Co. A. J. Smallton S. K. Stevenson Total $ 25,000.00 25,000.00 15,000.00 12,000.00 13,000.00 10,000.00 $100,000.00 Copyright, 1917, The Ronald Press Company (2) Subscriptions to Common Stock To — Common Stock To record subscriptions as follows: $100,000.00 1-18-7 $100,000.00 Fred Miller August Miller P. J. Kirkwood S. K. Stevenson Fred Higgins Frank Holloway Total $ 36,600.00 13,400.00 10,000.00 10,000.00 15,000.00 15,000.00 $100,000.00 (3) Office and Warehouse Fixtures 1,450.00 Delivery Equipment 1,750.00 Good-will 66,000.00 Inventory of Automobiles 30,000.00 Inventory of Finished Parts 5,890.00 Inventory of Miscellaneous Supplies (Stationery and Printing) 300.00 Consignment Stock Outward 3,200.00 Advances on Consignments Inward 1,100.00 Customers Ledger 35,542.00 Notes Receivable 10,100.00 Cash in Bank 3,634.00 Petty Cash Fund 100.00 Unexpired Insurance 50.00 Rent Paid in Advance 200.00 To — Miller Bros., Vendor To record assets acquired by purchase per bill of sale dated See resolution of Board of Directors dated and recorded in their Minute Book, page properly prepared. (4) Miller Bros., Vendor TO — Notes Receivable Discounted Notes Payable Bank Loan Audited Vouchers Interest Accrued on Notes Payable Taxes Accrued To record the liabilities assumed per bill of sale above referred to. 59,316.00 159,316.00 10,000.00 10,000.00 3,000.00 36,080.00 36.00 200.00 Copyright, 1917, The Ronald Press Company 1-18-8 (5) Miller Bros., Vendor $100,000.00 To — Subscriptions — 7% Preferred Stock $ 50,000.00 Subscriptions — Common Stock 50,000.00 To record the issue of 500 shares of 7% Pre- ferred Stock, par value $100, and 500 shares of Common Stock, par value $100, in full payment for net assets acquired under bill of sale above referred to. Solution to Problem 13 (1) Good-will $15,000.00 To~Fred Smith $ 7,500.00 Amos Williams 7,500.00 To record value of good-will on transfer of net assets to Grocers' Company. (2) Grocers' Company, Vendee 63,898.00 TO — Real Estate 6,000.00 Furniture and Fixtures 1,790.00 .Good-will y .15,000.00 Merchandise 6,713.00 Accounts Receivable 8,552.00 Notes Receivable 9,009.00 Cash in Bank 6,790.24 Cash on Hand 43.76 To record transfer of assets to Grocers' Com- pany, per bill of sale dated (3) Notes Payable 2,000.00 Accounts Payable 1,898.00 To — Grocers' Company, Vendee 3,898.00 To record assumption of liabilities by the "^ Grocers' Company. (4) Grocers' Company — Capital Stock \j 50,000.00 To — Grocers' Company, Vendee 50,000.00 To record receipt of payment in full for net assets transferred. (5) Fred Smith — Capital Account 27,500.00^ Amos Williams — Capital Account 22,500.00 To — Grocers' Company — Capital Stock , 50,000.00 To record distribution of stock to partners. Copyright, 1917, The Ronald Press Company 1-18-9 ANSWERS TO QUESTIONS Answer to Question 58 — (a) A corporation must secure the consent of the State before engaging in business, and is subject to certain regulations which do not affect a partner- ship. A partnership may be organized without consulting any public authority. It is simply a contract between the members. (b) Partners are usually liable for partnership debts to the full extent of their private fortunes, while the owners of the corporation are usually liable only for the amount of their subscriptions. (c) Partnerships may engage in any business; corporations are restricted to the purposes set forth in their charters. (d) Each partner is entitled to share in the management. In a corporation the board of directors controls the current operations. In a corporation the stockholders vote in proportion to their holdings for directors who alone have authority over the corporate property and business. These directors appoint officers to transact the business. The stockholders, as such, have no au- thority in the corporate affairs. Each partner is the agent of the others, and may perform any act within the scope of the partnership and by that act bind the other partners. (e) Partners cannot dispose of their interests without the consent of the other members. Stockholders can sell their shares of stock at will. (f ) The death, insanity, or insolvency of a member of a firm dissolves the firm. The death, insolvency, or insanity of a stockholder has no effect on the continuity of the life of a corporation. (g) A corporation has an entity separate from its members. It can sue its members and can be sued by them. Partners cannot sue the partnership of which they are a member, nor can the partnership sue one of its members. Answer to Question 59 — The difference of $5,000 would be a loss to be charged to the partners in accordance with the provision in their partnership agreement covering the division of profits and losses. Answer to Question 60 — (a) The values of various assets may have been overstated on the books of the firm on account of insufficient provisions for depreciation, failure to distinguish properly between capital and revenue expenditures, over-valuation of inventory, etc. (b) If the stock is to remain in the hands of a few parties, they may wish to capitalize merely for a nominal amount, the proportionate shares re- maining the same whether a high or low capitalization exists. (c) The earning power of the business might be such as to warrant only the price paid; i. e. , the capitalized earning power might be less than the value of the net assets per books. The book figures, however, might still be prop- erly valued from the viewpoint of the going concern, although if the business were liquidated the book values might not be realized. Answer to Question 61— A vendor is one who by bill of sale transfers prop- erty to another. The vendee is the party to whom the property is transferred. The terms are used to differentiate purchases or sales in the ordinary course of business from the occasional purchase or sale of a plant or other large asset or a complete going concern. Copyright, 1917, The Ronald Press Company 1-18-10 BONDS NATURE OF BONDS — If a corporation borrows money, notes or bonds may be given to evidence the transaction. Notes are usually preferred when one or more of the following conditions are present: (1) a small amount, (2) a few persons willing to advance the sum, or (3) a short period to run. Bonds are superior where the amount (1) is large, (2) is secured from a number of people, and (3) runs for a period of years. Bonds are more formal than notes, are executed under seal, possess a larger degree of marketability, and are usually secured. by a lien on property of the borrower. Bonds have a par value similar to capital stock, but the range of par values is much larger, running usually from $100 to $10,000. Bonds are a direct obligation of the corporation and therefore differ ma- terially from stock. Moreover, interest on bonds must be paid before any dividends can be declared, and in case of liquidation bondholders are usually secured as to principal. AUTHORIZATION — Unless otherwise provided by statute or by-laws, the power to issue bonds lies in the board of directors. A provision is usually found in the by-laws making necessary the consent of the stockholders in case the issue of bonds necessitates the mortgaging of corporate property. TRUST DEED — The trust deed is an instrument conveying title of properties of a borrowing corporation to a trustee for the purpose of insuring the rights of bondholders. It contains full details of the contract between corporation and bondholders. KINDS OF BONDS — In general, bonds may be divided, in terms of negotia- bility and form, into two classes: coupon and registered bonds. 1. Coupon bonds are usually payable to bearer both as to principal and interest, although in some cases they are registered as to principal. Coupons are the interest warrants attached to the bond and are "clipped" when accrued and treated as cash by banks. The coupons are numbered consecutively. 2. Owners of registered bonds are recorded on the books of the corpora- tion, and any changes in the ownership must also be recorded on its books. This is accomplished by surrendering the old bond, properly indorsed, and re- ceiving a new one in exchange. A registered bond is, therefore, non-negoti- able. Interest is paid to the registered bondholders by check. From the viewpoint of underlying security, bonds may be fully secured, partially secured, or unsecured. 1. The secured bond is the most common type. Its security may be personal property (equipment trust bonds, collateral trust bonds, etc.), real property (terminal bonds, construction bonds, etc.), or both real and personal property (general mortgage bonds, etc.). The security usually extends to both princi- pal and interest. 2. Partially secured bonds are illustrated by income bonds. Here the principal is usually secured by the terms of the trust deed, but interest is wholly dependent on the earning of income by the corporation. The interest may or may not be cumulative. Copyright, 1917, The Ronald Press Company 1-18-11 3. Unsecured bonds are termed "debentures* or debenture bonds. While they are obligations of a corporation, they are not ordinarily secured by a lien or mortgage on particular assets as are the secured and partially secured bonds. If default occurs, either as to principal or interest, debenture bondholders cannot foreclose. Other types of bonds commonly referred to are: 1. Convertible bond — one which may be converted under stated condi- tions into some security of the corporation, usually stock. 2. Serial bonds are those which are retired serially — a certain number annually until the entire issue has been redeemed. 3. Consolidated bonds are bonds issued in exchange for various other types of bonds in effecting a simplification of the financial structure. 4. Redeemable bonds are those which may be purchased, under certain conditions, by the issuing corporation, before their normal ma- turity. 5. Interest bonds are bonds given for interest payments in lieu of cash. 6. Refunding bonds are bonds exchanged for old issues matured or re- tired. AMOUNT OF BONDS — Various state laws prohibit the issue of bonds beyond a certain limit. For instance in Illinois the amount of bonds must not exceed the amount of capital stock. In the case of public utilities, most states re- quire that the amounts and kinds of bonds issued must bear the approval of the utilities commission of that state. ENTRIES REQUIRED — The accounting for bonds is comparatively simple. Bonds may be paid for outright or in instalments. For registered bonds a subsidiary record should be kept, a page being devoted to each registered bondholder. The following cases are illustrative. Assume that in all these cases, the authorized issue is $500,000. The first entry will, therefore, be: -July 1, 1917- Unissued First Mortgage Bonds $500,000.00 To — First Mortgage 6% Bonds $500,000.00 To record authorized issue of 6% Thirty- Year First Mortgage Bonds. See minutes. Board of Directors, page ; also con- current action at stockholders' meeting held on CASE 1 — Part of the bonds are sold at par for cash: Cash (as received) $400,000.00 To — Unissued First Mortgage Bonds $400,000.00 To record payment of entire issue dis- posed of. Copyright, 1917, The Ronald Press Company 1-18-12 CASE 2 — Others of the bonds are sold at par and accrued interest for cash: -September 1, 1917- Cash $ 50,500.00 To — Unissued First Mortgage Bonds $ 50,000.00 Interest Accrued on First Mortgage Bonds 500.00 To record sale of 50 bonds at par and ac- crued interest. CASE 3 — If the bonds are subscribed for smd paid in instalments: Bond Subscriptions $500,000.00 To — Unissued First Mortgage Bonds $500,000.00 To record subscriptions to bonds as fol- lows (give details). Cash 100,000.00 To — Bond Subcriptions 100,000.00 To record receipt of first instalment. Cases involving discount and premium on bond sa?.es will be taken up later. VOUCHER SYSTEM DEFINITION — A voucher system is a method of keeping an orderly record of every expenditure incurred by a business. This system includes the use of a "voucher" supporting each check drawn and a "voucher record" in which the vouchers are entered and summarized. KINDS OF VOUCHERS — The voucher consists usually of a paper on which are entered the details of the expenditure, including a distribution to the various ledger accounts affected, number of the voucher (vouchers are numbered consecutively) , number of the check, and signatures of clerks and officials who have prepared and checked the voucher and approved it for payment. The original invoice and other necessary supporting data are attached to the voucher before it is finally filed av;ay. Before the voucher is paid, it is filed numerically in the "Unpaid Vouchers" file and after payment in the "Paid Vouchers" file. In most cases vouchers are prepared after invoices have been checked and are, therefore, customarily referred to as "audited vouchers." In some cases the voucher is prepared when payment is made ; under such circum- stances there are no "unpaid audited vouchers." A "voucher check" is a combined voucher and check, similar in form to the voucher described above, except that the outer face of the voucher now repre- sents a check. The advantage of this form is that the creditor's indorsement receipts both the payment and details thereof. There is an attempt in some cases to have the ordinary voucher receipted by enclosing it with the check sent ; however, the voucher may not be returned, or more often not promptly re- turned, and thus the files will be incomplete. Vouchers may be made in duplicate, triplicate, etc., depending on the particular system followed. Copyright, 1917, The Ronald Press Company 1-18-13 VOUCHER RECORD OR REGISTER — The voucher register is a book of original en- try in which all vouchers prepared are entered in numerical order. The money columns of this register usually consist of an amount column, a discount column, and a series of distribution columns headed by the names of the most common expenditure accounts. Expenditures not falling under these headings are put in a special column, usually at the extreme right of the page, to- gether with the name of the account to be debited opposite the amount. Postings are made from the voucher record periodically (usually monthly), the amounts posted being the totals of the various distribution columns, ex- cept that in the miscellaneous or sundry column at the extreme right each item must be posted individually to the account named. The total of the amount column is posted to the credit of an Audited Vouchers or Vouchers Payable ac- count in the general ledger. The total of the discount column is posted to the credit of Discount on Purchases. That portion of a check representing a dis- count not taken advantage of will be debited to the Discount or Purchases ac- count. By providing contiguous to the amount (or Vouchers Payable) column a column headed "Accounts Payable" or "Creditors Ledger," a subsidiary ledger can be maintained for those few creditors with whom running or current ac- counts are kept. Otherwise, since usually a check is eventually made out for each voucher, the voucher register may serve as a book of final entry by in- serting a "Date Paid" or "Check Number" column; the sum of the vouchers not indicated "paid" should equal the balance of the Audited Vouchers (or Vouchers Payable) account in the general ledger. The discount column may be omitted from the voucher register and in that case would appear in the cash book. This would be desirable if not all dis- counts are taken advantage of. REFERENCES : Bennett, pages 197-251 Esquerre, pages 34-38 Gilman, pages 203-211 Copyright, 1917. The Ronald Press Company 1-19-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 19 RECORDS OF A MANUFACTURING BUSINESS MISCELLANEOUS QUESTIONS Question 71 — Many manufacturing concerns charge freight-inward direct to the materials accounts. Do you consider this correct accoiinting practice? Question 72 — A certain manufacturing business builds several machines for its own use. Three methods are suggested as proper for ascertaining the value at which they are to be charged to the Machinery accoimt: (a) On the basis of prime cost (raw materials and labor). (b) On the basis of prime cost plus a portion of factory overhead ex- penses which have been distributed in the usual way. (c) On the basis of the cost of the machines if purchased on the open market, i.e., manufactured by another business. What one of these bases, if any, is the correct one, in your opinion? Question 73 — A company purchased a tract of land for $20,000 and erected a factory. Three years later several other companies locating near them paid from 1/3 to 1/2 more for similar tracts. The management desires to raise the book value to $25,000 on the ground that the land is fully worth that sum. The matter is referred to you, as the accountant, for an opinion. WORK TO BE DONE IN THE PRACTICE SET SUMMARY OF TRANSACTIONS MAY 8 Receive on account of preferred stock Call No. 2, cash as follows: P. J. Kirkwood % 7,500.00 B. P. Goodrich Co. 6,000.00 A. J. Smallton 6,500.00 S. K. Stevenson 5,000.00 Total $25,000.00 On account of common stock Call No. 1: P. J. Kirkwood % 2,000.00 S. K. Stevenson 2,000.00 Fred Higgins 3,000.00 Frank Holloway 3,000.00 Total $10,000.00 Copyright, 1917, The Ronald Press Company 1-19-2 District managers report the following collections for the past week: Cash (District #1) $2,024.90 Discounts Allowed (District #1) 34.25 $2,059.15 Notes Receivable (District #1) 3,000.00 Total $5,059.15 (Enter cash and discount in the cash book, notes receivable in the j ournal . ) Increase petty cash fund by a check in favor of petty cashier for $100. MAY 9 Insurance on the factory is taken out from the National Fire Insurance Co, Premium for one year $870, net 5 days. MAY 10 A national advertising campaign is authorized by a resolution of the board of directors, who appropriate $70,000 for this purpose. The contract is awarded to the U. S. Advertising Co., and an initial payment of $1,000 is made. The remainder will be paid as the monthly bills are received, MAY 11 Bank reports that the note of the James Garage Co. for $10,000, which was discounted, has been paid. MAY 12 Received shipments as follows: B. F. Goodrich Co., Finishtd Parts $5,640.00 terms 2% 10 days, net 30 days Automobile Accessories Manufacturing Co. , Finished Parts Standard Wheel Co., Finished Parts Stahl Steel Works, Raw Material Best Drop Forge Works, Raw Material Specialties Manufacturing Co., Finished Parts MAY 14 Summary of district managers' sales reports for the week: FINISHED PARTS $ 398.68 125.00 768.23 478.44 95.40 7,732.75 H 2% 15 n n 30 2,099.50 n 2% 10 n n 30 1,787.00 m 1% 10 n n 30 2,701.25 n 2/2% 5 n N 30 1,202.85 n June 1 DISTRICT CARS #1 $ 4,885.00 2 4,300.00 3 2,600.00 4 7,900.00 5 900.00 $20,585.00 $1,865.75 Copyright, 1917, The Ronald Press Company 1-19-3 Pay-roll for the week: Factory: Direct Labor Indirect Labor Repairs Heat, Light, and Power Office: Salesmen's Salaries Office Salaries $3,754.32 2,643.12 765.43 138.00 $7,300.87 $ 412.50 115.25 527.75 $7,828.62 Pay our note for $10,000 in favor of Weil-Built Auto Co., with interest for 30 days at 6^. (Charge interest to Accrued Interest on Notes Payable.) Pay Penn. R. R. Co, $547.28, of which $207.50 is chargeable to Raw Ma- terials and $339.78 to Finished Parts. Also pay the Grand Trunk R. R. $58.75 freight on finished parts. Petty cashier surrenders receipts for $187.50, of which $68 is for stationery and printing, $37.25 for miscellaneous general ex- penses, and $82.25 for local advertisinc. Check for $487.50 is issued to him. The $300 additional is for the purpose of increasing the petty cash fund to $500. MAY 15 Report of collections for the past week: TOTAL CASH DISCOUNTS CREDITS TO NOTES RECEIVED DISTRICT CASH ALLOWED CUSTOMERS ON ACCOUNT #1 $1,465.15 $27.13 $1,492.28 $1,750.00 3 1,647.40 32.18 1,679.58 1,700.00 4 1,304.20 5.96 1,310.16 2,200.00 Total $4,416.75 $65.27 $4,482.02 $5,650.00 Pay the following bills: Stahl Steel Works B. F. Goodrich Co, Standard Wheel Co. Washed Coal Co. National Fire Insurance Co. Invoice of May 4 MAY 16 Receive shipment of machinery from the Edmond Machinery Co. In accordance with the terms of the purchase, remit check for $2,000 and our note for $3,500 for 30 days, interest at 5%, for the balance of the purchase price. Buy of Williams & Richards, shop supplies, to be delivered immediately, terms net 30 days, amount of invoice $356.25. MAY 17 Issue check to August Miller to pay salesmen's traveling expenses, per re- ports rendered, $307.81. Copyright, 1917, The Ronald Press Company 1-19-4 MAY 18 Shipments received from: B. F. Goodrich Co., Finished Parts $4,775.00 terms 2% 10 days, net 30 days Automobile Accessories Manufacturing Co., Finished Parts Specialties Manufacturing Co., Finished Parts New Idea Lamp Co., Finished Parts 6,923.50 R 2% 15 2,882.50 n June 1 827.75 N 2% 10 30 60 MAY 19 Sales for week per district managers' '•eports DISTRICT CARS #1 $ 4,200.00 2 14,900.00 3 3,900.00 4 11,560.00 5 13,125.00 7 7,000.00 $54,685.00 FINISHED PARTS $1,033.75 401.28 968.17 632.23 1,142.75 354.50 $4,532.68 Pay invoices as follows: Automobile Accessories Mfg. Co. Invoice May 4 Best Drop Forge Works " "12 Borrow $10,000 from the First National Bank. Give our demand note bearing 5% interest. MAY 21 Pay-roll for week: Factory: Direct Labor Indirect Labor Repairs, Plant and Equipment Heat, Light, and Power Unloading and setting up machinery (charge Machinery, Tools, and Equipment) Office: Salesmen's Salaries Office Salaries Freight bills for the week: $87.38 paid to Grand Trunk R. R. Co. and chargeable to Finished Parts; $352.02 paid to the Penn. R. R. Co., of which $57.65 is chargeable to Raw Material and $294.37 to Finished Parts. Best Drop Forge Works have refused to allow the discount taken on their invoice of May 12, as payment was not made within the time limit. Send them check for $67.53. $4,546.32 1,987.30 643.27 128.00 103.50 $7,408.39 $ 880.60 128.70 1,009.30 $8,417.69 Copyright, 1917, The Ronald Press Company r 1-19-5 Solution to Problem 14 THE GROCERS' COMPANY Organized under the laws of THE STATE OF MAINE With an Authorized Capital Stock of $75,000.00 divided into 750 Shares, par value $100.00 each. (1) Unissued Stock $75,000.00 To—Capital Stock $75,000.00 To record the amount of Capital Stock authorized. (2) Real Estate 6,000.00 Furniture and Fixtures 1,790.00 Good-will 15,000.00 Merchandise 6,713.00 Accounts Receivable 8,552.00 Notes Receivable 9,009.00 Cash in Bank 6,790.24 Cash on Hand 43.76 To—Smith & Williams, Vendors 53,898.00 To record purchase of assets of Smith & Wil- liams, per bill of sale dated See resolution of Board of Directors, recorded in their minute book, page. ••• (3) Smith & Williams, Vendors 3,898.00 To — Notes Payable 2,000.00 Accounts Payable 1,898.00 To record assumption of liabilities of Smith & Williams. (4) Smith k Williams, Vendors 50,000.00 To — Unissued Capital Stock 50,000.00 To record payment in full for net assets acquired from Smith & Williams, per bill of sale dated Copyright, 1917, The Ronald Press Company ANSWERS TO QUESTIONS Answer to Question 62 — 1-19-6 -January 1, 1917- Subscriptions $100,000.00 To — Capital Stock To record subscriptions to authorized capital stock as follows: $100,000.00 James Brown William Harper Charles Edwards 500 shares 250 " 250 " 1,000 -March 1, 1917- Cash To — Subscriptions To record payment in full. 100,000.00 100,000.00 Answer to Question 63~ - January 1, 1917- Unsubscribed Stock Subscriptions To — Capital Stock To record subscriptions to authorized capital stock as follows: $ 25,000.00 75,000.00 $100,000.00 James Brown William Harper Charles Edwards 250 shares 250 " 250 " 750 -March 1, 1917- Cash To — Subscriptions To record payment in full. 75,000.00 75,000.00 Answer to Question 64 — Entry at January 1 would be the same. The entry at March 1, 1917, would be as follows: Cash To — Subscriptions 50% paid in. $37,500.00 $37,500.00 Copyright, 1917, The Ronald Press Company Answer to Question 65— 1-19-7 f -March 2, 1917- Donated Stock $9,000.00 To — Capital Surplus $9,000.00 The following donations of capital stock are made for the purpose of raising working capital ; see action of Board of Directors as recorded in their minutes, page James Brown 30 shares, par value of |3,000.00 William Harper 30 " « ■ « 3,000.00 Chas. Edwards 30 " " " "3,000.00 Total 90 • • ■ ■ $9,000.00 -March 15, 1917- Cash 8,100.00 Capital Surplus 900.00 To — Donated Stock 9,000.00 The shares contributed by James Brown, William Harper, and Chas. Edwards are disposed of at $90 per share. Answer to Question 66 — The capital of a sole proprietorship or partnership consists of the original investment plus the portion of profits not withdrawn from the business and is represented by the capital accounts kept. That is, the capital of a partnership on a certain date is the sum of its capital ac- counts on that date. In a corporation, however, the profits are kept separate from the capital invested, the profits being put in a Surplus account. Ordi- narily, therefore, the capital of a corporation is the sum of its Capital Stock account and Surplus account. But it will be shown later that the capi- tal contributed by the owners of a corporation need not always be expressed by the Capital Stock account (e.g., donated stock creates a "capital surplus" which is part of the contributed capital), nor may the profits remain in the Surplus accouatf Copyright, 1917, The Ronald Press Company 1-19-8 RECORDS OF A MANUFACTURING BUSINESS ASCERTAINING THE COST OF GOODS SOLD — In a trading concern there is but one element in the cost of goods sold: the purchase price, to which is added freight-in and other expenses of bringing the goods to the warehouse. In a manufacturing business the following elements should be set out: 1. RAW MATERIAL is the material which must pass through manufacturing processes that alter its original condition before it is ready for sale as a finished product. Its cost is the invoice price to which is added freight, cartage, and other costs necessary to lay the same down in the factory. Where an adequate cost system is provided, a perpetual inventory (see below) of raw materials is kept, controlled usually by a ledger account. That part of materials used which can be allocated to some particular job or process is referred to as "direct material" ; the balance may be referred to as indirect material. 2. LABOR is divided into direct (productive) and indirect (non-productive) labor. Direct labor can be allocated to some particular job or process, while indirect labor, such as foremen, repair-men, timekeepers, watchmen, etc., can- not be distributed except over the operations as a whole. 3. INDIRECT FACTORY EXPENSES, BURDEN, or FACTORY OVERHEAD include all other expenses of factory operation outside of direct material and direct labor charges, such as indirect material, indirect labor, supplies, rent, taxes, insurance, depreciation, repairs and maintenance, heat, light, power, etc. Some kinds of indirect expense can be allocated directly to a certain product or process, while others must be distributed over the product as a whole. The correct allocation of indirect expenses forms one of the most difficult problems in cost accounting. The first two items compose what is called "prime cost," while the sum of all three items is termed "factory cost." Factory cost is the basis of de- termining the valuation of inventories and cost of goods sold. General and administrative expenses and selling expenses should not be confused with burden or factory overhead; they correspond to a similar classi- fication in a trading business (see 1-14-6) and do not enter into the cost of finished stock sold or on hand. INVENTORY ACCOUNTS KEPT A manufacturing business which keeps an adequate record of its costs main- tains three inventory accounts: (1) Raw Materials, (2) Work in Process, and (3) Finished Stock. These accounts may appear in the "factory" ledger de- scribed below, or in the general ledger, RAW MATERIALS ACCOUNT DEBIT . CREDIT With balance at beginning of period. With goods returned. With cost of purchases. At the end of period with totals of With freight- and cartage-inward. materials issued to operating de- With handling and storage costs. partments, at the same time debit- ing Work in Process account, the posting coming from a requisitions, j ournal . Copyright, 1917, The Ronald Press Company 1-19-9 The balance of the account will be a debit and represents the cost of raw materials on hand and not in process and should agree with a physical inven- tory of raw materials on hand as well as the total of the accounts carried in a raw materials stores ledger. The latter record is often a card ledger, a card being kept for each class of raw materials. The card is ruled to re- cord the receipts into stock and the deliveries from stock, and provides in some cases for the expression of receipts and deliveries in terms of units of measurement, unit price and cost price, in others merely in terms of the units of measurement. WORK IN PROCESS ACCOUNT DEBIT CREDIT With balance at beginning of period. With the totals of the cost sheets With totals of materials issued to representing work completed, at the operating departments, at the same same time debiting Finished Stock time crediting Raw Materials ac- account, the posting coming from a count, the posting being made from finished stock journal, a requisitions journal. With costs of direct labor, posted from pay-roll book, the contra credit being to Wages Accrued ac- count. With various items of indirect fac- tory expense, at the same time crediting these various expense accounts. The balance of the account will be a debit and represents the work in proc- ess at the end of the period. A total of the cost sheets representing work unfinished should equal the balance of this account, as well as a physical in- ventory of the unfinished work. FINISHED STOCK ACCOUNT DEBIT CREDIT With balance at beginning of period. With the cost of goods sold during With totals of the cost sheets rep- the period, at the same time debit- resenting work finished during the ing Trading account or Cost of period, the posting coming from a Sales account, the posting coming finished stock journal. from the sales journal which con- tains a colxMn headed "Cost of Sales." The balance of the account will be a debit and represents the cost of goods manufactured and still on hand. This balance should agree with a physical in- ventory of the finished stock, as well as the total of the accounts carried in a finished stock ledger. It should be noted that these three accounts are perpetual inventory ac- counts, the balances of which should represent the physical stocks on hand valued at cost. The controlling accounts are kept in values only; the sub- sidiary records may be kept in values only, or in quantities only, or in both. Copyright, 1917, The Ronald Press Company 1-19-10 NATURE AND OPERATION OF A FACTORY LEDGER In the business of the Miller Motor Car Company, the accounts making up a factory ledger appear in the general ledger; this necessitates in a larger business the keeping of a subsidiary ledger called an expense or cost ledger which supports the general ledger accounts. An alternative method is to in- stall a factory ledger which contains the inventory accounts, labor accounts, and factory overhead accounts. A factory ledger, therefore, separates the "cost" records from the "financial" records. An account in the factory ledger called "General Ledger" indicates its re- lation to the financial records, while an account called "Factory Ledger" is a general ledger account controlling the factory ledger. Thus, finished stock sold to a customer would call for an entry in the financial records as follows: Customers* Account $1,200.00 To — Sales $1,200.00 To record sale, etc. A special column in the sales book would produce the following entxy at the end of the month: Cost of Sales (or Trading) Account $1,000.00 To — Factory Ledger $1,000.00 To record cost of sales, per cost sheets, etc. In the cost records (i.e., a journal kept for the factory ledger) a summary entry at the end of the month would be made, using the cost sheets or special column in the sales books as a basis: General Ledger $1,000.00 To — Finished Stock Account $1,000.00 To record finished stock sold, etc. If for internal reasons it is undesirable to have the costs disclosed to those having access to the sales books, the cost of sales may be summarized separately. REFERENCES : Cole, pages 141-150 Dickinson, Chapter IX Esquerre, pages 173-185 Nicholson, "Cost Accounting," pages 24-32, 120-126 Copyright, 1917, The Ronald Press Company 1-20-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 20 FINANCIAL STATEMENTS OF A MANUFACTURING BUSINESS Problem 16 The following are trial balances of the general ledger and factory ledger of the Independence Manufacturing Co, at June 30, 1917. GENERAL LEDGER TRIAL BALANCE JUNE 30 , 1917 Real Estate $ 15,000.00 Buildings and Equipment 55,000.00 Accounts Receivable 44,500.00 Notes Receivable 6,500.00 Notes Receivable Discounted $ 5,000.00 Cash 18,100.00 Prepaid Interest 300.00 Unexpired Insurance 580.00 Capital Stock 75,000.00 Surplus — Balance, May 31, 1917 42,310.00 Bank Loans 10,000.00 Accounts Payable 15,800.00 Taxes Accrued 1,400.00 Factory Ledger 62,150.00 Sales 56,000.00 Discounts on Purchases . 130.00 Discounts on Sales 100.00 Office Salaries 1,570.00 General Expense 800.00 Salesmen's Salaries and Expense 950.00 Sales Office Salaries and Expense 1 740.00 Interest Received 650.00 $206,290.00 $206,290.00 Copyright. 1917, The Ronald Press Company b 1-20-2 FACTORY LEDGER TRIAL BALANCE JUNE 30, 1917 General Ledger $61,800.00 Raw Materials Account (including opening inventory and purchases) $40,400.00 Work in Process (Inventory, May 31, 1917) 4,100.00 Finished Stock (Inventory, May 31, 1917) 5,800.00 Factory Supplies 800.00 Direct Labor 8,550.00 Superintendence 650.00 Heat, Light, and Power (including fuel) 1,280.00 Miscellaneous Factory Expenses 220.00 $61,800.00 $61,800.00 Adjusting journal entries have been made in the general journal and posted to the general ledger, before the above trial balance was taken, as follows: Factory Ledger Account $250.00 General Expense 50.00 To — Taxes Accrued $300.00 To take up taxes accruing during June. Factory Ledger Account 100.00 To — Unexpired Insursince 100.00 Insurance expired in June, per insurance register. No corresponding entries have been made on the factory journal as yet. Materials issued during the month are shown by the requisitions journal to amount to $38,200. The cost of sales for the month appears in the sales book as $50,100. The total of cost sheets representing stock completed in the month of June is $48,500. Coal on hand amounts to $400. Office salaries un- paid $230. Prepaid interest expired $200, From the above information prepare: (a) Entries necessary to close both the factory ledger and general ledger at June 30, 1917. (b) A balance sheet at June 30, 1917, (c) A statement of profits and income for the month ending June 30, 1917. •(d) A statement of cost of sales during the same period. Copyright, 1917, The Ronald Press Company WORK TO BE DONE IN THE PRACTICE SET SUMMARY OF TRANSACTIONS 1-20-3 MAY 22 Collection report for last week: t DISCOUNT DISTRICT CASH ALLOWED #1 $ 1,233.75 $ 20.73 2 3,350.28 51.47 3 1,908.17 15.25 4 2,602.23 43.33 5 3,267.75 47.29 7 964.64 8.13 $13,326.82 $186.20 TOTAL CASH CREDITS TO CUSTOMERS $ 1,254.48 3,401.75 1,923.42 2,645.56 3,315.04 972.77 $13,513.02 NOTES RECEIVED ON. ACCOUNT $ 2,000.00 5,900.00 900.00 2,500.00 5,000.00 2,200c00 $18,500.00 The bank notifies us that the 30-day draft drawn on Frank Rice April 21 has been paid by him and credited to our account. The board of directors issued Call No. 2 for 60% of the common stock, pay- able in cash May 22. Received in response thereto: P. J. Kirkwood S, K. Stevenson Fred Higgins Frank Holloway $ 6,000.00 6,000.00 9,000.00 9,000.00 $30,000.00 Pay the New York Auto Supply Co., the balance of their account, $29,500. Pay: B. F. Goodrich Co. $5,640.00 less 2% Standard Wheel Co. 2,099.50 " 2% Stahl Steel Works 1,787,00 " 1% Williams and Richards 356.25 MAY 23 Shipment of tires received from B. F. Goodrich Co., $928.75, 2% 10 days, net 30 days. Received the balance of our contract with the Automobile Acces- sories Manufacturing Co., $318.75, 2% 15 days, net 30 days. Standard Wheel Co. $1,972.70, 2% 10 days, net 30 days. MAY 24 Buy of Williams and Richards shop supplies $487.50, terms 2% 5 days, net 30 days. Invoice of Western Printing Co., for advertising $38.29; stationery and printing $422.80; shop forms $165.75; total $626.84 net 30 days. MAY 25 Receipt of the following shipments is reported: Best Drop Forge Works, Raw Material Briscoe Radiator Co. , New Style Radi- ators $1,982.50 terms 2}^ 5 days, net 30 days 2,750.00 July 1 Copyright, 1917, The Ronald Press Company 1-20-4 MAY 26 District managers' sales reports: DISTRICT CARS #1 $11,300.00 2 5,000.00 3 9,875.00 4 16,350.00 5 5,495.00 7 8,900.00 8 4,875.00 $61,795.00 ?ay Star Auto Co. $1,580.00. Pay-roll for week: Factory: Direct Labor Indirect Labor Repairs — Plant and Equipment Heat, Light, and Power Office: Salesmen's Salaries Office Salaries MAY 28 FINISHED PARTS $ 946.37 1,059.25 873.60 1,500.43 1,983.65 387.00 625.42 ,375.72 $5,673.25 2,028.13 723.87 207.30 $1,028.35 175.50 ?8,632.55 1,203.85 ?9,836.40 Pay freight bills for week to Penn. R. R. Co. on finished parts $181.35, Pay Automobile Accessories Manufacturing Co., invoice of May 12. MAY 29 Collection report for past week: TOTAL CASH DISCOUNT CREDITS TO NOTES RECEIVED DISTRICT 'cash ALLOWED CUSTOMERS ON ACCOUNT #1 $4,273.21 $ 83.27 $4,356.48 $5,000.00 2 3,542.80 60.92 3,603.72 1,500.00 3 2,473.29 43.38 2,516.67 1,875.00 4 7,029.73 103.75 7,133.48 2,900.00 5 4,900.33 92.28 4,992.61 3,000.00 7 4,387.00 89.50 4,476.50 3,500.00 8 819.96 33.15 853.11 2,100.00 $27,426.32 $506.25 $27,932.57 $19,875.00 Pay: B. F. Goodrich Co. Invoice of May 18 Williams and Richards " 24 The U. S. Advertising Company presented their bill for $30,738 for May advertising under contract dated May 10, terms 15 days. Finished parts amounting to $20,000 were purchased from the Crown Automobile Company, terms July 1. Copyright, 1917, The Ronald Press Company 1-20-5 MAY 31 Accrued pay-roll to date: Factory: Direct Labor Indirect Labor Repairs — Plant and Equipment Heat, Light, and Power Office: Salesmen's Salaries Office Salaries Officers* Salaries (month) District managers* sales reports to May 31 $3,548.72 1,085.43 263.21 110.05 $5,007.41 $ 652.50 122.00 1,800.00 2,574.50 $7,581.91 DISTRICT CARS FINISHED PARTS #1 $7,000.00 $ 475.00 2 321.43 3 2,100.00 93.47 4 2,775.00 1.637.28 5 1,875.00 191.40 7 3,750.00 926.42 8 3,500.00 287.00 $21,000.00 $3,932.00 Petty cash disbursements to date, $220.83, are as follows: prepaid freight on cars sold $103.50; extra help unloading coal $46.50; sundry manufacturing expenses $13.23; local advertising $23.75; maintenance of delivery equipment $10.48; miscellaneous general expenses $23.37. The petty cashier is reim- bursed for the total. Collection report for the last three days: TOTAL CASH NOTES DISCOUNT CREDITS TO RECEIVED DISTRICT CASH ALLOWED CUSTOMERS ON ACCOUNT #1 I 345.25 $ 5.23 $ 350.48 $ 2 1,733.22 22.92 1,756.14 3 1,422.92 19.88 1,442.80 4 1,433.47 25.43 1.458.90 5 963.82 17.27 981.09 7 1.049.29 18.68 1,067.97 8 854.78 13.22 868.00 1,000.00 17.802.75 $122.63 $7,925.38 $1,000.00 Copyright, 1917, The Ronald Press Company Solution to Assignment 1-18-2 1-20-6 MILLER MOTOR CAR CO. BALANCE SHEET, MAY 1, 19— ASSETS CAPITAL ASSETS: Warehouse and Office Fixtures $ 1,450.00 Delivery Equipment Good-will SUBSCRIPTIONS: 7% Preferred Stock Common Stock CURRENT ASSETS: Inventories: Automobiles Finished Parts Miscellaneous Supplies Consignment Stock Outward Advances on Consignments-Inward Customers' Accounts Notes Receivable Less — Notes Receivable Discounted Cash in Bank Petty Cash Fund PREPAID EXPENSES: Unexpired Insurance Rent Paid in Advance 1,750.00 $ 3,200.00 66,000.00 $ 69,200.00 $50,000.00 50,000.00 100,000.00 $30,000.00 5,890.00 300.00 3,200.00 1,100.00 $ 40,490.00 35,542.00 100.00 3,734.00 $10,100.00 10,000.00 $ 3,634.00 100.00 79,866.00 $ 50.00 200.00 250.00 $249,316.00 LIABILITIES CAPITAL STOCK: 7% Preferred Stock Common Stock CURRENT LIABILITIES: Bank Loan Audited Vouchers Notes Payable Interest Accrued on Notes Payable Taxes Accrued $100,000.00 100,000.00 $200,000.00 $ 3,000.00 36,080.00 10,000.00 36.00 200.00 49,316.00 $249,316.00 Copyright, 1917, The Ronald Press Company 1-20-7 Solution to Problem 15 (1) Unissued First Mortgage 5% Bonds $150,000.00 To — First Mortgage 5% Bonds Authorized To record authorized issue of bonds ; see minutes of Board, page , and of stockholders, page (2). Cash 150,000.00 To — Unissued First Mortgage 5% Bonds Issue of bonds disposed of at par. 150,000.00 150,000.00 JOHNSON SHOE CO. BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Plant and Equip- ment $300,000 Good-will 50,000 $350,000 PROCEEDS FROM SALE OF FIRST MORTGAGE 5% BONDS, on December 31, 1917 150,000 LIABILITIES CAPITAL STOCK: Authorized $250,000 Deduct — Unissued $ 15,000 Purchased 10,000 25,000 Total Issued and Out- standing $225,000 CURRENT ASSETS: Inventories of — Raw Materials $25,000 Unfinished Goods 3,000 Finished Stock 12,000 Total $40,000 Accounts Receivable 44,000 Cash 10,000 PREPAID EXPENSE: Inventory of Stationery and Supplies FIRST MORTGAGE 5% BONDS: Issued and Outstanding DEBTS PAYABLE FROM PROCEEDS OF SALE OF FIRST MORTGAGE 5% BONDS (per contra) Mortgage on Plant $100,000 Bank Loans 94,000 CURRENT LIABILITIES: Accounts Payable SURPLUS : 1,000 Balance, Jan. 1, 1917 Profits for year $595,000 $ 20,000 10,000 150,000 50,000 150,000 40,000 30,000 $595,000 ANSWERS TO QUESTIONS Answer to Question 67— The bonds are to run for forty years from the date of issue; they are convertible into some other security of the corporation, probably stock, within the limits specified on the bond; they are to bear interest at the rate of 5% per annum; redemption is to be made in gold coin if demanded by the owner; the bond is coupon in form, that is, interest warrants are attached to the bond and are to be removed as they become due. Copyright, 1917, The Ronald Press Company 1-20-8 Answer to Question 68 — (a) In this case the discount column usually appears in the cash book, since the method is used most frequently where not all cash discounts are taken advantage of. Whether or not the column appears in the cash book or in the voucher register, its total will be posted (1) to the debit of Vouchers Payable account and (2) to the credit of Discounts on Purchases account. VOUCHERS PAYABLE ACCOUNT DEBITS: CREDITS: Total of vouchers payable column in Total of amount column in voucher cash disbursements book. register . Total of discount column in voucher Miscellaneous journal credits. register. Miscellaneous journal debits. (b) This case differs from (a) in that the total of the cash discount col- umn is not posted to the Vouchers Payable account, being posted to the credit of Discounts on Purchases account only. Answer to Question 69 — The voucher register performs the function of a book of original entry, since it is the record in which the transactions are entered at the time they occur and it contains a record of equal debits and credits which are posted to the ledger. It is also a book of final entry, in that dates or numbers of checks paying the vouchers are transferred to a special column of the register ; the register is thus equivalent to a sub- sidiary ledger, for the total of the "open" items should equal the balance of the Vouchers Payable controlling account. Answer to Question 70— (a) Raw Materials $15,000.00 Finished Parts 10,000.00 Productive Labor 28,000.00 To — Vouchers Payable $52,000.00 Discounts on Purchases 1,000.00 Totals of voucher register posted at end of month; all items will be posted in total except the miscellaneous column at the ex- treme right the details of which will be posted individually to the general ledger. Raw Materials ^ ^ 15,000.00 Finished Parts 10,000.00 Productive Labor 28,000.00 To — Vouchers Payable 32,000.00 Accounts Payable 20,000.00 Discounts on Purchases 1,000.00 •Totals of voucher register posted at end of month; all items will be posted in total with the exception of the general ledger column as in (a) and with the exception of the Accounts Payable which, besides being posted in total, will be posted as to the individual items appearing therein to the accounts payable ledger. Copyright, 1917, The Ronald Press Company 1-20-9 FINANCIAL STATEMENTS OF A MANUFACTURING BUSINESS The balance sheet and statement of profit and loss prepared by a manufac- turing business do not differ from those of a trading business except in the fact that the cost of sales is made up of the three elements indicated in 1-19-8. The merchandise purchased by a trading business is in a finished state ready for sale, while that purchased by a manufacturing business is raw material to which various costs must be added before ready for sale. The ob- ject of a cost of sales statement in a trading business is to show the cost of that portion of the purchases which has been sold; in a manufacturing busi- ness its object is to show the cost of that part of the goods manufactured which has been sold. It is also desirable to show a statement of the cost of manufacture, whether the finished or partly finished goods have been sold or not. The two statements are frequently combined (see illustration below) into a tabular statement entitled "Statement of Cost of Manufacture and Sales." The statements of the cost of manufacture and of sales are valuable chiefly to the manager of a manufacturing enterprise, in that comparative costs and rela- tive efficiency of various departments can be obtained. If percentages are used in these statements. Net Sales is usually taken as the basis. As in the case of the statement of profit and loss, the statement of cost of manufacture may be prepared in two ways, the one followed depending on the preference of the accountant. The first may be called the "account" form and the second the "report" or "statement" form. ACCOUNT FORM OF MANUFACTURING STATEMENT — The account form is essentially a replica of the ledger "Manufacturing Account," if one is kept, and usually appears in connection with the "Manufacturing, Trading, and Profit and Loss Account," illustrated by the following: ERDMAN MANUFACTURING CO. STATEMENT OF MANUFACTURING, TRADING, AND PROFIT AND LOSS YEAR ENDING DECEMBER 31, 1917 MANUFACTURING ACCOUNT Inventory of Raw Materials, Jan. 1, 1917 $10,122.15 Inventory of Partly Finished Goods, Jan. 1, 1917 3,672.01 Purchases of Raw Materials 68,090.58 Freight on Purchases 3,111.32 Wages 8,111.03 Power, Light, and Heat 1,100.50 Miscellaneous Factory Ex- penses 3,400.03 Depreciation 999.00 Insurance 300.00 Taxes 250.00 Inventory of Raw Materials, Dec. 31, 1917 ( 7,047.67 Inventory of Partly Finished Goods, Dec. 31, 1917 5,879.22 Cost of Finished Goods Manufactured, carried down to Trading Account 86,229.73 $99, 156.62 ^^99, 156.62 Copyright, 1917, The Ronald Press Company TRADING ACCOUNT 1-20-10 Cost of Finished Goods Manu- factured brought down $86,229.73 Inventory of Finished Goods, Jan. 1, 1917 5,238.11 Freight Allowances on Sales 2,925.09 Gross Profit carried down to Profit and Loss Account 28,815.99 $123,208.92 Inventory of Finished Goods Dec. 31, 1917 Sales i 3,176.89 120,032.03 $123,208.92 PROFIT AND LOSS ACCOUNT Salesmen's Traveling Ex- penses $ 1,425.50 Advertising 1,783.03 Office Rent 700.00 Office Salaries 4,004.50 Sundry Office Expenses 1,103.92 Bad Debts 854.83 Discount on Sales 2,100.75 Net Profit transferred to Surplus 18,586.86 $30,559.39 Gross Profit carried down from Trading Account Interest on Bills Re- ceivable Discount on Purchases $28,815.99 442.37 1,301.03 $30,559.39 If several products are made in the same factory, a manufacturing account may appear for each, or they may be shown in the same account by the use of a columnar ledger page. The form of the manufacturing account shown above may also be rearranged to bring out separately, (1) the cost of raw materials used (providing the inventory of raw materials is separable from the inventory of partly finished and finished goods); (2) the direct labor cost; and (3) the factory overhead. REPORT FORM OF MANUFACTURING STATEMENT — The following points are clearly indicated by the report form shown below: (1) the cost of manufacture for the period, subdivided into (a) material, (b) labor, and (c) factory overhead cost; (2) the cost of finished product manufactured; and (3) the cost of finished product sold. The last-named may be set out in a separate statement if desirable. Copyright, 1917, The Ronald Press Company 1-20-11 ERDMAN MANUFACTURING CO. STATEMENT OF COST OF MANUFACTURE AND OF SALES YEAR ENDING DECEMBER 31, 1917 MATERIALS: Inventory of Raw Materials, January 1, 1917 $10,122.15 Purchases $68,090.58 Freight-In 3,111.32 71,201.90 TOTAL RAW MATERIALS COST $81,324.05 Inventory of Raw Materials, December 31, 1917 7,047.67 $74,276.38 DIRECT LABOR 8,111.03 FACTORY OVERHEAD: Power, Heat, and Light $ 1,100.50 Depreciation 999.00 Insurance 300.00 Taxes 250.00 Miscellaneous Factory Expenses 3,400.03 6,049.53 TOTAL MANUFACTURING COST $88,436.94 DEDUCT — Increase in Inventory of Partly Finished Goods — December 31, 1917 $ 5,879.22 January 1, 1917 3,672.01 2,207.21 COST OF FINISHED GOODS MANUFACTURED $86,229.73 ADD — Decrease in Inventory Finished Goods — January 1,1917 $ 5,238.11 December 31,1917 3,176.89 2,061.22 COST OF FINISHED GOODS SOLD $88,290.95 REFERENCES : Esquerre, pages 430-446 Gilman, Chapter VII Greendlinger and Schulze, pages 335-355 Copyright, 1917, The Ronald Press Company 1-21-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 21 RESERVES WORK TO BE DONE IN THE PRACTICE SET MAY 31 Adjusting entries should be made in the journal for: fa) Depreciation at the following rate (per annum); buildings 2%; machinery 10%; office and warehouse fixtures 6%; delivery equip- ment 15%. (b) Reserve for bad debts, }4% of gross sales. (c) Additional taxes accrued ^247.67, (d) Insurance expired ^76.67. (e) Rent expired $50 (charge Miscellaneous Selling Expenses). (f) Miscellaneous supplies consumed (consisting of stationery) |100. (g) Interest accrued on notes payable and bonds. The cost of raw materials used in production during the month, according to total requisitions issued, is $8,754.78. All the finished parts are purchased, and the summary of parts issued shows that for May a total of $55,101.55 has been used in production, while a total of $14,953.18 has been sold, leaving a balance of $3,724.08 on hand. Work in progress transferred to finished stock during the month as per cost sheets amounts to $96,232.21. The automobiles on hand May 1 and the consignment returned have been sold during the month, as well as part of the finished stock of automobiles manu- factured amounting to $88,013.96, leaving a balance, agreeing with the cost sheets, of $8,218.25. ANSWERS TO QUESTIONS Answer to Question 71 — Part of the freight-inward, if prepaid, will have been included in the sales price of the materials purchased or added to the sales price on the invoice, and it is usually not possible or practicable to separate the two elements. Hence freight, when paid by the buyer of the goods, is often debited directly to the purchase accounts. Answer to Question 72— The second of three methods is one which should be followed, since this represents cost. The first does not take up all of the actual cost and leaves an amount of burden to be absorbed in the cost of other products manufactured, a procedure obviously unfair. The third method, provid- ing the market price exceeds the cost under (b), will include in the valuation of the machines a profit which is not earned ; moreover the purpose of the business in building the machines was to effect a saving, else it would have been a better bargain to purchase them. This saving is reflected by a lower depreciation charge during the life of the machines. Copyright, 1917, The Ronald Press Company 1-21-2 Answer to Question 75 — Land is continually appreciating in value nearly everywhere, but this fact is not enough to warrant taking up such increase on the books. It is usually considered that the contra credit to the increase in land valuations is not a realized profit and would appear on the books only when realized, i.e., when the land is sold. However, in the case of a re- valuation of properties, it might be desirable to give expression to the in- crease of land values on the books. But the credit should be made to capital surplus rather than to free surplus, in order that unrealized profits may not be distributed through payment of cash dividends therefrom. RESERVES A reserve is an account appearing on the balance sheet representing: 1. A valuation account ; 2. An appropriation of profits for a special purpose, called a "true reserve" ; or 3. A combination of the foregoing, 1. A valuation account, that is, an amount offsetting an asset which has declined in value, is illustrated by a reserve for depreciation, description of which appears below. It is created by a debit to operating expenses, and on the balance sheet is deducted from the asset it offsets. Similar reserves are provided, where necessary, for other assets such as inventories and ac- counts receivable. 2. "True" reserves are so called because their effect is to "reserve" profits from ordinary surplus available for dividends. Illustrations are found in reserves for contingencies, sinking fiind reserves, etc. They are also termed appropriated surplus since they are created out of profits and in reality are a part of the surplus whether shown as such on the balance sheet or not. 3. Reserves for pensions, insurance, accidents, etc., are usually created by a charge against operations (as in case 1) but, unless an actual liability, are nearly equivalent to a division of surplus (as in case 2). DEPRECIATION NATURE OF — A distinction between capital and current assets has already been drawn (See 1-5-2). This distinction is further indicated when it is said that a capital asset performs many services in a business before its useful- ness is impaired or destroyed, while a current asset performs but one service and immediately loses its identity. Contrast the services yielded, for example, by a machine whose life is five years and 1,000 tons of coal which are expected to last the same length of time. The cost was $3,000 each for both machine and coal, and each is ex- pected to have a scrap or residual value (scrap iron in the case of the machine, and cinders, etc., in the case of the coal) of, say, |200. Both machine and coal yield services, the only distinction being that the physical dimensions of one remain the same ; those of the other diminish. The VALUE — dimensions of each are decreasing at precisely the same rate, inasmuch as each Copyright, 1917, The Ronald Press Company 1-21-3 is contributing services or uses to the business. No one would deny that the coal, as consumed in operations, is an expense of those operations; hence, if this is true, it must follow that the machine, consumed in operations, is also an expense of operations. The decline in value of a capital asset, such as a machine, because of use in operations or for other reasons, is called depre- ciation. KINDS OF — Depreciation, or decline in value of capital assets, may be due to— 1. Physical causes, such as (a) Wear and tear from use ; (b) Exposure to the elements, or the working of other "laws of nature" ; or (c) Accidental causes. 2. Functional causes, such as (a) Obsolescence ; or (b) Inadequacy. Another classification is (1) unit depreciation and (2) composite depre- ciation, the former referring to various capital asset units of the business r the latter to the depreciation of the entire. capital asset investment of the business as a whole. TREATMENT IN TIffi ACCOUNTS — Depreciation of Machinery $ 560.00 To — Reserve for Depreciation of Machinery $ 560.00 Provision for year on machine. Since depreciation is £in expense of operations it is treated similar to any other expense: debited to the operations benefited; the- coal consumed would be debited in the same way. The other half of the entry is rarely posted to the capital asset account, however, as it is desirable to keep tho cost price distinct; in fact, the cost price of a capital asset is shown on the balance sheet from period to period, the depreciation being subtracted therefrom, until the capital asset has been disposed of. The reserve for de- preciation is thus seen to be merely an offset, and nothing else, to an over- stated asset. Continuing the example of the machine £ind assuming the foregoing adjusting entry is made at the close of each of the five years of its life, a reserve of 32,800 will have accumulated. If, then, the old asset is discarded, having a scrap value of $200: Reserve for Depreciation $2,800.00 Scrap Material 200.00 To — Machinery Account $3,000.00 Machine discarded. A new asset replacing the old will be debited to the capital asset account at its cost price in the usual way. Copyright, 1917, The Ronald Press Company 1-21-4 A PLANT LEDGER is kept by businesses having more than a few depreciating capital assets; it is commonly a card ledger, a card being devoted to each unit (machine or group of machines of the same character). The card is ruled in such a way that the depreciated value may be determined at any time, also the depreciation for the current period. (See illustrations in citations be- low.) Space is also provided for the recording of functional depreciation. The plant ledger may be divided into several sections such as buildings, machinery, fixtures, tools, etc., each having separate controlling accounts in the general ledger. Each section will be controlled by two accounts ; thus the details of the machinery ledger are summarized (1) in the Machinery account and (2) in the Reserve for Depreciation on Machinery account. METHODS OF PROVIDING FOR DEPRECIATION Several methods of providing for depreciation are in use. These methods have arisen owing to the following facts: (1) the allowance for depreciation must be an estimate, inasmuch as the life of an asset cannot be definitely forecasted; (2) the factor of obsolescence or inadequacy constantly lessens the value of preceding estimates ; (3) some machines require constantly in- creasing repairs as they age and it is found inequitable, in such cases, to equalize the cost of the asset over its life, especially when its produc- tivity, as it declines in value, is greatly reduced. 1. STRAIGHT-LINE METHOD — This is the method in most common use, being the simplest in theory and application. In the above example of a machine whose life is five years, a yearly charge of $560 is required. . This is computed ac- cording to the formula — C - S D = D representing the yearly charge to operations and yearly increase of depreci- ation reserve, C the cost of the asset, S its scrap or salvage value, and n the number of years the asset is expected to last. 2. REDUCING BALANCE METHOD — The reducing balance method applies under the theory that the expense of up-keep is light when an asset is new, and heavy in the final years of its life. The charges to operations on account of the* asset are, by use of this method, more evenly distributed. It is also claimed that this method more accurately reflects on the books the large composite de- preciation which takes place in the case of a new plant. The objection is that but few assets depreciate exactly in the manner indicated. In the fol- lowing formula, P represents the percentage to be deducted each year from the declining values: = i-"V- Copyright, 1917, The Ronald Press Company 1-21-5 This formula, applied to the foregoing illustration, will produce results as follows: Cost new First year Second year Third year Fourth year Fifth year YEARLY PROVISION » 1,254.81 729.96 424.64 247.03 143.70 At end of fifth year $2,800.14 TOTAL PROVISION $ 1,254.81 1,984.77 2,409.41 2,656.44 2,800.14 $2,800.14 DEPRECIATED VALUE $3,000.00 1,745.19 1,015.23 590.59 343.56 199.86 $ 199.86 The discrepancy of 14 cents is due to the fact that a six-place table of log- arithms was used. The longer the life of the asset, the more nearly will the reducing balance method approach the straight-line method. 3. SINKING FUND METHOD — In this method an amount of money is set aside each year along with the regular provision for depreciation, the money being deposited outside the business and accumulating at compound interest. The amount to be charged against the expenses of the business will be the same each year, and will be computed according to the following formula: D = (C - S)- (r - 1) (rn - 1) r being the rate, which, if the interest to be allowed is 4%, will be stated as 1.04 for the purposes of this formula. Supposing the interest in our il- lustration is 4% compounded annually, the following table may be set up: YEARLY TOTAL CREDIT DEPRECIATED CASH SET COMPOUND Cost I First ASIDE YEARLY INTEREST « lew year 9 516. ,96 ^->-— — Second year 516. ,96 20. ,68 Third year 516. ,96 42. ,18 Pourti \ year 516. .96 64. ,55 lifth year 516. .94 87, ,81 PROVISION TO RESERVE VALUE $ $3,000.00 516.96 516.96 2,483.04 516.96 537.64 1,945.40 516.96 559.14 1,386.26 516.96 581.51 804.75 516.94 604.75 200.00 Total $2,584.78 $215.22 $2,584.78 $2,800.00 $ 200.00 [The method as outlined is rarely used. It is considered better practice to retain the cash in the business and charge the interest element direct to op- erations. Other methods used are described on the following page. Copyright, 1917, The Ronald Press Company 1-21-6 RESERVE FOR BAD DEBTS Every business which caters to the general trade suffers losses from un- collectible accounts and notes. These losses are an expense of carrying on the business and are shown on a statement of profits and income as a selling or administrative expense, or, as advocated by a few writers, as a "financial" expense, i.e., deducted with such items as interest paid from net profits. At the end of each accounting period an estimate is made of the iincollectible ac- counts through any of the following methods: 1. A percentage of net sales 2. A percentage of outstanding accounts 3. An inspection of the accounts 4. Past experience and an adjusting entry made as follows: Bad Debts (an expense account) $500.00 To — Reserve for Bad Debts (a valuation account) $500.00 To take up estimate of loncollectible accounts. The reserve serves to hold the expected loss temporarily until the worthless accounts can be found, since it is usually not possible to ascertain in ad- vance just which accounts will prove to be worthless. An account, having proven bad, is written off as follows: Reserve for Bad Debts $ 75.00 To — Customer's Account $ 75.00 To write off uncollectible account. If the account is afterwards collected, the sum received is generally credited to the reserve. Theoretically the loss from bad debts is composed of two elements: (1) the cost of the merchandise which the customer does not pay for, and (2) gross profit, with which, in addition to the cost of the merchandise, the customer has been charged. The loss of gross profit is not an operating expense, but income never received; however, the two elements are not distinguished in practice, the loss of gross profit being a relatively small figure. i^ j^v' ' RESERVE FOR DISCOUNTS A reserve for discounts measures the overstatement of customers' accounts on account of cash discounts to be taken. It is created by a debit to Dis- counts on Sales account: Discounts on Sales (an expense account) $300.00 To — Reserve for Discounts $300.00 To provide for discounts expected to be taken. At the beginning of the following period the entry is reversed. Both the reserve for bad debts and reserve discounts are valuation ac- counts and therefore are deducted on the balance sheet from the assets to which they apply. REFERENCES : Hatfield, pages 121-142 Leake, pages 67-135 Montgomery, pages 401-429 Saliers, pages 13-33, 39-48 Copyright, 1917, The Ronald Press Company 1-22-1 I COMPLETE ACCOUNTING COURSE — PART I Lecture 22 SURPLUS Problem 17 The H. K. Jerome Co. is a manufacturing corporation which has been in business for many years. On January 1, 1917, they commenced operations for the year 1917 in an entirely new plant, the financing of which was accomplished through the issue of ten notes of $20,000 each, interest at 6%, the notes ma- turing at the rate of one each year commencing with January 1, 1918. The old plant was disposed of for $10,000 in cash during December, 1916, and the bal- £ince sheet prepared at December 31, 1916, showed the following condition of the business: Plant Less Scrap Value real- ized Current Assets Total Assets ASSETS $225,000.00 10,000.00 $215,000.00 80,000.00 LIABILITIES Capital Stock Surplus Profit and Loss for 1916: Net Sales $100,000.00 Less — Operat ing Expenses 75,000.00 $295,000.00 Floating Debt Total Liabilities $200,000.00 50,000.00 25,000.00 20,000.00 $295,000.00 ( The new plant was entered on the books at $200,000 on January 1, 1917, and is expected to have a life of 20 years (with a probable scrap value similar to the old plant). Owing to competition and limited demand for the products, the sales are not expected to increase, but the new and improved machinery, with better methods of manufacture, saves 10% in operating expenses according to the estimate of the manager. At December 31, 1917, a second balance sheet was prepared: ASSETS Plant Current Assets $415,000.00 112,500.00 LIABILITIES Capital Stock Surplus Profit and Loss for 1917: Net Sales $100,000.00 Less — Operat ing Exp. 67,500.00 Total Assets $527,500.00 Notes Payable Floating Debt Total Liabilities $200,000.00 75,000.00 32,500.00 200,000.00 20,000.00 $527,500.00 Copyright, 1917, The Ronald Press Company 1-22-2 Interest on the notes payable has been included in the operating expenses of $67,500. The directors, having examined the balance sheet, decide to de- clare a dividend. Discuss the foregoing and prepare a statement which, in your opinion, will more accurately display the financial position of the business on December 31, 1917. WORK TO BE DONE IN THE PRACTICE SET Record entries necessary to close the books on May 31, post same to gen- eral ledger, and prepare trial balance. Solution to Assignment 1-21-1 ADJUSTING JOURNAL ENTRIES NECESSARY BEFORE CLOSING BOOKS OF MILLER MOTOR CAR CO. , MAY 31 (1) Interest Paid $ 59.46 To — Interest Accrued on Notes Payable $ 59.46 Interest accrued during May on notes pay- able and bank loans as follows: $10,000.00 12 days @ 6% $20.00 3,000.00 31 days @ Q% 15,50 10,000.00 12 days @ 5% 16.67 3,500.00 15 days @ 5% 7.29 $59.46 (2) Bond Interest 625.00 To — Bond Interest Accrued 625.00 Interest accrued May 31 on bonds outstanding. (3) Depreciation 916.66 Depreciation on Fixtures 7.25 Depreciation on Delivery Equipment 21.88 To — Reserve for Depreciation of Buildings 83.33 Reserve for Depreciation of Machinery 833.33 Reserve for Depreciation of Fixtures 7.25 Reserve for Depreciation of Delivery Equipment 21.88 To set up reserves according to schedules. (4) Bad Debts 916.97 To — Reserve for Bad Debts 916.97 To provide reserve for bad debts at Vzfo of gross sales. (5) Taxes 247.67 To — Taxes Accrued 247.67 Additional taxes accrued during May. Copyright, 1917, The Ronald Press Company (6) Insurance To — Unexpired Insurance Insurance expired during May as per schedule. $76.67 1-22-3 $76.67 (7) Miscellaneous Selling Expenses To — Rent Prepaid Rent expired during May. 50.00 50.00 (8) Stationery and Printing To — Inventory of Miscellaneous Supplies Supplies consumed during May. 100.00 100.00 (9) Inventory of Raw Materials To — Purchases Raw Materials To transfer purchases. 10,121.18 10,121.18 (10) Work in Progress To — Inventory of Raw Materials Total of requisitions issued during month. 8,754.78 8,754.78 (11) Inventory of Finished Parts To — Purchases Finished Parts To transfer purchases. 67,888.81 67,888.81 (12) Work in Progress Cost of Sales — Finished Parts To — Inventory of Finished Parts Finished Parts transferred to Work in Progress and Sold during month. 55,101.55 14,953.18 70,054.73 (13) Work in Progress To — Direct Labor Indirect Labor Heat, Light, and Power Repairs — Pl£uit and Equipment Shop Supplies Depreciation Insurance Taxes Miscellaneous Factory Expenses To close out cost of work in progress. 37,786.05 20,394.07 9,057.87 2,591.85 3,478.53 843.75 916.66 76.67 247.67 178.98 Copyright, 1917, The Ronald Press Company 1-22-4 (14) Inventory Automobiles $96,232.21 To — Work in Progress $96,232.21 To transfer cost of automobiles completed during month as per recapitulation of cost sheets. (15) Cost of Sales — Automobiles 121,213.96 To — Inventory of Automobiles 121,213.96 To transfer cost of automobile sales. Solution to Problem 16 (a) ENTRIES ON FACTORY JOURNAL 10 CLOSE FACTORY LEDGER AT JUNE 30, 1917 (1) Taxes 250.00 Insurance 100.00 To — General Ledger Account $ 350.00 To take up accrued items as per entry in general journal. (2) Work in Process 38,200.00 To— Raw Materials 38,200.00 Total of requisitions issued for month, as per requisitions journal. (3) Work in Process 11,450.00 To — Factory Supplies 800.00 Direct Labor ' 8,550.00 Superintendence 650.00 Heat, Light, and Power 880.00 Taxes 250.00 Insurance 100.00 Miscellaneous Factory Expenses 220.00 To close out manufacturing cost, as per ledger accounts (4) Finished Stock 48,500.00 To— Work in Process 48,500.00 Stock completed during June as per finished stock journal. (5) General Ledger 50,100.00 To— Finished Stock 50,100.00 Cost of stock sold during month as per sales book and charged to customers in general ledger. Copyright, 1917, The Ronald Press Company ENTRIES ON GENERAL JOURNAL TO CLOSE GENERAL LEDGER AT JUNE 30, 1917 1-22-5 (1) Office Salaries To — Salaries Accrued Office salaries accrued and unpaid, ( 230.00 $ 230.00 Interest Expense To — Interest Prepaid Prepaid interest expired. (2) (3) Trading Account To — Factory Ledger To transfer cost of sales for month. 200.00 50,100.00 200.00 50,100.00 (4) Sales To — Trading Account To transfer sales for month. 56,000.00 56,000.00 (5) Trading Account To — Profit and Loss To close out gross profits for June. 5,900.00 5,900.00 (6) Profit and Loss To — Discount on Sales Office Salaries General Expense Salesmen's Salaries and Expense Sales Office Salaries and Expense Interest Expense To close out expense accounts. 4,590.00 100.00 1,800.00 800.00 950.00 740.00 200.00 (7) Discounts on Purchases Interest Received To — Profit and Loss To close out miscellaneous income accounts. 130.00 650.00 780.00 (8) Profit and Loss To — Surplus Net profits for June carried to Surplus. 2,090.00 2,090.00 Copyright, 1917, The Ronald Press Company (b) 1-22-6 Exhibit A ASSETS CAPITAL ASSETS: Real Estate $15,000 Buildings & Equip. 55,000 WORKING ASSETS: Fuel Supplies $ 400 Prepaid Interest 100 Unexpired Insurance 580 CURRENT ASSETS: Inventories of — Finished Goods $ 4,200 Work in Process 5,250 Raw Materials 2,200 Notes Receivable 1,500 Accounts Receivable 44,500 Cash 18,100 INDEPENDENCE MANUFACTURING CO. BALANCE. SHEET, JUNE 30, 1917 CAPITAL & LIABILITIES CAPITAL STOCK: Issued and Outstanding 170,000 CURRENT LIABILITIES: Bank Loans | 10, 000 $75,000 1,080 Accounts Payable Salaries Unpaid Taxes Accrued Notes Receivable Discounted $5,000 15,800 230 1,400 27,430 SURPLUS : Balance, May 31, 1917 Profits for June (Exhibit B) $42,310 2,090 75,750 $146,830 (c) INDEPENDENCE MANUFACTURING CO. STATEMENT OF PROFITS AND INCOME MONTH ENDING JUNE 30, 1917 SALES COST OF SALES (Exhibit C) GROSS PROFIT ON SALES DEDUCT— SELLING AND GENERAL EXPENSES: Selling Expenses: Salesmen's Salaries and Expense Sales Office Salaries and Expense General Expenses: Office Salaries General Expense 44,400 $146,830 Exhibit B $56,000.00 50,100.00 $ 5,900.00 $950.00 740.00 $1,690.00 ;i,800.00 800.00 2,600.00 NET PROFIT FROM OPERATIONS ADD— MISCELLANEOUS INCOME: Discounts on Purchases Interest Received DEDUCT— INTEREST CHARGES: Interest Expense SURPLUS NET PROFITS (Exhibit A) Copyright, 1917, The Ronald Press Company $130.00 650.00 4', 290. 00 $1,610.00 780.00 $ 2,390.00 300.00 $ 2,090.00 1-22-7 Eachibit C (d) INDEPENDENCE MANUFACTURING CO. STATEMENT OF COST OF MANUFACTURE AND OF SALES MONTH ENDING JUNE 30, 1917 MATERIALS DIRECT LABOR FACTORY OVERHEAD: Supplies Superintendence Heat, Light, and Power Taxes Insurance Miscellaneous Expense TOTAL MANUFACTURING COST DEDUCT — Increase in Inventory of Work in Process — May 31, 1917 June 30, 1917 COST OF GOODS COMPLETED ADD — Decrease in Inventory of Finished Stock — May 31, 1917 June 30, 1917 COST OF FINISHED STOCK SOLD (Exhibit B) $38,200.00 8,550.00 $800.00 650.00 880.00 250.00 100.00 220.00 2,900.00 $49,650.00 $4,100.00 5,250.00 1,150.00 $48,500.00 $5,800.00 4,200.00 1,600.00 $50,100.00 Copyright, 1917, The Ronald Press Company 1-22-8 SURPLUS DEFINITION — Surplus is the excess of the total assets over the total lia- bilities and capital stock of a corporation. Normally it represents the amount of realized profits which has not been appropriated for specific pur- poses, and therefore is available for dividends. In some companies, notably banks, a distinction is drawn between "Surplus" and "Undivided Profits," the former referring to that part which has been set aside permanently, and the latter to that part which is available for dividends. Adding capital stock to surplus gives "Net Worth" or "Book Value" of the business. PROFIT AND LOSS ACCOUNT — In a sole proprietorship or partnership the bal- ance of the Profit and Loss account is carried to the proprietors' accounts, while in a corporation the balance is carried to Undivided Profits account or Surplus account. Public utilities under jurisdiction of the Interstate Com- merce Commission are required to keep a Profit and Loss account which is equivalent to a Surplus account as the latter term is used by mercantile and industrial businesses. UNDIVIDED PROFITS ACCOUNT — As stated, the balance of the Profit and Loss account is sometimes carried to an Undivided Profits ledger account. Part of the undivided profits may be paid out in dividends, part may be transferred to Surplus ledger account, and part may remain in the Undivided Profits ledger account. APPROPRIATED SURPLUS — This term is applied to reserves for contingencies, sinking fund reserves, etc., which are part of the net worth or book value of the corporation, but which, for the time being, are set aside for special pur- poses by formal action of the board of directors. FREE SURPLUS — This term is equivalent to imdivided profits, and refers to the portion of surplus available for dividends. CAPITAL SURPLUS — This applies to that part of surplus which has not been earned through operations. It is distinct from ordinary surplus and should be shown separately on the balance sheet. Capital surplus may arise from the following sources: 1. CONTRIBUTIONS FROM STOCKHOLDERS: (a) Premiums on Sale of Capital Stock. Thus, if 1,000 shares, par value $100, are disposed of at 125, $25,000 of the receipts should be credited to Capital Surplus or to a similar account. The premium paid is not an earning. In the case of a new corporation the excess may represent an amount contrib- uted for working capital purposes, and is therefore as much a part of the capital investment as the par value of $100,000; or if contributed to pay promoters* expenses, expenses of incorporation, etc., the excess will be so applied. In the case of an established corporation, a premium given on sale of additional securities usually means that the earnings have influenced the sale price figure of the new stock. Copyright, 1917, The Ronald Press Company 1-22-9 (b) Donations of Capital Stock. The type of financing illustrated by this procedure is common in the case of mines, oil wells, etc., where the asset purchased with the stock is a wasting asset. The vendor conveys the property for a specified amount of capital stock and with the understanding that a specified amount of the stock received is to be donated to the company, sind from the sale thereof funds will be obtained for working capital. (c) Assessments on Stock. The term "assessments" refers to a "call" on stock not fully paid up (usually after a period of operation), or to a levy on fully paid-up stockholders to enable the corporation to continue operations. In the latter case the assessment is credited to Capital Surplus. (d) Undercapitalization. Illustration has already been given of a new corporation taking over the net assets of a business, the value of which ex- ceeded the par value of the stock. This is, in effect, a premium on the issue, provided the assets taken over are not overvalued. 2. BOOK ENTRIES. Increases in the value of land or other capital asset, if it is desirable to put such increase on the books, should be credited to Capital Surplus account, and taken out of Capital Surplus and transferred to ordinary surplus in case the asset is sold and the profit realized. REFERENCES : Bennett, pages 334-337 Montgomery, pages 199-200, 206 Esquerre, pages 357-359 Copyright, 1917, The Ronald Press Company 1-23-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 23 DIVIDENDS Problem 18 The Vanadium Manufacturing Co. is a New York corporation; its common stock has been issued "without par value." The preferred stock has a par value of $100 per share and is cumulative, non-participating, and non-voting. At the annual meeting of the board of directors on December 20, 1917, a dividend of 7% is declared on the preferred stock and $3 per share on the common, pay- able January 15, 1918, to stockholders of record January 1, 1918. The follow- ing is a trial balance of the general ledger December 31, 1917: Real Estate $ 30,000.00 Buildings 50,000.00 Machinery and Equipment 175,000.00 Good-will 50,000.00 Inventory of Finished and Partly Finished Goods, January 1, 1917 21,000.00 Inventory of Raw Materials, January 1, 1917 17,000.00 Accounts Receivable 8,000.00 Cash in Bank 14,000.00 Petty Cash Fund 500.00 Preferred Stock (1,200 shares) $120,000.00 Common Stock (2,500 shares) 125,110.00 Surplus, January 1, 1917 23,190.00 Accounts Payable 24,000.00 Accrued Taxes 2,200.00 Reserve for Depreciation of Buildings 10,000.00 Reserve for Depreciation of Machinery and Equipment 35,000.00 Sales 450,000.00 Purchases Raw Materials 245,000.00 Direct Labor 75,000.00 Heat, Light and Power 11,000.00 Superintendence 10,000.00 Maintenance and Repairs 5,000.00 Taxes 2,200.00 Miscellaneous Factory Expense 5,800.00 Officers* Salaries 25,000.00 Office Salaries 10,000.00 General Expense 9,000.00 Salesmen's Salaries and Commissions -. 15,000.00 Salesmen's Expenses :.' 3,000.00 Advertising 6,000.00 Sales Dlscoimts 2,000.00 $789,500.00 $789,500.00 Copyright, 1917, The Ronald Press Company 1-23-2 Inventories on December 31, 1917, were composed of: finished and partly finished goods $25,000; raw materials $15,000. Accrued taxes not on books $200. Yearly provision for depreciation, 3% on buildings, 10% on machinery and equipment (straight-line method) ; provision for 1917 does not yet appear on books. The dividends declared have not yet been recorded. Prepare statements to show financial condition on December 31, 1917, and results from operation during year ending that date. WORK TO BE DONE IN THE PRACTICE SET Prepare balance sheet at May 31, and statement of profits and income for month of May. Solution to Assignment 1-22-2 MILLER MOTOR CAR CO. TRIAL BALANCE, MAY 31, 19— ACCOUNT DEBIT CREDIT Land $ 25,000.00 Buildings 50,000.00 Reserve for Depreciation of Buildings $ 83.33 Machinery, Tools, and Equipment 105,603.50 Reserve for Depreciation of Machinery 833.33 Office and Warehouse Fixtures 1,450.00 Reserve for Depreciation of Fixtures 7.25 Delivery Equipment 1,750.00 Reserve for Depreciation of Delivery Equipment 21.88 Good-will 66,000.00 Subscriptions — Common Stock 10,000.00 Inventory of Automobiles, May 31 8,218.25 Inventory of Work in Progress, May 31 5,410.17 Inventory of Raw Materials, May 31 1,366.40 Inventory of Finished Parts, May 31 3,724.08 Inventory of Miscellaneous Supplies 200.00 Customers' Accounts 117,889.61 Notes Receivable 48,025.00 Reserve for Bad Debts 916.97 Cash in Bank 9,082.62 Petty Cash Fund 500.00 Unexpired Insurance 843.33 Rent Paid in Advance 150.00 Capital Stock — Preferred 100,000.00 Capital Stock — Common 100,000.00 5% First Mortgage Bonds 150,000.00 Notes Payable 3,500.00 Bank Loan 13,000.00 Audited Vouchers 70,885.14 Accrued Interest on Notes Payable 45.46 Accrued Bond Interest 625.00 Accrued Taxes 447.67 Accrued Pay-roll 7,581.91 Sales — Automobiles 164,065.00 Sales — Finished Parts 19,329.75 Copyright, 1917, The Ronald Press Company Discount on Sales — Finished Parts Cost of Sales — Automobiles Cost of Sales — Finished Parts Discount on Purchases Interest Received Consignment Earnings Salesmen's Salaries Salesmen's Traveling Expenses Advertising Freight -Out Delivery Equipment Maintenance Depreciation of Delivery Equipment Miscellaneous Selling Expenses Depreciation of Office and Warehouse Fixtures Office Salaries Salaries of Officers Stationery and Printing Bad Debts Miscellaneous General Expense Bond Interest , Other Interest Paid 914.60 121,213.96 14,953.18 3,358.95 475.81 31,882.29 103.50 10.48 21.88 50.00 7.25 628.95 1,800.00 590.80 916.97 60.62 625.00 59.46 1-23-3 1,093.97 150.00 300.00 $632,886.66 $632,886.66 SCHEDULE OF UNPAID VOUCHERS VOUCHER NO. FAVOR OF 23 Specialties Mfg. Co. 33 Auto. Accessories Mfg. Co. 34 Specialties Mfg. Co. 35 New Idea Lamp Co. 40 B. F. Goodrich Co. 41 Auto. Accessories Mfg. Co. 42 Standard Wheel Co. 44 Western Printing Co. 45 Best Drop Forge Works 46 Briscoe Radiator Co. 47 U. S. Advertising Company 48 Crown Automobile Company Total SCHEDULE OF CUSTOMERS' ACCOUNTS AMOUNT DISTRICT AMOUNT $ 1,202.85 #1 $48,203.58 6,785.03 2 9,945.35 2,882.50 3 9,682.20 811.19 4 28,972.03 910.17 5 7,519.46 312.37 7 9,100.68 1,933.25 8 4,466.31 626.84 1,932.94 Total $117,889.61 2 750.00 30,738.00 20.000.00 $70,885.14 Copyright, 1917, The Ronald Press Company 1-23-4 DIVIDENDS DEFINITION — A dividend is a portion of profits or surplus of a corpora- tion set aside by action of the board of directors for distribution among stockholders. The distribution may consist of the transferring of whatever property or property rights the directors may desire to distribute. KINDS OF — The nature of the various kinds of dividends is indicated by their titles: 1. CASH DIVIDEND — a distribution of cash. Unless otherwise qualified the term "dividend" refers to a cash dividend. 2. STOCK DIVIDEND — a distribution of treasury stock or unissued stock. 3. SCRIP DIVIDEND — a distribution of "scrip," i.e., promissory notes, usually interest-bearing. This kind of dividend is sometimes de- clared by railroads and other corporations for the purpose of re- taining in the business the funds with which the scrip must be finally liquidated. 4. PROPERTY DIVIDEND— a distribution of some kind of property, other than cash. A large munitions manufacturer in 1916 declared such a dividend payable in Anglo-French bonds. The term "dividend" is also applied to other distributions of property, such as bonuses to employees under profit-sharing schemes, etc., and distribu- tions of property to stockholders when a corporation winds up its affairs. DECLARATION — A dividend is "declared" by resolution of the directors, and until such resolution is passed the books of the corporation reflect no lia- bility, even to cumulative preferred shareholders, on account of proposed dividends. The directors have sole authority to dispose of corporate profits and no action on the part of stockholders can force them to pay out dividends, unless, of course, some fraudulent intent can be shown. Once declared, the amount of the dividend becomes a liability of the corporation enforcible by the stockholders through legal action. The declaration and payment may be made on the same date. This is possi- ble only in a small corporation. In a larger business there are usually three important dates in connection with each dividend declared: 1. Date of declaration. 2. Date stock records are closed. The time elapsing from (1) to (2) is utilized by purchasers of stock (on the open market for in- stance) by having their ownership properly inscribed on the stock ledger of the corporation. Thereafter dividends are payable only to "stockholders of record" on the day the stock ledger is closed. Stock sold between (2) and (3) is sold "ex-dividend" — the right to the dividend declared being retained by the seller. 3. Date of payment. These dates are indicated in the resolution authorizing the dividend. Copyright, 1917, The Ronald Press Company 1-23-5 PROFITS AVAILABLE FOR DISTRIBUTION — Directors have a wide discretion in declaring dividends. They may declare a dividend up to the total net profits available for distribution. If a portion of the profits of prior years has not been distributed in dividends but has been allowed to accumulate in the Surplus account, a dividend may be declared out of such accumulated surplus, even though the operations of the current period have resulted in profits of an amount less than the dividend or even a loss. The amount of a dividend is otherwise always a matter of policy which is based on a consideration of many points. It has been generally held that dividends cannot be paid "from capi- tal," i.e., where the result of the payment is to create or add to an already existing deficit. However, dividends paid by a mining corporation may include a return of both profits and capital invested. Courts have held that dividends may be paid from surplus arising from sources other than operations, such as increase in property values, donations of stockholders, etc., although as a matter of business policy such dividends might be objectionable, especially if paid in cash. PAYMENT — In a small corporation payment of cash dividends may be made to stockholders in currency or by check, the stockholder signing a receipt. With larger corporations it is the practice to deposit the required amount in a separate bank account and to draw checks against it. ENTRIES — When a dividend is declared, an entry similar to the following is necessary: -January 5, 1917- Dividends (a nominal account to be carried to Surplus) $20,000.00 To — Dividends Payable $20,000.00 To record dividend of 10% declared on common stock by resolution of the Board of Direc- tors at their annual meeting held today, payable March 1 to stockholders of record February 1. And when paid: -March 1, 1917- Dividends Payable $20,000.00 To — Cash (Unissued or Treasury Stock, etc.) $20,000.00 To record payment of dividend declared January 5. Dividends may be numbered consecutively, for various purposes. REFERENCES : Bennett, pages 133-155 Oilman, pages 321-328 Hatfield, pages 214-231 Copyright, 1917, The Konald Press Company 1-24-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 24 REDEMPTION OF BONDS Problem 19 A bond issue of the X Y Co. is dated April 1, 1909, and consists of 500 bonds having a par value of $1,000 each, running 50 years and bearing interest at 5%. Under the title of "Sinking Fund Assets" the following details appear on the balance sheet prepared December 31, 1916: Bonds of X Y Co. Bonds of A B Co. Cash Total $50,000.00 15,000.00 10,100.00 $75,100.00 On June 30, 1917, the trustee holding the sinking fund assets renders the following report for the six months ended that date: Dec 31, 1916 Cash balance RECEIPTS April 1, 1917 Instalment #8 received April 1, 1917 Coupons on Bonds of X Y Co. ($50,000 @ 5%, due Apr. 1 and Oct. 1) May 1, 1917 Coupons on Bonds of A B Co. ($15,000 @ 6%, due May 1 and Nov. 1) May 1, 1917 Sale of Bonds of A B Co at 104 June 30, 1917 Interest on Cash Balance PAYMENTS May 1, 1917 Purchase of Bonds of X Y Co. (36 at par and accrued interest) May 1, 1917 Commission on Sale and Purchase of bonds June 30, 1917 Expenses of Trustee (clerical help, sta- tionery, etc.) for six months ending June 30, 1917 June 30, 1917 Cash Balance $10,100.00 $10,000.00 1,250.00 450.00 15,600.00 240.00 27.540.00 $36,150.00 250.00 $37,640.00 50.00 36.450.00 $1,190.00 Give Journal entries necessary on the books of the X Y Co. relative to the sinking fund from December 31, 1916, to June 30. 1917. and indicate how the account would be shown in the balance sheet prepared at June 30, 1917. Copyright, 1917, The Ronald Press Company MISCELLANEOUS QUESTIONS 1-24-2 Question 74 — What differences would you expect to find in the accounting procedure (a) where the sinking fund assets are turned over to the trustee under the indenture, or (b) where the assets are retained in the corporation's treasury? Question 75 — "The company under its trust deed is required to set aside a certain percentage of its profits at the close of each year to provide a sink- ing fund for retiring its bonded indebtedness when it matures." Explain briefly what is meant by the above quotation, indicating to a bondholder not familiar with accounting theory how his interests are pro- tected. WORK TO BE DONE IN THE PRACTICE SET SUMMARY OF TRANSACTIONS JUNE 1 The management decides to change the payment of wages and salaries from a weekly to a semimonthly basis. In accordance therewith the pay-roll accrued at May 31 is paid. Pay invoices of Specialties Manufacturing Co. $1,202.85 and $2,882.50. Pay Best Drop Forge Works their invoice of May 25, deducting the discount. The board of directors declare a 1.75% cash dividend on the preferred stock, and 1% cash dividend on the common stock, payable June 5 to stockholders of record June 1. June 2 To enable the production department to keep pace with the sales and to insure prompt deliveries, the board of directors authorizes the purchase of the Best Automobile Co.'s plant. The balance sheet submitted by them is as follows: BEST AUTOMOBILE CO. BALANCE SHEET, MAY 31, 1917 ASSETS Land $15,000.00 Buildings 20,000.00 Machinery 60,000.00 Good-will 75,000.00 Inventories: Raw Material 4,504.00 Work in Progress 26,300.00 Finished Parts 19,050.00 Automobiles 55,150.00 Customers' Accounts 60,285.00 Notes Receivable 35,000.00 Cash 1,450.00 $371,739.00 LIABILITIES Capital Stock First Mortgage 6% Bonds Notes Payable Accounts Payable Bond Interest Accrued Taxes Accrued Pay-roll Accrued Surplus $100,000.00 75,000.00 67,000.00 57,985.00 3,000.00 1,562.00 11,542.00 55,650.00 $371,739.00 Copyright* 1917, The Ronald Press Company 1-24-3 After due consideration the Miller Motor Car Co. offers to purchase all the assets except good-will, customers' accounts, notes receivable, and cash, at the valuations given in the balance sheet and to assume all the liabilities except notes payable and accoiints payable. $25,000 is to be paid in cash on the date of sale, the balance in common stock. To complete the purchase the stockholders authorize an increase in the common stock to $500,000, and 839 shares are issued at once to the Best Automobile Co. and recorded as fully paid. Discount at City National Bank our 30-day note for $40,000 at 6%. Pay Standard Wheel Co., and B. F. Goodrich Co., invoices of May 23. Pay the ac- crued pay-roll of the Best Automobile Co. JUNE 4 District managers' reports show sales of $24,758.22 divided as follows: automobiles $18,575; accessories $6,183.22. Bank allowed $5.04 interest on May cash balances. JUNE 5 Collection report: cash $38,753.28; discount allowed $498.28; notes re- ceived $30,000. Purchase additional furniture from Chicago Furniture Co. $595.00, net 30 days. Issue checks to treasurer for the preferred stock dividend of $1,750, and the common stock dividend of $1,000. Pay Automobile Accessories Manufacturing Co. invoice of May 18 amounting to $6,923.50, deducting 2fo discount. JUNE 6 Sell 100 shares of coimnon stock at par. Receive from notes receivable $16,500, and accrued interest thereon $28.78. Receive the following shipments today: Specialties Mfg. Co., Finished Parts $6,875.50 terms July 1 Stahl Steel Works, Raw Material 2,933.74 " 1% 10 days, net 30 days Best Drop Forge Works, Raw Material 3,387.50 " 2!4% 5 " " 30 " B. F. Goodrich Co., Finished Parts 9,875.00 " 2% 10 " " 30 " Washed Coal Co.. Heat. Light, and Power 2,575.28 " 2% 10 " ■ 60 " JUNE 7 Automobile Accessories Manufacturing Co. refused to allow the discount of $138.47, which we deducted from their invoice dated May 18. Send them check for same. Also send them check in payment of their invoice of the 23rd. Pay our demand notes in favor of the First National Bank for $3,000 and $10,000. with accrued interest thereon amounting to $51.39. JUNE 8 The voucher in favor of Stahl Steel Works for invoice of $2,933.74 entered June 6 is incorrect. Same should be $2,393.74. (Cancel and issue a new one.) Issue check favor cash for $2,000 to be advanced to various salesmen on ac- count of traveling expenses. JUNE 9 Six cars are returned by customers as defective. (Return sales book.) The sale price thereof was $14,875. Pay freight bills of Penn. R. R. Co. $409.97, of which $129.72 Is chargeable to Finished Parts and $280.25 to Raw Material. Copyright. 1917, The Ronald Press Company 1-24-4 JUNE 11 Sales managers' reports show automobile sales of $63,250, and sales of accessories amounting to $11,698.23. Pay Best Drop Forge Works invoice of June 6. JUNE 12 Sundry parts sold prove to be unsatisfactory. Returns amounted to $475.27. Collection report: cash $31,322.98; discounts allowed $523.27; notes received $32,875. JUNE 13 Received shipment of finished parts from Western Motor Castings Co. with 10-day sight draft for $6,543.50 attached to bill of lading. Accept the draft . JUNE 14 District managers' reports show that $2,075.28 has been allowed to custom- ers, $1,854.00 on automobiles and $221.28 on accessories. Fred Miller pur- chases a car at $3,500 to be charged to his personal account. (Sales book.) JUNE 15 Returned to Best Drop Forge Works defective forgings (raw material) amounting to $460.50, less 2^% discount which was deducted on payment of in- voice. Receive on account of notes receivable $17,575 and $87.28 accrued in- terest. Copyright, 1917, The Ronald Press Company Solution to Assignment 1-25-2 MILLER MOTOR CAR CO BALANCE SHEET, MAY 31, 19— 1-24-5 Exhibit A Cost $ 25,000.00 50,000.00 CAPITAL ASSETS: Land Buildings Machinery, Tools, and Equipment 105,603.50 Office and Warehouse Fixtures 1,450.00 Delivery Equipment 1,750.00 ASSETS Reserve for Depreciation Present Value $ $ 25,000.00 3183,803.50 r Good-will SUBSCRIPTIONS TO CAPITAL STOCK CURRENT ASSETS: Inventories: Automobiles Work in Progress Raw Materials Finished Parts Miscellaneous Supplies Customers' Accounts Notes Receivable Less — Reserve for Bad Debts Cash in Bank Petty Cash Fund DEFERRED CHARGES: Unexpired Insurance Rent Paid In Advance 83.33 833.33 7.25 21.88 $945.79 49,916.67 104,770.17 1,442.75 1,728.12 $182,857.71 66,000.00 $248,857.71 10,000.00 $ 8,218.25 5,410.17 1,366.40 3,724.08 200.00 $ 18,918.90 164,997.64 9,582.62 $117,889.61 48,025.00 $165,914.61 916.97 $ 9,082.62 500.00 193,499.16 % 843.33 150.00 993.33 $453,350.20 Copyright, 1917, The Ronald Press Company 1-24-6 LIABILITIES CAPITAL STOCK: 7% Preferred Stock $100,000.00 Common Stock - 100,000.00 $200,000.00 5% FIRST MORTGAGE BONDS 150,000.00 CURRENT LIABILITIES: Notes Payable $ 3,500.00 Bank Loan 13,000.00 Audited Vouchers 70,885.14 Accrued Liabilities: Interest on Notes Payable $ 45.46 Bond Interest 625.00 Taxes 447.67 Pay-roll 7,581.91 - 8,700.04 96,085.18 SURPLUS : 7,265.02 Profit for May (Exhibit B) CAR CO. $453,350.20 MILLER MOTOR Exhibit B STATEMENT OF PROFITS AND INCOME MONTH ENDING MAY 31, 19— - FINISHED AUTOS PARTS TOGETHER SALES $164,065. 00 $19,329.75 $183,394.75 Deduct — Discount on Sales 914.60 914.60 NET SALES $164,065. 00 $18,415.15 $182,480.15 DEDUCT — Cost of Sales, Exhibits C and D 121,213. 96 14,953.18 136,167.14 GROSS PROFIT ON SALES $ 42,851. 04 $ 3,461.97 $ 46,313.01 DEDUCT— SELLING AND GENERAL EXPENSES: Selling Expenses (Exhibit E) $35,902.91 General and Administrative Expenses (I Sxhibit F) 4,004.59 39,907.50 NET PROFITS FROM OPERATION $ 6,405.51 ADD—MISCELLANEOUS INCOME: Discount on Purchases $ 1,093.97 Interest Received 150.00 Consignment Earnings 300.00 1,543.97 DEDUCT— INTEREST CHARGES: $ 7,949.48 Bond Interest $ 625.00 Other Interest Paid i to Exhibit 59.46 684.46 SURPLUS NET PROFITS (carriec A) $ 7,265.02 Copyright, 1917, The Ronald Press Company 1-24-7 Exhibit C MILLER MOTOR CAR CO. COST OF AUTO SALES MONTH ENDING MAY 31, 19— MATERIALS : Raw Materials: Purchases $10,121.18 Less — Inventory, May 31 1,366.40 Finished Parts DIRECT LABOR FACTORY EXPENSE: Indirect Labor Heat , Light , and Power Repairs, Plant, and Equipment Shop Supplies Depreciation Insurance Taxes Miscellaneous Factory Expenses TOTAL MANUFACTURING COST DEDUCT — Inventory Work in Progress, May 31 COST OF AUTOMOBILES MANUFACTURED ADD — Decrease in Inventory of Automobiles: Inventory, May 1 (including Consignment Returned) Inventory, May 31 COST OF AUTOMOBILES SOLD (carried to Exhibit A) $ 8,754.78 55,101.55 $63,856.33 20,394.07 $ 9,057.87 2,591.85 3,478.53 843.75 916.66 76.67 247.67 178.98 17.391.98 $101,642.38 5,410.17 $96,232.21 $33,200.00 8,218.25 24,981.75 $121,213.96 Exhibit D MILLER MOTOR CAR CO. COST OF FINISHED PARTS SALES MONTH ENDING MAY 31, 19— INVENTORY OF FINISHED PARTS, May 1 PURCHASES Less — Finished Parts used in Production Inventory, May 31 $ 5,890.00 67,888.81 $73,778.81 $55,101.55 3,724.08 58,825.63 COST OF FINISHED PARTS SOLD (carried to Exhibit B) $14,953.18 Copirright, 1917, The Ronald Press Company MILLER MOTOR CAR CO. SELLING EXPENSES MONTH ENDING MAY 31, 19- Salesmen's Salaries Salesmen's Traveling Expenses Advertising Freight-Out Delivery Equipment Maintenance Depreciation of Delivery Equipment Miscellaneous Selling Expenses Total (carried to Exhibit B) 1-24-8 Exhibit E $ 3,358.95 475.81 31,882.29 103.50 10.48 21.88 50.00 $35,902.91 Exhibit F MILLER MOTOR CAR CO. GENERAL AND ADMINISTRATIVE EXPENSES MONTH ENDING MAY 31, 19— Salaries of Officers* Office Salaries Depreciation of Office and Warehouse Fixtures Stationery and Printing Bad Debts Miscellaneous General Expense Total (carried to Exhibit B) 5 1,800.00 628.95 7.25 590.80 916.97 60.62 $ 4,004.59 Copyright, 1917, The Ronald Press Company 1-24^9 Solution to Problem 17 H. K. JEROME CO. ADJUSTED BALANCE SHEET, DECEMBER 31, 1917 ASSETS PLANT $200,000.00 DEDUCT — Reserve for Depreciation 9,500.00 $190,500.00 CURRENT ASSETS 112,500.00 $303,000.00 LIABILITIES AND NET WORTH NOTES PAYABLE ($20,000.00 Payable Jan. 1, 1918) $200,000.00 CURRENT LIABILITIES: Floating Debt 20,000.00 TOTAL LIABILITIES $220,000.00 NET WORTH: Capital Stock Issued and Outstanding $200,000.00 Deduct — Deficiency: Surplus as per books Jan. 1, 1917 $75,000.00 Deduct — Net Loss incident to abandonment of old plant representing accrued depre- ciation not provided for 215,000.00 Balance, as adjusted $140,000.00 Surplus Net Profits for year ending December 31, 1917 23,000.00 117,000.00 83,000.00 $303,000.00 It appears that up to within the last few years the business has not been very profitable and some part of the dividends paid, assuming that dividends were paid, has been out of capital. If no dividends have been paid, the de- ficiency is represented in actual losses sustained from operation. Provision for accrued depreciation of the new plant for the first year of its existence has been made in the adjusted accounts. Copyright, 1917, The Ronald Press Company 1-24-10 REDEMPTION OF BONDS MANNER OF REDEMPTION — The manner in which a particular bond issue may be redeemed is outlined in the trust deed. Some of the methods used are: 1. Redemption through payment of cash at maturity. It is usual in this case to create a sinking fund for the purpose, as described below. 2. Drawing by lot of bonds to be retired at various periods set forth in the trust deed. In this case a sinking fund may or may not be used. 3. Redemption by serial payments. Bonds here bear the title of "serial bonds" and are redeemable at the dates specified on their face. 4. Refunding. New bonds are exchanged for old, being given to old bondholders, or new bonds are issued and sold and proceeds used for redemption of old bonds. 5. Conversion. Bonds may be designated "convertible bonds," in which case, at the option of the holder, they may be converted into some other security of the corporation, usually stock. DISTINCTION BETWEEN SINKING FUND AND SINKING FUND RESERVE — The term FUND should be applied ONLY to assets, but often refers, especially when used in connection with "sinking fund," to both a debit and credit which appear on the balance sheet. In the following discussion, "sinking fund" will refer to the asset, while "sinking fund reserve" will refer to the credit. A SINKING FUND is a sum of money set aside, usually periodically and draw- ing interest, for the purpose of meeting a future obligation. A SINKING FUND RESERVE is an appropriation of profits or surplus main- tained until the obligation, to which it refers, has been met, after which it is returned to Surplus or otherwise disposed of. SINKING FUND — It is evident that the creation of either a sinking fund or a sinking fund reserve serves to protect the interests of the bondholders. Some trust deeds require the creation of a fund, others the creation of a reserve and in some cases the creation of both. The trust deed often provides that a certain sum of money shall be turned over to the trustee at regular intervals and shall be invested by him accord- ing to the terms of the agreement. The date of the first instalment may be some time after the issue of the security in order that the corporation may first get on its feet. Or an amount may be paid the trustee based on annual production. Copyright, 1917, The Ronald Press Company 1-24-11 For example, twenty-year bonds are issued January 1, 1915, to the amount of $1,000,000, the trust deed calling for the payment by the corporation to the trustee, of equal annual instalments, the total of which, together with 4% compound interest allowed by the trustee, will amount to the sum required for redemption January 1, 1935, which will be at par. By the use of a bond table (see Sprague, "Accountancy of Investment," page 354) the amount invested yearly for twenty years which will amount to |1 at 4% interest is $.03358175. The amount necessary to turn over to the sinking fund trustee in the illustra- tion cited will therefore be $33,581.75. -December 31, 1915- Sinking Fund Trustee $33,581.75 To— Cash $33,581.75 To record payment of Instalment #1 to trustee. See Section 4 of trust deed. A similar entry is made the following year: -December 31, 1916- Sinking Fund Trustee $33,581.75 To— Cash $33,581.75 To record payment of Instalment #2 to trustee, according to the provisions of the trust deed. Section 4. On December 31, 1916, however, interest will have accrued on the instal- ment of the previous year, requiring the following entry: -December 31, 1916- Sinking Fund Trustee $ 1,343.27 To — Income from Sinking Fund $ 1,343.27 Interest at 4% on instalment paid December 31, 1915. The income from the sinking fund will be added to the current profits for the year and carried to Surplus, unless a sinking fund reserve is also maintained, in which case the income may be credited to the reserve, as described below. If the trustee is allowed or required to use the funds in his possession to purchase portions of the outstanding issue for which the fund has been created, upon his report to the corporation of such purchase, the following entry would be made: -July 5, 1917- Bonds Held by Sinking Fund Trustee $20,000.00 To — Sinking Fund Trustee $20,000.00 To record purchase of 20 bonds by trustee at par, as detailed in his report dated July 1, 1917. In case bonds are repurchased by the trustee, the corporation may or may not be required by the trust deed to pay over to the trustee the interest accruing on the bonds held by him. In either case the net effect on the cor- poration's books would be the same since credit would be taken at the end of the year, as illustrated above, for all increment from the funds in the hands of the trustee. Copyright, 1917, The Ronald Press Company 1-24-12 If the bonds, when repurchased by the trustee are CANCELLED, an entry should be made to record the fact properly: -July 5, 1917- Bonds Outstanding $20,000.00 To — Bonds Held by Sinking Fund Trustee $20,000.00 To record cancellation of 20 bonds acquired by trustee. If the bonds are held alive in the sinking fund and will be sold again by the trustee they may be carried as an asset on the balance sheet, for the same reason that treasury stock may be carried as an asset. But if they are not to be resold, the better practice would seem to be to deduct them from the au- thorized issue, properly qualifying the deduction, however, by stating they are in the hands of the trustee. The purchase of bonds by the trustee may affect the annual instalment and interest. When the bonds are finally redeemed, if we suppose none were cancelled in the meantime, the following entry is necessary: Bonds Outstanding $1,000,000.00 To — Sinking Fund Trustee $ 400,000.00 Bonds Held by Sinking Fund Trustee 600,000.00 To record redemption of bonds by pay- ment of cash to bondholders by trustee <■ £ind the surrender and cancellation of the entire issue. (It is supposed that the trustee at the time of re- demption has acquired 6,000 bonds of the issue.) SINKING FUND RESERVE — Many trust deeds require that the sinking fund in- stalment shall be a charge "against eai^nings," the purpose being to prevent the distribution of dividends from the yearly profits before the sinking fund has been provided for. Nevertheless, the periodical instalment is an APPRO- PRIATION OF PROFITS, NOT AN EXPENSE, and on the balance sheet the reserve is often shown under the title of "Appropriated Surplus." The creation of a sinking fund reserve alone will not act as a guarantee to bondholders that funds will be available to redeem their holdings at maturity. Unless an equivalent amount of cash has been set aside at the same time, the corporation may be financially embarrassed when the date of redemption ar- rives, for the reason that the funds represented by the reserve, arising out of profits, may have been invested in capital assets or in forms of working capital other than cash and not readily convertible into cash. Hence, the provision for the reserve is seldom found alone. Following the illustration already mentioned, if a sinking fund reserve were required by the trust deed in addition to the sinking fund, an additional entry on December 31, 1915, would be necessary: Copyright, 1917, The Ronald Press Company ft 1-24-13 -December 31, 1915- Profit and loss $33,581.75 To — Sinking Fund Reserve $33,581.75 To set up reserve for Instalment #1, as per the provisions in the trust deed. Section 5. The same entry would again be made on December 31, 1916, and the following en- try would record the interest reported by the trustee: -December 31, 1916- Sinking Fund Trustee $1,343.27 To — Sinking Fund Reserve $ 1,343.27 Interest at 4% earned on instalment paid Dec- cember 31, 1915. When the bonds are redeemed, the sinking fund reserve is available for any purpose the company may desire. Sometimes a stock dividend is declared from it ; in other cases it is credited in whole or part to other reserves ; or the amount may be written back to Surplus (from which it came) by the following entry: -December 31, 1935- Sinking Fund Reserve $1,000,000.00 To—Surplus $1,000,000.00 To write back reserve to Surplus by order of Board of Directors ; see their minutes, page In some cases the trust deed provides that a portion of the reserve may be released as the bonds are repurchased for cancellation. ON TFffi BALANCE SHEET — The amounts paid to the sinking fund trustee may be designated under the title of "Sinking Xund" on the balance sheet, or "Sinking Fund Assets," and will appear between capital and current assets. The reserve will appear as "Sinking Fund Reserve" under "Appropriated Sur- plus," or may be shown separately between current liabilities and surplus, or under the general heading of "Net Worth." A sinking fund may be created also to retire preferred stock or for other purposes. . REFERENCES : Bennett, pages 279-319 Hatfield, pages 261-272 Journal of Accountancy, Vol. VI, page 394 Copyright, 1917, The Ronald Press Company 1-25-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 25 STOCK AND BOND INVESTMENTS MISCELLANEOUS QUESTIONS Question 76 — (a) Which yields the larger income, 6% stock at 148% or 4)^% stock at 112%? (b) What per cent stock can be bought at 119%, brokerage %% addi- tional, to yield 5% on the investment? Question 77 — The Brightmire Manufacturing Co. has a bond issue of $500,000 maturing June 1, 1917, which has run for fifteen years. The bonds were origi- nally issued at 95^ (par value $1,000, interest at 6% payable semiannually) and the expenses of floating the issue amounted to $1,530. Both a sinking fund and sinking fund reserve have been maintained, and the bonds are to be redeemed in cash. Give all the entries to be made on the books on June 1, 1917, assuming that the discounts have been kept correctly. Question 78 — P. J. Kirkwood purchased 100 of the bonds described in the previous question on February 1, 1912, at 97 and commission of 1/6%. What en- tries in his books relative to these bonds would you expect to find on or shortly after June 1, 1917? Question 79 — An Indiana corporation, a holding company, owns three-fourths of the capital stock of the Brightmire Manufacturing Co. and has taken up its portion of the profits of the subsidiary since the controlling interest was secured. Give entries on the books of the Indiana corporation to record the following facts: (a) Profits of Brightmire Manufacturing Co. for year ending December 31, 1916, $150,000. (b) Dividend declared January 5, 1917, $80,000. (c) Above dividend paid in cash January 31, 1917. WORK TO BE DONE IN THE PRACTICE SET SUMMARY OF TRANSACTIONS JUNE 16 By resolution of the board of directors, approved by a meeting of stock- holders, an arrangement is made whereby 2,000 shares of the common stock of the Miller Motor Car Co. are exchanged for 1,500 shares (out of a total issue of 2,500 shares) of the capital stock of the Durant Truck Co. (Debit to "In- vestments.") Pay the bill of the U. S. Advertising Co. for May advertising. Pay B. P. Goodrich Co. invoice of June 6, and invoices of Stahl Steel Works and Washed Coal Co. Copyright, 1917, The Ronald Press Company 1-25-2 JUNE 18 Pay Pay-rolls to June 15: Factory — Direct Labor Indirect Labor Heat, Light, and Pcver Repairs Office — Office Salaries Salesmen's Salaries $18,953.25 9,322.87 550.75 1,873.27 $30,700.14 548.50 2,943.50 3,492.00 $34,192.14 District sales managers* reports show sales of automobiles $65,875.00; ac- cessories $9,472.87. JUNE 19 Invoices are duly approved for the following shipments received today: Automobile Accessories Mfg. Co., Finished Parts Williams and Richards, Shop Supplies New Idea Lamp Co., Finished Parts Standard Wheel Co. , Finished Parts Briscoe Radiator Co., Finished Parts $18,750.00 terms 2% 15 days, net 30 days 683.85 " 2% 15 2,843.75 " 2% 10 5,875.00 " 2% 10 4,227.00 July 1 30 " 60 " 30 " Ohio Steel Foundries Co., Raw Material 9,427.25 July 1 Collection report shows the following receipts: From customers — notes $27,500; cash $19,283.26; discount allowed $782.98. From notes receivable — $22,135, and interest $103.78. JUNE 20 The bank presents a three-day sight draft for $20,000 drawn by the Crown Automobile Co. for finished cars purchased May 31. Accept the draft. Pay freight bills of Penn. R. R. Co. $826.36, of which $714.16 is chargeable to Finished Parts, $112.20 to Raw Material. Edmond Machinery Co. threaten to sue if their note is not paid. Send them check for $3,517.01. Fred Miller gives his check for the amount charged to his personal account. JUNE 21 Receive notes in full of subscription due on common stock in pursuance to call of the board of directors. JUNE 22 Receive from B. F. Goodrich Co. finished parts $10,483.50, terms 2% 10 days, net 30 days. Sundry allowances to customers, on account of finished parts, $1,831.47. Copyright, 1917, The Ronald Press Company 1-25-3 JUNE 23 Pay our acceptance of the 13th in favor of Western Motor Castings Co., and our acceptance of the 20th in favor of the Crown Automobile Co. Received of Westfield and Roe sundry repair parts for plant equipment $287.25, C. 0. D. Overhaul the truck, using finished parts from stock amounting to $77.27. JUNE 25 District sales managers' reports show sales of automobiles $58,185; ac- cessories $7,983.78. Pay Western Printing Co. invoice of May 24; Williams and Richards invoice of June 19. JUNE 26 Receive from the Quality Printers an invoice of $687.50, terms 1% 10 days, net 60 days. Distribute as follows: Miscellaneous Factory Expenses $107.50; Miscellaneous Selling Expenses $86.25; Stationery and Printing $493.75. Col- lection report shows receipts from customers as follows: notes $31,875; cash $20,138.98; discounts allowed $847.27. Notes receivable paid $15,375, with accrued interest, $78.25. JUNE 27 Receive shipment from Washed Coal Co. $5,093.27, terms 2% 10 days, net 60 days, f.o.b. factory. Pay freight bills to Penn R. R. Co. $283.27 (Finished Parts). $873.28 of uncollected accounts are charged off (charge Reserve for Bad Debts). JUNE 28 Notes given in full of common stock subscriptions on June 21 are paid. Give August Miller check for traveling expenses to date, $743.28. Receive from Best Drop Forge Works raw material amounting to $1,627, terms 2]^% 5 days, net 30 days. Receive check from National Fire Insurance Co. for $383.75 in full settlement of damage caused by fire in paint shop June 3 (Repairs — Plant and Equipment ) . JUNE 29 U. S. Advertising Co. presented bill for June advertising, amounting to $25,647.25. Pay same. Also pay the following invoices: New Idea Lamp Co., June 19; Standard Wheel Co., June 19. Sell 400 shares of common stock at 95, and retire bank loan of $40,000. Send check of $600 to W. K. Jones for royalties on patented device used. Copyright, 1917, The Ronald Press Company I Solution to Problem 18 1-25-4 Exhibit A THE VANADIUM MANUFACTURING CO. BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Real Estate Buildings Machinery and Equipment Total Good-will CURRENT ASSETS: Inventories: Finished and Partly Finished Goods Raw Materials Accounts Receivable Cash in Bank Petty Cash Fund Reserve for Cost Depreciation Book Value $ 30,000.00 $ $ 30,000.00 50,000.00 11,500.00 38,500.00 175,000.00 52,500.00 122,500.00 $255,000.00 $64,000.00 $191,000.00 $25,000.00 15,000.00 8,000.00 14,000.00 500.00 50,000.00 62,500.00 $303,500.00 LIABILITIES CAPITAL STOCK AND SURPLUS: Preferred Stock — consisting of 1,200 shares of a par value of $100 each Common Stock — consisting of 2,500 shares without par value sold for Surplus applicable to Common Stock: Balance, January 1, 1917 Profits for year ending December 31, 1917, per Exhibit B Less — Dividends declared December 20, 1917 Balance — Surplus Book Value Common Stock CURRENT LIABILITIES: Accounts Payable Dividends Payable Accrued Taxes $125,110.00 $ 23,190.00 8,800.00 $ 31,990.00 15,900.00 $16,090.00 $24,000.00 15,900.00 2,400.00 $120,000.00 141,200.00 42,300.00 $303,500.00 Copyright, 1917, The Ronald Press Company THE VANADIUM MANUFACTURING CO. STATEMENT OF PROFITS AND INCOME YEAR ENDING DECEMBER 31,1917 1-25-5 Exhibit B SALES Deduct — Cost of Sales (Exhibit C) GROSS PROFIT FROM SALES DEDUCT— SELLING AND GENERAL EXPENSES: Selling Expenses: Salesmen's Salaries and Commis- sions Salesmen's Expenses Advertising General Expenses: Officers' Salaries Office Salaries General Expense NET PROFIT FROM OPERATIONS DEDUCT — Sales Discounts Allowed $ 15,000.00 3,000.00 6,000.00 $ 24,000.00 $ 25,000.00 10,000.00 9,000.00 44,000.00 $450,000.00 371,200.00 78,800.00 SURPLUS NET PROFITS (Exhibit A) 68,000.00 $ 10,800.00 2,000.00 $ 8,800.00 Exhibit C THE VANADIUM MANUFACTURING CO. STATEMENT OF COST OF MANUFACTURE AND SALES YEAR ENDING DECEMBER 31, 1917 MATERIALS USED DIRECT LABOR PRIME COST FACTORY OVERHEAD: Heat, Light, and Power Superintendence Maintenance and Repairs Depreciation Taxes Miscellaneous Factory Expenses $247,000.00 75,000.00 $322,000.00 $11,000.00 10,000.00 5,000.00 19,000.00 2,400.00 5,800.00 TOTAL MANUFACTURING COST DEDUCT — Increase in Finished and Partly Finished Goods: December 31, 1917 $25,000.00 January 1, 1917 21,000.00 COST OP FINISHED GOODS SOLD (Exhibit B) 53,200.00 $375,200.00 4,000.00 $371,200.00 Copyright, 1917, The Ronald Press Company 1-25-6 Comments on Problem 18 The subject of capital stock without par value offers several interesting points of discussion. 1. There is some tendency to think that the amount received for a share of such stock when the stock is first marketed will fix a sort of par value, and when further portions of the stock are sold there is a tendency to regard the deficiency or excess real- ized under or over such imaginary par value as a debit or credit to surplus. (See article in Journal of Accountancy, Vol. 21, pages 294-297.) 2. Earnings would seem to be identified with the capital account as in the case of a partnership, but for various reasons the original investment should be kept separate. 3. Under the new excise tax law the "fair value" of the capital stock of a corporation is assessed with a yearly tax, thus reducing the importance of the term "par value" in the case of all classes of stock. Copyright, 1917, The Ronald Press Company 1-25-7 30ND PREMIUM AND DISCOUNT , NATURE — If a corporation issues a bond having a par value of $1,000 for $900, the bond is said to be issued at 90 and the difference of |100 is re- ferred to as bond discount. If this bond were sold for $1,100, the excess of $100 would be referred to as bond premium. In essence a bond is merely a note payable and the treatment of the discount on a bond should be identical with the treatment of discount on notes payable. The accepted rule is to spread such discoimts over the term of the debt so as to charge each accounting period with its proportion of the discount. The cost to the issuing company is rep- resented by the effective rate of interest, i.e., the sum of the nominal interest (interest paid at the regular interest dates) and the proportion of the bond discount charged off. Bond premiums would be dealt with likewise, each accounting period being credited with its proportion of the premium. BOND EXPENSE — One of the factors determining the amount of discount is the expenses connected with a bond issue, such as attorneys', engineers', and auditors* fees, printing, etc. If paid by the lender, the discount will natu- rally be higher than if the expenses are paid by the borrower. Inasmuch as the latter method predominates, bond expense is generally added to the bond discoiint and the total amortized over the life of the bonds. In this way bond expense enters into the effective interest. AMORTIZATION — To amortize the debt discount and expense, the simplest pro- cedure is to divide by the number of years the bond is to run. For example, $100,000 twenty-year 5% bonds are sold at 95 on January 1, 1917, the expenses of engraving, commission on sales, etc., being $2,000. Assuming the discount and expense to have been debited to "Bond Discount and Expense," the following entries will be made on June 30, 1917: (1) Interest (a nominal account) $2,500.00 To — Cash $2,500.00 To record payment of semiannual interest in cash. (2) Interest 175.00 To — Bond Discount and Expense 175.00 To write down 1/40 of Bond Discount and Expense. Or, if the bonds are sold at 110 (less the expenses of $2,000), and are re- deemable at par, entry (2) would be: Premium on Bonds $ 200.00 To — Interest $ 200.00 To write down 1/40 of Premium on Bonds. The 5% is called the "nominal" or "cash" rate, while the "effective" or ■income" rate is the one which produces the correct charge to the interest ac- count for the period. The process of prorating discount or premium over the life of the obligation is called "amortization." The effective rate as above computed is not theoretically correct but is near enough for ordinary purposes. Copyright, 1917, The Ronald Press Company 1-25-8 STOCK DISCOUNT AND PREMIUM NATURE — When stock having a par value of $100 is sold for $95, the differ- ence of $5 is referred to as "discount." Conversely, if sold for $110, the excess of $10 is referred to as "premium." Many states forbid the issue of stock at less than par on the theory that the issue of a certain amount of stock will lead investors and creditors to believe that assets equal to the par value have been received by the company. In Illinois the original issue of stock cannot be sold at less than par. In California the issue of stock at a discount is sanctioned, but stockholders at the same time are held liable, pro rata, for all debts of the corporation. In New York stock may be issued without par value and in such cases there can be no discount or premium, TREATMENT ON BALANCE SHEET — Stock discount is preferably shown separately as a Deferred Charge. Sometimes it is merged with organization expenses such as incorporation fees, prospectus, legal fees, etc., and carried under that caption as a Deferred Charge, or as Intangible Capital. Premium on stock is preferably shown under that caption immediately following Capital Stock. Oft- entimes it is merged with Capital Surplus. DISPOSITION — The best practice is summed up by the Interstate Commerce Commission as follows: The discount "should be carried on the balance sheet until extinguished (1) by premiums realized on subsequent sales of stock, (2) by assessments levied on the stockholders, (3) by appropriations of income or free surplus for the purpose, or (4) by retiring the stock. When any stock is retired, the proper discount account should be adjusted by crediting to it an amount equal to the unextinguished discount on such stock." Stock discount or premium differs fundamentally from debt discount or pre- mium. The latter is part of the cost of money borrowed for a definite period and must be included in determining the effective interest expense. The former represents the amount by which the actual contributions by the proprietors are less than or more than the face value of the evidences of proprietorship (stock certificates) issued to them. ENTRIES — Thus, the M N Company is capitalized at $100,000, consisting of 1,000 shares having a par value of $100 each, subscribed for at 85. The fol- lowing entries are made: Unsubscribed Stock $100,000.00 To— Capital Stock Authorized $100,000.00 To record authorized issue. Subscriptions 85,000.00 Discount on Stock 15,000.00 To— Unsubscribed Stock 100,000.00 The entire issue is subscribed for at 85. If, after' the first year, the directors vote to write off $5,000 of the dis- count : Profit and Loss (or Surplus) $ 5,000.00 To— Discount on Stock $ 5,000.00 To retire portion of the discount as per minutes of Board of Directors, page Copyright, 1917, The Ronald Press Company 1-25-9 If, in the above illustration, the stock is sold at 104, the following entry would be necessary: Subscriptions To — Unsubscribed Stock Premium on Stock Subscriptions to entire issue at 104. $104,000.00 $100,000.00 4,000.00 INVESTMENT IN BONDS OF OTHER COMPANIES VALUATION — Purchases of bonds of other companies should be charged to In- vestments account at cost. Subsequent treatment will depend on whether it is a permanent investment (to be held indefinitely) or a temporary investment (available for sale). In the former case, fluctuations in the market value should be ignored except where a drop in market value appears to be permanent, in which case the conservative policy would be to write it down. Temporary investments generally follow the rule of cost or market whichever is the lower. If a temporary investment is a quoted security readily salable, it is permissible in certain cases to use market value, whether it is more or less than cost. AMORTIZATION AND ACCUMULATION — The premium or discount on a bond purchased is dealt with in the same manner as a premium or discount on bonds issued, viz., amortized over the term of the debt. In this manner the true income for the period is determined. However, in the case of bonds purchased it is cus- tomary to leave the discount or premium in the investment account instead of segregating this element as is done in the case of bonds issued. ACCRUED INTEREST AT PURCHASE — Unless bonds are purchased on the dates in- terest collections are made, there will always be the purchase of accrued in- terest to consider. Thus, two $1,000 Q% bonds, interest payable January 1 £ind July 1, are purchased May 16 for $2,040. Accrued interest from January 1 to May 16 will be: 43i 6 X X $2,000, or $45 12 100 indicating that the two bonds cost $1,995 or 99% each. Transactions with a bond house will clearly show just what portion of the price represents accrued interest. The following entry will be required for the transaction just stated. Investment (or other asset account) Accrued Interest on Investments To — Cash Purchase of two bonds No and .., of the A B Company at 99?i and accrued interest. $1,995.00 45.00 $2,040.00 Copyright, 1917, The Ronald Press Company 1-25-10 INCOME — Interest accrues and becomes income from day to day. Practically it is taken up on the books at the end of each month or whenever financial statements are prepared. In the former case the following entry would be made : Accrued Interest on Investments To — Income from Investments To take up accrued interest at and when collected the following entry: Cash To — Accrued Interest on Investments BALANCE SHEET — Permanent investments should be shown between capital and current assets ; temporary investments are current assets. INVESTMENT IN STOCKS OF OTHER COMPANIES VALUATION — An investment in the capital stock of another company may be a (1) permanent or temporary, or (2) a controlling interest (50+%) or less than a controlling interest. All purchases of stock in other companies should be charged to an Invest- ment account at cost. If a temporary investment, the rule of cost or market, whichever is the lower, is most commonly applied although a listed stock in some cases may be valued at market, irrespective of cost. A permanent invest- ment is valued at cost. Should it appear that a permanent fall in value has occurred, conservative policy would require that the book value be reduced. In either case the par value may be ignored. HOLDING COMPANY — A holding company is a corporation which controls other companies through ownership of a majority of the voting stock. In some states the statutes do not permit one corporation to acquire the capital stock of an- other, thus preventing the formation of holding companies. INCOME — Income from stock is determined when a dividend is declared, at which time the following entry would be made: Dividends Receivable To — Income from Investments Dividend of ....% declared by A B Company on $.... par value of stock owned, and when collected: Cash . To — Dividends Receivable Where the investment represents a controlling interest in a subsidiary corporation, the portion of profits earned since the acquisition of the con- trolling interest and applicable thereto, may be taken up as income on the books of the holding company when the profits are earned, rather than when the dividend is declared. The entry would be: Copyright, 1917, The Ronald Press Company 1-25-11 Investment in Controlled Company $ To — Profit and Loss % To take up 75% of profits of X Y Company, for year ending as per their State- ment of Profit and Income. and when the dividend is collected: Cash S To — Investment in Controlled Company J. \ This procedure is based on the theory that all the surplus of a subsidiary is controlled by the holding company and may be distributed at will and hence should appear on the books of the holding company as soon as determined. BALANCE SHEET — Permainent investments should appear between capital and current assets, investments in controlled companies appearing as a separate item. Temporary investments are usually classed as current assets. REFERENCES : Bennett, pages 252-278 Cole, Chapter XII Esquerre, pages 261-291 Sprague, "Accountancy of Investment" Copyright, 1917, The Ronald Press Company 1-26-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 26 CAPITAL AND REVENUE EXPENDITURES Problem 20 In your examination of the Automobile Delivery Truck account of a company, you find the following entries: DEBITS Jan. 1, 1917, Trucks 1, 2, 3, 4, at $1,200 $4,800.00 July 1, 1917, Truck 5 1,500.00 Aug. 1, 1917, Truck 6 1,500.00 CREDITS Aug. 1, 1917, Truck 2 $ 900.00 Sept. 1, 1917, Truck 4 750.00 Balance, September 1, 1917 $6,150.00 The Reserve for Depreciation of Automobile Delivery Truck account stood credited on January 1, 1917, with $1,800. Upon ginalyzing the transactions represented by these items, you find the following facts: 1. Truck 5 purchased July 1 replaced Truck 1. The portion of the reserve for depreciation accumulated on January 1 for Truck 1 amounted to $900. Truck 5 was purchased on open account. 2. Truck 2 was traded in for $850 on the purchase of Truck 6 costing $1,500. The difference was paid in cash. The reserve which had been accumra- lated for depreciation on Truck 2 on January 1, amounted to $300. 3. Truck 4 was totally destroyed in an accident September 1. The reserve for depreciation on this truck amounted on January 1 to $300 and it was in- sured for $750. Assume the rate of depreciation to be 25% per year. Give journal entries which would properly record the above facts and show the balances of all accounts affected, as of September 1, 1917. MISCELLANEOUS QUESTIONS Question 80 — A corporation manufacturing explosives was compelled to pay exorbitant rates for a very limited amount of insurance, and in consequence was obliged to install an automatic sprinkler system at a cost of $75,000. This additional fire protection enabled it to secure a full line of insurance, though in mutual companies, and at a much lower rate than was obtainable prior to such installation. At the end of the fiscal year the company received dividends from these mutual insurance companies, aggregating $2,000. To what account should the cost of the sprinkler system be charged and to what account should this dividend be credited? State your reasons fully. Copyright, 1917, The Ronald Press Company 1-26-2 Question 81 — Should the following expenditures be charged to capital or to revenue : (a) Repairs to machinery, (b) Replacements of machinery and plant. (c) Royalties on machines used but owned by outside parties. (d) Brokerage on a piece of property purchased. (e) Costs attending a mortgage given. (f) Costs of patents, including lawyer's charges and government fee. (g) Expenses of incorporation. Give reasons for your answer in each case. WORK TO BE DONE IN THE PRACTICE SET SUMMARY OF TRANSACTIONS JUNE 30 District managers' reports show sales of cars $40,875, and accessories $4,328.25. Collection report to date shows cash received from customers $16,483.25; discount allowed $538.71; notes received $28,750. Received on notes $11,437, and for accrued interest, $98.38. Gave petty cashier check for following petty cash disbursements: heat, light, and power $157.25; miscel- laneous manufacturing expenses $48.27; traveling expenses $93.72; miscellane- ous selling expenses $67.20; office salaries $122; total $488.44. Received $29.43 from an account receivable charged off June 27. Depreciation of Buildings — 2% per annum (including purchase of June 2) " " Machinery — 10% « « " w n n w " " Delivery Equipment — 15% per annum ■ " Office and Warehouse Fixtures — 6% per annum (including pur- chase of Jiine 2) Reserve for Bad Debts — y-0o of Gross Sales Taxes Accrued 285.67 Bond Interest Accrued Rent Paid in Advance Insurance Expired 76.67 Accrued Interest on Notes Receivable 315.92 Prepaid Interest on Bank Loan Provide a Reserve for Discounts to be taken by customers 1,800.00 Inventory of Coal 3,500.00 Stationery 100.00 Accrued pay-roll to date: Factory: Direct Labor Indirect Labor Heat, Light, and Power Repairs — Plant and Equipment Motor Truck Maintenance $20,948.73 11,848.27 583.20 1,532.83 31.27 $34,944.30 Copyright, 1917, The Ronald Press Company Office: Salesmen's Salaries Officers* Salaries Office Salaries 1-26-3 $ 3,547.50 2,500.00 657.75 6,705.25 $41 » 649. 55 Prepare : (a) A trial balance of general ledger as of June 30, 19 — (b) Schedule of unpaid audited vouchers. Solution to Problem 19 (Entry already made) -April 1, 1917- Cash in Sinking Fund $10,000.00 To— Cash $10,000.00 Recording payment of instalment No. 8. -April 1, 1917- (1) Cash in Sinking Fund 1,250.00 To — Sinking Fund Reserve (Income from Sinking Fund) 1,250.00 Coupons collected by trustee on X Y Company 5% bonds. -May 1, 1917- (2) Cash in Sinking Fund " 450.00 To — Sinking Fund Reserve (Income from Sinking Fund) 450.00 Coupons collected by trustee on A B Company Q% bonds. (3) Cash in Sinking Fund 15,600.00 To — Securities in Sinking Fund (Bonds of A B Company) 15,000.00 Sinking Fund Reserve 600.00 Bonds of A B Company held by trustee sold at 104, book value $15,000. (4) Securities in Sinking Fund (Bonds of X Y Com- pany) 36,000.00 Accrued Interest on Sinking Fund Investments 150.00 To— Cash in Sinking Fund 36,150.00 36 X Y Company 5% bonds purchased by trustee at par and accrued interest. Copyright, 1917, The Ronald Press Company 1-26-4 (5) Sinking Fund Reserve (Expenses of Sinking Fund) $250.00 To — Cash in Sinking Fund $250.00 Commission paid by trustee on purchase and sale of bonds. -June 30, 1917- (6) Cash in Sinking Fund 240.00 To — Sinking Fund Reserve (Income from Sinking Fund) 240.00 Interest on cash balances allowed by trustee for six months ending today. (7) Sinking Fund Reserve (Expenses of Sinking Fund) 50.00 To — Cash in Sinking Fund 50.00 Expenses of trustee paid as per his report. The accounts appearing in parentheses are the ones which would be used in case there was no sinking fund reserve. On June 30, 1917, the sinking fund assets would appear as follows on the balance sheet : Bonds of X Y Company $86,000.00 Accrued Interest paid on above 150.00 Cash 1,190.00 $87,340.00 ANSWERS TO QUESTIONS Answer to Question 74 — The entries in either case are the same, all income being credited to an "Income from Sinking Fund" or similar account, and all expenses being debited either to the income account or to a separate Expenses of Sinking Fund account, as in the solution to Problem 19. Or if a sinking fund reserve is maintained, the income and expense will be carried and deb- ited, respectively, thereto. Answer to Question 75 — The theory of the sinking fund reserve rests on the assumption that the amount of profits withheld in the business by setting up the reserve will increase the assets and at the same time prevent such addi- tional assets from being withdrawn by stockholders as dividends. Without an accompanying provision for the creation of "Sinking Fund Assets," it may happen that the funds represented by the reserve will be invested in addi- tional capital assets or perhaps will be squandered, in either case no liquid funds being found on hand when the bonds are to be redeemed. Hence, while the reserve generally operates to protect the investor so far as the value of the underlying security is concerned, it does not assure him that funds will be on hand to pay the obligation at maturity. Copyright, 1917, The Ronald Press Company 1-26-5 CAPITAL AND REVENUE EXPENDITURES DEFINITION — "Capital and Revenue Expenditures" has reference to the ques- tion — "Shall certain expenditures be treated as additions to capital assets or as operating expenses or otherwise?" The term is usually exclusive of ex- penditures other than those relating to capital assets. NATURE OF PROBLEM — A building is erected, its cost included with other capital assets, and for a number of years is used for the purposes of the business for which it has been constructed. During that time a reserve for depreciation, based on a fifty-year life, has been accumulating, and all or- dinary repairs, such as repainting, redecorating, replacing window-panes, etc., have been charged to an appropriate expense account and closed into Profit and Loss at the end of each year. Of ordinary repairs such as these there has been no question. None have added any value to the property and they have been treated properly as operating expenses. But supposing expenditures out of the ordinary are incurred? A wall is torn down to make way for a new addition. Foundations are strengthened and considerable interior alterations are made necessary by installing new machin- ery. Machines already installed are shifted from one part of the building to another. Some of the accounts to which these and other expenditures having to do with the extension or maintenance of capital assets may be charged are: 1. Capital Asset Accounts 2. Reserves for Depreciation 3. Operating Expenses 4. Surplus 1. PROPERTY ACCOUNTS — The discussion here is concerned with (a) property purchased and (b) property constructed by the business itself. (a) PURCHASED PROPERTY. To the contract or invoice price which is charge- able to the capital asset account it is proper to add the costs of installa- tion, such as freight-in, handling charges, and all other costs incurred before the asset is ready for use. Trade discounts, cash discounts, rebates and allowances should be deducted. Sometimes assets are purchased in a depleted or worn-out condition. In this case the costs of bringing them to a state of normal efficiency are capi- tal expenditures since more would have been paid for the assets had they been in a state of proper repair, (b) PROPERTY CONSTRUCTED BY THE BUSINESS ITSELF. There are various methods in use for arriving at the cost of property constructed. One is that only materials used and direct labor expended (prime cost) are proper charges to construction. A second method often followed is to include as overhead (in addition to prime cost) those costs which will not continue after construction ceases and which have been incurred because of construction. In still other cases arbitrary percentages are added to the prime cost to cover manufacturing overhead and administrative expenses. A fourth method consists in charging to the asset account the market price if obtained from outsiders. Copyright, 1917, The Ronald Press Company 1-26-6 A rule supported most generally by accountants stands midway between the second and third methods outlined: to include materials and labor directly assignable to construction and that portion of overhead which represents cost actually applicable, whether composed of non-recurring charges or of regular overhead and administrative expenses. In the latter charge one might expect to find superintendence, engineering, part of the costs of the purchasing and receiving departments, and even interest. Charges for interest are generally limited to amounts actually paid or accrued during the period of construction, such as interest on bonds and interest on temporary borrowings for capital pi^rposes. Expenditures incurred on capital assets serving to increase the capacity of their output are usually additions to property accounts. But these expen- ditures to become capital charges must be made on assets which are otherwise operating efficiently; that is, they must not represent neglected repairs which of course might also result in an increased capacity of output as com- pared with the asset when in bad repair. Nor would expenditures the object of which is to lower the cost of output necessarily imply that value was being added to the property; the test would be, "Are there any additions or exten- sions to the normally functioning asset because of the expenditure?" 2. RESERVES FOR DEPRECIATION — Charges to depreciation reserves will in most cases be confined to the costs of old assets discarded or sold. Extraor- dinary repairs the result of which is to lengthen the life of the asset may as a rule be charged to the depreciation reserve, the effect being to extend the time during which depreciation is provided. Extraordinary expenses or repairs should not include amounts which represent delayed, deferred, or neglected re- pairs, since the latter are chargeable to past operations, not to the reserve. 3. OPERATING EXPENSES — All recurrent and ordinary expenses necessary to maintain an asset in a proper state of efficiency are classed as operating expenses. REPAIRS AND RENEWALS is often the name of an account purely nominal in character, "renewals" referring to small or frequent replacements of integral parts of a single asset such as a machine. Thus, while the life of a certain printing press is ten or fifteen years, certain rollers and bearings must be replaced repeatedly at the end of every six or eight months. Renewals of small parts is in most cases treated as an expense and should not be confused with the renewal of the whole asset or a substantial part of the asset. Frequently renewals of assets such as SMALL TOOLS are debited at once to expense accounts, leaving the asset account at its original figure, undepre- ciated. This method is to be recommended where the entire asset or most of it has a life of a year or less. In order that the book value of the asset may be neither too high nor too low, a periodical physical revaluation is provided for and an adjustment made between the asset and nominal account to bring the former into agreement with the inventory figure. Other methods of handling capital and revenue expenditures are illustrated in the various treatments of additions to furniture and fixtures which may be found in practice. Besides the usual treatment accorded other capital assets may be mentioned: Copyright, 1917, The Ronald Press Company 1-26-7 (a) The inventory method as in the case of Small Tools, Delivery Equipment, etc. (b) Writing off a larger amount for depreciation than is necessary. (c) Closing out the original asset account by means of a reserve for depreciation or by charging it off directly to Profit and Loss and treating subsequent additions as expenses. (d) Maintaining the original cost as an asset and writing off subse- quent additions to Profit and Loss. The error resulting from an application of these methods tends to be on the side of conservatism and a "secret reserve" may be created (the financial position of the business understated by the balance sheet). 4. SURPLUS — Charges to Surplus on account of capital assets would consist chiefly of neglected repair and maintenance charges and losses actually sus- tained in previous years but not written off until after the close of the period. An extraordinary loss, such as a fire loss, might also be charged to Surplus without first appearing in Profit and Loss. In some cases it may be necessary to make a finer differentiation of expenditures than above indi- cated, and Improvement Reserves, Deferred Charges, or Extraordinary Charges to Profit and Loss may be used for that purpose. REFERENCES : Dickinson, Chapter VII Esquerre, pages 226-230 Copyright, 1917, The Ronald Press Company 1-27-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 27 GOOD-WILL, PATENTS, COPYRIGHTS, AND TRADE-MARKS GENERAL REVIEW QUESTIONS Problem 21 (For General Review) The Jones Lithographing Co. commenced the year 1917 with the following balance sheet: JONES LITHOGRAPHING CO. BALANCE SHEET, JANUARY 1, 1917 ASSETS CURRENT ASSETS: Cash $ 4,000.00 Accounts Receivable 59,500.00 Personal Accounts 10,100.00 Inventories: Raw Materials 12,500.00 Work in Progress 3,100.00 General Expense (Office Supplies, Postage, etc.) 500.00 $ 89,700.00 DEFERRED CHARGES: Discount on Stock $ 15,300.00 Prepaid Commissions to Salesmen 9,670.00 Working Fund 5,000.00 Prepaid Insurance 1,030.00 31,000.00 CAPITAL ASSETS: Land | 45,000.00 Buildings 259,000.00 Machinery 240,000.00 Fixtures: Factory $160,000.00 Gen. Office 6,000.00 166,000.00 Investment in X Printing Co. 350,000.00 1,060,000.00 $1,180,700.00 Copyright, 1917, The Ronald Press Company 1-27-2 LIABILITIES CURRENT LIABILITIES: Accounts Payable $ 16,400.00 Notes Payable 4,000.00 . Bank Loan 5,000.00 Accrued Bond Int. 8,000.00 Accrued Taxes 3,000.00 $ 36,400.00 FIRST MORTGAGE 20-YEAR 4% BONDS (due Jan. 1, 1921): Issued and Outstanding 400,000.00 RESERVES FOR DEPRECIATION: Buildings $ 56,000.00 Machinery 72,000.00 Fixtures 40,000.00 168,000.00 OTHER RESERVES: ' Sinking Fund Reserve $320,000.00 Bad Debt Reserve 2,000.00 322,000.00 CAPITAL STOCK: Issued and Outstanding $500,000.00 Deficit, Jan. 1, 1917 245,700.00 254,300.00 $1,180,700.00 Personal accounts on January 1, 1917, were: D. R. Jones, President — Drawing Account $ 6,650.00 W. R. Single, Vice-President — Drawing Account 3,450.00 $10,100.00 "Investment in X Printing Co." is the cost of 3,000 shares (out of a total issue of 5,000 shares) which were acquired in 1911 by the present owners through exchange of one share of X Printing Co. stock for every 1 1/6 shares of Jones Lithographing Co. stock. Accounts payable at January 1 were on ac- count of raw material purchases $9,500; heat, light, and power, $5,900; and general expense $1,000. Cash receipts and disbursements during the year 1917 have been summarized as follows: RECEIPTS Customers on Account $ 831,000.00 Notes Payable 10,000.00 Bank Loans 75,000.00 Cash Sales 102,000.00 Sale of Machinery Scrapped in 1917 (cost $5,000, reserve provided $3,800) 1,200.00 Dividend on X Printing Co. Stock 7,000.00 Refund from Barr Chemical Co. (paid bill twice to them for purchase of raw materials) 150.00 TOTAL RECEIPTS $1,026,350.00 Copyright, 1917, The Ronald Press Company 1-27-3 DISBURSEMENTS Accounts Payable: Raw Material Purchases Manufacturing Supplies Heat, Light, and Power Additions to Buildings New Machinery Purchases (replacing old ma- chinery scrapped costing $10,000; reserve provided $10,000. This item is not related to the one appearing above.) Extraordinary Repairs on Fixtures (Factory) Prepaid Insurance Direct Labor Indirect Labor General and Administrative Expense Prepaid Commissions to Salesmen Commissions to Salesmen Notes Payable 1916 Taxes Bank Loans Bond Interest D. R. Jones — Drawing Account W. R. Single — Drawing Account Sundry Manufacturing Expenses BALANCE ON HAND, December 31, 1917 575,000.00 8,500.00 15,100.00 92,300.00 11,500.00 2,500.00 1,950.00 125,000.00 11,000.00 15,400.00 21,600.00 10,200.00 12,000.00 3,000.00 70,000.00 16,000.00 10,000.00 8,000.00 14,150.00 $1,023,200.00 7,150.00 Sales during the year charged to customers totalled $840,000; allowances during the year on the gross amount were $8,450; cash discounts allowed cus- tomers $2,400; accounts proving worthless and charged to reserve during 1917, $1,100; total accounts outstanding which are regarded as uncollectible at De- cember 31, 1917, $2,250. Credit to D. R. Jones, president and general manager, on account of salary for 1917, $12,000; credit to W. R. Single, vice-president and general superin- tendent of manufacturing operations (chargeable as factory burden), $6,000. Inventory of raw materials at December 31, 1917, $9,800; of work in pro- gress, $4,500; of postage, $500. All work being done on a contract basis, there is no finished stock. In view of the profits earned during the year, the directors vote to write off $5,000 of the discount on stock. Prepaid commissions to salesmen at De- cember 31, 1917, are $8,140; prepaid insurance $1,110; the president reports that while on January 1, 1917, he had the $5,000 working fund on hand, at De- cember 31 but $1,000 remains, the difference being chargeable to Promotion (Selling) Expense. Accoimts payable December 31, 1917, are $5,100 for raw material purchases, and general expense items $900; total $6,000. Provide as follows for depreciation, using as a basis the balances of the ledger accounts at cost at December 31, 1917: buildings 5%; machinery 10%; fixtures 15%, Copyright, 1917, The Ronald Press Company 1-27-4 Accrued taxes at December 31, 1917, consist of the following: Property Taxes $945.00 Income Tax and Capital Stock Tax (estimated) $962.30 The regular increment to the sinking fund reserve should be made. From the information above prepare: (a) Balance sheet at December 31, 1917. (b) Statement of profit and loss for year ending that date. The balance sheet may be rearranged in any way. GENERAL REVIEW QUESTIONS Question 82 — Give the procedure to be followed when attempting to ascer- tain the amount of profit or loss of an enterprise whose accounts have been kept on the single-entry basis. Question 83 — Wherein do trial balances and balance sheets differ? Question 84— What is the purpose of grouping assets and liabilities, so as to show the separate totals of the fixed and current assets and liabilities when preparing balance sheets? Question 85 — Differentiate between capital and revenue expenditures. Il- lustrate. Question 86 — Differentiate between the following terms — expenditure, dis- bursements, expense, receipts, income. Question 87 — Should goods, which have been sent out on consignment, be credited to sales account and charged to the consignee when recording such consignment on the books? Give reasons for your answer. Question 88 — Outline a method of handling consignments-outward involving the use of a subsidiary consignments-outward ledger. Question 89 — Outline a method of handling consignments-inward involving the use of a subsidiary consignments- inward ledger. Question 90 — What is a joint venture? Describe a simple method of ac- counting for a venture between A, B, and C, A acting as the manager of the venture, B advancing the merchandise shipped, and C collecting the proceeds, Questi-on 91 — Describe briefly two ways of accounting for accruing income and expense, using as an illustration interest accrued or notes payable. Question 92 — What is the underlying reason for excluding from merchandise inventory valuations the increase in market value over cost price of goods on hand in those cases where, if the market value is less than the cost price, the loss is taken into account? Copyright, 1917, The Ronald Press Company 1-27-5 Question 93 — Name two advantages derived from the method of keeping a separate cash fund out of which all petty expenses are paid with currency. Question 94 — What advantage is derived from the practice of entering cash sales daily in the sales journal and charging the cash received to a cash sales or cashier's account in the customers ledger, instead of simply credit- ing such sales direct from the cash book to the Sales account? Question 95 — Name and describe the chief partnership accounts not common to a corporation. Question 96 — By and under what authority does a corporation operate? Question 97 — Differentiate between treasury stock and unissued stock. Question 98 — How would you dispose of the difference between par value and selling price, where treasury stock is sold for less than par? Where treasury bonds are sold for less than par. Question 99 — On the balance sheet of the X Y Z Company, among the items under the heading of "Liabilities" appeared the following: 1 — 6% Preferred Capital Stock $200,000.00 2 — First Mortgage 6% Gold Bonds 200,000.00 What difference, if any, is there between these two liabilities, assuming the stock is preferred both as to dividends and assets? Question 100 — What difference is there in the nature of security for the following kinds of bonds: First Mortgage; Income; Municipal? Question 101 — Assuming that an entire issue of bonds ($100,000 par value) yielded $105,000 through sale, after all expenses in connection with floating the issue were paid, how would you record the receipt of the amount in excess of par value, and what disposition would you make of such item? Question 102 — Can surplus be created in any other way than through profits earned from operations? Question 103 — What entry should be made in the books of account of a cor- poration with respect to dividend authorized by the board of directors, even though payment of such dividend may be indefinitely deferred? Question 104 — Is it proper under any circumstances to borrow cash with which to pay dividends? Question 105 — Why is it necessary to include in a revenue statement or profit and loss account, an amount to represent depreciation of plant and equipment, when such plant and equipment have been maintained to the highest degree of efficiency through repairs and renewals, and when to replace same, even in their used or second-hand condition, would cost considerably more than the original purchase price? Copyright, 1917, The Ronald Press Company 1-27-6 Question 106 — Assuming that a reserve had been set up in the accounts at December 31, 1916, to provide for bad and doubtful accounts, how would you treat an account which appeared on the books at that date, but which becoming uncollectible in 1917, is to be charged off? Question 107 — Differentiate between a reserve set aside out of earnings (a) for retirement of bonds or any other debt ; (b) for depreciation of fixed assets. Question 108 — When, and under what circumstances, is it most proper to bring into the accounts an amount to represent the value of good-will? Question 109 — What do you understand by the phrase, "Capitalize such earn- ings as exceed the ordinary interest return on the investment?" Question 110 — What do you understand by the term "Consolidated Balance Sheet," and in what class of corporations are such balance sheets used? Question 111 — Give the principles underlying the perpetual inventory, and state the advantages derived from its use? How are perpetual inventory ac- counts related to controlling accounts? Question 112 — Explain three methods of providing for depreciation which are in general use. Question 115 — Give some of the essential elements of the voucher system. Under what circumstances would the use of the modern voucher system be inad- visable? Question 114 — If you were the clerk in charge of the voucher register and a voucher were handed to you for entry, what approvals would you look for? ANSWERS TO QUESTIONS Answer to Question 76 — 1. Assuming the par value in each case to be $100, the actual return on 6 the 6% stock will be S6 a year, which is or 4.03% on the investment. 148% 4.50 The 4^/^% stock will yield 4.004% ( ) on the investment; hence, the first 112% stock is preferable as to income. 2. The investment will be represented by the price paid for the stock plus costs of purchase, in this case 119%+%, or 120. If, for every |120 invested, it is desired to obtain a 5% income, or $6, it is apparent that a 6% stock must be purchased. Copyright, 1917, The Ronald Press Company 1-27-7 Answer to Question 77 — -June 1, 1917- (1) Interest on Bonds ( 15,000.00 To — Cash $ 15,000.00 Final instalment of interest paid to bond- holders. (2) Sinking Fund Trustee 33,333.33 To— Cash 33,333.33 Final instalment of sinking fund paid to sinking fund trustee. (3) Provision for Sinking Fund Reserve 33,333.33 To — Sinking Fund Reserve 33,333.33 To record yearly provision for sinking fund. (4) Interest on Bonds 1,602.00 To — Bond Discount and Expense 1,602.00 To close out proportion of bond discount and expense for year. (5) Bonds Outstanding 500,000.00 To — Sinking Fund Trustee 500,000.00 Payment of bonds by trustee. (6) Sinking Fund Reserve 500,000.00 To — Surplus 500,000.00 To write back sinking fund reserve per resolution of the Board of Directors. See minute book, page Answer to Question 78 — Periodically the purchaser will have increased his bond investment account so that at maturity it will appear on his books at $100,000, the final entry necessary to raise it to this value being: -June 1, 1917- (1) Investment in B Manufacturing Co. Bonds | 566.67 To — Income from Bonds $ 566.67 Proportion of difference between cost and redemption price of bonds (on yearly basis). (2) Cash 3,000.00 To — Income from Bonds 3,000.00 Semiannual interest coupons. Copyright, 1917, The Ronald Press Company 1-27-8 (3) Cash $100,000.00 To — Investment in B Manufacturing Co. Bonds $100,000.00 Surrender and redemption in cash, being due June 1, 1917. Answer to Question 79 — -December 31, 1916- Investment in B Manufacturing Co. Stock 112,500.00 To — Income from Subsidiaries 112,500.00 To take up our portion of profits as per their Statement of Profits and Income. -January 5, 1917- Dividends Receivable from Subsidiaries 60,000.00 To — Investment in B Manufacturing Co. Stock 60,000.00 Dividend declared this date. -January 31, 1917- Cash 60,000.00 To — Dividends Receivable from Subsidiaries 60,000.00 Dividend declared January 5, 1917, paid todey. Copyright, 1917, The Ronald Press Company 1-27-9 GOOD-WILL DEFINITION — "Good-will represents the value of business connections, the value of the probability that present customers will continue to buy, in spite of the allurements of competing dealers." (Hatfield) In the average business, even though long established and well patronized, the item good-will ordi- narily will not be found in the accounts, unless a reorganization or purchase of another business has taken place, VALUATION — A computation of good-will is based (1) on the existence of surplus earnings over a reasonable return on the capital investment, or (2) on the excess of the par value of securities exchanged over the accepted value of the net tangible assets taken over. The value of excess earnings is determined according to any one of three methods as follows: (a) Capitalize the average net profits and deduct the value of tangible assets. Thus, if the average yearly net profits are $15,000 and a reasonable return is estimated at 6%, the capital necessary to produce this income is 15,000 . ^ or $250,000. Assuming the accepted value of the tangible assets to be .06 $180,000, the good-will valuation will be $70,000. (b) If excess earnings are considered uncertain for the future it may be desirable to capitalize them at a higher rate. The yearly net profits being $15,000, and a fair return on the capital invested considered as 6% of $180,000, or $10,800, the income attributable to the asset good-will is $4,200 4,200 which, capitalized at 10%, amounts to $42,000 ( ). . xu (c) A number of years' purchase of the average net profits. The applica- tion of this rule varies according to whether "net profits" is taken to mean before or after providing for a fair return of the invested capital, owner's salary, depreciation, etc. Usually the computation is made after allowing for all these deductions £ind multiplying the result by the agreed number of years. In the illustration cited the excess profits, after deducting a fair return on the capital invested, were $4,200. Based on a five years' purchase of these excess profits, the good-will valuation is $21,000. In the preceding para- graph the valuation of good-will there shown is equivalent to a ten years* purchase of the excess profits. 2. Whenever the par value of the securities of a new corporation exceeds the accepted value of the assets of a business exchanged for the securities, it is the practice to show the difference as good-will. The computation should be based on one of the methods just described, otherwise the stock is termed "watered." It was formerly common on the books of a new corporation to find a single Plant account which was debited with the par value of securities issued, but the practice has been strongly discouraged by accountants. CHANGING VALUATION OF GOOD-WILL— Any change in the value of the asset of good-will should be referred to as FLUCTUATION, not DEPRECIATION or APPRECIA- TION. Such fluctuation is the direct result of an increase or decrease in earnings, and it is obvious that this fluctuation itself should not in any way increase or decrease earnings. Copyright, 1917, The Ronald Press Company 1-27-10 It follows that good-will need not be charged off for the purpose of stating true earnings. The desirability of charging off good-will is a ques- tion to be passed upon by the management, and any amount charged off would represent an appropriation of profits rather than an expense. In connection , with this proposed treatment the following quotations will be of interest: "And where it is clear that the valuation of the good-will was erroneous, that it is not worth its book value, the best method of . adjusting is that ad- vocated by Dicksee, to offset the decline in its value by a reduction of capi- tal, not by a charge against profits." (Hatfield) "As good-will does not suffer wear and tear, does not become obsolescent, is not used up in the operation of business, depreciation, as such, cannot be charged against it." (Montgomery) p Good-will varies from day to day and its value is unknown until the busi- ness is disposed of. Its uncertain value is the chief argument for its elimi- nation from the books. u. PATENTS, COPYRIGHTS, AND TRADE-MARKS Patents, copyrights, and trade-marks are rights issued by the federal gov- ernment to individuals or businesses allowing the exclusive use of these rights for a certain period of time. A patent is issued for seventeen years, a copyright for twenty-eight years (renewable for an additional fourteen years), and a trade-mark for thirty years (renewable for an additional thirty years). A small fee is paid the government at the time of registration. Patents are valued at cost, including legal fees and other costs of main- taining title to them. Although their life may be reckoned as seventeen years, and depreciation provided accordingly, it is more conservative to write off their costs in a much shorter time. Similar patents may be secured by rival concerns or improved substitutes introduced with the result that a pat- ent or series of patents may become valueless. Some patents taken out or pur- chased may immediately prove worthless, in which case their cost should be written off at once. Copyrights and trade-marks follow the same general rule, i.e., should be valued at cost and generally depreciated more rapidly than the period of their protection would indicate, for the reason that their future value is uncer- tain. In many cases patents, trade-marks, and copyrights are viewed as good-will and as such would not be written off for the reasons previously mentioned. REFERENCES : Hatfield, pages 107-118 Montgomery, pages 123-128 Wildman, Chapters XXV and XXIII Copyright, 1917, The Ronald Press Company 1-28-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 28 CONSOLIDATIONS WORK TO BE DONE IN THE PRACTICE SET Total raw material requisitions issued during month $18, 897. 04, * Finished parts used in production $45,109.16. Finished parts sold $25,724.33. Work in Progress transferred to Finished Stock, $142,725.39. Cost of automobile sales $175,543.64. From this information prepare closing entries, balance sheet as of June 30, and a statement of profit and loss for the month ending that date. Solution to Assignment 1-26-2 MILLER MOTOR CAR CO. TRIAL BALANCE, JUNE 30, 19— DEBIT Land $ 40,000.00 Buildings 70,000.00 Reserve for Depreciation on Buildings Machinery, Tools, and Equipment 165,603.50 Reserve for Depreciation on Machinery, Tools and Equipment Office and Warehouse Fixtures 2,045.00 Reserve for Depreciation on Office and Warehouse Fixtures Delivery Equipment 1,750.00 Reserve for Depreciation of Delivery Equipment Good-will 66,000.00 Investments 200,000.00 Inventory of Automobiles 63,368.25 Inventory of Work in Progress 31,710.17 Inventory of Raw Materials 5,870.40 Inventory of Finished Parts 22,774.08 Inventory of Miscellaneous Supplies 3,600.00 Customers' Accounts 104,013.40 Notes Receivable 116,003.00 Accrued Interest on Notes Receivable 315.92 Reserve for Bad Debts Reserve for Discounts Cash in Bank 50,186.45 Petty Cash Fund 500.00 Copyright, 1917, The Ronald Press Company CREDIT 200.00 2,213.36 17.48 43.76 1,522.75 1,800.00 1-28-2 Advances to Salesmen Unexpired Insurance Rent Paid in Advance Discount on Stock Capital Stock — 7% Preferred Capital Stock — Common Unissued Common Stock 5% First Mortgage Bonds 6% First Mortgage Bonds Audited Vouchers Accrued Bond Interest Accrued Taxes Accrued Pay-roll Surplus Sales — Automobiles Allowances on Sales — Automobiles Sales — Finished Parts Allowances on Sales — Finished Parts Discount on Sales — Finished Parts Discount on Purchases Interest Received Purchases — Raw Material Purchases — Finished Parts Direct Labor Indirect Labor Repairs, Plant, and Equipment Heat, Light, and Power Royalties Shop Supplies Depreciation Insurance Taxes Miscellaneous Factory Expenses Salesmen's Salaries Salesmen's Traveling Expenses Advertising Delivery Equipment Maintenance Depreciation on Delivery Equipment Miscellaneous Selling Expenses Officers' Salaries Office Salaries Depreciation on Office and Warehouse Fixtures Stationery and Printing Bad Debts Bond Interest Interest Paid $ 2,000.00 766.66 100.00 2,000.00 66,100.00 1,854.00 2,052.75 4,990.51 16,767.44 66,523.13 39,901.98 21,171.14 3,309.60 5,459.75 600.00 683.85 1,496.70 76.67 285.67 155.77 6,491.00 837.00 25,647.25 108.54 21.88 203.45 2,500.00 1,328.25 10.23 593.75 1,449.63 1,000.00 222.94 100,000.00 500,000.00 150,000.00 75,000.00 60,144.12 4,625.00 2,295.34 41,649.55 4,515.02 235,385.00 39,191.08 1,129.82 717.43 )1, 220, 449. 71 !iJl, 220,449. 71 Prepare and post entries necessary to close books at June 30. Copyright, 1917, The Ronald Press Company 1-28-3 Solution to Problem 20 -July 1, 1917- (1) Operating Expense (Depreciation) $ 150.00 To — Reserve for Depreciation $ 150.00 Depreciation from January 1 to July 1 on Truck 1. (2) Operating Expense (Depreciation) 21.43 Surplus 128.57 Reserve for Depreciation 1,050.00 To — Automobile Delivery Truck Account 1,200.00 Truck 1 scrapped. Shortage in provision for depreciation pertaining to prior years charged direct to Surplus account. (3) Automobile Delivery Truck Account 1,500.00 To — Accounts Payable 1,500.00 Truck 5 purchased. -August 1, 1917- (4) Operating Expense (Depreciation) 175.00 To — Reserve for Depreciation 175.00 Depreciation from January 1 to August 1 on Truck 2. (5) Automobile Delivery Truck Account (#6) 1,500.00 To — Automobile Delivery Truck Account (#2) 850.00 Cash 650.00 Purchase of Truck 6 in exchange for Truck 2 and cash. (6) Reserve for Depreciation 475.00 To — Automobile Delivery Truck Account 350.00 Surplus 78.95 Operating Expense (Depreciation) 46.05 To write off balance of account with Truck 2 exchanged, and to credit back over-provision for depreciation. -September 1, 1917- (7) Operating Expense (Depreciation) 200.00 To — Reserve for Depreciation 200.00 Depreciation from January 1 to September 1 on Truck 4. (8) Reserve for Depreciation 500.00 Insurance Adjustment Account 700.00 To — Automobile Delivery Trucks 1,200.00 Truck 4 totally destroyed. Copyright, 1917, The Ronald Press Company 1-28-4 (9) Cash $750.00 To — Insurance Adjustment Account $750.00 Proceeds from insurance carried on Truck 4, (10) Insurance Adjustment Account 50.00 To — Profit and Loss 50.00 Excess of proceeds over book value of Truck 4. (11) Operating Expense (Depreciation) 293.75 To — Reserve for Depreciation 293.75 Provision for depreciation to September 1 of following trucks: #3-8 months $200.00 #5-2 months 62.50 #6-1 month 31.25 $293.75 The above entries having been made and posted, the Auto Delivery Truck Account will have a balance of $4,200, representing the cost of the trucks on hand (#3, 5, and 6) ; the Reserve for Depreciation will contain a balance of $593.75, the accrued depreciation to date on the three trucks. ANSWERS TO QUESTIONS Answer to Question 80 — The cost of the sprinkler system should be charged to some equipment (capital asset) account, and depreciation written off from year to year and debited to manufacturing operations. Dividends received from the mutual insurance companies at the end of the year should be credited to Insurance Expense account since they represent a return of part of the premium paid at the beginning of the year. Dividends of this nature should not be confused with dividends from investments, the latter being an earning, the former a reduction of an expense. Answer to Question 81 — (a) Revenue. (b) Capital; care being taken that the old assets replaced are written off. (c) Revenue, unless part of the royalties apply on a purchase agreement, in which case they would be prorated as between capital and revenue. (d) Capital, the item being one of the costs necessary in obtaining the asset. (e) A deferred charge to be written off over the life of the mortgage. (f) Capital charge to be written off during the life of the patent, if not sooner. (g) A deferred charge to be written off within three or five years. Often permanently capitalized in the case of public utility corporations. Copyright, 1917, The Ronald Press Company 1-28-5 CONSOLIDATIONS ADVANTAGES — The advantages of consolidation may be briefly summed up as follows: 1. Decrease expenses, such as duplicate salesmen, executive officials, accounting departments, etc. 2. Specialization on certain lines by the constituent components, eliminating duplication in manufacturing and equipment. 3. Ability to hire the best men, since the cost is distributed over all the constituent components and not borne entirely by any one. 4. Larger profits through obtaining a partial monopoly and maintaining sales prices at a higher level. 5. Better facilities for borrowing money and obtaining additional capital. METHODS USED — The combination of two or more companies into a single organization may be effected through (1) merger or (2) holding company. A merger is the complete amalgamation of the constituent companies into a single company. The latter may be a new corporation or one of the constitu- ent companies. In either case the new organization would acquire the net assets of all the other companies which would then be dissolved. An alternate procedure is to organize a new company for the purpose of controlling the constituent companies through the ownership of a majority of the stock of each constituent company. The latter retain their separate cor- porate existence and operate as distinct organizations as heretofore. The control by the holding company arises through the election of a majority of the board of directors of each company. Under this method the holding company is usually the financial organization and the subsidiaries are manufacturing or selling organizations. A new company need not be organized where the laws of a state permit one of the constituent companies to acquire controlling interests in the other companies. EFFECT ON ACCOUNTING PROCEDURE — 1. MERGED COMPANY. The accounts in this case would not differ from those of any other corporation, 2. SUBSIDIARY COMPANY. There would be no change in the financial accounts of the subsidiary of a holding company. The only change would be on the stock ledger recording the transfer of shares from one set of stockholders to an- other. Sometimes there appears an additional asset of "Advances to Holding Company," or an additional liability of "Advances from Holding Company." 3. HOLDING COMPANY. The accounts peculiar to a holding company are: Assets — Investments in Subsidiaries ; Advances to Subsidiaries Liabilities — Advances from Subsidiaries Copyright, 1917, The Ronald Press Company 1-28-6 If the holding company is merely a financial organization and does not engage also in manufacturing and selling activities, its chief source of income is dividends from subsidiaries and its principal expenses would be incurred on account of the executive staff. Sometimes these expenses are prorated among the subsidiaries as cost of services rendered such subsidiaries by the holding company. CONSOLIDATED BALANCE SHEET — This is not the balance sheet of the holding company, nor of any legal entity whatsoever. It is a statement set up in con- ventional balance sheet form, designed to set out the true financial condition of the holding company and its subsidiaries viewed as a single organization at a particular moment of time and as a going concern. The method of preparing this statement is illustrated in Problem 22. Similar assets and liabilities of all companies are totalled. Intercompany transactions are omitted since the total amount which the compsinies owe one another must equal the total amount which is due from one another ; and con- sidered as one unit these transactions have no bearing on the financial posi- tion. If the investment in subsidiary companies was made at book value, then it is equal to and offsets the capital stock and surplus of all the subsid- iaries. It is obvious that the effect of this procedure is to substitute the net assets of the subsidiary in lieu of the asset of investment in subsidiary company. CONSOLIDATED PROFIT AND LOSS STATEMENT — The same method is pursued in preparing the profit and loss statement. Dividends paid by one company to another are ignored, and only the dividends of the holding company shown. The object is to show the result from operations of all the companies considered as one unit in their relations to outsiders. Problem 22 (Class Work) The General Manufacturing Co. was organized on January 1, 1917, with an authorized capital stock of $300,000 divided into 3,000 shares at $100 each. On the sane date they acquired on the open market the entire issue of capital stock of the Williams-Smith Co. (2,000 shares, par value $100), giving in ex- change 2,400 shares of stock of the General Manufacturing Co. During the year the remaining 600 shares of the General Manufacturing Co. were disposed of at par for cash. On January 1 and December 31, 1917, trial balances abstracted from the books of the Williams-Smith Co. stood as follows: ASSETS JAN. 1 DEC. 31 Plant and -Equipment $175,000.00 $180,000.00 Inventories 43,500.00 57,100.00 Customers* Accounts 35,450.00 31,500.00 Cash 14,050.00 17,900.00 $268,000.00 $286,500.00 Copyright, 1917, The Ronald Press Company LIABILITIES Capital Stock Audited Vouchers Surplus — Balance, January 1 Profits for year 1-28-7 JAN. 1 DEC. 31 $200,000.00 $200,000.00 28,000.00 34,500.00 40,000.00 40,000.00 12,000.00 $268,000.00 $286,500.00 On December 31, 1917, the balance sheet of the General Manufacturing Co. was prepared as follows: ASSETS INVESTMENT IN WILLIAMS-SMITH CO. CURRENT ASSETS: Merchandise Inventory Customers' Accounts Cash $240,000.00 $40,000.00 25,000.00 15,000.00 80,000.00 LIABILITIES CAPITAL STOCK CURRENT LIABILITIES: Audited Vouchers SURPLUS : Profit for year $320,000.00 $300,000.00 15,000.00 5,000.00 $320,000.00 Prepare a consolidated balance sheet of the two companies for December 31, 1917. Solution to Problem 22 To show the profits of the Willi£ims-Smith Co. on the books of the General Manufacturing Co., the following journal entry would be made on the books of the latter: Investment in Williams-Smith Co. To — Profit and Loss To take up the profits for 1917 of the Williams-Smith Co. as per their statement of profits and income dated December 31, 1917. $12,000.00 $12,000.00 Copyright, 1917, The Ronald Press Company The following consolidated working sheet would then be prepared 1-28-8 GENERAL MANUFACTURING CO. AND WILLIAMS-SMITH CO. CONSOLIDATED WORKING SHEET, DECEMBER 31, 1917 ASSETS ACCOUNT Plant and Equipment Investment in Williams- Smith Co. Par Value Surplus Inventories Customers' Accounts Cash GENERAL WILLIAMS- SMITH MFG. CO. CO. ^ $180,000.00 252,000.00 40,000.00 25,000.00 15,000.00 57,100.00 31,500.00 17,900.00 INTERCOMPANY ADJUSTMENTS (A)200,000.00 (B) 52,000.00 COMBINED $180,000.00 97,100.00 56,500.00 32,900.00 $332,000.00 $286,500.00 $252,000.00 $366,500.00 Capital Stock — G. M. Capital Stock — W. S. Audited Vouchers Surplus — G. M. Surplus — W. S. LIABILITIES $300,000.00 $ 200,000.00 (A)200,000.00 15,000.00 34,500.00 17,000.00 52,000.00 (B) 52,000.00 $300,000.00 49,500.00 17,000.00 $332,000.00 $286,500.00 $252,000.00 $366,500.00 GENERAL MANUFACTURING CO. AND WILLIAMS- SMITH CO. CONSOLIDATED BALANCE SHEET, DECEMBER 31, 1917 ASSETS CAPITAL ASSETS: Plant and Equipment $180,000.00 CURRENT A5SETS: Inventories $97,100.00 Customers' Accounts 56,500.00 Cash 32,900.00 186,500.00 $366,500.00 LIABILITIES CAPITAL STOCK—Issued and Outstanding CURRENT LIABILITIES: Audited Vouchers SURPLUS : Profits for year $300,000.00 49,500.00 17,000.00 $366,500.00 Copyright, 1917, The Ronald Press Company 1-29-1 COMPLETE ACCOUNTING COURSE — PART I Lecture 29 ANSWERS TO GENERAL REVIEW QUESTIONS Solution to General Review Problem 21 JONES LITHOGRAPHING CO. BALANCE SHEET, DECEMBER 31, 1917 CURRENT ASSETS: Cash Working Fund Accounts Receivable Due from Officers Inventories: Raw Materials Work in Progress ASSETS 7,150.00 1,000.00 54,300.00 10,100.00 9,800.00 4,500.00 Exhibit A. $ 86,850.00 DEFERRED CHARGES: Discount on Stock Prepaid Commissions Inventory of Postage Prepaid Insurance $ 10.300.00 8,140.00 500.00 1,110.00 20,050.0a INVESTMENT IN X PRINTING CO. CAPITAL ASSETS: Land Buildings Machinery- Fixtures Total TOTAL ALL ASSETS Cost $ 45,000.00 351,300.00 236,500.00 166,000.00 Reserve for Depreciation $ 73,565.00 81,850.00 62,400.00 Book Value $ 45,000.00 277,735.00 154,650.00 103,600.00 $798,800.00 $217,815.00 $580,985.00 350,000.00 580,985.00 $1,037,885.00 Copyright, 1917, The Ronald Press Company CURRENT LIABILITIES: Accounts Payable Notes Payable Bank Loan Accrued Bond Interest Accrued Taxes FIRST MORTGAGE 4% BONDS SINKING FUND RESERVE CAPITAL STOCK AND SURPLUS: Issued and Outstanding Deficit, Jan. 1, 1917 Less — Surplus Net Profit for year (Exhibit B) TOTAL LIABILITIES AND CAPITAL LIABILITIES AND CAPITAL 1-29-2 6,000.00 2,000.00 10,000.00 8,000.00 1,907.30 $500,000.00 $245,700.00 15,677.70 230,022.30 27,907.30 400,000.00 340,000.00 269,977.70 $1,037,885.00 JONES LITHOGRAPHING CO, STATEMENT OF PROFITS AND INCOME YEAR ENDING DECEMBER 31, 1917 Exhibit B SALES Less — Allowances on Sales NET SALES COST OF GOODS SOLD (Exhibit C) GROSS PROFIT FROM SALES DEDUCT—SELLING AND GENERAL EXPENSES: Selling Expenses (Exhibit D) General and Administrative Expenses (Exhibit E) NET PROFIT FROM OPERATIONS ADD — Dividend on X Printing Co. Stock Total Profits and Income DEDUCT — Interest on Bonds Discount on Sales Discount on Stock written off SURPLUS NET PROFIT for year DEDUCT — Provision for Sinking Fund BALANCE CARRIED TO SURPLUS ACCOUNT $ 37,330.00 30,512.30 $ 16,000.00 2,400.00 5,000.00 $942,000.00 8,450.00 $933,550.00 813,630.00 $119,920.00 67,842.30 $ 52,077.70 7,000.00 $ 59,077.70 23,400.00 $ 35,677.70 20,000.00 $ 15,677.70 Copyright, 1917, The Ronald Press Company 1-29-3 Exhibit C JONES LITHOGRAPHING CO. STATEMENT SHOWING COST OF SALES YEAR ENDING DECEMBER 31, 1917 RAW MATERIAL USED DIRECT LABOR FACTORY OVERHEAD: Manufacturing Supplies I Heat , Light , and Power Insurance Indirect Labor Sundry Manufacturing Expenses Property Taxes Depreciation Salary to W. R, Single TOTAL MANUFACTURING COST DEDUCT — Increase of Inventory of Work in Progress: December 30, 1917 5 January 1, 1917 Cost of Product Sold (Exhibit B) 8,500.00 9,200.00 1,870.00 11,000.00 14,150.00 945.00 65,215.00 6,000.00 4,500.00 3,100.00 $573,150.00 125,000.00 116,880.00 $815,030.00 1,400.00 $813,630.00 JONES LITHOGRAPHING CO. SELLING EXPENSES YEAR ENDING DECEMBER 31, 1917 Exhibit D Commissions to Salesmen Promotion Expense TOTAL SELLING EXPENSES (Exhibit B) $ 33,330.00 4,000.00 $ 37,330.00 Exhibit E JONES LITHOGRAPHING CO. GENERAL AND ADMINISTRATIVE EXPENSES YEAR ENDING DECEMBER 31, 1917 Salary — D. R. Jones General and Administrative Expense (unclassified) Depreciation on Fixtures Bad Debts Income Tax cuid Capital Stock Tax TOTAL GENERAL AND ADMINISTRATIVE EXPENSES (Exhibit B) $ 12,000.00 15,300.00 900.00 1,350.00 962.30 $ 30,512.30 Copyright, 1917, The Ronald Press Company 1-29-4 ANSWERS TO GENERAL REVIEW QUESTIONS Answer to Question 82 — 1. From all available sources prepare a schedule of assets and liabili- ties at the end of the period for which the profit or loss is to be ascer- tained. The difference between the assets and liabilities is the net worth (if the assets exceed the liabilities) or the net insolvency (if the liabili- ties exceed the assets) at that date. 2. Prepare a similar statement as of the date the period under considera- tion begins, and the difference between the assets and liabilities will repre- sent the net worth or net insolvency at that time. 3. The difference between the net worth at the beginning of the period and the net worth at the end of the period is caused by: (a) Moneys invested or withdrawn by the proprietors. (b) Profits made or losses incurred by the enterprise. 4. The following form presents the above facts: (Name) STATEMENT OF PROFITS (Period covered) Net Worth at end of the period Net Worth at beginning of period Balance — being increase (or decrease) in net worth during period Add — Dravfings of proprietors during period Deduct — Additional Capital contributed by proprietors during period Balance — Net Profit (or Loss) for the period 5. If no inventories of material on hand at beginning or end of the period have been taken, and if no reliable data as to the cost of such stock are available, the amoirnt of profit or loss for that period cannot be determined. If, however, such data are available, especially at the beginning of the period, an analysis of the various records, by way of contracts, cash receipts and disbursements, sales and purchase records, etc., should produce statements which will substantially set forth the financial status at the end of the period. The important point to bear in mind is that unless the net worth at the beginning of the period under consideration is an ascertainable fact, the profit or loss for that period cannot be determined. Copyright, 1917, The Ronald Press Company 1-29-5 Answer to Question 83 — A Trial Balance is a statement as of a certain date of all open accounts in a ledger kept by double entry, prepared after the books of a concern have been posted, showing in two parallel money columns either the total of the debit side and the total of the credit side of each ledger account, or the difference between the debit eind credit sides of each ledger account. If the total debit column equals the total credit column, the trial balance is said to be "in balance." A trial balance "before closing" contains all ledger accounts, real or nominal. A trial balance "after closing" contains only asset and liability accounts. A Balance Sheet is the trial balance "after closing" with the assets, lia- bilities, and net worth so summarized as to set out clearly the financial condition of the concern at a particular moment of time. It may be in "state- ment" or "account" form. Answer to Question 84 — The purpose of grouping assets and liabilities ac- cording to their nature is to bring out clearly the relation of the capital investment to fixed property, the amount of assets available for liquidating current indebtedness, etc. Answer to Question 85 — Two ways of regarding capital and revenue expendi- tures may be given: 1. Capital expenditures are expenditures the benefit of which has not ex- pired at the end of the fiscal period under consideration, while revenue expenditures are those the benefit of which has expired or will expire before the close of such fiscal period. Under this classification, capital expendi- tures would consist of the capital assets, current assets, and deferred charges existing at any one moment of time, this moment of time being commonly re- garded as the date on which a balance sheet is prepared, i.e., at the close of a fiscal period. Revenue expenditures would consist of debit nominal ac- counts. 2. Capital expenditures are expenditures for more or less permanent fix- tures of the business, evidenced on the balance sheet by what appears normally under the caption of "Capital Assets" ; while revenue expenditures are the current expenditures of the business of whatsoever nature, excluding those made for permanent assets. Revenue expenditures would thus consist of material, labor, and other expenses, some of which might appear on the balance sheet under the headings of current assets and deferred charges, while the remainder would appear in profit and loss accounts. The differences in the two viewpoints arise chiefly from the fact that in each case the time element is not the same. In the first instance a cross- section of the business is taken, presenting as capital that portion of ex- penditures made for the benefit of the future, whether "future" is considered as days or years. In the second instance, capital expenditures consist only of "aids in production"; that is, real estate, plant, machines, etc., whose usefulness extends to some indeterminable point in the future. Copyright, 1917, The Ronald Press Company 1-29-6 Answer to Question 86 — Receipts and Disbursements are transactions involv- ing the actual transfer of cash, whereas the terms Income and Expenditures refer to the entire revenue for any given period, either collected or still to be collected, and the total obligations incurred, whether paid or still owing. It would be noted here that the terms Expense and Expenditure do not carry the same meaning, in that the term expenditure is more comprehensive since it may involve the purchase of capital or fixed assets, as well as material for re- sale or other operating factors. If, however, payment has been made in settlement of either of such obligations, the transaction incident to payment thereof will constitute a disbursement. Whether the payment is made for a property asset or an expense item is immaterial. If the cash was actually paid out, it constitutes a disbursement. Answer to Question 87 — Goods out on consignment are the property of the consignor, under his control and subject to his orders. Therefore, the record of such consignment should not in any way be made to imply a sale or transfer of title to the consignee. The record should indicate clearly that the person charged is a consignee, not a customer; and the credit should not be made to the Sales account for the goods are still unsold. Answer to Question 88 — CONSIGNMENTS-OUTWARD LEDGER CONTROLLING ACCOUNT DEBIT WITH CREDIT WITH Invoice cost of consignments Advances made by consignee, at the shipped, at the same time credit- same time debiting Cash. ing Purchases. Net proceeds reported by consignee. Freight-out, express, and other at the same time debiting Cash or charges on shipment, at the same Consignee's Personal account. time crediting Cash or Accounts Payable. Profits on shipments, at the same time crediting Profits on Con- signments-Outward or Profit and Loss. The balance of the account will be a debit, representing the cost (less ad- vances) of consignments not yet closed out. A journal is ordinarily provided for the first debit, postings to the con- trolling account being made monthly. In the detail or subsidiary ledger a separate account is kept with each consignment, and debit and credit postings are made to each account in the usual way. Separate columns for the control- ling account should be provided in the cash receipts and disbursements books, voucher record, general journal, etc. Copyright, 1917, The Ronald Press Company 1-29-7 Answer to Question 89 — CONSIGNMENTS-INWARD LEDGER CONTROLLING ACCOUNT DEBIT WITH CREDIT WITH Costs of Consignments-Inward paid Proceeds from sales of consign- by the consignee, such as freight, ments, at the same time debiting express, drayage, etc., at the Cash or customers' accounts, same time crediting Cash. Advances to consignor, at the same time crediting Cash. Profits on consignments as deducted on account sales, at the same time crediting Profits on Consign- ments-Inward or Profit and Loss. The balance of the account will be a credit or debit and will represent the excess of sales over advances on consignments not closed out or the excess of advances over sales. Since the balance is made up of debit and credit bal- ances in the subsidiary ledger, it should be split for balance sheet purposes. The total of debit balances will appear as an asset and the total of credit balances as a liability. Special columns should be provided in the books of original entry, includ- ing the sales book. Answer to Question 90 — A joint venture is a temporary combination of two or more individuals, firms, or corporations for the purpose of undertaking some particular transaction. As the manager, A will keep account of the venture and will open up on his books an account with the venture, also accounts with each of the venturers. When B advances the merchandise, A will credit his account and debit the Ven- ture account at the agreed price. As C collects the proceeds A will debit his account with C and credit the Venture account. All the proceeds having been accounted for, A will close the Venture account, crediting the personal ac- counts for the proper amount of the profits to be distributed. A will then send each venturer a statement of the venture, indicating the amount to be re- mitted by C to A and B. Answer to Question 91 — There are three methods which may be used for ac- cruing interest on notes payable, viz.: 1. Make no entry until the interest is paid, at which time charge the pay- ment to Interest Expense account. This method is very simple to apply but it is unsatisfactory because as a general rule the interest is not charged to the period incurring the expense. 2. Interest when paid is charged to Interest Expense. At the end of each fiscal period take up the accrued interest as follows — -December 31- Interest Expense ^-..-. To — Interest Accrued ^— — To take up accrued interest at December 31. Copyright, 1917, The Ronald Press Company 1-29-8 At the beginning of the next fiscal period reverse the entry as follows: -January 1- Interest Accrued $ To — Interest Expense $ To reverse entry at December 31 taking up accrued interest at that date. The effect of this procedure is to charge each period with the amount of interest accruing during that period. 3. Under this plan it is assumed that all interest payments represent liquidation of liabilities already accrued. Consequently the liability is built up as follows: (1) Interest Expense $ To — Interest Accrued $ To take up interest accruing during month of . (2) Interest Accrued To — Cash Interest on paid. The balance in the Interest Accrued account is a current liability. Answer to Question 92 — The reason for omitting from merchandise inventory values the increase in market value over the cost price of the stock on hand is that to take up such increase when computing the results from operating would have the effect of including in any statement of earnings an amount of profit not yet realized. Profits are not realized from unsold goods. On the other hand, if the market value of goods in stock is less than the purchase price, then a loss has been sustained, in that such goods could be duplicated for less than they cost, and the same reasons which exclude from the state- ment of earnings any unrealized profits, also require that all losses should be taken into account within the period during which they occurred. Briefly, then, the rule for valuation of merchandise inventories is "cost or market, whichever is the lower." The accepted principle is that profits should not be anticipated and all probable losses should be provided for. Answer to Question 93 — 1. All receipts can be deposited and all disbursements made by check only. 2. Sifiall items can be paid in currency and the total of such payments for a period represented by a check drawn to replenish the fund. Control over these payments is secured because the replenishing of the cash fund calls for an inspection of the petty payments to date by an executive, thus reducing to a minimum the opportunities for theft of cash by employees. The amount of the fund will always be represented by receipts for dis- bursements or currency in the hands of the petty cashier. Copyright, 1917, The Ronald Press Company 1-29-9 Answer to Question 94 — This method of handling cash sales affords a check on the amount of cash to be accounted for by the cashier from this source. The charge to cash sales as reported by the sales department must be equalled by the amount of cash received from cash sales as reported by the cashier. Any difference between these amounts will at once be apparent and the reason for such discrepancy should be immediately ascertained. Answer to Question 95 — The chief accounts found in a partnership but not in a corporation are: 1. DRAWING ACCOUNTS. A drawing account is kept with each partner and is charged with whatever withdrawals of cash or merchandise are made, and cred- ited with salary and interest allowances and profits for the period. Some- times interest is charged to the drawing account if the partnership agreement provides that penalty for withdrawals above a certain amount. The balance of the drawing account may be a debit or credit and is usually transferred at the end of a period to the capital account of the partner, representing the net decrease or increase of the investment of the partner during the period. 2. CAPITAL ACCOUNTS. Each partner has his own capital account which is credited with his original investment. At the end of each fiscal or account- ing period, the drawing account is transferred to the capital account which then shows the book value of the partner's investment in the business on that date. As a rule no other entries are found in this account except those re- cording additions to or withdrawals of investment. 3. LOAN ACCOUNTS. Partners may advance amounts to their enterprise in the form of temporary loans rather than capital contributions. The account is handled like any note payable account and interest thereon may be charged to the Interest account and credited to the partner's drawing account. Answer to Question 96 — A corporation operates under the authority of a charter granted by the state under whose laws it is incorporated. Answer to Question 97 — Unissued stock consists of that part of the total authorized issue of capital shares which has not been issued to shareholders. They may or may not be subscribed for. Treasury stock consists of shares issued and fully paid for, which subse- quently are returned to the corporation by way of purchase, gift, or for- feiture, and not cancelled. Unissued stock, or rather unsubscribed stock, does not represent anything of value, but is simply a means of obtaining value through sale £ind issuance, thus creating a liability equal to the value to be so acquired. Treasury stock, however, having been once issued and fully paid for and subsequently surrendered to the corporation, is an asset of the corporation because the amount of liability for the authorized issue is not affected in case such ^tock Is again sold. Copyright, 1917, The Ronald Press Company 1-29-10 Answer to Question 98 — When treasury stock (carried on the books at par) is sold for an amount less than par, the difference between the selling price and par value represents a discount allowed for the purpose of promoting the sale, and should be charged on the books to an account of that name (Discount Allowed on Treasury Stock), This account should ultimately be closed into Surplus account. The reasons for so disposing of the discount account are: 1. If the treasury shares were acquired through gratuitous donations to the corporation, the par value thereof increased the surplus or decreased the amount of the deficit. If this full par value is not realized it is neces- sary to revise the amount previously credited to the Surplus or Deficit ac- count. If the credit is made to Capital Surplus when the stock is donated, the discount sustained should be charged to that account. 2. If, however, the treasury stock was acquired through purchase (at par), any amount less than par value which may have been accepted for such stock re- duces the amount of any surplus which may then exist. If there be no surplus, then such discount would either create or increase the amount of deficit. When treasury bonds (carried on the books at par value) are sold below par, the difference between par value and the selling price represents dis- count allowed to the purchaser, and should be charged to Discount Allowed on Treasury Bonds, and spread equitably over the life of the bonds. If the treasury bonds purchased are carried at cost, the amount received when sold may be credited to the purchase account and the difference would represent the profit or loss on the transaction. Answer to Question 99 — Bonds represent a liability for money borrowed, the repayment of which, together with interest, must be made within a definitely prescribed time, such repayment being ordinarily in no way contingent upon sufficiency of earnings, except in so far as the value of security for the bonds may be reduced by losses. Capital stock, however, represents money or property contributed by way of investment in the enterprise (not loaned) , ordinarily without provision for repayment during the life of the corporation. Payment of interest by way of dividends on capital stock, even though that stock be "preferred," may be con- trolled by the board of directors according to their judgment as to the suffi- ciency of the profits to justify a dividend payment. In other words, the proceeds from capital, contributed by way of invest- ment, are not subject to withdrawal during the ordinary course of the corpora- tion's activity, whereas loans mature at predetermined dates and constitute a prior claim against available assets (either specific or general). Answer to Question 100 — Payment of interest and repayment of principal on the first-named class of bonds are secured by a mortgage on specific property, either real estate or chattels, which may be sold and the proceeds used to meet the amount of such indebtedness in the event of defaulted payments. No specific property, however, is pledged as security for payment of either pi*incipal or interest in the case of income bonds. As the name would indicate, income bonds are merely contract obligations to provide out of the proceeds from net income a fund sufficient to redeem such bonds at maturity and to pay the interest thereon periodically before distributing any portion of such net income by way of dividends. In the event of dissolution, volun- tary or otherwise, its holders have no preference over other general creditors. Copyright, 1917, The Ronald Press Company 1-29-11 Usually no specific property is pledged or mortgaged to secure payment of either principal or interest on municipal bonds. The security for bonds of this class lies in the power vested in the municipality to levy taxes and the right of bondholders to enforce the exercise of such power. Answer to Question 101 — Any proceeds from bond sales in excess of the amount for which the bonds must be redeemed represent a premium and should be credited to a Premium on Bonds account. Payment of premiums for bonds is prompted by the high rate of interest offered (security for principal consid- ered), and therefore the total premium of $5,000 should be amortized over the life of the bonds. Answer to Question 102 — Surplus may accrue from several sources, viz.: 1. Profits from operations, withheld from distribution. 2. Donations of property or securities. 3. Sale of capital stock at premium. 4. Writing up the value of fixed assets. Generally, however, any surplus which has accrued from any of the three last-named causes is not immediately available for dividend purposes, and should be stated separately in the accounts and designated "Capital Surplus." Answer to Question 105 — When dividends have been officially declared, the amount thereof should at once be charged to "Surplus" and credited to "Divi- dend Payable" account. This is essential even though the time for payment be long deferred. A dividend once declared by the board of directors assumes the nature of a direct liability, as between stockholder and corporation, payment of which can be enforced by the stockholders then of record ; hence the ac- counts should be immediately made to show that a part of the surplus has been appropriated for ultimate payment of such dividend. Answer to Question 104 — When actual profits have been realized the direc- tors of a corporation have the right to declare dividends equal to any part of such profits, whether they be represented by cash or by less liquid assets. The question as to borrowing funds so as to pay such dividends in cash is one of policy, and should be decided according to the judgment of those parties vested with authority for, and charged with the responsibility of, formulating the policy for financing the corporation's various activities and functions. Answer to Question 105 — A reserve for depreciation is necessary in spite of the reasons given, since the purpose of the reserve is to charge against the profits, period by period, the proper loss which that period should stand, a capital asset being eventually used up in operation in the same sense that current supplies are used up in operation, the difference being one of time only. In answer to the two arguments presented, it may be said that operating efficiency has little to do with the reserve for depreciation that may be nec- essary. The operating efficiency may never fall below 70%, yet when it reaches that point the machine or plant may have to be scrapped, due to the fact that its operating cost is too high and its productive capacity too low for the purposes of the business. Copyright, 1917, The Ronald Press Company 1-29-12 Answer to Question 106 — The point involved here relates to the question as to whether losses from bad debts should be charged against earnings of the period during which such debts were acquired or the earnings of the period during which such losses become apparent and actual. The former method is the more conservative of the two. And it is to anticipate such losses that a re- serve is created by charging Profit and Loss account each period with the estimated amount of the accounts which in the course of liquidation may prove to be uncollectible. Hence, on the theory that the amount of such losses has been previously charged against profits, and assuming that the existing re- serve is ample, the proper disposition of such uncollectible item is to charge same against the reserve account. The entry then is: Reserve for Bad Debts |~ — To— Customers' Account ^ $ — Answer to Question 107 — A reserve set aside for the retirement of bonds is but a temporary device to indicate the portion of past earnings which must be kept intact, and not distributed until such bonds have been paid; whereas a reserve for depreciation represents the estimated portion of property and equipment cost which has entered directly into the expense of operating during previous periods. The difference in the nature of these two classes of reserves may be read- ily seen from the ultimate disposition to be made of each on the books. A Re- serve for Retirement of Bonds finally reverts to the Surplus account, but a Reserve for Depreciation goes to negative the book value of assets, the depre- ciation of which is provided for by such reserve. Answer to Question 108 — When such good-will has been acquired through pur- chase, as in the case of a firm, individual, or corporation buying the busi- ness of another and paying therefor an amount (either in cash or other prop- erty) over and above the appraised value of the net tangible assets. An amount to represent good-will may also be proper]-y recorded in the books of any enterprise when the value thereof has been realized through sale and converted into assets, the nature of which permits of their distribution among the owners of the net worth. Ordinarily, however, it is not considered good practice to set up in the accounts of a going concern any amount to represent the value of its own good- will. Answer to Question 109 — When the average earnings of an enterprise exceed the ordinary return by way of interest on the capital investment (after due allowance is made for proprietor's services), such excess earnings denote the existence of an intrinsic or inherent value, quite apart from that value rep- resented by the tangible property and other book assets directly employed in the production of those earnings. Occasion often arises for determining and expressing, in terms of dollars and cents, the commercial worth of that inherent factor, as in the case of the sale of the enterprise, or when an interest is to be acquired in the business by parties other than those whose capital or influence is responsible for the existence of such value. Copyright, 1917, The Ronald Press Company 1-29-13 If net earnings of, say, $10,000 are made annually from a capital invest- ment of $40,000, the percentage of profit is 25. If a fair normal return on capital is assumed to be 10%, then the normal earnings would be 10% on the $40,000 investment, or $4,000. The excess earnings of $6,000 would represent income from the good-will attaching to the business which may be valued at $60,000 as shown in the following illustration: Total Earnings $10,000.00 Deduct — Amount equal to normal interest return on capital investment at 10% 4,000.00 Excess Earnings % 6,000.00 If $6,000 represents 10% of the value by which that amount was produced, then 100%, or 10 x $6,000 = $60,000, would represent the entire value to be placed on that factor to which is attributed the earnings in excess of the normal rate of profit. To capitalize these earnings at that value would involve setting up an ac- count with "Good-will" (debit), and, correspondingly, crediting Surplus ac- count. Then, if capital stock is to be issued on the strength of such value, the book entry would be: Surplus $ To — Capital Stock $ Answer to Question 110 — A consolidated balance sheet does not, nor does it pretend to, represent the financial condition of any particular corporation; or in fact any legal entity whatsoever. It is a statement set up in conven- tional balance sheet form representing the true financial position of a group of companies which, from a practical point of view, are in reality one organi- zation. In the preparation of such a statement all items affecting the com- panies inter se are eliminated, so as to present their financial position so far as the public is concerned. Answer to Question 111 — A perpetual inventory is kept for the purpose of ascertaining the cost of goods sold (trading concern) or of goods used in pro- duction (manufacturing). To this end appropriate records are kept which may consist simply of quantities received and quantities given out and balance on hand in each class of stock or of raw materials. In some businesses, for in- stance, a trading concern dealing in notions, the expense of keeping perpetual inventory records would be all out of proportion to the advantages derived. In other businesses .the recording of goods sold by description may be a simple matter. The setting down of prices may be unnecessary and impracticable where purchases are made on fluctuating terms. The chief advantages to a manufac- turing concern of keeping a perpetual inventory record are usually enumerated as follows: 1. To enable the determination of monthly profits without a physical count of the goods on hand. However, the amount per books is customarily verified at least once a year by taking a physical inventory. Copyright, 1917, The Ronald Press Company 1-29-14 2. To prevent fraud and to insure careful handling on the part of store- keeper who must account for the materials under his charge. 3. To assure "maximum" and "minimum" quantities necessary for the proper operation of the factory. A controlling account is a condensed summary of all transactions posted in detail in a subsidiary ledger. This reduces the volume of work on the general ledger so that only the head bookkeeper is familiar with the results from op- erations. It can be balanced independently of the other ledgers, thus en- abling the bookkeeper to prepare financial statements on short notice. It also enables the head bookkeeper to control the work of his assistants and by localizing errors to a particular ledger the labor of locating them is mini- mized. From this description it is obvious that the general ledger accounts kept in connection with perpetual inventories are controlling accounts. Answer to Question 112 — 1. A fixed percentage applied on a flat basis. If an asset has a cost value of $2,000 and an estimated scrap value of $200, the difference of $1,800 must be charged off during the life of the asset. Assuming an estimated life of ten years, one-tenth of $1,800, or $180, must be written off annually. This is equivalent to 9% on the original cost, or 10% on the total deprecia- tion to be provided for. 2. A fixed percentage applied on the diminishing value. Assuming the above facts, 20.57% must be charged off annually. A rate is ascertained which if applied on the original cost and on the diminished value thereof, annually will reduce the book value of the asset to its estimated scrap value at the end of its estimated life, 3. Production. The estimated quantity of production during the estimated life of the asset is divided by the cost of the asset less its residual value to determine the amount per unit of production to be provided. This method is limited to cases where the depreciation accruing is closely related to the volume of production. Answer to Question 113 — The voucher system as generally used at the pres- ent time comprises: 1. Voucher 2. Check or voucher check 3. Voucher register , 4. No creditors' accounts 5. Index to vouchers Under the voucher system no disbursement c£in be made until a voucher is prepared. This voucher contains all the details of the transaction, shows the distribution of charges and credits, and bears the approvals referred to in answer to Question 114. Vouchers are kept in "Unpaid Vouchers" file until ready for payment. Copyright, 1917, The Ronald Press Company 1-29-15 A voucher may be paid by ordinary bank check or by voucher check. The latter consists of an ordinary bank check form together with a summary of the details shown on the voucher. Sometimes a voucher proper is not kept, the voucher check containing all details and serving as a voucher until issued. In the latter case it bears two serial numbers: first the voucher series, and secondly the cash book series. The voucher register is a journal containing all the necessary columns to distribute properly the charges and credits indicated on the voucher. Usually credit columns appear for "Audited Vouchers" (controlling account) and "Dis- count on Purchases," and a debit column for each numerous class of charges with one column for miscellaneous charges. Postings made monthly. The mis- cellaneous column is posted in detail but only the footing of each special column need be posted. In addition columns are provided for voucher number, party to whom issued, date paid or check number by which paid. An account with each individual creditor need not be kept, although this is often done. If individual accounts are not kept an index is essential. A card is prepared for each creditor showing the number of each voucher issued to him and the amount thereof. By this means all vouchers relating to an ac- count can be assembled when necessary. Oftentimes an additional copy of the voucher is made, to be filed alphabetically and thus serve as the index. The unpaid vouchers constitute the current accounts payable. The voucher system is best adapted to those concerns which pay their in- voices in full when due, and where frequent reference to creditors' accounts is not required. But where payments are continually made on account, or where constant reference to the creditor's account is a necessity, the advantage lies in keeping a ledger account with each creditor. In some cases credi- tors* accounts are divided, one part kept on the first-mentioned basis and the others on the latter basis. Answer to Question 114 — (a) The 0. K. of the receiving clerk or stock clerk as to receipt of goods of proper quality. (b) The 0. K. of the purchasing agent that the goods are as ordered and that the terms are correct as to dating, discount, freight, etc. (c) That the extensions and footings of the invoice are correct. The head of the accounting department approves the voucher as a whole, and the general manager or other authorized official approves the payment thereof. Copyright, 1917, The Ronald Press Company COMPLETE ACCOUNTING COURSE— PART I Lecture 30 GENERAL REVIEW Solution to Assignment 1-28-1 ENTRIES TO CLOSE THE BOOKS OF THE MILLER MOTOR CAR CO., JUNE 30, 19— 1-30-1 (1) Depreciation (Manufacturing) To — Reserve for Depreciation of Buildings Provision for month of June at 2% per annum. 116.67 $ 116.67 (2) Depreciation (Manufacturing) 1,380.03 To — Reserve for Depreciation of Machinery Provision for month of June at 10% per annum. 1,380.03 . (3) Depreciation of Delivery Equipment To — Reserve for Depreciation of Delivery Equipment Provision for month of June at 15% per annum. 21.88 21.88 (4) Depreciation of Office and Warehouse Fixtures To — Reserve for Depreciation of Office and Warehouse Fixtures Provision for month of June at 6% per annum. 10.23 10.23 (5) Bad Debts To — Reserve for Bad Debts ^ of gross sales for June. 1,449.63 1,449.63 (6) Taxes To — Taxes Accrued Teixes accrued during June. 285.67 285.67 Copyright, 1917, The Ronald Press Company (7) Bond Interest To — Bond Interest Accrued Accrued during June, viz.: 5% Bonds $625; 6% Bonds $375; total $1,000. $ 1,000.00 1-30-2 $ 1,000.00 Miscellaneous Selling Expenses To — Rent Paid in Advance Rent expired. (8) 50.00 50.00 (9) Insurance To — Unexpired Insurance Insurance expired. 76.67 76.67 (10) Interest Accrued on Notes Receivable To — Interest Received Interest accrued but not due. 315.92 315.92 (11) Interest Paid To — Interest Prepaid To write off prepaid interest on bank loan. 200.00 200.00 (12) Discount on Sales of Finished Parts To — Reserve for Discounts Reserve for discounts to be taken by customers. 1,800.00 1,800.00 (13) Inventory of Miscellaneous Supplies To — Heat, Light, and Power Stationery and Printing Inventory of supplies on hand at June 30. 3,600.00 3,500.00 100.00 (14) Inventory of Raw Materials To — Purchases Raw Materials To close latter account. 16,767.44 16,767.44 (15) Work in Progress To — Inventory of Raw Materials Raw materials requisitioned during June. 18,897.04 18,897.04 Copyright, 1917, The Ronald Press Company (16) Inventory of Finished Parts To — Purchases Finished Parts To close latter accoimt. $66,523.13 1-30-3 $66,523.13 (17) Work in Progress Cost of sales — Finished Parts To — Inventory of Finished Parts Finished parts requisitioned during June. 45,109.16 25,724.33 70,833.49 (18) Work in Progress To — Direct Labor Indirect Labor Heat, Light, and Power Repairs — Plant and Equipment Royalties Shop Supplies Depreciation Insurance Taxes Miscellaneous Factory Expense To close manufacturing accounts. 73,141.13 39,901.98 21,171.14 5,459.75 3,309.60 600.00 683.85 1,496.70 76.67 285.67 155.77 (19) Inventory of Automobiles To — Work in Progress To transfer cost of cars made during June. 142,725.39 142,725.39 (20) Cost of Sales — Automobiles To — Inventory of Automobiles To transfer cost of cars sold during June. 175,543.64 175,543.64 (21) Sales — Automobiles To — Automobile Trading Account To close Sales account. 235,385.00 235,385.00 (22) Automobile Trading Account To — Allowcuice on Sales — Automobiles Cost of Sales — Automobiles To close accounts. 177,397.64 1,854.00 175,543.64 (23) Sales — Finished Parts To — Finished Parts Trading Account To close Sales account. 39.191.08 39,191.08 Copyright, 1917, The Ronald Press Company 1-30-4 (24) Finished Parts Trading Account $32,767.59 To — Allowances on Sales — Finished Parts $ 2,052.75 Discount on Sales — Finished Parts 4,990.51 Cost of Sales — Finished Parts 25,724.33 To close latter accounts. (25) Automobile Trading Account 57,987.36 Finished Parts Trading Account 6,423.49 To — Profit and Loss Account 64,410.85 To transfer gross profit. (26) Profit and Loss Account 33,309.12 To — Salesmen's Salaries 6,491.00 Salesmen's Traveling Expenses 837.00 Advertising 25,647.25 Delivery Equipment Maintenance 108.54 Delivery Equipment Depreciation 21.88 Miscellaneous Selling Expenses 203.45 To close selling expense accounts. (27) Profit and Loss Account 5,881.86 To — Officers' Salaries 2,500.00 Office Salaries 1,328.25 Stationery and Printing 593.75 Depreciation of 0. & W. Fixtures 10.23 Bad Debts 1,449.63 To close general administrative expense accounts. (28) Discounts on Purchases 1,129.82 Interest Received 717.43 To — Profit and Loss Account 1,847.25 To close miscellaneous income accounts. (29) Profit and Loss Account 1,222.94 To — Interest Paid 222.94 Bond Interest 1,000.00 To close latter accounts. (30) Profit and Loss Account 25,844.19 To — Surplus 25,844.19 To transfer surplus net profits for June* Copyright, 1917, The Ronald Press Company MILLER MOTOR CAR CO. BALANCE SHEET, JUNE 30, 19— ASSETS 1-30-5 Exhibit A CAPITAL ASSETS: Land Buildings Machinery, Tools, and Equipment Office and Warehouse Fixtures Delivery Equipment COST $ 40,000.00 70,000.00 165,603.50 2,045.00 1,750.00 RESERVE FOR DEPRECIATION PRESENT VALUE $ 40,000.00 69,800.00 163,390.14 2,027.52 1,706.24 #- 200.00 2,213.36 17,48 43.76 $279,398.50 $ 2,474.60 $276,923.90 66,000.00 Good-will C CO. $342,923.90 INVESTMENT IN DURANT TRUCF 200,000.00 CURRENT ASSETS: Inventories: Automobiles Finished Parts Work in Progress Raw Materials Coal Stationery and Printing Accounts and Notes Receivable: Customers' Accounts Notes Receivable Accrued Interest on Notes Receivable $ 30,550.00 18,463.72 26,132.11 3,740.80 3,500.00 100.00 $ 82,486.63 $104,013.40- 116,003.00 315.92 $220,332.32 Deduct — Reserves for: Bad Debts Discounts CASH: Cash In Bank Petty Cash Fund DEFERRED CHARGES: Advances to Salesmen Unexpired Insurance Rent Paid in Advance Discount on Stock $1,522.75 1,800.00 3,322.75 217,009.57 $ 50,186.45 500.00 50,686.45 350,182.65 2,000.00 766.66 100.00 2,000.00 TOTAL ASSETS Copyright, 1917, The Ronald Press Company 4,866.66 $897,973.21 1-30-6 LIABILITIES CAPITAL STOCK: 7% Preferred — Authorized and Issued (1,000 shares, par value |100 each) $100,000.00 Common — Authorized (5,000 shares, par value |100 each) $500,000.00 Issued and Outstanding 433,900.00 $533,900.00 BONDED INDEBTEDNESS: 5% First Mortgage Bonds $150,000.00 6% First Mortgage Bonds 75,000.00 225,000.00 CURRENT LIABILITIES: Audited Vouchers $ 60,144.12 Accrued Liabilities: Pay-roll $ 41,649.55 Bond Interest 4,625.00 Taxes 2,295.34 48,569.89 108,714.01 SURPLUS : Balance, June 1 $ 7,265.02 Add — Profits for June (as per Exhibit B) 25,844.18 $ 33,109.20 Deduct — Dividends Declared and Paid Preferred Stock 1.75% $ 1,750.00 Common Stock 1.00% 1,000.00 2,750.00 30,359.20 $897,973.21 Copyright, 1917, The Ronald Press Company 1-30-7 Exhibit B MILLER MOTOR CAR CO. STATEMENT OF PROFITS AND INCOME MONTH ENDING JUNE 30, 19— GROSS SALES DEDUCT — Allowances DiscouQt on Sales FINISHED AUTOMOBILES PARTS TOGETHER $235,385.00 $39,191.08 . $274,576.08 1,854.00 $ 2,052.75 $ 3,906.75 4,990.51 4,990.51 1,854.00 $ 7,043.26 | 8,897.26 NET SALES $233,531.00 $32,147.82 $265,678.82 DEDUCT— Cost of Sales (Exhibit C and D) 175,543.64 25,724.33 201,267.97 GROSS PROFIT ON SALES $ 57,987.36 $ 6,423.49 $ 64,410.85 DEDUCT— SELLING AND GENERAL EXPENSES: Selling Expenses (Exhibit E) General and Administrative Expenses (Exhibit F) NET PROFITS FROM OPERATIONS ADD— MISCELLANEOUS INCOME: Discoiint on Purchases Interest Received DEDUCT— INTEREST CHARGES: Bond Interest Other Interest Paid SURPLUS NET PROFITS (carried to Exhibit A) $33,309.12 5,881.86 $ 39,190.98 $ 1,129.82 717.43 $ 1,000.00 222. 94 $ 25,219.87 1,847.25 $ 27,067.12 1,222.94 $ 25,844.18 Copyright, 1917, The Ronald Press Company 1-30-8 Exhibit C MILLER MOTOR CAR CO. STATEMENT SHOWING COST OF AUTO SALES MONTH ENDING JUNE 30, 19— MATERIALS : Raw Materials: Inventory, June 1 $ 5,870.40 Purchases 16,767.44 . $22,637.84 Less — Inventory, June 30 3,740.80 |18,897.04 Finished Parts 45,109.16 $ 64,006.20 DIRECT LABOR 39,901.98 FACTORY EXPENSES: Indirect Labor $21,171.14 Heat, Light, and Power 5,459.75 Repairs — Plant and Equipment 3,309.60 Royalties 600.00 Shop Supplies 683.85 Depreciation 1,496.70 Insurance 76.67 Taxes 285.67 Miscellaneous Factory Expenses 155.77 33,239.15 TOTAL MANUFACTURING COST $137,147.33 ADD — Decrease in Inventory of Work in Progress: Inventory, June 1 $31,710.17 Inventory, June 30 26,132.11 5,578.06 COST OF AUTOMOBILES MANUFACTURED $142,725.39 ADD — Decrease in Inventory of Automobiles: Inventory, June 1 $63,368.25 Inventory, June 30 30,550.00 32,818.25 COST OF AUTOMOBILES SOLD (carried to Exhibit B) $175,543.64 Copyright, 1917, The Ronald Press Company MILLER MOTOR CAR CO. COST OF FINISHED PARTS SOLD MONTH ENDING JUNE 30, 19— INVENTORY, June 1 ADD — Purchases DEDUCT — Finished Parts Used in Production Inventory, June 30 $45,109.16 18,463.72 1-30-9 Exhibit D COST OF FINISHED PARTS SOLD (carried to Exhibit B) $22,774.08 66,523.13 $89,297.21 63,572.88 $25,724.33 Exhibit E MILLER MOTOR CAR CO. SELLING EXPENSES MONTH ENDING JUNE 30, 19— Salesmen's Salaries Salesmen's Traveling Expenses Advertising Delivery Equipment Maintenance Delivery Equipment Depreciation Miscellaneous Selling Expenses TOTAL SELLING EXPENSES (Exhibit B) $ 6,491.00 837.00 25,647.25 108.54 21.88 203.45 $33,309.12 Exhibit F MILLER MOTOR CAR CO, GENERAL AND ADMINISTRATIVE EXPENSES MONTH ENDING JUNE 30, 19— Officers* Salaries Office Salaries Stationery and Printing Bad Debts Depreciation of Office and Warehouse Fixtures TOTAL GENERAL ADMINISTRATIVE EXPENSES (Exhibit B) $ 2,500.00 1,328.25 593.75 1,449.63 10.23 $ 5,881.86 Copyright, 1917, The Ronald Press Company FORMS FOR COMPLETE ACCOUNTING COURSE Andersen PART r This package contains the following: 2 sheets Form 1 Day Book 4 " Form 2 Journal 7 " Form 3 Record of Journal Entries 12 " Form 4 " " " " 3 " Form 5 Record of sales 2 " Form 6 Record of Returned Sales 2 " Form 7 Record of Purchases 6 " Form 8 Record of Audited Vouchers 6 " Form 8a Manufacturing Expenses 4 " Form 9 Cash Dishursements 6 " Form 10 •• " 3 " Form 11 Record of Cash Receipts 2 " Form 12 " " Checks Drawn 9 " Form 13 Ledger one account to the page 12 " Form 14 " two accounts to the page 36 " Form 15 " three accounts to the page Day Book Form 1 Day Book Day Book W Ti' 'T~: — »~ ,;gaj ForrtuJ. i 4 Day Book ■ ■_■■ Form 1 ■ • - J J Journal Form 2 Journal Form 2 T-r-1 r- Jottrnal Form 2 ■ ' ' '»r Journal Fo^m a =F=T=*= Journal Form a J» *■ ! ' 11 1 1 =^ Joui'nal Form a M ' I * ' t I ! ' ' Journal Form a ! " t ■ • ' Journal Form a "t ■ I ssqg JU, I I I I' Journal Fornr 1 S ! T~ n 11 ; i * ' ) , — ,_^_l Journal Form i- Record of Journal En tries.- I I' Form 3, Creditors Customers General IL^^m^I d.^i»..i... Ledaer Ledger Ledger |f«M«] Psrtioular. _ .. (1 General ^•"•ji Ledaer C«stomers Creditors Ledger Ledger 1 j 1 i i 1 ^ i 1 1 1 i 1 1 : ; • i 1 \ i 1 I 1 I 1 1 I i 1 Record of Journal Entries ga mw .ai editors Customers adgor Ledger General Ledger Folio Particulars =F=P 1=f _ ,, General Folip Ledger r=! i=i»= Customers Creditors Ledger Ledger TTT -^-4- f ' i_J 1x1 ■f- ( 1 1 I -i—i- ^-*-r r i ! -Record of Jo urnal Entries aaa^^ c Jroditors Customers General _ ,. p.^i„..i»,« f«ii« General 0»istomers C Ledger Ledger Ledger Fo''0 Particulars Folio Ledger Ledger redit Ledg« ! 1 1 ..,,. ^- 1 f " " ■ ! 1 J T ' ■ i 1 1 1 1 ; 1 I . 1 t i i i i 1 i 1 i \ 1 i Record of Journal Entries i ffeW K Creditors Ledger Customers Ledger General Ledger Folio Particulars Folio General Ledger Customers Ledger Credjtoi Ledger 1 1 ! 1 r ^ — ^ [— 1 — -r=P= — il 1' ' " \ : , ■ ; !' 1 i 1 w . I : 1 . ! 1 ...^. ..... . ' , -J- i i 1 : 1 ! • r " " i - - 1 ) j 1 i 1 1 1 I 1 \k 1 1 1 '^' i : i 1 ( i ! i i ^ i ' : ! 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Ledoer Folio Partioulars Folio General Customers Ledger Ledger Cred Led iters ger ! ! i 1' ' ' ll • 1 " i I ■'r 1 : i'""": _ - , 1 1 ' 4- ! j : ! 1 i 1 i i ■ - ! ! i . .4. — ; — ; ^ Ml \ ' ■; -Ml ^ 1 li ; ; ; 1 Record of Journal Entries Creditors Ledger Customers Lsdaer General Ladoer Folio TT-T Particulars Folio General Ledger Customers Ledger 4 . i ! I: . JFlecord of Journal Entries F a>iw a jditors C sdoer ustomers Ledger General Ledger Folio Particulars Foli« General Customers Ledger Ledger Creditors i Ledger IT" i 1 " \ 1 1 ; ; 1 ! 1 : If 1 t 1 . 1 1 i i \ r 1 T ■ ■ 1 ! 1 ^ 1 , '. i i : { i ' ! 1 1 ! : , : ■ ; 1 1 i 1 1 ; ! 1 1 1 1 1 1 1 ' 1 i ! 1 1 , Record of Journal Entrias_ i Creditors Customers Goneral ai-ii^ Partieuiapa Polio General f Ledger Ledger Ledger •'•"• Partloulars Folio Ledger Customers Cred Ledger Led : ; i i i t4 1 ! ■ 1 ' , i ] T ' " ' 1 - _ 1 — ! 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Ledger Folio Particulars 1 _ ,, General Customers Craditors Folio Ledger Ledger Ledger iii !i f ■ 'i , 1 i \ j ' 1 i i' 'I 1 ■ i '< ' ' i I " i i ! ! ! i; ■ \ 1 : i 1 ' 1 ' i ! 1 [ 1 I ' i - - - - ! 1 1 1 1 I , ■ i \ ] , \ ' 1 1 i i 1 1 ! j ■ 1 i ' ! i " ' ' ' ' '" ^ ■ Record of Journal Entries Foi Audited Vouchers Customers Ledger General _, ,, Ledger ^°"° Particulars rnii» General '^'»"« Ledger Customers Ledger Audit Vouch ' • ^1 1 ' 1 ■ M :; i ■■■■:- - ■■ ■ 1 1 i i i ' ! i f I 1 1 1 j i 1 i 1 1 1 i 1 1 1 1 i i i ' Record of Journal Entries Customers General _ ,, Ledger Ledger f^o'io Particulars Folio General Ledger T — TT Customers Ledger Audited Vouchers rrrT=r :ij. -1- "Tl'' Record of Journal Entries Audited Customers General _ ,, Vouchers Ledger Ledger ^°"° Particulars ai'»»-tigg"BB^=ga»g8ga5atagMi^^ja i«w «w>i»'«rBa^ cii. General Customers Audi fO"0 Ledger Ledger VoucI rrr- =f=^ Record of Joiimal Entries idlted uchers Customers Ledger General _ ,, Ledger ^°''° Particulars _ ,, General ^o"o Ledger Customers Ledger r m Audited Vouchers Record of Journal Entries For Audited Vouchers Customers Ledger General _ ,, Ledger •^0"° \ ^ \ \ Particulars P-„- General ^0"o Ledger Customers Ledger Audit Vouch Record of Journal Entries Customers Ledger General _ ,, Ledger *^°''° Particulars _ ,, General f^o"o Ledger Customers Ledger 1 — r-[TTT ITT Audited Vouchers Record of Journal Entries Fo Audited Vouchers Customers Ledger General _ ,. Ledger ^0"° Particulars _ , Qenerill Follo Ledger Customers Ledger Audi VoucI m T1 Record of Journal Entries • ^ Folio idlted uchers Customers Ledger General _ ,, Ledger '^o"o Particulars tHi lur General Ledger rrr Customers Ledger Audited Vouchers ITT Record of Journal Entries Audited Vouchers Customers Ledger General _ ,, Ledger ^o"® Particulars _ „ General '^o''o Ledger Customers Ledger : ' 1 -.-.- .,..,,= t— 1 1 r^~" 1 1 ■: i i i i ' - - 1 • j 1 ■ ; I i t i 1 1 1 1 t 1 1 i i i 1 i 1 1 : Record of Journal Entries =!«= Folio Customers Ledger General Ledger Folio Particulars General Ledger Customers Ledger Audited Vouchers T Record of Journal Entries Audited Vouchers Customers Ledger I M I I General _ „ Ledger ^0"° Particulars itaiim General ^0"0 Ledger Customers Ledger 1 I Record of Journal Entries Form 4 idlted uchers Customers Ledger General _ Ledger f^o'io Particulars TT Folio General Ledger Customers Ledger Audited Vouchers jm^n Record of Journal Entries Audited Vouchers Customers Ledger General Ledger Folio Particulars Folio General Ledger Customers Ledger For Audit Vouchi r^" ! . ■ ' ' 1 1 ! - T] r . I , 1 1 ' i -i ; 1 1 1 i j • ; . t 1 1 1 i • I j 1 i 1 j \ Record of Journal Entries idlted uchers Customers Ledger General Ledger Folio Particulars Folio General Ledger T-T Customers Ledger W^^ rr Audited Vouchers Record of Journal Entries For Audited Cuttomers General D-rti,...i!.p« r«ii« General Customers Vouchers Ledger Ledger ^ollo Particulars Folio Ledger Ledger f , , — , i ■_ ■ 1 ^ L , , _ r— r^?-^r=^^^^!-^=T _. ^ a 1 _ , i — T^TZ : *— r — = 1 ! Audit) Vouch* : 1 I 1 . . 1 , ' ' :, ^ ' ! 1 i , t 1 • I 1 i : i 1 . i i i 1 1 1 1 1 1 1 1 1 1 Record of Journal Entries -| li iiM>l ' ..— -TTf Form 4 idtted uchers Customers Ledger General _ ,, Ledger ^°"0 ! I -ft Jli Particulars _ ,, General Folio Ledger Customers Audited Ledger Vouchers Tnr Record of Journal Entries Audited Vouchers VESS^fSSESSS^KB Customers Ledger General Ledger Folio Particulars Folio General Ledger Customers Ledger i ■> T— T rn Record of Journal Entries Forni 4 idited jchers Customers Ledger General Ledger Folio Particulars Mil ^ j Folio General Ledger TT Customers Ledger 1 Audited Vouchers Record of Journal Entries Audited Vouchers Customers Qeneral _ ,, Ledger Ledger ^o"o Particulars -.„. General Customers Audit FOiio Ledger Ledger Vouch "' i ;i 1 i i 11 1 ■' i _ i' T" ' j 1 1 ! 1 '■ 1 1 ' ! 1 / 1 i 1 1 Record of Journal Entries i^^i Folio jited chers Customers Ledger General Ledger wrrj Folio Particulars General Ledger Customers Ledger Audited Vouchers i^Toqn Record of Journal Entries Foi Audited Vouchers Customers Ledger General _ ,. Ledger '^^''o Particulars Folio Qenerar Ledger Customers Ledger Audll Vouch » Record of Journal Entries General _ Ledger *^^"0 Form 4 ■*"" "«' dfted ichers Customers Ledger Particulars litV \\ _ ,, Qeneraf ^o"o Ledger Customers Ledger Audited Vouchers T=T tfrrrrr * i i ! 1 . 1 i ■ i i i i i ' j i 1 i i i i 1 : 1 1 1 1 j j j r i i j 1 1 1 1 1 ' 1 ■ , ■ i 1 ■ i j ' . 1 Record of Journal Entries Audited Vouchers Cuttomers Ledger General Ledger Folio Foi Particulars Folio General Ledger Customers Ledger Audit Vouch Record of Journal Entries B^SS T i| _ General *^°>'0 Ledger Jdlted uchers Customers Ledger General _ Ledger ^°"° Particulars Customers Ledger Audited Vouchers Record of Sales _Faran Distribution of S al es •♦• N*©.*** Nam© T»rm« Folio Amount . ^ ... Accesst Automobiles and Sup >' 1 IN ii 1 j 1 1 : ! ' !' , ' ! 1 j 1 1 j 1 ! • J 1 1 r I ; 1 1 t r "1 j i i ! j L ^ .„^ 1 1 1 - — _ • i ' i: i 1 •-^-- — « L^i ii _> — ! . . 1 .. a Jlecord of Sales Form 8 ivoice No. Name Terms Folio Amount Distribution of Sale* Automobiles Accessories and Supplies -. , • ! ' ' ' 1 I' : ! , j 1 ■ ; i 1 '' 1 ! ' •-r ■" i ►— 1 i Record of Sales ^^^ ' ■orm ales Distribution of S ♦• No. N«m« T«rm« Folio Amount . ^ ^,, Aecesso Automobiies. and Supt ! 1 ; I i i ' 1 I ' .1 j - ... i ! ! ' 1 J 1 ! - i 1 - 1 1 - _ - - 1 i 1 i ! Record of Sales Form 6 nvoioa No. N«m« Distribution of Sales Torms Folio Amount ' Accessories Automobiles and Supplies ! ^ M ! ; ^ ' ■ ' i ' . 1 . 1 . i i II - ' 1 J - 1 II 1 1 j ■ ; ! f^ __j — — , — L , Record of Sales Oi stribution of S al es te No N«m« T«rm« Folio Amount . . ^,. Aocesso Automobiles and Supf 1 : ii " i f i ' i i 1 ' i t j ; i 1 1 1 i I i 1 1 i ' 1 i !' 1 !" 1 - - ! -~ I -• i 1 ■■ ■» ■ 1 .... --„, , 1. — .— 1 - i i i Record of Sales Form 5 Distribution of Sales nvoico iLi.«.« No. Name Torms Folic Amount ^ , ^,. Aooassories Automobiles and Supplies - ( , . " . r 1 1 ' • ■■ 7 !' ' i 1 _. ' 1 i ' i , ■ ! 1 1 , ! M : '- ' — h ■ ! 1 , — — . ^-1 — ' Record of Returned Sales _ . Invoice Date No. Month of 19 It ..... ■ ■ ! Terms Folio Amount Distribution of Sale . . ^,, Acces Automobiles ^nj, 5^ Record of Returned Sales Month of 19 voice No. Terms Folio Amount Distribution of Sales - . ... Accessaries Automobiles and Supplies Record of Returned Sales Month of 19 " |f~ Distribution of Sal« i' . ... Acces! Automobiles and Su _ . Invoice Da'e No. Name Terms Folio Amount Record of Returned Sales voice No. Name Month of Terms Folio Amount 19 Form 6 Distribution of Sales I' . . ^., Accessories Automobiles and Supplies L Record of Purchases Month of JL9_ Invoiea t Distribution of Sate 3ate i^o Name Terms Folio Amount ■ Acces: , Automobiles ^ntl gj, i '■: ■ ! 1 — i • ^ 1 1 [__, , 1 * 1 1 1; ij i -4- 1 i - - - -T 1 1, j. ; ii i: ■- " i 1 fiecQjrd of Purchases Month of 19 voioa No. Form 7 Name Terms Folio Amount Dietrlbutlon of Sale* . ^ ^,, Accessories Automobiles and Suppliaa ■ 1 1 1 : ■ ', 1 i ! ,i I ' ; j II! il 1 \ 1 1 1 1 j 1 ! ! 1 1 i 1 ' 1 • . i ■ Record of Pur chases Month of Date '"n'J.*'* Name Terms Folio Amount 1 Distribution of Sale » X .... Access Automobiles ^nd Su 1 1 1 ! 1 1 i' 1 I i i 1 1 1 1, 1 - • - i T — - - — • JBLecord of Purchases Jfli_aath_jQf_ 19 voioa No. Name Terms Foilo Amount ^BK^£ Distribution of Sales . . ^., Accessories Automobilaa and Supplies i . MM U ^ 1' i 1 i ! ; i Record of Audited Vouchers Month of 19 Sheet No. SeLUNG EXPENSES GENERAL EXPENSES SUNDRY A CCOUNTS Account Folio Am( Salesmen's Traveling . . ., , Misc. Office Stationery „, „ „ Expenses Expenses Advertising Expenses Salaries & Printing MIscellaneou i ! I Record of Audited Vouchers Month of 19 Form 8 'i-j i t l - h*"" Date Detail Check No. Amount Discount on Purchases Distribution of Purchase: Raw Finished Materials Parts Record of Audited Vouchers Month of 19 Sheet No. s^LLme expeivj&ES ± GENERAL EXPENSES " SUNDRY A CCOUNTS ]^ Account Folio Am< Salesmen's Traveling ah.,-,.*i-i-« Misc. Expenses Expenses Advertising Expenses r ^ 4-4 ->- ■'- - 4 - Offlce Stationery ... ., „ Salaries & Printing M'scellaneoi* TT Hi -W' Record of Audited Vouchers Month of 19 Form 8 --T^r r *'•'■ Data Name Detail Check No. Amount Discount on Purchases Distribution of Purchase; Raw Materials Finished Parts Record of Audited Vouchers Month of 19 Sheet No. F( Salesmen's Expenses SELLING EXPENSES Traveling Expenses GENERAL EXPENSES Advertising Misc. Expenses Office Salaries « hi-l Stationery „ & Printing MIscellaneoufi T t SUNDRY ACCOUNTS Account Folio Amo Record of Audited Vouchers Month of 19 Form 8 fier ,)att Name Detail Check No. -1L-1_»[1 1. I J III I . M.H I .■ | l.l l -.IIH^l_.UU^HU4. . I -J . J Discount r Distribution of Purchaser Amount p„°ha«« ^^"^ Finished Purchases Materials Parts Record of Audited Vouchers Mouth of 19 Sheet No. Fe GENer^AL EXPENSES SELLING EXPENSES Advertising Stationery ... „ u & Printing MIscellanaou T" SUNDRY A CCOUNTS Account Folio Amo Record of Audited Vouchers Month of 19 Form 8 tier oat« Name ^ Detail Check No. Amount Discount on Purchases ' 1 Distribution of Purchase. Raw Finished Matc>rialfi D^fte ill Record of Audited Vouchers Month of 19 Sheet No. Fo SELLING EXP ENSES Traveling GENERAL EXPENSES Misc. Expenses Expenses Advertising Expenses Office Stationery ... .. ji Salaries & Printing Miscellaneou i i ... ^ SUNDRY ACCOUNTS Account Folio Amo Record of Audited Vouchers Month of 19 Form 8 her Oat« Name Detail Check Amount No. Tl Discount Distribution of Purchase on Purchases Raw Materials Record of Audited Vouchers Month of 19 Sheet No. SELLING EXPENSES GENERAL EXPENSES Salesmen's Travelino a^.,— »i-,i-« Misc. Expenses Expenses Advertising Expenses Office Stationery ... .. „ Salaries & Printing M'scellaneou 1 I SUNDRY ACCOUNTS Account Record of Audited Vouchers Month of 19 Form 8 hei" Dat« Name Detail Check Amount No. Discount on Purchases Distribution of Purchase Raw Finished Materials . _ Parts i I Record of Audited Vouchers Month of 19 Sheet No. Fo SELLING EXPENSES GENERAL EXPENSES Salesmen's Traveling , . ., , Misc. Office Stationery ^^, „ „ Expenses Expenses Advertrting Expenses Salaries & Printing MIscellaneou !■ I ! i ! 1 I ! SUNDRY ACCO UNTS Account Folio Amo Record of Audited Vouchers Month of 19 Form 8 ''•'' Date Name I Detail Check Amount No. Discount ' Distribution of Purchases on Purchases Raw Finished Materials Parts U^ Form 8a ;burseinents LABOR Direct Indirect I ! . I Record of Audited Vouchers Form «a -3. •■ Oat« Name Detai MANUFACTURING EXPENSES PlapTEquip. anf'Power Shop Supplies Miscellaneou. Cash Disbursements Forrr Cash Disbursements Form 9 Cash Disbursements Form Cash Disbursements Form 9 Cash Disbursements .££!JI Cash Disbursements Form 9 Cash Disbursements Forn Cash Disbursements form 9 Cash Disbursements Month of 19 Form _ , . Check ^ ,, General Creditors Date Account Particulars No. '^°"° Ledger Ledger Discount on Purchases Bar WIthdr ! 1 ! i ^ M ■ 1 ! ' ! 1 I 1 t Cash Receipts Month of 19 Particulars Account Folio General Ledger Cuttomers Ledger f=T Discount on Sales Cash Disbursements Month of 19 Fornn Date Account Particulars Check _ ,, General No. '^°"° Ledfler Creditors Ledger Discount on Bar Purchases WIthdr il l \ I I ! I I Cash Receipts Month of 19 Account apa Partlculart Folio General Ledger Customers Ledger 1^-^ -t=T=r Discount on Sales rrprr J _I Cash Disbursements Month of 19 r Form Bar WIthdr Account Particulars Check No. Folio General Ledger Creditors Ledger ^T [T ' \ \r \ Discount on Purchases Cash Receipts Month of 19 Account Partlcularc Folio General Ledger Customers Ledger Discount on Sales -r- Cash Disbursements Month of 19 — , - — „ ^ ^ . Forn- Check _ ,, General Creditors Date Account Particulars No. ^°''° Ledger Ledger Discount on Bai Purchases Wlthdr J. ^ -- - '-^ r . 1 - i — — r -r—T ----- • i . Cash Receipts Month of 19 Account Particulars Folio General Ledger Customers Ledger M Discount on Sales m TfT Cash Disbursements Month of 19 '^^sm Form Date Account Particulars Check No. Folio General Ledger Creditors Ledger Discount on Purchases Ban Withdrs TT Cash Receipts Account Particulars Month of Folio 19 ^-"- -1. . — "I":." — ji^t -^ : .U ^MSfii^MeeBi General Customers Ledger Ledger Discount on Sales Form 10 Bank Deposits Cash Disbursements Month of 19 Ill fei i TT- ■ - rfcai»ijaan.r i — i— Form Date Account _ . . Check _ ,, General • Creditors |l Discount on Ban Particulars nq. Folio Ledger Ledger Purchases WIthdr: Cash Receipts Month of Account Particulars Folio General Ledger 19 CuttomcrB Ledger Discount on Sales Form 10 Bank Deposits V Record of Cash Receipts Month of 19 _ ,. General Customers Oate Account Particular* Folio Ledger Ledger Discount on Sales Banh DeposI -- '! ■ - -^~1 ' — r- ' ' ' '1 ! I ' ': ' M ! M ...y. 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No. Check No. Amount Date Voucher Check No. No. Amouni Record of Checks Drawn Montii of -'t^ ate Voucher Check No. No. Amount Date 1= Voucher Check No. No. Amount Date Voucher Check No. No. Amount Record of Checks Drawn Month of Fo Date Voucher Check No. No. Amount Date Voucher Check No. No. Amount Date Voucher Check No. No. Amount Record of Checks Drawn Month of Form 1 'afs ^ . Voucher Check 'te No. No. Amount Date Voucher Check No. No. Amount Date Voucher Check No. No. Amount T ITT ^V-J.Jd.--!- TT n T™!" — f T T t — 1 1 ! 1 1 1 TT rn^f -.- ' I'.: :'jr~- ' : j i '-'uii i * ii^jj gg^si^gg Li J n 1 11 .'.i- TT [ ! » 1 fl I it - L.___ 1 ■ s-^ '': i j' --.J I « I ! M If T 4=±=t= i-Ji i it COMPLETE ACCOUNTING COURSE— PART II By ARTHUR ANDERSEN, B.B.A., C.P.A. Of Arthur Andersen 4 Co., Certified Public Accountants, Chicago, New York, Milwaukee; Professor of Accounting, Northwestern University DAVID HIMMELBLAU, B.A. , B.B.A., C.P.A. Of Arthur Andersen & Co. ; Associate Professor of Accounting, Northwestern University ERIC L. KOHLER, M.A. , C.P.A. Professor of Accounting, Northwestern University New York THE RONALD PRESS COMPANY 1920 Copyright, 1919, The Ronald Press Company COMPLETE ACCOUNTIN G COURSE — PART II CONTENTS Lecture 1 Statement of Affairs 2 Special Points in Partnership Accounting 3 Statement of Realization and Liquidation 4 Capital and Revenue Expenditures 5 Depreciation 6 Analysis of Profits 7 Receiverships 8 Branch House Accounting 9 Distribution of Factory Burden 10 Estate Accounts 11 Balance Sheet Construction 12 Statement of Application of Funds 13 Profit and Loss Construction 14 Foreign Exchange 15 General Review 16 A Survey of Auditing 17 Cash and Cash Funds 18 Receivables 19 Inventories 20 Investments; Deferred Charges 21 Fixed Assets 22 Intangible Assets 23 Current Liabilities 24 Funded Debt ; Reserves 25 Capital Stock; Surplus; Profit and Loss Account 26 Contingent and Miscellaneous Liabilities 27 Consolidated Balance Sheets 28 Closing the Audit ; Reports 29 Other Kinds of Audits 30 Review Problems and Questions No. of pages 10 6 15 14 16 14 13 12 18 19 13 13 15 11 9 14 10 16 14 16 17 13 12 16 16 16 21 14 15 27 Copyright, 1919, The Ronald Press Company II-l-l COMPLETE ACCOUNTIN G COURSE — PART II Lecture 1 STATEMENT OF AFFAIRS Problem 1 ( For Class Work ) The firm of A & B suspend payment, and the following particulars are ob- tained from their books as of December 31, 1918: ASSETS Real Estate Buildings liachinery and Equipment Tools and Fixtures Inventories Customers' Accounts Cash LIABILITIES Mortgage obligation on Real Estate, Buildings, Machinery, Equipment, etc. Bills Payable Trade Creditors Partners' Capital Accounts: Balance at Jan. r^ 1918 $ 80,000.00 50,000.00 Loss for Year $38,712.50 38,712.50 $130,000.00 $77,425.00 Book Value \ 33,000.00 96,000.00 82,800.00 13,250.00 95,250.00 94,100.00 3,175.00 Expected to Realize $ 30,000.00 60,000.00 78,000.00 9,000.00 85,000.00 85,000.00 3,175.00 $417,575.00 $350,175.00 $125,000.00 145,000.00 95,000.00 52,575.00 $417,575.00 Each partner's drawings for the year amounted to $10,000, which were paid In cash and absorbed in the expenses of doing business. Prepare : (a) Statement of affairs (b) Deficiency account Copyright, 1919, The Ronald Press Company 11-1-2 Problem 2 August Miller, of the firm of Miller Brothers, indorsed notes of Fred Bentley to the amount of $6,000. Through the failure of Mr« Bentley to pay the same when due, August Miller was called upon to meet the notes and was unable to do so. A meeting of the creditors was called to determine whether further credit should be extended, or the business liquidated. They requested that a statement of affairs be prepared showing the status of the business as a liquidating concern. The following balances were abstracted from the books of Miller Brothers, as of April 30, 1918: Delivery Equipment, $1,750; Warehouse and Office Fixtures, $1,450; Inventories — Merchandise, $39,090, Miscellaneous Supplies, §300; Advances on Consignments-Inward, $1,100; Customers' Accounts, $35,542; Notes Receivable, $10,100; Cash in Bank, $3,676.84; Petty Cash Fund, $100; Unexpired Insurance, $50; Rent Paid in Advance, $200; Notes Payable, $10,000; Accounts Payable, $36,080; Notes Receivable Discounted, $10,000; Bank Loan, $3,000; Taxes Accrued, $200; Fred Miller — Capital, $17,625.23; August Miller- Capital, $16,417.61; Interest Accrued on Notes Payable, $36. In going over these accounts the partners decided that the delivery equip- ment would bring $1,200, and the fixtures $625; that the inventory of merchandise, while in good condition, would realize but $25,000 on forced sale, and miscellaneous supplies, $100. Of the customers* accounts, $17,500 were good; $11,800 were doubtful but would realize 50%; $6,242 were bad. Of the notes receivable, $10,000 were good; $100 were bad; advances on consignments- inward, $1,000; $173 was due for wages. From the above information prepare a statement of affairs and a deficiency account. Problem 3 The following trial balance was abstracted from the books of the firm of D & E as of June 30, 1919. D— Capital Account E " " D — Drawing Account E — " " Real Estate and Buildings Machinery and Fixtures Office Furniture Merchandise on hand January 1, 1919 Merchandise Account Freight on Purchases Wages Power, Light, and Heat Miscellaneous Factory Expenses Insurance Discounts Received on Purchases Sales Account Discounts Allowed on Sales Freight Allowances on Sales $ 32,113.29 17,803.92 2,500.00 2,100.00 3,700.00 10,011.93 990.62 19,032.27 88,090.58 3,111.32 8,111.03 1,100.50 3,400.03 900.00 2,100.75 2,925.09 1,301.03 120,032.03 Copyrights 1919, The Ronald Press Company II-1-3 Office Rent 900.00 Traveling Expenses 1,425.50 Advertising 1,783.03 Bad Debts Written Off 854.83 Sundry Office Expenses 1,103.92 Office Salaries 4,004.50 Interest Paid on Bills Payable 1,403.27 Inventory of Finished Product (at January 1, 1919) 9,803.27 Interest Received on Bills Receivable 442.37 Trade Creditors 19,803.04 Bills Receivable 9,800.00 Customers' Accounts 24,093.27 Bills Payable 10,000.00 Rents Collected 900.00 Accrued Interest and Taxes to June 30, 1919 1,100.03 Taxes 250.00 $203,495.71 $203,495.71 Under the partnership agreement, the following salaries were. allowed: D, $2,700; E, $2,100. The partners' capital accounts (calculated on the beginning balances) should be credited with interest at the rate of 6% per annum; no interest is chargeable on the withdrawals during the year. The inventory of finished products on hand at June 30, 1919, was valued upon the basis of the approxi- mate cost of $20,103.98, against the selling value of $27,093.87. The inventory of raw material was also valued at cost and totaled $16,103.78. Prepare : (a) The journal entries necessary to close the books at June 30, 1919. (b) Balance sheet at June 30, 1919, with relative manufacturing, trading, and profit and loss accounts. MISCELLANEOUS QUESTIONS Question l~In case you find a surplus to creditors in preparing a statement of affairs for a corporation, how would you arrange the last section of this statement (not the deficiency account), where otherwise the details of the deficiency to stockholders would be summarized? In your answer draw up a form for this section which you would follow. Question 2 — The M S Co. suffers a large loss by fire (several buildings and considerable merchandise) only partially covered by insurance. There will be additional losses if liquidation takes place. Draw up skeleton deficiency account which you would expect to find in such a case. Question 3~A small trading corporation doing an exclusively cash business has as its only book of account a columnar cash book. Columns are provided on the receipts side for Sales Department A, Sales Department B, Return Pur- chases, Miscellaneous, and First National Bank; and on the disbursements side Copyright, 1919, The Ronald Press Company 11-1-4 for Rent, Light, Postage, Salaries, Miscellaneous Store Expense, Purchases Department A, Purchases Department B, Discounts on Purchases, Return Sales, Miscellaneous, Check Number, and First National Bank, Receipts are deposited intact, sales being recorded in total each day from cash register footings. A petty cash fund serves the twofold purpose of supplying change and paying small bills; it is reimbursed each week by check. There are no accounts receivable or payable, no notes, and no capital assets. Discuss: (a) The question as to the adequacy of the records. (b) Whether profit and loss statements and balance sheets may be properly prepared from such a record, (c) Whether a single- or double-entry system of booldceeping is being followed. Question 4~In what order should the accounts in a general ledger be arranged? Question 5 — Distinguish between (a) a statement of receipts £ind disburse- ments and (b) a statement of income and expenditure. Copyright, 1919, The Ronald Press Company Solution to Problem 1 I 1-1-5 A & B PARTNERSHIP STATEMENT OF AFFAIRS DECEMBER 31, 1918 Book Value % 3.175 94,100 95,250 $192,525 ASSETS CURRENT ASSETS: Cash Customers* Accts. Inventories Expected to Realise $ 3,175 85,000 85,000 $173,175 Gross Liabilities LIABILITIES Expected to Rank $125,000 FULLY SECURED CREDITORS: Mortgage Obligation (deducted per contra) PROPERTY ASSETS: $ 33,000 Real Estate $ 30,000 145,000 96,000 Buildings 60,000 95,000 82,800 Machy. & Equip. 78,000 13,250 Tools & Fixtures 9,000 $177,000 $225,050 LESS — Mortgage Ob- ligation there- against 125,000 $ 52,000 $417,575 Total, All Assets $225,175 Deficiency to Credi- tors — carried down 14,825 $240,000 UNSECURED CREDITORS: Bills Payable Trade Creditors $365,000 Total Liabilities $145,000 95,000 $240,000 $240,000 Deficiency to Part- ners $ 67,400 $417,575 Deficiency to Credi- tors — brought down $ 14,825 Partners' Capital 52,575 Accounts 52,575 $67,400 $417,575 $ 67,400 Copyright, 1919, The Ronald Press Company II-1-6 A & B PARTNERSHIP DEFICIENCY ACCOUNT DECEMBER 31, 1918 20,000 Loss from operations for the year ending December 31, 1918 (ex- clusive of partners' salaries) $57,425 Partners' drawings in respect of salary for the year ending December 31, 1918 Loss over book value on the realization of assets: Customers' Accts. $ 9,100 67,400 Inventories 10,250 Real Estate 3,000 Buildings 36,000 Machy. & Equip. 4,800 Tools & Fixtures 4,250 Capital Investment of A & B at January 1, 1918 Balance — Deficiency as per statement of affairs $130,000 14,825 $144,825 $144,825 Copyright, 1919f The Ronald Press Company Book Value 5 5 PORM OF STATEMENT OF AFFAIRS Gross ASSETS CURRENT ASSETS: Cash Customers' Accts: Good 3 Doubtful (50%) Bad Expected to Realize Liabili- ties LIABILITIES II-1-7 Expected to Rank 5 ^ $ I Notes Receivable: Good I Doubtful (50%) Bad PREFERRED CREDITORS: For Taxes $ " Wages Deducted, per contra $— -- FULLY SECURED CREDITORS: (deducted — per contra) $ Insurance Unexpired Inventories (less stocks held by partially se- cured creditors) Total Current Assets CAPITAL ASSETS: Land Buildings Machinery and Tools Other Equipment PARTIALLY SECURED CREDI- TORS: Amount of Lia- bility $— DEDUCT — Securi- ty thereagainst (per contra) DEDUCT — Fully Secured Creditors (per contra) Total Capital Assets Total, All Assets DEDUCT — Preferred Credit- ors (per contra) Assets available for divi- sion among Creditors sub- ject to Realization and Liquidation Expenses Balance — Deficiency to Creditors carried down UNSECURED CREDITORS: Ordinary Trade Accounts Notes Payable Sundry Accts, $ Total Liabilities 9 Deficiency to Proprietors $ Deficiency to Creditors brought down — Capital Accounts « I 3 Copyright, 1919, The Ronald Press Company II-1-8 DEFICIENCY ACCOUNT DEBIT WITH Loss from shrinkage in value of assets, per statement of affairs: Customers* Accounts Notes Receivable Insurance Unexpired Inventories Land Buildings Machinery & Tools Other Equipment CREDIT WITH Deficiency as per statement of affairs Original Capital contribution upon the part of (a) single proprietor, (b) partners, or (c) stockholders Profits from operation up to the date of liquidation Withdrawals by (a) single proprietor, (b) partners, or (c) stockholders, in the shape of dividends Losses from operation up to the date of liquidation Total Debits Total Credits STATEMENT OF AFFAIRS DEFINITION — Statement showing assets, liabilities, and net worth of a concern at a particular moment of time on a liquidating basis, PURPOSE — 1. To set forth the total unsecured claims and net available assets from which payment can be made 2. To set up the proprietor's equity in the net assets on a forced liquidation basis in case of (a) Bankruptcy (b) Reorganization, and (c) Solvent concern desiring unusual credit FORA* — See illustration, 1. "Book Value" is sometimes shown contiguous to "Expected to Realize" column, and "Gross Liabilities" are sometimes shown contiguous to the "Expected to Rank" column, 2. Items in the "Book Value" and "Gross Liabilities" columns should agree with the balance sheet accounts. Copyright, iyi9. The Ronald Press Company II-1-9 EXPLANATION OF TERMS USED — 1. BOOK VALUE, Represents value of assets as shown by the books of account. 2. EXPECTED TO REALIZE. Estimated amount which can be realized on forced sale of assets and liquidation of outstanding liens thereon. 3. GROSS LIABILITIES. Represent the liabilities appearing on the books of account. 4. EXPECTED TO RANK, Estimated unsecured claims which will share propor- tionately in assets not subject to liens. 5. PREFERRED CREDITORS. Claims such as rent and wages which by law must be paid in full out of any available assets before any payment is made on unsecured claims. 6. FULLY SECURED CREDITORS. Claims having a lien on specific assets whose realisable value is sufficient to settle such claims in full. 7. PARTIALLY SECURED CREDITORS. Claims having a lien on specific assets whose realizable value is not sufficient to settle such claims in full. The excess of such claims over the realizable value of the assets on which the lien is held is considered unsecured. 8. UNSECURED CREDITORS. Claims having no lien on specific assets and pay- ment of which will be made proportionately out of the net free assets, 9. NET FREE ASSETS. Represents the total amount which it is expected will be realized from the assets after all liens are settled, and after claims having a legal preference are paid. DIFFERENTIATED FROM A BALANCE SHEET AS TO— 1. PURPOSE: A balance sheet shows the assets, liabilities, and net worth as a "going concern" ; a statement of affairs shows the same data as a "liquidating" concern. 2. FORM: A balance sheet is arrsmged to show: (a) Assets, classified as between fixed and current (b) Liabilities, classified as between fixed and current (c) Net worth of proprietors, showing separately the net income for the last fiscal period A statement of affairs is arranged to show (a) Net free assets (b) Total unsecured creditors (c) Amount the unsecured creditors may expect to receive on their claims (d) Deficiency or surplus to proprietors after all liabilities are liquidated Copyright, 1919, The Ronald Press Company II-l-lO DEFICIENCY ACCOUNT- Condensed statement showing the causes of the insolvency. REFERENCES : Kester, Vol. II, pages 631-639 Hatfield, Chapter XVIII Esquerre, Chapter XXXIX Copyright, 1919, The Ronald Press Company II-2-1 COMPLETE ACCOUNTING COURSE — PART II Lecture 2 SPECIAL POINTS IN PARTNERSHIP ACCOUNTING Prot)leni 4 Jones 4 Smith carried on a business together with plants at Seattle, Wash., and Portland, Ore., each having sole charge of a plant. The partnership agree- ment provided that : 1. The Seattle partner's salary to be at the rate of $6,000 per year and the Portland partner's salary at $2,500 per year plus one-fourth of the net profits of the Portland branch, 2« Interest to be allowed at the rate of 5% per annum on the capital in- vested, which amounted to $250,000, of which $100,000 was invested at Seattle and $150,000 at Portland, 3, Depreciation at 5% per sinnum to be written off Plant account and all repair and renewal charges absorbed in the Profit and Loss account in the period in which they are incurred. The investment in plant and buildings at Seattle was $140,000 and at Portland $210,000. 4. All interest charges in respect of borrowed money to be debited against the Profit and Loss account of each plant in the proportion of two- fifths to Seattle and three-fifths to Portland, The charges of this nature amounted to $6,750 for the year. The profits for the year (before taking any of the foregoing items into con- sideration) totaled $77,500, of which $30,000 was earned by the Seattle branch and the balance by the Portland branch. Prepare a statement setting out the net profit after deducting all charges and show the amounts to be credited to each partner's account* Problem 5 January 1, 1918, A & B signed articles of copartnership to engage in a mercan- tile business, agreeing to invest $15,000 and $25,000, respectively. Profits were to be divided in proportion to the actual original capital contributed, and interest at 5% was to be allowed on investments in excess of the agreed con- tributions and was to be charged on deficits under the agreed contributions. The trial balance of their books on December 31, 1918, was as follows: Copyright, 1919, The Ronald Press Company I 1-2-2 A — Capital Account B •• ■ Purchases Office Expenses Real Estate Building Customers' Accounts Cash on Hand Notes Receivable Furniture and Fixtures Discounts Received Creditors* Accounts Salaries and Wages Notes Payable Sales $ 60,000.00 1,000.00 5,000.00 10,000.00 12,000.00 1,000.00 8,000.00 2,000.00 4,000.00 9,000.00 27,000.00 1,000.00 7,000.00 4,000.00 55,000.00 $103,000.00 $103,000.00 The merchandise inventory on hand December 31, 1918, was valued at $10,000. After allowing for interest on investments, divide the net profits in accord- ance with the agreement and submit the balance sheet as of December 31, 1918, and also a statement of the partners' capital accounts. Problem 6 On January 1, 1919, a third party, C, desired to enter the partnership referred to in Problem 5, and it was agreed: 1» That C pay $9,000 in cash for a one-fourth interest in the new concern. 2. That the good-will of A & B be valued at $3,000. 3. That A & B adjust their capital accounts in accordance with C's invest- ment so that they hold a one-fourth and one-half interest respec- tively in the new firm. 4. That profits and losses be divided according to actual original capital contributions. In the adjustment, A received cash (out of the $9,000 paid in by C) for his excess investment, while B received the remainder of the $9,000 paid in by C, and the balance due him was considered a loan to the partnership for which he received a note. Give journal entries necessary to record the above facts. MISCELLANEOUS QUESTIONS Question 6 — In making an analysis of the Accounts Receivable controlling ac- count for the month of January, 1918, you find the following items. Set them up in account form and close the account. Balance January, 1918, $5,000; total net cash receipts per cash book, $8,000; sales, as per sales record, $15,000; total freight and other allowances, $120; total Copyright, 1919, The Rcnald Press Company II-2-3 of customers ledger debit column in the journal, $4,000; cash discounts allowed per cash book, $247.62; total notes receivable given by customers, and other journal credits, $1,250. Question 7 — A company is using the imprest system of handling petty cash and plans to open the account with $200. At the end of the first month it is found that the petty cash disbursements have been as follows: Postage $14; dinners $12; advertising $75; car-fare $9.20; miscellaneous general expense $7. Outline the procedure to be followed in handling the fund and give the entries that should be made because of the disbursements and replenishment of the fund. Question 8 — Outline the entries that would be made on the books of a partner- ship to record its sale to a corporation. Question 9 — X of the partnership of X & Y borrows money for the purpose of purchasing, at a low figure, certain merchandise for the regular requirements of the business. He pledges certain other merchandise on hand as security for the note and turns over the cash realized. Under what further conditions would the cash thus received by the business be credited to any of the following accounts: (a) Notes Payable (b) Accounts Payable (c) X — Loan Account (d) X — Capital Account Question 10 — In preparing a statement of profits with a view of setting out the earning power of a partnership, which, if any, of the following items should be excluded and why; (a) interest on bonded indebtedness, bank loans, and other indebtedness, $52,500; (b) profit arising from the sale of property, $5,000; (c) settlement in connection with patent litigation extending over a period of ten years, $25,000; (d) management salaries, $100,000 ; (e) partnership excess prof its tax for 1917, $5,000; (f ) interest on partners' capital accounts, $15,000. PARTNERSHIPS Review Lecture 6, Part I. Partnership accounting occasionally offers difficulties which may be classi- fied under the following heads: INTEREST ALLOWANCES — Interest is frequently allowed on capital accounts or allowed or charged on drawing accounts in order that due credit may be given each partner for the amount of capital which he retains in the business. The basis for the interest credit or debit will be found in the partnership agreement. Some of the common methods of computation are as follows: 1. Interest may be allowed on the excess of salary credits or other credits or amounts over drawings or charged on the excess of drawings over stipulated sums. For example, in the partnership of B & C it is provided (a) that interest computations shall be made at the end of each month; (b) that drawing accounts will be credited with (1) monthly prof its, one-half to each partner, (2) salary al- lowances of $500 for B and $750 for C, (3) additional capital contributions or losses during the month, and debited with all drawings of whatever kind during the month; Copyright, 1919, The Ronald Press Company II-2-4 (c) that interest at 6% will be computed on each sum as of the date contributed or withdrawn (including the opening balance at the beginning of the month), except that in the case of the credit or debit of monthly profit or loss and the credit of monthly salary, one-quarter of 1% thereof will represent the interest com- putation; (d) that the difference betv/eon the credit and debit interest items so computed will be the basis of a journal entry debiting or crediting the part- ners' drawing accounts and crediting or debiting "Interest — Partners' Drawing Accounts" account; and (e) that computations will be made on the basis of a 360- day year £ind a 30-day month. Under such provisions as outlined we might expect to find the drawing account of B for the month of July, 1918, somewhat as follows; B~DRAWING ACCOUNT DATE PARTICULARS AMOUNT INTEREST DATE PARTICULARS July 6 Cash $400.00 $ 1.67 July 1 Balance, June " 27 Cash 700.00 .47 " 16 Additional Capital " 31 Salary, July ■ 31 Net Interest Credits " 31 Balance carried down 12,157.88 34.67 AMOUNT INTEREST $ 1,502.04 I 7.51 10,000.00 500.00 " 51 Profits, July 1,221.17 " 31 Interest per contra 34.67 $13,257.88 $36.81 Aug. 1 Balance $12,157.88 25.00 1.25 3.05 $13,257.88 $36.81 2. Interest on capital accounts may be computed for the entire period on the balance at the beginning of the period. To continue the illustration in (1), it might be expected that interest would be credited to the capital accounts at the end of the year computed on the balance at the beginning of the year, inasmuch as all additions thereto or subtractions therefrom had been taken care of through the drawing accounts. Often interest on the capital accounts at the beginning of the period is the only interest on the partners' accounts, no account being taken of changes during the year. In no case should interest be allowed unless the partnership agreement specifically provides therefor. It should also be remembered that unless the disparity between the capital accounts and the profit-sharing ratios is very great, or unless the capital interest is very large, little is gained by com- puting interest on drawing and capital accounts. DRAWING ACCOUNTS — Drawing accounts are commonly credited with salary, in- terest, profits, and other allowances and debited with current withdrawals, interest, and various personal charges. On the other hand, each of the above elements may be carried in separate accounts and consolidated at the end of each accounting period, CAPITAL ACCOUNTS — The original investment and subsequent profits (i.e., capital arid surplus in the case of a corporation) are usually consolidated on the books of a partnership, being separated only as to partners. It has become Copyright, 1919, The Ronald Press Company II-2-5 the practice to regard each partner's prof its not withdrawn as additional invest- ment. If additional cash is invested by a partner during a period it may be de- sirable to credit the amount to his drawing account in order to preserve the opening balance of his capital account intact throughout the period. Ordinarily, however, capital additions and capital withdrawals are credited or debited directly to the capital accounts. GOOD-WILL — The manner in which good-will may be placed on the books of a cor- poration or partnership in case of purchase is described in Lecture 27, Part I. It will sometimes happen that in the reorganization of a partnership, in case a new member is taken into an established business, or for other reasons, a Good- Will account will be created, the credits offsetting the debit being made to the capital accounts of the partners already in the business on the basis of their profit and loss sharing ratios. Or the partnership agreement may provide that upon the death or retirement of a partner, his share in the good-will which has been created as a result of his efforts shall be credited to his capital account. A Good-Will account in such case will be opened, debiting thereto the amount cred- ited to the partner's account, an entry which in fact records a purchase of good- will. The balance of the good-will computation applying to the remaining partners would not ordinarily be put on the books unless settlement with them is contemplated. LIQUIDATING DIVIDENDS OF A PARTNERSHIP — When a partnership is dissolved, the capital accounts should be reduced by the first liquidating dividends to a profit and loss sharing ratio, so that subsequent dividends may be distributed without the danger of overpaying any one partner. Thus A, B, and C share profits and losses one-third each; their capital accounts are $30,000, $40,000, and $50,000 respectively, and liquidating dividends of $10,000, $20,000, and $15,000 are distributed in order on successive dates as follows: ABC TOGETHER Balance Capital Accounts $30,000.00 $40,000.00 $50,000.00 $120,000.00 Dividend #1 10,000.00 10,000.00 $30,000.00 $40,000.00 $40,000.00 $110,000.00 Dividend #2 10,000.00 10,000.00 20,000.00 $30,000.00 $30,000.00 $30,000.00 $ 90,000.00 Dividend #3 (final) 5,000.00 5,000.00 5,000.00 15,000.00 Balance Net Loss from Realiza- tion $25,000.00 $25,000.00 $25,000.00 $ 75,000.00 The above assumes that A, whose capital account is the lowest, will not make good any capital losses in excess of his capital investment. Without agreement to the contrary this assumption should always be made ; otherwise the partner with the greatest invested capital may be the loser. To illustrate, suppose A had agreed with B and C to make good losses exceeding his capital account. The first dividend would then be distributed $2,000 to B and $8,000 to C, as may be seen from the following! Copyright, 1919, The Ronald Press Company I 1-2-6 Balance of capital accounts $120,000.00 Less dividend to be paid 10,000.00 Balance remaining, which for the purpose of distributing the dividend should be considered a complete loss $110,000.00 Loss to each partner $ 36,666.66 Subtracting this loss from each of the capital accounts, B is found to be entitled to $3,333.33 and C to $13,333.33, while A owes the firm $6,666.66. Awaiting subsequent liquidation, however, the debit in A's account would remain as an account receivable, while the dividend of $10,000 would be distributed pro rata (i.e., 1:4) between B and C, resulting inpayments to them of $2,000 and $8,000, respectively. REFERENCES : Hatfield, Chapter XVII Lisle, pages 194-232 Copyright, 1919, The Ronald Press Company II-3-1 COMPLETE ACCOUNTIN G COURSE — PART II Lecture 3 STATEMENT OF REALIZATION AND LIQUIDATION Problem 7 ( For Class Work ) After due consideration of the statement of affairs (see II-1-5) A & B de- cided to liquidate. The cash received from the realization of customers' accounts was $82,000 and from inventories $84,500. The property assets were bid in by the mortgage holder for $130,000. For expenses of the proceedings $500 was paid out, and the balance of the funds used to pay off the unsecured creditors pro rata. Prepare a realisation £ind liquidation statement. Problem 8 From the following information prepare a statement of affairs with a rela- tive deficiency account: Wages Unpaid $ 3,000.00 Real Estate, Buildings, and other Plant Equipment 95,000.00 First Mortgage 6% Bonds (In Treasury $50,000) Bills Payable 50,000.00 (Secured by the deposit of $50,000 First Mortgage 6% Bonds) Trade Creditors 275,000.00 Notes Receivable: Good $22,000.00 Bad 3,000.00 Doubtful (take up 50%) 8,000.00 33,000.00 Bank Overdraft 4,800.00 Cash on hand 400.00 Inventory of Merchandise 105,000.00 Partially Secured Trade Creditors (Secured by merchandise of a value of $30,000) 45,000.00 Ordinary Trade Accounts: Bad $32,000.00 Doubtful (50% probably good) 35,000.00 Good 85,000.00 152,000.00 Capital Stock 200,000.00 Copyright, 1919, The Ronald Press Company II-3-2 Deficiency Account: Balance as at January 1, 1917 $33,000.00 Net Loss, year ending December 31: 1917 $80,050.00 1918 39,350.00 119,400.00 $152,400.00 Dividends declared and paid 40,000.00 $192,400.00 Problem 9 After due consideration of the statement of affairs prepared April 30, the firm of Miller Brothers decided to liquidate, and Fred Miller was appointed receiver for that purpose. On July 2, 1918, he reported as follows: COLLECTED Customers' Accounts $23,000.42 Merchandise Inventory ' 26,500.50 Miscellaneous Supplies 100.00 Delivery Equipment 1,340.00 Fixtures 785.00 Advances 1,000.00 DISBURSED Taxes Accrued $ 200.00 Notes Payable 10,000.00 Accounts Payable 36,080.00 Accommodation Paper 5,000.00 Bank Loan 3,000.00 Interest Accrued on Notes Payable 36.00 Expenses (including Wages) 1,544.70 $1,000 accommodation paper was renewed. The accommodation paper which August Miller had indorsed was charged to his capital account. You are asked to prepare: (a) Journal entries required by the bookkeeper to close the books; (b) Realization and Liquidation account ; (c) Status of partners' accounts. The partnership agreement provided V that profits and losses were to be divided as follows: Fred Miller 2/3; August Miller 1/3. MISCELLANEOUS QUESTIONS Question 11 — Name and describe briefly the principal books of account of a business with which you are familiar. Question 12 — Vi/hat is your understanding of the following terms: (a) Book profits (b) Inventory reserves (c) Contingent liabilities Copyright, 1919, The Ronald Press Company II-3-3 Question 13 — In the examination of the customers' accounts you find certain credit balances aggregating $13,011,31 arising out of allowances in respect of returned goods, defective goods, etc. It has been the practice of the company to deduct items of this nature from sums due from customers and to state the net difference, in the balance sheet, as "uncollected customers' accounts." Have you any criticism to make of this treatment? Question 14 — Included among the accounts receivable are the follow- ing items: (a) Bad debt suspense $13,103.93 (b) President's drawing account 10,500.00 (c) Consignment stocks 51,708.25 (d) Working funds 1,250.00 Discuss whether or not these items have been properly classified. Question 15 — Set up the following information in account form as you would expect it to appear on the books of the consignee, and explain concisely what methods should be followed by the consignee in making an accurate record of such consignments if handled in large quantities: July 1, paid freight on shipment of 1 car (25,000 lbs.) of butter from the Bitter Hills Creamery Co., $123.50; cartage to storage, $45.75; July 14, sold 10,000 lbs. @ 47^/^?^; July 20, sold 12,000 lbs. @ 48 1/30; the balance was purchased by the consignee for his stock (small wholesale sales) at the average market price July 20, 480. The total storage costs were $78.90, one-half of which is charged by agreement to the consignor. In addition the consignee is entitled to a commission of 10% on gross sales and a 1% cash discount based on the amount that would otherwise be remitted if the balance due the consignor were not paid before July 31. Payment is made on July 25. Copyright, 1919, The Ronald Press Company II-3-4 Solution to Problem 2 CO CO K W K EH O fQ W «a5 00 - o o o o o o £> (D CD H •> o O rH CM •s X to t> to rH ID to w OI iH CM to •PI ^: *©= o o o O o o o 1 tn o o o o o o o tn • • • • • • o o o o o o w CM • 9> « «> A a o o o t- rH CD lO •H =« iH H rH rH rH to tn a o o w CO > «(> m • ^= ^J= e* in ^ •H Q o •p •H ^ iH o o o tn (D en CO O 0) o 1 • •• :3 S! tn T3 na S o P^ O o • •P O Q P. C r-t TJ tn (D B tn 13 ^ lO o CO CO rH EH i» W O en pc; -O o ■p o ^ « — ' 'a § ^ fl 0) 2: ^ •p (D o 0) CO •p o o o CO c: O O w tn +j •P CJ K^ nq en o o Q m > M u cn K CO (0 O :3 I CD o o CM o o o 00 M 3 t- o o ^* o O o o pH CD H rH lO r-i o to Gi o CO •H •« A •t A »t PQ > to O to iH Oi C7i rH to to CO ^> <«• Copyright, 1919, The Ronald Press Company II-3-5 o o CD lO o o CD in lO CD lO H o f-4 w CD o • • • • t>- to t>- o CO CM —1 to to CD fl < -H © tH rH (^ M a> CO P-. Q ^ o o o o o • • o o m in *» o o • o o CM m to CO (0 O E-l O O • CD to CJi in o Tt O ■«# CD o o CO o 00 rH o « • • • • • in H to 00 t>- CD CM O IN CM 00 iH QO f-\ to t<- to rA M •^ « A iH in ""t in in in in «©= «* «* ^= in Pi o ♦J •H •O (D O 73 0} Pi Pi (D tn V) ■»-> n P* o +» •H •d o Pi O O Pi +J (D Fh iH >. o rH o rH •H fl iH s 0) •H •H S +J o tn •H TS ^ . < o © S (D a p n P4 p< (0 Pui o o a o (D Q 00 • 00 in to to C^ Copyright, 1919, The Ronald Press Company II-3-6 Estimated Loss on Realization of Assets: Notes Rec, $ 100.00 Customers' Accts. 12,142.00 Advances 100.00 Udse, Inventory- 14,090.00 Mi so. Suppl. Inventory 200.00 Unexpired Insurance 50.00 Rent Prepaid 200.00 Delivery- Equip. 550.00 Fixtures 825.00 $28,257.00 Accommodation Paper Indorsed by A. Miller 6,000.00 Wages Accrued 173.00 $34,430.00 DEFICIENCY ACCOUNT Capital Accounts: Fred Miller August Miller Deficiency to Creditors per Statement of Affairs $17,625.23 16,417.61 387.16 $34,430.00 Solution to Problem 3 NOTE — Indicate the good and the poor points of the following solution, D & E STATEMENT OF PROFIT AND LOSS ACCOUNT MANUFACTURING ACCOUNT Inventory of Raw Materials at January 1, 1919 Purchases of Raw Materials (including freight charges) Wages Factory Expenses; Power, Light, and Heat Miscellaneous Factory Expenses Insurance Taxes $ 19,032.27 91,201.90 8,111.03 $1,100.50 3,400.03 900.00 250.00 5,650.53 $123,995.73 Inventory of Rav; Materials at June 30, 1919 Discounts Received •Balance — being cost of manufacture carried to the Trading Account 16,103.78 1,301.03 106,590.92 $123,995.73 Copyright, 1919, The Ronald Press Company TRADING ACCOUNT II-3-7 Inventory of Finished Products on hand at January 1, 1919 Cost of Manufacture for the six months ended June 30, 1919, brought down Balance — Gross Profit on Sales carried to the Profit and Loss Account $ 9,803.27 106.590.92 18,715.98 $135,110.17 Gross Sales Invoiced $120,032.03 LESS— Discounts Allowed $2,100.75 Freight Allowances 2,925.09 5,025.84 Net Sales Invoiced Inventory of Finished Products on hand at June 30, 1919 115,006.19 20,103.98 $135,110.17 PROFIT AND LOSS ACCOUNT Partners' Salaries Interest on Partners* Capital Accounts Office Rent Traveling Expenses Advertising Office Salaries Interest Paid on Bank Loans Bad Debts Written Off Sundry Office Expenses Balance — Net Profits carried to the Partners* Drawing Accounts as follows: D 1,142.89 E 1,142.89 $ 4,800.00 1,497.52 900.00 1,425.50 1,783.03 4,004.50 1,403.27 854.83 1,103.92 17,772.57 2,285.78 $20,058.35 Gross Profits on Sales brought down from Trading Account Rents Collected Interest Received or Accrued on Bills Receivable $18,715.98 900.00 442.37 $20,058.35 Copyright, 1919, The Ronald Press Company II-3-8 CAPITAL ASSETS: Real Estate and Buildings Machinery and Fixtures Office Furniture Total Capital Assets CURRENT ASSETS: Inventories Customers' Accounts Bills Receivable Total Current Assets BALANCE SHEET ASSETS $ 3,700.00 10,011.93 990.62 $36,207.76 24,093.27 9,800.00 $14,702.55 70,101.03 $84,803.58 LIABILITIES CAPITAL ACCOUNTS: Balance at January 1, 1919 Profits Interest on Capital Account Salaries LESS — Drawings BALANCE at June 30, 1919 TOTAL of Capital Accounts CURRENT LIABILITIES: Bills Payable Trade Creditors Accrued Interest and Taxes Total Current Liabilities D E $32,113.29 $17,803.92 1,142.89 1,142.89 963.40 534.12 2,700.00 2,100.00 $36,919.58 $21,580.93 2,500.00 2,100.00 $34,419.58 $19,480.93 $10,000.00 19,803.04 1,100.03 $53,900.51 30,903.07 $84,803.58 JOURNAL ENTRIES (1) Partners' Salaries $ 4,800.00 To — D — Drawing Account E — " " Salaries allowed to the respective partners under the partnership agreement. $2,700.00 2,100.00 Copyright, 1919, The Ronald Press Company II-3-9 (2) Interest on Partners' Capital Account $ 1,497,52 To — D — Drawing Account $ 963.40 E— " " 534.12 Interest at 6% per annum for six months on each partners' capital investment at January 1, 1919. (3) Raw Materials on hand June 30, 1919 16,103,78 To — Manufacturing Account 16,103.78 To take up the inventory of raw materials on hand June 30, 1919. (4) Merchandise (or Raw Materials Purchased) Account 3,111.32 To — Freight on Purchases 3,111,32 To close latter account. (5) Finished Products on hand June 30, 1919 20,103.98 To— Trading Account 20,103.98 To take up the inventory of finished products on hand at June 30, 1919. CLOSING ENTRIES 11) Manufacturing Account $123,995.73 To — Inventory of Raw Materials at January 1, 1919 $19,032.27 Merchandise Account 91,201.90 Wages 8,111.03 Power, Light, and Heat 1,100.50 Miscellaneous Factory Expenses 3,400.03 Insurance ' 900.00 Taxes 250.00 To close foregoing accounts. (2) Discounts Received 1,301.03 To — Manufacturing Account 1,301.03 To close foregoing account. (3> Trading Account . 106,590.92 To — Manufacturing Account 106,590.92 To transfer the cost of goods manufactured during the six months ended June 30, 1919 to the Trading Account. Copyright, 1919, The Ronald Press Company II-3-10 Sales Account To — Trading Account To close foregoing account. (4) (5) 1120,032.03 $120,032.03 Trading Account 14,629.11 To — Discounts Allowed Freight Allowances Inventory of Finished Products on hand at January 1, 1919 To close foregoing accounts, (6) Trading Account 18,715.98 To — Profit and Loss Account To transfer the gross profit on sales to the Profit and Loss Account. 2,100.75 2,925.09 9,603.27 18,715.98 (7) Rents Collected Interest Received or Accrued on Bills Receivable To — Profit and Loss Account To close foregoing accounts. (8) Profit and Loss Account To — Partners' Salaries Interest on Partners* Capital Accounts Office Rent Traveling Expenses Advertising Office Salaries Interest Paid on Bank Loans Bad Debts Written Off Sundry Office Expenses To close foregoing accounts. (9) Profit and Loss Account To — D — Drawing Account E — " •• To transfer net profit to drawing accounts. 900.00 442.37 17,772.57 2,285.78 (10) D — Drawing Account E — " " To — D — Capital Account E — " " To 'close drawing accounts. 2,306.29 1,677.01 1,342.37 4,800.00 1,497.52 900.00 1,425.50 1,783.03 4,004.50 I5403.27 854.83 1,103.92 1,142.89 1,142.89 2,306.29 1,677.01 Copyright, 1919, The Ronald Press Company II-3-11 ANSWERS TO QUESTIONS Answer to Question 1 — There would be in this case a surplus belonging to stockholders which, if liquidation actually takes place, will be distributed among them. The form shown in Lecture 1 would be altered as follows: Surplus belonging to Stockholders Balance — representing loss in book value of stockholders* in- vestment Capital Stock Surplus $ Answer to Question 2 — M S COMPANY DEFICIENCY ACCOUNT Losses arising from fire: Buildings $■ Fixtures Merchandise Loss over book value on realization of Assets: Land Buildings Customers' Accounts Merchandise Fixtures Profits from Operation for four months ending June 30, 1919 Capital stock Surplus Dividends declared and paid in 1919 Answer to Question 3 — (a) For a business of the type described the records are adequate. Many small retail businesses having a capital of a few thousand dollars may secure from such records all the information necessary for credit and income tax pur- poses, as well as for their own purposes, (b) A balance sheet together with a supporting profit emd loss statement may be easily prepared. The assets would probably consist of only merchandise and cash, and there would be no liabilities. The surplus at the end of the Copyright, 1919, The Ronald Press Company II-3-12 period would be the surplus at the beginning, plus net profits, less dividends paid. (c) The system followed would be a double-entry system, provided the state- ments described in (b) balance and are prepared regularly. The columnar cash book in this case becomes a ledger. Answer to Question 4 — In arranging the accounts to be kept in a general ledger of a single proprietor, partnership, or corporation the following order is usually adopted: 1. Capital liability accounts, including: single proprietor's, partners' capital and drawing accounts; capital stock, surplus, and other capital liability accounts. 2. Capital asset accounts, with proper sub-classification for each of the various units of a company's property and holdings, 3. Current asset accounts — in the same order in which the various items would appear in the balance sheet. 4. Current liability accounts — in the same order in which the various kinds of current liabilities would be stated in the balance sheet. 5. Profit and loss or nominal accounts, with the accounts arranged in the same order in which the items would appear in the regular periodical statements prepared. A preferable method in many cases is to show, first, the assets in the order they appear on the balance sheet ; second, the liabilities in the order they appear on the balance sheet ; third, the profit and loss accounts in the order they appear on the periodical statement of profits and income. Answer to Question 5— (a) A STATEMENT OF CASH RECEIPTS AND DISBURSEMENTS is a summary of the cash transactions for a period regardless of whether they are in respect of income and expenditure pertaining to that period, or not. On the left-hand side is shown: 1, The cash on hand or in bank at the beginning of the period 2, The receipts for the period under appropriate descriptive headings and on the right-hand side is shown: 1, The disbursements for the period under appropriate descriptive head- ings, 2, The balance on hand or in bank at the end of the period Both revenue and capital receipts and disbursements are included. (b) A STATEMENT OF INCOME AND EXPENDITURE is a term applied to the operating statement of a non-trading concern and shows the income and expenses for the period, whether received, paid, or outstanding, and thus corresponds to a profit and loss account. It does not include capital receipts or capital expenditures. These two statements differ in that the former is prepared on a cash basis while the latter is prepared on a profit and loss basis. Copyright, 1919, The Ronald Press Company II-3-13 REALIZATION AND LIQUIDATION ACCOUNT DEFINITION — Statement showing in summarized form the results of the liquida- tion of a business, FORM — (Name of Concern) REALIZATION AND LIQUIDATION ACCOUNT (Date) ASSETS TO BE REALIZED: LIABILITIES TO BE LIQUIDATED: Land § Notes Payable $ Buildings Audited Vouchers Equipment — — - Inventories — — ADDITIONAL LIABILITIES TO BE Customers' Accounts LIQUIDATED Notes Receivable $- PROCEEDS FROM REALIZATION OF ^ ASSETS ADDITIONAL ASSETS DISCLOSED ASSETS NOT REALIZED LIABILITIES LIQUIDATED BALANCE— Net Loss on Realiza- LIABILITIES NOT LIQUIDATED tion and Liquidation EXPENSES OF REALIZATION AND LIQUIDATION BALANCE— Net Profit on Realisa- tion and Liquidation Dividend to Creditors %. EXPLANATION OF TERMS USED — 1. ASSETS TO BE REALIZED are the assets shown by the books or the latest balance sheet. They are listed at book values. Cash is not included because it is already realized, 2. ADDITIONAL ASSETS DISCLOSED. Refers to assets not appearing on the books which can be realised upon for the purpose of meeting liabilities to be liquidated. 3. LIABILITIES TO BE LIQUIDATED. Refers to the liabilities appearing on the books or latest balance sheet which are tc be paid from the proceeds of the asseti realized upon. 4. ADDITIONAL LIABILITIES TO BE LIQUIDATED. Refers to liabilities which must be paid but which do not appear on the books. 5. LIABILITIES LIQUIDATED. Refers to the liabilities listed under (3) or (4) which have been paid by the receiver or liquidator. 6. LIABILITIES NOT LIQUIDATED. Refers to the liabilities listed under (3) or (4) which have not been paid at the date the statement is prepared. 7. PROCEEDS FROM REALIZATION OF ASSETS. Refers to the amount realized from the sale of assets listed under (1) or (2)« Copyright, 1919, The Ronald Press Company II-3-14 8. ASSETS NOT REALIZED. Refers to the assets listed under (1) or (2) which have not been disposed of at the date the statement is prepared. 9. EXPENSES OF REALIZATION AND LIQUIDATION. Refers to the expenses incurred by the receiver or liquidator in disposing of the assets and discharging the liabilities. 10. BALANCE. The difference between the items on the debit and credit sides represents the profit (in case the credits exceed the debits) or loss (in case the debits exceed the credits) on realization and liquidation. 11. "CASH" does not appear as an "Asset to be Realized" or as an "Asset Not Realized." LEDGER ACCOUNTS — Two methods are in general use: 1. A Realization and Liquidation account is opened in the general ledger. By journal entries the assets to be realized are charged to this account and the liabilities to be liquidated are credited thereto. Additional assets disclosed would be charged to the Realization and Liquidation account by journal entry, the contra credit being the Profit and Loss account or an investment account. Similarly, additional liabilities to be liquidated would be credited to the Realization and Liquidation account and, per contra, charged to the Profit and Loss account or an investment account. The debits for liabilities liquidated are posted from the liquidators' cash disbursements book and the credits for assets realized are posted from the cash receipts book. Expenses of realization and liquidation will be posted from the cash disbursements book. 2. Instead of transferring the assets and liabilities to a general Realiza- tion and Liquidation account, the proceeds from the sale of each asset may be credited directly to the respective asset accounts, and the payment of each liability may be charged directly to the respective liability accounts. Any profits or losses on realization are then transferred to the Profit and Loss account. ENTRIES — 1. Transfer all assets to be realized to the Realization and Liquidation account. 2. Transfer all liabilities to be liquidated to the Realization and Liquida- tion account. 3. Take up any additional assets disclosed. 4. Take up any additional liability to be liquidated. 5. Credit Realization and Liquidation account with proceeds from sale of assets as per cash receipts book. 6. Debit Realization and Liquidation account with liabilities discharged as per cash disbursements book. 7. Where a debit is liquidated by transfer of an asset make a journal entry within the account for record purposes, as follows: Realization and Liquidation Account To — Realization and Liqu::dation Account To record transfer of in payment of 8. Debit Realization and Liquidation account with expenses of realization as per cash disbursements book. Copyright, 1919, The Ronald Press Company II-3-15 WHEN THE REALIZATION AND LIQUIDATION ACCOUNT IS TO BE STATED it is customary for record purposes to make memorandum journal entries charging and crediting Realisation and Liquidation account in order to show "Liabilities not Liquidated* and "Assets not Realised" on the face of the Realisation and Liquidation account, as follows: (1) Realisation and Liquidation Account $ - To — Realisation and Liquidation Account |— — — . To record assets not realised at (2) Realisation and Liquidation Account To — Realisation and Liquidation Accounts To record liabilities not liquidated at In entry (1) the credit only would be posted and in entry (2) the debit only would be posted. The effect of these postings i£. to cancel the original charge for asset to be realised and the original credit for liability to be liquidated. Then the profit and loss on realisation and liquidation is ascertained and trans- ferred by journal entry, as follows: (3) Profit and Loss Account $— — — To — Realisation and Liquidation Account $—- .— — To transfer loss to date. Having balanced the Realisation and Liquidation account, post the debit of entry (1) and the credit of entry (2) and proceed as before. The alternative method would be to transfer to the respective asset and liability accounts all assets not realised and liabilities not liquidated. After eliminating the profit or loss as shown in entry (3) retransfer the assets and liabilities to the Realisation and Liquidation account, BOOKS OF RECEIVER — If concern is to be continued under a receiver instead of liquidating immediately, it is advisable to 1. Transfer the assets and liabilities to the receiver at the expected-to- realise and expect ed-to-rank values. The difference between these values and the book values would be closed into the Profit and Loss account. 2. The receiver would open a new set of accounts starting out with the assets and liabilities taken over. The excess of assets and liabilities would be credited to the bankrupt estate. 3. The assets and liabilities created through the receiver's operations should be separated rigorously from the assets and liabilities taken over from the estate, REFERENCES : Kester, Vol. 2, pages 639-650 Esquerre, Chapter XL Copyright, 1919, The Ronald Press Company II-3-1 COMPLETE ACCOUNTIN G COURSE — PART II Lecture 3 STATEMENT OF REALIZATION AND LIQUIDATION Problem 7 ( For Class Work ) After due consideration of the statement of affairs (see II-1-5) A & B de- cided to liquidate. The cash received from the realization of customers' accounts was 582,000 and from inventories $84,500, The property assets were bid in by the mortgage holder for $130,000. For expenses of the proceedings $500 was paid out, and the balance of the funds used to pay off the unsecured creditors pro rata. Prepare a realization and liquidation statement. Problem 8 From the following information prepare a statement of affairs with a rela- tive deficiency account: Wages Unpaid $ 3,000.00 Real Estate, Buildings, and other Plant Equipment 95,000.00 First Mortgage 6% Bonds (In Treasury $50,000) Bills Payable 50,000.00 (Secured by the deposit of $50,000 First Mortgage 6% Bonds) Trade Creditors 275,000.00 Notes Receivable: Good $22,000.00 Bad 3,000.00 Doubtful (take up 50%) 8,000.00 33,000.00 Bank Overdraft 4,800.00 Cash on hand 400.00 Inventory of Merchandise 105,000.00 Partially Secured Trade Creditors (Secured by merchandise of a value of $30,000) 45,000.00 Ordinary Trade Accounts: Bad $32,000.00 Doubtful (50% probably good) 35,000.00 Good 85,000.00 152,000.00 Capital Stock 200,000.00 Copyright, 1919, The Ronald Press Company II-3-2 Deficiency Account: Balance as at January 1, 1917 $33,000.00 Net Loss, year ending December 31: 1917 $80,050.00 1918 39,350.00 119,400.00 $152,400.00 Dividends declared and paid 40,000.00 $192,400.00 Froblem 9 After due consideration of the statement of affairs prepared April 30, the firm of Miller Brothers decided to liquidate, and Fred Miller was appointed receiver for that purpose. On July 2, 1918, he reported as follows: COLLECTED Customers' Accounts $23,000.42 Merchandise Inventory 26,500.50 Miscellaneous Supplies 100.00 Delivery Equipment 1,340.00 Fixtures 785.00 Advances 1,000.00 DISBURSED Taxes Accrued $ 200.00 Notes Payable 10,000.00 Accounts Payable 36,080.00 Accommodation Paper 5,000.00 Bank Loan 3,000.00 Interest Accrued on Notes Payable 36.00 Expenses (including Wages) 1,544.70 $1,000 accommodation paper was renewed. The accommodation paper which August Miller had indorsed was charged to his capital acccimt. You are asked to prepare: (a) Journal entries required by the bookkeeper to close the books ; (b) Realisation and Liquidation account ; (c) Status of partners' accounts. The partnership agreement provided that profits and losses were to be divided as follows: Fred Miller 2/3; August Miller 1/3. MISCELLANEOUS QUESTIONS Question 11 — Name and describe briefly the principal books of account of a business with which you are familiar. Question 12 — What is your understanding of the following terms: (a) Book profits (b) Inventory reserves (c) Contingent liabilities Copyright, 1919, The Ronald Press Company H-4-L CO^tPLETE ACCOUNTING COURSE — PART II Lecture 4 CAPITAL AND REVENUE EXPENDITURES Problem 10 The balance sheet of the Miller Motor Car Co, on June 30, 1918, was as follows: MILLER MOTOR CAR CO. BALANCE SHEET, JUNE 30, 1918 ASSETS RESERVE FOR PRESENT CAPITAL ASSETS: COST DEPRECIATION VALUE Land Buildings $ 40,000.00 70,000.00 % ^ 40,000.00 69,800.00 ff 200.00 Machinery, Tools, and Equipment 165,603.50 2,213.36 163,390.14 Office and Warehouse Fixtures 2,045.00 17.48 2,027.52 Delivery Equipment 1,750.00 43.76 1,706.24 Good-will $279,398.50 $ 2,474.60 $276,923.90 66,000.00 $342,923.90 INVESTMENT IN DURANT TRUCK CO. CURRENT ASSETS: Inventories: Automobiles Finished Parts Work in Progress Raw Materials Coal Stationery and Printing Accounts and Notes Receivable: Customers* Accounts Notes Receivable Accrued Interest on Notes Receivable 200,000.00 % 30,550.00 18,463.72 26,132.11 3,740.80 3,500.00 100.00 $ 82,486.63 $104,013.40 116,003.00 315.92 $220,332.32 Copyright, 1919, The Ronald Press Company II-4-2 Deduct — Reserves for; Bad Debts Discounts CASH: Cash in Bank Petty Cash Fund DEFERRED CHARGES: Advances to Salesmen Unexpired Insurance Rent Paid in Advance Discount on Stock TOTAL ASSETS $1,522.75 1,800.00 3,322.75 217,009.57 50,186.45 500.00 50,686.45 350,182.65 $ 2,000.00 766.66 100.00 2,000.00 4,866.66 $897,973.21 Deduct — Dividends Declared and Paid Preferred Stock 1.75% Common Stock 1.00% $500,000.00 LIABILITIES CAPITAL STOCK: 7% Preferred — Authorized and Issued (1,000 shares, par value $100 each) ~ Common — Authorized (5,000 shares, par value $100 each) Issued and Outstanding BONDED INDEBTEDNESS: 5% First Mortgage Bonds Q% First Mortgage Bonds CURRENT LIABILITIES: Audited Vouchers Accrued Liabilities: Pay-roll Bond Interest Taxes SURPLUS: Balance, June 1 Add — Profits for June $ 41,649.55 4,625.00 2,295.34 1,750.00 1,000.00 $100,000.00 433,900.00 $533,900.00 $150,000.00 75,000.00 225,000.00 60,144.12 48,569.89 108,714.01 $ 7,265.02 25,844.18 $ 33,109.20 2,750.00 30,359.20 $897,973.21 Copyrighti 1919, Tile Ronald Press Company I 1-4-3 On July 1, 1918, the plant was destroyed by fire. At a special meeting of the Board of Directors held the following day, a committee was appointed to examine into the affairs of the company and report their finding to the Board. July 6, 1918, the special committee reported as follows: 1. Buildings, machinery and equipment, delivery equipment, fixtures, and inventories, were totally destroyed. Insurance carried was |100,000. 2. Estimated salvage, of which $10,000 pertains to inventories, $40,000. 3. No insurance is carried on inventories. 4. Value of land appreciated, $5,000. 5. Notes receivable — $25,000 considered good; $50,000 considered doubtful, of which it is estimated 30% will be recovered; the balance, $41,003, desperate. 6. Customers* accounts — $30,000 considered good ; $30,000 doubtful, of which it is estimated 50% will be recovered; $44,013.40, desperate. 7. Accrued interest on notes receivable—all but $103.42 considered good. 8. Good-will — In event of liquidation it is worthless. 9. Bond interest — $200 has accrued to date. 10. Investment will realize $100,000. 11, Expenses of realization and liquidation estimated at $12,500. You are retained by the committee to prepare a statement of affairs and a deficiency account. Problem 11 A corporation was formed under the laws of the State of Illinois with an authorized capital stock of $2,000,000, divided into 20,000 shares of par value of $100 each, all of which was subscribed for and subsequently paid in in cash, aside from $300,000 (par value) which was satisfied by the subscriber turning in real estate and other property upwards of that value. Formulate the necessary opening entries to be given effect to on the books of the company in respect to the above-mentioned transactions. Problem 12 Five years after the organization of the corporation described in Problem 11, a stock dividend of 50% was declared, and at the same time $1,000,000 preferred stock was authorized and offered for sale at par to holders of common stock and at 121 to outsiders. The holders of common stock were allowed to subscribe up to 40% of their holdings in common, not including the stock dividend. They took advantage of this privilege in full, and the balance was disposed of to the public at the offered price. Provide journal entries for the above transactions.. Copyright, 1919, The Ronald Press Company II-4-4 MISCELLANEOUS QUESTIONS Question 16 — What do you understand by the term "deferred charges to oper- ating or income"? Name a few items that ordinarily are regarded as being deferred charges. Question 17 — What is your understanding of the term "Notes Receivable Discounted"? How should an item of this kind be dealt with in stating the balance sheet at the end of a period? Question 18 — What do you understand by the following terms: (a) Provision or Reserve for Bad and Doubtful Accounts (b) Accrued Taxes (c) Accrued Wages Draw up a skeleton ledger account showing the nature of the transactions that would ordinarily enter into the accounts referred to. How would the re- spective items be shown in a balance sheet? Question 19 — How would you distinguish between plant and machinery expen- ditures chargeable to capital asset accounts and those chargeable to ordinary repair and maintenance accounts? Question 20— Do you consider that the following expenditures are proper additions to the property accounts? (a) Repairs to buildings, machinery, and other equipment at a total cost of $8,110.17. (b) Purchase of horses, wagons, and stable equipment at a cost of $11,000 — no depreciation has been provided in respect of a similar asset now standing upon the books of the company. Solution to Problem 4 NOTE — See pages 6 and 7 for the solution to this problem. Copyright, 1919, The Ronald Press Company II-4-5 Solution to Problem 5 A & B BALANCE SHEET, DECEMBER 31, 1918 ASSETS CAPITAL ASSETS: Real Estate $ 5,000.00 Building 10,000.00 Furniture and Fixtures 2,000.00 $17,000.00 CURRENT ASSETS: Cash $ 1,000.00 Notes Receiv- able 8,000.00 Customers' Ac- counts 12,000.00 Merchandise Inventory 10,000.00 31,000.00 $48,000.00 LIABILITIES CAPITAL ACCOUNTS: . A — December 31, 1918 I 9,000.00 B — December 31, 1918 28,000.00 $37,000.00 CURRENT LIABILITIES: Notes Payable $4,000.00 Creditors* Ac- counts 7,000.00 11,000.00 $48,000.00 A & B STATEMENT OF PARTNERS' CAPITAL ACCOUNTS DECEMBER 31, 1918 Balance, January 1, 1918 Add Interest Deduct Interest Add Profits Balance, December 31, 1918 A B TOGETHER $9,000.00 $27,000.00 $36,000.00 100.00 100.00 •,000.00 $27,100.00 $36,100.00 300.00 .300.00 1,700.00 $27,100.00 $35,800.00 300.00 900.00 1,200.00 $9,000.00 $28,000.00 $37,000.00 Copyright, 1919, The Ronald Press Company I 1-4-6 Solution to Problem 4 O O EH EH PC O EH EH o o • o o to • «» o o • o o to o o • o o o o to ■P 01 H Vi CO 0) (^ iH D o S CO fl g w„ ■ . +a « O ^ q C0-H>T3-H+J'H'd^-^ ------ ^ Q O EH EH O to PS O M S o P»4 EH O W lO CJ * O 00 EH O Q O a . <: o h^ o EH lO PC •^ O (M Ph o W O Hi • EH O EH O H CO © "H ti o a ^ o ^ o o • o lO t«- CD o o • o lO o o o • o o o o • o o lO CM O O • o o to o o • o o o to o o • o o lO iH o o • o o to o o o • o o o p< (X, en p< o o • o lO CM to «* o o • o to to CM o o • o o t- o CM o o o o • • o o o to to CM «k • »>- CM t- to *» <» o o o o a • o o o to lO OJ *t . m t>- CM ^ CM «* «» o O o o • • o o o o o to •« ■t o o> to ©5= «» © ■p Pi •H o Pi o ^ ^ ^— *s o Ah ;::55: in ^ <>H en ■!-> o © W) •• •H a .Q a Pi •p 4h CO •H t»o tn O Pi 4J S © Pi PQ m o Pi Oi ■IJ :3 T3 © +J •H 13 Pi ■tJ © CO ~ to to «» O o o O o lO • • • o o b- to o to Oi to t*- 9^ •t » CM t- lO CM 4©= «» O o O o • • o o o o to o 9k «s 05 o to o o • o lO CM m CM to o o • o lO c:^ CM CM o o • o o to CJi lO to o CM CM o • • • CD CD o to to to CM CM CM « A A to to CM iH rH to to to o CM CM o • • • CD CD o O O to CD CD Oi •t •« •« CO CO CM CM o o O o o O • • • o o o to to o CD CD to A •« •* '* "* o 1 O •H 1 •H ■p Pi Pi Oi Ci to « o (0 rH CO O PQ © CO o a C/3 CJ a a tn O C3 O o o © •H O • S > +J Pi pH © CO +j © o © CO Pi rH Pi +J Pi •p p o, p^ <0 a a © Pu. 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O J5 ft Pl. w ■»-> O ft P. :3 a 3 ^ o ja o "5 ® B CO . -H o o • o o o CD O O CD CD O o o o CTi o o • o to CD o o o o o o o o o o 10 10 CM C"- E-t pci •• C>- ■^"^ Ph a • # EH EH < c«- w •» •k CO CD CM Pi CO P. CT5 1 u as CO ♦J CO t3 (D (O CM 1 in Pi m c CO •0 ♦J >. ■p CD s m (D a Pi *-• ^ to m iH § <0 CO ^ •> ■p u, ■•-> iH p. r-i CO en t3 ■»-> 4-> CO CO ^ Pi rH ® © a CO Pi d w 10 Ph «» Pi > *> a> CM (D .s en (U ^ Pi o o • o o in o o • o o o in I € «l m a © z § ■P M cn © iH Pi CO © ■«-> 4-> -H G O O • o o in o o o o o o o • o CO m Oi -«* «» o o • o CM o o • o o • o CM in 9. o CO 3 O Pui u a a, o © I Pi CO O to ♦J •H O p, T3 W © (1h © Pi CO • • • to to 00 CO in •t mt 0^ to to C-. iH iH • • • CO 00 rH iH in •k •1 9i CJ> cn IS • • • in in CD CD •k •> •t -'l* ''i* to © "tJ © 4-> Q .... Pi 4^ CO 4J CO ca (u u (it o Copyright, 1919, The Ronald Press Company I 1-4-8 Solution to Problem 6 Cash (1) To — C — Capital Account For a one-quarter interest in the partnership. (2) Good-Will To — A — Capital Account B — Capital Account Division of good-will between partners on basis of original capital contributed. (3) A — Capital Account To — Cash To reduce A's investment to one-quarter of the partnership capital. (4) B — Capital Account To — Cash Notes Payable To reduce B's investment to one-half of the partnership capital. $ 9,000,00 3,000.00 $ 9,000.00 750.00 2,250.00 750.00 750.00 12,250.00 8,250.00 4,000.00 ANSWERS TO QUESTIONS Answer to Question 6 — CUSTOMERS ' LEDGER 1918 1918 January 1 Balance $ 5,000.00 January 31 " 31 Sales 15,000.00 " 31 " 31 Journal 4,000.00 31 31 31 February 1 Balance $24,000.00 $14,382.38 Cash $ 8,000.00 Discounts allowed 247.62 Notes, etc. 1,250.00 Freight, etc., al- lowances 120.00 Balance 14,382.38 $24,000.00 Answer to Question 7 — The Petty Cash account will be charged originally with $200. As disbursements are made by the petty cashier, vouchers, or debit tickets, will be taken in receipt therefor. The petty cashier makes up a petty cash sheet from the debit slips on hand and a voucher is prepared as for any other payment; an officer of the corporation K*s the voucher, which is then passed on. for payment by the general or disbursing cashier. An entry will be made in the cash disbursements book at the time of the replenishment of the fund as follows: Copyright, 1919, The Ronald Press Company II-4-9 Postage $14.00 Dinners 12.00 Advertising . 75.00 Car-fare 9.20 Miscellaneous General Expense 7.00 To— Cash ' $117.20 Answer to Question 8 — The following journal entries would be made: (1) Good- Will $ — To — M — Capital Account $ N— " " To set up Good-Will on books prior to sale thereof to Smith Manufacturing Co. (2) Smith Manufacturing Co., Vendee •-- — -— To — Land Buildings Machinery ~ Good-Will Merchandise ~ Etc. — — ■ To record transfer of assets to Smith Manufac- turing Co* as per bill of sale dated (3) Accounts Payable — .— Notes Payable • — —— • To — Smith Manufacturing Co., Vendee ♦-— — — To record assumption of liabilities by Smith Mfg. Co. (4) Capital Stock of Smith Manufacturing Co. •—- —•- To — Smith Manufacturing Co., Vendee ■•— — Payment for net assets acquired as per bill of rale. (5) M — Capital Account i,— «-— — N— Capital Account — To — Capital Stock of Smith Manufacturing Co. — — — . Distribution of remaining assets to partners. NOTES— 1. Without instructions to the contrary good-will will be credited to the partners' capital accounts according to the profit and loss sharing ratio. 2. Not all the assets and liabilities of the partnership may be transferred, in which case the partnership books should be continued until complete liquidation is effected. Copyright, 1919, The Ronald Press Company II-4-10 Answer to Q uestion 9 — (a) Notes Payable would be credited if X signed the note as a member of the firm. (b) Accounts Payable might be credited if the agreement with the creditor provides that the note, although a liability solely of X's, is to be paid by the partnership to the payee. (c) If it is agreed among the partners that the money secured by X is to be considered as a special loan to the partnership, the cash received would be cred- ited to X — Loan Account, no matter whether evidenced by a note from the partner- ship or not. (d) X — Capital Account should be credited if the partners look upon the cash received as additional capital invested. The treatment would depend en- tirely on the facts in the case. Answer to Question 10~ (a) Interest of $52,500 on bonded and other indebtedness should be excluded in preparing a statement setting forth the earning power of a business, on the ground that interest in this case is a division of profits rather than expense of operation. (b) The profit of $5,000 arising from the sale of property is not one relating to the ordinary operations of the business, i.e., from the manufacture and sale of a product or from trading operations. If the item were included in the statement of profits and income at all, it would be included as "Ex- traordinary Profits" and taken up after arriving at the profits pertaining strictly to the ordinary business operations. (c) There is some question as to whether or not the litigation expense of $25,000 should be excluded. More information would have to be obtained in regard to the character of the business of the company for whom the statement of profits is to be prepared. The word "patent" suggests that the company is manufacturing a patented article which may or may not conflict with patents granted to others. The charge would probably be made against the current period's income as an extraordinary expenditure unless a reserve had been previously created to cover the probable liability. In that case it would be charged against the reserve, (d) Management salaries are at all times proper charges against the cost of doing business and go in reduction of the NET operating profits. The amount of $100,000 suggests, however, that the payment in respect of management salaries is perhaps disproportionate to the business done and is, therefore, in effect a partial division of profits. This is particularly true if the managers are the stockholders or owners of the business. If this condition existed it would appear desirable to set out the amount of the management salaries on the face of the statement of profits. Copyright, 1919, The Ronald Press Company II-4-11 (e) It would be excluded, partnerships being no longer subject to such tax. (f ) Interest on capital accounts would also be excluded. There would be no need of making any reference to such interest in the statement of profits except for the general information conveyed. CAPITAL AND REVENUE EXPENDITURES 1. ACCOUNTS TO BE CHARGED — Expenditures involving the extension or maintenance of capital assets should be charged to: (a) Property Account (b) Depreciation Reserve (c) Deferred Charges (d) Operating Expenses (e) Profit and Loss (f) Surplus, or (g) Improvement Reserve depending on the character and purpose of the expenditure. 2. BASES UNDERLYING THE DETERMINATIO N OF THE ACCOU NT TO BE CHARGED — The following is an extract from Mr. Dickinson's paper on "Profits of a Corporation" relating to construction expenditures: ■In completing the survey of the conditions so far as regards Capital Assets, it is well to consider what expenditures may reasonably be added to the original investment of Capital, instead of being charged against Profits. These expenditures may be divided into the following general classes: "(a) Actual additions to the property, such as new buildings, new engines or new tools, which did not exist before, or additions to existing articles of this class. All such expenditure would be at once admitted as a proper charge to Capital Account. "(b) Alterations to Capital Assets resulting in increased capacity, some portion, but not the whole of which in most cases may be charged to Capital Account. ■(c) Alterations to Capital Assets resulting not in increased capacity but in a lower cost of output. Such items are frequently treated as additions to Capital Account, even by conservative corporations, but it may be doubted whether they should not rather be considered as operating expenses paid in advance, especially if, as in most manufacturing concerns, the processes to which the improvements are applied have only a limited life, after which they will be superseded by other and more modern ways of doing the same thing. In other words, the most conservative way of treating this class of ex- penditures would be to consider them as deferred charges to operating to be Copyright, 1919, The Ronald Press Company II-4-12 written off over a definite term of years against Profits. Among this class may be mentioned change of grade or alignment in railroads which is too frequently treated as a capital charge ; the shifting of machinery from one position to another, or a general rearrangement of a factory; as well as stripping and development work, on mineral lands, which is of a capital nature in so far as it is money sunk in the property prior to taking anything out of it, but in all conservatively managed mines is treated in the way indicated above. "(d) Alterations to capital assets resulting partly in increased output and partly in decreased operating expenses. In this class much must depend on the nature of the expenditure, but a division between capital and operat- ing accounts on some definite basis arrived at on the principles outlined in (b) and (c) would as a rule be fair and conservative treatment. "(e) Exceptional and extraordinary renewals of existing assets resulting partly in the increased capacity necessary in order to keep pace with more modern plants, partly in diminished operating expenses and partly in a mere replacement. Such -expenditures include the modernizing of a property necessary to prevent or to repair a deterioration in its value, due either to the comp'etition of more modern properties or to the greater demands of the public, and consequently not resulting in increased earnings. Here again many corporations will charge part of such expenditures to Capital Account, and would be 'legally justified in so doing; but undoubtedly the sane and conserva- tive course is to charge them wholly against Profits through the medium of a Depreciation or Improvement Fund. "(f) Finally, we have ordinary replacements, repairs and renewals recurrent either at long or short intervals, and resulting neither in, increased capacity nor in saving in operating expenses. Such would always be a, charge against Profits, either through the Depreciation Fund or direct, according to the nature of the outlay." • 3. BASIS U NDERLYING THE DETERMINATION OF THE AMOUNT AT WHICH THE CHARGE SHOULD BE MADE — "It is important to note that the charges made under any of the above headings should be cost only and should not include any addition by way of Profit. The operation is merely a conversion of Current into Fixed Assets, upon which no Profit can be realized as long as the Asset is maintained. Possibly, however, where a corporation employs in the erection of plant for its own purposes facilities which it would otherwise be employing in similar erections for outsiders at a Profit, it would be fair, although not con- servative, to consider a reasonable charge for the use of thes'e facilities as part of the cost of erection. Also when special loans are raised for con- struction purposes, the interest on such loans during the period of construc- tion would fairly be part of the cost. "SALE OF FIXED ASSETS. If Fixed Assets, becoming unnecessary for the purposes of the business, are sold or are abandoned and dismantled, the question arises whether Profit or Loss arising therefrom should be added to or Copyright, 1919, The Ronald Press Company II-4-13 deducted from the Profit arising from the general operations. Legally, if as a result of a revaluation of Capital Assets a surplus was found to exist, the realised portion thereof may probably be treated as a Profit, but not otherwise; and on the other hand there would not appear to be any legal necessity to provide for a loss. As a matter of accounting, the safe policy is to carry forward Profits and provide for Losses, but the circumstances in each case must be considered. Where the losses are large, as in the case of the dismantling of a whole plant, it would be sufficient to provide for it gradually out of the profits of a series of years." The following is an extract from Mr. Dickinson's paper "Special Points in Corporation Accounting": "In the paper dealing with the 'Profits of a Corporation,* to which reference has already been made, some general rules were laid down as to different classes of expenditures, which might be legitimately considered as an addition to capital assets, and it is now proposed to consider the equally important point of the method of ascertaining the amount of such expenditures when the work is carried out by the corporation itself, ■The problems involved in the determination of the proper charges to be made for construction work are: "Firstly, to correctly ascertain the actual labor and material expended thereon, which if proper records be kept, is a comparatively easy matter, and "Secondly, to determine the amount, if any, which should be added to these direct costs for general and management expenses, and possibly for interest. "In a going concern a conservative course is generally adopted, and no charge is made beyond the labor and material cost, for expenditures of moderate amount on additions to the property; but, on the other hand, if a new and distinct plant were in course of construction, and producing no earnings from operation, the whole of the administration expenses, and the interest paid on Loans raised for this special purpose would be charged to construc- tion account, and rightly so being necessary elements of completing the work. This at once suggests the argument that what is reasonable £ind proper in the latter case should also be reasonable and proper in the former, particularly if facilities are employed which would otherwise be used on profitable work for outside parties. It must, however, be remembered that profits can only be made out of the sale of products; and that it is, therefore, incorrect that a concern should take credit for profits on work which is not intended for sale, and will, in all probability, never be sold as long as the concern is continuing to carry on business, "It would follow then that no charges should be made to construction for expenses which would have been equally incurred if there had been no such construction, and would in that case have been charged against profits ; although if special loans have been raised to provide funds for construction purposes, and a special staff of employes maintained for this sole purpose, it would seem quite legitimate that the interest paid on such loans, and the salaries of the special staff, should be charged to Construction Account until the work under construction is in full operation. Any other method might result in the creation of paper or fictitious profits, which would not be real- ized as long as the property was operated, and might never be realized on an ultimate sale thereof. A good instance is the case of a railroad building Copyright, 1919, The Ronald Press Company II-4-14 large extensions, the material for which in considerable quantities is carried over its own road. The freight on this material forms part of the earnings of the road, and if the new construction bears a large proportion to the mileage in operation, the earnings will be swelled to abnormal proportions by the additional traffic so created, and the road will appear, for a short period to be earning profits entirely out of proportion to those derived from its normal operations. The whole of this increase is really fictitious and does not add to the value of the stock in any way. "Managers of the operating departments of a factory frequently claim that they should be allowed to charge a profit on construction work carried out for their own mills, on the ground that if the work were done outside they would have to pay a profit, and at the same time would set free their own facilities to carry out additional work at a profit for outside customers; and they even go so far as to say that if they cannot charge a profit on construction work so carried out, they will in future have the work done on outside contracts. It must be admitted that this is a plausible argument, but a little further consideration will show that it is fallacious. There is here a confusion between a Profit and a Saving. The reason that a concern undertakes its own construction work in place of letting outside contracts therefor, is that it can by that means effect a saving in its expenditure, by taking advantage of its own capital and facilities to carry out the work instead of using the organization and the capital of others, upon which it would have to pay a profit. The saving so effected is of considerable advantage in that it reduces the amount of capital invested and future earn- ings will represent a larger return on the investment. Moreover, it is seldom true that the use of a corporation's own facilities for construction expenditure really means the throwing av;ay of profitable work for outsiders, which would otherwise have been undertaken. It is doubtful if any well managed concern ever refuses profitable orders, because of its own construction work; its organization can and will, almost automatically, expand sufficiently to provide for any increase in its operations which is likely to be thrown upon it. Moreover, if a sum be added to the cost of construction and credited to profit and loss, to represent the profit which would have been earned by the Company if the work had been done for outsiders instead of for itself, this profit can only be made available for distribution by increasing the amount of capital contributed for new construction work; and it can hardly be con- sidered good financial policy to increase indebtedness for the purpose of paying dividends. The only sound principle that can be adopted is to charge to construction all costs and expenses which are directly attributable to that construction, but nothing for indirect expenses, interest or profit." REFERENCES : Kester, Vol. II, pages 87-97 Copyright, 1919, The Ronald Press Company II-5-1 COMPLETE ACCOUNTING COURSE — PART II Lecture 5 DEPRECIATION Problem 13 A meeting of bondholders and creditors was held July 10, 1918, to consider the advisability of extending the indebtedness of the Miller Motor Car Co. so as to enable the company to recover from the fire which had de- stroyed the plant. After due consideration of the statement of affairs dated July 6, 1918, it v/as agreed to grant an extension of one year on condition that the stockholders raise $200,000 to be used for the immediate rebuilding of the plant. On July 12, 1918, a meeting of the stockholders was held to consider the proposition submitted by the creditors. The stockholders expressed their inability to raise the required funds, whereupon by resolution duly passed it was resolved to dissolve the company. The Central Trust Compeuiy was requested to act as receiver. August 6, 1918, the receiver reported as follows; COLLECTIONS Notes Receivable and accrued interest ^ $ 52,253.25 Accounts Receivable 49,480.22 Insurance Company — covering loss sustained on buildings, machinery, trucks, and fixtures 100,000.00 Salvage from machinery, tools, equipment, and fixtures 30,000.00 Salvage from inventories (merchandise stock was not insured) 10,000.00 Land, less commission 44,100.00 Investment 100,000.00 DISBURSEMENTS Wages and taxes paid in full. The bonds were paid off together with interest amounting to $ 5,850.00 Audited Vouchers 60,144.12 Expenses 9,842.78 Remaining assets are worthless and there are no further liabilities to be paid. Prepare balance sheet, cash account, and statement showing results of the realization and liquidation to date and state what dividend (if any) may be expected by the stockholders. Also prepare the journal entries to close the books of the Miller Motor Car Co., showing separately the loss by fire and the loss on liquidation of the business. Copyright, 1919, The Ronald Press Company II-5-2 MISCELLANEOUS QUESTIONS Question 21 — What is your understanding of the following terms: (a) Opening entries (b) Closing entries (c) Adjusting entries. Question 22 — What is your understanding of the following terms: (a) Accrued Interest on Bills Receivable and Bills Payable. (b) Insurance Unexpired. (c) Rents Paid in Advance. How should each of these items be classified in a balance sheet? Illus- trate the character of items you would find in such accounts. Question 25 — A corporation which had its financial statements prepared for the year ending December 31, 1918, contemplates making a substantial addition to its reserve for depreciation as of December 31, 1918. What effect will this have on the various balance sheet accounts and how will working capital be affected? Question 24 — During an examination of the books of a certain company the following entries are submitted for your approval: Investment in other Companies (5% stock interest) To — Dividends Received Account For proportion of estimated dividend expected to be paid on......... on the capital stock of the A Mfg. Co. $10,000.00 $10,000.00 (2) Property Account 15,000.00 To— Surplus Account 15,000.00 To write up the book value of certain land and buildings per instructions of the general manager. (3) Depreciation Reserve 18,500.00 To — Depreciation (Profit and Loss) 18,500.00 To write back the provisions for depreciation for the year 1918. What would be your comment in each case? Question 25 — Draft a form of cash book suitable for a trading concern that has two sales ledgers, accounts payable or voucher record, and a private ledger, all of which are balanced separately; the system to provide that (a) all receipts be deposited intact and (b) all disbursements be made by the use of a combination voucher-check. Copyright, 1919, The Ronald Press Company II-5-3 Solution to Problem 7 A & B PARTNERSHIP REALIZATION AND LIQUIDATION ACCOUNT (Date) ASSETS TO BE REALIZED: Customers $ Inventories Real Estate Buildings Machinery and Equipment Tools and Fixtures 94,100 95,250 33,000 96,000 82,800 13,250 $414,400 LIABILITIES TO BE LIQUIDATED: Mtge. Obligation $125,000 Bills Payable 145,000 Trade Creditors 95,000 $365,000 LIABILITIES LIQUIDATED: Mtge. Obligation $125,000 Bills Payable 105,231 Trade Creditors 68,944 299,175 LIABILITIES NOT LIQUIDATED: Bills Payable $ 39,769 Trade Creditors 26,056 EXPENSES ASSETS REALIZED: Customers Inventories Real Estate Buildings Machinery and Equipment Tools and Fixtures LOSS ON REALIZATIO AND LIQUIDATION 82,000 84,500 130,000 296,500 118,400 65,825 Balance Carried Forward Customers Inventories Property Assets 500 $779,900 CASH rd $ 3,175 82,000 84,500 5,000 ACCOUNT Expenses Bills Payable Trade Creditors $174,675 $779,900 > 500 105,231 68,944 $174,675 Copyright, 1919, The Ronald Press Company II-5-4 Solution to Problem 8 COMPANY STATEMENT OF AFFAIRS DECEMBER 31, 1918 Book or Cost Value Expected Gross Expected ASSETS CURRENT ASSETS: \ 400 Cash 152,000 Trade Accounts Good $ 85,000 Doubtful (50% good) 35,000 Bad 32,000 33,000 50,000 105,000 $340,400 $152,000 Notes Receivable Good $ 22,000 Doubtful (50% good) 8,000 Bad 3 , 000 To Realize Liabilities LIABILITIES to Rank PREFERRED CLAIMS: $ 400 $ 3,000 Wages Deducted — 102,500 per contra FULLY SECURED CREDITORS: 50,000 Bills Payable $50,000 DEDUCT— Security- held there- against (per 26,000 contra) $50,000 $ 33,000 First Mtge, 6% Bonds DEDUCT— Bills Payable (per contra) 50,000 Inventory of Mdse, (less $30,000 per contra) 75,000 50,000 First Mtge. 6% Bonds Deducted— per contra PARTIALLY SECURED CREDITORS: 45,000 Trade Creditors $45,000 DEDUCT— Va?.ue of Mdse. 30,000 $ 15,000 UNSECURED CREDITORS: 275,000 Trade Creditors$275,000 4,800 Bank Over- draft 4,800 279,800 $203,900 $427,800 Total Liabilities $294,800 Copyright, 1919, The Ronald Press Company II-5-5 PROPERTY ASSETS: $ 95,000 Real Estate, Bldgs. & Other Assets $95,000 DEDUCT— First Mtge. Q% Bonds (per contra) 50,000 45,000 $248,900 3435,400 Total All Assets DEDUCT — Preferred Claims (per contra) 3,000 Net Free Assets Balance — Deficiency to Creditors $245,900 48,900 $294,800 $294,800 192,400 Deficiency per books Deficiency to Stockholders $627,800 $200,000 $200,000 Capital Stock $200,000 $627,800 $200,000 $200,000 DEFICIENCY ACCOUNT Deficiency at January 1, 1919 Losses from Operations for the Fiscal Year Ending December 31: 1917 $80,050 1918 39,350 $ 33,000 Dividends Declared and Paid Estimated Loss on the Real- ization of Assets — per Statement of Affairs: Notes Receivable $ 7,000 Ordinary Trade Accts, 49,500 119,400 40,000 56,500 $248,900 Original Investment of Stockholders Represented in Capital Stock Issued and Outstanding Balance — Deficiency to Creditors as per State- ment of Affairs $200,000 48,900 $248,900 Copyright, 1919, The Ronald Press Company II-5-6 Solution to Problem 9 JOURNAL ENTRIES (1) August Miller, Capital To — Accommodation Paper To charge A. Miller with liabilities to be paid by the firm. $ 6,000.00 $ 6,000.00 (2) Notes Receivable Discounted 10,000.00 To — Notes Receivable 10,000.00 To transfer the credit from Notes Receivable Discounted Account to Notes Receivable Account. (3) Realization and Liquidation Account 79,582,00 To — Notes Receivable 100.00 Customers' Accounts 35,542.00 Merchandise Inventory 39,090.00 Miscellaneous Supplies 300.00 Delivery Equipment 1,750.00 Fixtures 1,450.00 Advances on Consignments- Inward 1,100,00 Unexpired Insurance 50.00 Rent Paid in Advance 200.00 To transfer assets to be realized to Realization and Liquidation Account. (4) Taxes Accrued 200,00 Notes Payable 10,000.00 Accounts Payable 36,080.00 Bank Loan 3,000.00 Interest Accrued on Notes Payable 36.00 Accommodation Paper 6,000.00 To — Realization and Liquidation Account 55,316.00 To transfer liabilities to be liquidated to Realization and Liquidation Account. (5) Cash 52,725.92 To — Realization and Liquidation Account 52,725,92 Assets Realized: Customers' Accounts $23,000.42 Merchandise Inventory 26,500.50 Miscellaneous Supplies 100.00 Delivery Equipment 1,340.00 Fixtures 785.00 Advances 1,000.00 Copyright, 1919, The Ronald Press Company II-5-7 (6) Realization and Liquidation Account $54,316.00 To — Cash $54,316.00 Liabilities Paid: Notes Payable $10,000.00 Accounts Payable 36,080.00 Taxes Accrued 200.00 Accommodation Paper 5,000.00 Bank Loan 3,000.00 Interest Accrued on Notes Payable 36.00 (7) Realization and Liquidation Account 1,544.70 To— Cash 1,544.70 Expense paid. (8) Realization and Liquidation Account 1,000.00 To — Realization and Liquidation Account 1,000.00 Accommodation paper renewed. 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After the closing entries have been made the balances in the various accounts represent the capital and current assets, deferred charges, capital and current liabilities, including the baleince of the Surplus Account in the case of a corporation. The term is also applied to the entries required to close the books of a single-proprietorship, co-partnership, or corporation on the liquidation of the business by sale or otherwise. (c) ADJUSTING ENTRIES are entries that must be made in order that the ac- counts prepared at any given date may be correctly stated and usually are* rendered necessary because of the failure to take up all of the income and expenditure relating to a given period and therefore are really an adjustment of the results between periods; for instance, taking up accrued interest, set- ting up inventory reserve, etc. Answer to Question 22 — (a) ACCRUED INTEREST on BILLS RECEIVABLE represents the interest earned on bills receivable but not due at ^ given date. The interest may be "inven- toried" or handled on the "accrual" basis. 1. Open an account entitled: ACCRUED INTEREST ON BILLS RECEIVABLE DEBIT WITH CREDIT WITH Total amount of interest on bills re- Interest received on bills receiv- ceivable accruing during the current able — contra a debit to Cash Ac- month — contra a credit to Interest count. Earned, Profit and Loss Account. The balance of the account represents the accrued interest en bills receivable, and is shown as a current asset on the balance sheet. 2. Open an account entitled: Copyright, 1919, The Ronald Press Company II-7-9 INTEREST RECEIVED DEBIT WITH CREDIT WITH Accrued interest on bills receivable Interest Received on bills receiv- at beginning of period — contra a able during period — contra a debit credit to Accrued Interest on Bills to Cash Account. Receivable (asset account). Accrued Interest on bills receivable at the end of period — contra a debit to Accrued Interest on Bills Re- ceivable (asset account). The balance of the account represents the net interest earned during the period and is transferred to the credit of the Profit and Loss Account. ACCRUED INTEREST on BILLS PAYABLE represents interest accrued but not due at a given date. If the interest is matured but unpaid, it should be styled "Matured Interest on Bills Payable Unpaid." Accrued interest may be handled in one of two ways : 1. Open an account entitled: ACCRUED INTEREST ON BILLS PAYABLE (Liability account) DEBIT WITH CREDIT WITH Total payments of interest on bills Total amount of interest on bills pay- payable during period — contra a able accruing during current month credit to Cash, —contra a charge to Interest Paid (profit and loss account). The balance of the account represents unpaid accrued interest on bills pay- able and would be shown as a current liability on the balance sheet. 2* Or pass the accrued interest through the Interest Paid Account as follows: INTEREST PAID (Profit and loss account) DEBIT WITH CREDIT WITH Interest paid during period. Interest accrued but unpaid at be- Interest accrued but unpaid at end of ginning of period — contra a debit period — contra a credit to Accrued to Accrued Interest on Bills Pay- Interest on Bills Payable Account. able Account. The balance of the account represents the net interest charge for the current period and is transferred to the debit of the Profit and Loss Account. (b) INSURANCE UNEXPIRED represents the unearned insurance premiums or the insurance unexpired at any given date, being an expenditure incurred in one period which applies to that and subsequent periods and properly should be carried forward in order that the expense of carrying insurance may be equitably distributed over the term of the policy. The transactions that would enter into the Insurance Unexpired Account are shown below: Copyright, 1919, The Ronald Press Company II-7-10 (1) INSURANCE UNEXPIRED ACCOUNT DEBIT WITH CREDIT WITH Insurance unexpired, or unearned in- Cost of carrying insurance during the surance premiums at the beginning period or the earned insurance of the period. premiums — contra a debit to In- Insurance premiums paid or credited surance Premium Account (profit during l;he period — contra a credit and loss account), to Cash or Accounts Payable. Return premiums on policies can- celled during the period. The balance of the account, insurance unexpired, or unearned insurance pre- miums at the end of the period, would appear in the balance sheet as a deferred charge to operations. In some companies the insurance premiums are handled in the manner illus- trated above, although in the smaller enterprises the following method of deal- ing with the insurance premiums is generally adopted; J (2) INSURANCE PREMIUMS ACCOUNT (A profit and loss account, except at the end of the period, when the insurance unexpired, or unearned insurance premium, is re- corded in the account, when it becomes a deferred charge to oper- ations account) DEBIT WITH CREDIT WITH Insurance unexpired, or unearned in- Insurance unexpired, or unearned in- surance premiums, at the beginning surance premiums, at the end of the of the period, being the amount period. brought down from the previous Return premiums on policies can- period, celled during the period. Insurance premiums paid or credited during the period — contra a credit to Cash or Accounts Payable. The balance of the account, cost of carrying insurance during the period, trans- ferred to the debit of the Manufacturing, Trading, or Profit and Loss Accounts, as the case may be. (c) RENTS PAID IN ADVANCE represents the unearned rent or prepaid rent at any given date ; also an expenditure incurred in one period, the benefit from which accrues to a succeeding period. An illustration of the transactions en- tering into such an account is given below: RENTS PAID IN ADVANCE ACCOUNT (A deferl'ed charge to operations account) DEBIT WITH CREDIT WITH Rents paid in advance at the beginning Rents paid in advance at the end of the of the period. period. Rents paid during the period — contra a credit to Cash or Accounts Payable. Copyright, 1919, The Ronald Press Company II-7-11 The balance of the account, rental charge for the period, transferred to the debit of the Manufacturing, Trading, or Profit and Loss Accounts, as the case may be. Rents paid in advance can also be handled much the same as Insurance Unex- pired Account referred to in (1). Answer to Question 23 — The effect on the balance sheet of increasing the reserve for depreciation in the case of a manufacturing business will be some- what as follows: !• The book value of the capital assets will be decreased. 2. Profit and loss, and hence surplus, will be decreased to the extent that depreciation charges have been included in cost of sales, 3« Work in process and finished stock inventory will be increased, owing to the fact that the large increase in the provision for depreciation will make necessary a raise in the burden rate, thus . affecting all goods worked on during the period whether sold or still on hand, 4. Working capital will be increased by that proportion of the addi- tional depreciation apportionable to inventories on hand December 31, 1918. Answer to Question 24 — (a) Unless the company owns a controllin g interest it is improper to take up any earnings of the other company until a dividend is declared. The policies of the other company are dictated by others and losses may subsequently occur which will prevent the payment of a dividend. The entry made anticipates an unrealized profit, (b) A resolution of the board of directors must authorize this entry. The general manager does not have the authority. Writing up the value of property assets is contrary to good accounting practice except when financing is under- taken or a sale is to be made, etc. The credit should be to capital surplus rather than surplus, since the profit is as yet unrealized. (c) If the current provision was excessive by this amount, the entry is correct. In this case future provisions should be made on the new basis. To write back the depreciation merely for the purpose of increasing book profits is incorrect. Answer to Question 25 — The following draft form will probably meet the con- ditions set out in the question: CASH RECEIPTS DATE ACCOUNT PARTICULARS FOLIO SALES LEDGERS DISCOUNT PRIVATE NO. 1 NO, 2 ON SALES LEDGER BANK CASH DISBURSEMENTS CHECK AUDITED PRIVATE DATE ACCOUNT PARTICULARS NUMBER FOLIO VOUCHERS LEDGER BANK Copyright, 1919, The Ronald Press Company II-7-12 The essential features are separate columns for Sales Ledger No, 1, Sales Ledger No. 2, and Audited Vouchers, so that the monthly totals may be obtained for posting purposes. RECEIVERSHIPS In Lectures 1 and 3, the statement of affairs and the realization and liquidation account have been explained as being those prepared immediately preceding and immediately following the dissolution of a business. Or, a state- ment of affairs may be utilized to portray the condition of a business on a forced sale basis, whether actual liquidation is contemplated or not. It re- mains now to consider another aspect of a corporation's records, i.e., the accounts kept during the administration of a receiver. It sometimes happens that a debtor will assign all or part of his assets to a creditor, or other assignee, for the purpose of satisfying certain of his cred- itors. The assignee is a receiver in equity if formal application 'is made through a court. Insolvency need not exist, but the act of assignment is one of bankruptcy. However, if all the creditors are agreed, the receiver in equity may con- tinue his administration of the business for an indefinite period until (a) the creditors are satisfied, (b) bankruptcy proceedings are initiated, or (c) reorganization takes place. In connection with the accounts kept by a receiver, the following points should be noted: 1. The receiver should open a separate set of books containing: (a) All the assets of the business, the valuation reserve accounts, and all other items except investment and liability accounts (accrued up to the date of his appointment) which have been assigned to him. (b) Capital asset accounts may be omitted but are usually transferred. It is desirable but not essential that the schedule of accounts used by the receiver should be the same as that of the business taken over, in order that analyses of operations under his administration may be compared with operations before his appointment. 2. Accrued assets should be computed as of the day of the receivership and the books brought up to date before transfer is made charging the receiver with the assets taken over. The closing entries of the business with regard to the receiver's account should agree with the opening entries on the receiver's books. The corporation will charge "A B, Receiver" while the receiver will credit "C Company, in receivership." These two accounts may be reconciled in much the same manner as home office and branch office accounts. 3. The receiver's operations will be strictly separated from previous trans- actions. Liabilities of the previous administration which he pays will be charged to an account properly designated or directly to the corporation's account.' Preference in such payment will be made as described under the state- ment of realization and liquidation. Copyright, 1919, The Ronald Press Company II-7-13 4. As a rule, all current items of expense will be charged to expense accounts in the usual way, without similar entries being made on the books of the corporation. However, certain items, such as bond interest, are obliga- tions not incurred by the receiver and will be accrued on the corporation's books. When the interest is paid, accrued interest will be charged and the receiver's account credited. On the receiver's books, cash will be credited and the corporation's account or "Interest, AB Co." charged. 5. The receiver's books should be closed at the end of each fiscal or calendar year in conformity with the previous practice of the corporation. 6. Reports which receivers submit are usually prescribed in a general way, at least, by the court, but the accountant may, in addition, add to the report and exhibits such other information which in his opinion are essential to a proper interpretation of the receiver's transactions. The exhibits will include: (a) Balance sheet, generally combined with the balance sheet of the corporation to show the financial condition of the corporation in receivership. (b) Statement of profit and loss during the receiver's administration, together with combined statement of receiver's profit and loss and corporation's profit and loss (if any) during the fiscal period under review. (c) Detailed schedules supporting (a) and (b) where necessary. (d) Statement of application of funds during the period of receiver's administration. (For the construction of this statement see Lecture 12. ) (e) A statement of charge and discharge similar to the statement pre- pared in connection with estate accounts (Lecture 10) instead of (d). (f ) Occasionally, a summary of cash receipts and disbursements. 7. The receiver terminates his accounts according to the method of disposing of the business which may be one of the following: (a) Initiation of bankruptcy proceedings. The receiver will turn over his assets to the receiver in bankruptcy just as the cor- poration turned over its assets to the receiver in equity. The distinction between these two sorts of receiverships should be noted* (b) Reorganization* (o) Sale. 8. When the receivership ends, the profits of the receivership should be entered on the corporation's books preliminary to closing the latter, and like- wise all assets and liabilities turned back by the receiver should be entered and his account closed. REFERENCES: H. C. Freeman, Yearbook American Institute of Accountants, 1917, pages 83-104 Bays, Debtor and Creditor and Bankruptcy. Copyright, 1919, The Ronald Press Company II-8-1 COMPLETE ACCOUNTING COURSE — PART II Lecture 8 BRANCH HOUSE ACCOUNTING Problem 18 The American Manufacturing Co, opened a branch store on July 1, 1918, in one of the large cities with A as manager. From that date to June 30, 1919, the following transactions took place: 1. Merchandise to the value of $11,083.77 was shipped during the year direct from the warehouse of the home office. 2. Freight charges (prepaid by the home office) thereon amounted to $911.03. 3. Uncollected customers' accounts at June 30, 1919, amounted to §3,911.33, and the Accounts Payable (in respect of salaries and other expenses) to $598.11. 4. Materials to the value of $8,378.11 were purchased by and paid for direct by the branch. 5. The total sales of all products during the year ended June 30, 1919, amounted to $30,811.74. 6. Branch expenses paid (including salaries of salesmen and office clerks, rent, light, advertising, etc., but exclusive of the unpaid items above referred to) $6,987.45. 7. Charge of $675 rendered by the home office in respect of the proportion of management salaries and expenses chargeable to the branch office. 8. Materials to the value of $1,318.11 were shipped to Branch II of the company (including the freight charges thereon of $98.11). 9. Inventory of materials on hand June 30, 1919, $1,103.27. A separate set of books was kept at the branch and you are required to prepare: (a) The necessary entries to record the foregoing transactions on both the branch and home office books, (b) The necessary closing journal entries for the branch books, (c) The necessary entries to take up the profit or loss on the home office books. (d) The necessary statements to show the profits or losses from trading, and a summary of the transactions between the branch and the home office. Copyright, 1919, The Ronald Press Company II-8-2 Problem 19 The General Manufacturing Co. asks you to prepare its general balance sheet at December 31, 1918. Its home office is located in New York. It has a plant in Chicago and branches in San Francisco, New Orleans, and Omaha, each having a separate set of books. Following are the trial balances at December 31, 1918, after closing. HOME OFFICE TRIAL BALANCE, DECEMBER 31, 1918 Cash $ 58,000.00 Accou^ts Receivable 294,300.00 Inventories 773,200.00 Other Current Assets 43,650.00 Interest Insurance and Taxes Prepaid 12,590.00 Bond Discount not Amortized 2,500.00 Stocks of Other Companies 120,000.00 Miscellaneous Stocks and Bonds • 12,250.00 Liberty Bonds 125,000.00 Sinking Fund Investment 10,000.00 Land 78,410.00 Buildings 183,540.00 Machinery and Equipment 65,450,00 Office Furniture and Fixtures 7,320.00 Delivery Equipment 5,425.00 Construction in Progress 30,158.00 Other Fixed Assets 16,380.00 Good-will 350,000.00 Current Account — Plant 356,750.00 Current Accounts — Branches 135,800.00 Depreciation Reserve $ 97,700.00 Notes Payable 695,000.00 Accounts Payable 52,800.00 Accrued Interest, Taxes, and Wages 5,380.00 Other Current Liabilities 3,250.00 Bonds Issued and Outstanding 500,000.00 Capital Stock 1,000,000.00 Contingent Reserves 75,000.00 Surplus 210,500.00 Profit and Loss 66,093.00 Dividends Paid S5,000.00 $2,705,723.00 $2,705,723.00 Copyright, 1919, The Ronald Press Company II-8-3 CHICAGO PLANT TRIAL BALANCE, DECEMBER 31, 1918 Cash Petty Cash Trade Accounts Receivable Sundry Accounts Receivable Inventory Merchandise Inventory Supplies Sundry Current Assets Interest Prepaid Insurance Prepaid Miscellaneous Prepaid Charges Liberty Bonds Buildings Machinery and Equipment Office Furniture and Fixtures Delivery Equipment Depreciation Reserve Notes Payable Trade Accounts Payable Sundry Accounts Payable Accrued Interest Accrued Wages Other Current Liabilities Home Office Account 5 38,760.00 950.00 99,255.00 23,490.00 185,650.00 • 4,375.00 3,290.00 3,600.00 2,144.00 630.00 25,000.00 38,400.00 15,460.00 1,190.00 11,050.00 $ 18,480.00 180,000.00 13,819.00 10,080.00 1,160.00 850.00 1,300.00 227,555.00 :$453 , 244 . 00 $453 , 244 . 00 BRANCH HOUSES TRIAL BALANCES, DECEMBER 31, 1918 NEW ORLEANS SAN FRANCISCO OMAHA Cash Petty Cash Trade Accounts Receivable Sundry Accounts Receivable Inventory Merchandise Inventory Supplies Insurance and Miscellaneous Prepayments Land Buildings Machinery and Equipment Office Furniture and Equipment Delivery Equipment \ 575.00 50.00 10,360.00 130.00 11,095.00 140.00 175.00 2,230.00 10,025.00 2,330.00 765.00 950.00 $ 2,191.00 75.00 17,468.00 187.00 18,380.00 225.00 195.00 4,157.00 16,320.00 3,230.00 316.00 831.00 $ 1,914.00 100.00 15,686.00 632.00 10,144.00 328.00 310.00 6,320.00 375.00 860.00 $38,825.00 $63,575.00 $36,669.00 Copyright, 1919, The Ronald Press Company II-8-4 Trade Accounts Payable Miscellaneous Accounts Payable Accrued Taxes Accrued Wages Depreciation Reserve Home Office Account 2,960.00 $ 5,954.00 $ 2,914.00 336.00 143.00 260.00 1,460.00 33,666.00 1,953.00 783.00 460.00 2,130.00 375.00 176.00 2,850.00 52,295.00 30,354.00 $38,825.00 $63,575.00 $36,669.00 Upon reconcilement of the plant and branch current accounts the following items were iound to be open: 1. Account with plant at Chicago: (a) Charge by home office of $100,000 cash sent to plant ; not taken up by plant (b) Invoices for goods shipped to plant, for which plant has not given credit, aggregating $29,195 2. Branch house current accounts : (a) Charges by branches against customers whose accounts are carried at the home office — no credit yet given by home office — $8,400 (b) Invoices for goods shipped and charged to branches — not credited by branches--aggregating $11,085 You are requested to prepare a balance sheet of the General Manufacturing Co. at December 31, 1918, having due regard for the elimination of inter- office accounts. Prepare in connection with the above a working sheet showing how the final balance sheet totals were arrived at. MISCELLANEOUS QUESTIONS Question 36 — A company operating a niunber of departments desires to know the profit on sales by each department. How would you suggest that the books be kept in order that the desired information can be furnished to the management ? Question 37 — How should the followinfc expenditures be distributed in the accounts of a manufacturing concern: Payments aggregating $11,037.27 for real estate, personal property, and corporation taxes for the year 1918 — monthly provisions have been made for the accrued taxes. Question 38 — What is the difference between cash dividends, bonuses to officers, and stock dividends? Formulate the entries required to be made in dealing with each item. Question 39 — How should preferred stock dividends in arrears be stated in the balance sheet of a company? Copyright, 1919, The Ronald Press Company II-8-5 Question 40 — How would you state the following items in a balance sheet? (a) Unpaid subscriptions to capital stock, (b) Unissued capital stock. (c) Dividends declared and unpaid. Solution to Problem 14 F AND G BALANCE SHEET, JUNE 30, 1919 Exhibit I ASSETS CAPITAL ASSETS: Real Estate & Bldgs. 130,083.27 llachy. & other Equip. 19,093.09 Tool Equip. 1,903.23 Total Capital Assets $ 51,079.59 CURRENT ASSETS: Inventories of Finished Product 5 1,835.07 Raw Material 1,108.37 Customers* Accounts 51,027.03 Notes Receivable 4,705.27 Accrued In- terest on Notes Re- ceivable 135.34 Cash 12,403.24 Total Current Assets 71,214.32 LIABILITIES CAPITAL ACCOUNTS: F Balance at July 1, 1918 Profits for year Interest on Capital $23,983.27 $ 17,093.27 27,633.86 27,633.85 1,800.06 1,374.46 LESS— drawings Balance at June 30, 1919 $53,417.19 $46,101.58 1,800.00 1,700.00 $51,617.19 $44,401.58 Total of Capital Accounts $96,018.77 CURRENT LIABILITIES: Bills Payable Accounts Payable Accrued In- terest on Bills Payable $ 9,000.00 17,091.07 184.07 Total Current Liabilities 26,275.14 Total All Assets $122,293.91 Total Capital & Liabilities $122,293.91 Copyright, 1919, The Ronald Press Company I 1-8-6 Exhibit II F AND G COMPARATIVE STATEMENT OF PROFIT AND LOSS SIX MONTHS ENDING DECEMBER 31, 1918, AND JUNE 30, 1919 PARTICULARS Sales Cost of Sales (Ex- hibit II-A) Gross Profit from Operation Less — Selling Expenses General and Adm, Expenses SIX MONTHS ENDING SIX MONTHS ENDING INCREASE DECEMBER 31, 1918 JUNE 30, 1919 OR DECREASE* Amount % to Sales Amount % to Sales Amount % to Sales $59,276.05 100.00 $61,323.70 100.00 $2,047,65 28,648.95 48.33 24,326.51 39.67 *4, 322.44 *8.66 $30,627.10 51.67 $36,997.19 60.33 $6,370.09 8.66 3,981.93 6.72 $ 3,136.99 5.12 *$ S44.94 *1.60 1,688.85 2.85 1,022.82 1.67 *666.03 *1.18 $ 5,670.78 9.57 $ 4,159.81 6.79 *$1,510.97 *2.78 Add — Miscellaneous Income (net) $24,956.32 42.10 $32,837.38 53.54 $7,881.06 11.44 1,788.93 3.02 *381.85 *0.62 *2,170.78 *3.64 $26,745.25 45.12 $32,455.53 52.92 $5,710.28 7.80 Less—Interest (net) 1,081.36 1.82 *322.81 *0.53 *1,404.17 *2.35 $25,663.89 43.30 $32,778.34 53.45 Less — Interest on Partners' Accounts 1,232.30 2.08 1,942.22 3.17 ,114.45 10.15 709.92 1.09 Surplus Net Profits $24,431.59 41.22 $30,836.12 50.28 1,404.53 9.06 Distributed as follows; F G $12,215.80 12,215.79 $15,418.06 15,418.06 $30,836.12 Total $27,633.86 27,633.85 $55,267.71 Total, as above $24,431.59 *Red. If it is assumed that the selling price is unchanged during the year, the analysis of profits will appear as follows: Copyright, 1919, The Ronald Press Company II-8-7 Increase in Gross Profits due to Increase in Sales (|2,047«65 X 51.67%) $1,057.99 Increase in Gross Profits due to proportionate decrease in Cost of Sales ($61,323,70 x 8.66%) 5,31?.10 Total Increase in Gross Profits $6,370.09 Add—Decrease in Selling Expenses $ 844.94 General and Administrative Expenses 666.03 1,510.97 $7,881.06 Deduct — Decrease in Miscellaneous Income $2,170.78 Increase in Interest (net) 1,404.17 766.61 ',114.45 Deduct — Increase in Interest Allowance on Partners' Capital Accounts 709.92 Net Increase in Surplus Net Profits $6,404.53 F AND G STATEMENT OF COST OF PRODUCTION AND GOODS SOLD SIX MONTHS ENDED SIX MONTHS ENDED DECEMBER 31,1918 JUNE 30, 1919 RAW MATERIALS USED: Inventory of Raw Material at beginning of the period $ 9,027.03 $ 989.11 Raw Materials purchased 9,133.91 12,382.09 $18,210.94 $13,371.20 Less — Inventory of Raw Mat- erial at end of period 989.11 $17,221.83 1,108.37 $12,262.83 PRODUCTIVE LABOR 9,988.91 8,957.34 FACTORY EXPENSES: Heat and Power $ 1,403.27 $ 1,501.56 Taxes 341,55 446.89 Insurance 451.05 330.98* Factory Expenses 818.17 3,014.04 1,086.15 3,365.58 Cost of Goods Manufactured $30,224.78 $24,585.75 INVENTORY VARIATIONS: Inventory of Finished Product at beginning of the period $ $ 1,575.83 Inventory of Finished Product at end of period 1,575.83 1,575.83 1,835.07 259.24 Cost of Goods Sold (Exhibit II) $28,648.95 $24,326.51 Copyright, 1919, The Ronald Press Company II-8-8 Exhibit III SUMMARY OF PARTNERS' CAPITAL ACCOUNTS Balance as at July 1, 1918 ADD— Prof its for the six months ending December 31, 1918 Interest on Capital Accounts for the six months ending December 31, 1918 DEDUCT — Cash withdrawals during the six months ending December 31, 1909 Balance as at December 31, 1918 ADD~Interest on Capital Accounts for the six months ending June 30, 1919 Profits for the six months ending June 30, 1919 DEDUCT — Cash withdrawals during the six months ending June 30, 1919 BALANCE — Capital Accounts June 30, 1919, as per balance sheet as of that date F G TOGETHER $23,983.27 $17,093.27 $41,076.54 12,215.80 12,215.79 24,431.59 719.50 512.80 1,232.30 $36,918.57 $29,821.86 $66,740.43 900.00 1,100.00 2,000.00 $36,018.57 $28,721.86 $64,740.43 1,080.56 861.66 1,942.22 15,418.06 15,418.06 30,836.12 $52,517.19 $45,001.58 $97,518.77 900.00 600.00 1,500.00 $51,617.19 $44,401.58 $96,018.77 ANSWERS TO QUESTIONS Answer to Question 26 — (a) Fixed charges are those expenditures that are of a more or less fixed nature in connection with the conduct of a business and include such items as interest on bonded indebtedness, provision for sinking fund, etc. The term is used particularly among public utility corporations, although its us© has extended to other companies. (b) Replacement expenditures are those expenditures incurred in the renewal or replacement of plant, machinery, tools, and other equipment which are worn out or obsolete. Expenditures of this nature must be met out of profits or earnings. (c) Maintenance expenditures are expenditures incurred in connection with the repair, maintenance, or upkeep of a property in order to maintain the necessary efficiency to permit of the successful operation of the property. This class of expenditure is chargeable against the period in which the same was incurred, and under no circumstances can ordinary repairs be carried forward as a deferred charge against a subsequent period. In some businesses. Copyright, 1919, The Ronald Press Company II-8-9 particularly a business of "seasons," it is necessary to make some provision during the producing period for repairs that necessarily have to be deferred until the "slack" or intervening period. This is generally accomplished by debiting Operating Expenses and crediting "Provision for Accrued Repairs." This amount may be based on a certain sum "per ton" of product produced, or on past experience. Answer to Question 27 — Capital assets are those more or less permanent in nature, by means of which the business is carried on, and which are held for the purpose of earning income, and not for the purpose of sale, e.g., land, buildings, plant, machinery, etc If asked to explain why the capital assets appear in the balance sheet in amounts in excess of what they would realize if sold, the auditor should say that it is not necessary to take into account the market value of capital assets which may be subject to considerable fluctuations. The question to consider is their value to the business as a going concern, and not the break-up value. In the event of a forced realization, heavy losses would probably ensue, but it would not be reasonable to anticipate such losses before arriving at the current profits of the business. Answer to Question 28 — (a) Additions and extensions to property, $98,102.15. From the descrip- tion of the expenditure it is quite obvious that the amount is a proper charge to Capital Account. (b) Extraordinary repairs and renewals, $18,027.11. These charges should be made against the Depreciation Reserve, being expenditures incurred in making good depreciation and prolonging the life of the equipment repaired and renewed. (c) Ordinary repairs and renewals, $27,081.33. These expenditures must be charged to the current operating expenses of the period in which they were incurred and under no circumstances can they be carried forward as "Deferred Charges." (d) The replacement value of $125,091.27 is proper charge against Property Account, provided that the same account is relieved by a charge against the Depreciation Reserve of the estimated original cost value (181,047.27) of the equipment replaced. In this case the salvage of $9,818.28 recovered would be credited to the Depreciation Reserve Account. Answer to Question 29-- Scrap Depreciation Reserve To — Property Account (a) 9 10,000.00 91,000.00 $101,000.00 To write off value of buildings torn down. Copyright, 1919, The Ronald Press Company II-8-10 Property Account |175,000«00 To — Construction Account $175,000.00 To set up value of completed buildings. (b) Depreciation Reserve 31,093.87 To — Construction 31,093.87 Value of extraordinary renewals of machine shop equipment. Answer to Question 30— (a) The expenditure of $11,383.11 apparently represents extensive repair and renewal work in connection with the soap-making machinery and if this is the case the amount would be a proper charge against the Depreciation Reserve Account. The information given in the question is too meager to definitely state the most conservative treatment to adopt — the facts would have to be ascertained. It may be that the amount should be apportioned between (1) repairs and renewals and (2) depreciation reserve. (b) The advance of $5,000 to John Smith should be charged to his account and shown on the face of the balance sheet under the general heading of Deferred Charges as "Prepaid Salaries." The amount should be written off against the six months' operations in monthly instalments of $833.33 each. (c) The improvement expenditure of $25,000 on the machine shop equipment. As previously pointed out, improvement expenditures are frequently regarded as capital charges. It may be that in this case some part of the amount of $25,000 represents capital outlay. Improvement expenditures, from a con- servative point of view, are in the nature of deferred operating charges to be written off in a few years* time or over the estimated life of the improvement BRANCH HOUSE ACCOUNTING In connection with the development of large scale operations, it fre- quently becomes desirable for a business to maintain plants or branches in various parts of the country. Inasmuch as the central office may be located at a distance from the branches, it is necessary to devise special methods of con- trol properly to handle their accounts. CURRENT ACCOUNTS BETWEEN OFFICES — The home office will provide in its general ledger an account for each branch and, conversely, each branch will maintain an account with the home office. In case there are a number of branch accounts, it is desirable to place these accounts in a separate ledger under a control account in the general ledger. Transactions between branches are likely to occur frequently, but it is desirable to handle such transactions through the home office books. The Home Office Account on the books of the branch is charged or credited with all transactions and, similarly, these transactions are listed on the Branch Current Account in the home office books. The frequency of branch house reports, as well as the amount of detail informa- Copyright, 1919, The Ronald Press Company II-8-11 tion to be included, depends upon the volume of trainsactions. Daily statements are sometimes used, but more often weekly or monthly statements are provided for. Branch House Accounts should be reconciled monthly or more frequently with the home office books; i.e., all items making up the difference between the balances on the branch and home office accounts, representing mostly in- transit items, should be listed. The reconciliation is usually prepared by the branch and may be made up in the following manner: Charges by branch — not credited by home office | ~ Credits by home office — not taken up by branch house Credits by branch — not charged by home office |- Charges by home office — not credited by branch house Difference in accounts S- Such differences can then be properly classified for balance sheet pur- poses; thus, if the open items represent merchandise in transit the inventory account would be debited or credited as the case may be; if cash items are in transit the cash account in the balance sheet must be adjusted, etc. PREPARATION OF REPORTS FOR LARGE ORGANIZATIONS — Large organizations having many plants and branches, each carrying its own set of books, find it very de- sirable to have a standard classification of accounts and standard report forms. These are more readily consolidated or accumulated at the end of the period in order to arrive at the general balance sheet and general income account of the company. The classification of accounts used should be built around the same prime accounts for all the plants or branches though, of course, the subsidiary or secondary accounts may not be the same. A branch, for instance, will usually carry many accounts in its ledger that in the case of a plant would appear in some subsidiary record. The same will hold true of a plant, that it will have many accounts that at the home office might appear under some control account. The balance sheets submitted by the plants and branches, therefore, should group the individual accounts under prime accounts so that the consolidation to be prepared will consist only of prime accounts, i.e., those which will appear in the final balance sheet or income statement. It is advantageous to have the plants and branches show their accounts in detail, as it enables the main office to keep a better control over the branch accounts. Such accounts as Prepaid Interest, Insurance, Accrued Wages, Accrued Taxes, etc., can be controlled more readily if carried in detail. Accounts re- ceivable will usually appear divided as between trade and sundry, and the trade accounts classified between current, past due, suspended, etc. CLOSING OF ACCOUNTS AND PREPARING REPORTS— Branches and plants should close their books at the end of the period in the usual way. Their nominal accounts are all closed out to Profit and Loss and a statement prepared. This, together with a balance sheet, is forwarded to the home office. At the same time the Copyright, 1919, The Ronald Press Company II-8-12 branch will make an entry transferring the balance in its Profit and Loss Account to its Home Office Account. The home office then picks up this Profit and Loss of the plant or branch and transfers it from the current account to the general Profit and Loss Ac- count. It closes out its own Income accounts and draws off a trial balance after closing which is its balance sheet. The general balance sheet is then prepared by combining all plant and branch house balance sheets with the home office and eliminating inter-office accounts. A general Income account would be prepared in a like manner by com- bining all the individual income statements and eliminating the interoffice transactions. Columns on a working sheet may be headed up thus (arranged horizontally) : 1. Home Office Balance Sheet 2. Plant 1 3. Plant 2 4. Branch 1 5. Branch 2 6. Total (Home Office, Plants, and Branches) 7. Interoffice Eliminations — Debits 8. Interoffice Eliminations — Credits 9. Combined Balance Sheet Similar procedure is applicable to the Income account. REFERENCES : Dicksee, Advanced Accounting, pages 23-29 Kester, Vol. 2, Chapter XXX Copyright, 1919, The Ronald Press Company II-9-1 :OMPLETE ACCOUNTIN G COURSE — PART II Lecture 9 DISTRIBUTION OF FACTORY BURDEN Problem 20 Prepare a statement from the following showing the factory departmental ex- penses and the percentage of burden in each department for the year: Wages of Unskilled Workmen Light Depreciation Repairs and Renewals Taxes Oil and Waste Power Expense Productive Labor DEPT. A $20,013.11 1,078.27 3,989.23 4,098.28 1,100.00 989.50 2,138.17 93,107.32 GENERAL FACTORY EXPENSES Superintendent • s Salary Foremen's Salaries Factory Office Salaries Telegraph and Telephone Stationery and Printing DEPT. B $ 18,073.27 1,303.05 4,809.32 9,081.78 1,400.00 1,208.43 3,289.42 101,391.42 $6,000.00 8,950.00 4,780.00 308.92 989.32 DEPT. C $14,091.34 1,811.32 8,073.11 10,108.33 1,800.00 1,383.11 3,033.11 98,103.12 The general factory expenses to be apportioned over the three factory de- partments in the same proportion as the productive labor of each bears to the total productive labor. Problem 21 On January 1, 1918, A, B, and C enter a joint venture in oil lands, agreeing to share profits and losses equally. There are two adjacent properties, called the Royal and Arcadia wells, respectively, the cost of which to the partners follows: Lease for 27 years $62,000.00 $33,000.00 Less Mortgage given, (dated Jan. 1, 1918 (6%) 41,000.00 10,000.00 Cash Consideration January 1, 1918 Legal Fees re Title March 1, 1918 Land Improven;ents and Construction Work up to December 31, 1918 12,500.00 Repairs, Labor, and Operating Expenses for 1918 15,250.00 $21,000.00 $23,000.00 1,250.00 1,300.00 10,100.00 11,600.00 Total cash outlay to December 31, 1918 $50,000.00 $46,000.00 Copyright, 1919, The Ronald Press Company JI-9-2 In addition. A, as manager of the properties, is to be credited with a salary of $4,000 for 1918, chargeable to the Royal wells; and B, as his assistant, with $2,000, chargeable to the Arcadia wells. A has assumed the Royal mort- gage and B the Arcadia mortgage, while C has financed the remainder of the venture which has consisted of cash receipts from sales amounting to $75,000 for the Royal and ;$88,000 for the Arcadia and the cash outlay of $96,000 listed above. C is to te credited with interest at 6% on original property payments made, including legal fees, from the date of payment, £ind on all other expendi- tures from an average date, which in the case of construction work is fixed at July 1, and operating expenses at August 1, and is to be debited similarly with interest on sales receipts as though all had been received November 1. It is estimated that in 1918 one twenty-fourth of the expected flow of the Royal wells and one-twentieth of the Arcadia wells had been produced, there teing on December 31, 1918, an inventory of oil on hand and unpaid customers* accounts as follows: Royal Arcadia CUSTOMERS* ACCOUNT $21,500.00 32,600.00 OIL ON Market $ 4,875.00 32,700.00 HAND Cost $1,500.00 4,400.00 Total $54,100.00 $37,575.00 $5,900.00 The land improvements and construction work are to be regarded as having been in use throughout the year. They will last as long as production continues, at the end of which time they will have an approximate scrap value of $1,000 for each well. Neglecting income and profits taxes, prepare: (a) A statement showing the profits and income to which each partner is entitled. (b) A balance sheet as of December 31, 1918. On January 1, 1919, the Royal wells are disposed of for $250,000 cash, the purchaser assuming the mortgage and taking over the inventory on hand and the customers* accounts receivable pertaining to the Royal wells. Prepare: (c) The necessary journal entries to record the transaction. Copyright, 1919, The Ronald Press Company II-9-3 MISCELLANEOUS QUESTIONS Question 41 — How would you suggest that the following expenditures be dis- tributed: (a) Expenditures totaling $93,083.11 in respect of real estate, build- ings and machinery purchased. The machinery was purchased to replace other machinery of a cost value of $8,131.81. Adequate provision has been made for depreciation, (b) Officers' salaries, totaling |32,500, in a gas company that has com- pleted and is operating about one-half its plant and is engaged in constructing and equipping the remainder. (c) Capital stock amounting to $200,000 is issued to pay for a leasehold having 27 years to run. Question 42 — How would you distribute the following expenditures, i.e., between Capital and Revenue Accounts? (a) Extensive repairs to the power house equipment at a total cost of $4,391.27. (b) A boiler house was remodeled and extended in order to permit of the installation of larger and more modern type of vertical water tube boilers. The expenditures for remodeling aggregate $4,131.11 and those for the extension $5,103.71. Question 43 — How should the following expenditures be distributed in the accounts of a manufacturing concern: (a) Repair and renewal of machine shop equipment at a total cost of $11,032.11. (b) Construction expenditures in connection with the extension of the blacksmith shop, the charges aggregating $27,013.18. State your reasons for distributing the items in the manner suggested. Question 44~Vrtiat is your understanding of the following: (a) Work in process (b) Direct or productive labor (c) Overhead expenses; furthermore, what are two classes of overhead expenses? Question 45 — The value of a certain inventory of finished products on hand at December 31, 1918, is as follows: Materials $193,000.75 Productive labor 98,111.32 Factory overhead (basis of 100% of productive labor) 98,111.32 Total $389,223.39 The actual factory expenses amounted to 120% of the productive labor for the year. Do you consider that the inventory has been properly valued? Copyright, 1919, The Ronald Press Company II-9-4 Solution to Problem 15 (1) Realization and Liquidation Account $40,000.00 To — Sundry Assets 140,000.00 To transfer sundry assets to Realization and Liquidation account. (2) Sundry Creditors 14,000.00 To — Realization and Liquidation Account 14,000.00 To transfer sundry liabilities to Realization and Liquidation account. (3) Cash 14,000.00 To — Realization and Liquidation Account 14,000.00 First instalment from realization of assets. (4) Realization and Liquidation Account 14,000.00 To — Cash 14,000.00 Payment of sundry creditors in full. (5) Cash 10,000.00 To — Realization and Liquidation Account 10,000.00 Second instalment from realization of assets. (6) B — Capital Account 5,000.00 C— " " 1,000.00 To — Cash 6,000.00 To adjust partners' capital investment ratio to profit and loss sharing ratio. (7) A — Capital Account 2,000.00 B— " " 1,000.00 C— " " 1,000.00 To — Cash 4,000.00 To distribute balance of cash on hand on basis of adjusted capital accounts — one-half to A, one-quarter to B, and one-quarter to C; the capital ratio now being the same as the profit and loss sharing ratio. (8) Cash 10,000.00 Jo — Realization and Liquidation Account 10,000.00 Final instalment from realization of assets. Copyright, 1919, The Ronald Press Company C9) A — Capital Account B — " " C — ■ " To — Cash To charge each partner with his proportion of loss on realization of assets. $3,000.00 1,500.00 1,500.00 II-9-5 16,000.00 (10) A — Capital Account B — ■ ■ C — " " To — Cash To distribute balance of cash on hand and close capital accounts. 5,000.00 2,500.00 3,500.00 10,000.00 SUMMARY OF PARTNERS' CAPITAL ACCOUNTS PARTICULARS Original Investment Cash Dividend to Equalize Capital Accounts Adjusted Capital Accounts Cash Dividend Adjusted Capital Accounts Loss on Realization Cash — Final Dividend ABC TOGETHER $10,000 $10,000 $6,000 $26,000 5,000 1,000 6,000 $10,000 $ 5,000 $5,000 $20,000 2,000 1,000 1,000 4,000 $ 8,000 $ 4,000 $4,000 $16,000 3,000 1,500 1,500 6,000 $ 5,000 $ 2,500 $2,500 $10,000 A B & C REALIZATION AND LIQUIDATION ACCOUNT (DATE) ASSETS TO BE REALIZED: Sundry Assets LIABILITIES LIQUIDATED: Sundry Creditors $40,000.00 14,000.00 LIABILITIES TO BE LIQUIDATED: Sundry Creditors $14,000.00 ASSETS REALIZED: Sundry Assets 34,000.00 LOSS ON REALIZATION AND LIQUIDATION DIVIDED AS FOLLOWS : A $3,000.00 B 1,500.00 C 1,500.00 6,000.00 $54,000.00 $54,000.00 Copyright, 1919, The Ronald Press Company II-9-6 Solution to Problem 16 Exhibit A HENRY PARKER, RECEIVER FOR ASHTON MANUFACTURING COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS CURRENT ASSETS: Cash $ 5,650.00 Accounts Receivable 12,140.00 Inventory of Raw Material 38,400.00 Inventory of Finished and Partly Finished Goods 26,120.00 5 82,310.00 UNAMORTIZED DISCOUNT ON RECEIVER'S CERTIFICATES 3,000.00 LIABILITIES CURRENT LIABILITIES: Accounts Payable $31,240.00 Interest Accrued 2,700.00 $ 33,940.00 FIRST MORTGAGE BONDS: Par Value |50,000.00 Reserve for Premium 5,000.00 RECEIVER'S CERTIFICATES: Two-year notes dated July 1, 1918 55,000.00 40,000.00 CAPITAL ASSETS: Real Estate $ 75,000.00 Machinery and Equipment 80,000.00 $155,000.00 Less — Reserve for De- preciation 29,500.00 125,500.00 $210,810.00 NET WORTH: Capital Stock Surplus : Balance (debit) January 1, 1918 Surplus Net Profits for year (Ex- hibit B) 80,000.00 1,900.00 8,770.00 1,870.00 $210,810.00 Copyright, 1919, The Ronald Press Company II-9-7 HENRY PARKER, RECEIVER FOR Exhibit B ASHTON MANUFACTURING COMPANY STATEMENT OF PROFIT AND LOSS YEAR ENDING DECEMBER 31, 1918 SALES $358,000.00 Less — Cost of Sales: Materials used $ 88,800.00 Factory Expenses (including Labor and Depreciation) 207,450.00 296,250.00 GROSS PROFIT FROM RECEIVER'S OPERATIONS $ 61,750.00 DEDUCT— General and Selling Expenses $ 41,100.00 Receiver's Expenses 6,680.00 47,780.00 NET PROFIT EXCLUSIVE OF INTEREST $ 13,970.00 DEDUCT — Interest : Bond Interest $ 3,000.00 Interest on Receiver's Certificates (including proportion of discount) 2,200.00 5,200.00 SURPLUS NET PROFIT FOR YEAR (Exhibit A) $ 8,770.00 NOTE — The receiver may desire to qualify the above statements with respect to the items for which he disclaims all responsibility, such as interest ; or he may set up in parallel vertical columns the accounts appearing in each set of books In addition to the consolidation above shown. Solution to Problem 17 (1) Cash $105,000.00 To — A — Capital Account $ 52,500.00 B— " " 52,500.00 To record the capital contributed by A and B. (2) Real Estate Account 250,000.00 To — Real Estate Purchase Account 250,000.00 To record the purchase price of property acquired from...*. • ••••• (3) Real Estate Purchase Account 100,000.00 To — Cash 100,000.00 Casi payment in connection with the purchase of the property referred to in the preced- ing entry, entry. Copyright, 1919, The Ronald Press Company II-9-8 (4) Real Estate Purchase Account $150,000.00 To — Mortgage Obligation Outstanding $150,000.00 To record the mortgage obligation assumed in connection with the purchase of property from (5) Real Estate Account 3,000.00 To — Cash 3,000.00 Expenses paid in connection with the property purchased from Uncollected Rentals To — Income from Rents (6) Cash To — Uncollected Rentals (7) (8) Maintenemce and Other Expenses in connection with the upkeep of the building Interest on Mortgage Obligation To — Accounts Payable (9) Accounts Payable To — Cash (10) Real Estate Sale Account To — Real Estate To debit Real Estate Sale Account with sales price of the property sold to 310,000.00 310,000.00 (11) Real Estate Account 57,000.00 To — Profit on Sale of Real Estate Account 57,000.00 To transfer from the Real Estate Account the profit on sale of real estate, (12) Cash 160,000.00 To — Real Estate Sale Account 160,000.00 Cash received in connection with the sale of the property. Copyright, 1919, The Ronald Press Company II-9-9 (13) Mortgage Obligation Outstanding $150,000,00 To — Real Estate Sale Account Mortgage obligation assumed by tbe purchaser of the real estate. $150,000.00 (14) Rents Collected and Other Miscellaneous Incomes Profit on Sale of Real Estate Account To — Profit and Loss Account (15) Profit and Loss Account To — Maintenance and Other Expenses in connection with the upkeep of the property- Interest on Mortgage Obligation Profit and Loss Account To — A — Capital Account B — " " A — Capital Account B — " " To — Cash (16) (17) 57,000.00 .90,500.00 71,500.00 38,000.00 19,000.00 162,000.00 PROFIT AND LOSS ACCOUNT liaintenance and Other Ex- penses in connection with the upkeep of the property Interest on Mortgage Obliga- tion Balance — Net Profit carried to the Partners' Accounts A $38,000 B 19,000 57,000.00 $57,000.00 Profit from Sale of Real Estate Rents Collected eind Other Miscellaneous Income $57,000.00 $57,000.00 Copyright, 1919, The Ronald Press Company II-9-10 SUMMARY OF CASH TRANSACTIONS RECEIPTS Capital contributed by A and B Rents and other miscel- laneous income collected Cash received on account of sale of real estate $105,000.00 160,000.00 DISBURSEMENTS Payment in connection with the purchase of real es- tate Payment of expenses in con- nection with the acquisi- tion of real estate Maintenance and other ex- penses paid Balance paid to the partners A $90,500.00 B 71,500.00 $100,000.00 3,000.00 $265,000.00 162,000.00 $265,000.00 ANSWERS TO QUESTIONS Answer to Question 31 — Briefly stated, a perpetual inventory provides for a system of book records of both quantity and value kept for each class of raw material and finished product. On the debit side of the record the quEintity and value of materials received or produced are entered, being in effect a charge to the storekeeper for the materials turned over to him; and on the credit side the quantity and cost value of materials consumed or sold are entered, thus relieving the storekeeper of that part of the materials accounted for. The difference between the debit and credit balances represents approximately the quantity and value of material on hand, which can be verified by the taking of a physical inventory (which is usually undertaken when a particular class of stock is at a low ebb), and any difference can then be adjusted by writing the same off to the Profit and Loss Account of the period through an intermediate account entitled "Inventory Adjustment Account." The advantages of keeping book or "perpetual" inventories are: (1) that fairly accurate statements of profits can be prepared without necessitating the taking of a physical inventory; (2) it provides the means of keeping a stricter control over the issuance of materials and stock. The controlling or general ledger accounts opened in connection with a system such as that outlined above are as follows: Copyright, 1919, The Ronald Press Company II-9-11 STOCK ACCOUNT trolling Account diary books or records) CREDIT WITH Total cost value (including freight and handling charges) of materials consumed as per production reports— contra a debit to Work in Progress Controlling Account (see below). Total cost value of materials returned to shippers — contra a debit to Aud- ited Vouchers Controlling Account, (A column might also be introduced on the credit side of the account in which the total quantities consumed or re- turned could be recorded.) The balance of the account is the quantity and cost value of materials on hand at end of period as per summary of balances of substock accounts carried in the subsidiary stock book or record. RAW MATERIALS General Ledger Con (Details carried in subsi DEBIT WITH Total invoice value of raw materials purchased — contra a credit to Aud- ited Vouchers Controlling Account. Total freight and handling charges thereon — contra a credit to Aud- ited Vouchers Controlling Account. (A column might be introduced on the debit side of account in which the total quantities purchased could be recorded. ) WORK IN PROGRESS ACCOUNT General Ledger Controlling Account (Details carried in subsidiary books or records) CREDIT WITH DEBIT WITH Total cost value (including freight and handling charges) of materials consumed as per production reports — contra a credit to the Raw Mate- rials Stock Account (see above). Total wages of workmen directly en- gaged in the manufacture of the goods — contra a credit to the Aud- ited Vouchers Controlling Account. Total factory or indirect expenses chargeable to orders in process of manufacture — contra a credit to the Factory Expenses Account. Total manufacturing cost of finished goods produced during the period— contra a debit to the Finished Product Stock Account (see below). The balance of the account is the manufacturing cost value of work in progress of manufacture or uncompleted work at any given date. The detailed orders or sub- work in progress accounts are carried in a subsidiary book or record and a sunanary of the total should agree with the balance called for by the controlling account. Copyright, 1919, The Ronald Press Company II-9-12 FINISHED PRODUCT STOCK ACCOUNT General Ledger Controlling Account (Details carried in subsidiary books or records) DEBIT WITH CREDIT WITH Total manufacturing cost value of Total manufacturing value of finished finished goods produced during the goods shipped to Customers — period — contra a credit to the contra a debit to Cost of Goods Work in Progress Account (see Sold Account, above). Total manufacturing cost value of finished goods returned by Cus- tomers — contra a credit to the Cost of Goods Sold Account. The balance of the account is the manufacturing cost value of finished goods on hand. The details of the various kinds of finished products on hand are carried in a subsidiary book or record and a trial balance abstracted therefrom should agree with the amount called for by the controlling accoimt. Answer to Question 32 — (a) Finished products on hand should be valued at the cost of the materials used, productive labor expended and proportion of factory or indirect expenses. The factory cost thus arrived at should be less than the list or selling value - if not a reserve should be created to reduce the inventories to the basis of selling values less a further deduction to cover the estimated cost of selling, (b) Goods in process of manufacture should be valued at the factory cost to date, represented in materials used, productive labor expended and proportion of the factory expenses chargeable thereto, assuming that the factory has been operating under normal conditions, and that the factory expenses were not out of proportion to the productive labor during that period, (c) Inventories of Raw Materials on hand should be valued on the basis of cost or market whichever is the lower. Answer to Question 33 — The effect of this treatment in the accounts is to credit Profit and Loss Account with an unearned profit — a profit which may never be realized and commonly referred to as a book profit. The management in this case apparently lost sight of the distinction between a saving and a profit. The proper treatment of such expenditures would be to charge the capital asset accounts with the actual cost — making no entries in respect of the difference between the market and cost value of the tools and equipment manufactured, Xnswer to Question 34— (a) The guaranty constitutes a contingent liability of the company and conse- quently must be disclosed on the balance sheet. The character of the considera- tion is immaterial. The fact that the steel and iron material has not been fur- nished as yet does not affect the contingent liability existing at the balance sheet date. Copyright, 1919, The Ronald Press Company II-9-13 (b) The contingent liability should be shown in respect of $25,000, being the amount of the claim. It would be preferable, however, to charge current Profit and Loss with the $10,000 and credit a Reserve for Injuries Account, since this portion is a probable loss and should be provided for. If this were done no reference need be made to the remaining $15,000 of the claim. Answer to Question 35 — (a) The variation in the periodical charge to operating expense under the fixed percentage on a flat basis, fixed percentage on diminishing value, and sinking fund methods is clearly contrasted in Lecture 5, page 12. Note that under the first method the charge is the same each year. Under the second method the charge decreases each year. Under the third method, although the charge to operating expense is the same each year, the credit to the depreciation reserve increases each year, due to the interest accumulations. The periodical charge under the "production" method cannot be stated, as the quantity of production is not known. (b) In case the company refuses to provide for depreciation and requires the auditor to certify to the balance sheet without such provision being made, the auditor should qualify the property assets and surplus as follows: "(subject to accrued depreciation not provided for)." Where the statement of profits and income does not include a provision for depreciation and a certificate thereto is required, the surplus net profits for the period should be qualified as follows: "(subject to current depreciation not provided for)," DISTRIBUTION OF FACTORY BURDEN 1, PRIME COST consists of — a. DIRECT MATERIAL — material taken from stock and used in production which can be assigned to a specific order or process, b. DIRECT LABOR — time of workmen spent on a specific order or process. 2, In order to ascertain the real cost of production there must be added to this prime cost the proper proportion of burden or general factory expenses, 3, GENERAL FACTORY EXPENSES consist of— a. INDIRECT MATERIAL — material taken from stock and used in production but which cannot be assigned to a specific order, such as brooms, oil, and other factory supplies; repair parts; etc. b. INDIRECT LABOR — time which cannot be assigned to a specific order such as lost time of productive workmen, foremen, timekeepers, Janitors, etc. c. EXPENSES connected with the use of the facilities employed in pro-. / duct ion, such as: V Copyright, 1919, The Ronald Press Company II-9-14 Repairs of buildings, machinery, etc. Depreciation of buildings, machinery, etc. Taxes and insurance on buildings, machinery, etc. Interest on investment in " " " Power, light, and heat Factory supplies Salaries and expenses of cost department Salaries and expenses of superintendent's office Etc. 4. In those lines of business where all the costs incurred in production cannot be charged to a process, some other method must be employed to ascertain the actual cost of the various articles produced, or jobs worked on, so as to enable the management to compare costs from time to time in order to determine the operating efficiency, and to value the work in progress and finished product inventories. In order to ascertain the actual cost of production, the burden is distributed over the articles produced or jobs worked upon, 5. No particular method of burden distribution can be applied to all parts of a plant unless conditions are uniform throughout. Each plan will produce accurate results under certain conditions and the extent of its use is limited thereby. 6. PERCENTA GE ON DIRECT WAGES METHO D— a, PRINCIPLE — Product increases in value according to the amount of labor added thereto. The indirect expenses are incurred in pro- portion to the amount of labor involved, and this amount of labor is measured by the cost thereof, i.e,, wages paid. b. Under this plan production costs are segregated under three headings: (1) Direct Material (2) Direct Labor (3) Burden, consisting of: (a) Indirect Material (b) Indirect Labor (c) General Factory Expenses c. METHOD OF OPERATION — Monthly, divide the total burden by the total cost of direct labor. Assuming this percentage to be 80%, then for each dollar of direct labor charged to any order, 800 is added for burden. d, ADVANTAGES— (1) Easy to understand and easy to apply (2) Distributes all overhead expense incurred during the period (3) Produces satisfactory results: (a) Where the cost of the direct labor is the most important factor in production (b) Where the machinery used is the same throughout the shop as to value and operating cost Copyright, 1919, The Ronald Press Company II-9-15 (c) Where the work passing through the various departments is uniform (d) Where the lost-time factor is unimportant e. DEFECTS— (1) Most of the general factory expenses depend on the time element and are not incurred in proportion to wages paid (2) Source of error is variable (3) Is an average rate and produces unsatisfactory results: (a) Where the time element is more important than the wages paid (b) Where labor is not the dominating element in cost. (c) Where expensive and inexpensive machines are in use side by side (d) Where high-priced and low-priced operatives are em- ployed (e) Where low-priced operative using an expensive semi- automatic machine works with high-priced operative using cheap hand machine, or performing hand labor (f ) Where different classes of product pass through the shop and require a variable use of the machinery and operatives (g) Where the lost time factor is important. (4) May be approximately correct as to tot al cost of production but it is inexact as to the cost of the individual articles of jobs produced, 7. HOURLY BU RDEN METHOD — a. PRINCIPLE — As in the case of the percentage on direct wages method, the product increases in value in proportion to the amount of labor added thereto. Similarly, the indirect expenses are in- curred in proportion to the amount of labor involved: but the measure of that amount of labor is time — i.e., hours of direct labor — rather than wages paid, b» Under this plan production costs are segregated under three headings: (1) Direct Material (2) Direct Labor (3) Burden, consisting of: (a) Indirect Material (b) Indirect Labor (o) General Factory Expenses 0. METHOD OF OPERATION—Monthly, the total burden is divided by the number of productive labor hours for the same period to ascertain the burden "per hour." Assuming this rate to be 20d per hour, then for each hour of productive labor charged to a specific article or job, 200 is added for burden. Copyright, 1919, The Ronald Press Company II-9-16 d, ADVANTAGES— (1) Easy to understand and easy to apply (2) Distributes all overhead expense incurred during the period (3) Source of error is constant (4) Burden is more a function of time than of labor cost (5) Produces satisfactory results: (a) Where the time spent on a specific order is the most important factor in the shop operation, since the basis of distribution is the number of hours spent on the order rather than the wages charged to that order (b) Where the machinery used is uniform throughout the shop (c) Where the work passing through the shop is uniform (d) Where the lost time factor is unimportant e» DEFECTS — Is an average rate and produces unsatisfactory results: (1) Where both expensive and inexpensive machines are in use (2) Where different classes of product pass through the shop making a variable demand on the machinery and operatives (3) Where the lost-time factor is important 8. DIRECT LABOR AND MATERIAL — a* PRINCIPLE — Cost of material is one of the factors giving rise to in- direct expense, and the indirect expense is incurred in proportion to the prime cost b. METHOD OF OPERATION — Monthly, divide the total burden by the com- bined cost of direct labor and direct material to ascertain the percentage to be added to the prime cost for burden c» ADVANTAGES — Most satisfactory results from this method are obtained where direct labor does not exceed the cost of direct material d. DEFECTS— (1) Subject to limitations of all average rate methods (2) Not applicable where labor is a material factor in production (3) Does not give proper weight to investment — time factors in production 9. OLD MACHINE RATE — a. PRINCIPLE — Consideration should be given to the value and upkeep of the equipment used in production and the variable demands made thereon by the various orders r J),: METHOD OF OPEPvATION — Each order using the machine is charged at a certain rate per hour of use. This hourly rate is usually based on the probable life of the machine under full work and is used to charge an order with a proportion of the interest on and wear and tear of the machine employed thereon Copyright, 1919, The Ronald Press Company II-9-17 c, ADVANTAGES — Provides for the variation in the cost of work done on different types of machines in that it recognises the factor of interest on investment in machinery and the depreciation and upkeep thereof by making a heavier charge for the use of an ex- pensive machine than for the use of a cheaper machine . d. DEFECTS— (1) Idle time not provided for (2j Used to distribute other burden factors through an arbitrary increase in the hour rate (3) Does not provide for the fundamental principle of burden distribution, viz., every dollar of general factory charges must be burdened ont o some order 10. FIXED MACHINE RATE AND SUPPLEMENTARY RATE— a. PRINCIPLE — Factors making up burden should be analyzed to ascer- tain their incidence. The shop is divided into its constituent production centers and full play is given to the natural differ- ences between them as far as practicable, instead (as on the averaging plan) of throwing them into one common receptacle or lump sum of shop expenses. Expenses not distributed in this manner, together with idle time, are prorated through a "supple- mentary rate" over the production of the period. b. METHOD OF OPERATION — Each machine is considered as an independent "production center," To such centers are allocated all shop ex- penses which can, on reasonable analysis, be considered charge- able as a composite rent or machine rate for all the factors of production affecting a particular production center. On this basis the hourly machine rate is determined. Each month there is charged to a Shop Expense Account all expenses incurred by that shop whether they are expenses entering into the machine rate, or general shop expenses which could not be spread over the production centers. This account is credited with the amounts charged to orders through the machine rates for the use of machines. The remaining balance constitutes the supplementary rate which may be spread over the orders on the hourly-burden plan or prorated over the orders in proportion to the amounts previously charged through the machine rate. The supplementary rate, which consists principally of idle time of machines, becomes an index to the current efficiency of the shop. 0. ADVANTAGES— (1) Most of the usual "indirect" expenses are distributed as direct charges to a machine, bench, or process, thus eliminating "averaging" (2) All expenses possible are gathered "at the point of the tool" (or other production center) where they are easily applied to the product operated on Copyright, 1919, The Ronald Press Company II-9-18 (3) Comparison of the normal cost of production can be made over a series of periods because idle time does not affect the burden rate (4) The percentage of the supplementary rate indicates the non- utilized capacity of the shop and is a measure of the "waste" (5) Heterogeneous processes can be carried on side by side without affecting costs. d. DEFECTS — (1) Requires an elaborate, intelligent analysis of conditions before the per hour rate for each production center can be fixed in the first instance, (2) Requires elaborate records to record the cost of orders and to gather the data necessary for the readjustment of machine rates, 11, Numerous modifications of the foregoing methods are in use. REFERENCES : Nicholson & Rohrbach, Chapter ZI Copyright, 1919, The Ronald Press Company II-lO-l COMPLETE ACCOUNTIN G COUR SE— PART II Lecture 10 ESTATE ACCOUNTS Problem 22 ( For class work ) The following is an inventory of B's estate at his death on August 29, 1919: Cash on hand and in bank $ 9, 031. 08 Notes Receivable 11,035.07 Mortgage Loans (secured by Trust Deeds) 20,500,00 Accrued Interest thereon 1,105.85 Stocks at market values at August 29, 1919 19,502.75 Bonds - • « « n n « 35,425.35 Life Insurance Policies (face value) 10,000.00 Loans to Sundry Persons 5,000.00 Household Goods 2,000.00 Bills Payable (secured by the above-mentioned stocks) 15,000.00 Sundry Liabilities 5,000.00 (a) Prepare the opening entries for the executor's books. (b) Give expression to the following transactions: legacies paid, $7,500; bonds disposed of, $34,050; funeral expenses, $1,025; probate court costs, $987.50; attorney's fees, $1,000; accountant 's fees, $350. (c) Prepare a charge and discharge statement. Problem 23 At C's death on June 15, 1918, the net value of his estate was $300,000 and the executor's books opened on that basis. During the year ending June 15, 1919, the following transactions took place: PAKTiCULARS INVENTORY VALUE REALIZED Missouri Pacific First Mortgage Bonds $ 90,000.00 $ 94,000.00 C. k N. W. Ry, Co, First Mortgage Bonds 125,000.00 131,000.00 Loans to Sundry Persons 39,000.00 24,500.00 Preferred Stock in the New Manufacturing Co. 35,000.00 40,000.00 Investment in the firm of C & D 34,000.00 40,000.00 $323,000.00 $329,500.00 Liabilities estimated at $23,000 were found to be actually $26,000, which were paid on September 1, 1918. Copyright, 1919, The Ronald Press Company II-10-2 Prepare the necessary journal and cash book entries in respect of the fore- going transactions. Problem 24 A died on July 1, 1918, leaving: Cash on hand $ 900.00 Bank Overdraft 2,250.00 Life Insurance Policy (on which he has borrowed $1,000, with interest at 5%; the loan was made three years ago; no interest has been paid) 5,000.00 Preferred Stock in Wilson Manufacturing Co. 100,000.00 Loan to John Smith (interest at Q% payable January 1 and July 1. Interest paid to January 1, 1918) 25,000.00 First Mortgage 5% Bonds of the Western Lumber Co., interest payable March and September 1 (bonds sold on October 1 for $300,000) 291,000.00 Sundry Liabilities 8,000.00 Funeral Expenses 900.00 Accrued interest on Bonds and Loans — not included in above Dividend received on the Wilson Mfg. Co. Preferred Stock 10,000.00 The net income is payable to the wife. The insurance policy was paid on August 1, 1918, the amount of the loan with the accrued interest being deducted in the settlement. Ail liabilities were paid, and the income collected to December 31, 1919, was paid to A's wife — per terms of will. Prepare all of the entries to give expression to the foregoing transac- tions and set up the necessary ledger accounts. MISCELLANEOUS QUESTIONS Question 46 — Define an "account current" and make out such an account for A & Co. in respect of the following transactions with B & Co. 1919 April 1 Goods sold to B & Co. $ 500.00 May 1 Received cash from B & Co. 220.00 June 15 Goods purchased from B & Co. • 1,250.00 July 1 Cash paid to B & Co. 830.00 July 15 " " n n n M 750.00 August 1 Goods purchased from B & Co. 1,250.00 August 15 " " » n II M 550.00 The account should be made up as of August 31, 1919, interest to be calcu- lated at the rate of Q% per annum upon the basis of 360 days to a year. Copyright, 1919, The Ronald Press Company II-10-3 Question 47 — In a large manufacturing company with several factories and tranch offices, a separate set of books is carried at each point — being con- trolled, however, through the medium of the general office books. In the balance sheet prepared at the end of the year, the Net Branch Office Account as shown on the head office books is incorporated as part of the Sundry Debtors. Would you consider it proper to deal with the branch office accounts in this way? Question 48 — State in the form of journal entries on the books of A Company the following transactions: (a) Insurance collected by the company, on account of fire, $76,500 applying on building, fixtures, and merchandise. The building is valued at $50,000, fixtures at $8,950, and merchandise at $30,000 (b) Increase in value of real estate, $15,000 (c) Instalment notes given by the company for $40,436.50, on purchase of real estate; face of notes include interest charges of $436.50, up to and including maturity of notes Question 49 — State briefly what information should be submitted by the executor to the probate court, and the form in which the accounts might be submitted. Question 50 — What is your understanding of the following terms: (a) Capital surplus (b) Surplus profits available for dividends (c) Organization or preliminary expenses Solution to Problem 22 JOURNAL ENTRIES (1) Cash on Hand and in Bank $ 9,031.08 Notes Receivable 11,035.07 Mortgage Loans 20,500,00 Accrued Interest thereon 1,105.85 Stocks 19,502.75 Bonds 35,425.35 Life Insurance Policies 10,000.00 Loans to Sundry Persons 5,000.00 Household Goods 2,000.00 To— Bills Payable Sundry Liabilities Estate Account To record inventory of estate of B as filed in Probate Court on (2) Estate Account 1,375.35 To — Bonds Loss on sale of bonds. $15,000.00 5,000.00 93,600.10 1,375.35 Copyright, 1919, The Ronald Press Company II-10-4 SUMMARY OF CASH TRANSACTIONS PARTICULARS PRINCIPAL INCOME Cash on hand and in bank Aug. 29, 1919 $ 9,031.08 Proceeds from the sale of bonds 34,050.00 $43,081.08 PARTICULARS Legacies Funeral Expenses Probate Court Costs Attorney's Fees Accountant's Fees Bills Payable Sundry Liabilities Balance — cash on hand and in bank at end of period PRINCIPAL INCOME $ 7,500.00 1,025.00 987.50 • 1,000.00 350.00 15,000.00 5,000.00 12,218.58 $43,081.08 B'S ESTATE CHARGE AND DISCHARGE STATEMENT (Date) CHARGE ESTATE AT THE DEATH OF THE TESTATOR, AUG. 29, 1919: Cash $ 9,031.08 Notes Receivable 11,035.07 Mortgage Loans 20,500.00 Accrued Interest thereon 1,105.85 Stocks 19,502.75 Bonds 35,425.35 Life Insurance Policies 10,000.00 Loans to Sundry Persons 5,000.00 Household Goods 2,000.00 $113,600.10 LESS — Liabilities ; Bills Payable $15,000.00 Sundry Liabilities 5,000.00 20,000.00 Per Inventory $93,600.10 $93,600.10 DISCHARGE PAYMENTS OUT OF PRINCIPAL: Legacies $ 7,500.00 Funeral Expenses 1,025.00 Probate Court Costs 987.50 Attorney's Fees 1,000.00 Accountant 's Fee 350.00 Total payments of $10,862.50 LOSS ON REALIZATION OF BONDS: Book value $35,425.35 sold for $34,050, or a loss of 1,375.35 ESTATE AT CLOSE OF PERIOD: Cash $12,218.58 Notes Receivable 11,035.07 Mortgage Loans 20,500.00 Accrued Interest 1,105.85 Stocks 19,502.75 Life Ins. Policies 10,000.00 Loans to Sundry Persons 5,000.00 Household Goods 2,000.00 81,362.25 $93,600.10 Copyright, 1919, The Ronald Press Company II-10-5 Solution to Problem 18 ENTRIES UPON BRANCH OFFICE BOOKS (1) Merchandise Purchased $11,083.77 To — Home Office Account §11,083,77 For cost value of merchandise received during the year from the warehouse, (2) Freight on Purchases 911.03 To — Home Office Account 911.03 Freight prepaid by home office on materials purchased. (3) Salaries and Other Expenses 7,585.56 To — Accounts Payable 7,585.56 Total of salaries and other expenses during the year as per voucher record. (4) Accounts Payable 6,987.45 To— Cash 6,987.45 Total of salaries and other expenses actually paid during the year. (5) Customers' Accounts 30,811.74 To — Sales Account 30,811.74 Total sales during the year as per sales record or journal. (6) Cash 26,900.41 To — Customers* Accounts * 26,900.41 Total of customers accounts collected during the year as per cash book, (7) Proportion of Home Office Management Salaries and Expenses 675.00 To — Home Office Account 675.00 Charge rendered by the Home Office represent- ing this Branch's proportion of the Home Office salaries and expenses during the year ended June 30, 1919. Copyright, 1919, The Ronald Press Company II-10-6 (8) Branch No. 2 (or the Home Office Account) To~Merchandise Purchased Freight on Purchases Cost value (including freight charges thereon) of merchandise shipped to Branch No. 2. $1,318.11 ;i,220.00 98.11 (9) Merchandise Purchased 8,378.11 . To — Accounts Payable 8,378.11 Merchandise purchased direct by the branch office, as per voucher record. (10) Accounts Payable 8,378.11 To— Cash 8,378.11 Total of outside purchases of merchandise which were paid for during the year ending June 30, 1919. (11) Inventory of Merchandise on hand at June 30, 1919 1,103.27 To — Trading Account 1,103.27 To take up the inventory of materials on hand at June 30, 1919. Sales Account To — Trading Account CLOSING ENTRIES (1) (2) Trading Account To — Merchandise Purchased Account Freight on Purchases $30,811.74 19,054.80 $30,811.74 18,241.88 812.92 (3) Trading Account To — Profit and Loss Account 12,860.21 12,860.21 (4) Profit and Loss Account To — Salaries and Other Expenses Proportion of Home Office Management, Salaries, and Expenses 8,260.56 7,585.56 675.00 Copyright, 1919, The Ronald Press Company II-10-7 (5) Profit and Loss Account $ 4,599.65 To — Home Office Account $ 4,599.65 To transfer net profit of branch to Home Office Account. The statements ordinarily sent to the Home Office after the Branch Office books are closed are as follows: BRANCH OFFICE LEDGER TRIAL BALANCE (After Closing) JUNE 30, 1919 Home Office Account (including the charge of $1,318.11 to Br£inch No. 2 above referred to) $15,951.34 Customers* Accounts (supported by a detailed list showing the status of each account at June 30, 1919) $ 3,911.33 Cash on Hand and in Bank (supported by a statement showing the composition of the amount) 11,534.85 Inventory of Merchandise on Hand at June 30, 1919 (sup- ported by a detailed inventory properly certified to by the Manager and Bookkeeper respectively) 1,103.27 Accounts Payable (with a detailed list of the items appended to the Trial Balance) 598.11 $16,549.45 $16,549.45 TRADING AND PROFIT AND LOSS STATEMENT FOR YEAR ENDING JUNE 30. 1919 TRADING ACCOUNT Purchases of Merchandise Sales $30,811.74 during the Year $19,461.88 Freight Charges on Merchan- dise purchased 911.03 $20,372.91 LESS — Mdse. shipped to Branch No. 2 $1,318.11 Inventory of Mdse. on hand at June 30, 1919 1,103.27 2,421.38 Cost of Goods Sold $17,951.53 Balance — Gross Profits car- ried to Profit and Loss Account 12,860.21 $30,811.74 $30,811.74 Copyright, 1919, The Ronald Press Company II-10-8 PROFIT AND LOSS ACCOUNT Salaries and Other Expenses $ 7,585.56 Proportion of Home Office Salaries and Expenses 675.00 Balance — Net Profits from Trading for the year ending June 30, 1919, carried to the Home Office Account 4,599.65 $12,860.21 Gross Profit brought down from Trading Account $12,860.21 $12,860.21 SUMMARY OF BRANCH OFFICE ACCOUNT WITH THE HOME OFFICE Merchandise shipped to Branch No. 2 $ 1,220.00 Freight Charges thereon 98.11 Balance as per Trial Balance 15,951.34 Merchandise received from Home Office Freight charges thereon Proportion of Home Office Management Salaries and Expenses Balance of Profit and Loss Account as per detailed $11,083.77 911.03 675.00 statement appended hereto 4,599.65 $17,269.45 $17,269.45 ENTRIES UPON HOME OFFICE BOOKS (1) Branch No. 1 Office Account To — Finished Product Freight on Branch Shipments To record materials shipped to Branch No. 1 at cost and prepaid freight thereon. (2) Branch No. 1 Office Account To — Management, Salaries, and Expenses To charge Branch No. 1 with proportion of home office management salaries and expenses. (3) Branch No. 2 Office Account To — Branch No. 1 Office Account Materials shipped at cost from Branch No. 1 •to Branch No. 2, including freight charges from home office to Branch No. 1. $11,994.80 $11,083.77 911.03 675.00 675.00 1,318.11 1,318.11 Copyright, 1919, The Ronald Press Company II-10-9 (4) Branch No. 1 Office Account To — Branch No. 1 Profit and Loss Account To take up net profit of Branch No. 1 as per trading and profit and loss account for the year ending June 30, 1919. $ 4,599.65 $ 4,599.65 Solution to Problem 19 THE GENERAL MANUFACTURING COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS CURRENT ASSETS: Cash Accounts Accounts Receivable Inventories Other Current Assets DEFERRED CHARGES: Interest, Insurance, etc.. Pre- paid Bond Discount not Amortized INVESTMENTS: Stocks of Other Companies Miscellaneous Bonds and Stocks Liberty Bonds SINKING FUND FOR BONDS LAND, BUILDINGS, MACHINERY, ETC: Land Construction in Progress Buildings Office Furniture and Fixtures Machinery and Equipment Delivery Equipnent Other Fixed Assets LESS — Depreciation Reserve GOOD-WILL $248,285.00 9,966.00 92,790.00 19,116.00 16,380.00 $386,537.00 122,620.00 ; 202,615.00 469,908.00 1,043,817.00 46,940.00 19,644.00 2,500.00 120,000.00 12,250.00 150,000.00 84,797.00 30,158.00 263,917.00 ,763,280.00 22,144.00 282,250.00 10,000.00 378,872.00 350.000.00 $2,806,546.00 Copyright, 1919, The Ronald Press Company 11-10-10 LIABILITIES CURRENT LIABILITIES! Notes Payable Accounts Payable Accrued Interest, Taxes, and Wages Other Current Liabilities $ 875,000.00 91,191.00 9,212.00 4,550.00 ^ 979,953.00 BONDS ISSUED AND OUTSTANDING CONTINGENT RESERVE NET WORTH: Capital Stock, 10,000 shares par value $100 each $1,000,000.00 Surplus at January 1, 1918 $210,500.00 Profits, Year Ending December 31, 1918 66,093.00 500,000.00 75,000.00 LESS — Dividends Paid $276,593.00 25,000.00 251,593.00 1,251,593.00 !, 806, 546. 00 Copyright, 1919, The Ronald Press Company II-lO-ll 88 8 8 8 88 8 888 8 8 M «« KN >« S N II • * 1 8S§ * S «» «» «» «» «» «» 88888888 C^ ti f^ If^ t~i t-i K\s^ 8 8 8 8888 8 8 88888 8 M OO CO 4» 1 • • 8SS» 9 l-l CM UN * » « • • o» § i • • * • • r? * c« A J^ si ■^5 8888 8lSS^ O OO r4 ^ 3 '^~ 88 8 8. tfxco r> Q •H Q >^ ♦ ^ 1^ t/\ Co 5"* 8 S ^ e 88 8 I ^S *5* 88. 888 O (M Q M fH ^ 88888888 r* C« r* O^ rH »H K\^^ ^OQ CM V'' (r^ o>o < oo ^ O^ r^ t*\r4 t Si? 888 K\K\i-t 888 8 §|H CM O O^ »-< UN f-l 0 »-CM O K\ tf\ - >A w\ i/\ s^s-^a 00 5 ;x «» «» «» «» «* • «» 4» S. 88 8 8 8 L 88 8 888 8 8 • & SI • • o 9 n UN R M CM CM • CM i • o 88888888 o q Q o >^<» Q o r^ ^ J\ CM 8838 ir\CM UMr\ 8 8. o § * 1 88 8 »:5 s^i ir\ II t»-vO 5?^ 4» II 8 8 i«\ ev >o vO l-i 8888 8 R 8 §?^S8 Ooo O l*v & UN • • • • • O >^ Bad and Doubtful Accounts 5l»848.75 To — Reserve for Bad and Doubtful Accounts $1,848.75 1% on sales for year, (6) Sundry Materials and Supplies Used 7»400«00 To — Storekeeper 7,400.00 Materials and supplies used during the year ended June 30, 1918, as per storekeeper's distribution reports, (7) Bond Interest 6,000.00 To — Accrued Interest on First Mortgage 6% Bonds 6,000*00 To take up the accrued interest on the first mortgage 6% bonds for the fiscal year ending June 30, 1918* CLOSING ENTRIES (1) Raw Materials Used $150,000.00 To — Raw Materials Purchased $150,000.00 Cost value of raw materials used per store- keeper's distribution report. w Manufacturing Account 220,050.00 Discounts Received 1,200.00 To— Raw Materials Used 150,000.00 Mill Labor 29,475.00 Heat and Power 4,200.00 Taxes 750.00 Factory Expenses 2,550.00 Sundry Materials and Supplies 7,400.00 Depreciation 26,875.00 To close manufacturing expense accounts, (3) Cement Stock Account 220,050.00 To — Manufacturing Account 220,050.00 To transfer cost of manufacturing cement. (4) . Cost of Cement Sold 193,644.00 To — Cement Stock Account 193,644.00 To debit Cost of Cement Sold account with the cost value of 220,000 barrels of cement sold during the year ending June 30, 1918. Copyright, 1919, The Ronald Press Company II-17-8 Trading Account To — Cost of Cement Sold Discounts Allowed To close latter accountSt Sales To~Trading Account To close Sales account* (5) (6) $195,044.00 184,875.00 $193,644.00 1,400,00 184,875.00 (7) Profit and Loss Account 10,169.00 To — Trading Account 10, 169. 00 To transfer gross loss on sales to Profit and Loss account, (8) Profit and Loss Account 15,998.75 Interest on Bills Receivable, etc. 900.00 To — Office Salaries and Expenses 5,175.00 Bad and Doubtful Accounts 1,848.75 Interest on Notes Payable 3,875.00 Bond Interest 6,000.00 To transfer sundry accounts to Profit and Loss. (9) Deficiency Account 26,167.75 To — Profit and Loss Account 26,167.75 To transfer total loss for year ending June 30, 1918, to Deficiency account. references: Montgomery, pages 59-71; 296-312 Wildman, pages 21-41 ; 78-101 Copyright, 1919, The Ronald Press Company II-17-9 (f.f<^ (^ahyyCJtyo t^isi^ ^ 4x»uAv^ J. ^ijCtU. ^j2^^ - ^eJi^iAx^ayrcL 2>, iqiq ^ V r ■ — if- — ' «— ^dxt0rajL Jget.« <5i •»»»,(>« ^ amtk 6 4* ^- . A ailt..J> ^ ^ f. ^ frfK c 'a^ A. A, Jk. ^fi liin fl/' ^ '2 /, '?! /,? ^, ^ Tf/ "^ kv )f^l '-• ^ \fi t'fll ip 15 ^ce^^ 0^ ',U A ^' ^ 7'f ^ f^ •f >Vf f* ^l t si. 'L. n 00 A- > • »P.i f/^ ^ rAftt r< >. ift^ t % r /(, l^ 1 u A itiv 7 (^ V\ r, / 7f*7 /L rpi-n o&my)7tJunt ^ylatUhux. 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U,A/ ? <¥iajOi ^^ li r 7J? 00 7 ioim^ '^ /ifui. : Id i<>P r" f^ Q9 Z'J ^ M-' /S Vo IS ^ %j/i ul Of III- 00 /// 00 ^hU uUr% vA in f^ /// Ifo ir lk t (* ,^t(A ^?fj /■ ^A r?o ^^ 0(1 aOLMa f ^ UiHJU > oa — r" H^ oc> < ^ml^ ^^ UUi£ IV^ J S9 ¥7 00 t^ ,fo ^ f4l iiSt <^A .P9 fi 4o ^Vi^ g]l k^f V tl U H OQ 7 ?*/ J^avHA. t^ '>*^ 7^? iP 7f f9 rjfir 1 '^ioL r?if^ , m 00 — *"r 7lf 00 0itm ifJt /»4A^ .qo ^/ 99 Hi op SoimtA tl«««. / 4f 99 ho QO ^3s ^ ^^ ^ ^ *3t- 1 »^ 1 1 J 1 Copyright, 1919, The Ronald Press Company H-18-12 c/. XI (ya^\yv^ji4) •*■ ^• U- COCOt^^Ay^ASta l(:kxieJ. %U ne yif ^ 6o 4/ 6c % OK 91 U4' M ^><^ >^ 7?. oo /^ So 4. ^< Too-, ^ f 22 20 22 ,2o J ^ ^t r(^c jU ^' u 3 ^^7 ^ / - / ,^ p=> So III 45 ^/^~'k /Aj-^ y^an 4f- ^a [/H/*- ;^ ^ /6 ,7r^ '//; '7^ % \4 Ori ^^/»« td>n /- 7^ on 7^ op \S) .3luct ^.'^ \<7n JT" i no q(. 00 ! ri. Q Mu. v^uy k^: ?<= .no <7^ no 1 1 A- :^ %. w fo) ood J ■ L ?-^ /^ ?.^ 1 h k?. 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't 1 ,3 ^ ^ ^ ^ 1 ■l ^ ^ -sO ■ ^ d ^ = 1 r4 8 o A t 5 ^ « Q t>4 ^ H. ^ ^ a r§ si^ § 8 o] S <3- * «> ^ ^ •5 Q '». ♦* »* '«v ' . - ' • 1 ? -8 55 ^ v2 S5 ^ f^ H ** ^ 1 v^ § o o s l! o Q § c 1^ ^ 4?! s. ^ 5 § ^ -i? Vi i ■X -^ ^ ? ^ "1 1 ^ ^ ,^ ^1 >v ■^ j ^ "t 1 X (> ^ f^ J ^ 4 :^ ^ .^ r ^ ■i; ':| >^ J: i 'i^S ^ rt ^ 1 1 •^ ^ "^ * a c -f -^! ^ $ 'S ■71 1 •?i ~J '^ ^ ^ ^ .5^ -t 1 «i .s 1 <5j- 1 '■^ jl ^ ^ 1 \| '^ ^ 4 1 <* 1=1°; ^ s ^ ^ _1 ^ 5o ^ : •^ ^ k| <^ ^ 1 .> 1 1 ^ I S <-•? S J? ^ ? s) ^ i ^ 1 i^ ^^ '^ ^ ^ •'» J "^ 1 1 i'^ s tf li ^.) «sl "*nS (P (^ ^ ^ — "^ ^ ^^ ^ ^!^ ^ ■^=« ^ # ^ 1 J ^ ^ ^- ^ ';:n "^ ^ *^^ ^'^ **?« 1 = 1 ~r -^ ^ !5 ^ ^tr «s- ^'21 <» H « ^ ^ -<5 --^ -^ 1 "1 ^ ^J-^ a ^ "^ "K ^ ® V- ' f^ J (p [g iGl U- _ r 3 H 1 1 d J ___ __ J □ J _ Copyright, 1919, The Ronald Press Company 11-18-15 0.. X- 3aAywL^ r^. (^jfKiXroOjcJh e^ ^^UPdo ^juZJuXhCL&^a-^ ^3Lcuu>ia^ -E- Ou> o^ ^eju^^ri£n/r 3', iqii ^(XhA- 2^ %fdSAjJl- ^^ixsu C^/nLtKA/ntJ- ^^Mto/t/:^ 1- U-\ r ^1 >^/M ^^t fc 'Ml EC^ ■^ f*7. ^•5^ Vi .hl*>Ui iAxL ^ - ^f£. '14 2- V-ii J ■n^f ' '/^ V 2-/: r-n ^ *«< xb L u 'Ji*u ><^ 1 ^<^ 3-l^~t<^ ri3 ^ e^ IomjU^* \/3iJiS \o- [-ft s T % ffM tMXe ^^ «.,/ i^. 6<5J '2-2U-/^ pj 6i? 1 /-: -''? 23 ( 00 (fc ieU //?; H ' ■^/, f7/Jo'? W "aM. 1*4^ Oi 'JC IMjC ^ ^ 27 0^ ^7 ;? // ^. f7 ( ^4 i 33 4/ ~ — ■ 1 ■ . Copyright, 1919, The Ronald Press Company 11-18-16 d. JC. (BoAyyxJLa t"^. T (^nomAn^ 9 iA/tC Z XV .U xyp^ < A. yii VbLu, ■# } CO- 'Ac (si d A/IA. w ue. X ^ '/ i-k 'i^ Ir / $ 0. oo ^L r ^ aM. y\/?i yu ) 7oo oo 'h > f 7> J. Ox a •mt ^& /S^ .op 57' 00 4 /, "VW Qo A. rt - 7u 'itU^ 4 'i< \ai MM P ^ 'A" k' ^ {',lf [T 7 L 7 4 If ^p '\ / T (^fV nM V ? oo ''k ^ X!U6 ClA. tW ;^, /(, 70 /2/<5 '-Tk .^ '^ u 7 4 ,<'p <^,& a fe^r On ax -u ta"^ ^ 00 '^,5 i "U^n rvtJe i< v^ o^ ^ "^7 So 'V^ r9. ;f 0(a \uSL (, 00 <^IS / 5?/tC 7 -^ k '^ /LCI 217 fO '^15 ^ tare lA '^ r ^ ^ ?,< ^oo >^I6 ^ ^, % <^7t. % ^>ylt -i<^. ^« foo •^15 ■ O. Mj. t / f^7 ,fn '^U ?/w, '^ ^. f^/ \x ' 1 41, >fo <^jiS 'i \(3 S\ 9U* TX^ •A. 7 fY> •^liS ^ tzn iJi£. ^ AA. e^ .70 'Ycf ^ ^.0. fa ru 4 03 '4^ i ko. (?. ^ e^ fC ( ^ 4s 6 oM 'jUr «v 7H ^ lot^ 00 % "? hie u ^' atJk c^ m I?" ^^lis a -J ^ b^ ^ 41 (?7 ^'?7 ^0 ( f^a ^^ JCf. ^ £C ,5/ -/^, ^ ti^ 5^j //o ~~ •\ ' m «- c .rr. H Jc fff -h > ( Yf <>^r 2 (A y HA^ (^^ ^^ '^^. 7 < n. f /' ?/,f -< 5s/ 'd. nAi f^ ^ 'f' ~'7( 1 - S- \j^. i,l Ul 1 ' f Copyright, 1919, The Ronald Press Company II-19-1 COMPLETE ACCOUNTIN G COURSE — PART II Lecture 19 INVENTORIES Problem 41 The operations of the Reliable Machine Co* for the month of April consisted of the following: 1* Materials used $39,083.27, productive labor |38,092.78, and general foundry expenses $19,027.83 for the month of March, these expen- ditures representing the cost of producing 1,200,000 pounds of castings during that month. 2. Castings produced on the following orders S ORDER NO. POUNDS 196 . 304,000 198 100,000 203 98,000 206 350,000 209 175,000 Charge each of these orders with the cost of the castings based upon the average cost per pound for the month of March. 3. General stores issued S '^ ORDER NO. VALUE 196 $11,088.12 198 9,001.33 201 12,081.32 207 11,091.33 208 31,083.27 212 13,827.23 215 9,038.11 4. Productive labor: MACHINE SHOP ORDER NO. Hours Amount 196 11, ,000 $4,608.07 198 10, ,000 3,812.08 201 13. ,000 5,708.91 207 14. ,000 6,103.27 208 52, ,000 18,081.33 212 16, 000 6,308.-^2 215 10. ,500 4,108.27 Copyright. 1919, The Ronald Press Company II-19-2 5. General factory expenses $38,083.11, Distribute the factory- expenses against the various orders upon the basis of the machine hours. 6> Ihe following orders were shipped: ORDER NO. SELLING PRICE 196 $35,000.00 198 21,000.00 206 35,000.00 209 20,000,00 Prepare all of the necessary entries in respect of the foregoing. Problem 42 The John Anson Co. is a corporation engaged in the commission, business and deals exclusively in butter, all of which is received on consignment. Their balance sheet on July 1, 1919, follows: JOHN ANSON COMPANY BALANCE SHEET, JULY 1, 1919 ASSETS CURRENT ASSETS: Cash $8,747.61 Accounts Receivable (Less — Reserve for Discounts, $150) 8,965,42 Merchandise on Hand 4,545.67 $22,258.70 % PREPAID INSURANCE 889.61 FURNITURE AND FIXTURES $3,745.00 Less — Reserve for Depreciation 2,400.00 1,345.00 $24,493.31 LIABILITIES CURRENT LIABILITIES: Accounts Payable fort Freight $ 15,50 Cartage 26,72 Miscellaneous Charges 15.00 General Expenses 18.71 Accrued Taxes 221,74 Sales on Consignments not closed out (less — Freight $87.45, Cartage $4.16, and Drafts $961,75) 6,420.82 $ 6,718.49 Copyright, 1919, The Ronald Press Company NET WORTH: Capital Stock Surplus — Balance June 1, 1919 Profits for June (including gross profit of (1, 140. 71 on consignments partially sold) II-19-3 10,000.00 $5,346.68 2,428.14 7,774.82 $24,493.31 Three books of account are kept: cash register. In addition, a memorandum ace ment on a separate sheet ; when advances ( the amounts are carried to the consignme paid and thus closed out the sheet is f il basis for preparing an account sales. Th tomers, all of whom settle their account The term "merchandise" as used here refer thereof which the business pays for on i tomers in the usual way. The cash book, are columnar in form and admit of the f o July, 1919; book, sales book, and account sales ount is opened up with each consign- drafts or expenses) or sales are made nt sheet, and when the consignment is ed away after having served as the ere are only a few dozen credit cus- s weekly; hence no ledgers are kept, s to certain consignments or portions ts own behalf and sells to its cus- sales book, and account sales register llowing information for the month of CASH BOOK CASH RECEIPTS Cash Balance, July 1, 1919 $ 8,747.61 Customers* Ac- counts $28,673.92 Discounts Al- lowed 768.50 27,905.42 311.42 3,020.23 Cash Sales — Merchandise Cash Sales — Consignments Interest on Bank Balance, July Cash in Exchange for checks issued (per contra) 341.00 10.05 CASH DISBURSEMENTS Charged to Consignments: Freight $ 540.60 Cartage 112.84 Storage 57.50 Miscellaneous 157.98 Drafts 9,749.23 Net Proceeds 17,337.75 Selling and General Expenses: Clerks' Salaries 475.00 Office Salaries 330.00 Rent 125.00 Postage and Stationery 53.67 Insurance 110.00 General Expenses 74.86 Checks in exchange for cash (per contra) 341.00 Cash Balance, July 31, 1919 10,870.30 $40,335.73 $40,335.73 Copyright, 1919, The Ronald Press Company II-19-4 SALES BOOK (Does not include Cash Sales) Merchandise Sales Consignment Sales $ 5,337.89 30,014.55 ACCOUNT SALES REGISTER DEBITS Freight $ 436.82 Cartage 114,45 Storage 57.50 Miscellaneous 142.98 Drafts 9,462.47 Net Proceeds 17,337.75 Gross Profit (Commission) 2,586.09 $30,138.06 CREDITS Merchandise Purchases Consignment Sales $ 5,463.81 24,674.25 $30,138.06 An examination of the sheets on the consignments not yet closed out yielded the following summary: DEBITS Freight Cartage Drafts CREDITS ; 190.55 Sales (of which it is esti- 13.43 mated $2,111.16 is gross 1,248.51 profit) $16,975.42 There are accounts payable on July 31 on account of: freight, $14.82; cartage, $37.60; general expense, $44.66; additional taxes accrued during July, $35.16. It is expected that customers will take advantage of discount to the extent of $275; additional depreciation has accrued on furniture and fixtures of $100; insurance has expired amounting to $42.78. The merchandise on hand at July 31 is $5,473.82. From the above information prepare a detailed statement of profit and loss for the month of July and a balance sheet as of July 31, 1919, QUESTIONS Question 106 — Outline the procedure you would follow if called upon to audit the raw material inventory of an automobile manufacturing company. Question 107 — In auditing the accounts of a steel products manufacturing company would you consider it proper under any circumstances to allow the Profit and Loss account to be credited with profit on uncompleted work? Question 108 — What steps would an auditor take in the verification of inven- tories of finished products? Copyright, 1919, The Ronald Press Company II-19-5 Question 109 — Where an auditor is engaged in verifying the finished product inventory of a bicycle manufacturer, to what extent is he justified in relying upon the cost records to determine the cost of such inventories? Question 110 — What do you understand by the: (a) Gross profit test (b) Comparative inventory test State how these tests would be applied in a manufacturing concern. Solution to Problem 37 Exhibit I A B CO. BALANCE SHEET, JANUARY 1, 1919 ASSETS CAPITAL ASSETS: Plant I 250,000.00 CURRENT ASSETS: Inventory (after deducting reserve for discounts of 516.000) $304,000.00 Accounts Receivable $400,000.00 DEDUCT— Bad Debt Re- serve I 4,000.00 Reserve for Discounts 16,000.00 20,000.00 380,000.00 Notes Receivable 30,000.00 Cash 50,100.00 764,100.00 DEFERRED CHARGES: Prepaid Interest 18,000.00 $1,032,100.00 LIABILITIES CAPITAL STOCK ISSUED AND OUTSTANDING $ 225,000.00 CURRENT LIABILITIES: Notes Payable $600,000.00 Accounts Payable (after deducting reserve for discounts of $4,500) 85,500.00 685,500.00 SURPLUS : Balance, as at January 1, 1918 $ 55,000.00 ADD~Surplus Net Profits, as per statement of Profits and Income (Exhibit II) for year ending January 1, 1919 ' 66,600.00 121,600.00 $1,032,100.00 Copyright, 1919, The Ronald Press Company II-19-6 Exhibit II A B CO. STATEMENT OF PROFITS AND INCOME YEAR ENDING JANUARY 1, 1919 SALES $1,500,000.00 DEDUCT— Returns $100,000.00 Discounts 55,900.00 155,900.00 NET PROCEEDS FROM SALES $1,344,100-00 DEDUCT — Cost of Sales (Exhibit III) 1,064,000.00 BALANCE— GROSS PROFITS $ 280,100.00 DEDUCT— GENERAL AND ADMINISTRATIVE EXPENSES: Salaries $ 20,000.00 Taxes 5,000.00 Bad Debts 3,000.00 Expenses 156,000.00 184,000.00 BALANCE— NET PROFITS FROM OPERATION $ 96,100,00 DEDUCT — Interest paid 30,500.00 $ 65,600.00 ADD — Miscellaneous Income, pertaining to prior year's operations; Credit Insurance on 1910 losses 1,000.00 SURPLUS NET PROFITS carried to Surplus Account (Exhibit I) $ 66,600.00 Exhibit III A B CO. STATEMENT OF COST OF SALES YEAR ENDING JANUARY 1, 1919 INVENTORY AT JANUARY 1, 1918 (Less— Reserve of $12,000 for discounts) $ 228,000.00 MERCHANDISE PURCHASES $1,250,000.00 DEDUCT — Returns $5*0 , 000 . 00 Discounts taken 60,000.00 110,000.00 1,140,000.00 $1,368,000.00 DEDUCT — Inventory at January 1, 1919 (Less — Reserve of $16,000 for discounts) 304,000.00 BALANCE— COST OF SALES (Exhibit II) $1,064,000.00 NOTE — Adjusting journal entries are not called for by the problem, but the following are submitted in order to enable the students better to understand the effect of the adjustments: Copyright, 1919, The Ronald Press Company II-19-7 ADJUSTING ENTRIES (1) Reserve for Discount Accounts Payable | 500.00 To — Purchase Discounts % 500.00 To increase reserve for discounts to 5% on outstanding accounts^ (2) Discounts Allowed Customers 4,000.00 To — Reserve for Discount Accounts Receivable 4,000.00 To increase reserve for discounts to 4% of outstanding Accounts Receivable. (3) Bad Debts charged off 1917 collected 500.00 To — Reserve for Bad Debts 500.00 To transfer first-named account, (4) Reserve for Bad Debts 2,500.00 To — Bad Debts charged off to January 1, 1919 2,500.00 To transfer bad debts charged off to reserve. (5) Bad Debts 3,000.00 To — Reserve for Bad Debts 3,000.00 Increase reserve to 1% of gross Accounts Receivable at January 1, 1919. (6) Cost of Sales Account 4,000.00 To — Reserve for Discount Merchandise Inventory 4,000.00 To close latter account. (7) Interest 12,500.00 To — Prepaid Interest 12,500.00 To close latter account, interest expiring July 1, 1918. (8) Prepaid Interest 18,000.00 To — Interest 18,000.00 To set up prepaid interest at December 31, 1919. Copyright, 1919, The Ronald Press Company II-19-8 Solution to Problem 38 Exhibit I A— PROPRIETOR BALANCE SHEET, DECEMBER 31, 1917 ASSETS CURRENT ASSETS: > Inventory of Mer- chandise $25,000 Accounts Receivable 5,000 Advances to Em- ployees 2,000 Cash on hand 1,300 $33,300 LIABILITIES AND DEFICIT LOANS (subject to accrued in- terest not provided for) FIXTURES (subject to accrued depreciation not provided for) 7,000 John Smith Mary White ACCOUNTS PAYABLE Total Liabilities DEFICIT: Balance at January 1, 1917 $ 2,700 Net Loss year ending December 31, 1917 $30,000 6,000 $36,000 15,000 $51,000 (Exhibit II) Drawings 5,000 3,000 *10,700 $40,300 $40,300 * Red NOTES— (1) The Mary White item of $6,000 is presumably still unpaid. (2) Advances to employees of $2,000 have been taken to be unpaid. A—PROPRIETOR STATEMENT OF PROFITS AND INCOME YEAR ENDING DECEMBER 31, 1917 SALES DEDUCT—COST OF GOODS SOLD: Merchandise Purchases $50,000.00 Less— Inventory December 31, 1917 25,000.00 Exhibit II BALANCE— GROSS PROFITS DEDUCT— EXPENSES BALANCE— NET LOSS FOR YEAR $40,000.00 25,000.00 $15,000.00 20,000.00 $ 5,000.00 Copyright, 1919, The Ronald Press Company II-19-9 ANSWERS TO QUESTIONS Answer to Question 96 — (a) A balance sheet audit consists of such an examination of the books, accounts, and vouchers of a business as shall enable the auditor to satisfy himself as to whether or not the balance sheet is properly stated so as to exhibit a true and correct view of the financial condition of the business at a certain date. The general audit differs from the balance sheet audit in that the auditor must also satisfy himself as to whether or not the statement of profits and income is so drawn up as properly to set out the results from operation dur- ing the period under audit. The scope of a detailed audit would require in addition thereto a detailed check of vouchers, checks, postings, and footings. (b) A cash audit consists of such an examination of the books, accounts, and vouchers of a business as shall enable the auditor to satisfy himself as to: 1. Whether all cash recorded as received has been accounted for by the receiving agents. 2. Whether all cash which should have been recorded as received has as a matter of fact been so recorded. 3. Whether all cash recorded as disbursed has been accounted for by the disbursing agents. 4. Whether all cash recorded as disbursed has been properly authorized. Answer to Question 97 — See Montgomery, pages 53-58. Answer to Question 98 — Yes, especially if the footing is the amount posted to the ledger. For instance, if the cash disbursements side has a column for ex- pense, the total of which is posted to the debit of Expense account, the raising of the footing of this column would conceal a corresponding shortage in cash, and the same purpose could be attained by increasing the footing of the cash receipts column. It is necessary to check the postings to see that the items in the ledger purporting to come from the cash book are in fact cash book entries, and not arbitrary entries made for the purpose of balancing the ledger, either because the bookkeeper is too lazy or incompetent to locate an error, or to conceal fraud. A nswer to Question 99— The following steps would be adopted in the verifi- cation in the cash balance given in the question: 1. A certificate would be obtained from the bank as to the bank balance of $5,610. 2. A B's check for $400, not deposited, would be traced into the pass book in the subsequent period to see that it actually cleared and was good. 3. The outst£inding checks represented in the total of $2,500 would be verified. The auditor should be careful to note that the entries in respect thereof were entered in the cash book on or prior to the date of the cash verification. 4. The cash in drawer, amounting to $300, would be counted by the auditor, preferably at the close of business on the day of the verification. Copyright, 1919, The Ronald Press Company 11-19-10 Answer to Question 100 — As part of the verification of bank balances it is necessary to trace the receipts, per cash book, with the deposits per pass book in order to insure that all receipts were deposited intact. To illustrate the point, a cashier might be short $500 in his accounts during the year and knowing that an audit is to be made as of a subsequent date, v;ould make good this shortage, temporarily at least, by depositing the amount before the close of business on the last day of the period to be audited. On the first day of the succeeding period the amount could again be v/ithdrawn by an appropriation of receipts for that day. Thus the balance at the close of the period would agree with the cash book, while as a matter of fact there was a sum of $500 misappropriated. REFERENCES : Montgomery, pages 84-99 Wildman, pages 108-119 Copyright, 1919, The Ronald Press Company 11-19-11 ^. J\ ^OAy^u^ i-^Go. ^ h^ S^yUiTl^O-ru r^Eo . 3^ l^/S CiixJl OyUxHru^^ ifa, *y 0oJ\Aio I Louri 9to. 4»ah OiLaAXJh L TtA / , r U\ ritA < v^ £cr << A;.- ^ifa ^oC/ / ^ //, m ?^ < '■/o 753 .2.? 4 fo. -m ,>g <- 1 * Kg mA '^ f ^ ►f. 'fV*' ^»t^ ./U*. ^ \.rcu <7 ;? i^ QXl o Ui 20 f 111 HtM ■% H .fp IXl IS- It A? f ^ ^^ 1 po M^l |ujg> f^'% f.Tfrt ?^^ 10 1 /o? ?(? / /o? 7P 1 ln> U3 i' %/ 4 ^V7 ^^ 3 ^ -tua II / M ?^ /, 7^ /^<' h (^ ii % ■ ^ % l^r^ 1^ ^ m /^ / >f(, So 1, f^ Iff- V I k ttf Lth/ t /3 M 7-^ P^, 7^ V^ IS- I . .\\ M ^ ^ruL ^ Va, ^ f^ 2 m 7^ ?; 4» 'iv 7 UH n r k [pftlH^ ^(1 ^ ^-'/^^f/^ 1^ if} 7fM V •v A. A % sht , > ^ Hi \eo f. 3r 4( ir^ (^^ f/i. % ^9| r^ *w- 'VK ? i 71/ Yi^ nC: <1p^ l^ f^"! L, ^ 1?,^ Sf OA ^Cf/C mI ju{, r lOA. ^ a Vt •^ 1 -w? \. ^ 4/H. W Z)L* -3 xaa. n^ec M ^<; e/tn. A r - '^ aI iti . eu ?*>/ "^ I'M A *♦» 1 ^ ^>K^ (^ -t ' »\- jii> ■l^i' i^c a ^^t. *r ^ \rta ei/\i K'Ai, A^ fr^ /y 1 »^^ ^H ^m 41 ■tf ^ 0/. f/n/\ ^ L^ ^ k^ (AM1 k^ ^ f (K f "H^ 4/Lr f'/rl ^/> i^' <■?- (^ \/rii n/r / # "iltJU ^ ^,. f , ^C4' /ki^ 75c ^« •7f 4 m Mi. Cui\ buu t^jt \c^\ 'V 'In h OOG VI To ?ir rt Ai: ■So ^^ iH^k -u^ 1 "1 d L . 1 1 1 _J Copyright, 1919, The Ronald Press Company 11-19-12 Copyright, 1919, The Ronald Press Company 11-19-13 J". JC: (BaJv*ot^ /"^ 3vsJJS^^AJ^-^^ c^ &i: ^KjccMASny 3f, iQii JS~ M^^iijuLy ^'hf'^^O % ' Ih^^ ^K^MkA/I' CLdCuudL ^^/tii\^ ^: ;t (OVo no ^ :2fi [/It/ /nt te- y /^.f II /, C/? n 77?, ^0' 0.' L -K, U': ^ -.«s r/« 'JVO ^.^^ ^. /^7 X lo,'? 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'^JU Art ^ ,^ttr . ^ l^ ■ >ytc ab. ,<<^ a ^■ ^ f^) (* ce<- r^ ) 11 (/ r < ^ 1 ~" L_ Copyright, 1919, The Ronald Press Company II-20-1 COMPLETE ACCOUNTIN G COURSE — PART II Lecture 20 INVESTMENTS; DEFERRED CHARGES Problem 43 The following are the balance sheets on December 31, 1918, of the A and B Companies, respectively: ASSETS Land and Buildings Machinery and Plant Sundry Debtors Inventories Cash in Bank and on Hand A COMPANY $112,500.00 163,295.00 123,410.00 193,200.00 115,440.00 $707,845.00 LIABILITIES Capital (100,000 shares of $5 each, fully paid) Sundry Creditors Reserve Surplus — Balance $500,000.00 90,645.00 35,000.00 82,200.00 $707,845.00 B COMPANY ASSETS Machinery and Plant, Cost Sundry Debtors Inventories Cash Surplus — Balance $111,200.00 31,245.00 47,115.00 645.00 11,145.00 $201,350.00 LIABILITIES Capital (6,000 shares at $25 each, fully paid) Sundry Creditors $150,000.00 51,350.00 $201,350.00 It is agreed that the business shall be consolidated by the A Company purchasing the B Company as on December 31, 1918, on the following basis: 1. Dividend of 15% to the shareholders of A Company, to be declared prior to the consolidation. 2. The A Company to take over the assets of the B Company, the con- sideration being: (a) The payment of the liabilities of the B Company. (b) The payment of the costs of consolidation. (c) The issue to the shareholders of the B Company of 7 fully paid shares of $5 each in the A Company for every 2 fully paid shares in the B Company. Copyright, 1919, The Ronald Press Company II-20-2 The cost of consolidation amounted to |6,030. The machinery and plant and the floating assets of the A Company were worth the values stated on the balance sheet. Draft the journal entries recording the purchase in the books of the A Company, and set out the balance sheet of the A Company after the consolida- tion, assuming no cash payments have been made. Problem 44 A corporation is formed January 1 with a nominal capital of $5,000,000 in $50 shares. There is a first issue of 50,000 shares, $2.50 per share being due on application; $7.50, making $10, due on allotment, January 14; $10 due on February 1; and $10 due on April 1. Balance subject to call. Applications were received for 44,652 shares, and 43,822 were allotted on January 14. Give the journal entries required to record these facts. Problem 45 Under the laws of the State of Maine, certain companies were taken over by a newly organized corporation which bought their entire assets and conducted the business for several months before it was discovered that the inventories upon which the transaction was first based were overstated to the extent of $10,000 in the case of one of the constituent companies by reason of a clerical error. It was further found that it would be impracticable to recover said $10,000, or any portion of it, from any of the original companies, or from any of the original stockholders. The balance sheet of the Maine corporation, prior to the discovery of the error in inventory, was as follows: ASSETS Plant Good-Will and Patents Cash Bills Receivable Accounts Receivable Inventories $268,137.00 28,967.49 5,638.35 13,282.22 117,203.88 232,751.42 $665,980.36 LIABILITIES Capital Stock Accounts Payable Bills Payable Surplus $500,000.00 22,684.26 102,000.00 41,296.10 $665,980.36 What entries would the bookkeeper be justified in making to adjust the accounts? Give reasons for your answer. Copyright, 1919, The Ronald Press Company II-20-3 MISCELLANEOUS QUESTIONS Question 111 — A company shows among its assets $2,675 as unexpired insur- ance on January 1, 1918. On February 1, 1918, the plant is destroyed by fire and a total loss of $57,875 occurs, which the insurance company pays. How would you treat the $2,675 unexpired insurance item? Question 112 — As an auditor, how would you undertake to satisfy yourself in regard to the following items carried on the balance sheet as investments: (a) First mortgage 6% bonds of the Progressive Manufacturing Co., par value $100,000, cost value $99,000, market value $96,000. (b) Second preferred shares in the New Manufacturing Co., value $155,000, par value $175,000, market value $160,000. Question 113 — How would you verify the extensions of an inventory taken by a large 5 and 10 cent store? Question 114 — Would you regard the following items as proper ones to carry forward as Deferred Charges at December 31, 1918; (a) Advertising expenditures — spring season of 1919, $8,311.83. (b) Traveling expenses of salesmen in disposing of goods for shipment in that season, $41,073.24. (c) Proportion general and office expenses considered to have been incurred in connection with securing of orders for delivery in ' the 1919 season, $11,045.27. Question 115 — How should the following items be valued for the purposes of a balance sheet : (a) Investments in other companies held as marketable investments. (b) Investments in other companies held as permanent investments. As auditor, how would you satisfy yourself as to these valuations? Copyright, 1919, The Ronald Press Company II-20-4 Solution to Problem 39 A X COMPANY STATEMENT OF APPLICATION OF FUNDS YEAR ENDING DECEMBER 31, 1917 FUNDS WERE OBTAINED FROM THE FOLLOWING SOURCES: Sale of Common Stock (250 shares at par) Income from operations: Surplus Net Profits LESS — Book Profit on increase in land valuation Increase in Reserves: Reserve for Depreciation Sinking Fund Reserve Reduction of Bond Discount Unamortized Total Funds Provided $52,700.00 5,000.00 $38,000.00 10,000.00 $ 25,000.00 47,700.00 48,000.00 1,000.00 $121,700.00 THE FUNDS OBTAINED WERE APPLIED IN THE FOLLOWING MANNER: Purchase of new Machinery and Equipment Preferred Stock retired Dividends paid Increase in Working Capital as summarized below $ 35,000.00 15,000.00 8,100.00 63,600.00 $121,700.00 SUMMARY OF CHANGES IN WORKING CAPITAL PARTICULARS 1916 1917 INCREASE DECREASE Inventories $ 88,000.00 $ 65,500.00 $ $22,500.00 Accounts Receivable 104,000.00 86,000.00 18,000.00 Investments 65,000.00 71,500.00 6,500.00 Cash 2,500.00 18,100.00 15,600.00 Prepaid Expenses 5,000.00 4,000.00 1,000.00 TOTAL CURRENT ASSETS $264,500.00 $245,100.00 $22,100.00 $41,500.00 LESS — Accounts Payable 145,000.00 62,000.00 83,000.00 WORKING CAPITAL $119,500.00 $183,100.00 $63,600.00 Copyright, 1919, The Ronald Press Company Solution to Problem 40 II-20-5 Exhibit A THE WESTERN MAIJUFACTURING COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS PLANT Less — Reserve for Depreciation CURRENT ASSETS: Inventories of: Raw Material Work in Progress Finished Stock Customers* Accounts Less — Reserve for Bad Debts Cash in Bank and on Hand DEFERRED CHARGES: Une3q>ired Insurance ;j400,000.00 14,000.00 $386,000.00 $10,000.00 6,000.00 28,575.00 $ 44,575.00 48,000.00 720.00 47.280.00 11,500.00 103,355.00 1,200.00 $490,555.00 LIABILITIES CAPITAL STOCK: Authorized Issued and Outstanding FIRST MORTGAGE Q% GOLD BONDS Issued eind Outstanding CURRENT LIABILITIES: Accounts Payable Accrued Bond Interest Accrued Wages SURPLUS: Balance at January 1, 1918 DEDUCT — Loss for year ending December 31, 1918 (Exhibit B) •Red. $400,000.00 $350,000.00 150,000.00 $ 35,000.00 9,000.00 500.00 44,500.00 $ 51,000.00 104,945.00 * 53,945.00 $490,555.00 Copyright, 1919, The Ronald Press Company II-20-6 Exhibit B THE WESTERN MANUFACTURING COMPANY STATEMENT OF PROFITS AND INCOME FOR YEAR ENDING DECEMBER 31, 1918 (Number of tons sold, 190,000) SALES $228,000.00 Less — Discount on Sales 7,000.00 PER TON NET SALES $221,000.00 $1,163 COST OF SALES (Exhibit C) 237,925.00 1.253 GROSS LOSS ON SALES $ 16,925.00 $ .090 DEDUCT — Miscellaneous Income 4,700.00 $ 12,225.00 ADD—SELLING AND GENERAL EXPENSES: Salesmen's Salaries and Expenses $ 21,000.00 Bad debts 720.00 Office Salaries and Expenses 62,000.00 83,720.00 LOSS FROM OPERATIONS $ 95,945.00 ADD — Bond Interest 9,000.00 TOTAL LOSS TRANSFERRED TO SURPLUS (Exhibit A) $104,945.00 Exhibit C FINISHED STOCK ACCOUNT TONS PER TON AMOUNT TONS PER TON AMOUNT Inventory at Sales 12,500 $1.00 $ 12,500 Jan. 1 12,500 $1.00 $ 12,500 " 177,500 1.27 225,425 Production Inventory at (Exhibit D) 200,000 1.27 254,000 Dec. 31 22,500 1.27 28,575 212,500 $266,500 212,500 $266,500 NOTE — Two methods of ascertaining the cost of sales are in general use: 1. On the assumption that the inventory on hand at January 1 is sold first, price all sales up to that amount at the opening inventory price. 2. Price all sales at average cost of finished stock to date of sale. Copyright, 1919, The Ronald Press Company II-20-7 Exhibit D THE WESTERN MANUFACTURING CO. STATEMENT OF COST OF MANUFACTURE FOR YEAR ENDING DECEMBER 31, 1918 MATERIALS USED: Inventory of Raw Materials at January 1, 1918 $ 40,000.00 Materials Purchased less returns 159,500.00 $199,500.00 DEDUCT — Inventory at December 31, 1918 10,000.00 $189,500.00 PRODUCTIVE LABOR 40,500.00 FACTORY EXPENSES: Heat, Light, and Power $ 3,500.00 Depreciation 4,000.00 Miscellaneous Factory Expenses 12,500.00 20,000.00 $250,000.00 ADD — Variation in Work in Progress Inventories: Inventory at January 1, 1918 $ 10,000.00 Inventory at December 31, 1918 6,000.00 4,000.00 COST OF FINISHED PRODUCT MANUFACTURED $254,000.00 ANSWERS TO QUESTIONS Answer to Question 101 — 1. Obtain a copy of the customers ledger trial balance. 2. Check the balances against the corresponding ledger accounts, noting: a) Whether the balance is apparently correct. This is done by scanning the debits £ind credits without formally footing them. b) Whether the balance represents certain specific invoices or is the net balance of a number of debits and credits. c) Whether the balance represents current invoices, £in old balance carried forward, unpaid notes, drafts, or checks charged back, etc. d) Whether the balance as of the closing date has since been liquidated in cash, returns, allowances, etc. 3. Foot the trial balance to see whether the total of the customers ledger trial balance is in agreement with the general ledger controlling account. If there be no controlling account, it is advisable to construct one wherever possible. Whenever possible, verify the balance through communication with Copyright, 1919, The Ronald Press Company II-20-8 the customer. If this be done, great care must be exercised in order that the balance of the statement sent to the customer is not altered after the auditor has compared same with the ledger account, and that all replies are received by the auditor in such manner that they could not be altered or withheld. The procedure generally preferred is as follows: a) Statement prepared by bookkeeper in usual way. b) Statement compared with ledger account by auditor. c) Rubber stamped with request to examine the statement and notify auditor whether it is correct, or if desired whether it is not correct. d) Statement mailed by auditor in envelope bearing auditor's return address. e) Reply received and carefully examined. f ) Second and third request made when considered advisable. 4. In order to ascertain the sufficiency of the reserve for bad and doubtful accounts classify all overdue balances as follows: OVER PAGE NAME AMOUNT 30 DAYS 60 DAYS 90 DAYS 90 DAYS Take up these accounts with the credit man or official in charge of collections. Supplement the information obtained from him by an examination of the correspond- ence with these customers. Answer to Question 102 — A list of the outstanding accounts which each col- lector is to collect must be prepared in the office, and receipts in duplicate should be written out in the office and handed to the collector in respect of these amounts. At the end of each week or other period the collector will then either have to account for cash or produce the receipts in respect of those items which he has not yet collected. The collectors in the various districts should be changed about frequently. Answer to Question 105 — All charges other than sales should be verified to ascertain: 1. The character of such charges. 2. Whether they were properly authorized. Where such debits are few in number a complete check may be made readily. Where the number involved will not permit of a complete verification, a test is generally resorted to. Answer to Question 104 — The only satisfactory verification of the balances in an officer's account is to obtain the written approval of that officer. Oftentimes an analysis of the account would be presented for his perusal. Answer to Question 105 — (a) In the case of an agricultural implement manufacturer practically all customers* accounts would be represented by notes. Notes on hand should be Copyright, 1919, The Ronald Press Company II-20-9 examined and the total compared with the general ledger account. In case notes are out for collection or in litigation they should be verified by corre- spondence with the party holding same at the date of the audit. Notes paid be- tween the closing date and the date of audit are verified by examination of the cash receipts book. Overdue notes should be classified in the same manner as overdue accounts receivable. In determining the adequacy of the reserve for bad and doubtful notes it should be noted that in the implement business the fact that a note is long overdue is not in itself evidence of non-collectibility« Oftentimes the accrued interest is not taken up. In such cases it may be con- sidered an offset to the collection expenses not reserved for. (b) In the case of a retail department store the notes on hand would be veri- fied in the manner outlined above. In determining the adequacy of the reserve for bad and doubtful notes it should be noted that in the department store business notes receivable are a sign of financial weakness and overdue notes are generally doubtful of collection. REFERENCES: Montgomery, pages 99-103; 128-133 Wildman, pages 43-47; 142-147 Copyright, 1919, The Ronald Press Company 11-20-11 rf. L- (BaA/V\SyQ rioo. n^ ^KAUi^O/LAJLdi/ ^Jti/UiA^OAJUtH^ ^3, iSi^. ?( -£. C^_ ' ^ 9^1 l/U L % ^OiA ixa juct^ [?(rl 7 fl \hii Jlt\l9li, 'iv X l}ta*A ??, y^/ TcfL^ ,1 <:>«>o 9? Mr ^^ M ^JUm. 6v t^ /i [ ^ i^f ftlM/. U< 5e >-oo PM .at**- t yuJut-Ka P • 1 1(C ^rt^ r*^ %i^ IS fif f U'.a4- J 0OO rOo 3^)O0 lOS 00 -^ ^.v] L¥^ ^ (?c . ft Met- ^i> "xct , i '*^ l,t vf 1 UiAjr f.fh *9P oo /.>/:. S, 1% gS?T) ^^^J'ju^ J 7Hi, 19*i ^ Iffiff/ ^On. •/^ \ UXi -', 1 VI -if 3 cfiaX4> '?. OOP oo /'i.oo 51 fl^A ^CttjuM f^M, i33 US ■ k-1 \.^ U* *»/. ;. "JOM •■f, vt 3tft4UU> ,f Ooo oo //^ «o 77 JreJ \J fin «/57 1^ dut t6t ^ ^ A m 'A^r.f4 y^l, 7^;^ ^4Am iH i^f ^ h^ tdU Ji ^ '/., ^J6 ^ fkMJ «^ u t >i 7^ ooo oo 3^j:oo 3/2 3o" 1 ^rH m 7 f/K> ^/ -o Ti a N /^ lA. "^ 0} r/t i««« ''t ^ ^ \d f wf ^^ jt > •'^, t c< (Xaa f(& ueC ^^ 2s. / r -jy^ 7^ • •a a i ^^ ^3i 4. f(> s /a ^*■ rs. ^ / 27Z 5V <^. ■ ^ «- gVi t<< H, i/^/ h \(.u Zo y > [b}C T'/ >N BSiS 1 — — ' '^r L_ Copyright, 1919, The Ronald Press Company 11-20-12 nT. X^' (MoAyi/tt^ i- -©o. (^uMcoicU .^n/?/ije. 1/v\ ■uuu U', % Z/^ M-C ^ 3c l/tO (C ^'^ i i' 7nn .oo A hj24 cue L(! k .^^ — ''z l^t . oo \T 1 Copyright, 1919, The Ronald Press Company 11-20-13 ^. ,>t (3ar\y^ot^ % -too. /V ^l&^Atu, (3(y^\J^ ^ do.ooosoo = 1- ' : )^~ /o XA* ^^ t u 9& itMt VC< a A gg* tAJO _ . 7)t ^ /(5 OOO OO ^3 j; eoo oo ^ IS ooo oo i •^O/ n^ JC^ ^ •nrf n M vf/ LCO 'is 4 t 1^ Hisi 1r^< ^ r(ri/ ^ V. // If i ^< '41. ?^- ',.i i-S -i ;< ^io iff 43- 5(>o ^f(- ?- *^ .ot - too ■^.i y kfh ^^ ' 1 Ox. '^ir ■tc c:£ 'pp '.d 1 r r.p. ^( yicLt C % ft ^^^ >/■ fei A (S L^ \x. 3 1 = 4 /SK^ ^3 K 1 1 fi J. t^ £ W/ . y - f ^ ^(^. u'>Hi »oi> (^ > ^ 2^ 7 - ^ w i5 10 ^ky \ ^ «>o !» :.( 7,0 i- 2 CKK\ C>0 /».■■ '1 zo yo _^ ee« S& 7 r1 OOO oo ™ SB i' '-U- * %. ^ i^ 'U^ LC/i> (f\ *yu- lU iffi L. ' ■/'/ 7 ..I eon u£2 oo KJ 7 If (00 «\ Va 'V lyy/^t \jb (^ 'Ml cA ^OVi y ' ^ ax:{ b 5/^ ^/^ - c L^ A^^ ::e- ' / ' 1 uL ^/^ r- ^ 1^ vdL ' r (r[n n^ M,<^ > / \e' r P/^ ^ Ct u^ J 0©' b' 1£. ^ y; 7 1 a. CAP/ ^. 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C ^/^ UUl aU) ^0 1j) _ _ ^g^) 1 is C.2 u$ \$ I "ne* ^ 5^2 fj 7 IQ cno 00 _ fr ooo oo $ 10 m 77 ^ % la OfV 1 oo $ 20 '4-I0 77" 'r)i '. / Uu or <;^J d. 1^^ 1»V\ ^ _ /-'Jf ^^ ai CL, 0) ik. mI ^. ■Vfy ira Cvn Mt;^ ? i Vq- ooc ri ^/v ue^u ^/ Yr- yUt ■«- ii LaA > ; ■^ la.^ ., Ht tKA^ ir 1* u lO *i "/^f/, '2) (7t 'J ^ ^ ^A ^ -^po -,'< *i A<;J '<.CL h VU) ^i -J ;ff> ^^i ^n U^' fe^ ^a f?U £i^ -"< % ^/p I. /n^ ffAa Q^r T>\. ' ^a l^A ecu 9 M- ^vu I (9 '-^ jZa. J r c AA.C ■ o ^ ( «/»-»*( yuyt t<, ■ ,/ve- 'JiAA. ■^ ■ fcl i ■hi' U /n. '^ . a^ i /-^ >?i (^ ■ Cl 91/f x^ yvr\. Z^nA ^4 ryi ~i '^. 'K^ jC. 9? ^ ■K* /« -y^ CAk Uq, V e7/La ^ .^'^ U 4/ l/i< ? i/.tf jr trc x^ir < / (^ it^ 6 r^, ^ ^ f fa iCA/ 'W, C API ■nx. L5 :iix^ AU. /:3[>tx. k if .a «A-C < ( ?^ ?^; 7J^ X3I r 7 /d;f^ ■ A 'ix- ^^ / S. y te m^ lU >i / A/ / ^' K r -J / I'f -4-^ 1 Lf< r u r a \ 3. b4- i ^ iBj^ \^ ■ Z \ ^i / fi'ri tr^V 1/ TfC i % ^ W ■yyi ?A<{ ^ , ^jR ^;> o.< '. / Mrf^ (, ^r \/*\^ ^ U >^ / -K/? ^ (^ r^ (f 9 T^ 7 ^ 3^ r?f?r 00 7 \^ H W'f I '4n ^r; rA \ A fr- f^^ w Ot.'. -)- a v^ 7 y %h ?/, I ?^(^ ■(^ \M\ ni^ y-A ' ^^h &(^ -^tf >w^ < 7 IS, « ^ Oop c> •v "^ ■ ^. ■.(^ trf (^ ■«> r^/ U} >o I , r^ ^A )/ ^( ^vi^ 7? t4 ^ ^ K<^ ^ ' ' f. r. ff< ii < H^' r ^ 5 1^ r-fr ^ca^ Uc< e!^ 'X-/\. r^ L^ ) tAtiO / »^r r^ j* *« kJ- UoxjC f^ < r<^ C / ViA \iit !^ r/^ , -rt > ^^ < a yf/^ rl <^ ^ if > *A4 'C ^ CL bU7. / ,/ ^ ii^ f^fi M»- Af 7 u.ui y ? < %,. iA uui 7 " f . ' i^' ^H ■> f* to^ 3t< ' hf lti h ^ ^• P/ * J ^7 \ 7 7/ 1 J "r Copyright, 1919, The Ronald Press Company 11-21-14 Copyright, 1919, The Ronald Press Company 11-21-15 ^ /. ■(f )(5i/r/»ife> ^4o. pg. OlUtx::^jut^£A4i^ t • CW ^XMA ■^(, I '/TV. ',(', v^ 'u f??;< OO 1 7fr <9f7 ^.tl^Lli ^4 (771 CL Wv r- ' ' U 5% } uaht. r/n r;. O "3^ -l i^- -i^ir. fw -i^, ^^ tnr\ f^H C*? 1 <7T< (»,, Mp^ fJ'A ^i 1 i;!o ^l ' ( \ ^e. fa}} ft C '• 1, ,-?! r^ '^^o ).0( ^. tOXi f 1 '4 f at fmt \ / &*- n/lt 3 n^ t'<5 ^I^J ^. >o • iff( a If-. ( iM' ho .^azG (^ .j^_ / * f) " % f?- i a^MJ2 ?< ^ ^Z^ Wr; ff^r t^ 4a. ^ec f:^^ y iLt ?-e< 4j^ L«< ('■fnt A iJ(r,l> 7 f (. ^ c2L22i a t K^ ^^. ^/^ »7*i / i»^<^ f c >9^ Ott. \< T, . ,ij ,»-{Li \a^ '^ ^??^ A fe^f, r?p '^ h/A Tt. Jm vitju. %/«^ 7t- ftitift (p ^: M^ ^ !? ?^ rw TtU A 4a_^ r/^, Af V*,/r i V 1^ 7y?iC5j. W/?i ? .J] 7 ^ i,i ■ %,^ /^ 6/MX> ka^ M iqr ^ ^ *^. 20/} 70 •\ ol f^. Sjrx^ 1^ 7^ V/5 L .^/H V.\k I'l y^ 5 ^ %r V rf/ '?/}/t 7 / IH- 7k ,^. ifoi .S 1 % "^M ^ i 7? ? \ & H/,^ ^. 9^ . i •kj, •5 ^23 oo Mi ^f A. ^ ' 2 (•5 •V ~^ , a >^ , ^ w Un ■f? W yvu. t,. '»?f' yf't l-tk ■■ip 'th C 7^ / // n<. '4, '^y3 h \My- f - Q^ '.} 10, 1 c n^t uli. } 1 » $^ D p 4 > d i>. ' ( {q^a ^ JL -v ' V'^ k J 71. ir> 4 a h ZJ^ I li u ru '? kA i) 4 11 ^P ■(/' > _— ■ L- Copyright, 1919, The Ronald Press Company 11-21-17 S, oC (jdaA/vijLa ^ , { 71^ 00^ ^ ( "TTo ~^^ ^ p. ^££ J lie, ^^ mi < ^ (,^ ^'f'^ -U m ^F ^.?f 53V /-^' ^ ^ H 2^ ^^ su V7c ,28'' , - — . . — - = 4 n. \ Copyright, 1919, The Ronald Press Company II-22-1 COMPLETE ACCOUNTIN G COURSE — PART II ♦ Lecture 22 INTANGIBLE ASSETS Problem 48 The following trial balance was abstracted from the general ledger of the Vfhite Manufacturing Co. as of December 31, 1918. ACCOUNT . Capital Stock Surplus Real Estate Buildings Machinery and Equipment Notes Receivable Customers* Accounts Notes Payable Accounts Payable Inventory of Raw Materials at January 1, 1918 Purchases of Raw Materials Wages Light, Heat, and Power Sales Discounts on Sales Discounts on Purchases Freight-Inward Allowances on Sales Factory Expenses Superintendent's Salary Bad Debts Officers' Salaries Salesmen's Salaries and Commissions Freight Outward Salesmen's Traveling Expenses Cash Inventory of Finished Product at January 1, 1918 Repair and Maintenance Charges Interest Received Interest Paid Insurance DEBITS $24,000.00 36,783.11 87,105.99 21,678.03 96,798.93 38,983.45 293,839.18 160,511.92 2,908.38 19,419.87 18,067.50 13,081.14 6,093.17 3,000.00 1,314.13 12,000.00 11,425.50 10,439.23 6,638.19 10,751.02 80,303.93 22,037.73 4,783.50 1,403.98 CREDITS $200,000.00 69,304.48 45,000.00 39,632.95 620,033.89 6,487.11 2,909.45 $983,367.88 $983,367.88 Copyright, 1919, The Ronald Press Company I 1-22-2 Prepare a balance sheet at December 31, 1918, with relative statement of profits and income. Set out your statements in the best possible form irrespec- tive of the number of accounts involved. The following items have not been taken into consideration, 1. Inventory of : (a) raw materials, $69,075,23; (b) in process of manu- facture, 114,908.17; (c) finished product, |27,575.50. 2. Insurance unexpired, $593.44. 3. Dividend of 3% on the capital stock outstanding payable to the stock- holders of record December 31, 1918. The dividend was declared by the board of directors at a meeting held on December 27, 1918, and is payable on January 15, 1919. Problem 49 A died on June 1, 1918, and his estate consisted of the following: Cash on Hand % 350.00 Cash in Bank 3,137.11 First Mortgage 6% W Ry, Co. Bonds (Interest Payable April 1 and October 1) 75,000,00 6% Mortgage Loans (Interest Payable March 1 and September 1) 40,000.00 Preferred Stock (at par) in the Allen Manufacturing Co. 125,000.00 Notes Receivable (Interest at 5% paid to May 1, 1918) 30,000.00 Household Furniture 1,000.00 Sundry Liabilities 12,000,00 The household furniture was given to his wife and she is entitled to the income from the estate for life. The following legacies were mentioned in the will: (1) William Brown, |3,000; (2) John Smith, $2,000; (3) A. R. Jones, $1,000. Funeral expenses amounted to $1,200; probate court costs $1,500; attorney's and accountant's fees $1,200. The preferred stock was sold for $130,000. On August 1, 1918, the debts were paid, and on August 15, 1918, the legacies. The income from the investments was received as and when due, and the income collected to October 31, 1918, was paid to the widow on that day. Prepare : (a) The necessary opening entries for the executors (b) Write up the books for the period ending October 31, 1918 (c) Statement of charge and discharge In what respects (if any) would the foregoing exhibits be altered if the widow died October 31, 1918? Copyright, 1919, The Ronald Press Company II-22-3 MISCELLANEOUS QUESTIONS Question 121 — A died, leaving an estate consisting of: Real estate, valued at $ 30,000,00 Share in partnership, estimated at 175,000.00 Shares of stock 75,000.00 Household furniture 19,500.00 Cash at bankers 4,000.00 The will provided for an annuity of $1,000 payable to testator's wife out of income, the remainder of the income being divisible among his six children equally so long as they live and until the youngest attained the age of 21 years. What books and accounts would you open for the executors, and what informa- tion would you require to enable you to write them up and adjust the capital and income? Question 122 — At November 30, 1918, you are called upon to audit the accounts of the estate of Glenn Richards, for the eleven months ending that date. How would you satisfy yourself as to the accuracy of the opening journal entry as shown by the books? Question 125 — Under the last will and testament of Henry Rogers all the in- come from his estate consisting of farm land, stocks and bonds, etc., is payable to the widow during her lifetime. After her death, the entire residuary estate is to be a gift to the Memorial Hospital. The income derived from the estate is the widow's sole means of support. Draft the form of cash book to be kept by the trustee. Question 124 — Referring to Question 123, assume Henry Rogers died on March 15. How would you apportion as between principal and income: (a) Interest from bonds (b) Dividends from stocks (c) Rents from farm land Question 125 — Referring to Question 123 and 124, assume the widow of Henry Rogers died on the following April 15, before any moneys had been received in respect of rents, interest, or dividends. Would the entire estate at April 15 pass to the remainderman (the Memorial Hospital), or would some apportionment as between the life tenant (widow of Henry Rogers) and remainderman be called for? Give full reasons for your answer. If in your opinion an apportionment is called for, outline the procedure required to make such £ui apportionment. Copyright, 1919, The Ronald Press Company II-22-4 « Solution to Problem 43 JOURNAL ENTRIES (1) Surplus $ 75,000.00 To — Dividend Payable $ 75, 000*00 Dividend of 15% declared by the board of directors as of December 31, 1918* (2) Unissued Stock 105,000.00 To — Capital Stock 105,000.00 To record increase in capital stock author- ized by resolution adopted at stockholders* meeting held on See minute book, page..,.,. (3) Machinery and Plant 111,200.00 Sundry Debtors 31,245.00 Inventories 47,115.00 Cash 645.00 To — B Co. Vendor Account 156,350.00 Capital Surplus 33,855.00 To record purchase of assets from B Co., per agreement dated. • and per resolutions adopted by directors at a meeting held on ; A Co« to pay liabilities of B Co. and to issue 7 shares of preferred stock (par value $5 each) for every 2 shares (par value $25 each) turned in by the B Co. stockholders. (4) B Co. Vendor Account 51,350.00 To — Sundry Creditors .51,350.00 To record the assumption of the outstanding liabilities of B Co. in accordance with the agreement dated (5) Consolidation Expenses 6,030.00 To — Accounts Payable 6,030.00 Expenses incurred in connection with the consolidation. (6) Capital Surplus 6,030.00 To — Consolidation Expenses 6,030.00 To write off the consolidation expenses. Copyright, 1919, The Ronald Press Company I 1-22-5 (7) B Co. Vendor Account $105,000.00 To — Unissued Stock To record the issue of 21,000 shares of capi- tal stock (par value %5 each) to share- holders of B Co, in full payment for assets turned over, in accordance with the agreement and resolution referred to in entry No, 3. $105,000.00 A COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS CAPITAL ASSETS: Land and Buildings Machinery and Plant CURRENT ASSETS: Inventories Sundry Debtors Cash on Hand and in Bank $112,500.00 274,495.00 $386,995.00 $240,315.00 154,655.00 116,085.00 511,055.00 $898,050.00 LIABILITIES CAPITAL STOCK ISSUED AND OUTSTANDING CAPITAL SURPLUS (representing excess of value of the sundry assets acquired from B Co. over the par value of the stock issued in payment therefor) DEDUCT— Consolidation Expenses CURRENT LIABILITIES: Sundry Creditors Accounts Payable in respect of Consolidation Expenses Dividend Payable RESERVE SURPLUS ACCOUNT: Balance at .......... DEDUCT — Dividends Declared $ 33,855.00 6,030.00 $141,995.00 6,030.00 75,000.00 $ 82,200.00 75,000.00 $605,000.00 27,825.00 223,025.00 35,000.00 7,200.00 $898,050.00 Copyright, 1919, The Ronald Press Company II-22-6 Solution to Problem 44 JOURNAL ENTRIES (1) Unissued Stock $2,767,400.00 Application and Allotment 2,232,600.00 To — Authorized Issue Capital Stock 15,000,000.00 To record the authorized issue of cap- ital stock per minutes of stock- holders' meeting held on and certificate issued by the Sec- retary of State under date of (2) Cash 111,630.00 To — Application and Allotment Account 111,630.00 Application for 44,652 shares, $2.50 per share received in cash. (3) First Call Account 328,665.00 To — Application and Allotment . Account 328,665.00 First call of $7.50 per share on 43,822 shares allotted. (4) Cash 328,665.00 To — First Call Account 328, 665*. 00 Cash received on first call. (5) Application and Allotment Account 2,075.00 To — Cash 2,075.00 Return of payment on application of $2.50 per share on 830 shares not allotted. (6) Second Call Account 438,220.00 To — Application and Allotment Account 438,220.00 Second call of $10 per share on 43,822 shares allotted. (7) Cash 438,220.00 To — Second Call Account 438,220.00 Cash received on second call. Copyright, 1919, The Ronald Press Company II-22-7 (8) Third Call Account $438,220.00 To— Application and Allotment Account % 438,220.00 Third call of $10 per share on 43,822 Shares allotted. (9) Cash 438,220.00 To — Third Call Account 438,220.00 Cash received on third call. ALTERNATIVE SOLUTION (1) Unissued Stock $5,000,000.00 To — Capital Stock — Authorized $5,000,000.00 To record authorized issue of 100,000 shares, par value $50 each, as per minutes of stockholders' meeting held on See certificate issued by the Secretary of State under date of (2) Cash 111,630.00 To--Appli cat ions for Stock Subscrip- tions 111,630.00 To record receipt of deposit of $2.50 .per share on 44,652 shares applied for, (3) Subscriptions 2,191,100.00 To — Unissued stock 2,191,100.00 To record allotment of 43,822 shares par value $50 each, (4) Subscription Instalment #1 438,220.00 Subscription Instalment #2 (February 1) 438,220.00 Subscription Instalment #3 (April 1) 438,220.00 To — Subscriptions 1,314,660.00 To record instalments called on date of allotment. Copyright, 1919, The Ronald Press Company II-22-8 (5) Applications for Stock Subscriptions $111,630.00 To — Subscription Instalment #1 $109,555.00 Cash 2,075.00 To record return of deposit of $2.50 per share on 830 shares applied for but not allotted, and application of balance of deposits on Subscription Instalment #1. (6) Cash 328,665.00 To — Subscription Instalment #1 328,665.00 To record receipt of $7.50 per share on 43,822 shares, being balance due January 14. (7) Cash 438,220.00 To— Subscription Instalment #2 438,220.00 To record receipt of Instalment #2 due on February 1. (8) Cash 438,220.00 To — Subscription Instalment #3 438,220.00 To record receipt of Instalment #3 due on April 1. Solution to Problem 45 Under the circumstances referred to in the problem, the amount cf $10,000 is a proper charge to Good-Will, because the new company acquired less in the way of tangible assets than it supposed at the time the property was purchased. Before the bookkeeper spreads the entry on the books, the proposed treatment should be passed upon by the board of directors or at least the executive officers of the company. It may be the desire of the board to write off the amount to the Accumulated Surplus account. In so doing it would be desirable for them to adopt resolu- tions instructing the accounting officer to deal with the item in that manner. In the event it is decided to write off the item, the whole transaction should be clearly set forth in the accounts of the year in which the write-off took place. Copyright, 1919, The Ronald Press Company II-22-9 ADJUSTING ENTRIES ON THE CORPORATION'S BOOKS Good-Will $10,000.00 To— Inventories $10,000.00 To charge off the clerical error of $10,000 in the calculation of the inventories taken over from the company. See page of minute book for resolution authorizing this charge adopted by the board of directors at a meeting held on ALTERNATIVE ENTRY Surplus $10,000.00 To — Inventories $10,000.00 To charge off the clerical error of $10,000 in the calculation of the inventories taken over from the company. See page ... of minute book for resolution authorizing this charge adopted by the board of directors at a meeting held on ANSWERS TO QUESTIONS Ansver to Question 111 — The first step would be to verify the amount of un- expired insurance at January 1, 1918. If this amount had been properly calcu- lated the proportion pertaining to the month of January, 1918, should be charged to the operations of that month. The balance is properly chargeable to the Fire Insurance Recovery account, inasmuch as a total loss having been incurred and settled for, the insurance company has no further liability under the policy. Answer to Question 112 — (a) First mortgage 6% bonds of the Progressive Manufacturing Co., par value $100,000. The bonds should be inspected, and preferably the inspection should be made on the date of the balance sheet. The market value is $3,000 less than the cost or book value, and it would seen, desirable, if not necessary, to in- troduce a reserve to cover the possible loss on realization. The voucher cover- ing the purchase of the bonds in the first instance should be examined* (b) Second preferred stock (par value $175,000). The shares evidencing this stock ownership should be inspected on the date of the balance sheet if possible. The market value is $5,000 in excess of the cost value and therefore the inclusion of the asset in the balance sheet at the cost value would be the conservative treatment to adopt. The voucher issued in payment of the shares should be examined as evidence supporting the cost price. Copyright, 1919, The Ronald Press Company 11-22-10 In the case of both (a) and (b) it might be advisable to refer to the minutes of the proceedings of the directors' meetings to determine whether or not the purchases were approved by the board. Answer to Question 115 — An inventory of a large 5 and 10 cent store would consist primarily of a very large number of small items. In verifying the exten- sions of such an inventory prove the largest items and scrutinize a portion of the others so as to ascertain whether they are approximately correct. In a case of this kind a comptometer or other mechanical device would be of great value. Answer to Question 114 — (a) Advertising incurred in connection with the sale of goods for the spring season of 1919 may be properly carried forward as a deferred charge, at say December 31, 1918, only in those lines of business which are termed "seasonal" in that the expenses involved in making the sales for a season are generally incurred in one period while the sales are taken up as income in the following period. In such cases there can be no serious objection to the carrying forward of the advertising expense to the period in which the sales are credited. But where the advertising cannot be directly connected with the sales of a particu- lar period, good business practice as well as conservative accounting requires that such advertising be charged off in the period in which the advertisement was run. Any other practice generally results in a constantly increasing ac- cumulation of deferred charges which should have been taken care of in the operations of past periods. (b) Traveling expenses of salesmen in disposing of goods for shipment in the spring of 1919 v;ould follow the principles outlined in (a). In this case it is somewhat easier to connect the expense with the sales, (c) It must be admitted that some part of the general and office expenses of 1918 were incurred in connection with the securing of orders for delivery in the 1919 season, and it would therefore seem that such expense is properly chargeable to that season. But it must be noted that where this is done it is essential to provide out of 1918 operations the expense which will be incurred in the collection of accounts and notes receivable, etc. Consequently it is generally accepted that if these expenses are not unusual in character and are annually recurrent, no portion thereof should be carried forward. But if in any particular case it should be found that a part of these expenses were unusual and pertained solely to the season of 1919, it may be permissible to carry forward as a deferred charge only that portion of the gen- eral and office expense. From an operating point of view it is essential that the practice at the beginning and end of a period shall be the same. Answer to Question 115 — (a) Investments in other companies held as marketable investments should, in most cases, be valued on the basis of market or cost, whichever is the lower, • Copyright, 1919, The Ronald Press Company 11-22-11 (b) Investments in other companies held as permanent investments should be valued at the cost thereof, except for the subsequent adjustment of that value in respect of (1) proportion of profits or losses arising from operations and (2) dividends received. In this connection it might be well to quote from Mr. Dickinson's paper, ■Profits of a Corporation," dealing with the valuation of investments in other companies held as marketable investments: ■The term marketable investments is intended to include only such invest- ments as are part of the circulating as distinct from the fixed assets. The latter class of investments may be defined as those which cannot be disposed of without affecting the operations, for the reason that the ownership thereof in a permanent form is necessary, however remotely, to the business which the corporation is carrying on. Their valuation would be governed by the same principles as have been outlined above for other fixed assets. ■Marketable investments, on the other hand, may be either: (a) The stock in trade of the corporation. (b) The investment of surplus cash held in this form until required for ordinary operating purposes. (c) The investment of a reserve or other special fund. ■In case (a) the rule of cost or market value, whichever is the lower, applied to each individual investment and not to the group as a whole, is un- doubtedly the most conservative. That is to say, no profit could be taken up on any investment until it is sold, but on the other h£ind, where the value has clearly fallen, some provision should be made therefor. Where, however, the investments all have a definitely ascertainable market value at any time, it is perhaps fair and reasonable to allow a fall in value of some individual investments to be set off against a rise in value of others, provided that the aggregate valuation is not above original cost or market value, whichever is the lower, ■In case (b) the usual custom is to value at the mean market price on the last day of the fiscal period for the reason that the investments represent the equivalent of cjish and should therefore be maintained at their cash value in the balance sheet. ■In case (c) any profit or loss, either realized or estimated, would be a credit or charge to that fund, and not to the Profit and Loss account. But in the balance sheet such investments should either be clearly stated as maintained at cost or preferably be adjusted each year to the aggregate market value if below cost. •Another method of dealing with the fluctuations of marketable investments of classes (b) and (c) is to create an investment fluctuation reserve, either out of estimated or realized profits on investments, or by a charge to Profit and Loss of such an amount as may be necessary to prevent this reserve from showing a debit balance, and by charges or credits to this reserve to maintain the asset at market value." REFERENCES : Montgomery, pages 120-128; 134-145 Wlldman, pages 134; 66-77; 121-129 Copyright, 1919, The'Ronald Press Company 11-22-13 3'. JL- (^OAyvU^ "^ '^. 2^ '^Ofi-ttMtrJJL . . (7t m ^ t<^ M# (3l - t^r ^ 2z/t X ■'f^/ J \ .r« L 7X^ <^< n \£ta 4- -4 ^ C.^OJl t^t. > •?! H^ ck; H ^ n 4f^ /v •" /!frtrf p / z*' r fC0. f l(n M ?^ ^ .-^ UA^ ur.^ t fo ?52 7? •;V^ ewo Q9 Cicuq A O/t ftu. «> ^ «• J_^ J L J _!__ =^ r- Ti \ Copyright, 1919, The Ronald Press Company II-23-1 COMPLETE ACCOUNTING COURSE — PART II Lecture 23 CURRENT LIABILITIES Problem 50 The Martin Manufacturing Co., the United States Specialty Co., and the firm of Brown 4 Smith (a partnership) decide to consolidate under the name of the Progressive Manufacturing Co., with an authorized capital stock of $1,300,000 divided between 7% cumulative preferred stock of $500,000 and com- mon stock of 5800,000. Under the agreement of purchase the vendors receive preferred stock (at par) for the net tangible assets and common stock for good-will. The issue of common stock to be based upon a sum equal to ten times the average annual earn- ings of the past five years, after allowing 7% interest on the capital invested. The following balance sheets reflect the financial position of the respective interests at the date of the consolidation. (Brown & Smith share profits or losses equally. ) ASSETS MARTIN UNITED STATES BROWN & MFG. CO. SPECIALTY CO. SMITH Plant and Equipment Accounts and Notes Receivable Inventory Insurance Unexpired Discount Paid in Advance Cash ^102,000.00 $145,000.00 $ 95,500.00 62,400.00 48,500.00 1,250.00 500.00 5,600.00 78,500.00 61,500.00 1,700.00 38,700.00 43.650.00 800.00 7,250.00 8,650.00 $220,250.00 $293,950.00 $187,300.00 Capital Stock Brown — Capital Account Smith — Capital Account Accounts and Notes Payable Accrued Interest Accrued Taxes Labor Unpaid Surplus LIABILITIES $100,000.00 36,100.00 750.00 1,400.00 82,000.00 $150,000.00 $• 86,075.00 850.00 825.00 2,200.00 54,000.00 72,000.00 42,000.00 70,230.00 1,220.00 600.00 1,250.00 $220,250.00 $293,950.00 $187,300.00 Copyright, 1919, The Ronald Press Company II-23-2 YEARLY EARNINGS First Year $ 37,500.00 $ 42,700.00 $ 33,400.00 Second Year 48,700.00 31,800.00 26,900.00 Third Year 43,400.00 39,600.00 27,350.00 Fourth Year 36,200.00 46,100.00 31,600.00 Fifth Year 59,200.00 39,800.00 30,750.00 $225,000.00 $200,000.00 $150,000.00 Prepare the following: (a) Opening journal entries on the books of the Progressive Manufacturing Co. (b) Balance sheet after giving effect to the entries referred to in (a), (c) Necessary journal entries to close the books of the respective vendors. Problem 51 A share and investment corporation promotes a subsidiary corporation, and on January 1, 1918, subscribes $30,000 worth of stock, receiving also $70,000 stock as consideration for its services as promoter. Its promotion expenses amounted to $500. Sales of its holding in the subsidiary corporation are made as follows: ^^^^^ STOCK REALIZED February $ 5,000.00 $1,000.00 March 10,000.00 2,500.00 April 10,000.00 3,000.00 May 10,000.00 5,500.00 June 10,000.00 7,500.00 October 5,000.00 1,500.00 At December 31, 1918, the parent corporation's financial year closes, at which date it holds a balance of $50,000 stock, the current market price being $25 per $100 stock. Give detailed ledger account, bringing down the balance at the figure at which it should be shown on the balance sheet, and assign your reasons for the valuation you place upon itt QUESTIONS ON AUDITING Question 12 6 — As auditor, how would you satisfy yourself as to the accuracy of the liability Notes Payable as shown by the balance sheet? Question 127 — As auditor, how would you satisfy yourself as to the accuracy of the liability Accrued Taxes? Question 128 — Outline the procedure to be followed in the audit of the materials, supplies, and coal inventory of a small electric light company which generates its own electricity. Copyright, 1919, The Ronald Press Company II-23-3 Question 129 — In the course of an audit of a wholesale and retail butcher shop you find that all meats have been inventoried at the market price thereof at the date of inventory, (a) Has the inventory been priced on the correct basis? (b) How would you verify the prices used by the management? Question 150 — What is your understanding of the following: (a) Mortgage bonds (b) Collateral trust bonds (c) Income bonds (d) Debentures Solution to Problem 46 JOURNAL ENTRIES ON THE BOOKS OF THE UNIVERSAL MANUFACTURING CORPORATION (1) Unissued Capital Stock To — Authorized Issue Capital Stock To record authorized issue of capital stock, as per certificate of incor- poration issued by the Secretary of State under date of . . • • • (2) Real Estate and Buildings Plant Cash Bills Receivable Horses, Wagons, and Harness Office Furniture Good-Will To— Smith Manufacturing Co., Vendor To record the purchase of the foregoing assets from the Smith Manufacturing Co., in accordance with contract dated and resolutions adopted by the directors at a meeting held on. • . «. (3) Real Estate and Buildings Plant Cash Bills Receivable Horses, Wagons, and Harness Office Furniture Good-Will To— Young Manufacturing Co., Vendor 12,000,000.00 680,000.00 390,000.00 15,000.00 10,000.00 4,000.00 1,000.00 122,222.22 327,000.00 160,000.00 3,000.00 6,000.00 3,000.00 1,000.00 55,555.56 $2,000,000.00 1,222,222.22 555,555.56 Copyright, 1919, The Ronald Press Company II-23-4 To record the purchase from the Young Manufacturing Co. of the above assets as per contract dated and resolutions adopted by the di- rectors at a meeting held on. • • (4) Real Estate and Buildings Plant Cash Horses, Wagons, and Harness Office Furniture Good-Will To — Star Manufacturing Co., Vendor To record the purchase of the foregoing assets from the Star Manufacturing Co. under the terms and conditions recited in the contract of sale dated and resolutions adopted by the directors at a meet- held on... •. $126,000.00 71,000.00 1,000.00 1,500.00 500.00 22,222.22 $222,222.22 (5) Cash To — Unissued Capital Stock Proceeds from sale of one share. 100.00 100.00 (6) Smith Manufacturing Co., Vendor Account Young Manufacturing Co. , " " Star Manufacturing Co. , ■ ■ To — Cash Payment in cash. 22.22 55.56 22.22 100.00 JOURNAL ENTRIES ON BOOKS OF STAR MANUFACTURING CO. (1) Profit and Loss Account To — Real Estate and Buildings Plant Horses, Wagons, and Harness Office Furniture To record the loss of the book over the appraisal value on the sale of the above assets to the Universal Manu- facturing Corporation, NOTE — Probably arose from the failure to provide for the accrued deprecia- • tion of plant, etc. $301,000.00 $124,000.00 176,000.00 300.00 700.00 Copyright, 1919, The Ronald Press Company II-23-5 (2) Good-Will % 22,222.22 To— Profit and Loss Account $ 22,222,22 To set up the asset of good-will, not heretofore carried on the books of the company. (3) Universal Manufacturing Corporation, Vendee Account 222,222.22 To — Real Estate and Buildings 126,000.00 Plant 71,000.00 Cash 1,000.00 Horses, Wagons, and Harness 1,500.00 Office Furniture 500.00 Good-Will 22,222.22 To record sale of the above assets to the Universal Manufacturing Corpora- tion, under the terms of the contract dated and per resolu- tion adopted by the stockholders and directors at a meeting held on (4) Investment in Capital Stock of Universal Manufacturing Corporation 222,200.00 Cash 22.22 To — Universal Manufacturing Corpo- ration, Vendee 222,222.22 Stock and cash received in payment for the assets sold to the Universal Manufacturing Corporation. (5) Bills Payable 50,000.00 Accounts Payable 51,000.00 To — Investment in Capital Stock of Universal Manufacturing Cor- poration 101,000.00 Liquidation of bills and accounts pay- able liabilities. (6) Capital Stock 400,000.00 To — Investment in Capital Stock of Universal Manufacturing Cor- poration 121,200.00 Cash 22.22 Profit and Loss Account 278,777.78 To record final distribution of assets. Copyright, 1919, The Ronald Press Company II-23-6 Solution to Problem 47 ENTRIES ON BOOKS OF WILSON AND WILSON (1) Unissued Preferred Stock $ 60,000.00 Unissued Common Stock 240,000.00 To — Preferred Stock $ 60,000.00 Common Stock 240,000.00 To record the authorized issue of capital stock as per certificate of incorporation issued by the Secretary of State dated (2) Subscriptions to Capital Stock 30,000.00 To — Unissued Common Stock 30,000.00 To record subscriptions to $30,000 of the common stock of the Company, as follows: Charles Wilson $10,000.00 Robert Wilson 10,000.00 Henry Miller 10,000.00 $30,000.00 * (3) Real Estate and Buildings 165,000.00 Machinery and Fixtures 39,000.00 Horses, Trucks, and Harness 4,500.00 Patents 1,500.00 Stocks and materials 20,000.00 Notes and Loans Receivable 5,000.00 Accounts Receivable 15,000.00 To — Wilson & Wilson, Vendor Account 210,000.00 Notes Payable 6,000.00 Accounts Payable 34,000.00 To record the purchase from Charles and Robert Wilson of their respective in- terests in the foregoing net assets as per contract of sale dated •• and minutes of directors' meeting held on (4) Wilson and Wilson, Vendor Account 210,000.00 To — Unissued Common Stock 210,000.00 To record issue of stock in payment for the assets referred to in the preceding entry. Copyright, 1919, The Ronald Press Company II-23-7 (5) Unissued First Mortgage 5% Bonds ^50,000.00 To — Authorized Issue First Mortgage 5% Gold Bonds $50,000.00 To record the authorized issue of first mortgage 5% gold bonds as per resolu- tion adopted by the stockholders at a meeting held on... (6) Notes Payable 6,000.00 Accounts Payable 34,000.00 To — Unissued Preferred Stock 20,000.00 Unissued First Mortgage 5% Bonds 20,000.00 To record the liquidation of the notes and accounts payable liabilities as per agreement made with these creditors. ANSWERS TO QUESTIONS Answer to Question 116 —' 1. Bookkeeper should prepare statement of each consignee's account. 2. Compare statement with ledger account. 3. Rubber stamped with request to examine the statement and notify auditor whether it is correct, or if desired, whether it is not correct. 4. Statement mailed by auditor in envelope bearing auditor's return address. 5. See that the consignments are carried in the Inventory and not as accounts receivable. 6. See that the inventory price placed on these consignments is the same as that placed on similar goods in the stockroom. If there is nothing to indicate that the goods will be returned, or will not yield a fair price when sold, it is proper to add to the inventory price any expense, such as freight, insur- ance, etc.,. incurred by the consignor or consignee in connection with the ship- ment. Answer to Question 117 — The broker should not be stated as a debtor, but the item should be shown in the balance sheet as "Stock Sold, Not Yet Delivered," since payment cannot be enforced until the stock is delivered. In any case the actual debtor will not be the broker but his principal. At the date of the balance sheet the stock still will be registered in the name of the company or its nominees. Therefore, the stock should be verified in the usual manner by inspection or by certificate. The broker's sold note should also be examined. Copyright, 1919, The Ronald Press Company II-23-8 Answer to Question 118 — To the Board of Directors of the Blank Manufacturing Company, Chicago, Illinois. Dear Sirs: I have carefully considered the advisability of your company pay- ing a return to the stockholders on their investment during the period of construction and have come to the conclusion that it is inadvisable to do so for the following reasons: 1. Capital is invested for the purpose of earning profits, and until property is placed on a revenue-producing basis (which cannot take place until the plant is complete as an operating unit) there can be no profits. 2. The legality of such a distribution might be questioned, since it is in effect a payment out of capital. This feature had best be referred to the company's counsel for a final opinion. 3. It is poor business policy to increase the capital investment for the purpose of providing funds to pay a return to stockholders during the construction period. Some question may arise as to the proprietary of charging interest on BORROWED capital to construction since it is not considered proper to include interest on INVESTED capital as a charge to Property account. Borrowed capital is a liability, and the interest thereon is a fixed charge and must be paid even though there are no profits. Capital stock is the proprietor's investment upon which no return can be paid until profit is made. I shall be glad to furnish you any additional information that may be desired. Very truly yours, JOHN DOE, Certified Public Accountant Copyright, 1919, The Ronald Press Company II-23-9 Answer to Question 119 — Coal in transit should be taken up and shown as "Coal in Transit" under the Inventory caption or the balance sheet and as "Unaudited Invoices" under the Current Liabilities caption. In case the client refuses to make the necessary adjustment the auditor's attitude would depend on the relative importance of the transaction. If the amount involved is (1) relatively small, (2) has no material bearing on the current liabilities, and (3) the market price is equal to or more than the cost price, the auditor may pass the point. In £iny other case it will be necessary to qualify the certificate at- tached to the balance sheet. The coal received record contains the car numbers of each car received and unloaded. Comparison of the invoices with the freight bills will be of assist- ance in determining whether the coal stated to be "in trauisit" was actually received and included in the inventory. Answer to Question 120 — In the case of a retail department store with annual gross sales of $2,500,000, the auditor cannot assume responsibility for the inventory. The quantities cannot be tested, due to the fact that at the time of the audit the goods on hand at inventory date have been disposed of to a very large extent and new goods have been purchased. The inventories are so large that even a test check of extensions and footings is impracticable because of the expense incident to the proper performance of this work. In some cases it is customary to have an outside concern prove all extensions and footings. If this concern is reliable, a certificate as to the work done may be accepted. The prices are generally shown at selling price less the per cent of gross profit added when the goods were placed in stock. The clerical accuracy of such prices can be readily tested. On account of the character of the inventory, the market price is apt to be less than cost on a very large number of articles. The prices to be placed on seasonable goods, shelf-worn, or slow-moving goods is an extremely important point as to which a satisfactory solution is diffi- cult to obtain. REFERENCES : Montgomery, pages 146-167 Wildman, pages 150-155 Copyright, 1919, The Ronald Press Company 11-23-11 9. cC- (SoAyyxjU? ^ '6>. OfAtf^ ouuJC Xf. f^J' W ^ f MCfc ^ ^ bdlf ^r»* >^ . m,K«tA*^ i>% h9 /?■« /; ^ Uk tA ^^^ ^ >Ai Sa Si m^ A^ i>i' _ '/, /< f/f . t^f- ?«rt^ fiAi ^ ^<^ k 1 Vlkf^.tL \*jC ^% — - •?ff, ooo c>r? I / lJS Oi^ CO ^ ^ 'i^ ^O- <2d. r f' t£a lEiir? ^ 1 4 ti fAtt f^ 7Af (lit 'r^ i ffT ^t^ *M A (^i nl< Ufa ■3AJU (^■^ w : hAx ^ h/i "-^ l9Ul iuA 9 ^ ^^ -_Jg 9 /-^ ^^ r I. ^^ - ( ' (r- a \. ( ■^-1 c k' % 4 ^, OHl ,f. 5,f' 1$ ' M ^ r, C .ax. ^^ Mkl *^1 U ^f^ ; Hi ^1 7 J?-'', 4 _^ 6(? 'il •v ^ — r 272 ^'y'^ X 1 - "1 ^ nr "r "1 —i 1 Copyright, 1919, The Ronald Press Company 11-23-12 d*. X (^a/t^va^ 9^ 'Xx>. VotuJjAyO (f/XU^A/L^ ^■5~ flrr.tHAMtS (PLl^lMl^ (Xcjcaajjl(L ^taJa JoVe^ l/-Uyt^^ ^M /l/i m .^ 7M ^n ^4(1 he /J' % \f<^ y^i •M^ iir> .m. \dU, , - - fh. oo n // "} 'm^ L^h ^de 4> njr\ &. l> Ca^ ^ V f> > „ iC a ■ml fr- W Vi' m H' ^. ^/o y.. 4 f u h II /^ a >K 1,(& ^< H \ ^ A. 3, fjQ H U- If ^ (f (m/\ /O/W^ CI-AA. h rv - - v^y: 1 l> ^ 1 w /^ 9- W4 'Q (/f>1 r, ' ^ _ ■^ if r 0^ .f> i fA^ '^(k M^ f -to i'o -^ij 4 ^y /?f/ i- ^r. 7d h(7. \(ifA ■h ifi fryyf \u k, r'f — ~ ^A (,s- ^. 24 4 TUn K 9a^ Q^ fn -k Co. II b? ('I ^ i ZfS ^( ^ rfVL W i£ 2£i 1 — l-ff-^t i> 0'^ ioA ^^a V. II ' u ^ o - — • f 1^ Kn ',f^^ pf/:, ifhi &TAA \SL ^ 7?\ \K at q^ SLl ij ^ i k 'CC4. rfp t (^ iixi Z 1^ n ^ O^f. 'i<}/f 'lA <> 7 , 4 2(.S .>3 (f^ oo >tA td, IM ^/\t II . /, 7^ ,?' I 1 'i Lq ^t^"^ ■ _J a Copyright, 1919, The Ronald Press Company II-24-1 COMPLETE ACCOUNTING COURSE — PART II Lecture 24 FUNDED DEBT ; RESERVES Problem 52 On January 1, 1918, A purchases the plant and business of B for $400,000, payable $100,000 cash; $150,000 January 1, 1919; $150,000 January 1, 1920; with interest on deferred payments at 6%. Wone of the book accounts or stock of finished goods on hand January 1, 1918, are included in the sale, but are specifically reserved by B. Of such the accounts receivable are $28,500, and finished goods, per inventory, $45,000. The agreement further stipulates that B shall operate the plant during the year 1918 and shall be reimbursed on January 1, 1919, for all funds advanced for supplies, expense, labor, or any other purpose in connection with the operation of the business during 1918, as shown by B*s books. Such advances to be computed monthly and to bear interest from the last day of each month at 6% per annum to January 1, 1919. The profits of the business for the year 1918 to belong to A. On December 31, 1918, B reports that inventory of finished goods on hand is $48,500. Expenses have been $284,000 and sales $350,000. Condensed particulars of transactions are as follows: January February March April May June July August September October November December SALES i 15,000.00 10,000.00 5,000.00 5,000.00 5,000.00 5,000.00 100,000.00 80,000.00 75,000.00 25,000.00 15,000.00 10,000.00 CASH COLLECTIONS $ 10,000.00 15,000.00 10,000.00 15,000.00 5,500.00 18,000.00 55,000.00 75,000.00 55,000.00 45,000.00 50,000.00 19,000.00 CASH ADVANCES 10,000.00 25,000.00 12,000.00 32,000.00 35,000.00 25,000.00 30,000.00 25,000.00 30,000.00 30,000.00 15,000.00 15,000.00 INTEREST DUE B $ 550.00 1,250.00 540.00 1,280.00 1,225.00 750.00 750.00 500.00 450.00 300.00 75.00 $350,000.00 $372,500.00 $284,000.00 $7,670.00 Copyright, 1919, The Ronald Press Company II-24-2 B presents the following statement to A on January 1, 1919, and requests settlement: Sale of Plant and Business as per contract $400,000.00 Less — Cash paid by A January 1, 1918 100,000.00 $300,000.00 Interest at 6%, 1 year 18,000.00 Advanced by B monthly 284,000.00 Interest on Advances 7,670.00 $609,670.00 Sales 350,000.00 Balance due B $259,670.00 Of which $150,000 deferred to January 1, 1920 150,000.00 Due January 1, 1919 $109,670.00 A is not satisfied with statement and employs certified public accountants to investigate and report another basis of settlement. It is found that the accounts receivable December 31, 1918, are $6,000 and B has taken these, as well as the finished goods remaining on hand ($48,500) and claims both items belong to him. There are no liabilities. . Make statement for A, as requested, using your own methods. B's statement of interest on advances may be assumed to be correct in this question. Problem 55 A land development company organizes with a capital stock of $30,000 of which $5,000 is issued for organization expenses. The company purchases a tract of land for $50,000, giving a mortgage of $34,000 in part payment, and expends $13,000 for surveys, grading, etc., part in cash and part on book account. The company also erects two similar dwelling houses at a cost of $13,000 — part in cash, part on book account , and part on sites within its land, representing a further value of $1,200. One of said houses is sold for $9,000. The sales of lots amount to $30,200, including purchase money mortgages taken to secure part consideration on which interest to the amount of $750 is re- ceived, said mortgages being in turn pledged by the company for a loan. The company pays $11,300 on account of the $34,000 mortgage, to release from incumbrance lots sold, and gives notes in settlement of book accounts to the sum of $4,000* Copyright, 1919, The Ronald Press Company The cash transactions are as follows: II-24-3 RECEIPTS Capital Stock Purchasers' Accounts Loan Commissions and Fees $25,000.00 20,825.00 12,000.00 905.00 PAYMENTS Organization Expenses Land Purchased Surveying and Grading Accounts Payable Bills Payable Construction of Dwellings Mortgage Payable Interest Expense, Rent, Salaries, etc. Balance $58,730.00 $ 625.00 16,000.00 6,000.00 1,000.00 3,000.00 7,000.00 11,300.00 1,719.00 7,500.00 $54,144.00 4,586.00 $58,730.00 Inventory: Land $42,000, Dwelling $7,100. Prepare ledger accounts, profit and loss accounts, and balance sheet. QUESTIONS ON AUDITING Question 131 — What steps do you consider that an auditor should take in the verification of the following? (a) First Mortgage 5% Bonds issued and outstanding, $250,000 (b) Preferred Stock issued and outstanding, $200,000 Question 132 — In the examination of the accounts of an important railroad, it appears that none of the invoices and material purchased appear on the company's books until they have been approved by the purchasing agent and division superintendents, although the various storekeepers' reports show that much of the material and supplies has actually been received. How would you deal with such a condition and determine the real position of the railroad with respect to purchases not taken up on the voucher register? Question 133 — The Bristol Manufacturing Co. issued and sold on the 1st of January, 1918, to A and B, 100 (50 to each at the same price) first mortgage bonds of $500 each, bearing interest at 4% per annum, and received $48,000 in cash. What records of the transaction should be made, and in what books? Question 134 — How should the following items be dealt with in the accounts of a company: (a) Discount on bonds or stock (b) Premium on stock or bonds (c) Common stock issued as a bonus with the sale of preferred stock How would you audit the foregoing transactions? Copyright, 1919, The Ronald Press Company I 1-24-4 Question 155 — A charitable institution receives annual subscriptions and donations and employs a csinvasser who has to induce persons to become sub- scribers and who is also authorized to receive subscriptions and donations. State what you consider the best system of bookkeeping to guard against peculation and what regulations you would lay down for the conduct of the financial affairs of the institution. Solution to Problem 48 Exhibit I WHITE MANUFACTURING COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS CAPITAL ASSETS (subject to accrued depreciation not provided for) : Real Estate $ 24,000.00 Buildings 36,783.11 Mach. & Equip. 87,105.99 $147,889.10 CURRENT ASSETS: Inventories of: Raw Material $ 69,075.23 Work in Progress Finished Product Customers* Accts. Notes Receivable Cash 14,908.17 27,575.50 $111,558.90 96,798.93 21,678.03 10,751.02 240,786.88 DEFERRED CHARGES: Insurance Unexpired 593.44 LIABILITIES CAPITAL STOCK: Issued and Outstanding 2,000 shares Par Value $100 CURRENT LIABILITIES: Notes Payable $ 45,000.00 Accts. Payable 39,632.95 Dividend Payable Jan. 15, 1919 6,000.00 $200,000.00 SURPLUS : ' Balance at Jan. 1, 1918 $ 69,304.48 Add — Surplus Net Profits for year ending Dec. 31, 1918 (Exhibit II) 35,331.99 Deduct — Dividends $104,636.47 6,000.00 Balance at Dec. 31, 1918 (subject to accrued depreciation not provided for) 90,632,95 $389,269.42 98,636.47 $389,269.42 Copyright, 1919, The Ronald Press Company WHITE MANUFACTURING COMPANY STATEMENT OF PROFITS AND INCOME FOR YEAR ENDING DECEMBER 31, 1918 I 1-24-5 Exhibit II SALES Deduct— Discounts on Sales Allowances on Sales Freight NET PROCEEDS FROM SALES DEDUCT—Cost of Goods Sold (Exhibit III) GROSS PROFIT ON SALES ADD — Miscellaneous Income: Interest Received Discounts on Purchases TOTAL PROFITS AND INCOME FROM ALL SOURCES DEDUCT— SELLING AND GENERAL EXPENSES: Selling Expenses (Exhibit IV) General Expenses (Exhibit V) NET PROFITS FROM OPERATION DEDUCT — Interest Paid SURPLUS NET PROFITS (Exhibit I) $19,419.87 13,081.14 10,439.23 AMOUNT $620,033.89 42,940.24 PER CENT. $577,093.65 514,996.90 100.00 89.24 $ 2,909.43 6,487.11 $ 62,096.75 9,396.56 10.76 1.63 SOURCES $ 71.493.31 31,377.82 12.39 $19,377.82 12,000.00 3.36 2.08 5.44 $ 40,115.49 4,783.50 6.95 .83 $ 35,331.99 6.12 Copyright, 1919, The Ronald Press Company I 1-24-6 Exhibit III WHITE MANUFACTURING COMPANY STATEMENT OF COST OF MANUFACTURE AND GOODS SOLD YEAR ENDING DECEMBER 31, 1918 MATERIALS : Inventory of Raw Material at January 1, 1918 $ 38,983.45 Purchases $293,839.18 Freight-In 18,067.50 311,906.68 LESS — Inventory at December 31, 1918 WAGES FACTORY EXPENSES: Superintendent ' s Salary Light, Heat, and Power Insurance Repairs and Maintenance Sundry Factory Expenses DEDUCT— WORK IN PROGRESS INVENTORY VARIATION; Inventory at January 1, 1918 Inventory at December 31, 1918 COST OF FINISHED PRODUCT MANUFACTURED ADD—FINISHED PRODUCT INVENTORY VARIATION: Inventory at January 1, 1918 Inventory at December 31, 1918 COST OF GOODS SOLD (Exhibit II) $350,890.13 69,075.23 3,000.00 2,908.38 810.54 22,037.73 6,093.17 $281,814.90 160,511.92 34,849.82 $477,176.64 $14,908.17 14,908.17 $ 80,303.93 27,575.50 WHITE MANUFACTURING COMPANY STATEMENT OF SELLING EXPENSES YEAR ENDING DECEMBER 31, 1918 Salesmen's Salaries eind Commissions Salesmen's Traveling Expenses Bad Debts TOTAL SELLING EXPENSES (Exhibit II) $462,268.47 52,728.43 $514,996.90 Exhibit IV $11,425.50 6,638.19 1,314.13 $19,377.82 Copyright, 1919, The Ronald Press Company II-24-7 WHITE MANUFACTURING COMPANY STATEMENT OF GENERAL AND ADMINISTRATIVE EXPENSES YEAR ENDING DECEMBER 31, 1918 Officers' Salaries Exhibit V $12,000.00 TOTAL GENERAL AND ADMINISTRATIVE EXPENSES (Exhibit II) $12,000.00 Solution to Problem 49 JOURNAL ENTRIES (1) Cash % 3,487.11 First Mortgage 6% W Ry. Co. Bonds 75,000.00 6% Mortgage Loans 40,000.00 Preferred Stock (at par) Allen Mfg. Co. 125,000.00 Notes Receivable 30,000.00 Household Furniture 1,000.00 Accrued Interest as follows: 1,475.00 Bonds % 750.00 Loans 600.00 Notes Receivable 125.00 $1,475.00 To — Estate Account Sundry Liabilities To record inventory of estate of A as filed in probate court on....< $263,962.11 12,000.00 (2) Estate Account To — Household Furniture To record transfer of household furniture to A's widow in accordance with the terms of the will. 1,000.00 1,000.00 (3) Preferred Stock To — Estate Account To transfer profit on sale of Allen Manufacturing Co. preferred stock. 5,000.00 5,000.00 Copyright, 1919, The Ronald Press Company II-24-8 o o iz: «» o o o o CM o o • o o iH ik CVJ 2 M o M o o o o • • o o o o OJ to o o o o • • o o o o CM O • •> iH CM o o o o o o • • • o o o o o o o o o •k Vk « to CM H I • I b- I to I Oi I ^ I CM iH tO 00 to EH § m tn (U r-i o CO ■!-> U CO §o Pq Pu. ■P a o o u < en (D O 0) tn » -H •H a s CO CO K o ►-5 t/3 nq 00 »^ PQ G p. CO Si a •> CO rH in b- CM CM «» C» cn o a *» 0) » fH CO o EH O o o o o o o o o o o o o c«~ o o o o o lO to o o o o o K5 fH O O O O O to lO O lO O (H C^ ^ CM to 01 C o O O • fH o fH o • • CM o CD o Oi o » » in CM c«- fH CM «»= o o • o in o o CM CD to CD CM O O • o o o in o o o o CM O O O O • • o o o o in CD ««= CM CD O CM (0 CO C/l f^ •• o Q H s E-t C3 •• < o 4^ 2 o cn cn n o o Pi 13 § H pd (D o o M 2 4J m ^ Pi^ o a o o M K as Copyright, 1919, The Ronald Press Company 11-24-10 In case the widow died October 31, 1918, no change need be made in respect of the cash transactions, but the following additional journal entries would be required: (4) Accrued Interest $ 375.00 To—Income $ 375.00 To take up interest accrued from October 1 to October 31 on first mortgage 6% W Ry. Co. bonds. (5) Accrued Interest 400.00 To — Income 400.00 To take up interest accrued from September 1 to October 31 on 6% mortgage loans. (6) Accrued Interest 625.00 To — Income 625.00 • To take up interest on notes receivable at 5% from June 1, 1918, to October 31, 1918. (7) Income 1,400.00 To — Estate of A's Widow 1,400.00 To transfer income accrued to A's widow at October 31, 1919. Copyright, 1919, The Ronald Press Company 11-24-11 o o • o o a* o o • o o o CO o o o o o o • • • o o o o o o o o o •> « » to N o o o o CM o o • o o CO •H • > t- to 00 • o o o o o o • • • o o o o o o o o o CM CD o CO lO CM o o lO CM CM CD CM* CM o B CO .s a o s "-J •H |!^ iH CM to o o O iH t^ ^ to 13 * C» S to ^ CO S •o • o Q M o EH O O CD tn o g o o 1 O § E-t (D 00 o >^ < 43 OS m O ■< CO DQ a> •o O i s o O fi CJi O K M «< w OT (^ ♦J O M r-l m O o S EH CO P^ ^ o C < < to o •H CO fa D CM O O O O O o o o o o o c^ o o o o o If5 to O O O O O to iH O O O O O to m o in o (H t- ^ CM to to in o o o • lO o o o o o o • • • O O lO lO O CM e«. CO rH H o pH o • • CM o CD o C3J o •^ * in CM t>- iH CM «» pH O o iH o o • • • CM o o CD o o C71 o rH * • • to Ifi CM CD CM O O O O • • o o o o o lO CD o H o iH • • o CM o CD •^ -"^ •t 9k •H CM CM O o o O o o • • • lO o in c^ o CM to "^ CO o ♦^ CO > ^ c © "^ h f^ « •H fi ^U o (D £3 © o: o tj tn M in ^ © xJ c © en © d C CO «-> © en (< o o o v> d o o) h^ s o o o 2; X < CO ■H t I CO CO en 01 -a c U ^4 CO 3 o o ^ m ^^ o o K Q 01 0) 01 §•§ §2 o o o « h) SS g o o o o 4^ 43 as M M % u s o a M M M CM to Copyright, 1919, The Ronald Press Company 11-24-12 ANSWERS TO QUESTIONS Answer to Question 121 — The books and accounts to be opened are as follows: 1. Books to be kept: Ledger Journal Cash book -^ 2. Accounts to be opened: Real Estate Share in Partnership ; Shares of Stock Household Furniture Cash at Bsinkers Estate Income The accountant should obtain a copy of the appraisal as filed in the probate court and acquaint himself with all provisions in the will affecting the accounts. Ke must apportion all receipts as between principal and income, and for this purpose a cash book providing separate columns on each side for principal and income will be of advantage. Answer to Question 122 — The auditor should call for a certified copy of the inventory filed in the probate court. Comparison of this inventory with the opening journal entry would be a satisfactory verification. Answer to Question 125 — CASH RECEIPTS DATE FROM WHOM PARTICULARS FOLIO PRINCIPAL INCOME CASH DISBURSEMENTS DATE TO WHOM PARTICULARS FOLIO PRINCIPAL INCOME Answer to Question 124 — (a) Interest accrues from day to day. Consequently all interest from bonds accrued up to and including the date of death would be principal ; all interest accrued subsequent thereto should be credited to income. (b) A dividend becomes income to the stockholder on the day it is declared. Consequently, all dividends declared up to and including the date of death would be principal ; dividends declared after the date of death should be credited in toto to income. The rule of law in respect of stock dividends is unsettled. In some juris- dictions stock dividends are not differentiated from other dividends, and the date of declaration determines whether it is principal or income. In other jurisdictions it has been held that stock dividends should be apportioned be- tween principal and income. (See Howe, "American Law of Principal and Income. ") Copyright, 1919, The Ronald Press Company 11-24-13 (c) There is no clear rule of law as to the apportionment of rent between principal and income. In some jurisdictions the courts hold that the date the rent falls due is the determining factor. In such cases rent due on or before the date of death would be principal irrespective of whether such rents be pre- paid or accrued. In other jurisdictions the courts hold that rents should be apportioned over the period covered by the payments. In such cases rents accrued prior to the date of death would be principal irrespective of whether the rental is paid prior or subsequent thereto. Answer to Question 125 — Under the last will and testament of Henry Rogers the widow is entitled to all income from the estate during her lifetime. Whether this income is actually received in cash during her lifetime is immate- rial ; the widow's estate would be credited with: 1. All interest accrued on bonds from March 16 to April 15, inclusive. 2. All dividends declared on stocks from March 16 to April 15, inclusive, unless in this jurisdiction the courts should require the appor- tionment of stock dividends. 3. All rents paid from March 16 to April 15, inclusive, unless in this jurisdiction the courts should require the apportionment of / rents. REFERENCES : Montgomery, pages 157-158; 181-185; 194-199; 388-389 Wildman, pages 148-150 Copyright, 1919, The Ronald Press Company 11-24-15 J*. A . (3oA^ySL«> f? Qt i'urA '9 CT1, c iJd^ r^"/ roA^ ViUt/0 ^M k'tOLA ^A C/tf Y /ff 7f/i/t V 10, ooa oo lATi, k^ 3k r £/*:/5^ f i <;?«/ ^/? Mi. i tATL L (^^ 5<-A 1* /, P2;r f 2 ly-q nt- .51 \ 4- \li\tMt. ^f\ mV ( 'V^^ y//, ^o \o 1^? 7^ ^ (1, 7,IQ ^Q A. i^ 7f^ ^7 1^ r / 267 7P ^7 A j2 M. 5h ^ ^ V 4^ '^ tLT ■ - Tm <2 ^2,J 'f a t d*tcr?v< L- ihO if, 7tl\ v'KC Trout ' ^ i^ 7^ >cc ;? % 0^ u {a\^Qi ^ pstaA- ■¥■ f5,«?i oo 7^ fr^ ^ 'SV 7 fh O OAjI ^^ If* Ifr ' A ■>*t c<^; U-t ■ <*i' O' : «> 7l > fi\ ^ Hft J^ /t U^u Uti f tkl w u \n A^ 4 ;:^' ^•<7 ^^ »41^ i ft ' it &I ^ ffhf \u. xj». "mM n f ruA, k^, f^ / , /^,0 ^(/f% ■^^ Trfr ^r LiMi '/ -r^ 3^ f A Tj ttnr L 1^ ' /ii TTU. / t^'pf o^ ifV fp / i i*M Ur id ^ Jfion )w /f lr ^fc fA\^ ■ ^ > P i' 7n- 14^- i ^ii bTM fj •fA "7" — . b D Copyright, 1919, The Ronald Press Company 11-24-16 nf. X. (BoAyvxju) ^ ^- 2^ ^JAaJ' O^mtoiXaey L'^o (^(Trulo y^ X '/ ^3- 1!^ ^. f/0 '/v, f ^ un XAa ^; ^ f {^ J. ? / II 10, ooo oo I \aA. r ■ 1 ^A &i -gv II 20, 000 oo t. f^e lAM. y) A S?> ■SI , 5 ocn oo m Uc hMi '4 $^ ^'i?'? II ^ 000 OQ 1'2L W/ fe^ A (jL -T7 „ ;z poo OO ly\ i^,t 0. /U<( '/A ^^ // s OOO oo % f.Tli u tA/H ''A 102 -f'7 n J2. ooo oo 2 loo Ooc .oo •A — 5 >t W< ''A' '>to 4 Si f«? (■^ ^f(^ I « fP ff>\ ^^^ ^tOi c L uC a^ u^ o 1 V ^ ^ ' L_ Copyright, 1919, The Ronald Press Company II-25-1 COMPLETE ACCOUNTIN G COURSE — PART II Lecture 25 CAPITAL STOCK; SURPLUS; PROFIT AND LOSS ACCOUNT Problem 54 From the following trial balance abstracted from the books of the Edwards Manufacturing Co. at December 31, 1918, prepare a balance sheet as of that date with a relative statement of profits: PARTICULARS Preferred Stock Common Stock First Mortgage 6% Gold Bonds Surplus at January 1, 1918 Land Buildings Machinery and Equipment Tools and Running Gear Notes Receivable Customers* Accounts Sundry Debtors Notes Payable Unpaid Audited Vouchers Matured Bond Interest Coupons Inventory Raw Materials at January 1, 1918 Inventory Work in Progress at January 1, 1918 Purchases of Raw Materials Wages Light, Heat, and Power Sales Traveling Expenses (Miscellaneous) Discounts on Sales Discounts on Purchases Freight-Inward Allowances on Sales Insurance — one-half Manufacturing and one-half Selling Factory Expenses Superintendent's Salary Bad Debts Royalties Officers' Salaries Salesmen's Salaries and Conmlssions Fre i ght -Out ward DEBITS 23,500.00 133,127.11 64,133.34 13,113.78 19,422.03 93,183.27 1,378.34 23,083.27 10,100.00 284,311.93 149,327.31 2,483.11 1,983.50 18,343.11 19,067.27 11,332.50 2,450.00 3,350,31 2,400.00 937.11 3,307.50 11,500.00 10,375.50 12,397.50 CREDITS 100,000.00 125,000.00 100,000.00 42,493.98 45,670.00 33,198.34 3,425.00 583,111.37 3,118.93 Copyright, 1919, The Ronald Press Company II-25-2 Salesmen's Traveling Expenses 3,983.21 Cash (Banks) 6,908.73 Cash (Deposited with Fiscal Agent) 3,425.00 Inventory of Finished Product January 1, 1918 78,111.30 Repair and Maintenance Expenditures 19,083.27 Interest Paid 9,398.32 11,036,017.62 $1,036,017.62 The following items should be considered in preparing the balance sheet with the relative statement of profits: 1. Insurance Unexpired $ 450.00 2. Accrued Interest on Bonds and Notes Payable 1,125.00 3. Taxes Accrued of 2,234.83 4. Inventory of; a) Raw Materials $24,308.14 b) Work in Process 33,987.32 c) Finished Products 40,398.50 5. Wages Accrued 13,134.87 6. Provide Depreciation for the year on the bal- ance given in the Trial Balance upon the basis of the following rates: Buildings 2}^% per annum Machinery and Equipment 10% per annum Tools and Running Gear 10% per annum Problem 55 A single-entry set of books for 1918 is sent to you with an order to state a Profit and Loss account for the year and a balance sheet at December 31. The starting capital was $34,500. The Accounts Receivable Jan. 1 " Accounts Payable " " ■ Merchandise " " " Pl£int and Machinery " ■ " Furniture & Fixtures " ■ A Summary of the cash book for the year shows as follows: RECEIVED Accounts Receivable $30,000.00 Capital paid in 2,500.00 DISBURSED Bank Overdraft January 1 $ 3,700.00 Accounts Payable 12,500.00 General Expense 5,000.00 Wages 7,750.00 Personal Account 1,500.00 leaving a bank account of $2,000, and currency on hand $50. Copyright, 1919, The Ronald Press Company $26,500.00 Dec. 31 $44,000.00 7,500.00 II n 9,750.00 8,500.00 n If 9,500.00 10,000.00 ■ ■ 10,000.00 700.00 n ■ 700.00 II-25-3 Provide 5% interest on capital, disregarding additions during the year and personal drafts, deducting 10% for plant and machinery depreciation, 5% for furniture and fixtures, and 5% for bad debts. Problem 56 A company with head office in Chicago and factory at South Bend, Indiana, conducts three selling branches in New York, San Francisco, and Montreal, which are supplied with goods from the factory, the invoices being sent out from the head office. The branches keep their own sales ledgers, send out monthly statements to customers, and receive cash against their ledger accounts, which they remit weekly to Chicago. All branch expenses, including salaries and wages, are paid by the branches from petty cash accounts, kept at a fixed balance of ^500, by draft on head office. The following information is supplied by the branches at December 31, 1918, summarizing the transactions of the previous six months; NEW YORK SAN FRANCISCO MONTREAL Rents and Taxes Paid $ 200.00 $ 175.00 $ 75.00 Sales for 6 months to December 31, 1918 Salaries and Wages Return Sales Allowances to Customers Bad Debts Cash Sales Cash Received from Customers on Ledger Ac- counts Debtors, July 1, 1918 Debtors, December 31, 1918 Petty Cash on Hand, July 1, 1918 Petty Cash on Hand, December 31, 1918 Stock, July 1, 1918 Stock, December 31, 1918 Goods Received from Head Office Factory Prom these details prepare branch accounts as they should appear in the head office books and draw up a final general trial balance with branch profit and loss accounts. 12,500.00 11,800.00 10,225.00 1,650.00 1,520.00 1,600.00 200.00 100.00 250.00 50.00 40.00 30.00 125.00 60.00 6,250.00 5,380.00 6,100.00 10,850.00 10,260.00 9,150.00 5,820.00 6,140.00 7,240.00 7,220.00 7,415.00 7,975.00 500.00 500.00 500.00 500.00 500.00 500.00 3,450.00 3,820.00 3,650.00 4,300.00 4.720.00 4,500.00 11,500.00 10,240.00 10,350.00 QUESTIONS ON AUDITING Question 136 — Under what circumstances may a company reduce its capital stock? Assuming a reduction of capital stock to have taken place, what special duties would fall upon you as auditor on the occasion of the first audit there- after? Copyright, 1919, The Ronald Press Company II-25-4 Question 157 — In the course of your audit of a company you find that certain commissions have been paid for underwriting the shares issued to the public, and other commissions for placing shares. Under what circumstances would you be prepared to pass these payments as in order, and how would you vouch them? Question 158 — State how, in your opinion, the following items should be dis- tributed in the accounts: (a) Purchase by the Rapid City R. R. Co. of locomotives, passenger cars, freight train cars, and other equipment of a value of $100,000 (b) Extraordinary repairs to machinery, tools, and equipment, tending to prolong the life of the equipment, $55,017.44 How would you audit the foregoing transactions? Question 159 — In the course of your audit you find the following items in- cluded under the heading of Plant and Machinery: (a) Interest on bank loans, |5,700 (b) Legal and other expenses incurred in connection with acquisition of certain property, $1,000 (c) Consulting engineer's salary, $7,500 If engaged by the president of the company, what would be your attitude in respect of the foregoing items? Would you alter or modify your position if the audit were being made on behalf of a bond house which expected to fund "8.0% of the cash expenditures for additions and betterments"? Question 140 — How would you as an auditor undertake to satisfy yourself in regard to the correctness of journal entries? Solution to Problem 50 JOURNAL ENTRIES TO OPEN BOOKS OF THE PROGRESSIVE MANUFACTURING CO. (1) Preferred Stock Unissued $500,000.00 Common Stock Unissued 800,000.00 To— Preferred Stock $500,000.00 Common Stock 800,000.00 To record the authorized issue of capital stock per charter granted by the State of Copyright, 1919, The Ronald Press Company II-25-5 (2) Plant and Equipment Accounts and Notes Receivable Inventory Insurance Unexpired Discount Paid in Advance Cash Good-Will To — The Martin Manufacturing Co., Vendor United States Specialty Co. , Vendor Brown & Smith, Vendor Accounts & Notes Payable Interest Accrued Taxes Accrued Labor Unpaid Assets acquired and liabilities assumed in the acquisition of the business of The Martin Manufacturing Co., United States Specialty Co., and Brown & Smith, respectively, under the agreements with $342,500.00 179,600.00 153,650.00 3,750.00 500.00 21,500.00 800,000.00 $504,600.00 461,200.00 334,200.00 192,405.00 2,070.00 2,175.00 4,850.00 MARTIN U.S. SPEC. BROWN & MFG. CO. CO. SMITH TOGETHER ASSETS Plant and Equip- ment $102,000.00 $145,000.00 $ 95,500.00 $ 342,500.00 Accounts and Notes Receiv- able 62,400.00 78,500.00 38,700.00 179,600.00 Inventory 48,500.00 61,500.00 43,650.00 153,650.00 Insurance Un- expired 1,250.00 1,700.00 800.00 3,750.00 Discount Paid in Advance 500.00 500.00 Cash 5,600.00 7,250.00 8,650.00 21,500.00 Good-Will 322,600.00 257,200.00 220,200.00 800,000.00 $542,850.00 $551,150.00 $407,500.00 $1 ,501,500.00 Copyright, 1919, The Ronald Press Company II-25-6 MARTIN U.S. SPEC. BROWN & MFG. CO. CO. SMITH LIABILITIES Accounts and Notes Payable $ 36,100.00 $ 86,075.00 $ 70,230.00 $ Interest Accrued 850.00 600.00 Taxes Accrued 750.00 825.00 1,220.00 Labor Unpaid 1,400.00 2,200.00 1,250.00 TOGETHER 192,405.00 2,175.00 2,070.00 4,850.00 $ 38,250.00 $ 89,950.00 $ 73,300.00 $ 201,500.00 Net Assets 504,600.00 461,200.00 334,200.00 1,300,000.00 $542,850.00 $551,150.00 |407,500.00 $1,501,500.00 (3) The Martin Manufacturing Co., Vendor $504,600.00 United States Specialty Co., Vendor 461,200.00 Brown & Smith, Vendor 334,200.00 To — Preferred Stock Unissued Common Stock Unissued To record the issue of preferred and common stock to The Martin Manufacturing Co., United States Specialty Co., and Brown & Smith, respectively, under the terms and conditions of the agreement dated .., preferred stock to be issued for the net tangible assets and common stock for the good-will. COMMON STOCK PREFERRED STOCK The Martin Manufactur- ing Co. $322,600.00 $182,000.00 ? United States Specialty Co. 257,200.00 204,000.00 Brown & Smith 220,200.00 114,000.00 $500,000.00 800,000.00 TOGETHER 504,600.00 461,200.00 334,200.00 $800,000.00 $500,000.00 $1,300,000.00 Copyright, 1919, The Ronf Id Press Company II-25-7 THE PROGRESSIVE MANUFACTURING CO. BALANCE SHEET AT THE COMMENCEMENT OF THE BUSINESS ASSETS CAPITAL ASSETS: Plant and Equipment Good-Will CURRENT ASSETS: Inventories Accounts and Notes Receivable Cash DEFERRED CHARGES TO INCOME: Insurance Unexpired Discount Paid in Advance $342,500.00 800,000.00 $153,650.00 179,600.00 21,500.00 $3,750.00 500.00 $1,142,500.00 354,750.00 4,250.00 $1,501,500.00 LIABILITIES CAPITAL STOCK — Authorized and Issued: Preferred Shares Common Shares CURRENT LIABILITIES: Accounts and Notes Payable Interest Accrued Taxes Accrued Labor Unpaid $500,000.00 800,000.00 $192,405.00 2,070.00 2,175.00 4,850.00 $1,300,000.00 201,500.00 $1,501,500.00 Copyright, 1919, The Bonald Press Company II-25-8 ENTRIES UPON THE BOOKS OF THE MARTIN MANUFACTURING CO, (1) Good-Will $322,600.00 To — Surplus Account $322,600.00 To set up the value of good-will as arrived at in the following manner, being the basis at which it is to be taken over by The Progressive Manufacturing Co., under the agreement dated The average annual earnings for the last five years amounted to $ 45,000.00 LESS — Interest at 7% per annum on the capital investment, viz: Capital Stock $100,000.00 Surplus 82,000.00 $182,000.00 7% thereof is 12,740.00 32,260.00 Ten times this amount $322,600.00 (2) The Progressive Manufacturing Co., Vendee 504,600.00 Accounts and Notes Payable 36,100.00 Taxes Accrued 750.00 Labor Unpaid 1,400.00 To— Good-Will 322,600.00 Plant and Equipment 102,000.00 Accounts and Notes Receivable 62,400.00 Inventory 48,500.00 Insurance Unexpired 1,250.00 Discount Paid in Advance 500.00 Cash 5,600.00 To record assets sold to and liabilities assumed by The Progressive Manufacturing Co. under bill of sale dated... Copyright, 1919, The Ronald Press Company II-25-9 (3) The Progressive Manufacturing Co. : Preferred Stock ^182,000.00 Common Stock 322,600.00 To — The Progressive Manufacturing Co., Vendee Account $504,600.00 Preferred and common stock received in payment from The Progressive Manufac- turing Co. for the net assets sold to that company under the agreement dated (4) Surplus Account 404,600.00 To—Dividend Payable 404,600.00 Dividend of 404.6% declared to the stock- holders and payable in the stock re- ceived from the sale of the business to the Progressive Manufacturing Co. (5) Dividend Payable 404,600.00 Capital Stock 100,000.00 To — The Progressive Manufacturing Co.: Preferred Stock 182,000.00 Common Stock 322,600.00 Payment of dividend and the return of the original capital investment, per reso- lution adopted by the board of directors at a meeting held on , 1919. Similar entries should be made on the books of the United States Specialty Co. and Brown & Smith, respectively, except that in the case of the partnership the capital profit arising from the sale of the good-will should be credited direct and in equal proportions to Brown's and Smith's Capital accounts; in that case entry 4 (as above) would not be required; moreover, the "Dividend Pay- able" feature of entry 5 would be eliminated, but in all other respects the same entries would be made. Cop3rright, 1919, The Ronald Press Company 11-25-10 Solution to Problem 51 E-t » • • • • • « • • • D S 10 ID in in tn in •» •» 0t » •« « •h m> s 10 in r-i H H H in (^ iH OT «» «» E-l M •0 (D 1 CO •H W 3 rH CO > fH ,Q CO ■0 rH tn H to Xi S (D g » r « B B (D t1 •H 4-> (D S4 rH CO Q JB M ^ § CO 2 EH H ♦J Si § B « B B B rH CO U (0 Ph CO n 00 • • • (D • iH ^ ^ (h >> C 4-> Oi 0) CO O, CO 3 O •H Fq S © § •P to c- a Ph iH CO #» «* •H E-l »H u PQ -d v> |z] s u > . -H CO * 1 ® K 2 © 1-^ "S " a> tn u a © a 3 J3 5 -O (D a © •H -— N •d to © ^ >> ■p •H tn rO +J § M 4a CO •H ■P (D •p fn •H EH ^ -H ^ ft > s tn •H H s fl -(yK^ Saf>4taL i Jtd-cAs. )ft> '/ 1 71^ r ^fclMi r^ ff> < ^^ ■(8 XiW w c ^^A y^ui / , • i J^ bXA' %■ ^ !l.tb< M^ toL /^c Oft ^ ^ 4 150 ooo oo ^ / / ^'iT 11 (c^ ?4 ^K f^ ^ ^ ^n u u. \a/X ne^ ^, COQ oo I Hi4 Mf.i flir ' W//£». fot ^1 to ■«te< e (^ W\Jl ^ /;? \0Q, (90 L i*^ '.1 ?n . 4/ ^ r^ to- ^ fe, Szy 5^ 3* pen <5o, Of? ri^ fflr?(? ffff a A. Uii'i uW' > ( ^ IM frfKr rt? ■ . Ca Witf tyvi. f ^^ »X (J imt ^r 2jr Si ' )* at. \t\ f. 3' M/f ' I<1 17 "hio.k r.d A ^ iK •x% ^00 n ?00 \ 4 \(^ii1 17 u i7 f^ /frc? (MTl 7 #^ %<\ "1 ft //t.;j (^a yw ? r 53 2^ 1 J, !ttfl. ff f^ li? r?:.f. u kuM *= 35- 10 « /o 1^ m i Tr >> \' yf ')l.O do ^* I' #■ 36 Xf U ?s *■ , :io w ./» ((w e^ yi/>^ M^ A//? a<^ ?,f»< Pf. Af^ ?,^« C^ OAA^ / ^ — z 1 1 • Copyright, 1919, The Ronald Press Company 11-25-16 ^ £ 3a/tyyM^ % L. -^^ J)AAAJbfuAa OucxJiu/n/r' •m.tnv vfi t-nm wttt ^. ^ ', 14 % h /^ (?/l* ^ f 1 i/?ay r ^.^ (no-j IS a '•if- >, f< "7 fdun ^,<^ tLf Ki<: H i?i. Jx oo #^ ^0 op V 1 ?l. 'jf, 1 VI 11 ^ i tii^. '„'^ UH rlW d^ ^ c^ %« ?/, 3o,. oo ) < ^ '// fiOQ OO \. J ' Copyright, 1919, The Ronald Press Company II-26-1 COMPLETE ACCOUNTIN G COURSE — PART II Lecture 26 CONTINGENT AND MISCELLANEOUS LIABILITIES Problem 57 You are required to point out (a) errors in principle and (b) misstatement of facts in the balance sheet and relative statement of profits and income of the American Optimist Co, shown below: THE AMERICAN OPTIMIST COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS PROPERTY ACCOUNT AS AT JANUARY 1, 1917: Real Estate, Buildings, Plant, Machinery, Equipment, Patents, and Good-will, includ- ing Discount and Commission on Bonds Sold $5,500,000.00 ADD — Expenditures for Year in Dismantling Plant at Hoboken and in Remodeling and Re- constructing Department C, including all other Additions and Extensions 775,000.00 ( 6,275,000.00 CURRENT ASSETS: Stocks and Bonds in Treasury at par $2,000,000.00 Investments in other Companies held as Permanent Investments 375,000.00 Inventories on Hand: Raw Materials and Supplies (at cost) $2,600,000.00 Finished Goods and Work in Progress 500,000.00 Consigned Merchamdise (Selling Values) 150,000.00 3,250,000.00 Contracts under Way: Amount of Contracts $2,500,000.00 LESS — Estimated Cost to complete 1,000,000.00 1,500,000.00 Accounts and Bills Receivable (Gross) 1,400,000.00 Cash and other Cash Assets, including De- posits with Trustee under Mortgage 650,000.00 9,175,000.00 DEFERRED CHARGES TO FUTURE OPERATIONS: Prepaid Interest, Insurance, etc., and Ad- vertising Expenses carried forward 325,000.00 $15,775,000.00 Copyright, 1919, The Ronald Press Company II-26-2 LIABILITIES CAPITAL STOCK: 50,000 Shares of $100 each $ 5,000,000.00 BONDED INDEBTEDNESS OUTSTANDING OR REDEEMED AND HELD BY TRUSTEE (20-year Bonds) 3,000,000.00 CURRENT LIABILITIES: Bills Payable $3,500,000.00 Accounts Payable and Audited Vouchers, in- cluding Pay-Rolls and Interest due but unpaid 750,000.00 Taxes Accrued 25,000.00 4,275,000.00 RESERVE FUNDS: For Depreciation and Accruing Renewals (Less Expenditures) $ 50,000.00 Bond Sinking Fund 400,000.00 For Unaudited Bills on Hand 50,000.00 500,000.00 SURPLUS : Balance at January 1, 1918 $2,500,000.00 LESS — Adjustments 250,000.00 $2,250,000.00 Net Earnings for Year as per Statement attached 1,500,000.00 $3,750,000.00 LESS — Appropriations : For Dividends $500,000.00 Bond Sinking Fund 100,000.00 Depreciation 150,000.00 750,000.00 3,000,000.00 $15,775,000.00 Copyright, 1919, The Ronald Press Company II-26-3 THE AMERICAN OPTIMIST COMPANY STATEAffiNT OF PROFITS AND INCOME, YEAR ENDING DECEMBER 31, 1918 GROSS SALES AND CONSIGNMENTS (excluding Contracts) $8,575,000.00 Deduct — Cost of Sales 6,825,000.00 BALANCE— GROSS PROFITS ON GENERAL BUSINESS $1,750,000.00 ADD — Profits on Contracts in Progress 275,000.00 MISCELLANEOUS INCOME: Profits on Bonds Purchased $ 15,000.00 Interest received on Sundry Investments 25,000.00 Sundry Items 35,000.00 75,000.00 TOTAL PROFITS AND INCOME FROM ALL SOURCES $2,100,000.00 DEDUCT — Administration and Selling Expenses $325,000.00 Taxes 25,000.00 Interest Charges 250,000.00 600,000.00 BALANCE— NET EARNINGS FOR THE YEAR $1,500,000.00 Problem 58 James Hewson and Walter Fellows had been in partnership for several years, and at December 31, 1919, desiring to retire, they entered into an arrangement to dispose of their business to William Jones, on the general terms that he, Jones, should take over everything as it then stood, subject to the following condi- tions: 1. Inventory of merchandise to be subject to a rebate of 6%. 2. Accounts receivable to have a deduction of 734% to meet possible losses. 3. Office furniture to be subject to a deduction of 12^4% for depre- ciation. 4. Liabilities to creditors to be discharged by February 1. On the exact amount required to be paid over to the parties by Jones being* ascertained, he was to pay one-fourth in cash on February 4, and the balance by equal instalments, giving his notes for the same which are paid in cash as they fall due, dating from January 1, at three, six, and nine months, such instal- ments to carry interest at 5% per annum. The inventory of merchandise in hand amounted to $21,800, the accounts receivable to $18,200, and the office furniture stood in the books at $1,250. The sums due to creditors amounted to $6,250. You are asked, as representing Jones, to prepare the ledger accounts as they should be recorded £ind give effect to the foregoing arrangement in Jones's ledger* Copyright, 1919, The Ronald Press Company I 1-26-4 QUESTIONS ON AUDITING Question 141 — During the audit you are making of the accounts of a corporation, you become aware of a claim against the company which you think is likely to be enforced, but which the directors do not recognize, and for which they will make no reserve. What would you do in the circumstances? Question 142 — (a) Define the relation between the directors of a company and the company. (b) In the course of your audit of a company you ascertain the following facts: (1) One of the directors has sold a considerable quantity of goods of the comp£iny. (2) The directors have passed a resolution for payment to themselves of traveling expenses incurred in attending board meetings. (3) They have also passed a resolution waiving half their directors' fees for the current year. Do these points concern you as auditor, and if so, how would you deal with them? Question 145 — What authority would you require as auditor for passing the remuneration of the directors of a company, and to what book would you refer to ascertain the names of the persons entitled thereto? Question 144 — What measures should be taken to ascertain whether or not any notes receivable have been discounted and cleared from the books, notwithstand- ing the fact that they are not due and at maturity will be subject to demand on the last indorser in case payment is defaulted by the maker? Question 145 — As an auditor what sort of documentary evidence would you re- quire in support of the following expenditures: (a) Shop wages paid (b) Dividends paid (c) Merchandise purchases Copyright, 1919, The Ronald Press Company II-26-5 Solution to Problem 52 The feature in this problem appears to be, that B in submitting a statement to A did not prepare a statement of profit and loss, but dealt only with the re- ceipts from sales and disbursements for purchases and expenses represented in the advance. The following is the correct statement of the profits: PARTICULARS SALES DEDUCT — Cost of Sales and Expenses: Inventory January 1 Purchases and Expenses LESS — Inventory December 31 BALANCE—PROFIT A's account on B's books would appear thus: DEBITS AMOUNT $350,000.00 $ 45,000.00 284,000.00 $329,000.00 48,500.00 280,500.00 $ 69,500.00 Sale of Plant $400,000.00 Interest on Deferred Pay- ments 18,000.00 Interest on Advances 7,670.00 CREDITS Cash Received on Account $100,000.00 Profit for Year 69,500.00 Balance due January 1: 1919 $106,170.00 1920 150,000.00 256,170.00 $425,670.00 $425,670.00 B's account on A's books would appear thus: DEBITS Cash Paid on Account $100,000.00 Assets taken over Dec. 31: Cash $ 88,500.00 Inventory 48,500.00 Accts. Rec. 6,000.00 143,000.00 Balcmce due January 1 : 1919 $106,170.00 1920 150,000.00 256,170.00 $499,170.00 CREDITS Sale of Plant Interest on Deferred In- stalments Interest on Advances Inventory January 1, 1918 Accounts Receivable Jan- uary 1, 1918 $400,000.00 18,000.00 7,670.00 45,000.00 28,500.00 $499,170.00 Copyright, 1919, The Ronald Press Company II-26-6 Solution to Problem 53 SKELETON JOURNAL ENTRIES (1) Organization Expenses % 5,000.00 To — Capital Stock $ 5,000.00 (2) Plotted Tracts 50,000.00 To — Mortgage Payable 34,000.00 Accounts Payable 16,000.00 (3) Plotted Tracts 7,000.00 To — Accounts Payable 7,000.00 (4) Dwelling House Account 1,200.00 To — Plotted Tracts 1,200.00 (5) Dwelling House 13,000.00 To — Accounts Payable 13,000.00 (6) Accounts Receivable 9,000.00 To — Dwelling House Sales 9,000.00 (7) Accounts Receivable 30,200.00 To — Plotted Tracts Sales 30,200.00 (8) Accounts Payable 4,000.00 To — Notes Payable 4,000.00 (9) Plotted Tract Sales 19,800.00 To— Plotted Tracts 19,800.00 (10) Dwelling House Sales 7,100.00 To — Dwelling House 7,100.00 (11) Dwelling House Sales 1,900.00 Plotted Tract Sales 10,400.00 Commission and Fees 905.00 •To — Profit and Loss 13,205.00 Copyright, 1919, The Ronald Press Company II-26-7 Profit and Loss To~Interest Expenses Profit and Loss To — Surplus (12) (IS) CASH BOOK $ 9,219.00 3,986.00 1,719.00 7,500,00 3,986.00 RECEIPTS Capital Stock Accounts Receivable Interest Loan Commission & Fees PAYMENTS $25,000.00 Organization Expenses % 625.00 20,075.00 Accounts Payable 16,000.00 750.00 Plotted Tracts 6,000.00 12,000.00 Accounts Payable 1,000.00 905.00 Accounts Payable 7,000.00 Mortgage Payable 11,300.00 Bills Payable 3,000.00 Interest 1,719.00 Expenses 7,500.00 Balance 4,586.00 $58,730.00 $58,730.00 Balance LEDGER ACCOUNTS CAPITAL STOCK $30,000.00 Cash Organization Expenses $30,000.00 $25,000.00 5,000.00 $30,000.00 PLOTTED TRACTS Accounts & Mtgs. Payable Cash Accounts Payable $50,000.00 6,000.00 7,000.00 $63,000.00 Dwelling House Plotted Tract Sales Balance $ 1,200.00 19,800.00 42,000.00 $63,000.00 Plotted Tracts Accounts Payable DWELLING HOUSE $ 1,200.00 Dwelling House Sales 13,000.00 Balance $14,200.00 $ 7,100.00 7,100.00 $14,200.00 Copyright, 1919, The Ronald Press Company II-26-8 Dwelling House Sales Plotted Tracts Sales ACCOUNTS RECEIVABLE $ 9,000.00 Cash 30,200.00 Balance $39,200.00 $20,075.00 19,125.00 $39,200.00 Receipts CASH $58,730.00 Disbursements Balance $58,730.00 $54,144.00 4,586.00 $58,730.00 Cash Cash Cash Notes Payable Balance ACCOUNTS PAYABLE $16,000.00 Plotted Tracts 7,000.00 1,000.00 4,000.00 8,000.00 $36,000.00 Plotted Tracts Dwelling House Account $16,000.00 7,000.00 13,000.00 $36,000.00 Cash Balance MORTGAGES PAYABLE $11,300.00 Plotted Tracts 22.700.00 $34,000.00 $34,000.00 $34,000.00 Balance LOAN ACCOUNT $12,000.00. Cash $12,000.00 Cash Balance BILLS PAYABLE $3,000.00 Accounts Payable 1,000.00 $4,000.00 $4,000.00 $4,000.00 Capital Stock Cash ORGANIZATION EXPENSES $5,000.00 Balance 625.00 $5,625.00 $5,625,00 $5,625.00 Copyright, 1919, The Ronald Press Company II-26-9 Plotted Tract Profit and Loss PLOTTED TRACT SALES $19,800.00 Accounts Receivable 10,400.00 $30,200.00 $30,200.00 $30,200.00 Dwelling House Profit and Loss DWELLING HOUSE SALES $7,100.00 Accounts Receivable 1,900.00 • $9,000.00 $9,000.00 $9,000.00 Profit and Loss Profit and Loss Cash Cash COMMISSIONS & FEES $905.00 Cash INTEREST RECEIVED $750.00 Cash EXPENSES $7,500.00 Profit and Loss INTEREST PAID $1,719.00 Profit and Loss $905.00 $750.00 $7,500.00 $1,719.00 Expenses Interest Surplus PROFIT AND LOSS $ 7,500.00 Dwelling House Sales 1,719.00 Plotted Tract Sales 4,736.00 Commissions and Fees Interest Received $13,955.00 $ 1,900.00 10,400.00 905.00 750.00 $13,955.00 SURPLUS Profit and Loss $4,736.00 Copyright, 1919, The Ronald Press Company 11-26-10 Exhibit A LAND DEVELOPMENT COMPANY BALANCE SHEET, (Date) ASSETS LIABILITIES TRACTS AND HOUSES HELD FOR SALE: CAPITAL STOCK $30,000 Plotted Tracts ,.^t,™^.«^ ^.,r.T,^,, (at cost) $42,000 MORTGAGE PAYABLE 22,700 Dwelling House CURRENT LIABILITIES: (at cost). 7,100 $49,100 Bills Payable $ 1,000 Loans 12,000 CURRENT ASSETS: Accts. Payable 8,000 21,000 Accounts Receivable $19,125 Cash 4,586 23,711 SURPLUS: Surplus Net Profits for DEFERRED CHARGES : period ending Organization Expenses 5,625 (Exhibit B) 4,736 $78,436 $78,436 Inasmuch as the tracts are being disposed of it would be desirable to charge off part of the organization expenses, say about one-third. Exhibit B LAND DEVELOPMENT COMPANY STATEMENT OF PROFITS AND INCOME FOR MONTHS ENDING PLOTTED DWELLING TRACTS HOUSES TOTAL SALES $30,200.00 $9,000.00 $39,200.00 DEDUCT— Cost of Sales 19,800.00 7,100.00 26,900.00 GROSS PROFIT $10,400.00 $1,900.00 $12,300.00 ADD—MISCELLANEOUS INCOME: Commissions and Fees $905.00 Interest Received 750.00 1,655.00 $13,955.00 DEDUCT — Expenses 7,500.00 NET PROFIT FROM OPERATIONS $ 6,455.00 DEDUCT— Interest Paid 1,719.00 SURPLUS NET PROFITS $ 4,736.00 Copyright, 1919, The Ronald Press Company 11-26-11 ANSWERS TO QUESTIONS Answer to Question 131 — (a) First mortgage 5% bonds: 1. Obtain a certificate from the trustees under the indenture as to the amount of bonds outstanding at the date of the balance sheet as shown by the trustee's records. Reconcile certificate with general ledger account. 2. Examine trust deed to ascertain provisions bearing on the amount of bonds which may be outstanding at the balance sheet date. (b) Preferred stock: 1. In case this stock is taken care of by a registrar obtain a certifi- cate from the registrar as to the amount of stock outstanding at the date of the balance sheet as shown by the registrar's records. Compare this certificate with the general ledger account, 2. In case this stock is taken care of by the secretary of the company, list the certificates outstanding as shown by the stock certifi- cate book, thus: NUMBER OF TO WHOM NO. OF CERTIFICATE ISSUED SHARES AMOUNT Note whether the total agrees with the balance in the general ledger account, 3. Note whether any blank certificates are missing. 4. See that all canceled certificates are pasted to the corresponding stubs. 5. If the procedure outlined in (2) is not deemed to be a sufficient verification, take off a trial balance of the stock ledger. The total shown by the trial balance should agree with the total of the schedule of stock certificates, and with the balance shown by the Preferred Stock account in the general ledger. Answer to Question 132 — The effect of this treatment in the accounts is to understate the asset of materials and supplies and per contra the liability of audited vouchers payable. At the close of the fiscal period an entry should be introduced charging Materials find Supplies and crediting Unaudited Invoices, Inasmuch as the liability exists at the balance sheet date it must be reflected on the balance sheet before the true financial condition can be stated. In case the amount involved is insignificant, the auditor may ignore same if in his opinion it would not affect the financial condition of the company. Copyright, 1919, The Ronald Press Company 11-26-12 Answer to Question 135 — The records of the transactions would be as follows; JOURNAL (1) Unissued First Mortgage 4% Bonds $50,000.00 To — First Mortgage 4% Bonds $50,000.00 To record the authorized issue of 100 first mortgage 4% bonds as per resolution adopted by stockholders at a meeting held on. . • , • (2) . Discount on Bonds 2,000.00 To — Unissued First Mortgage 4% Bonds 2,000.00 To record discount allowed on sale of 100 bonds of $500 each. CASH BOOK ENTRY Cash $48,000.00 To — Unissued First Mortgage 4% Bonds $48,000.00 To record proceeds from sale of 100 first mortgage 4% bonds, par value $500 each. Answer to Question 134 — (a) DISCOUNT ON BONDS OR STOCK (1) Bond discount. It is now generally recognized that discount on bonds is an addition to the nominal rate of interest paid and as such should be spread over the term of the bonds. The proportion pertaining to the period of con- struction is admitted as a proper charge against the cost of construction of a plant . The amount of the discount would be charged to a Discount on Bonds account, which should be relieved from time to time with the credits in respect of the proportion chargeable to either (a) Profit and Loss account or (b) Construc- tion account, as the case may be. (2) Discount on Stock. The question arises first of all as to whether or not stock (at least in most states) can be sold at a discount. In the event it is done, the amount of discount should be charged to a Discount on Stock account and so shown on the face of the balance sheet. (b) PREMIUM ON STOCK OR BONDS (1) Premiums on bonds. Premiums on bonds are the reverse of discounts on bonds. The premium when received should be credited to a Bond Premiums account to be spread over the term of the bonds and applied in reduction of the nominal rate of interest paid. Periodically bond premiums should be charged with the proportion of the premium applicable to that period, the contra credit being made to: (a) Profit and Loss account or (b) Property or Construction account, as the case may be. Copyright, 1919, The Ronald Press Company 11-26-13 (2) Premiums on stock. The amount received over and above the par value of the shares should be credited to Premium on Stock account or Capital Surplus account. The latter term is used to differentiate same from surplus arising from the regular operations of the concern. (c) BONUS COMMON STOCK. In this case the common stock was issued as a bonus with the sale of preferred stock. It should be charged to Common Stock Bonus ac- count, being in effect a discount on the preferred stock. Frequently, however, bonuses are regarded as organization expenses and so dealt with. To audit the discount or premiums on bonds, obtain the periodical reports of the bankers handling the bond issue. These reports indicate the amount of bonds sold, when sold, and the discount or premium arising from the sale. Verify the amount of discount or premium unamortized and note whether the amortized dis- count or premium has been properly dealt with as between: 1. Current Profit and Loss account 2. Surplus 3. Property or Construction It would be advisable to examine the minute book for resolutions bearing on the terms on which bonds should be sold. There will probably be a contract between the bankers and the company outlining the terms of the sale. In the audit of discount on stock, premium on stock, and bonus common stock, examine the minute book for resolutions bearing on the terms upon which each class of stock should be sold. Check the various stock transactions to ascer- tain whether the proper premium was received, and whether the allowances for stock discount and the amount of bonus common stock are correct. Answer to Question 155 — Receipts for payments on account of subscription should be written up in duplicate and the receipt book numbered consecutively in advance. When receipts are issued the original is given to the subscriber and the duplicate surrendered to the office. Broadly speaking, the scheme of book- keeping would be as follows: 1. General ledger, in which all asset, liability, income, and expense accounts would be kept. 2. General cash book, arranged in columnar form in order to facilitate posting. 3. Record of audited vouchers. 4. General Journal. All checks should be signed and countersigned j all receipts deposited in- tact, and a petty cash fund established. In addition, regular financial state- fljents should be prepared, setting forth the results from operation and the financial position of the institution. To guard as far as possible against the collection and withholding of funds by the collector through the use of a receipt other than the official form, it is advisable to publish in the annual report a list of subscribers and donors showing the amount of each subscription and donation. This annual report should be mailed to every contributor. But oftentimes it will be found that some contributors will object to publication of their names and contributions. Copyright, 1919, The Ronald Press Company 11-26-14 Consequently it is difficult to ascertain whether an item has been properly or improperly omitted, because the amounts involved are usually the same. REFERENCES : Montgomery, pages 168-181 ; 185-190 Wildman, pages 61-65; 48-58 Copyright, 1919, The Ronald Press Company 11-26-15 3s- Lfe^ yw jg^ sU-. %jOjrcS^ Ofy^ ^Pncuf ^^UMJL^ Jil. 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SciJfbia 1LUL4^ hil r^l i£i:^4a. iL iH'JjsL^ 21 HlJi J^ i£*£ dJfMAioAl a J k*i^ ia id ^ ^ ^iOlK^tkZ !^ lk sil n ISM Ok I i^*SL ^ Til'fi 1 m m Oti ^^ £k Copyright, 1919, The Ronald Press Company 11-26-16 ^. A' (3aAyyuu> 1) So. ^ sye. % 'eoA- k u. TkomJL CL^j^aX ^^'^ g^<^»u>^ 1^2_ j^n. Ik Q£L 12. QO_ 3i if Mil (2.00, JX. II'. J^a 2a Idi ^ i2^ ^■ 122^ J2. ^£a U ^!{SL Li. ILL. J$iJ- ^ Li. Jac—l IZQ^QQ. ii $S2. Ll. TJ^ j^l_2 m^ as: m- m jfe_ BlL ^ 7 175, k. :f2_2 l£3. 3% ^ i^— i, oL ii. q^ 122. 5«- M J3- .Qii. n K. 2i. p. ^ ^ HL. ML ^L-1 2Z& OL ^. ii^ IL. J,3!(jtDCL. Sp toi'cJb /(j n Jk ^ ho. m0L -2? /i M. 4iL li 4o ihL l^ 12^ liqL ^ ^ -^ V 4^ 53 4i^ 02. £511 M dAiJX 12:. :^22iL 2/ ^ S\3ZQ t/o T ■4 ^ i^ 22. ^ ^ ^4 ^i3 32. £52 2^ ^ ^ # ^ ^^ 1^^ ^ , 211211 Js^ Jl-L J?r^ jJ^^jfl. ^ n jii. Sa ;22e M. £i &J2l ^. ih tih :fM2D. £h. m. Ho. I c^? n 1,513. lo ^ I 4o4 ^ MJ^ U MM lU L2M. ^ AM. 2o_ /?•' ■4 ij- i^_jjM ^ L3^ 1°. ^—l 2K Sh ^. 112. hs. £&'. ^fl££ j22_ ^ ll. J$ LSlL io ^ Mil Q0_ SlUA ^-l m. u Hj ii. 2a£.'LD .M5_ ■4 ^ n—^m ^—^, qK So_ 2£L k L nk V- Dl-fZ McL n- '.L£3. Jh. 4[i. UlLj112L ILJ 15f>g. Ls. ^-A oiL IOi(_l 2nL tsL. M. ^SSa lo_ M;l ^ M 32 11 -JMIL i2: nU Q^ 4- t£SL 3o .J2£L -4 l± fd t](,fo Ml ^ l2iL Mi: L OS^ ^.^ I QiSL. ii M—l ergo . ■^ iaJU i^ Mn^ J$ n- l%D Jk (A. M M. ^ iio LL ±^ £ogl go ^^ 72 // CI03> IL iji ogM4o ■n UmL ii ^031 014- L^. gr^ 224 5 i4o. U\ SiSz 31 >5?23 2L M ^ hSL AfH^:^ a^J/.'hrLjf aJ?»<^a^ce^ m^L iM. tin .p2. JM. m no I! 7.^ ^ JM. 7>/T // 52£ ^o M n so. 2liu /SfloS 22'2—l ■m. jh. IL JM (oli loAMLlJk M2. 2S. ^ni ir- Li}k il. IBS' 1^^ 2^ ^ U hsf ?i ikL Q&. ^ Copyright, 1919, The Ronald Press Company II-27-1 COMPLETE ACCOUNTING COURSE — PART II Lecture 27 CONSOLIDATED BALANCE SHEET Problem 59 The Central Manufacturing Co. has owned the controlling interest in John Doe & Co. and Richard Roe & Co. since the subsidiaries were organized. From the balance sheets of the respective companies given below prepare a consoli- dated balance sheet. Attach thereto your working papers showing how the con- solidated balance sheet figures were arrived at. JOHN DOE & CO. BALANCE SHEET, APRIL 1, 1919 ASSETS LIABILITIES CAPITAL ASSETS: Plant and Equipment CAPITAL STOCK: $ 50,000 750 shares at $100 $ 75,000 CURRENT ASSETS: Inventories Advance to Richard Roe k Co. Customers Cash $30,000 3,500 25,000 5,000 63, ,500 CURRENT LIABILITIES: Accounts Payable Notes Payable — Central Mfg. Co. Dividends Payable $27,000 8,500 3,000 38,500 $113, ,500 $113,500 RICHARD ROE k CO. BALANCE SHEET, APRIL 1, 1919 ASSETS LIABILITIES CAPITAL ASSETS: CAPITAL STOCK: Plant & Equipment 1 97, ,500 1,250 shares at $100 CURRENT ASSETS: CURRENT LIABILITIES: Inventories $47,400 Accounts Payable Customers 25,000 Advances from Advances to Central John Doe & Co. Mfg. Co. 7,500 Cash 3.850 83, ,750 SURPLUS $181, ,250 ^*' $125,000 $46,500 3,500 50,000 6,250 $181,250 Copyright, 1919, The Ronald Press Company I 1-27-2 CENTRAL MANUFACTURING COMPANY BALANCE SHEET, APRIL 1, 1919 ASSETS CAPITAL ASSETS: Investment in the Capital Stock of John Doe & Co. , 750 shares at $100 Investment in the Capital Stock of Richard Roe & Co. , 1,000 shares at $100 $100,000 90,000 $190,000 LIABILITIES CAPITAL STOCK: 2,500 shares at $100 CURRENT LIABILITIES: Advances from Richard Roe & Co. SURPLUS $250,000 7,500 3,000 CURRENT ASSETS: Notes Receivable of Richard Roe & Co. $ 8,500 Dividends Receivable 3,000 Cash 59,000 70,500 $260,500 . $260,500 Copyright, 1919, The Ronald Press Company II-27-3 Problem 60 From the following comparative balance sheets at December 31, 1918, and June 30, 1919, prepare statement showing the chemge in the financial condition of the C D Company between those dates: ASSETS DEC. 31, 1918 JUNE 30, 1919 Plant and Equipment $310,000.00 $375,000.00 LESS — Reserve for Depreciation ' 90,000.00 100,000.00 Investment in: Current Assets: $220,000.00 $275,000.00 X Y Z Company $ 62,000.00 — P Q Company 120,000.00 $148,000.00 $182,000.00 $148,000.00 Inventories $138,000.00 $ 96,200.00 Customers* Accounts less Reserve for Bad Debts and Discounts 31,200.00 89,700.00 Officers and Employees 6,200.00 4,050.00 Cash 7,400.00 14,500.00 $182,800.00 $204,450.00 Deferred Charges (2) $ 4,800.00 $ 8,550.00 $589,600.00 $636,000.00 LIABILITIES Capital Stock $ 50,000.00 $ 50,000.00 First Mortgage Q% Gold Bonds due 1929 (1) $100,000.00 Purchase Money Obligation $ 12,500.00 $ 12,500.00 Current Liabilities: Notes Payable $146,000.00 $ 19,400.00 Audited Vouchers 39,000.00 53,000.00 Other Accounts Payable 3,300.00 3,800.00 $188,300.00 $ 76,200.00 Surplus $338,800.00 $397,300.00 $589,600.00 $636,000.00 NOTES— (1) The Q% bonds were sold for cash at 91. (2) Bond discount $9,000, less $450 charged off during six months ending June 30, 1919. Copyright, 1919, The Ronald Press Company II-27-4 Problem 61 On January 1, 1919, X Y Z Co. acquired the entire capital stock of the P Q Co., consisting of 1,000 shares of a par value of $100 each, for which was paid the sum of $150,000. After the transaction was recorded on the books of the X Y Z Co. the balance sheets of the two companies were as follows: ASSETS X Y Z COMPANY P Q COMPANY Real Estate $ 50,000.00 $ 25,000.00 Building, Plant, & Equipment 75,000.00 45,000.00 Good-Will 25,000.00 Investment in P Q Company 150,000.00 Inventories 80,000.00 20,000.00 Accounts Receivable *60,000.00 70,000.00 Cash 10,000.00 15,000.00 LIABILITIES Accounts Payable $ 50,000.00 *$50,000.00 Loans 50,000.00 Capital Stock 250,000.00 100,000.00 Surplus 100,000.00 25,000.00 $450,000.00 $450,000.00 $175,000.00 $175,000.00 ♦Includes account of $15,000 due by P Q Co. to X Y Z Co. Prepare a consolidated balance sheet attaching thereto the working sheets used. QUESTIONS ON AUDITING Question 146-147 — How would you vouch the following items appearing in the books of a company you are auditing; and state specifically the papers or documents you would call for in support of the disbursement: (a) The Rapid Typewriter Co. Typewriter purchased in exchange for old one $ 30.00 (b) Alex. Greene Real Estate for plant site 7,500.00 (c) Automatic Sprinkler Co. Instalment paid on sprinkler system 1,000.00 (d) John Mace Stumpage purchased for 625.00 (e) Safety Trust Co. Par value $3,000 bonds 2,970.00 (f) Machinery constructed and erected by the company's staff 10,500.00 (g) John Jones, Salesman Traveling expenses for week 73.20 (h) A B Company Note payable discounted 987.50 Copyright, 1919, The Ronald Press Company II-27-5 Question 148 — How would you guard against using a voucher twice for the payment of money? Question 149 — In the verification of cash disbursements what sort of evidence would you require? Moreover, would you regard it sufficient to ac- cept the regular bank statement or passbook in support of the balance in bank at the date of the verification? Question 150 — What courses should an auditor pursue in order to verify the correctness of the following items: (a) Allowances made to customers (b) Calls in arrear Solution to Problem 54 Exhibit A EDWARDS MANUFACTURING COMPANY BALANCE SHEET, DECEMBER 31, 1918 ASSETS CAPITAL ASSETS: Real Estate Buildings Machinery and Equipment Tools and Running Gear Reserve for Cost Value Depreciation \ 23,500.00 133,127.11 64,133.34 13,113.78 3,328.18 6,413.33 1,311.38 Book Value $ 23,500.00 129,798.93 57,720.01 11,802.40 3233,874.23 $11,052.89 $222,821.34 CURRENT ASSETS: Inventories: Raw Materials $24,308.14 In Process 33,987.32 Finished Product 40,398.50 Customers* Accounts Notes Receivable Sundry Debtors Cash: With Fiscal Agents $3,425.00 Banks 6,908.73 DEFERRED CHARGES: Insurance Unexpired $98,693.96 93,183.27 19,422.03 1,378.34 10,333.73 $223,011.33 450.00 $446,282.67 Copyright, 1919, The Ronald Press Company LIABILITIES II-27-6 CAPITAL STOCK: Preferred Stock Common Stock FIRST MORTGAGE 6% BONDS CURRENT LIABILITIES: Notes Payable Trade Creditors Matured Interest Coupons Accrued Interest on Bonds and Notes Accrued Taxes Accrued Wages SURPLUS ACCOUNT: Balance at January 1, 1918 $100,000.00 125,000.00 $ 45,670.00 33,198.34 3,425.00 1,125.00 2,234.83 13,134.87 $ 42,493.98 $225,000.00 100,000.00 98,788.04 LESS — Net Loss year ended Dec. 31, 1918 (Exhibit B) 19,999.35 22,494.63 EDWARDS MANUFACTURING COMPANY STATEMENTS OF PROFITS AND INCOME YEAR ENDING DECEMBER 31, 1918 GROSS SALES Deduct — Discounts on Sales Freight Outward Allowances NET PROCEEDS FROM SALES Cost of Goods Sold (Exhibit C) GROSS PROFITS FROM OPERATION ADD — Other Income — Discount on Purchases TOTAL PROFITS AND INCOME FROM ALL SOURCES DEDUCT— SELLING AND GENERAL EXPENSES: Selling Expenses : Salesmen's Salaries and Commissions $10,375.50 Insurance Bad Debts Traveling Expenses General Expenses: Officers' Salaries Traveling Expenses $18,343.11 12,397.50 11,832.50 1,000.00 937.11 3,983.21 $16,295.82 $11,500.00 1,983.50 13,483.50 NET LOSS FROM OPERATIONS ADD~Interest on Bonds and Bills Payable TOTAL LOSS — Carried to Surplus Account (Exhibit A) Copyright, 1919, The Ronald Press Company $446,282.67 Exhibit B $583,111.37 42,673.11 $540,538.26 523,353.90 $ 17,184.36 3,118.93 $ 20,303.29 29,779.32 $ 9,476.03 10,523.32 $ 19,999.35 EDWARDS MANUFACTURING COMPANY STATEMENT OF COST OF PRODUCTION AND GOODS SOLD FOR YEAR ENDING DECEMBER 31, 1918 MATERIALS USED: Inventory of Raw Materials at January 1, 1918 $ 23,083.27 Purchases 284,311.93 Freight Inward 19,067.27 II-27-7 Exhibit C $326,462.47 Less — Inventory of Raw Materials at Dec. 31, 1918 24,308.14 WAGES INDIRECT FACTORY EXPENSES: Superintendent • s Salary Taxes Insurance Light, Heat, and Power Royalties Repairs and Maintenance Depreciation on: Buildings Machinery and Equipment Tools and Running Gear Miscellaneous Factory Expenses $3,328.18 6,413.33 1,311.38 DEDUCT— INCREASE IN INVENTORY OF WORK IN PROCESS; Inventory at January 1, 1918 Inventory at December 31, 1918 COST OF FINISHED GOODS PRODUCED ADD— DECREASE IN INVENTORY OF FINISHED GOODS: Inventory at January 1, 1918 Inventory at December 31, 1918 COST OF GOODS SOLD (Exhibit B) 2,400.00 2,234.83 1,000.00 2,483.11 3,307.50 19,083.27 11,052.89 3,350.31 $ 10,100.00 33,987.32 $ 78,111.30 40,398.50 $302,154.33 162,462.18 44,911.91 $509,528.43 23,887.32 $485,641.10 37,712.80 $523,353.90 Copyright, 1919, The Ronald Press Company II-27-8 Solution to Problem 55 V JOHN DOE BALANCE SHEET, DECEMBER 31, 1918 ' ASSETS CAPITAL ASSETS: Plant and Machinery $10,000.00 LESS— Reserve for Depreciation 1,000.00 ? 9,000.00 Furniture and Fixtures ( 700.00 LESS— Reserve for Depreciation 35.00 665.00 $ 9,665.00 CURRENT ASSETS: Inventory of Merchandise $ 9,500.00 Accounts Receivable $44,000.00 LESS — Reserve for Bad Debts 2,200.00 41,800.00 Cash: In Bank $ 2,000.00 On Hand 50.00 2,050.00 53,350.00 $63,015.00 LIABILITIES AND CAPITAL JOHN DOE— CAPITAL: Balance at January 1, 1918 $34,500.00 ADD— Investment 2,500.00 Interest on Capital 1,725.00 Profit for year 16,040.00 $54,765.00 DEDUCT— Withdrawals 1,500.00 Balance at December 31, 1918 $53,265.00 CURRENT LIABILITIES: Accounts Payable 9,750.00 $63,015.00 Copyright, 1919, The Ronald Press Company II-27-9 JOHN DOE PROFIT AND LOSS ACCOUNT FOR YEAR ENDING DECEMBER 31, 1918 Inventory at January 1, 1918 $ 8,500.00 Purchases Wages Depreciation of: Plant and Machinery Furniture and Fixtures Bad Debts General Expense Net Profit from Operation 14,750.00 7,750.00 1,000.00 35.00 2,200.00 5,000.00 17,765.00 $57,000.00 Sales Inventory at December 31, 1918 $47,500.00 9,500.00 $57,000.00 5% Interest on Capital at January 1, 1918 Surplus Net Profit $ 1,725.00 16,040.00 $17,765.00 Net Profit from Operation $17,765.00 $17,765.00 Comments on Problem 55 1. This is a simple problem in single-entry bookkeeping. The two points involved are the ascertainment of the sales and purchases for the period. This is done by building up the Accounts Receivable and Accounts Payable accounts from the information given, viz. ; Jan. 1 Balance Sales ACCOUNTS RECEIVABLE $26,500.00 Dec. 31 Balance 47,500.00 Cash $74,000.00 $44,000.00 30.000.00 $74,000.00 Deo. 31 Balance Cash ACCOUNTS PAYABLE $ 9,750.00 Jan. 1 Balance 12,500.00 Purchases $22,250.00 $ 7,500.00 14,750.00 $22,250.00 2. Five per cent is to be provided for bad debt reserve. Whether this is to be calculated on the sales or the outstanding accounts is not clear. The latter method would appear to be preferable under the circumstances. 3. The Profit and Loss account brings out the method of stating interest on capital, which is not an expense, but only a method of dividing profits. Copyright, 1919, The Ronald Press Company 11-27-10 Solution to Problem 56 Balance, July 1, 1918: Debtors |5,820.00 Petty Cash . 500.00 Stock 3,450.00 $ 9,770.00 NEW YORK—CURRENT ACCOUNT Cash $17,100.00 Rents and Taxes Salaries and Wages Goods from Factory Net Profit 200.00 1,650.00 11,500.00 6.000.00 $29,120.00 Balance, December 31, 1918: Debtors Petty Cash Stock ^7,220.00 500.00 4,300.00 12,020.00 $29,120.00 SAN FRANCISCO— CURRENT ACCOUNT Balance, July 1, 1918: Debtors $6,140.00 Petty Cash 500.00 Stock 3,820.00 $10,460.00 Rents and Taxes Salaries and Wages Goods from Factory Net Profit 175.00 1,520.00 10,240.00 5,880.00 $28,275.00 Cash $15,640.00 Balance, December 31, 1918: Debtors Petty Cash Stock $7,415.00 500.00 4,720.00 12,635.00 $28,275.00 MONTREAL— CURRENT ACCOUNT Balance, July 1, 1918: Debtors $7,240.00 Petty Cash 500.00 Stock 3,650.00 $11,390.00 Rents and Taxes Salaries and Wages Goods from Factory Net Profit 75.00 1,600.00 10,350.00 4,810.00 $28,225.00 Cash $15,250.00 Balance, December 31, 1918: Debtors $7,975.00 Petty Cash 500.00 Stock 4,500.00 12,975.00 $28,225.00 Copyright, 1919, The Ronald Press Company 11-27-12 00 r-l Q So pi) Q W O M O W ^ 9 PQ W Q o o o o o o o o o o • • • • • O Ifi o in o Tj« C3> 00 tn I> CD CD rH t- CM •> • • » * o in rH C^ CD iH iH rH •^ «» «» - CD rH '"t 00 fH CM tn iH H CM iH •> » M • * » •> CO lO CM b- lO o H iH Pi (H H Tl* O «> «» (D o o O O O Pi o o • • o • O • O O J3 o o o o d ■P O lO in CM CM o •H CO c^ O c^ •« * • * 9k fc^ fH 00 CD to tn rH iH ■«* o «» «» o o o o O o O O o o •H •P o o o o o o o O O o o • • • • • • • • • CO tn o o o o o o o o o o O lO CM tn o in o in o CM § « iH to CQ >* CM in CD 01 t>- •> •> •« • •> •« «l t>- CM t«- to H H to H rt >* «> «» (D CO tn <-« rj .H o rt o o o o o o o ■ci 2: o o o o o o o CO • • • • • • x: o o o o o o o o a> W O ^1* lO OJ CM CM 3 (0 Pi ^ M H CD CM o t- Gi •k » «% •> •k * •> O t^ lO to CM CD CD x> to H rH H to iH H CO tn .p «9= ^: (D CO O O O O O CO o o O o O in 4h « • a • • •H O lO lO o o Oi ■P (0 Wk m •k 9s * TJ to w to t> CD }» 3 CM CM CM -* rH H ^ rH O ^ «» (D 'H t CO (D o •g •H n a s •d 13 . in 0) •H O *> Oi en F^ (D F^ •H a H S O ttO Pi *H ♦» <0 o P CO tn 3 o o Ih in o & . 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CO CM r-i Oi CD CM to CO CO lO CM t> to O H O O in ^ «» o o in 00 iH Oi s »-J 4^ § ♦* n o o § m *i o ♦» o §§ < 9 n « o o ac o *> o u < o a o § A o a> o «-s ♦» o < (i *< CO o s s^ p H ♦> f: cn o 3 4^ o> tn s u, u a a •H g o to u m a> 1 o *> 5 tn 5 u 1 h • tn o * (D a ^ o u iH (D o <0 9 1 •H :3 o 3 rH 4-> Pm •o 1 o tn >. CO § H a> *» 1 ^ 1 ^ rH tn in s u a 1 o 1 en 3 a o "2 tn ^H O M S iH CO •-> TJ o t^ tn s «J v« a ^ (0 £• o w o^ a> 9 ^ Q> x> u i» o (< 0) ^ a •H . o A4 in Pi » in f^ in Q _, o v> 4J J5 ♦J <*-> O 0) :3 o •o 00 4J •d > » 9 q o in •»j ^ o H 4J r-« o i-i C -a to q a> o CD CO a> 0) 4-> (d 0} rH o (0 o (0 s M s to X 1^ u cu Q tn w PC «< C3 to » ca s Copyright, 1919, The Ronald Press Company 11-27-14 A COMPANY STATEMENT OF PROFIT AND LOSS FOR SIX MONTHS ENDING DECEMBER 31, 1918 TOTAL NEW YORK SAN FRANCISCO MONTREAL SALES: On Account Cash TOTAL SALES LESS — Returned Sales and Allowances NET SALES COST OF SALES: Inventory at July 1, 1918 Goods from Factory LESS — Inventory at December 31, 1918 $34,525,00 $12,500.00 '$11,800.00 17,730.00 6,250.00 , 5,380.00 $52,255.00 $18,750.00 $17,180.00 670.00. 250.00 140.00 $10,225.00 6,100.00 $16,325.00 280.00 $51,585.00 $18,500.00 $17,040.00 $16,045.00 ,920.00 $ 3,450.00 $ 3,820.00 32,090.00 11,500.00 10,240.00 $43,010.00 $14,950.00 $14,060.00 13,520.00 4,300.00 4,720.00 $ 3,650.00 10,350.00 $14,000.00 4,500.00 $29,490.00 $10,650.00 $ 9,340.00 $ 9,500.00 GROSS PROFIT FROM SALES $22,095.00 $7,850.00 $7,700.00 $6,545.00 DEDUCT—EXPENSES: Salaries and Wages Rents and Taxes Bad Debts TOTAL EXPENSES NET PROFIT $ 4,770.00 $ 1,650.00 $ 1,520.00 450.00 200.00 175.00 185.00 125.00 $ 1,600.00 75.00 60.00 $ 5,405.00 $ 1,850.00 $ 1,820.00 $ 1,735.00 $16,690.00 $ 6,000.00 $ 5,880.00 $ 4,810.00 ANSWERS TO QUESTIONS Answer to Question 136 — Where the company is acting under a special resolu- tion, the auditor should examine same and ascertain that it is in order. The auditor should also see that the statutory provisions have been complied with. This will enable him to vouch the necessary journal entries recording the alteration or reduction of the capital. Where the scheme involves an alteration in the number of shares held by each shareholder, or in the nominal amount of such shares, or the conversion of one class of shares into another class, the auditor should check the neces- sary entries ; and where new share ledgers have been opened, he should ascertain that each shareholder is duly credited with the amounts to which he is entitled. All canceled certificates should be inspected. Copyright, 1919, The Ronald Press Company 11-27-15 Answer to Question 137 — From the minute book ascertain the authority upon which the commissions are being paid and the rate thereof, audit the voucher check in the usual manner, giving especial attention to the accuracy of the commission calculation. Note whether the vouchers are approved by someone f&miliar with the commission contracts. Answer to Question 138 — (a) Purchases of additional equipment, being extensions to existing proper- ties, represent legitimate charges to capital asset accounts. Therefore, the expenditure of §100,000 for locomotives, passenger cars, freight train cars, and other equipment is a proper capital addition. If this equipment were pur- chased to replace other equipment the necessary entries in respect of the book or record value of the equipment sold, destroyed, or dismantled should be made to relieve the property accounts and per contra debit the depreciation reserve account. (b) The description of the expenditure clearly indicates that it was of an extraordinary nature and tended to prolong the life of the equipment against which provision for the accrued depreciation had been made. In other words, this expenditure tended to make good or arrest depreciation and therefore is a proper charge against the depreciation reserve that had been created for this purpose. The auditor should examine the vouchers supporting the purchase of equip- ment. These vouchers should be examined as to authority and clerical accuracy. Assuming the concern made its own repairs, it will be necessary to verify the material and labor charges from the stores requisitions and pay-rolls. If burden has been added to prime cost it is especially important to inquire into the basis upon which such burden has been added with the view of ascertaining whether an excessive £imount has been charged. Answer to Question 139 — (a) Interest on bank loans, $3,700. If the moneys were borrowed for cur- rent working capital requirements of the business in connection with the manu- facture and sale of its product, the expenditure would be a charge against the Profit and Loss account of the period. If the moneys were raised for the pur- pose of meeting payments in connection with construction work and represented interest on the loans during the period of construction, the expenditure would be a proper charge against the capital asset or property accounts. (b) Legal and other expenses, $1,000, incurred directly in connection with the acquisition of certain property would be a proper charge against the capital asset accounts, being, as it is, a part of the cost of acquiring the property. (c) Consulting engineer's salary $7,500. There is not sufficient informa- tion given in the question to enable one to determine whether or not the ex- penditure should be charged against capital or revenue. The whole question is, ■On what kind of work did the engineer spend his time, i.e., in connection with additions and extensions to property or in the repair and upkeep of the prop- erty?" In the first-named case the charge would be against capital asset ac- Copyright, 1919, The Ronald Press Company 11-27-16 counts, and in the last-named case the charge would be against the Maintenemce or Repair Expense account, or, in other words, against the Profit and Loss account of the current period. It may be that part of his time was spent on construction work and part on repair and upkeep work. In this case the charge would have to be apportioned between the two accounts. It appears under the provisions of the trust deed that 80% of the cash expenditures for additions and betterments are fundable. Consequently in either case, the auditor must ascertain; 1. Whether the items in question constitute proper charges to additions and betterments. 2, Whether they have been paid for in cash inasmuch as cash expendi- tures only are fundable. Answer to Question 140 — Journal entries should be supported by a journal voucher properly approved., Documentary evidence supporting each entry and showing an approval of the transaction by an official should be called for even though formal journal vouchers are not used. HOLDING COMPANIES EARLY HOLDING COMPANIES — 1. SPECIAL CHARTER COMPANIES Pennsylvania Company — 1870, by Pennsylvania American Bell Telephone Co. — 1880, by Massachusetts '2. GENERAL LAWS First enacted in 1888 by New Jersey. Now in force in majority of states. METHODS OF CONSOLIDATING — 1. MERGER. One of the original companies acquires the net assets of the other companies, vendors dissolving. Acquired properties operated as branch works or dismantled. 2. AMALGAMATION, A new company is formed to acquire the net assets of the consolidating companies • vendors dissolving. Acquired prop- erties operated as branch works or dismantled, 3. HOLDING COMPANY. One of the old companies or a new company acquires a controlling interest in the capital stock of the consolidating companies. Original companies retain their corporate existence and operate separately, BALANCE SHEET — Balance sheet of merged or amajLgamated company and holding company contrasted as to information conveyed with regard to: 1. Relation of quick assets to fixed assets, 2. Relation of capital investment to fixed assets. 3. Working capital as represented by the excess of current assets over current liabilities, 4. Surplus available for dividends. Copyright, 1919, The Ronald Press Company 11-27-17 CONSOLIDATED BALANCE SHEET — A consolidated balance sheet does not, nor does it pretend to, represent the financial condition of any particular corporation, or, in fact, any legal entity whatsoever. It is a statement set up in balance sheet form which represents the true financial condition of a group of com- panies which from a practical point of view are in reality one organization. In the preparation of such a statement all items affecting the companies inter se are eliminated so as to present their financial position so far as the public is concerned. ■ MODUS OPERANDI " — 1. On the consolidating working sheet the accounts are 15sted vertically and the companies horizontally, with additional horizontal columns for "Inter- company Adjustments" and "Consolidated Balance Sheet." Reverse method may also be used. The intercompany transactions to be eliminated are listed in the "Intercompany Adjustments" column. Similar assets and similar liabilities are aggregated and the totals listed in the "Consolidated Balance Sheet" column. 2. Heading of consolidated balance sheet should indicate clearly that that statement shows the condition of all the affiliated companies and not merely the holding company alone. ADVANCES TO AKTO FROM AFFILIATED COMPANIES may consist of : 1. Loans by holding company to subsidiary, evidenced by open account or note. 2. Loans by subsidiary to holding company, evidenced by open account or note. 3. Loans by one subsidiary to another subsidiary, evidenced by open account or note. The loans receivable and loans payable, being exactly equal, offset each other and neither is shown in the consolidated balance sheet, DIVIDENDS — Dividends payable by an affiliated company which will be re- ceived in toto by another affiliated company are eliminated. If the entire dividend does not pass to the holding company, that proportion pertaining to parties outside the organization is shown as a current liability. That pro- portion of the dividends receivable not derived from an affiliated company is shown as a current asset. INTERCOMPANY SALES AND PURCHASES — The amount due from affiliated companies for goods sold should equal the amount due to affiliated compeinies for goods purchased, and both are eliminated, I NTERCOMPANY NOTES RECEIVABLE DISCOUNTED — Where a not© iS Signed by one affiliated company and discounted by another, the liability of the several companies considered as one organization is direct, not contingent, and would be shown as "Notes Payable." Copyright, 1919, The Ronald Press Company 11-27-18 INTERCOMPANY BOND OWNERSHIP — Holding company may own part or all of the subsidiaries' outstanding bonds, and the subsidiaries may own part or all of the holding company's bonds, or the bonds of other subsidiaries. In any event, the par value of the intercompany bonds owned by affiliated companies would offset the corresponding liability of the issuing affiliated companies, and on the consolidated balance sheet there would appear only those bonds of affiliated companies which were held by the public, INTERCOMPANY STOCK OWNERSHIP AND GOOD- WILL — 1. Where a holding company acquires the shares of a subsidiary at book value , the investment account on the books of the holding company is exactly offset by the par value of the capital stock appearing on the books- of the subsidiaries and the proportion of the surplus pertaining to those shares, and both are eliminated. 2. Where a holding company acquires the shares of a subsidiary at a price in excess of the book value, such excess represent intangible value in the nature of good-will. If possible, it should not be merged with tangible values. It cannot be considered as a charge to surplus as that procedure would treat the excess paid as a loss. 3. Where a holding company acquires the shares of a subsidiary at a price less than the book value the difference should be: (a) Applied in reduction of any existing good-will, or (b) In reduction of the valuation placed on "Cost of Properties." (c) If there are no intangible values to be extinguished, may be shown as a capital surplus, but not as "Surplus" available for dividends. 4. Good-will in the consolidated balance sheet is used in its broadest sense, i.e., to represent any intangible value. MINORITY STOCKHOLDERS — If the holding company does riot own all the shares of its subsidiaries, the equity of the minority stockholders would consist of: 1. The par value of the capital stock held by the minority stockholders, 2. That proportion of the undistributed surplus to which they are en- titled by virtue of their ownership of the aforementioned stock. This equity would be shown on the consolidated balance sheet thus: MINORITY STOCKHOLDERS' INTEREST IN AFFILIATED COMPANIES: Capital Stock (par value) $ Surplus $ It is customary to aggregate the entire minority stockholders' interest in the various subsidiaries in the manner just indicated, and no effort is made to show the amount of such interest in any particular subsidiary. SURPLUS (Undistributed Profits Available for Dividends) — 1. SURPLUS OF SUBSIDIARY AT DATE OF PURCHASE by holding company is part of the assets acquired, and should be applied in reduction of the holding com- pany's investment account for the purpose of preparing a consolidated balance Copyright, 1919, The Ronald Press Company 11-27-19 sheet. Only the holding company's proportion of the profits earned after the date the controlling interest was acquired can be considered as Surplus avail- able for dividends. 2. DATE OF PURCHASE is date contract was entered into and not the date the transfer was actually consummated, provided the purchaser had a legal existence at that date. 3. INTERCOMPANY PROFITS IN INVENTORIES consist of the profits made by an affiliated company on goods sold to another affiliated company, and on hand in the latter 's inventory. Such profit is not earned (from the viewpoint of the organization) until a sale is made to a solvent debtor outside the organiza- tion. The intercompany profit should be deducted in toto from the surplus pertaining to the holding company. No portion can be deducted from the minority stockholders' interest in the surplus, since these profits are earned so far as the individual companies are concerned, 4. INTERCOMPANY PROFITS IN CONSTRUCTION consist of the profits made by an affiliated company on construction work performed for another affiliated company. Following the generally accepted practice that construction work performed by a company for itself should be valued at cost, it would seem that construction work performed by one unit for another should also be valued at cost within the organization. Intercompany profit should be excluded and, as aforementioned, should be deducted in toto from the surplus pertaining to the holding company because so far as the performing company is concerned, the profit is realized, OTHER METHODS OF STATING THE FINANCI AL POSITION OF HOLDING COMPANIES — 1. Summarize the financial condition of the subsidiary under the heading of "Investment in Subsidiary." 2. Attach a balance sheet of the subsidiary as an exhibit supporting the asset of "Investment in Subsidiary." 3. Attach a columnar statement containing the balance sheets of the indi- vidual companies and a combined balEince sheet (after eliminating all inter- company items) as an exhibit supporting the asset of "Investments in Subsidiary Companies Controlled." 4. Using the consolidated balance sheet form as first outlined, take up only the holding company's proportion of the assets and liabilities of the subsidiaries so as to avoid showing "Minority Stockholders Interest in Sub- sidiary Companies." WHEN IS A COMPANY A SUBSIDIARY ?— 1. An investment in shares of another compeuiy is a marketable investment in case of : (a) Temporary investment of surplus funds in shares of another company. (b) Company purchasing such shares as stock-in-trade. Copyright, 1919, The Ronald Press Company 11-27-20 2. An investment in shares of another company is a permanent investment In case of: (a) Purchase of shares as investment of reserve funds, (b) Purchase of shares for purpose of controlling facilities as in the case of a union depot company. 3. Relation of holding company and subsidiary arises where one company: (a) Owns a majority of the voting stock of another; and (b) Exercises the control obtained by virtue of such majority ownership. NOP COMPANY & SUBSIDIARIES CONSOLIDATING WORKING SHEET DEBITS INTERCOMPANY CONSOLIDATED ACCOUNT A B CO. C D CO. N P CO. ADJUSTMENTS BALANCE SHE] Investment in Capital ' Stock of A B Co. 500 shares at $100 $ 50,000 (A)$50,000 Investment in Capital Stock of CD Co. 250 shares at $100 25,000 (B) 25,000 Cash ( 500 $ 1,300 25,000 $ 26,800.00 Receivables 10,000 18,000 28,000.00 Inventories 14,500 21,200 35,700.00 Land 10,000 10,000.00 Buildings 25,000 25,000.00 Furniture & Fixtures 7,500 2,500 10,000.00 $67,500 $43,000 $100,000 $75,000 $135,500.00 CREDITS Accounts Payable $16,000 $18,000 $ 34,000.00 Accrued Wages 1,500 ( 50,000 (A)$50,000 1,500.00 Capital Stock ( 25,0 00 (B) 25,000 ( $100,000 100,000.00 , $67,500 $43,000 $100,000 $75,000 $135,500.00 REFERENCES : Dickinson, pages 176-186 Kester, Vol. 2, pages 600-619 Copyright, 1919, The Ronald Press Company 11-27-21 • c .. — J 1 — —- — [^ 1 1 — 1 . "-- ! 1 r~ 4 _, t -^ %'i _L 8 ^ 1^13 •> I -^^ S ' ? « a 1? ^ ^ s -i!^ S g' :3 ^a ^ S X a . qI r « ■ w ^ c g 'T ^5,^3i X'Si^liJli ^^ •* li^-^ s slJ = ■ ^ - «i- •* 5"^~2~? "^"^ - ^"^ "^ fi ^ *v - ^ Q«* a t -^a r ?. ^ ^ • 1 t- J * — 1 1 ^ >^ "9" "J— - — - J. •* ^ « 9- S ss c4 [ 5 ~j U S !d s § 8 s; ?"' SL5 St"? ■tr P. 55 ^|S4 h A N ^K 5^ Z^ SS JS £ aJIc?a. 7 ^. ^ M> 'fri r tr ( AA^t 4 » i^/i vr^ ^ '^ A vo n ii t ??f ?m Ii ^r -6 C£ua ti (^. M ^ '/'ii'? .(,r TTi V1/ n h^ <7o i' rei uJo\ f- 1 7f r? 1 /ru 9« ' A v^ « U ng H 'iS • Vud w (Fa v^ r^ rV f? ^ qu7 ,2j? %. ~\l yiW^ ^fT *f ^. ^fi T-^ ^ ?4'? >a "Tk CfiKo U-ur*' '.^ h ' V ^ ^rM' «x/ f stc« - , ^ Z\, ^^ S . ( ^ ^A I & fMO 9^ % r\A fA- (bun Q 1 ' // W^ T^ 4 'l? m n r n^ Of ■ v^ r i Htuta 9UX ) 1, (??/? 9^ / (V( 1^ 27 77 *i^ t^ r '. XOm 7 .J. /47 Ig 2, 0^ I? U fo i ML 7^. 10 ■■7} gli /,f / ^n ^ f-^ f^^ % U (LUi I • fr. ^ f^l ^ ^IrS, f«? U %vr^ ct. ^ ^. \{ 1 7 ht W 1,^ Mt i t^ Wfi ^■ /(AA r (?/. ru fa a JD ■ V. f- 1 <^ S^ i L M tt'^ \A,^ >c f^ V 9A'' Mis£A ^ 7 loA l£l ^ (U ■A 2L i lauLi «yv- H'f h ^^ 2f7 i> u f,% Qf> 4 Hiy t? It I /if 1^9 ^f^ 71? *f^ nn 7 7f Ha - ? i/k\\ r ?> r^ri !/B/l -fi. *7- ^^ W nn ^fM' «/ nu ^ ^ i<3<> t/*0 '( &£ M £^ L IfS 7i u KQ M f/tfH ■CM 'V «<^ iVM, % a flfti 'ft ^ ' f Xi* 7 ^ *jr V toKi ^ i M 1 T ■■ ■ "1 1 n Copyright, 1919, The Ronald Press Company 11-28-12 3\ 'f. if^hLTUAO^ V- &>. QjM'^^^}^^^^^^^*^ Q:^- 56 :tc ■3 >fr »>T^ C 'f .^ 7 J i^i f^, ■2. A LO Aa^ 4 a, , iju -^ FM, . 1 '^ A 1 / \M/ tAAJI. rv_ 4 (B '^XJt. ^ -*><..« ^ • 1 d 'ffj ^ B/M /^^ // ^(>H ('I ;;rp 'i ^^ UM -M\< ^ '^i^Ai 7^rrM mJ- (iy i?. ^^ /)^ (? ^ h M ^7 ^A ^:?^ 'if <■ rff ^ 1 ^ ylA^ ovu ^ T ZXfy ' -i ur At^ ^-ce* 7 a % (^ ^ 1/* 4^ le'^ J) < ( ^o) (2 H -ct- / UjU> 1 J,...,. 4 70 on ^ ^. f/t^ '" vf^ *■ i^i V\Ji^ fr?' Ux _ OKc A /H- ^ l^o oo c u ^ n 7 ^ ?^ V 1 7/^ ^ I to u / 'II] & m /C^ , 4 711 "7 J^ -he 'A<*^ r^. ^^ tp} '\eM la OJ 'A ^^ 3 ? V!f . _ Copyright, _1919, Ihe, Ronald Press Company 11-28-13 2< f^ ^..lA^^t^ "J^^. /7 /tAAAX)ttM.'\ U^U/V^K^Ojiy (h'TiXruX^ - P^U»iC 3 B (J f '' Ct: /j/fei,ui!i»v< »r. 4r. 1 'IP) ifrf AAA Kl ^leL < ^3 009 00 ^0 : — t ^/i^ 0<2^ a cc< i«. u. ff^^ ( I?>t-( la ^3 000 .00 % ^ po^ CJ&C rv/t/u ^>lx fu ^»v^ ■'!■ Il9 1 '^ "^ hf, 'is ' 1 ^l^) C'tt VU. \dy\ ^tiaz U0 >L y^ mJ( ^.^ / 77h 7ft ^0 M^ (5 K Uaj- rA, * f 7z4 ii/. ft \Kp ^ 0^^, Vt<> ^ A ^i ^PX? >-a p ■cs. > th ^^ -r/. ;, ^ _/££ ^U r ■ / '¥) ii<^ ^A'A fA\ KJ 5d>1 yK y % / ( , U. 4oo 00 ^< r ..ji yi^ ^ ^c iT^ 7 ({ «^ •6t >-) C . « 3 « i m u m I. *t • f • n TJ T3 ^ ««!««> 3 3 3 3 t4 I. U U V U V V u u c u < <<< 8 oeo 2S. I « o ( ^4 «> is 7 a f-t i « o u • •-I II • lO 11 r- p- lO e- o s t~ ^ 3 s s s .r-t to T>. -^ • t« J4 *' • a Tj O »< < « O « M td -tec ^ TJ « c « -• > •-« o u u H « • • a o v^ B 3»->v, ■< « t-t — -a: 3 C-« r-« ' to ~ •3 3 8 CO TJ <» TJ > • a ;; I a; V o> 3 <-i o r^ u. « « }. lO t^ •-•iN Mi«) •oiin t^ t O II r- » r- II ■^ t Ci W - t - 11 |0 t O II M> » •-« II I A II i OW«00> liOO* I^CM l-t r-l Ol a I n I •-« rt CM I lO I r>lO r-< I flO CM ^ r> » I CO o> «>n CM • to M man « ♦* O w •* ^ O • H ». a •« u •> HiC • • • u o KUi4 CE • « o • al • 9 K o • • *> /a o Ur4 < • *< o « • » *• p. b • • •X'^ • ox: << a tj k 6*" FiTJ TJ -.^ O SIS 11-29-12 BthlMt IX ^ P« P. L. BARWaS ARC COMPANY B. STORY MANUFACTURING COMP A.N Y CONSOLIDATED 3TATMSNT OF PROFIT AND L0S3 YgAR SNDING DBGlftlBSR 31. 1918 Par t 1 c u 1 a r B GROSS SALES less- Discounts, Returns and Allowances Net Sales ISSS- COST OF SAI2S Grose Profit from Sales ADD: Income from Restaurant Miscellaneous Income Anount 508.68 26.78 Gross Profit from Operations JJ5S3-f SELLING AND GBNEBAL EXPENSES » lifagazine Advertising $11,876.07 Newspapef Advertising 6,178.29 Uiscelianeous Selling Expenses 6.167.03 Officers' Salaries 16,660.00 Office Salaries 14,447.01 Rent 3,204.99 Inventory Depreciation 1,558.18 Bad Debts 702.79 Miscellaneous General Expense 2,049.72 Net Profit from Operations LESS: Interest paid Interest received t 9 .430.17 551.76 Surplus Net Profit before providing for Federal Taxes IBSSr RESERVE FOB FEUBBAl TAXES Final Net Profit Which is Accounted for Thus: Minority Stoclrholder8» Interest Provision for Sinking Fund Reserve Balance • Carried to Surplus Account f 441,817. 62 85,094.05 $356,723.67 262,151.62 i 94.572.06 336.46 i 94.907.61 62.834.13 $ 32.073.38 8,878.41 $ 23. 194; 97 2,627.44 $ 20,567.53 # 448.24 10,000.00 10,119.29 i 20,667.63 Copyright, 1919, The Ronald Press Company i P m < n < p. ^ •-] a * o c o> o r5 B o: -< e m g M B a • K 1 tut K C < 1 s s P 1 < •-I 5 f « a ;i 1 o> A »^ 1 - »■ m • § b: t-l /> • < 5 i: O a p. • t ?^ o o-f o Ne- oa) * o<-« >-t o 1 ■-• IS tf> 1 « » o » •-< k <-l • •-t r-» 1 t y l«» 'T* s » 1 t- o • p- 1 CJ > oo • lO < o> i t' o » r» % o *-♦ :8g 1 O » o •^ 1 C' t f:i o . e-<-« I A • .-» . KJr^ 1 M • «» >4» • 4» I o • » • » t Ok > » t O. • M 1 N t CM t S 1 * » 1 - 1 • « ^ :!;i :?:: 40 i«» i«» • s:9 ■ e 5 *• c •' • o o rl (QtE • « C C <-• K O O a p. *• *> >t a o 01 a • a Pk *> I- »> C a a a a ♦' »• a a o c c C ■»» C »-l M COL ofc;^ « « k4 « • * a 3 3 A Xi -c ». ». c c ». » a Sx a •-« < a - a cc •-I a (o o. c gi-i td aio B u ♦< ^ R <•- a C a (. 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Question 157— (a) What is a statement of charge and discharge? (b) State the purpose for which this statement is prepared (c) Draft same Question 158 — (a) What is a trustee's cash account? (b) Draft same Question 159 — Outline a method of presenting the accounts of a trustee or executor without the use of a statement of charge and discharge. Question 160 — Explain the following terms commonly used in estate accounting: (a) Principal (b) Corpus (c) Income (d) Testator (e) Intestate (f) Legatee (g) Life tenant (h) Remainderman (i) Beneficiary (j) Advances (k) Apportionment (1) Estate (m) Trustee (n) Executor (o) Administrator Question 161 — (a) Outline your conception of the distinction between principal €uid income as applied to estate accounting. (b) In what way, if any, does this differ from industrial or com- mercial accounting? Question 162 — (a) What is a consolidated balance sheet? (b) What function does it perform? (c) In what way does it differ from the ordinary balance sheet pre- pared for industrial £ind commercial concerns? Question 163 — (a) What is a consolidating working sheet? (b) State the purpose for which it is prepared. (0) Draft form. Copyright, 1919, The Ronald Press Company II-30-2 Question 164 — Explain the following terms commonly used in connection with consolidated balance sheets: (a) Holding company (b) Subsidiary (c) Controlling interest (d) Minority stockholders' interest (e) Good-will (f) Intercompany adjustments (g) Date of purchase Question 165 — (a) What is your conception of an audit? (b) Name several kinds of audits giving the distinguishing character- istics of each. (c) State the objects to be attained by an audit. Question 166 — (a) What do you understand by a "system of internal check"? (b) What bearing, if any, would such systems have on the auditor's work? Question 167 — Give a brief outline of the duties of an auditor. Question 168 — At what stage of an audit should cash and negotiable se- curities be examined? Why? Question 169 — An audit of a set of books for the half-year ending December 31 is begun on January 26. State the procedure you would adopt to prove the correctness of the cash on hand at December 31. Question 170 — In an audit of the accounts of a firm or corporation how may the cash, as shown by the bank pass book, be reconciled with the amount called for by the cash book or ledger? After this has been done, is it necessary to check the pass book with the deposits as shown by the cash book? What might such detailed checking show? Question 171 — Give a convenient method of ascertaining whether accounts receivable are good, bad, or doubtful in a concern with 5,000 open accounts at the date of the balance sheet. Question 172 — State a method of procedure in an examination of securities consisting of bonds, stocks, and bills receivable. Question 2-73 — State the precautions you would take in verification re- quiring several days' work, of the securities of an insurance company includ- ing both stocks and bonds in negotiable and non-negotiable form, Questi'on 174 — How would you satisfy yourself as to the existence of se- curities given as security for a loan to a company? Copyright, 1919, The Ronald Press Company II-30-3 Question 175 — In auditing the books of a manufacturing business that had a supposedly highly developed cost system, what steps would you take regarding inventory values that were found to agree with the cost records? Question 176 — The accounts of a steel and iron company show large additions to plant and machinery. It is found that these charges include considerable amounts from pay-rolls. In the absence of specific explanations as to pay- roll element, what method should be employed by the auditor to determine the accuracy and propriety of these charges? Question 177 — Give the procedure you would adopt in auditing cash payments, and state how to prevent the reproduction and passing of vouchers a second time. Question 178 — (a) Under what circumstances should paid checks be treated as vouchers? (b) Are checks proper and sufficient vouchers for purchases? Question 179 — In examining cash vouchers in the course of an audit is it necessary to place your initials or some other distinctive mark on each voucher? Question 180 — In an audit stipulating for the examination of all vouchers of every description, what would be proper vouchers for the following: (a) Purchases (b) Return purchases (c) Sales (d) Return sales (e) Cash receipts (f) Cash disbursements (g) Journal entries Question 181 — How would you satisfy yourself as to whether the credits for merchandise returned are bona fide, and not made for the purpose of concealing a shortage in cash? Question 182 — In making an audit would you consider it necessary to check in detail the postings of subsidiary ledgers? Question 183 — Of what use is the minute book of a corporation to an auditor? Question 184 — Should the auditor verify the stock ledger of a corporation? Question 185 — In an audit of the accounts of a corporation should the auditor accept as conclusive the certificate of the registrar of the stock as to the total amount of capital stock outstanding? Question 186—13 it the duty of an auditor to examine the transfer books of a company? Copyright, 1919, The Ronald Press Company II-30-4 Question 187 — Give the steps to be taken to insure the statement of the full liability on the following items appearing on the balance sheet: (a) Preferred cumulative stock (b) First mortgage bonds (c) Collateral trust bonds (d) Income bonds (e) Car trust notes Question 188 — An auditor is engaged by a man who is buying an interest in a firm, to report upon the assets and liabilities of the' firm as at a given date and upon the profits of the three years just prior. Upon the auditor's report he purchases an interest in the firm and in its assets and liabilities. Six months later it is discovered that there were bills payable due by the firm amounting to $10,000 at the time the auditor made his examination and not reported upon by him, and that these bills had continuously been due by the firm for one year prior to such examination, but no record of same had been made upon the books. Under what circumstances would the auditor be considered guilty of negligence in not discovering this fact, and under what circum- stances would he be considered entirely free of any blame in the matter? Question 189 — In the statement of the earnings of a business to be sold on the basis of its earning capacity, how should the question of interest paid on accounts payable, on bills payable, and on loans be treated? Question 190 — In the case of an audit of the books of a corporation where the volume of transactions is so large that a detailed checking of postings and footings is out of the question, what course should be pursued in the examination in order to insure the correctness of the balance sheet? Copyright, 1919, The Ronald Press Company II-30-5 Solution to Problem 62 MONTAUK MANUFACTURING CO. STATEMENT OF AFFAIRS, JULY 2, 1919 ASSETS Expected Book Value To Realize CURRENT ASSETS: S 1,402.00 Cash $ 1,402.00 2,108.00 Bills Receivable 2,108.00 19,740.00 Accounts Receivable 18,100.00 35,800.00 Inventories 29,000.00 % 59,050.00 $50,610.00 CAPITAL ASSETS: 600.00 Office Fixtures $ 500.00 7,000.00 Tools and Appliances 4,000.00 50,000.00 Machinery $30,000.00 DEDUCT — Partially Secured Claim (per contra) 45,000.00 8,000.00 Boats $ 6,000.00 DEDUCT — Fully Secured Claim (per contra) 6,000.00 4,000.00 Horses and Trucks $ 3,000.00 DEDUCT — Fully Secured Claim (per contra) 3,000.00 90,000.00 Factory Site and Buildings $90,000.00 DEDUCT — (per contra) Bonds $90,000.00 Bond Interest 2,700.00 92,700.00 $159,600.00 $ 4,500.00 CONTINGENT ASSETS: Notes Receivable Discounted $ 340.00 $218,650.00 Total All Assets $55,110.00 DEDUCT — Preferred Claims (per contra) 2,500.00 Total Net Free Assets available for distribution among creditors (subject to expense of realization and liquidation) $52,610.00 Balance — Deficiency to Creditors 6,890.00 59,500.00 $218,650.00 Deficiency to Stockholders (non-assessable) $27,990.00 Copyright, 1919, The Ronald Press Company II-30-6 LIABILITIES Gross Expected Liabilities To Rank PREFERRED CREDITORS: ( 2,500.00 Taxes, Wages, etc. (deducted per contra) $ 2,500.00 FULLY SECURED CREDITORS: 9,000.00 Chattel Mortgages $ 9,000.00 (deducted per contra) 9,000.00 PARTIALLY SECURED CREDITORS: 90,000.00 Bonds (Principal) $ 90,000.00 2,700.00 Bond Interest 2,700.00 $ 92,700.00 DEDUCT — Value of Factory Site and Buildings (per contra) 90,000.00 $ 2,700.00 45,000.00 Chattel Mortgage $ 45,000.00 DEDUCT — Agreed Value of Machinery (per contra) 30,000.00 15,000.00 UNSECURED CREDITORS: 30,000.00 Bills Payable 30,000.00 11,460.00 Accounts Payable 11,460.00 Discounted Notes Receivable Dishonored 340.00 CONTINGENT LIABILITIES: Notes Receivable Discounted $ 6,660.00 $190,660.00 Total All Liabilities $59,500.00 $100,000.00 Capital Stock $100,000.00 72,010.00* Deficit (per books) 72,010.00 27,990.00 $218,650.00 $27,990.00 * Red. Comments on Problem 62 Deficiency to stockholders is shown at $27,990, on the theory that the stockholders' equity per books at July 2, 1919, was only $27,990 and inasmuch as the stock is non-assessable the stockholders will not lose more than their equity. In event the stock is assessable, the deficiency to stockholders would be their equity of $27,990, plus the deficiency to creditors of $6,890 which they would be called upon to make good, or a total of $34,880. Copyright, 1919, The Ronald Press Company II-30-7 DEFICIENCY ACCOUNT ESTIMATED LOSS ON REAL- IZATION AND LIQUIDATION: Accounts Receivable $1,640 Inventories 6,800 Office Fixtures 100 Tools & Appliances 3,000 Machinery 20,000 Boats 2,000 Horses 4 Trucks 1,000 NOTES RECEIVABLE DISCOUNTED DISHONORED DEFICIT (per books) CAPITAL STOCK OUTSTANDING $100,000 DEFICIENCY TO CREDITORS AS PER STATEMENT OF AFFAIRS 6,890 $ 34,540 340 72,010 $106,890 $106,890 Solution to Problem 63 SOLUTION SUBMITTED BY PROFESSOR JOHN R. WILDMAN IN FEBRUARY. 1913, ISSUE OF JOURNAL OF ACCOUNTANCY ■It is probable that circle swings are sufficiently familiar to the average reader to require no description. They have sprung into existence and attained popularity within the past fifteen years. They are now an im- portant feature of most amusement parks. ■This problem is taken from a company which was organized by the man who, it is understood, was the inventor of the circle swing, and is largely based on facts. It illustrates the ingenuity of an inventor who was an organizer and man of business ability as well as a mechanical genius. ■With a sufficiency of patents and no funds, this man, who for our purposes may be called 'Hampton' set about to organize a corporation and acquire the entire capital stock thereof in exchange for patents. The details of or- ganization, such as the paying in of the small amount of cash required and the matter of organization expense, may be passed over, since such points have been fully discussed in previous problems and the purpose of the present problem is to bring out other points. ■With the donation by Hampton of 2,499 shares of stock we are brought face to face with the first debatable point. Presumably no one will dispute the fact that the stock, from the standpoint of the company, becomes treasury stock, since it complies with the usual Interpretation of the term which holds that treasury stock is such stock as has been once issued for value and sub- sequently acquired. Parenthetically it may be noted that Hampton, while having provided stock which may be sold at whatever price it will bring, or if desir- able, given away, has not parted with the controlling interest in the cor- poration. It is also apparent that his object in donating the stock was to provide what may be rather loosely termed 'working capital.' Copyright, 1919, The Ronald Press Company II-30-8 "On the question of what account title or interpretation shall be given to the credit which arises when treasury stock is debited, authors, authorities, and novices differ. It has been variously referred to as Stock Donation account. Treasury Stock Donated, Treasury Stock Suspense, Working Capital, Capital Surplus Suspense, Surplus from Donated Stock, etc. A consideration of what it is rather than what it is called will doubtless be of some interest. ■The capital stock in the amount of $500,000 was originally issued for patents. Were the patents worth $500,000? Only future operations of plants and income derived therefrom will answer such a question. If in the judgment of the directors, this being a New York corporation, such was the value, their judgment in the absence of fraud would be conclusive. If it is conceded that $500,000 was the value of the patents, any subsequent donation of stock would affect the surplus to the extent of the value of the stock. The question of this value then becomes the second question to be settled. "Any attempt to fix or estimate the value of the donated treasury stock would encounter ridicule. Obviously it is worth what it will bring upon sale. It is therefore apparent that some temporary disposition must be made of the credit if an account is to be set up for the treasury stock. Of the titles mentioned all are available except Surplus from Donated Stock. It should in the opinion of the author be pointed out that this is not yet surplus. It is merely a bookkeeping account set up as an expedient for holding the amount in suspense until the exact amount of the surplus arising from the donation is determined. For this purpose Stock Donation account perhaps serves as well as any other. "In the problem under discussion, when the donated stock is received. Treasury Stock may be debited in the amount of $249,900 and Stock Donation account credited. When the 2,250 shares are sold at 90, and 225 shares given away as a bonus. Treasury Stock should be credited in the amount of $247,500 and Cash $202,500, Discount on Stock $22,500, and Stock Bonus $22,500 respec- tively, debited. The accounts for Discount and Stock Bonus might then, if it were desired to close the books, or set up a comprehensive balance sheet, be closed out to the Stock Donation account, the balance of which ($202,500) after bringing down an amount corresponding to the inventory of treasury stock ($2,400) could be closed out to Capital Surplus or to Profit and Loss Surplus. The former would not be available for dividends, while the latter "would be. So far as the author has been able to ascertain after energetic research, there is no legal restriction upon treating such an item as profit and loss surplus. So to treat it, however, and pay it out as cash dividends would defeat the purpose of the donation. To its distribution as stock dividends there could apparently be no objection. "Up to this point the question at issue has been presented from one point of view, that point of view being taken by those who would contend that the patents could be consistently valued at $500,000. With a view to full discus- sion, it should be pointed out that those who oppose this view hold that the donation of the stock is in itself evidence that the assets acquired should not be valued at the par value of the capital stock issued for them. The treatment of the accounts in this case would be the same as previously presented except that the amount previously credited ultimately to Capital Surplus or to Profit and Loss Surplus would be credited to Patents, thereby reducing the book value of the asset. This treatment it seems cannot be Copyright, 1919, The Ronald Press Company II-30-9 consistently applied if the directors hold to the contrary through their right to fix the value, but such procedure would undoubtedly be conservative, ■Still another theory concerning the matter holds that the donation of stock is equivalent to discounting the capital stock, and such theorists would debit Discount on Stock and credit Patents in the amount of the donation. One of the earlier legal decisions in the matter holds such a transaction to be evidence of discount, or issue below par; but the courts have latterly held the contrary. If such an entry as was above noted should be made it is evident that treasury stock would not appear on the books, but that sales of the stock would be debited to Cash and credited to Discount on Stock. It is presumed that the balance of the Discount account would be written off against profits over a period of years. ■The journal entries required by the problem are as follows: Patents To — Capital Stock Outstanding $500,000.00 $500,000.00 Treasury Stock To — Stock Donation Account 249,900.00 249,900.00 Cash Discount on Stock Stock Bonus To — Treasury Stock 202,500.00 22,500.00 22,500.00 247,500.00 Stock Donation Account To — Discount on Stock Stock Bonus Capital Surplus 247,500.00 22,500.00 22,500.00 202,500.00 Cost of Swings To — Accounts Payable Cash 118,634.50 73,247.92 45,386.58 Accounts Payable To— Cash 50,000.00 50,000.00 Privileges (1912) To — Cash Cash To — Income from Swings Coney Island $12,273.85 Atlantic City 2,863.15 Port George 6,743.35 12,000.00 21,880.35 12,000.00 21,880.35 121,880.35 Copyright, 1919, The Ronald Press Company 11-30-10 Cash To — Cost of Swings Profit and Loss $ 50,000.00 $ 39,544.83 10,455.17 Salaries and Expenses To — Cash 18,787.59 18,787.59 Accounts Payable To—Cash 23,247.92 23,247.92 Privileges (1913) To — Cash 2,000.00 2,000.00 Profit and Loss To — Privileges (1912) Salaries and Expenses 30,787.59 12,000.00 18,787.59 , Income from Swings To — Profit and Loss 21,880.35 21,880.35 Profit and Loss To—Profit and Loss Surplus 1,547.93 1,547.93 ASSETS Equipment (cost) Patents Treasury Stock Cash Privileges (1913) . THE HAMPTON CIRCLE SWING CO. BALANCE SHEET, SEPTEMBER 30, 1912 LIABILITIES AND CAPITAL $ 79,089.67 Capital Stock Outstanding $500,000.00 500,000.00 Stock Donation Account 2,400.00 Capital Surplus 122,958.26 Profit and Loss Surplus 2,000.00 $706,447.93 2,400.00 202,500.00 1,547.93 $706,447.93 Copyright, 1919, The Ronald Press Company 11-30-11 ANSWERS TO QUESTIONS Answer to Question 151 — The Net Profits of the Corporation amount to $337,193.08 DEDUCT-- Interest on Mortgage Indebtedness; Interest on 4% Mortgages $20,000.00 Interest on 6% Mortgages 45,000.00 65,000.00 Balance — Surplus Net Profits available for Dividends $272,193.08 The proposed Dividend of Q% on Capital Stock of $5,000,000 is equivalent to $300,000.00 DEDUCT — Surplus Net Profits for year available for Dividends 272,193.08 Balance — representing amount of Surplus at beginning of year required to be appropriated in order to pay the proposed Dividend $ 27,806.92 The Surplus or Undivided Profits at that date amount to $ 27,806.92 It will be seen, therefore, from the foregoing that it is necessary to appropriate all of the undivided profits or surplus at the beginning of the year in order to pay the proposed dividend. Answer to Question 152 — If a periodical provision for depreciation is not called for by the by-laws or minutes of the board of directors, it is not legally necessary to provide for depreciation of a wasting asset. Whether it is conservative business policy to do so is another question which must be decided in each case as it arises. Where a company is organized to exploit a wasting asset and will cease to exist when its main asset is exhausted, it appears from both a legal and ac- counting point of view that no depreciation need be provided. In such cases the stockholders must realize that each dividend received constitutes a partial return of capital invested as well as earnings. Where a company is organized to exploit wasting assets and new assets are to be acquired when the original ones are exhausted it appears essential, at least from an accounting point of view, to provide periodically for deprecia- tion. If this be not done, when the original cemetery lots are sold the company will find its asset exhausted and no funds available for the ac- quisition of another asset. And it may be extremely difficult at that time to obtain such funds from its then stockholders who in all probability may not be the same individuals. Copyright, 1919, The Ronald Press Company 11-30-12 Answer to - Question 155 — Some of the closing entries in the case of a partnership are as follows; (1) Partners' Salaries $ To — A — Drawing Account $ B — Drawing Account — — Partners' salaries as per partnership agreement. (2) Interest on Capital Accounts To — A — Drawing Account B~Drawing Account — — Interest on capital accounts per partnership agreement, (3) All Income Accounts (detail) — ~ To — Profit and Loss Account All Expense Accounts (detail) Partners' Salaries Interest on Capital Accounts To close l^alances of nominal accounts* (4) Profit and Loss Account To — A — Drawing Account B — Drawing Account To close Profit and Loss account. (5) A — Drawing Account — — — B — Drawing Account — — To — A — Capital Account B~Capital Account Comments 1. Entries 1 and 2 would of course only be made in the event the stipulations in the partnership agreement required that these features be dealt with. 2. It may be necessary to introduce entries in respect of proportion of commission earned on incomplete work, or preferential allowances on the business brought in by each partner. Copyright, 1919, The Ronald Press Company 11-30-13 Answer to Question 154 — Assuming a complete investigation is necessary, the following will be the course of procedure: 1. The cash book should be footed and vouched in detail and cer- tificates obtained of the opening and closing bank balances, 2. The pass book should be checked completely with the cash book, particular attention being paid to the dates when the receipts are paid in, and to ascertain that each day's receipts are included. 3. If possible, the original deposit slips from the banlf should be obtained and compared with the cash book. 4. All discounts of £iny consequence should be tested. 5. Where a mailing department record of cash receipts has been kept, these should be compared with the cash book. 6. It should be seen that the proceeds of all notes receivable have been duly received and notes and other securities in hand should be examined. 7. As regards cash payments, special care should be taken in examining the vouchers to note any that appear to be irregular; and it is advisable that the returned checks and indorsements thereon should be examined. In the case of any vouchers being missing, dupli- cates should be obtained. All amounts charged to the drawing accounts of the officials and employees should be vouched by them as being correct. 8. The petty cash book should be vouched and footed, as this is a very likely source of fraud. Special attention must be paid to salaries and wages, and the accountant should ascertain that the names of all the employees, and the amounts received by them, are correct, 9. If it is possible for circulars to be sent out to the debtors, it should be done as this is the best method of confirming the valid- ity of the outstanding balances. 10. Special attention should be paid to vouching allowances, bad debts, and returns, 11. Vouch cash sales with all evidence possible. 12. Vouch entries in audited voucher record. Duplicates should be ob- tained of missing invoices and the creditors' statements compared with the balances as shown by the creditors ledger. 13. Check stock certificate book. Answer to Question 155 — The directors' remuneration is commonly fixed by the by-laws and in such cases should be perused to determine the Eimount to be paid and whether it is payable to all directors or only to those present. If the point is not covered in the by-laws the amount to be paid and to whom it should be paid would be stipulated by a resolution adopted by the board of directors. The minute book would give the names of the directors present at each meeting* Copyright, 1919, The Ronald Press Company 11-30-15 Arthur Andersex &• Co CEMTIFieO PIJBUC ACCOUITXAirTS MII.VIAVKEE W. C. WCVCI* MtMKMtm TJiUST.BtTXUXnrO CiucAGO March X, 1919. Ur* f. L. Barnes, President » F* L. Barnes and- Coiapany, 72 W. Adams Street, ChicagOf 111. Dear Sir: As instructed, we have audited the books and accounts' of F. L* Barnes and Company for the year ending Decemher 31, 1916^ and submit herewith our report thereon together with t'he following exhibits showing the* financial position on that date and the results from operation for the year: Consolidated Balance Sheet - F. L. Barnes and Company and D. B. Story Jiianufacturing Cotapany at December 31, 1918 Bxhibit Consolidated Statement of Profit and Loss • F. L% Barnes and Company and D. B. Story Manufacturing Company for year ending December 31, 1918 Zxhibit II Comparative Balance Sheets- F. L. Barnes cmd Company at December 31, 1917> and December 31, 1918 Bxhibit III Comparative Statements of Profit and Loss F. L. Barnes and Company years ending December 31, 1917, and December 31, 1918 Ixhiblt IV Comparative Statements of Cost of Sales * F. L. Barnes and Company years ending December 31 , 1917, and December 31 , 1918 Exhibit IV-a Ad.lustlng Journal Entries necessary tc bring books into accord with auditor's report Exhibit Copyright, 1919, The Ronald Press Company 11-30-16 -2- PROFITS FROM OPERATION The results from operations of P. L. Barnes and company for the years 1917 and 1918 are shown in the following condensed summary: Fart iculars Net Proceeds from Salea Year Ending December 31 1917 1918 Increase or Decrease * $58,160.96 $256,148.03 $314,308.99 Factory Cost of Goods Sold Gross Profit on Sales % to Sales 190,726,62 231,806.85 41,080.23 $ 65,421.41 25.54 $ 82,502.14 26.25 $17,080.73 *71 Add- Miscellaneous Income Total Income and Profits from all sources % to Sales ^.243.88 .— '>^3», . $ 68,665.29 26.81 2,128,42 1,115.46 $ 84,630.56 26.93 $15,965,27 .12 Selling and General Expenses % to Sales net Profit from Operations % to Sales De duct- Interest on Borrowed Money Interest Received Surplus Net Profits "before Federal Taxes 42,540.74 16.61 52,992.86 16.86 10,45"2-.12 .25 $ 26,124,55 10.20 $ 31,637.70 10.07 $ 5,513.15 $ 8,321.18 81.82 $ 9,430.17 511.76 $ 8,918.41 $ 1,108.99 429.94 $ 8,239.36 $ 679,05 $ 17,885,19 $ 22.719,29 $ 4,834,10 Deduct- Estimated Federal Taxes Pinal Net Profits 1,000.00 2,600.00 1,600.00 $ 15,885.19 $ 20,119.29 $ 3,234.10 The F.inal Profits of $20,119.29 for 1918 are accounted for as follows: Ist Mortgage Bonds Sinking Fund Reserve Free Surplus As above $10,000.00 10,119.29 $20,119.29 ♦ Red. Copyright, 1919, The Ronald Press Company 11-30-17 -3- Froo the above, the oouscb of the increase of f3,334.10 In Final Net Profits may be set forth as foliowe: Increase in Gross Profits due to Increase in Sales (35.54^ of 058,160.96) Increase in Gross profits due to Decrease in Cost of Sales (.71^ of $314,308.99) Total Increase in Gross Profits from Sales Decrease in profits of D. B. Story Manufacturing Company Less- Increase in Miscellaneous Income Net Increase in Total Income and Profits Less- Increase in Advertising and Other Selling E}q>enses Increase in General Expenses Increase in Net Profits from Operations Increase in Interest Paid Less- Increase in Interest Received Increase in Provision for Federal Taxes Net Increase in Final Net Profits $1,450.93 335.46 14,918.33 5,533.89 $1,108.99 439.94 $ 679.05 1.600.00 $14,854.58 3,336.15 il7,080.7aE 1,115.46 $15,965.37 10,453.13 $ 5,513.15 3,379.05 $ 3,334.10 SSSBSBSKSS The volume of sales has increased materially during the year, as may be seen from the following table: Increase or 1-9 17 1^18 Decrease* Style Number 17 Amount! $ 937.00 Number 7 Amountt Numbe *10 r Amountt 160 $ 366.00 *$ 571.00 181 778 48,073.19 1,176 73,533.31 398 34,451.13 183 800 60,749.13 881 66,545.46 81 .5,796.34 185 1,139 98,498.33 1,303 111,606.06 163. 13,107.73 187 447 43,988.81 634 59,439.05 177 16,450.34 Specials 43 3,343.03 51 4,351.41 9 908.39 Visoellaneous - 3,133.76 - 738.70 - •3,394.06 Total 3,333 $357,731.33 4,041 $315,469.99 818 $57,748.76 Less- Returns and Allowances. - 1,573.30 - 1,161.00 - • 413.30 bet Sales 3,333 $356,148.03 4,041 $314,306.99 818 $58,160.96 carsT; ss»s=:=t:eEBB ■ S£ = S ■■srwsrsrsr era BBS=S==S=r • Red. f After deducting discounts Improved Kitchen Cabinet Company. Copyright, 1919, The Ronald Press Company 11-30-18 -4- In connection with Bschibit iv-a which compares the coat of ealee for the yeare 1917 and 1918 we desire to call your attention to the follow- ing points: (1) Increased prodiiction has not materially increased factory overhead. Heat, Light and Power has even decreased, owing to the purchase of a cheaper grade of coal. (2) The ratio of factory overhead to direct lahor was 103,9^ in 1917 as compared with 82.66^ in 1918, This is explained by the fact that, although materials and direct labor both increased approximately 30^ in 1918 as compared with 1917, factory expenses increased but 3^. (3) The amount of factory overhead in work in process and finished stock was determined in the inventory of December 31, 1918 by applying the ratio of total factory expenses for the year to total direct labor for the year. This ratio was 82.48:^, the small difference resulting when compared with the percentages appearing in (2) being caused by minor adjustments in the accounts after com- puting the latter. (4) The increase in gross profits attributable to the propor- tionate decrease in cost of sales is ^2,226,15, as shown in the above profit and loss analysis. The increase in selling and general expenses is due principally to the increase in both newspaper and magazine advertising, and to the increase in officers and office salaries. It may be added, however, that in view of increased sales the increases in these items are normal* A consolidated income statemsntr will be found in Exhibit II. BALANCE SHE ET A consolidated balance sheet appears in Exhibit I showing the com> bined financial strength of P. L. Barnes and Company and its subsidiary, the D, B. Story Manufacturing Company, at December 31, 1918. However, as the financial policies of the two companies are quite separate - there having been no intercompany transactions during the year 1918 - our remarks are here confined to the Isalance sheet of F, L. Barnes and Company appearing in com- parative form in Exhibit III. Copyright, 1919, The Bonald Press Company 11-30-19 -5- CASH ON HAND AND IH BANK - »14.633.83 ; Ve reconciled the book balances of cash an bank with the "balance certified to by the bank. Petty cash of $500.00 was verified and traced back satisfactorily to Decenber 31, 1918. LIBERTY BONDS - 820.000.00 ; There are fib, 000.00 of the Third Issue on hand fully paid for and subscription receipts for $10,000.00 of the Fourth Loan one-half of which has been paid. The resiaining instadmeivtB of $2,500.00 each were paid on January 16 and January 30, 1919 respectively. ACCOUNTS AND NOTES RECEIVABLF - $14,031.32 RBSERVE FOR BAD DEBTS 502.40 ; We carefully exajnined the outstanding acoounts and notes, and the reserve, ve believe, is ample to cover any losses from uncollectible accounts It will be of interest to note that the accounts receivable of $10,050.22 were charged as follows; September 1918 October November December $ 12.55 513.45 1,768.12 7,756.10 $10,050.22 INVENTORIES - $127,846.62 LB3S- RESERVE FOR LOSS ON INVENTORIES - . 3.192.76 ; Ve made thorough checks on extensions, footings and pricings and are pleased to state that we found the inventory well taken and carefully handled throughout. On the principle of cost or market, which ie the lower, we provided email additions to the inventory rewerve, one to reduce the cost of lumber purchased to market (see Adjusting Journal Bntry 3) and another to provide for losses on sales of obsolescent styles (see Adjusting Journal Bntry 4). All other goods on band are of recent purchase and manufacture and represent saleable stock. Responsible officials have certified to the Copyright, 1919, The Ronald Press Company 11-30-20 •6- correctneBB of the inventory (a) taken by actual count, weight and measure, (b) condition of stock, and (c) valuation. INVESTMENTS IN- D. B. STORY MANUFACTURING COMPANY - $33,056,84 . IMPROVED KITCHEN CABINET COMPANY - 19.000,00 ; The first of tneee accounts is made up as follows: Jan. 1, 1917 200 Shares (out of aUotal out- standing of 250) ai 150 Dec. 31, 1917 Pour-fifths of 1917 Profits Dec. 31, 1918 Pour-fifths of 1918 Profits Lesb- Dividends received as follows: July 1, 1917 Casn Dividend July 1, 1918 Cash Dividend Balance December 31, 1918 |1,000.00 1.000.00 $30,000.00 3,243.88 1,792.96 $35,036.8.4 2,000.00 $33,036,84 The investment in the Improved Kitchen Cabinet Company ( a selling organization) represents the total coat of 191 shfires out of a. total ^issued and outstanding of 500 shares. Ho dividends have as ^et been declared by thin company. CASH AND SECURITIES IN HANDS OP S INK INC.. .FUND^ TR U STEB - $2 . 410. 7 7 : A statement v/as obtained frozn; the Atlas Trust Company, trustee under the trust indenture, certifying that the following was in their possession on December 31, 1918: Cash Liberty Bondfe- let Issue (par $10,300.00) $10,316.77 10,094.00 $20,410.77 cs= = = = = ss=s The trust deed provides that at the close of each calendar year the company shall turn over to the Sinking Pund Trustee the sum of $10,000,00 in cash which may be invested by the Trustee at. his -discretion in Government Bonds only, A Copyright, 1919, The Ronald Press Company 11-30-21 -7- We eatlBfled oureelvea that these and other provisions of the trust Indenture have been fully complied with. LAMB, BUILDINGS, MACHIKBRY« EQ,UIPUENT AND FIXTURES - ♦254,591.93 LESS- RESERVE FOR DEPRECIATION - 54.470«28 ; The changes that have taken place in the Capital Asset Accounts during the year 1918 may be summarized as follows: Additions Balance During Balance Reserve for Book Value Account Jain. 1 1918 Year Dec. 31 1918 Depreciationpec.31 1918 Buildings $ 89,722.27 |10, 060.11 $ 99,782.38 $10,640.54 $ 89,141.84 Building Equipment 8,854.52 500.00 9,354.52 3,789.35 5,565.17 Machinery 108,951.36 1,262.72 110,214.08 39,234.16 70,979.93 Office Furniture and Fixtures 2,208.20 782.75 2,990.95 806.24 2,184.71 Land 32,250.00 - 32,250.00 - 32,250.00 Total $241,986.35 $12,605.58 $254',591.93 $54,470.28 $200^121.66 Ve examined the vouchers supporting th^ purchase of these assets and in our opinion they have been correctly charged at cost to the above accounts. Depreciation has been computed on the basis of 3^ for buildings, 10$& for building equipment and machinery, and 15^ for office furniture and fixtures. It «ill be noted that the' larger part of the machinery taken over from F. L. Barnes and Sons was valued at a depreciated figure whioh was said tc average approxiniately 90f^ of the original cost, and that the actual depreciation rate on this basis is only 9^. Depreciation was provided for during 1918 as follows: Asset Pate Amount Buildings 3% $ 2,691.67 Building Equipment 1(^ 885.46 Machinery 1(9( 10,965.14 Office Equipment 15^ 331.23 Total Provision $14,873.49 sssacssssa In our opinion the rates and the amounts so fau:* provided ta^ adequate. Copyright, 1919, The Ronald Press Company 11-30-22 -8- CURRBKT LIABILITIES « $103.906. 58 ; So far ae we were able to ascertain all liabilities at December 31, 1916 have been given expression to on the books of account on that date and in the attached exhibits. CAPITAL STOCK - ♦250.000.00 ; Un issued stock was sold during the yeaa at par amounting to $20,000.00. There were no transfers in 1918. The book values per ahare at December 31, 1917 and December 31, 1918 were; Part icularg Capital Stock Surplus Sinking Fund Reserve • let Mortgage Bonds Total Book Value Book Value per share December 31 19 17 19 18 $230,000.00 $250,000.00 27,342.99 26,707.57 10,000.00 20,410.77 $267,342.99 $296,118.34 $116.24 $118.45 23;z===B=c:aa a==s==:;==33 CHANGE IN FINANCIAL POSITION below: A sunsiary of the funds received and applied during 1918 appears Funds were derived from the following sources- Sale of Capital Stock - 200 shares at par Income from Operations including provision for accrued depreciation- Final Net Profits Additions to Reserve for Depreciation Dividend from D. B. Story Manufacturing Company Less- Book write-up covering profits of D. B^ Story Manufacturing Coopcmy Total Funds Provided $20,000.00 $20,119.29 14,623.49 1,000.00 $35,742.78 1.792.96 33,949.82 $53,949.62 Copyright, 1919, The Ronald Press Company 11-30-23 .9- Which were applied in the following manner; Additional investment in Buildings, Machinery trnd Equipment $12,6 05.58 Additional Sinking Fund Deposit 10,* 000. 00 Dividends paid lljsOO.OO Purchase of additional stock in Improved Kitchen Cabinet Company 900.00 Payment of 1917 Income Tax in excess of provision therefor 254,71 Net Increase in Working Capital as eiunmarized below 18,689.53 Total (a8 above) $53,949.82 SUMMARY OF INCREASES AND DBCREASES IN WORKING C/JITAL December 31 Current Assets 19 17 1 9 18 Increase Decrease Cash I 11,733.55 $ 14,633.83 $ 2.900.28 $ Notes and Accounts Receivable (net) 18,127,34 13,753.16 - 4,374.18 Liberty Bonds - 20,000.00 20,000.00 Inventories (net) 102,775.34 124,653,86 21,878.52 Prepaid Expenses 3,074,80 4,474.81 1,400.01 Total Current Assets $135,711.03 $177,515.66 $41,804.63 $ Less- Current Liabilities 80,851.48 103,966.56 23,115.10 as above $ 54,859.55 $ 73,549.08 $18,689.53 $ It will be noted that although working capital has actually in- creased daring the year $16,669,53, the ratio of current assetB to current liabilities has remained practically constant (1.68 to 1 in 1917 as compared with 1.70 to 1 in 1918). Our examination of purchase discounts taken and not teken leads us to the conclusion that if thlc ratio were 2.5 or 3 to 1 the purchase diecounte for the year could have been more than doubled. The problem of whether or not an additional investment of $40,000,00 or $50,000.00 should be made for working capital purposes should bo given careful study. Copyright, 1919, The Ronald Press Company 11-30-24 -10- GENERAL During the course of our audit we examined in detail the cash receipts and disbursements for the months of April and December 1918; tested the distribution as shown on the supporting vouchers; footed the cash book and traced the totals into the general ledger; checked over the sales invoices during the same two months, including the posting to customers* accounts; and by these and other checks we satisfied ourselves that the books had been properly kept. Vte also examined the minutes of the Directors and Stockholders meetings and satisfied ourselves that all actiojv^aken at these meetings affecting the accounts has been properly recorded on the books of the company* In conclusion we wish to acknowledge the courtesies rendered our representatives during the audit. Very truly yours, Certified Public Accountants. Copyright, 1919, The Ronald Press Company p. L. BARNES A.gD COMPANY ADJUSTING JOURNAL ENTRIES TO BRING BOOKS INTO CONFORMITY WITH REPORT 11-30-25 Xxbilsit V 112 OFFICE FURNITURE AND FIXTURES P/C VOU. #1561 MISCELLANEOUS RESTAURANT EXPENSE P/C" VOU. #1543 FACTORY K2AT, LIGHT AND POWER P/C VOU. #1580 OFFICE REPAIRS P/C VOU. #1575 ADVERTISING - NEWSPAPERS P/C VOU. #1581 To ACCOUNTS PAYABLE! November and December 1918 invoices paid in January 1919. 78. SO 17.50 56.00 6 4.13 281.18 I 497.61 121 CASH IN BANK To PROFIT AND LOSS 1918 1915 and 1916 Payroll checks written off. 26.78 26.78 131 PROFIT AND LOSS 1918 To INVENTORY RESERVE Markdovm in the following ac count e- Ac count Cost Market Difference Lumber (Yard) Lumber (Factory) Lumber (Kiln) 111,584.29 110,758.28 f826.01 1,023.96 1,001.19 27.77 2,147;18 2,058.68 88.50 $14,760.43 $13,818.15 $942.28 942.28 942.28 ■SMasssaaa IS3 = 333a3 3333: lii PR09IT AND LOSS 1918 TO IHVSNTORY RBSSRVS Markdowns in Inventory of Work in Froceea to glve.expreeaibn to additionca cost of Job Ticket Style let. Coat Avg. Coet Markdown 18,341 187 $6,287.12 $4,875.00 $412,13 18,349 180 653.78 450.00 203.78 ■83333333 333333333 MSaaaaa 615.90 616.90 Copyright, 1919, The Ronald Press Company 11-30-26 •2- la RETURNS AND AT.T.OWANCES BAD vmfs 9 264.00 702,79 To ACCOUNTS RECEIVABLB INSTAUiKNT ACCOUNTS RECEIVABLB $ 773.00 193.79 Uncollectible Accounts Recalvable as per lists thereof. HI PROFIT AND LOSS 100.00 To INVESTMENT IN IMPROVED KITCHEN CABINET COMPAilY 100.00 10 shares stock purchased July 1, 1918 at 90j ; Investment was charged at par and Profit and Loss credited; this entry to reduce in- vestment to cost. Ill BUILDINGS 200.00 To OFFICERS' SALARIES 200.00 To adjust salary of H. E. Barnes for the month of July 1918, 1/2 of his time being devoted to the construction of Building 0. (8) BUILDINGS 1.264.67 To BUILDING EQUIPMENT AND FIXTURES 1,264.67 Tranofer of cost of skylights installed in 1918 to Buildings Account. (9) BUILDING EQUIPMENT AND FIXTURES 500.00 To REPAIRS AND UPKEEP - BUILDINGS 500.00 Cost of 2 Johnson heating furnaces, charged to Repairs in error. .(10) PROFIT AND LOSS RESERVE FOR DEPRECIATION - MACHINERY •SAI£S 70.00 180.00 350.00 To MACHINERY 600.00 Lathe scrapped during year and proceeds credited to sales. Copyright, 1919, The Ronald Press Company 11-30-27 -3- (11 J INTEREST PAID $ 212.07 To ACCRUED IKT2REST ON NOTES PAYABLE ^ 212.07 Interest on Bank Loans and Trade Notes at Decexalier 51, 1918. 1121 INTEREST PAID 3,000.00 To INTEREST ACCRUED ON BONDS 3.000.00 Interest Accrued from July 1, 1918 to December '31, 1918. (13) ACCRUED INTEREST RECSIVABIfiA 224,24 To INTEREST RECEIVED 224.24 Interest Accrued as follows: Notes Receivable $ 35.61 Liberty Bonds 188.63 csssxza • CI4) FEDERAL INCOME TAX 2,600.00 To FEDERAL TAXES ACCRUED 2,6l00.00 Xstimatod Income and Profits Taxes for 1918. Copyright, 1919, The Ronald Press Company ur RETURN TO the circulation desk of any University of California Library or to the NORTHERN REGIONAL LIBRARY FACILITY BIdg. 400, Richmond Field Station University of California Richmond, CA 94804-4698 ALL BOOKS MAY BE RECALLED AFTER 7 DAYS ^2 rnonth loans may be renewed by calling ^510^ 642-6753 . . . . 1 year loans may be recharged by bringing books to NRLF ^^h^ / . Renewals and recharges may be made 4 days prior to due date. DUE AS STAMPED BELOW SEhTTONlLL MAY 1 8 1999 bt' 12,000(11/95) VE 02158