UC-NRLF ;l H F yez/ illlillMIIH I LABORATORY MANUAL THEORY AND PRACTICE OF ACCOUNTING ^ Fayettb H. Elwell, B. A., C. P. A. PROFESSOR OF ACCOUNTING THE UNIVERSITY OF WISCONSIN LABORATORY MANUAL THEORY AND PRACTICE OF ACCOUNTING 1921 EDITION ^ Fayette H. Elwell, B. A., C. P. A. PROFESSok^ OF ACCOUNTING THE UNIVERSITY OF WISCONSIN COPYRIGHT. 1921 BY FAYETTE H. ELWELL The Parksr Company Madison, Wisconsin PREFACE This revision of the laboratory manual for a course in Theory and Practice of Accounting evidences the experiences gained in using a problem manual for several years. The manual contains 1. A short bibliography. 2. Text references for some of the subjects discussed in the course. 3. A classification of accounts for a hypothetical manufacturing company. 4. A set of problems with brief comments on some of the points brought out in many of the problems. 5. A set of theory problems. From the problems and questions presented are selected those which com- prise the greater portion of the laboratory work for the Course in Theory and Practice of Accounting given in the Course in Commerce, University of Wisconsin. This supplements the laboratory material contained in the texts and assigned readings. Some of the problems are original and the others have been adapted from or selected from the Certified Public Accountant examinations given in the different states, the American Institute of Accountants' examinations and from the Intermediate and Final examinations given in England. The solution of these problems furnishes practice in the application of principles given in the lectures. The theory questions may be used in recitations and discussions. As indicated, many of these questions have been selected from Certified Public Accountant examinations. F. h.;elwell. Madison, Wis. September 15, 1921. ^ 452330 Digitized by the Internet Archive in 2007 with funding from IVIicrosoft Corporation http://www.archive.org/details/elwellaccountingOOelwerich INDEX TO PROBLEMS Classification of Accounts 1. "Wisconsin, 1915. 2. Wisconsin, 1919. 3. Wisconsin, 1919. 4. 5. Institute, 1917. 6. Wisconsin, 1919. 7. Wisconsin, 1919. 8. Wisconsin, 1917 and Missouri, 1915. 9. Wisconsin, 1919. 10. Missouri, 1913. Revenue Accounts 11. Institute, 1919. 12. Michigan, 1908. 13. Ohio, 1916. 14. Ohio, 1919. 15. Massachusetts, 1917. 16. English, 1912. 17. English, 1910. Working Capital; Net Current Assets; Net Tangible Assets 18. Wisconsin, 1916. 19 20. Pennsylvania, 1900. 21. North Carolina, 1919. 22. Maine, 1917. Cash and Cash Items 23. Wisconsin, 1917, and Ohio, 1918. Trade Acceptances 24. Wisconsin, 1918. Notes Receivable 25. Wisconsin, 1918. Accounts Receivable 26. Wisconsin in 1918. Merchandise Inventory 27. Wisconsin, 1918. 28. Comparative Balance Sheets . 29. Illinois, 1907. 30. New York, 1915. 31. Kentucky, 1917. 32. Illinois, 1906. 33. Illinois, 1915. 34. Institute, 1919. 35. Criticism of Financial Statements 36. Illinois, 1916. il. Massachusetts, 1917. Value of Stock 38. Wisconsin, 1919. 39. Wisconsin, 1919. Interim Accoimts 40. Missouri, 1914. 41. Institute, 1917. Partnership Accounts 42. New York, 1916. 43. California, 1908. 44. Illinois, 1914. 45. 46. Institute, 1917. 47. 48. 49. English, 1908. 50. English, 1907. 51. English, 1900. 52. English, 1907. 53. Illinois, 1914. 54. Wisconsin, 1917. 55. English, 1911. 56. English, 1908. 57. Wisconsin, 1916. 58. Illinois, 1910. 59. Illinois, 1908. 60. Illinois, 1912. 61. Illinois, 1910. 62. Institute, 1917. 63. Illinois, 1910. 64. Wisconsin, 1919. 65. New York, 1915 (into corporation). 66. Ohio, 1913 (into corporation). 67. Washington, 1908 (into corpora- tion). 68. Ohio, 1918 (into corporation). Opening Entries — Corporation 69. Iowa, 1918. Capital Stock— No Par Value 70. Wisconsin, 1917. 71. Wisconsin, 1919. Valuation of Goodwill 72. Massachusetts, 1914. IZ. Institute, 1919. Depreciation 74. Wisconsin, 1915-1919; West Vir- ginia, 1917; Institute, 1921. 75. Ohio, 1918; Illinois, 1918; Indiana, 1918. 76. Wisconsin, 1915. n. Illinois, 1910. 78. Wisconsin, 1918. 79. 80. 81. 82. 83. 84. Wisconsin, 1918. Massachusetts, 1914. Designing an Accounting System 85. Wisconsin, 1916. Cash Requirements 86. Wisconsin, 1916. Setting Up Accounts — Bills Receivable — Bills Payable 87. Illinois, 1913. Fire Insurance Adjustment 88. Illinois, 1907. 89. Florida, 1915. 90. 91. Institute, 1920. 92. Wisconsin, 1919. 93. Flood Loss 94. New York, 1914. Dividends 95. English, 1912. 96. Wisconsin, 1918. Sinking Funds 97. Iowa, 1918. 98. Illinois, 1916. 99. Illinois, 1904. Bond — Premium and Discoimt; Amortization 100. Wisconsin, 1916. 101. Wisconsin, 1917. 102. New York, 1914. 103. New York, 1915. 104. Wisconsin, 1914-1915. 105. Florida, 1915. 106. Kansas and Missouri, 1915. 107. Michigan, 1915. 108. Maine. 1916. Capitalization 109. 110. Consolidation 111. Illinois, 1914. 112. Wisconsin, 1915. 113. Wisconsin, 1918. 114. Illinois, 1913. 115. Illinois, 1913. Ratio of Solvency 116. New York, 1915. Statement of Affairs 117. Wisconsin, 1914. Business Statistics 118. Wisconsin, 1919. REFERENCE BOOKS Theory and Practice of Accounting Bassett, W. R. — Accounting- as an Aid to Business Profits. Bennett, R. J. — Corporation Accounting. Child, Percy — Partnership Accounts. Cole, Wm. Morse — Accounts, Their Construction and Interpretation. Day, Clarence M. — Accounting Practice. Dawson, S. S. — Accountants Compendium. Dewing — Financial Policy of Corporations. Dickenson, A. B. — Accounting, Practice and Procedure. Dicksee, L. R. — Advanced Accounting. Dicksee, L. R. — Depreciation, Reserves and Reserve Funds. Dicksee, L. R. — Good Will and Its Treatment in Accounts. Esquerre, P. J. — The Applied Theory of Accounts. Hatfield, Henry R. — Modern Accounting. Kester, R. B. — Accounting Theory and Practice, Vols. I and II. Lisle, George — Accounting in Theory and Practice. Lough, Wm. H. — Corporation Finance. Lough, Wm. H. — Business Finance. Lyons, Hastings — Corporation Finance. Miner & Elwell — Principles of Bookkeeping. Paton & Stevenson — Principles of Accounting-, Saliers, Earl — Principles of Depreciation. Spicer & Pegler — Bookkeeping and Accounts. Sprague, Charles — The Philosophy of Accounts. Sprague & Perrine — The Accountancy of Investment. Wildman, John R. — Principles of Accounting. SUBJECT REFERENCES The following references on some of the subjects included in the course will save the student's time in looking them up for himself and in copying them when given during the lecture period. Particular attention is called to the fact that the omission of various texts under the subject headings should not be construed as meaning that such texts do not contain material on these subjects. CLASSIFICATION OF ACCOUNTS Ksqtierre, 131-138. Miner and Elwell, 365-368; Departmental, Hattield, 1-33. 384-386; Manufacturing, 459-461. Kester, Vol. 11, 563-570. REVENUE ACCOUNTS AND OPERATING STATEMENTS Bennett, 338-373. Kester. Vol. II, 477-492; 689. Dickinson, 55-74. Miner and Elwell, 325-336; 369-375; 441-448. Fsquerre, 430-445. Paton & Stevenson, 192-219. Hatfield, 274-292. PARTNERSHIP ACCOUNTS Esquerre, 19-27. Lisle, 194-232. Hatfield, 316-334. Paton & Stevenson, 255-268. Kestcr, 650-654. Spicer & Pegler. FINANCIAL STATEMENTS AND BALANCE SHEETS FORMS AND PRINCIPLES OF VALUATION Cole 109-140. Hatfield, 35-85; 184-194. Dickinson. 1-54. Kester, Vol. II, 60-98. Esquerre. 396-429. Spicer & Pegler, 269-286 DISCUSSION ON VARIOUS ACCOUNTS (Excepting Amortization and Good Will) Dickinson. 75-152. Kester, Vol. II, 210-224; 225-240; 241-257; Esquerre, 139-185; 221-242; 250-260. 279-296; 297-315; 316-331; 339-355. Hatfield, 86-106. DEPRECIATION Cole, 95-108. Miner & Elwell, 319-322. Dickinson, 153-174. Nicholson & Rohrbach's Cost Accounting, Esquerre, 2>7\-2>7Z; 377-380. 144-162. Hatfield, 121-143. Saliers, Principles of Depreciation. Kester, Vol. II, 99-209. GOOD WILL Dicksee, Good Will and Its Treatment in Hatfield, 107-118. Accounts. Kester, Vol. II, 331-338. Esquerre, 243-250. Lisle. 134-137. CAPITAL STOCK Bennett, 16-29; 101-132. Kester, Vol. II, 372-386. Esquerre, 28-38; 319-335. E^aton & Stevenson. 269-293. Hatfield, H4-183. BONDS Bennett. 197-265; 305-319. Kester. Vol. II. 357-367. Cole, see index. Louojh, Business Finance. Dewing, Financial Policy of Corporations. Lyons, Corporation Finance. Dickinson, 116-118; 133-143. Sprague & Perrine, Accountancy of In- Esquerre, 336-350. vestment. Journal of Accountancy, see indices. A MORTIZATION AND BOND PREMIUM AND DISCOUN T Bennett, 266-278. Hatfield, 93-96 Cole, 159-202. Journal of Accountancy, see indices. Esquerre, 273-283 <:read all of Chap. 23). Kester, Vol. II, 258-278; 365-369. SINKING FUNDS Bennett, 279-304. Journal of Accounlanov, see indices. Corporation Finance Texts. Kester, Vol. II, 276-277; 447-465 Hatfield, 261-273. PROFITS AND DIVIDENDS Bennett, 133-155. Cole, see index. Dickinson, see index. Hatfield, 195-232. Kester, Vol. II, 387-406; 428-446. Bennett, 324-337. Esquerre, 369-380. SURPLUS AND RESERVES Hatfield, 233-260. Kester, Vol. II, 407-427. Esquerre, 461-473. Hatfield, 335-340. STATEMENT OF AFFAIRS Kester, Vol. II, 620-639. Esquerre, 474-490. REALIZATION AND LIQUIDATION Kester, Vol. II, 639-654. CLASSIFICATION OF ACCOUNTS for the ILLUSTRATIVE MANUFACTURING COMPANY *1. ASSETS *11. Current Assets. *111. Cash. ♦nil. Cash on Hand. 11111. Main Office Cash Fund. 11112. Sales Department Cash Fund. 11113. Purchasing Department Cash Fund. 11114. Factory Cash Fund. ♦1112. Cash on Deposit. 11121. First National Bank. 11122. Old National Bank. *11123. Second Ward Savings Bank. 111231. First Preferred Stock Dividend Account, r 111232. Second Preferred Stock Dividend Account. 111233. Common Stock Dividend Account. *112. Receivables, *1121. Negotiable Instruments Receivable. 11211. Trade Acceptances Receivable. 11212. Customers' Notes Receivable. 11213. Officers' Notes Receivable. 11214. Foreign Bills of Exchange Receivable. *1122. Accounts Receivable. 11221. Customers' Accounts Receivable. 112211. Reserve for Bad Debts. 11222. Officers' Accounts Receivable. 11223. Employes' Accounts Receivable. *1123. Contracts Receivable. 11231. Special Order Contracts. 11232. General Order Contracts. *1124. Subscriptions Receivable. 11241. Subscriptions to First Preferred Stock. 11242. Subscriptions to Second Preferred Stock. 11243. Subscriptions to Common Stock. *113. Inventories. ♦1131. Raw Materials Inventory. 11311. Store Room A. 11312. Store Room B. *1132. Goods in Process Inventory. 11321. Department Number 1. 11322. Department Number 2. ♦1133. Finished Goods Inventory. 11331. Stock Room X. 11332. Stock Room Y. 10 ♦114. Funds. ♦1141. Depreciation Funds. 11411. Building Depreciation Fund. 11412. Machinery and Equipment Depreciation Fund. 11413. Furniture and Furnishings Depreciation Fund. *1142. Sinking Funds for Bond Redemption. 11421. Sinking Fund for First Mortgage Bonds. 11422. Sinking Fund for Second Mortgage Bonds. ♦1143. Special Funds. 11431. Plant Addition and Extension Fund. 11432. Contingency Fund. 11433. Workmen's Welfare Fund. ♦lis. Temporary Investments. ♦1151. Bonds. 11511. Government Bonds. 11512. Industrial Bonds. 1152. Stocks. ♦12. Fixed Assets. ♦121. Land. 1211. Main Office Land. 1212. Main Factory Land. 1213. Branch Factories Land. 1214. Land for Employes' Cottages. 1215. Land Held for Investment and Future Requirements. ♦122. Buildings and Fixtures. 1221. Main Office Building & Fixtures. 12211. Reserve for Depreciation. 1222. Main Factory Building and Fixtures. 12221. Reserve for Depreciation. 1223. Power Plant. 12231. Reserve for Depreciation. 1224. Branch Factories. 12241. Reserve for Depreciation. 1225. Employes' Cottages. 12251. Reserve for Depreciation. 1226. House on Land Held for Investment. 12261. Reserve for Depreciation. ♦123. Machinery and Equipment. 1231. Main Factory Machinery and Equipment. 12311. Reserve for Depreciation. 1232. Power Plant Machinery and Equipment. 12321. Reserve for Depreciation. 1233. Branch Factories Machinery and Equipment. 12331. Reserve for Depreciation. ♦124. Furniture and Furnishings. 1241. Main Office Furniture and Furnishings. 12411. Reserve for Depreciation. 1242. Sales Department Furniture and Furnishings. 12421. Reserve for Depreciation. 1243. Purchasing Department Furniture and Furnishings. 12431. Reserve for Depreciation. 1244. Cost Department Furniture and Furnishings. 12441. Reserve for Depreciation. 1245. Factory Furniture and Furnishings. 12451. Reserve for Depreciation. 11 *125. Delivery Equipment. 1251. Auto Trucks, Type A. 12511. Reserve for Depreciation. 1252. Auto Trucks, Type B. 12521. Reserve for Depreciation. ♦126. Permanent Investments. 1261. Investments in Branch Factories. 1262. Stock of Subsidiary Companies held for Control. 127. Organization Expenses. *13. Intangible Assets. 131. Good Will. 132. Patents. 133. Franchises. 134. Trade Marks. *14. Accrued Assets. 141. Accrued Interest Receivable. 142. Accrued Rents Receivable. 143. Accrued Royalties Receivable. ♦15. Deferred Assets. 151. Prepaid Insurance. 152. Discount on Second Mortgage Bonds. 153. Stationery and Office Supplies Inventory. 154. Postage Inventory. 155. Fuel Inventory. 156. Main Factory Supplies Inventory. 157. Power Plant Supplies Inventory. *2. LIABILITIES *21. Current Liabilities. *211. Payables. *2111. Negotiable Instruments Payable. 21111. Trade Acceptances Payable. 21112. Creditors' Notes Payable. 21113. Officers' Notes Payable. 21114. Foreign Bills of Exchange Payable. ♦2112. Accounts Payable. 21121. Creditors Accounts Payable. 21122. Officers Accounts Payable. 21123. Employes Accounts Payable. 2113. Contracts Payable. ♦2114. Dividends Payable. 21141. Dividends Payable, First Preferred Stock. 21142. Dividends Payable, Second Preferred Stock. 21143. Dividends Payable, Common Stock. ♦212. Deposits and Fund Accounts. 2121. Locker Deposits. 2122. Workmen's Welfare Trust Fund Account. ♦22. Accrued Liabilities. 221. Salaries and Wages Accrued. 222. Accrued Taxes. 223. Accrued Ppwer Expense. 224. Accrued Light Expense. 225. Accrued Telephone Expense. 226. Accrued Interest Payable. 12 *23. Funded Liabilities. 231. First Mortgage Bonds Payable. 232. Second Mortgage Bonds Payable. *24. Contingent Liabilities. *241. Discounted Negotiable Instruments. 2411. Trade Acceptances Receivable Discounted. 2412. Customers Notes Receivable Discounted. 2413. Officers Notes Receivable Discounted. 2414. Foreign Bills of Exchange Receivable Discounted. 242. Guarantees. *243. Uncompleted Contracts. 2431. Special Order Contracts. 2432. General Order Contracts. *2S. Deferred Liabilities. 251. Premium on First Mortgage Bonds Payable. 252. Premium on Consolidated Mortgage Bonds Payable. *3. PROPRIETARY INTEREST *31. Capital Stock. 311. First Preferred Capital Stock. 312. Second Preferred Capital Stock. 313. Common Stock. *32. Surplus. 321. Free Surplus. *322. Appropriated Surplus. 3221. Reserve for Federal Income Tax. 3222. Reserve for State Income Tax. 3223. Reserve for Contingencies. ♦3224. Reserve for Sinking Fund. 32241. First Mortgage Bonds. 3225. Reserve for Plant Additions and Extensions. *3226. Dividends Declared. 32261. Dividends Declared on First Preferred Stock. 32262. Dividends Declared on Second Preferred Stock. 32263. Dividends Declared on Common Stock. *33. Revenue Accounts. 331. Branch Factories. 332. Manufacturing. 333. Trading. 334. Administration. 335. Financial Income and Expense. 336. Appropriation. *34. Suspense Accounts. 341. Cash Over and Under. *4. INCOME *41. Operating Income. 411. Branch Factory Income. 412. Sales of Main Factory. 4121. Main Factory Return Sales and Allowances. 13 *42. Non-operating Income. ♦421. Income from Sale of Fixed Assets. 4211. Sale of Investment Land. 4212. Sale of Branch Factory. 4213. Sale of Auto Trucks, Type C. ♦422. Income from Sale of Subsidiary Commodities. 4221. Sale of Boiler Room Products. 4222. Sale of Waste Paper. 4223. Sale of Kindling Wood. *423. Investment Income. 4231. Interest Earned on Government Bonds. 4232. Interest Earned on Industrial Bonds. 4233. Dividends Received on Stock. 4234. Rents Earned on Employes Cottages. 4235. Dividends Received from Stock Held for Control. 4236. Royalties Received on Patents from Subsidiaries. *424. Financial Income. 4241. Interest Earned on Bank Deposits. 4242. Interest Earned on Funds. 4243. Merchandise Discount on Purchases. 4244. Amortization of Premium on First Mortgage Bonds. 4245. Amortization of Premium on Consolidated Mortgage Bonds. *5. EXPENSE *51. Operating Expense. 511. Branch Factories Expenses. ♦512. Manufacturing Expenses. ♦5121. Prime Cost. ♦51211. Direct Material. 512111. Merchandise Purchases. ♦512112. Purchasing Department Expense. 5121121. Salaries and Wages. 5121122. Stationery and Office Supplies. 5121123. Testing Department Expense. 5121124. Heat. 5121125. Light. 5121126. Telephone and Telegraph. 5121127. Trade Catalogues and Magazines. 5121128. Depreciation on Furniture and Furnishings. 5121129. Miscellaneous Expenses. 512113. Receiving Department Expense. 512114. Postage, Freight, and Express Inward. 512115. Depreciation on Delivery Equipment. 512116. Delivery Expense (Inward). ♦51212. Direct Labor. 512121. Productive Labor Department Number 1. 512122. Productive Labor Department Number 2. ♦5122. Factory Burden. ♦51221. General Departments. ♦512211. Department Number 1. 5122111. Superintendence. 5122112. Taxes, Property. 5122113. Insurance, Fire and Liability. ♦5122114. Repairs. 51221141. Building and Fixtures. 51221142. Machinery and Equipment. 14 *S122115. Depreciation. 51221151. Building and Fixtures. 51221152. Machinery and Equipment. 51221153. Patents Written Off. 51221154. Furniture and Furnishings. 5122116. Heat. 5122117. Light. 5122118. Telephone and Telegraph. 5122119. Factory Supplies Used. 512211901. Loss from Strikes and Lockouts. *512212. Department Number 2. Same accounts as under Dept. 1. ♦51222. Special Departments. *5i2221. Cost Department Expense. 5122211. Salaries and Wages. 5122212. Stationery and Office Supplies. 5122213. Employment Department Expense. 5122214. Heat. 5122215. Light. 5122216. Telephone and Telegraph. 5122217. Time Recording Machine Rentals. 5122218. Depreciation on Furniture and Furnishings. 5122219. Miscellaneous Expenses. *512222. Power Plant Expense. 5122221. Depreciation on Power Plant. 5122222. Depreciation on Machinery and Equipment. 5122223. Insurance. 5122224. Salaries and Wages. 5122225. Fuel and Water. 5122226. Supplies. 5122227. Heat. 5122228. Light. 5122229. Telephone and Telegraph. *512223. Store Room Expense. 5122231. Salaries and Wages. 5122232. Heat. 5122233. Light. 5122234. Telephone and Telegraph. 5122235. Stationery and Office Supplies. 5122236. Miscellaneous Expense. *513. Trading Expenses. *5131. Departmental Expenses. *51311. Sales Department Expense. 513111. Salaries and Wages. 5131111. Salary of Manager. 5131112. Salaries and Commission of Salesmen. 5131113. Salaries of Clerks. 513112. Traveling Expenses of Salesmen. 513113. Stationery and Office Supplies. 513114. Postage. 513115. Catalogues and Price Lists. 513116. Entertaining Customers. 513117. Heat. 513118. Light. 513119. Telephone and Telegraph. *51312. Advertising Department Expense. 513121. Salaries and Wages. 513122. Stationery and Office Supplies. *S13123. Publicity Expense. 5131231. Newspaper and Magazine Space. 5131232. .Billboard and Electric Sign Space. 5131233. Mimeographing and Special Letters. 1#' *51313. Shipping Department Expense. 513131. Salaries and Wages. 513132. Boxes and Packing Cases. 513133. Delivery Expense. 513134. Depreciation on Delivery Equipment. 513135^ Twine and Wrapping Material. ♦51314. Credit Department Expense. 513141. Salaries and Wages. 513142. Stationery and Office Supplies. 513143. Subscriptions to Credit Rating Services. 513144. Heat. 513145. Light. 513146. Telephone and Telegraph. 513147. 5132. Parcels Post, Freight, and Express, Outward. 5133. Bad Debts. 5134. Insurance. 5135. Taxes. 5136. Repairs. 5137. Depreciation on Sales Department Furniture and Furnishings. ♦514. Administrative Expense. ♦5141. Salaries and Wages. 51411. Salaries of Officers. 51412. Salaries of Managers and Clerks. 51413. Directors' Fees. 51414. Christmas Presents to Staff. 5142. Stationery and Office Supplies. 5143. Postage. 5144. Telephone and Telegraph. 5145. Filing Department Expense. ♦5146. Occupancy Expense. 51461. Heat. 51462. Light. 51463. Depreciation on Office Building and Fixtures. 51464. Depreciation on Furniture and Furnishings. 51465. Property Taxes. 51466. Repairs. 51467. Insurance. 51468. Ice Water. 51469. Towel Service. 5147. Traveling Expenses of Officers. 5148. Donations. 5149. Miscellaneous General Expenses. ♦52. Non-operating expense. ♦521. Expenses of Sale of Fixed Assets. 5211. Cost of Sale of Investment Land. 5212. Cost of Sale of Branch Factory. 5213. Cost of Sale of Auto Trucks, Type C. ♦522. Expenses of Sale of Subsidiary Commodities. 5221. Cost of Sale of Boiler Room Products. 5222. Cost of Sale of Waste Paper. 5223. Cost of Sale of Kindling Wood. ♦523. Investment Expense. 5231. Taxes on Investment Land. ♦5232. Cottage Expense. 52321. Taxes on Cottages. 52322. Repairs on Cottages. 52323. Insurance on Cottages. 52324. Depreciation on Cottages. 16 *524. Financial Expense. *S241. Interest Paid. 52411. Interest Paid on First Mortgage Bonds. 52412. Interest Paid on Second Mortgage Bonds. 52413. Interest Paid on Consolidated Mortgage Bonds. *52414. Interest Paid on Negotiable Instruments. 524141. Interest Paid on Trade Acceptances. 524142. Interest Paid on Notes. 524143. Interest Paid on Officers' Notes. 524144. Interest Paid on Foreign Bills of Exchange. 5242. Discount on Second Mortgage Bonds Written Off. 5243. Merchandise Discount on Sales. * No accounts should be opened in the ledger for account titles marked with an asterisk, unless as controlling accounts for the sub-accounts. They are used as head- ings merely for the purpose of detailed classification. , 17 PART I PROBLEM 1 (Adapted from Wisconsin, 1915) Classify and group the following accounts of a manufacturing company- according to kind of asset, liability, proprietary interest, income and expense: 1. Accounts Payable. 35. 2. Accounts Receivable. 36. 3. Accrued Interest on Bonds Issued. 37. 4. Accrued Salaries and Wages. 38. 5. Advertising. 39. 6. Bad Debts Written Oflf. . 40. 7. Bills Payable. 41. 8. Bills Receivable. 42. 9. Bond Discount on Bonds Purchased. 43. 10. Bond Premium on Bonds Issued. 44. 11. Capital Stock. 4.S. 12. Cash. 46. 13. Credit Department Expenses. 47. 14. Depreciation of Buildings, Machinery 48. and Plant. 49. 15. Depreciation of Workmen's Cottages. 50. 16. Directors' Fees. 51. 17. Discount on Purchases. 52. 18. Discount on Sales. 53. 19. Federal Income Tax. 20. First Mortgage Bonds. 54. 21. Freigh. and Cartage Inward. 22. Freight and Cartage Outward. 55. 23. General Office Expenses. 56. 24. Good Will. 57. 25. Insurance. 58. 26. Insurance Premiums Unexpired. 59. 27. Interest on Bills Payable. 60. 28. Interest on Bonds Issued. 61. 29. Income from Investments. 62. 30. Inventory, Raw Materials. 63. 31. Inventory, Goods in Process. 64. 32. Inventory, Manufactured Goods. 65. 33. Investments (Outside). 66. 34. Maintenance of Buildings, Machinery 67. and Plant. 68. Maintenance of Workmen's Cottages. Manufacturing Power, Heat and Light. Miscellaneous Factory Expenses. Miscellaneous Selling Expenses. Non-Productive Labor. Office Equipment. Office Salaries. Officers' Salaries and Expenses. Organization Expenses. Patent Rights. Patterns and Drawings. Plant Site. Plant Buildings. Plant Machinery and Equipment. Productive Labor. Purchasing Department Expense. Raw Materials Purchased. Rent of Workmen's Cottages. Reserve for Depreciation of Buildings, Machinery and Plant. Reserve for Depreciation of Workmen's Cottages. Reserve for Doubtful Accounts. Reserve for Sinking Fund. Returns and Allowances, Purchases. Returns and Allowances, Sales. Sales of Manufactured Goods. Sales of Waste Materials. Sales Agents' Commissions. Salesmen's Salaries. Salesmen's Expenses. Sinking Fund Investments. Surplus. Taxes on Plant and Equipment. Taxes Accrued. Workmen's Cottages. Comment (Problems 1, 2, 3, 4, 5). The solutions to these problems may be prepared by writing the sub-class heading in the margin and listing the names of the accounts falling under that heading in an indented column beneath; i.e.: Current Assets Cash. Notes Receivable. Etc. As an aid in determining the classification of some of the more unusual accounts, set up the journal entry which might bring the account on the books. What would-b« the counterbalancing debit or credit? Does the account represent an ani.ount applicable to more than one period? Distinguish between surplus reserves and liability or. valuation reserves. A valuation 18 reserve covers a loss which has been suffered or is certain to be suffered though the amount may be uncertain. "Bad Debts Written Off" refers to losses which have been suffered and are written off the books. "Bad Debts" may refer to losses which have occurred or to losses which are expected to occur in the future. The interpretation to be placed on the account may be determined by reference to the counter balancing account. The counter balancing credit is either "Reserve for Bad Debts" or "Accounts Receivable." If the former account is used, the amount is an estimate; if the latter, the amount represents a realized loss. "Sinking Fund Investments," for purposes of these problems, may be treated as a fixed asset account. Also treat "Workmen's Cottages" as fixed assets. Under some circumstances both accounts might be current assets. Whether or not securities are held for purposes of control determine their status as fixed or current assets. PROBLEM 2 (Wisconsin, May, 1919) Classify the accounts properly recording the following items according to the subdivision of assets, liabilities, proprietary interest, income and expenses, under which they should be grouped : 1. Expenses Advanced Salesmen. 15. 2. Wages Due Workmen and Office Staff. 16. 3. Organization Expenses. 17. 4. Organization Expenses Written Off. 5. Reserve for Depreciation on Buildings. 6. Reserve for Income and Excess Profits Taxes. 18. 7. Property Taxes. 19. 8. Income and Excess Profits Taxes. 20. 9. Sinking Fund for Bond Redemption. 10. Reserve for Sinking Fund. 21. 11. Cash Discount on Merchandise Pur- chases. 22. 12. Cash discounts on Merchandise Sales. 23. 13. Interest on Invested Capital. 24. 14. Dividends Declared. 25. Dividends Payable. Notes Receivable Discounted. Trade Acceptances. (a) Given. (b) Received. (c) Discounted. Premium on Bonds Issued. Discount on Bonds Purchased. Amortization of Premium on Bonds Issued. Amortization of Discount on Bonds Purchased. Returned Sales. Wages Paid Workmen and Office Staff. Maintenance of Workmen's Cottages. Income from Stocks and Bonds Owned. PROBLEM 3 (Wisconsin, November, 1919) Classify and group the following accounts according to kind of asset, liability, proprietary interest, income and expense*. Interest Collected in Advance. .Sinking Fund. Notes Receivable Discounted. Treasury Stock. Work in Progress, Dividends Unclaimed. Capital Stock Subscription. Suspense Accounts Receivable. _ Discount on Bonds Issued Written Off. Accrued Property Taxes. Accrued Income and Excess Profits Taxes. 'nterest Accrued on Notes Receivable. Interest Accrued on Bonds Payable. Reserve for Sinking Fund. Reserve for Bad Debts. Merchandise Purchases. Sales' Returns Allowances. Reserve for Building Extensions. Bonds Payable. Interest Earned on Liberty Bonds. Interest Paid on Liberty Loan Installments. Reserve for Depreciation, Buildings. Dividends Declared. Dividends Payable. Investments in and Advances to Companies for Purposes of Control. Advances to Company Officials. Insurance Premiums Paid by Company or Life of its President (in which the Com- pany is Beneficiary). Installment Payments by Employes on Lib- erty Bonds Bought for Them by Com- pany. Liberty Bonds Bought for Employes. Employes' Liberty Bond Subscription. 19 PROBLEM 4 Classify and group the following accounts of a manufacturing corporation according to kind of asset, liability, proprietary interest, income and expense : 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. Z7. 38. Trade Marks and Patents. Merchandise Discount on Sales. Real Estate, Factory Site. Gross Sales. Merchandise Discount on Purchases. Cash on Hand. Interest Paid on First Mortgage Bonds. Interest on Debenture Bonds Accrued but Not Due. Bank Account. Interest Received from Customers. Interest Paid. Miscellaneous Factory Expenses. Reserve for Depreciation, Factory and Office Buildings. Depreciation Fund for Replacement of Physical Assets. Reserve for Bad Debts. Sinking Fund for First Mortgage Bonds. Raw Materials. Reserve for Depreciation of Power Plant. Finished Goods Inventory. Direct Labor. Machinery and Tools. Reserve for Depreciation of Auto Trucks. Reserve for Depreciation of Machinery and Tools. Amortization of Patents. Notes T?eceivable. Real Estate, Investment. Sale of Investment Land. Amortization of Discount on Deben- ture Bonds. Auto Trucks. Factory Materials and Supplies. Factory Materials and Supplies, In- ventory. Coal Oil, and Waste, Inventory. Coal. Oil, and Waste. Repairs to Machinery. Reserve for Depreciation of Furni- ture and Fixtures. Property Taxes. Furniture and Fixtures. Enpfineers and Firemen, Labor. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. yz. 74. 75. 76. 77. 79. SO. 81. Power Plant. Factory Superintendence. Factory Insurance. Cash Balance in Banks. Factory and Office Buildings. Repairs to Factory Buildings. Salesmen's Salaries. Salesmen's Salaries Paid in Advance. Advertising. Shipping Expenses. Salaries of Executive Officers. Unexpired Fire Insurance. Accounts Payable. Office Salaries. Accrued Taxes. Postage, Telegrams, and Telephone. Capital Stock, Preferred. Stationery and Printing. Notes and Loans Payable. Wages Accrued and Unpaid. Capital Stock, Common. Goodwill. First Mortgage Bonds Issued. Treasury Stock. Donated Surplus. Revaluation Surplus. Free Surplus. Notes Receivable Discounted. Bonuses Paid Workmen. Protested Notes Receivable. Premiums Realized on Preferred Stock Sales. Discount on Common Stock Sales. Premium on First Mortgage Bonds Issued. Life Insurance Premiums Paid on Life of President. Fire Loss on Factory, Not Covered by Insurance. Debenture Bonds Issued. Discount on Debenture Bonds Issued. Amortization of Premium on First Mortgage Bonds Issued. Reserve for Income and Excess Profits Tax. Sales Returns and Allowances. Accounts Receivable. Bad Debts. Depreciation. PROBLEM 5 (Adapted from Institute Examination, November, 1917) Classify and group the following accounts : Accounts Payable- Accounts Receivable. Accrued Interest on Investments. Accrued Interest on Mortgage Payable Advertising. Buildings. Capital Stock. Capital Stock Unsubscribed. Cash on Deposit. Commis-sions Paid Salesmen. Depreciation, Buildings. Depreciation, Machinery. Discount Allowed on Sales. Discount Received on Purchases. 20 Factory Expenses. Factory Payroll. Factory Payroll Accrued. Finished Goods Inventory. Freight and Cartage Inward. Freight and Cartage Outward. Fuel. Good-will. Insurance, Buildings and Machinery. Insurance, Finished Goods. Interest Paid. Interest Received. Investments. Machinery. Mortgage on Plant. Notes Payable. Notes Receivable. Office Expenses. Office Furniture and Fixtures. Office Salaries. Office Salaries Accrued. Organization Expenses. Pettv Cash. Prepaid Taxes on Real Estate. Profit and Loss. Raw Material Purchased. Raw Material Inventory. Real Estate. Repairs, Buildings. Repairs, Machinery. Reserve for Bad Debts. Reserve for Depreciation on Buildings. Reserve for Depreciation on Machinery. Returns and Allowances on Sales. Salaries — Executive Officers. Salaries — Salesmen. Sales. Salesmen's Accounts — Advances on Salaries. Subscriptions and Donations. Taxes — Income. Taxes — Real Estate. Unexpired Insurance, Buildings and Machinery. Unexpired Insurance, Finished Goods. Work in Process Inventory. PROBLEM 6 (Wisconsin, May, 1919) The following a.sset accounts appear upon the books of the Wisconsin State Normal Schools : Land. Land Improvements. Structures and Attached Fixtures. Machinery and Equipment. Educational Apparatus. Furniture and Furnishings. Live Stock and Poultry. Library Books. Text Books. Museum Specimens. Indicate the account or accounts to which each of the following items should properly be charged : (a) Canary for Kindergarten Dept. (b) Sidewalk. (c) Office Desk. (d) Log Chain. (e) Tractor. (f) Shrubbery. (g) Piano for Music Dept. Cream Separator. (i) Ford Automobile. (j) Cinders for Track. (k) Test Tubes. (1) Copy of Wis. Statutes. (m) Adding Machine. (n) Cash Register. (o) School Manual. (h) Comment. — In this problem the purpose for which one asset is used is the deter- minant factor. PROBLEM 7 (Wisconsin, May, 1919) The State Fair Division of the Department of Agriculture has three appro- priations as follows : L Operation — for the ordinary ever recurring expenses of the department. 2. Capital — for the acquisition of permanent property, such as lands, buildings, equipment, etc. 3. Maintenance — for the keeping of permanent property in a condition suitable for use and occupancy. 21 In the following cases, indicate the appropriation to be charged with the expenditures mentioned : (a) A new team is purchased to replace a team struck by lightning. The value of the old and new team is the same. (b) Ticket booth for War Exhibit. (c) Oil for roads on fairground. (d) Bunting. (e) Free Exhibition. (f) Special Electric Arches for Illuminating Purposes. (g) Sewer Pipe. (h) Flowers and Shrubs, (i) Whitewash, (j) Exhibit Signs. Comment. — The student may ask himself three questions in connection with this problem: (1) Did the expenditure result in the addition of a comparatively permanent asset? If so, it is capital. (2) Did the expenditure tend to delay the decline in value of some asset, or restore an asset to original value? Such expenditures are maintenance charges. (3) If an expenditure has neither of the above results it is a proper charge to operation. PROBLEM 8 I. (a) State whether each of the following accounts is a liability account, a valuation account, or a proprietary interest account : 1. Reserve for Depreciation. 2. Reserve for Extensions. 3. Reserve for Bad Debts. 4. Reserve for Contingencies. 5. Reserve for Inventory Adjustment. 6. Reserve for Sinking Fund. (b) Discuss the accuracy of the terminology employed in each of the above account names. (Wisconsin, 1917.) II. In the balance sheet of a company, as prepared by the secretary, you find the following items : Under "Capital Assets." (a) Factory real estate, buildings, plant and machinery. (b) Real estate held for investment. (c) Investments in and advances to another company for purposes of control. (d) Franchises having a fixed term. Under "Current Assets." (e) Company's treasury stock (carried at 50 cents on the dollar). (f) Raw material, finished product and inventory of office supplies and stationery. (g) Advances to officials of the company (unsecured). (h) Insurance premiums paid by the company on a policy on the life of the company's president, in which the company is beneficiary, (i) Due to customers, (j) Sinking fund investments, (k) Unexpired fire insurance premium. (1) Cash in bank and on hand. Discuss the correctness or otherwise of the above classification of items under capital and current assets, giving reasons for your opinions, and criticising the items generally. (Missouri, 1915.) Comment. — As already stated, the test of a valuation account is whether it represents provision for a loss which has occurred or is sure to occur, though the amount may be doubtful. Real estate held for investment may be either a fixed or a current asset, depending upon the ease with which it may be converted into cash. 22 PROBLEM 9 (Wisconsin, May, 1919) (a) State the revenue account or section of the operating (or income) statement in which each of the following items would be placed in general accounting practice. (b) State the treatment given each of the items under the Revenue Act of 1918, i. e., if an income item state whether it is to be included in calculating gross income, and if an expense item, state whether it is allowable as a deduc- tion. Note : The examinee must first decide whether each item mentioned should be included in an operating (or income) statement. 1. Contributions to (a) Relief and charitable organizations. (b) Hospitals. (c) Political campaign fund. (d) Fund to promote certain legislation. (e) City convention fund. 2. Expenses of the president of the company attending the national and the state trade conventions. 3. Loss through enforced sale of Liberty Bonds. 4. Expenses incurred in advertising Liberty Bonds and War Savings Cer- tificates. 5. Taxes and assessments as follows : State Income Tax ; Federal Income and Excess Profits Tax ; Real Property Tax ; Street Paving Assessment ; Street Repaving Assessment. 6. Insurance premium on life of the company's president. 7. Loss suffered on salvaged property in excess of depreciation reserve created to date. 8. Profit on goods manufactured on order and held for future shipment. 9. Interest paid on (a) Bonds outstanding. (b) Bank Loans. (c) Liberty Bond Installments. (d) Scrip Dividends. 10. Profit on donation of treasury stock (par value, $10,000; market value, $5,000) sold within the year for $5,500. 11. Rent of factory building ($2,000 per year) paid to a corporation in which your client owns $10,000 of the $100,000 capital stock. 12. Rent for $75 per month for a warehouse. On July 1, 1918, the com- pany purchased the warehouse property for $6,000. A cash payment of $2,000 was made, and the company was to pay the balance at the rate of $75 per month. 13. Depreciation which the corporation figures on the following items at the stated rates : (a) Brick factory building, 6?^%. (b) Brick office building, 5%. (c) Machinery Equipment, 12^^%. (d) Automobile Trucks, 33y3%. 14. A premium of $2,000 received from the sale of $100,000 of the cor- poration's bonds. 15. An item of $2,000 for the replacement of a portion of an old machine. 23 16. An item of $200 incurred in removing a discarded machine to make room for a new machine. 17. Expenses of officials paid in visiting the corporation's properties in Buenos Aires. 18. Gifts to members of the Board of Directors. 19. Salary of $10,000 to the vice-president of the corporation. 20. Interest on invested capital. Comment. — Only part A of this problem is required of students in Theory and Practice of Accounting. The remainder of the problem pre-supposes a knowledge of the Income Tax Regulations. PROBLEM 10 (Missouri, 1913) Following is a list of the accounts appearing on the trial balance of a Manufacturing Company, which deals in finished merchandise purchased, as well as in its own products. From this list, and without using figures, draw up plans of Financial Statements (Balance Sheet, Manufacturing account. Trading account. Profit and Loss account, etc.), in the form which you think most suitable: Accounts Payable. Sales (own products). Salaries, Management. Inventory (own products). Capital Stock. Inventory (raw materials). Notes Receivable. Inventory (partly manufactured goods). Cash. Inventory (merchandise purchased). Notes Payable (partly secured by deed of Inventory (repair supplies). trust). Undivided Profits (end of last year). Salaries, Office and Store. Purchases (merchandise). Real Estate. Sales (merchandise purchased). Fuel. Rent, Factory. Insurance (Plant). Rent, Store and Office. Light. Printing and Stationery. Freight (on Merchandise Purchased). Accounts Receivable. Machinery and Tools. Horse, Wagon and Harness. Freight (on Raw Material).. Stable Expense. Buildings. Advertising. Purchases (raw materials). Interest Payable. Machinery Repairs. Depreciation — Buildings, Machinery, Productive Labor (factory). Wagons and Harness. Labor (warehouse). Sundry Factory Expenses. Office Furniture. Sundry Office Expenses. Reserve, Uncollectible Accounts. Postage. Reserve for Depreciation. Subscriptions and Donations. Insurance (merchandise). Discounts on Purchases (merchandise). Uncollectible Accounts. Rents, Income. Salesmen's Expenses and Salaries. Insurance Paid in Advance, Plant. Management Salary, Office. Insurance Paid in Advance, Merchandise. Discounts on Sales (own product). Management Salary, Factory. Comment. — In this problem the term "financial statements" obviously is used in its broad sense to include both the financial statement (balance sheet), and the operating statement. Although the Manufacturing Account, Trading Accounts and the Profit and Loss Account are called for, the usual operating statement may be compiled. An easy method of procedure would be to draw up a skeleton financial statement and operating statement showing the main division headings, such as "current assets." Then dispose of the items in the order in which they appear in the problem, placing each item under the appropriate heading in one of the skeleton statements. Another method of procedure would be to go through the list of accounts and pick out all items belonging to each subdivision of the division before taking up the next. In this case all current assets would be picked out and grouped together first, then fixed assets, etc. 24 PROBLEM 11 (Adapted from Institute Examination, May, 1919) The following trial balance of the B. C. Cotton Company is taken from the books after the inventories have been adjusted and the deferred charges posted. The accounts are ready to close for the period. The consigned goods account has been inactive for six months and will continue so for the present. Trial Balance— March 31, 1921 Cash $ 116,247.19 Accounts Receivable 63,492.58 Inventory: March 31: Raw Materials 113,860.99 Goods in Process 31,464.02 Finished Goods 114,069.57 Fuel 1,250.00 Starch . . . • • 800.00 Factory Supplies 1,300.00 Consignments 14,438.42 Liberty Bonds 1,000.00 Buildings and Machinery 341,378.14 Reserve for Dep'n., Bldg. and Mach $ 4,267.23 Tenement Buildings 20,000.00 Prepaid Taxes 208.96 Unexpired Insurance 660.41 Prepaid Interest 5,100.00 Accounts Payable '. 313.45 Notes Payable 225,000.00 Capital Stock 362,500.00 Surplus 188,866.14 Sales-Cloth 268,337.28 Purchases 162,403.68 Labor-Productive 33,862.99 Light-Factory 132.72 Royalties 50.00 Oils 38.62 Finishing 7,455.55 Supplies Used 1,276.06 Starch Used 800.00 Fuel Used 1,455.99 Freight Inward 1,353.99 Dep'n. on Bldgs. and Machinery 4,267.23 Insurance-Factory 350.00 Taxes, Factory 567.71 Commissions 7,121.42 Office Salaries 3,000.00 General Expense 542.88 Water-Tenements 202.24 Tenements, Repairs, Insurance, Taxes 1,610.99 Interest Paid 2,539.90 Discount Allowed 899.50 Rent from Tenements 500.00 Waste Sales 1,401.39 Discounts Taken 4,016.26 $1,055,201.75 $1,055,201.75 25 The inventories of finished goods have been adjusted through the cloth sales account and inventories of goods in process and raw materials through the purchases account. Inventories January 1, 1921 Raw Materials .$143,566.55 Goods in Process 22,258.01 Finished Goods 132,833.85 Prepare : (a) Operating Statement for the quarter ended March 31, 1921. Show cost of goods made and sold. (b) Financial Statement as of March 31, 1921. PROBLEM 12 (Adapted from Michigan Examination, 1908) The following figures are taken from the books of the Fairview Manu- facturing Company of New York City, on the 31st of December, 1907: "^Inventory of Finished Goods (January 1) $ 3,684.57 ^ v/ Inventory of Raw Material (January 1) 11,392.70 ^ , Purchases of Raw Materials 62,519.85 — V Sales . . . . ■ 217,387.42 V Wages 109,317.88 - Rent 19,500.00 ^ "^ Discounts Received on Purchases 375.60 C . Discounts Allowed on Sales 186.36 " ^Power, Light and Heat 8,710.64 -r ^ Light and Heat for Office 168.00 — ^ - Repairs 1.090.00 -^ V Packing • ■ 2,017.00 - V Factory Expense 3,270.00 — General Expense , 5,230.00 - Factory Insurance . . . • • 1,050.00 General Insurance 750.00 ' Machinery and Plant 12,350.00- -Tools 2,600.00 " Commissions Paid 7,642.00 , Office Salaries 9,700.00 - ^ Salesmen's Salaries 8,930.00 V Interest on Loans 440.00''^ vLoans Payable 22,000.00 '^ Discount Lost 120.00 - y Notes Receivable 130,000.00 ^ . Notes Rec. Disc 8,000.00 Q HSTotes Payable 19,500.00 V Accounts Receivable 101,026.00 -- \y Accounts Payable 30,020.00 '' vOffice Furniture 1,100.00 - ^ Furniture and Fixtures 1,950.00 -" V Cash on Hand 1,825.00^ •. Cash in Banks 26,467.00 -^ V Returned Sales 276.00 r^ "> Capital 200,000.00 ^ V Reserve for Depreciation 3,236.98 ^ -'Reserve for Bad Debts 5,727.00 "• ^Freight and Cartage, Inward 727.00 'Stable Expenses 2,750.00 ^ Horses, Wagons and Harnesses 8,500.00 • Postage and Express 1,250.00 Superintendence 3,500.00 - Taxes 250.00 ' Goodwill 10,000.00 Stationery and Printing 1,080.00 Advertising 8,630.00 ^Surplus (1906) 63,753.00 O 26 You are requested (a) to prepare from them a trial balance, arranging the accounts according to the system used in laboratory; (b) to draft journal entries for closing the books; (c) the proper revenue accounts in statement form; (d) to certify your results by a balance sheet, the items of which are arranged in the order used in presenting such statements to bond houses for an issue of mortgage bonds. Notations : The following items are to be taken into consideration before preparing the statement asked for : Raw Materials $ 16,250.00 Finished Goods • 9,386.00 Tools • • 2,000.00 Office Furniture 1,000.00 Furniture and Fixtures 1,500.00 Stationery and Printing 300.00 Allow for depreciation : On machinery 5 per cent. On horses, wagons and harness 10 per cent. Reserve 1 per cent, of the sales for bad debts. The item of rent, $19,500, is to be apportioned as follows : Fifty-three per cent, for factory, 2 per cent, for salesrooms, and 25 per cent, for office. The item of superintendence, $3,500, is to be divided % to factory and % to general expense. Comment. — This problem may be solved first on a twelve column working paper. The columnar headings of the working sheet would be as follows: Columns 1 and 2 Columns 3 and 4 Columns 5 and 6 Columns 7 and 8 Columns 9 and 10 Columns 11 and 12 Trial Balance debit and credit. Adjustments debit and credit. Manufacturing debit and credit. Trading debit and credit. Administrative and Financial debits and credits. Financial statement, debit and credit. The Adjustment columns should contain both a debit and a credit for each notation. If the name of the account to be debited or credited does not appear on the trial balance, il should be written below. Debits and credits for items transferred from one account to another also should be placed in the adjustment columns. These columns should receive all entries which should be made in the journal prior to the closing entries, but after the trial balance is taken. After adjustments are entered, the amounts in the adjustment columns are to be combined with the appropriate trial balance items to arrive at the amounts to be entered in the proper columns of the working sheet. After the working sheet is prepared, it is comparatively easy to take ofi the operating statement (columns 5 to 10 inclusive), and the financial statement (columns 11 and 12). Attention is called to the fact that but six columns, or three pairs of columns, are used for the operating items. Since the balance of each pair of columns can show but one fact, only three of the six operating results usually shown on statements can be designated on the working sheet. The six operating results usually shown are: 1. Cost of goods made. 2. Cost of goods sold. 3. Gross profit. 4. Trading profit. . 5. Operating profit. 6. Net profit. The student is asked to show the second, third, and sixth of the above named results as balances of the three pairs of operating columns of the working sheet above outlined. 27 PROBLEM 13 (Ohio, 1916) At the close of its fiscal year, December 31, 1915, the Trial Balance of The Nau-Pace Company was as follows : Real Estate $ 225,000.00 Fixed Machinery 150,000.00 Movable Equipment 18,000.00 Shaftings, Pulleys, Etc 10,500.00 Stable Equipment 3,500.00 Office Equipment 2,915.90 Drawings and Patterns 9,000.00 Patents 75,000.00 Capital Stock $ 500,000.00 First Mortgage Bonds 100,000.00 Profit and Loss Surplus 86,140.28 Dividends 300.00 Interest on Bonds 5,000.00 Other Interest Paid 1,323.10 Interest Received 2,469.50 Cash Discount on Purchases 13,389.52 Cash Discounts on Sales 2,861.50 Sales 1,540,816.75 Return Sales 8,258.25 Cash 27,750.65 - Bills Receivable 50,750.00 Accounts Receivable 298,650.25 Raw Materials 622,190.90 Finished Goods, January 1, 1915 62,735.06 Goods in Process, January 1, 1915 24,747.27 Fuel 38,688.28 Insurance 4,000.00 Taxes ; 5,000.00 Bills Payable 40,000.00 Accounts Payable 46,585.85 Reserve for Depreciation: Machinery and Equipment 50,000.00 Baildings 30,000.00 Patents 22,058.80 Bad Accounts 6,240.75 Salaries, Officers and Clerks (General) 56,150.00 General Office Supplies 2,950.75 Postage, Telegraph and Phone 1,560.00 Miscellaneous General Expenses 850.00 Advertising 35,000.00 Salaries and Expenses, Salesmen 72,350.31 Agents' Commissions 30,141.40 Credit Department Salaries 7,560.00 Miscellaneous Expenses, Selling 610.00 Stable Expenses 3,963 46 Direct Labor (Mfg.) 508,311.39 Indirect Labor (Mfg.) 44,981.01 Superintendence, Factory 6,000.00 Factory Supplies 8^547.18 Repairs, Machinery and Equipment 7,418.52 Repairs of Buildings 2,860.47 Power, Heat and Light 2,875.80 $2,438,001.45 $2,438,001.45 You are to take into consideration the following- facts : 1. Real Estate, Machinery and other Factory equipment, and Patents are stated at cost. 28 2. Of the Real Estate $25,000 is for Land and $200,000 is for Buildings. 3. All Capital Stock authorized has been issued and is outstanding. 4. Allowances for depreciation are : Machinery and Factory Equipment $ 15,000.00 Building, 3% on cost Patents, 1 l-17th of cost 5. $15,000 is to be set aside as a reserve for bad accounts. 6. Ten per cent, of the book values of Stable Equipment and Office Equipment, and % of the book value of Drawings and Patterns are to be charged off. 7. Inventories at the close of the fiscal year were : Raw Materials $ 63,580.40 Finished Goods 58,864.56 Goods in Process 27,024.52 Fuel 4,823.43 Factory Supplies 1,525.00 Office Supplies 500.00 Prepaid Insurance 500.00 8. The accruals are : Taxes $ 7,000.00 Direct Labor • • 12,618.75 Indirect Labor 2,040.50 Interest on Bonds 1,000.00 Advertising 4,718.50 9. The depreciation on Stable Equipment (see item 6) is to be charged to Stable Expenses, and % of the latter is apportioned to Manufacturing Expenses and % to Selling Expenses. 10. The cost of Fuel used is to be charged to Power, Heat and Light. 11. Maintenance of Real Estate is to be charged with cost of repairs to Buildings, depreciation on Buildings, 20% of Taxes for the year, and $1,000 for insurance. The total cost of such maintenance is to be shown as an item of manufacturing expense on the statement of Cost of Sales. 12. The portion of Insurance remaining after charging Maintenance of Real Estate is to be allocated to manufacturing expenses. 13. Thirty per cent, of the Taxes for the year is to be apportioned to manufacturing expenses and 50% is to be charged against income. 14. Of the salaries of Officers and Clerks, General. $3,600 should be apportioned to selling expenses. 15. Amongst the Bills Receivable is a note for $5,000 pertaining to a previous fiscal year, which is considered to be worthless. No provision was made for such loss. 16. Regardless of theory, cash discount? on purchases and sales are to be treated as pertaining to income. 17. On the 10th of December, 1915, a dividend of 10% on the Capital Stock was declared and made payable on January 10, 1916, for which no entry was made prior to taking off the Trial Balance. Given the foregoing information, you are asked to prepare the following statements in approved form for the information of your clients : 1. Cost of Sales. 2. Profit and Loss, having (a) the gross profit and the per cent, of same on sales; (b) selling expenses and per cent, of same on gross profits; (c) general expenses and the percentage that such expenses bear to gross profits ; and (d) the net profits and the per cent, of same on sales. 3. Balance Sheet, showing the Surplus at the beginning of the fiscal year, and the amount at the close of the year. Comment. — Working sheets may be used in the solution of this problem in a 29 manner similar to that followed in problem 12. Refer to the comments on problem 12 for instructions relative to columnar headings and balances. The statement in the problem that fifty per cent of the taxes are to charged against income is taken to mean that half of the taxes are income taxes, and therefore, not chargeable as expenses. The student should distinguish between dividends declared and dividends payable, as the latter are liabilities. After the working sheet is completed, the operation and financial statements may be taken off on journal paper. PROBLEM 14 (Adapted from Ohio, 1919) The Ohio Manufacturing Company commenced business on January 1, 1921, with a paid-in capital of $100,000.00. The transactions for the year 1921 were as follows : Purchases on credit : Land, $5,000.00; Buildings, $20,000.00; Machinery and Equipment, $30,000.00; Raw Material, $100,000.00; Factory Supplies and Expenses, $10,200.00; and Office Expenses, $3,000.00. The Cash payments for the year included : Factory productive labor, $40,000.00; Factory non-productive labor, $20,000.00; Officers' Salaries, $10,- 000.00; other Office Salaries, $8,000.00; and Salaries and Expenses of Sales- men, $10,000.00. Inventories at December 31, 1921, were: Raw Material, $20,000.00; Factory Supplies, $1,000.00; and Work in Process amounting to $30,000.00; two-thirds of which amount was for materials and one-third for productive labor. The open Accounts Receivable amounted to $20,000.00, after charging ofif $1,000.00 for bad debts, and the Accounts Payable amounted to $18,200.00. The units completed during the year amounted to 10,000, of which 8,000 were sold at $20.00 each. Provide for 10% depreciation on Machinery and 3% on Building. You are required to prepare an Operating Statement and a Financial Statement as of December 31, 1921, PROBLEM 15 (Massachusetts, 1917) The following is a Trial Balance before closing of the second year on Tune 30, 1917 : DEBITS Treasury Stock (XTrustee) $ 35,000.00 Real Estate 200,000.00 Buildings • • 300,000.00 Machinery and Equipment 150,000.00 Materials (Inventory, June 30, 1916) 65,000.00 Finished Goods do 158,000.00 Accounts Receivable 320,000.00 Purchase of Materials 305,000 00 Labor 132,800.00 Operating Expenses, Repairs, etc 121,500.00 Sinking Fund Trustee 25,000.00 Discount on Donated Stock sold from Treasury by Trustee.. 25,000 00 Cash 74,837.50 Discount on Bonds sold July 1, 1915 25,000.00 . ■ Bond Interest 12',50o!oO General Expenses ] 7,500.00 Insurance Unexpired June 30, 1916 3!oOo!oO $1,970,137.50 SO CREDITS Capital Stock Issued $ 500,000.00 1st Mortgage 5% Bonds 250,000.00 Accounts Payable 40,000.00 Reserve for Sinking Fund (Bonds) 25,000.00 Premium on Capital Stock 50,000.00 Sales of Finished Goods (Net) 915,000.00 Surplus on Donated Stock 60,000.00 Reserve for Depreciation of Buildings . . . ■. • • 6,000.00 Reserve for Depreciation on Machinery and Equipment 11,362.50 Reserve for Bad Debts (Balance) 650.00 Reserve for Replacements 15,000.00 Bond Interest Accrued 3,125.00 Taxes Accrued ■ ■ 9,000.00 Unappropriated Surplus June 30, 1916 85,000.00 $1,970,137.50 You are required to adjust the accounts, and prepare (a) Certified Balance Sheet; (b) Profit and Loss Account for the year; (c) Surplus Account. The following information is given : Inventory June 30, 1917, Materials $ 52,000.00 Goods in Process at Cost 105,000.00 Finished Goods at Cost 137,000.00 1. Bonds mature in 10 years from July 1, 1915, the interest being pay- able in April and October of each year. Bonds were sold at 90. 2. Depreciation on Buildings is estimated to be 2 per cent, annually. 3. Depreciation on Machinery and Equipment is estimated at 7^ per cent, yearly. 4. A Reserve for Bad and Doubtful Debts was set up on June 30, 1915, to the amount of $3,000, against which the bad debts written ofif during the fiscal year were charged. Create a Reserve for the coming year of 1 per cent, on Accounts Receivable. 5. According to the Company's By-Laws all replacements are to be made from Revenue. During the year a machine value at $6,000 was re- moved and replaced by a similar machine costing $10,000, which sum was charged to "Operating Expense Repairs, etc." The discarded machine was afterwards sold for $1,500 and this sum was credited to Machinery Account. 6. The Trustee of the Sinking Fund Investments reports that he received j^r),250 of income during the year. He is to be paid the amount iii cash which is credited to the Sinking Fund Reserve. 7. The Insurance was paid on July 1, 1915, for a period of three years. 8. Taxes were charged as $3,(XX) monthly to "Operating Expenses" and "Taxes Accrued" credited therewith. The Taxes paid during the year were $27,000. The tax year ends March 31. 9. The Treasury Stock was donated and has been all sold. Dividend of 10 per cent, declared on June 30, payable July 15, 1917. Comment. — The student is again referred to problem 12 for points relative to the use of the twelve column workmg sheet. Attention is also called to the following points: 1. The trial balance is for the close of the second year's business. Keep this fact in mind when dealing with the bond discount. 2. Adjustments for note 5 must be made before computing depreciation. 3. Interest earned by a sinking fund is financial income of the corporation even though the amount necessary to be paid into the sinking fund is not reduced by-that amount. 4. It is assumed that accrued taxes represent $3,000.(X) per month for April, May, and June and that an adjustment was made on March 31. 5. The account, "Treasury Stock (X Trustee)" must represent the cash proceeds of the sale of the treasury stock, because the problem states that the stock has all been sold. Consider this in connection with the discount on treasury stock sold amounting to $25,000.00. 31 PROBLEM 16 (Adapted from English Final Examination, May, 1912) A, B and C carry on business in partnership as gas engine dealers and repairers, their business being divided into two parts: (1) Engine Depart- ment, (2) Repair Department. The following were the Ledger Balance on 31st of December, 1910: Engines — Purchases and Freight $ 40,000.00 Fitters, Wages and Expenses 7,500.00 Stocks, 12/31/09 10,000.00 Sales 60,000.00 Repairs— Purchases 25,000.00 Stock, 12/31/09 4,000.00 Wages and Expenses 10,000.00 Sales 50,000.00 Accounts Receivable 20,000.00 Accounts Payable 11,200.00 Salaries 2,500.00 Rent and Taxes 1,500.00 Fuel and Light • ■ 250.00 Insurance — Fire and Workmen's Compensation 700.00 Life Policy— Surrender Value, 12/31/09 1,500.00 Life Insurance Premium 175.00 Bank Interest and Commission (Dr.) • • 100.00 Office Expenses 600.00 Discount (Dr.) 1,250.00 Office Furniture 750.00 A, Drawing Account (Dr.) 500.00 B, " " (Dr.) 600.00 C, " " (Cr.) 1,000.00 C, Loan Account (at 5 per cent) 2,500.00 A, Capital Account '. 2,500.00 B, " " 2,500.00 C, " " 2,500.00 Cash in Hand 125.00 Cash at Bank 5,150.00 Stocks, 31st December, 1910: Engines • • 10,500.00 Repairs ■ • 4,750.00 Surrender value of life policy 31st of December, 1910, $1,625. Interest on capitaj at 5 per cent, per annum. The profits were divided : A 7/20, B 6/20, C 7/20. Make out a trading account for each of the two departments, and the firm's profit and loss account for 1910. and balance sheet as on 31st of Decem- ber, 1910. Comment. — The following revenue accounts should be used in the solution of thij problem: Repair Trading, Engine Trading, Administration and Appropriation. Any items belonging definitely to either trading account should be placed accordingly. General items or amounts concerning which the information is too limited to determine the correct treatment, should be placed in the Administration account. The increase in the surrender value of the insurance policy should be capitalized. PROBLEM 17 (Adapted from English Final Examination, November, 1910) On December 31, 1909, the Trial Balance of the Jones Garage Company was as follows : 300 Shares Common Stock, $100 each $ 30,000.00 Good Will $ 12,750.00 Garage 7,500.00 32 Machinery and Tools 500.00 Fixtures and Fittings 100.00 Taxicabs 2,500.00 Sundry Debtors 12,500.00 Stock of Accessories, December 31, 1909 1,250.00 Cash at Bank 5,275.00 Sundry Creditors •• 765.00 Reserve for Bad Debts, December 31, 1908 400.00 Accessories, including Tires and Tubes (used).... 10,000.00 Gasoline, Oil, etc. (used) -. 2,750.00 Cost of Repairing Cars (Wages and Materials) .... 3,750.00 Charges to Customers for Repairing Cars 4,0(X).(X) Expense of Taxicabs 1,000.00 Wages 600.00 Sales of Accessories, including Tires and Tubes... 13,250.00 Cars Purchased for Re-sale 55,000.00 Sales of Gasoline, Oil, etc ■ • 3,750.00 Sundry Receipts (Washing Cars. Charging Batter- ies, etc.) 425.00 Car Sales • • 60,000.00 Management Expense 2,250.00 Garage Rents • • 225.00 Repairs, Paint, etc 90.00 Bad Debts Written Oflf 250.00 Freight on Cars Sold 400.00 Surplus 4,000.00 Charges to Customers for Taxicabs 1,650.00 $118,465.00 $118,465.00 Depreciation is to be written off on : Machinery and Tools at the rate of 20 per cent., Fixtures and Fittings 10 per cent., Taxicabs 25 per cent. Reserve 2 per cent, of total sales for bad debts. Prepare complete accounts in the form which, in your opinion, is calcu- lated to give the greatest amount of information to the Directors as to the working results of the business at a glance. Comment. — Use the following revenue accounts in the solution of this problem: Repair Shop Trading. Accessory Trading. Taxi Service Trading Car Sales Trading. Miscellaneous Income. Administration Expenses. Indefinite items of income and expense may be entered in the Miscellaneous Income Account and Administrative Expense Account respectively. PROBLEM 18 (Wisconsin, 1916) a. What is the amount of the net working capital in the following balance sheet? Balance Sheet January 1, 1915 Real Estate $ 10,000.00 Capital Stock $ 50,000.0(t Patents 8,000.00 Bonds 20,000.00 Buildings 55,260.00 Notes Payable 10,000.00 Cash 9,320.00 Reserve for Bad Debts 5,350.00 Inventories . 32,600.00 Accounts Payable 32,502.00 Interest Prepaid 1,600.00 Reserve for Depreciation, Accounts Receivable 40,200.00 Buildings 20,000.00 Surplus 19,128.00 $156,980.00 $156,980.00 33 b. What is the amount of the net working capital in the balance sheet of the same company as of January 1, 1916, which here follows? Balance Sheet January 1, 1916 Real Estate $ 17,000.00 Patents 7,000.00 Buildings 68,520.00 Cash 3,260.00 Inventories 38,710.00 Interest Prepaid 820.00 Accounts Receivable 42,200.00 $177,510.00 Capital Stock $ 50,000.00 Bonds 30,000.00 Notes Payable 20,000.00 Reserve for Bad Debts 6,240.00 Accounts Payable 25,620.00 Reserve for Depreciation, Buildings 35,200.00 Surplus 10,450.00 $177,510.00 Profits as per Profit and Loss account for the year amounted to $6,322.00 and a 30 per cent, dividend was declared and paid. c. Submit a statement accounting for the increase or decrease in the working capital. Comment. — For the purposes of this problem do not include prepaid expenses as working capital. Also distinguish betvi^een reserves which apply to current assets and those which apply to fixed assets. Prepare a comparative balance sheet showing in- creases and decreases of current assets and current liabilities. PROBLEM 19 From the data given in the following financial statement state : a. The working capital. b. Tic net working capital. c. The value of the net current assets per share of stock. d. The value of net tangible assets per share of stock. Assets Current Assets $ 40,000.00 Fixed Assets '. 40,000.00 Intangible Assets 15,000-00 Accrued Assets 2,000.00 Deferred Expenses 3,000.00 Total Assets $100,000.00 Liabilities Current Liabilities $ 10,000.00 Accrued Liabilities 5,000.00 Funded Liabilities 20,000.00 Deferred Income 5,000.00 Total Liabilities 40,000.00 Proprietary Interest Capital Stock (500 shares) $ 50,000.00 • Surplus 10,000.00 Total Proprietary Interest $ 60,000.00 84 PROBLEM 20 (Pennsylvania, 1900) Which of the following corporations is the stronger financially? Show how and why. RUTHLESS IRON COMPANY Cash $ 381,845.32 Real Estate, Buildings, etc 1,204,123.98 Bills Receivable 84,843.08 Accounts Receivable 1,154,111.35 Good Will, Trade Marks, Patents 5,000,000.00 Bonds on Hand 5,026.67 Taxes and Insurance 5,730.87 Lost Creek Railroad Stock 8,245.36 Company Capital Stock, Title 650.00 Inventory — Materials, Supplies 1,664,113.28 Machinery, Tools, Patterns, Office and Shop Furniture and Fixtures 2,286,158.30 Total Assets $11,794,848.21 Liabilities Accounts Payable • ■ $ 545,039.55 Preferred Stock 5,000,000.00 Surplus 204,302.88 Contingency 49,432.34 Common Stock 5,000.000.00 Loss and Gain 996,073.44 Total Liabilities $1 1,794,848.21 ENDLESS CHAIN COMPANY Cash $181,845.32 Bills Receivable 84,843.08 $ 266,688.40 Accounts Receivable 954,111.35 Bonds (Investment) 15,026.67 Atlantic City R. R. Stock 18,245.36 Other Company Stock 11,650.00 Machinery and Patterns 2,255,158.30 Real Estate and Buildings 1,104,123.98 Good Will and Patents 5,000,000.00 Taxes and Insurance 15,730.87 Inventory — Materials, Supplies 1,774,113.28 Total $1 Ml 4,848.21 Liabilities Capital Stock $10,000,000.00 Accounts Payable ' 1,090,079.10 Surplus 59,263.46 Profit and Loss 226,073.44 Contingency • • 39,432.21 Total $11,414,848.21 Comment. — Some of the points for analysis and comparison in this problem are: 1. Net current assets 2. Proportion of intangible assets 3. Investment bonds as compared with stock 35 PROBLEM 21 (North Carolina, 1919) What is the book value of a share of stock of a corporation, the balance sheet of which is as follows? (Arrange the balance sheet so as to show the book value of its net assets, and state the book value of a share of its stock.) ASSCTS Cash on Hand $ 35,687.85 Accounts Receivable 25,972.42 Stocks Owned at Cost 72,000.00 Inventories at Cost 49,889.22 Deferred Charges to P. & L 527.19 Liberty Bonds 20,000.00 Value of Good Will (set up) 50,000.00 Notes Receivable 5,000.00 Treasury Stock 30,000.00 Cost of Plant 780,398.32 $1,069,475.00 LIABILITIES Capital Stock (3,000 shares) $ 300,000.00 Surplus 100,000.00 Undivided Profits 165,000.00 Bonds Outstanding 200,000.00 Reserve for Depreciation 75,000.00 Reserve for Additions and Improvements to Plant 50,000.00 Reserve for Shrinkage of Inventory Values 5,000.00 Reserve for Dividends 15,000.00 Reserve for Doubtful Accounts 2,000.00 Reserve for Extinguishment of Bonds 50,000.00 Reserve for Estimated Federal Income Taxes 15,000.00 Accounts Payable 31,000.00 Notes Payable 60,000.00 Accruals 1,475.00 $1,069,475.00 Comment. — For the purposes of this problem eliminate goodwill from the assets. Distinguish between valuation accounts and true reserves. The reserve for shrinkage in inventory values might be either a surplus reserve or a valuation account, but here treat it as a valuation account. PROBLEM 22 (Adapted from Maine, 1917) From the .following trial balance, you are asked to prepare the operating statement and the financial statement of the B Company. What is the book value of a share of common stock on December 31, 1920? TRIAL BALANCE, DECEMBER 31, 1920 Inventory $ 4,328.91 Purchases 13,852.33 Wages 9,499.19 Factory Expense 242 11 Sales .. ■ $15,794.79 Discount on Purchases 417 41 Discount on Sales I95 34 Re"t ■A-^-- 300.00 General Oflfice Expense 312.87 36 Cartage on Deliveries 166.09 Insurance 354.54 Commission, Sales Expense 45.00 General Salaries 3,031.49 Cash 19.91 Bank 2,651.73 Accounts Receivable 7,578.26 Deposits on Contracts 500.00 Notes Receivable 4,408.13 Show Room Stock 1,812.50 Plant- Machinery $ 4,399.78 Tools 2,325.66 Drawings 311.55 Models 2,107.55 Office Furniture and Fixtures 759.29 59,202.34 Factory Alterations and Improvements.... 852.59 Notes 'Payable $14,550.00 Capital Stock, authorized 25,000.00 Capital Stock, unissued 10,000.00 15,000.00 Surplus 14,292.73 $60,054.93 $60,054.93 The inventory December 31, 1920 is: Material $ 1,266.00 Orders in Process 15,369.00 $16,635.00 Depreciation, Machinery and Tools 10% ; Office Furniture and Fixtures 10%. Reserve 1% of Sales for Bad Debts. The drawings and models repre- sent two years' outlay, all of which are carried as assets, but they have no realizable value. Factory alterations and improvements are to be spread over a period of ten years represented by the lease of the factory. Divide General Salaries equally between Sales Expense and Administration. PROBLEM 23 I. Considering all the following items as cash in drawer, the cash count on January 5, 1917, agrees with the cash book balance. What comment would you make in your report relative to each item ? (a) A check signed by John Jones, payable to the cashier, dated June 1, 1916. (b) A slip with the following * notation: "John Smith, janitor, January wages advanced $22.00." (Signed) John Smith. The janitor's salary is $80.00 per month. (c) A check payable to cash signed by the cashier, $10.00. (d) A receipted express bill of $5.87. (e) A slip of paper with the notation "Postage stamps — $25.00." ({) A certificate of deposit made out in favor of the cashier for $400. (g) A bill against a customer for $19.80 on which there appears the notation "will pay on the 31st." You find that the customer has been given credit for the payment of this invoice on the ledger. (h) A slip of paper with the following notation — "I. O. U. $10. John Doe." (Washington, 1917.) II. In auditing the cash of a certain company as at January 1, 1918, you find that the cash drawer balance, which is reported as $200.00, consists of the following items : (a) Currency and Coin $122.50 (b) Postage Stamps (received from customers in payment of small balances and cashed from drawer) 17.50 (c) A Slip Inscribed "I. O. U. $20.00, J. B. S." 20.00 37 (d) Check Payable to "Cash," signed by the cashier and dated August 2, 1917. 28.00 (e) A Slip Inscribed "Butter and Eggs for Mr. Steele" (the General Man- ager) 3.00 (f) A Receipted Express Bill for charges on a motor received from The Electric Co. You are informed that this motor should have been sent prepaid 9.00 Total $200.00 In preparing your balance sheet, what amount would you enter as cash on hand and what disposition would you make of items not included therein? (Ohio, 1918.) Comment. — The test of cash items is the ease with which they are converted into cash. A certificate of deposit not endorsed to the company or business is questionable. PROBLEM 24 (Wisconsin, 1918) (a) Define a trade acceptance and summarize its advantages to 1. The seller. 2. The buyer. (b) Under what account or accounts should be recorded 1. Trade acceptances received. 2. Trade acceptances given. 3. Trade acceptances discounted. (c) Would you advise a client to accept a trade acceptance for a renewal of one unpaid at maturity? (d) May a partial payment be made upon a trade acceptance? If so, what would be the entry to record it? (e) Does the rule prohibiting banks from loaning more than 10 per cent. of their capital and surplus to any one borrower apply to trade acceptances? PROBLEM 25 (Wisconsin, 1918) (a) Previous to examining the accounts of a corporation at the end of its first fiscal. year you find that Notes Receivable stands in the financial statement prep?.red for the banker at $5,500. Upon investigation it is disclosed that $20,000 of notes from customers were received during the period, and that $10,000 of these notes were duly paid in full by the customers to the company at maturity, and $5,000 of the notes were discounted at the bank. Of the notes discounted, a note for $500 given by Brown & Company was not paid when due, and has been charged back to the Notes Receivable Account. Notes to the amount of $1,500 are not yet due at the bank. Partial payments have been made to the company to the extent of $500 on notes still due and these payments have been credited to an account called Partial Payments on Notes Receivable. The item is listed in the financial statement as a liability. A customer's note of $1,000 is found to have been given as collateral for the payment of a note of the company discounted at the bank. A 30 day note given by an officer of the company for $200 is treated as a cash item. The note is 60 days past due. You are asked to give the journal entry or entries for obtaining the 3-^ proper account or accounts to record the above facts, and to give such comments as you would consider appropriate to include in your report relative to these items. Comment. — The principal pofnts to this problem are the proper accounting for liabilities incident to notes receivable discounted and partial payments on notes. An additional account is n-ecessary for the former. PROBLEM 26 (Wisconsin, 1918) In examining the accounts of a corporation you find that the Accounts Receivable were stated as $216,100.00 in a financial statement already prepared by the company's bookkeeper and handed to a banker. Upon examining the accounts you find that this amount is made up of the following items : Trade Accounts Receivable $175,000.00 Advances on Merchandise Purchased 5,000.00 Cash Advanced to Officers 10,000.00 Unpaid Subscriptions to Capital Stock 8,500.00 Advances to Traveling Salesmen for Expenses 350.00 Consignees' Accounts (full selling price of goods shipped on consignment, credited to sa:es) 7,500.00 Claims against Railroad and Express Companies 1,750.00 1 nvestments in Other Companies 8,000.00 Although the controlling account with Accounts Receivable stand debited with $175,000 in the general ledger, you learn that the sum of the individual debit balances in the sales ledger is $190,000, and that the sum of the individ- ual credit balances in the sales ledger amounts to $15,000.00. (a) You are asked to criticize the treatment of these items, stating such adjustments as it would be advisable to make in preparing the operating and financial statements, and to show exactly how the several items should appear in the financial statement. (b) Would you recommend that a corrected copy of the financial state- ment be given the banker? (c) Assume that upon further investigation you discovered that the company had not charged off any accounts as bad debts during the six years that it has been in business, and that no provision has been made for absorb- ing such losses through a Reserve for Bad Debts account. , Outline procedure for verifying the accuracy of the accounts, and for classifying them according to the possibility of collection. Give such a state- ment as you would include in your certificate to cover this condition of affairs. Comment. — This problem illustrates the necessity of keeping Trade Accounts Re- ceivable distinct from all other receivables. It is desirable to keep each kind of receivable in an account by itself. Consignees' accounts are not receivable until the goods are sold, and are frequently carried as memorandum accounts. PROBLEM 27 (Wisconsin, 1918) In checking the inventory sheets and ledger accounts dealing with mate- rials you found that the following errors had occurred : December 31, 1916. An item of $500 was added to inventory sheet after totals had been obtained and was not entered in the ledger account. 39 December 31, 1916. An error of $1,000 in adding the inventory extensions resulting in an overstatement of the inventory by this amount. December 31, 1917. An error is made in valuing one lot of material, the result of v^hich is an overstatement of the inventory value to the amount of $2,000. December 31, 1917. An error of $10,000 in footing the inventory exten- sions, resulting in an understatement of the ledger inventory value by this amount. December 31, 1917. An invoice of $4,000 for materials just received in- cluded in Accounts Payable but "the amount was not included in the inventory. You are asked to draft the necessary journal entry or entries to correct these errors, and to show the net effect of the errors upon the profits of each of the two years. Assume that the profits shown on the ledger for 1916 were $20,000 and for 1917, $30,000. Comment. — This problem illustrates the fact that an overstatement of assets at the end of a period results in an equal overstatement of profits. PROBLEM 28 The purchases for a certain department made during the month of April amounted to $60,000. The goods, upon purchase, were immediately "marked up" for selling purposes with 50% of the cost price, and transactions then took place as follows : Sales: May $ 8,000 June 6,100 July ■ 10,000 August 11,370 September 7,000 October 6,000 N ovember . . . • • 6,000 Total $54,470 Price Changes: On May 31, all goods were marked up S%. On June 30, all goods were marked up 4%. On July 31, all goods were marked down 25^%. On August 31, all goods were marked down 5%. On September 30, all goods were marked down 4%. On December 1, the inventory of the goods remaining in the department was taken. (a) What was the total selling value of the inventory in the department on December 1 ? (b) In closing the books of the department, what value should be used to represent the inventory ? Explain how that amount was obtained. PROBLEM 29 (Illinois, 1907) A corporation's balance sheets for August, 1907, and September, 1907. were respectfully as follows : Assets: August, 1907 Plan and Equipment $4,000,000.00 Furniture ■ • 6,000.00 Tools 3,000.00 -^0 Stable 3,811.28 Cash 15,250.36 Material. Supplies ■ • 30,750.28 Accounts Receivable , 28,920.13 Unexpired Insurance 510.29 Total $4,088,242.34 Liabilities: Capital Stock $2,500,000.00 Bonds 1,350,000.00 Accounts Payable 31,336.28 Bills Payable 26,240.12 Accrued Taxes • • 3,500.00 Accrued Interest 5,625.00 Profit and Loss • • 171,540.94 Total $4,088,242.34 Assets: September, 1907 Plant and Equipment $4,012,310.21 Furniture • • 6,205.58 Tools 3,218.86 Stable 4,009.37 Cash • 8,328.29 Material, Supplies 39,280.17 Accounts Receivable • • 32,321.83 Unexpired Insurance 832.12 Total $4,106,506.43 Liabilities: Capital Stock $2,500,000.00 Bonds 1,362,000.00 Accounts Payable 33,445.57 Bills Payable 18,240.12 Accrued Taxes 4,000.00 Accrued Interest • • 11,250.00 Profit and Loss 177,570.74 Total $4,106,506.43 Analyze the differences in the corresponding accounts for the period and show disposition of increased resources. Comment. — Prepare comparative balance sheets, showing increases and decreases in the amount of the accounts. PROBLEM 30 (New York, June, 1915) The following is a comparative balance sheet at December 31, 1910, and at December 31, 1911, presented to the board of directors of the Western Company at its meeting January 5, 1912. Assets December December 31,1910 31,1911 Land $ 20,000.00 $ 25,000.00 Buildings 45,000.00 45,000.00 Machinery and Tools 86,000.00 89,000.00 Horses, Wagons and Harnesses 1C,500.00 10,500.00 Patents 6,000.00 6,000.00 Good Will 25,000.00 25,000.00 Cash . 28,300.00 10,300.00 Accounts Receivable 29,600.00 26,550.00 Investments and Bonds 15,000.00 Inventory— Goods in Process 10,800.00 14,690.00 Inventory— Material and Supplies 6,750.00 10,300.00 Agency Investments 3,680.00 $267,950.00 $281,020.00 41 Liabilities Bonds and Mortgage Payable $ 20,000.00 Notes Payable $ 35,000.00 2,000.00 Accounts Payable 16,400.00 19,350.00 Reserves for Depreciation 2,500.00 6,750.00 Discount on Bonds 1,000.00 Capital Stock: Preferred 150,000.00 150,000.00 Common 50,000.00 50,000.00 Surplus 14,050.00 31,920.00 $267,950.00 $281,020.00 The land increase was due to appraisal based on rise of values of factory- sites in the immediate vicinity. Together with the above balance sheet, there was submitted to the board a statement of income and profit and loss showing the profits of the year to have been $22,120. The directors state to the auditor that in view of the decrease of cash and accounts receivable, of the absence of dividends, and of the increase of capital liabilities, they are unable to ascertain what has become of the profits of the year. Prepare a statement to show clearly how the Western Company has applied such resources of the year 1910 as have been lost in 1911 and the resources and profits of the year 1911. PROBLEM 31 (Kentucky 1917) On January 4, 1917, the following comparative balance sheet was sub- mitted to the Board of Directors of the Lewis Jones Company : Assets December December 31, 1915 31, 1916 Cash $ 32,500.00 $ 12,100.00 Accounts Receivable 34,400.00 28,200.00 Bonds 1,300.00 27,300.00 Inventory, Goods, Process of Mfg 12,200.00 16,400.00 Inventory, Material and Supplies 15,100.00 20,500.00 Real Estate 20,000.00 20,000.00 Buildings 42.000.00 47,000.00 Machinery and Tools 87,000.00 90,000.00 Automobiles, Trucks 12,000.00 12,000.00 Insurance 400.00 600.00 Patents 5,000.00 5,000.00 Good Will 30.000.00 30,000.00 $291,900.00 $309,100.00 Liabilities Capital Stock Preferred $50,000.00 $50,000.00 Common 100,000.00 100,000.00 Accounts Payable 51,200.00 16,100.00 Bonds and Mortgage Payable 2,000.00 18,000.00 Discount on Bonds 500.00 1,500.00 Reserve for Depreciation 4,500.00 6,500.00 Surplus 83,700-00 117,000.00 $291,900.00 $309,100.00 42 Together with the above balance sheet there was also submitted to the Board of Directors a statement of Profit and Loss, showing the profits of the year to have been $35,300. The directors desire a statement showing what has become of the profits for the year and why they cannot declare a large dividend in view of the fact that they have apparently earned $35,300. Prepare a statement to show clearly how the Lewis 'Jones Company applied the profits for year ending December 31, 1916. Comment. — This problem is similar to one of Esquerre's problems on page 388 of his Applied Theory of Accounts. Notice the difference between the two figures indicat- ing profits and the amount of the increase in the depreciation reserve. The problem is similar to the two immediately preceding. PROBLEM 32 (Adapted from Illinois, May, 1906) A manufacturing company that had been in business several years began operations January 1, 1921, in an entirely new plant, the building of which was made necessary by the depreciation of the old plant. The cost of the new plant was $200,000 and its estimated life 20 years. To finance the new construction, there were issued 10 obligations of $20,000 each, bearing 6% interest, and maturing one each year starting with January 1, 1922. The old plant was sold for $10,000 in December, 1920, at which time the following financial statement was prepared : Plant $225,000.00 Less Scrap Value 10,000.00 $215,000.00 Other Assets 80,000.00 Total $295,000.00 Liabilities and Proprietary Interest Capital Stock $200,000.00 Surplus 50,000.00 Profit and Loss: Gross Sales for Year $100,000.00 Less Operating Expenses 75,000.00 25,000.00 Floating Debt 20,000.00 Total $295,000.00 Owing to competition and limited use of the products, the sales have been uniform for a number of years, and could not be expected to increase, but the new and improved machinery with better methods of manufacture, saves 10% in operating expenses (including therein 6% interests on borrowed money) by their method of accounting. The books have shown an annual net earning of $25,000. At the close of the first year's operation of the new plant, the financial statement showed as follows: Plant $415,000.00 Other Assets 112,500.00 Total $527,500.00 48 Liabilities and Proprietary Interest Capital Stock $200,000.00 Surplus 75,000.00 Profit and Loss: Sales for year $100,000.00 Less Operating Expenses 67,500.00 32,500.00 Notes Payable 200,000.00 Floating DeBt 20,000.00 Total $527,500.00 The financial statement is submitted, and a iHvidend is declared. Discuss all the foregoing, and draw up a statement showing what, in your opinion, is the true financial condition of the company. PROBLEM 33 (Adapted from Illinois, May, 1915) The Greenleaf Manufacturing Company began operations January 1, 1919, The financial statements at December 31, 1919, and December 31, 1920, may be summarized as follows : Dec. 31, 1919 Dec. 31, 1920 Cash $ 25,000.00 $ 20,000.00 Accounts Receivable 175,000.00 250,000.00 Inventories 400,000.00 385,000.00 Buildings 475,000.00 810,000.00 Reserve for Depreciation on Buildings 25,000.00 60,000.00 Machinery 210,000.00 430,000.00 Reserve for Depreciation on Machinery... 10,000.00 30,000.00 Land 40,000.00 40,000.00 Unexpired Insurance 3,000.00 4,000.00 Investment in Stocks and Bonds 95,000.00 Goodwill 200,000.00 260,000.00 $1,588,000.00 $2,109,000.00 Accounts Payable $ 125,000.00 $ 125,000.00 Bank and Other Loans 70,000.00 80,000.00 Bonds 350,000.00 500,000.00 Accrued Interest 7,000.00 11,000.00 Accrued Taxes 4,000.00 6,000.00 Capital Stock 800,000.00 1,100,000.00 Surplus 212,000.00 287,000.00 $1,588,000.00 $2,109,000.00 During the year a dividend of 4% was declared and paid on the stock outstanding at the beginning of the year. The bonds were sold for par, and the stock at 80 and the difference was charged to goodwill account. In the light of the above facts interpret the changes that have taken place in the financial position of the company between the two dates and, so far as possible, indicate how they were effected. PROBLEM 34 (American Institute, November, 1919) The following are the balance sheets of the ABC Company on December 31, 1919 and December 31, 1920. 44 Assets December December 31, 1919 .31, 1920 Cash $ 200,000.00 $ 550,000.00 Accounts Receivable 850,000.00 800,000.00 Inventories 1,000,000.00 1,160,000.00 Capital Assets 600,000.00 900,000.00 Deferred Charges 20,000.00 10,000.00 $2,670,000.00 $3,420,000.00 Liabilities, Reserves and Proprietary Interest Accounts Payable $ 500,000.00 $ 600,000.00 Bank Loans 750,000.00 400,000.00 Bonds (issued at par) 500,000.00 Reserve for Replacements and Depreciation... 100,000.00 200,000.00 Capital Stock 1,000,000.00 1,000,000.00 Capital Surplus 150,000.00 Earned Surplus 320,000.00 570,000.00 $2,670,000.00 $3,420,000.00 Notations : The capital assets were revealed by appraisal on December 31, 1920. Part of the increase in value was credited to Capital Surplus and another part was credited to Reserve for Replacements and Depreciation. The profits for the year were $450,000 and dividends amounting to $200,000 were paid during the year. The sum of $100,000 was charged to operation for depreciation during the year, and $50,000 was charged against the reserve on account of replacements made. Prepare : (a) The comparative balance sheets in form showing the increases and decreases during the year. (b) Schedules and brief comments showing, as nearly as possible, the intermediate transactions. PROBLEM 35 The following financial statements show the financial condition of the Famous Players-Lasky Corporation at the dates mentioned. A summary is also given of the gross and net profits for the years ending on the dates the financial statements were taken. Assets Dec, 1918 Dec. 1919 Dec, 1920 Property, Plant, etc $ 757,787.00 $ 4,096,2.S8.00 $9,648,197.00 Investments 500,328.00 2,494,775-00 6,394,276.00 Deferred Charges, etc 276,893.00 866,202.00 1,445,976.00 Good Will 7,611,445.00 7,655,680.00 7,538,122.00 Cash 647,461.00 8.282,800.00 5,119.573.00 Receivables 4,428,445.00 5.725,736.00 5,785,018.00 Inventory 4,658,950.00 7,692,784.00 12,889,965.00 Marketable Securities 834,402.00 300,396.00 Total ..$18,881,309.00 $37,648,637.00 $49,121,523.00 Liabilities Capital Stock Preferred $10,000,000.00 $ 9,650.000.00 Capital Stock Common $13,406,080.00 16,013,780.00 16,937,330.00 Notes (not due) 3.472,494.00 46 Minority Interests 405,000.00 310,500.00 296,792.00 Advance Payments Films.. 1,093,608.00 1,981,636.00 2,180,279-00 Bills and Accounts Payable 2,428,666.00 4,894,593.00 6,103,243.00 Estimated Taxes, etc 156,552.00 1,328,762.00 3,343,527.00 Surplus and Reserves 1,391,403.00 3,119,366.00 7,137,858.00 Total $18,881,309.00 $37,648,637.00 $49,121,523.00 Gross Earnings $18,048,433.00 $27,165,327.00 $36,000,000.00 Net Profits (after all charges) 1,281,175.00 3,109,226-00 5,337,129.00 Prepare : A comparative financial statement showing increases and decreases for the years 1918, 1919 and 1920. x'\rrange the items according to the methods followed in the laboratory. PROBLEM 36 (Adapted from Illinois, May, 1916) Criticise the following financial statement of the Cleveland Building Com- pany for the year ended December 31, 1921 : Assets Fixed Assets: Goodwill $ 500,000.00 Patent Rights, etc., at cost $ 53,000.00 Patent Fees, etc., paid during year 1,216.00 54,216.00 Plant and Machinery, at cost 58,222.00 $ 612,438.00 Investment in Branch— Detroit 102,000.00 Deferred Charges: Dividend on Preferred Stock paid in advance. $ 1,500.00 Interest and Insurance paid in advance 2,103.00 3,603.00 Current and Working Assets: Cost of unfinished contracts, including ma- chinery in use $ 52,125.00 Add: Estimated Profit— 20% 10,425.00 $ 62,550.00 Inventory of Materials and Supplies, at cost. 12,307.00 Notes Receivable — Customers and for Capital Stock 512,000.00 Accounts Receivable 14,218.00 Cash in Bank 5,260.00 Cash on Hand and advanced to agents 14,817.00 621,152.00 Total $1,339,193.00 Deduct: Deficit 58,618.00 $1,280,575.00 Liabilities Capital Stock: 6% Preferred. 1,000 shares of $100.00 each fully paid (Issued at 90%) $ 90,000.00 Common, 10,000 shares of $100.00 each 1,000,000.00 $1,090,000.00 Due to Branch— Toledo 190,575.00 $1,280,575.00 46 PROBLEM 37 (Massachusetts, 1917) A corporation was organized and began business January 1, 1915. On December 31, 1916, it closed its books and presented a statement to its bank, the statement embodying the accounts as given below. The bank not being satisfied with the statement, instructs you to prepare and certify a new one. You find that Depreciation reserves on buildings and property have never been set up. In connection with the machinery, dies and patterns, you find that the business operates under valuable patents granted January 1, 1915, and that the machinery, dies and patterns are planned and expected to last during the life of the patents. The patents used by the cor- poration will not be subject to renewal. The product is sold on a 20 per cent, margin of gross profit. 5 per cent, allowed to all customers for cash discount and all customers' accounts are collectible. Salesmen sell goods on commission and are allowed to draw in advance as required. Preferred-stock dividends were paid semi-annually at the annual rate of 7 per cent. Preferred stock was retired on December 30, 1916, at 115, the January 1, 1917, dividend, not yet paid, to go to the stockholder. Common stock dividends have been paid at the rate of 5 per cent, each year on December 1. A judgment was recorded against the corporation for $5,000.00 in Decem- ber, and the treasurer states that he does not wish it to appear in the state- ment for the year. There is a law suit pending against the corporation for $20,000, based according to the corporation's attorney on grounds hard to defend. TRIAL BALANCE Debit Credit Machinery $ 85,000.00 Land 8,000.00 Buildings— Brick 38,000.00 Wooden 28,000.00 Patents 400,000.00 Accounts Payable— Purchase Ledger $ 178,000.00 Notes Payable 200,000.00 Mortgage Payable 54,000.00 Finished Goods (Selling Value) 100,000.00 Prepaid Insurance 7,850.00 Cash 55,000.00 Dies and Patterns 34,000.00 Prepaid Interest 4,400.00 Customers' Ledger 189,500.00 Personal Accounts — Salesmen 4,500-00 Officers 4,000.00 Goods in Process (Cost) 40,000.00 Raw Materials (Cost) 170,000.00 Supplies 2,500.00 Preferred Stock Retired 37,950.00 Personal Accounts — Officers 2,200.00 Salesmen 3,000.00 Preferred Stock 250,000.00 Common Stock 400,000.00 Accrued Pay Roll 4,000.00 Surplus 117,500.00 $1,208,700.00 $1,208,700.00 a. Prepare revised balance sheet. b. State the profits for the past two years after paying preferred stock dividends. 47 c. The expenses of selling and distributing the product leave a margin of net profit equivalent to ^ of the gross profit. What were the total gross sales in the two years ? Comment. — For the purposes of this problem assume that interest and discount charges are included in selling and distributing expenses and that the 20% margin is on sales rather than cost. The following points need careful consideration: 1. Finished Goods Inventory. 2. Preferred Stock Retired. 3. Contingent Liability on Account of Litigation. 4. Depreciation. PROBLEM 38 (Wisconsin, May, 1919) On January 2, 1916, the X Manufacturing Company took over the busi- ness of Brown and Smith. The capitalization of the company was $400,000, divided as follows : 7% Cumulative Preferred Stock $200,000.00 Common Stock 200,000.00 On March 1, 1919, the annual stockholders meeting was held and the following financial statement was presented : X MANUFACTURING COMPANY FINANCIAL STATEMENT, DECEMBER 31, 1918 Real Estate $ 5,000.00 Buildings $125,000.00 Less Reserve for Depreciation 2,500.00 122,500.00 Equipment $380,000.00 Less Reserve for Depreciation 4,800.00 375,200.00 Inventories: Raw Material 30,000.00 Goods in Process 75,000.00 Finished Goods 65,000.00 Sundry Factory Supplies 5,000.00 Accounts Receivable 15,000,00 Notes Receivable '. 5,000.00 Cash 10,000.00 Prepaid Expense Items 5,000.00 Total Assets $712,700.00 Liabilities Notes Payable $180,000.00 Accounts Payable 50,000.00 Reserve for Taxes 3,000.00 Accrued Salaries and Wages 2,000.00 Total Liabilities 235,000.00 Proprietary Interest Preferred Stock $200,000.00 Common Stock 200,000.00 Surplus 77,000.00 Total Proprietary Interest 477,000.00 The stockholders authorize the issuance of $300,000 of 5 per cent, first mortgage bonds, the proceeds of which are to be used to pay the current debts and for necessary improvements in the buildings and equipment. The Company has given the above financial statement and the following summary operating statements to the A Bond Company, who may purchase the entire issue at 95. The A Bond Company, in turn, asks you to verify the statements and to report upon the advisability of the purchase. X MANUFACTURING COMPANY SUMMARY OPERATING STATEMENTS 1916 1917 1918 Sales $690,700.00 $720,900.00 $870,200.00 Cost of Production 560,000.00 690,800.00 706,700.00 Gross Profits $130,700.00 $30,100.00 $163,500.00 Selling Expenses 25,000.00 28,100.00 31,000.00 Net Operating Profit $105,700.00 $ 2,000.00 $132,500.00 Interest and other Financial Ex- penses 25,000.00 22,000.00 27,500.00 Net Profit or Loss $ 80,700.00 $ 20,000.00 $105,000.00 Dividends Paid 28,000.00 14,000.00 28,000.00 Balance in Surplus $ 52,700.00 $ 18,700.00 $ 77,000.00 Outline the report requested by the A Bond Company, state the reasons for your conclusions according to data available, and also detail other points which should be investigated before a definite decision as to the purchase is made. Comment. — Some of the points in this problem requiring special thought and atten- tion are the following: 1. Depreciation. 2. Relation between value of fixed assets and total capital at the start. 3. The adequacy of working capital. 4. The cause of the relatively larger production in 1917. 5. The fixed assets which will be security for the bonds. PROBLEM 39 (Wisconsin, November, 1919) The following balance sheet has been published by the X Company as showing the condition of the business after the sale of $10,000,000.00 of the first preferred stock and all of the second preferred stock noted therein. A prospective purchaser of some of the stock asks you to tell him book values of each class of stock, amounts of net tangible and net quick assets for tho appropriate class or classes of stock, and to advise him whether to purchase the first preferred at 95 or the common at 90: Land, Buildings, Machinery $ 7,000,000.00 Good Will and Patents 8,000,000.00 Investments 500,000.00 Cash 10,715,000.00 Inventories 13,000,000.00 Accounts and Notes Receivable 10,000,000.00 Other Current Assets 450,000.00 Deferred Charges 335.000.00 $50,000,000.00 49 Liabilities Capital Stock: 7% Cumulative First Preferred $15,000,000.00 7% Cumulative Second Preferred 5,000,000.00 Common Stock, 75,000 Shares no Par Value 6,000,000.00 Notes and Accounts Payable 13,000,000.00 Dividends Payable 52,500.00 1919 Federal Taxes 1,000,000.00 Reserve for Depreciation 3,447,500.00 Surplus 6,500,00000 $50,000,000.00 The par value of the preferred stock shares is $100.00. It is expected that a quarterly dividend of $2.00 per share w^ill be paid upon the common stock. In your report mention such matters as it w^ould seem advisable to know in addition to those contained in the statement given above. PROBLEM 40 (Missouri, 1914) The trial balance of the Interstate Manufacturing Company, on June 30, 1912. after closing entries have been made, is given below: Patents and Goodwill ' $ 250.000.00 Office Furniture 8,746.00 Inventory. June 30, 1912: Raw Material 83,247.00 Supplies 4,932.00 Finished Goods 42,761.00 Pettv Cash 100.00 Land 270,000.00 Buildings 165,000.00 Machinery 235,00000 Cash Subject to Check 69,433.00 Accounts Receivable 273,842.00 Common Capital Stock $ 500,000.00 Preferred Capital Stock 500,000.00 Bonds, 6% 50-year 1st Mortgage, Issued June 30, 1912 200,000.00 Premium on Bonds 20,000.00 Preferred Stock Dividends Payable August, 1912 17,500.00 Common Stock Dividends Payable August. 1912 12,50000 Reserve for Bad and Doubtful Accounts 8,294.00 Undivided Surplus 66,375.00 Accounts Payable 78,392.00 $1,403,061.00 $1,403,061.00 During the year ending June 30, 1913, the company purchased 29,047 tons of raw material at $22 per ton, which was delivered before the books closed. Of the amount purchased, payment has been made for 26,647 tons. They have also made payments for the following accounts : Accounts payable, $78,392; salaries, $80,360; selling expense, $86,017; labor, $468,932 ; shop expense, $9,461 ; taxes, $7,842 ; repairs and maintenance, $30,955 ; office expense, $2,478 ; and supplies, $37,637. Customers have paid $1,502,927 in cash, and have been given discounts 50 amounting to $18,395. Returns and allowances amount to $8,474. Bad debts written off, $2,407. Rents received, $500, and sales, $1,515,572. Fifty thousand dollars was borrowed on call on June 30, 1913, the market value of the collateral security being $72,100.00. The inventory on June 30, 1913, is made up of finished goods, $20,495; supplies, $8,129, and 2,163 tons of raw material, the market price of which is $24 per ton. The land is estimated to be worth $300,000. Semi-annual dividends of 3^^ per cent, on the preferred stock and 2^ per cent on the common stock have been paid from the earnings of the half year ending December 31, 1912. Dividends at the same rate have been declared on the preferred and common stock for the last half of the fiscal year, payable in August, 1913. You are asked to set up a balance sheet dated June 30, 1913, and accom- pany it with a statement which will show correctly the Operations of the company. The following annual rates of depreciation are to be assumed : Buildings, 3 per cent.; machinery, 7^ per cent.; office furniture. 10 per cent. It is also assumed that there should be a reserve for bad and doubtful accounts equal to 3 per cent, of the balance of accounts receivable. Calculate these percentages to the nearest dollar. Comment. — This problem, illustrating interim accounts may best be worked on twelve column working paper first. It consists simply of making the entries in the adjustment columns for the totals of transactions that took place during the year. Care should be taken in dealing with the estimated worth of the land. After completing the working sheet, the operating and financial statements should be drawn off on journal paper. PROBLEM 41 (Adapted from Institute Examination, November, 1917) The following is the financial statement of the A B Company for January 1, 1915: Assets Cash $ 52,864 Accounts Receivable $197,425 Less Reserve for Bad Debts 4,718 192,707 Inventories: Raw Materials. , , , $ 84,268 Finished Goods 31,597 115,865 Furniture and Fixtures 7,500 Real Estate 180,000 Buildings 150,000 Machinery 250,000 Total Assets $948,936 Liabilities Accounts Payable $ 35,482 Dividends Payable Preferred Stock, 2/1/15. . 7,500 Dividends Payable Common Stock, 2/1/15. . 10,000 Mortgage Bonds, 20 years at 6% dated, 1/1/15 100,000 Premium on Bonds •. . 5,000 Total Liabilities 157,982 Capital ■ Stock Capital Stock— Preferred . $250,000 51 Capital Stock — Common 500,000 Surplus 40,954 $790,954 The following transactions took place during the year ending December 31, 1915: Account Receivable Collected $793,501 Rent Received . .• 600 Raw Material Purchases 1,232,000 lbs. at 20 cents: Sales $823,334 Discount on Sales 23,519 Bad Debts Written Of? 2,143 Disbursements have been made for: Accounts Payable $243,356 Manufacturing Expenses: Factory Expenses $ 3,489 Factory Labor 351,426 Factory Repairs 23,843 * Taxes 7,853 390,611 Trading Expense 52,914 Administrative Expenses: Office Expense $ 1,927 Salaries 58,471 60,398 Inventories, December 31, 1916: Raw Material — 412,595 lbs. with a market value of 22 cents. Finished Goods $30,842 Semi-annual interest on bonds was paid July 1. Semi-annual dividends of 3% on the preferred and 2% on the common were declared in June and December and payable August 1, and February 1. The following rates for depreciation reserves are to be used: Buildings, 3%. Machinery, 5%. Furniture and Fixtures, 10%. The Reserve for Bad Debts account should be brought up to 2% of the Accounts Receivable as of December 31, 1915. Prepare operating and financial statements as of December 31, 1916. PROBLEM 42 (New York, January, 1916) John Smith is in business for himself. His net assets are $18,000, his net liabilities $10,000. At this time he makes the following proposal in writing, to his manager, Frank Doe : "Give me $5,000 in cash, and I will make of you an equal partner, chang- ing the firm name to John Smith & Co. I will continue to draw a salary of $60 per week and you will get $50 per week." Mr. Doe accepted this offer, by writing across its face, in red ink : "This suits me. I accept." Mr. Doe a few days later delivered to Mr. Smith $1,200 in cash and $3,800 in checks. Show the entry or entries in the books of John Smith which will continue to be employed by the partnership. Comment. — It is not clear from the statement of this problem whether the money paid in by Frank Doe is to remain in the busness or is to go to John Smith, personallj'. The student should solve the problem according to each assumption, though the latter is probably the assumption of the person who made up the problem- Good will may be assumed to enter into the problem. The student should be able to prepare solutions either with or without good will appearing on the ledger. There are, therefore, four possible methods of solving the problem. 52 PROBLEM 43 (California, 1908) Two partners, named Wilson and Peters, find at the end of the first year's business the Balance Sheet shows that Wilson's interest is worth $18,000.00 and Peters' $9,000.00. The good will of the firm is worth $3,000.00. Each draws profits in pro-- portion to his investment. They conclude to take in another partner, and he is to have a one-quarter interest in the new firm. What sum must the new partner contribute? How will the partnership accounts appear after the payment in of the additional capital? How will the profits be divided? Give skeleton form of accounts. Comment. — The phrases "new firm" and "additional capital" in this problem are very significant. PROBLEM 44 (Illinois, May, 1914) A and B, equal partners in a manufacturing" business, admit their factory superintendent, C, as an equal partner with them in the profits without his furnishing any capital, A and B reserving to themselves in case of dissolution any good will which may have accrued to the business. On December 31, 1912, a balance sheet was drafted and approved by all concerned as follows : Assets Real Estate and Plant $ 90.000.00 Merchandise Inventory 35,000.00 Accounts Receivable 25.000.00 Bills Receivable 15,000.00 Cash and Bank Funds 18.000.00 $183,000.00 Liabilities Bills Payable $ 10,000.00 Accounts Payable 12,500.00 A's Account $ 4.500.00 B's Account 4,000.00 Cs Account 2,000.00 $ 10,500.00 Capital Accounts A $75,000.00 B 75,000.00 — $150,000.00 $183,000.00 Later the business was sold as a "going" concern and the partnership dissolved. The purchaser assumes all outside liabilities and pays the sum of $225,000 cash, of which the real estate and plant is valued at $120,000. Draft the settlement accounts as between the partners. Comment. — The following points are to be observed in this problem: 1. An investment is not necessary to constitute an interest in a business as a partner. 2. Realized increases in the value of capital assets are divided among partners the same as operating profits. 3. Good will, by agreement ,is divided on a different basis from that usually followed. Partners' personal accounts should not be confused with outside liabilities. 63 PROBLEM 45 A and B are equal partners and their financial statement on May 31, 1921 is as follows : Assets Cash $14,000 Notes Receivable 15,000 Accounts Receivable $30,000 Less Reserve for Bad Debts 5,000 25,000 Mdse. Inventory 20,000 Furniture and Furnishings $ 5,000 Reserve for Depreciation 1,000 4,000 Delivery Equipment $ 7,000 Reserve for Depreciation 2,000 5,000 Prepaid Expenses 1,000 Total Assets $84,000 Liabilities Notes Payable $10,000 Trade Acceptances Payable 5,000 Accounts Payable 40,000 Accrued Expenses 5,000 Total Liabilities 60,000 Proprietary Interest A, Capital 12,000 B, Capital 12,000 Total Proprietary Interest $24,000 They agree to sell C a one-fourth interest in the firm for a sum equal to one-fourth of the present proprietary interest in the firm plus a sum for Good Will agreed upon as one-half the average of the last three years net profits. The profits for these years are $6,000, $7,500, and $4,500 respectively. C purchases his interest equally from A and B. a. Give such entries as may be necessary to record the sale of the interest to C, as well as the payment by C. PROBLEM 46 (Adapted from Institute Examination, June, 1917) The partnership of A and B have the following statement on January 1, 19—: Building $15,000 Accounts Payable $10,000 Accounts Receivable 12,000 Notes Payable 5,000 Cash 9,000 A Investment 30,000 Furniture and Fixtures 2,800 B Investment 35,000 Merchandise 37,000 Other Equipment 4,200 $80,000 $80,000 C is admitted as a partner at the close of the year under the following agreement : C to contribute cash $30,000 and to be entitled to one-third of the profits of the business including this year. The following changes in the books are to be 54 made, the losses being to A and B's investment accounts; the building to be marked down 5%, a Reserve for Bad Debts account to be created amounting to 2% of the Accounts Receivable of January 1, 19 — , the Merchandise In- ventory to be revalued at $35,000, Furniture and Fixtures to be revalued at $2,500. At the end of the year good will is to be fixed at 3 times the net profits in excess of $20,000 and to be set up on the books crediting A and B equally. A, B and C each to draw $3,000 of the net profits, the remaining profits to be carried to their investment accounts. During the year the following is a summary of the transactions that took place : Merchandise Purchases ($240,000 on credit) $265,000 Sales ($175,000 on credit) 300,000 Accounts Payable paid (Face $245,000—2% discount) 240,100 Accounts Receivable collected (Face $170,000, net except $50,000 on which 2% is allowed) •. 169,000 Trading Expenses 31,500 Administrative Expenses 7,500 Paid cash for interest on Notes Payable 250 The three partners each withdraw $3,000.00 as agreed. In closing the books for determining the profits and good will the follow- ing facts are given : Merchandise inventory December 31, 19— $60,000 Depreciation on Building 2% Additional Reserve for Bad Debts 165 Reserve for Depreciation on Furnishings and Fixtures 200 After good will has been determined, set upon the books, and credited to A and B, C then contributes enough cash so that his Investment account equals one-third of the total investment. You are asked to do the following : 1. Give a journal entry showing how the accounts are to be adjusted as per the agreement. 2. Prepare an operating statement as of December 31, 19 — . ^ 3. Figure the good will and give the journal entry. 4. Give skeleton account of (a) the investment accounts of A, B and C, and (b). Cash. 5. Prepare a financial statement as of December 31, 19 — . PROBLEM 47 1. A and B are partners with capitals of $20,000 and $11,000, respectively. It is agreed that a third party, C, shall buy a one-third interest in the partner- ship, equally from A and B upon the following conditions : The fixed assets are to be valued at $4,000 less than the figure at which they appear in the balance sheet; good will is valued at $6,000. Give journal entries necessary to give eflFect to the above agreement. 2. A and B are partners with investments of $7,500 and $5,000, respec- tively. They agree to take in C as a partner upon the following conditions : Good will is valued as two years' purchase of the average of the last three years' net profits which were $2,000, $2,500 and $2,700, respectively. C is to pay in cash to the credit of the firm cash sufficient to make him one-quarter interest in the new firm. Give the journal entries. 3. A and B are in partnership with investments of $6,000 and $4,000, respectively. They agree to take in C as an equal partner in the business on the following terms : The good will is to be valued at two years of pur- 65 chase of the average of the last three years' profits, which were $1,600, $2,000 and $1,800, respectively. C is to purchase his interest equally from A and B and is to pay $5,000 for it. Give the journal entries. Comment. — In part 3, C is to have a one-third interest in the business rather than an equal interest. The important point to these problems refers to the price paid by the incoming partner. Is it additional capital of the partnership or the price paid to the old partners individually for part of their interest? PROBLEM 48 1. A and B are in partnership, having investments of $12,000 and $8,000, respectively, and sharing profits and losses in the proportion of 75 per cent, and 25 per cent., respectively. Interest at 5 per cent, per annum is allowed on investments. Give the journal entry which adjusts interest between partners without use of Interest or Profit and Loss accounts. 2. X and Y entered into a partnership agreement whereby each was to receive interest at 5 per cent, on the excess over or pay interest on the deficit under the agreed investment as indicated below. Draft journal entry to adjust the interest between the partners without using the Interest or Profit and Loss accounts. Profit and loss is to be shared in proportion to agreed contributions. X Y Agreed Investment $4,000.00 $2,000.00 Actual Investment 6,000.00 1,000.00 3. A and B are in partnership, A's investment being $15,000 and B's is $12,000. A agreed to invest $11,000 and B $18,000. Interest is to be allowed on excess over and charged on deficit under agreed contributions. Make a journal entry to adjust interest between partners without running it through the Interest and Profit and Loss accounts. Profits are to be shared according to agreed contributions. 4. A, B and C are in partnership sharing profits in the proportions of Yz, Vs and Vq, respectively. Their respective investments are $20,000, $18,000 and $15,000. Interest at 6 per cent, is allowed on capital. Give the journal entry that will adjust interest without use of an interest or Profit and Loss account. 5. A and B agree to invest $20,000 each in a partnership, but the actual investments are $15,000 and $22,000 respectively. Profits and losses are to be shared in proportion to agreed investments. Interest on investment at 6% is to be allowed on the excess over and charged on the deficit under the agreed investments. Give the entry which will adjust the interest directly between the partners' accounts. Comment. — The five parts of this problem call for Journal entries to adjust interest between partners. The directions against the use of the Interest and Profit and Loss Accounts does not prevent the student from using dummy accounts in making the calculation. PROBLEM 49 (Adapted from English Intermediate Examinations, November, 1908) I. There are three partners in a trading concern — X, Y and Z — with equal amounts of capital in the business, on which they draw interest at 5 per cent. The net profits of the business, before charging interest on capital, amount to 20 per cent, on such capital. The net profits, after charging interest on capital, are divided as follows: X, one-half; Y, one-third; Z, one-sixth. Tak- 6« ing the interest and the net profits together, prepare accounts showing the respective proportion of the profit to be credited to each partner. II. A firm of three partners, G, H and J, who were interested in the profits or losses of their general business in the proportions of 40 per cent., 30 per cent, and 30 per cent., respectively, entered, at the instance of H, into two outside ventures on the understanding that if a profit resulted in either case, H's proportion thereof should exceed his usual proportion by 10 per cent., and if, on the other hand, a loss resulted from either transaction, H's proportion thereof should exceed his usual proportion by 15 per cent. Venture No. 1 yielded a profit of $5,000.00. Venture No. 2 resulted in a loss of $2,500.00. The ordinary business showed a profit of $10,000.00. Divide up the results in the manner agreed, and show their effect in a personal account with each partner. Comment. — Part I. Probably the easiest way to solve this problem is to make it concrete by assuming a definite investment of some amount for each partner, such as $1,000.00. The total investment would then amount to $3,000.00. A more abstract solution would begin by letting each man's investment be repre- sented by 100%; or the total investment could be 100% in which case each investment would be 33y3% of the total. Part II. The statement in the fifth line that H's proportion should exceed his usual proportion by 10% is ambiguous. It might mean either a flat 10% or ten per cent of his usual proportion. The latter interpretation would result in a comparatively small increase. Therefore the student may assume that a flat increase of 10% was intended and solve the problem accordingly. He will also assume that the 15% is a flat increase. The student should notice that any increase in one man's proportion of profit or loss must be taken from the other two proportions in their profit and loss sharing ratio. PROBLEM 50 (Adapted from English Final Examination, May, 1907) A and B are partners, sharing profits equally. They agree to dissolve partnership on December 31, 1906, A to retire from the concern and to have, in addition to his capital and profits, one-half of the good will agreed as one year's purchase upon an average of the past three years' net profits, the two preceding years' net profits being $55,000 and $52,500, respectively. The following is the Trial Balance of their books on the above date : Stock, 1st January $ 41,500.00 Goods Purchased 245,000.00 Goods Sold $313,000.00 Discount on Sales 7,500.00 Salaries and Wages 9,000.00 Incidental Expenses 1,500.00 Stationery and Postage 500.00 Banlc Discount 100.00 Fire Insurance 100.00 Bills Receivable 14,700.00 Bills Payable 8,500.00 Creditors 13,750.00 Debtors 41,250.00 Bank 8,925.00 Cash in Hand 75.00 Bad Debts 1,100.00 A' Capital, 1st January 32,500.00 B's Capital, 1st January 19,500.00 A's Drawings 9,000.00 B's Drawings 7,000.00 $387,250.00 $387,250.00 6'? The Stock at 31st of December was $37,500. Allow $1,000 as discount off debtors and $500 discount off creditors, charg- ing interest at 5 per cent, upon capital and drawings, the latter being by equal installments at the end of each quarter, and prepare Profit and Loss account, partners' Capital accounts, and balance sheet. Comment. — This problem illustrates the computing of a value for good will and for recording interest and partners' accounts. Here interest is charged upon partners' drawings as well as being credited upon the investment. The statement that drawings are in equal installments at the end of each quarter furnishes the time basis for com- puting the interest on drawings. The discounts on debtors and creditors accounts to be considered as allowed prior to payment is unusual. A good way to handle these items is to set up a reserve for discount on debtors and a reserve for discount on creditors. The former will be a credit account, the latter a debit account. PROBLEM 51 (Adapted from English Final Examinations, December, 1900) Crank and Crane carried on business in partnership, and divided profits and losses in proportion to their capital, three-fifths and two-fifths. On January 1, 1900, Crank's capital was $52,000 and Crane's $35,000, as shown by a balance sheet of that date. They agreed to admit Clark as a partner from the same date on the following terms : 1. The assets, liabilities and capital to be taken as shown in the balance sheet. 2. $12,500 to be added to the assets for good will. 3. The amount of good will to be added to Crank's and Crane's capital in the proportion in which they divide profits, 4. Clark to pay in cash to the credit of the partnership such a sum as would give him a one-fifth share in the business. State what amount of capital Clark has to bring in ; set up the Capital accounts of each partner in the new partnership, and state in what propor- tions the profits will be divided in the future; Crank and Crane, as between themselves, sharing in the same proportions as before. PROBLEM 52 (Adapted from English Final Examinations, May, 1907) A and B are equal partners, and their balance sheet at a certain date is as follows : Machinery and Plant $ 6,250.00 Creditors $10,000.00 Horses and Wagons 1,250.00 A's Capital 15,000.00 Furniture and Fixtures 750.00 B's Capital 15,000.00 Stock 18,250.00 Debtors 11,500.00 Bank 1,500.00 Cash 500.00 $40,000.00 $40,000.00 They decide to admit C and D, the former to provide $15,000 as his capital, and the latter, in consideration of his having a personal business connection, only to bring in $10,000, but his Capital account to be credited with the same amount as C's. C and D only accept A and B's balance sheet subject to -the following alterations, which are agreed to : 68 Machinery and Plant to be taken at $ 5,500.00 Horses and Wagons 1,000.00 Stock 16,500.00 Debtors to be subject to a 5 per cent discount. Creditors to be subject to a 3 per cent discount. Adjust the accounts and prepare commencing balance sheet of the new firm. Comment. — Here a new partner enters the business bringing with him a value to be capitalized as good will. In most of the former problems the good will attaches to old partners. PROBLEM 53 (Illinois, May, 1914) A and B ent-er into a partnership and will share profits in the proportions indicated by their investments. A furnishes $25,000, and B furnishes $15,000, which is invested in lands and buildings, $10,000; merchandise, $30,000. How- ever, before they have actually commenced business, C realizing that A and B have a promising venture, offers to buy one-third interest in the business for $20,000. A agrees to sell, provided B will consent to pay him a bonus of $4,000 out of his (B's) share. This B agrees to do, and consents to the sale. How should the $20,000 be divided between A and B, so that the interest of all three partners will be equal? Comment. — It is to be kept in mind that C is buying a one-third interest from the old partners in such proportions that the interests of all partners wiil be equal in the end. Also note that the mutual agreement between A and B to sell implies that the profit made oS C is a partnership profit to be divided between A and B at the agreed rates. PROBLEM 54 (Washington, 1917) Black and White were partners upon the following terms : 1. They were to receive 5 per cent, interest upon their respective partner- ship capital, 2. They were to receive as partnership salaries as follows : Black, $250.00 per month ; White, $100.00 per month, and were to draw no further sums pending the ascertainment of profits. 3. Depreciation at 10 per cent, per annum to be written oflf Plant and Machinery as standing on the books at the close of the year. 4. Provision at 5 per cent, (for doubtful accounts) to be reserved for all accounts, receivable, not including, however, bills receivable. 5. The net profit or loss to be shared as follows : Black, two-thirds ; White, one-third. On November 30, 1915, the following was the trial balance of the firm's books, which were kept by double entry : Cr. Dr. Partner's Salary Account $ 3,850.00 Purchases 127,310.00 Investments (at cost) 6,150.00 Wages 19,205.00 John Jones & Co 17,130.00 Jas. Smith & Son 35,695.00 Wm. Owen 18,120.00 Legal Expenses 70.00 Cash 110.00 Bank 6,025.00 Real Estate 103,205.00 59 Machinery and Plant 27,200.00 Bills Receivable 2,510.00 Manager's and Clerks' Salaries 4,725.00 Office Expense 540.00 Discount 1,070.00 Inventory, January 1, 1915- 19,210.00 Rent (11 months) 3,300.00 Albert Black (Capital Account on Jan. 1, 1915) $ 21,000.00 Benjamin White (Capital Account on Jan. 1, 1915) 7,500.00 Dividends Received on Investments , 150.00 Bills Payable 19,075.00 Sales 242,805.00 Roberts Brothers 41,215.00 Robinson & Co 28,840.00 J. Green & Son 34,840.00 $395,425.00 $395,425.00" Amend the foregoing- balances so far as may be necessary by posting the following transactions for the month of December, 1915 : Dec. 2. Purchased from Roberts Bros, (on credit) $39,205.00 " 8. Paid Taxes 705.00 9. Paid Robinson & Co. (after deducting discount of $60.00) 1,200.00 10. Paid Bill Payable to H. Brown & Co 500.00 11. Received from J. Smith & Co. (less discount of $210.00) 4,740.00 12. Sold Wm. Owen (on credit) 5,000.00 15. Purchased from J. Green & Son (on credit) 17,105.00 16. Bought Gas Engine from Al-Ki Gas Engine Co. (on credit) 1,750.00 17. Paid Wages 2,210.00 21. Paid Taxes 105.00 24. Paid Premium on fire Insurance Policy for Year Ending December 24, 1916 525.00 30. Received for Sale of Investments 6,000.00 31. Paid Office Salaries 1,800.00 Paid Office Expenses 100.00 Paid Wages 2,200.00 Sold James Smith & Co. (on credit) 5,245.00 All of the above payments were made by check and all amounts received were paid into the bank upon receipt. The stock on hand on December 31, 1915, was agreed by the partners as worth $17,000.00. The outstanding rent due to Benjamin & Lewis for December, $300.00, and the partners drawings for the same month must be provided for. After making all adjustments provided for in the clauses of the partnership agreement, balance the books as at December 31, 1915, and prepare trial balance. Make up a profit and loss account divided into the proper trading and general sections. Close this by dividing the net profits between the partners in the proper proportions and prepare a balance sheet. Comment. — A working sheet should be used for the solution of this problem. The transactions for December are to be recorded in the adjustment columns and entries made also for the notations. Then a new trial balance might be placed in the fifth and sixth columns of the working sheet if desired. That would leave two columns for Manufacturing and two for the other profit and loss items, (Trading, Administration, and Financial). If the new trial balance is not taken the extra columns should be used for Trading as usual. PROBLEM 55 (English Intermediate Examination, May, 1911) Brown and Smith are partners. The partnership deed provides inter alia : 1. That the accounts be balanced on 31st of December in each year. 60 2. That the profits be divided as follows: Brown, one-half; Smith, one- third, and carried to a Reserve Account one-sixth. 3. That in event of the death of a partner, his executors be entitled to be paid out : a. The capital to his credit at date of death. b. His proportion of reserve at date of last Balance Sheet. c. His proportion of profits to date of death based on the average profits of the last three completed years. d. By way of good will his proportion of the total profits for the three preceding years. On the 31st of December, 1909, the Ledger Balances were: Brown's Capital $ 9,000.00 Smith's Capital 6,000.00 Reserve 3,000.00 Creditors 3,000.00 Bills Receivable $ 2,000.00 Investments 5,000.00 Cash 14,000.00 $21,000.00 $21,000.00 The profits for the three years were : 1907 $4,200.00 1908 3,900.00 1909 4,500.00 Smith dies May 1, 1910. Show the account as between the firm and Smith's executors on May 1, 1910. Comment. — The point to this problem is based upon the principle that a reserve which is set up for any purpose other than to record a loss realized or certain to be realized, is appropriated surplus. This reserve, then, is a part of the profit and the partners have the same relative interests in it that they have in the other five-sixths of the profit. What are the relative shares of the partners in the profits which are divided-* PROBLEM 56 (Adapted from English Intermediate Examination, May, 1908) Aird and Batty have each carried on a prosperous business, which they decide to combine and convert into a Corporation, transferring the assets at book values, and adding for good will a sum equal to four years' purchase of the combined net profits of the two concerns based on the average of the preceding years. The sum so ascertained for good will is to be divided as follows: Aird, two-thirds, and Batty, one-third. The three years' profits were : Aird $48,315 and Batty $37,950. The assets taken over by the Company, viz. Land, Buildings, Plant. Machinery. Patterns, Stock, and Debtors, amount to : Aird $157,280 and Batty $59,040. The purchase money is payable as follows : Fully-paid preferred stock and cash, in equal proportions, to represent the above assets. Fully-paid common stock to represent the value of good will. Show the amounts receivable by each of the vendors in preferred stock, in common stock, and in cash. PROBLEM 57 (Wisconsin, 1916) A, B and C are in partnership. A invested $11,000; B invested $5,000; 61 and C invested $1,200. Their agreement provides that profits or losses shall be divided as follows : A, 4/9; B, 3/9; C, 2/9. The partnership has become insolvent and has therefore decided to dis- solve. The cash value of assets is $10,000. The deficit is, therefore, $7,200. How should the assets be divided and how much money will each partner receive? Comment. — This is a problem in the distribution of assets upon dissolution. Assets are never distributed in the profit and loss sharing ratios as such. Show by jpiirnal entry the relation of the partners after the distribution. Remember that losses are distributed before assets. PROBLEM 58 (Illinois, May, 1910) A, B and C engage in business, A contributing $10,000 capital ; B, $5,000, and C undertakes to take the active management at a salary of $3,000 a year, to be paid to him monthly. After providing 5 per cent, interest on capital they are to divide the net results in the proportions of 5, 3 and 2. At the end of 18 months they ascertain the position to be unfavorable and decide to wind up. The assets are agreed to be worth $12,500, of which A takes $10,000 and B $2,500. There are no liabilities except for the capital and simple interest thereon, and one month's salary due C. State the position of the three partners to each other. PROBLEM 59 (Illinois, November, 1908) A, B and C were partners and contributed the following capital : A $8,000, B $6,000 and C $4,000. Profits and losses were to be borne equally. At the end of 4;he first year each partner had drawn $1,000. The assets were then disposed of for $3,000, the purchaser discharging all liabihties of the firm. How should this sum of $3,000 be apportioned among the partners and would any of them have to advance any further sum? If so, state which partner and how much and make up the necessary accounts to show the results. PROBLEM 60 (Adapted from Illinois, May, 1912) A partnership between three persons had run for three years upon the following capital and interest in profits : A $9,000.00 H Interest B 8,250.00 H Interest C 2,000.00 H Interest The annual profits, which had been credited to the partners' drawing accounts, were as follows : 1918 $30,510.75 1919 29,026.30 1920 37,026.72 Each partner had, during the three vears, withdrawn cash to the amount of $15,000. On December 31, 1920, C expressed his dissatisfaction and announced his 62 intention of dissolving the agreement, so far as He was concerned, unless he was placed in the same position as to profits as A and B, dating back to January 1, 1920. A and B agree to this, provided C will agree to a transfer from his Draw- ing Account of a sum sufficient to equalize the Capital Accounts. This is accepted by C provided, however, that A and B reduce their Capital Accounts to $6,750 each, and provided also that the aggregate stated profits are revised by setting up a Reserve for Depreciation of Office Furniture of v$l,200. Assuming the books to have been closed each year under the original terms of agreement, draft the journal entries necessary to adjust the accounts and show the relative condition of the respective Capital and Drawing Accounts at the opening of the new partnership, January 1, 1921. PROBLEM 61 (Adapted from Illinois, December, 1910) A and B agree to dissolve partnership December 31, 1920, at the close of their first year's business. Their financial statement is as follows : Assets Merchandise $ 57,500.00 Furniture and Fixtures 2,000.00 Accounts Receivable 85,500.00 Notes Receivable (Discounted) 14,000.00 ' Good Will 5,000.00 Total $164,000.00 Liabilities and Proprietary Interest Accounts Payable $ 50,000.00 Notes Payable— Bank 2,500.00 Notes Payable— Trade 1 1,500.00 Notes Receivable (Discounted) 14,000.00 Capital Accounts: A $53,500.00 B 17,500.00 71,000.00 Profit, 1920 15,000.00 Total $164,000.00 Profits are divisible, A 2/3, and B 1/3. Six per cent, interest which is allowed on capital has not been considered for the current year. There are no interest charges on drawings, which are upon the basis of $2,500 each. Each partner has. during the year, drawn out the full amount allowed him by this provision. A is to continue the business and assume all liabilities. B opening up business elsewhere is to take one-fourth of the stock and agrees to leave in the business $2,500 as guarantee for one year against floating liability for bad debts and discounted merchandise notes. At the end of the year any balance is to be settled in cash. Prepare journal entries to record the above transactions, and A's financial statement after dissolution expressive of the terms stated. PROBLEM 62 (Adapted from Institute, June, 1917) A, B and C formed a partnership. A agreed to furnish $10.0(X), B and C each $7,000. A was to manage the business and to share one-half of the profits and losses; B and Cwere each to share one-fourth. The partners are to be charged with interest- on the amounts under and credited with the amounts over their agreed investments. A actually furnished merchandise worth $8,500, but no additional cash. B actually furnished in cash $9,000, and C, $5,500. As manager of the business A purchased additional merchandise amount- ing altogether to $75,000. Sales amounted to $100,000. Accounts receivable amounted to $80,000. Accounts payable paid amounted to $73,500. Expenses incurred amounted to $2,900 of which $2,400 had been paid. It is decided to close out the business. $4,500 of the accounts receivable is collected, the balance prove worthless. The accounts payable are paid. The merchandise is inventoried at $500 and this amount is realized on sale. a. Prepare skeleton ledger accounts showing above transactions. Close the accounts and show the operating profit or loss for the period. b. Adjust the interest directly between the partners. c. Divide the net profit or loss in the agreed ratio between the partners. d. Then (1) indicate the final adjustment in closing the partnership affairs. (2) If A defaults in accounting for the partnership funds and this proves to be worthless since A has no assets, show the modification in the final adjustment. PROBLEM 63 (Adapted from Illinois, May, 1910) A and B, who are equal partners in a trading firm, decide to dissolve their business. The following financial statement was prepared at the close of the year immediately prior to the dissolution : FINANCIAL STATEMENT Assets Cash $ 500.00 Accounts Receivable 9,500.00 Merchandise 5,500.00 Building and Fixtures 10,000.00 Machinery 7,500.00 Good Will 2,500.00 Total $35,500.00 Liability and Proprietary Interest Accounts Payable $13,750.00 Reserve for Doubtful Accounts 750.00 Capital Accounts: A $12,500.00 B 6,000.00 18,500.00 Profit and Loss 2,500.00 Total $35,500.00 The following assets were disposed of for the amounts indicated : Accounts Receivable $6,500.00 Merchandise 5,750.00 Machinery 2,500.00 Building and Fixtures 4,000.00 Prepare statement showing the realization of assets, the adjustment of the partnership accounts, and the distribution of the funds. 64 PROBLEM 64 (Wisconsin, November, 1919) A, B and C were partners in a business on the following basis : Capital Contributed Shar« of Profit Salaries A $45,000.00 50% $6,000.00 B 22,500.00 40% 4,000.00 C 7,500.00 10% 2,400.00 At the end of the second year's business A died. The partners' drawing accounts before crediting their year's salaries appeared with the following debit balances: A, $2,572.00; B, $1,218.00; C, $1,710.00. The net assets of the business, after finally closing the books, were found to be $74,780.00. B and C liquidate the afifairs of the partnership. Three distributions of the proceeds of liquidation were made as follows: $25,000.00, $35,000.00, $11,780.00. You are asked to prepare a tabulation showing the share of each of the distributions to each of the partners. Comment. — The liquidation of partnership assets by installments is the principal point to this problem. Shares of losses should be distributed before attempting to distribute assets. To protect the person in charge of the liquidation the first distribution should be made in such a manner that the resulting balances in the investment accounts are as nearly as possible in the profit and loss sharing ratios. In this problem the first install- ment accomplishes that purpose. PROBLEM 65 (New York, January, 1915) On June 30, 1913, X and Y, partners, operating a manufacturing plant, incorporated under the laws of the state of New York as the X and Y Manu- facturing Company with an authorized capital of $500,000. The corporation purchased all of the assets and assumed all of the liabilities of the partnership as set forth in a balance sheet dated June 30, 1913, giving as consideration its entire issue of capital stock, which stock was all taken by X and Y. BALANCE SHEET, JUNE 30, 1913 Plant and Machinery $175,000.00 Material on Hand, per Inventory 102,625.00 Accounts Receivable 113, 750.00 Notes Receivable 7,500.00 Cash 32,125.00 Total $431,000.00 * Liabilities X. Capital $240,000.00 Y, Capital 160.000.00 Accounts Payable 26.250.00 Notes Payable 3,500.00 Wages Due and Unpaid 1,250.00 Total $431,000.00 The change in organization was not reflected on the books at the time of incorporation, but at the close of the first fiscal year (June 30, 1914) of the corporation's existence the condition of the books was shown by the following trial balance : 66 TRIAL BALANCE, JUNE 30, 1914 X, Capital $ 240,000.00 Y, Capital 160,000.00 Plant and Machinery $ 187,500.00 Material, per Inventory June 30, 1913 102,625.00 Sales 657,025.00 Purchases 240,000.00 Labor 172,500.00 Office Salaries 35,000.00 Traveling Expenses 12,000.00 Interest 3,000.00 Stationery and Printing 875.00 Rent and Taxes 21,000.00 Discount and Allowances 11,250.00 Fuel 23,000.00 Insurance 875.00 Freight, inward 8,750.00 Commission 31,875.00 Advertising 2,500.00 Notes Receivable 30,575.00 Notes Payable 5,500.00 Accounts Receivable 180,575.00 Accounts Payable 39,250.00 Cash 37,875.00 $1,101,775.00 $1,101,775.00 Depreciation on plant and machinery, 5 per cent. ; unexpired insurance, $375; bad debts, $1,625; inventory of material on hand June 30, 1914, $98,025. Make such entries as would convert the partnership books into those of the corporation, and prepare a statement of income and profit and loss for the year July 1, 1913, to June 30, 1914, and a balance sheet as of June 30, 1914. Comment. — There are two parts to this problem: First the journal entries neces- sary to convert the partnership books into those of the corporation. The disposition of good will valued at the difference between the net assets of the partnership and the total stock issued needs careful attention. The second part of the problem calls for the usual operating and financial state- ments, of li.e corporation. PROBLEM 66 (Ohio, November, 1913) The Unique Manufacturing Company, a corporation, was organized July 1, 1913. with an authorized capital stock of $215,000. par value of shares, $100 each, for the purpose of manufacturing novelties. The five incorporators subscribed and paid for five shares each, organization expenses were incurred to the amount of $5,000 and paid for in stock, and the balance of the stock was disposed of on the following conditions : Ten per cent, upon subscription, and three equal calls for the balance at 30, 60 and 90 days. On July 31 The Unique Manufacturing Company secured an option for thirty days on the plant of A and B, for $10,000, agreeing to take over the assets exclusive of cash, and assume the liabilities of the partnership, as at July 31, for the sum of $200,000, payable $90,000 immediately after taking over the business, and the balance in 90 days. At the expiration of the option, the corporation took over the plant as agreed. The following is a transcript of A and B's ledger balances as at July 31, 1913: Land $30,000.00 Buildings 35,000.00 Machinery 20,000.00 Furniture and Fixtures 5,000.00 Raw Material 10,000.00 fi6 Tools 2,500.00 Finished Goods 10,000.00 Work in Process 5,000.00 Supplies 7,500.00 Accounts Receivable 25,000.00 Cash 8,200.00 Mortgage on Buildings 10,000.00 Reserve for Depreciation — Machinery 2,500.00 Reserve for Bad Debts 1,000.00 Accounts Payable 15,000.00 "A" 77,820.00 "B" 51,880.00 During the interval A and B, with the consent of the corporation, had sold finished goods for $5,000, which was 25 per cent, above cost. The subscription to the stock of the corporation were met on call with the exception that on the second call a subscriber for twenty-five shares noti- fied the corporation that he was unable to complete his agreement, and he was released without further liability. The forfeited stock was sold for cash, at par. From the foregoing, draft : a. Journal entries necessary to close the books of the partnership. b. To open the books of the corporation and to show all transactions on The Unique Company's books. c. Balance Sheet of The Unique Manufacturing Company, September 1, 1913. Comment. — This is the first problem in this set involving an option. Usually option agreements provide that any amount paid for option is to apply on the purchase price if the purchase is made. Such a contract should be assumed in this problem. The sale during the option period of $5,000 at a profit of 25% above cost, amounts to a payment on the purchase price equal to the profit. A new set of books is to be opened and the old books are to be closed. In this respect it is different from the foregoing problem where the old books were converted into corporation books. PROBLEM 67 (Washington, 1908) A and B were partners trading under the name of A. B & Co. Jwne 30. 1908, the following balances appear on their ledger: A. Capital Account $70,000.00 B. Capital Account 50,000.00 Real Estate 22.000.00 Buildings • ■ 20,000.00 Machinery and Tools 44,000.00 Furniture and Fixtures 2,000.00 Accounts Receivable 50,000.00 Cash 7,000.00 Materials and Merchandise 53,000.00 Accounts Payable 35,000.00 Bills Payable 48,000.00 Bills Receivable 5,000.00 On June 30. 1908. the business is incorporated as the X Company, on the following plan : 1. Capital Stock. $150,000.00. 2. X Co. takes over entire assets and liabilities of A, B & Co. at the book figures as above, except (a) real estate of the book value of $5,000, which is retained by A. B & Co. ; (b) the accounts receivable, which are taken over at $48,000 and (c) the capital accounts of the partners. 67 3. X Co. pay A, B & Co. $30,000 for the good will of the business. 4. Payments to A, B & Co. are made as follows, viz., $50,000 in first mortgage bonds, and the balance in capital stock of the X Company. 5. After paying off A, B & Co. the remainder of the capital stock is sold for cash to sundry persons. The real estate which is retained by A, B & Co. is bought from A, B & Co. by A for $7,000 and is charged to A's capital account. After the conclusion of the foregoing described transactions A and B dissolve partnership. You are required : a. To prepare closing entries for the books of A, B & Co. b. A statement setting forth the partners' accounts down to their final closing, beginning with the balances shown by the books on June 30, 1908. c. Opening entries for the X Company. Comment. — This is another problem illustrating the accounting for the conversion of a partnership into a corporation. Two points needing special attention are the good will and the profit on the sale of the real estate to a partner. The student should be able to account for the good will by recording it on both the partnership books and the corporation ))Ooks or only on the corporation books. The transfer to the corpora- tion of part of the assets and the liabilities does not close the partnership books because the real estate is sold to a partner. The profit on the real estate sale must appear distributed on the partnership books, but the profit on account of the good will may or may not appear on the old books because it will be sold to the corporation and paid for in capital stock. PROBLEM 68 (Adapted from Ohio, 1918) B. Sharp and R. Wise, partners, for several years conducted a manufac- turing business under the firm name, Sharp and Wise. The business having grown to such an extent that incorporation was deemed advisable, a corpora- tion known as the Sharp-Wise Company, with an authorized capital stock of $200,0C0.C0 common and $200,000.00 preferred, was formed to take over the business. It was arranged that the corporation assume control on January 1, 1922. The following trial balance was taken from the books of the partnership as at the close of business, December 31, 1921, after closing: SHARP AND WISE Post Closing Trial Balance as at December 31, 1921 Cash $ 8,500.00 Accounts Receivable 90,000.00 Notes Receivable 20,000.00 Inventory— Raw Material 104,000.00 Inventory — Goods in Proc 32,500.00 Inventory— Finished Goods 19,000.00 Machinery and Tools. 50,000.00 Reserve for Depreciation $ 15.000.00 Horses and Wagons 2,500.00 Reserve for Depreciation 900.00 Fixtures 3,000.00 Buildings 75,000.00 Reserve for Depreciation 6,700 00 Real Estate— Land 25,000.00 Accounts Payable 72,000-00 Notes Payable 18,000.00 Mortgages Payable 30,000.00 B. Sharp— Capital 145,000.00 R. Wise— Capital 141,900.00 $429,500.00 $429,500.00 68 It was agreed that the corporation should take over all of the assets, excepting cash, at the value at which they appeared in the partnership trial balance of December 31, 1921, and assume the liabilities. The partners were to receive, in consideration for the business the entire authorized issue of common stock, and $118,400.00 par value of the preferred stock of the Sharp- Wise Co. The transfer was consummated as above and Sharp was elected President and General Manager and Wise Secretary-Treasurer and Office Manager of the corporation, the former at a salary of $6,000.00 per year and the latter at a salary of $5,000.00 per year. On the morning of January 1, 1922, $100,000.00 par value of common stock and $59,200.00 par value of preferred stock of the Sharp-Wise Co. was issued and delivered to each of them. Each partner then withdrew his share of the partnership cash, the amounts being charged to their respective drawing accounts. No entry was made on the partnership books for the capital stock received by the partners. It should here be noted that the partnership agreement between Sharp and Wise was silent as to the ratio in which profits were to be shared. No new books were provided for the corporation. Without further ad- justment, conversion or opening entries, the current transactions of the corporation were recorded in the old partnership books and this practice was continued throughout the year. At December 31, 1922, the trial balance taken off by the bookkeeper, before closing the books, was as follows: THE SHARP-WISE COMPANY Trial Balance as at December 31, 1922 Cash $ 28,400.00 Accounts Receivable • 117,000.00 Notes Receivable 8,000.00 Inventory— Raw Material 104,000.00 Inventory — Goods in Proc 32,500.00 Inventory — Finished Goods 19,000.00 Liberty Bonds Held 50,000.00 Furniture and Fixtures 3,500.00 Machinery and Tools 67,800.00 Reserve for Depreciation $ 15,000.00 Horses and Wagons 3,000.00 Reserve for Depreciation 900.00 « Buildings 75,000.00 Reserve for Depreciation 6,700.00 Real Estate 25,000.00 Accounts Payable 64,200.00 , Notes Payable 7,500.00 \ Mortgages Payable 30,000.00 ' Capital Stock— Preferred 81,600-00 B. Sharp— Capital Account 145,000.00 R. Wise— Capital Account 141,900.00 B. Sharp— Drawing Account 11,000.00 R. Wise— Drawing Account 7,200.00 Sales 739,100.00 Cash Discounts Received 3,700.00 Purchases— Raw Materials 540,000.00 Productive Labor 95,000.00 Non-Productive Labor 10,000.00 Fajctory Repairs 1,500-00 Power, Light and Heat 2,200.00 Taxes 3,000.00 Insurance 800.00 Salaries, Superintendent and Foremen 7,000.00 General Factory Expense 900.00 69 Advertising 1,200.00 Commissions on Sales 6,000.00 Office Salaries 4,200.00 Office Expenses 2,500.00 General Expense 700.00 Cash Discount Allowances 2,100.00 Interest Paid 1,600.00 Dividends Paid on Preferred Stock 5,500.00 $1,235,600.00 $1,235,600.00 At this juncture the bookkeeper declared himself hopelessly confused at the condition of the accounts and unable to proceed with the closing of the books or the preparation of financial statements for the corporation. You were called upon to adjust the accounts and prepare operating- and financial statements. Upon your advice a new set of books was scoured for the corporation. Proper opening entry for the corporation accounts was made as of January 1, 1922. Inasmuch as the time and labor required to transcribe the entries for the year in detail would have been {prohibitive and as the old books would still be on file for reference purposes, you decide to transfer the effects of the transactions for the year to the new books by a single summary entry. Upon further investigation you ascertained the following facts and made the necessary adjustments therefore upon the new corporation books: The inventories as at December 31, 1922, were as follows: Raw Material $112,500.00 Goods in Process 46,000.00 Finished Goods 27,500.00 Interest on Notes Payable had been paid for the year and interest on the Mortgage, Payable had been paid to September 1, 1922. The rate on both the Notes and Mortgage was 6% per annum. Messrs. Sharp and Wise had, from time to time during the year, drawn various amounts of cash which had been charged to their respective drawing accounts but neither had received any credit for salary. During the first half year the remainder of the authorized preferred stock had been sold for cash at par to provide working capital. It was decided to charge for depreciation on Buildings 3% ; on Machinery and Tools, 10% ; and on Horses and Wagons, 20%, calculations to be based on the average balance of each account for the year which, in this case, you may assume to be one-half the sum of the balances at January 1, 1922, and December 31, 1922. The preferred stock bears 7% cumulative dividends payable January 1 and July 1. The July 1, 1922 dividends were paid on that date but the divi- dend for the last half year was not declared and paid until January 2, 1923. No other adjustments were found to be necessary. From the foregoing data, you are required to prepare and submit: (a) The entries which should properly have been made on the books of the partnership on January 1, 1922. to record the sale of the business and to open up the necessary accounts for the corporation. (b) Necessary summary entry to record on the new set of books of the corporation as at December 31, 1922, the total effect of the transactions for the year 1922 as recorded in detail on the partnership books. (c) Financial statement and operating statement of the Sharp-Wise Com- pany for the year ending December 31, 1922. 70 PROBLEM 69 (Iowa, 1918) A corporation, incorporated under the laws of the State of South Dakota with an authorized capitalization of $2,000,000.00 ($1,000,000.00 common, $1,000,000.00 preferred) offers stock for subscription under the following terms and conditions : The sale of shares of preferred stock, par value $100.00, at a discount of 25 per cent., payable in five installments. To each purchaser of preferred stock shall be donated one share of common stock, par value $100.00. At the end of the year it was found that money had been received from installments paid on subscriptions to preferred stock as follows : First Installments $120,750.00 Second Installments 96,600.00 Third Installments 96,600.00 Fourth Installments 96,600.00 Fifth Installments 96,600.00 The organizer of the corporation had purchased a vacant building and real estate suitable for the factory site, paying therefor $27,500.00. The prop- erty purchased was appraised by disinterested appraisers and valued con- servatively at $45,000.00. The owner (organizer) then turned the said property over to the corpora- tion at the appraised value, viz., $45,000.00, and received therefor preferred stock at same price as subscribers, which was at 25 per cent, discount, and also received one share of common stock (donated) for each share of pre- ferred stock. The expenses of organization and sale of stock at the end of the year was found to be as follows : Commissions on Sale of Stock $10,000.00 Office Expenses, Clerk Hire, Heat and Light, Stationery and other Expenses 3,000.00 Appraisal 250.00 Betterments and Remodeling Building for Occupancy 2,000.00 Draw up statement showing the condition of organization, using receipts and disbursements as above and showing the condition of stock subscriptions and stock issue. Comment. — This problem illustrates accounting for the organization of a corpora- tion in which promoter's profits, installment payments and a stock bonus are the prin- cipal features. Attention is called to the fact that the laws of most states forbid the issuing of capital stock at a discount. The problem states that each purchaser of pre- ferred stock received as a donation one share of common stock. The assumption is that one share of common stock was donated for each share of preferred stock subscribed. PROBLEM 70 (Wisconsin, 1917) Assume that the Wisconsin Motor Company was incorporated in New York on January 2, 1917, to acquire the business of the Wisconsin Automo- bile Corporation. The authorized capital stock of the Wisconsin Motor Com- pany is $2,000,000 7 per cent, cumulative preferred and 600,000 shares of com- mon stock of no specified par value. The balance sheets of the Wisconsin Automobile Corporation on January I, 1917, and January 1, 1916, were as follows: 71 Assets 1917 1916 Cash on Hand and on Deposit $ 564,747.00 $1,173,135.00 Notes and Accounts Receivable 2,873,383.00 1,049,005.00 Investments 530,702.00 401,127.00 Merchandise Inventories • 5,860,948.00 3,327,301.00 Real Estate, Buildings, Machinery 3,184,278.00 2,215,831.00 Goodwill 1.00 1.00 Prepaid Expenses 37,480.00 27,863.00 $13,051,539.00 $8,194,263.00 Liabilities 1917 1916 Notes Payable $3,000,000.00 $ 250,000.00 Accounts Payable 1,040,799.00 437,283.00 Dealers' Contract Deposits 105,662.00 90,326.00 Accrued Accounts 243,821.00 73,969.00 $4,390,282.00 $ 851,578.00 Proprietary Interest 1917 1916 Preferred Stock $1,400,000.00 $1,100,000.00 Common Stock 5,000,000.00 5,000,000.00 Contingent Reserve 136,783.00 145,764.00 Surplus 2,124,474.00 1,096,921.00 $8,661,257.00 $7,342,685.00 The preferred stock of the old corporation was exchanged for the full amount of the preferred stock in the new company. Of the new company's common stock 200,000 shares were exchanged for the common stock of the old corporation, 200,000 shares were unissued at the present and the remaining 200,000 shares were offered for public subscription at $35 per share. The transactions in this portion of the stock are as follows: 50,000 Shares Sold at $32.00 Per Share. 100,000 Shares Sold at $36.00 Per Share. 50,000 Shares Sold at $34.00 Per Share. The new company expects to maintain a dividend policy on common stock at $3 per share per annum. You are asked to prepare : (a) The opening balance sheet of the Wisconsin Motor Company, as of January 2, 1917, assuming that the common shares were sold for cash on that day. (b) What is the book value of a share of common stock in the new company (c) How would you account for the sale of stock at $32-$36 per share ? (d) Prepare a comparative statement of assets, liabilities and proprie- tary interest of the Wisconsin Motor Corporation by showing increases or decreases for each of the items listed. (e) What is the probable cause of forming the new company? Of in- corporating under the law which allows capital stock of no par value to be issued? Comment. — The accounting for the organization of a corporation involving capital stock of no par value is illustrated in this problem. In the solution it should be assumed that the preferred stock is preferred as to both dividends and assets. Some- times when book value of stock is called for, good v^^ill is intended to be excluded as being an asset of doubtful value. For purposes of this problem include good will in the valuation of the stock. 72 PROBLEM 71 (Wisconsin, November, 1919) On January 1, 1919, the close of its third year's business, the following ac- counts were open upon the General Ledger of the Winner Manufacturing Company : Preferred Capital Stock $ 376,000.00 Common Capital Stock 600,000.00 Cash on Deposit $ 50,000.00 Imprest Cash Fund 500.00 Real Estate 250,000-00 Buildings 300,000.00 Notes Receivable 8,000.00 Factory Equipment 450,000.00 Accounts Payable 53,000.00 Notes Payable 25,000.00 Reserve for Depreciation, Buildings 6,000.00 Reserve for Depreciation, Factory Equipment. 75,000.00 Accounts Receivable 75,000.00 Patents 1.00 Patterns 25,000.00 Auto Trucks 10,000.00 Bonds Issued 200,000.00 Premium on Bonds Issued 2,000.00 Inventory, Raw Material 180,000.00 Inventory, Finished Goods 40,000.00 Inventory, Goods in Process 70,000.00 Reserve for Depreciation, Auto Trucks 4,000.00 Surplus, January 1, 1918 50,000.00 1918 Operating Profit and Loss 67,501.00 $1,458,501.00 $1,458,501.00 The preferred capital stock was $400,000.00, 7 per cent, cumulative, and the provisions of its issue require that 3 per cent, of the authorized amount be set aside annually as a sinking fund for its redemption at $125.00. The common capital stock of the company is without par value; 20,000 shares have been authorized ; 12,000 shares issued. The Real Estate account is found to consist of the following items : Factory Real Estate $ 20,000.00 Fertile Farms Investment 120,000.00 City Real Estate Investment 110,000.00 The bonds of the company are twenty-year, 7 per cent, gold bonds, sold on September 30, 1918, for 101. Interest is payable October 1 and April 1. The bond recital provides for the creation of a pro-rata sinking fund to be reserved out of the profits of each year and for the setting aside of cash equivalent to such reservation. The income taxes for the year are estimated at $5,000.00. You learn that the directors met on January 10, 1919, and declared a divi- dend of 7 per cent, upon the preferred stock, authorized the purchase of shares of preferred stock in accordance with the terms of issue and declared a divi- dend of two dollars ($2.00) per share of common stock. The dividends were paid on January 15, 1919, and the preferred stock was purchased on that date. In view of the above conditions, you are asked to prepare a financial state- ment of the Winner Manufacturing Company as of January 1, 1919. after the books for the year have been closed finally. Comment. — This is another problem in capital stock of no par value. As in the above problem, assume that the preferred stock is preferred as to both dividends and 78 itJ^T assets. The provision for a sinking fund for preferred stock is the first encountered in these problems. Notice that no reserve for such sinking fund is called for. Should the income tax be used in determining the amount of the net profit? PROBLEM 72 (Massachusetts, October, 1914) A client submits to you the following statement, covering a period of ten years, of a long-established nut and bolt business which he contemplates purchasing : Sales— Averaging Per Year $300,000.00 Wages— Averaging Per Year 100,000.00 Expenses — Averaging Per Year 15,000.00 Materials Used — Averaging Per Year 115,000.00 Real Estate— Appraised Value 50,000.00 Machinery— Two Years Old (Original Cost) 20,000.00 Machinery— Four Years Old (Original Cost) 10,000.00 Machinery— Ten Y^ears Old (Original Cost) 20,000.00 Materials on Hand 40,000.00 From the above figures write a brief report to submit to your client, set- ting forth the value of the business, including good will. Comment. — For the purposes of this problem on good will, assume that it is to be valued at three years purchase of the average of the last ten years. Also assume that each piece of machinery less than ten years old replaced other similar machinery. PROBLEM 73 (Adapted from the Institute Examination, May, 1919) A has agreed to sell to B the Good will of the X. Y. Company on the basis of three years' profits to be determined by you on sound principles of account- ing as accurately as possible from the following statement handed you by A. You are required to compute the value of the Good Will, but are not expected to take into account any consideration outside those presented by the state- ments. Credits: First Year Second Year Third Year Sales (selling prices substantially uniform during period) ..... .$638,400.00 $602,500.00 $ 564,000.00 Estimated value of construction work performed and charged to property 1 10,000.00 77,600.00 154,000.00 Appreciation of real estate upon revaluation of experts 80,000.00 Profit on sale of Bethlehem Steel Company stock 85,000.00 Inventory at end of period: Production material at cost.. 72,000.00 103,100.00 106,600.00 Finished goods at selling prices 76,500.00 114,000.00 150,000.00 $896,900.00 $977,200.00 $1,059,600.00 Debits: Production Materials Purchased.. $233,000.00 $253,400.00 $ 220,300.00 Production Labor 50,850.00 61,400.00 60,900.00 Production Expenses Depreciation 66,750.00 69,300.00 70,300.00 Selling Expenses 52,500.00 55,650.00 62,800.00 Interest 96,000.00 94,000.00 98,500.00 Cost of Construction Work 74,600.00 49,000.00 86,000.00 Inventory at Beginning: Production material at cost... 51,400.00 72,000.00 103,100.00 Finished goods at selling prices 54,900.00 76,500.00 114000.00 $680,000.00 $730,250.00 $ 815,900.00 Balance being profit claimed by A. $316,900.00 $246,950.00 $ 343,700.00 74 PROBLEM 74 1. From the data given below state clearly and explain at least three different methods of arriving at the amount to charge annually for the depre- ciation of any one or all of the following items : Items Value Estimated Life Scrap Value Buildings $50,000.00 50 years $1,000.00 Machinery 20,000.00 20 years 2,000.00 Tools 5,000.00 5 years 100.00 Patterns 10,000.00 3 years 100.00 (Wisconsin, 1915) 2. The A Manufacturing Company has four general types of depreciable assets : Rate Cost Scrap Value Buildings 2% $51,000.00 $1,000.00 Machinery A 10% 11,000.00 1,000.00 Machinery B 20% 12,000.00 2,000.00 Office Equipment 10% 4,100.00 100.00 The directors desire to keep but one Reserve for Depreciation Account and request you to determine the composite rate which may be used in deter- mining the annual depreciation charge. Determine the composite rate as requested, tabulate the necessary facts used in determining it, and comment upon the practicability of such a plan. (Wisconsin, 1919.) 3. (a) Determine the average life of the following fixed assets belonging to the Western Hardware Company : Estimated Estimated Assets Cost Scrap Value Life in Years Buildings $200,000.00 $70,000.00 20 Machinery 140,000.00 50,000.00 IS Tools 40,000.00 10,000.00 10 • Patterns 20,000.00 8 (b) After determining the average life of the fixed assets, state the amount of annual depreciation by the straight-line or fixed proportion method. 4. A coal company owns 4,000 acres of coal land with a four-foot seam of workable coal. The land cost $200.00 per acre and the company has spent $100,000.00 in development, equipment, etc. How much depreciation should be charged against each ton of coal mined? A lumber company owns a 3,000-acre tract of timber cruised at 6,000 feet to the acre. The mill and timber cost $105,000.00. The salvage value of the mill is estimated at $3,500.00 and the land valued at $15,000.00. How much depreciation should each one thousand feet of lumber carry? A coal company leases land in which they are to pay a minimum royalty of $25,000.00 a year. Their royalty contract is based on a production of ten cents per ton. Any year that the royalty does not amount to $25,000.00 they have a right to make up this shortage before they pay more than the mini- mum royalty in any two succeeding years. Explain how you would handle this on the books of the coal company so that the royalty account would show properly. The actual royalty for the first vear is $20,000.00, for the second year $22,000.00 and for the third year $30,000.00. Prepare the journal entry to explain your answer. An oil company owns propertv with a new well producing 100 barrels per day. This property cost $50,000.00. What in your opinion would be a •?6 just percentage of the cost of the leasehold for depreciation for the first year and so on until the end of six years? (West Virginia, 1917.) Comment. — Parts 1, 2, and 3 of this problem involve the computing of depreciation charges by various methods explained in the lectures. It is doubtful if the composite life plan answers the requirements of the Treasury Department for Income Tax pur- poses. Part 4 is a series of problems in depletion of natural resources and computation of royalties related thereto. It is not necessary to set up a reserve for depletion since a definite portion of the assets have disappeared. ^ PROBLEM 75 1. A manufacturing concern has annually for the past six years made provision, at the rate of 10 per cent, per annum, for depreciation of its plant and machinery, crediting the amount of such depreciation to a suitable reserve account. During the year an engine which cost originally $5,000.00 was replaced by an improved engine costing $6,800.00. The cost of the new engine was charged to Machinery Account at time of purchase. $300.00 was realized from the salvage of the old engine, this amount being credited to "Scrap Sales" when received, and later closed to Profit and Loss. Draft the adjustment entries which you consider necessary and explain the principle upon which these entries are based. (Ohio, 1918.) 2. An engine installed in a factory January 1, 1914, at a cost of $1,000.00 is replaced by one of larger capacity December 31, 1917, costing (second hand) $2,800.00. The discarded machine was sold for $900.00. The cost of making the change was $200.00. It has been the practice of the company to charge off 10 per cent, depreciation annually (on the diminishing basis) carry- ing the credit to a Depreciation Reserve Account. Make the necessary journal entries. (Illinois, 1918.) 3. A machine costing $12,000.00 was estimated to have a life of twelve years, with a residual value of $1,500.00. At the close of each year a charge of $875.00 was made to depreciation and a like amount credited to "Reserve for Depreciation." Just prior to closing the books at the end of the twelfth year the machine was discarded and sold for $2,000.00 (cash) and a similar machine was bought, costing $16,000.00. Show the journal entries you would make to close the books at the end of the twelve years in order to close these transactions and to make necessary adjustments. (Indiana, 1918.) 4. In the Machinery Account of a company under audit you find the fol- lowing : Balance at Beginning of Year $30,000.00 Purchase of Two Machines, Type A, Including Freight 6,000.00 Cost of Removing a Discarded Machine, Type B, to Make Room for New Machine 125.00 Cost of Installing Two New Machines 200.00 Alterations to 4 Type C Machines, Made Necessary by Change of Product 500.00 Cost of Moving Two Machines from Building A to Building B to Permit of More Economical Operation, Including Re- installation 205.00 Sale of Old Machine, Type A (Less Freight and Cost of Removal) 150.00 Sale of Old Type B Machine 1,100.00 The balance of the Reserve for Depreciation (Machinery) Account shows an increase for the year of the year's depreciation charge computed at the rate of 6 per cent, on the balance of the Machinery Account at the beginning of the year. 76 You are asked to make the adjustment entries necessary to correct the account. (Adapted from Indiana, 1918.) 5. The Machinery Account on the books of the X Company was deb- ited with $10,000.00 on January 1, 1917. Depreciation had not been consid- ered upon the books up to this date. On June 1, 1917, new machinery was purchased for $3,000.00 and on September 1 old machinery was scrapped, the cost price of which was $3,000.00. The machinery is estimated to last five years. Depreciation is figured on the fixed proportion method, no scrap value. In May, 1918, the additional equipment, amounting to $2,000.00, is pur- chased. At the end of 1918 the management decides to use the sum-of-year digits method for calculating depreciation. Give all entries required by the above citation of facts. Comment. — There is a difference of opinion regarding the cost of removing old machinery referred to in Part 4. Such expense could be capitalized as part of the cost of the new machine, charged to the reserve for the depreciation of the old machine, if there were such an account, or it could be charged as a current expense. If that were the only spot where the new machine could be conveniently placed, such cost may best be capitalized. If there were no reserve for depreciation of the old machine, it would be better to capitalize the cost of moving rather than treat it as an expense. It will be so treated here. PROBLEM 76 (Wisconsin, 1915) In your examination of the Automobile Delivery Truck Account of a com- pany you will find the following entries : Debits Jan. 1, 1914, Trucks 1, 2, 3, 4, at $1,200.00 $4,800.00 July 1, 1914, Truck 5 1,500.00 Aug. 1, 1914, Truck 6 1,500.00 Credits Aug. 1, 1914, Truck 2 $ 900.00 Sept. 1, 1914, Truck 4 750.00 . Balance, Sept. 1, 1914 6,150.00 The Reserve for Depreciation for Automobile Delivery Truck Account stood credited on January 1, 1914, with $1,800.00. Upon analyzing the transactions represented by these items, you find the following facts: a. Truck 5 purchased July 1, replaced Truck 1. The portion of the re- serve for depreciation accumulated on January 1 for Truck 1 amounted to $900.00. Truck 5 was purchased on open account. b. Truck 2 was traded in for $850.00 on the purchase of Truck 6, costing $1,500.00. The differetice was paid in cash. The reserve which had been ac- cumulated for depreciation on Truck 2 on January 1 amounted to $300.00. c. Truck 4 was totally destroyed in an accident September 1. The re- serve for depreciation on tliis truck amounted on January 1 to $300.00 and it was insured for $750.00. Assume the rate of depreciation to be 25 per cent, per year. Give journal entries which would properly record the above facts and show the balances of all accounts aflFected, as of September 1, 1914. Comment. — The student should ignore the items on the credit side of the account, and make such entries as he deems proper for the transactions for which they stand. The student is advised to set up one reserve for depreciation account, itemize the balance of $1,800 on January 1 and indicate the numbers of the trucks to which all the other debits and credits apply. The depreciation is to be computed up to September 1, 1914. 77 PROBLEM 77 (Illinois, May, 1910) A factory consists of two blocks of buildingfs, "A" and "B." On the first of January. 1907, "A" contains engine and boiler which costs $4,000.00, and machinery costing- $13,000.00; "B" contains machinery costing $7,000.00. The following are purchases of machinery: October 1, 1907, "A," $1,000; July 1, 1908, "A," $750; "B," $1,500; April 1, 1909, "A," $600; "B," $900; October 1, 1909, "B," $250. On January 1, 1908, machinery (costing January 1, 1907, $1,000) is sold from "A" for $625, and on July 1, 1908, machinery (costing $1,300 January 1, 1907) is sold from "B" for $1,000. ^ The accounts are made up to December 31 each year. On December 31, 1909, the whole premises and contents are destroyed by fire, and the fire in- surance company agrees to pay upon the following basis : Engine and boiler, cost price less depreciation 8 per cent, per annum upon that sum ; machinery in "A," cost, less depreciation at 10 per cent, per annum upon diminishing value; machinery in "B," cost, less depreciation at 7^^ per cent, per annum upon diminishing value. Prepare ledger accounts showing how much is recoverable upon this basis. Comment. — This problem illustrates the relation of depreciation to fire insurance. The depreciation is to be computed to even calendar months. PROBLEM 78 (Wisconsin, 1918) In an audit of the Acme Motor Car Company you find the Reserve for Depreciation Account and the Surplus Account composed of the items as here enumerated. The Reserve for Depreciation Account was opened on December 31, 1915. the close of the first business year, by debiting the depreciation accotints of the various assets with $265,000.00. The Reserve for Depreciation Account was also credited with $25,00000 on December 31, 1916, and with $20,000.00 on December 31, 1917. During 1916 and 1917 the following items have been charged against this Reserve for Depreciation Account : Assets Scrapped $125,000.00 •Bad Debts 25,000.00 Repairs 10,000.00 Fire Loss on Building and Equipment 7,500.00 Organization Expenses 65,000.00 Salesmen's Extra Commission 12,000.00 The Surplus Account for 1915 and 1916 has been closed, the balance having been paid out in dividends. The Surplus Account on December 31. 1917, is found to consist of the following credit items : Reserve for Car Guarantees $ 50,000.00 Premium on Stock Sold 50,000.00 Reserve for Obsolescence > 50,000.00 Bonus from Commercial Club 50,000.00 Reserve for Income and Excess Profits Taxes, 1917 80,000.00 Operating Profits 750.000.00 You are requested to make such adjustments in the Reserve for Deprecia- 78' tion Account and Surplus Account as are appropriate, and to show how the several items and accounts should appear in the financial statement. Comment. — The practice of charging improperly many items to Reserve for De- preciation and to Surplus is here illustrated. The arbitrary methods followed in setting up the Reserve for Depreciation are to be corrected. The costs of the assets are not given in the problem, hence there is no way to judge the adequacy of the charge except by comparison with other items. PROBLEM 79 A business has been operating for five years, but depreciation on the machinery was not in any year considered as an expense. The machinery cost $5,000 and no additions have been made since installation. It has an estimated life of 12 years and a scrap value of $500. The net profit or loss, according to the company's books, for each of the five years is as follows : 1916 Profit $5,492.00 1917 Profit 6,910.00 1918 Profit 4,132.00 1919 Loss 165.00 1920 Profit 2,206.00 Average $3,715.00 After calculating the depreciation at 17^% on the fixed percentage (diminishing balance) method, and duly recognizing the annual charges, you find errors in the annual operating statements which result in the following net adjustments to the figures prepared from the company's books. 1916 Reduction of Profit by $400.00 1917 Increase of Profit by 852.00 1918 Reduction of Profit by 690.00 1919 Reduction of Loss by 102.00 1920 Increase of Profit by 136.00 Prepare a table showing the amount of these profits or losses. The average net profit remains the same as before the adjustments were made, $3,175.00. Why would you consider it necessary that your figures be used, rather than those prepared by the company? PROBLEM 80 (a) The following account is a copy of the Machinery and Equipment account of the A Company as it stood on December 31, 1920. The account has not been balanced since 1915. and various purchases, repairs, and re- newals have been charged to it. Depreciation has also been charged to it at the rate of 20% annually, the basis being the total of the charges to the account. Depreciation was properly charged as a manufacturing expense, but no Reserve for Depreciation account was set up. Machinery and Eqmpment 1915 Machinery Purchase $15,000.00 1915 Depreciation $2,200.00 1916 Machinery Purchase 1,000.00 1916 Depreciation 2,475.00 1916 Repairs to Machinery... 500.00 1917 Depreciation 2,662.50 1917 Renewals to Machinery.. 1,250.00 1918 Depreciation 3,150.00 1918 Machinery Purchases .... 2.500.00 1919 Depreciation 3,675.00 1918 Renewal and Expense... 750.00 1920 Depreciation 3,900.00 1919 Machinery Purchases 3,000.00 1919 Repairs 500.00 1920 Renewals 1,500.00 79 The A Company now sells its plant and includes the machinery and equip- ment at $10,000. Adjust and correct the above account, set up the accounts as they should be, and determine the profit or loss on the machinery and equipment, assuming the rate of depreciation to have been adequate. (b) The Automobile Truck account of the A Company was as follows : Automobile Truck 1918 New Truck Purchase $4,200.00 1918 Depreciation $1,250.00 1918 Repairs 800.00 1919 Depreciation 2,000.00 1919 New Truck Purchase 2,500.00 1920 Depreciation 2,300.00 1919 Renewal of Motor 500.00 1920 New Truck Purchase 1,200.00 i.:.. Depreciation had been charged into the expense accounts but there was no Reserve for Depreciation account. It was credited to the Automobile Truck account. The basis for determining the charges at a 25% annual rate was the total debits to the Automobile Truck accoulnt. The truck purchased in 1919 was wrecked the day before the sale of the company was completed. The salvage value of the truck was $150 and $1,250 insurance was allowed by the insurance company. The remainder of the trucks were included in the sale at $3,800. Adjust and correct the accounts and determine the profit or loss on the sale of the trucks. PROBLEM 81 In the examination of the books of the A Company it is found that the Equipment Account, the Reserve for Depreciation Account and the Operat- ing Expense Accounts have been improperly kept. Charges which should have been made against the Reserve for Depreciation Account have been made in some cases to the Operating Expense Account and in other cases to the Asset Account. Scrapped assets have beejn allowed to remain in the Assets Accounts at original cost. The following data are given with the request that the proper adjustment entries be made so that the Equipment Account, the Reserve for Deprecia- tion Account, and the net eflfect upon the operating profit for each year will be clearly shown. Type A equipment purchased in 1917 to the amount of $100.00 was charged to the Asset Account when it should have beeJn charged to the Reserve for Depreciation Account. Likewise in 1918 $500.00 had been so charged. In 1916 replacements to Type B equipment amounting to $600.00 had been charged to the Equipment Account when it should have been debited to the Reserve for Depreciation .Account. In 1917 similar items aggregated $750.00, and in 1918 $350.00. Type C equipment was traded in January, 1917, for Type D equipment. Type D equipment is valued at $10,000.00. The portion of the Reserve for Depreciation Account applicable to Type C was found to be $8,500.00. However, a loss of only $5,000 was suffered when the machinery was traded. Type E equipment contains charges to the amount of $5,000.00 which should have been charged against the Reserve for Depreciation Account. The amounts of the several years are as follows: 1916, $1,500.00; 1917. $2,000.00; 1918, $1,500.00. An analysis of the Factory Repair Account shows that during 1916 items amounting to $2,000.00 had been charged to this account which should have 80 been charged against the Reserve for Depreciation Accou'jit. In 1917 similar items totalled $2,500.00, and in 1918 $1,750.00. The rates of depreciation are as follows : Type A, 10 per cent. ; Type B, 20 per cent., and Type E, 25 per cent. Comment. — Corrections of somewhat complicated errors in computing deprecia- tion are called for by this problem. Each type of equipment must be considered separately and for every year it has been owned. The student is to assume that no depreciation is to be computed on type D equipment on account of the short time it was owned. In connection with the type C equipment, the problem states that a $5,000 loss was suffered. The loss is assumed to have been arrived at without computing depreciation since the problem states that the accounts have been improperly kept. PROBLEM 82 (Wisconsin, May, 1919) The A Company had an appraisal made early in January, and after com- pleting the annual audit for the A Company the Directors authorize you to record upon the books the proper values as given in the appraisal. .-Xmong the terms used in the appraisal company's report are the following: 1. Sound Value. 2. Depreciated Value. 3. Replacement Value. 4. Insurable Value. 5. Book Value. Define each of these terms and state definitely just what values it would be proper to record upon the books. What adjustment account or accounts would be used in the work and what disposition should be made of any balances remaining in such account or accounts? Comment. — The definition of five terms used by appraisers are called for in the first part of the problem. A description of the use of the Appraisal Adjustment account is called for in the second part of the question. PROBLEM 83 (Massachusetts, October, 1914) The following is a trial balance of Blank Manufacturing Company at De- cember 31, 1913, before closing: Land $ 2,000.00 Buildings 25,250.00 Machinery and Equipment 31,120.00 Materials Used in Manufacture 35,930.00 Wages 13,560.00 Salaries 3,500.00 Repairs 740.00 Insurance and Taxes 850.00 Office Expenses 1.560.00 Depreciation 1,200.00 Accounts Receivable 24,130.00 Accounts Payable $ 17,820.00 Bank Loans 5,000.00 Inventory, December 31, 1913 8,210.00 Accrued Interest 150.00 Interest 150.00 Sales 74,610.00 Trade Discounts on Sales 1,730.00 Capital 50,000.00 Surplus 2,350.00 $149,930.00 $149,930.00 An appraisal was made of the plant as of December 31, 1913, which showed the following values : Replacement Depreciation Value Value Land $ 1,800.00 Buildings 30,000.00 $27,000.00 Machinery and Equipment 42,000.00 33.600.00 The Board of Directors approve the appraisal values, and pass a resolution to change the books to agree therewith. 1. Prepare journal entries to adjust the books to agree with values shown by the appraisal. 2. Prepare balance sheet and Profit and Loss Account after giving effect to the appraisal adjustment. Comment. — In this problem the results of an appraisal are to be recorded on the books. In the solution, the student is expected to use an Appraisal Adjustment account. PROBLEM 84 » (Illinois, December, 1918) You are called upon to examine the accounts of a corporation for the purpose of certifying its balance sheet. An item is carried on the liability side described "Sundry Reserves — $375,000.00.' You will find that this amount is made up as follows : Reserves for Contingencies $ 50,000.00 Plant Depreciation Reserve 80,000.00 Reserve for Bad Debts 10,000.00 Reserve for Collection Expenses 15,000.00 Premium on Sale of Capital Stock 12.000.00 Reserve for Personal Injury Suit which has just been decided itgamst the Company 8,000.00 Reserve for Patent Litigation Pending 20,u00.00 Reserve for Income and War Excess Profits Taxes 40,000.00 Special Reserve against a Possible Drop in Market Values of :*lerchandise on Hand , X,000.00 Sinking Fund for Retirement of Bonds 48,000.00 Provision against Dismantlement of Aurora Works 34,000.00 Pension Fund 28,000.00 $375,000.00 The president is unwilling to change the company's balance sheet without consulting the Board of Directors and states that if you take exception to this item you should write him with your views so that he may bring the matter formally before them. Write such a letter, stating clearly the reasons for any exception you may take. Comment. — This problem furnishes a review of the classification of reserve accounts. What characteristic distinguishes valuation accounts from true reserves? Which of these items listed as reserves are liabilities rather than reserves? PROBLEM 85 (Wisconsin, 1916) The Wisconsin Hardware Company is to be organized as follows : A and B are equal partners in a retail hardware business, the financial condition of which is shown by the following balance sheet : P2 Cash on Hand and in Bank $ 2,000.00 Accounts Receivable 4,000.00 Merchandise 6,000.00 Fixtures 400.00 Shop Tools 300.00 Delivery Equipment 300.00 Total Assets $13,000.00 Liabilities and Capital Accounts Payable $ 1,000.00 A— Investment 6,000.00 B— Investment 6,000.00 $13,000.00 The above net worth is to be combined with $6,0(X).0O cash to be brought in by C, and the Wisconsin Hardware Company is to be formed and is to issue $18,000.00 of full paid stock, $6,000.00 each to A. B and C in payment for their respective contributions. Immediately upon the formation of the new firm the company is to pur- chase the business of a competing hardware store in the same city, and to continue its operation as a second store under the name "Badger Hardware Store." The "Badger" store inventory is as follows : Stock of Merchandise $ 6,500.00 Fixtures 200.00 Delivery Equipment 350.00 Total to be Taken Over $ 7,050.00 The stockholders expressly instruct the accountant to design an account- ing system so that each store may keep its own set of books, pay its own bills, have its own cash account and bank account and prepare its own detailed operating and financial statements at the end of each month. The accounts of the Wisconsin Hardware Company must be so arranged as to reflect the ownership and operating profits or losses of the Badger store. Triplicate sales books are to be used at each store. These will supply the individual accounts receivable accounts, and the system designed should recognize the use of the sales book slips for other purposes. Keeping in mind the above facts: a. Design a classification of accounts for the Wisconsin Hardware Com- pany's main store. b. Sketch the ruling of such books of original entry as you deem ad- visable. c. Give the necessary journal entries to record the conversion of the part- nership into a corporation upon the new books. d. Give the necessary journal entries to record the purchase of the "Badger Hardware Store." e. Give the entries necessary to open the books at the "Badger Hard- ware Store." f. Outline a method of approximately determining monthly profits where physical inventory of stock is taken but once a year, and draft form of oper- •ating statement suitable for main store. Comment. — The Wisconsin Hardware Company problem covers several important accounting subjects, the chief of which is a classification of accounts which provides for proper records of a main store and one branch store. In connection with the rulings of books of original entry, the attention of the student is called to the fact that this problem refers to a retail hardware business. The routine of such a retail business will need consideration. 88 PROBLEM 86 (Wisconsin, 1916) As accountant to a coal mine you are instructed to prepare estimates of the cash balances at the close of each of the succeeding six months. The fol- lowing details, averages of the past years, are available : Cost of Mining $0.5107 per ton Current Selling Price 75 per ton Assume that the mine starts operation January 1 after having been shut down, that there was $50,000.00 cash in bank at that date, that mining will be at the rate of 80,000 tons per month, that all labor and supplies are paid for in cash, and that the company has contracts for delivery of 60,000 tons per month, payable the following month. a. Prepare an estimate of monthly cash balances, January 31 to June 30. b. What are the profits for the six months? Comment.^ — In this problem on cash balances it will be necessary to assume that there are no bad accounts among the receivables and that all accounts are paid during the month in which they fall due. The profits will be found by the balance sheet method. PROBLEM 87 (Illinois, May, 1913) The accounting firm of C, P & A employ you as a senior accountant and for your initial job requires you to draft a Bills Receivable Account and a Bills Payable Account from memoranda taken from the diary of a client, who is an expert broker, as follows : 1912 Jan. 2. Took G. D.'s Note, 90 Days' Settlement of Account $ 600.00 " 3. Accepted M. O.'s 30-day Draft, Documents Attached for Goods Shipped Me from Paris 1,945.00 " 4. Received from Bank of Havanna 60-day Draft, for Proceeds of Ac- counts Collected by Them 425.00 " 24. Received from B. A. Note at 30 Days on Settlement of Account 650.00 " 25. Drew on C. M. 15 Days from Date for Account of Goods Shipped to London 350.00 " 26. Accepted L. H.'s Draft, 60 Days Sight 750.00 " 28. Received C. M.'s Draft, Accepted January 26th 350.00 " 29. Discounted G. D.'s Note at Bank, Received 591.25 Feb. 5. Paid M. O. Draft " 10. Discounted Bank of Havana Draft, Received 41 1.65 " 11. C. M. Draft Returned " 26. B. A. Note Paid. Draft the said accounts. Comment. — The dates of entries are important. How are discounted notes to be recorded? PROBLEM 88 (Illinois, 1907) In 1895 the Chicago Manufacturing Company purchase real estate costing $12,000.00, erect a building for $30,000.00, and purchase machinery costing $25,000.00. No further purchases are made, and on January 1, 1905, a balance sheet of the company discloses the following condition : 84 Real Estate $ 12,000.00 Buildings 30,000.00 Machinery 25,000.00 Merchandise Inventory 60,000.00 Accounts Receivable 75,000.00 Cash 10,000.00 $212,000.00 Liabilities Capital Stock $150,000.00 Surplus 23,500.00 Reserve for Deprecfation: On Buildings 7,500.00 On Machinery 15,000.00 Accounts Payable 16,000.00 $212,000.00 On May 16, 1905, their factory is burned down, a total loss ensuing. Their books of account as on that date show the following ledger balances : . Debit Balances Real Estate $ 12,000.00 Buildings 30,000.00 Machinery 25,000.00 Merchandise Inventory, January 1, 1905 60,000.00 Purchases 150,000.00 Labor and Other Factroy Cost 60,000.00 General Expenses 45,000.00 Accounts Receivable 73,000.00 Cash 32,000.00 $487,000.00 Credit Balances Capital Stock $150,000.00 Surplus 23,500.00 Reserve for Depreciation: On Buildings 7,500.00 On Machinery 15,000.00 Sales (Net) 280,000.00 Accounts Payable 11,000.00 $487,000.00 For the years 1902 and 1904 their books showed a gross profit on manu- facturing averaging 25 per cent, of the net sales. The company, however, only succeeds in obtaining $55,000.00 from the first insurance companies for merchandise lost. In respect to the buildings and machinery the companies acknowledge that the cost of replacing same would be 10 per cent, higher in 1905 than in 1895, and after taking this fact into consideration and determining what they con- sider fair depreciation they settle these two items as follows : Building $28,- 000.00, machinery $17,500.00. The company erects a new building costing $40,000.00 and purchases machinery costing $35,000.00, and finding that the value of its real estate is now $24,000.00 it makes book entry to so record it. Prepare cash book and iournal entries to properly record all of the above transactions, losses or gains due to fire, actual trading profit from January 1, 1905, to date of fire, and balan-f^e sheet after making all above entries. For purposes of this question assume no accounts receivable collected or accounts payable paid. Comment. — The student is advised to use a Fire Loss Adjustment account. Should the real estate be written up to $24,000? PROBLEM 89 (Florida, 1915) The store and stock of the Diamond Jewelry Company was destroyed by fire on November 1. The safe was opened and books were recovered intact. The trial balance taken off was as follows : Cash in Bank $ 1,000.00 Accounts Receivable 10,000.00 Accounts Payable • $ 30,000.00 Merchandise Purchases 90,000.00 Furniture and Fixtures 7,500.00 Sales 110,000.00 General Expense 18,000.00 Insurance 1,500.00 Salaries 5,500.00 Real Estate— Store Lot ' 50,000.00 Store Building 35.000.00 CapHal Stock 50,000.00 Surplus 28.500.00 $218,500.00 $218,500.00 The a\ erag^e gross profit as shown by the books and accepted by the insur- ance company was 40 per cent, of sales. The insurance adjuster agreed to pay 75 per cent, of the book value of furniture and fixtures, 90 per cent, of the book value of the store building, and the entire loss on merchandise stock. Draft journal entries to include the account against the insurance com- panies, and construct final proof and loss account and balance sheet. Comment. — This is another insurance problem in which the j^ross profit method of arriving at values of inventories should be used. PROBLEM 90 The .A Company was totally destroyed by fire on July 31, but the books of the company were saved. From them the following facts were ascertained regarding the transactions since the last closing: Sales .. . $ 51,000 Merchandise Purchase 125,000 Inventory of Merchandise, Dec. 31 85,000 Among the miscellaneous records saved were foiuid memorannums of three transactions not yet entered on the books . (1) A memorandum of a gross profit of $12,375.00 on a sale made on July 30. The amount of the sale could not be discovered, but it was dis- covered by the auditor that the goods in this transaction had been marked 40% above cost price and that a discount of 5% had been allowed for cash, which discount had been deducted before the "g-ross'' profit had been obtained. (2) A memorandum of a sale to Jones and Company, amounting to $25,2(30.00, half of which had been shipped and half of which had remained in the storehouse at the time of the fire. These goods had been marked up 50% for the purpose of the sale. (3) A memorandum of a shipment of goods which the company had expected to sell for $16,600.00. Three-fifths of these goods had been received, 86 and two-fifths were still in transit. The above expected selling price had been obtained by inarking up the cost price 33^5%- By an examination of the past records of the business the auditor deter- mined that the gross profit in past years has averaged 50%. (a) Proceed to determine the total fire loss. (b) Determine the rate of gross profit for the company after the above transactions have been adjusted. PROBLEM 91 (Adapted from Institute, May, 1920) The books of a concern recently burned out contained evidence of pur- chases, including inventory, of $200,000 and sales of $40,800 since the last closing. Upon investigation, however, the auditor ascertained that a sale of merchandise had been made just prior to the fire, and not recorded in the books at an advance of two-fifths (%) over cost less a 10% cash discount, on which the profit was $31,928.00. The past history of the business indicated an average gross profit of 50% on cost of goods sold. (a) What amount should be claimed as fire loss? (b) What rate of gross profit do the transactions finally yield? PROBLEM 92 (Wisconsin, November, 1919) On October 31, 1919, the store of the Good Merchandise Company was destroyed by fire. It was a total loss. The books and records were found to be complete and the trial balance built up as of October 31 was as follows: Accounts Receivable $ 7,000.00 Accounts Payable $ 5,000.00 Cash 2,000.00 Mdse. Inventory, January 1, 1919 15,000.00 Mdse. Purchases 85,000.00 Real Estate 3.000.00 Dividends Paid 4.000.00 Buildings and Fixtures ' 1«.(XK).00 Furniture and Furnishings 5,000.00 Reserve for Depreciation. Bldgs. and Fix 3,000.00 Reserve for Depreciation, Furn. and Fnsh 300.00 Unexpired Insurance 2,500.00 Mdse. Sales 99,000.00 Miscellaneous Income 1,500.00 Clerks' Salaries 5,000.00 Light, Heat and Power 1,000.00 Advertising 2,000.00 Office Salaries 2,500.00 Officers' Salaries 5,000.00 Postage 700.00 Treasurv Stock 10,000.00 Taxes 2,500.00 Telephone and Telegrams 150.00 Sundry General Expense '. 500.00 Capital Stock 50,000.00 . Surplus 12,050.00 $170,850.00 $170,850.00 An average gross profit of 33V3 per cent, was agreed upon by all partie.'^ concerned. 87 Stock, buildings, fixtures and furnishings were insured under the 80 per cent, clause, the building, etc., for $15,000.00 and the stock for $32,000.00. Set- tlement is made on the basis of these facts. You are asked to give : ■ a. The profit or loss due to fire. b. The operating statement for the period ending October 31. Comment. — The student is to assume that the $15,000, insurance mentioned in the next to the last paragraph applied to both buildings and fixtures and furniture and furnishings. The gross profit method of arriving at the value of the inventory must be used. Does the co-insurance clause apply? PROBLEM 93 The A Company operates four camps and has its property insured under the average clause and also under the 80 per cent, co-insurance clause. The amount of insurance carried is $13,125.00, and a fire loss of $415.69 has oc- curred in Camp No. 1. The sound property valuations are as follows ; Camp No. 1 $ 3,022.99 Camp No. 2 10,708.61 Camp No. 3 9,953.90 Camp No. 4 14,879.05 Total • $38,564.55 The insurance policies carried in the several companies are as follows : Company A $ 1 ,625.00 B 2,500.00 C 5,000.00 D 2,500.00 E 1,500.00 $13,125.00 You are asked to determine the portion of the loss which the assured con- tributes and to apportion the claim among the five companies. Comment. — In this fire loss problem are found both the average clause and the 80% co-insurance clause. The average applies to the total insurance carried and must be prorated over the camps before the co-insurance clause is applied. PROBLEM 94 (New York, June, 1914) John Adams lost his stock of merchandise May 1. 1914, through a flood in the Mississippi River. Adams applied to the local Mutual Flood Insurance Society for reimburse- ments, claiming a loss of $5,886.35 on merchandise stock. From the following data ascertain his merchandise inventorv : Net profits May 1, 1914, $4,452.91 ; 'drawings, $1,598.00; legal expenses, $17.50; interest debit, $313.00; advertising, $14.00; commissions debit, $961.01 ; insurance, $196.23; sales, $81,688.04; inventory December. 1911. $1,568.62; purchases. $55,415.82 ; labor, productive, $19,499..S8 ; telephone, $416.06; sundry factory expenses, $3,201.92; repairs, $16.00; surplus May 1, 1914, $2,854.91. Comment. — This problem involves the gross profit method of determining the value of the inventory. However, the gross profit must be built up from the facts given starting with net profit. For purposes of this problem treat insurance as a manu- facturing expense. 68 PROBLEM 95 (Adapted from English Final Examination, May, 1912) The Alpha Manufacturing Company had an authorized capital of $100.- 000.00, divided into 600 "A" shares and 400 "B" shares of $100.00 each, of which 500 "A" and 250 "B" shares were issued and fully paid up. The com- pany's articles provided that the profits should be divided as follows, so far as the directors might decide : 1. In payment of a cumulative dividend of 10 per cent, on the "A" and 20 per cent, on the "B" shares. 2. In payment of a non-cumulative dividend of 15 per cent, on the "B" shares. 3. In payment of a non-cumulative dividend of lYz per cent, on the "A" shares. 4. In payment of a further dividend pro rata, but so that the dividend on each "B" share should be twice that on each "A" share. The profits for the year 1910 amounted to $45,000.00, and there was an un- distributed balance from 1909 of $17,500.00. The directors decided to pay the dividends under 1, 2 and 3 above, and a further dividend under 4 of 7^ per cent, on the "A" and 15 per cent, on the "B" shares ; and to place one-half of the balance to Reserve for Contingencies and carry the other half forward to next year. PROBLEM 96 (Wisconsin, 1918) The stockholders of the Farmers' Co-operative Store share the store's earnings in proportion to purchases made during the year, and "dividends" may be withdrawn in trade or in cash. The fiscal year corresponds to the calendar year, but the dividend year runs from March 15 to March 14. a. The following facts are given you with the request that you ascertain the status of the Surplus Account on December 31, 1917. and indicate the dis- position of any "dividends" which may have been paid out in excess of avail- able surplus : The balance of the Reserve for "Dividends" Account on December 31, 1916, was $2,540.15. This represented the "dividends" which might be with- drawn in cash during the period January 1, 1917, to March 15, 1917. The "dividends" withdrawn in cash during the year 1917 amount to $1,015.37, and those withdrawn in trade during 1917 amount to $24,786.29. In order to reduce trade "dividends" to a cash basis, 20 per cent, is deducted from the selling price of goods so withdrawn and charged back against the sales. The balance of surplus available for dividends on December 31, 1916, was $20,710.43. An examination of the accounts show that "dividends" to the amount of $2,496.63 (cash basis) may be withdrawn between January 1, 1918, and March 14, 1918. During the period January 1. 1917, to March 14, 1917, "dividends" were withdrawn to the amount of $1,720.15, cash basis. b. The sales to members for the year 1917 are $162,280.00 and the net profits are $20,285.00. In your judgment what "dividend" should be declared in trade and in cash for the year 1918? 89 c. Briefly criticise the plan followed by this company in distributing the earnings to the stockholders. Comment. — In the solution of this problem dealing with dividends of cooperative stores the student is to assume that any dividends not drawn by the end of the dividend year are forfeited. PROBLEM 97 (Iowa, 1918) The Jones Company, Incorporated, acquired the business from S. R. Jones, who took bonds amounting to $50,000.00 in part payment. These mature in twenty years, and can be cancelled by payment after fifteen years, and bear interest at the rate of 5 per cent, per annum. A sinking fund is to be estab- lished for their redemption by payment to the Bankers Trust Co., Trustees, of $2,500.00 a year, the interest on this fund to accumulate to help in retiring the bonds before twenty years. November 30, 1918, was the end of the first fiscal year and the trial bal- ance of that date is as follows: Real Estate $ 30,000.00 Buildings 30,000.00 Machinery 43,150.00 Accounts Receivable 4,260.00 Cash 12,759.00 Merchandise 46,540.00 Labor 20,000.00 Office Expense 1,950.00 Miscellaneous Investments 440.00 Bond Sinking Fund 2,500.00 Interest Paid on Bonds 3,000.00 Capital Stock $ 50,000.00 Bonds Payable 50,000.00 Net Sales 68,090.00 Notes Payable 5,000.00 Accounts Payable 21,450.00 Miscellaneous Income 60.00 $194,600.00 $194,600.00 Inventory of merchandise is $28,500.00. Under date of May 30, 1918, the company paid the Bankers Trust Co. $2,500.00. Under date of November 30, 1918, the Bankers Trust Co. reported that they had received the $2,500.00; that on June 15. 1918, they purchased two $1,000.00 bonds at par and accrued interest. Rate of interest 5 per cent., payable in November and May each year, that they collected $50.00 interest on November 1, 1918, and that they have allowed 4 per cent, interest per annum, computed semi-annually, on the lowest amount of cash in the fund during the period. They show the cash in the fund which you are asked to compute from the above to verify the correctness of their balance. (1) Make the necessary journal entries to close the books for the fiscal year. (2) Prepare income and expense accounts for the year. (3) Construct balance sheet as of November 3. 1918. (4) Prepare statement of sinking fund in hands of Bankers Trust Co. Comment.— The Jones Company problem furnishes an exercise in computing the interest on sinking funds and accounting for the same. Annual payments into sinking funds are usually made at the end of the year. The fund is increased by interest on securities in the sinking fund as well as interest on cash not invested. As stated before, the interest earned by the. sinking fund is financial income of the corporation even though the cash has to remain in the fund. 90 PROBLEM 98 (Adapted from Illinois, May, 1916) (a) A company is formed for the purpose of acquiring certain real estate and g-radually realizing- the same. The directors request you to open the books from the following details: Authorized Capital Stock $5,000,000.00 Capital Stock Issued for Real Estate Acquired. 2,500,000.00 ' Capital Stock Issued to Promoters for Services Rendered 1,000,000.00 Appraised Value of Real Estate 7,500,000.00 6% First Mortgage Gold Bonds Issued and Fully Subscribed on Incorporation, at 80% 2,500,000.00 Promotion Expenses, etc.. Payable in Cash 100,000.00 Liabilities Assumed by Company 1,400,000.00 The client does not want your opinion as to the policy of adopting the appraised value for real estate, but you are requested to advise a sound accounting policy for the treatment of real estate sold. The following transac- tion is typical : Real estate of the appraised value of $1,000.00 is sold for $1,500.00, of which 40% is received in cash and the balance in ten notes of equal amounts, maturing semi-annually over the succeeding five years. Give entries neces- sary to record the transactions, assuming the cash was received and one note fully met, but foreclosure followed. Ignore the question of interest on the vendor's lien notes. (b) Assume that the bonds in question "a" are redeemable at par l.'^ years after issue, with an option at market price or 102 at any time thereto. A sinking fund is to be provided by depositing with the trustee for bond- holders a certain scheduled price per acre for all real estate released from the mortgage. The total scheduled price is $3,750.00. Five years after date of issue the company had sold real estate of the appraised value of $1,000,000.00, which was scheduled at $500,000.00. The fund of $500,000.00 so deposited with trustee had been drawn upon for the cancellation of bonds as follows : $200,000.00 par value at 102. $290,000.00 par value at 99. The real estate sold netted large profits, most of which had been distri- buted in dividends, after writing ofT the total discount of 20% on the bonds. State the bonds and sinking fund investment as they would appear on the financial statement. Point out in what respects, if any, you consider the directors acted unwisely, and in what respects, if any, they were more con- servative than was necessary. PROBLEM 99 (Adapted from Illinois, November, 1904) The stockholders of a company with bonds outstanding of $500,000, bear- ing interest at 5% per annum, resolve to provide for paying off the same when they fall due on December 3\. 1928, by investing $50,000 per annum and allowing the same to accumulate with interest ; this arrangement to com- mence with the financial statement for the year ending December 31, 1920. Show the Bond Redemption Fund Accounts on December 31. 1924, on the assumption that on December 31, 1920, and on the same day in each year following, the $50,000 referred to was invested in 4% Railroad Bonds at par, that the interest thereon to June 30, and December 31 in each year was received in July and January following, and was allowed to accumulate in 91 the bank until June 30 and December 31 following, when it was invested in the same class of securities at the same price in multiples of $1,000. If the bond recital had provided for the setting aside of $50,000 per year out of profits, show how the accumulation of these amounts would appear on December 31, 1928, before the redemption of the bonds. What is the final disposition of this accumulated amount? PROBLEM 100 (Wisconsin, 1916) Corporation A issues 50 bonds, par value $50,000.00, bearing 5 per cent, interest, payable annually. The bonds are numbered serially, and are to be retired in consecutive groups of ten each year. They are all sold at date of issue for an average price of $950.00. a. Submit, in the form of ledger accounts, all entries required to handle this bond issue, in what you consider the most equitable manner, from date of issue to retirement. b. Corporation B buys bonds Nos. 21 to 40, inclusive, on date of issue, at $950.00 each, and sells Nos. 21 to 30 at the end of two years for $1,000.00 each. The other ten bonds are retired when due. Submit, in the form of ledger accounts, all necessary entries in corpora- tion B's books for handling the matter in what you consider the most equitable manner. Comment. — This problem deals with discount on a serial bond issue. The problem is to be solved by pro-rating the discount. The issuing corporation pro-rates the discount on the entire issue while the pur- chaser pro-rates the discount only on the bonds purchased. It, therefore, makes con- siderable difference to the purchaser which bonds he holds. Is there a profit reaHzed on the bonds sold? PROBLEM 101 (Wisconsin, 1917) On December 15. 1914, the stockholders of the A Corporation authorized an issue of $100,000.00 ten-year 5 per cent. First Mortgage Bonds. These bonds were sold on January 1, 1915, at 95. On January 1, 1916, another duly authorized issue of $100,000.00 twenty-year 6 per cent, bonds was sold at 102. In accordance with the terms of the bond recitals the sinking fund install- ments were to be invested in outside securities, and on January 1. 1916, a portion of the pro rata installment of the first bond issue was used in pur- chasing 100 Sy2 per cent, bonds of the X Corporations, at 98. On January 1, 1917, the pro rata installments were invested as follows: Issue No. 1. 100 6^ per cent, bonds of the T government at 102. Issue No. 2, SO 7 per cent, bonds of the W government at par. Draft the proper entries to record the above transactions, and show the ledger accounts and balances as of January 2, 1917. Interest calculations need not be given. Comment. — In these problems journal entries for discount and premium on bonds are to be made. The purchases of bonds for the sinking funds are to be recorded at par. Purchases of an investment bond house are not to be confused with those of brokers. 02 PROBLEM 102 (New York, January, 1914) An investment bond house purchased 10 New Jersey Traction Company first mortgage 5 per cent, bonds at 83;^^ ; 10 New Orleans Gas Light and Power Company first mortgage 5 per cent, bonds at 1.04 (accrued interest not to be considered). Prepare the necessary entries to record properly these transactions on the books of the bond house and to facilitate an audit. PROBLEM 103 (New York, June, 1915) The Smith & Jones Manufacturing Company issued $200,000.00 of first mortgage 50-year 5 per cent, sinking fund bonds, which were marketed at 98y2 and 1 per cent, commission, and expended the entire porceeds in the erec- tion of their plant. The discount and commission were charged to Unamor- tized Debt, Discount and Expense Account, to be subsequently charged to Profit and Loss, proportionately, during the life of the bonds. Five years later the company was enabled, owing to a disturbance in the financial mar- ket, to purchase $50,000.00 of said bonds for sinking fund account at 95. Pre- pare the necessary journal entries to record correctly the above transactions on the books of the company. Comment. — In this problem, the Unamortized Debt, Discount and Expense account is used as a financial income and expense account. The balance shows either a financial profit or a financial loss. PROBLEM 104 (Wisconsin, 1914 and 1915) 1. a. A corporation has sold $100,000.00 5 per cent. 20-year first mortgage bonds at a premium of $4,000.00. It also has sold $50,000.00 6 per cent. 10- year second mortgage bonds at 92. Using these facts to illustrate your state- ments, state and explain the several methods of accounting for premium and discount on bonds. b. Assuming that your employer has purchased, as an investment, both the first and second mortgage bonds described in (a), set up proper journal entries covering the purchase thereof. n. A corporation decided to issue and sell bonds to the amount of $100,- 000.00 par value. The denomination of such bonds, $1,000.00 each; term of bonds, fifteen (15) years; interest rate 5 per cent, payable semi-annually. On January 1, 1914, these bonds were sold for $105,411.33, or on a 4>4 per cent, return basis. July 1, 1914, interest was paid amounting to $2,500.00. a. What entry should the corporation have made when the bonds were sold? b. What entry should the corporation have made when it paid the $2,500.00 interest referred to above ? c. What entry should the purchaser of these bonds have made when he received the first interest payment? d. Sketch the form of a bond ledger which will provide the purchaser of these bonds with a perpetual detail record of this bond transaction. Comment. — In part I, four methods of treating bond discount and premium should be used. In answering "d", part II, columnar headings should be given. 98 PROBLEM 105 (Florida, 1915) A company purchased a piece of real estate for $100,000.00. The terms of payment agreed upon were $10,000.00 each year thereafter, without interest, until the whole $100,000.00 was paid. At the end of the fourth year, twelve months before the tifth payment was due, the company found itself possessed of considerable available cash, and decided to relieve itself of the liability specified by depositing one amount sufficient to pay the annual installments as they matured. The bank agreed to pay 5 per cent, per annum on all money deposited for that purpose. What is the single amount which the company must deposit at 5 per cent, to pay the yearly installments as they mature? Comment. — In this problem the student is to find the present worth of an annuity. Use a table or solve by simple long division. PROBLEM lOi (Kansas and Missouri, 1915) The present value of an annuity of $1.00 for four periods at 2 per cent, is $3.80772870. What is the value on January 1, 1914, of a 5 per cent, per annum bond issue of $100,000.00, bought on a 4 per cent, per annum basis (semi-annual coupons), due January 1, 1916? Prepare amortization table as follows : Date Total Interest Income Amortization Book Value Par 2V^% 2% $100,000.00 Jan. 1, 1914 Julyl, 1914 Jan. 1, 1915 Julyl, 1915 Jan. 1, 1916 Insert values under the various heads to the nearest cent. Comment. — There are three methods by which the problem may be solved. The fact that the annuity of one dollar for four periods is given is a good hint to use the information. However, the student should be able to solve the problem by two other methods. PROBLEM 107 (Michigan, December, 1915) A contractor proposes to build a bridge to Belle Isle and accept the city's 4 per cent. 20-year bonds to the amount of $2,000,000.00 in payment. He ad- vocates as a means of retiring the bonds the establishment of a toll system on foot passengers and automobiles at the respective rates of 1 and 5 cents each. Assuming the ratio of foot passenger to automobiles to be ten to one, how many of each would be necessary to pay the interest annually and create a fund which, placed at the same rate of interest, would be sufficient to retire the bonds at maturity? Note: $1.00 compounded at 4 per cent, for 20 years=2. 191 12314. Comment. — Annuities and compound interest are involved in this problem. The student may make use of the fact that the amount of an annuity equals the compound interest for the period divided by the rate per period. 94 PROBLEM 108 (Adapted from Maine, 1916) You are engaged in auditing the books of a corporation for the calendar year 1920, and find on the ledger an account with Maine Central Railroad Bonds, which was charged on April 1, 1918, with $110,072.42 as the cost of $100,000.00 first mortgage bonds, payable January 1, 1923, and bearing interest at 6%, payable January 1 and July 1 of each year. You observe that no part of the premium has been charged off, and on investigation, you find the following credits were made to "Interest on Maine Central Bonds" for the interest received on the bonds : July 10, 1918 $3,000 Jan. 8, 1919 3,000 July 9, 1919 3,000 Jan. 12, 1920 .-. . 3,000 July 10, 1920 3,000 You are informed that these bonds were purchased on a 4% semi-annual basis. Possessed of this information you are required to prepare a schedule showing the book value of the bonds on April 1, 1918 and on July 1 and January 1 of each year ; the interest received ; the income and amortization for each period on the basis of which the bonds were purchased ; the conven- tional method being used for the initial fractional period, so as to furnish necessary information for making future entries as to income and amortiza- tion. From this data you are also to submit the necessary journal entries to adjust the accounts to December 31, 1920. PROBLEM 109 The X Company is to be formed with a total capitalization of $3,300,000 for the purpose of acquiring the properties of three companies — A, B and C. You have been called upon to work out various bases of consolidation from the facts they submit to you. The average net assets and the average annual net profits of each company for the past five years are as follows : \ R C Average Net Assets $500,000 $1,000,000 $250,000 Average Net Proftts 60,000 60,000 60,000 Upon inquiry you find that the average net profit was obtained from the following average operating statement of the three companies : Sales $600,000 $750,000 $217,700 Cost of Materials Used $300,000 $330,000 $ 80,000 Productive Labor 110,000 180,000 34,900 Heat, Light and Power 5,000 6,000 3,000 Depreciation of Equipment 10,000 8,000 5.000 Repairs to Equipment 7,500 5,000 5,000 Property Taxes 2,000 2,500 1,000 Sundry Factory Expense 5,500 5,000 2,000 Total Factory Cost $440,000 $536,500 $130,900 Gross Manufacturing Profit $160,000 $213,500 $ 86,800 Selling Expenses 60,000 90,000 15,000 Trading Profit $100,000 $123,000 $ 71,800 Office Salaries $ 20,000 $ 25,000 $ 6,500 95 Office Supplies 2,000 3,000 500 Sundry Office Expense 8,000 10,000 4,800 Net Operating Profit $ 60,000 $ 60,000 $ 60,000 Interest Paid $ 5,000 $ 1,000 $ 1,000 Discount on Sales 12,000 6,000 2,000 Interest Received 500 750 1,000 Discount on Purchases 8,500 8,250 2,000 Anticipated Profits on Contracts 5,000 Profit on Sale of Stock 1,000 26,000 Net Profits $53,000 $93,000 $60,000 Comment. — It is to be assumed that profits will increase 10% under the new corporation. PROBLEM 110 Three manufacturing concerns decide to consolidate. It is agreed that average earnings in each case shall be considered the average of the last three years net operating profits. Net Operating Smith Harris Lamb Profits Company Company Company 1918 16,050 29,500 27,400 1919 29,300 18,200 27,000 1920 26,650 24,300 * *The net operating profit for this year should be determined from the fol- lowing data : Trial Balance — Lamb Company December 31, 1920 Cash $16,000 Customers' Accounts 24,000 Reserve for Bad Debts $ 2,000 Materials Inventory, Dec. 31, 1920 26,200 Land 4,000 Plant and Machinery 50,000 Reserve for Depreciation 6,000 Office Supplies Inventory 600 Creditors Accounts 12,200 Dividends Payable 200 Capital Stock 20,000 Surplus 62,100 Material Sales 60,000 Interest Received 300 Cost of Material Sales 32,000 Selling Expense 4,000 Officers' Salaries 6,000 $162,800 $162,800 Inventory December 31, 1920. Office Supplies, $200. The average net assets of the Smith Company were $400,000 and of the Harris Company were $200,000. It is agreed that the net assets of the Lamb Company on December 31, 1920, shall be taken as their average net assets. (a) From the preceding information you are to prepare schedules of capitalization at 6% on the four different bases, one on the assumption that earnings will not increase and three on the basis that earnings will increase 20 per cent. These schedules should show clearly the amount of stock each company receives. (b) Give the proper journal entry to record each of the above bases of consolidation on the books of the A Manufacturing Company, which is the new Company. Common Stock only is to be issued. 96 PROBLEM 111 (Illinois, May, 1914) Assume a scheme was on foot for the consolidation of six competitive man- ufacturing companies engaged in the same line of business, and that you were invited to formulate a scheme for the valuation of the good will and assets of the respective companies that would be fair and equitable to all parties. Outline generally the plan you would recommend, dealing specifically and separately with (a) good will ; (b) plant and equipment ; (c) inventories of raw material, work in process and finished stock, respectively ; and (d) ac- counts and bills receivable. PROBLEM 112 (Wisconsin, 1915) In a report upon a proposed amalgamation of two companies, state how you would treat the following points in arriving at the earning power of each concern. Give reasons for your treatment : (a) Anticipated profits on contracts in process. (b) Interest paid on borrowed capital. (c) Insurance of any description. (d) Wages paid general workmen. (e) Salaries paid officers and directors. (f) Depreciation of plant and equipment. (g) Bad debt reserves. (h) Repairs, renewals and replacement of plant and equipment. (i) Taxes. (j) Audit and legal fees. PROBLEM 113 (Wisconsin, 1918) The directors of the Charles Manufacturing Company decide to change their plan of capitalization by retiring their common stock and issuing pre- ferred stock and new common stock in place of it. On December 31. 1917, their books showed $1,000,000.00 common stock and $300,000.00 surplus. The new plan offered each common stockholder 1.3 shares of preferred .^tock and 1 share of new common stock for each share of old common stock, fractional shares amounting to $6,400 to be redeemable in cash. Amendments to the articles of incorporation were dulv made providing an authorized amount of $1,500,000.00 of preferred stock and $2,000,000.00 of common stock. On April 1 all exchanges had been completed, with the following exceptions: Unissued common stock. 1,000 shares: unissued preferred stock. 1,300 shares: frac- tional shares, $300.00. The par value of each kind of stock is $100.00 per share. Draft the necessary journal entry or entries to record the above changes. Comment. — Recapitalization, involving good will and fractional shares, is illustrated by this problem. If the good will account were not used what would the difference between the par value of the old stock and new stock be charged to? 97 PROBLEM 114 (Illinois, May, 1913) In making up a consolidated balance sheet of a holding or parent company and two subsidary companies, where in case of one of the subsidiary com- panies its entire capital stock has been acquired at less than par, and in the case of the other at a substantial premium, how would you deal with such discount and premium, respectively, in the consolidated balance sheet? In the event that all the stock of the subsidary companies was not owned by the parent company, how should such proportions of said stock belonging to the minority stockholders, together with the proportion of surplus apper- taining thereto, be stated in the balance sheet? PROBLEM 115 (Illinois, May, 1913) A parent company holding notes receivable from a subsidiary company to the extent of $100,000.00 indorses and discounts said notes with its bankers, thus creating a contingent liability thereunder. In preparing a consolidated balance sheet of the two companies, state how and where the liability would appear. PROBLEM 116 (New York, June, 1915) Two concerns failed, owing each other money, the amotmts of which were included in their respective Accounts Payable accounts. A summary balance sheet of A, which is accepted as correct, is as follows : Balance Sheet of Firm X Due from Y $ 10,000.00 Due to Y $ 40,000.00 All other .Xssets 180,000.00 All other Liabilities 200,000.00 Deficit 50,000.00 $240,000.00 $240,000.00 A summary balance sheet of Y, which is accepted as correct, is as follows : Balance Sheet of Firm Y Due from X $ 40,000.00 Due to X $ 10,000.00 All other Assets 160,000.00 All other Liabilities 270,000.00 Deficit 80,000.00 $280,000.00 $280,000.00 The court holds that it is unfair to other creditors to allow such firms to strike a balance between their respective accounts and then to settle with the outside creditors on a percentage basis. Accordingly, it is necessary to obtain the "ratio of solvency," i. e.. the percentage (how many cents on the dollar) each concern will be able to pay on the basis of the respective balance sheets. Determine this "ratio of solvency" for each firm. Comment, — This is a problem in ratio and proportion. Tt can be solved by algebra using two unknown quantities. 9S PROBLEM 117 (Wisconsin, 1914) The balance sheet of the Richard Rowe Manufacturing Company on April 1, 1913, was as follows: Cash $ 5,000.00 Notes Payable $ 30,000.00 Notes Receivable 20,000.00 Accounts Payable 10,000.00 Accounts Receivable 50,000.00 Mortgage on Real Estate 10,000.00 Inv. Raw Materials 40,000.00 Capital Stock 300,000.00 Inv. Jol)s in Progress 25,000.00 Surplus 5,000.00 Buildings, Plant. Machinery... 120,000.00 Real Estate Holdings 75,000.00 Good Will 20,000.00 $355,000.00 $355,000.00 April 1, 1914, the creditors forced the company into bankruptcy and you have been employed by the receiver to prepare: (a) .\ comparative .statement of the book values of the assets and liabili- ties as on April 1, of both years, showing the changes in value which led to bankruptcy. This statement to be accompanied with your comments as to changes in values. (b) A statement of affairs and deficiency account. (c) A statement as to the approximate dividends the creditors may ex- pect in settlement of their claims. You obtain the following facts from the books and other sources of infor- mation as to the condition of Richard Rowe Manufacturing Company on April 1. 1914. The capital stock has been reduced to $200,000.00. During the past year new machinery amounting to $20,000.00 was pur- chased on the installment basis, $5,000.00 having been paid on installments to date;. The accounts receivable total $60,000.00, of which $20,000.00 is in good accounts, $20,000.00 is in doubtful accounts expected to realize $10,000.00. and the remainder is considered worthless. A loan of $15,000.00 was obtained from friends by giving a mortgage on certain real estate, the book value of which is $25,000.00. Other notes payable to the amount of $25,000.00 are outstanding, $10.- 000.00 of which is fully secured by a mortgage on certain real estate, the book value of which is $15,000.00. The Notes Receivable Account stands on the books at $5,000.00. but notes receivable and not yet due to the amount of $10,000.00 have been discounted. An examination of these discounted notes shows that one of $1,000.00 will be dishonored. The $5,000.00 of notes receivable on the books will realize $1,000.00. Orders whose selling prices total $50,000.00 are on the way through the factory. The cost records show that $20,000.00 has already been spent upon such orders and it is estimated that $35,000.00 will have to be spent to com- plete them ($5,000.00 of materials on hand are included in the $35,000.0^) estimate). There is $500.00 cash on hand and on deposit. The trade accounts payable amount to $90,000.00. The inventory of raw materials is $15,000.00. Accrued wages of the past month total $500.00. Taxes amounting to $2,000.00 are unpaid. 90 The value of the buildings, plant and old machinery (book value $120,- 000.00) is appraised at $30,000.00. The market value of the unmortgaged real estate is $5,000.00. The real estate mortgaged to secure the $15,000.00 loan will only meet that claim and the remaining mortgaged real estate will bring its book value in the open market. Prepare the statements for the receiver in proper form. Comment. — A comparative balance sheet showing increases and decreases in values of accounts, is called for in this problem as well as a statement of affairs and deficiency account. The information as to values at the later date is found in the notes. PROBLEM 118 (Wisconsin, 1919) (a) State the use for which each of the following kinds of charts are best adapted in plotting business statistics : Line or curve chart Bar chart Circle chart Area chart (b) On the cross section paper given herewith, plot the following sta- tistics : 1. Productive and Non-Productive Labor: Productive Labor Non-Productive Labor 1918 1919 1918 1919 January ; $ 4,500.00 $ 8,000.00 $ 1,750.00 $ 4,000.00 February 5,000.00 10,000.00 1,800.00 5,500.00 March 4,000.00 10,500.00 1,800.00 5,500.00 2. Sales: Total Sales Sales Quota Brown Jones Brown Jones January $10,000.00 $ 7,500.00 $12,000.00 $ 7,000.00 February 12,750.00 9,000.00 13,000.00 7.500,00 March 15,000.00 8,000.00 1.3,500.00 9,000.00 (c) State any additional information necessary for proper interpretation of the charts which you have just prepared. Comment. — In connection with the chart,'; called for by this problem the student is referred to Montgomery's .\uditing, Students' Edition, pages 276-287. 100 PART II 1. (a) What is meant by a "classification of accounts"? (b) What different plans or bases are there for classifying accounts? (c) Illustrate. (d) Show by chart or outline the various divisions and subdivisions of all asset, liability, income and expenditure accounts. (e) What are the advantages obtained through numbering accounts? (f) Name and briefly describe two methods of numbering or lettering accounts. (Wisconsin, 1914.) 2. (a) Define and distinguish between operating and non-operating in- come and expenses. (b) State the several classes of non-operating income and expense and give illustrations of each. (c) Distinguish between operating expenses and maintenance ex- penses. 3. Give a typical operating statement for a small mercantile concern, using your own accounts and amounts. 4. Give the items which are to be found in the operating statement of a manufacturing concern. 5. Mention some of the points to be considered in the interpretation of the revenue account. 6. Discuss three methods of dealing with discounts on purchases and dis- counts on sales. 7. What form of the revenue account is used in the columns of news- papers and financial publications? 8. Give a revenue account for each divisional activity of a business with which you are acquainted. 9. Define and distinguish between a balance sheet, a financial statement, and a statement of assets and liabilities. 10. Name and describe the various forms of balance sheets and financial statements. 11. State the advantages and disadvantages of the working sheet. 12. What is meant by the double account form of balance sheet ? Should not the double account form of balance sheet be applied to all commercial enterprises? 13. Name two general methods of arranging the items in balance sheets. Explain when each of them should be followed. 14. What are the advantages of comparative balance sheets? 15. Build up a typical financial statement briefly explaining each of the items mentioned therein. 16. Define depreciation. 17. Is depreciation an operating charge or a division of the net profits? 18. Explain how depreciation is distinct from fluctuation, appreciation and maintenace. 101 19. Whi^ ■^kf..^'i}^c^T8X(i.\iQConsidertd in determining the rate of de- preciation ? • " 20. How should depreciation be recorded upon the books of account? 21. Explain how a Reserve for Depreciation Account and a Depreciation Fund may be set upon the books for the writing off and replacement of a given asset. Use your own figures to illustrate your answer. 22. Assume that a Reserve for Depreciation Account has been accumu- lated upon the books amounting to $1,000.00, and that a Depreciation Fund has been accumulated of a like amount, both for the purpose of writing off and replacing an asset of $1,000.00. When this asset of $1,000.00 is discarded, the scrap value is found to be $100.00 and an asset costing $1,500.00 is purchased. Give entries for these facts upon the books of account, and show exactly how the Reserve for Depreciation Account, the Depreciation Fund and the Asset Account stand when the transactions are completed. 23. The replacement value of machinery and equipment is given as $225,- 000.00 in an appraisal recently made for a company ; the sound value as $190,- 000.00. The book value of the machinery and equipment is $240,000.00, and the Reserve for Depreciation, Machinery and Equipment Account is credited with $49,000.00. (a) Give the necessary journal entry or entries which will record the proper facts upon the ledger. (b) State the practice which the company evidently has followed in recording the purchases of new equipment. (c) Outline a system for having data available in compact form rela- tive to the original cost, repair, replacement and depreciation of equipment, and state the relationship of such system to the gen- eral financial accounts. (Wisconsin, 1918.) 24. A mill sells a lot of its old machinery for $7,300.00 and credits the amount to "Repairs" Account. State (a) your opinion thereof, and (b) the reasons supporting your answer. (Massachusetts, 1911.) 25. (a) State the basis for determining the depreciation charge under each of the following methods : 1. Fixed Proportion. 2. Fixed Percentage. 3. Sum of Year Digits. 4. Composite Life. 5. Annuity. 6. Sinking Fund. (b) State whether a constant, an increasing, or a decreasing depre- ciation charge is obtained from the use of each of the six meth- ods given under (a). (Wisconsin, 1917.) 26. A water company finds it necessary to renew a line of service mains which cost $50,000.00 seven years ago. Double capacity is now advisable, for which the outlay will be $80,000.00. Depreciation at 10 per cent, per annum has been regularly charged on the first installation. Draft the necessary journal entries to meet the essential facts. (Illinois, May, 1912.) 27. Define Good Will. 28. When should Good Will be considered? 29. Discuss the points to be considered in placing a valuation upon Good Will. 102 30. Explain the meaning of the word "Purchase" as applied to Good Will. 31. Should Good Will be kept upon the ledger as a fixed account or should it be written down each year? 32. At the time of taking inventories and closing its accounts preparatory to ascertaining its financial condition, a corporation has obligations under contracts to pay for raw materials to arrive on which no payments have been made. At the time of closing the accounts the prices of the contracts are in excess of the market prices for deliveries corresponding with the contracts. State : (a) how this condition should be reported in the accounts and state- ment of financial condition, and (b) your reasons. (Massachusetts, 1911.) 33. The manager of a branch store received instructions from his head office to forward the inventory of December 31, 1917, at cost and selling prices. He asks you to prepare the statement, since past reports have been based on sales only. These prices include a profit of 20 per cent. The data with which he supplies you are as follows : Inventory, January 4, 1918, $98,000.00. Merchandise received December 31, 1917, to January 4, 1918. $1,000.00. Sales for this period, $1,200.00. 34. In examining the business to determine and show separately the profits for two years ending December 31, 1916, it is found that an item amounting to $500.00 has been omitted from the inventory of December 30. 1914, that an error has been made in the footing of the inventory of December 31, 1915, by which that inventory was overstated to the amount of $250.00. and that in pricing the inventory of December 31, 1916, an error was made by which that inventory was understated to the amount of $1,000.00. State fully the effect of these errors on the profits of each of the two years. (Louisiana, 1917.) 35. It is generally conceded that merchandise inventories should be cal- culated on "cost" prices, but in practice there are found many diflferences in the method of determining the cost price. State whether or not the following items should be regarded in arriving at this cost, giving your reason in each case : Cash Discounts. Trade Discounts. Freight Inward. Freight Outward. Rebates and premiums, such as are found in connection with the tobacco business. Draying and handling (inward). Packing and draying (outward). (Florida, 1915.) 36. (a) Upon what theory is the maxim based that inventories should be valued at cost or market value, whichever is lower at the date of the balance sheet ; and under what circumstances, if any, is it permissible to value raw materials at market prices for bal- ance sheet purposes, where said market prices are in excess of cost owing to a gradual or sudden rise in prices after the ma- terials were purchased? (b) Assuming an automobile manufacturing company made a con- tract for rubber tires at $35.00 each with the understanding that it was to receive a rebate of $5.00 a tire if the purchases exceeded 40,000 tires, and that at the end of the season when 103 the accounts were made up, say on July 31, it was found that 45,000 tires had been purchased and a claim for the rebates were thereupon made and a check in settlement was received on August 31 following. On July 31 there were 15,000 tires on hand. At what price should they be valued for inventory purposes, and how should the rebate be dealt with in the ac- counts for the year ending July 31 ? (Illinois, 1914.) 37. Define a partnership. With what phases of the partnership organiza- tion and accounts is the accountant most concerned? 38. State the accounting clauses which should be in partnership agree- ments. 39. Why is it necessary for partners to have Investment (or Capital) and Drawing (or Personal) accounts? Show the relationship which exists between them. 40. State and explain at least three methods of dividing the profits or losses of a partnership. 41. Explain why interest on investment is frequently allowed in part- nerships. 42. Show the effect of not allowing for interest on investments in part- nerships. 43. If capital investments are equal but profits and losses are divided un- equally, and if interest on investment is not allowed, which partner loses? Illustrate your answer with figures. 44. If profits are divided equally, but capital investments are unequal, and if interest on investment is not allowed, which partner loses? Illustrate your answer with figures. 45. If capital investments are equal, and profits and losses are divided equally, what is the effect of allowing for interest on investment? Illustrate your answer with figures. 46. Explain how interest on investment may be credited directly to the partners' accounts rather than be thrown into an interest account, closed into profit and loss, and then transferred to the partners' accounts. 47. Explain at least three methods of admitting a new partner. Illustrate your answer with figures. 48. When a partnership is dissolved, how are assets distributed? 49. Explain how profits or losses resulting from a partnership dissolution should be borne by several partners. 50. The following is a trial balance of the general ledger of a partnership in which the profits are shared equally at the end of the first year of its existence : Buildings and Equipment $ 6,000.00 Merchandise and Materials 7,000.00 Accounts Receivable 4,000.00 Profit and Loss Account 5,700.00 John Smith, Drawing Account 2,500.00 George Jones, Drawing Account 1,300.00 Arthur Morris, Drawing Account 2,000.00 John Smith, Capital Account $ 10,000.00 George Jones, Capital Account 8,500.00 Arthur Morris, Capital Account 6,500.00 Accounts Payable 3,500.00 104 The firm decided to sell the business out and to dissolve the partnership and procured a purchaser who offered the sum of $50,000.00 for the business, including good will, etc. The oft'er was ultimately accepted on the under- standing that the purchaser would assume all existing liabilities, which he agreed to do, and the sale was forthwith consummated. State how the proceeds of the sale should be apportioned among the part- ners, showing the amount each would receive. (Illinois, May, 1914.) 51. A corporation manufacturing explosives is compelled to pay exorbi- tant rates for a very limited amount of insurance, and in consequence was obliged to install an automatic sprinkler system at a cost of $75,000.00. This additional fire protection enabled them 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 $2,000.00. 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. (Louisi- ana, 1917.) 52. A clothing store carries fire insurance to the amount of $30,000.00 on a stock of $50,000.00. The policies contain the 80 per cent, co-insurance clause. State (a) the amount collectible if a partial loss of $15,000.00 were suffered, and (b) the amount collectible if a total loss occurred. (c) If you believe that a merchant should carry one hundred per cent, insurance protection upon his property, draft the entry or entries to record the annual insurance charge. Assume that it is only necessary for him to carry 80 per cent, in outside companies to take advantage of the co-insurance clause. (Wisconsin, 1918.) 53. A fire in a manufacturing concern resulted in a loss on machinery $5,000.00, merchandise (raw material) $10,000.00, manufactured goods $25^- 000.00, which amount of $40,000.00 was agreed on and paid by the insurance companies. Give the entries necessary to record properly the above transac- tions on the books of the concern. (New York, 1914.) 54. The Insurance Account as kept upon the books of the Good Merchan- dise Company is charged with the premiums paid on the following kinds of insurance : Fire Insurance on Buildings, Merchandise and Fixtures ; Sprinkler Leakage ; Employer's Guarantee Bond ; Safe Burglary ; Robbery and Hold Up ; Automobile Fire, Theft and Liability ; General Liability ; Ele- vator Liability ; Steam Boiler ; Tornado ; Plate Glass ; Use and Occupancy ; Insurance on Officers' Lives. You are asked to indicate the proper treatment to be given each of the above items ; i. e., indicate the name of the account or accounts to which they should be charged, give the adjusting entries, state the section of the revenue account or income statement in which each would appear, etc. (Wisconsin, November, 1919.) 55. The partnership "Black & White" has insured the lives of its partners for equal amounts. The policies are payable to the firm. Permiums have been paid for five years, (a) Show the annual entries for each of the five years. At the end of the fifth year "White" dies, (b) What would be the proper entries to make upon receipt of the amount of the policy? (Wisconsin, 1915.) 56. Should a corporation borrow money ? What percentage of the capital employed by a corporation is usually borrowed money? 105 57. Explain why a corporation should borrow money, illustrating it, using your own figures, 58. What are the three general sources from which a corporation may borrow money? Explain the types of the security given according to the sources of the funds obtained. 59. Define a mortgage bond ; a debenture bond ; an income bond ; a col- lateral trust bond. 60. The stockholders of a corporation authorize an issue of $1,0(X),CXX).00 of bonds ; $500,000.00 of these bonds, duly registered and certified by the trus- tee, were returned to the corporation and disposed of as follows : The corporation sold $200,000.00 for cash, pledged $200,000.00 as collateral security for the payment of its notes, and retained $100,000.00. How should this issue of bonds appear on the balance sheet of the cor- poration? (New York, January, 1914.) 61. What is a sinking fund? 62. Assuming that a corporation has issued $100,000.00 of ten-year first mortgage bonds, and that the trust deed provides that there shall be set aside annually an amount sufficient to redeem the bonds at maturity, give the necessary journal entries attending the issuance of the bonds, the annual en- tries, and the final entries when the bonds are redeemed. 63. (a) Compare the serial plan of bond redemption with the sinking fund method. Which is preferable and why? (b) A municipality has built a public building from the proceeds of a bond issue. Should the municipality write off depreciation on the building and at the same time also create a sinking fund? (c) State the various ways of calculating contributions to a sinking fund. (d) How may sinking funds be invested? (e) How may a sinking fund appear upon a balance sheet? (f) Discuss the disposition of a sinking fund reserve account which is no longer necessary. (g) Are sinking fund reserve appropriations a satisfactory protection to the bondholder? (Wisconsin, 1916.) 64. (a) The present tendency of industrial corporations seems to be to issue preferred stock rather than bonds. As evidence of your familiarity with this tendency, you are asked to detail the more important of typical prefer- ential and protective features of preferred stocks now being marketed. Enu- merate some of the reasons why the public would buy such preferred stock rather than bonds. (b) Compare the sinking fund provisions of typical preferred stock issues with the sinking fund provisions of typical bond issues as to entries to be made : 1. When the sinking fund is set up. 2. When the purpose of creating the sinking fund has been at- tained. 3. When any balances remain in the sinking fund or allied ac- counts. (Wisconsin, November, 1919.) 65. What is the distinction between appropriated and free surplus? 106 (:^. Is discount on bonds a capital or a revenue charge? Is premium on bonds a credit to capital or to revenue. 67. What does the Interstate Commerce Commission require in connec- tion with the recording and the financial presentation of premiums and dis- counts on bonds, and the premiums and discounts on stocks? State the theo- retic reason for the difiference, if any, in the handling of these two classes of facts. (New York, January, 1914.) 68. In auditing the books of a corporation, you discover that a portion of its capital stock has been sold at a premium and the premium utilized for the payment of dividends. (a) What criticism of this, if any, would you make in your report? (b) Had this company acquired treasury stock at par and sold it at a premium, utilizing the premium for the payment of divi- dends, would your criticism be the same? Why? (Ohio, 1918.) 69. Define amortization. State three methods of accounting for the pre- mium or discount on stocks and bonds. Which is preferable, and why ? 70. A firm purchased ten $1,000.00 bonds at 97^^, due January 1, 1915, bearing 5 per cent, interest, payable semi-annually. What procedure would you adopt to care for the discount at maturity? (New York, January, 1914.) 71. A corporation decided to issue and sell bonds to the amount of $100,- 000.00 par value. The denomination of such bonds, $1,000.00 each; terms of bonds, fifteen (15) years; interest rate 5 per cent, payable semi-annually. On January 1, 1914, these bonds were sold for $105,411.33, or on a 4^<^ per cent, return basis. July 1, 1914, interest was paid amounting to $2,500.00. (a) What entry should the corporation have made when the bonds were sold? (b) What entry should the corporation have made when it paid the $2,500.00 interest referred to above? (c) What entry should the purchaser of these bonds have made when he received the first interest payment? (d) Sketch the form of a bond ledger which will provide the pur- chaser of these bonds with a perpetual detail record of this bond transaction. (Wisconsin, 1915.) 72. Define capitalization. Th. What bases are used in determining the capitalization of a corpora- tion ? 74. Discuss in detail the earning power basis for capitalizing corpora- tions. 75. Is there a distinction between watered stock and stock covered by the earning power but not by physical assets ? 76. Discuss the subject of consolidation of corporatioas. 77. A financing corporation which had paid $450,000.00 for six patents of equal value sold one of these patents during the first year of its existence and received as the consideration for the sale 1,500 shares of preferred stock (par value $100.00) in a subsidiary company organized for the purpose of working the patent. During the second year of its life the financing corporation sold 107 the 1,500 shares of preferred stock for $100,000.00. State how you would treat the accounts in respect to these two transactions in the financing cor- poration at the end of the first and second years, respectively. (North Da- kota, 1918.) 78. In the general ledger of a corporation is a controUing account for the Accounts Receivable ; the individual accounts relating thereto being kept in an Accounts Receivable ledger. The balance of thre controlling account is $550,000.00. The total of the balances at the debit of the individual accounts is $590,000.00; the total of the balances at the credit of the individual accounts is $40,000.00. The corporation issues to banks a balance sheet showing its ac- counts receivable as $550,000.00. State (a) whether you approve of same ; (b) if you differ, what you would enter in the balance sheet ; and (c) your reasons. (Massachusetts, 1911.) 79. The amount of outstanding accounts receivable by a selling house for account of a consignor, whose account is unguaranteed, is $762,000.00; the selling house had advanced thereon to the consignor $80,000.00. The con- signor shows in his balance sheet: "Outstanding accounts receivable, $682,- 000.00," as embracing the above. State (a) your opinion of the propriety thereof, and, if you would treat items differently, (b) how and (c) why. (Massachusetts, 1911.) 80. Should a manufacturing concern charge its goods sent to branch houses : (1) At selling price, or (2) At the prevailing wholesale price of the same or similar goods in the open market, or (3) At cost? State advantages and disadvantages of each method. (Colorado, 1914.) 81. (a) Explain the treatment you would give the following in the books of account: (b) State the counterbalancing or offsetting accounts, (c) Explain how they would appear in the balance sheet : (1) Note receivable discounted. (2) Actions pending against your client. (3) Cumulative preferred dividends payable. (4) Liability as guarantor for third parties. (5) Liability as accommodation signer on note. (6) Contingent liabilities under contracts. (7) Unpaid balances on contracts not yet fulfilled. (8) Collateral in possession of your banker to secure payment of a note. (Wisconsin, 1915.) 82. You are engaged to verify the financial statement of a corporation after the books and accounts have been closed. Your investigation discloses the fact that the following items have not been provided for on the books and accounts at the closing date : 1. Unexpired insurance premiums. 2. Prepaid interest on notes payable. 3. Depreciation on buildings. 4. Excess of appraisal over book value of machinery. 5. Sinking fund reserve for payment of bonds called for by the trust deed. 6. Taxes for current year not payable until following year. 108 7 . Capital stock issued in payment of patent rights acquired. 8. Cash surrender value of life insurance. 9. Accounts payable for merchandise intransit. 10. Cash discount on customers' accounts receivable. Prepare the journal entries necessary to adjust the accounts in conformity with the above facts, using arbitrary figures and explaining the reasons for your journal entries. (Missouri, 1916.) 83. State your opinion on the use of diagrams, charts or graphs, giving at least three methods of showing diagrammatically the earnings and ex- penses of a mercantile or manufacturing concern. State how you would prepare curves showing the monthly results accom- plished, and what particular sets of figures you would use as conveying the most important information, using the following example : Gross Sales $320,000.00 per annum Cost of Goods Sold 260,000.00 " Expenses of Handling 30,000.00 " Expenses, Overhead 10,000.00 " (Florida, 1915.) 84. A manufacturer finds that during three months his goods have cost per cent, on the sale price : Raw Material 30 Wages 20 Rent, etc 05 Fuel 10 General Expenses 15 80 What should he add to his selling price to obtain the same profit if the following advances take place? Coal . SO per cent, advance Material 5 per cent, advance \^'^ages 21/2 per cent, advance (Illinois, 1909.) 85. A coal mine is operated under a twenty-year lease at a royalty of 10 cents per ton, but for which a minimum payment of $5,000.00 per annum must be made. After the third year an arrangment was effected between the lessor company and the lessee company whereby the minimum royalties were to apply, if in excess of the tonnage mined, against future operations. In the first year 25,000 tons were mined; in the second, 26,500; in the third, 24,600; in the fourth, 31,000; and in the fifth, 30,500 tons. Journalize these transac- tions and state how the respective royalties paid would aflFect the Profit and Loss. Account and balance sheet. (Washington, 1917.) 86. John Barton leases a coal mine from Thomas Sutton upon the fol- lowing terms: At a royalty of 25 cents a ton as, rental, with an annual mini- mum of $500.00 — the privilege being given to recover "dead" or "unearned" minimum rent within a period of 20 years. Draft the journal entries relative to the following output for five years: 1st year 1,000 tons 4th year 1,800 tons (strike) 2nd year 2,500 tons 5th year 3,800 tons 3rd year 4,500 tons (Illinois, 1912.) 109 87. The Good Music Company sells pianos on the installment basis. On January 2, 1914, Jones purchased a piano from the company for $375, to be paid for as follows : $25.00 down and the balance in quarterly installments of $50.00 each, bill of sale to be given on date of final payment. The piano cost the company $125.00. The four installments for 1914 were duly received, the last one having been paid on December 31st. (a) Set up the proper ledger accounts covering this sale and the pay- ments thereon. (b) Give the journal entry (at the close of the year) by which the year will be credited with its proper proportion of the profit of the transaction. (c) Sketch the ruling of a book or books which might be used to facili- tate the handling of installment sales and collections. (Wis- consin, 1915.) 88. The authorized capital stock of a corporation is $500,000.00, divided into 5,000 shares, par value $100.00. Of this amount $400,000.00 has been sub- scribed and paid for in full. The corporation purchases ten shares of a dissat- isfied stockholder for $75.00 a share, and five other stockholders each donate five shares to the company. Five shares of the purchased stock and all of the donated stock are sold for $50.00 a share. (a) Draft proper entries and show the ledger accounts and balances. (b) How would the balances of the accounts in (a) appear in a bal- ance sheet? (c) Give the entries and show the ledger accounts and balances if the capital stock were of no specified par value, but 5,000 shares had been issued at $80.00 and the other conditions re- main as stated in the first paragraph. (d) How would the balances of the accounts in (c) appear in a bal- ance sheet? (Wisconson, 1917.) 89. A corporation's profits for the year ended December 31, 1912, amount to $451,000.00. The by-laws require a reserve equal to 10 per cent, of any dividend paid to the common stockholders, and any surplus remaining after such dividend is paid is also to be applied to the reserve until such reserve ac- count amounts to $250,000.00. The reserve on December 31. 1911. was $156,- 020.00. The capital is $2,000,000.00— one-half cumulative preference 5 per cent, and one-half common, all fully paid. On December 31, 1912, the preferred dividend is two and one-half years in arrears. On December 31, 1911, Profit and Loss Account was in debit $202,- 000.00. Set out your treatment of the profit for 1912 with a few concise com- ments. (Colorado, 1914.) 90. The books of a corporation (with a capital stock of $800,000.00) at the beginning of the last fiscal year showed a surplus of $28,450.00. During your examination, immediately subsequent to the close of the fiscal year, you learn the following facts : That the net profit on goods delivered to customers during the year amounted to $115,350.00. That prior to, and at the close of the year, the company owned bona fide contracts for the delivery of goods during the next few months. That the company had purchased a sufficient quantity of merchandise in order to fill these contracts. That the company, after making due allowances for all production cost, 110 expenses incidental to the delivery of the contract goods, cost of selling, etc., had arrived at a net profit amounting to $51,120, which was carried to Profit and Loss Account. This made a total net balance of $166,470.00. That there was declared and paid a dividend of 20 per cent, (or $160,000.00) and that $6,470.00 was carried to Surplus Account. Would you consider it necessary to call particular attention to this matter in your report to the stockholders? State your reasons. (Wisconsin, 1914.) 91. A corporation has two classes of stock fully issued: $5,000,000.00 7 per cent, cumulative preferred as to dividend and assets ; 10 per cent, divi- dends are in arrears. $12,000,000.00 common, on which no dividend has been paid. The corporation proposes to retire by purchase $2,000,000.00 common. What would be the effect, if any, on the interests of the preferred stock- holders? Give reasons supporting your answer. (Massachusetts, 1911.) 92. The Jones Manufacturing Company, needing a larger building for its increasing business, finds a property desirable in every respect excepting that the building is much larger than is necessary. They lease the property at an annual rental of $18,000.00, after considering that they can probably sub- lease part of the building. Owing to the desirability of the property and other favorable conditions they execute a sub-lease for one-half of the building at an annual rental of $18,000.00. How would you treat these facts in compiling the annual income statement of the Jones Manufacturing Company. (Wis- consin, 1915.) 93. A manufacturing company offers premiums costing 75 cents each to its customers on the return of 100 of its wrappers. The company invested $5,000.00 in premiums and sold $500,000.00 units of the commodity during the year. You find that 300,000 of the wrappers have been redeemed, while it is estimated that 20 per cent, will not be presented for redemption. At the end of the year how would you treat this matter in the preparation of the revenue account and balance sheet? (Wisconsin, 1915.) ill m UNIVERSITY OF CALIFORNIA LIBRARY BERKELEY Return to desk from which borrowed. This book is DUE on the last date stamped below. FEB 4 1348 LD 21-100jn-9,'47(A5702sl6)476 •Slwell fJh, VF 02735 52330 UNIVERSITY OF CALIFORNIA UBRARV f II >! i