Digitized by the Internet Archive in 2007 with funding from lyiicrosoft Corporation http://www.archive.org/details/elementaryaccounOOwildrich Elementary Accounting Problems BY JOHN RAYMOND WILDMAN, M.C.S., C.P.A. Professor of Accounting in New York University School of Commerce^ Accounts and Finance 1914 THE WILLIAM G. HEWITT PRESS 61-67 NAVY STREET, - BROOKLYN, NEW YORK rtf Copyright, 1914 JOHN RAYMOND WILDMAN TABLE OF CONTENTS Problem No. 1. Sole proprietorship. Single entry. Profits deter- mined by asset and liability method Page 1 Pkoblsm Na 2. Sole proprietorship. Conversion from single to dou- ble entry. Profit and loss method of determining gains and losses. First step in the evolution of the statement of income and profit and loss. Introduction of the wcK-king sheet Page 8 P&OBLEM No. 3. Sole proprietorship. Second step in the evolution of the statement of income and profit and loss. Working sheet discussed. Establishing balances through complementary ac- counts. Trading and profit and loss account. Simple balance sheet Page 17 Problem No. 4. Sole proprietorship. Third and final step in evolu- tion of statement of income and profit and loss. Variation of the working sheet. Planning the accounts. Comparative statement of income and profit and loss. General balance sheet Page 29 Problem No. 5. Copartnership. Sale of share in sole proprietorship. Goodwill. Adjustments not requiring working sheet. Man- ufacturing, trading and profit and loss accounts. Balance sheet Page 38 Problem No. 6, Copartnership. Depreciation. Interest on invest- ments. Elaborate statement of income and profit and loss. Schedule showing distribution of profits. General balance sheet Page 50 Problem No. 7. Copartnership. Sale of interest in going concern. Adjustment of lease. Closing accounts of sole proprietor. Open- ing accounts of copartnership Page 59 i 325476 TABLE OF CONTENTS Problem No. 8. Copartnership. Salary, drawings and interest an capital of partners. Balance sheet. Statement of income and profit and loss. Schedule showing gross profit by classes of merchandise Page 65 Problem No. 9. Copartnership dissolution. Death of partner. Broken periods. Cost determined by gross profit method. Equal sharing of profits, irrespective of investments. Balance sheet. Statement of income and profit and loss Page 76 Problem No. 10. Copartnership liquidation. Compensation to sur- viving partners for liquidating. Goodwill valueless. Cash account. Profit and loss account. Proprietorship accounts of the part- ners Page 85 Problem No. 11. Incorporation. Financial and stock records. Formal method of setting up capital stock accounts. Opening journal entries. Skeleton ledger accounts. Corporate balance sheet. Stock book. List of stockholders Page 92 Problem No. 12. Incorporation. Taking over copartnership. Adjust- ments due to discrepancies in assets and liabilities. Organizati970.43 23 Elementary Accounting Problems The working sheet may now be prepared, the journal en- tries posted, and the adjustments and extensions made. WORKING SHEETS— BOOKS OF R. J. DIMLAWN May, 1910 Trial Adjustments Balance Profit & Debits Balance, April 30, Sheet, May 31, Loss Month of 1910 Dr. Cr. 1910 ■May, 1910 Furniture and fixtures $350.00 $350.00 Merchandise — inventory 9,745-94 r$3,920.3i $9,854.32 1,277.47 1 $*(io8.38) Cash in bank. .. 275-06 J 10,000.00 1 1^^ I 206.39 10,427.69 L 2,705.25 Petty cash 75-62 900.00 S 151.471 1 607.855 216.30 Accounts receiv- r 13.06] J 7-82 1 1 206.39 1 able 56.05 218.47 L 47.25 J Purchases 2,559-05 2,559-OS Inward freight. . 45-77 45.77 Inward cartage. J 12.00 ] 1 18.21 j 1,200.00 30.21 Automobile 1,200.00 Auto expense. . 1 So.oo ) 1 22.84 j 72.84 Sales returns. . . ^ 164.53 ^ 164.53 Delivery ex- \ 15.00 \ 69.63 pense \ 54-63 1 Wages of sales- \ 204.50 ) 221.50 women I 17.003 Wages of janitor 40.00 40.00 Salary of book- keeper 60.00 60.00 Office expence.. 18.50 18.50 Commissions to \ 144.85 \ \ 20.173 165.02 saleswomen.. . Drawings, R. J. Dimlawn 75.00 t75.oo Rent 75.00 14.72 150.25 75-00 14.72 150.25 Light Advertising Stationery and printing 12.50 12.50 Packing supplies 65.00 65.00 Insurance paid in advance. . . . 60.00 5.00 55.00 Sales allowances 7.82 7.82 * Credit. tOffset to proprietorship. 24 Problem Number Three Trial Adjustments Balance Profit & Debits Balance, April 30, Sheet, May 31, Loss Month of 1910 Dr. Cr. 1910 May, 1910 Interest on notes payable. 44-37 44.37 Provision for depr. of furni- ture and fix- tures 10.00 10.00 Provision for depr. auto. . . . 20.00 20.00 Mdse — inven- tory (new) . . . 9,854-32 9,854.32 Accounts receiv- able (new) 47.25 47-25 Insurance 500 S-00 Profit and loss.. 702.58 702.58 Total $10,502.67 $14,503.12 $4,373-07 Credits Accounts pay- able $8,784.10 225.64] ■ 1,970.43 \ [10,427.69] 3,839.66 R. J. Dimlawn, proprietor . . . 1,718.57 702.58 $2,421.15 Sales 4,138.78 $4,138.78 Trade discount on purchases. 88.15 88.15 Purchase allow- ances 137-49 137.49 Notes payable. . 10,000.00 10,000.00 Accounts pay- able (new) 1,970.43 1,970.43 Int. accrued on notes pa3^able. 44-37 44-37 Int. on bank balance 8.65 8.65 Wages accrued. 17-00 17.00 Commissions ac- crued 20.17 20.17 Reserve for depr. F. & F. 10.00 10.00 Reserve for depr. auto 20.00 20.00 Total $10,502.67 $43,688.44 $43,668.44 $14,503.12 $4,373-07 The above working sheet does not shov^ a scientific arrange- ment of the accounts for the reason that it has been built up from the journal entries. With one or two exceptions it has been constructed in the exact order in which the entries appear. A scientific arrangement would show the accounts in the order 25 Elementary Accounting Problems in which they would appear in the respective statements. The working sheet herewith has the advantage from the point of view of instruction of affording an opportunity for study in arranging the accounts in the statements. The accounts are classified with regard to the statements. They are proven mathematically and lead to the preparation of the trading and profit and loss account and the balance sheet which are now presented. R. J. DIMLAWN Trading and Profit and Loss Account for the Month Ended May 31, 1910 DR. Trading Section CR. Inventory, Apr. 30, 1910. $9,745-94 Purchase 2,559.05 Inward freight 4577 Inward cartage 30.21 Sales returns 164.53 Sales allowances 7-82 Delivery expense 69.63 Wages of saleswomen 221.50 Commissions to sales- women 165.02 Advertising 150.25 Packing supplies 65.00 Balance carried down, being gross profit 994.02 $14,218.74 Sales $4,138.78 Trade discount on pur- chases 88.15 Purchase allowances 137.49 Inventory, May 31, 1910.. 9,854.32 $14,218.74 DR. Profit and Loss Section CR. Salary of bookkeeper. . . . $60.00 Office expense 18.50 Stationery and printing. . 12.50 Rent 7500 Light 1472 Wages of janitor 40.00 Insurance S.oo Interest on notes payable 44-37 Provision for depr. F. & F. 10.00 Provision for depr. auto. 20.00 Balance carried down, being net profit 702.58 $1,002.67 Balance brought down, being gross profit $994.02 Interest on bank balance. 8.65 $1,002.67 26 DR. Problem Number Three Proprietorship CR. Drawings $75-00 Balance, proprieorship, May 31, 1910 2,346.15 $2,421.15 Balance brought down, being net profit $702.58 Balance, proprietorship, April 30, 1910 1,718.57 $2,421.15 R. J. DIMLAWN Balance Sheet, May 31, 1910 Assets Insurance paid in advance 5S.oo Automobile 1,200.00 Merchandise — inventory.. 9,854.32 Cash 2,921.5s Accounts receivable 47-25 Insurance par in advance SS-OO Total assets $14,428.12 Liabilities and Capital Notes payable $10,000.00 Accounts payable 1,970.43 Wages accrued 17.00 Commissions accrued 20.17 Interest accrued on notes payable 44.37 Reserves : For depr. of fur- niture and fix- tures $10.00 For depr. of auto 20.00 30.00 Proprietorship $2,346.15 Total liabilities and capital $14,428.12 27 Elementary Accounting Problems Problem No. 3A (Practice) The following is a trial balance of the general ledger of Peter Millard for the year ended December 31, 191 1, before closing. Debits Land and buildings Furniture and fixtures.. Cash $80,000.00 1,500.00 2,465.00 Accounts receivable Notes receivable Mdse — inventory, Jan. i, IQII 12,000.00 5,000.00 18,000.00 Purchases 20,000.00 Sales returns . . . Salesmen's commissions Advertising Heat and light 100.00 2,500.00 1,000.00 50.00 75.00 25.00 2,500.00 144.00 1,350.00 1500 Office salaries Office expenses Salary— Peter Millard. . Insurance Taxes Interest on notes pay- able Credits Capital $106,329.00 Accounts payable 7,500.00 Notes payable 3,000.00 Reserve for deprecia- tion: Buildings 2,000.00 Furniture and fixtures 7500 Drawing account, P. Millard 50.00 Sales 25,000.00 Trade discount on pur- chases 500.00 Interest on notes receiv- able 250.00 Interest on bank balance 20.00 Rent — income 2,000.00 Total $146,724.00 Total $146,724.00 The inventory of merchandise at December 31, 191 1, was val- ued at $22,475. The insurance unexpired was $44. There were invoices for purchases amounting to $350 not on the books although the goods were received prior to December 31st. The light bill for December amounting to $12 is not included in the above. There is also an item of $10 for interest on a cus- tomer's account to be considered. Prepare : (a) Trading and profit and loss account for the year ended December 31, 191 1. (b) Balance sheet — Decmber 31, 191 1. 28 Problem Number Four PROBLEM No. 4 Demonstration The objection on the part of the business man to the trading and profit and loss account is that he does not understand it. The word "account" is used here in its full significance. Any- thing resembling an account, with balances carried down from one side to another, suggests "bookkeeping" to the business man. He insists that he does not understand bookkeeping; therefore, he does not understand a statement in the account form. There is another objection, which, however, the business man seldom discovers for himself, and that is, that the account form of statement does not permit of comparison. Comparatively few business men realize that the first step towards comprehensive financial statements upon which to base administrative judgment is the comparison of one period with a preceding one. Grouping items of income or expense around the business factors and arranging these factors so as to display the results of operations is the object of the ideal profit and loss statement. To do this with the trading and profit and loss account would require so many sections as to make it almost impracticable. Such an account would also contain much useless and confusing balancing and carrying down. The statement of income and profit and loss has three distinct advantages. First, it is understood by the layman. He under- stands it because he would determine his profit that way if he were doing it himself. Second, it permits of the comprehensive grouping of items without the useless bookkeeping technicalities. Third, it facilitates comparison. The facts which it sets forth are the same as those shown in a trading and profit and loss account. The manner of presen- tation tends however to convey a clearer impression of the situation. The form is known as a statement in "report" form. It is also called the "running" form. In connection with the accounts of R. J. Dimlawn as set forth in problem three it will be remembered that the results of operations for the month of May were embodied in a trading and profit and loss account. 29 Elementary Accounting Problems The profit for the month exclusive of Mr. Dimlawn^s draw- ings of $75. was $702.58. The proprietor's account, after the profit had been added and the drawings charged, showed a bal- ance of $2,346.15. During the month of June there was not much variation in the transactions except that Dimlawn sold a small bill of goods to a dealer in an outlying district for which he took the party's note in the amount of $384.24. The note was dated June 1 1, 1910, and bore interest at the rate of 6% per annum. A trial balance of the ledger before closing on June 30, 1910, included the following items : furniture and fixtures, $350 ; notes payable, $10,000; sales returns, $29.99; advertising, $500; mer- chandise inventory, $9,854.32; wages accrued, $14.50; accounts payable, $1,845.33; cash, $2,600.06; auto expense, $76.29; wages of saleswomen, $218.75; wages of janitor, $40; proprietorship, $2,346.15; office expense, $23.75; sales allowances, $17.25; auto- mobile, $1,200; accounts receivable, $82.43; inward freight, $71.29; rent, $75; sales, $5,319.86; insurance (expense), $5; trade discount on purchases, $187.94; commissions to sales- woman, $185.47; interest on bank balance, $18.75; purchases, $3,758.92; commissions accrued, $13.25; notes receivable, $384.24 ; interest accrued on notes payable, $93.67 ; provision for depreciation of furniture and fixtures, $10; purchase allowances, $26.50; provision for depreciation of auto, $20; purchase re- turns, $12.72; interest on notes receivable, $1.36; reserve for depreciation of furniture and fixtures, $20 ; insurance unexpired, $50 ; packing supplies, $98.75 ; accrued interest on notes receiv- able, $1.36; salary of bookkeeper, $60; reserve for depreciation of auto, $40; stationery and printing, $65; light, $12.86; interest on notes payable, $49.30; drawings, $100. The inventories June 30, 1910, were as follows : merchandise, $10,463.58; gasolene, $5.40; packing supplies, $25; stationery and printing, $40; advertising paid in advance, $300; postage (charged to office expense), $2.50. Auto expense is to be dis- tributed, 75% to inward cartage, 25% to delivery expense. There has been an error of $1.25 made in accruing the wages of saleswomen. The error understating the wages accrued was discovered after the trial balance was taken off. There is also an item of $3.47 in the accounts receivable which was offset 30 Problem Number Four against an account payable in settlement. This is to be taken into consideration in solving the problem. From the foregoing, together with the trading and profit and loss account in problem three prepare : (a) A working sheet, in which attention is given to the planning of the accounts, so as to facilitate the preparation of the financial statements. (b) A balance sheet — June 30, 19 10. (c) A statement of income and profit and loss for the months of June and May, 1910, respectively. SOLUTION TO PROBLEM No. 4 . R. J. DiMLAWN Working Sheet — ^June, 1910 Debits Trial Balance June 30, 1910, Before Closing Adjustments Balance Sheet, June 30, 1910 Income and Profit Dr. Cr. Loss Items Furniture and Fix- tures $350.00 1,200.00 9,854.32 2,600.06 82.43 384.24 1.36 50.00 76.29 3,758.92 71.29 $350.00 1,200.00 Automobile Merchandise — Inven- tory Cash $10,463.58 (*$6o9.26) 2,600.06 78.96 384.24 1.36 50.00 Accounts Receivable. 3.47 Notes Receivable.... Accrued Interest on Notes Receivable. . Insurance Unexpired. Auto Expense Purchases ( 70.89 ( 5-40 3,758.92 71.29 53.17 29.99 17.25 17.72 220.00 Inward Freight Inward Cartage 53.17 Sales Returns 29.99 17.25 **'*2i875 185.47 500.00 98.75 60.00 23-75 65.00 75.00 12.86 40.00 5.00 Sales Allowances.. .. . Delivery Expense. .. . Wages of Saleswomen Commissions to Saleswomen 17.72 1.25 185.47 200 00 Advertising 300.00 25.00 Packing Supplies Salary of Bookkeeper Office Expense Stationery & Printing Rent 73.75 60.00 2.50 40.00 21.25 25.00 75.00 1286 Light Wages of Janitor Insurance (expense). 40.00 5.00 ' 'Indicates a credit item. 31 Elementary Accounting Problems Working Sheet— Cow/mM^cf. Debits Trial Balance June 30, 1910, Before Closing Adjustments Balance Sheet, June 30, 1910 Income and Profit Dr. Cr. Loss Items Interest on Notes Payable 49-30 10.00 20.00 100.00 49.30 10.00 Provision for Depr. R & F Provision for Depr. Auto 20 00 Drawings ". fioo.oo $10,463.58 5-40 25.00 40.00 300.00 2.50 New Accounts Merchandise — Inven- tory (new) $10,463.58 540 25.00 40.00 300.00 2 en Gasolene — Inventory. Packing Supplies — Inventory Stationery & Printing — Inventory Advertising Paid in Advance Postage — Inventory. . ! "^ Total $19,940.03 S^TO.QOR 62 Jl^TO OTO 8/1 $15,601.10 $4,336.71 ^ ^ -r tOff set to proprietorship. Credits Trial Balance June 30, 1910, Before Closing Adjustments Balance Sheet, June 30, 1910 Income and Profit Dr. Cr. Loss Items Wages Accrued $14-50 13-25 1,845-33 10,000.00 93-67 20.00 40.00 2,346-15 5,319-86 187.94 26.50 12.72 18.75 1.36 $1.25 $15-75 13-25 1,841-86 10,000.00 93-67 20.00 40.00 2,346-15 Commissions Accrued Accounts Payable.... $3.47 Notes Payable Interest Accrued on Notes Payable R e s e rve — Depr. F. & F Reserve — Depr. Auto Proprietorship Sales 5,319.86 187-94 26.50 12.72 18.75 1.36 Trade Discount on Purchases Purchase Allowances Purchase Returns... . Interest on Bank Bal- ances Interest on Notes Receivable Total $19,940.03 $3-47 $1.25 $14,370.68 $5,567.13 The working sheet above presented differs, it will be noted, from those previously shown. The variation consists in separat- 32 Problem Number Four ing it into two sections and balancing each section separately. If the totals of the adustment columns are applied to the trial balance column the result should be equaled by the total of the balance sheet column and the column containing the income and profit and loss items. When used this way the working sheet does not establish the net profit or loss nor adjust the proprietor's account. As used in the solution of this problem the first column in each section shows the trial balance taken from the general ledger before closing. To these figures are applied the closing and adjusting entries, after the application of which, the items are classified as between balance sheet and profit and loss items. The journal entries supporting the adjustment column and which by the way should always be prepared by the student and not neglected as of no consequence, are given below : Merchandise — Inventory (new) $10,463.58 Gasolene — Inventory 5.40 Packing Supplies — Inventory 25.00 Printing & Stationery — Inventory 40.00 Advertising Paid in Advance 300.00 Postage — Inventory 2.50 To Merchandise — Inventory (old) $10,463.58 Auto Expense 5.40 Packing Supplies 25.00 Printing & Stationery 40.00 Advertising 300.00 Office Expense ■, 2.50 To set up inventories of merchandise, supplies and prepaid accounts, in closing the books at June 30, 1910. Inward Cartage $53-17 Delivery Expense '^7-72 To Auto Expense 70.89 To distribute the auto expense for the month in the proportions of 75% and 25%, respectively. Wages of Saleswomen $1.25 To Wages Accrued $1.25 To correct error in above accounts. Accounts Payable. $3.47 To Accounts Receivable $347 For item in accounts receivable offset against ac- counts payable in settlement with Planning the accounts means arranging the accounts so that they will be in the order in which they appear in the statements 33 Elementary Accounting Problems when needed. There is no doubt about the advisabiHty of plan- ning the accounts in the ledger. To attempt to plan them in the working sheet when solving problems is undoubtedly a waste of time. The accounts should be entered on the working sheet, ordinarily, in the order that they appear in the problem. In so doing the opportunity for error is lessened. This order has the added advantage of getting all the accounts before one and adjust- ing them before having to puzzle over the arrangement. The financial statements called for by the problem appear below : R. J. DIMLAWN Balance Sheet— June 30, 1910 Assets: Furniture & Fixtures $35o.oo Automobile $1,200.00 Working & Trading As- sets: Merchandise — Inven- tory $10,463.58 Gasolene — Inventory . . 5.40 Packing Supplies — In- ventory 25.00 Stationery & Printing — Inventory 40.00 Postage 2.50 Total Working & Trading Assets $10,536.48 Current Assets: Cash in hand and on deposit $2,600.06 Accounts Receivable.. . 78.96 Notes Receivable 384.24 Accrued Interest on Notes Receivable 1.36 Total Current Assets. $3,064.62 Deferred Charges to Expense: Insurance Unexpired. . $50.00 Advertising Paid in ad- vance 300.00 Total Deferred Charges to Expense $350.00 Total Assets $15,501.10 Liabilities and Capital: Current Liabilities: Wages Accrued $1575 Commissions Accrued.. 13.25 Accounts Payable 1,841.86 Notes Payable 10,000.00 Interest Accrued on Notes Payable 93-67 Total Current Lia- bilities $11,964.53 Reserves : Depreciation : Furniture & Fixtures.. $20.oa Automobile 40.00 Total Reserves $60.00 Proprietorship $3,476.57 Total Liabilities & Capital $15,501.10 34 Problem Number Four R. J. DIMLAWN Statement of Income and Profit and Loss for the Months of June AND May, 1910, Respectively June 30, 1910 May 31, 1910 $5,319-86 29-99 $4,138-78 164.53 $5,289.87 $3,974-25 $17-25 17.72 $7.82 69.63 $34.97 $77.45 $5,254.90 $3758.92 12.72 $3,896.80 $2,559.05 $3,746.20 $26.50 187.94 $2,559.05 $137.49 88.15 $214.44 $225.64 $3,531-76 71.29 53-17 73-75 $2,333-41 45-77 30-21 65.00 $372997 609.26 $3,120.71 $2,134.19 $2,474-39 108.38 $2,366.01 $1,530-79' $220.00 185-47 200.00 12.86 $221.50 165.02 150.25 14.72 $618.33 $551.49 $1-515-86 $979.30 Gross Sales Less — Sales Returns Net Sales , Deductions from Sales : Sales Allowances , Delivery Expense , Total Deductions from Sales Income from Sales Cost of Sales : Gross Purchases Less — Purchase Returns Net Purchases Deduction from Purchases : Purchase Allowances Trade Discount on Purchases Total Deductions from Purchases Cost of Purchase Inward Freight Inward Cartage Packing Supplies Total Deduct — Increase in Inventorj'^ Total Cost of Sales Gross Profit on Sales Selling Expense : Wages of Saleswomen Commissions to Saleswomen Advertising Light Total Selling Expense Selling Profit 35 Elementary Accounting Problems June 30, 1910 May 31, 1910 Statement — Continued. Administrative Expense : Salary of Bookkeeper $60.00 21.25 25.00 40.00 $60.00 18.50 Office Expense Stationery and Printing 12. "^0 Wages of Janitor 4.0.00 Total Administrative Expense $146.25 $1,369.61 $18.75 1.36 $20.11 $I'^I,00 Net Profit on Sales — Income from Operation Income from Sources other than Operation: Interest on Bank Balance $848.30 $8.65 Interest on Notes Receivable Total Other Income $8 6=; Total Income $1,389.72 $75-00 5-00 49-30 $856.95 $71;. 00 Deductions from Income : Rent Insurance ■^.00 Interest on Notes Payable 44.^7 Total Deductions from Income $129.30 $1,260.42 $10.00 20.00 $124 ?7 Net Income — Profit and Loss $7^2 c;8 Profit and Loss Charges : Provision for Reserves for Depreciation Furniture and Fixtures $10.00 Automobile Total Profit and Loss Charges $30.00 $1,230.42 100.00 $1,130.42 2,346.15 $3,476.57 $30.00 $702.58 75.00 Profit and Loss for the period Deduct — Drawings Profit and Loss added to Proprietorship $627.58 1,718.57 Proprietorship beginning of period Proprietorship end of period $2,346.15 36 Problem Number Four Problem No. 4A (Practice) From the following transcript of accounts taken from the books of John H. Elwell prepare a statement of income and profit and loss for the year ended December 31, 191 1 : Rent-income, $2,000; interest on notes payable, $15; interest on bank balance, $20; taxes, $1,350; interest on notes receivable, $250; insurance, $144; salary, John H. Elwell, $2,500; office expenses, $25 ; trade discount on purchases, $500 ; office salaries, $75; land and buildings, $80,000; capital, $106,329; furniture and fixtures $1,500; accounts payable, $7,500; cash, $2,456; notes payable, $3,000; accounts receivable $12,000; reserve for de- preciation of buildings, $2,000; notes receivable, $5,000; merchan- dise-inventory, January 1, 191 1, $18,000; purchases, $20,000; sales returns, $100; reserve for depreciation of furniture and fixtures $75; salesmen's commissions, $2,500; advertising, $1,000; drawing account, J. H. Elwell, $50 (credit) ; heat and light, $50; sales $25,000. Inventory, December 31, 191 1, $22,475; unexpired insurance, $44; purchases not included above, $350; light omitted above, $12 ; interest on accounts receivable $10. 37 Elementary Accounting Problems PROBLEM No. 5 Demonstration- James Winston, who for several years has been engaged in the manufacture and sale of men's shirts, feels that on account of his declining years it is desirable that he should take into partner- ship with him two of his employes. The factory is located at Troy, New York, while the selling and administrative office is in New York City. The general books are kept in New York, monthly reports of operations being re- ceived from the factory. The shirt on account of a peculiar and novel arrangement of the collar band and Winston's originality in advertising has become extremely well-known and popular. It has been Winston's practice during the last few years to withdraw, as soon as the profits for the year have been deter- mined, an amount equal to the profits in excess of $150,000. The articles of copartnership provide that the new partners, namely, F. H. Northrup and T. E. Ames shall make investments of $150,000 and $100,000 respectively. Northrup is to pay in $25,000 as at the close of business on December 31, 191 1 ; while Ames is to pay in $20,000 as of the same date. The balance of each investment is to be charged with interest at the rate of 6 per cent per annum, which interest is to be credited to Winston's drawing account. It is provided in the agreement that the goodwill, estimated by Winston on the basis of excess income averaged for a period of ten years and capitalized at 6 per cent, shall be valued at $1,500,000 and shall be set up before the new partners' accounts are opened. Profits are to de determined monthly. The existing system Is to be extended so that book inventories will be possible. Profits are to be divided: Winston, one-half; Northrup, three-tenths; AmeSj one-fifth. 38 Problem Number Five A trial balance of the general ledger of James Winston on December 31, 1911, before closing, is as follows: Debits Land, buildings and equip- ment $ 750,000 Machinery and tools 275,000 Auto trucks 25,000 Furniture and fixtures .... 12,000 Securities owned 200,000 Materials and supplies, in- ventory 12/31/10 127,896 Goods in process — inven- tory 12/31/10 75,423 Finished goods — inventory 12/31/10 32,867 Cash 5^,477 Accounts receivable 163,941 Notes receivable 50,000 Insurance unexpired 598 Advertising unexpired 5,875 Gross purchases 376,825 Sales returns 2,749 Sales allowances 1,846 Trade discount on sales 7,411 Labor 293,865 Manufacturing supplies ... 1,527 Factory expense 20,902 Salaries of salesmen 25,119 Traveling expenses of salesmen 8,623 Advertising 44,725 Commissions to salesmen.. 9,462 Salaries of clerks — N. Y. office 8,728 Office expense — N. Y 1,243 Printing and stationery — N. Y 547 Telegraph and telephone — N. Y 263 Legal expense — N. Y 5,000 General expense — N. Y. . . . 7,496 Interest on b. & m. payable 15,000 Interest on notes payable.. 1,125 Cash discount on sales .... 4,749 Taxes 6,273 Insurance 6,597 Bad debts — written off 746 Total debits $2,620,898 Credits James Winston, proprietor. $ 848,654 Bond and mortgage payable 300,000 Taxes accrued 6,273 Wages accrued 173 Accounts payable 94,862 Notes payable 75,ooo Interest accrued — notes payable 1,125 Interest accrued on bond and mortgage payable .. 11,250 Reserve for depreciation of buildings and equipment, etc 302,000 Gross sales 949,979 Purchase returns 732 Purchase allowances 261 Trade discount on pur- chases 9,536 Income from securities * owned 10,000 Interest on bank balances . . 947 Rent of factory sheds 600 Interest on notes receivable 462 Cash discount on purchases 9,044 Total credits $2,620,898 39 Elementary Accounting Problems The inventories at the end of the year were: Materials and suppHes, $142,719; goods in process, $86,941; finished goods, $47,868. From the foregoing prepare : (a) Manufacturing, trading and profit and loss account for the year ended December 31, 191 1. (PI General balance sheet — December 31, 191 1, after the ad- mission of the new partners. S01.UT10N TO Problem No. 5 A working sheet is unnecessary in the solution of this problem. To use one would involve a waste of time. Two of the advan- tages of a working sheet are the insuring of accuracy in the results where adjustments are numerous and freedom from worry as to the completeness and arrangement of the accounts until the accurate results are obtained. In this case neither of these two obstacles appears. The adjustments are few and the arrange- ment is ideal. It would therefore seem preferable to express such facts as supplement the trial balance in journal entry form and take cognizance of them in preparing the required statements. Viewed with regard to their relation to the books and accounts the entries will be seen to be of two kinds: first, those which close the books of James Winston and thereby determine his profit for the year ; second, those which set up the goodwill and adjust the partners' accounts. Those in the first class have to do with the nominal accounts from which the manufacturing, trading and profit and loss account is made. The others appertain only to the real accounts and may be made after the nominal accounts have been closed. The question sometimes arises as to whether or not new books shall be opened. Nothing would seem to be gained by opening new books, 5ince the change involves only the adjustment of 40 Problem Number Five proprietorship. The assets and HabiHties will remain unchanged. The nominal accounts required in the future will be the same. Why, then, go to the trouble of opening new books on account of the change in proprietorship? The old books may have been filled up, or it may have been the practice of the bookkeeper to open new books at the beginning of each year. Such might be the reasons for so doing in this case. Surely it would not be made necessary by the admission of new partners. If new books were opened, it is probable that in accordance with the reading of the problem the entries would be made on the old books and the accounts transferred after they had been adjusted. The closing entries would require a charge to inventory (new) and a credit to inventory (old) for the three classes of inventory as follows: Materials and supplies — inventory (new) $142,719 Goods in process — inventory (new) 86,941 Finished goods — inventory (new) 47,868 To materials and supplies — inventory (old) $142,719 Goods in process — inventory (old) 86,941 Finished goods — inventory (old) 47,868 The goodwill is frequently the cause of considerable mis- understanding. The situation in this instance is precisely the same as it would have been if James Winston in walking along the street had suddenly found at his feet a package of negotiable securities for which no owner could subsequently be found and had determined to invest them in his business. No one would think of saying that when he sold an interest in his business James Winston sold nothing but the bonds. The bonds would have been but a part of the assets representing Winston's equity in the business out of which he sold a share upon which a value of $250,000 perhaps had been placed. Goodwill, granting that it was worth $1,500,000, which need not concern us for the purpose of this discussion, was not different from bonds except that the bonds were susceptible to the physical touch while goodwill was not. If it existed and was worth the value stated, it was one of the assets in which Winston's equity 41 Elementary Accounting Problems was vested and nothing more. When he sold from his equity $250,000, he did so without involving the goodwill any more than any other of the assets. The eifect of setting it up was not to enable him to realize upon it when he sold a share of his proprie- torship to his partners. Their investment from the point of view of realization was of minor importance compared to Winston's. The important feature of the copartnership was that it gave each new partner a voice in the management. Having built up the business Mr. Winston, or his heirs, is entitled to the benefits accruing from the goodwill. Placing a value upon the goodwill reduced relatively the investment of the new partners. It placed beyond dispute the value of the goodwill as among the partners in case of death or dissolution from other causes. In order to set up the goodwill the following entry might be made: 12/31/11 Goodwill $1,500,000 To James Winston, proprietor $1,500,000 To place on the books the goodwill of James iWinston, proprietor, prior to the entrance into the business of Messrs. F. H. Northrup and F. E. Ames as copartners. It seems unnecessary to frame the entry which would close out the nominal accounts on the books. It should suffice if attention is called to the fact that two entries would accomplish the closing after the inventories have been closed out. If reference is made to the trial balance it will probably be seen that the first entry would consist in charging profit and loss and crediting the ac- counts on the debit side of the trial balance, beginning with gross purchases, while the second would charge the accounts on the credit side, beginning with gross sales, and credit profit and loss. This explanation is made, of course, on the assumption that no intermediate, or group accounts, to reflect manufacturing or trad- ing are made in closing. The practice of raising group accounts on the books in closing is a subject concerning which questions are often asked. The answer seems to consist in saying that if a statement is not made 42 Problem Number Five < the books should show the intermediate steps in closing; if a statement is made from the books, it is much easier to prepare the statement from a comprehensive profit and loss account showing the details without grouping than from the intermediate accounts which are subsequently closed into profit and loss. It is probable that the statement in account form which is now known as the "manufacturing, trading and profit and loss account" came from a profit and loss account in the ledger of which it is a counterpart. The solution of this problem will perhaps be clearer if the man- ufacturing, trading and profit and loss account called for by the problem is now presented while the entries adjusting the proprie- tor's accounts are postponed until after the books have been closed. JAMES WINSTON Manufacturing, Trading and Profit and Loss Account for the year ended December 31, 191 1 Debit i/i/ii ^ Inventories : Materials and supplies. Goods in process Gross purchases Labor Manufacturing supplies . Factory expense Manufacturing section Credit 12/31/11 Purchase returns ? 73^ $ 127,896 Purchase allowances 261 75,423 Trade discount on pur- 376,825 chases 9.536 293,865 Inventories : 1,527 Materials and supplies... 142,719 20,902 Goods in process 86,941 Balance carried down, be- ing cost of goods mtgd. . . 656,249 $896,438 $896,438 43 Elementary Accounting Problems Debit Trading section Credit Balance brought down, be- Gross Sales $ 949,979 ing cost of goods mfgd. .$ 656,249 Inventory, fin. goods i/i/ii 32,867 Inventory, fin. goods 12/31/11 47,868 Sales returns 2,749 Sales allowances 1,846 Trade discount on sales . . . 7,411 Salaries of salesmen 25,119 Traveling expenses of sales- men 8,623 Advertising 44,725 Commission to salesmen. . . 9,462 Balance carried down be- ing gross profit 208,796 $997,847 $997,847 Debit Profit and loss section Credit Salaries of clerks — N. Y. office $ 8,728 Ofl&ce expense — N. Y 1,243 Printing and stationery — N. Y 547 Telegraph and telephone — N. Y 263 Legal expense — N. Y 5,000 General expense — N. Y. . . . 7,496 Interest on bond and mort- gage payable 15,000 Interest on notes payable.. 1,125 Cash discount on sales 4,749 Taxes 6,273 Insurance 6,597 Bad debts — written off.... 746 Balance carried down, be- ing net profit 172,082 Balance brought down, being gross profit $ 208,796 Income from securities owned Interest on bank balances.. Rent of factory sheds Interest on notes receivable Cash discount on purchases 10,000 947 600 9,044 $229,849 $229,849 Debit Drawings $ Proprietorship end of per- riod 998,654 Proprietorship 22,082 Credit $1,020,736 Balance brought down, be- ing net profit $ 172,082 Proprietorship beginning of period 848,654 $1,020,736 44 Problem Number Five Transfers of proprietor- Balance brought down, be- ship : ing proprietorship before To F. H. Northrup $ 150,000 adjustment $ 998,654 T.E.Ames 100,000 Goodwill 1,500,000 $250,000 Balance being *proprietor- ship after adjustment 2,248,654 $2,498,654 $2,498,654 While nothing was said in the problem to the effect that Winston would draw out $22,082 as representing profit for the year 191 1, it was stated that his established practice in the past had been to withdraw annually an amount equal to the profits in excess of $150,000. There is apparently no reason why he should not continue the practice as in the past. The statement of fact in the problem relative to the established practice constitutes what might be called a *'hint" and one on which the person attempting the solution of a problem should act. The withdrawal above referred to would have the effect of reducing cash. The transaction expressed in the form of journal entry would be as follows : James Winston proprietor $22,082 To cash ^ .$22,082 For cash withdrawn, representing profits for the year ended December 31, 191 1, in excess of $150,000. The charge might have been made to profit and loss instead of the proprietor's account if the profit for the year had not yet been transferred. It is appropriate now that entries affecting the entrance into the business of the partners should be made. Nothing was said in the problem concerning the way in which the entrance was to be effected. Possibly from the requirement as to the balance sheet the new partners are to contribute new capital to the busi- ness ; not buy a share of the old business. The manner of mak- * Proprietorship of James Winston. 45 Elementary Accounting Problems ing" the entries would depend upon whether the new partners con- tributed new capital or bought a share of Winston's interest. Were the latter the case, as apparently it seems, an entry- charging Winston's proprietorship account and crediting the pro- prietorship accounts of the new partners would suffice. The cash used in settlement, would be paid to Winston personally and would not enter into the business. As the matter appears herein, Winston allowed Messrs. Nor- thrup & Ames to come into the business, with combined cap- ital of $250,000 of which they paid him immediately $45,000. The balance of $205,000 was loaned to them by Winston. For this loan he charged them interest at 6 per cent which was credited to his drawing account. An entry expressing the facts would read as follows : James Winston, proprietorship $250,000 To F. H. Northrup, proprietorship $150,000 T. E. Ames, proprietorship 100,000 For investments of F. H. Northrup and T. E. Ames in the business of James Winston, of which Messrs. Northrup and Ames paid him in cash $25,000 and $20,000 respectively, the balance in each case bearing interest at 6% per annum chargeable to the above mentioned gentlemen and to be credited to the drawing account of Mr. James Winston. After making the adjustments in the real accounts made nec- essary by the above and previous entries the balance sheet on fol- lowing page might be prepared. No mention having been made of a new firm name, it may be assumed that the firm will trade under the name of James Winston, which in New York State is possible if certain statutes are complied with. Such law requires that there shall be filed with the clerk of the county in which the busi- ness is conducted, a certificate, setting forth the name under which the business is conducted and the true or real full name or names, of the party, or parties, conducting the business, with the cor- responding post office address, or addresses. 46 Problem Number Five JAMES WINSTON General Balance Sheet — December 31, 1911 Assets Land, buildings and equip- ment $ 750,000 Machinery and tools $ 275,000 Auto trucks $ 25,000 Furniture and fixtures $ 12,000 Securities owned $ 200,000 Working and trading assets : Materials and supplies... $ 142,719 Goods in process 86,941 Finished goods 47,868 Total working and trad- ing assets $ 277,528 Current assets : Cash $ 29,395 Accounts receivable 163,941 Notes receivable 50,000 Total current assets ...$ 243,336 Goodwill $1,500,000 Deferred charges to ex- pense : Insurance premiums un- expired $ 598 Advertising unexpired . . 5,875 $ 6,473 Total assets $3,289,337 Liabilities and capital Bond and mortgage payable $300,000 Current liabilities: Taxes accrued $ 6,273 Wages accrued 173 Accounts payable 94,862 Notes payable 75i000 Interest accrued on bond and mortgage payable. 11,250 Interest accrued on notes payable 1,125 Total current liabilities $ 188,683 Reserve for depreciation of buildings, equipment, etc. $302,000 Proprietorship : James Winston. $2,248,654 F. H. Northrup. 150,000 T. E. Ames .... 100,000 Total proprietorship . . .$2,498,654 Total liabilities and capital $3,289,337 PROBI.EM No. 5 A (Practice) The following is a trial balance, before closing, of the general ledger of Robert J. McDougall at December 31, 191 1: 47 Elementary Accounting Problems Debits Labor $ 276,838 Insurance 5.865 Commissions to salesmen.. io,i94 lyand, buildings and equip- ment 628,576 Securities owned 200,000 Auto trucks 20,000 Sales returns 2,223 Advertising 45.251 Interest on notes payable.. 799 Bad debts — written off 1,072 Insurance unexpired 628 Machinery and tools 375,ooo Cash 48,739 Trade discount on sales... 7,381 Interest on b. & m. payable 15.000 Factory expense i8,i74 Salaries of clerks — N. Y. office 11,456 Furniture and fixtures 17,000 Finished goods — inventory 12/31/10 33,693 Advertising unexpired 8,613 Goods in process — inven- tory 12/31/10 77,329 Gross purchases 393,852 Manufacturing supplies . . . i,954 Traveling expenses of sales- men 8,196 Legal expense — N. Y 3,500 Taxes 7>77Z Telegraph and telephone — N. Y 271 Salaries of salesmen 25,071 Materials and supplies in- ventory 12/31/10 125,164 Notes receivable 47,000 Sales allowances 3,078 Office expense — N. Y 3,243 Cash discount on sales 5,981 Printing and stationery — N. Y 547 Accounts receivable 166,687 General expense — N. Y. . . 4-750 Total debits ....$2,600,898 Credits Purchase allowances $ 371 Gross sales 948,215 Reserve for depreciation of buildings and equipment, , etc 274,175 Interest accrued on bond and mortgage payable... 11,250 Robert J. McDougall, pro- prietor 876,479 Income from securities owned 10,000 Cash discount on purchases 8,872 Bond and mortgage payable 300,000 Purchase returns 622 Rent of factory sheds 772 Taxes accrued 5,784 Interest accrued — notes pay- able 1,614 Accounts payable 81,112 Trade discount on pur- chases 1 1,300 Interest on bank balances.. 918 Wages accrued 202 Notes payable 68,750 Interest on note receivable 462 Total credits $2,6oo,J The inventories December 31, 191 1 were: Materials & sup- plies, $139,987; goods in process, $88,847; finished goods, $48,694. 48 Problem Number Five Prepare : (a) Manufacturing, trading & profit & loss account for the year ended December 31, 191 1. (b) General balance sheet— December 31, 1911. 49 Elementary Accounting Problems PROBLEM No. 6 Demonstration The following is a trial balance of the general ledger of James Winston, June 30, 1912, before closing: Debits Land, buildings and equip- ment $ 775,862 Machinery and tools 281,427 Auto trucks 25,000 Furniture and fixtures 12,000 Material and supplies 12/ 31/11 142,719 Goods in process 12/31/11. 86,941 Finished goods 12/31/1 1... 47,868 Cash 41,073 Accounts receivable 142,942 Notes receivable 40,000 Goodwill 1,500,000 Insurance premiums unex- pired 782 Advertising unexpired 7,496 James Winston, drawings.. 10,000 F. H. Northrup, drawings. . 3,000 T. E. Ames, drawings 3,000 Gross purchases 207,253 Sales returns 3,176 Sales allowances 941 Outward freight 4,903 Trade discount on sales 2,347 Labor 160,769 Manufacturing supplies ... 2,146 Superintendence 3,000 Heat, light and power 800 Repairs to machinery 427 Office salaries, factory 3,750 Offices expenses, factory .. 986 Miscellaneous factory ex- pense 1,207 Salaries of salesmen 15,793 Traveling expenses of sales- men 4,211 Advertising 20,960 Commissions to salesmen.. 5,355 Salaries, New York office.. 4,598 General expenses. New York 3,742 Interest on bond and mort- gage payable 9,000 Interest on notes payable.. 3,000 Cash discount on sales.... 2,389 Credits Bond and mortgage payable $ 300,000 Taxes accrued 3,379 Wages accrued 348 Accounts payable 80,157 Notes payable 50,000 Interest accrued on bond and mortgage payable . . . 9,000 Interest accrued on notes payable 3,000 Reserve for depreciation of buildings, equipment, etc. 302,000 James Winston, capital 2,046,154 F. H. Northrup, capital 150,000 T. E. Ames, capital 100,000 Gross sales 532,846 Purchase returns 427 Purchase allowances 275 Trade discount on purchases 5,682 Income from securities owned 2,500 Interest on bank balances.. 537 Rent of factory sheds 300 Interest on notes receivable 222 Cash discount on purchases 4,599 Reserve for bad debts .... 1,270 50 L Problem Number Six (Debits continued) (Credits continued) Rent, New York office 4,000 Taxes 3,379 Insurance 3,184 Provision for bad debts . . . 1,270 Total debits $3,592,696 Total credits $3,592,696 On April ist, 1912, Winston, by common consent withdrew the securities which had been carried at $200,ocx) and on which there was accured interest amounting to $2,500. On the same date Ames paid to Winston $20,000 on account of his invest- ment of $100,000. It was mutually agreed, that, beginning Janu- ary I, 1 91 2, the firm should depreciate its property on the basis of cost at the beginning of each period and make the correspond- ing charges to operations at the end of each six months. The rates agreed upon were 5% on buildings, 8% on building equip- ment, 10% on machinery and tools, 20% on auto trucks, 12% on furniture and fixtures. An analysis of the property accounts follows : Book Value Items Cost Depreciation Dec. 31, 191 1 Land $ 100,000 $100,000 Buildings 600,000 $185,000 415,000 Building equipment 50,000 10,000 40,000 Machinery and tools 275,000 95,ooo 180,000 Auto trucks 25,000 10,000 15,000 Furniture and fixtures 12,000 2,000 10,000 Total $1,062,000 $302,000 $760,000 The land, based on assessed valuations and sales of neighbor- ing parcels during the latter part of the year 191 1, was estimated as being worth $25,000 more than cost. It is to be remembered that according to the copartnership agreement, profits are to be divided, 50% to Winston, 30% to Northrup and 20% to Ames, and that interest at 6% is to be charged on the unpaid portion of the new partners' investment accounts and credited to Winston. The inventories June 30, 1912, were as follows: Materials and supplies, $164,924, goods in process, $75,826, finished goods, $63,926. From the foregoing prepare : (a) General balance sheet — June 30, 1912. 51 • Elementary Accounting Problems (b) Statement of income and profit and loss for the six months ended June 30, 1912. Solution to Problem No. 6 It will be seen from the text which follows the trial bal^ ance that certain facts must be taken into consideration before the statements can be prepared. The withdrawal of securities with the accrued interest thereon has been taken care of in the books. The entry presumably consisted in charging Winston with $202,500 and crediting se- curities owned with $200,000, while income on securities owned was credited with $2,500. The payment by Ames to Winston of $20,000 reduced the indebtedness of the former to the latter and would affect the interest. On the basis of the deficits in investments, the inter- est of the new partners, computed at 6^/0 to June 30, 191 2, would amount respectively to $3,750 and $2,100. These amounts would be the subject of an entry as follow : F. H. Northrup, drawing account $3,750.00 T. E. Ames, drawing account 2,100.00 To J. Winston, drawing account $5,850.00 For interest on deficit in investments of Northrup and Ames as follows: $150,000 $100,000 25,000 20,000 $125,000 $ 80.000 @ i^% = $1,200 .03 20,000 $3,750.00 $ 60,000 @ lJ/2% = 900 $2,100 A situation such as exists with regard to the capital accounts in this copartnership might be a source of some annoyance to the bookkeeper in computing the interest by reason of the fact that he has no record of cash payments, such as are considered above, except that furnished to him by W^inston or Ames. This annoyance might have been obviated so far as the bookkeeper is 52 Problem Number Six concerned, if in making the entries at the time of the admission of the new partners, he had charged accounts for "capital sub- scribed," somewhat after the manner in which subscribers to capital stock are charged for subscriptions, and credited the cap- ital investment accounts of the respective new partners. As cash was paid in the "capital subscribed" account would be credited and if the cash were subsequently paid to Winston, his account would of course be charged. Under such procedure the "capital subscribed" account would at all times show the amount due from the new partners, as well as payments with their dates, and in making up the balance sheet the accounts would be offset against the capital investment accounts thereby showing, with regard to the new partners, the exact amount of their respective investments. In the matter of property, it will be noted that the land had ap- preciated. Such appreciation might be treated in one of three ways : first, as an offset to the depreciation on building, etc., second, as a profit, and third, set up as a reserve. Of these ways, the first has no logical foundation, since the land is quite distinct from the buildings; the second is to be deplored for the reason that it anticipates profits ; the third is to be advocated, if any cognizance at all is to be taken of an increase in value, since if any advantage or gratification is to be derived from such a step it is equally true that no disadvantage is sustained. The depreciation is properly computed on the basis of cost. The rates given are for the year. For the six months under consideration the figures are as follows: Buildings $600,000 2^^% $15,000 Building equipment 50,000 4% 2,000 Machinery and tools 275,000 5% i3,75o Auto trucks 25,000 10% 2,500 Furniture and fixtures 12,000 6% 720 Tota $33,970 Whether the asset shall be written down or a reserve created depends upon opinion. The latter method seems preferable since the desired result of reducing the value is accomplished without interfering with the asset account which should show the cost, plus or minus actual additions or deductions, of physical assets. The entry would therefore be: 53 elementary Accounting Problems Provision for depreciation of machinery and tools $13,750.00 Provision for depreciation of buildings, equipment, etc.. 20,220.00 To reserve for depreciation of buildings and equipment, etc $33,970.00 The statements required by the problem are as follows: JAMES WINSTON Statement of Income and Profit and Loss for the six (6) months ended June 30, 1 91 2 Income : From operations: Gross sales $ 532,846 Less returns 3,176 Net sales $ 529,670 Deductions from sales : Sales allowances $ 941 Outward freight 4,903 Trade discount on sales 2,347 Total deductions ..$ 8,191 Income from sales $ 521,479 Cost of goods sold: Manufacturing cost: Gross purchases ^ .$ 207,253 Less returns ^ 427 Net purchases $ 206,826 Deductions from purchases: Allowances $ 275 Trade discounts on purchases 5,682 Total deductions $ 5,957 Cost of purchases $ 200,869 Deduct increase in inventory — materials and sup- plies 22,205 Cost of purchases consumed in manufacturing $ 178,664 Manufacturing supplies 2,146 Labor 160,769 Superintendence 3,000 Heat, light and power 800 Repairs to machinery 427 Provision for depreciation — machinery and tools.. 13,750 Office salaries — factory 3,750 Office expenses — factory 986 Miscellaneous factory expense 1,207 Total charges to manufacturing $ 365,499 Add decrease in inventory of goods in process 11,115 54 Problem Number Six Manufacturing cost $ 376,614 Deduct increase in inventory finished goods 16,058 Total cost of goods sold ^ $ 360,556 Gross profit on sales $ 160,923 Selling expense: Salaries of salesmen $ I5,793 Traveling expenses of salesmen 4,211 Commissions to salesmen 5,355 Advertising 20,960 Total selling expense ^ $ 46,319 Selling profit - - $ 114,604 Administrative expenses : Salaries, New York office $ 4,598 General expense, New York office 3,742 Total administrative expense ...^« $ 8,340 Net profit on sales — income from operation $ 106,264 From sources other than operation: Income from securities owned $ 2,500 Interest on bank balances 537 Rent of factory sheds 300 Interest on notes receivable 222 Cash discount on purchases 4,599 Total other income .$ 8,158 Deductions from income: Interest on bond and mortgage payable $ 9,000 Interest on notes payable 3,ooo Cash discount on sales 2,389 Rent, New York office 4,000 Taxes 3,379 Insurance 3,184 Total deductions from income .$ 24,952 Net income from sources other than operation 16,^94 Total income from all sources — ^profit and loss $ 89,470 Profit and loss charges: Provision for depreciation of plant and equipment $ 20,220 Provision for bad debts 1^270 Total profit and loss charges ^ $ 21,490 Profit and loss for the period „.$ 67,980 Proprietorship beginning of period, as adjusted 2,280,154 Proprietorship — ^June 30, 1912 — per schedule No. i ^$2,348,134 EXHIBIT "B" =^ 55 Elementary Accounting Problems JAMES WINSTON Schedule showing adjustment of partners' accounts F. H. T. E. Total J. Winston Northrup Ames Proprietorship— Dec. 31, 191 1- •• .$2,498,654 $2,248,654 $150,000 $100,000 Add profit, six months ended June 30, 1912 67,980 33,990 20,394 I3,596 Total $2,566,634 $2,282,644 $170,394 $113,596 Deduct withdrawals 218,500 212,500 3,000 3,000 Balance $2,348,134 $2,070,144 $167,394 $110,596 Adjustment of interest 5,850 3,750 2,100 Proprietorship— June 30, 1912... $2,348, 134 $2,075,994 $163,644 $108,496 EXHIBIT ''B"— SCHEDULE NO. i JAMES WINSTON General Balance Sheet — June 30, 1912 Assets Liabilities and Capital Land, buildings and equip ment $800,862 Machinery and tools $281,427 Auto trucks $ 25,000 Furniture and fixtures $ 12,000 Working and trading assets Materials and supplies. . .$164,924 Goods in process 75,826 Finished goods 63,926 Total working and trad- ing assets $304,676 Current assets : Cash $ 41,073 Accounts receivable 142,942 Notes receivable 40,000 Bond and mortgage payable.$300,ooo Current liabilities: Taxes accrued $ 3,379 Wages accrued 348 Accounts payable 80,157 Notes payable 50,000 Interest accrued on bond and mortgage payable.. 9,000 Interest accrued on notes payable 3,000 Total current liabilities..$i45,884 Reserves Appreciation of land $ 25,000 Depreciation buildings, equipment, etc 335,970 Bad debts 1,270 Total reserves $362,240 56 Problem Number Six Total current assets. . . .$ 224,015 Goodwill $1,500,000 Deferred charges to ex- pense : Insurance premiums un- expired ..$ Advertising unexpired... 782 7,496 Total deferred charges to expense $ 8,278 Total assets $3,156,258 Proprietorship : J. Winston $2,075,994 F. H, Northrup 163,644 T.E.Ames.... 108,496 Total proprietorship $2,348,134 Total liabilities and capital.. $3, 156,258 EXHIBIT "A" Problem No. 6- A (Practice)^ The following is a trial balance of the general ledger of Frederick H. Rowan, June 30, 1912, before closing: Debits Labor $ 136,250 Insurance 2,720 Commissions to salesmen.. 4,986 Land, buildings and equip- ment 638,576 Auto trucks 20,000 Sales returns 2,1 17 Advertising 20,162 Interest on notes payable.. 327 Bad debts— written off 1,000 Insurance unexpired 428 Machinery and tools 395,ooo Cash 45,247 Trade discount on sales.... 4,927 Outward freight 3,159 Interest on b. & m. payable 7,500 Factory expense 9,276 Manufacturing supplies 784 Salaries of clerks — N. Y... 5,432 Furniture and fixtures 17,000 Finished goods — inventory 12/31/11 48,694 Advertising unexpired 4,027 Goods in process — inven- tory 12/31/11 88,847 Gross purchases 250,862 Traveling expense — sales- men 7,877 General expense — N. Y 4,285 Taxes 3,874 Salaries pf salesmen 17,926 Credits Purchase allowances $ 251 Gross sales 637,982 Reserve for depreciation of buildings and equipment. 274,175 Interest accrued on bond and mortgage payable . . . 3,250 Frederick H. Rowan, capital 733,133 Cash discount on purchases 7,426 Bond and mortgage payable 300,000 Purchase returns 578 Rent of factory sheds 386 Taxes accrued 3,874 Interest accrued on notes payable 2,572 Accounts payable 87,498 Trade discount on pur- chases 7,427 Interest on bank balances . . 487 Wages accrued 375 Notes payable 65,000 Interest on notes receiv- able 241 57 Elementary Accounting Problems {Debits continued) {Credits continued"^ Materials and supplies, in- ventory 12/31/11 139,987 Notes receivable 45,000 Sales allowances 2,544 Office expense — N. Y 1,621 Cash discount on sales 3,988 _ Accounts receivable 177,928 ~~ Superintendence 8,000 Repairs to machinery 125 Heat, light and power — fac- tory 1,425 Office salaries, factory 2,754 Total debits $2,124,655 Total credits $2,124,655 The inventories June 30, 1912, were: materials and sup- plies, $145,782; goods in process, $64,927; finished goods, $68,928. As of January i, 191 2, Rowan took into partnership, J. T. Bergen, giving him an interest of $300,000. Bergen paid in as of January ist, $200,000, which was immediately drawn out by Rowan. According to the agreement, the buildings, machinery and tools were to be depreciated at the rate of 10%' per annum beginning with the date of the copartnership. The partners were to be credited with interest on their respective investments, or charged with interest on the deficiency at the rate of 6%. No adjustments for capital, depreciation, or interest have been made on the books. Land $70,000. From the foregoing prepare : (a) General balance sheet — ^June 30, 191 2. {b) Statement of income and profit and loss for the six months ended June 30, 1912. 58 Problem Number Seven PROBLEM No. 7 Demonstration" Murray Hemmingway, a retail dealer in art objects, began business on January i, 191 1, with a cash capital of $10,000. He engaged a store on Broadway, agreeing to pay therefor $500 a month, in advance. According to the terms of the lease he was to have the rent for two months free of charge with the under- standing that the matter was to be adjusted through a rebate at the end of the year. He purchased furniture and fixtures on account for $7,000 and borrowed from a bank on January i, 191 1, $50,000, through two notes, one of $30,000 and one of $20,000, each bearing interest at 5% (360 day basis). The note for $30,000 was due May i, 191 1, and that for $20,000 was due August I, 191 1. The purchases for the period were $40,000, The items of expense which follow were all paid in cash: light, $1,200; salesmen, $3,750; porter (in store), $360; bookkeeper and clerk, $900; office expense, $125; sundry store expense, $300. Hemmingway drew in cash, as salary, $6,000. The rent was paid to A. Kupper, landlord, as per the agreement, that for the month of July being paid on June 30th. The sales for the period were $75,000. The allowances on sales were $325. The cash discount on sales was $565. The purchase returns were $1,000. The delivery charges on sales, paid in cash, were $875. The interest on bank balances was $250. Two notes, bearing interest at 6% and due August i, each in the amount of $5,000, were taken from customers on June 1st. The inventory of mer- chandise on June 30th was $10,000. There was due from custo- mers $32,000 and due to creditors $25,000. The notes payable were taken care of as they matured. Prior to June 30, 191 1, Hemmingway began negotiations with M. Blauvelt, whereby the latter was to purchase a one-half inter- est in the business for $26,950. The negotiations were concluded and the copartnership effected as of July i, 191 1, not, however, until Hemmingway had valued and placed on his books an ac- count for goodwill in the amount of $15,000. Blauvelt gave 59 Elementary Accounting Problems Hemmingway a check for $26,950, which was not deposited in Hemmingway's business account. Frame the journal entries necessary to (o) Close the books of Murray Hemmingway. {h) Open the books of Hemmingway & Blauvelt. (Explain the entry or entries.) (Provide for a controlling account in the case of accounts receivable.) Solution to Problem No. 7 The solution to this problem involves two sets of books. Those of Hemmingway & Blauvelt are to be opened. The books of Murray Hemmingway are to be closed. Before either operation can be accomplished it is necessary to determine the financial status of the business in which an interest was sold. This type of problem illustrates the formation of a copartner- ship through the sale of an interest in a going concern. The extent of the interest is not apparent on the face of the problem and must be ascertained. The financial condition showing what was available for sale will be revealed by a balance sheet. A balance sheet cannot be prepared until a trial balance has been constructed. A trial bal- ance cannot be made until the accounts have been raised. Ac- counts proceed from journal entries. Hence the sequence of operations begins with the journal entries taking up the items in the order in which they appear in the problem. It is to be understood that while some of the transactions involve cash, and the entries would be made in the cash book, they may very properly be expressed in the form of journal entries. The facts will bear scrutiny to determine which should be journalized and which are given for explanatory purposes only. The journal entries follow: Cash $10,000 To Murray Hemmingway, proprietor $10,000 Furniture and fixtures 7,000 To accounts payable 7,000 Cash 50,000 To notes payable 50,000 Note due May i, 191 1, $30,000 — 5% " " Aug. I, 1911, $20,000—5% 60 Problem Number Seven Purchases $40,000 To accounts payable $40,000 Light 1,200 Salaries of salesmen 3,750 Wages of porter 360 Salary bookkeeper and clerk 900 Office expense 125 Sundry store expense 300 M. Hemmingway, salary 6,000 To cash 12,63s Rent 3.000 Rent paid in advance 500 To cash 3,500 Customers 75,000 To sales 7S,ooo Sales allowances 325 Cash discount on sales 565 To customers 890 Accounts payable 1,000 To purchase returns ...^ 1,000 Delivery charges 875 To cash 875 Cash 250 To interest on bank balances 250 Notes receivable 10,000 To customers 10,000 Two notes, $5,000 each dated June i, 191 1, bearing interest at 6%, due August i, 191 1. Accrued interest on notes receivable 50 To mterest on notes receivable -<. 50 $10,000 X 6% = $600 -i- 12 = $50. Inventory (new) 10,000 Customers (new) 32,000 Accounts payable (old) 25,000 To purchases 10,000 Customers (old) 32,000 Accounts payable (new) 25,000 Cash 32,110 To customers 32,110 Accounts payable 21,000 To cash 21,000 Interest on notes payable 1,000 To interest accrued on notes payable 1,000 $30,000 X 5% = $1,500 -^- 12 X 4 = $ 500 $20,000 X 5% = $1,000 -^2 =500 $1,000 61 Elementary Accounting Problems Notes payable 30,000 Interest accrued on notes payable 500 To cash 30,500 Goodwill 15,000 To Murray Hemmingway, proprietor 15,000 In addition to the above there is one entry which seems to require explanation. It will be remembered that according to the terms of the lease, Hemmingway was to have the use of the premises for two months free of charge. The agreement was modified, however, in that the adjustment was to be made through a rebate at the end of the year. This being the case, it is probable that the adjustment would be accomplished so far as Hemmingway was concerned by not paying any rent for the months of November and December, 191 1. Such is the practice frequently met with in similar cases. Thus, when Hemmingway completed negotiations with Blauvelt for the sale of an interest in the business, there existed a right, owned by Hemmingway, to recover from A. Kupper, the landlord, the amount of $1,000. This right, of which Hemmingway had not availed himself, would have the effect of reducing the rent, not for the year, but for the first six months and would thereby create an asset in the form of an account collectible from A. Kupper. It would thus appear, that in the circumstances an entry should be made previous to closing which would be as follows : A. Kupper, landlord $1,000 To rent $1,000 If at this point all of the above journal entries were to be posted to skeleton ledger accounts a trial balance would show the following accounts and amounts. Further a classification of the accounts into real and nominal groups would reveal a profit for the period of $28,900 which should be closed into the pro- prietor's account by journal entry. Debits Furniture and fixtures $ Light Salaries of salesmen Wages of porter , Salary bookkeeper and clerk . . Office expense , Sundry store expense , M. Hemmingway, salary 6,000 Rent Rent paid in advance 500 500 Sales allowances 325 325 62 Trial Income debits Balance balance and credits Sheet items \ 7,000 $ 7,000 1,200 $ 1,200 3,750 3,750 360 360 900 900 125 125 300 300 6,000 6,000 2,000 2,000 Problem Number Seven Cash discount on sales 565 565 Delivery charges 875 875 Accrued interest on notes receivable 50 50 Inventory (new) 10,000 10,000 Interest on notes payable 1,000 1,000 Goodwill 15,000 15,000 Cash 23,850 23,850 Purchases 30,000 30,000 Customers 32,000 32,000 Notes receivable 10,000 10,000 A. Kupper ^ 1,000 1,000 Profit and loss 28,900 28,900 Total $175,700 Credits Sales - $ 75,000 Purchase returns 1,000 Interest on bank balances 250 Interest on notes receivable ........ 50 Accounts payable 25,000 Notes payable 20,000 Interest accrued on notes payable.. 500 }A. Hemmingway, proprietor 53,900 Total $175,700 $76,300 $99,400 $75,000 1,000 250 50 $25,000 20,000 500 53,900 $76,300 $99,400 At this point it becomes possible to comply with the require- ments of the problem and frame, first, the journal entries nec- essary to close the books of Murray Hemmingway in accordance with the terms of the sale. Two entries are made instead of one in order to show that the business was taken over and con- tinued by Hemmingway & Blauvelt. Hemmingway & Blauvelt $53,900 Accounts payable 25,000 Notes payable 20,000 Interest accrued on notes payable - 500 To Furniture and fixtures $ 7,000 Merchandise (inventory) 10,000 Cash 23,850 Accounts receivable 33,5oo Notes receivable 10,000 Accrued interest on notes receivable 50 tioodwill .-. 15,000 To close asset and liability accounts to new proprietors* accounts. Murray Hemmingway, proprietor $53,900 To Hemmingway & Blauvelt $53,900 To close old proprietor's accounts. The second requirement of the problem covers the opening of the books of Hemmingway & Blauvelt and is fulfilled by the following entry: 63 Elementary Accounting Problems Furniture and fixtures $ 7,(X)0 Merchandise (inventory) 10,000 Cash 23,850 Accounts receivable 33,500 Notes receivable 10,000 Accrued interest on notes receivable 50 Goodwill 15,000 To Accounts payable $25,000 Notes payable 20,000 Interest accrued on notes payable 500 M. Hemmingway, proprietor 26,950 M. Blauvelt, proprietor 26,950 To set up on the books, the accounts repre- senting the business of Hemmingway & Blauvelt, as taken over from Murray Hemmingway under an agreement of co- partnership dated July i, 191 1. Probi^dm 7-A (Practice) From the following trial balance at June 30, 191 1, and sup- plementary information, frame the entries to close the books of John Simmonds and open those of Ralph & Simmonds in the case of a copartnership agreement in which Franklin Ralph purchases a half interest in the business of John Simmonds, under date of July i, 191 1, for $43,000: Debits Credits Advertising $ 5,000 Sales $ 95,000 Horse, wagon and harness. 1,200 John Simmonds 60,034 Rent 1,500 Salaries accrued 50 Furniture and fixtures 10,000 Rent 60 Bad debts-written off 3,500 Notes payable 5,000 Cash 25,162 Purchase allowances 240 Salaries of clerks 2,500 Interest accrued on notes Accrued interest on notes payable 175 receivable 275 Interest on notes receivable 275 Commissions 7,000 Commission accrued 400 Merchandise 12/31/10 12,000 Accounts payable 12,473 Interest on notes payable.. 350 Purchase returns 180 Accounts receivable 35,700 Reserve for bad debts 3,500 Sales allowances 750 Rent paid in advance 250 Sales returns 200 Notes receivable 10,000 Insurance 300 Purchases 60,000 Office expense 1,700 Total debits $177,387 Total credits $177,387 Inventory — merchandise — June 30, 191 1 — $16,000. Value of goodwill $10,000. Unexpired insurance $50. Reserve for bad debts to be increased 1% of accounts receivable. The cash paid by Ralph to Simmonds was not involved in the accounts. 64 Problem Number Eight PROBLEM No. 8 Demonstration According to the terms of the copartnership agreement en- tered into on July i, 191 1, by M. Hemmingway & M. Blauvelt, Hemmingway was to have the active management of the busi- ness and to receive a salary of $5,000 per annum. Drawings were to be permitted and charged in the case of each partner to a drawing account. Interest, computed on the capital invest- ment at the rate of 6% per annum was to be credited to the respective drawing accounts. A trial balance of the general ledger at the beginning of busi- ness July I, 191 1, embraced the following accounts: Debits: fur- niture and fixtures, $7,000; merchandise, $10,000; cash, $23,850; accounts receivable, $33,500; notes receivable, $10,000; accrued interest on notes receivable, $50; goodwill $15,000. Credits were: accounts payable, $25,000; notes payable, $20,000; interest ac- crued on notes payable, $500 ; M. Hemmingway, capital, $26,950 ; M. Blauvelt, capital, $26,950. The transactions during the six months ended December 31, 191 1, aside from those indicated by the text above, comprised the following: Debits to merchandise, $161,324; credits to merchandise, $207,- 310; credits to accounts payable for purchases, $155,156; light, $1,500; sundry store expense, $378; debits to accounts payable $176,091; debits to accounts receivable $192,143; credits to ac- counts receivable, $183,496. The cash receipts were $10,100, for notes receivable and interest and $175,828 from customers. The cash disbursements were: Hemmingway, $6,000; Blauvelt, $10,000; creditors, $160,924; rent payable, $1,500; notes pay- able and interest, $20,538,33; salaries of salesmen, $4,000; wages of porter, $360; advertising, $2,500; commission $450; salary of bookkeeper and clerk, $1,000; office expense, $527. Upon analysis the merchandise account was found to con- tain the following: Antique furniture: Inventory, July i, 191 1, $5,000; purchases, 65 Elementary Accoimiing Problems $50,000; inward freight, $1,127; sales returns, $1,512; delivery expense, $544; rebates and allowances, $222; purchase returns, $2,000; trade discount on purchases, $4,827; inventory, Decem- ber 31, 191 1, $6,732; sales, $53,815.20. Paintings and tapestries: Inventory, July i, 191 1, $3,000; pur- chases, $70,000; inward freight, $1,465; sales returns $2,199; de- livery expense, %y2y ; rebates and allowances, $295 ; purchase re- turns, $500; purchase allowances, $50; trade discount on pur- chases, $6,431; inventory, December 31, 191 1, $7,894; sales $94,- 216.50. Statuary and carvings: Inventory, July i, 191 1, $1,500; pur- chases, $20,000; inward freight, $472; sales returns, $1,672; de- livery expense, $532 ; rebates and allowances, $100 ; purchase re- turns, $100; trade discount on purchases, $1,232; inventory, De- cember 31, 1911, $3,987; sales, $30,331.20. Miscellaneous: Inventory, July i, 191 1, $500; purchases, $10,000; inward freight, $263; sales returns, $45; delivery ex- pense, $26; rebates and allowances, $123; purchase returns, $20; trade discount on purchases, $7; inventory, December 31, 191 1, $299; sales, $13,780.10. From the foregoing prepare: (a) General balance sheet, December 31, 191 1 {b) Statement of income and profit and loss for the six months ended December 31, 191 1, supported by a schedule showing the gross profit according to the diflferent classes of goods. S01.UT10N TO Proble:m No. 8 The procedure necessary to the solution consists, first, in setting up the trial balance as at the beginning of business July I, 191 1 ; second, in making and posting the adjusting entries representing the transactions for the six months ended Decem- ber 31, 191 1 ; third, in completing the working sheet; and fourth, in preparing the statements required. The sequence of operations is somewhat difficult to show unless the demonstrator has the visual attention of the student. It will be more apparent, perhaps, in this case if the journal en- 66 Problem Number Eis:ht ii' tries are framed before any part of the working sheet is con- structed. The problem is purposely somewhat vague. The solution involves in places a violation of the principle that any prob- lem, as well as its solution, should be complete in itself and not require reference to preceding problems. The connection in this case is so apparent, however, than rather than cause annoy- ance it will probably stimulate an interest in investigation with which the accountant has so frequently to deal. Following the text of the problem it will be seen that Hem- mingway is to receive a salary of $5,000 per annum as manager. This is presumably due to the fact that Blauvelt will give little time, if any, to the business. The salary allowed Hemmingway tends to equalize the standing of the partners, since it would be inequitable for Hemmingway to give his entire time to the business and receive as his compensation only one-half of the profits. Nothing is said as to the division of profits but the rule in such cases is that partners shall participate in the profits and be charged with the losses equally. The journal entry covering the salary of Hemmingway would be as follows: Salary of manager $2,500.00 To M. Hemmingway, drawing account $2,500.00 It will be noted also that interest, computed on the capital investment at the rate of six per cent per annum is to be credited to the respective drawing accounts of the partners. Hence the following: Interest on capital $1,617.00 To M. Hemmingway, drawing account $ 808.50 M. Blauvelt, drawing account 808.50 For six months' interest at 6 per cent on the capital investment of $53,900 standing to the credit of M, Hemmingway and M. Blauvelt in equal amounts. It is perhaps pertinent at this point to discuss not only the propriety but the necessity of charging and crediting interest. It is far from necessary and while not perhaps improper is a 67 Elementary Accounting Problems waste of time and energy with nothing gained in the end. Hem- mingway and Blauvelt have equal amounts of capital invested in the business and share equally in the profits and losses. To charge and credit interest in this case would have the effect of charging profit and loss with $1,617 ^^^ crediting each part- ner with $808.50. Profit and loss would subsequently be closed out to the partners' accounts and each would be charged with $808.50, thereby nullifying the first entry. It is difficult to see what would have been accomplished by such procedure. As a general proposition it is contrary to the economic theory on which good accounting is based to charge the accounts of the business with interest on capital, since capital is invested in and not lent to the business, and receives as its share in the dis- tribution the profit which results from its employment in the enterprise. Where there are unequal investments of capital it is usual, however, to employ this expedient of adjusting the ac- counts of partners. It would doubtless be better where there are unequal investments of capital among partners, unless the co- partnership agreement specifies that interest shall be charged, to refrain from making any interest entries in the operating accounts and adjust inequalities of investment among partners in the partners' accounts. The matter of rent requires some explanation since it is connected with the preceding problem. Under the terms of the lease, the rent was to be $500 a month. The agreement was modified, however, by the stipulation that Hemmingway was to enjoy two months* rent free. In so far as the copartnership is concerned the matter of rent was adjusted at the time of the formation of the copartnership. It will be remembered that there were among the accounts receivable of $33,500 at June 30, 191 1, two items, amounting respectively to $1,000 and $500 repre- senting in the first instance an amount due from A. Kupper for the rent rebate and in the second instance the rent for July paid in advance. On the books of the copartnership the rent for the six months ended December 31, 191 1, would be covered by a charge to rent and a credit to rent payable in the amount of $3,000. In settlement of this liability there would be applied the amount of $1,500 above mentioned. The balance would have to be paid in cash. This explanation assumes, of course, that the rent for January, 191 2, was not paid in advance and the period 68 Problem Number Eight of six months from July i to December 31, 191 1, was treated as a whole without regard to any variations which might have developed through the payment of the rent from month to month. The journal entries based on the above follow: Rent $3,000.00 To rent payable $3,000.00 For rent for six months ended December 31, 1911, Rent payable $3,000 To accounts receivable $1,500.00 Cash 1,500.00 For accounts due from A. Kupper landlord and cash applied in settlement of rent as above. The other entries which are related to the preceding problem are those having to do with the accrual of interest on notes receiv- able and notes payable. The interest in the case of the former as accrued to June 30, 191 1, amounted to $50. As the notes were due and paid on August i, 191 1, it would be necessary to accrue the interest to that date, which would require a charge and credit of $50 more, viz.: Accrued interest on notes receivable $50.00 To interest on notes receivable $50.00 The note payable in the amount of $20,000, which was out- standing June 30, 191 1, was due and paid August i, 191 1. The interest was accrued to June 30th and amounted to $500. There- fore an accrual of one month's interest is required on this note and is as follows: Interest on notes payable $83.33 To interest accrued on notes payable $83.33 The following journal entries are developed from the trans- actions contained in the text of the problem: Merchandise $161,324.00 Light 1,500.00 Sundry store expense 378.00 Accounts payable 15,167.00 Accounts receivable 192,143.00 69 Elementary Accounting Problems To merchandise $207,310.00 Accounts payable 157,034.00 Accounts receivable 6,168.00 Cash $185,928.00 To notes receivable $ 10,000.00 Accrued interest on notes receivable... 100.00 Accounts receivable 175,828.00 M. Hemmingway, drawing account .$ 6,000.00 M. Blauvelt, drawing account 10,000.00 Accounts payable 160,924.00 Notes payable 20,000.00 Interest accrued on notes payable 583.33 Salaries of salesmen 4,000.00 Wages of porter 360.00 Advertising 2,500.00 Commission 450.00 Salary of bookkeeper and clerk 1,000.00 Office expense 527.00 To cash $206,344.33 All of the above entries should now be posted to the ad- justment columns of the working sheet which will have been constructed with the trial balance of July i, as the basic factor. 70 Problem Number Eight Trial Balance Adjustments Balance Profit and July 1, 1911 Debits Credits Sheet Items Loss Items DSBITS Furniture and fixtures $ 7,000.00 $ 7,000.00 Merchandise 10.000.00 $161,324.00 ($ 18,912.00) t$54,898.00 ( 207,310.00) Cash 23,850.00 185,928.00 (206,344.33) 1,933.67 ( 1,500.00) ( 6,168.00) Accounts receirable 33,500.00 192,143.00 ( 1,500.00) 42,147.00 ( 175,828.00) Notes receivable 10,000.00 10,000.00 Accrued interest on notes receivable 50.00 50.00 100.00 Goodwill 15,000.00 15,000.00 $99,400.00 Salary of msr^ger T. 2,500.00 2,500.00 Interest on capital 1,617.00 1,617.00 Rent 3,000.00 3,000.00 Light 1,500.00 1,500.00 Sundry store expense 378.00 378.00 Interest on notes payable 83.33 83.33 Salaries of salesmen 4,000.00 4,000.00 Wages of porter 360.00 360.00 Advertising 2,500.00 2,500.00 Commission 450.00 450.00 Salary of bookkeeper and clerk 1,000.00 1,000.00 Ofllce expense 527.00 527.00 Merchandise — inventory (new) 18.912.00 18,912.00 $84,992.67 t$36,982.67 CREDITS Accounts payable $25,000.00 ( 160,924.00) 157,034.00 $ 5,943.00 *T * ^, ( 15,167.00) Notes payable 20,000.00 20.000.00 Interest accrued on notes payable 500.00 583.33 83.33 M. Hemmingway, capital 26,950.00 18,516.33 45,466.33 M. Blauvelt, capital 26,950.00 18,516.34 45,466.34 $99,400.00 %, rr , . ( 808.50) M. Hemmingway, drawing account 6,000.00 ( 2,500.00) * 2,691.50 M. aiauvelt drawing account 10,000.00 808.50 ♦ 9,191.50 Rent payable 3.000.00 3,000.00 Interest on notes receivable 50.00 $ 50.00 Profit and loss ''^ "" •37.032.67 $84,992.67 $36,982.67 t Credit item. • Debit item. HEMMINGWAY & BLAUVELT Qbnbral Balance Sheet — December 31, 1911 ASSETS LIABILITIES AND CAPITAL Accounts payable $ 5,943.00 rurniture and fixtures $ 7.000.00 Proprietorship : Goodwill 15,000.00 M. Hemmingway $42,774.83 Merchandise— inventory 18,912.00 M. Blauvelt 36,274.84 79,049.67 Cash 1,933.67 Accounts receivable 42,147.00 Total assets $84,992.67 Total liabilities and capital $84,992.67 EXHIBIT "A" 71 Elementary Accounting Problems HEMMINQWAY & BLAUVELT Statement of Income and Profit and Loss fob the Snc Months Endbd Decembeb 31, 1911 Gross profit on sales (schedule No. 1) $54,898.00 Selling expense : Salaries of salesmen $4,000.00 Commission 450.00 Advertising 2,500.00 Light 1,500.00 Sundry store expense 378.00 Total 8,828.00 Selling profit $46,070.00 Administrative expense : Salary of manager $2,500.00 Salary of bookkeeper and clerk 1,000.00 Office expense 527.00 Wages of porter 360.00 Total 4,387.00 Net profit on sales — income from operations $41,683.00 Other income : Interest on notes receivable 50.00 Total income $41,733.00 Deductions from income : Interest on capital $1,617.00 Interest on notes payable 83.33 Rent 3,000.00 Total 4,700.38 Net income — profit and loss for the period $37,032.67 Proprietorship beginning of period as adjusted (schedule No. 2) 42,017.00 Proprietorship — December 31, 1911 .$79,049.67 EXHIBIT "B" 72 Problem Number Eight HEMMINGWAY & BLAUVELT ScHCDULR Showing Qboss Pbofit on Sales, Classified, for thb Six Months Endbd December 31, 1911 Antique Paintings and Statuary and Mis- Total Furniture Tapestries Carvings cellaneous TmRR «?ales $192,143.00 $53,815.20 $94,216.50 $30,331.20 $13,780.10 L€s»— returns"..*.* 5,428.00 1,512.00 2,199.00 1,672.00 45.00 Net sales .$186,715.00 $52,303.20 $92,017.50 $28,659.20 $13,735.10 Deductions from sales : Rebates and allowances $ 740.00 $ 222.00 $ 295.00 $ 100.00 $ 123.00 Delivery expense 1,829.00 544.00 727.00 532.00 26.00 Total $ 2,569.00 $ 766.00 $1,022.00 $ 632.00 $ 149.00 Income from sales ..$184,146.00 $51,537.20 $90,995.50 $28,027.20 $13,586.10 Cost of goods sold : Gross purchases $150,000.00 $50,000.00 $70,000.00 $20,000.00 $10,000.00 Less — purchase returns 2,620.00 2,000.00 500.00 100.00 20.00 Net purchases ..$147,380.00 $48,000.00 $69,500.00 $19,900.00 $ 9,980.00 Add— inward freight 3,327.00 1,127.00 1,465.00 472.00 263.00 Total $150,707.00 $49,127.00 $70,965.00 $20,372.00 $10,243.00 Deductions from purchases : Purchase allowances $ 50.00 $ 50.00 Trade discount 12,497.00 $ 4,827.00 6,431.00 $ 1,232.00 $ 7.00 Total ..$ 12,547.00 $ 4,827.00 $ 6,481.00 $ 1,232.00 $ 7.00 Cost of purchases sold ..$138,160.00 $44,300.00 $64,484.00 $19,140.00 $10,236.00 Add or deduct — increase or decrease in inventory 8,9U.OO 1,7S2.00 4,89Jf.OO 2,^87.00 201.00 Total cost of goods sold $129,248.00 $42,568.00 $59,590.00 $16,653.00 $10,437.00 ©ross profit on sales ..$ 54,898.00 $ 8,969.20 $31,405.50 $11,374.20 $ 3.149.10 EXHIBIT "B" SCHEDULE NO. 1 HEMMINGWAY & BLAUVELT , SCHXDTTLB SHOWING ADJUSTMENT OF PROPRIETORSHIP AS AFFECTED BY ENTBIBS During thb Six Months Ended December 31, 1911 Total M. Hemmingway M. Blauvelt Proprietorship — July 1, 1911 $53,900.00 $26,950.00 $26,950.00 Add: Interest on capital $1,617.00 $ 808.50 $ 808.50 Salary of manager 2,500.00 2,500.00 Total $4,117.00 $3,308.50 $ 808.50 Total $58,017.00 $30,258.50 $27,758.50 Deduct — drawings 16,000.00 6,000.00 10,000.00 Proprietorship, as adjusted $42,017.00 $24,258.50 $17,758.50 EXHIBIT "B" SCHEDULE NO. 2 73 Elementary Accotuiting Problems Problem No. 8 A (Practice) The merchandise accounts in the general ledger of Palmer & Stubbs, December 31, 191 1, showed the following: CLOTHING 1911 1911 Dec. 1 Balance $ 8,000.00Dec. 31 Returns $ 300.00 31 Purchases 30,000.00 Allowances 25.00 Rebates and allow- Discount (trade) . . . 2,920.00 ances 45.00 Sales 32,563.20 Delivery expense . . . 300.00 Inward freight 586.00 Returns 450.00 $39,381.00 $35,808.20 FURNISHINGS 1911 1911 Dec. 1 Balance $ 4,000.00Dec. 31 Sales $21,662.10 3:1. Returns 75.00 Allowances 176.00 Purchases 17,000.00 Returns 415.00 Delivery expense . . . 200.00 Trade discount 1,892.00 Allowances 22.00 Inward freight 232.00 $21,529.00 $24,145.10 MISCELLANEOUS MERCHANDISE 1911 1911 Dec. 1 Balance $ 200.00Dec. 31 Returns $ 10.00 ,31 Purchases 900.00 Allowances 5.00 Inward freight 15.00 Trade discount 95.00 Delivery expense . . . 45.00 Sales 885.00 Allowances 5.00 $ 1,165.00 $ 995.00 The other accounts in the ledger were: Debits: salary of manager, $500; furniture and fixtures $10,000; interest on capital, $500; cash, $12,790; rent, $600; account receivable, $18,742.31; light, $52; notes receivable, $5,- 000; sundry store expense, $75; accrued interest on notes re- ceivable, $100; interest on notes payable, $250; goodwill, $5,- 000; salaries of salesmen, $325; wages of porter, $50; advertis- ing, $750; commission, $225; salary of bookkeeper and clerk, $100; office expense, $112; A. Palmer, drawings, $200; B. Stubbs, drawings $1,000. Credits: accounts payable, $5,548.01; notes payable, $10,- 000; interest accrued on notes payable, $250; A. Palmer, cap- ital, $20,000; B. Stubbs, capital, $20,000; rent payable, $600; interest on notes receivable, $100; A. Palmer, drawings, $750; B. Stubbs, drawings, $250. 74 Problem Number Eight The inventories at December 31, 191 1, were clothing, $9,- CXX>; furnishings, $3,000; miscellaneous merchandise, $250. From the foregoing prepare: (o) General balance sheet — December 31, 1911. {b) Statement of income and profit and loss for the month ended December 31, 191 1, supported by a schedule showing the gross profit according to the different classes of goods. 75 Elementary Accounting Problems PROBLEM No. 9 Demonstration Plimpton, Gordon & Grey were partners engaged in the wholesale cotton goods business. The respective investments were $50,000.00, $30,000.00, and $20,000.00. The copartnership agreement provided that the partners should receive interest on their original investments at the rate of 6^ per annum. Plimp- ton drew $50.00 a week as salary. Gordon and Grey each drew $40.00 a week as salary. Partners were allowed to draw against profits, irrespective of salaries, but drawings were charged with interest at 6%. The goodwill, although not on the books, was estimated as worth $20,000.00. It was a matter of agreement among the partners that in case of dissolution for any cause whatever the goodwill should be apportioned in proportion to their respective investments. A trial balance of the general ledger, after closing, at Decem- ber 31, 191 1, was as follows: Land and buildings, ^$72,300; fur- niture and fixtures, $3,000; securities owned (stocks), $10,000; merchandise inventory, $45,000; cash, $12,000; accounts receiv- able, $37,000; notes receivable, dated December 15, i^ii, due February 15, 1912, interest 5%, $3,000; bond and mortgage on building dated October i, 1910, due October i, 1913, interest 5%, last paid to October i, 191 1, amount of mortgage, $35,000; accounts payable, $21,070; notes payable, $10,000, dated Decem- ber I, 1911, due February i, 1912, interest 5%; reserve for de- preciation on buildings, s% per annum., $7,230; proprietorship — Plimpton, $55,000; Gordon, $32,527; Grey $21,473. The aver- age gross profit on cost for the past three years had been 35%. The transactions during January, 1912, were as follows: Purchases, prior to and including January 17, $12,000, subse- quent to January 17, $18,000; sales prior to January 17, $13,500, subsequent, $20,250; salaries of salesmen, not paid until Febru- ary 3, one at $250 a month, three at $200 each, two at $150 each a month; expense funds forwarded to salesmen January 10, $1,500; expenses for the month reported by salesmen were * Land $20,000.00. 76 Problem Number Nine found upon analysis to be, prior to January 17, $510, subsequent, $420; advertising, bills contracted prior to January 17, $90, of which space corresponding to $50 was used prior to January 17, and $40 was not used during the month; office salaries per week, exclusive of partners, $174, paid in cash at the end of each week*; general expense, prior to January 17, $125, subsequent, $450; drawings — Plimpton, January 15, $200; Gordon, January 17, $500; Grey, January 20, $300. Received from customers, prior to January 17, $35,000. Paid to creditors, prior to Jan- uary 17, $20,000. Plimpton died on January 17, leaving his estate to his wife. The business was continued by the surviving partners who did not settle with the widow until April 30, at which time, however, they paid her what was due her with interest at 6%. Prepare an accounting such as the partners might have rendered to the widow. Solution to Problem No. 9 Copartnership settlements are among the most difficult ac- countings to prepare. The agreements rarely stipulate clearly what shall be done in case of death. It is a well-known fact, of course, that death terminates a contract. Copartnership agreements are no exception to this general rule. Death, however, does not by any means terminate the business. The business may continue if the surviving part- ner or partners so elect. In such cases, the continuing partners become trustees in the business for the estate of the deceased partner. The point at issue is the determination of the extent of the interest of the deceased at the time of his death. Unfortunately for the accountant, death pays no respect to the periods which govern the stating of accounts. Rarely does a death occur at the end of the month or year at which times inventories are taken and other measures incident to the closing of the books effected. On this account it becomes necessary to draw a sharp line of demarcation in the financial transactions at the date of death unless the copartnership agreement provides that the in- terest of the deceased shall be determined as at the end of the month or year in which the death occurs. 3j^ weeks. 77 Elementary Accounting Problems Such was not the case, apparently, judging from the text of the problem, in the copartnership of which Plimpton, Gordon and Grey were members. Plimpton died on January 17, and we are charged by the problem with the preparation of an accounting such as the surviving partners would probably have rendered to the widow. The question before us is to determine the extent of Plimp- ton's share, or equity, in the business at the close of business on January 17. It is presumed to be the desire of the surviving partners to render to the widow such an accounting as will be complete and satisfactory. To do this it would seem necessary to prepare not only a statement which would show financial con- dition at January 17, but an additional statement which would establish the connection between such statement of financial con- dition and the last preceding similar statement which Plimpton is presumed to have received. It is therefore suggested that the problem will be properly solved and the most exacting demands of the widow satisfied if there is prepared a general balance sheet at the close of business January 17, 1912, and a statement of income and profit and loss for the seventeen days from De- cember 31, 191 1, to said date, supplemented by an interest calcu- lation which will show how much the widow was to have re- ceived on April 30, 1912. The first step in the solution consists in setting up a working sheet which will have as its basis the items comprising the trial balance of the general ledger at December 31, 191 1. Subse- quently, journal entries, setting forth the transactions for the portion of the month,"prior to and including January 17, together with accruals at said date, may be framed. If these then be posted in the adjustment columns and the accounts adjusted and classified, there can be found with very little difficulty the items from which the balance sheet and income statements may be prepared. Assuming that the working sheet has been raised with the items of December 31, 191 1, therein, the journal entries are now given : Purchases $12,000.00 To accounts payable $12,000.00 ***** Accounts receivable 13,500.00 To sales 13,500.0a ***** 78 Problem Number Nine Salaries of salesmen 630.53 To salaries accrued 17/31 of $1,150.00 ***** Traveling expense funds 1,500.00 To cash ***** Traveling expenses — salesmen 510.00 To traveling expense funds ***** Advertising 50.00 Advertising — unused 40.00 To accounts payable ***** Office salaries 4350o To cash Salaries accrued ***** General expense 125.00 To accounts payable ***** Plimpton — drawing account 200.00 Gordon — drawing account 500.00 To cash ***** Cash 35,000.00 To accounts receivable ***** Accounts payable 20,000.00 To cash ***** Salaries of partners 325-00 To cash Plimpton — drawing account Gordon to Jan. 17—2^ weeks at $40 $100 Grey to Jan. 17 — 2^4 weeks at $40 100 Plimpton to Jan. 13 — 2 weeks at $50 100 $300 Plimpton accrued to Jan. 17 — ^ week at $50. . 25 $325 ***** Accrued interest on notes receivable .- 13-32 To interest on notes receivable I month, 2 days (legal method). * * * * ♦ 79 630.53 1,500.00 510.00 90.00 348.00 87.00 125.00 700.00 35,000.00 20,000.00 300.00 25.00 13.32 Elementary Accounting Problems Interest on bond and mortgage payable 51I4.21 To interest accrued on bond and mortgage payable 51421 3 months, 16 days (legal method). ***** Interest on notes payable 63.58 To interest accrued on notes payable 63.58 1 month, 16 days (legal method). ***** Interest on investment 263.01 To Plimpton, drawing account 13151 Gordon, drawing account 78.90 Grey, drawing account 52.60 16 days (legal method) (original investment). ***** Plimpton, drawing account .06 To interest on drawings .06 2 days (legal method). ***** Provision for depreciation of buildings 121.79 To reserve for depreciation of buildings 121.79 17/365 of $2,615. ***** Goodwill 20.ooaoo To Plimpton, capital account 10,000.00 Gordon, capital account 6,000,00 Grey, capital account 4,000.00 ***** Inventory (new) t 47,000.00 To inventory (old) 47,000.00 ***** Profit and loss 475.26 To Plimpton, drawing account 158.42 Gordon, drawing account 158.42 Grey, drawing account 158.42 t Sales ($13.500) -^ 135% = cost of sales ($10,000). Purchases ($12,000) less cost ($10,000) = increase in inventory ($2,000). Inventory 121/3/11 ($45,000) plus increase ($2,000) = inventory 1/17/12 ($47,000). 80 Problem Number Nine WORKING SHEET— JANUARY 17, 1912 Trial Balance Dec. 31. 1911 Land and buildings $ 72,300.00 Furniture and fixtures 3,000.00 Securities owned 10,000.00 Merchandise — inventory 45,000.00 Cash 12,000.00 Accounts receivable 37,000.00 Notes receivable 3,000.00 Purchases Salaries of salesmen Traveling expense funds Traveling expense — salesmen Advertising Advertising — unused Office salaries General expense Salaries of partners Accrued interest on notes receivable.. Interest on bond and mortgage payable Interest on notes payable Interest on capital Provision for depreciation of buildings. Goodwill Inventory (new) Profit and loss Adjustments Dr. Cr. $35,000.00 13,500.00 12,000.00 630.53 1,500.00 510.00 50.00 40.00 435.00 125.00 325.00 13.32 514.21 53.58 263.01 121.79 20,000.00 47,000.00 $47,000.00 ( 300.00) ( 20,000.00) ( 1,500.00) ( 348.00) ( 700.00) 35,000.00 510.00 Balance Sheet $ 72,300.00 3,000.00 10,000.00 Statement of Income and Profit and Loss 24,152.00 15,500.00 3,000.00 .00 40.00 13.32 20,000.00 47,000.00 *$ 2,000.00 12,000.00 630.53 510.00 50.00 435.00 125.00 325.00 514.21 63.58 263.01 121.79 475.26 $182,300.00 $195,995.32 $13,513.38 Mortgage payable $ 35,000.00 Accounts payable 21,070.00 20,000.00 Notes payable 10,000.00 Reserve for depreciation of buildings.. 7,230.00 Proprietorship: Plimpton 50,000.00 Gordon 32,527.00 Grey 21,473.00 Drawing accounts: Plimpton 200.06 Gordon 500 Grey Sales Salaries accrued Interest on notes receivable Interest accrued on bond and mort- gage payable Interest accrued on notes payable.... Interest on drawings ( 12,000.00) ( 90.00) ( 125.00) 121.79 10,000.00 6,000.00 4,000.00 158.42) 25.00) 131.51) 158.42) 78.90) 158.42) 52.60) 13,500.00 717.53 13.32 514.21 63.58 .06 $ 35,000.00 13,285.00 10,000.00 7,351.79 65,000.00 38,527.00 25,473.00 114.87 t 262.68 211.02 717.53 13,500.00 13.32 514.21 63.58 .06 $182,300.00 $195,995.32 $13,513. • Credit item, t Debit item. 8i Elementary Accounting Problems PLIMPTON, GORDON & GREY General Balance Sheet — January 17, 1912 Liabilities and Capital ^^^^i^ Bond and mortgages payable ..$ 35,000.00 Land and- buildings $ 72,300.00 Current liabilities Furniture and fixtures $ 3,000.00 Salaries accrued $ 717.53 Accounts payable 13,285.00 Securities owned $ 10,000.00 Notes payable 10,000.00 Interest accrued on bond and Goodwill $ 20,000.00 mortgage payable 514.21 Interest accrued on notes Merchandise — inventory $ 47,000.00 payable 63.58 Current assets: Total current liabilities. .$ 24,580.32 Cash $ 25,142.00 Accounts receivable 15,500.00 Proprietorship: Notes receivable 3,000.00 Restricted: Accrued interest on notes re- Reserve for depreciation ceivable 13.32 of buildings $ 7,351.79 Unrestricted: Total current assets.. $ 43,655.32 Plimpton $65,114.87 Gordon 38,264.32 Advertising— unused $ 40.00 Grey 25.684.02 129,063.21 Total proprietorship $136,415.00 Total assets $195,995.32 Total liabilities and capital. .$195,995.32 PLIMPTON, GORDON & GREY Statement of Income and Profit and Loss for the Seventeen Days Ended January 17, 1912 Sales $13,500.00 Cost of sales : Purchases $12,000.00 Less — increase in inventory 2,000.00 10,000.00 Gross profit on sales $ 3,500.00 Selling expense: Salaries of salesmen $ 630.53 Traveling expenses — salesmen 5 10.00 Advertising 50.00 Total 1,190.53 Selling profit $ 2,309.47 Administrative expense Office salaries $ 435.00 Salaries of partners 325.00 General expenses 125.00 Total 885.00 Net profit on sales — income from operation $ 1,424.47 Other income interest on notes receivable 13.32 Total income $ 1,437.79 Deductions from income: Interest on bond and mortgage payable $ 514.21 82 Problem Number Nine Interest on notes payable 63.58 Interest on investment (net) 262.95 Total 840.74 Net income — profit and loss $597.05 Profit and loss charge — provision for depreciation of buildings 121.79 Profit and loss surplus for the period $475.26 Plimpton Gordon Grey Proprietorship— Dec. 31, 191 1.. $55,000.00 $32,527.00 $21,473.00 Add: Goodwill 10,000.00 6,000.00 4,000.00 Interest on investment i3i-45 78.90 52.60 Salary accrued 25.00 Total $65,156.45 $38,605.09 $25,525.60 Deduct — drawings 200.00 500.00 Proprietorship, as adjusted $64,956.45 $38,105.90 $25,525.60 128,587.95 Add — PROFITS 158.42 158.42 158.42 Proprietorship— Jan. 17, 1912. .$65,114.87 $38,264.32 $25,684.02 $129,063.21 ACCOUNT OF DECEASED PARTNER— FINAL SETTLEMENT Capital — January 17, 1912 $65,114.87 Interest— January 17 to April 30, 1912 — 3 months and 13 days (legal method) 1,115.87 Amount paid to widow , $66,230.74 Problem No- A (Practice) The balance sheet of Redmond, Short & Collins, March 31, 19 1 2, contained the following items : Land and buildings, *$8o,ooo ; furniture and fixtures, $3,000 ; $10,000 St. Louis & Southern Mountain 4's, carried at par, inter- est payable May i and November i, last collected November i, 191 1, merchandise inventory, $50,000; cash, $15,0000; accounts receivable, $32,000; note receivable, dated March 12, 1912, in- terest 6%, $4,000; bond and mortgage payable, $50,000, interest 6% payable January i and July i, last paid January i, 1912; ac- counts payable, $24,725 ; notes payable, $12,000, dated March I, 1912, interest 5% ; reserve for depreciation of buildings (ij4 years). $5,000; capital — A. Redmand, $54,327 (investment Land $25,000. 83 Elementary Accounting Problems $40,0827.9S 3,827.95 $432,918.29 $1132,485.69 $112,403,19 $188,029.41 ♦Debit among credits. This working sheet leaves something to be desired in the way of explanation. Each section proves separately by cross- footing the last three columns, thus establishing the mathematical accuracy of the work; assets and liabilities are all accounted for; the cash receipts and disbursements articulate with the re- spective complementary accounts but the balance of cash ($iii,- 594.69) does not agree with combined proprietorship accounts ($188,091.91). The difference is $76,497.22. Careful inspection will discover that the losses have not been distributed on the working sheet. If to the total of $76,434.72, as shown in the profit and loss column in the upper section, tliere is added $62.50 representing additional interest paid on notes payable, it will be seen that the amount is $76,497.22. If this amount then were to be divided equally among the partners' accounts the balances would show the respective portions of $111,594.69 in cash which each would receive. The items of $10,552.50 appearing opposite the capital ac- counts of Johnson and Swift represent the commission (10% of $211,050.06) which they received for their services in settling up the affairs of the copartnership. The question may be raised as to the prevalence of such practice. It is sufficient to say that it has been known to occur and upon investigation the justice of it will be apparent. At the close of business on August 31, 1912, the business stopped automatically. The surviving part- ners were obliged to devote their attention to liquidating it. They were not free to offer their services elsewhere or engage in other business and they were paid for their services in winding up the affairs of the firm. The charge for their compensation is 88 Problem Number Ten made to profit and loss and credited to their capital accounts in equal parts. If the propriety of making the charge to profit and loss is questioned, a moment's thought will reveal the fact that the only other place where it might be charged, namely, Mor- ton's account, would be a highly improper place since it would have the eflfect of making Morton's estate stand the entire ex- pense of liquidation. The accounts required by the problem follow : CASH 1912 1912 ^ , . „ Aug. 31 Balance $ 12,947.82 Salaries & wages $ 257.32 Motor trucks . . . 5-275 00 Accounts payable 65,843.17 Land, etc 175,000.00 Notes payable . . 25,197,70 Accounts rec. .. 22,371.20 Commission 21,105.00 Notes rec 8,043.86 M.T.Johnson.. 29,688.74 Insurance 360.00 Est. B. L. Mor- ton 53,784.39 E.W.Swift.... 28,121.56 $223,997.88 $223,997.88 PROFIT AND LOSS ACCOUNT 1912 1912 Land, buildings, M. T. Johnson.. $ 32,534.07 etc $20,748.00 Est. B. L. Mor- Motor trucks . . 3,725.00 ton 32,534,08 Goodwill 50,000.00 E. W. Swift 32,534.07 Accounts rec. .. 1,107.11 Int. on notes rec. 54.61 Advertising .... 800.00 Interest on notes payable 62.50 Commission .... 21,105.00 $97,602.22 $97,602.22 M. T. JOHNSON 1912 1912 -^— Mdse., etc $ 38,202.87 Aug. 31 Balance $100,425.68 Cash 10,552.50 Commission .... 10,552.50 P- & I^ 32,53407 Cash 29,688.74 $110,978.18 $110,978.18 89 Elementary Accounting Problems 1912 1912 P. & L $ 32,534.08 Aug. 31 Balance $ 86,318.47 Cash 53,784-39 $ 86,318.47 $ 86,318.47 E. W. SWIFT 1912 1912 Mdse., etc $38,202.87 Aug. 31 Balance $98,858.50 Cash 10,552.50 Commission 10,552.50 P. & L 32,53407 Cash 28,121.56 $109,411.00 $109,411.00 Probi,i:m No. io-a (Practice) The following is a trial balance taken from the general ledger of Barnum, King & Wheeler, a copartnership, after closing August 31, 1912: Debits: Land and buildings, $250,000; equipment, $50,000; furniture and fixtures, $10,000; motor trucks, $10,000; goodwill, $60,000; materials and supplies, $34,257.92; goods in process, $15,872.74; finished goods, $20,523.57; cash, $14,147.28; ac- counts receivable, $25,874.13; notes receivable and interest, $10,125.32; advertising paid in advance, $1,000; insurance un- expired, $540; consignees, $2,421.18. Credits: Bond and mortgage payable, and interest, $50,500 (interest 6%, payable July i and January i, last paid July i, 1912) ; taxes accrued $1,940; salaries and wages accrued, $325; accounts payable, $75,348.77; notes payable and interest, $35,- 148.37; A. Barnum, proprietor, $113,500; B. King, proprietor- ship, $125,000; C. Wheeler, proprietorship, $103,000; consigned sales, $2,421.18. The articles of copartnership specified that, in the event of the death of a partner or partners, the accounts were to be stated at the end of the month in which the death or deaths occurred and the business was to be discontinued and liquidated. The surviving partners were to receive as compensation for such services 10% on all cash disbursed to outsiders. 90 Problem Number Ten Barnum and King were killed on August 23 and Wheeler proceeded to realize and liquidate. The transactions were as follows : Motor trucks sold for $6,000 ; land, buildings, equipment and furniture were sold to Benton & Hughes who took the property subject to the mortgage and taxes and paid $180,000 in cash; the salaries and wages were paid; Wheeler took over the working and trading assets at their book value; the notes payable and interest were paid; accounts receivable were col- lected except $875.13 which was written off; the creditors were paid in full; the notes receivable were discounted realizing $10,087.25; insurance policies realized $500; advertising con- tracts realized $800; the balance of cash was distributed among the estates of the deceased and the surviving partner Wheeler paid his indebtedness. From the foregoing prepare: (a) Cash account. (b) Profit and loss account. (c) Proprietorship accounts of the partners. 91 Elementary Accounting Problems PROBLEM No. ii The American Chocolate Company was organized by James Phipps, Henry Borman, and WiUiam Jennings, who signed the certificate of incorporation and subscribed for ten shares each. The certificate of incorporation was filed by the secretary of the state of New York on July i, 1912. The authorized capital stock was $100,000 divided into one thousand (1,000) shares of the par value of $100 each. The subscribers paid for their stock on July I St. The organization tax and filing fees amounted to $54.20. The certificates issued to the incorporators were numbered I, 2 and 3, in the order in which the names appear above. Dur- ing the six months subsequent to July ist the following trans- actions took place. July 23d, J. F. Dominick bought 100 shares and received cer- tificate No. 4 ; August loth, A. J. Hudson subscribed for 5 shares and paid 25% on account; August 20th, the incorporators sub- scribed for 500 shares and paid 25% on account; August 28th, certificate No. 5 for 100 shares was issued to A. E. Pratt for land ; September 4th, paid contractor $5,000 on account of build- ing contract of $40,000; September loth, incorporators paid 25% on account of stock; September 12th, paid contractor $15,000; September 14th, issued certificate No. 6 for 50 shares to R. E. Holmes for patents on machinery; September 17th, bought ma- chinery for $10,000, paying $5,000 on account and giving notes for the balance; September 20th, Dominick sold 25 shares to James Powers (new certificates No. 7 and No. 8) ; September 24th, incorporators paid balance due on stock, except Jennings, who gave a note for $5,000 for part of the amount due from him; certificates were issued — No. 9 to Phipps for 200 shares. No. 10 to Borman for 200 shares, and No. 11 to Jennings for 100 shares; October loth, paid balance on building contract; October 1 2th, William Mortimer, attorney, rendered a bill of $500 for services in connection with the organization of the company; 92 Problem Number Eleven October 14th, H. Britton subscribed for 15 shares of stock and paid 50% on account; October i8th, Dominick sold 5 shares each to D. Reed, H. Robinson, and F. Stone (new certificates No. 12, No. 13, No. 14, No. 15) ; October 30th, Hudson refused to make further payments on his subscription and it was cancelled ; Octo- ber 31st, Borman pledged 100 shares of his stock as collateral for a personal loan of $5,000 from the Park National Bank. From the foregoing prepare : (a) Formal journal entry opening the general books (debit- ing capital stock unissued and crediting capital stock authorized). {b) Skeleton ledger accounts showing the transactions on the general books. {c) General balance sheet, October 31, 1912. {d) Stock book as required by law. (^) List of stockholders, showing number of shares held by each, October 31, 1912. Memo : acceptance of Jenning's note found not to be legal. (Penal law-section 644; sub-section 3). Note replaced by cash Sept. 27. Solution to Probi^em No. 11 A careful persual of the problem together with the require- ments shows that the stock records as well as the financial records are involved. For the purpose of demonstration the problem will therefore be divided into two parts, namely, that dealing with the entries affecting the financial transactions and that dealing with the stock record and entries. The authority for corporate existence is the charter. The ^ charter sets forth the amount of the authorized capital stock f* The corporate existence begins with the official act of filing the certificate of incorporation which is the function of the secretary of state. For example, although a given certificate of incorpora- tion might be signed and executed by the incorporators on July I, if the certificate were not officially filed by the secretary of state until July 5, the life or legal existence of such corporation would not begin until the latter date. The law in New York prescribes that the filing and recording fees (filing $10, record- ing 15c per 100 words) shall be sent to the secretary of state while the organization tax (50c per $1,000 of the authorized capital stock) shall be paid to the state treasurer. 93 Elementary Accounting Problems There may be raised at this point the very interesting question ; "How can a corporation have funds and make payments before its legal existence begins?" The question may be answered by stating that the difficulty is overcome in at least three different ways. Many incorporators deposit with their attorney, who pre- pares the papers and attends to the incorporating, a sum to be used for this purpose. It may be remarked incidentally that the work of preparing the papers belongs to the lawyer and is uni- versally conceded by the best opinions to be without the province of the accountant. In other cases a sufficient sum is advanced, in trust as it were, by one or more of the incorporators, to the person charged with carrying out the formalities of attending to these payments. In still other cases, the incorporators pay for all or a part of their stock subscriptions in advance under the con- ditions previously named. We come now to the method of making the opening entries. Two methods must be recognized. One consists in setting up the authorized capital stock as of the date the corporate life begins. This may be called the formal method. The other consists in making a memorandum entry at such time, but deferring the opening of a capital stock account until such time, and in such amounts, as the stock is issued. This is known as the pro forma method. Needless to say accountants differ in their preference. The public service commission of New York and the Interstate Commerce Commission require the formal method. One of the leading members of the accounting profession recently character- ized it as absurd. The author modestly recommends it since on several occasions he has spent hours and in one case actually days in trying to ascertain the authorized capital stock. In all of these cases the information was essential to a comprehensive report. It is proposed in these problems to treat of both methods, since it is the desire to present at all times as many phases of a situation as possible rather than express personal opinions. In this prob- lem, however, the formal method will be used since it is one of the requirements of the problem. The entries follow: 1912 July I Capital stock unissued $100,000.00 To capital stock authorized $100,000.00 To record the organization of the Ameri- can Chocolate Company incorporated under the laws of the state of New York, July i, 94 Problem Number Eleven 1912, with an authorized capital stock of $100,000 divided into 1,000 shares of the par value of $100 each. Subscribers to capital stock $ 3,000.00 To subscriptions to capital stock $ 3,000.00 For 30 shares of stock subscribed for by the incorporators. Cash $ 3.000.00 To subscribers to capital stock $ 3,000.00 Stock paid for by incorporators. Subscriptions to capital stock $ 3,000.00 To capital stock unissued $ 3,000.0a For 30 shares of stock issued to incor- porators upon payment therefor. Organization expense $ S4'20 To cash $ 54.20 For organization tax and filing fee. July 2Z Cash $ 10,000.00 To capital stock unissued $ 10,000.00 For 100 shares of stock issued for cash. Aug. 10 Subscribers to capital stock $ 500.00 To subscriptions to capital stock $ 500.00 For subscription to 5 shares of stock. Aug. 10 Cash $ 125.00 To subscribers to capital stock $ 125.00 For 25% paid on account of above stock subscription. Aug. 20 Subscribers to capital stock $ 50,000.00 To subscriptions to capital stock $ 50,000.00 For subscriptions to 500 shares of stock. Cash $ 12,500.00 To subscribers to capital stock $ 12,500.00 First payment of 25% on account. Aug. 28 Land $ 10,000.00 To capital stock unissued $ 10,000.00 For 100 shares of stock issued to A. E. Pratt for land. Sept. 4 Buildings $ 5,000.00 To cash $ 5,000.00 95 Elementary Accounting Problems First payment on account of $40,000 build- ing contract. Sept 10 Cash $ 12,500.00 To subscribers to capital stock $ 12,500.00 Second payment of 25% on account of stock subscriptions. Sept. 12 Buildings $ 15,000.00 To cash $15,000.00 Second payment on account of building contract. Sept. 14 Patents $ 5,000.00 To capital stock unissued $ 5,000.00 For 50 shares of stock issued to R. E. Holmes for patents on machinery. Sept. 17 Machinery $ 10,000.00 To cash $ 5,000.00 Notes payable 5,000.00 Sept. 24 Cash $20,000.00 Notes receivable 5,000.00 To subscribers to capital stock $ 25,000.00 Balance due on account of stock subscrip- tions. Note received from Wm. Jennings. Subscriptions to capital stock $ 50,000.00 To capital stock unissued $ 50,000.00 Oct. 10 Buildings $ 20,000.00 To cash $ 20,000.00 Final payment on $40,000 building con- tract. Oct. 12 Organization expense $ 500.00 To accounts payable $ 500.00 Legal expenses in connection with incor- poration. Oct. 14 Subscribers to capital stock $ 1,500.00 To subscriptions to capital stock $ 1,500.00 Subscription to 15 shares of capital stock. Cash $ 750.00 To subscribers to capital stock $ 750.00 Payment of 50% on account of above sub- scription. Oct. 30 Subscriptions to capital stock $ 500.00 To subscribers to capital stock $ 375.00 Profit and loss 125.00 96 Problem Number Eleven For subscription of A. J. Hudson to 5 shares of capital stock cancelled on account of failure to pay balance due on stock. SKELETON LEDGER ACCOUNTS Capital Stock Unissued Capital Stock Authorized $100,000.00 $100,000.00 Bal. $ 22,000.00 Bal. $ 3,000,00 10,000.00 10,000.00 5,000.00 50,000.00 22,000.00 $100,000.00 $100,000.00 Subscribers to Capital Stock Subscriptions to Capital Stock $ 3,000.00 $ 3,000.00 500.00 125.00 50,000.00 12,500.00 1,500.00 12,500.00 25,000.00 750-00 375-00 Bal 750.00 $ 55,000.00 $ 55,000.00 Bal. $ 750.00 $ 3,000.00 50,000.00 500.00 Bal. 1,500.00 $ 3,000.00 500.00 50,000.00 1,500.00 $ 55,000.00 $ 55,000.00 Bal. $ 1,500.00 Cash $ 3,000.00 $ 54.20 10,000.00 5,000.00 125.00 15,000.00 12,500.00 5,000.00 12,500.00 20,000.00 20,000.00 750.00 5,000.00 Bal. 18,820.80 $ 63,875.00 $ 63,875.00 Bal. $ 18,820.80 Land $ 10,000.00 97 Notes Payable $ 5,000.00 Accounts Payable $ 500.00 Elementary Accounting Problems Buildings Notes Receivable $ 5,000.00 15,000.00 20,000.00 Patents $ 5,000.00 Organization Expense % 54.20 500.00 $ 5,000.00 $ 5,000.00 Machinery $ 10,000.001 Profit and Loss 125.00 THE AMERICAN CHOCOLATE COMPANY Generai, Bai^ance Sheet — October 31, 1912 Assets Liabilities and Capital Land and buildings $50,000.00 Machinery 10,000.00 Patents 5,000.00 Current assets : Cash $ 18,820.80 Subscribers to capital stock 750.00 Total current assets $ 19,570.80 Organization expense .. 554-20 Total assets $ 85,125.00 Capital Stock : Authorized $100,000.00 Less — unissued 22,000.00 Issued and outstanding.. 78,000.00 Subscriptions to capital stock 1 ,500.00 Current liabilities : Accounts payable $ 500.00 Notes payable 5,000.00 Total current liabilities $ 5,500.00 Profit and loss — surplus 125.00 Total liabilities and cap- ital $ 85,125.00 98 Problem Number Eleven O O pq W u O H 1 O U u < w :^ I— I w C/3 CO gj a ^ M ^ ^ i P^ i (U -43 o ^ o^ ^ -c^ IS c . C to O aJ M-l ^ o t^ V /'~\ ir, ^ <" 1^2^ ^ ^"^ M O v^ mount Paid hereon < H <«- en (U ;-i ^3 03 OJ ^ 3 C/3 en o" CO ^ "cS tn o O VC :^ Vh <-M ^ U '■S u 'O Si ,^ » 0\^ HfgO 1-1 ;3 1—, TS tn , rt Vh J3 ^- c : . en . .5 a; O « Ti-^ C j;,'- oj ^f^iri Qffife «>'d ^ »- ^ 03 00 Datec ransfe ares b; oveN "0 1 ^^ •a I a d i I c o o I •d I 99 Elementary Accounting Problems AMERICAN CHOCOLATE COMPANY List op StockhoivDErs — October 3i» 1912 Name No. of Shares Henry Borman 210 J. F. Dominick 60 R. E. Holmes 50 William Jennings no James Phipps 210 A. E. Pratt 100 James Power 25 D. Read 5 H. Robinson 5 F. Stone 5 780 2. By Section 32 of Stock Corporation Law, New York, every stock corporation must keep or cause to be kept at its principal office a book called the STOCK BOOK, containing all names alphabetically arranged of stockholders, places of residence, number of shares held by each, time when they became owners, amount paid thereon. Neglect to keep such a Stock Book, imposes a penalty of $50, neglect or refusal to make proper entries in same, neglect or refusal to exhibit same or allow same to be inspected as provided by said Section imposes a penalty on the corporation, or officer, or agent thereof of $50 for every day of such neglect or refusal. PROBI.EM No. II-A The New York Tool Company was incorporated under the laws of the state of New York, July i, 19 12, with an authorized capital stock of $100,000, divided into 1,000 shares of the par value of $100 each. The incorporators, each of whom subscribed and paid for 20 shares of stock, were R. S. Savage, W. L. Groves, and S. B. Long. The organization tax and filing fees were $53.45. The bill of the attorney for services in connection with incorporation was $300. The first three stock certificates were issued to the incorporators. The subsequent transactions were as follows: July 20th, C. Stevens bought 100 shares and received certificate No. 4; August 5th, H. Tepper subscribed for 10 shares and paid 50% on account thereof; August 17th, Savage subscribed for 100 shares. Groves 125 shares, and Long 75 shares, each paying 50% on account; August 26th, certificate No. 5 for 300 shares was issued to John Thompson for land and buildings; September 5th, bought ma- chinery in the amount of $12,000, paying $8,000 in cash and giv- ing note for balance; September i6th, certificate No. 6 for 60 100 Problem Number Eleven shares issued to John Darby for patents; October 2d, Stevens sold 30 shares to M. McLean (new certificates No. 7 and No. 8) October 4th, Savage and Groves paid balance on account of sub- scriptions, in cash; Long paid part in cash and gave a note of $2,500 for the balance; certificates No. 9, No. 10 and No. 11 issued to the incorporators; October 21st, K. Libby subscribed for 30 shares, paying 50% on account; October 23d, M. McLean sold 10 shares to B. Partridge, 5 shares to E. Flint, and 5 shares to T. Porter (new certificates No. 12, No. 13, No. 14 and No. 15 issued) ; October 31st, Savage assigned 10 shares of stock to B. Jones : Tepper refused to make further payments on his sub- scription and it was cancelled. From the foregoing prepare: (a) Formal journal entry opening the general books and journal entries for subsequent transactions. , (b) General balance sheet, October 31, 191 2. (c) Stock book as required by law. (d) List of stockholders, showing number of shares held by each, October 31, 1912. lOI Elementary Accounting Problems PROBLEM No. 12 Demonstration On April I, 1912, W. B. Hone, A. J. Hone, and F. G. Hone, all being general partners in the firm of L. B. Hone's Sons, build- ing contractors, decided, in order to preserve the organization of their business in case of the death of any of the partners, to in- corporate. Accordingly they filed a certificate of incorporation with the secretary of state at Albany, and paid the organization tax and fil- ing fee in the amount of $15.75 ($12.50 tax, $3.25 filing fees) out of $500 advanced by W. B. Hone. The par value of the shares was $100 each. The balance sheet of the copartnership was as follows : assets : land and buildings (net value), $35,000; machinery and tools (net value), $9,500; loM Mich. Cent. 4's (cost), $9,887.50; horses, wagons, and harness (net value), $500; furniture and fixtures (net value), $1,000; building materials, $7,929.04; con- tracts in progress, $18,417.23; cash, $12,395.84; accounts receiv- able, $22,486.75; notes receivable and interest, $3,025.17; unex- pired insurance, $425. Liabilities and capital: taxes accrued, $125; salaries and wages accrued, $250; accounts payable, $7,- 528.82; capital, W. B. Hone, $40,237.28; capital, A. J. Hone, $35,182.16; capital, F. G. Hone, $37,243.27. Upon the formation of the corporation and the taking over of the business, each partner received 83 1-3 shares of stock and notes bearing interest at the rate of 6% per annum for the bal- ance of his capital account. The corporate name was L. B. Hone's Sons, Incorporated. After the new books had been opened it was discovered that charges to contracts in the amount of $325.72 had been omitted from the schedule and that $53.75 had been omitted from the ac- counts payable. On April 3d a cheque in the amount of $100 was received from the firm's brokers for interest, due April ist, which had been collected on the Mich. Cent. 4's. The cheque was handed to W. B. Hone. 102 Problem Number Twelve Prepare : (a) Journal entries opening the books of the corporation. (b) Balance sheet of the corporation, April i, 1912. (c) Skeleton ledger accounts showing the closing of the firm's books. SoiyUTlON TO PrOBI^EM No. 12 The problem presented herewith should be interesting, if somewhat novel, because of the fact that it was taken from actual experience. It illustrates one of the peculiar situations which arise in practice. Incorporation was resorted to in this case partly for the pur- pose of preserving the organization against death and partly to avoid having any action for employer's liability brought against the individual members of the firm by employees; also to avoid any individual difficulties with labor unions, etc. Judging from the combined capital accounts of the three partners as shown by the balance sheet of the copartnership one might have expected the capital stock of the corporation to have been from $100,000 to $125,000. It was pointed out by counsel that such procedure would increase the organization tax and the subsequent corporation taxes and that no more would be gained than if the capital stock were nominal in amount. As a conse- quence $25,000 was decided upon as the amount at which the corporation would be capitalized; the difference between the par value of 83 1-3 shares of stock and the capital of each partner being covered by notes of the corporation. In order that there might be funds out of which to pay the expenses of incorporation one of the partners advanced $500. In this respect the same question arises as in problem 11, as to how, not having achieved existence the corporation could hold funds and make disbursements. Legally perhaps it could not. What really happened it seems was that one of the partners advanced in trust for the proposed corporation an amount which was made available for disbursements on account of the corporation. The entry affecting the receipt of cash for expenses and the corresponding disbursements might perhaps more properly be made after the formal entry opening the books, if it were con- tended that no expenses could arise until the corporate life had 103 Elementary Accounting Problems begun. On the other hand if the entries were to be made chrono- logically there could be no question as to the priority. So much for theory. As a matter of practice, one entry would be made in the journal (setting up the capital stock) while the other (organ- ization expenses, etc.) would be made in the cash book. Both would probably be made as of April i, 1912 and no one could con- sistently complain thereat. Expressed in the form of journal entries and using the formal method of recording the organization of the company the items under discussion would appear as follows : 1912 April I Capital stock unissued $25,000. To Capital stock authorized $25,000. To record the organization of L. B. Hone's Sons, Incorporated, incorporated under the laws of the State of New York with an au- thorized capital stock of $25,000 divided into 250 shares of $100 each. Cash SCO. To W. B. Hone 500. For cash advanced for expenses of organiza- tion. Organization expense 15.75 To Cash 15.7s Following these entries would come the act of taking over the assets and liabilities of the copartnership, and the issuing of the capital stock to the individuals. The entry recording same would be based on the balance sheet of the copartnership, substituting for the capital accounts of the partners, the capital stock and notes payable of the corporation. The entry would appear as below: Land and buildings $35»ooo. Machinery and tools 9»500- Horses, wagons and harness 500. Furniture and fixtures 1,000. Mch. Cent. 4's (loM) 9,887.50 Building materials 7,929.04 Contracts in progress 18,417.23 Cash 12,39584 Accounts receivable 22,486.75 Notes receivable and interest 3,025.17 Unexpired insurance .^ 4^5- To taxes accrued ~ $ 125. Salaries and wages accrued 250. 104 Problem Number Twelve Accounts payable 7,528.82 Notes payable 87,662.71 Capital stock 25,00a I -» r. For the assets and liabilities of L. B. Hone's Sons \'*''' taken over by L. B. Hone's Sons, Incorporated in — * — exchange for capital stock and notes payable as above. With the exception of those affecting the discrepancies dis- covered after the books of the corporation were opened the jour- nal entries are now complete. In connection with the latter, it may be said that the question of disposition of these items is not so difficult as it would have been had not the parties in interest have been the same in each organization. If the schedule repre- senting contracts in progress had been correct, it would have shown $325.72 more than it did show. The effect of this would have been to increase the capital of the partners. Likewise a correct schedule of accounts payable would have shown $53.75 more than was shown, with a corresponding decrease in the capital accounts of partners. The net effect of these items would have been to increase the capital $271.97. If this had been done, the notes payable when issued would have been greater in amount to that extent. For practical purposes, the error may be cor- rected by distributing the amount among the three interested parties and issuing new notes for the correct amounts ($31,- 994.60, $26,939.49, $29,000.59) issuing additional notes for $271.97 ($90.66 each), or crediting the amount ($271.97) to accounts payable, representing the individuals. The objection to the latter would be that unless paid to the partners immediately they would loose the interest at 6% to which they are entitled and which was borne by the notes. It is therefore thought de- sirable to make an entry as follows : Contracts in progress $3^5-7^ To Accounts payable 53-75 Notes payable $271.97 From the above entries the accounts may be set up and ad- justed so that the following balance sheet will result: 105 Elementary Accounting Problems Iv. B. HONE'S SONS, INCORPORATED Balance Sheet — April i, 19 12 Assets Liabilities and Capital Land & buildings $ 35,000. Machinery & tools 9,500. Horses, wagons & harness 500. Furn. & fixtures 1,000 Mich. Cent. 4's (par $10,000) 9,887.50 Working assets: Material & sup $ 7,929.04 Invested in contracts . . 18,742.95 Total working assets $ 26,671.99 Current assets: Cash $ 12,880.09 Accounts rec 22,486.75 Notes rec. & int 3,025.17 Total current assets $ 38,392.01 Deferred charges to ex- pense : Unexp. insurance $ 425. Organization exp 15.75 Total deferred charges to exp $ 440.75 Total assets $121,392.25 Capital stock outstanding $ 25,000.00 Notes payable 87,934.68 Current liabilities : Taxes accrued $ 125. Sal. & wages ace 250. Accounts payable 8,082.57 Total current Iblts. . .$ 8,457.57 Total liabilities and capital $121,392.25 The problem calls for skeleton ledger accounts showing the closing of the firm's books. Since what is true of one asset ac- count is true of all asset accounts in this particular case — and the same may be said of the liabilities — it is thought that time and labor may be saved if the assets are represented collectively and respectively by single accounts called "copartnership assets" and "copartnership liabilities." In following the entries it may help if it is known that the assets and liabilities were first debited and credited respectively to L. B. Hone's Sons, Incorporated ; that account was closed when the capital stock and notes were re- 106 Problem Number Twelve ceived; the latter two accounts were closed when the stock and notes were distributed among the partners. Copartnership assets $120,566.53 I $120,566.53 L. B. Hone's Sons, Inc. Copartnership liabilities $7,903.82 I $7,903.82 W. B. Hone, Capital Assets $120,566.53 Contr's. 325.72 Liabs. $7,903.82 A/cpay. 53.75 Capital stk. 25,000. Notes 87,934.68 $120,892.25 B. H. Sons Inc. Stock Notes •.$ ^,333-33 .. 31,994.60 $40,237.28 90.65 $40,327.93 $40,327.93 A. J. Horn $120,892.25 Capital Stock I. . ', Cnpital $25,000. $25,000. Stock Notes ..$ 8,333-33 .. 26,939-49 $35,182.16 90.66 Notes payable L. B. H. Sons Inc. ,$35,272.82 F. G. Horn $35,272.82 7, Capital $87,94368 $87,943.68 Stock Notes .$ 8,333-33 . 29,000.59 ^37,24327 90.66 $37,333-92 $37,333-93 Probi^km No. 12-A (Practice) In order to avoid personal liability the firm of Smith Brothers, comprised of A. L., B. M., and C. N. Smith, incorporated in New York, on July i, 19 12, under the title of Smith Brothers, Incor- porated with an authorized capital of $50,000, divided into 500 shares of the par value of $100 each. A. L. Smith advanced $1,- 000 for expense. The organization tax and filing fees were $28.75 J legal expenses paid in connection with incorporation, $300. The balance sheet of the copartnership was as follows: As- sets, investments, $14,962.50; notes receivable and interest, $8,- 025; furniture and fixtures, $2,000; accounts receivable, $18,- 946.25 ; land and buildings, $50,000 ; materials and supplies, $12,- 107 Elementary Accounting Problems 483.12; equipment, $15,000; insurance unexpired, $250; cash, $10,573.43; motor trucks, $5,000; goods in process, $20,318.79. Liabilities and capital; bond and mortgage payable and interest $10,300; taxes accrued, $275; salaries and wages accrued, $1,250; accounts payable $18,496.27; notes payable and interest $10,125; proprietorship, A. L. Smith, $50,000; B. M. Smith, $45,321.16; C. N. Smith, $21,791.66. When the business was transferred to the corporation each partner received $166 2-3 shares of stock and notes for the balance of his investment. From the foregoing prepare : (a) Journal entries opening the books of the corporation. (b) Balance sheet of the corporation, July i, 1912. (c) Skeleton ledger accounts showing the closing of the co* partnership books. 108 Problem Number Thirteen PROBLEM No. 13 Demonstration The Hackett Novelty Company was organized on January i, 191 2, under the laws of the state of New York, with an author- ized capital stock of $5oo,0(X) divided into 2,500 shares of pre- ferred stock of the par value of $100 each and 5,000 shares of common stock of the par value of $50 each. At the first meeting of the directors a proposition was re- ceived from Jones and Hackett, a copartnership trading under said name, whereby it was proposed to transfer the business property and goodwill of the copartnership, except cash, to the corporation, for and in consideration of the sum of $400,000 to be paid in the capital stock of the corporation, $250,000 in pre- ferred stock and $150,000 in common stock, the corporation to assume all the debts in connection with said business. The propo- sition was accepted by the directors and the value of the busi- ness acquired fixed by them at $400,000. From the schedules of assets and liabilities the following ac- counts were opened by the corporation : land and buildings, $100,- 000; equipment; $25,000; motor truck, $6,000; furniture and fix- tures, $8,000; investments, $50,000; materials and supplies, $15,- 963.21; goods in process, $32,813.97; finished goods, $25,195.64; accounts receivable, $47,972.13 ; notes receivable and interest, $10,- 125 ; insurance unexpired, $475 ; bond and mortgage payable and interest, $30,450 ; taxes accrued, $780 ; salaries and wages accrued, $3,265 ; accounts payable, $49,607.52 ; notes payable and interest, $20,225.72. Of the common stock remaining after the issue of that to Jones and Hackett, 1,200 shares were sold to various persons for cash, out of which $1,000 was paid to an attorney for organization taxes, filing fees, and expenses. From the above prepare : (a) Pro-forma journal entry opening the books, followed by journal entries expressing the subsequent transactioas. 109 Elementary Accounting Problems \h) General balance sheet of the corporation after the entries have been made. (c) Skeleton ledger accounts showing the closing of the firm's books. Note : According to the balance sheet of the firm on Decem- ber 31, 191 1, the assets were $354,328.24; the Habilities, $104,- 328.24; capital, A. Jones, $150,000, B. Hackett, $100,000. The partners divided profits and losses in proportion to investment. S01.UT10N TO Proble:m No. 13 The method of treating the capital stock in this solution dif- fers from that in problem No. ii in that no cognizance, in so far as the money value is concerned, is taken of the capital stock until same is issued. A memorandum or pro-forma entry is made to record the organization of the company and to give the details concerning the amount, number of shares and par value of the capital stock authorized. The first entry affecting the capital stock account on the general ledger is made in connection with the purchase of the business property and goodwill of the copartner- ship of Jones & Hackett. Subsequent entries are made in the capital stock account in connection with the sale of 1,200 shares of the common stock for cash. The capital stock accounts, namely, preferred and common, show only the capital stock out- standing. The capital stock authorized is not shown in any way on the general books. The disadvantages of the pro-f orma method were discussed in problem No. 11. In connection with the purchase of the business property and goodwill of Jones & Hackett, an account called "Plant and Sun- dry Assets" is charged with the amount of the purchase price agreed upon. Jones & Hackett as vendors are credited with the amount. It will be noted in the journal entry covering this trans- action that the directors have fixed the value of the business ac- quired at $400,000. This is in order that the stock issued for said property may be fully paid and not liable to any further call. In New York state the judgment of the directors, in the absence of fraud in the transaction, is conclusive as to the value of the property purchased. The law further states, "In all statements and reports of the corporation, by law required to be published or filed, this stock shall not be stated or reported as no Problem Number Thirteen being issued for cash paid * * * but shall be reported as issued for property purchased." For the purpose of getting the assets and liabilities on the books in detail, it becomes necessary to distribute the plant and sundry assets account. From the schedules of assets and liabil- ities acquired and taken over it will be seen that the assets amount to $321,544.95 while the liabilities amount to $104,328.24. Thus the value of the net assets taken over is found to be $217,216.71. For these the corporation apparently paid $400,000. The differ- ence between the net assets and this amount, namely, $182,783.29 must be attributed to goodwill, and the goodwill account is there- fore set up in this amount. It is not the intention of the author either to approve or disapprove of this procedure nor to discuss the question of whether or not the goodwill is worth the amount at which it is shown. The purpose is rather to illustrate one of the various procedures resorted to in the treatment of goodwill. The remaining entries and statements required by the prob- lem will presumably need no discussion with the exception of the skeleton ledger accounts showing the closing of the firm's books after the sale had taken place and settlement had been made by the corporation. Comparing the assets taken over by the cor- poration with the assets stated as having appeared on the balance sheet of the firm on December 31, 191 1, a discrepancy will be noted while the liabilities agree. In this connection attention is invited to the fact that the corporation purchased the property and goodwill of the copartnership except cash. It would thus seem logical to attribute the difference to the cash which was not transferred. This might give rise to the question concern- ing the distribution of the assets as to whether or not the cash should not first be taken out and distributed between the part- ners. This of course might be done but it would seem to be unnecessary since if it were done, the cash would be distributed in the proportions of investment and nothing would be gained by making a separate transaction of it since profits and losses as well as net assets resulting in this particular case were divided be- tween the partners in accordance with their respective investments. January i, 1912. To record the organization of The Hackett Novelty- Company, incorporated under the laws of the state of New York on January i, 1912 with an III Elementary Accounting Problems authorized capital stock of $500,000 divided into 2,500 shares of preferred of the par value of $100 each ($250,000) and 5,000 shares of common of the par value of $50 each ($250,000), this entry- is made. Plant and sundry assets $400,000.00 To Jones & Hackett, vendors $400,000.00 For the business property and goodwill of Jones and Hackett, a copartnership, pur- chased from said parties for the sum of $400,000, in accordance with proposal and ac- ceptance of January i, 1912, which sum was fixed by the directors of The Hackett Novelty Company as the value of said property and goodwill, payment to be made in capital stock of The Hackett Novelty Company as follows. Preferred stock 2,500 shares. $250,000.00 Common stock 3,000 " 150,000.00 $400,000.00 Jones & Hackett, vendors 400,000.00 To Preferred capital stock outstanding .... 250,000.00 Common capital stock outstanding .... 150,000.00 To record the settlement with Jones & Hackett, vendors, in accordance with the terms of contract above set forth. Land and buildings ^..^ ^ . . . 100,000.00 Equipment 25,000.00 Motor truck 6.000.00 Furniture and fixtures 8,000.00 Investments 50,000.00 Materials and supplies 15,963.21 Goods in process 32,813.97 Finished goods 25,195.64 Accounts receivable 47,972.13 Notes receivable and interest 10,125.00 Insurance unexpired 475-00 Goodwill 182,783.29 To Bond and mortgage payable and interest 30,450.00 Taxes accrued 780.00 Salaries and wages accrued 3,265.00 Accounts payable 49,607.52 Notes payable and interest ^0,^225.72 Plant and sundry assets 400,060.00 To distribute the plant and sundry assets account. Cash 60,000.00 To Common capital stock outstanding 6o,000.00 For 1,200 shares of common stock sold at par. 112 Problem Number Thirteen Organization expense i,ooo.oo To Cash 1,000.00 Payment to attorney for incorporation tax, filing fees and sundry expenses incident to organization. THE HACKETT NOVELTY CO. General Balance Sheet — ^January i, 1912 Assets Land and buildings $100,000.00 Equipment 25,000.00 Motor trucks 6,000.00 Furniture and fixtures.. 8,000.00 Investments 50,000.00 Goodwill 182,783.29 Working and trading as- sets: Materials and supplies $ 15,963.21 Goods in process 32,813.97 Finished goods 25,195.64 Total working and trading assets ....$ 73,972.82 Current assets: Cash $ 59,000.00 Accounts receivable . • 47,972.13 Notes receivable and interest 10,125.00 Total current assets. $117,097.13 Deferred charges to ex- pense : Insurance unexpired ..$ 475.00 Organization expense.. 1,000.00 Total deferred charges to expense. $ 1,475,00 iTotal assets .$564,328.24 Liabilities and Capital Capital stock outstanding : Preferred $250,000.00 Common 210,000.00 Total capital stock outstanding $460,000.00 Bond and mortgage pay- able and interest 30450.00 Current Liabilities: * Taxes accrued $ 780.00 Salaries and wages ac- crued 3,265.00 Accounts payable 49,607.52 Notes payable and in- terest 20,225.72 Total current liabil- ities $ 73,878.24 Total liabilities and capital $564,328.24 113 Elementary Accounting Problems Skeleton Ledger Accx)unts Showing the Cwsing of the Firm's Books, After the Sale Assets Liabilities ?354,32«.24 \F.&h $354,32«.24 P. & L $I04,32«.24 | $104,328.24 The Hackett Novelty Company Securities Sale . .$400,000.00 I Secur- H.N. Co. $400,000! Jones. .$240,000.00 ities $400,000.00 1 Hackett 160,000.00 PROFIT AND LOSS Assets $354,328.24 Jones 90,000.00 Hackett 60,000.00 $504,328.24 Liabilities $104,328.24 H.N.Co 400,000.00 $504,328.24 A. Jones B. Hackett Secur- ities $240,000.00 $240,000.00 Secur- Bal. $150,000.00 ities $160,000.00 P&L 90,000.00 $240,000.00 $160,000.00 Bal. $100,000.00 P&L 60,000.00 $160,000.00 PROBI.EM No. 13-A (Practice) The Classical Book Company, a corporation organized and existing under the laws of the state of New York, having filed its charter on July i, 1912, which charter authorized preferred capital stock, 1,250 shares, $100 each, and common capital stock, 2,500 shares, $50 each, receives a proposition from Benedict and Selleck whereby said parties agree to transfer all the property, business, and goodwill, except cash of the firm of Benedict and Selleck in consideration of all the capital stock of The Classical Book Company, said corporation to assume all debts of the firm. The proposition was accepted and the value of the property ac- quired fixed by the directors at $250,000. Benedict advanced $10,000 in cash, taking the corporation's note. The assets and liabilities acquired were valued in detail as follows: land and buildings, $75,000; machinery, tools, etc., $18,000; horses, wagons and harness, $2,500; furniture and fix- tures, $5,000; Atlantic Coast Line 4's, $15,000; paper stock and supplies, $20,782.13; work in process, $15,951.46; books, $35,- 114 Problem Number Thirteen 864.17; accounts receivable, $13,326.19; notes receivable and in- terest, $5,012.50; advertising unused, $325; bond and mortgage payable and interest, $15,125; taxes accrued, $250; salaries and wages accrued, $1,875; accounts payable, $43,046.13; notes pay- able and interest, $30,247.79. The balance sheet of Benedict and Selleck on June 30, 1912, showed assets, $215,543.92; liabilities, $90,543.92; capital, A. Benedict, $100,000; B. Selleck, $25,000. Profits and losses were distributed in proportion to investments. Prepare : (a) Pro-forma journal entry opening the books of the cor- poration, followed by journal entries to record the sub- sequent transactions. (J?) General balance sheet of the corporation after the en- tries have been made. {c) Skeleton ledger accounts showing the closing of the firm's books. "5 Elementary Accounting Problems PROBLEM No. 14 Demonstration The Hampton Circle Swing Company was organized in New York on April i, 19 12, with an authorized capital stock of $500,000, divided into 5,000 shares of the par value of $100 each. The certificate of incorporation was filed April 5th. At a meeting of the directors held on April 6th, there was acquired from W. J. Hampton at a valuation of $500,000, all his right, title and interest in various patents held by him on the Hampton Circle Swings. In order to raise funds with which to exploit the invention Mr. Hampton donated to the company 2,499 shares of stock. Of this 2,250 shares were sold from time to time at an average price of 90, and 225 shares were used in giving a bonus of 10% in stock. The parts necessary to erect and equip three swings were purchased from the Danielson Iron Company. The cost was $73,247.92, of which $50,000 was paid in cash. The labor inci- dent to erection was paid for in cash and amounted to $45,386.58. One swing was installed at Coney Island at a cost of $39,544.83 ; one at Atlantic City at a cost of $41,275.17; and one at Fort George at a cost of $37,814.50. The privileges cost, collectively, $12,000. The net income from the operation of the swings for the season was: Coney Island, $12,273.85 (sold before Labor Day for $50,000) ; Atlantic City, $2,863.15 (installation not com- pleted until after July 4th) ; Fort George, $6,743.35. The salaries and expenses of the company from April i to September 30, 1912, were $18,787.59. The balance on account was paid to the Danielson Iron Company and $2,000 was paid for a privilege at Ocean City for the season of 191 3. Prepare : (a) Journal entries opening the books of The Hampton Circle Swing Company and covering subsequent transactions. (Jb) Balance sheet, September 30, 1912. 116 Problem Number Fourteen S01.UT10N TO Probi:.e:m No. 14 It is probable that circle swings are sufficiently familiar to the average reader to require no description. They have sprung into existence and attained popularity within the past fifteen years. They are now an important feature of most modern amusement parks. This problem is taken from a company which was organized by the man who it is understood was the inventor of the circle swing and is largely based on facts. It illustrates the ingenuity of an inventor who was an organizer and man of business ability as well as a mechanical genius. With a sufficiency of patents and no funds, this man, who for our purposes may be called "Hampton," set about to organize a corporation and acquire the entire capital stock thereof in ex- change for his patents. The details of organization, such as the paying in of the small amount of cash required and the matter of organization expense may be passed over since such points have been fully discussed in previous problems and the purpose of the present problem is to bring out other points. With the donation by Hampton of 2,499 shares of stock we are brought face to face with the first debatable point. Pre- sumably no one will dispute the fact that the stock, from the standpoint of the company, becomes treasury stock, since it complies with the usual interpretation of the term which holds that treasury stock is such stock as has been once issued for value and subsequently acquired. Parenthetically it may be noted that Hampton while having provided stock which may be sold at whatever price it will bring, or if desirable, given away, has not parted with the controlling interest in the corporation. It is also apparent that his object in donating the stock was to provide what may be rather loosely termed "working capital." On the question of what account title or interpretation shall be given to the credit which arises when treasury stock is debited, authors, authorities and novices differ. It has been variously referred to as "stock donation account," "treasury stock do- nated," "treasury stock suspense," "working capital," "capital surplus suspense," "surplus from donated stock," etc. A consid- eration of what it is rather than what it is called will doubtless be of some interest. 117 Elementary Accounting Problems The capital stock in the amount of $500,000 was originally- issued for patents. Were the patents worth $500,000? Future operations of plants and income derived therefrom only will answer such a question. If in the judgment of the directors, this being a New York corporation, such was the value, their judgment in the absence of fraud would be conclusive. If it is conceded that $500,000 was the value of the patents, any subsequent donation of stock would affect the surplus to the extent of the value of the stock. The question of this value then becomes the second question to be settled. Any attempt to fix or estimate the value of the donated treasury stock would encounter ridicule. Obviously it is worth what it will bring upon sale. It is therefore apparent that some temporary disposition must be made of the credit if an account is to be set up for the treasury stock. Of the titles mentioned all are available except "surplus from donated stock." It should in the opinion of the author be pointed out that this is not yet surplus. It is merely a bookkeeping account set up as an expe- dient for holding the amount in suspense until the exact amount of the surplus arising from the donation is determined. For this purpose, "stock donation account" perhaps serves as well as any other. In the problem under discussion, when the donated stock is received, treasury stock may be debited in the amount of $249,900 and "stock donation account" credited. When the 2,250 shares are sold at 90, and 225 shares given away as a bonus, treasury stock should be credited in the amount of $247,500, and cash, $202,500, discount on stock, $22,500, and stock bonus, $22,500, respectively, debited. The accounts for discount and stock bonus might then, if it were desired to close the books, or set up a comprehensive balance sheet, be closed out to the stock donation account, the balance of which ($202,500), after bringing down an amount corresponding to the inven- tory of treasury stock ($2,400), could be closed out to cap- ital surplus or to profit and loss surplus. The former would not be available for dividends while the latter would be. So far as the author has been able to ascertain after energetic research, there is no legal restriction upon treating such an item as profit and loss surplus. So to treat it, however, and pay it out as cash dividends would defeat the purpose of the donation. To its 118 Problem Number Fourteen distribution as stock dividends there could apparently be no objection. Up to this point the question at issue has been presented from one point of view — that point of view being taken by those who would contend that the patents could be consistently valued at $500,000. With a view to full discussion, it should be pointed out that those who oppose this view hold that the donation of the stock is in itself evidence that the assets acquired should not be valued at the par value of the capital stock issued for them. The treatment of the accounts in this case would be the same as previously presented except that the amount previously credited ultimately to capital surplus or profit and loss surplus would be credited to patents, thereby reducing the book value of the asset. This treatment it seems cannot be consistently applied if the directors hold to the contrary through their right to fix the value, but such procedure would undoubtedly be conserva- tive. Still another theory concerning the matter holds that the donation of stock is equivalent to discounting the capital stock and such theorists would debit discount on stock and credit pat- ents in the amount of the donation. One of the earlier legal decisions in the matter holds such a transaction to be evidence of discount, or issue below par ; but the courts have latterly held the contrary. If such an entry as was above noted should be made it is evident that treasury stock would not appear on the books, but that sales of the stock would be debited to cash and credited to discount on stock. It is presumed that the bal- ance of the discount account would be written off against profits over a period of years. The journal entries required by the problem are as follows : Patents $500,000.00 To capital stock outstanding $500,000.00 Treasury stock 249,900.00 To stock donation account 249,900.00 Cash 202,500.00 Discount on stock 22,500.00 Stock bonus 22,500.00 To treasury stock 247,500.00 Stock donation account 247,500.00 To discount on stock 22,500.00 Stock bonus 22,500.00 Capital surplus 202,500.00 119 Elementary Accounting Problems Cost of swings 118,634.50 To accounts payable Cash Accounts payable 50,000.00 To cash Privileges (1912) 12,000.00 To cash Cash 21,880.35 To income from swings Coney Island $12,273.85 Atlantic City 2,863.15 Fort George 6,743.35 $21,880.35 Cash 50,000.00 To cost of swings Profit and loss Salaries and expenses 18,787.59 To cash Accounts payable 23,247.92 To cash Privileges (1913) 2,000.00 To cash Capital surplus 29,41 1.76 Profit and loss 30,787,59 To privileges ( 1912) Salaries and expenses Patents — written off Income from swings 21,880.35 To profit and loss Profit and loss i,S47-93 To profit and loss surplus THE HAMPTON CIRCLE SWING CO. Balance Sheet — September 30, 19 12 73,247.92 45.386.58 50,000.00 12,000.00 21.880.35 39,544.83 10,455.17 18,787.59 23,24792 2,000.00 12,000.00 18,787.59 29,411.76 21,880.35 1,547.93 Assets Equipment (cost) $79,09.67 Patents 470,588.24 Treasury stock 2,400.00 Cash 122,958.26 Privileges (1913) 2,000.00 Total assets $677,036.17 Liabilities and Capital Capital stock outstand- ing $500,000.00 Stock donation account. . 2,400.00 Capital surplus 173,088.24 Profit and loss surplus.. 1,547.93 Total liabilities and capital $677,036.17 120 Problem Number Fourteen PROBI.EM No. 14- A (Practice) The Roller-Coaster Company was incorporated January i, 1912, under the laws of the state of New York, with an author- ized capital stock of $750,000, divided into 5,000 shares of pre- ferred and 2,500 shares of common stock of the par value of $100 each. The stock was all issued to Frederick Jolinson for patents. Johnson donated the common stock for working capital. Ninety per cent of it was sold at an average price of 85. Three outfits were erected as follows: Coney Island, cost $60,827.92; Midland Beach, cost $61,382.43; Glen Island, cost $59,783.47. The cost is composed of material obtained from sundry creditors in the amount of $120,421.78 (of which $97,- 421.78 was paid in cash), and labor of installation, $61,572.04. Privileges cost $8,750. The net income from operation for the season was: Coney Island, $8,762.50; Midland Beach, $5^327.90; Glen Island, $2,275.85. A privilege at Old Orchard for the season of 191 3 was purchased for $500. The salaries and expenses of the company from January ist to September 30th were $22,836.79. Prepare : (a) Journal entries opening the books and covering subse- quent transactions. {b) Balance sheet, September 30, 1912. 121 Elementary Accounting Problems PROBLEM No. 15 Demonstration The following is a trial balance of The Cotton Seed Oil Com- pany, September 30, 1912, after closing: Land and buildings, $1,275,946.27; equipment, $348,727.43; horses, wagons, and motor trucks, $12,872.51; furniture and fixtures, $15,269.50; investments, $200,000; materials and sup- plies, $65,138.79; goods in process, $25,591.46; finished goods, $45,468.71; cash, $68,649.52; accounts receivable, $125,279.34; notes receivable and interest, $41,286.39; sinking fund for re- demption of first mortgage bonds, $207,667.95; first mortgage bonds purchased out of sinking fund (87 at an average price of 102^), $89,175; deferred charges to expense, $12,813.97; first mortgage bonds payable, $300,000 (dated October i, 1892, due Ocotober i, 191 2, interest six per cent, payable April i and Octo- ber I, last paid April i, 1912) ; taxes accrued, $14,025; salaries and wages accrued, $18,927.34; accounts payable, $87,316.75; notes payable and interest, $51,487.63; interest accrued on first mortgage bonds, $9,000; reserve for depreciation of plant and equipment, $142,305.12; reserve for sinking fund, $210,825; Pre- ferred capital stock issued and outstanding, $1,000,000; com- mon capital stock issued and outstanding, $500,000; profit and loss surplus, $200,000. The sinking fund has been accumlated by a semi-annual deposit scientifically calculated, and the reserve for the sinking fund has been created out of profits. The entry affecting the reserve for the six months ended September 30, 1912, has been made, but the final sinking fund deposit has not been made. The bonds were taken up and cancelled as of October I, 191 2. The company issues as of October i, 191 2, a new series of 300 ten-year gold bonds which bear interest at five per cent, have a sinking fund provision, and the reserve for the sinking fund is to be created out of profits as before. Sinking fund deposits are to be made quarterly instead of semi-annually. The amount deposited December 31, 1912, was $6,136.68. The in- 122 Problem Number Fifteen tercst allowed on the deposit by the sinking fund depository to March 31, 1913, was $61.36. The amount deposited March 31, 1913, was $6,136.68. Prepare : (o) Journal entries and skeleton ledger accounts affecting the two issues of bonds. {b) Balance sheet, March 31, 1913. Solution to Problkm No. 15 The author's experience in making and solving problems leads him to observe that, while much attention has been paid to the creation of sinking funds, little attention has been given to their disposition. This problem has therefore as its object, in part, the illustration of how a sinking fund fulfills the purpose for which it is accumulated. The need for a sinking fund arises in connection with an issue of bonds. The day of reckoning may not be ignored. In order that the funds necessary to meet the obligation at maturity may be on hand when needed, they are accumulated, by laying aside installments periodically, in what is called a sinking fund. The authority upon which it rests is usually the sinking fund clause in the mortgage which states that the fund shall be "set aside out of profits." This is a somewhat loose form of expression, and from an accounting point of view frequently leads to dis- cussion. The accountant, with his love of precision, finds himself questioning the meaning of an expression such as the above. He is unable to determine whether a reserve is first to be created out of profits and subsequently funded, or whether a certain amount of cash or its equivalent is to be set aside only if the net profits are sufficient, without regard to the creation ol the reserve. It is doubtful if the man who drew the first mort- gage from which the others have been carelessly copied really knew himself what he meant. A moment's reflection will show the importance of being clear on the point. The fund may be accumulated by merely setting aside the cash installment from time to time and the company may pay dividends regularly. II the provision for the sinking fund is made out of profits, the company may pay no dividends until after the bond issue is 123 Elementary Accounting Problems retired To the author, reserving for a sinking fund seems ultra-conservative, since the reserve reverts to surplus as soon as the fund is used to pay off the bonds and the company is in no better position to pay a cash dividend than before. It is true, of course, that the surplus may be distributed as a stock divi- dend, but, it would appear, to the detriment of stockholders dur- ing the period intervening between the placing and retiring of the bonds if the list were a changing one. It may also be men- tioned here in passing that railroads and large industrials rarely issue sinking fund bonds any more, apparently on the theory that outstanding bond issues will be everlastingly refunded. Without further discussion of the relative advantages and disadvantages of reserves, it may be stated that the fund is ac- cumulated by setting aside periodically (monthly, quarterly, semi- annually or annually) a certain sum. These sums with their interest accumulate so that at the maturity of the bonds the fund is sufficient to retire them. The sinking fund scientifically cal- culated represents what is called *'the amount of an annuity." The amount to be set aside each time is determined by "divid- ing one (i) by the amount of an annuity." The easiest manner of determining the proper amount is to consult sinking fund tables such as Sprague's. In a word, the periodical installment is that which will, when set aside regularly at compound inter- est, amount to the required sum at the end of a given period. Another method of determining the amount to be set aside con- sists of dividing the amount of the indebtedness by the number of years, or divisions thereof, which the indebtedness has to run. The amount so determined is that which should be set aside at the end of each period. The fund will not only equal the amount of the bonds outstanding at maturity, but there will be an excess representing the accumulation of interest. Such procedure would be questionable from a standpoint of good finance, in that the company would have been unnecessarily deprived of the use of certain funds. This objection is sometimes overcome by deduct- ing from the amount to be deposited at the end of any period, after the first, an amount equal to the interest earned on the fund during the period just passed. For example; if the amount of a mortgage bond outstanding were $100,000 and the period covered by the bond, ten years, the amount to be deposited in the sinking fund semi-annually would be $5,000. If at the end 124 Problem Number Fifteen of the second period the interest on the $5,000 deposited at the end of the first period were $100, the amount to be deposited at the end of the second period would be $4,900. By continuing with this process, the amount which the company would be required to provide would decrease gradually as the interest on the fund increased. The sinking fund may exist in the form of cash on deposit with some interest paying institution or interest bearing secur- ities, the rate of interest on deposits ranging from two per cent, which is probably the most common, to four per cent, which is fairly high. The yield on securities will range from four and one-half to five and one-half per cent. In some instances the company's own bonds aflFord the most profitable medium of investment. That is to say, it sometimes becomes more profit- able to call some of the outstanding bonds even at a premium rather than allow the funds to remain invested in securities of other companies or deposited in a bank. This is usually pro- vided for in the bond through a clause which permits the com- pany to call the bonds after a certain date at a slight premium, sometimes however as high as no. If for example, a com- pany places an issue of five per cent bonds at par and sub- sequently the level of yield on bonds in general falls so that it is difficult to invest the sinking fund in bonds yielding more than four per cent, it becomes profitable, provided sufficient length of time remains before the maturity of the issue and the premiums required to obtain the bonds is not too high, for the company to call and cancel its own bonds, thereby saving the difference between four per cent and premium on the one hand and five per cent on the other. The contrast is the more striking and the extent of the saving more apparent if a de- posit at two per cent is substituted for the four per cent bond investment used in the above illustration. The effect of calling bonds is disastrous to the sinking fund calculations since they must be revised each time bonds are called and redeemed. If allowed to remain undisturbed until the maturity of the bonds the fund if scientifically calculated will amount exactly to the par of the bonds outstanding. If it exists in the form of bonds of other companies such securities will be converted into cash. The cash, whether proceeding from this source or 125 Elementary Accounting Problems from gradual accumulation, will be used to purchase the bonds outstanding, which will then be cancelled. There will doubtless arise, in thinking about the matter of interest involved in sinking funds, the question of what be- comes of the complement. When interest is charged to sinking fund, what is credited? Usually one of three accounts, namely, income from securities, reserve for sinking fund, or interest on bonds. Obviously, if the bonds are to be retired out of profits, that is, a reserve created and funded, the interest must be credited to the reserve in order that it may at all times equal the fund. If a reserve is not involved, the better procedure would seem to be to credit the amount to interest on bonds: first, be- cause by virtue of this income the expense for interest has been reduced; and second, because the funds corresponding to the income are tied up in the sinking fund and are not available for general purposes. The journal entries required by the problem follow. A work- ing sheet, for the sake of brevity in so far as the skeleton ledger accounts are concerned and to make the solution clear, has been substituted for the ledger accounts as called for: Sinking fund for redemption of first mtge. bonds... $ 3,157.05 To cash $ 3.157.05 For deposit to sinking fund (9/30/12), be- ing final payment on account of mortgage payable October i, 1912. First mortgage bonds purchased 213,000.00 To sinking fund for redemption of first mortgage bonds 210,825,00 Cash 2,175.00 For purchase of 213 first mortgage bonds outstanding September 30, 1912, at par. Interest accrued on first mortgage bonds 9,000.00 To cash 6,390.00 Profit and loss surplus 2,610.00 Payment of interest accrued and due on 213 bonds at time of cancellation ; excess inter- est on 87 bonds credited to profit and loss. First mortgage bonds payable 300,000.00 Profit and loss surplus 2,175.00 To first mortgage bonds purchased 302,175.00 To record cancellation of 300 first mortgage bonds due October i, 1912, and charge to surplus the premium on 87 bonds purchased at i02}/2. 126 Problem Number Fifteen Reserve for sinking fund 210,825.00 To profit and loss surplus 210,825.00 To close out to surplus the reserve for sink- ing fund, the bonds, for which the sinking fund was provided, having been purchased and cancelled. io/i/i2 Cash 300,000.00 To first mtge. bonds payable 300,000.00 For issue of first mortgage 5% gold bonds idated October i, 1912, due October i, 1922, subject to sinking fund, the reserve for which is to be created out of profits. ia/31/12 Sinking fund 6,136.68 To cash 6,136.68 Profit and loss surplus 6,136.68 To reserve for sinking fund 6,136.68 3/31/13 Sinking fund 61.36 To reserve for sinking fund 61.36 a/31/13 Sinking fund * . 6,136.68 To cash 6,136.68 Profit and loss surplus 6,136.68 To reserve for sinking fund 6,136.68 Profit and loss surplus (interest on bonds) 7,500.00 To int ace. on first mtge. bonds payable.. . . 7,500.00 127 Elementary Accounting Problems WORKING SHEET Debits Land and buildings Equipment H. W. and motor trucks. Furniture and fixtures.. Investments Materials and supplies. Goods in process Finished goods Cash Accounts receivable. Notes rec. and int. . . S/F for 1st mtge. bonds, 1st mtge. bonds pch'd, . . Deferred charges to exp. . Credits 1st mtge. bonds Taxes accrued Salaries and wages acrd. Accounts payable Notes payable and int.. . Int. ace. on ist mtge. bds. Res. depn. plant and equip Res. for sinking fund. . . , Pfd. C/S issued and out standing Com. C/S issued and out- standing P & L — surplus. Trial Balance Sept.30, 1912 $1,275,946.27 348,727.43 12,872.51 15,269.50 200,000.00 65,138.79 25.591-46 45,468.71 68,649.52 125,279.34 41,286.39 207,667.95 89,175.00 12,813.97 $2,533,886.84 300,000.00 14,025.00 18,927.34 87,316.75 51,487-63 9,000.00 142,305.12 210,825.00 1,000,000.00 500,000.00 200,000.00 $2,533,886.84 Adjustments Debits $ 300,000.00 5,157.05 6,136.68 61.36 6,136.68 213,000.00 300,000.00 9,000.00 210,825.00 6,136.68 2,175.00 7,500.00 6,136.68 Credits 6,390.00 2,175.00 3,157.05 6,136.68 6,136.68 210,825.00 302,175.00 Balance Sheet Mar. 30, 1913 $1: 300.000,00 7,500.00 6,136.68 61.36 6,136.68 210,825.00 2,610.00 275,946.27 348,727.43 12,872.51 15,269.50 200,000.00 65,138.79 25,591.46 45,468.71 344,654.11 125,279.34 41,286.39 12,334.72 12,813.97 $ 2,525,383.20 300,000.00 14,025.00 18,927.34 87,316.75 51,487.63 7,500.00 142,305.12 12,334.72 1,000,000.00 500,000.00 391,486.64 $2,525,38320 128 Problem Number Fifteen THE COTTON SEED OIIv COMPANY Bai^anc^ Sh^t, March 31, 1913 Assets Liabilities and Capital Capital stock (out- standing) : Preferred $1,000,000.00 Common 500,000.00 Total cap. stock... $1,500,000.00 I St mtge. 5% bonds (1922) 300,000.00 Current liabilities: Taxes accrued $ 14,025.00 Salaries and wages accrued 18,927.34 Accounts payable ... 87,316.75 Notes payable and in- terest 51,487.63 Int. ace. on bonds.... 7,500.00 Total current lia- bilities $ 179,256.72 Reserve for depr. of plant and equip 142,305.12 Reserve for sinking fund 12,334.72 P & L — surplus 391,486.64 Total liabilities and capital $2,525,383.20 Land and bldgs $1,275,946.27 Equipment 348,727.43 Horses, wagons and motor trucks 12,872.51 Furniture and fixtures. 15,269.50 Investments 200,000.00 Working and trading assets : Materials and sup- plies $ 65,138.79 Goods in process 25,591.46 Finished goods 45,468.71 Total working and trading assets... $ 136,198.96 Current assets: Cash $ 344,654.11 Accounts rec 125,279.34 Notes rec. and int... 41,286.39 Total current as- sets $ 511,219.84 Sinking fund 12,334.72 Deferred charges to exp. 12,813.97 Total assets $2,525,383.20 Probi,e:m No. 15a (Practice) The following is a trial balance of The National Gelatine Company, September 30, 1912, after closing: Land and buildings, $1,537,876.49; equipment, $384,734.72; horses, wagons, and truck, $15,296.25; furniture and fixtures, $20,543.62; investments, $250,000; materials and supplies, $56,- 973.15; goods in process, $37,195.64; goods in stock (packed), $54,864.17; cash, $86,946.25; accounts receivable, $130,972.43; 129 Elementary Accounting Problems notes receivable and interest, $51,362.93; sinking fund for re- demption of first mortgage bonds, $416,924.75; first mortgage bonds purchased out of sinking fund (75 at an average price of I03M)> $77^812.50; deferred charges to operations, $15,318.79; first mortgage bonds payable, $500,000 (dated October i, 1892, due October i, 19 12, interest six per cent, payable April i and October i, last paid April i, 1912) ; taxes accrued, $15,375; salaries and wages accrued, $16,297.43; accounts payable, $84,- 371.57; notes payable, $61,728.36; interest accrued on first mort- gage bonds, $15,000; reserve for depreciation of plant and equip- ment, $171,861.83; reserve for sinking fund, $422,187.50; pre- ferred capital stock outstanding, $1,000,000; common capital stock outstanding, $500,000; profit and loss surplus, $350,000. The sinking fund has been accumulated by setting aside an amount scientifically calculated, and the reserve for the sink- ing fund has been created out of profits. The final deposit to the sinking fund has not been made, but the reserve was in- creased as usual before closing on September 30. The bonds due October i were taken up and cancelled as of that date. The company issues as of October i, 191 2, a new series of 500 ten-year gold bonds which bear interest at five per cent, have a sinking fund provision, and the reserve for sinking fund as before. Sinking fund deposits are to be made quarterly in- stead of semi-annually. The amount deposited December 31, 1912, was $10,227.80. The interest allowed on the deposit by the sinking fund depository to March 31, 19 13, was $102.27. The amount deposited March 31, 191 3, was $10,227.80. Prepare : (a) Journal entries and skeleton ledger accounts affecting the two issues of bonds. (b) Balance sheet, March 31, 191 3. 130 PROBLEM No. i6 Demonstration The Investment Securities Company began business on Janu- ary I, 19 1 2, with a paid-in capital of $2,000,000, for which stock was issued. During the year the following transactions took place : Janu- ary I, 1912, purchased 200 shares of American Shoe Company stock at 102 J^ and }i; 50M American Motor 4's (interest pay- able semi-annually on January i and July i — ^bond to run 6 years) at I02j^ and }i ; January 17, purchased at private sale 2,000 shares (entire capital stock) Sunshine Varnish Com- pany at 103; July I, purchased 50M Wheeling and Lake Erie 4's (to yield 4.7%, interest January i and July i — 18 years to run) for $45,780.25 and brokerage }i ', 5, 000 shares (entire capital stock) of the New York City Properties Com- pany at an average price of no and % ', 500 shares (entire cap- ital stock) of the Spot-Light Lamp Company at an average price of 75^ and %. The sales were : March 31, loM American Motor 4's at 105 >^ less ^ and accrued interest $100; September 30, 20M Wheeling & Lake Erie 4's at 98 less }i and accrued interest $200. American Shoe paid a stock dividend of 4% on August ist; Sunshine Varnish a cash dividend of 4% on September 15th. The New York City Properties stock was deposited with a trustee on October i, 1912, as security for an issue of $300,000 collateral trust 6% gold bonds, due October I, 1922, interest April 1st and October ist, which were sold at par. The New York City Properties stock paid a 10% dividend on November 15, 191 2. The yield on American Motor 4*s, based on a cost of $51,342.44, is 3>^%. The surplus on the Sunshine Var- nish Company's balance sheet at December 31, 1912, was $45,750; that on the New York City Properties, $125,000. There was a deficit of $10,000 on the balance sheet of the Spot-Light Lamp Company at December 31, 1912. 131 Elementary Accounting Problems Provide for amortization or accumulation in the case of bonds; revalue stocks in accordance with the respective balance sheets ; and prepare : (a) General balance sheet, December 31, 19 12. (h) Statement of income and profit and loss for the year. (Brokerage on 50M-W. & L. E. 4's is to be regarded as an expense) Solution to Probi^em No. 16 JOURNAI. ENTRIES 1912 Jan. I American Motor 4's $ 29.94 To profit and loss $ 29.94 To adjust cost of 50M Am. Motor 4's pur- chased, so as to place them on an exact 3J^% basis. Mar. 31 Sales — American Motor 4's 10,268.49 To American Motor 4's 10,268.49 To transfer cost of loM Am. Motor 4's, representing 1/5 of 50M at $51,342.44, to sales of same. Interest on bonds IO.15 To sales — American Motor 4's 10.15 For -amortization of premium on loM Am. Motor 4's sold, being the difference be- tween $100, the accrued interest at time of sale and Y^ of 31^% on $10,26849. June 30 Accrued interest on American Motor 4's... 800.00 To interest on bonds 718.79 American Motor 4's , 81.21 To accrue interest on 40M Am. Motor 4's for the six months ended June 30, 1912, and apportion same to interest on bonds and amortization of premium as follows: 2% (H of 4% ) on $40,000.00... $800.00 iM% (K of 3^%) on $41,073.95... 718.79 Amortization $ 81.21 Problem Number Sixteen Aug. I American Shoe stock 800.00 To profit and loss surplus 800.OO For 4% stock dividend. Sept.30 Sales— W. & Iv. E. 4's 18,34243 To W. &L. E. 4's 18,342.43 To transfer cost of 20M W. & L. E. 4's, representing 2/5 of 50M at $45,780.25 plus $75-83, to sales of same. Sept. 30 Sales— W. & L. E. 4's 15.52 To interest on bonds 15.52 For accumulation of discount on 20M W. & L. E. 4's sold, being the difference be- tween $200, the accrued interest at time of sale and %. of 4.7% on $18,342.43. Dec. 31 Sunshine Varnish stock 39,750.oo N. Y. Properties stock 74,375.00 Spot-light Lamp stock 2,062.50 To reserve for revaluations of securi- ties 116,187.50 For revaluations of above securities in accordance with the values indicated by their respective balance sheets. Accrued interest on Am. Motor 4's 800.00 To interest on bonds 717-37 American Motor 4's 82.63 To accrue interest on 40M Am. Motor 4's for the six months ended December 31, 1912, and apportion same to interest on bonds and amortization of premium as fol- lows : 2% (5^ of 4% ) on $40,000.00... $800.00 lH% (^ of 3^%) on $40,992.74. . . 717.37 Amortization $ 82.63 Accrued interest on W. & L. E. 4's 600.00 Wheeling & L. E. 4's 46.57 To interest on bonds 646.57 133 Elementary Accounting Problems To accrue interest on 30M W. & L. E. 4's for the six months ended June 30, 1912, and apportion same to accrued interest and accumulation of discount as follows : 2.35% (^ of 4-7%) on $27,513.65... $646.57 2% (^2 oi 4% ) on $30,000.00. . . 600.00 Accumulation $ 46.57 Interest on bonds payable 4,500.00 To interest accrued on Coll. Trust 6's.. 4,500.00 Interest on $300,000 from Oct. i to Dec. 31, 1912, at 6%. Sales — American Motor 4's 279.16 Sales — Wheeling & L. E. 4's 1,217.05 To profit and loss 1,496.21 To close out sales accounts and show profits on respective sales as indicated. SKELETON LEDGER ACCOUNTS Cash Capital Stock i $2,390,212.50) American Shoe Stock $912,242.75 $2,000,000.00 Sales — Am. Motor 4'j Stock div. $20,525.00 800.00 American Motor 4's SoM $51,312.50 P. & L 29.94 loM $10,268.49 Amort 81.21 Amort 82.63 loM $10,268.49 loM $10,537.50 P. & L 279.16) Amort 10.15 Sales — Wheeling & L. E. 4'j $18,342.43 20M $19,575.00 20M Accum 15.52 P. & L 1,217.05 Sunshine Varnish Stock Collateral Trust 6's $206,000.00 Revaluation. . . 39,75o.oo Wheeling & Lake Erie 4's $300,000.00 Reserve for Revaluation of Securities 50M ... Accum. .$45,780.25 20M $18,342.43 46.57 $116,187.50 New York City Properties Stock Interest on Bonds Receivable Revaluation $550,625.00 .. 74,375.00! Spot-Light Lamp Stock Am. Mo. 4's. .$ 10.15 $37,937.So| Revaluation ... 2,062.50 loM Am. Mo. 4*s $100.00 Am. Mo. 4's 718.79 20M W.&L.E.4's 200.00 Do 15.52 Am. Mo. 4's 717.37 W. & L. E. 4's. 646.57 134 Problem Number Sixteen SKELETON LEDGER ACCOUNTS {Continued) Accrued Interest on Bonds Dividends on Stocks Owned Am. Mo. 4's $ 800.00 Am. Mo. 4's 800.00 W. & L. E. 4's. . 600.00 Cash $ 800.00 Sunshine $8,000.00 N. Y. C 50,000.00 Interest on Bonds Payable $4,500,001 Interest Accrued on Coll. Trust 6's $4,500.00 Profit and Loss Brokerage $ 62.50 Am. Mo. 4's $ 29.94 Profit Am. Mo. 4's 279.16 Profit W. & L. E. 4's 1,21705 Profit and Loss Surplus |Am. Shoe $ 800.00 THE INVESTMENT SECURITIES COMPANY Cash Book Date Receipts Amount 1912 Jan. I Capital Stock $2,000,000.00 Mar. 31 loM Am. Motor 4's at I05J^ less % io,537-50 Accrued interest on above 100.00 July I Interest on 40M Am. Motor 4's 800.00 Sept. 15 Sunshine dividend, 4% on $200,000 8,000.00 Sept. 30 20M W. & L. E. 4's at 98 less % i9,57S-0O Accrued interest on above 200.00 Oct. I Collateral Trust 6's sold at par 300,000.00 Nov. 15 N. Y. C. Prop, dividend, io% on $500,000 50,000.00 $2,389,212.50 Date Disbursements Amount 1912 Jan. I 200 Am. Shoe at 102^ and ^ $ 20,525.00 50M Am. Motor 4's 102^ and ^ 51,312.50 Jan. 17 2,000 Sunshine Varnish at 103 206,000.00 July I 50M W. & L. E. 4's ($45,780.25 and $62.50) 45,842.75 5,000 N. Y. City Props, at no and ^. .. 550,625.00 500 Spot-light at 75M and Ya 37,93750 Dec. 31 Balance 1,476,96975 ' $2,389,212.50 Elementary Accounting Problems Trial Balance — ^December 31, 1912 (before closing) Debits Credits Cash $1,476,969.75 Capital stock $2,000,000.00 Am. Shoe stock Am. Motor 4's. Sunshine Varnish Co.. WheeHng & L. E. 4's. . N. Y. City Properties 300,000.00 21,325.00 Collateral Trust 6's. .. . 40,910.11 Reserve for revalua- 245,750.00 tions of securities 27,484.39 Int. accrued on Coll. Trust 6's stock 625,000.00 Int. on bonds receivable Spot-light Lamp stock. 40,000.00 Dividends on stocks Accrued int. on bonds. 1,400.00 owned 58,000.00 Int. on bonds payable. . 4,500.00 Profit and loss 1,463-65 Profit and loss surplus. 800.00 116,187.50 4,500.00 2,388.10 $2,483,339.25 $2>483,339.25 THE INVESTMENT SECURITIES COMPANY General Balance Sheet — December 31, 1912 Assets Liabilities and Capital Securities owned* $1,000,469.50 Cash 1,476,969.75 Accrued interest on bonds 1,400.00 Total assets $2,478,839.25 Capital stock $2,000,000.00 Coll. Trust 6% bonds.. 300,000.00 Int. accrued on Coll. Trust 6's 4,500.00 Reserve for revalua- tions of securities 116,187.50 Surplus 58,15175 Total liabilities and capital $2,478,839.25 THE INVESTMENT SECURITIES COMPANY Statement of Income and Profit and Loss for the Year Ended December 31, 19 12 Gross income from investments : Dividends on stocks $58,000.00 Interest on bonds receivable 2,388.10 Total income $60,388.10 Expense : Interest on bonds payable 4,500.00 Net income from investments $55,888.10 Profit and loss credits : Adjustment of cost — Am. Motor 4's $ 29.94 Profits on sales of securities 1,496,21 N. Y^ City Properties stock (par value $500,000, book value $625,000) deposited Tri to secure Collateral Trust 6'i 136 Problem Number Sixteen Total $57,414.25 Front and loss charge — brokerage 62,50 Profit and loss — surplus $57,351-75 Add — stock dividend — Am. Shoe stock 800.00 Profit and loss surplus — Dec. 31, 19,12 $58,151.75 Few comments are necessary on this problem since most of the entries are self-explanatory. It would perhaps make the demonstration clearer if all transactions, cash as well as others, were expressed in journal entry form chronologically. This, however, would either cause a duplication, if the cash book were also shown, or deprive the solution of a very important part of its content. The entries in the cash book are given as they would appear in practice, and the items, as there, give only a hint as to supplementary adjustments which must be made through the medium of the journal. Examples of this are the amortization of premium and accumulation of discount and transferring the cost of sales to the sales account when sales of securities take place. The latter practice is consistent and clear, but I believe will be the exception rather than the rule. Too often will the sale be simply credited to the stock account. The result is a mixed account which must be analyzed at closing time since the stock remaining in the account will have been affected by the profit or loss on the transaction. In the matter of amortization and accumulation a word or two may be said. Amortization is the term used to express the gradual reduction, through the application of a part of the in- terest earned, of premium on bonds. Accumulation is the term used to express the gradual increase, through the application of a part of the interest earned, of a bond purchased below par. In either case the object is to bring the bond to par at maturity. Amortization is sometimes applied to discount as well as pre- mium but erroneously so. Such use of the term probably fol- lows the thought that it is the discount which is being reduced. While this is of course true, consistency requires that the bond be looked upon as increasing in amount as time passes until at maturity it reaches par. The best illustration of the necessity for care in the matter of amortization and accumulation is the so-called life-tenant and remainderman case. If an estate is left so that one person is to receive the income during life and 137 Elementary Accounting Problems a second the principal upon the death of the first person, then the interest must be carefully apportioned. A bond purchased at 112 will cost $1,120. At maturity it will be redeemed at $i,ooo. If the interest in full shall have been paid to the life- tenant, the estate will at time of maturity of the bond have been depleted to the extent of $120. As a matter of justice and equity, part of the interest must be applied to the reduction of the premium while the balance may be paid to the life-tenant. The interest received is called the nominal. The interest paid to the life-tenant the effective. Problem No i6-fl The Wall Street Securities Company began business on Janu- ary I, 1 91 2, with a paid-in capital of $1,000,000 for which stock was issued. The transactions during the ensuing year were as fol- lows : January i, purchased 200 shares American Iron Company stock at 103^ and }i; 50M C. M. & St. P. 6's (interest payable semi-annually on January i and July i — ^bond to run 17^^ years) at 112 and }i; January 23, purchased at private sale 2,000 shares (entire capital stock) of the Hudson Brick Com- pany at 105; July I, purchased 50M Naugatuck Valley 4's (to yield 4.85%, interest January i and July i — 6 months to run) for $49,792.53 and brokerage }i; entire capital stock (5,000 shares) Philadelphia Realties Company at an average price of 112 and %; entire capital stock (500 shares) Yonkers Wall Paper Company at an average price of 78 J^ and %. The sales were: April 30, loM C. M. & St. P. 6*s at 114 less % and accrued interest $200; August 31, loM Naugatuck Valley 4's at 98 less % and accrued interest $66.67. The American Iron Company paid a stock dividend of 5% on August 15th. Hudson Brick Company a cash dividend of 5% CD September 15th. The Philadelphia Realties Company stock was deposited with a trustee on October i, 1912, as security for an issue of 400M collateral trust 4^% gold bonds, due October i, 1922, interest April ist and October ist, which were sold at par. The Philadelphia Realties Company paid a dividend 138 Problem Number Sixteen of 9% on November 15, 1912. The yield on C. M. and St. P. 6's, based on a cost of $56,098.65, is 4.95%. The surplus on the balance sheet of the Hudson Brick Company at December 31, 1912, was $50,000; that on the Philadelphia Realties Com- pany, $135,257.42. There was a deficit of $12,538.26 on the balance sheet of The Yonkers Wall Paper Company at Decem- ber 31, 1912. Provide for amortization or accumulation in the case of bonds; revalue stocks in accordance with the respective balance sheets; and prepare: (a) General balance sheet, December 31, 1912. (&) Statement of income and profit and loss for the year ended December 31, 1912. (Brokerage on 50M Naugatuck Valley 4's is to con- sidered as an expense.) 139 Elementary Accounting Problems PROBLEM No. 17 Demonstration The Kent Wire Screen Company having acquired all of the capital stock of the Derby Wire Netting Company, it is proposed to merge the latter with the former as of July i, 1912. The trial balances June 30, 191 2, of the respective companies after closing, are as follows ; Kent Wire Screen Company Land and buildings, $525,750; equipment, $85,729.43; motor trucks, $8,780.25 ; furniture and fixtures, $6,943.27 ; Derby Wire Netting Company, capital stock, par value $100,000, cost $97,- 713.50; materials and supplies, $18,379.51; goods in process, $16,591.46; finished goods, $23,468.46; cash, $12,640.31 ; accounts receivable, $54,345.26; notes receivable and interest, $10,132.75; sinking fund, $45,376.59; deferred charges to expense, $1,537.82; first mortgage 6% gold bonds payable, due 1927, $250,000; taxes accrued, $5,250; salaries and wages accrued, $3,178.29; accounts payable, $85,216.04; due to Derby Wire Netting Company, $536.12; notes payable and interest, $41,273.25; interest accrued on bonds payable, $2,500; reserve for depreciation of plant and equipment, $69,434.91 ; preferred capital stock outstanding, $250,000; common capital stock outstanding, $150,000; profit and loss surplus, $50,000. Derby Wire Netting Company Land and buildings, $240,327.92; machinery and tools, $48,934.27 ; horses, wagons, and harness, $6,387.35 ; furniture and fixtures, $8,500; capital stock of the Improved Screen Door Company, par $20,000, cost $23,457.86; patents, $10,000; raw materials, $23,721.89; goods in process, $32,568.34; finished goods, $18,478.27; cash, $14,686.43; accounts receivable, $57^395-05; due from the Kent Wire Screen Company, $536.12; 140 Problem Number Seventeen notes receivable and interest, $8,037.50; sinking fund, $30,483.14; consignment, $1,000; deferred charges to operations, $1,250; first mortgage 5% gold bonds payable, due 1930, $100,000; taxes accrued, $2,ySy; salaries and wages accrued, $5,843.62; accounts payable, $114,527.16; due the Improved Screen Door Company, $10,000; notes payable and interest, $51,673.53; interest accrued on first mortgage bonds, $833.33; reserve for sinking fund, $30,483.14; reserve for depreciation of plant and equipment, $37,329.52; common capital stock outstanding, $100,000; profit and loss surplus, $72,286.84. From the foregoing submit: (a) The entries on the books of The Kent Wire Screen Company necessary to effect the merger. (b) The necessary entries on the books of the Derby Wire Netting Company. (c) Balance sheet of The Kent Wire Screen Company after the merger. S01.UT10N TO Problem No. 17 A consolidated trial balance of the books of the Kent Wire Screen Company and the Derby Wire Netting Company serves the dual purpose of showing the situation with regard to the individual companies and the effect of the consolidation. It is therefore presented before beginning a discussion of the various requirements of the problem, and is as follows: Consolidated Trial Balance Debits June 30, 1912 Land and buildings $766,077.92 Machinery, tools and equip- ment 134,663.70 Horses, wagons, harness and motor trucks 15,167.60 Furniture and fixtures 15,443.27 Derby Wire Netting Co., stock, $100,000 par ! Materials and supplies .... 42,101.40 Goods in process 49,159.80 Finished goods 41,946.73 Cash 27,326.74 141 Trial Balance Elimina- tions June 30, 1912 Kent Derby Wire Wire Net- Screen Co. ting Co. $525,750.00 $240,327.92 85,72943 48,934-27 8,780.25 6,94327 6,387.35 8,500.00 97,713.50 97,71350 18,379.51 16,591.46 23,468.46 12,640.31 23,721.89 32,568.34 18,478.27 14,686.43 Elementary Accounting Problems Accounts receivable 111,740.31 54>345-26 57,395-05 Notes receivable and interest 18,170.25 10,132.75 _ 8,037.50 Sinking funds 75,859-73 45,376-59 30,483-14 Deferred charges to expense 2,787.82 l»537-82 1,250.00 The Improved Screen Door Co., $20,000 par 23,457-86 23,457.86 Patents 10,000.00 10,000.00 Kent Wire Screen Co 536.12 536-12 Consignment 1,000.00 1,000.00 Total debits $i,334,903,i3 $98,249.62 $907,388.61 $525,764.14 Credits First mortgage 6% bonds, due 1927 $ 250,000.00 $250,000.00 Taxes accrued 8,037.00 5,250.00 $ 2,787.00 Salaries and wages accrued. 9,021.91 3,178.29 5,843-62 Accounts payable 199,743.20 85,216.04 114,527.16 Due Derby Wire Netting Co. $ 536.12 536.12 Notes payable and interest. 92,946.78 41,273.25 51,673-53 Interest accrued on bonds payable Z,ZZZ-3Z 2,500.00 833.33 Reserve for depreciation plant and equipment 106,764.43 69,434.91 37,329-52 Preferred capital stock out- standing 250,000.00 250,000.00 Common capital stock out- standing 152,286.50 97,713.50 150,000.00 100,000.00 Profit and loss surplus 122,286.84 50,000.00 72,286.84 First mortgage 5% bonds, due 1930 100,000.00 100,000.00 The Improved Screen Door Co 10,000.00 10,000.00 Reserve for sinking fund.. 30,483.14 30,483.14 Total credits $i,334,903-i3 $98,249.62 $907,388.61 $525,764.14 The object of this problem is to show the effect of a merger on the accounts of the companies involved. In New York State, "Any corporation lawfully owning all of the stock of any other corporation organized for and engaged in business similar or incidental to that of the possessor corporation may merge such other corporation with it and be possessed of all estate, property, rights, privileges and franchises of such other corporation." A consolidation differs from a merger in that "any two or more corporations organized for the purpose of carrying on any kind of business of the same or similar nature which a corporation organized under the business corporations law might carry on, may consolidate into a single corporation." The essential dif- ference between the two is that in the case of merger all the stock of the subsidiary or adjunct company must be owned by 142 Problem Number Seventeen the parent company, whereas in consolidation no cross-ownershil> of stock is necessary. The entire capital stock of the Derby Wire Netting Company was owned by the Kent Wire Screen Company and carried on the books as an asset. The ownership of the capital stock made the merger possible legally and the merging of the accounts followed. It was not consistent for the Kent Wire Screen Com- pany to take up the assets and liabilities of the Derby Wire Net- ting Company and carry the stock of the latter as an asset. No more was it consistent to consider accounts between com- panies as assets and liabilities of the respective companies. Hence the necessity for eliminating in the consolidated trial bal- ance the accounts between companies and the capital stock. The capital stock of the Derby Wire Netting Company in the amount of $100,000 par was, it will be noted, carried on the books of the Kent Wire Screen Company at cost, namely, $97,713.50. This latter amount is therefore the amount at which the elimination is shown both on the debit and credit sides of the consolidated trial balance. Since the common capital stock of the Derby Wire Netting Company outstanding is $100,000, and the cost to the Kent Wire Screen Company was but $97,713.50, there appears in the consolidated trial balance, opposite the item common capital stock outstanding, the amount of $152,286.50, of which $2,286.50 is the excess over $150,000 of the common capital stock of the Kent Wire Screen Company. This amount of $2,286.50 will be recognized as the difference between $100,000 and $97,713.50. This difference from the point of view of the Kent Wire Screen Company after the merger becomes in effect surplus, and in setting up the balance sheet after the merger should be treated as such. Previous to the merger, the Kent Wire Screen Company owed the Derby Wire Netting Company $536.12 on open ac- count. In merging the two companies this amount is treated as an elimination since in the very nature of things a concern may not owe itself money. The matter of offsets should, in case of mergers and con- solidations, receive careful attention. It often becomes neces- sary in practice to spend considerable time in reconciling ac- counts between or among companies in order that when the accounts of the companies are put together intercompany trans- 143 Elementary Accounting Problems actions may be in agreement. This is especially true of capital stock, bonds, accounts receivable, and sometimes interest, notes re- ceivable and interest, advances, consignments, and other items of a similar nature to the ones mentioned above. From the consolidated trial balance there may now be pre- pared the entries on the books of the Kent Wire Screen Com- pany necessary to show the effect of the merger. It is not thought that any additional light will be thrown on the solution of the problem by setting forth the assets and liabilities in detail since they are shown very clearly in the consolidated trial balance. They have therefore, in the entry which follows, been set up under the general captions of sundry assets and of sundry lia- bilities. Sundry assets $525,228.02 Accounts receivable (account of Kent W. S. Co.)--- 536.12 To Sundry liabilities $353,47730 Derby W. N. Co., outstanding capital stock 100,000.00 Profit and loss surplus 72,286.84 To place on the books of the Kent Wire Screen Co. the assets, liabilities, capital and surplus of the Derby Wire Netting Co. in accordance with the terms of merger of the two companies as of July i, 1912. Accounts payable (Derby W. N. Co.) S36.12 To accounts receivable (Kent W. S. Co.)... 536.12 To offset accounts between companies after merger. Derby W. N. Co., outstanding capital stock 100,000.00 To Derby W. N. Co., stock (asset) 97,713-50 Profit and loss surplus 2,286.50 To offset the accounts between companies relating to capital stock and take up as surplus on the books of the Kent W. S. Co., the difference between the par and cost of Derby W. N. Co. capital stock. The closing entries on the books of the Derby Wire Netting Company are simple in the extreme. They consist merely in setting up an account with the Kent Wire Screen Company and closing out to this account all other accounts on the books. As in the previous case, it is not thought necessary to itemize the assets and liabilities. The entries are as follows: 144 Problem Number Seventeen The Kent Wire Screen Co $525,764.14 To sundry assets $525,764.14 To close out all assets to the Kent W. S. Company in accordance with the terms of merger of July i, 1912. Sundry liabilities 353477-30 Capital stock 100,000.00 Profit and loss surplus 72,286.84 To Kent W. S. Co 525,764.14 To close out liabilities, capital stock and sur- plus to the Kent W. S. Co. in accordance with the terms of merger of July i, 1912. The above entries complete the requirements of the problem except as to the balance sheet of the Kent Wire Screen Company- after the merger which appears below. THE KENT WIRE SCREEN COMPANY Bai^ance Sheet— June 30, 1912 Assets Land and buildings $ 766,077.92 Machinery, tools and equipment 134,663.70 Horses, wagons, harness and motor trucks 15,167.60 Furniture and fixtures 15,443.27 Patents 10,000.00 Securities owned 23,457.86 Working and trading assets: Materials and supplies $ 42,101.40 Goods in process 49,159.80 Finished goods 41,946.73 Total working and trading assets 133,207.93 Current assets: Cash $ 27,326.74 Accounts receivable 111,740.31 Notes receivable and interest 18,170.25 Total current assets 157,237.30 Sinking funds .* ^ 75,85973 Deferred charges to expense 2,787.82 Consignments 1,000.00 Total assets $1, 334,903 13 Liabilities and Capital Capital stock outstanding: Preferred $250,000.00 Common 1 50,000.00 Total capital stock outstanding -. $ 400,000.00 145 Elementary Accounting Problems • Bonds outstanding: Kent Wire Screen Co. 6's due 1927 $250,000.00 Derby Wire Netting Co. 5's due 1930 100,000.00 Total bonds outstanding 350,000.00 Current liabilities: Taxes accrued $ 8,037.00 Salaries and wages accrued 9,021.91 Accounts payable 209,743.20 Notes payable and interest 92,946.78 Int. accrued on bonds payable 3,333-33 Total current liabilities 323,082.22 Reserves : Depreciation of plant and equipment $106,764.43 Sinking fund 30,483.14 Total reserves 137,247.57 Profit and loss surplus 124,573,34 Total liabilities and capital $1,334,903.13 Problem No. 17-A (Practice) The following items appear on the balance sheet of the American Pin Company, June 30, 1912: Land, buildings, equip- ment, etc., $335,000; capital stock of the Bronx Pin Ticket Company, par, $50,000; cost, $57,400; patents, $15,000; working and trading assets, $37,500; cash, $10,000; accounts receivable, $32,000; due from Bronx Pin Ticket Company, $375.82; de- ferred assets, $1,500; first mortgage 6% gold bonds payable, due 1922, $100,000; taxes accrued, $3,250; salaries and wages ac- crued, $4,327.82; accounts payable, $123,749.83; notes payable and interest, $80,125; interest accrued on first mortgage bonds payable, $2,500; reserve for depreciation of buildings and equip- ment, $35,000; preferred capital stock outstanding, $75,000; com- mon capital stock outstanding, $50,000; profit and loss surplus, $14,823.17. The American Pin Company having acquired all the capital stock of the Bronx Pin Ticket Company, the balance sheet of which appears below, it is proposed to merge the two companies as of July I, 1912. The Bronx Pin Ticket Co. Assets — land, buildings, and equipment, etc., $260,000; capital stock of the Blauser Pin Tray Company carried at par, $35,000; 146 Problem Number Seventeen patents, *working, and trading assets, $32,625; cash, $10,365.27; accounts receivable, $37,943.86 ; sinking fund, $3,236.92 ; deferred charges to expense, $1,200. Liabilities and capital — first mort- gage 5% gold bonds payable, due 1925, $50,000; taxes accrued, $2,750; salaries and wages accrued, $3,147.83; due to creditors, $144,720.30; due to American Pin Company, $375.82; notes payable and interest, $31,372.53; interest accrued on first mort- gage bonds payable, $1,250; reserve for depreciation of plant and equipment, $27,500; common capital stock outstanding, $50,000; profit and loss surplus, $69,254.57. Prepare : (o) The entries on the books of the American Pin Company. {h) The entries on the books of the Bronx Pin Ticket Com- pany. (r) Balance sheet of the American Pin Company after the merger. * $10,000. 147 Elementary Accounting Problems PROBLEM No. i8 Demonstration The Central Furniture Company was incorporated under the laws of the state of New York on July i, 191 2, with an author- ized capital stock of $2,ooo,cxx), divided into 10,000 shares of preferred of the par value of $100 each, and 20,000 shares of common of the par value of $50 each, for the purpose of effecting a consolidation of three companies engaged in the manufacture of furniture and furniture parts. There was also authorized an issue of 5% collateral trust bonds, to be dated July I, 1912, to the extent of $1,000,000. The consolidation was promoted and managed by the Syndi- cate Trust Company, which prior to July ist caused an investi- gation to be made of the accounts of the various companies; the properties to be appraised; secured options upon the stock and made contracts with the holders thereof. It was stipulated in the contract between the trust company and the newly organ- ized furniture company that the former should receive for its services 10% of the par value of the preferred stock issue, in stock, and should advance the cash necessary to pay the bonus to the stockholders of the consolidating companies, recovering the advances out of the proceeds of bond sales when same were issued. The balance sheets of the consolidating companies on May 31, 1 91 2, were as follows: The The Riverton The Chat- Irvington Furniture terton Chair Cane Seat Assets Company Company Company Land and buildings $ 6^z,7^A2 $432,548.52 $875.41917 Equipment « 85,321.88 47,997-22 90,405-74 Motor trucks « 8,500.00 5,000.00 7,800.00 Furniture and fixtures 15,132.69 10,547.86 12,532.52 Securities owned («> 52,987.50 (6)72,827.25 (0)40,000.00 Patents, trade-marks and goodwill 25,000.00 25,000.00 45,250.00 Materials and supplies 18,943.26 20,617.32 19,437.62 Goods in process 7,562.89 12,881.23 15,258.45 Finished goods 22,713.48 14,683.04 11,138.12 Cash 30,343.75 23,387.92 27,287.47 Accounts receivable (d)i25,486.29 (6)112,783.48 (/)i02,65i.43 Notes receivable (^)i5,237.8o 11,624.49 12,132.19 Accrued interest on securities... 125.00 500.00 250.00 148 Problem Number Eighteen Sinking fund 43,274-13 Organization expense 4,750.00 5,125.00 2,525.00 Moving expense 1,275.00 Insurance unexpired 325-00 273.14 526.19 Total assets $1,099,493-09 $797,071-47 $1,262,613.90 Liabilities and Capital First mortgage bonds $ 300,000.00 Debentures $500,000.00 Bond and mortgage payable .... $250,000.00 Taxes accrued 3,275-00 2,500.00 4,38500 Salaries and wages accrued i,327-5o 847.25 3,127.23 Accounts payable Ci) 103,843.87 0*)97,98i.i4 (*)98,4i7-45 Notes payable and interest 61,328.43 (^)45,62i.29 76,818.54 Interest accrued on bonds 6,000.00 Interest accrued on debentures.. S,ooo.OO Interest accrued on bond and mortgage 3,000.00 Reserve for depreciation, build- ings and equipment 148,718.29 200,000.00 225,237.15 Preferred capital stock— par $100. 250,000.00 200,000.00 Common capital stock — par $100. 175,000.00 100,000.00 100,000.00 Profit and loss surplus 50,000.00 97,121.79 49,628.53 Total liabilities and capital $1,099,493.09 $797,071.47 $1,262,613.90 (a) Includes 50 shares of the Chatterton Chair Company acquired at 102 14. (&) Includes 40M Ann Arbor, 1st g.- 4's at 80. (c) Includes 25M Riverton Ist mortgage bonds at par: (d) Includes $613.95 due from the Chatterton Chair Company, (e) Includes $2,647.92 due from the Irvington Cane Seat Company. (/) Includes $1,532.17 due from the Riverton Furniture Company, (g) Includes $5,125.75 notes and interest of the Chatterton Chair Company. (7i) Includes $1,532.17 due to the Irvington Cane Seat Company. (;) Includes $613.95 due to the Riverton Furniture Company, (fc) Includes $2,647.92 due to the Chatterton Chair Company. (1) Includes $5,125.75 notes payable and interest In favor of the Riverton Furniture Company. On July 1st, the stock of the Central Furniture Company was issued to the Syndicate Trust Company in blank, the latter taking up the stocks of the consolidating companies in accordance with the contracts. Preferred stockholders of the Riverton Furniture Company received one share of preferred, two shares of common and 25% in cash; common stockholders, two shares of common and 15% in cash. Stockholders of the Chatterton Chair Company received four shares of common and 40^^ in cash. Preferred stockholders of the Irvington Cane Seat Com- pany received one share of preferred, two shares of common and 25% in cash; common stockholders, three shares of common and 10% in cash. Upon receipt of the stocks of the subsidiary companies, they were deposited with a trustee and $500,000 collateral trust 5% bearer bonds were issued to the Syndicate Trust Company. The bonds were sold at an average price of 97. The balance of the preferred stock was sold at an average price of 90, after which 149 Elementary Accounting Problems the trust company made its accounting, returning the balance of common stock unsold. The trust company sold the stock re- ceived as a commission at 90. Prepare : (a) Consolidated balance sheet of the three companies, May 31, 1912. {b) General balance sheet the Central Furniture Company, July 31, 1912. Solution to Problem No. 18 The requirements of this problem are that there shall be a consolidated balance sheet of the three companies at May 31, 1912, and a balance sheet of the Central Furniture Company after the opening entries have been made. At first glance these might seem to be the same thing. If the situation is analyzed they will be found quite different. The consolidated balance sheet was presumably prepared prior to the actual organization of the Central Furniture Company as a basis for determining principally what the capitalization would need to be. It will also have been observed in reading the problem that the Central Furniture Company was to be a holding company, maintaining control of the three underlying companies through stock owner- ship and deriving its income from dividends on stocks and interest on bonds. Consequently the detailed assets and lia- bilities of the three companies will not appear on the books of the holding company, their place being taken by the investments in securities. As a matter of law, "any two or more corporations organ- ized for the purpose of carrying on any kind of business of the same similar nature which a corporation organized under the business corporations law might carry on, may consolidate into a single corporation." No previous cross-ownership is necessary here as in the case of a merger. It is probably true that the holders of the stock of the companies about to be consolidated might pool their interests and select representatives without giving up or in any way changing the status of their stock. It makes a much cleaner matter of it, however, to organize a new corporation, the capital stock of which is used to exchange for and take up the capital stock of the consolidating companies. The exchange of stock is not always par for par. The 150 Problem Number Eighteen consolidation may have originated with stockholders of the con- stituent companies who have seen an opportunity for mutual advancement and profit, or it may have originated with some promoter who has seen an opportunity for himself in bringing about the consolidation. In the first instance various classes of stock may give to the respective holders varying degrees of power. Holders of preferred stock may be loath to give up such stock unless they receive stock of equal strength in the new company. In the second case certain stockholders will not, perhaps, give up their old stock without additional incentive in the form of cash. Further, it may be necessary to give a stock or cash bonus in order to equalize the settlements among stock- holders of the various companies on account of goodwill, sur- plus, franchises carried at a nominal figure or not shown, patents and trade-marks carried in the same way, and various other attachments which a par for par exchange would ignore.. It therefore happens that all sorts of plans are contrived, all having as their prime purpose a distribution which will be equitable and satisfactory to all concerned. In the problem under discussion the first requirement is a consolidated balance sheet of the three companies May 31, 1912. Before this can be prepared a consolidated trial balance or working sheet is necessary. Incident to its preparation, there must be taken into consideration the accounts between com- panies. What might be a perfectly good asset as long as someone else owns a certain business becomes valueless if perchance you, happening to be the debtor which the asset represents, should purchase the business in question. So in the case of a consolida- tion, what was formerly a debt owing by one company to another loses its value when the accounts of the two companies are put together. Examples of such accounts are, capital stock, bonds, ac- counts receivable and payable, notes and interest receivable and payable, loans and advances, inter-company sales, rent, etc. The danger of duplicating these inter-company transactions is avoided in consolidated working sheets or trial balances by the introduc- tion of an elimination column. The operation of this as well as the illustration of the above mentioned peculiarities common to consolidation will be seen from the consolidated trial balance appearing on following page : 151 Elementary Accounting Problems CONSOUDATED TRIAL BALANCE OF THE RIVERTON FURNITURE COMPANY, THE CHATTERTON CHAIR COMPANY AND THE IRVINGTON CANE SEAT COMPANY May 31, I9I2, AFTER CLOSING The The The Riverton Chatter- Irvington Elirai- Furniture ton Chair Cane Seat Debits Total nations Company Company Company Land and buildings $i,95i»757ii $643,789.42 $432,548.52$ 875,419.17 Equipment 223,724.84 85,321.88 47,997.22 90,405-74 Motor trucks 21,300.00 8,500.00 5,000.00 7,800.00 Furniture and fixtures 38,213.07 15,132.69 10,547.86 12,532.52 Securities owned 135,689.75 (oc) $30,125.00 (a)52,987.50 (&)72,827.25 (0)40,000.00 Patents, trade-marks and goodwill 95,250.00 25,000.00 25,000.00 45,250.00 Materials and suppHes 58,998.20 18,94326 20,617.32 19,437.62 Goods in process 35,702.57 7,562.89 12,881.23 15,258.45 Finished goods 48,53464 22,713.48 14,683.04 11,138.12 Cash 81,019.14 30,343.75 23,387.92 27,287.47 Accounts receivable 336,127.16 (d«/)4,794.04 (d) 125,486.29 (e) 112,783.48 (/) 102,65143 Notes receivable 33,868.73 ^0)5,125.75 to present a coiv solidated balance sheet may smack of duplication, since the items in the balance sheet will be the same as the combined items in the trial balance after eliminating the offsets. The consolidated balance sheet is presented nevertheless in order that the differ- ence between it and the subsequent balance sheet of the Central Furniture Company may be strongly apparent The consolidated balance sheet is as follows: 153 Elementary Accounting Problems THE RIVERTON FURNITURE COMPANY, THE CHATTERTON CHAIR COMPANY AND THE IRVINGTON CANE SEAT COMPANY Consolidated Balance Sheet, May 31, 1912 Assets Liabilities and Capital Land and buildings ...$1,951,757.11 Equipment 223,724.84 Motor trucks 21,300.00 Furniture and fixtures. 38,213.07 Securities owned 135,689.75 Patents, trade-marks and goodwill 95,250.00 Working and trading assets : Materials and sup- plies $ 58,998.20 Goods in process.... 35,702.57 Finished goods 48,534.64 Total working and trading assets ..$ 143,235.41 Current assets: Cash $ 81,019.14 Accounts receivable. . 336,127.16 Notes receivable 33,868.73 Acct. int. on securities 875.00 Total current assets. $45 1,890.03 Sinking fund 43,274.13 Deferred charges to ex- pense : Organization expense $ 12,400.00 Moving expense .... 1,275.00 Insurance unexpired, 1,124.33 Total deferred chgs. to expense $ 14,79933 Total assets $3,119,13367 Capital stock: Preferred $ 450,000.00 Common 370,000.00 Total capital stock. $ 820,000.00 First mtge. bonds . . . 275,000.00 Bonds and mtge. pay- able 250,000.00 Debentures 500,000.00 Current liabilities: Taxes accrued $ 10,160.00 Salary and wages accrued 5,301.98 Accounts payable . . . 295,448.42 Notes payable and interest 178,642.51 Int. accrued on bonds 6,000.00 Int. accrued on b/m. 3,000.00 Int. accrued on de- bentures 5,000.00 Total current lia- bilities $ 503,552.91 Reserve for deprecia- tion : Buildings and equip- ment 573,955-44 Profit and loss surplus. 196,625.32 Total liabilities and capital $3,119,133.67 The consolidated balance sheet affords the promoters a basis for planning the capitalization of the holding companies and the consolidated trial balance shows the standing of the respec- 154 Problem Number Eighteen tive companies. The latter serves as a basis for settlement with the stockholders. While the entries covering the exchange of stock will appear in their historical order among the others, it may be of interest to glance at the following tabulation for the purpose of seeing how much stock and cash the stockholders of the respective companies will receive under the proposed plan as well as how much preferred and common stock and cash will be needed to meet the combined requirements : Total 1 Kd. Common 1 Cash Riverton Preferred stockholders : 2500 sh. X I pfd. ($100 par) 2500 sh. X 2 com. ($50 par) ....$250,000 . . . . 250,000 $250,000 200,000 $250,000 175,000 200,000 200,000 150,000 $250,000 X 25% cash .... 62,500 $ 62^00 Total preferred stockholders... $562,500 Common stockholders: 1750 sh. X 2 com. ($50 par) .... $175,000 X 15% cash . . . .$175,000 . . . . 26,250 26,250 Total common stockholders ... $201,250 Chatterton Common stockholders: 1000 sh. X 4 com. ($50 par) .... $100,000 X 40% cash . . . .$200,000 . . . . 40,000 40,000 Total common stockholders .. $240,000 Irvington Preferred stockholders : 2000 sh. X I pfd. ($100 par) 2000 sh. X 2 com. ($50 par) .... $200,000 .... 200,000 $200,000 X 25% cash . . . . 50,000 50,000 Total preferred stockholders.. ....$450,000 Common stockholders: 1000 sh. X 3 com. ($50 par) $100,000 X 10% cash $150,000 ... . . 10,000 xo,ooo Total common stockholders... $160,000 Grand total ..$i.6i'?,7=;o $450,000 $975,000 $188,750 In the journal entries, covering the opening of the books of the Central Furniture Company which follow, the explanations appear to be sufficient in most cases to make the entries clear. In the case of organization expense, however, a word or two may be necessary. The amount of $145,000 is made up of two 1=; DD Elementary Accounting Problems items, namely $100,000 as commission to the trust company for services and $45,000 representing the discount allowed by the trust company on the preferred stock. To show this latter item on the books as such would appear to be an admission on the part of the company, in the circumstances, that the stock in question was not full-paid when issued and the corresponding legal liability would therefore attach to the holders of the stock. Since it is not the intention to place any such liability upon stockholders but rather to increase the compensation to the trust company to allow for such contingencies the organization expense representing commissions allowed to the trust company is cor- respondingly increased. Preferred capital stock unissued ,..$1,000,000 Common capital stock unissued 1,000,000 To preferred capital stock authorized $1,600,000 Common capital stock authorized l,000,00a To record the organization of the Central Furniture Company, incorporated under the laws of the state of New York on July i, 1912, with an authorized capital stock of $2,000,000 divided into 10,000 shares of pre- ferred of the par value of $100 each and 20,000 shares of common of the par value of $50 each. The Syndicate-Trust Company 2,000,000 To preferred capital stock unissued i,ooo,ooa Common capital stock unissued 1,000,000 For capital stock issued in blank to the Syn- dicate-Trust Company. Five per cent collateral trust bonds unissued 1,000,000 To five per cent collateral trust bonds au- thorized 1,000,000 Provision for issue of five per cent collateral trust bonds authorized as of July i, 1912. The Syndicate-Trust Company 500,000 To five per cent collateral trust bonds unissued 500,000 For bonds issued to the Syndicate-Trust Company for sale. Common capital stock unissued 25,000 Organization expense 145,000 Discount on bonds 15,000 Riverton Furniture Co. — pfd. stock, 2500 sh 562,500 Riverton Furniture Co. — com. stock 1750 sh 201,250 Chatterton Chair Co. '^ — com. stock 1000 sh 240,000 156 Problem Number Eighteen Irvington Cane Seat Co. — pfd. stock 2000 sh 450,000 Irvington Cane Seat Co. — com. stock 1000 sh 160,000 Cash 701,250 To the Syndicate-Trust Co 2,500,000 To account for preferred and common stock and bonds turned over to the Syndicate Trust Company. THE CENTRAI, FURNITURE COMPANY Generai, Bai^ance Sheet, July 31, 1912 Assets Liabilities and Capital Securittes owned $1,613,750 Cash 701,250 Organization expense .... 145,000 Discount on bonds 15,000 Capital stock: Preferred — issued and outstanding $1,000,000 Common : Auth $1,000,000 Less unissued 25,000 975,000 Total capital stock. $1,975,000 Collateral trust 5% bonds: Auth $1,000,000 Less unissued 500,000 Issued and outstanding. 500,000 Total assets ...... .$2,475,000 Total liabilities and capital $2,475,000 It will be noted that in the balance sheet the stocks have been grouped under the title of securities owned rather than shown in detail, since a general balance sheet is asked for. As a matter of further interest, the stocks of the underlying companies will be seen to have lost their identity, in so far as the par is con- cerned, having been taken up at their cost in par of the stock and cash of the parent company. The latter will in the future take its earnings from subsidiaries through dividends. Probi,e:m No. 18-A (Practice) From the text and demonstration of problem No. 18, prepare : (a) Journal entries relating to the consolidation, as they ap- peared on the books of the Syndicate Trust Company. (b) Skeleton ledger accounts of the Syndicate Trust Com- pany. 157 Elementary Accounting Problems PROBLEM No. 19 Demonstration The Ironton Manufacturing Company was incorporated July I, 1910, under the laws of the state of New York, with an author- ized capital stock of $1,000,000, divided into 7,000 shares of preferred, par value $100 each, and 6,000 shares of common stock, par value $50 each. The incorporators subscribed collectively to 10 shares of the preferred stock and paid on account thereof 50 per cent of the par value. Subsequent to incorporation, a proposal was received by the company from Arthur Drummond, on behalf of Franklin Mans- field and Curtis Blackwell, two of the incorporators, wherein it was proposed to sell to the company for the sum of $500,000, payable $400,000 in preferred stock and $100,000 in common stock, all right and title in the net assets, exclusive of cash, of Mansfield and Blackwell, a copartnership engaged in manufac- turing, along lines similar to those proposed by the new company. These assets, exclusive of cash ($20,000), were carried on the books of the copartnership at $400,000 ; Mansfield and Blackwell being equally interested in the assets, but dividing profits in the proportion of three-fifths and two-fifths, respectively. For the purpose of providing working capital, the proposal of Drummond having been accepted and the stock issued by the company, Mansfield and Blackwell donate to the company 50© shares of the preferred stock. The assets and liabilities acquired are booked by the com- pany as follows: land and buildings, $225,000; machinery and tools, $150,000; furniture and fixtures, $15,000; accounts re- ceivable, $125,000; notes receivable, $40,000; patents, $25,000; mortgage payable, $100,000; accounts payable, $20,000; notes payable, $10,000. For the purpose of refunding the mortgage, the company authorized an issue of bonds to the extent of $125,000 of which a par of $50,000 was sold at 95 and a further par of $50,000 at 158 Problem Number Nineteen 1 10. The life of the bonds was lO years, and with the proceeds of sale the mortgage was retired. A firm of bankers, Simpson and Guthrie, agreed to under- write i,ooo shares of the preferred stock at 90, provided a bonus of 10 per cent in preferred stock was allotted to them, and ad- vanced on account of the contract $50,000 in cash. The bankers subsequently accounted for the sale of the stock, but did not pay over the balance due. The preferred stock used for bonus pur- poses was taken from that donated. The balance of the donated stock was sold at 80. The operating transactions for the six months ended De- cember 31, 1910, were as follows: income from sales, $100,000; cost of sales, $60,000 (composed as follows: purchases, $55,000, less inventory, December 31, 19 10, $15,000; wages paid, $14,000; manufacturing overhead, $5,000 paid, $1,000 accrued) ; selling expense, $6,000 paid, $2,000 accrued; administrative expense, $11,000 paid, $1,000 accrued; other income, $2,000; deductions from income, $7,000. On December 31, 1910, the balance of the accounts receivable was $138,000, and the balance of the accounts payable, $10,000. Spread the organization expense over a period of two years. Provide for the premium on bonds sold. Prepare : The Ironton Manufacturing Company. (a) General balance sheet, December 31, 1910. (b) Statement of income and profit and loss, six months ended December 31, 1910. Mansfield and Blackwell. Skeleton ledger accounts showing copartnership dissolution. S01.TJT10N TO ProbIvKm No. 19 Scrutiny of the text of this problem will reveal the fact that it covers a number of different phases. It might almost be con- sidered a review of the preceding problems on corporations with the added feature of building up the cash and other real accounts from the complementary nominal accounts. The opening entries will not differ from preceding problems, but attention should be given to the fact that the common stock 159 Elementary Accounting Problems differs with regard to par value from the preferred, and this fact should be borne in mind on account of its bearing on subsequent transactions. Preferred capital stock unissued $700,000 Common capital stock unissued 300,000 To preferred capital stock authorized $700,000 Common capital stock authorized 300,000 To record the organization of The Ironton Manufacturing Company, incorporated on July I, 1910, under the laws of the state of New- York, with an authorized capital stock of $1,000,000, divided into 7,000 shares of the par value of $100 each and 6,000 shares of the par value of $50 each. The subscription to ten shares of the preferred stock and the payment of cash on account was presumably made by the in- corporators in order to comply with the letter of the law and avoid any appearance of not being legally capable of carrying on negotiations looking to the acquisition of the property of Mans- field & Blackwell. The law in New York requires that the amount of capital with which a corporation may begin business shall not be less than five hundred dollars. It is questionable, therefore, if cash had not been paid in on account of subscribed stock, if the corporation could legally have proceeded to acquire the property in question. Much discussion is had in books, classrooms and elsewhere as to the terminology to be employed in stating the entry covering subscriptions of this kind, but the following seems to be true and accurate and as desirable as any : Subscribers to preferred capital stock $ 1,000 To subscriptions to preferred capital stock $ 1,000 For ten (10) shares of preferred capital stock at $100 each subscribed by the incorporators. Cash 500 To subscribers to preferred capital stock 500 ^ For 50 per cent of $1,000 paid by incorporators on account of their subscriptions to 10 shares of the preferred capital stock. The entries below which follow closely the text of the problem call for little comment since they are either self-explanatory or are followed by explanations. Where such explanations are not deemed sufficient comments will be inserted. 160 Problem Number Nineteen Plant and sundry assets $500,000 To Arthur Drummond, vendor $500,000 To credit Arthur Drummond, vendor, with the purchase price of the net assets (.exclusive of cash) of Mansfield & Blackwell in accordance with proposal and acceptance of July i, 1910, whereby in consideration of $400,000 in pre- ferred stock and $100,000 in common stock said Arthur Drummond is to convey to The Ironton Manufacturing Company all right, title and in- terest in said net assets, exclusive of cash. Arthur Drummond, vendor 500,000 To preferred capital stock unissued 400,000 Common capital stock unissued 100,000 For payment under terms of contract as above set forth. Treasury stock, preferred 50,000 To stock donation account 50,000 For 500 shares of preferred stock of The Iron- ton Manufacturing Company, donated by Mans- field & Blackwell for the purpose of providing working capital. With regard to the next entry the question may be asked as to how the corporation arrived at the figures which are given for the assets and liabilities. In reply to this it may be pointed out that this was a case of "friendly proceedings." The same men who carried on the business of Mansfield & Blackwell continued with the business merely under a different legal type of organization as The Ironton Manufacturing Company. There is no reason to suppose that these men would have any hesitancy about supplying any information for the books of the corporation or concealing the value at which they placed their goodwill as partners. If the reverse had been true it is to t)e presumed that the details of notes and accounts would have been obtained from schedules furnished by Mansfield & Black- well, the mortgage from the instrument itself, while the other assets would have been inventories and either appraised or valued by the purchasing corporation or its representatives. While the goodwill has been treated as the difference between the net assets ($450,000) and the par value of the capital stock issued ($500,000) there is no reason why the goodwill might not have "been absorbed in the valuation of the assets. I^and and buildings , $225,000 Machinery and tools 150,000 Furniture and fixtures 15,000 161 Elementary Accounting Problems Accounts receivable 125,000 Notes receivable 40,000 Patents 25,000 Goodwill 50,000 To mortgage payable $100,000 Accounts payable 20,000 Notes payable 10,000 Plant and sundry assets 500,000 First mortgage bonds unissued 125,000 To first mortgage bonds authorized 125,000 To provide for the issue of $125,000 first mort- gage bonds, the proceeds of which are to be devoted to the extent of $100,000 to refunding the present outstanding mortgage. Discount on bonds 2,500 Cash 102,500 To first mortgage bonds unissued 100,000 Premium on bonds 5,000 For sale of $100,000 par of bonds; $50,000 at 95 and $50,000 at no. Mortgage payable 100,000 To cash 100,000 For retirement of old mortgage out of proceeds of bond issue. Simpson & Guthrie 100,000 To preferred capital stock unissued 100,000 For 1,000 shares of the preferred capital stock issued in blank to Simpson & Guthrie, bankers, under the terms of an underwriting agree- ment whereby said bankers are to account for said stock at 90 and receive a bonus of 10 per cent in preferred stock. Cash 50,000 To Simpson & Guthrie 50,00a For cash advanced by bankers on account of the above underwriting agreement. Organization expense 10,000 Stock donation account 10,000 To Simpson & Guthrie 10,000 Treasury stock, preferred 10,000 For adjustments relative to the underwriting contract with the bankers whereby they were to receive 10 per cent for thrir services and a bonus of 10 per cent in preferred stock. Cash 32,000 Stock donation account 8,000 To treasury stock, preferred 40,000 For balance of treasury stock sold at 80. The following entries have to do with the operations of the six months ended December 31, 1910, from which, together with 162 Problem Number Nineteen the balances in accounts receivable and payable, the cash account for the six months is built up Accounts receivable , $100,000 To income from sales $100,000 Purchases 55.000 To accounts payable 55,000 Inventory (new) 15,000 To purchases 15,000 Wages .- 14,000 Manufacturing overhead 6,000 Selling expense 8,000 Administrative expense 12,000 Deductions from income 7,000 To cash 43,000 Expenses accrued 4,000 Cash ; 2,000 To other income 2,000 Accounts receivable (new) 138,000 To accounts receivable (old) 138,000 Accounts payable (old) 10,000 To accounts payable (new) 10,000 Cash .' 87,000 To accounts receivable 87,000 Accounts payable 65,000 To cash 65,000 The last three entries are those which have to do with ad- justments incident to the closing of the books, namely, writing down the organization expense, spreading the net premium on bonds over the life of the bonds and closing out the stock dona- tion account to capital surplus. Profit and loss .$ 2,500 To organization expense $ 2,Soa One-quarter of $10,000, corresponding to the period of six months on a basis of a two-year period over which the organization is to be written off. Premium on bonds 125 To profit and loss US For one-twentieth of $2,500 the net premium on bonds sold showing the proportion applicable to the six months' period on a basis of ten years. Stock donation account 32,000 To capital surplus 32,000 To close out the stock donation account, the balance representing the amount realized Oft preferred capital stock donated. 163 Elementary Accounting Problems In connection with the above entries it i^ possible that the amount of organization expense written off might be appro- priately charged against capital surplus instead of profit and loss. In fact objection could scarcely be found if the entire amount of the organization expense were to be charged imme- diately to the stock donation account. To follow either of the suggestions would certainly be conservative. There appears to be little choice between charging capital surplus and charging profit and loss. The latter method has perhaps a shade the bet- ter of the argument, since there is a well settled theory concerning organization expense which considers it a proper charge against operations extending over a period of time. If the journal entries above given are to be posted to skeleton ledger accounts or set up on a working sheet a trial balance will result. From such trial balance there may be prepared the state- ments relative to The Ironton Manufacturing Company required by the problem and which appear below : THE IRONTON MANUFACTURING COMPANY GsNERAi, Bai^ancs Sheet — December 31, 1910 Assets Liabilities and Capital Land and buildings $225,cxx) Machinery and tools 150,000 Furniture and fixtures .... 15,000 Patents and goodwill 7S,ooo Materials and supplies, In- ventory 15,000 Current assets: Cash $ 66,000 Accounts receivable 178,500 Notes receivable 40,000 Total current assets $284,500 Organization expense 7,500 Total assets $772,000 Pfd. C/S Auth.... $700,000 Less unissued . . . 200,000 $500,000 Com. C/S Un. ... 300,000 Less unissued . . . 200,000 100,000 1st Mtge. Bd. Au.. 125,000 Less unissued . . . 25,000 100,000 Subscription to pfd. capital stock 1,000 Current liabilities: Accounts payable 10,000 Notes payable 10,000 Expenses accrued 4,000 Total current liabilities. $ 24,000 Premium on bonds 2,375 Capital surplus 32,000 Profit and loss surplus 12,625 Total liab. and capital. $772,000 164 Problem Number Nineteen THE IRONTON MANUFACTURING COMPANY Statement of Income and Profit and Loss for the Six Months Ended December 31, 1910 Income from sales $100,000 Cost of sales 60,000 Gross profit on sales $ 40,000 Selling expense 8,000 Selling profit $ 32,000 Administrative expense 12,000 Net profit on sales $ 20,000 Other income 2,000 Total income $ 22,000 Deductions from income 7,000 Net income — profit and loss $ 15,000 Profit and loss — credits : Premium on bonds 125 Profit and loss — gross surplus $ 15,125 Profit and loss — charge: Organization expense — written off 2,500 Profit and loss — surplus — December 31, 1910 $ 12,625 The third requirement of the problem relative to the accounts of Mansfield & Blackwell is found in the following journal entries and skeleton ledger accounts : Cash $ 20,000 Miscellaneous assets 400,000 To Mansfield— capital $2X0,000 Blackwell— capital 210,000 Ironton Manufacturing Co 500,000 To miscellaneous assets 400,000 Profit and loss 100,00c Preferred stock 400,000 Common stock 100,000 To Ironton Manufacturing Co 500,000 Profit and loss 50,000 To preferred stock (donated) 50,000 Profit and loss 50,000 To Mansfield & Blackwell 5O,O00 Mansfield capital 240,000 Blackwell capital , 230,000 To Mansfield & Blackwell— capital 470,000 Mansfield & Blackwell 470,000 To preferred stock 35o,ooo Common stock 100,000 Cash 20,000 165 Elementary Accounting Problems Misc. Assets Mansfield & Blackwell, Capital 400,000 400,000 Mansfield, Capital 240,000 210,000 30,000 Cash 20,000 20,000 Preferred Stock 400,000 50,000 350,000 Common Stock 100,000 20,000 100,000 350,000 240,000 230,000 Blackwell, Capital 230,000 210,000 20,000 Ironton Mfg. Co. 500,000 500,000 Profit and Loss 50,000 50,000 100,000 100,000 PROBI.EM No. 19-A (Practice) The Sedgwick Manufacturing Company was incorporated under the laws of the state of New York, on July i, 1912, with an authorized capital of $1,000,000, divided into 7,500 shares of preferred and 2,500 shares of common, of the par value of $100 each. The incorporators each subscribed to and paid for 20 shares of the preferred stock. Sundry other persons subscribed to 50 shares of the preferred stock and paid 25 per cent on ac- count thereof. At the first meeting of the stockholders, a proposal was re- ceived from Franklin Chance, acting in behalf of C. B. Murray and H. B. Forbes, two of the incorporators, in which the busi- ness of Murray & Forbes, a copartnership, was offered to the corporation for $500,000, payable $400,000 in preferred stock and the balance in common stock; the corporation to receive all the goodwill and property of the copartnership except cash $25,000, and to assume all the liabilities. A balance sheet of Murray & Forbes, June 30, 19 12, showed Murray's capital as 166 Problem Number Nineteen $225,000; Forbes, $200,000. Profits are divided according to capital. The proposition was accepted and the stock issued. Murray and Forbes donate 400 shares of preferred stock to provide working capital, and the assets and liabilities acquired are set up on the books of the corporation as follows : land and buildings, $250,000; machinery and tools, $125,000; furniture and fixtures, $17,000; accounts receivable, $123,000; notes re- ceivable, $45,000; patents, $20,000; bond and mortgage payable, $125,000; accounts payable, $30,000; notes payable, $20,000. For the purpose of retiring the bond and mortgage payable the company authorized an issue of 6 per cent bonds in the amount of $150,000, payable July i, 1922. The bonds were sold at an average price of 102}^ and the bond and mortgage was refunded. The Molten Trust Company agreed to underwrite 1,500 shares of the preferred stock at 85 upon condition that they receive in stock a bonus of 10 per cent. The trust company advanced $75,000 on account. The bankers subsequently accounted for the sale of the stock but did not pay over the balance due. The stock used for bonus purposes was taken from that donated. The balance of the donated stock was sold at 85. The operating transactions during the six months ended De- cember 31, 1912, were as follows: income from sales, $95,000; cost of sales $50,000 (made up of purchases, $65,000, less inven- tory, December 31, 1912, $35,000; wages paid, $13,000; wages accrued, $1,000; manufacturing overhead paid, $6,000); selling expense, $7,000; administrative expense paid, $10,000; adminis- trative expense accrued, $2,000; other income, $125.62; deduc- tion from income, $4,500; provision for bad debts, $500. On December 31, 1912, the balance of accounts receivable was $136,- 000; accounts payable, $10,000; no new note transactions except extensions. Spread the discount on the preferred stock over a period of five years. Provide for the premium on bonds sold. Prepare : (a) General balance sheet, December 31, 1912. (&) Statement of income and profit and loss for the six months ended December 31, 19 12. (r) Closing entries, books of Murray & Forbes. 167 Elementary Accounting Problems PROBLEM No. 20 Demonstration The following is the balance sheet on February 29, 191 2, of John Barber, who has filed a voluntary petition in bankruptcy: land, $10,000; buildings, $25,000; machinery and tools, $8,500; horses, wagons and harness, $540; furniture and fixtures, $1,200; merchandise, $8,525; cash in bank, $237; cash in hand, $40; accounts receivable, $5,465; notes receivable, $2,000; bond and mortgage payable, $18,000 (due July i, 19 12, interest 6 per cent last paid January i, 1912) ; accounts payable, $27,527; notes payable, $10,000; capital, $5,980. An inspection of the books reveals the fact that the balance sheet is not complete, since the following items have not been considered: accrued interest on notes receivable, $21.43; un- expired insurance, $45; interest accrued on bond and mortgage payable, $180; taxes accrued, $65; interest accrued on notes payable, $100. After the appomtment of the receiver the following facts were established: land has increased in value and is worth $12,000; buildings have not been depreciated and are appraised at $20,000; machinery and tools will bring, approximately, $5,000; horses, wagons and harness, $200; an offer of $500 has been received for the furniture and fixtures ; merchandise to the extent of $500 is covered by the chattel mortgage of a creditor whose claim is $350; another creditor whose claim is $800 is less for- tunate, holding a chattel mortgage of only $625; the cash in hand contains a $10 I. O. U. of an employee, which memorandum is worthless; accounts receivable are classified as good, $3,575, doubtful, $325, balance worthless; the notes receivable are con- sidered good. The personal estate of John Barber consists of a house and lot, $5,000, subject to a mortgage of $2,000; money lent to a friend, $200, which is good ; household debts, $257. From the foregoing prepare : (a) Statement of affairs. (b) Deficiency account. 168 Problem Number Tzventy SoivUTlON TO PrOBI^EM No 20 Statement of affairs and deficiency accounts seem to cause more unrest and trouble in the student world than any other class of statements. A problem bearing on insolvency or bank- ruptcy and calling for these statements seems to be the signal for a state of collapse which is more or less general. It is not uncommon to find instructors attaching an amount of importance to the subject which appears somewhat uncalled for. If a student or anyone interested in the subject could be made to see that a statement of affairs is in effect an estimated balance sheet it might throw a different light on the subject. The occa- sion for such a statement arises when it becomes desirable to ascertain what the condition of the proprietor and his relation to creditors would be were the business to be wound up. It matters not whether the proprietor appear as a sole proprietor, copartners or a corporation, except in one or two cases which will be mentioned later. If the reader is able to imagine the sole proprietor of a business receiving from his bookkeeper a balance sheet showing assets comprising land, buildings and furniture, $25,500; merchandise, $10,000; cash, $5,000; accounts receivable, $8,000, and liabiHties in favor of purchase creditors, $33j500> the proprietorship will be seen to amount to $15,000. Such an amount the business is said to be worth. If, however, the proprietor were to consider winding up or liquidating the business (not selling it as a going concern) a somewhat dif- ferent condition might present itself. The land, buildings and furniture at forced sale might not bring more than $15,000; merchandise, $7,000. Accounts receivable might contain a num- ber of debts which were worthless and others which could not be realized upon if speedy collection were attempted, so that only $5,000 would be realized. Thus, if the hypothetical pro- prietor were to add these estimates and the cash together he would find that he could reasonably depend only upon $32,000 with which to pay creditors, $33,500. The result, if his estimates were correct, would be that instead of having a capital of $15,000, he would be owing $1,500 more than he had assets, or he would have a "deficit" of $1,500. If he were to start with the balance sheet taken from the books and compare the items one by one with the estimates, the result would be as below and he would have the foundation of a statement of affairs. 169 Elementary Accounting Problems Assets Esti- mated Per to book realize Liabilities Esti- mated Per liqui- book dation Land, bldgs. and fur- niture Merchandise Cash Accounts receivable. .$25,500 $15,000 . 10,000 7,000 . 5,000 5,000 . 8,000 5,000 Accounts payable . Proprietorship (surplus) ..$33,500 $33,500 .. 15,000 Deficit $48,500 $32,000 1,500 $48,500 - $33,500 $33,500 If an attempt is made to ascertain the cause of the deficit, a comparison of the amounts estimated to be realized will show an estimated loss of $10,500 on land and buildings, $3,000 on merchandise and $3,000 on accounts receivable, or a total of $16,500. Against this estimated loss there is the proprietor's capital of $15,000 to be offset, revealing again the fact that his capital has been wiped out and that his assets are insufficient to the extent of $1,500 to meet his creditors. These figures may be moulded into a deficiency account as follows: Debits Credits Estimated losses on realiza- tion : Land, bldgs. and furniture. $10,500 Merchandise 3,000 Accounts receivable 3,000 Proprietorship $15,000 Deficit 1 .500 $16,500 $16,500 A statement of affairs is typical of insolvency although it is conceivable that it might be prepared out of curiosity when insolvency was not suspected. It is analogous in the case of insolvency to the balance sheet in solvency in that it shows financial condition, which, however, is estimated. Like the bal- ance sheet it is prepared by or in behalf of the proprietor. Since 170 Problem Number Twenty an important feature of the statement is to show the relation to creditors, especially those whose claims are unsecured the impression sometimes gains recognition that the statement is made up from the point of view of creditors. This, together with the fact there is usually an excess of liabilities over assets, has led to a transposition of the two sides as they appear in the balance sheet. The argument in favor of the transposition when based on the assumption that it is a creditor's statement should be ignored for the reason that it is no more a creditor's statement than is a balance sheet. The argument relative to the excess of liabilities over assets has some foundation, but the objection to it, as will be seen later on, is that with the numerous contras which have to be deducted it is very confus- ing to transpose the sides without anything in particular being gained. In the same way that the statement of affairs is analogous to the balance sheet the deficiency account is analogous to the profit and loss account. The profit and loss account explains the fluctuation in proprietorship. The deficiency account serves in a similar way to connect the proprietorship as shown by the balance sheet with the deficit as shown by the statement of affairs. It should be borne in mind that both statement of affairs and deficiency account are statements which are prepared apart from the books and that the books are not adjusted to agree with them. Realization and Hquidation which follows insolvency rarely coincides with the estimate and therefore to adjust the books in accordance with the estimate would result in hopeless confusion. There are perhaps one or two general remarks concerning these statements which should be made before proceeding to the solution of the present problem, namely, that any assets or liabilities of the business which do not appear on the books should be treated as if such were the case and accordingly added to the items in the balance sheet. There should also be included, in the case of a sole proprietor, his personal estate since busi- ness and personal creditors rank equally in the distribution of the combined business and personal estate. A working sheet will be found valuable in this type of problem. It differs from those used in previous problems but 171 Elementary Accounting Problems is fully as useful. It may be criticized on the ground that it consumes considerable time; but the accuracy which results and the facility with which the statements may be prepared seem to justify the means. By applying the principles embodied in the simple case illustrated above it will be seen that the increases and decreases resulting from the application of the estimated realization and liquidation to the balance sheet or book figures will, when applied to the propietorship, produce the deficit. Thus the figures will all be tied up before starting on the state- ments and the attention may be devoted the more important matter of arrangement. .WORKING SHEET FOR STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT Estimated real- Per ization and Assets books liquidation Increase Decrease Land $10,000.00 $12,000.00 $ 2,000.00 Buildings 25,000.00 20,000.00 $ 5,000.00 Machinery and tools 8,500.00 5,000.00 3,500.00 Horses, wagons and harness .... 540.00 200.00 340.00 Furniture and fixtures 1,200.00 500.00 700.00 Merchandise 8,525.00 8,525.00 Cash in bank 237.00 227.00 10.00 Cash in hand 40.00 40.00 Accounts receivable 5,465.00 3,575.00 1,890.00 Notes receivable 2,000.00 2,000.00 Accrued interest on notes rec 21.43 21.43 Unexpired insurance 45.00 45.00 Personal estate : House and lot 5,000.00 5,000.00 Loan receivable 200.00 200.00 Total assets $66,773.43 $57,33343 Liabilities Bond and mortgage payable $18,000.00 $18,000.00 Accounts payable 27,527.00 27,527.00 Notes payable 10,000.00 10,000.00 Interest accrued on B/M 180.00 180.00 Taxes accrued 65.00 65.00 Int. accrued on notes payable 100.00 100.00 Personal debts: Mortgage on house and lot 2,000.00 2,000.00 Household debts 257.00 257.00 Total liabilities $58,129.00 $58,129.00 Capital as adjusted $ 8,644.43 $ 795.57 $ 2,000.00 $11440.00 From the above the statement of affairs and deficiency ac- count may be prepared. The statement of affairs is arranged 172 Problem Number Twenty with the assets and deficit above liabilities in order to show one of the variations in form. A statement showing the assets and liabilities in account form will be presented in connection with a subsequent problem. JOHN BARBER Statement of Affairs — as of February 29, 1912 Estimated realization Book and Assets and Deficit Value liquidation Cash $ 277.00 $ 267.00 Merchandise $ 8,525.00 Less — mtges. — per contra $350.00 625.00 97500 7,550.00 7,550.00 Accounts receivable : Good 3.575.00 3,575.00 Doubtful 32500 Bad 1,56500 Notes receivable and interest 2,021.43 2,021.43 Loans receivable 200.00 200.00 Furniture and fixtures 1,200.00 500.00 Horses, wagons and harness 540.00 200.00 Machinery and tools 8,500.00 Land and buildings $35,000.00 Less — mtge. and interest — per contra 18,180.00 16,820.00 13,820.00 House and lot $ 5,000.00 Less — mtge. — per contra 2,000.00 3,000.00 3,000.00 Unexpired insurance 4500 45-oo Total assets $45,618.43 $36,178.43 Less — preferred claims — taxes (per contra) 65.00 Net assets — subject to expenses of receivership avail- able for unsecured creditors — representing 97.84 plus per cent of their claims $36,113.43 Deficit 795.57 Total assets and deficit $36,909.00 Liabilities Preferred claims (deducted per contra) : Taxes $ 65.00 Creditors : Fully secured (deducted per contra) : Bond, mortgage and interest — land and buildings 18,180.00 Bonds and mortgage — house and lot 2,000.00 Chattel mortgage 350.0O Partly secured (deducted per contra) : Chattel mortgage 625.00 Unsecured $36,909.00 Liabilities (unsecured creditors) $36,909.00 173 Elementary Accounting Problems JOHN BARBER Deficiency Account Debits Credits Non-ledger liabilities : Interest ace, on B/M payable $ 180.00 Taxes accrued 65.00 Int. acc. on N/P 100.00 Personal liabilities : Mtge. on house and lot 2,000.00 Household debts 257.00 Balance 8,644.43 Capital per ledger $ 5,980.00 Add: Non-ledger assets: Acc. int. on N/R 21.43 Unexpired insurance. 45.00 Personal assets : House and lot 5,000.00 Loans receivable 200.00 $11,246.43 Estimated losses on real- ization : Buildings $ 5,000.00 Machinery and tools... 3,500.00 Horses, wagons and har. 340.00 Furniture and fixtures. . 700.00 Cash 10.00 Aces, receivable 1,890.00 $11,246.43 Bal. cap. as adjusted. ... .$ 8,644.43 Estimated gain on realiza- tion : Land 2,000.00 Deficit — per statement of affairs 795.57 $11,440.00 $11,440.00 Theoretically the assets and liabilities should be arranged in the statement of aflfairs in the order that they will be realized and liquidated. This is practicable with regard to the liabilities, but scarcely possible if strict accuracy is to be required with the assets. No one can tell whether furniture and fixtures will be sold ahead of merchandise or what will happen. The order is at best an estimate based on the probabilities as determined by the experience of ordinary business routine. Criticism is sometimes raised in connection with the employ- ment of the terms "book value," since it is argued that the statement contains items which are not on the books. While this may be true, so far as problems are concerned, the items probably should be put on the books before a final trial balance is taken. Problem No. 20- A (Practice) The following is the balance sheet on March 31, 1912, of William Pearce, who has filed a voluntary petition in bankruptcy : 174 Problem Number Twenty land, $I5,CXX); buildings, $40,cxx); machinery and tools, $9,000; horses, wagons and harness, $600; furniture and fixtures, $1,500; merchandise, $9,375; cash in bank, $126; cash in hand (includ- ing worthless memorandum of $8), $30; accounts receivable, $8,792; notes receivable, $1,500; bond and mortgage payable, $35,000; accounts payable, $26,998; notes payable, $15,000; cap- ital, $8,925. Items not on the books are : interest accrued on notes payable, $150; unexpired insurance, $37,50; interest accrued on bond and mortgage payable, $350; accrued interest on notes receivable, $32.45; taxes accrued, $87.50. The personal estate consisted of securities of the market value of $8,787.50 (cost, $10,000), which were deposited as collateral to secure a personal loan of $5,000 and personal living expenses amounting to $375. The land and buildings were appraised at $47,000 (of which $18,500 pertained to the land); machinery and tools, $7,500; horses, wagons and harness, $250; furniture and fixtures, $300; there are two chattel mortgages on the merchandise, one of $1,236 in favor of a creditor whose claim is $975, and another of $975 in favor of a creditor whose claim is $1,263; the cash in hand contains postage stamps, $2.40; of the accounts receiv- able $4,525.72 are good, $1,262.34 are doubtful, but will probably realize 20 per cent, and the balance are considered worthless; the notes receivable are worthless. From the foregoing prepare: (a) Statement of affairs. (&) Deficiency account. 175 Elementary Accounting Problems PROBLEM No. 21 Demonstration The following is a balance sheet of The Columbia Traction Company, April 4, 1912, prepared for receivers appointed on said date: Assets Liabilities and Capital Cost of road $2,500,000 Cost of equipment 750,000 Franchise 2,000,000 Construction material 70,000 Construction work 25,000 Cash 37,500 Due from other lines 5,000 Notes receivable — allied companies 40,000 Accrued interest on notes receivable 250 Organization expense 100,000 Injuries and damages dur- ing construction 50,000 Total $5,577,750 Preferred capital stock. . .$2,000,000 Common capital stock . . . 1,000,000 First mortgage 6% bonds and interest 2,031,250 Taxes accrued 15,000 Wages accrued 14,500 Salaries accrued 10,000 Accounts payable 20,664 Due connecting lines — allied 257,860 Notes payable 200,000 Int. accrued on notes pay- able 3,150 Surplus 25,326 Total $5,577,750 Estimates made by appraisers and investigations made by accountants reveal the fact that the assets are grossly overstated. The actual cost of the road was $1,525,750; equipment, $560,000. The road is now worth, after allowing for depreciation, $1,200,000; the equipment, $300,000. The franchise, based on the excess earning power, is valued at $2,200,000. The construc- tion material is worth the book figure. The construction work contains about $3,000 of night work paid for at double-time rates. The accounts and notes receivable are good. Organiza- tion expense and injuries and damages will of course be worth nothing in liquidation. In view of the fact that the franchise was a valuable one and liquidation would prove so disastrous to the stockholders, the receiver was authorized to continue the operations and to issue $500,000 of receiver's certificates bearing interest at 5 per cent. 176 Problem Number Twenty-One These were issued as of May ist and sold at an average price of 923^. The proceeds were expended for new equipment to the extent of $400,000, while $50,500 was used to pay off notes payable and interest. During the period from April i to June 30, 1912, the operating income was $536,732.15; the operating expense, $302,517.64. Of the operating income, $125,417.82 was from other lines, on account of which and previous charges the companies paid $126,286.25. Of the operating expense, $145,843.29 was through credits to connecting lines, to which $175,328.15 was paid. The taxes accrued at June 30th were $30,000; wages accrued, $5,650; salaries accrued, $8,000; salaries paid, $27,500. The other ex- penses paid in cash were $12,375. The organization expense and receiver's discount are to be written oflf one-twentieth. The construction work was completed by credits to material of $7,525 and wages of $12,436.23. On July I, 191 2, the company was authorized to increase its capital stock to $5,000,000 preferred and $5,000,000 common, and to issue $5,000,000 of 5 per cent bonds. The proposition made to the bond and stockholders was as follows: holders of receiver's certificates to exchange for 5 per cent bonds; bond- holders to exchange for 5 per cent bonds and receive a bonus of three shares of common for each bond; preferred stock- holders to pay an assessment of $10 per share; common stock- holders to pay an assessment of $22.50 per share. All assented and exchanged except holders of 120 shares of the common. Prepare the balance sheet of the company after the reorganiza- tion, injuries and damages during construction having been capitalized. Solution to Problem No. 21 (Demonstration) In reading the problem, the second paragraph, which deals with the estimates made by the appraisers, etc., may not be passed over without attention, since it has a decided bearing on the demonstration problem. The information is also essential to the solution of the practice problem which calls for a state- ment of affairs and deficiency account. 177 Elementary Accounting Problems In the case of the company which forms the subject-matter of the problem a statement of affairs was prepared in order to furnish information to the court on which to decide whether the best interests of creditors would be served by allowing the receiver to continue the business or liquidate it. The decision being in favor of continuation the receiver was authorized to issue certifi- cates for the purpose of raising funds with which to rehabilitate the equipment and afford relief to the more pressing creditors. It is to be presumed that the court would direct the receiver to adjust the property accounts so as to squeeze all the water out, as it were. If the cost of the road was actually $1,525,750, instead of $2,500,000, as shown on the books, then obviously the book figure should be reduced. Correspondingly, if $1,525,750 represents the original cost and after making reasonable allow- ance for depreciation the replacement cost is but $1,200,000, a further reduction to this latter figure should be made. There will here, as always, be a certain amount of discussion as to the propriety of writing up the franchise to put it on the basis of its earning power. The question may well be asked, "iTow can there be any excess earning power with the company in a condition which warrants the appointment of a receiver?" Obviously the figure is an estimated one, based on probable income from operation and decreased operating expenses under conservative and efficient management. If the estimate has been carefully and scientifically made no objection could be found to writing up the franchise. If the estimate is the result of a hap- hazard guess or the offhand opinion of someone not qualified or it was the desire of the receiver, as it undoubtedly would be, to be conservative, the franchise would probably not be written up. In fact it would not startle anyone especially if the receiver were to refuse to recognize the franchise as an asset since conservatism is predominant among the rules which guide him. To illustrate this, the receivers for a concern in a recent case refused, in having the statement of affairs made up, to recognize any liabilities except those which had been incurred since their appointment. This presumably on the theory that other liabili- ties were not operative against the receivers until proof of claim had been filed. No importance attaches to the statement that the construction work contains night work paid for at double time. It is a mat- 178 Problem Number Twenty-One ter of interest, however, in this connection to note that the high cost of street railway construction work in New York City as compared with other cities is due to the fact that it was done almost entirely at night when the traffic is lighter. The first step in the solution of the problem consists in setting up a working sheet, taking as a basis the balance sheet. Since inserting and completing the working sheet at this point would tend to detract from the demonstration its presentation will be deferred until after the journal entries have been given. The first journal entry would consist in writing down the cost of road and equipment. Following this would come the entries setting up the receiver's certificates, the applica- tion of the proceeds of same, the operating transactions and the entries bearing on the refunding. If such journal entries are applied to the working sheet there will result the figures for a statement of income and profit and loss and a balance sheet reorganization, the latter only being required by the problem. Surplus $ 1,750,000.00 To Cost of road $ 1,300,000.00 Cost of equipment 450,000.00 To write down the cost of road and equipment accounts to the appraised value of the respective assets. Cash 487,500.00 Discount on receiver's certificates 12,500.00 To Receiver's certificates 500,000.00 For $500,000 receiver's certificates bearing interest at 5% issued May i, 1912, and sold at 975/^. Cost of equipment 400,000.00 Notes payable 50,000.00 Interest accrued on notes payable 500.00 To Cash 450,500.00 Disposition in part of funds realized through the sale of receiver's certifi- cates. Cash 411,314.33 Due from other lines 125,417.82 To Operating income 536,732.15 Cash 126,286.25 To Due from other lines 126,286.25 179 Elementary Accounting Problems Operating expense 302,517.64 To Due connecting lines Cash Due connecting lines 175,328.15 To Cash Taxes 15,000.00 To Taxes accrued Wages accrued (old) 14,500.00 To Wages accrued (new) Cash Salaries accrued (old) 10,000.00 Salaries 25,500.00 To Salaries accrued (new) Cash Administrative expenses 12,375.00 To Cash Org. Exp. and rec. disc, written off 5,625.00 To Organization expense Discount on receiver's certificates Construction work 19,961.23 To Construction material Cash (wages) Cost of road 44,961.23 To Construction work Interest 4,166.66 To Interest accrued on receiver's cer- tificates Interest on $500,000 for two months at 5%. Interest 28,750.00 To Interest accrued on first mtge. 6% bonds Interest on $2,000,000, for six months at 6% ($60,000) less interest accrued on same to April 4 ($31,250). Preferred capital stock unissued 3,000,000.00 Common capital stock unissued 4,000,000.00 First mortgage 5% bonds unissued 5,000,000.00 To Preferred capital stock authorized Common capital stock authorized First mortgage 5% bonds au- thorized Increases in stock and bond issues authorized for refunding purposes. 180 145,843-29 156,674.35 175,328.15 15,000.00 5.650.00 8,850.00 8,000.00 27,500.00 12,375.00 5,000.00 625.00 7,525.00 12,436.23 44,961.23 4,166.66 38,750.00 3,000,000.00 4,000,000.00 5,000,000 joo Problem Number Twenty-One Since there are numerous theories concerning the handling of the refunding entries they had better, perhaps, be deferred until after they have been discussed. The following tabulation will show at a glance the whole situation : Received Issued Securities Cash 5% bonds Pfd. stock Com. stk. Receiver's certificates. First mtge. 6's Preferred stock Com. stock, $1,000,000 12,000 $ 500,000 2,000,000 $200,000 222,300 $ 500,000 2,000,000 $600,000 $2,500,000 $422,300 $2,500,000 $600,000 . From the above it appears that the securities issued are as follows : 5% bonds $2,500,000 Common stock 600,000 $3,100,000 While there has been received: Receiver's certificates $ 500,000 First mortgage 6's 2,000,000 Cash 422,300 2,922,300 Showing an excess of securities based over securities and cash received of $177,700 The disposition of this amount then becomes the question of interest. Five ways suggest themselves, namely, charge either cost of road; franchise; reorganization expense; treasury bonds and stock (distributing the amount appropriately over the various securities to which it pertains and carrying it along with the bonds and stocks as treasury securities); or, surplus (deficit). To charge cost of road or franchise would be decidedly out of the question under the circumstances. The expense is one inci- dent to raising capital and has not enhanced in any way the value of the property. To charge the surplus amount, which at this point would be showing a deficit, would clear the matter out of the way and allow the company to start afresh with a full knowl- edge of a deficit, the size of which would be appalling. On the other hand, the expense may be looked upon as attaching to the acquisition of the old bonds and the stock and should therefore increase the cost of such securities. To do this would be to 181 Elementary Accounting Problems defer the day of reckoning since when the stocks were sold, if they ever were, the company would be obliged to show a heavy loss on them. Obviously, the only thing remaining to do is to charge reorganization expense and write the account down over a period of years. Either this or charging it to surplus immediately seems to be the most desirable of the five ways offered with preference for the former. In this way the expense is spread over a period of years and since the benefits of refunding, if experience proves the scheme to have been a judicious one, will accrue over period of years, justice will be more or less consist- ently meted out to a changing list of stockholders. Not for- getting, of course, that no dividends will be paid until the deficit resulting from the revaluation of the assets has been obliterated. The entry, therefore, in accordance with this line of reasoning is as follows: Receiver's certificates $ 500,000 First mortgage 6% bonds 2,000^000 Common stock 12000 Cash •••.... 422,300 Reorganization expense 177,700 To First mortgage 5% bonds unissued ' $2,500,000 Common capital stock unissued 600,000 Non-assenting common stock 12)000 There is nothing in particular gained in this case by setting up the non-assenting common stock further than to brand as it were the minority stockholders who have refused to become a party to the reorganization. Sometimes the procedure with re- gard to reorganization is different, an entirely new company being organized and the securities of the old company exchanged for those of the new. In such a case certain stockholders who refuse to exchange may not be ignored and their stock is carried on the books of the new company as non-assenting stock. The position of a stockholder who does not care to send good money after bad is a peculiar one. Nothing can compel him to exchange, neither will anything permit the company to ignore him. He is therefore carried along by the company with such stigma as "non-assenting stock" implies. In bringing about the exchange of receiver's certificates and bonds it is probable that the interest would have been adjusted up to July I. The following entry is, therefore, in order. 182 Problem Number Twenty-One Interest accrued on receiver's certificates $4,166.66 Interest accrued on first mortgage 6's 60,000.00 To cash $64,166.66 At this point the working sheet may be prepared. It is shown in its entirety * even though the problem does not require an income statement, in order that the figures may be tied up. Unfortunately nothing is said in the problem about the interest on notes receivable and payable so that it cannot be accrued at this time. From the working sheet a balance sheet may be prepared.f It has been dated July 31, 1912, in order to leave no question as to its having been prepared after the reorganization, since no date is given in the problem. Since this is an arbitrary date no cognizance has been taken of accruals for the month of July. PROBI.EM No. 2 1 -A (Practicai.) From the text of Problem No. 21 prepare a statement of affairs and deficiency account after the receiver had taken charge and secured appraisals and estimates. * See pages 242 and 243. t See page 186. 183 Elementary Accounting Problems v?8 8 8 8^ >-l Q O t>. 01 HH cT lo lo ci" "^ rf O 1-1 C^< w &i to lO 00 r^ fS On fh l^ t< !^ % »o <^ ^8888 8^8^^8.8 8??^^ to 0\ tOVO f^OO to CO xf t^ -^ --. --^^--.- -- - - TTOO O Q tO\o VO Vd to vg CO CS O 8 is* 8 rC H-Tvo" of 00 "-H 0< 0» "qj (V, p o q q q w Tt q, „ ^ „ . (L> --. (5" q" o" cT to O'C O io O t>. 04 pq c B o ^ c o .^ 'ti'^-?. ? o) c« t^ C C o o 2 o o :^88 8 8^8 8 88cJ5» 8i^ t>^ 01 HH O "2 ^ *^ "2 ^7^, <^ o 04 04 to to of to oT o' ^ "■ fo o o o r6 -^ to o< 88888 Q Q o q to O O 04 t^ to O CO ^ o ^ CJ3 c O ■sli.il ^ c O u, ^ N en ^, cu d OS i5 ^ O u u --7 184 o -; 10 a> ti i5 (U e "•• 1^ T3 V-r O £ bfi-M O o Problem Number Twenty-One % 8: CO 1— +-> ' ^ H J < >— > P^ S H s w < m HH u m u j^ kJ o < pq ^ ;J d\ S ro CO fO CO lO "0 ^ ^ ^ m ««- ^ < t« V- g CO w (u ^ u i; C Z! rt.2 O rt bo u n .« o P ;OQp:5 i86 Problem Number Twenty-Two PROBLEM No. 22 Demonstration A trial balance of the books of Chauncey, Bennett and Cooper, a limited copartnership, on June 3, 1912, the date on which A. M. Dawson, was appointed receiver, was as follows : Debits Credits Equipment $ 80,972.50 Wages accrued $ 12,862.15 Building material 18,43573 Salaries accrued 1,243.74 Invested in contracts.... 125,942.36 Due supply houses 198,891.30 Cash 5,875.80 Notes payable 85,000.00 Due from customers 117,226.15 Int. accrued on notes pay- Due from sub-contractors 1,520.37 able 126.79 Notes receivable 25,000.00 Reserve depreciation Accrued interest on notes equipment 35,348.27 receivable 136.27 Capital : Rent paid in advance 1,000.00 J. D. Chauncey 23,256.64 Cost of contracts 187,536.24 P. H. Bennett 22,177.25 Salaries — office 20,946.32 J. W. Cooper (special) 25,000.00 Expenses — office 8,314.69 Income from contracts.. 190,236.42 Interest 1,236.13 Total $594,142.56 Total $594,142.56 The estimates of values made by the receiver are as follows: equipment if sold at forced sale will bring $15,000; building ma- terial, $15,275; notes receivable, $25,000, and interest; due from subcontractors, $1,200. The account "due from customers" con- tains $50,000, drawn out by Chauncey and Bennett. Liens against work in progress amount to $3,000. Estimated cost of completing contracts which will yield $150,000 h $9,057.64. (Labor, $7,259; special material, to be purchased, $1,798.64.) After consideration it was decided to allow the receiver to continue the business. Certain of the creditors combined in advancing $10,000 and extending credit necessary to enable the receiver to purchase additional materials. Chauncey and Ben- nett, under pressure, succeeded in raising $30,000, which they paid in. The receiver's transactions were : cash paid to creditors, $113,452.17; to workmen, $25,875.32; salaries, $3,500; charges to 187 Elementary Accounting Problems cost of contracts, for material, $12,781.43; for labor, $15,653.74. Charges for salaries, $3,468. 33; office expenses, $1,239.73; con- tracts completed, charged at $i75,ocx), cost $149,343.27; interest accrued on notes payable, $135.75; purchases of material on ac- count, $8,793.25; collected from customers, $187,525.15; paid notes and interest, $20,127.35 ; expenses of receivership, $2,590.75. On January i, 1913, the receiver restored the business to the partners, after collecting i per cent on disbursements as his com- mission. J. S. Cooper, the special partner, receives one-fourth, of the profits and losses. Prepare a statement of affairs and deficiency account. Solution to Probi^em No. 22 While this problem contains the necessary information for both the demonstration and practice problems only so much as concerns the former will be considered here. For this purpose the problem need only be read to the end of the paragraph fol- lowing the trial balance excepting of course the last line which calls for a statement of affairs and a deficiency account. The problem differs somewhat from the previous one of this type in that a trial balance rather than a balance sheet is given. The trial balance includes certain nominal accounts which should be either closed out or ignored in estimating the realization and liquidation. In the latter event, however, the deficiency account will show the profit or loss on operations. As a practical matter the nominal accounts would always be closed out on the books and the balance sheet resulting would become the basis for the statement of affairs. In solving problems of this type where the nominal accounts appear, the technique is somewhat simpli- fied by allowing them to stand. It is, of course, true that the deficiency account may be begun with the adjusted capital, ignor- ing the profit or loss on operations, but as this detracts some- what from the comprehensiveness or, perhaps, rather the inclu- sion of the operating results of the period prior to receivership adds to the comprehensiveness it is thought such results may well be included. To bring out this point the following may serve : 188 Problem Number Twenty-Two Capital per tri^l balance $70,433.89 Income from contracts $190,236.42 Cost of contracts $187,536.24 Salaries — office 20,946.32 Expe*^ses— office 8,314.69 Interest 1,236.13 218,033.38 Loss on operations 27,796.96 Capital, June 3, 1912, after closing $42,636.93 If the nominal accounts were to be closed out the deficiency account would begin with the amount $42,636.93 and the loss from operation would be ignored. If they are not closed out the deficiency account will begin with $70,433.89, and the loss shown in the account either broad (debits and credits) or net, as choice may dictate. The question of the capital adjustment raises an interesting question concerning the account of the special partner. Accord- ing to the terms of the copartnership contract, J. W. Cooper, the special partner, is to receive one-fourth of the profits, or be charged with one-fourth of the losses. In accordance with such agreement he would be charged with one-fourth of $27,796.96 or $6,949.24. The law concerning limited or special copartner- ship jequires that the capital of special partners must be main- tained at least in the amount contributed and while they may receive interest and profit on their investments such payments may not impair their capital. The question concerning the J. W. Cooper account is the effect of the loss above mentioned. It must be conceded, it would seem, that there is a holding out to creditors that Cooper has $25,000 invested in the business. If the loss is charged against him, obviously, he will have only $18,050.76. The inference to be drawn from the law therefore is that the general partners could hold him for the loss and that the amount due from him might reasonably be considered as an asset available for the liquidation of liabilities. As the first step in the solution of the problem a working sheet should be prepared, taking as a basis the trial balance and placing against it the estimated reali.-^ation. The working sheet is desirable in order that the figures may be proven and a clear idea of the situation obtained before beginning work on the statements. 189 Elementary Accounting Problems WORKING SHEET FOR STATEMENT OF AFFAIRS AND DEFICIENCY ACCOUNT Estimated real- Trial ization and Debits balance liquidation Increases Decreases Equipment $ 80,972.50 $ 15,000.00 $ 65,972.50 Building material i8,435-73 15,27500 3.160.73 Invested in contracts 125,942.36 150,000.00 $ 24,057.64 Cash 5,875-80 5,87580 Due from customers 117,226.15 67,226.15 50,000.00 Due from subcontractors ... 1,520.37 1,200.00 320.37 Notes receivable 25,000.00 25,000.00 Accrued interest on notes rec. 136.27 136.27 Rent paid in advance 1,000.00 1,000.00 Cost of contracts 187,536.24 187,536.24 Salaries — office 20,946.32 20,946.32 Expenses — office 8,314.69 8,314.69 Interest 1,236.13 1,236.13 Total debits $594,142.56 Due from special partner ... 6,949.24 6,949.24 Total estimated assets... $287,662.46 Deficit 19,519.16 Total $307,181.62 Credits Wages accrued $ 12,862.15 $ 12,862.15 Salaries accrued 1,243.74 1,243.74 Due supply houses 198,891.30 198,891.30 Notes payable 85,000.00 85,000.00 Interest accrued on notes payable. 126,79 126.79 Reserve for depn, equipment 35,348.27 35,348.27 Capital : J. D. Chauncey 23,256.64 23,256.64 P. H. Bennett 22,177.25 22,177.25 J. W. Cooper (special) ... 25,000.00 25,000.00 Income from contracts 190,236.42 190,236.42 Total credits $594,142.56 Estimated cost of completing contracts 9,057.64 9,057.64. Total estimated liabilities $307,181.62 $327,025.46 $346,544.62 $ 19,519-16 In looking at the above it will be seen that the net decrease, shown at the bottom on the right, amounts to $19,519.16, the same as the deficit. A glance at the working sheet will also show 190 Problem Number Twenty-Two that all the information necessary to the preparation of the statements, except preferences and offsets is clearly set forth. The first two columns give the data for the statement of affairs, while the third and fourth provide that for the deficiency account. It may be difficult to understand why the reserve, the capital accounts and the income from sales are shown as increases when obviously this mechanical procedure is the reverse of that fol- lowed above in the case of the assets. Equipment, for example, appears in the trial balance as $80,972.50, while in the estimated realization and liquidation column it appears as $15,000, hence the difference appears in the decrease column. The reserve for depreciation appears in the trial balance as $35,348.27, while it is missing from the estimated realization and liquidation column. Apparently following the line of reasoning with regard to equip- ment it has decreased; still the difference is shown as an in- crease. It is probable that this matter can be cleared up if increases and decreases are considered with regard to their re- lation to capital. As a result of the above changes has capital increased or decreased? Concerning equipment surely it has decreased. If the reserve is released capital has increased. In- come from sales increases capital. If the deficit is to be ascer- tained then capital, which is available for the liquidation of the liabilities, must be brought into play and treated like any increase. The item of rent paid in advance may have been treated somewhat arbitrarily and the matter may be open to discussion. If the rent has been paid in advance, of necessity there must be a lease covering a period extending into the future. Since in the present instance the receiver is to continue the business it is to be presumed that he will be able to work out the amount paid in advance, which probably does not cover any extended period. By virtue of this fact creditors will receive more than they would if the payment had not been made and he were obliged to use other funds for this purpose. It is, therefore, worth as an asset $1,000. Were the business to be wound up and the use of the property discontinued by the receiver he would doubtless be able to realize on the prepayment either by selling the lease or subletting. It is true that the full amount might be reduced to the extent of commission paid to real estate brokers, but since such a reduction is a matter of speculation, 191 Elementary Accounting Problems it seems, in the absence of any specific information on the point to take it at its face value. Nothing is said in the problem concerning the division of profits or losses between the two general partners. The general rule in copartnership problems, as well as in copartnership con- tracts, where the manner of division is not specified, is that the profits and losses shall be divided equally in accordance with the number of partners. If this rule is to be applied here, after deducting one-fourth of the total which is applicable to the special partner the amount remaining will be equally divided between the other two partners. Consequently it is to be presumed that the drawings of the partners which were included in the amount due from customers are to be charged against them in equal amounts and that subsequently the funds which they raised un- der pressure were credited to them in the same way. 192 Problem Number Twenty-Two n i \f^ u s •I •3 «> o g c : o . 3 o ^^ _ 3 , > cj bo.-t: =: o -^ - Soo Wii. 8 ^5 § VO c^ *-* ^^ CM «^ COM IT) to VO M >^ 88 a^ In. lO ?i^ O o o 0\(N ON loro CO CD "^ 00 fO ^ ^3- C3 J. C3, CO 0^_T ^■3 o o ■«-> CO O C *-• o to (U ^j CO (S w Elementary Accounting Problems RECEIVER FOR CHAUNCEY, BENNETT & COOPER Deficiency Account as of June 3, 1912 Adjustment of partners Capital $70,433.89 accounts $50,000.00 Balance 7,2/^3-07 Loss on operations 27,7^.^ %77,79^-<^ %77,7^'9^ Balance $ 7,Z^Z'07 Estimated losses on real- Estimated profit on con- ization : tract $15,000.00 Subcontractors 320.37 Due from J. W. Cooper. . 6,949.24 Building material 3,160.73 Equipment 30,624.23 Deficit 19,519.16 $41,468.40 $41,468.40 In working problem 22-A, the nominal accounts should be closed out before taking up the transactions for the receiver since it is the intention to show through the statement of income and profit and loss the efficiency of the receiver. To merge with his operations those corresponding to the period before he took charge would be eminently unfair. The rent paid in advance should be treated as having expired during the period of the receivership. pROBi^EM No. 22-A (Practice)' From the text of problem No. 22 prepare: (a) Balance sheet, December 31, 1912. {h) Statement of income and profit and loss for the period ended on said date. 194 Problem Number Twenty-Three PROBLEM No 23 Demonstration A receiver in bankruptcy having been appointed for W. B. Tileson, who has been engaged in a trading business, it is de- sired to know, approximately, the percentage which unsecured creditors will receive on their claims. A balance sheet at June 30, 1912, is as follows: A ssets Land $ 25,000.00 Buildings 175,000.00 Machinery and tools 187,500.00 Auto trucks 15,000.00 Furniture and fixts 8,000.00 Stock-Altair Wheel Co. . . 45,000.00 N. Y. Central stock — 200 shares at 131-1/8 26,225.00 Merchandise-inventory . . 20,000.00 Cash in hand 752.00 Cash in bank 1,856.00 Accounts receivable 27,843.00 Loan-Altair Wheel Co. . . . 90,000.00 Notes receivable 15,000.00 Accrued int. on notes re- ceivable 251.00 Unexpired insurance 300.00 Total $637,727.00 Liabilities and Capital Bond and mtge. on land & bldgs $125,000.00 Int. ace. on B/M 6,250.00 Taxes accrued 1,500.00 Wages accrued 275.00 Accounts payable 175,725.00 Notes payable 200,000.00 Int. ace. on notes payable 12,000.00 Reserve for depreciation: Buildings 35,000.00 Machinery and tools 45,477.00 Auto trucks 12,500.00 Furniture and fixtures 4,000.00 W. B. Tileson, capital 20,000.00 Total $637,727.00 The following appraisals and estimates of values have been made: land, $30,000; buildings, $135,000; machinery and tools, $85,000; auto trucks, $2,000; furniture and fixtures, $1,200; merchandise-inventory, $12,000; accounts receivable, good, $20,- 000; uncollectible, $2,616; doubtful, $5,277, but estimated to realize, $3,000. Notes receivable and interest are secured by 150 shares of Louisville and Nashville stock, quoted at 156. The cash in hand contains an I. O. U. of W. B. Tileson in the amount of $75. Of the New York Central stock, which is quoted at 150, 175 shares are pledged to secure notes payable 195 Elementary Accounting Problems of $20,000, with interest amounting to $i,ooo. Accounts payable to the extent of $5,362 are secured by a chattel mortgage on mer- chandise of $3,000. The unexpired insurance figured on the short rate basis will yield $85. Tileson's personal estate consists of vacant lots at Ampere, New Jersey, valued at $1,000, and an insurance policy for $5,000, the cash surrender value of which is $3,000, while his personal and household debts amount to $450. The balance sheet of the Altair Wheel Company shows assets, $150,000; liabilities, $100,000; capital stock outstanding, $50,000. The assets have been appraised at $80,000. From the foregoing prepare : (a) Statement of affairs as of June 30, 1912. {h) Deficiency account. S01.UT10N TO Probi^^m No. 23 (Demonstration) In so far as the method is concerned this problem may be solved the same as the preceding. The content of the problem differs slightly in that no nominal accounts appear in the trial balance; nor is there anything in the facts which follow the trial balance which calls for the setting up of any nominal ac- counts. The form of the working sheet remains the same. In general it should cause no trouble. In three or four particulars it will undoubtedly be found vexatious. For example when one at- tempts to supply the figure for estimated realization and liquida- tion opposite "stock-Altair Wheel Company" the question of its estimated value arises. Reference to the last few lines of the paragraph preceding the requirements shows it to be worthless. According to the balance sheet of the Altair Wheel Company the stock is worth par. When, however, it develops that the assets have been appraised at $80,000 the aspect changes entirely. The extensive shrinkage in the assets not only wipes out the equity of the stockholders but leaves a deficit of $20,000 which must be sustained by creditors. Hence it will be seen that the stock may not be depended upon to produce anything. In some states where stock is assessable for the benefit of creditors or in case the stock were not fully paid a further liability on the part of Tileson might even attach to such stock ownership. The loan made to the Altair Wheel Company is carried on the 196 Problem Number Twenty-Three books at $90,000. If there are only $80,000 worth of assets to meet $100,000 worth of obUgations it is obvious that, if the assets realize as much as is estimated and the liabilities remain the same, creditors will be obliged to suffer a loss of 20%. If this percentage is applied against the loan on Tileson's books it will be seen that he or the receiver will not realize more than $72,000. Concerning the I. O. U. of W. B. Tileson, some slight hesita- tion may be experienced. There is nothing said with regard to the value of the paper in question. It is not specifically men^ tioned as being worthless. The inference, taking all the facts into consideration, is that it should not be given a value. The cash is therefore decreased $75. Notes receivable and interest are secured by 150 shares of Louisville and Nashville stock quoted at 156. The notes and in- terest amount collectively to $15,251. The one hundred and fifty shares of stock at one hundred and fifty-six are worth $23,400. From these facts it may be concluded that the notes and in- terest will bring their face value. The mistake should not be made of taking up the stock in the estimated realization and liquidation column. It should be remembered that the stock in question is not the property of Tileson. It is merely deposited with him as security for certain notes. If perchance the notes were not paid and he or the receiver were to sell the stock at the market price of 156 the amount of the notes and interest, namely, $15,251 would be deducted from the proceeds of $23,- 400 and the balance of $8,149 paid over to the owner of the stock. The working sheet, concerning which there will probably be no other new questions, follows: 197 Elementary Accounting Problems WORK SHKBT FOR STATEMENT OF AFFAIRS & DEFICIENCY AC- COUNT DEBITS Trial Balance Estimated Realiza- tion & Li- quidation Increases Decreases Land Buildings Machinery and tools Auto trucks Furniture & fixtures Stock- Altair Wheel Co New York Central stock . . Merchandise-inventory . . . Cash- in hand Cash in bank Accounts receivable Loan- Altair Wheel Co. . . . Notes receivable Ace. int. on notes rec Unexpired insurance Total debts Lots — Ampere, N. J Personal insurance policy . Total estimated assets . . Deficit Total CREDITS Bond & Mortgage on land and buildings Int. ace. on B/M Taxes accrued Wages accrued Accounts payable Notes payable Interest ace. on N/P Res.depr. -bldgs do do -mach. & tools . do do -auto trucks . . . do do -furn. & fixt. . . . W. B. Tileson, capital TOTAL CREDITS . . Person & household debts . Total estimated liabilities $ 25,000.00 $ 30,000.00 175,000.00 135,000.00 187,500.00 85,000.000 15,000.00 2,000.00 8,000.00 1,200.00 45,000.00 - - 26,225.00 30,000.00 20,000.00 12,000.00 752.00 677.00 1,856.00 1,856.00 27,843.00 23,000.00 90,000.00 72,000.00 15,000.00 15,000.00 251.00 251.00 300.00 85.00 $637,727.00 1,000.00 3,000.00 $412,069.00 109,131.00 $521,200.00 $125,000.00 125,000.00 6,250.00 6,250.00 1,500.00 1,500.00 275.00 275.00 175,72500 175,725.00 200,000.00 200,000.00 12,000.00 12,000.00 35,000.00 45,477.09 12,500.00 4,000.00 20,000.00 $637,727.00 450.00 $521,200.00 $ 5,000.00 3,775.00 1,000.00 3,000.00 35,000.00 45,477.00 12,500.00 4,000.00 20,000.00 $129,752.00 ) 40,000.00 102,500.00 13,000.00 6,800.00 45,000.00 8,000.00 75.00 4,843.00 18,000.00 215.00 450.00 $238,883.00 $109,131.00 198 Problem Number Twenty-Three The statement of affairs presented below is about as complete as will ordinarily be found. It offers an unusually good oppor- tunity to study "offsets," or "contras" as they are sometimes called. Take for example the New York Central stock. Two hundred shares were owned. One hundred and seventy-five shares were pledged to secure notes payable and interest. Ac- cordingly the block of stock is divided into two parts; one of twenty-five shares and the other of one hundred and seventy- five. The unpledged portion is set up on the asset side, the book value and estimated to realize being one-eighth of the respective values applicable to two hundred shares. The one hundred and seventy-five shares being pledged to secure notes payable and interest of $21,000 are carried to the liabilities' side of the statement at the market price of 150 or $26,250. Since this latter amount is greater than the amount of indebtedness the equity of $5,250 is carried back to the asset side where it appears in the estimated to realize column. 199 Elementary Accounting Problems o CO g w ^ s rt HH H < m pq U< < ^ PCl O ^ ^ w ^ u :-H r> O Q O O CI Q r^ >o Q >o >o vo Q '5 »o N t^ ts o N M CO o iS j^ ^ 1.^ (_l VO to »o ro rO M Zi bo CO aj *^ o TO D U ^ ^ ^ O b'd -b ^ O) rt 23 So ^ flj — o • 0) • bo ^§ -^ _^ O CO 8 8 8 8 §88 O (N >-' o . M 00 to M ^ «^ U3 cS >^ o o 20O Problem Number Twenty-Three 8 8 8 ♦o O lO \o >o 1^ rO -* >H O rj- t^ VO 4^ J2 o s5 tn '■3 ' 0< CO w O ■5 2S_ lip ^ <: fe ,201 'Elementary Accounting Problems W. B. TILESON Deficiency Account Household debts $ 450.00 Capital $ 20,000.00 Personal estate: Land 1,000.00 Insurance policy 3,000.00 5,000.00 Estimated increase in value of land 5,000.00 Estimated increase in 57,023.00 value of securities .... 3,775-00 Estimated losses: Buildings . . . .$ 40,000 Less-reserve . . 35,000 Mach & tools $102,500 Less-reserve 45,477 Auto trucks $ 13,000 Less-reserve 12,500 Deficit 109,131.00 Fum. & fixt. $ 6,800 Less-reserve 4,000 500.00 2,800.00 Stock-Altair Wheel Co 45,000,00 Cash 7500 Merchandise 8,000.00 Accoimts receivable . . . 4,843.00 Loan-Altair Wheel Co. 18,000.00 Unexpired insurance .. 215.00 $141,906.00 $141,906.00 ProbIvEm No. 23A (Practice) You are engaged by T. M. Jarvis, receiver in bankruptcy for H. M. Carley, to prepare a statement which will enable him to announce to the unsecured creditors the approximate liquida- tion dividend which they will receive. A balance sheet at September 30, 1912, is as follows : Assets Land $ 30,000.00 Buildings 180,000.00 Machinery and tools 65,000.00 Horses, wagons & har- ness 2,500.00 Furniture and fixtures 8,000.00 Stock-Auto Wrench Co. . . 50,000.00 D. L. & W. stock- 1 50 shares at 138 3/4 19,312.50 Merchandise-inventory ... 23,782.95 Cash in hand 342.86 Cash in bank 1,235.47 Accounts receivable 351836.25 Loan- Auto Wrench Co. . . . 100,000.00 Notes receivable 12,000.00 Int. ace. on notes rec 127.50 Unexpired insurance 240.00 Liabilities & Capital Bond and mortgage pay- able, lands and build- ings $150,000.00 Interest ace. on B/M . . . 2,250.00 Taxes accrued 3,000.00 Wages accured 7,825.00 Accounts payable 186,783.15 Notes payable 105,000.00 Int. ace. on notes payable 1,050.00 Reserve for depreciation : Buildings 43,826.00 Machinery and tools .. 12,784.00 Horses, wagons & har- ness 250.00 Furniture and fixtures 1,275.00 H. M. Carley, capital . . . 14,334.38 Total $528>377-53 Total $528,377.53 202 Problem Number Twenty-Three The following appraisals and estimates are made : Land, $25,- 000; buildings, $135,000; machinery and tools, $40,000; horses, wagons and hari^ss, $750; furniture and fixtures, $250; mer- chandise, $15,000; accounts receivable, good, $18,426.12; uncol- lectible, $12,372.28 ; doubtful, $5,037.85, but estimated to realize, $2,000. Notes receivable and interest are secured by 100 shares of American Real Estate Company pfd. at 125. The cash in hand contains a counterfeit $10 bill. Of the 150 shares of D. I^. & W. which is quoted at 140^^, shares to the extent of 100 are pledged to secure $10,132.50 of notes payable and interest. Ac- counts payable to the extent of $4,875.23 are partially secured by a chattel mortgage on merchandise. The short rate for in- surance is .0673. Carley's personal estate consists of improved property on I^ong Island valued at $7,500 but subject to a mort- gage of $3,500, and household debts in the amount of $325. The balance sheet of the Auto Wrench Company, in which Carlcy owns the majority of the stocks, shows assets, $250,000 ; liabilities, $175,000; capital stock outstanding, $75,000. The assets have been appraised at $140,000. From the foregoing prepare: (a) Statement of affairs. (b) Deficiency account, 203 Elementary Accounting Problems PROBLEM No. 24 Demonstration Arthur Dixon, the trustee for W. B. Tileson, proceeded to wind up the affairs of the bankrupt and effected the following transactions : L,and and buildings (subject to the mortgage, and interest of $6,371.54, and taxes accrued of $1,528.50) were sold for $175,000; the machinery and tools brought $80,000; auto trucks, $1,500; furniture and fixtures, $975; merchandise, $15,- 486.27; accounts receivable, $22,248.74; 150 shares ly. & N. stock sold at 162^-1/8; 150 shares N. Y. Central sold by creditor at 152^-1/8; 50 shares sold by trustee at 152 1/8-1/8; insurance unexpired, $63.75; ^^^s Ampere, N. J., sold for $1,200; life insurance policy, $3,017.32; Altair Wheel stock was a total loss; interest accrued on the secured notes payable when settled was $1,005.81 ; accrued interest on notes receivable when collected, $257.86; there were 87 creditors; liquidation com- pleted; office expenses of receiver, $5,321.45; stenographers* and witness fees, $575 (loan Altair Wheel Co. produced $72,000) ; trustee's fees, $2,700; referees's fees $2,300, no further interest to be accrued. Prepare : Skeleton ledger accounts showing books of the trustee. Show the percentage which unsecured creditors received on their claims. SOLUTION TO PROBLEM No. 24 (DEMONSTRATION) Land $25,000.00 I $25,000.00 Buildings $175,000.00 I $175,000.00 Machinery and Tools Auto Trucks $15,000.00 $12,500.00 1,500.00 1,000.00 $15,000.00 $15,000.00 $187,500.00 $187,500.00 $ 45,477.00 80,000.00 62,023.00 Furniture and Fixtures ,000.00 $187,500.00 $8,000.00 $4,000.00 97500 3,025.00 ;,ooo.oo 204 Problem Number Twenty-Four Stock- Altair Wheel Co $45,000.00 I $45,000.00 N. Y. Central Stock $26,225.00 4,268.75 $30,493.75 $30,493-75 Merchandise — Inventory $20,000.00 $20,000.00 $15,486.27 4»5i3-73 $20,000.00 Cash in Hand $752.00 I $752.00 Cash in Bank $ 1,856.00 752.00 42,099.96 120,210.01 15,257-86 1,887.94 7,600.00 76,281.07 $265,944-84 $ 10,896.45 3,000.00 275.00 Bal 251,773.39 $265,944.84 $251,773-39 Accounts Receivable $27,843.00 $27,843.00 $22,248.74 5,594-26 $27,843.00 Loan Altair Wheel Co. $90,000.00 $90,000.00 $72,000.00 18.000.00 $90,000.00 Notes Receivable $15,000.00 I $15,000.00 Ace. Int. On Notes Rec. $251.00 $251.00 Unexpired Insurance $300.00 $22,893-75 7,600.00 $300.00 $63,75 236.25 $300.00 Lots — Ampere, N. J. $1,000.00 200.00 $1,200.00 $1,200.00 $1,200.00 Life Insurance Policy $3,000.00 17.32 $3,017.32 $3,017.32 $3,017.23 Bond & Mtge. on Land & Buildings $125,000.00 I $125,000.00 Int. Ace. on Bond and Mtge. $6,371.54 $6,371.54 $6,250.00 121.54 $6,371.54 Taxes Accrued $1,528.50 $1,528.50 $1,500.00 28.50 $1,528.50 Wages Accrued $275.00 Accounts Payable $275.00 $3,000.00 Bal. $172,725.00 $175,72500 $175,725.00 $175,725.00 $172,725.00 Notes Payable $ 20,000.00 Bal. 180,000.00 $200,000.00 $200,000.00 $200,000.00 $180,000.00 205 Elementary Accounting Problems Int. Ace. on Notes Payable $ 1,000.00 Bal. 11,000.00 $12,000.00 $12,000.00 $12,000.00 $11,000.00 Reserve for Depn. of Bldgs. $35.00000 I $35,000.00 Reserve for Depn. Mach. & Tools $45,477.00 I $45,477-00 Reserve for Depn. Auto Trucks $12,500,00 I $12,000.00 Reserve for Depn. Fum. & Fixt. $4,000.00 $4,000.00 W. B. Tileson, Capital i5i35,95i-6i $135,951-61 $ 20,000.00 3,550.00 Bal. 112,401.61 $135,951.61 $112,401.61 Personal and Household Debts $450.00 Vendee $175,000.00 I $175,000.00 Lane and Buildings $200,000.00 10,000.00 $210,000.00 $175,000.00 35,000.00 $210,000.00 Fees and Expenses of Receivership $10,896.45 $10,896.45 Reai,ization and Liquidation Account Int. on B/M $ 121.54 Int. on Notes rec. ... Int. on notes pay 5.81 Land & bldgs Taxes 28.50 N. Y. Central stock . Mach. & tools 62,023.00 Lots — ^Ampere, , Auto trucks 1,000.00 Life Ins. policy $ 6.86 10,000.00 4,268.75 200.00 17-32 Fum. & fixt 3,025.00 W. B. Tileson, capital... 135,951.61 Stock- Altair Wheel Co. . . . 45,000.00 Merchandise 4»5i3-73 Accoimts rec 5,594.26 Loan— Altair W. Wheel Co 18,000.00 Unexpired ins 236.25 Fees & exp. of receiver . . . 10,896.45 $150,444.54 $150,444.54 JouRNAi, Entries Lots — Ampere, New Jersey $ 1,000.00 Life Insurance Policy 3,000.00 To Personal and Household Debts $ 450.00 W. B. Tileson, capital 3.550.oo To place the personal assets and liabilities of W. B. Tileson on the books of the business. Cash in bank 752.00 To Cash in hand 752.00 206 Problem Number Twenty-Four Vendee 175,000.00 To Land and buildings 175,000.00 For sale price of land and buildings. Land and buildings 200,000.00 To Land 25,000.00 Buildings 175,000.00 To consolidate the two accounts Reserve for depreciation of bldgs 35,000.00 To Land and buildings 35,000.00 To offset the cost of land and buildings by the re- serve for depreciation of buildings Realization and liquidation account 150.04 To Interest accrued on B/M 121.54 Taxes accured 28.50 For accrual of interest and taxes for the period from June 30 to date of sale. Bond and mortgage on land and bldgs 125,000.00 Int. accrued on bond and mtge 6,371.54 Taxes accrued 1,528.50 Cash 42,099.96 To Vendee 175,000.00 To record settlement by vendee. Reserve for depreciation — Mach. and tools 45,477.00 " " " autotrucks 12,500.00 " " " furn. and fixt 4,000.00 To Machinery and tools 45,477.00 Auto trucks 12,500.00 Furniture and fixtures 4,000.00 To close out reserves and set up book values of above assets. Cash 120,210.01 To Machinery and tools 80,000.00 Auto trucks 1,500.00 Furniture and fixtures 975-oo Merchandise 15,486.27 Accounts receivable 22,248.74 Cash 15,257.86 To Notes receivable 15,000.00 Accrued int. on notes receiv 251.00 Real, and liq. a/c (ace. int. June 30 to» date of sale) 6.86 For sale of 150 shares L & M stock at 162 1/2— 1/8 $24,356.25 Amount paid by broker to maker of notes 9.098.39 Amount paid to Receiver $15,257.86 Notes payable 20,000.00 Interest ace. on notes payable 1,000.00 Real, and liq. a/c, (ace. int. June 30 to date of sale) 5.81 207 Elementary Accounting Problems Cash 1,887.94 To New York Central stock 22,893.75 For sale of 150 shares N. Y. Central stock at 152 3/4—1/8 $22,893.75 IftC6 WT o'rH b- CO s= s Sll I si ^2/ .eccooooooor-ieo OlOOO'^OOkOCO rJ<'tC^OOC< .00 ocs CO o 05 qco GO 00 «5 Ob^ CO «D d O^ »* lO WO 00 00 tHCO r-l as* -* O000t-05QO oooot-^-^oq ddd»^ CO CO'* OlOOb-rHTfO O'^a.O'HOo ko»Oioooqoo OOrHiHlbiOdd we^c^t- oo i-IC0»O t-co la cici C0OK5O MOC^O OOOO WrHCO'ka CDO NO TjJd OO ioo_ looo" 0 O0000»0000e000r-!0 NOOOMOO-^OOkCO OkOOO oo oo £ I I 03 5Sog MXJO^ o , oj ^^ a^lS 2- Of3 OTt<0iQr-(OO ko»o»ooaooo C0TH-HK5»odd WNc^t- oo thoojo t-co OOOO ooqq o>oot- 2^2i-2S^g5 w o o o fl 2 oS cr-O ■<-> floj be »-i ° OS ag •o a fl Qj <2 03 2 „ „ IH — < a> m ■t-OOO ■b-Tt<00 ;coo6-* .rH Tt<0 • ciTjToo r-l IOCS coknoo ooooooo o oooqooo q dddkoicdd d oiocb-iMoo ta o_^cq»qo ._,co-ie r-l O .. ,. H oi "^ W S ^ S 2 ^w m m -' " a- g^5wS5H« 212 rt^^B •O o3 o5«-2 dos o q s i d to U3 t4 00 -St a _ dps fl I Problem Number Twenty-Five PROBLEM No. 25A Practice From the text of Problem No. 24 A and solution prepare a trustee's statement of realization and liquidation. 213 Elementary Accounting Problems PROBLEM No. 26 Demonstration The Hoyt Machine Company, incorporated January i, 1900, with an authorized capital stock of $50,000, which is now out- standing, has been unfortunate in having the type of machine which it manufactures superseded by new patents and has been authorized to dissolve. The balance sheet after closing on June 30, 1912, is as follows : Assets Land and buildings $ 75,000.00 Equipment 40,000.00 Merchandise 25,000.00 Cash in bank 15,867.00 Accounts receivable 18,625.00 Notes receivable and in- terest 10,132.00 Contingent fund (securi- ities) 12,500.00 Total $197,124.00 Liabilities and Capital Bond and Mortgage on buildings and equip- ment $ 25,000.00 Accounts payable 15,475.00 Notes payable and interest 10,307.00 Interest accrued on bond and mortgage 1,500.00 Reserves : Depreciation buildings and equipment 18,475.00 Contingencies 12,500.00 Capital stock 50,000.00 Surplus 64,137.00 Total $197,124.00 The transactions incident to realization and liquidation were as follows: The mortgagee bought the land, buildings, and equipment for $120,000, paying in cash the difference between the purchase price and the amount of the mortgage and interest accrued, $26,- 585.30. The merchandise was sold for scrap iron at $1,257.39. The accounts receivable were collected except $259.26. Thie notes receivable ($10,000) and accrued interest ($147.50) were collected. The securities in the contingent fund realized $12,- 262.50, net. The accounts in favor of creditors were paid, as were notes of $10,000 with interest accured of $43.75. The expenses of realization and liquidation were $3,675.24. Prepare : (a) Journal entries for the dissolution of the company. (b) A statement of realization and liquidation showing the amounts distributed to the stockholders. 214 Problem Number Twenty-Six SOLUTION TO PROBLEM NO. 26 (Demonstration) Journal Entries Land and buildings $ 40,000.00 To Equipment $ 40,000.00 Reserve for depreciation — buildings and equipment 18,475.00 To Land, buildings and equipment 18,475.00 Cash 93,414.70 Bond and mortgage payable 25,000.00 Interest accrued on bond and mortgage payable. .. 1,585.30 To Land, buildings and equipment 120,000.00 Cash 1,257-39 To Merchandise 1,257.39 Cash 18,365.74 To Accounts receivable 18,365.74 Cash 10,147.50 To Notes receivable and interest 10,147.50 Cash 12,262.50 Expenses of realization and liquidation 3,675.24 To Cash 3,675.24 Reserve for contingencies 12,500.00 To Surplus 12,500.00 Land, buildings and equipment 23,475.00 Notes receivable and interest 15.50 To Surplus 23,490.50 Surplus 28,006.66 To Merchandise 23,742.61 Accounts receivable 259.26 Contingent fund 237.50 Notes payable and interest 6.75 Interest accrued on bond and mortgage payable 85.30 Expenses 3,675.24 Surplus 72,120.84 To Capital stock 72,120.84 Capital stock $122,120.84 To Cash $122,120.84 215 Elementary Accounting Problems THE HOYT MACHINE COMPANY Working Sheet Showing Closing of the Accounts Journal Entries Assets Dr Cr. Land and buildings $75,000.00 | ?^3,475.oo $130,000.00 Equipment 40,000.00 40,000.00 23,742.61 Merchandise 25,000.00 1,257.39 122,120.84 ♦Cash in bank 15,867.00 135,447.83 29,193.99 259.26 Accounts receivable 18,625.00 18,365.74 Notes receivable and interest 10,132.00 15.50 10,147.50 Contingent fund 12,500.00 237.50 12,262.50 $197,124.00 Expenses—realization and liquidation. 3,675.24 3,675.24 Liabilities and Capital Bond and mortgage, buildings and equipment $25,000.00 $25,000.00 Accounts payable. ,. 15,475.00 15,475.00 Notes payable and interest 10,037.00 10,043.75 6.75 Interest accrued on bond and mortgage 1,500.00 1,585.30 85.30 Reserves : Depreciation, buildings and equipment 18,475.00 18,475.00 Contingencies 12,500.00 12,500.00 Capital stock 50,000,00 122,120.84 72,120.84 72,120.84 Surplus 64,137.00 4,516.16 12,500.00 $197,124.00 $484,450.46 $484,450.46 ♦Details of cash debits and credits. Dr. Cr. $93,414.70 $25,518.75 1,257.39 3,675.24 18,365.74 10,147.50 12,262.50 $135,447.83 $29,193.99 216 Problem Number Twenty-Six „T3 S'S h^hJ ^8^85. v2^ l>. t>. IT) C^ C^" rt ^^^:?^ §8 m" looo" d of t^i t-l M l-l >-l tN. w- 8888 I «»-H rt o O o 00 >S' c6 8 88888 I t^ to •♦-> o C •J o ^ £: N ^ ^ cn nJ (U bO« c c •C o 3 .2* .2 ^ .a ^ - J' *^ S O) o o »^ »-i CM s c c o C QJ B 'S *0 CO oo .2 4J J to - 888 V (V (V ,. „ 4-> ■«-• V w __, 3 (0 -' -^ rt 4> 3 1 o a -4-> o; £? to IS bo §1 •o rt Sirs u 0|2 "'^ S.o" 5 o o ^-o ojtc o O O «j «— d " W CO 2 •" n rt •r? •»-» ■•-' V *-• f 1 •« 217 Elementary Accounting Problems PROBLEM No. 26A Practice From N. Y. C. P. A. Examination of Janaury 31, 191 1 The Sinclair Trading Company has been granted permission to dissolve its corporate existence. You are consulted about the procedure of closing its books and are given the following in- formation : An abstract of the ledger, on July 15, 1910, discloses: land and buildings, $30,000; plant and machinery, $50,000; merchan- dise inventory, $22,500; notes receivable, $10,500; accounts re- ceivable, $16,800; contingent fund, $15,200; mortgage bonds (on machinery and plant), $25,000; accrued interest on the mort- gage, $52; notes payable, $27,000; accounts payable, $28,000; capital stock (authorized, issued, and outstanding), $50,000; re- serve for depreciation of plant and machinery, $9,500; reserve for depreciation of buildings, $1,950; reserve for contingencies, $15,200; surplus, $798. There is a balance in the bank of $12,500. A report rendered by the secretary of the company shows the result of the realization as follows : The mortgagees bought the plant and machinery for $35,000, paying cash for the difference between the amount of the mort- gage, and the accrued interest, and the purchase price. The land and buildings were sold for $33,000. The inventory of mer- chandise was disposed of for $20,000. The notes receivable were paid; the accounts receivable realized $15,150 and the se- curities of the contingent fund realized $14,700. All notes payable and accounts payable were paid and the expense of realization and liquidation amounted to $3,200. Prepare : (a) All closing entries for the dissolution of the com- pany (b) A statement of realization and liquidation showings the amounts distributed to the stockholders. 218 UNIVERSITY OB' CALIFORNIA LIBRARt THIS BOOK IS DUE ON THE LAST DATE STAMPED BELOW ■-ti 5 1916 War 11 i9m \ SEP 28 182S FEB 11 ism i90ct'59CT OCT 15 15! vm 30m-l,'15 re 25023 825476 UNIVERSITY OF CALIFORNIA LIBRARY