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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. Organizati<m 
 expense. Journal entries opening books of the corporation. Bal- 
 ance sheet of the corporation. Skeleton ledger accounts showing 
 closing of the copartnership books Page 102 
 
 Problem No. 13. Incorporation. Pro-forma method of opening the 
 books. Stock issued for property and goodwill of copartnership. 
 Balance sheet. Skeleton ledger accounts showing closing of the 
 copartnership books Page 109 
 
 Problem No. 14. Incorporation. Stock issued for patents. Stock 
 donated. Stock sold at a discount. Capital surplus. Journal en- 
 tries opening books. Balance sheet Page 116 
 
 Problem No. 15. Corporate form of organization. Sinking fund — 
 creation, operation and closing. Purchase and cancellation of 
 bonds. Working sheet substituted for skeleton ledger accounts. 
 Balance sheet Page 122 
 
 Problem No. 16. Corporate form of organization. Amortization and 
 accttmtilation of bonds. Sale of accrued interest. Revaluation of 
 
TABLE OF CONTENTS 
 
 securities. Nominal and effective interest. Skeleton ledger ac- 
 counts and trial balance. Balance sheet. Statement of income 
 and profit and loss Page 131 
 
 Problem No. 17. Merger of two corporations. Consolidated trial 
 balance. Eliminations. Entries recording the merger on the books 
 of each corporation. Balance sheet after the merger Page 140 
 
 Problem No. 18. Consolidation of corporations. Promotion. Hold- 
 ing company. Control of subsidiaries through stock ownership. 
 Exchange of stock. Consolidated trial balance. Consolidated 
 balance sheet. Balance sheet of holding company Page 148 
 
 Problem No. 19. Organization of corporation to take over copartner- 
 ship. Stock donated for working capital. Subsequent under- 
 writing agreement with bankers. Refunding mortgage. Premium 
 and discount on bonds. Opening entries, balance sheet and state- 
 ment of income and profit and loss for corporation. Journal 
 entries and skeleton ledger accounts showing dissolution of 
 copartnership Page 158 
 
 Problem No. 20. Voluntary bankruptcy, sole proprietor. Personal 
 estate involved. Statement of affairs. Deficiency account, Page 168 
 
 Problem No. 21. Insolvency of corporation. Receivership, Re- 
 ceiver's certificates. Reorganization. Assessments. Assenting 
 and non-assenting stock. Balance sheet after reorganiza- 
 tion Page 176 
 
 Problem No. 22. Receivership for limited copartnership. Uncom- 
 pleted contracts. Statement of affairs and deficiency account. 
 Business restored to partners Page 187 
 
 Problem No. 23. Insolvency. Sole proprietorship. Stock owned in 
 insolvent corporation. Estimated value of stock. Offsets and 
 contras. Statement of affairs and deficiency account. ...Page 195 
 
 Problem No, 24, Realization and liquidation of insolvent sole pro- 
 prietor. Skeleton ledger account showing books of trustee 
 and percentage which unsecured creditors received on their 
 claims Page 204 
 
TABLE OF CONTENTS 
 
 Problem No. 25. Realization and liquidation of insolvent sole proprie- 
 tor. Trustee's statement of realization and liquidation .... Page 211 
 
 Problem No. 26. Dissolution of corporation. Journal entries. State- 
 ment of realization and liquidation showing amounts distributed 
 to stockholders Page 214 
 
INTRODUCTION 
 
 It is probably not an extravagant statement, to say that all 
 accounting problems prepared for the use of students, or set at 
 examinations to test their knowledge of practical accounting, 
 have points, or principles, embodied in them which it is intended 
 shall be uncovered or dug out by the student. The man who 
 prepares a problem purposely puts something into it. The 
 student's task is to get that something out. 
 
 In that they are built around certain principles all problems 
 are similar. Thus it becomes possible to formulate certain gen- 
 eral rules governing their solution somewhat as follows : 
 
 1. Read the problem carefully, from the first word to the 
 last. 
 
 2. Grasp the principles embodied in the problem. 
 
 3. Digest the contents and make certain that the object of the 
 problem is understood. 
 
 4. Study over questionable points and decide on how they are 
 to be handled. 
 
 5. Prepare a mental plan for solving the problem. 
 
 6. Give as an answer what is asked for in the problem. 
 While some of these rules are so simple as to seem almost 
 
 absurd, it is surprising to note how many excellent students have 
 failed in examinations through a violation of one or more of 
 them. 
 
 Several men are known to have failed in C. P. A. examina- 
 tions because they did not take time to read the first or the 
 last paragraphs in certain problems, with care. Some men have 
 failed because of ignorance, nervousness, or for lack of time. It 
 would almost be safe to venture the opinion that the majority of 
 
 ^ failures are due to the fact that candidates do not give what the 
 problem calls for. This is known to be true in the case of one 
 of the best prepared men who ever attempted the state exam- 
 ination. 
 The problems which follow have a double purpose. They 
 are intended in part to offer an opportunity for practice in the 
 
Elementary Accounting Problems 
 
 solving of problems. The added purpose, and perhaps the more 
 important, is to show the application of accounting principles. 
 
 With this in view the problems have been developed logically 
 following in the main the four prominent types of organization. 
 An effort has been made in the first eight or ten problems to show 
 what the writer believes to be the evolution of the modern state- 
 ment of income and profit and loss. The text and comments 
 will show the reasons which are believed to be responsible for 
 its development. 
 
 The first group of the series deals principally with sole pro- 
 prietorship. The second covers copartnership and shows the con- 
 version of the sole proprietorship into the copartnership. The 
 third group brings out the transition from copartnership to incor- 
 poration and the accounts and transactions which are common to 
 corporations. Consolidations, mergers, holding companies or 
 trusts, form the subject matter of the fourth group. 
 
 Because of the fact that the early problems appear very simple, 
 the impression should not be gained that they are all the same. 
 Some of the subsequent problems will probably be found suffi- 
 ciently difficult to interest the keenest mind. 
 
 The comments have in places been left somewhat incomplete 
 in order to stimulate original thought on the part of students and 
 to offer an opportunity to instructors to bring out in demonstra- 
 tion the points passed over. 
 
 The form and arrangement of the financial statements used 
 in the solutions of certain problems may be something of an inno- 
 vation. Some of the statements will no doubt be startling. No 
 claim is made by the writer for their originality. They are pre- 
 sented with full credit to every one with whom he has ever come 
 in contact, or received a thought or idea from, and most espe- 
 cially the well-known accounting firm with which he served his 
 apprenticeship. If the statements provoke discussion they will 
 have served a purpose. If the book succeeds in lighting the way 
 for even one struggling student it will not have been in vain. 
 
 New York John Raymond Wildman. 
 
 July 20, 1 914. 
 
 VI 
 
ELEMENTARY ACCOUNTING PROBLEMS 
 
 PROBLEM No. i 
 Demonstration 
 
 On January i, 1910, Robert J. Dimlawn began business as 
 a retail drygoods merchant. His capital consisted of merchan- 
 dise $2,300, cash in bank $150, and cash in hand $50. 
 
 The business appeared to prosper from the beginning. Most 
 of his goods were sold for cash. Some were sold on charge 
 accounts. His credit became well established and he was able 
 to buy large invoices of certain lines on very Hberal terms. 
 
 The books were kept by single entry and consisted of a ledger 
 and a journal. It was the custom to keep individual accounts 
 with the charge customers, the creditors, and the proprietor. 
 
 At the end of three months, or on March 31, 19 10, Mr. Dim- 
 lawn began to be curious as to whether or not he was making 
 any money. He instructed his bookkeeper to have the pass- 
 book balanced at the close of business on that date and to count 
 the cash in the store after the business of the day was over. 
 The clerks were set to work taking an inventory of the stock on 
 the same evening, but did not complete the task when they were 
 obliged to leave for the night. They did, however, on the fol- 
 lowing morning keep a record of the sales until such time as the 
 inventory was completed. The bookkeeper balanced off all the 
 accounts in the ledger with customers and creditors as of 
 March 31st. 
 
 Upon the conclusion of the above-mentioned work the fol- 
 lowing results were obtained: 
 
 Merchandise stock (cost $9,062.62) estimated by 
 
 the proprietor as being worth $10,000.00 
 
 Accounts receivable (customers) 162 . 74 
 
 Accounts payable (trade creditors) 10,203 .21 
 
 .Cash in bank 2,572.43 
 
 Cash in hand 224.17 
 
 The figure given as the cost of the inventory includes stock in 
 
 I 
 
^\ ^ : Elementary Accounting Problems 
 
 the amount of $18.75 which was received prior to March 31, 
 1910, but had not been credited to the account payable when the 
 balances of such accounts were taken off, but does not include 
 sales made on the morning of April ist, before the completion 
 of the inventory, the cost of which was $200. 
 
 Mr. Dimlawn instructs his bookkeeper to prepare a state- 
 ment which will show the amount of the profit or loss for the 
 three months ended March 31, 1910. 
 
 Solution to Problem No. i 
 
 A careful and complete reading of the problem reveals two 
 things. The thing required by the problem is the first one. The 
 manner or process of obtaining the information is the second. 
 
 The bookkeeper understands that he is to prepare a state- 
 ment showing the amount of the profit or loss. Such is the 
 requirement of the problem. The character, or form, of the 
 statement will be determined by the information available. 
 
 The facts presented enable him to determine two things: 
 first, the capital of the proprietor on January i, 1910, and, sec- 
 ond, the capital on March 31, 1910. In the first instance, the 
 task is simple. In the second instance, it is slightly more com- 
 plex, in that it must be determined by comparing the liabilities 
 with the assets. 
 
 As to the profit or loss, it is obvious that it will be determined 
 in either case by a comparison of the capital at the two dates. 
 If the capital at the end of the period is larger than at the begin- 
 ning of the period, provided there have been no additions of capi- 
 tal in the interim, a profit must have resulted from the conduct 
 of the business. If the capital at the end of the period is smaller 
 than at the beginning of the period unless there have been with- 
 drawals of capital, a loss must necessarily have been the result. 
 
 The source of the information in this case it will be noted 
 is not confined to the books. Much of the information came 
 from sources outside of the books. If the bookkeeper had been 
 asked for the amount of the profit and loss, instead of a state- 
 ment, he might have determined the amount from his books. 
 This he could not have done, however, until he had gone through 
 practically the same process as was necessary in order to compile 
 the statement. 
 
Problem Number One 
 
 The books, it will be remembered, were kept by single entry^ 
 Pure single entry, although little is really known of its origin, 
 and early history, is understood to have embraced three classes 
 of accounts ; those with customers, those with creditors, and one 
 with the proprietor. The customers' accounts, and conversely 
 the creditors', were run precisely as they are to-day, showing: 
 any and all transactions of the proprietor with the individuals.. 
 The proprietor's account showed his invested capital at the be- 
 ginning of the business undertaking, his additions or withdraw- ■ 
 als, and through a single entry at the end of a given period the- 
 amount of his capital at such time. Thus by the segregation^ 
 of these items, and comparing the capital at the beginning and 
 end of the period, having due regard for additions and with- 
 drawals of capital, it was possible to determine the amount of 
 the profit or loss. 
 
 It should be borne in mind that, although the proprietor's 
 account showed his capital at different times, it did so without 
 regard to the form in which such capital existed. Nor did his- 
 ledger elsewhere show such facts except in part. Thus a manz. 
 starting in business with merchandise amounting to $2,300, cash". 
 in bank $150, and cash in hand $50 would have but one entry" 
 in his books. Such an entry would appear in his proprietor's' 
 account showing an investment of capital of $2,500. 
 
 Leaving out of consideration for the moment the question 
 of additions and withdrawals, it will be seen that there would, 
 in the problem under consideration, spring up from time to time 
 accounts with customers and creditors. A transaction affecting 
 one of these customers' accounts would be made once in the 
 customer's account without further consideration. A customer ' 
 would be charged with what he purchased and credited with:? 
 what he paid. No other record of the transaction would be made, 
 in the ledger. 
 
 When the end of the period arrived the amount of the capital ' 
 might be ascertained as below and still only one entry of $2,000 
 would be made in the ledger, and that in the proprietor's account : 
 
 Merchandise $9,262 . 62 
 
 Customers 162 . 74 
 
 Cash 2,796.60 
 
 $12,221.96 
 
 Less — due creditors 10,221 . 96 
 
 Capital $2,000 . 00 
 
 3 
 
Elementary Accounting Problems 
 
 The above illustrations bring out strongly the inadequacy of 
 ^he information furnished by ledger even in a case so simple 
 •as the one in question. Any method of keeping the books ap- 
 pears to be weak when it becomes necessary to obtain so much 
 information from outside sources. 
 
 In gathering the data necessary in the preparation of the 
 statement certain difficulties have arisen. Two of these are in 
 connection with the inventory, while one concerns the accounts 
 payable. 
 
 With regard to the inventory, the question must first be set- 
 tled as to whether it is to be shown at cost or at the estimated 
 value placed upon it by the proprietor. No matter which figure 
 is used there must be added to it the amount of $200, represent- 
 ing the cost of goods sold previous to the completion of the stock- 
 taking. 
 
 The question of valuing an inventory is troublesome to the 
 accountant. It may be almost as troublesome to the bookkeeper. 
 If he has his choice in the matter he will presumably price the 
 inventory at cost, since he will realize that increasing the value 
 over cost is to anticipate a profit. If the proprietor insists on 
 fixing the value he will probably use it as fixed, but if he is a 
 .conscientious bookkeeper he will call attention to the question- 
 able practice. 
 
 The slight difficulty involving the accounts payable serves to 
 illustrate one of the rules upon which statements, such as this 
 problem calls for, rest. The accuracy of the result is deter- 
 mined by the accuracy of the items entering into the factors 
 which produce the result. Therefore, in order that the correct 
 result may be obtained, it is necessary that all assets and all 
 liabilities be included and that all items be correct. Hence, 
 when the statement is made that the inventory includes an item 
 of $18.75 which has not been credited to the accounts payable, 
 it becomes necessary to adjust the liabilities in this amount. 
 
 The statement to be prepared by the bookkeeper might vary 
 according to individual tastes. Essentially it would embody the 
 .facts set forth in the following: 
 
Problem Number One 
 
 ROBERT J. DIMLAWN 
 
 Statement Showing Loss on Operations for the Three Months Ended- 
 
 March 31, 1910 
 
 Capital — ^January i, 19 10, represented by- 
 Assets: 
 
 Merchandise $2,300 . 00 
 
 Cash in bank 150. 00 
 
 Cash in hand 50 . 00 
 
 $2,500. oa 
 
 Capital — March 31, 1910, represented by 
 Assets: 
 
 Merchandise $9,262 . 62 
 
 Cash in bank 2,572 . 43 
 
 Cash in hand 224 . 1 7 
 
 Accounts receivable (customers) ... 162.74 
 
 Total assets $12,221 .96 
 
 Liabilities: 
 Accounts payable (trade creditors) 10,221 .96 2,000.00 
 
 Loss $500. oa 
 
 The determining of profits in this way is known as the asset 
 and liabiHty method. It is intimately associated with single en- 
 try. It is many times treated slightingly by accountants, but it 
 has its value as a practical expedient many times in instances 
 where the question of whether or not expensive analytical work 
 shall be done will depend upon whether or not the expense is 
 warranted by the result which will be obtained. 
 
 Where the asset and liability method is used the results will 
 be affected by additions and withdrawals. In the problem under 
 discussion, if Dimlawn had put in additional capital amounting 
 to $1,000 during the period, then the loss would have been $1,500 
 instead of $500. If, on the contrary, he had withdrawn $1,000 
 during the period the result would have been a profit of $500 
 instead of a loss of $500. Thus two rules may be framed as 
 follows : 
 
 1. To the profit as determined by a comparison of capital 
 at two different dates, add withdrawals and deduct newr 
 capital. 
 
 2. To the loss as determined by a comparison of capital at 
 two different dates, add new capital and deduct withdrawals. 
 
 These rules may be proven by applying the second one to 
 the problem being discussed. If Dimlawn had, at some time 
 after beginning business, added cash amounting to $2,000 and. 
 
 5 
 
Elementary Accounting Problems 
 
 had from time to time withdrawn amounts aggregating $i,ooo, 
 the loss for the three months would have been $1,500, arrived 
 .at as follows: 
 
 Loss, as shown by comparison of capital $500. 00 
 
 Add — new capital 2,000 . 03 
 
 Total $2,500 . 00 
 
 Deduct — withdrawals i ,000 . 00 
 
 Actual loss $1 ,500 . GO 
 
 It might be more clearly proven by such a tabulation : 
 
 Capital — January i, 1910 $2,500.00 
 
 Add — new capital 2,000. 00 
 
 Total $4,500 . 00 
 
 Deduct — withdrawals i ,000 . 00 
 
 Adjusted capital $3,500 . 00 
 
 Capital — March 31, 1910 2,000.00 
 
 Loss $1 ,500 . 00 
 
 There follows, a problem similar to the present problem, 
 which may be used to test the student's grasp of the principles 
 embodied in the above. 
 
Problem Number One 
 
 PROBLEM No. lA 
 
 A. Howell engaged in business January i, 19 lo, with a capi- 
 tal of $10,000, comprised of accounts receivable $8,000, accounts 
 payable $4,000, merchandise $5,000, cash $1,000. On March 31, 
 1910, his assets and liabilities comprised cash $100, accounts pay- 
 able $7,000, notes payable $1,000, furniture and fixtures $800, 
 merchandise $12,000, accounts receivable $8,000. During the 
 three months he had added $2,000 and withdrawn at different 
 times $1,000, $600, and $1,400. 
 
 Prepare a comparative statement of assets and Uabilities, 
 showing increases and decreases of the various items, supple- 
 mented by a tabulation which will determine the profit or loss 
 for the three months ended March 31, 1910. 
 
Elementary Accounting Problems 
 
 PROBLEM No. 2 
 Demonstration 
 
 Mr. Dimlawn, upon looking over the statement presented 
 by his bookkeeper, which showed a loss of $500 for the three 
 months ended March 31, 1910, might readily be imagined as re- 
 marking, " I don't understand how that can be." To his book- 
 keeper he might have addressed the inquiry, " Mr. Sherwood, 
 how do you account for the loss ? " 
 
 The bookkeeper presumably would be unable to explain it. 
 The statement prepared would not show, with any degree of sat- 
 isfaction, the cause of the loss. The ledger, it will be remem- 
 bered, contained less information than the statement. Obviously 
 it would be useless to depend upon either source for satisfactory 
 information. 
 
 Reasoning as a layman, Mr. Dimlawn would unquestionably 
 reach the conclusion that either he was not making enough 
 money on his goods, or that the expense of running his store 
 was too high. But how could he tell, when not even the amount 
 of his merchandise transactions or of his expenses were shown 
 on the statement, much less on the books ? Surely this informa- 
 tion must exist, but where? Possibly not in the ledger would 
 the data be found, but certainly in some of the books. 
 
 Consultation with the bookkeeper revealed the fact that, in 
 addition to the check book, which Mr. Dimlawn already knew 
 about, there was kept a blotter or journal in which all purchases 
 on account, charge sales, returns and allowances, etc., were en- 
 tered daily. There was also a small cash book where the re- 
 ceipts and disbursements were entered. 
 
 As a result of the proprietor's investigation the bookkeeper 
 was directed to go over these books and records and separate all 
 the different kinds of transactions. He began with the blotter, 
 and after a careful analysis produced the following results : mer- 
 chandise purchases, $10,421.96; merchandise purchase returns, 
 $200; merchandise charge sales, $854.39; merchandise sales re- 
 turns and allowances, $127.52. The cash book showed receipts 
 from cash sales, $2,432.47; from customers on charge accounts, 
 $564.13; expenses paid in cash, $347.32. The check book dis- 
 
 8 
 
Problem Number Two 
 
 closed deposits of $2,475.11, and expenses paid by check, 
 amounting to $52.68. 
 
 Dimlawn, bent upon finding out just how the loss of the 
 previous three months had occurred, would probably have 
 adopted the ordinary lay method of accomplishing such object 
 and set down the figures as follows: 
 
 I have sold: 
 
 For cash $2,432.47 
 
 On account 854-39 
 
 $3,286.86 
 Less returns and allowances 127.52 
 
 $3,159-34 
 The goods sold cost me: 
 
 Inventory, January i $2,300,00 
 
 Purchases 10,421 . 96 
 
 $12,721.96 
 Less: 
 
 Returns $200.00 
 
 Inventory 9,262.62 9,462.62 3.259-34 
 
 I have lost on the goods $100.00 
 
 In addition I have had expenses: 
 
 Paid in cash $347-32 
 
 Paid by check 52.68 400.00 
 
 My total loss is $500.00 
 
 The fact that he had proven or accounted for the loss might 
 have been a source of great satisfaction to the proprietor. Of 
 far greater importance should have been the disclosure that 
 there was a loss of $100 on the sale of the merchandise, to say 
 nothing of the expense of $400 incident to its sale. The thing 
 which should have annoyed him was the fact that so much time 
 and trouble had been consumed in getting the information. Thus 
 Mr. Dimlawn, although not a bookkeeper, might easily have been 
 self-convinced of the inadequacy of his books and the necessity 
 for changes in his merchandise pricing. 
 
 Upon talking matters over with his bookkeeper, he learned 
 that the books were kept by single entry, which accounted for 
 the meager information they afforded as to the transactions of 
 the business as a whole. The bookkeeper informed him that 
 double entry would greatly improve matters, and that books 
 
 9 
 
Elementary Accounting Problems 
 
 kept by that method would yield information, not only as to 
 results at certain times, but as to the causes underlying the 
 results. 
 
 He was accordingly instructed by the proprietor to convert 
 the books from single to double entry as of March 31, 19 10, and 
 to keep them on such basis in the future. 
 
 In following the bookkeeper through such process it is to be 
 remembered that the ledger contained only accounts with cus- 
 tomers, creditors, and the proprietor. For all practical pur- 
 poses here the customers and creditors may be represented by 
 two controlling accounts, amounting respectively to $162.74 and 
 $10,221.96. The balance in the proprietor's account was $2,000. 
 
 The first step would probably consist in making an entry in 
 the blotter, which book, assuming it to be suitably ruled, would 
 in the future constitute the journal. 
 
 Such an entry would be as follows : 
 
 Merchandise $9,262 . 62 
 
 Cash in bank '. 2,572 . 43 
 
 Cash in hand 224 . 17 
 
 Accounts receivable 162 . 74 
 
 To Accounts Payable $10,221 .96 
 
 R. J. Dimlawn, Proprietor 2,000.00 
 
 Obviously such accounts as accounts receivable, accounts 
 payable, and proprietorship already appearing on the ledger need 
 not be posted from the journal. The remaining items having 
 been posted, the ledger would then be in equilibrium. 
 
 Regarding the conversion from single to double entry, one or 
 two variations from the case in question should be mentioned. 
 Single entry is rarely found in its pure state. The cases are 
 probably few in which the proprietor's account is found. The 
 cases are numerous in which accounts other than those planned 
 by single entry appear. Common among such are the property 
 accounts, furniture and fixtures, and various expense accounts. 
 Cash is even introduced at times and the books made to operate 
 on a hybrid system which partakes of both single and double 
 entry. 
 
 Where such variations exist, the capital must be established 
 if no account exists, or the account adjusted if such steps are 
 indicated by the conditions. The capital will be determined by 
 gathering together, Hsting and placing on the books all assets 
 
 10 
 
Problem Number Two 
 
 and liabilities. If expense accounts are found they may be in- 
 cluded upon the debit side of the list of accounts, and, after the 
 capital thus established has been placed upon the books, the ex- 
 pense accounts may be closed out to the capital account by 
 journal entry, thus reducing the capital, or they may be ignored 
 in the establishment of the capital by being merely ruled off in 
 the ledger, provided the old ledger is continued in use. 
 
 Mr. Dimlawn's conversation v^ith the bookkeeper impressed 
 upon the mind of the latter two points. The first one was, that 
 his books must show causes as well as results; the second, that 
 these causes must be classified. In short, he realized that in this 
 particular case causes were divided into sales of merchandise 
 and expenses. To show these he must needs introduce accounts 
 for them and see to it that when transactions with customers and 
 creditors or with cash occurred, both phases of the transactions 
 were recorded. In the instance of the merchandise, the account 
 already existing could be used for such purpose. 
 
 What the bookkeeper planned to do was to introduce nominal 
 accounts, which would serve the temporary purpose of record- 
 ing, in a classified manner, the changes during a given period in 
 the real accounts. 
 
 With the change from single to double entry came also cer- 
 tain improvements in the books used. As previously mentioned, 
 the blotter was converted into a journal. The purchases and 
 sales were withdrawn from the journal and entered respectively 
 in purchase and sales journals. The original cash book was re- 
 placed by one arranged in columnar form providing on the left- 
 hand page for net cash receipts, cash discount on sales, accounts 
 receivable, cash sales, and sundries, while the right-hand page 
 provided for net cash disbursements, cash discount on purchases, 
 accounts payable, and sundries. 
 
 During the month of April, Mr. Dimlawn had changed his 
 policy in several respects; one was to give more attention to the 
 display of goods, another was to advertise. He also instituted 
 the practice of providing chairs for his patrons. He purchased 
 the desk and chair for his bookkeeper which he had had on 
 approval. 
 
 The transactions for the month were as follows: cash sales, 
 $954.32; charge sales, $318.11; merchandise purchases, $1,- 
 427.83; trade discount on purchases, $56.22; purchase allow- 
 
 II 
 
Elementary Accounting Problems 
 
 ances, $57.58; inward freight, $72.37; sales returns, $26.43; 
 chairs purchased on account, $65; display fixtures ($237.50) 
 and office furniture ($47.50) purchased on account. 'There was 
 received from customers on accounts receivable, $398.37. All 
 cash receipts were deposited in the bank. From time to time 
 during the month, $250 was transferred from the bank to the 
 petty cash. The bills for rent, amounting to $75; light, $15.80; 
 advertising, $135, were paid by check, and other checks aggre- 
 gating $3,174.26 were drawn in settlement of sundry accounts 
 payable. The following disbursements were made out of petty 
 cash: salaries, saleswomen, $200; janitor and porter, $40; book- 
 keeper and cashier, $60; office expenses, $12.50; stationery and 
 printing, $8.75 ; wrapping paper, etc., $20 ; messenger, delivering 
 goods, $15; commission to saleswomen, $42.30. The inventory, 
 April 30, 1910, was $9,745.94. 
 
 From the opening balances at the beginning of the month, 
 supplemented by the April transactions, we are instructed to 
 prepare a working sheet which will show all the transactions as 
 they would appear on the ledger and prepare therefrom a bal- 
 ance sheet at April 30, 1910, and a profit and loss account for the 
 month ended on the same date, setting forth the profit on mer- 
 chandise and the expense separately. 
 
 Since the books of R. J. Dimlawn are now on a double entry 
 basis, and the principle underlying double entry is equilibrium, 
 the transactions above given should permit of expression in the 
 form of journal entry. In order that no complementary trans- 
 actions may be overlooked, it seems desirable that the trans- 
 actions which affect the opening balances be so treated. 
 
 The journal entries covering the transactions for the month 
 of April, 1910, together with those necessary to close the books, 
 are as follows: 
 
 Cash in bank $954-32 
 
 Accounts Receivable 318. 11 
 
 Accounts Payable 1 13 . 80 
 
 (Mdse. discount on purchases $56.22) 
 
 (Purchase allowances 57 • 5^) 
 
 To Merchandise $1,386.23 
 
 Merchandise $1,541 .63 
 
 To Accounts Payable 1,500. 20 
 
 (Purchases $1,427 • 83) 
 
 (Inward freight 72-37) 
 
 12 
 
Problem Number Two 
 
 To Accounts Receivable (sales returns 
 
 Petty Cash (messenger) 
 
 Cash in bank 398.37 
 
 To Accounts Receivable 
 
 Furniture and fixtures 350.00 
 
 To Accounts Payable 
 
 (Chairs $65,00) 
 
 (Display fixtures 237.50) 
 
 (Office furniture 47.50) 
 
 $350-00 
 
 Petty Cash 250.00 
 
 To Cash in bank 
 
 Expense 609.35 
 
 To Cash in bank 
 
 Petty cash 
 
 Rent $75.00 
 
 Light 15.80 
 
 Advertising 135.00 
 
 Salaries — saleswomen 200.00 
 
 Janitor 40.00 
 
 Bookkeeper 60.00 
 
 Office expense 12.50 
 
 Stationery and printing 8.75 
 
 Wrapping paper 20.00 
 
 Commission 42.30 
 
 $609.35 
 
 Accounts Payable 3,174.26 
 
 To Cash in bank 
 
 Merchandise — Inventory (new) 9,745.94 
 
 To Merchandise 
 
 Merchandise Z27-92, 
 
 To Profit and Loss 
 
 To close the merchandise account. 
 
 R. J. Dimlawn, Proprietor 281.43 
 
 To Profit and Loss 
 
 To transfer net loss for the month. 
 
 26.43 
 15.00 
 
 398.37 
 
 350.00 
 
 250.00 
 
 225.80 
 383.55 
 
 3,174-26 
 
 9,745.94 
 
 327.92 
 
 281.43 
 
 It will be noted that the above entries summarize the trans- 
 actions for the month, and, when taken in connection with the 
 trial balance of the ledger at the time it was put upon a double 
 entry basis, show a complete reflection in totals of the books. 
 
 The value of the following working sheet to the accountant, as 
 well as the student who strives to solve problems, will doubtless be 
 
 13 
 
Elementary Accounting Problems 
 
 evident after a study of it has been made. It is not intended to 
 be a three-column balance sheet, or anything of the sort. It is 
 intended to give a picture of the ledger and afford an opportunity 
 for adjustments and the proving of figures before attempting to 
 prepare financial statements. In the following illustration it ap- 
 pears in its simplest form. 
 
 WORKING SHEET-BOOKS OF R. J. DIMLAWN 
 April, 1910 
 
 
 Trialbalance. 
 April I, 1910 
 
 Adjustments 
 
 Balance 
 
 Sheet, 
 
 April 30, 
 
 1910 
 
 Profit & 
 Loss for 
 
 the 
 month of 
 
 
 Debit 
 
 Credit 
 
 April, 
 1910 
 
 Merchandise 
 
 Cash in bank . 
 Petty cash 
 
 $9,262 . 62 
 
 2,572-43 
 224.17 
 162.74 
 
 ($1,541.63 
 i 327-92 
 
 5 954-32 
 ( 398.37 
 
 250.00 
 318. II 
 
 350.00 
 
 609.35 
 
 9.745-94 
 
 ( 113-80 
 ( 3.174-26 
 
 281.43 
 
 $1,386.23 
 
 9.745-94 
 ( 250.00 
 < 225.80 
 (3.174-26 
 j 1500 
 i 383-55 
 
 5 26.43 
 i 398.37 
 
 1,500.20 
 350.00 
 
 ( 327-92 
 
 I 281.43 
 
 $275.06 
 
 75.62 
 56.05 
 
 350.00 
 
 9.745-94 
 
 
 Accounts Receivable. . 
 
 
 Total 
 
 $12,221.96 
 
 
 
 
 New Accounts 
 Furniture and fixtures. 
 Expense 
 
 1 
 $10,221.96 
 
 2,000.00 
 
 $609.35 
 
 Mdse. — Inventory. . . . 
 
 
 Credits 
 
 $10,502.67 
 
 $609.35 
 
 Accounts Payable 
 
 R. J. Dimlawn, Prop. . 
 
 $8,784.10 
 1,718.57 
 
 
 Total 
 
 $12,221.96 
 
 
 
 
 New Accounts 
 Profit and Loss 
 
 
 $327-92 
 2S1.43 
 
 
 $18,065.13 
 
 $18,065.13 
 
 $10,502.67 
 
 $609.35 
 
 From the working sheet, the financial statements may now be 
 prepared by taking the items from the last two columns. To be 
 understood, the working sheet should be studied and the figures 
 followed through step by step. A few minutes of study on this 
 form will produce more satisfactory results than voluminous ex- 
 planations. The financial statements follow. 
 
 14 
 
Problem Number Two 
 
 R. J. DIMLAWN 
 Balance Sheet — ^April 30, 19 10 
 
 Assets 
 
 Liabilities and Capital 
 
 Furniture and fixtures . . 
 Merchandise inventory . 
 Cash 
 
 $350.00 
 
 • 9-745-94 
 350.68 
 
 Accounts Payable $8,784. 10 
 
 Proprietorship 1,718.57 
 
 Accounts Receivable. . . . 
 
 56.05 
 . $10,502.67 
 
 Total Liabilities and 
 
 Total Assets 
 
 Capital $10,502.67 
 
 
 
 
 
 
 R. J. DIMLAWN 
 Profit and Loss Account — Month of April, 1910 
 
 Expenses $609.35 
 
 $609.35 
 
 Gross profit on sales of 
 
 merchandise $327 . 92 
 
 Balance — Net loss trans- 
 ferred to proprietor's 
 account 281.43 
 
 $609.35 
 
 R. J. DIMLAV7N, Proprietor 
 
 1910 
 
 April 30 Loss for month $281 .43 
 
 Balance 1.718.57 
 
 $2,000.00 
 
 1910 
 
 March 31 Balance $2,000 . 00 
 
 $2,000.00 
 
 15 
 
Elementary Acco\mting Problems 
 
 PROBLEM No. 2A 
 
 From the following items, prepare an entry which would 
 convert the books of A. Howell from a single to a double entry 
 basis, at March 31, 1910: cash, $100; accounts payable, $7,000; 
 notes payable, $1,000; furniture and fixtures, $800; merchandise, 
 $I2,0G0; accounts receivable, $8,000; expenses, $750. 
 
 16 
 
Problem Number Three 
 
 PROBLEM No. 3 
 Demonstration 
 
 Mr. Dimlaw's capital account at the end of April was 
 $281.43 smaller than at the beginning. Evidently he had lost 
 money during the month. This fact was borne out by the profit 
 and loss account, which summary showed that, while the gross 
 profit on merchandise had been $327.92, the expense of con- 
 ducting the business had been $609.35, resulting in a net loss of 
 $281.43. 
 
 The result was not inspiring. Losses meant diminished cap- 
 ital. A continuation would result in bankruptcy. To avoid bank- 
 ruptcy some remedy must be applied. Before any remedy could 
 be applied the cause must be known. Thus the proprietor may 
 have reasoned. 
 
 Mentally he may have inquired: **Are my expenses higher 
 than the business will justify, or am I not making a sufficiently 
 large gross profit to cover the expenses which are warranted by 
 the volume of business? Will this profit and loss account which 
 I have before me, give me this information ? Will it help me to 
 remedy the cause of the trouble? Will it help me to administer 
 my business so that I shall make instead of lose money next 
 month ?" 
 
 Concluding that it would not, he may be imagined to have 
 called his bookkeeper and asked for the ledger which showed the 
 following accounts : 
 
 Merchandise 
 
 Expense 
 
 3/31/ 10, In- 
 
 ventory ... $9,262.62 
 Purchases ... 1,427.83 
 Inward freight 72.37 
 Sales returns 26.43 
 Messenger... 15.00 
 P. & L 327-92 
 
 $11,132.17 
 
 4/30/ fo. In- 
 ventory ... $9,745.94 
 
 Sales 
 
 Allowances. 
 Discount .. 
 Inventory.. 
 
 M.272.4 
 57-5^ 
 56.22 
 
 9»745-^ 
 
 $11,132.17 
 
 Rent $75-oc 
 
 Light 15.8c 
 
 Advertising 135.00 
 
 Salaries, Salesmen 200.00 
 
 Janitor 40.00 
 
 Bookkeeper 60.0c 
 
 Office expense 12.50 
 
 Stationery and printing 8.75 
 
 Wrapping paper 20.00 
 
 Commission 42.30 
 
 $609.35 
 
 P & L $605.33 
 
 $609.35 
 
Elementary Accounting Problems 
 
 From these accounts he may have determined the following: 
 
 Ratio of gross profit to cost 3631 + 
 
 Ratio of expense to cost 6747 + 
 
 Resulting in a loss of , 31164- 
 
 Which applied to the cost of $903.08 shows the loss of $281.43 
 
 In order to make a profit in May, Dimlawn concluded that 
 he must purchase more cheaply, increase his volume of business, 
 reduce expenses, or add to the cost of all his goods a percentage 
 greater than 67.47%. 
 
 Having in mind the reforms necessary, and the service which 
 the merchandise and expense accounts have rendered him in de- 
 termining what to do, he instructs his bookkeeper to arrange to 
 furnish him at the close of May with a statement which will em- 
 brace the information shown by these accounts. 
 
 In accordance with this request the bookkeeper arranges to 
 open accounts for the various classes of expenses and, foreseeing 
 that at some time the entries in the merchandise account may 
 become numerous, or that his employer may call upon him for 
 statements extending back over a greater period than a month, 
 abandons the merchandise account, setting up in place thereof 
 accounts which will properly classify the elements of which it 
 is composed. 
 
 The transactions for May included the following: credits to 
 accounts payable, aggregating $3,839.66 distributed as follows; 
 merchandise purchases $2,559.05 ; inward freight $45.77 ; inward 
 cartage $12; automobile $1,200; auto-expense (gasoline) $22.84. 
 
 The cash sales for the month were $3,920.31 ; charge sales 
 $218.47. The sales returns amounting to $164.53 composed 
 of $151.47 involving the petty cash and $13.06 credited to cus- 
 tomers' accounts. 
 
 The petty cash disbursements were: wages of chauffeur $50; 
 wages of messenger delivering goods $15 ; wages of saleswomen 
 $204.50; wages of janitor $40; salary of bookkeeper $60; office 
 expense $18.50; commission to saleswomen $144.85; drawings, 
 R. J. Dimlawn $75. 
 
 Among the disbursements by check were the following: rent 
 $75; light $14.72; advertising $150.25; stationery and printing 
 $12.50; packing supplies $65 ; insurance (one year from May ist) 
 $60; transferred to petty cash $900. 
 
 18 
 
Problem Number Three 
 
 The trade discount on purchases amounted to $88.15; pur- 
 chase allowances $137.49; sales allowances applicable to charge 
 sales $7.82. Other transactions comprised insuring the stock of 
 merchandise and borrowing $10,000 from the Cedar Trust Com- 
 pany on a three months' note bearing interest at 6% and dated 
 May 5th. 
 
 The bookkeeper opened an account which he called "auto-ex- 
 pense" and to which he charged the wages of the chauffeur and 
 the gasoline purchased. There was not enough gasoline on hand 
 at the end of the month to warrant taking cognizance of it in 
 the inventory. It was estimated that the automobile service was 
 devoted to the delivery of goods and the hauling of incoming 
 goods respectively in the proportions of three-fourths and one- 
 fourth. 
 
 The inventory of merchandise on May 31st was $9,854.32. 
 The balance of the accounts receivable was $47.25, while that of 
 accounts payable was $1,970.43. The interest accrued on notes 
 payable was $44.37. The interest on bank balances was $8.65. 
 In order to be exact the bookkeeper accrued the wages of sales- 
 women, for the two days intervening between the end of the week 
 and the end of the month. The amount involved was $17. 
 There was also due saleswomen for commission during the two 
 days $20.17. The bookkeeper was instructed to depreciate the 
 furniture and fixtures at the rate of $10 per month and the auto- 
 mobile on the basis of a five year life. 
 
 From the above facts taken in conjunction with the balance 
 sheet of April 30th prepare ; 
 
 (a) Working sheet (adjustment columns supported by 
 
 journal entries). 
 {h) Trading and profit and loss account for the month 
 
 ended May 31, 1910. 
 ■(c) Balance sheet — May 31, 1910. 
 
 Solution to Problem No. 3 
 
 The purpose of the working sheet it will be remembered is 
 to show a picture of the books; to provide for proof of mathe- 
 matical accuracy as the work progresses ; to facilitate the prep- 
 aration of the financial statements. It is of as much practical 
 
 19 
 
Elementary Accounting Problems 
 
 help to the accountant as to the student who undertakes the solu- 
 tion of problems. How often does it happen that the accountant 
 prepares the statements contained in his report from the trial 
 balance without adjusting any figures? Seldom! How often 
 <ioes the accountant have to make so many adjusting entries 
 for the purpose of his report that if he is not careful and sys- 
 tematic in his work he may be greatly confused and embarrassed 
 when called upon, sometimes months afterwards, to explain cer- 
 tain differences between the books and his report? Frequently! 
 Would it not be better, then, to have a working sheet which 
 shows the figures per the books, all adjustments, with journal 
 entries supporting them, and tracing the connection between the 
 books and the report ? Decidedly ! 
 
 When a student undertakes the solution of a problem wherein 
 do the pit-falls lie ? They lie in failing to start with the accounts 
 in balance; failing properly to interpret some statement of facts 
 entailing an adjustment; failing to credit some account at the 
 5ame time a certain account is debited, or vice versa ; failing cor- 
 rectly to apply the adjusting items; failing properly to classify 
 the accounts; failing to foot correctly. A student who finishes 
 a problem and finds that his solution is wrong wants to know 
 where the trouble is. If he is working in an examination he 
 wants to know quickly. The working sheet enables him to 
 localize his error. It enables him to do so quickly. The figures 
 are all before him and not scattered about on scraps of paper. 
 A systematic review of the work will discover the error very 
 promptly. This review will consist of the following steps : 
 
 1. Re-foot trial balance. 
 
 2. Foot adjustment columns if same has not been done; 
 
 re- foot if previously footed. 
 
 3. Check application of adjusting entries and distribution 
 
 into balance sheet and profit and loss statement col- 
 umns. 
 
 4. Re-foot balance sheet and profit and loss columns. 
 
 There is some question as to whether it takes longer to solve 
 a problem with or without the working sheet. Without paus- 
 ing to give due consideration to the question we should probably 
 
 20 
 
Problem Number Three 
 
 say that the working sheet undoubtedly takes longer. Wheit 
 you consider the amount of time lost in hunting for errors it is 
 probable that the method which seems at first the longer is after 
 all the shorter. There is now (1912) being conducted by the 
 accounting department of the New York University, School of 
 Commerce, Accounts and Finance, a series of experiments to 
 determine the relative merits of the two methods so far as 
 their effect upon speed is concerned. 
 
 The solution of the present problem is not dependent upon 
 speed. The procedure may therefore include the use of the work- 
 ing sheet. The actual task of setting it up may be deferred until 
 such time as the journal entries which play so important a part 
 in the solution have been made. 
 
 It may be advisable before journalizing the transactions for 
 the month to explain what is meant by "framing journal en- 
 tries." Students frequently express surprise when in so doing 
 cash is included in an entry. Invariably the act will be objected 
 to by the student with the statement that "cash does not go into 
 journal." As regards bookkeeping of course he is correct. As 
 regards the solution of a problem little cognizance is taken of 
 books and the framing of journal entries in reality means ex- 
 pressing the financial transactions of whatever nature in tha 
 form of a journal entry. ^ 
 
 Framing journal entries is an accomplishment much to be* 
 sought by the student. It has frequently been said that the ac- 
 countant who can analyze a complicated series of financial trans- 
 actions and express them in the form of journal entries need', 
 never worry about succeeding in his work. To be able to frame; 
 the journal entries is to do more than half of the hard work iir 
 most problems. Failure to understand and apply them usually 
 means failure in the solution. Familiarity with them is accom- 
 panied by that comfortable feeling of being at ease which takes 
 the sting and dread out of practical problems. 
 
 The journal entries, which seem to be sufficiently expressive 
 without explanation, covering the transactions for May, follow:. 
 
 Purchases $2,559.05 
 
 Inward freight 45-77 
 
 Inward cartage 12.00 
 
 Automobile - 1,200.00 
 
 Auto expense (gasoline) 22.84 
 
 To accounts payable $3,839.66* 
 
 21 
 
Elementary Accounting Problems 
 
 Cash in bank 3,920.31 
 
 Accounts receivable 218.47 
 
 To sales 4,138.78 
 
 Sales returns 164.53 
 
 To Petty cash. . .' I5I-47 
 
 Accounts receivable 13.06 
 
 Auto expense (wages of chauffeur) 50.00 
 
 Delivery expense (wages of messenger) 15.00 
 
 Wages of saleswomen 204.50 
 
 Wages of janitor 40.00 
 
 Salary of bookkeeper 60.00 
 
 Office expense 18.50 
 
 Commissions to saleswomen 144-85 
 
 Drawings, R. J. Dimlawn 75.oo 
 
 To petty cash 607.85 
 
 Rent 75 00 
 
 Light 1472 
 
 Advertising 150.25 
 
 Stationery and printing 12.50 
 
 Packing supplies 65.00 
 
 Insurance paid in advance 60.00 
 
 Petty cash (transfers) 900.00 
 
 To cash in bank 1,277.47 
 
 Accounts payable 225.64 
 
 To Trade discount on purchases 88.15 
 
 Purchase allowances 137-49 
 
 Sales allowances 7.82 
 
 To accounts receivable 7.82 
 
 Cash in bank 10,000.00 
 
 To notes payable 10,000.00 
 
 Delivery expense 5463 
 
 Inward cartage 18.21 
 
 To auto expense 72.84 
 
 Inventory (new) 9,854.32 
 
 To inventory (old) 9,854.32 
 
 Accounts receivable (new) 47-25 
 
 To accounts receivable (old) 47-25 
 
 Accounts payable (old) 1,970.43 
 
 To accounts payable (new) 1,970.43 
 
 • Interest on notes payable 44-37 
 
 To interest accrued on notes payable 44-37 
 
 Cash in bank 8.65 
 
 To interest on bank balance 8.65 
 
 Wages of saleswomen 17.00 
 
 To wages accrued 17.00 
 
 Commissions to_ saleswomen 20.17 
 
 . To commissions accrued 20.17 
 
 Provision for depreciation of furniture and fixtures. 10.00 
 
 To reserve for depreciation of furniture and fix- 
 tures 10.00 
 
 Provision for depreciation of automobile. 20.00 
 
 To reserve for depreciation of automobile 20.00 
 
 Insurance 5-00 
 
 To insurance paid in advance 5.00 
 
 Cash in bank 206.39 
 
 To accounts receivable 206.39 
 
 Accounts payable 10,427.69 
 
 To cash in bank 10,427.69 
 
 Profit and loss 702.58 
 
 To R. J. Dimlawn, proprietor 702.58 
 
 22 
 
Problem Number Three 
 
 The two entries next preceding the last require some explana- 
 tion. Those referred to reflect the amounts received from cus- 
 tomers and paid to creditors respectively. Ostensibly the entries 
 showing the transactions for the month covered all the transac- 
 tions. In reality some were omitted. The wording was de- 
 ceptive and at the same time truthful. This illustrates what is 
 known as a "catch" in problems. The statement was made that 
 "the transactions for May included the following." This is 
 quite different for example from the statement "the transactions 
 were as follows." This illustration shows how carefully a prob- 
 lem must be read and how the student must ever be upon the 
 alert. 
 
 This feature also serves to bring out the application of the 
 principles which are involved in finding the "missing cash ac- 
 count" or the cash balance. It amounts to arriving at conclusions 
 by deduction. It is a valuable expedient often in solving prob- 
 lems but it is a dangerous one in practice. 
 
 The amounts are determined by building up skeleton ledger 
 accounts for the accounts receivable and accounts payable. All 
 known amounts are entered on the respective sides including the 
 balances carried down. The difference in the account which re- 
 sults is attributed to cash received from customers or paid to 
 creditors depending upon the account and so treated. The ap- 
 plication may be seen in the ledger accounts which appear below : 
 Accounts Receivable 
 
 Balance, 5/1/10 
 
 Sales 
 
 .... $56.05 
 .... 218.47 
 
 Sales returns 
 
 Sales allowances 
 
 Balance, 5/31/10 
 
 Cash 
 
 . . . $13.06 
 
 7.82 
 
 47.25 
 
 
 $68.13 
 206.39 
 
 Balance, 6/1 /lo 
 
 $274-52 
 .... $47-25 
 
 $274.52 
 
 Accounts Payable 
 
 Trade discount 
 
 Purchase allowances. 
 Balance, 5/31/10 
 
 $88.15 
 
 137-49 
 
 1,970.43 
 
 Cash 
 
 $2,196.07 
 10,427.69 
 
 ^12,623.76 
 
 Balance, 5/1/10. 
 Purchases, etc. . 
 
 ^,784.10 
 3,839.66 
 
 Balance, 6/1 /ro. 
 
 $12,623.76 
 • $i>970.43 
 
 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 
 
 $40,0<X), drawing account $14,327) ; capital — B. Short, $23,484 
 (investment, $20,CX)0, drawing account, $3,484) ; capital — C. Col- 
 lins, $24,464 (investment $20,000, drawing account, $4,464). 
 
 The transactions during April were as follows: Purchases, 
 $40,000; sales, $35,000; advertising expense (for April magazine 
 insertions, invoices received but unpaid at April 30) ; salaries 
 of salesmen, $900 (paid April 30) ; traveling expenses, salesmen, 
 $675 (expense reports received but not vouchered at April 30) ; 
 salaries of clerks, $150 a week (paid to include April 27) ; 
 salaries of partners, paid by the week, Redmond, $40; Short, 
 $30 ; Collins, $25 ; general expense, $240 ; drawings — Redmond, 
 $200, April 2; Short, $300, April 15; Collins, $250, April 20; 
 receipts from customers, $17,500; payments to creditors, $20,000. 
 
 Interest was according to the copartnership agreement al- 
 lowed on investments and charged on drawings at the rate of 6% 
 per annum. 
 
 Short died on April 15. 
 
 The goodwill was for the purpose of settlement valued at 
 $15,000. Analyses showed purchases prior to April 15 to be 
 $22,786; sales, $19,427; collections on accounts receivable, $9,- 
 827; payments to creditors, $7,500. The inventory ascertained by 
 working back the sales at cost was estimated at $57,957. 
 
 Prepare an accounting to be rendered to the heirs of the 
 deceased partner, assuming that settlement was had with them 
 on May 5, 19 12, and that interest was allowed on Short's capital 
 from the date of his death to the date of settlement. 
 
 84 
 
Problem Number Ten 
 
 PROBLEM No. lo 
 Demonstration 
 
 The following is a trial balance taken from the general ledger 
 of Johnson, Morton & Swift, a copartnership, after closing 
 August 31, 1912: 
 
 Debits: Land and buildings, $200,000; equipment, $40,000; 
 furniture and fixtures, $8,000; motor trucks, $9,000; goodwill, 
 $50,000; materials and supplies, $43,297.52; goods in process, 
 $14,782.47; finished goods, $18,325.75; cash, $12,947.82; ac-- 
 counts receivable, $23,478.31 ; notes receivable and interest, 
 $8,098.47; advertising paid in advance, $800; insurance unex- 
 pired, $360; consignees, $3,827.95. 
 
 Credits: Bond and mortgage payable and interest, $50,500 
 (interest 6%, payable July i and January i, last paid July i, 
 1912) ; taxes accrued, $1,752; salaries and wages accrued, 
 $257.32; accounts payable, $65,843.17; notes payable and inter- 
 est, $25,135.20; M. T. Johnson, proprietorship, $100,425.68; B. 
 L. Morton, proprietorship, $86,318.47; E. W. Swift, proprietor- 
 ship, $98,858.50 ; consigned sales, $3,827.95. 
 
 According to the terms of the articles of copartnership, in 
 the event of the death of a partner, the accounts were to be 
 stated at the end of the month in which the death occurred and 
 the business was to be liquidated forthwith. The surviving 
 partners were to receive as compensation for such services, 
 10% of all cash collected. 
 
 Morton died on August 20. The surviving partners pro- 
 ceeded in accordance with the agreement and effected the fol- 
 lowing transactions: Motor trucks were sold for $5,275; the 
 land, buildings, equipment, furniture and fixtures were sold to 
 a concern which took over the mortgage, agreed to pay the taxes 
 and paid Johnson, Morton & Swift, $175,000; the salaries and 
 wages accrued were paid; the surviving partners took over the 
 material and supplies, goods in process and finished goods at the 
 book values; the notes payable of $25,000 were paid with 
 interest amounting to $197.70; accounts receivable were col- 
 
 85 
 
Elementary Accounting Problems 
 
 lected except $782.54 and $324.57 which represented the balance 
 due from a concern in bankruptcy which had paid its final liqui- 
 dation dividend; the creditors were paid in full; the notes 
 receivable were discounted, realizing, $8,043.86; the insurance 
 poHcies were transferred to the concern which purchased the 
 building in consideration of $360, the amount of the unexpired 
 insurance which was received; no arrangements could be made 
 with the advertising agents to transfer the account for advertis- 
 ing; the balance of cash was distributed among the estate of the 
 deceased and the surviving partners. 
 From the foregoing set up: 
 
 (a) Cash account. 
 
 (&) Profit and loss account. 
 
 (c) Proprietorship accounts of partners. 
 
 Solution to Problkm No. 10 
 
 The first step in the solution consists in raising the trial bal- 
 ance from the accounts given in the text. Careful scrutiny of 
 the accounts reveals the fact that the trial balance has all the 
 essentials of a balance sheet. The notes receivable are seen to 
 include the accrued interest. The same is true of the bond and 
 mortgage payable and the notes payable. Accruals are im- 
 portant items in stating the accounts for the purpose of settle- 
 ment. In this case all accruals appear to have been spread on 
 the books. There is no reserve for depreciation. This, how- 
 ever, in a situation of this kind is not essential, since the property 
 is subsequently sold. If such reserve had existed, while it would 
 have decreased the proprietorship in this or prior periods, it 
 would also have decreased the loss on the property at the time 
 of sale. 
 
 The stipulations in the contract of copartnership relative to 
 the stating of the accounts are perhaps unusual but decidedly 
 practical. Many hours of labor and annoyance would be saved 
 if all copartnership agreements were to provide for the stating 
 of the accounts in such manner in the case of death. To liqui- 
 date a business upon the death of a partner and pay the surviv- 
 ing partners a commission for liquidating is also the exception 
 
 86 
 
Problem Number Ten 
 
 rather than the rule ; but it must be remembered that the partners 
 may contract to do anything not illegal and the contract must 
 govern. 
 
 Obviously the solution to the problem is decidedly easy in so 
 far as what is to be done is concerned. The assets must be con- 
 verted into cash; the Habilities liquidated; the losses accounted 
 for; the surviving partners compensated for their services as 
 liquidators and the remaming cash distributed among all the 
 parties interested. The question arising then becomes one of 
 method. 
 
 The standard working sheet is always available. To use it 
 in this case would be set up the trial balance; frame and post 
 the journal entries incident to realization and liquidation and 
 apply the items appearing in the adjustment column to the re- 
 spective figures in the trial balance. Anticipating the result it 
 will be seen that there would be no necessity for a fourth column 
 since the accounts would be closed out automatically by the 
 posting of the journal entries, if the figures were correct. 
 
 A briefer method would consist in the use of a modified 
 working sheet such as that shown below. With this working 
 sheet the journal entries are eliminated and altogether the 
 process is not as clean cut as in the first case. Brevity is its 
 recommendation but its use is attended with some confusion 
 and danger of inaccuracy in the result. 
 
 Trial 
 
 balance 
 
 August 
 
 31,1912 
 
 Land and buildings $200,000.00 
 
 Equipment 40,000.00 
 
 Furniture and fixtures 8,000.00 
 
 Motor trucks 9,000.00 
 
 Goodwill 50,000.00 
 
 Materials and supplies .... 43,297.52 
 
 Goods in process 14,782.47 
 
 Finished goods 18,325.75 
 
 Cash 12,947.82 
 
 Accounts receivable 23,478.31 
 
 Notes receivable and interest 8,098.47 
 Advertising pd. in advance. 800.00 
 
 Insurance unexpired 360.00 360,00 
 
 Consignees 3.827.95 3,827.95 
 
 
 Cash 
 
 Profit and 
 
 
 receipts 
 
 loss items 
 
 
 and dis- 
 
 and pro- 
 
 Offsets 
 
 Dursements prietorship 
 
 $ 52,252.00 
 
 $175,000.00 
 
 $ 20,748.00 
 
 
 5,275.00 
 
 3.725.00 
 50,000.00 
 
 43,297.52 
 
 
 
 14,782.47 
 
 
 
 18,325.75 
 
 12,947.82 
 
 
 
 22,371.20 
 
 1,107.11 
 
 
 8,043.86 
 
 54.61 
 800.00 
 
 $432,918.29 $i32.485-69 $223,997-88 $ 76,434-72 
 87 
 
Elementary Accounting Problems 
 
 Bond and mortgage payable 
 
 and interest $ 50,500.00 $ 50,500.00 
 
 Taxes accrued i,752.oo 1,752.00 
 
 Salaries and wages accrued. . 257.32 $ 257.32 
 
 Accounts payable 65,84'3-i7 65,843.17 
 
 Notes payable and interest... 25.135.20 25,197.70*$ 62.50 
 
 M. F. Johnson, proprietorship 100,425.68 38,202.87 10,552.50 51,670.31 
 
 B. L. Morton, proprietorship 86,318.47 86,318.47 
 
 E. W. Swift, proprietorship 98,858.50 38,202.87 10,552.50 . 50,1031.13 
 
 Consigned sales 3>827.9S 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 
 
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 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 <i^)i5,237.8o 11,624.49 12,132.19 
 
 Accrued interest on securities 875.00 125.00 500.00 250.00 
 
 Sinking fund 43,274-13 43,274-13 
 
 Organization expense 12,400.00 4»750.oo 5,125.00 2,525.00 
 
 Moving expense 1,275.00 1,275.00 
 
 Insurance unexpired 1,124.33 32500 273.14 526.19 
 
 Total debits $3,ii9,i33-67 $40,044.79 $i,099,493.09 $797,071-47 $1,262,613.90 
 
 Credits 
 
 First mortgage bonds $ 275,000.00 (w)$25,ooo.oo $ 300,000.00 
 
 Debentures 500,000.00 $ 500,000.00 
 
 Bond and mortgage payable 250,000.00 250,000.00 
 
 Taxes accrued 10,160.00 3,27500 2,500.00 4,38500 
 
 Salaries and wages accrued. 5,301.98 1,327.50 847.25 3,127.23 
 
 Accounts payable 295,448.42 C^/*) 4,794.04 ^^^ 103,843.87 (y)97,98i.i4 (fc)98,4i7.45 
 
 Notes payable and interest.. 178,642.51 (^)5ii25.75 61,328.43 (^45,621.29 76,818.54 
 Interest accrued on bonds.. 6,000.00 6,000.00 
 Interest accrued on deben- 
 tures 5,000.00 5,000.00 
 
 Interest accrued on bond 
 
 and mortgage 3,000.00 3,000.00 
 
 Res. depn. bldgs. and equip.. 573,955-44 148,718.29 200,000.00 225,237.15 
 
 Preferred capital stock 450,000.00 250,000.00 200,000.00 
 
 Common capital stock 370,000.00 (»»)5,ooo.oo 175,000.00 100,000.00 100,000.00 
 
 Profit and loss surplus 196,625.32 (»») 125.00 50,000.00 97,121.79 49,628.53 
 
 Total credits $3,i 19,133.67 $40,044.79 $1,099,493.09 $797,071.47 $1,262,613.90 
 
 (a) Includes 50 shares Chatterton Chair Co. at 102%. (c) Includes 25M Riverton first mortgage 
 bonds at par. (d) Includes $613.95 due from the Chatterton Chair Co. (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, (h) Includes 
 $1,532.17 due to the Irvington Cane Seat Company. (;) Includes $613.95 due to the Riverton Furni- 
 ture Company, (k) Includes $2,647.92 due to the Chatterton Chair Co. (I) Includes $5,125.75 notes 
 payable and Interest in favor of the Riverton Furniture Co. (m) 50 shares of Chatterton stock at 
 1021^ held by the Riverton Chair Co. (n) 25M bonds of the Riverton Chair Co. held by the Irvingtos 
 Cane Seat Co. 
 
Problem Number Eighteen 
 
 The eliminations will, after reference to the respective foot- 
 notes, presumably be clear with the possible exception of the 
 adjustment of the surplus in the amount of $125. This occurs 
 by reason of the fact that in the securities owned by the Riverton 
 Furniture Company there appear 50 shares of the Chatterton 
 Chair Company carried at 102 J4 or $5,125, while the par value 
 of the stock as shown by the Chatterton Chair Company is 
 $5,000. While the stock in question may have cost the Riverton 
 Furniture Company $5,125 and the stock as evidenced by the 
 surplus of the Chatterton Chair Company may be worth said 
 amount, it is apparent that the premium increases the surplus 
 of the Riverton Furniture Company, and that in putting the two 
 companies together and eliminating the stock the premium must 
 be offset against the combined surplus. 
 
 Owing to the fact that the books of the companies about to 
 be merged have been closed before taking off the trial balance 
 and consequently no nominal accounts appear> 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 
 
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Problem Number Twenty-One 
 
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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 
 
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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 
 
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Problem Number Twenty-Three 
 
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 ,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 
 
 I<ess deducted by broker for creditor ... 21,005.81 
 
 Balance paid to receiver $ 1,887.94 
 
 Cash 7,600.00 
 
 To New York Central stock 7,600.00 
 
 For 50 shares of N. Y. Central stock sold by the 
 trustees at 152 1/8 — 1/8 
 
 Cash 76,281.07 
 
 To Unexpired insurance 63.75 
 
 Lots — Ampere, N. J 1,200.00 
 
 Life insurance policy 3,017.32 
 
 Loan — Altair Wheel Co 72,000.00 
 
 Fees and expenses of receivership 10,896,45 
 
 To Cash 10,896.45 
 
 Office expenses $ 5,321.45 
 
 Stenographers' and witness fees 5 75 00 
 
 Trustee's fees 2,700.00 
 
 Referee's fees 2,300.00 
 
 $10,896.45 
 
 Accounts payable 3,000.00 
 
 To Cash 3,000.00 
 
 For claim of $3,000 covered by a chattel mortgage 
 on merchandise of $5,362 
 
 Wages accrued 275.00 
 
 To Cash 275.00 
 
 Land and buildings 10,000.00 
 
 New York Central stock 4,268.75 
 
 Lots — Ampere, N. J 200.00 
 
 Life — insurance policy 17. 32 
 
 To Realization and liquidation a/c 14,486.07 
 
 Realization and liquidation a/c 150,288.69 
 
 To Machinery and tools 62,023.00 
 
 Auto trucks 1,000.00 
 
 Furniture and fixtures 3,025.00 
 
 Stock — Altair Wheel Co .» 45,000.00 
 
 Merchandise 4,5 13-73 
 
 Accounts receivable 5,594.26 
 
 Loan — ^Altair Wheel Co 18,000.00 
 
 Unexpired insurance 236.25 
 
 Fees and expenses of receivership 10,896.45 
 
 W. B. Tileson, capital I35,95i-6i 
 
 To Realization and liquidation account ... 135,951.61 
 To close reahzation and liquidation account to ac- 
 count of proprietor. 
 
 208 
 
Problem Number Twenty-Four 
 
 Very few comments seem to be necessary in this solution. 
 Most complications arise in connection with the transactions of 
 the receiver. These transactions are journalized. The journal 
 entries are made sufficiently explicit so that comment on the 
 transactions would seem to be somewhat superfluous. Most 
 benefit will be derived by studying the transactions in connection 
 with the journal entries and tracing the posting of the journal 
 entries to the respective ledger accounts. If this is done the 
 manner in which the problem has been solved will be apparent. 
 
 In arriving at the percentage which unsecured creditors should 
 receive on their claims, a trial balance of the skeleton ledger ac- 
 counts after closing is desirable. The trial balance is as follows : 
 
 Trial Balance (After Closing) 
 
 Cash $251,773.39 A/cs payable $172,725.00 
 
 Deficit 112,401.61 Notes " 180,000.00 
 
 Int. ace. N/P 11,000.00 
 
 Personal debts 450.00 
 
 $364,17500 $364,175.00 
 
 From the above trial balance it will be seen that the total 
 amount due unsecured creditors is $364,175 while there re- 
 mains in cash available, to meet these claims, only $251,773.39. 
 Dividing this amount representing cash by the total amount due 
 unsecured creditors it will be seen that they should receive 
 69.13 plus % of their claims. 
 
 K 
 
 Problem No. 24 (Practice) 
 
 The following are the transactions effected by T. M. Jarvis, 
 trustee for the bankrupt estate of H. M. Carley : 
 
 Land and buildings sold for $162,500, the purchasers paying 
 the taxes for the year of $3,250, and assuming the mortgage with 
 accrued interest of $2,625 ; machinery and tools, $38,525 ; horses, 
 wagons and harness, $525; furniture and fixtures, $260; mer- 
 chandise, $14,813.26; accounts receivable, $20,409.63; 100 shares 
 of American Real Estate Company preferred sold at 122^ ; 100 
 shares D. I^. & W. sold by creditor at 145; 50 shares sold by 
 trustee at 145 ^ ; insurance cancelled at .0492 ; property on Long 
 Island sold for $4,500, the purchaser assuming the mortgage; 
 Auto Wrench Company stock sold for $5,000. The interest ac- 
 
 209 
 
Elementary Accounting Problems 
 
 crued on the secured notes payable when settled was $145.70; 
 accrued interest on notes receivable $132.50. There were 95 
 creditors. The office expenses of the receiver were $6,217.52; 
 stenographers' and witness fees, $435.22. I^oan to Auto Wrench 
 Co. paid in full Referee's fees, $2,400. Trustee's fees, $2,600. 
 No interest to be accrued. 
 
 Prepare : 
 
 Skeleton ledger accounts showing books of the trustee. What 
 percentage was paid to unsecured creditors? 
 
 210 
 
Problem Number Twenty-Five 
 
 PROBLEM No. 25 
 
 Demonstration 
 
 From the text and solution of Problem No. 24 prepare a 
 trustee's statement of realization and liquidation. 
 
 SOLUTION TO PROBLEM No. 25 
 
 Demonstration 
 
 In problem number twenty-four the facts incident to the 
 realization and liquidation of the business of W. B. Tileson were 
 shown by means of skeleton ledger accounts. The accounts 
 showed as initial entries the items contained in the balance sheet 
 of W. B. Tileson at June 30, 191 2. These were followed by 
 items representing the transactions of Arthur Dixon, Trustee, 
 during the period of his incumbency as such. Thus there 
 appeared if the accounts were to be scrutinized : 
 
 (i) Assets and liabilities per books (as adjusted). 
 
 (2) Assets and liabilities not realized or liquidated. 
 
 (3) Assets and liabilities to be accounted for (difference 
 
 between (i) and (2). 
 
 (4) Losses and gains incident to realization and liquidation. 
 
 (5) Assests realized and liabilities liquidated. 
 
 (6) Balance of cash on hand. 
 
 The duty of a liquidating trustee is to convert the assets into 
 cash, pay off the creditors, and turn the balance, if any, over to 
 the bankrupt. 
 
 In view of this, and the foregoing, it seems desirable that a 
 statement purporting to show the transactions of a trustee in 
 winding up a bankrupt estate should be so arranged as to bring 
 out such facts. The columnar form seems best adapted to the 
 present purpose and is for that reason made use of. The improve- 
 ment of such a form of statement over the "realization and 
 liquidation account" will probably be apparent. 
 
 Attention should be invited to the figure for expenses of ad- 
 ministration which may appear to be in error in the amount 
 of 14 cents. This is due to fractions of cents in applying the 
 percentage of loss to the accounts of creditors. 
 
 211 
 
Elementary Accounting Problems 
 
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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 
 
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 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 
 
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re 25023 
 
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 UNIVERSITY OF CALIFORNIA LIBRARY