XXXV. ACCOUNTS AND REPORTS OF RECEIVERS AND TRUSTEES

XXXV. ACCOUNTS AND REPORTS OF RECEIVERS AND TRUSTEES

Appointment of Assignee or Receiver

A condition of bankruptcy does not necessarily exist in order to secure the appointment of an officer of the court or a representative of a business for the purpose of taking possession and disposing of the property and applying the proceeds to the liquidation of some or all of the debts. The titles given to the various capacities of the representative of the business or the court are assignee, receiver, and trustee. An assignee is a party to whom the owner of a business makes a general assignment of his business, usually for the benefit of his creditors. The owner is usually bankrupt or verging on bankruptcy at such a time. The assignee becomes a representative of the owner, appointed by him, and to that extent the owner is able to regulate the distribution of his estate. As a usual thing the creditors must consent to the appointment of the assignee if the estate is to be liquidated and distributed under his control. If such consent is not given or if the appointment of the assignee and his conduct of the liquidation prove unsatisfactory, it is possible for certain creditors to bring bankruptcy proceedings against the owner and secure the settlement of the estate under bankruptcy procedure. It is usually held, however, that no creditor who has given active approval of the liquidation under assignment can become a party to an application in bankruptcy. The procedure of the assignee in winding up the affairs of the owner does not differ in any essential respect, so far as the accounting is concerned, from that of the receiver or trustee. The accounting features, therefore, will be treated under the later heads of “Receiver” and “Trustee.”

If everything is satisfactory to both parties, a complete settlement of the estate will be effected by the assignee and the affairs of the owner will thus be wound up. In case of dissatisfaction, or in the absence of a general assignment in favor of creditors, proceedings in bankruptcy may be brought against the owner. As was pointed out in Chapter XXVIII, a receiver as an agent of the court may act in two capacities, he may be either a receiver in bankruptcy or a receiver in equity.

The receiver in bankruptcy takes possession of all the property of the bankrupt with the expectation of its ultimate disposal and the application of the amounts realized therefrom to the liquidation of the debts of the bankrupt. The receiver in equity, however, usually comes into possession of only a part of the property, which he is to use in whatever way seems best for the liquidation of the more pressing current claims of creditors. In this latter case a condition of insolvency cannot be said to exist because usually the assets exceed the liabilities. Simply because the management has allowed the current assets to become tied up in a more or less unrealizable form which is inapplicable to payment of liabilities, the business finds itself in difficulty. It becomes necessary temporarily to turn the property over to a representative of the owner and his creditors in order to satisfy their claims and at the same time to preserve the property from needless dissipation until such time as a satisfactory settlement with creditors can be made and the business placed on a sound footing once again. In case, however, a condition of insolvency exists, i.e., a condition in which the liabilities exceed the assets, a receiver in bankruptcy may be appointed by the court upon application of the creditors or at the request of the owner.

Appointment of Trustee

If the owner makes a voluntary application for settlement in bankruptcy there is usually no need to appoint a receiver. The creditors may come together almost immediately and elect a trustee who takes charge of the property and applies it to settlement with the creditors. If the bankruptcy is involuntary, it is frequently necessary for the court to appoint a receiver to whom the property of the proposed bankrupt is turned over for safe-keeping until the exact status of the owner can be determined and a trustee appointed. The primary duty of the receiver and the purpose of his appointment is to prevent the dissipation of the owner’s property and to maintain its integrity, thus insuring its full application to the claims of creditors. Hence, whether the procedure is one in voluntary or in involuntary bankruptcy, the receiver may be appointed if the court deems that the conditions so warrant. A receiver will almost always be appointed in case any of the properties of the proposed bankrupt are of a perishable nature and must be disposed of immediately to secure any return from them. In the absence of a receiver, sometimes the marshal in bankruptcy is called upon to take possession of the property and preserve it.

The receiver holds the property until the first meeting of the creditors which must be called by the court within 30 days after the owner has been adjudged a bankrupt by the court. Creditors are entitled to 10 days’ notice of the meeting in order to make their plans to attend. The chief business of this first meeting of creditors is the appointment of a trustee who takes over the property from the receiver in case one has been appointed, or from the bankrupt in the absence of the intermediary receiver. It is the duty of the trustee to take charge of the entire property, to turn it into cash as quickly and advantageously as possible, and to apply the proceeds to the liquidation of all claims against it.

It is purposed now to discuss some of the accounting phases of the receiver’s and trustee’s activities and to present also some more or less academic theories with regard to such accounting.

Accounts and Reports of a Receiver in Equity

When a receiver in equity is appointed by the court, he is entrusted with property for a specific purpose and must render a full accounting of his stewardship. It becomes necessary, therefore, for him to keep full record of all his activities. In simple situations where his activities are not complex, the keeping of a record of cash receipts and disbursements is sometimes deemed all that is required. Usually, however, it is much better for the receiver to keep a complete set of books showing the detail of his operation of the business, thus enabling him to furnish any desired information. The receiver generally acts under the somewhat specific orders of the court and must be careful to follow out those instructions in all matters. The opening up of the accounts of the receiver will depend somewhat on the court’s order specifying the property to be taken over.

It frequently happens that only a portion of the property passes into the possession and control of the receiver. As a usual thing he does not take onto his records the liabilities of the corporation incurred prior to his appointment, although he may be ordered by the court to pay those liabilities or some portion of them. His books will show, however, the liabilities incurred by him in his conduct of the business. Sometimes this requires a nice distinction and care must be exercised in making it—as in the case of goods ordered prior to the appointment of the receiver but not received until after his appointment. At the time the receiver takes over the properties, an account is opened with him on the books of the corporation, in which he is charged with all properties turned over to him and credited with all valuation reserves applicable to those properties. But, as stated above, no credit for liabilities is entered. The offsetting entries to the receiver’s account are credits and debits respectively to the accounts of the assets taken over and the valuation reserve accounts. On the books of the receiver these entries are reversed, i.e., the various asset accounts will be charged and their valuation reserves credited and a credit will be made to the corporation in receivership for the net values taken over. In case he is required by the order of the court to pay any of the prior liabilities of the corporation, the entry for such becomes a debit to an account called Debts Paid for the Corporation, or other similar title, and a credit to his cash.

In keeping account of the regular operations of the receiver, nothing new in principle is met. The receiver must at all times be careful to keep distinct all payments on his own account from those for the corporation. Similarly, he must keep separate the expenses which are incurred by him and those which belong to the corporation but which he pays. It is held, for instance, that the interest charges on the corporation’s obligations are not an operating expense of the receiver although he may be ordered by the court to pay them. Some of his duties will more than likely be to realize partly or fully on some of the assets turned over to him, in addition to the regular trading assets with which he conducts most of the business. These are accounted for on his books just as they would be on the books of the corporation. In a similar way any liabilities liquidated, record of which appears on his books, will be shown canceled in the usual way. As mentioned above, care must be exercised to keep his liabilities separate from those of the corporation. In the payment of liabilities the question of priority often arises. He must be careful in passing on their priority and he may have to secure the instructions of the court before settling the matter. This will be true particularly with regard to receiver’s certificates, the court usually determining at the time of their issue their relative priority as compared with the other liabilities. On the books of the receiver certain expenses will appear which are peculiar to the receivership. These include such items as lawyers’ and accountants’ fees, bonding company costs, etc., and are, of course, to be treated as his expenses. He should close his books periodically, and so far as possible the period of closing should correspond with the regular fiscal period of the corporation for the sake of preserving the continuity of the records for purposes of comparison.

Reports to the Court

The receiver must make periodic reports to the court—the first report to be made shortly after the assumption of his duties. In it he presents schedules or inventories of the properties taken over. If some of these are mortgaged or have other liens on them, the facts should be indicated. At the same time schedules of the corporation’s creditors should be drawn up, grouped under the heads of preferential, secured, unsecured, and contingent. In the preferential group appear those claims against the corporation which are given preference by law, such as taxes due the state, wages due workmen, mechanics’ liens, etc. In the secured group appear the claims of creditors who hold property as partial or full security for their claims. In the unsecured group appear all claims not secured; while in the contingent group appear the usual items of contingent liability such as were discussed in Chapter XIX.

Subsequent reports will be made to the court at its will or at least once yearly. No standardized form is followed in the submission of these reports, the attorney’s wishes usually governing. The report is designed for the purpose of apprising the court of the progress of the receiver’s administration and should cover such items as the assets realized during the period since the last report, the liabilities liquidated, and the results of the operation of the properties held by the receiver. A convenient form for the showing of this report is that known as the “charge and discharge” form. Under it the receiver is shown charged with certain items of property and income received, and discharged with liabilities paid and other similar items. Whatever variations from this form are needed to meet particular conditions, these should be incorporated. The report may follow somewhat the order of the items shown below.

“The receiver charges himself with:

1. The assets at the date of the receivership (or at the date of the last report), exclusive of permanent or fixed assets. 2. Additions to such assets since discovered. 3. Increments upon realization of such assets. 4. Amounts realized from the sale of permanent or fixed assets. 5. Amounts realized from the sale of receiver’s certificates. 6. Increases in the amount of receiver’s liabilities. 7. Gross income from the operation of the property.

“The receiver credits himself with:

1. Preferred or other liabilities of the company paid. 2. Decreases in the assets stated as taken over at the date of the receivership. 3. Losses on realization of such assets. 4. Expenditures on permanent or fixed assets. 5. Receiver’s certificates repaid. 6. Decreases in the amount of receiver’s liabilities. 7. Interest charges paid. 8. Expenses of operation of the property. 9. Receivership expenses. 10. The assets at the close of the period covered by the report, exclusive of permanent or fixed assets.”[75]

[75] From a paper by Herbert C. Freeman, entitled “Accounting for Receivership,” presented at the annual meeting of the American Institute of Accountants at Washington, D. C., 1917.

This report may well be supported by a comparative balance sheet showing the condition at the time of the previous report and now. A profit and loss account to show the operations of the receiver is also helpful. A summary of all cash transactions may be included.

In a final report to the court a summary should be presented of all the operations since the beginning of the receiver’s control. This will, of course, show whatever property is turned back to the corporation. Upon the close of the receivership the receiver’s books may be closed up by crediting the accounts of the various assets which are turned back to the corporation, charging the corporation’s account which was originally set up at the time the property was taken over by the receiver and through which adjustments of the values of the assets have been made at the time of sale or otherwise. An important thing to keep in mind in connection with all accounts and reports of the receiver is the necessity for making full and adequate explanations of all entries, giving the authority for them and their source.

ACCOUNTS AND REPORTS IN BANKRUPTCY PROCEEDINGS

Initial Statements Presented to the Court

In the case of a voluntary bankrupt, as was stated in Chapter XXVIII, at the time of the petition to the court a schedule must be presented of all the property owned by the bankrupt and a list of his creditors giving the address, if known, the amount of the claim, the consideration, and the security held, if any. If the bankrupt makes any claim for exemption of any properties, that claim should be presented at this time. These schedules must follow the forms prescribed by the court. In the case of an involuntary bankrupt, these various schedules will, of course, not be available at the time the petition is made, inasmuch as the condition of the proposed bankrupt is undetermined; the amounts of his assets and of his liabilities are unknown. It becomes necessary, therefore, to examine him in the presence of the court for the purpose of securing a statement of all property owned and of all claims against it. This information, as elicited by court examination, becomes the basis for the receiver’s and trustee’s records. If a receiver is appointed by the court and remains in possession of the property for any length of time, it will be necessary for him to present periodic reports to show the condition of the property at various times and a statement of his operations. The reports which he will make will be similar to those which a trustee would make had he been appointed immediately; therefore, the matter of reports and accounts for both the receiver and the trustee can be treated together.

Reports and Accounts of Receiver or Trustee

The law provides that the trustee must keep regular accounts showing all amounts received and the sources from which received, and all amounts expended and on what account such expenditures were made. This would seem to imply merely the keeping of a record of the cash received and expended. The trustee, however, is looked upon both as the representative of the bankrupt, as custodian of his property, and as the representative of the creditors for the purpose of liquidating their claims. Immediately upon assuming office he must make, or cause to be made, a complete inventory of all property coming into his possession. In valuing this inventory all real and personal property belonging to the bankrupt’s estate must be appraised by three disinterested appraisers appointed by the court. The trustee must make a written report to the court of the condition of the estate, as to the amount of money on hand and any other details demanded by the court, within the first month after his appointment, and bimonthly thereafter unless otherwise ordered by the court. His final report must be made 15 days before the final meeting of the creditors is called by the court.

In disposing of the property of the bankrupt, provision is made that without court order the trustee cannot sell any of the property for less than 75% of the value at which it was appraised by the court’s appraisers. The right of set-off is allowed, i.e., if the bankrupt has a claim against any of his creditors, the amount of the claim is canceled dollar for dollar against the creditor’s claim and only the balance of the claim is to be prorated on the same basis as the other creditors.

The trustee must keep a careful record of all properties disposed of by him and of all liabilities liquidated. What constitutes a careful record will depend largely on the circumstances in each case. Sometimes merely a record of cash received and disbursed will fulfill all requirements. In other cases it may be necessary to keep a full set of books in order properly to secure the information needed in the accounting to the court and the creditors. All reports made should be narrative in form rather than consisting only of formal schedules and accounts. A straightforward statement of all the activities of the trustee, supported by schedules in order to show summarized results, is the desideratum.

Liquidating Dividends

Whenever the cash in the hands of the trustee is sufficient to pay the claims of preference creditors and a 5% dividend to the unsecured creditors, a dividend must be declared. The declaration of the dividend is placed in the hands of the referee in bankruptcy who is a direct representative of the court in most bankruptcy matters. The trustee must pay the dividend within 10 days after its declaration by the referee who prepares and delivers to the trustee dividend sheets showing the dividend declared and the parties to whom payable. All dividend checks drawn by the trustee must be countersigned by the referee.

Relative Standing of the Creditors

In connection with the creditors of a receiver in equity a statement was made above of the various classes of creditors whose claims are to be satisfied. These consist of preference creditors, secured creditors, and unsecured creditors. The trustee in making his liquidating dividends will pay first those creditors who are given preference by law. Within the preference class the order of priority of claims is as follows:

1. Taxes due the government, the state, or the municipality. 2. The actual costs incurred by the trustee or receiver in the preservation of the estate subsequent to time of filing the petition in bankruptcy. 3. The filing fees paid by creditors in the case of a petition in involuntary bankruptcy. 4. The costs of administration by the trustee. 5. The wages due workmen, clerks, servants, etc., earned within three months prior to the date of commencement of proceedings—not exceeding $300 to each claimant. 6. Debts owing to any person who, by federal or state law, is entitled to priority. In the State of Pennsylvania claims on account of rent are frequently entitled to this kind of priority.

Creditors who are fully secured rest their claims against the security held by them and not against the trustee. Any surplus realized on the property held must be turned over to the trustee for the benefit of unsecured creditors. The general rule in the case of a lien is that the remedy against the property must be exhausted first before any creditor may share with the unsecured creditors. When all the property has been realized upon and all the cash which has come into the hands of the trustee has been disbursed in satisfaction of the claims of the various creditors, the trustee’s duties are at an end and his records may be closed up.

Statement of Affairs

While having no legal status in this country, the statement of affairs, as it is called, is used to serve certain purposes in connection with matters in insolvency proceedings. Under the English bankruptcy laws such a statement is required of every insolvent debtor. Its complementary schedule, known as the deficiency account, is also required. In this country the chief significance of these two forms of statement is found in the examinations set by the various state boards of certified public accountants. They may, however, serve some additional purposes, chief of which are the following:

1. To show whether a receiver in equity should be appointed to manage the affairs of the business. 2. To show whether the creditors should advance funds in order to allow the business to continue, and perhaps in this way be able to meet its debts in full. 3. To show whether bankruptcy should be forced. 4. It may prove a valuable method of showing the exact condition of affairs to an incoming partner or investor.

The statement of affairs presents lists of all assets at their book values and also at the values which they might fairly be expected to realize upon a forced sale. Against this showing of the assets, an analysis is set up of all the claims against the business by its outside creditors on the basis of the various classes of creditors referred to above, namely, preference creditors, fully secured creditors, partially secured creditors, and unsecured creditors. Such a statement gives information in such form that it can be used for the purposes enumerated above. There are two forms of presenting this information. In the one the liabilities are shown on the left-hand side and the assets on the right-hand side, as is the case with the English form of balance sheet. The reason sometimes given for this is either that it is analogous to the English form of balance sheet or that in such a case the liabilities may be expected to exceed the assets and are therefore of prime importance. In the other form the assets are shown on the left and the liabilities on the right, as in the usual form of balance sheet. This latter form is the one shown here. The statement of affairs thus ties together the values shown on the balance sheet as taken from the books, with a fair estimate of the values which may be realized, and so indicates the shrinkage in value expected by forced realization of the assets.

Basis of Valuations in Statement of Affairs

The basis for the estimate of valuations is the same as in the case of bankruptcy proceedings where appraisers are appointed to determine the value of properties. Here, however, the matter is not under court control and the best appraisal possible must be made by the parties concerned, although if proceedings have progressed to the point where the appraisers’ report is available, these values may be incorporated. The order of marshalling the assets and liabilities in the statement is not standardized although it would seem best to follow the customary balance sheet order for the assets, running perhaps from the most liquid to the fixed. With the liabilities, those entirely unsecured may be shown first, followed by the partly secured, the fully secured, and the preferred creditors. A comparison of the total values expected to be realized from the sale of the assets with the total of the unsecured creditors gives some indication of the share which each creditor in the unsecured class may expect to receive. The student is referred to the type solution and form shown on pages 635-638.

STATEMENT OF AFFAIRS ------+----------------------------------+------+--------+---------- Book | | |Expected| Expect’d Values| Assets |Items | to | Loss on | | | Realize|Realizat’n ------+----------------------------------+------+--------+---------- |Cash | | | |Notes Receivable (see Schedule 1) | | | |Accounts Receivable | | | | (see Schedule 2) | | | | Good |$.....| | | Doubtful | .....| | | Bad | .....| | | |======| | |Merchandise | | | |Securities on Hand | | | | (see Schedule 3) | | | |Securities Pledged with Creditors:| | | | Partly Secured |$.....| | | Fully Secured | .....| | | |------| | | Deducted contra | | | | |======| | |Excess of Pledged Securities over | | | | Claims of Creditors Fully | | | | Secured (see contra) | | | |Other Properties (see Schedule 4) | |--------| | Total Unpledged Assets | |$ ......| |Less Preferential Claims | | | | (see contra) | | ......| | | |--------| |Net Free Assets for Unsecured | |$ | | Claims | | | |Deficiency (see Deficiency | | | | Account) | | | ------| | |--------|---------- | | | | ======| +======+========+==========

------+-----------------------------------+--------+--------- Book | Liabilities | Items |Expected Values| | |to Rank ------+-----------------------------------+--------+--------- |Creditors Unsecured | | | (see Schedule 5) | |$...... |Creditors Partly Secured | | | (see Schedule 6) |$...... | | Less Securities Held (see contra)| ...... | | |--------| | Portion Unsecured | | ...... | Creditors Fully Secured | | | (see Schedule 7) |$...... | | Less Securities Held | ...... | | |--------| | Excess Carried contra |$...... | | |========| |Contingent Liabilities | | | (see Schedule 8) | | |Preferential Creditors | | | (see Schedule 9): | | | Deducted contra | ...... | | |========| |Capital | | |Surplus | | | | | | | | | | | | | | | | | | | | | | | | | | | | |--------- | | | =====| |========|=========

Deficiency Account

It is customary to support the statement of affairs by a deficiency account, which bears somewhat the same relation to the statement of affairs that the profit and loss account does to the balance sheet, i.e., it is a statement of the expected losses incurred upon realization of the assets and must prove against the losses or deficiency as shown by the statement of affairs. Sometimes on the asset side of the statement of affairs a third column is shown in which is indicated in detail the expected loss on realization for each asset. Where this is done the information which makes up the deficiency account is readily available. On the debit side of the deficiency account appears such items as losses on trading, shrinkages in value of the assets, and, if a partnership, withdrawals of capital. On the credit side appear the capital as shown by the books. The difference between the two sides is the amount of deficiency as shown by the statement of affairs. It may sometimes happen that the assets will realize more than enough to meet the claims of all creditors, leaving a remainder to be distributed among the owners. Where such is the case the deficiency account, instead of being technically described as such, is sometimes called an impairment of capital account—carrying, however, essentially the same information. The balance of the account is on the opposite side and indicates the present capital as impaired by the losses incurred. The skeleton form on page 633 and that given below show the way in which the various items may be presented.

DEFICIENCY ACCOUNT =================================+================================== Detailed Shrinkage in | Appreciation in Values as Values as per Statement | per Statement of Affairs of Affairs | Capital (Net Impairment of Capital) | Surplus | Net Deficiency as per | Statement of Affairs ----- | ------ | ===== | ======

Illustration of Statement of Affairs and Deficiency Account

Problem. The following balance sheet shows the condition of the A B C Company as on December 31, 1918.

A B C COMPANY BALANCE SHEET, DECEMBER 31, 1918 ======================================+============================== Cash $ 3,000.00 | Notes Payable $ 25,000.00 Notes Receivable 55,000.00 | Accounts Payable 310,000.00 Accts. Rec. $255,000 | Accrued Expenses 10,000.00 Res. for Bad Debts 5,000 250,000.00 | Bonds Payable 175,000.00 -------- | ----------- Merchandise 77,000.00 | Total Liabilities $520,000.00 X Y Co. Stock 30,000.00 | Mach. & Equip $ 95,000 | Capital Stock 250,000.00 Depr. Res 25,000 70,000.00 | Surplus 25,000.00 -------- | Buildings $ 88,000 | Depr. Res 13,000 75,000.00 | -------- | Land 110,000.00 | Good-Will 125,000.00 | ----------- | ----------- $795,000.00 | $795,000.00 =========== | ===========

The company has had difficulty in meeting its current claims. Interest to the amount of $5,000 on its bonds is past due. On January 10, 1919, it would become liable for $30,000 on accommodation paper to that amount, because of the bankruptcy of the makers. It is estimated that the creditors will receive 50% of their claims. At a meeting of its creditors, where this condition of affairs was disclosed, it was decided to have a statement prepared to show the condition of the company on a liquidating basis, any action respecting a petition in bankruptcy to be deferred until after receipt of such statement. An appraisal committee made the following report, to be used as the basis for the statement.

In the cash are found I O U memos, not collectible, $500. The notes receivable, all estimated good, are pledged with creditors on open account to secure claims of $61,000. Of the accounts receivable, $100,000 are good, $80,000 doubtful, estimated at 50% of their value, and the remainder bad. The merchandise is estimated to bring in $50,000, the machinery $20,000, and the land $125,000. The land and buildings are expected to yield no surplus above the claims of bondholders. The X Y Co. stock is pledged with the holders of notes payable and should produce a surplus of $10,000. The accrued expenses comprise taxes $1,500, unpaid pay-roll $3,500, and bond interest $5,000.

Solution

A B C COMPANY STATEMENT OF AFFAIRS, DECEMBER 31, 1918 ===========+========================+===========+===========+=========== Book Values| Assets | Items |Expected to|Shrinkages | | | Realize | -----------+------------------------+-----------+-----------+----------- $ 3,000.00|Cash | |$ 2,500.00| $ 500.00 250,000.00|Accounts Receivable: | | | | Good |$100,000.00| 100,000.00| | Doubtful— | | | | worth 50% | 80,000.00| 40,000.00| 40,000.00 | Bad $75,000.00| | | | Less Reserve 5,000.00| 70,000.00| | 70,000.00 | ---------+-----------| | | |$250,000.00| | | |===========| | 30,000.00|Claim Against | | | | Accommodated Party | | | |(Estimated to yield 50%)| | 15,000.00| 15,000.00 77,000.00|Merchandise | | 50,000.00| 27,000.00 70,000.00|Machinery | | 20,000.00| 50,000.00 |Securities Pledged | | | | with Creditors: | | | | Partly Secured: | | | 55,000.00| Notes Receivable | | | | (Deducted contra) |$ 55.000 00| | | |===========| | | Fully Secured: | | | 75,000.00| Buildings |$ 55,000.00| | 20,000.00 110,000.00| Land (at market) | 125,000.00| [76] 15,000.00 | |-----------| | | Deducted contra |$180,000.00| | | |===========| | 30,000.00| X Y Co. Stock | 35,000.00| [77] 5,000.00 | (at market) | | | | Deducted contra | | | | Excess over Claims | | | | against it | | 10,000.00| 125,000.00|Good-Will. | | | 125,000.00 | | |-----------| |Total Unpledged Assets | |$237,500.00| | Less Preferential | | | | Creditors | | | | (see contra) | | 5,000.00| | | |-----------| |Net Free Assets for | | | | Unsecured Claims | |$232,500.00| |Deficiency | | | |(see Deficiency Account)| | 52,500.00| -----------| | |-----------|----------- $825,000.00| | |$285,000.00|$327,500.00 ===========+ +===========+===========+===========

[76] Increments in value.

[77] Increments in value.

A B C COMPANY STATEMENT OF AFFAIRS, DECEMBER 31, 1918 (Continued) ===========+================================+======================= Book Values| Liabilities | Items |Expected | | | to Rank -----------+--------------------------------+-----------+----------- |Unsecured Creditors: | | $249,000.00| Accounts Payable |$310,000.00| | Less Partly Secured | 61,000.00|$249,000.00 |Partly Secured Creditors: |===========| 61,000.00| Accounts Payable | $61,000.00| | Less Notes Receivable | | | Held as Security | 55,000.00| 6,000.00 |Fully Secured Creditors: |-----------| 25,000.00| Notes Payable | $25,000.00| | X Y Co. Stock | | | Held as Security | 35,000.00| | |-----------| | Excess of Security | | | Carried contra | $10,000.00| 175,000.00| Bonds Payable. $175,000.00 |===========| 5,000.00| Accrued Interest | | | on Bonds 5,000.00 | | | ----------- |$180,000.00| | | ==========| | Land & Buildings | | | Held as Security | 180,000.00| |Contingent Liabilities: | | 30,000.00| Accommodation Notes. | | | Maker, now bankrupt, | | | will pay 50% | 30,000.00| |Preferential Creditors: | | 1,500.00| Taxes | $1,500.00| 3,500.00| Wages | 3,500.00| | |-----------| | Deducted contra | $5,000.00| | |===========| 250,000.00|Capital Stock | | 25,000.00|Surplus | | | | | | | | | | | -----------| | |----------- $825,000.00| | |$285,000.00 ===========| | |===========

ABC Co. will be able to pay, on the basis of the above showing, 81.6 cents on the dollar of all unsecured claims.

A B C COMPANY DEFICIENCY ACCOUNT, DECEMBER 31, 1918 ==================================+================================ Estimated Shrinkages in Value: | Estimated Increments in Value: Cash $ 500.00 | Land $ 15,000.00 Accounts Receivable. 110,000.00 | X Y Co. Stock 5,000.00 Claim against | Capital Sunk: Accommodated Party 15,000.00 | Capital Stock 250,000.00 Merchandise 27,000.00 | Surplus 25,000.00 Machinery 50,000.00 | Net Deficiency to be Buildings 20,000.00 | borne by Creditors Good-Will 125,000.00 | (see Statement of | Affairs) 52,500.00 ----------- | ----------- $347,500.00 | $347,500.00 =========== | ===========

Comments on Problem. From the above solution it will be noted that the order of showing the assets is not quite the same as would be ordinarily followed on a balance sheet. A separate group is made to indicate the securities pledged with creditors, shown under the two heads “Partly Secured,” and “Fully Secured.” It is to be further noted that the securities in the hands of partly secured creditors have no realizable value applicable to general unsecured creditors; hence, they are always shown deducted on the liability side of the statement from the claims of partly secured creditors, the difference giving the amount of such claims which must rank with other unsecured creditors. In the case of fully secured creditors, if the value of the security held is estimated to exceed the claims against it, this excess will be shown on the asset side of the statement as property to which the unsecured creditors may look for the satisfaction of their claims.

It should be noted that the amount of net worth is included in the Book Values column of the liabilities, chiefly for the purpose of showing a complete balance sheet. This makes possible an easy estimate of the deficiency figure, as shown on the face of the statement. The estimate is made by subtracting the figure of net worth from the total of the Shrinkages column. This is, of course, the same figure as shown in the Deficiency account and is arrived at in practically the same way. In the solution given, the two items indicated by asterisk in the Shrinkages column represent increments in value, and in arriving at the total of that column these are, of course, subtracted from the total shrinkages.

Inasmuch as the accommodation notes were not previously carried on the books of the bankrupt, they must here be inserted in the balance sheet columns both as an asset and a liability.

It is to be noted that the amount due the preferential creditors must be shown deducted from the total unpledged assets because the creditors have no claim against any specific asset although a first claim against all unpledged assets. After deducting the amount from the total unpledged assets, the figure of net free assets which can be applied to the claims of unsecured creditors is arrived at. A comparison of this figure of net free assets with the total amount due unsecured creditors gives the percentage which the creditors may expect on their claims. It is to be understood that the expenses of winding up the business will also be a charge against the net assets before the creditors can receive anything. It therefore usually happens that the estimate of this percentage is higher than is actually realized at the time of final settlement.

REALIZATION AND LIQUIDATION ACCOUNT

The realization and liquidation account is a statement which has played a somewhat prominent part in C. P. A. examinations. It is never used in practice and has no value other than to test the ability of the student to analyze and present in logical form facts and activities which are sometimes difficult to analyze and present in a condensed form and in such fashion as to show the relation of the various items. Presumptively, the purpose of the statement is to show the activities of the trustee after the appraisal of the bankrupt’s estate. In some instances the realization and liquidation statement takes the values of the assets as appraised by the trustee or other party making up the statement of affairs and shows the activities carried on through the realization of the assets and the liquidation of the liabilities. In other cases the realization and liquidation account is tied up with the values at which the assets are carried on the account books. There is no principle at issue as between the two methods. It seems perhaps more logical to look upon the two accounts, namely, the statement of affairs and the realization and liquidation account, as a unit statement covering the entire bankruptcy proceedings. Under that interpretation the “expected-to-realize” value as shown by the statement of affairs would form the basis for the realization and liquidation account, but, as stated above, either method is correct and no accounting or legal principle is involved.

Evolution of the Realization and Liquidation Account

The development of the realization and liquidation account through its various stages seems to have been based on three theories. When first used it was supposed to represent an account actually opened on the books of the bankrupt through which his assets and liabilities were shown transferred to the receiver or trustee.

The theory underlying the account was that it represented the trustee, who was to be charged with all the assets turned over to him and credited with the liabilities assumed. During the process of realization and liquidation he was to be credited in the same account with the assets at the amount realized therefrom, and debited with the liabilities as liquidated. Under this theory, strangely enough, the account was charged also with the expenses incurred by the trustee and credited with any income items received during his trusteeship. The balance of the account was the profit or loss on the realization and liquidation transactions. This theory of the realization and liquidation account as an account actually opened on the books has given place to a second theory, though the account itself as set up for showing solutions to problems set in certified public accountants’ examinations is still sometimes constructed according to this first theory.

The advocates of the second theory maintain that the realization and liquidation account represents the trustee’s report to the court, accounting for the charges and credits therein on that basis. The nature of such a report has been explained earlier in the chapter, from which it is seen that the formal realization and liquidation account as usually set up cannot represent nor take the place of the trustee’s report to the court.

Under a third theory the realization and liquidation account is looked upon simply as a condensed summary of the trustee’s activities analyzed into sections, the purpose of which is to present all the information needed for almost any report which the trustee may have to make. The theory of its debits and credits is not so important here and in some cases may not apply, the effort being simply to arrange the data in such fashion that a full accounting can be given for all the properties turned over to the trustee and all the liabilities assumed by him, the whole being supported by a statement of the trustee’s operations. This information is set up in account form and brought together in one account supplementary to which there must be carried also a summary of the trustee’s cash transactions. The information as given in these two accounts provides the data for any reports which the trustee may have to make. The two forms are shown in skeleton form just below:

REALIZATION AND LIQUIDATION STATEMENT—USUAL FORM =================================+============================= Assets to be Realized | Liabilities to be Liquidated (In detail) | (In detail) New Assets Acquired | New Liabilities Assumed (In detail) | (In detail) Liabilities Liquidated | Assets Realized (In detail) | (In detail) Supplementary Charges | Supplementary Credits (In detail) | (In detail) Liabilities Not Liquidated | Assets Not Realized (In detail) | (In detail) Gain on Realization | Loss on Realization ------ | ------ | ====== | ====== Assets to be Realized | Liabilities to be Liquidated (Balance brought down) | (Balance brought down)

REALIZATION AND LIQUIDATION STATEMENT—IMPROVED FORM =================================+============================= Assets Taken Over | Liabilities Assumed (Original and after-acquired) | (Original and after-acquired) (In detail) | (In detail) Disposition of Liabilities | Disposition of Assets (A full accounting for all | (A full accounting for all values assumed as above, | the values taken over as per contra) | above, per contra) ------ | ------ | ====== | ====== | Operations of the Trustee: | Operations of the Trustee: Expenses | Income (In detail) | (In detail) | Values Continued or Returned | Values Continued or Returned to the Owner: | to the Owner: Assets | Liabilities (In detail) | (In detail)

In the first example, which may be termed the usual form, the net balance of the account indicates the profit or loss incurred in winding up the business. If the values used as the basis for the statement are those of the statement of affairs, this profit or loss is in addition to the expected loss shown by the deficiency account. If, however, the book values are used as the basis for the statement, the profit or loss will be the net profit or loss on the entire realization and liquidation. Under the new and second form a full accounting is made for the value at which every asset is brought into the statement so that a separate figure of profit or loss is not shown excepting in so far as that is made a part of the operating section of the statement. Sometimes a third form is used which is not a formal statement but consists rather of the auditor’s working sheet. In this, columns are used to show the assets taken over by the trustee; the new assets acquired by him; the realization of the assets; the losses incurred on realization; the net assets remaining to be realized or to be returned to the owner; a similar statement in columnar form showing the liabilities to be liquidated; the full or partial liquidation of the liabilities; and the portion turned back to the owner or continued for further liquidation.

Supporting Schedules

Where the first form of the realization and liquidation statement is made use of, the profit or loss as shown by that statement should be explained by means of a supporting statement known as the realization and liquidation profit and loss account in which will be shown the losses on realization of the assets and any other items which have entered into profit or loss as shown by the realization and liquidation statement. Another schedule known as the trustee’s cash account is also usually presented. In this appears a more or less summarized statement of cash receipts and disbursements, indicating the main lines of activity of the trustee and their results.

The Question of Cash

It is sometimes maintained that inasmuch as cash is a realized asset it has no place in the realization and liquidation statement. Accordingly, under that theory the cash appears only in the trustee’s cash account. There is a good reason, however, for the insistence of some that the realization and liquidation statement should show all the assets taken over by the trustee or receiver and a full accounting for them. Therefore, the cash taken over by the trustee and all subsequent cash acquired by him must be shown in the realization and liquidation statement and fully accounted for as disbursed or still on hand. Inasmuch as the statement has no foundation in practice, it has no standardized form and therefore such matters of opinion will largely be left to the individual student except so far as the force of logic may in the course of time indicate the best method of treatment.

The Handling of Valuation Reserves

In both the statement of affairs and the realization and liquidation statement the handling of valuation reserves presents some difficulty. Either they must be included among the liabilities, which is awkward inasmuch as they cannot be shown as belonging to any of the classes of creditors, or the asset value as set up in the Book Value column must be the value after deducting the reserve therefrom. This latter method, which seems to present the least difficulties and raise the fewest objections, is the one followed here.

Illustration of Realization and Liquidation Statement

Problem. The Kay Corporation became embarrassed because of the tying up of current funds in fixed properties. A friendly receiver was appointed to operate the plant until the assets could be realized upon sufficiently to reduce the most pressing of the claims against the insolvent corporation. At the time the receiver took possession, the balance sheet of the company showed as follows, in summarized form:

KAY CORPORATION BALANCE SHEET =================================+============================== Assets | Liabilities and Capital | Cash $ 4,000.00 | Notes Payable $ 80,000.00 Accounts Receivable 120,000.00 | Accounts Payable 110,000.00 Merchandise 60,000.00 | Accrued Expenses 14,000.00 Other Property 500,000.00 | Bonds Payable 200,000.00 | Capital Stock 250,000.00 | Surplus 30,000.00 ---------- | ----------- $684,000.00 | $684,000.00 =========== | ===========

A summary of the receiver’s transactions showed that he made sales of $131,000, of which $51,000 were for cash. He purchased $70,000 worth of merchandise for which he paid $12,500 cash, $25,000 in notes of the corporation, and the rest was carried on account. He bought other property for $20,000, giving therefor $10,000 cash and $10,000 notes. He collected $100,000 cash from customers and wrote off $25,000 as uncollectible. Other property carried on the books at $75,000 was sold for $69,000 cash. He collected from rentals $1,000. Selling expenses amounted to $10,000 and the receiver’s administrative expenses were $7,500, both of which were paid. Of the liabilities he liquidated $70,000 of notes payable and $100,500 of accounts payable. All the accrued expenses were paid. The inventory of merchandise was $20,000 when the receiver turned the property back to the owners.

Set up a realization and liquidation statement and receiver’s cash summary to show the receiver’s stewardship and result of his operations.

Solution

KAY CORPORATION REALIZATION AND LIQUIDATION ACCOUNT ===========================+===========+==============+============= | Original |Acquired under| Total | | Receivership | ---------------------------+-----------+--------------+------------- Assets Taken Over: | | | Cash | | | (see Receiver’s | | | Cash Account) |$ 4,000.00| $221,000.00 | $225,000.00 Accounts Receivable | 120,000.00| 80,000.00 | 200,000.00 Merchandise | 60,000.00| 70,000.00 | 130,000.00 Other Property | 500,000.00| 20,000.00 | 520,000.00 |-----------| ------------ | ------------ |$684,000.00| $391,000.00 |$1,075,000.00 |===========| ============ | ============ | | | | Liquidated| Continued | +-----------+--------------+------------- | | | Disposition of Liabilities:| | | Notes Payable |$ 70,000.00| $ 45,000.00 | 115,000.00 Accounts Payable | 100,500.00| 42,000.00 | 142,500.00 Accrued Expenses | 14,000.00| | 14,000.00 Bonds Payable | 200,000.00| 200,000.00 | | | | | | | | | | +-----------+--------------+------------- |$184,500.00| $287,000.00 |$1,546,500.00 +===========+==============+============= Operations of the Receiver:| | | Expenses: | | | Merchandise originally | | | taken over | $60,000.00| | Purchases | 70,000.00| $130,000.00 | | ----------| | Merchandise Returned | | | to Owner | | 20,000.00 | | | ----------- | Cost of Goods Sold | | $110,000.00 | Profit on Sales | | | (carried down) | | 21,000.00 | | | ----------- | | | $131,000.00 | | | =========== | Selling Expenses | | $10,000.00 | Expenses of Receiver’s Adm.| | 7,500.00 | Losses on Realization: | | | Accounts Receivable: | | 25,000.00 | Other Property | | 6,000.00 | $48,500.00 | | ========== | =========== | | | $48,500.00 +===========+==============+============= Values Returned to Owner: | | | Cash | | $ 500.00 | Accounts Receivable | | 75,000.00 | Merchandise | | 20,000.00 | Other Property | | 445,000.00 | | | ------------ | | | | $540,500.00 | | +=============

KAY CORPORATION REALIZATION AND LIQUIDATION ACCOUNT (Continued) ===============================+===========+============+============= | | Acquired | | Original | under | Total | |Receivership| +-----------+------------+------------- Liabilities Assumed: | | | Notes Payable |$ 80,000.00| $35,000.00| $115,000.00 Accounts Payable | 110,000.00| 32,500.00| 142,500.00 Accrued Expenses | 14,000.00| | 14,000.00 Bonds Payable | 200,000.00| | 200,000.00 | | | |-----------|------------|------------- |$404,000.00| $67,500.00| $471,500.00 |===========|============| |Disposed of| Continued | |-----------+------------| Disposition of Assets: | | | Cash (see Receiver’s | | | Cash Acct.) |$224,500.00| $ 500.00| 225,000.00 Accounts Receivable: | | | Amount Collected $100,000.00| | | Loss on Bad Debts 25,000.00| 125,000.00| 75,000.00| 200,000.00 -----------| | | Merchandise: | | | Sold for (see next | | | section) $131,000.00| | | Profit on 21,000.00| 110,000.00| 20,000.00| 130,000.00 -----------| | | Other Property: | | | Sold for $69,000.00| | | Loss on 6,000.00| 75,000.00| 445,000.00| 520,000.00 ----------|-----------| -----------|------------- |$534.500.00| $540,500.00|$1,546,500.00 |===========| ===========|============= Operations of the Receiver: | | | Income: | | | Sales | | $131,000.00| | | | | | | | | | | | | | | -----------| | | $131,000.00| | | ===========| Profit on Sales | | | (brought down) | | | $21,000.00 Rental | | | 1,000.00 Decrease in Value of | | | Business under | | | Receivership | | | 26,500.00 | | | | | | ---------- | | | $48,500.00 |===========|============| =========== Values Returned to Owner: | | | Notes Payable | | $ 45,000.00| Accounts Payable | | 42,000.00| Bonds Payable | | 200,000.00| | | ----------| | | | $287,000.00 | | | ===========

RECEIVER’S CASH ACCOUNT ===================================+================================ Balance Taken Over by | Purchase $ 12,500.00 Receiver $ 4,000.00 | Other Property 10,000.00 Sales $ 51,000 | Selling Expenses. 10,000.00 Accts. Rec. 100,000 | Receiver’s Other Property 69,000 | Administration 7,500.00 Rentals 1,000 | Accrued Expenses 14,000.00 -------- | Notes Payable 70,000.00 Cash Acquired under | Accounts Payable 100,500.00 Receivership 221,000.00 | Balance Returned to | Owner 500.00 ----------- | ----------- $225,000.00 | $225,000.00 =========== | ===========

Comments on Problem. Under the method of solution presented here, it will be noted that the trustee is held to an accounting for both the original assets which have been turned over to him, and all new assets acquired during the course of his receivership. Inasmuch as all income items, usually from sales and, in this case, from rentals also, are reflected in the assets acquired under the receivership, the receiver is thus charged with the income received by him.

In rendering his accounting for the assets acquired, he must make a full accounting for all values turned over to him. Accordingly, in the “Disposition of Assets” section are shown not only the amount realized from the sale of the assets, but also the loss incurred in their sale. This makes possible the tying up of the assets accounted for with the value at which they were turned over to the receiver. It is to be noted that in the case of merchandise there is a profit on sales and not a loss. This is shown by setting up the merchandise disposed of at its sales figure—as is also indicated in the next section below under the head of “Operations of the Receiver: Income”—and deducting from it the profit made as shown by the next section contra under the head of “Operations of the Receiver: Expenses.” The difference between these two figures of merchandise at sales price and the profit on the merchandise gives the value of the merchandise with which the receiver is charged. By showing in parallel columns the values disposed of and the values still on hand, the final column accounts for the full value with which the receiver has been charged contra.

As a supplement to his accounting for the assets and liabilities, the receiver’s expenses and income are incorporated as a part of the statement. This is done not with the idea that he is to be charged with the one and credited with the other, for the principles of debit and credit, as stated above, have little logical application to the statement, but in order to bring onto the face of the statement informational data which are essential to an intelligent reading of his accounting.

The difference between the two sides of this section of the statement—in this case $26,500—is the decrease in net worth of the business during the period of the receivership. This figure is capable of proof by comparing the net worth of the business as originally turned over to the receiver with the net worth as turned back by him. In the one case it is $280,000, as shown by the difference between total assets of $684,000 and liabilities of $404,000. In the other case it is $253,500, as shown by the difference between the total assets of $540,500 returned to the owner and the total liabilities of $287,000 turned back.

When this information is given in the one statement, the latter becomes somewhat complex, but by careful analysis all the information desired can be secured from it and the attached receiver’s cash summary.

Uses to which Realization and Liquidation Statement May be Put

The realization and liquidation statement is frequently used also to analyze the activities of a receiver in equity. Where such is the case, the final section of the statement shows the assets and liabilities returned to the business at the close of the term of the receivership. The statement is sometimes used also to summarize by instalments a trustee’s activities, in which case at the end of the first period (at which time the realization and liquidation have been only partially completed) the final section of the statement will be the inventories of the assets yet to be realized and the liabilities yet to be liquidated which are carried over to the second instalment period. The statement for the second instalment period follows exactly the lines of that presented for the first period.

It should be understood always that the statement has no basis in practice, is purely theoretical, and any discussion of it is largely academic. It is presented here only because it is so frequently met in the formal examinations for the C. P. A. certificate.

LIQUIDATION OF A PARTNERSHIP BY INSTALMENTS

Nature of the Problem

In connection with the problem of realization and liquidation, a similar problem is sometimes met upon the voluntary dissolution of a partnership. This, as stated in Volume I, Chapter XLIV, is briefly:

Where the process of liquidation is of long duration, the partners may desire to receive what is due them by instalments rather than wait until the termination of proceedings and receive their respective shares in one amount. If the profit and loss sharing ratios of the partners are the same as their capital ratios, no trouble will be encountered in making the liquidating dividends on capital account as the dividends will be in the profit and loss sharing ratio. Trouble is encountered, however, when the two ratios are different inasmuch as it is not known at the time the various instalments, except the last, are made what the expenses and losses will be in the end. Because of the fact that these expenses and losses are shared in a different ratio from the capital ratios, their capital ratios are constantly changing after the losses and expenses to be borne by the various partners are charged in each case. Liquidating dividends are always made on the basis of capital investment ratios rather than profit and loss ratios. By this is meant simply that after all expenses and losses have been determined and charged to the partners in their profit and loss sharing ratios, their capital accounts show their respective interests in the business, and upon dissolution payment must be made to them in accordance with the showing of their capital accounts. Where, however, payment is made in instalments, neither the capital ratio nor the profit and loss sharing ratio, if these are different, gives the correct basis for making the distribution of the instalment. If payment of the instalments is made on some arbitrary basis or on the ratio of the profit and loss or of their capitals, it may result in an overpayment of some of the partners and an underpayment of others. Accordingly, the only safe method of handling the situation is to pay the first instalments to those partners whose capital ratios are in excess of their profit and loss ratios until their capitals are reduced to the point where the capital ratios of all the partners are the same as their profit and loss ratios. Thereafter further instalment payments are made in the profit and loss ratio, not because it is the profit and loss ratio but because now the capital ratios are the same as the profit and loss ratios so that whatever loss or expense must ultimately be cared for will automatically be distributed to the partners’ accounts in this way.

The solution of the problem is perhaps best handled, at the time of the first instalment, by deducting the amount of the first instalment from the total net capitals of the partners at that time. This leaves the capital remaining after payment of the instalment. A distribution of this net remaining capital is made in the profit and loss ratio. A comparison of the former capital to the credit of each partner with his new capital as derived by means of the distribution just made in profit and loss ratio indicates the share each partner is to receive of the first instalment. If the first instalment is sufficiently large to adjust the partners’ capital ratios to their profit and loss sharing ratios, no trouble will be experienced with future instalments. However, it very frequently happens that the first instalment is not sufficiently large to adjust the capitals to the profit and loss sharing basis. To do this would require the contribution of additional capital by those partners whose capital ratio is less than their profit and loss ratio, and it is doubtful if such a contribution would ever be made. Accordingly, it becomes necessary to distribute the instalments only to those partners whose capital ratios are in excess of their profit and loss ratios.

A new problem is met here, namely, the determination of the respective shares of the deficiency which must be borne by partners sharing the first instalment. How this is to be treated can perhaps be seen best in the illustrative problem on page 654. There it is seen that with the distribution in profit and loss ratio of the capital remaining after the first instalment, a deficiency of $6,000 arises representing the amount of C’s capital deficiency. This $6,000 must be borne by A and B and their shares therein are based on their relative profit and loss sharing ratios. Since A bears 25% of the profits or losses and B 35%, A should bear ⁵/₁₂ of C’s capital deficiency and B ⁷/₁₂—amounting to $2,500 for A and $3,500 for B. This reduces their shares in the first instalment to $3,000 each, as shown in the columns headed “Actual Distribution.” Similarly, the second instalment still results in a capital deficiency for C of $2,700 which must be borne by A and B in the amounts indicated. The third instalment is sufficiently large to give all of them something and at the same time reduce their capital ratios to a profit and loss sharing ratio. Thereafter all instalments are distributed on the profit and loss sharing basis.

After the final instalment is distributed, it will be noted that a net loss results on liquidation of $20,000 which is distributed automatically to the partners in the sums of $5,000 to A, $7,000 to B, and $8,000 to C, which represent their profit and loss sharing ratios. In conclusion it should be said that the problem is theoretical and academic and will perhaps seldom, if ever, be met in practice because of the objections which the partner whose account shows a deficiency would raise to non-participation in all instalments until his capital deficiency had been eliminated. It may be said that where such objections are raised the only course of the liquidating partner or agent is to refuse distribution of any instalment until a sufficiently large sum has accumulated to place the partners’ capitals on a profit and loss sharing basis. Such is the exact situation in strict theory. In practice, however, any agreement which the partners might make as among themselves would have to be carried out by the liquidating partner and would, of course, protect him in case of ultimate overpayment to any of the partners.

Illustration of Liquidation by Instalments

To illustrate the liquidation of a partnership by instalments, a typical problem is appended shown in summarized form.

Problem. A, B, and C, sharing profits in the ratios of 25%, 35%, and 40% respectively, decide to dissolve partnership and distribute the net assets by instalments as realized. A balance sheet as on the date of dissolution showed net worth of $100,000, in which A’s interest was $30,000, B’s $40,000, and C’s $30,000. The liquidator distributed a first instalment of $10,000, a second instalment of $8,250, a third instalment of $15,000, a fourth instalment of $16,750, and a final instalment of $30,000. Show the shares which each of the partners will have in the various instalments.

Solution

========================+==============++========================= | Net || A, 25% | Capital ++------------+------------ | of the firm ||Theoretical | Actual | ||Distribution|Distribution +--------------++------------+------------ Original Capital | $100,000.00 || $30,000.00 | $30,000.00 First Instalment | 10,000.00 || | | ------------ || | Net Capital | $90,000.00 || 22,500.00 | | || ---------- | | || $ 7,500.00 | Instalment Deficiency | || | to be borne by A & B | || 2,500.00 | 5,000.00 | || ========== | ---------- | || $25,000.00 | $25,000.00 2nd Instalment | 8,250.00 || | | ------------ || | Net Capital | $81,750.00 || 20,437.50 | | || ---------- | | || $ 4,562.50 | Instalment Deficiency | || | to be borne by A & B | || 1,125.00 | 3,437.50 | || ========== | ---------- | || $21,562.50 | $21,562.50 3rd Instalment. | 15,000.00 || | | ------------ || | Net Capital | $66,750.00 || 16,687.50 | 4,875.00 | || ---------- | ---------- | || | $16,687.50 4th Instalment | 16,750.00 || | 4,187.50 | ------------ || | ---------- Net Capital | $50,000.00 || | $12,500.00 Final Instalment. | 30,000.00 || | 7,500.00 | ------------ || | ---------- Net Loss on Liquidation | $20,000.00 || | $5,000.00 | ============ || ========== | ========== ========================+==============++========================= | Net || B, 35% | Capital ++------------+------------ | of the firm ||Theoretical | Actual | ||Distribution|Distribution +--------------++------------+------------ Original Capital | $100,000.00 || $40,000.00 | $40,000.00 First Instalment | 10,000.00 || | | ------------ || | Net Capital | $90,000.00 || 31,500.00 | | || ---------- | | || $ 8,500.00 | | || | | || | Instalment Deficiency | || | to be borne by A & B | || 3,500.00 | 5,000.00 | || ========== | ---------- | || $35,000.00 | $35,000.00 2nd Instalment | 8,250.00 || | | ------------ || | Net Capital | $81,750.00 || 28,612.50 | | || ---------- | | || $ 6,387.50 | | || | Instalment Deficiency | || | to be borne by A & B | || 1,575.00 | 4,812.50 | || ========== | ---------- | || $30,187.50 | $30,187.50 3rd Instalment. | 15,000.00 || | | ------------ || | Net Capital | $66,750.00 || 23,362.50 | 6,825.00 | ------------ || ---------- | ---------- | || | | || | $23,362.50 4th Instalment | 16,750.00 || | 5,862.50 | ------------ || | ---------- Net Capital | $50,000.00 || | $17,500.00 Final Instalment. | 30,000.00 || | 10,500.00 | ------------ || | ---------- Net Loss on Liquidation | $20,000.00 || | $7,000.00 | ============ || ========== | ========== ========================+==============++========================= | Net || C, 40% | Capital ++------------+------------ | of the firm ||Theoretical | Actual | ||Distribution|Distribution +--------------++------------+------------ Original Capital | $100,000.00 || $30,000.00| $30,000.00 First Instalment | 10,000.00 || | | ------------ || | Net Capital | $90,000.00 || 36,000.00| | || -----------| | ||[78]$6,000.00| | || ===========| | || | Instalment Deficiency | || | to be borne by A & B | || | | || | ---------- | || $30,000.00| $30,000.00 2nd Instalment | 8,250.00 || | | ------------ || | Net Capital | $81,750.00 || 32,700.00 | | || -----------| | ||[79]$2,700.00 | || ===========| Instalment Deficiency | || | to be borne by A & B | || | | || | ---------- | || $30,000.00| $30,000.00 3rd Instalment. | 15,000.00 || | | ------------ || | Net Capital | $66,750.00 || 26,700.00| 3,300.00 | ------------ || -----------| ---------- | || | | || | $26,700.00 4th Instalment | 16,750.00 || | 6,700.00 | ------------ || | ---------- Net Capital | $50,000.00 || | $20,000.00 Final Instalment. | 30,000.00 || | 12,000.00 | ------------ || | ---------- Net Loss on Liquidation | $20,000.00 || | $8,000.00 | ============ || ===========| ===========

[78] Represent capital deficiencies at the time of the 1st and 2nd instalments.

[79] Represent capital deficiencies at the time of the 1st and 2nd instalments.

APPENDIX A

PRACTICE WORK FOR STUDENT—FIRST HALF-YEAR

Instead of the student’s practice work appearing at the close of each chapter of the text as in Volume I, it has seemed best in this volume to place this material in a separate appendix at the end of the text because of the impracticability of dividing the text matter into uniform sections with one or two chapters constituting a lesson assignment. In some classes more practice work may be undertaken than in others. The practice work is, however, laid out in fairly uniform portions and it is expected that the student will be able to handle one practice assignment for each hour of class work. Thus, if the lecture period is of two hours’ duration, two assignments of work should be set.

The practice work is given in three parts. Appendix A will be found to contain sufficient material for the first semester of approximately 30 hours of lecture work. This appendix, in the main, is comprised of a formal set of accounts relating to a manufacturing corporation, to be worked out with suitable blanks. A few miscellaneous problems bearing particularly on some portions of the text are also provided. Appendix A should be covered in connection with the first twenty-seven chapters of the text.

Appendix B contains a series of well-graded problems more or less closely connected, illustrating, by means of its method of keeping accounts, the growth of the business. Single entry is changed to double entry, a simple trading business into a complex manufacturing concern, and many of the problems peculiar to such types of business organization are incorporated. Some unrelated problems illustrating special forms of statements, combinations, capitalization, and the consolidated balance sheet are also included.

Appendix C contains a group of unrelated, miscellaneous problems, taken mostly from C. P. A. examinations. These can be used to supplement the assignments from Appendices A and B and to give variety to the work during succeeding years.

I

PROBLEMS

1. J. B. Rogers and B. R. Jay, owners of similar businesses, agree to consolidate under a partnership agreement whereby each turns over his business as it stands, subject to the liabilities shown, and the deficient partner contributes sufficient cash to equalize their capitals. Rogers’ standing is: cash $750; merchandise $3,900; notes receivable $1,000, with interest accrued on same $10.25; accounts receivable $750, estimated as worth $725; furniture $975; notes payable $1,000, being his personal non-interest bearing note at 60 days discounted at 8% with 20 days yet to run; accounts payable $325. Jay’s standing is: cash $365; merchandise $4,500; accounts receivable $1,350, guaranteed as good; furniture $825; delivery equipment $325, valued at $300; accounts payable $265; notes payable $1,200, with accrued interest of $8.69; salaries earned but unpaid $50. The furniture in each case is taken in at its face value.

Make the opening journal entry and balance sheet for the new firm. Make journal entries for each partner to close his old set of books.

2. From the following information take a trial balance, make closing journal entries and summary statements as of December 31.

Notes receivable on hand $3,000; accounts receivable $7,500; notes payable $2,100; accounts payable $4,600; real estate $6,000; plant and machinery $8,000; rent and taxes $600; general expense $2,000; salaries $1,500; wages $600; freight $150; duty $200; cash on hand $150; cash in bank $1,800; bad debts written off $140; goods on hand at beginning of year $9,500; purchases $26,000; sales $40,000; interest paid $210; furniture $600; Jas. Buckham, partner, invested $10,000, withdrew $1,450; E. J. Cockburn invested $14,000, withdrew $1,300; the merchandise on hand is valued at $9,000; rent unpaid $250; insurance unexpired $140; interest accrued on notes receivable $25; wages accrued $115. Allow 10% depreciation on plant and machinery, and 12½% on furniture. Estimate losses from bad debts as 5% of accounts and notes outstanding. Losses and gains are divided ⁴/₇ to Cockburn and ³/₇ to Buckham. Interest on capitals at 6% is to be allowed.

3. At the end of the first year of a partnership, Wilson has an interest of $18,000 and Peters of $9,000, each drawing profits in proportion to his capital.

They decide to admit Johnson into the partnership, selling him a one-quarter interest, valuing their good-will at $3,000. Under the conditions named, in what two ways may Johnson secure his interest? What will be the amount of his investment in each case?

Instructions

Problem 1. The student is referred to Volume I, pages 458-459, where a similar problem is illustrated.

Problem 2. See Volume I, pages 285-286.

II

PROBLEMS

1. The Ibex Manufacturing Co. is incorporated with an authorized capital stock of $500,000 common and $250,000 6% preferred; $150,000 of the preferred is subscribed for and paid in full. One-half of the common is subscribed for and 50% paid in, the balance to be paid in five monthly instalments. The remaining preferred stock is later subscribed for at 101 and 50% paid, and half of the remaining common is subscribed for at 90 and paid in full. After operating for six months the remaining common is sold at 102 to provide funds for enlargement, one-half paid in cash and the balance in one month. Balance of preferred subscriptions are paid in cash. Show all the above transactions by means of journal entries.

2. At the close of the first year, the Ibex Manufacturing Co., being short of ready funds and not desiring to extend its credit further, secures from its stockholders a donation of $50,000 common and $10,000 preferred, one-half of which is immediately sold at 90 and 101 respectively. At the end of the second year the remainder of the donated stock was disbursed to the stockholders as a dividend, net profits for the year amounting to $45,000. Journalize all the above transactions, showing ultimate disposition of the working capital.

3. The Smith Brooks Publishing Co. has a capital stock of $750,000, of which one-third is 6% cumulative preferred stock. The company has a surplus of $65,000. It has an outstanding bond issue of $200,000 at 4½% interest. The profits for the year are $61,392.75. No profits have been distributed for three years. The directors pay the bond interest, declare a 3% dividend on common, and carry $7,500 to the sinking fund. Bring all of the above onto your books.

4. A corporation has been formed with an authorized capital stock of $200,000, one-fourth of which is 7% cumulative preferred. The entire issue of preferred is subscribed for at par and 50% paid in. When the balance is paid, one share of common is to be given as a bonus with every five shares of preferred. The promoter of the company is given $15,000 in common for his services. The company paid cash $250 for a set of stock records; $25 for corporate seal; $500 for lawyer’s fees in incorporating; $250 for state charter, and $375 for sundry expenses in organizing. $75,000 of the common stock has been subscribed for at par to be paid in five monthly instalments. The balance has been paid on the preferred stock and three instalments on the common. Make journal entries covering the above transactions.

Instructions

For the opening entries of a corporation, the student is referred to Volume I, Chapter XLIX, in addition to Chapter I of the present volume.

Problem 1. Make entries covering the five monthly instalments.

Problem 2. Assume that no preferred dividend was paid during the first year.

III

PROBLEMS

1. Draw up a form of voucher check suitable for a professional man.

2. Draw up a form of voucher check suitable for a trading concern.

3. Draw up a form of voucher register for a manufacturing concern desiring to segregate manufacturing, trading, and general expenses under which there are twelve, ten, and fifteen subdivisions of expense, respectively. Provide for other possible expenditures. Treat purchase discounts as a reduction of cost price.

4. Using the voucher register you drew up for Problem 3, from your own data make at least one entry in each column and three in the Sundries column. Show the register footed, closed, and posted.

5. What change would you make in the form of a voucher register in order to treat purchase discount as a financial management item?

6. Using your own data for a purchase ledger in which there are at least six open accounts, show the entries necessary to close it and open a voucher register to take its place.

Instructions

See Chapter II where all these points are discussed.

IV

PROBLEM

Caxton & Dolton began business January 1, 1916. Caxton invested $12,000, and Dolton invested $11,000. May 1, 1916, Caxton withdrew $3,000, and Dolton invested $1,000. July 1, 1917, Evans was admitted to the partnership, investing $8,000. October 1, 1917, Evans invested $4,000 more, and Dolton withdrew $2,000. July 1, 1918, Dolton and Evans purchased Caxton’s interest in the business. On that date their books showed the following financial condition: cash $19,364.50; merchandise $17,500; notes receivable $10,000; accounts receivable $8,945; interest receivable $248.50; real estate $6,500; accounts payable $14,000; notes payable $5,130; interest payable $167.40; accrued expenses $325.60. For the purpose of the sale good-will was estimated at $5,000; depreciation on real estate 5%; bad debts at 3% of the outstanding notes and accounts. Each partner was to share in profits on the basis of capital and the length of time the capital was invested. Of the purchase price of Caxton’s share, Dolton and Evans were to pay such amounts respectively as would make their new capitals equal. Set up the partners’ ledger accounts and show all entries to them in order to take effect of all the above data.

Instructions

For explanation of this method of sharing profits, see Volume I, pages 281-284.

V

PRACTICE DATA

This set contains material for the student’s practice work in keeping the records of a corporation engaged in trading and manufacture. Two blank books will be used for the record. Of the “Journals,” pages 1-32 comprise the general journal; pages 34-44 the cash book; pages 45-48, the sales journal; page 49 the sales returns and allowances journal; page 51 the purchase journal (to be used for the month of September only); and pages 54-57 the voucher register (to be used after the purchase journal is discontinued). Pages 58-60 are to be used for the record of continuous trial balances. Of the “Ledger” blank, pages 1-44 comprise the general ledger; pages 45-51 the sales ledger; and pages 52-56 the purchase ledger. Column headings for the different journals are given in the blanks.

It is expected that the student has already acquired correct habits of the daily posting of customers’ and creditors’ accounts. In addition to a training in some peculiarities of manufacturing accounts, the purpose of the course is to give the student practice in handling some of the larger problems of accounting which are not of daily occurrence. For the first few assignments considerable detail is given to provide a necessary minimum of practice in the summarization and posting of the different books of original entry. After this the ordinary transactions are given in condensed form to save unnecessary repetition and burdening the student. In the use of the analytical general journal, the student must be very careful to make entries in the proper column, as otherwise trouble will be experienced with the controlling accounts. (See Volume I, pages 410, 430, and 431.)

Open the following accounts in the various ledgers as indicated. The numeral preceding the account title indicates the ledger folio on which the particular account is to be opened.

GENERAL LEDGER—Give one-third page to each account except Notes Receivable, Trade Debtors, Merchandise Inventory, Notes Payable, Vouchers Payable, and Subscribers, for each of which allow 4 additional lines, shortening the allowance for the account next following in each case.

1. Drew National Bank 1. Petty Cash 1. Sinking Fund Trustee 2. Notes Receivable 2. Notes Receivable Discounted 2. Notes Receivable Special 3. Trade Debtors 3. Reserve for Doubtful Accounts 3. Accounts Receivable Special 4. Prepayment on Purchases 4. Merchandise Inventory 4. Raw Materials Inventory 5. Goods in Process Inventory 5. Plant and Sundry Assets 5. Jackson, Edwards, Hansen, Vendors 6. Delivery Equipment 6. Depreciation Reserve Delivery Equipment 7. Patterns 7. Depreciation Reserve Patterns 8. Furniture and Fixtures 8. Depreciation Reserve Furniture and Fixtures 9. Power Equipment 9. Depreciation Reserve Power Equipment 10. Factory Buildings 10. Depreciation Reserve Factory Buildings 10. Tools 11. Machinery 11. Depreciation Reserve Machinery 11. Factory Land 12. Patents and Trade-Marks 12. Good-Will 12. Organization Expense 13. Notes Payable 13. Vouchers Payable 13. Boston Office Company 14. Dividends on Common 14. Dividends on First Preferred 14. Dividends on Second Preferred 15. Purchase Money Mortgage on Machinery 15. Bonds Payable (Authorized Issue $20,000)[A] 15. Discount on Bonds 16. Subscribers 16. Call No. 1 16. Call No. 2 17. Capital Stock Subscriptions 17. Capital Stock Common (Authorized Issue $100,000)[80] 17. Capital Stock First Preferred (Authorized Issue $50,000)[81] 18. Capital Stock Second Preferred (Authorized Issue $25,000)[82] 18. Discount on Stock 18. Treasury Stock 19. Surplus 19. Donated Working Capital 19. Sinking Fund Reserve 20. Manufacturing 21. Profit and Loss 22. Desks and Tables Sales 22. Desks and Tables Sales Returns and Allowances 22. Bookcases and Filing Cabinets Sales 23. Bookcases and Filing Cabinets Sales Returns and Allowances 23. Sundry Office Supplies Sales 23. Sundry Office Supplies Sales Returns and Allowances 24. Knoxfraud Sales 24. Knoxfraud Sales Returns and Allowances 24. Desks and Tables Purchases 25. Bookcases and Filing Cabinets Purchases 25. Sundry Office Supplies Purchases 25. Raw Materials Purchases 26. Knoxfrauds Manufactured 26. In-Freight and Delivery 26. Receiving and Shipping Room Expense 27. Direct Labor 27. Indirect Labor 27. Factory Supplies 28. Light, Heat, and Power 28. Building Maintenance and Repairs 28. Machinery Repairs 29. Assembling and Setting Up Expense 29. Depreciation 29. Sundry Factory Expense 30. Royalties 30. Experimental Expense 31. Salesmen’s Salaries 31. Salesmen’s Commissions 31. Salesmen’s Traveling Expense 32. Delivery Expense 32. Warehouse Expense 32. Warehouse Rent 33. Sundry Selling Expense 33. Advertising 34. Office Salaries 34. Stationery and Printing 34. Telephone, Telegraph, and Postage 35. Sundry Office Expense 35. Insurance 35. Taxes 36. Rent 36. Interest and Discount 36. Collection Expense 37. Bond Interest 37. Sales Discount 37. Bad Debts 38. Purchase Discount 38. Rent Income 38. Commission Income 39. Loss from Sale of Power Equipment 39. Fire Loss 39. Strike Costs 40. Damage Claims 40. Damage Claims Reserve

SALES LEDGER—Allow one-third page to each account.

45. Smith Brooks Stationery Co. The Brush Co. The Kistler Stationery Co. 46. C. F. Hoeckle Office Supply Co. John Bach & Sons T. J. Stewart Office Specialties Co. 47. Saxon Edwards 47. T. C. Macie & Co. The Alexander Jacobs Co. 48. Field & Co. Sundry Customers 49. Salesmen Advances New Method Manufacturing Co. General Ledger Adjustment

PURCHASE LEDGER—Allow one-third page to each account.

52. P. J. Johnson Mills Co. B. F. Brainard & Co. Jackson City Supply Co. 53. F. C. Good Rubber Co. 53. B. A. Franklin Press Brickley Desk Co. 54. R. M. Goddard Furniture Co. City of Hoboken

[80] The account title may be written just as given or, better, the parenthetical part may be put on the small half-line space immediately below the title line as that is usually ruled. (See ruling at top of any ledger page.)

[81] The account title may be written just as given or, better, the parenthetical part may be put on the small half-line space immediately below the title line as that is usually ruled. (See ruling at top of any ledger page.)

[82] The account title may be written just as given or, better, the parenthetical part may be put on the small half-line space immediately below the title line as that is usually ruled. (See ruling at top of any ledger page.)

The column headings for the different books are given in the blanks with a few exceptions. The fourth columns of the sales and sales returns and allowances journals are left blank. The student should write in here “Sundry Office Supplies.” This will be used till October 31, 1916, at which time it will be necessary to write in its place, “Knoxfrauds.” The heading for voucher register, column No. 5, which is left blank, must be written in as above, “Sundry Office Supplies Purchases,” for use until October 31, when “Raw Materials Purchases” will be substituted.

Messrs. Stanley Jackson, J. T. Edwards, and P. Hansen, on September 1, 1915, made application as incorporators to the Secretary of State for a certificate of incorporation authorizing the Acme Office Furnishings Co. to transact a general business of all kinds in trading, manufacturing, and printing, as principals or as agents, to acquire and trade in real estate, patents, trade-marks, licenses, and the like, and to act as promotion and financial agents. The customary certifications were made, the organization tax of $50 was paid, and the certificate duly issued. The authorized capital stock was $100,000, divided into 1,000 shares of common stock only, of par value $100 each. Subscriptions at par to capital stock had been made as follows:

Stanley Jackson 225 shares J. T. Edwards 162 ” P. Hansen 113 ” T. J. Noble 100 ” A. H. Lawrence 75 ” H. C. McCullough 50 ”

At the first meeting of the incorporators and subscribers, after the adoption of a set of by-laws and organization thereunder, a proposal of sale made by the Jackson, Edwards, Hansen firm of their business and good-will at a stated figure of $50,120.97 was referred to the board of directors for their consideration and investigation, with authority to act. After looking over the properties, all of which it was found would be advantageous to the company, the proposal was accepted and transfer was made. A committee from the board was appointed to make a careful appraisal of the purchased properties and report as soon as possible. Accordingly, on September 15, the following report of valuation was made and accepted and authority given for the opening up of a set of accounting records with the stated values of the properties. The services of a public accountant were secured to plan and install a system that would meet the needs of the proposed business and to open the books.

The properties acquired were: cash $5,269.14; accounts receivable, as per schedule following, $10,125.61; notes receivable $1,250; desks and tables inventory $15,694; bookcases and filing cabinets inventory $18,392; sundry office supplies inventory $8,196.27; rent prepaid $125; insurance unexpired $95.36; delivery equipment $492.50; store furniture and fixtures $526; office furniture and fixtures $274; good-will $4,500.

The liabilities assumed were: accounts payable, as per schedule following, $10,126.73; notes payable $4,692.18. Upon the guaranty by Jackson, Edwards, Hansen of the accounts and notes receivable taken over, the company assumed the contingent liability on notes receivable under discount amounting to $250. No cognizance was taken of prepaid discount.

Payment was made to Jackson, Edwards, Hansen by the cancellation of indebtedness on their subscription contracts in the amounts severally shown, and in cash for the balance (distributed in the ratio of their subscriptions)—Jackson $54.44, Edwards $39.19, and Hansen $27.34.

A. H. Lawrence and H. C. McCullough on September 20 paid in cash 75% of their subscriptions, the balance due in 30 days. Certificates of stock, properly executed, were issued September 20 to all the above-mentioned parties, except Noble, in the amounts of their subscriptions.

Open the books and prepare a balance sheet of the company according to the data given.

Instructions

The fourth method illustrated in Volume I, pages 454 and 457, is to be used for opening the books.

Record the cash payment of organization tax as on September 1.

The purchase of the Jackson, Edwards, Hansen business is to be recorded under date of September 1, making use of the accounts “Jackson, Edwards, Hansen, Vendors” and “Plant and Sundry Assets.” Upon receipt of the appraisal committee’s report, bring the detailed assets and liabilities onto the books. It is to be noted that only one Inventory account is carried, in which the detail must be shown, using one line for each kind of commodity. Bring the discounted note on the books. This is not included in the amount given for notes receivable outstanding.

In a small corporation with stock closely held, certificates are sometimes issued although not yet fully paid for.

VI

PRACTICE DATA

The following schedules support their respective titles found among the assets and liabilities taken over and appraised by the Acme Office Furnishings Co.:

ACCOUNTS RECEIVABLE

Smith Brooks Stationery Co., June 24, $750; July 7, $100; August 22, $113.14; 2/10 $963.14

The Brush Co., May 20, $825; August 15, $216.69; 2/10, 1/30 1,041.69

The Kistler Stationery Co., April 18, $1,000; June 15, $250; August 20, $317.40; 2/10 1,567.40

C. F. Hoeckle Office Supply Co., March 12, $1,000; July 18,$123.90 1,123.90

John Bach & Sons, June 13, $300; July 30, $119.36 419.36

T. J. Stewart Office Specialties Co., July 20, $319.45; August 12, $523.12 842.57

Saxon Edwards, February 10, $585; May 23, $206.75 791.75

T. C. Macie & Co., May 11, $115.10; June 21, $210.15; July 8, $450; August 25, $465.15; 2/10, n/30 1,240.40

The Alexander Jacobs Co., August 28, $362.25; 3/5, 2/10 362.25

Field & Co., June 15, $1,015.05; July 6, $250; August 24, $508.10; 2/10, n/30 1,773.15

ACCOUNTS PAYABLE

The P. J. Johnson Mills Co., January 15, $1,895.60; August 5, $736.15; 1/30 $2,631.75

B. F. Brainard & Co., April 18, $590.10; July 11, $802.15 1,392.25 Jackson City Supply Co., June 10, $512.60; June 25, $428.20; July 18, $622 1,562.80

F. C. Good Rubber Co., July 1, $175.19; August 13, $300; 2/10, 1/30 475.19

B. A. Franklin Press, May 2, $850; June 22, $262.15 1,112.15

Brickley Desk Co., March 8, $912.50; May 6, $1,500; August 16, $540.09; 2/10, 1/30 2,952.59

NOTES RECEIVABLE

John Bach & Sons, dated July 3, for 3 months with interest at 6% and discounted at the Drew National Bank, August 16, at 8%. Face of note $250.

Andrew Jackson, dated August 25 for 60 days, without interest. Face $750.

The Brush Co., dated July 29, for 2 months, with interest at 6%. Face $500.

NOTES PAYABLE

No. 91, favor Second National Bank for $2,500, dated July 15, at 3 months, discounted at 6%.

No. 95, favor Brickley Desk Co. for $1,261.40, dated August 20, at 4 months, interest 6%.

No. 96, favor B. F. Brainard & Co., for $930.78, dated August 25, at 60 days, interest 6%.

The new system provides for a voucher register, but due to delay on the part of the printer, a creditors ledger will have to be opened temporarily. Open the sales and purchase ledgers according to the data given.

Instructions

Record the above data directly (i.e., not via journal) in the various ledgers. The details of the various sales and purchases should be shown, and not just the total to be charged or credited to each account.

VII

PRACTICE DATA

The board, having completed negotiations with T. J. Noble, authorizes the purchase from him of the whole of his right, title, and interest in a patent device known as Knoxfraud to be used for the purpose of preventing the raising of the amounts of commercial paper. The transfer is made, including the trade-mark covering “Knoxfraud,” and payment to Noble is made by the cancellation of 90 shares on his subscription contract and full-paid stock is issued him therefor. Make the entry under date of September 20.

In order to avoid detail, all additional customers will be handled under a collective account in the sales ledger called “Sundry Customers.” Transactions will be grouped and summarized wherever possible. Make record under proper dates. (Figures at beginning of paragraphs signify September dates.)

September 1. Received check for $311.05 from Kistler Stationery Co. in payment of their bill of August 20, $317.40, less $6.35 discount.

3. Alexander Jacobs Co. paid their bill of August 28, $362.25 less $10.87 discount. Sold the Brush Co. at 2/10, n/30, desks and tables $875.40, and bookcases $469.75.

4. Drew petty cash check for $150 and placed it in petty cash drawer in charge of bookkeeper. Field & Co. paid their bill of August 24, $508.10 less $10.16 discount, and $500 on account.

5. Paid P. J. Johnson Mills Co. bill of August 5, $736.15 less discount $7.36, and $500 on account. Smith Brooks Stationery Co., paid their bill of August 25, $113.14 less $2.26 discount. T. C. Macie & Co. paid their bill of August 25, $465.15 less $9.30.

6. Bought of R. M. Goddard Furniture Co. at 1/30, n/60, desks and tables $5,912.60, bookcases $3,190.10, and office supplies $837.40. Sold C. F. Hoeckle Office Supply Co. n/30, desks $1,512.75, filing cabinets $647.80, office supplies $215.69.

8. C. F. Hoeckle Office Supply Co. paid $750 on account.

9. Paid B. F. Brainard & Co. bill of April 18, $590.10. Sold T. C. Macie & Co. at 2/5, 1/10, tables $1,575.50, filing cabinets $440.25, office supplies $175.30.

11. Paid Jackson City Supply Co. bill of June 10, $512.60.

12. Sold C. F. Hoeckle Office Supply Co. at 1/30, n/60, tables and desks $1,895, bookcases $625.30, office supplies $110.85.

13. Paid F. C. Good Rubber Co. bill of August 13, $300 less $3 discount. Jno. Bach & Sons paid $250 on account. The Brush Co. paid their bill of September 3, $1,345.15 less $26.90 discount.

15. Paid Brickley Desk Co. bill of August 16, $540.09 less $5.40 discount, and bill of March 8, $912.50 less special discount of $12.50 in consideration of giving our note No. 1, for $1,500 at 6%, payable in 6 months, in settlement of bill of May 6, $1,500. Brush Co. paid bill of August 15, $216.69 less $2.17 discount. Sold Jno. Bach & Sons at 2/10, n/30, desks $1,680, filing cabinets $725.90, office supplies $240.60.

16. Bought of P. J. Johnson Mills Co., at 2/10, n/30, tables $3,085.95, bookcases and filing cabinets $5,293.85, office supplies $1,750.90.

18. T. J. Stewart Office Specialties Co. paid their bill of July 20, $319.45. Sold Alexander Jacobs Co., at 1/30, n/60, desks $1,465.85, bookcases $625.95, office supplies $145.60.

19. T. C. Macie & Co. paid their bill of September 9, $2,191.05 less $21.91 discount.

21. Sold Saxon Edwards at 2/5, 1/10, tables and desks $1,327.85, bookcases $842.60, office supplies $222.60.

24. Sold Field & Co. at 1/30, n/60, tables and desks $1,825, bookcases and filing cabinets $735, office supplies $246.

25. Saxon Edwards paid on account $500.

26. Bought of B. F. Brainard & Co., at 1/30, n/60, desks $4,675, filing cabinets $5,080, office supplies $1,280. Jno. Bach & Sons paid bill of September 15, $2,646.50 less $52.93 discount. Paid P. J. Johnson Mills Co. bill of September 16, $10,130.70 less $202.61 discount.

Instructions

For the transactions of September, the cash disbursements journal will be operated as a full posting medium, i.e., all charges for cash paid out will be posted from it.

VIII

PRACTICE DATA

(Figures at beginning of paragraphs signify September dates.)

September 27. Sold Smith Brooks Stationery Co. at 2/5, 1/10, tables and desks $1,200, bookcases and filing cabinets $1,150, office supplies $175.

28. Paid B. A. Franklin Press bill of May 2, $850.

29. Brush Co. paid their note of July 29, $500 with interest $5. The board of directors authorized the purchase of a piece of land lying outside the city limits, with good shipping and warehouse facilities, to be used as a site for a factory for the manufacture of Knoxfrauds, paying the Hoboken Development Co. $10,000 cash (with the current year’s taxes of $75 unpaid and due the City of Hoboken, February 1, 1916), and $125 to J. N. Hicks for fees in connection with special search of title and recording of deed. Plans and specifications which Noble had had prepared six months ago when negotiations with him had been opened by Jackson in behalf of the Jackson, Edwards, Hansen firm were adopted and ordered, placed with contractors for bids to be received not later than October 6, the board reserving the right to accept any or reject all bids.

30. Sold Brush Co. at 2/5, 1/10, tables $1,475.80, bookcases $723.85, office supplies $340. Paid salesmen’s salaries $2,500; commission to salesmen $500; salesmen’s traveling expense $1,500; in-freight and delivery $525.69, delivery expense $200; rent September 15 to October 15, $250; receiving and shipping room expense $150; sundry office expense $100.25; office salaries $600; advertising $275; petty cash voucher $137.10, of which $45.50 was for telegraph, telephone and postage, $50 for office stationery, $25 for sundry selling expense, and $16.60 for sundry office expenses. Cash sales for the month were: office supplies $1,325.40, bookcases $2,150, desks and tables $4,250.

Summarize and post completely all books of original entry. (See Volume I, page 431, for general journal summary.) Take a trial balance, recording it in the first two columns on pages 58-60, “Journal Blank.” Enter all accounts—whether needed for this trial balance or not—in the order in which they are carried in the general ledger. Leave bottom and top lines free for totals and forwarding where necessary.

Instructions

September 29. Record the accrued taxes on land in the general journal as a liability to the City of Hoboken.

30. Distribute the cash sales through the sales journal, entering only the total for all departments in the cash book.

IX

PRACTICE DATA

The directors plan to keep sufficient funds on hand to take advantage of all discounts offered on purchases. All invoices will therefore be entered “net” in the Vouchers Payable column of the voucher register. Extension will be “gross,” however. Postings to Purchase Discount account will be made from the voucher register. Purchase Discount column in the cash book will be used as a memo column of discounts actually taken. The difference between the totals of the purchase Discount columns in voucher register and cash book at the end of a month (or other posting period) shows the amount of unearned discount on that date. This should always be checked against the discounts entered in detail in the voucher register, for the unpaid vouchers as shown in Unpaid Vouchers column of the register. (Figures at beginning of paragraphs signify October dates.)

October 1. Delivery of the voucher register having been made, your accountant closes the purchase ledger and opens the voucher register, transferring the balances thereto. The Kistler Stationery Co. presented their bill for $150 ($95.50 for stock books, records, etc., and $54.50 for stationery and printing). Paid New York Novelty Works $15 for corporate seal. Paid Northwestern Fire Insurance Co. $125 for 1-year policy on stock of goods.

3. Sold Jno. Bach & Sons at 2/10, n/30, desks $1,755, bookcases and filing cabinets $658.90, office supplies $140. In order to raise money for the purpose of building and equipping the Knoxfraud factory, the board of directors authorized the sale of the rest of the unsubscribed stock at not less than 95. Accordingly subscriptions were received from A. J. Scobey for 90 shares at 96, from A. K. Ladd for 125 shares at 95, and from J. B. Gaynor for 60 shares at 97. One-half is received in cash, the rest due on October 25. Certificates of stock are issued the new stockholders.

4. Smith Brooks Stationery Co. paid their bill of September 27, $2,525 less $50.50 discount.

5. The bank notified you John Bach & Son’s note for $250, dated July 3, for 3 months at 6% and under discount with them since August 16, has gone to protest; you took up the note, drawing your check in favor of the Drew National Bank for $256.25 including protest fees, and notified John Bach & Sons. Paid R. M. Goddard Furniture Co. bill of September 6, $9,940.10 less $99.40 discount.

6. Bought of Jackson City Supply Co. at 1/30, n/60, office supplies $3,028.95. Sold T. C. Macie & Co. at 2/5, 1/10, desks $1,685, bookcases $642, office supplies $156. Paid Hoboken Electric Co. light and power bill for September, $50 ($30 was for sign display).

7. The bids for the construction of the factory were opened and all found to exceed the architect’s estimate by $10,000 or more. It was accordingly decided to reject all bids and construct the factory upon their own responsibility, retaining I. M. Builder as supervising architect and appointing J. T. Noble as purchasing agent and general superintendent during construction. All funds from the sale of stock were ordered placed under a Building Fund account in the Drew National, subject to drawing by Hansen in payment of all bills when passed for payment by Edwards and Noble. The transfer of funds was accordingly made. Alexander Jacobs returned desks and tables $465.85 of their purchase of September 18. Brush Co. paid their bill of September 30, $2,539.65 less $50.79 discount. C. F. Hoeckle Office Supply Co. paid their bill of September 6, $2,376.24.

8. Drew check for $500, advances to salesmen, which the bookkeeper charged to an account entitled Salesmen’s Advances opened in the customers’ ledger. Paid N. G. Goodman, accountant, $250 for services, in connection with installation of the system of accounts.

9. Sold Kistler Stationery Co. at 1/30, n/60, tables and desks $1,858.95, bookcases and cabinets $720, and office supplies $248.

10. Took at cost price, furniture from stock for store and office (desks and tables, $150 for office and $300 for store; bookcases and filing cabinets, $175 for office and $75 for store).

11. Bought from the New Model Truck Co., delivery trucks for $3,000, giving our note with 6% interest at 6 months for $2,500 and $500 cash.

12. Sold C. F. Hoeckle Supply Co. at 1/30, n/60, tables and desks $1,625, bookcases and cabinets $720, and office supplies $140.

13. Received J. T. Noble’s demand note without interest for $1,000 in payment of balance of subscription contract. The C. F. Hoeckle Office Supply Co. paid bill of September 12, $2,631.15 less $26.31 discount. T. C. Macie & Co. paid their bill of October 6, $2,483 less $49.66 discount.

15. Sold Alexander Jacobs Co. at 1/30, n/60, desks $1,825.85, bookcases $642, office supplies $240. Paid note No. 91, $2,500. Jno. Bach & Sons paid their bill of 10/3, $2,553.90 less $46.98 discount, and an allowance of $50 on bookcases and $155 on tables account of damage.

16. Bought of R. M. Goddard Furniture Co. at 1/30, n/60, tables and desks $9,425, bookcases and cabinets $8,227, office supplies $1,025.

18. Sold T. J. Stewart Office Specialties Co. at 2/5, 1/10, desks and tables $1,878, bookcases and cabinets $580, office supplies $249.

19. Alexander Jacobs & Co. paid their bill of September 18, $1,771.55 less $17.72 discount.

20. T. J. Stewart Office Specialties Co. returned office supplies $49.50 and cabinets $75, of their purchase of October 18. A. H. Lawrence and H. C. McCullough paid $3,125, the balance on their subscriptions.

24. Andrew Jackson paid his note of August 25, $750. The T. J. Stewart Office Supplies Co. paid their bill of October 18, $2,582.50 less $51.65. Sold Field & Co. at 1/30, n/60, desks and tables $1,789, bookcases and cabinets $680, office supplies $348. Sold Sundry Customers at n/30, desks and tables $1,100, bookcases and cabinets $860, office supplies $350. Paid note No. 96, $930.78 with interest $9.31.

25. A. J. Scobey, A. K. Ladd, and J. B. Gaynor paid the balance on their subscriptions, $13,167.50.

26. Bought from Brickley Desk Co. at 2/10, n/30, tables and desks $6,240, bookcases and cabinets $3,780. Paid B. F. Brainard & Co. bill of September 26, $11,035 less $100.35. R. M. Goddard Furniture Co. made us an allowance on purchase of October 16, of $200 on desks and $150 on cabinets due to latent defects.

27. Paid Kistler Stationery Co. bill of October 1, $150.

Instructions

October 1. See page 39 for method of transferring purchase ledger accounts to voucher register.

October 5. See Volume I, page 327, for handling Bach’s protested note. Here the record will be partly in the voucher register and partly in the general journal.

October 7. Where a special bank account is kept temporarily, oftentimes a separate cash book is used. One additional column on each side of the cash book will also serve to segregate the charges and credits to it. Here, since receipts are few, they will be entered in the regular bank column with an “X” placed in front of them to secure periodic analysis. All disbursements will be made by regular voucher check, but recorded in the first column of the cash disbursements journal instead of the regular bank column. Inasmuch as only the one account is kept on the ledger with the bank, postings to it will have to be made in two items—one the regular, the other the building fund—for both receipts and disbursements. An alternative method is to carry the detail of the account only in the cash book, posting only totals of all receipts and disbursements to the ledger bank account. However handled, the cash book should show, when balanced, the amounts in both funds and the trial balance should contain the same information.

To effect the transfer of cash to the Building Fund account at the bank, a regular voucher check is drawn to order of Building Fund account. This is distributed in the voucher register to Sundry columns as a charge to Voucher Payable and must be entered on both sides of the cash book but, of course, not posted.

October 8. Charge payment to Goodman to Organization Expense.

October 10. Distribute the merchandise taken from stock through the sales journal, with the necessary correcting entry in the general journal. (See Volume I, pages 423 et seq.) Since but one Furniture and Fixtures account is carried, the detail necessary for analysis must be shown in it just as with Merchandise Inventory.

October 11. The Model Truck Co. transaction must be split, the cash portion being recorded in the voucher register, the rest in the general journal. (See page 43 for method of handling notes payable under the voucher system.)

October 13. Certificate of stock is issued to Noble.

October 20. These receipts from subscribers are regular items.

October 25. These receipts from subscribers are building fund items.

October 26. The student will perhaps detect at once that the discount of $100.35 on the Brainard bill is incorrect. It is to be entered as given, however; correction will be made later.

X

PRACTICE DATA

October 30. Sold Jno. Bach & Sons at 2/10, n/30, tables and desks $1,465, bookcases and cabinets $456, office supplies $435. Sold Sundry Customers at n/30, desks and tables $1,800, bookcases and cabinets $620, office supplies $300. Cash sales for the month were desks and tables $3,500, bookcases and cabinets $2,832.60, office supplies $3,167.40. Office supplies drawn from stock for use by the office, $350. Pay-roll check on Building Fund carried $1,950.70 for excavating and foundation labor, Noble $200 salary, Builder $350 commission. Paid Hoboken City Hospital $50 bill for workmen injured during construction. Paid regular pay-roll $5,769 (salesmen’s salaries $2,650; salesmen’s commission $580; salesmen’s traveling expense $1,525.50; delivery men $250; receiving and shipping clerks $163.50; office salaries $600); N. Y. C. Ry., freight-in $631.72; N. Y. Paper Co. for sundry office expense $84.75; Ward & Gow Publicity Co. for advertising $280, and sundry selling expense $50.25; petty cash voucher $144.95, of which $50.75 was for telegraph, telephone, and postage, $5 to Bullinger Publicity Co. for entry in city directory, $62.50 for stationery and printing, $10 for credit information to R. G. Dunn & Co., $16.70 for sundry office expenses. Paid the Builders Testing Laboratories $50 for test of cement and concrete for use in factory construction. Paid J. P. Landown rent, October 15 to November 15, $250. Sundry Customers returned tables $150, bookcases $85, and sundry office supplies of $52.50 of their purchase of October 24 as not being what they had ordered; we returned bookcases $500 to the Brickley Desk Co. of our purchase of October 26, because of failure of patent doors to operate.

Summarize all the books of original entry and post completely. For method of summarizing the voucher register, see page 36. Extend into the Unpaid Vouchers column all unpaid vouchers as shown by the Manner of Payment column. Take a trial balance as of October 30, 1915, recording it in the third and fourth columns of pages 58-60 of the journals. Be sure to show the two balances for cash, the regular and the building fund.

When posting, make the sales ledger self-balancing and take a trial balance of it, recording it on page 61, journal blank. (See Volume I, page 420, for method of making ledger self-balancing.)

Verify the balance of Vouchers Payable account by checking against the Unpaid Vouchers column of the voucher register.

Instructions

Charge office supplies drawn from stock to Stationery and Printing.

Pay-roll checks are usually drawn to the order of treasurer or other company official. Make the necessary distribution in the voucher register.

Bookcases, $500, returned to Brickley Desk Co. are priced at billed price, i.e., the net credit allowed us will be $490 ($500 less 2%). Be careful to make the proper voucher register entry, as three columns are affected, viz., Vouchers Payable, Purchase Discount, and Bookcases and Filing Cabinets Purchases.

It should be noted that wherever an allowance is made, the figure given in the practice data will always be the gross figure, unless specifically stated otherwise.

Charge credit information cost to Sundry Office Expense.

XI

PRACTICE DATA

Make the following detailed entries for transactions with customers and creditors under the dates given:

November 2. Field & Co. gave their note for 1 year at 6% for $3,571.05 in payment of invoices of July 6, September 24, and balance June 15. Gave P. J. Johnson Mills Co. our note at 6 months for $1,462.59, which included $66.99 interest to date at 6% for balance of bill of January 15, $1,395.60.

3. Kistler Stationery Co. honored our sight draft for $1,250 payment of bills of April 18 and June 15.

4. Wrote B. F. Brainard & Co. claiming a $10 adjustment on account of overpayment on October 26 of bill of September 26, on which the discount allowed was $110.35.

5. Paid Jackson City Supply Co. bill of October 6, $3,028.95 less $30.29 discount. Gave Brickley Desk Co., our note for $9,329.60 at four months at 6% for bill of October 26, $10,020 less $190.40 discount and credit memo of October 30 for $500.

6. Field & Co. wrote stating that our monthly statement of account to them carried a charge for October 24 of $2,817, whereas their bill of that date carried $2,310. An investigation showed their contention correct, the error being due to a transposing of charges between them and Sundry Customers for sales on October 24 when the sales journal entry was made. The error was corrected and correct statements were sent out. The Brush Co. paid their bill of May 20, $825.

7. Received credit memo from B. F. Brainard & Co. for $10 in reply to letter of November 4.

10. Kistler Stationery Co. gave their note for 6 months at 6% for $2,826.95, payment of bill of October 9.

12. Jno. Bach & Sons paid their bill of October 30, $2,356 less $47.12. Saxon Edwards paid their bill of May 23, $206.75, and balance on February 10, $85. Paid B. F. Brainard & Co. bill of July 11, $802.15 less credit memo of November 7, $10.

15. Paid R. M. Goddard Furniture Co. bill of October 16, $18,677, less credit memo of October 26 for $350 and discount of $183.27. C. F. Hoeckle Office Supply Co. paid their bill of October 12, $2,485 less $24.85 discount.

18. Alexander Jacobs paid their bill of October 15, $2,707.85 less $27.08 discount.

21. Saxon Edwards paid their bill of September 21, $2,393.05.

24. Sundry Customers paid their bills of October 24, $2,529.50.

25. Field & Co. paid their bill of October 24, $2,310 less $23.10 discount.

27. T. C. Macie & Co. gave their note for $775.25 in payment of bills of May 11, June 21, and July 8.

30. Sundry Customers paid their bills of October 30, $2,720. C. F. Hoeckle Office Supply Co. paid their bill of July 18, $123.90, and balance on March 12, $250.

December 4. Paid Jackson City Supply Co. $1,050.20 for bills of June 25, and July 18.

9. Smith Brooks Stationery Co. gave their note for $873.15, including interest $23.15 on unpaid bills of June 24 and July 7.

13. T. J. Stewart Office Specialties Co. honored sight draft for bill of August 12, $523.12.

17. Offered Field & Co. a discount of $71.05 from the face of their note of November 2 if they would pay $2,000 cash and give a new note for $1,500 for the balance. Offer was accepted and cash and new note for $1,500 received on December 20. (In making adjustment take account of accrued interest on old note of $26.79.)

18. Paid F. C. Good Rubber Co. bill of July 1, $175.19.

20. Paid our note No. 95, $1,261.40, with $25.23 interest, held by the Brickley Desk Co.

23. Honored B. A. Franklin Press draft at sight for bill of June 22, $262.15. Bank’s statement of account showed charges of $1.25 and 75c respectively for collection of Kistler Stationery Co. draft of November 3, and T. J. Stewart Office Specialties Co. draft of December 13.

Instructions

November 2. Treat all sight drafts when honored as cash transactions.

November 6. Field & Co. adjustment is made in the general journal. Be careful to make entry in proper columns.

November 7. The $10 allowance made us by B. F. Brainard & Co. must be recorded in red in the voucher register close beside the next voucher which will be paid to Brainard—in this case the bill for $802.15 dated October 1. No entry will need to be made in the general journal to secure the proper posting of this item, as the entry in the voucher register is merely a memo to prevent overpayment at time of next settlement. (See page 40 for discussion of the problem of returns and allowances.)

December 17. Handle the Field & Co. note transaction with care. The discount is a charge to Interest and Discount.

December 23. Run the bank’s collection charges through on a voucher which must be recorded in voucher register and cash book.

XII

PRACTICE DATA

The following transactions took place during the remainder of the fiscal year which ended August 31, 1916, and are to be entered as of the given date:

January 3. A one year’s insurance policy at a cost of $250 cash was taken out on a stock of merchandise which had been removed to a warehouse, as stated below.

February 1. The accrued taxes of $75 at date of purchase of factory site were paid.

March 1. On account of the flourishing condition of the sales, an interim dividend of 4% was declared and paid. Noble’s was applied as a partial payment on his stock note.

June 15. The Boston Office Co. sent $5,000 of office specialties to be sold on a 5% commission basis for their account.

July 1. A statement of affairs was received from Jno. Bach & Sons showing their insolvency and copy of an agreement signed by several creditors to accept settlement of all claims on a 40% basis. Your attorney, having been unable to collect and having investigated, advised the acceptance by you of their offer. Accordingly on July 27, a check was received from Bach & Sons for 40% of the balance as shown by your books. (Charge Jackson, Edwards, Hansen with 60% of $169.36, the part guaranteed by them, and Reserve for Doubtful Accounts with 60% of $256.25.)

On August 15, 1916, the factory building was completed. The following expenditures had been made: for steel, concrete, brick and other materials $15,740.20; for labor of all sorts $11,579.35; for insurance, injuries incurred during construction, legal expense in defense, and interest on moneys borrowed for the building fund, $750; J. T. Noble’s salary $2,000; I. M. Builder’s fees and commission $1,113.51; and Builders’ Testing Laboratories $250. The factory was largely of concrete and numerous tests were necessary. Several purchases of cement had been returned as not being of the required standard. The company’s note for $10,000 had been discounted for $9,800 and the proceeds placed in the Building Fund to finance the undertaking. The $200 discount is included in the $750 mentioned above.

Noble reported that orders for machinery and equipment had been placed with sundry firms and that about three months would be required before the machinery could be placed and ready for operation as some of the machines were of delicate and complex construction and would require careful testing before acceptance. He suggested that orders for the raw materials used in the manufacture of the Knoxfraud be now placed to take advantage of a low market. Accordingly $10,000 worth was ordered, an advance payment of $2,500 being made on August 25 and charged to New Method Manufacturing Co. in the sales ledger to show our claim against them for the prepayment—the balance to be paid when delivery is made, not earlier than October 31.

Due to lack of floor space in the sales department and the necessity of carrying a large assortment of styles in stock at all times, on January 2, 1916, a warehouse was rented nearby for a monthly rental of $100 payable in advance. Under date of August 31, 1916, enter a payment of $900.

The receiving and shipping room quarters were also removed to the warehouse. On March 1, a portion of the warehouse was sublet at a monthly rental of $40 payable in advance. Enter a receipt of $280 under date of August 31, 1916. Services of A. Pinkerton for $20 a month beginning March 1 were secured to watch store, warehouse, and factory. Record on August 31, 1916, a payment of $120.

It was decided to close out the division of sundry office supplies and dispose of the balance on hand October 31 at a lump sum.

Instructions

February 1. Refer to Practice Data VIII for the original booking of this item.

March 1. Charge the interim dividend to Dividend account, since there is no Surplus on the books against which to charge it.

June 15. No entry will be made of the Boston Office Co. consignment. (A memo entry in the journal may be made, if desired. This would consist merely of a statement of the receipt of the goods, with no extension of amount into the money column.)

July 1. Handle the Jno. Bach bankruptcy with care. The basis for the entries indicated rests on the original sale agreement between the Acme Office Furnishings Co. and Jackson, Edwards, Hansen, Vendors. (See Practice Data V.)

August 15. Record the discounted note for $10,000 as usual. Be careful not to post the discount twice. All expenditures are cash items.

August 31. Charge A. Pinkerton’s salary to Warehouse Expense. This is not quite accurate, but sufficiently so.

XIII

PRACTICE DATA

In addition to the special data given in Practice Data XII, the following transactions in due course took place:

Make the record as of August 31, 1916 with summary entries.

SALES JOURNAL—Sales to Sundry Customers were: desks and tables $200,670.20, bookcases and filing cabinets $153,803.40, and sundry office supplies $16,115.26. Cash sales were: desks and tables $35,000, bookcases and filing cabinets $21,500, and sundry office supplies $2,825.15. Return sales and allowances to Sundry Customers were: desks and tables $4,240.15, bookcases and filing cabinets $4,250.65, and sundry office supplies $675.50.

CASH BOOK—Received: from cash sales as above; from Sundry Customers $269,359.50 less sales discount of $3,940.20; from notes receivable $5,000; from notes payable discounted $42,500 less $350 discount; from notes receivable discounted $15,000 less discount of $50. Disbursed for vouchers payable $359,720.40, of which $100 is chargeable to Building Fund (Noble’s salary).

JOURNAL—Gave our notes to Sundry Creditors for $8,500; received notes from Sundry Customers $25,200.50; notes receivable discounted were paid by makers at maturity $10,250; stationery was drawn from stock $250 and used for advertising purposes.

VOUCHER REGISTER—Bought desks and tables $99,842.95, bookcases and filing cabinets $73,758.15, and sundry office supplies $12,684.40. Purchases discount was $2,153.40; in-freight and delivery $3,740.28; receiving and shipping room expense $2,690.14; light, heat, and power $725.16; salesmen’s salaries $65,840.20; salesmen’s commissions $20,730.30; traveling expenses $42,420.70; advertising $12,280; sundry selling expense $940.03; delivery expense $7,280.90; warehouse expense $50; office salaries $11,600; stationery and printing $450; collection and exchange $30.05; interest and discount $1,096.27; sundry office expense $72.15; telephone, telegraph, and postage $475.03; notes payable $47,250.19; rent $3,250; power equipment $5,000; taxes $160.15; Noble’s salary for August $200. (Charge $100 to Factory Building and $100 to Power Equipment.)

Instructions

These transactions are listed in summarized form to avoid detailed entry and, at the same time, to provide the necessary volume of business. They are to be entered as indicated. Use as little space as possible.

SALES JOURNAL—Use 2 lines for the entries. Enter returns and allowances in their proper journal.

CASH BOOK—Be careful to indicate by some distinctive mark all interest and discount items recorded in the Sales Discount column. No purchase discount on paid vouchers is given inasmuch as the cash book record of it is merely a memo, although providing data for checking the amount of unearned discount at the close of a period. It will doubtless be found that in this summarized method of stating transactions much detailed information is omitted (because not absolutely essential), that would be available under ordinary conditions.

JOURNAL—Treat stationery taken from stock as a credit to Sundry Office Supplies Sales; this is not included in the sales journal data given above.

VOUCHER REGISTER—For the sake of saving space, run all these transactions through on one voucher, using just one line for the entry, except in Sundry column, where use as many as are needed. $100 of Noble’s salary comes out of building fund cash, as indicated on page 675.

XIV

PRACTICE DATA

Summarize the various books and post completely. Be careful, in summarizing, to show any extraneous items recorded, for the sake of convenience, in theoretically improper columns or books.

XV

PRACTICE DATA

Take a trial balance of the general and sales ledgers and record them as usual.

XVI

PRACTICE DATA

Draw up statements for the year, supporting both the profit and loss statement and the balance sheet by schedules. (See Volume I, pages 411-412 and 509-510, for suggestive forms and instructions as to methods of condensation of data.)

Take into consideration the following data:

Rent income received in advance $40; warehouse rent paid in advance $100; interest accrued on notes receivable $50; salesmen’s salaries accrued $420; salesmen’s commissions accrued $125; advertising bills unpaid $100; advertising paid in advance $250; stationery on hand $50.

Insurance: first policy, one year, bought October 1, cost $125, part unexpired $10.04; second policy, one year, bought January 2, cost $250, ⁴/₁₂ unexpired $83.33. Taxes for the year 1916, estimated $565.42, ⅔ used $376.95. Purchases discount not yet taken advantage of on unpaid vouchers, $475.

The Knoxfraud patent had 15 years to run when purchased. Write off ¹/₁₅ of its value, it being the policy of the company to maintain an experimental laboratory and so overcome any possible supersession. Write off organization expense and good-will 5% each. Create reserves for: furniture and fixtures 10%; delivery equipment 15%; doubtful accounts ½% on all sales gross. Take no account of depreciation on factory building or power equipment.

Inventories of stock-in-trade: desks and tables $4,943.86, bookcases and filing cabinets $1,521.31, sundry office supplies $3,197.20, total $9,662.37.

In-freight and delivery: charge $2,500 to Desks and Tables purchases, $2,100 to Bookcases and Filing Cabinets Purchases, $297.69 to Sundry Office Supplies Purchases.

Light, heat, and power: charge ¾ to Selling, ¼ to General Administrative.

Receiving and shipping room: charge ¾ to Shipping, ¼ to Receiving, of which 50% to Desks and Tables, 45% to Bookcases and Filing Cabinets, 5% to Sundry Office Supplies.

Rent: charge ⁴/₅ to Selling, ¹/₅ to General Administrative.

Insurance: charge $335.24 to Selling, $41.75 to General Administrative.

Taxes: charge all of the 1915 taxes ($160.15) Surplus.

Discount on stock: charge to Factory Buildings.

Instructions

Most of the above data are necessarily arbitrary, particularly the basis for distribution of the various expense items. For many such items, even in practice, a more or less arbitrary basis must be adopted. See Chapters III, XIV, and XXVII for a brief discussion of this point.

The student may object to the indicated methods of handling some of the items but is asked to make the record as suggested. Any necessary corrections will be made later.

Draw up all formal statements, for presentation to the instructor, on blank paper, letter size, i.e., 8½ x 11 inches.

XVII

PRACTICE DATA

Adjust and close the books in accordance with the information given in the preceding Practice Data XVI.

The student is referred, for illustration of the work of adjusting and closing the books, to Volume I, Chapters XXIX, XXX, and XLIII, and to certain portions of Chapters XIV and XIX of Volume II.

XVIII

PRACTICE DATA

The results for the year proving very unsatisfactory in comparison with the volume of business transacted, N. G. Goodman was retained to make an audit of the year’s operations in an effort to locate the trouble. In his report covering the audit, he called attention to the following items:

(a) In the Trade Debtors are included two charges, viz., advances to salesmen $500, and New Method Manufacturing Co. for purchases $2,500, which are in no sense charges to customers.

(b) In the Notes Receivable is included Noble’s note given in payment of the balance on his subscription to capital stock $1,000 but now reduced to $600 through the application of his March dividend as a partial payment. This does not belong in Notes Receivable account.

(c) There is on the books no record of the Boston Office Co. consignment received on June 15, 1916. Investigation showed that on July 2, a sale of $4,500 was made from the consignment and the balance was included in the Sundry Office Supplies Inventory, being there valued at $1,000. It was ascertained that the freight and cartage paid on the incoming consigned goods amounted to $25.12, and had been charged to the In-freight and Cartage account.

(d) The inadequacy of the purchases system was shown. Perhaps due to the fact that during the year the main stock was withdrawn from the store and the immediate supervision of the responsible head and placed in the warehouse, the stock had been allowed to run down so that it amounted at the close of the year to only $9,662.37—correct value being $8,662.37 when allowance for the inclusion of the Boston Office Co. consigned goods was made—as compared with $42,282.27 on hand at the beginning. Suggestion for the installation of a distinct purchasing department and the introduction of a stock record was made in order to keep track of the condition of the stock.

(e) The depreciation of good-will is to be reversed.

(f) The discount on capital stock, charged to Factory Building, is to be taken out and shown as a separate item under its own name.

(g) An analysis of the sales developed that: on desks and tables sales gross profit was 47%, and rate of turnover was 9+; on bookcases and filing cabinets gross profit was 38% and turnover 6.4+; and on sundry office supplies a gross loss of 17+% was sustained and the turnover was only 3+. Taken as a whole, the selling expense was too high, very probably due to salesmen’s abnormal traveling expenses and commissions. The present commissions policy was severely condemned as tending to an increase of sales without regard to the financial standing of the customer. For the purpose of establishing a consistent policy of passing on credits and following up collections, the installation of a department of credits and collections was advised.

(h) It was advised that the petty cash be taken out of the bookkeeper’s control.

(i) Of the 1915 taxes charged to Surplus, one-third should have been charged to Profit and Loss.

Make all of the entries necessary to adjust the books in accordance with the auditor’s suggestions. Post, close, and draw up corrected statements, including the adjustments to Surplus. Supporting schedules may be omitted; the condensed statements will be sufficient.

Instructions

Study carefully all the suggestions made by Goodman and determine the proper correcting entries. All necessary accounts have already been set up on the books.

The principles involved in suggestions (a) and (b) are covered in Chapter XII. For (c) see Volume I, Chapter L, and Volume II, Chapter XIII. Take cognizance of the accrued commission. For (e) see Chapter XVIII, and for (f) see Chapter XXI. For the surplus statement to show all adjustments made through it, see Chapter XXIII.

XIX

PRACTICE DATA

September 2, 1916, the remainder of the Boston Office Co. consignment was sold for $1,250 cash and our check sent for the balance due them. Desks and tables $575, and filing cabinets $250, were taken from stock for use in the factory. Additional benching and racks were bought for $450 cash. Shop and hand tools cost $875.25 cash.

September 10, 1916 a one-year fire insurance policy covering factory building and equipment was bought from the Northwestern Fire Insurance Co. for $584.68.

At a meeting of the directors and stockholders for the purpose of reviewing Goodman’s report and forecasting a policy for the coming year, the following items were thoroughly considered:

(a) In order to pursue a vigorous sales policy such as would now be necessary and along the lines suggested by Goodman, immediate purchases in large amounts would have to be made.

(b) The company’s credit, at the present time, with more than $70,000 of current payables outstanding, would not bear further expansion. Ready funds of at least $20,000 would have to be provided within the next month to take up outstanding notes and the more pressing bills, to say nothing of the amount needed to take advantage of all discounts offered on new purchases.

(c) The contracts entered into for purchases of machinery and raw materials would soon have to be fulfilled, requiring an additional sum of $20,000 to $25,000.

(d) In view of the policy previously determined to close out the division of sundry office supplies on October 31 and push with vigor the new Knoxfraud, a widespread advertising campaign was decided upon for the next six months in order fully to present the need for the new device and its merits. It was estimated that $15,000 or $20,000 would be required for this.

(e) The absolute necessity for additional capital was apparent. Before the company could hope successfully to secure subscriptions to a new issue of stock, not only would that stock have to be made attractive, but the company’s condition as to surplus would have to be improved. Accordingly, it was voted to donate 10% of the capital stock into the treasury and offer it for sale first to the present stockholders and then to the public at not less than 90. Then it was ordered that the capital stock be increased by the issuance of $50,000 of first preferred 6% cumulative, and $25,000 of second preferred 8% non-cumulative, both classes of stock to have further participation on the following basis:

In the event of dividends in excess of the requirements for the preferred stock and 6% on the common, the first preferred should share ⅓ and the common ⅔ of such excess for an additional dividend until they should have received in all an 8% dividend and so be placed on an equality with the second preferred. Of all further dividends the common was to share ¾ of the amount of such excess dividends, and the two preferred classes the other ¼ distributable between them in the ratio which the amount of each outstanding bore to the total of both classes outstanding. It was decided, at the time of the application for an increase of capitalization, to change the name of the corporation to the Knox-Davis Manufacturing Company.

The necessary legal requirements for increasing their capital having been met, the present stockholders took all the treasury stock at 90, and the two classes of preferred were entirely subscribed for at par, payable ½ down and the remainder subject to two equal calls at the end of 4 and 8 months respectively. Cash was received for treasury stock in full and for the preferred as indicated, i.e., for the ½ down in cash at the date of subscription. Permission was granted to change the name of the corporation as requested.

Make the entries to record the above data under date of October 25, 1916. (Charge the discount on stock against the surplus received from donation.) Transfer the cash balance in the Building Fund into the General Cash, there being no longer any need of the separation.

Instructions

September 2. Make careful calculation of the balance due Boston Office Co. Record in the general journal the stock drawn for factory furniture and fixtures, as a credit to proper sales account.

October 25. Transfer of the balance of Building Fund cash back to General Cash is effected in the same way as the original creation of the fund. Issue certificates of stock to new holders.

XX

PRACTICE DATA

By October 31, 1916, all of the sundry office supplies had been closed out for $2,000 cash.

The raw materials contracted and partially paid for on August 25, were received, and on November 10 a check for the balance due less 2% discount on the contract, was sent to the New Method Manufacturing Co. (Be sure to book the proper charge to Raw Materials.) Materials were insured for one year at a cost of $175 cash.

On November 30, the last of the machinery was received from the Harvey Machine Manufacturing Co. and installed. The invoice cost was $15,000, of which $12,000 was paid in cash and the company’s note secured by mortgage on the machinery was given for the balance. In-freight and delivery on the machinery amounted to $675.40, and placement expense (not including concrete platforms and piers which had been charged to the building at a cost of $750) amounted to $225, all of which were paid in cash. Noble’s salary for the three months while passing upon and superintending the placing and erection of machinery is to be charged $400 to Machinery and $200 to Power Equipment. The additional expenditure of connecting the machinery with the power—including shafting, belting, labor, etc.—amounted to $550.50 cash.

On December 2 an insurance policy for one year covering machinery was purchased for $275.40 cash from the New Jersey Mutual.

Full factory operations were commenced on December 1, 1916, and orders were taken for Knoxfrauds for delivery beginning with the first of the year.

It was determined to extend the current fiscal period and not close the books until December 31, 1917.

Call No. 1 on unpaid subscriptions to capital stock for one-half the outstanding was made on February 25, 1917.

The advertising campaign was producing results so that to fill orders the factory had to work two shifts of men beginning with March 1, 1917. As a result of seeming prosperity and a discontent engendered by labor leaders who had recently unionized the works, a demand for a 15% increase in wages was made and refused, resulting in a walk-out on March 30. A patrol against strike-breakers was established on April 2, after about one-third of the full complement of workers needed for operation had been secured. Some of these defected and the rest were quartered in the shops to prevent violence. After three weeks of partial operation at an increased expense of $1,500 directly attributed to the strike, one of the boilers exploded damaging the building and equipment, the resulting fire consuming supplies and damaging raw materials. An investigation placed the blame on a half-crazed workman whose sympathies were with the strikers. Hospital fees for injured workmen amounted to $500. (Record these two items as cash expenditures for the purposes named under date of April 20.) The insurance companies settled the losses as follows: the building and the power equipment on which the estimated damage was $3,500 were placed in complete repair; the estimated damage on materials, determined after an inventory and comparison with stock records, amounted to $4,000 and was covered by $3,200 insurance which was paid. In making the estimate, scrap value of damaged goods was placed at $1,000 but only realized $750 when sold; machinery costing $3,500 on November 30, with a scrap value of $500, realized on sale by the company $650, the insurance received being $2,000. (Depreciation on the machinery at the rate of 8⅓% annually on cost value is to be taken into account, and the portion of the unexpired insurance—roughly estimated at $150—now canceled by the payment of the insurance on both raw materials and machinery is to be considered in making charges to the Fire Loss account.) Additional loss and expense due to decreased production and cancellation of orders because of not being able to deliver goods when promised was estimated at $7,500. The strike was finally settled by granting a 5% increase in wages.

The directors had under consideration the incorporation with the Knoxfraud of a patent listing and adding device owned by J. Q. Osgood. In view of the need of some additional capital anyway due to the strike losses, it was decided to incorporate the new device now, since it would be easier to make the needed changes at this time than after operations had been resumed. Accordingly, a rearrangement of the machinery was necessary to make room for the new machinery and place it for proper routing of the product. This entailed a cash expenditure of $750 for the rearrangement, and $5,500 for new machines to replace those disposed of and to manufacture the new device. (Make the record as of April 30.) The contract entered into with Osgood was on a royalty basis per unit turned out by the machines and for one year’s time beginning May 1, 1917. The directors decided on a continuation of the advertising campaign. To provide funds for these purposes a bond issue was determined upon—$20,000 20-year 6%, interest coupons redeemable November 1, and May 1,—secured by mortgage on the factory and its equipment. The trust agreement provided for the payment at the close of each fiscal year of $750 out of profits into the hands of the Guaranty Trust Co. for investment in securities until a sinking fund sufficient to retire the bonds at their maturity shall have been established. $15,000 of the bonds were offered for sale and were purchased at 95 for cash except one purchase on a note for $950. The remaining $5,000 were held in the treasury until needed.

Record the above transactions as of the dates given—the bond transactions took place on May 1.

Instructions

October 31. The columns in sales journal, sales returns and allowances journal, and voucher register headed “Sundry Office Supplies,” will now be given the headings “Knoxfraud” for the first two journals, and “Raw Materials” for the voucher register.

November 10. A part of the charge to Raw Materials must be made in the general journal. “Prepayment on Purchases” account will be closed.

November 30. Record the note payable secured by mortgage under the title “Purchase Money Mortgage on Machinery.” Voucher the cash portion of this purchase of machinery. Transfer the cost of concrete platforms from Buildings to Machinery account. This had previously been charged to Buildings and is merely a transfer entry here. Run Noble’s salary through the voucher register as a cash transaction, making the proper distribution of it. The payment of $550.50 for connecting power is to be charged to Power Equipment.

April 20. Charge these two items as cash expenditures to Strike Costs. In accounting for the fire losses, clear the accounts of their original values by transfer to Fire Loss account (Raw Materials Purchases $5,000, and Machinery $3,500 less depreciation for 4⅔ months, i.e., from November 30 to April 20). Credit Fire Loss from the cash book with the insurance received and with the cash received from sale of scrap. Charge Fire Loss also with the canceled insurance premiums. Record all of this under date of April 20. (The student is referred to Chapter XXXII for a full treatment of fire loss adjustments.)

Indirect losses due to strike must not be brought onto the books.

No sinking fund entries will be made till the close of the fiscal year.

May 1. Handle the sale of bonds in cash book and general journal.

Treat the note received as a “Note Receivable Special.” No record will be made of the unissued bonds.

XXI

PRACTICE DATA

The remaining data for the 16 months ending December 31, 1917, have been summarized in most instances and were as follows: (In making record, use the dates given or December 31, where none are given.)

June 1. A dynamo costing $525 on August 31, 1916, was sold for $415 and a larger one purchased from the General Electric Co. at a cost of $975.50 installed. (Take into account depreciation at 12½% per annum.) Additional motor trucks were purchased from the New Model Truck Co. for $1,790. (Entry was made at $1,740, taking into account a special discount of $50 for payment within 10 days. Through oversight the voucher was not paid till July 1, thus losing the discount.)

June 25. Call No. 2 was made for the balance of unpaid subscriptions to capital stock.

VOUCHER REGISTER—Bought desks and tables $200,431.95, bookcases and filing cabinets $149,878.79, raw materials $62,749.63. Purchases discount was $4,290.89; in-freight and delivery $8,650; pay-roll, direct labor $99,475.50, indirect labor $11,900.17; engineers and firemen’s wages $5,125.67; building maintenance and repairs $200; machinery repairs $193.50; receiving and shipping clerks $1,550.20; assembling and setting up labor $500.80; salesmen’s salaries $173,790.25; traveling expense $91,475.89; salesmen’s commissions $79,612.40; delivery men $3,500; office salaries $15,900; patterns $1,250; factory work benches $75; experimental laboratory $2,500. Materials purchased for building maintenance and repairs $326.40, for machinery repairs $85, for patterns $550. Coal and water cost $11,193.40; sundry light, heat, and power expense $1,062.60; packing and shipping supplies $4,469.70; delivery expense, including motor-truck repairs and maintenance, $12,989.14; taxes for 1916 $585.43; factory supplies $1,124.17; sundry factory expense $750.28; royalties $875; insurance, including employers’ liability insurance for factory workmen, $2,277.45; warehouse expense $540; warehouse rent $850; sundry selling expense $2,196.40; rent $7,500; stationery and printing $2,310.17; telephone, telegraph, and postage $1,092.15; sundry office expense; $1,312.43; collection expense $1,025.43; interest and discount $902.20; bond interest $450; materials for laboratory $1,500; legal expense in defending patents $175; street and sewer improvement tax on factory site $525.60; advertising $123,470.10; notes payable paid $25,261.75; notes receivable discounted but protested and charged back, $1,260.50; advances to salesmen $1,500.

SALES JOURNAL—Sales to sundry customers: desks and tables $290,721.15; bookcases and filing cabinets $204,422.20, Knoxfrauds $351,622.50. Cash sales were: desks and tables $91,213.10, bookcases and filing cabinets $71,253.20, Knoxfrauds $124,121.25. Sales returns and allowances were: desks and tables $10,192.50; bookcases and filing cabinets $8,269.10, Knoxfrauds $21,569.65.

CASH BOOK—Received: from cash sales as above; from Sundry Customers $624,736.74 less sales discount of $15,962.14; from interest $750; from notes receivable discounted $19,260.25 less bank discount of $210.25; from notes receivable $10,192.60; from rent income $160—the sub-lease on the warehouse was canceled because the room was needed for increased stock; from first call on outstanding subscriptions to capital stock $18,250, from second call $18,000. Disbursed: for vouchers payable $1,005,833.95.

JOURNAL—Received notes from Sundry Customers $59,370.50. Gave notes to Sundry Creditors $45,000. Notes receivable discounted were paid by makers at maturity $12,379.60. Trade debts proved uncollectible from bankruptcy or other cause to the amount of $3,572.40.

Instructions

June 1. Charge the loss on sale of dynamo to Loss from Sale of Power Equipment. Accrued depreciation for 9 months must be taken into account. Run the neglected discount item through on a new voucher, making cross-reference to the original. Be sure to make proper distribution of it.

June 25. Call No. 2 is for $18,750.

Voucher Register. Make careful distribution of all items—particularly as between capital and revenue charges. Discounted notes receivable protested will be charged to Sundry Customers.

Journal. Make here also the entry necessary to complete the record of the discounted notes which went to protest, as indicated by the voucher register entry above.

XXII

PRACTICE DATA

Summarize and post the books and take a trial balance as of December 31, 1917. Record the trial balance in the usual place.

XXIII

PROBLEM

A trial balance taken from the general ledger of the Metal Bed Manufacturing Co. for December 31, 1917, showed as follows:

Bed Sales $325,198.67 Bed Sales Returns and Allowances $10,240.80 Bed Accessories Sales 192,460.90 Bed Accessories Sales Returns and Allowances 8,175.25 Raw Material Inventory 25,240.16 In-Freight and Drayage 1,460.24 Beds in Process 15,970.20 Finished Beds 42,490.70 Accessories Inventory 19,580.65 Direct Labor 35,918.60 Indirect Labor 10,372.40 Light, Heat, and Power 8,917.18 Manufacturing Expense 5,890.10 Rent 3,300.00 Machinery Repairs and Renewals 575.00 Raw Materials Purchases 175,460.18 Raw Materials Purchases Returns and Allowances 9,840.60 Accessories Purchases 95,640.81 Accessories Purchases Returns and Allowances 4,890.06 Advertising 4,800.00 Salesmen’s Salaries 13,690.75 Salesmen’s Commissions 4,610.15 Traveling Expense 10,111.25 Out-Freight and Shipping 790.20 Delivery Expense 3,816.25 Insurance on Sales Room Stock 475.00 Insurance on Factory Materials 820.00 Insurance on Buildings and Equipment 1,890.00 Miscellaneous Selling Expense 4,175.30 Office Salaries 15,210.40 Interest and Discount 3,620.55 Bank Expense 125.45 Office Furniture and Fixtures 1,240.00 Depreciation Reserve Office Furniture and Fixtures 620.00 Office Supplies 720.20 Miscellaneous Office Expense 1,810.65 Leasehold (99 years) 99,000.00 Extinction Reserve for Leasehold 24,000.00 Buildings 125,000.00 Depreciation Reserve for Buildings 50,000.00 Machinery 72,520.70 Depreciation Reserve for Machinery 21,490.16 Tools 5,140.17 Patterns 7,500.00 Depreciation Reserve for Patterns 5,405.14 Factory Furniture and Fixtures 8,100.00 Depreciation Reserve Factory Furniture and Fixtures 3,190.20 Sales Room Furniture and Fixtures 10,250.00 Depreciation Reserve Sales Room Furniture and Fixtures 4,330.10 Sales Discount 8,440.05 Purchases Discount 10,375.90 Good-Will 50,000.00 Accounts Receivable 110,472.05 Notes Receivable 5,640.10 Accounts Payable 62,490.35 Notes Payable 10,000.00 Mortgage Payable 15,000.00 Petty Cash 150.00 Surplus 150,154.24 Reserve for Doubtful Accounts 3,519.72 Capital Stock Common 100,000.00 Capital Stock Preferred 6% 50,000.00 Harriman National Bank 10,114.55 Common Dividend No. 37 2,000.00 Preferred Dividend No. 25 1,500.00 ------------- ------------- $1,042,966.04 $1,042,966.04 ============= =============

The company conducts a factory for the manufacture of metal beds. It deals also in mattresses, springs, bed furnishings, etc., which it buys ready-made and sells to the retail trade. Its two classes of sales, beds and accessories are kept distinct.

Draw up a balance sheet and profit and loss statement for the year, taking into account the following inventories and other adjustments:

Inventories: Raw Materials $31,216.15 Beds in Process 18,793.80 Finished Beds 31,470.95 Bed Accessories 24,640.10

Accrued Expenses: Direct Labor 690.20 Indirect Labor 325.00 Rent 300.00 Light, Heat, and Power 180.20 Advertising 590.00 Sales Commissions 319.40 Interest 150.00 Prepaid Expenses: Coal, Waste, Oil, etc. $125.00 Advertising 300.00 Office Supplies 75.00 Bank Discount 125.00 Insurance on Sales Room Stock 50.00 Insurance on Factory Materials 125.00 Insurance on Buildings and Equipment 256.40 Interest earned on Notes Receivable but not yet due 75.20

Depreciation is estimated as follows on a yearly basis: Office Furniture and Fixtures 8⅓% Factory Furniture and Fixtures 10% Sales Room Furniture and Fixtures 10% Buildings 2% Machinery 10% Patterns 20%

The leasehold was originally for 99 years of which 25 years have now expired. Bad debts are calculated as 2% of the accounts and notes outstanding. Tools now on hand amount to $4,800.25. In-freight and drayage is to be charged 55% to Factory and 45% to Selling. Light, heat, and power charge 90% to Factory, 9% to Selling, and 1% to Office. Rent, charge 60% to Factory, 35% to Selling, and 5% to Office. Insurance on buildings and equipment distribute according to the values invested, separating buildings’ values on the same basis as rent. Dividends No. 26 for 3% on preferred and No. 38 for 6% on the common are declared and paid.

Instructions

The leasehold was purchased for a lump sum with provision for the payment of a small annual rental in addition. The rent item on the books covers this charge. $1,000 a year is the amortization charge on the leasehold.

Insurance on buildings and equipment covers buildings, machinery, tools, patterns, and office, salesroom, and factory furniture and fixtures. Be careful to distribute this among the manufacturing, selling, and office sections of the profit and loss summary. Separate the asset values of these items, which show investment in the factory, the selling section, and the office section of the plant, and distribute the insurance on the basis of the investment shown.

Depreciation on buildings will be distributed also on the same basis as rent.

Dividends 25 and 37 have evidently been paid but not yet charged against Surplus. This is sometimes done when it is desired to charge an interim dividend against profits of the current year. In drawing up the balance sheet take cognizance of the fact that dividends 26 and 38 have also been declared and paid though not yet booked.

Support the balance sheet and profit and loss statement with the customary schedules. The “Cost of Goods Sold” schedule must in turn be supported by a schedule showing the “Cost to Manufacture.” As explained in Chapter III, in the cost of goods sold schedule the cost of goods manufactured—shown by the cost to manufacture schedule—takes the place of the item “Net Purchases” in a trading business. A typical form of manufacturing statement is shown below.

EXHIBIT B—SCHEDULE 1 COGSWELL & SONS, MANUFACTURERS

COST TO MANUFACTURE, FOR THE YEAR ENDING DECEMBER 31, 1917

FIRELESS COOKERS: Raw Materials: Inventory, January 1, 1917 $25,000.00 Purchases, Net $125,000.00 In-Freight and Cartage 5,000.00 130,000.00 ----------- ----------- $155,000.00 Less Inventory, December 31, 1917 28,100.00 ----------- Cost of Raw Materials Used in Manufacture $126,900.00 Direct Labor 178,600.00 ----------- Prime Cost $305,500.00 Factory Expenses: Indirect Labor $30,000.00 Light, Heat, and Power 20,000.00 Factory Supplies 5,000.00 Sundry Factory Expense 1,500.00 Machinery Repairs 750.00 Building Maintenance and Repairs 1,225.00 Depreciation 6,210.00 Insurance 850.00 Taxes 2,195.00 Royalties 15,276.00 83,006.00 --------- ----------- $388,506.00

Deduct, excess of: Goods in Process, December 31, 1917 over $40,210.00 Goods in Process, January 1, 1917 32,794.00 7,416.00 ---------- ----------- Cost of Finished Cookers $381,090.00 (carried to Schedule 2) ===========

As stated above, this “Cost of Finished Cookers” is carried to Schedule 2, “Cost of Goods Sold,” where it is combined with its initial and final inventories to develop the cost of the cookers sold during the period. With the exception noted, this schedule, for a departmental business, follows the forms already shown and will not be repeated here. The same thing is true of the other supporting schedules.

XXIV

PROBLEM

Using the information of Problem XXIII and the statements drawn up there, prepare adjusting and closing journal entries covering just the manufacturing activities of the business.

Instructions

It is desired here to give the student practice with the group of entries with which he is not yet familiar. The adjusting and closing entries covering the other activities of the business follow the methods already explained. In summarizing the manufacturing group of entries, the process is the same, in the main, as other summary entries. The exact entries necessary depend, of course, on the accounts carried and the way in which they are used. This applies particularly to the use of one or several different inventory accounts and the Goods in Process account.

To bring the goods in process inventory on the books requires a debit to Manufacturing and a credit to Goods in Process to clear it—i.e., Goods in Process—of the initial inventory, and then a debit to Goods in Process and a credit to Manufacturing to set up the present inventory. This secures the proper charge or credit, for the excess of the one inventory over the other, necessary to develop the correct cost to manufacture.

Where a Finished Goods account is carried, it is sometimes used as an inventory account, in which case the method of handling it is similar to that of Goods in Process excepting that the Finished Goods account is used in connection with the Profit and Loss (or Trading) account instead of the Manufacturing account. When Finished Goods account is used in this way, the balance of the Manufacturing account, i.e., the cost of goods manufactured, is transferred in toto to the Profit and Loss account in which the cost of the manufactured goods sold is developed. Where other commodities are dealt in, in addition to the manufactured product, this may result in an awkward and inconsistent method of developing the costs of the different commodities sold. This has sometimes led to the use of the Finished Goods account somewhat on the lines of a purchases account. To it the balance of the Manufacturing account is transferred, and the cost of finished goods sold is developed in it by bringing the two inventories into this account. This necessitates the use of a Finished Goods Inventory account in addition to Finished Goods account—or finished goods inventory may be set up in Merchandise Inventory account, where only one inventory account is carried. The cost of manufactured goods sold is then transferred from Finished Goods account to Profit and Loss account, where, together with the costs of the other commodities sold, it helps to effect the closing of the books.

In this problem use the Finished Beds account as an inventory account.

XXV-XXVI

PRACTICE DATA

Prepare a condensed balance sheet and profit and loss statement as of December 31, 1917, taking account of the following adjustments and inventories. Also draw up a statement of surplus for the 16 months of the current fiscal period.

Coal and Power Supplies on Hand $1,240.19 Packing Materials on Hand 340.20 Gasoline on Hand 125.00 Factory Supplies 100.00 Insurance Unexpired 540.23 Warehouse Rent Prepaid 150.00 Stationery on Hand 150.00 Experimental Laboratory Materials on Hand 425.00 Advertising Prepaid 500.00 Purchases Discount Not Yet Taken on Unpaid Vouchers 840.22 Advertising Unpaid 1,000.00 Direct Labor Accrued 1,793.75 Indirect Labor Accrued 225.33 Engineers and Firemen’s Wages Accrued 125.67 Receiving and Shipping Clerk’s Wages Accrued 75.50 Assembling and Setting Up Wages Accrued 15.00 Salesmen’s Salaries Accrued 2,524.50 Salesmen’s Commissions Accrued 1,360.18 Deliverymen’s Wages Accrued 67.50 Royalties Accrued 150.00 Rent Accrued 400.00 Interest Payable 17.25 Taxes on Factory Accrued 819.37 Taxes on Stock Accrued 395.62 Bond Interest Accrued 150.00

Inventories of stock-in-trade and raw materials were:

Desks and Tables $20,855.10 Bookcases and Filing Cabinets 17,671.40 Knoxfrauds, Finished 2,511.20 Raw Materials 15,241.92 Goods in Process 9,255.65

Calculate depreciation at the yearly rates given below. The balance in the account is to be used as the basis, reckoning for 16 months.

Power Equipment 12½% Machinery 8⅓% Factory Buildings 1½% Patterns 20% Patents ¹/₁₇ Delivery Equipment 15% Furniture and Fixtures, Factory 12½% Furniture and Fixtures, Store and Office 10% Organization Expense 5% of the original cost Tools Inventory $825.50

Allocate the following charges as indicated:

Insurance: $2,196.43 to Factory and $519.24 to Selling.

Taxes: $1,012.24 to Factory and $411.23 to Selling.

Receiving and shipping: ¾ to Shipping and ¼ to Receiving, of which 40% to Desks and Tables, 35% to Bookcases and Filing Cabinets, 25% to Raw Materials.

In-freight and delivery: $4,400 to Desks and Tables, $3,500 to Bookcases and Filing Cabinets, $750 to Raw Materials.

Rent: $6,400 to Selling, $1,500 to Office.

Light, heat, and power: 92% to Factory, 6% to Selling, 2% to Office.

Create a reserve for doubtful accounts of ½% of all gross sales for the period. It is decided to take into account as an additional expense chargeable to this period 1¼% of outstanding trade debtors for sales discounts that will probably still be taken advantage of.

Close Loss on Sale of Dynamo against Surplus.

Close Fire Loss and Strike Costs to Surplus.

In closing, bond discount is to be amortized on a straight line basis, i.e., ¹/₄₀ each half-year. Take account of accrued amortization for the two-month period since November 1.

The experimental laboratory has succeeded in securing a patent for a listing and adding device for use with the Knoxfraud, of much simpler operation and cheaper to manufacture, than the one on which royalty is being paid. Hence, when the royalty contract expires it will not be renewed. Capitalize the laboratory expense to date.

A very careful analysis of the advertising costs shows an expenditure of $78,445.25 above normal. It is decided to transfer this to Good-Will.

Claims for damage have been filed against the railways amounting to $1,025.10. (Bring this on to the books with an offsetting reserve of the same amount.)

A dividend of 12½% on the common is declared payable January 20, 1918.

Take into consideration the sinking fund requirements of the bond mortgage.

Instructions

On the condensed balance sheet, show all receivables (other than the claims against customers on note and open account) under the title “Other Accounts Receivable,” immediately following but separate from the current asset group. Carry all inventories under one title “Inventories.” All fixed assets, except the intangibles, show under the title “Plant and Equipment,” from which show deducted the total of the various depreciation reserves. List the intangible assets individually. Set up supporting schedules for all condensations effected. The profit and loss statement must have supporting schedules, also.

Although some inaccuracies result from using the bases indicated for the calculation of depreciation, they are insignificant. Note that the basis for writing down patents has been changed since the last period. This indicates a policy of intention to secure patented improvements on the various devices owned. (See Chapter XVIII for discussion of this point.)

Declaration of a dividend on common stock means, of course, that the required dividends on both issues of preferred have also been authorized. The student is required to calculate the rates on these.

XXVII-XXVIII

PRACTICE DATA

Adjust and close the books in accordance with the data given in assignments XXV-XXVI.

Treat the account “Knoxfrauds Manufactured” as a purchase account as explained in assignment XXIV.

Handle the estimate of 1¼% of trade debtors for expected sales discounts, as an accrued item in Sales Discount account.

There is no accrual on sinking fund provisions, inasmuch as the trust deed requires that payment out of profits be made at the close of the fiscal period and not at the time bond interest falls due.

The Knox-Davis blanks, with all statements, are due at the time of the last class period and must be turned in whether completed or not, if credit is desired for the course.

APPENDIX B

PRACTICE WORK FOR STUDENT—SECOND HALF-YEAR

In this appendix enough material is furnished for approximately 30 hours of classroom work. If more time is devoted to the work, this material may well be supplemented by drawing on Appendix C.

The student will find it convenient to have a supply of standard-ruled journal paper and of analysis paper—10- or 12-column—to be used for working sheets.

For all formal statement work prepared for presentation to the instructor, it is suggested that plain, unruled paper of uniform size (8½ × 11 inches, letter size) be used. The chief purpose of this second semester’s work is to give training in analysis—the ability to grasp the essentials of a given set of conditions and to see the significance and interrelations of the various parts. Next in importance to this is the ability to draw up a statement or statements which shall present clearly and in proper order the results of your analysis. The student should develop the habit of thinking clearly and setting forth conclusions in intelligent, clean-cut form. In ninety-nine cases out of every hundred, slovenly, sloppy work evidences a like characteristic of reasoning ability. If the course develops clear thinking and clean-cut presentation, it will have accomplished its two main purposes.

The problems have a more or less direct relation to Chapters XXVIII to XXXV of this volume, but of course they are not limited to the principles developed there. Many of the problems are somewhat closely connected and relate to each other while some are entirely disconnected. They are graded, proceeding from the simpler to the more difficult by easy stages. Where necessary, instructions are given, although the student is thrown more on his own resources than previously. In the solution of problems involving trial balance, adjustments, and financial statements, the method of the accountant’s working sheet will be found to offer the best procedure. See Volume I, Chapter XLIII, pages 386-391, for explanation and illustration.

As to the method of attacking problems, the student is perhaps already aware that before attempting solution it is best to read and study the problem carefully to determine exactly what is called for and then to decide as to the treatment of all doubtful points and items—what they mean and how they must be handled to arrive at what is called for. With these preliminary points cleared up, the solution itself is mostly a matter of accuracy and form. In all problems calling for financial statements, the trial balance should first be tested as to the equality of debits and credits. As stated above, the method of the work sheet is usually the best method for summarizing results, although sometimes skeleton ledger accounts will be found helpful in order to visualize the effect of entries and to trace their course through the accounts. Only painstaking work and the solution of many problems will produce facility and confidence in work of this kind.

The instructor should direct the student to take Problem XXVIII under consideration throughout the whole semester, in order adequately to get his material together and into shape. It may well be treated as a thesis for the semester.

I

At the close of the fiscal year ended June 30, 1913, Thomas J. Howe called you in to determine his financial condition. From the books, which were kept on the single-entry plan, and from other sources, you gathered the following information:

The ledger contained the following accounts: Thomas J. Howe, Capital, $4,000; Thomas J. Howe, Drawing (debit) $472; Expense (debit) $184; Sales $18,945; Purchases $17,450; customers’ accounts considered good: H. E. Brewer $110; D. Cohen $85; Will Benton $190; Linn Bros. $77; customers’ accounts which have proved uncollectible and are considered bad: Peter Metz $43; L. C. Fish $101; creditors’ accounts: Stone Bros. $942; Little & Co. $1,082; H. Hudson $1,220; also accounts with Salaries $375; Advertising $112.

Other sources yielded this information: stock of goods on hand inventoried at $5,641; horses and wagons estimated as worth $730; store fixtures $1,114; rent of store building unpaid $300; clerks’ salaries unpaid $84; notes receivable $2,300; notes payable outstanding (non-interest bearing) $2,400. Bill of goods received from Stone Bros., which has been included in the inventory but which has not been entered in Stone Bros.’ account, $193; interest accrued on notes receivable $16; cash in the bank and safe $1,724.

It was found that the following information was available for determining his financial condition as at the close of the preceding fiscal year, June 30, 1912: cash $1,478; notes receivable $500; notes payable $800; Howe’s capital $4,000; store fixtures $900; inventory of goods in stock $2,800; horses and wagons at an estimated value of $800; customers’ accounts total $2,314; creditors’ accounts total $3,609.

From the foregoing prepare:

(a) Statement of financial condition of Thomas J. Howe as of June 30, 1913. (b) Statement showing the amount of profit made or loss sustained for the fiscal year ended June 30, 1913. (c) Statement setting forth in numerical order the advantages of double-entry over single-entry accounting systems. (d) As a result of your convincing argument Mr. Howe has decided to change his system of accounting from single- to double-entry. Prepare the necessary entries to change the accounting system to double-entry, continuing the use of the old ledger and providing for controlling accounts for customers and creditors.

Instructions

See Volume I, Chapters LV and LVI.

II

The following trial balance was taken from the books of Thomas J. Howe at the close of the next fiscal year.

THOMAS J. HOWE TRIAL BALANCE, JUNE 30, 1914

Cash $894.00 Notes Receivable 5,000.00 Accounts Receivable 18,000.00 Thomas J. Howe, Capital 6,000.00 Thomas J. Howe, Drawing 560.00 Notes Payable 3,000.00 Accounts Payable 15,640.00 Purchases 77,100.00 Sales 93,620.00 Merchandise Inventory, June 30, 1913 5,641.00 Purchase Discounts 743.00 Sales Discounts 1,420.00 Freight Inward 2,884.00 Insurance 300.00 Interest Earned 146.00 Returned Sales 930.00 Returned Purchases 760.00 Furniture and Fixtures 2,000.00 Horses, Wagons, and Harness 1,200.00 Rent 1,500.00 Advertising 300.00 Expense 180.00 Salaries 1,600.00 Commissions Paid on Sales 400.00 ----------- ----------- $119,909.00 $119,909.00 =========== ==========

At this date, you will find that the following items must be considered to determine the financial condition of Mr. Howe: Merchandise inventory $2,470; insurance unexpired $100; interest accrued on notes receivable $66; interest accrued on notes payable $30; he owes for two months’ rent $300.

1% of net sales is to be set aside as a reserve for uncollectible accounts. Furniture and fixtures are to be written off in the amount of 10%. Provide for a reserve of 10% for depreciation of horses, wagons, and harness.

Advertising carried forward to the next period $75; unused stationery and other expense items $42; commissions on sales due but unpaid $90.

(a) Prepare the working sheet. (b) Construct the balance sheet as of June 30, 1914. (c) Prepare profit and loss statement—percentages based on net sales. (d) Write the adjusting and closing journal entries.

III

Joseph Mason was Howe’s greatest competitor. After getting better acquainted with each other, Howe conceived the plan of uniting their capital and services in the form of a partnership. After some discussion it was decided to operate as Howe & Mason, the capital to consist of $12,000, of which Howe is to contribute $8,000 in the form of his existing business. The excess of Howe’s net worth, as shown by the balance sheet of June 30, 1914, over $8,000, his investment in the partnership, is to be considered as a loan to the firm. Mason is to transfer his entire business—assets and liabilities—and sufficient cash to make his net investment $4,000, or one-third of the total capitalization.

As of July 1, 1914, the date of the formation of the partnership, Mason’s assets and liabilities were as follows: cash $1,340; accounts receivable $2,460; notes receivable $1,120; stock of goods inventoried at $4,590; furniture and fixtures appraised at $1,316; accounts payable $5,280; notes payable $1,770; rent unpaid $320.

Prepare journal entries to give effect to the foregoing on Howe’s books, which are to be continued for the partnership.

During the year Charles Palmer purchased one-third interest in the capital and profits of the firm by contributing $9,000 in cash. The total capital of the new firm is set at $18,000. Business is to be conducted under the old firm name, the old partners retaining their respective capital investments. Howe’s loan account is to be continued at its original amount.

Write the necessary journal entries to record on the books of the firm the admission of the new partner and the adjustments between Howe and Mason.

Before determining the profits for the year Palmer assigns his interest in the capital and profits of the firm to John H. Bartlett, who settles directly with Palmer for $10,000. Howe and Mason agree to admit Bartlett as a partner in place of Palmer and new articles of partnership are signed by the members.

Give journal entries to show the effect on the partnership books.

Instructions

Note carefully the terms under which Palmer is admitted. His capital will appear on the books as $6,000. Make the adjustment through a good-will account. Howe and Mason withdraw cash to effect their respective adjustments.

IV

The business has been in operation as a partnership one year. At the conclusion of this period the trial balance given below shows the condition of the accounts on the books of the firm.

HOWE & MASON TRIAL BALANCE, JUNE 30, 1915

Cash $ 1,872.00 Accounts Receivable 22,945.00 Reserve for Bad Debts $384.00 Horses, Wagons, and Harness 3,100.00 Reserve for Depreciation, Horses, Wagons, and Harness 120.00 Furniture and Fixtures 5,390.00 Merchandise Inventory June 30, 1914 7,060.00 Notes Receivable 12,456.00 Notes Receivable Discounted 4,780.00 Accounts Payable 24,220.00 Notes Payable 8,500.00 Thomas J. Howe, Loan 1,540.10 Thomas J. Howe, Capital 8,000.00 Thomas J. Howe, Drawing 2,440.00 Joseph Mason, Capital 4,000.00 Joseph Mason, Drawing 1,710.00 John H. Bartlett, Capital 6,000.00 Sales 158,335.00 Returned Sales and Allowances 3,890.00 Purchases 144,244.60 Freight Inward 3,518.50 Warehouse Labor and Supplies 1,002.00 Returned Purchases and Allowances 2,714.00 Salesmen’s Salaries 2,215.00 Advertising 872.00 Freight and Cartage Outward 316.00 Office Salaries 2,619.00 Postage 82.00 Stationery and Printing 116.00 Legal Expenses 85.00 Office Heat and Light 212.00 Interest Earned 117.00 Interest on Bank Balances 14.00 Cash Discount on Sales 2,306.00 Cash Discount on Purchases 3,041.00 Interest Paid 143.00 Telephone and Telegrams 17.00 Insurance 500.00 Rent 2,200.00 Miscellaneous Expense 74.00 Commissions on Sales 380.00 ----------- ----------- $221,765.10 $221,765.10 =========== ===========

Additional information is as follows:

Merchandise inventory, June 30, 1915, $13,260; stationery and printed matter on hand $35; unused postage stamps $17.00. One-fourth of advertising is to be applied to the next year. Warehouse labor of $130, due but unpaid, has not been recorded on the books. Interest accrued but not recorded: on notes receivable $71, on notes payable $47, on bank balances $8. Rent prepaid $200.

You find that no record has been made on the books for $750 worth of merchandise received from Marsh & Co., but that these goods have been included in the current inventory. Four-fifths of the insurance has expired. Interest is to be accrued on Howe’s Loan account at 6%. Through error $100 of commissions on sales has been charged to Salesmen’s Salaries account.

It has been decided to provide for depreciation and reserves as follows: 10% reserve on reducing balances for horses, wagons, and harness; a reserve of ½% on sales for uncollectible accounts; by writing off 10% of the book value of furniture and fixtures.

Profits and losses are to be shared according to the original investments of the partners.

Give due consideration to the foregoing and construct:

(a) The working sheet as of June 30, 1915. (b) Balance sheet. (c) Profit and loss statement containing percentages on sales. (d) Adjusting and closing journal entries.

Instructions

Note the bases for the various depreciation reserves and that depreciation on furniture and fixtures is to be written off the books, i.e., no reserve is to be set up.

V

July 1, 1915, the capital of the firm of Howe & Mason is increased to $30,000 and Wm. R. Gray is admitted as a partner.

Among other things, the articles of copartnership provide that:

Business is to be conducted under the firm name of Howe, Mason & Co.

The representation of the partners in the capital of the firm shall be Howe, 8/20; Mason, 5/20; Bartlett, 3/20; Gray, 4/20.

Profits and losses shall be shared according to the capital representation of the partners as at the time of formation of this partnership. In the event of the death of a partner an accounting shall be made at the close of the fiscal year in which the death occurs and the value of the deceased partner’s estate determined as of the date of his death by prorating profits on a monthly basis.

Gray is to pay for one-fifth interest in the capital of the firm by giving the firm his note for $2,000 and $4,000 in cash. The difference in capital is to be supplied by good-will, which is to be distributed among the three partners constituting the firm of Howe & Mason on the basis of their original capital representations in that firm, i.e., in the ratio of $8,000, $4,000, $6,000 respectively.

After adjustments have been made, the respective partners’ drawing accounts shall be settled in cash.

(a) Write the necessary journal entries to admit Gray as a partner and to adjust the several partners’ capital and drawing accounts. (b) Set up the capital and drawing accounts of all the partners.

Instructions

The partnership agreement is to be interpreted to mean that, after distribution of the good-will, Howe, Mason, and Bartlett are to contribute or withdraw cash necessary to give them the respective capital shares agreed upon for the new firm.

VI

Wm. R. Gray died November 30, 1917, two years and five months after he became a partner in the firm of Howe, Mason & Co. As provided in the articles of partnership, the business continued until the end of the fiscal year, June 30, 1918, at which date an accounting was made on the basis of the following trial balance and subjoined data.

HOWE, MASON & CO. TRIAL BALANCE, JUNE 30, 1918

Land $10,000.00 Buildings 40,000.00 Reserve for Depreciation, Buildings $2,000.00 Delivery Equipment 6,000.00 Reserve for Depreciation, Equipment 1,200.00 Furniture and Fixtures 5,990.00 Good-Will 6,000.00 Cash 2,010.00 Accounts Receivable 36,000.00 Reserve for Bad Debts 1,460.00 Notes Receivable 7,500.00 Notes Receivable Discounted 4,500.00 Merchandise Inventory—Bags, June 30, 1917 6,770.00 Merchandise Inventory—Trunks, June 30, 1917 12,410.00 Mortgage Payable 25,000.00 Accounts Payable 26,000.00 Notes Payable 14,400.00 Thomas J. Howe, Loan 2,000.00 Thomas J. Howe, Capital 12,000.00 Thomas J. Howe, Drawing 1,210.00 Joseph Mason, Capital 7,500.00 John H. Bartlett, Capital 4,500.00 Wm. R. Gray, Capital 6,000.00 Wm. R. Gray, Drawing 1,100.00 Sales—Bags 71,432.00 Returned Sales and Allowances—Bags 3,690.00 Sales—Trunks 222,386.00 Returned Sales and Allowances—Trunks 1,508.00 Purchases—Bags 59,315.00 Returned Purchases and Allowances—Bags 4,230.00 Purchases—Trunks 184,824.00 Returned Purchases and Allowances—Trunks 2,716.00 Freight Inward 7,020.00 Warehouse Labor and Supplies 1,875.00 Salesmen’s Salaries 4,303.00 Salesmen’s Traveling Expenses 2,809.00 Advertising 2,146.00 Freight and Cartage Outward 1,154.00 Commissions on Sales 981.00 Office Salaries 2,274.00 Miscellaneous Office Supplies 170.00 Legal Expense 200.00 Postage 127.00 Telephones and Telegrams 93.00 Interest Earned on Notes Receivable 385.00 Cash Discounts on Purchases 3,547.00 Rent Collected 1,500.00 Taxes 1,312.00 Insurance 680.00 Interest Paid 472.00 Cash Discounts on Sales 2,789.00 Collection and Exchange 24.00 ----------- ----------- $412,756.00 $412,756.00 =========== ===========

The books have been closed at the end of each fiscal year.

Merchandise inventories, June 30, 1918, bags $2,431, trunks $4,380. A reserve of ½% of the sales is to be provided for bad debts. The furniture and fixtures are to be written down 10% of their book value.

The old account of Horses, Wagons, and Harness was closed and Delivery Equipment opened when the horses were sold and an automobile service installed. It is deemed advisable to increase the reserve by 10% of the declining value.

An additional 5% of the original cost of the buildings will be set aside as a reserve for depreciation.

Accruals are as follows: taxes $370; interest on mortgage 9 months at 5%; interest on notes receivable $80; interest on notes payable $520; interest on bank balances $61.20; office salaries $150; interest on Howe loan 6% for one year.

Advances made to salesmen on salaries $400; tenants paid $300 in advance rent; unused postage $32; miscellaneous office supplies on hand $30; one-fourth of the insurance remains in force; advertising deferred $600. Distribute in-freight and warehouse labor on the basis of gross purchases.

Profits and losses are to be shared according to the original investments, as stated in the articles of partnership.

One clause in the partnership agreement entered into July 1, 1915, read as follows:

“In the event of dissolution, good-will is to be increased at the rate of 24% per year of the original value.” Take this into account now as effective for 2 years and 5 months.

As of June 30, 1918:

(a) Prepare working sheet. (b) Construct balance sheet. (c) Construct income statement. (d) Write the closing journal entries. (e) The three remaining partners, as a firm, take over the interest of Gray’s estate, paying therefore cash $1,000 and three equal notes with interest at 6%, maturing in one, two, and three years, for the balance. (f) Write entries which will adjust the partnership interest represented by Gray’s estate and show settlement of that interest.

VII

The Ironclad Trunk Corporation was organized and incorporated November 1, 1912, for the purpose of manufacturing trunks, bags, and brushes of all kinds and dealing in traveling requisites of every description.

The authorized capital of $100,000 consists of 750 shares of common stock having a par value of $100 per share, and 250 shares of preferred stock of the same par value.

The incorporators subscribed for at par and paid for the common stock as indicated below:

Arthur Butler, 250 shares in cash.

A. J. Lindsey, 150 shares by transferring the following assets and liabilities: cash $3,000; accounts receivable $7,000; notes payable $3,000; notes receivable $2,000; stock of raw material $9,000; accounts payable $5,000; furniture and fixtures $2,000.

Edward Harrison, 100 shares by giving bill of sale of machinery appraised at $6,000; the balance to be paid in one year.

Charles E. Wells, 50 shares by his personal note for $5,000 with interest at 6%, due in one year.

In connection with the organization of the corporation the following items were paid in cash: corporation tax $50; filing fees $20; recording fees $12; legal expenses $500.

(a) Write journal entries to record this information on the books of the corporation.

(b) Prepare a balance sheet showing the condition of the corporation at this date.

Instructions

Refer to trial balance of VIII to see the method pursued in making the opening entries for the corporation.

VIII

The following trial balance was taken from the books of the Ironclad Trunk Corporation at the close of its first year. From it and the additional notations appended thereto you are asked to furnish:

(a) Working sheet. (b) Balance sheet. (c) Income statement. (d) Closing journal entries.

IRONCLAD TRUNK CORPORATION TRIAL BALANCE, OCTOBER 31, 1913

Fifth National Bank $7,940.00 Imprest Cash 200.00 Land 10,000.00 Buildings 30,000.00 Machinery and Tools 25,000.00 Materials and Supplies, October 31, 1912 9,000.00 Accounts Receivable 12,000.00 Notes Receivable 10,000.00 Notes Receivable Discounted $4,000.00 Advertising Unexpired 1,000.00 Insurance Prepaid 200.00 Purchases—Material 108,000.00 Notes Payable 18,000.00 Taxes Accrued 200.00 Wages Accrued 3,400.00 Returned Sales 2,200.00 Returned Purchases 2,800.00 Factory Supplies 2,600.00 Labor—Direct 70,000.00 Superintendence 4,000.00 Heat, Light, and Power 12,000.00 Miscellaneous Wages—Factory 3,620.00 Factory Expense 400.00 Accounts Payable 26,000.00 Reserve for Depreciation, Buildings 3,000.00 Interest Accrued on Notes Payable 700.00 Sales 214,706.00 Interest on Bank Balances 46.00 Freight Inward 2,770.00 General Expense 1,920.00 Taxes 350.00 Rent of Building 1,000.00 Reserve for Depreciation, Machinery 2,500.00 Salesmen’s Salaries 4,200.00 Repairs to Machinery 630.00 Reserve for Bad Debts 1,000.00 Cash Discount on Purchases 3,110.00 Interest Earned 418.00 Commissions—Salesmen 3,600.00 Office Salaries 2,800.00 Insurance 150.00 Freight Outward 1,100.00 Bad Debts 1,000.00 Furniture and Fixtures 3,700.00 Authorized Capital Stock—Preferred 25,000.00 Authorized Capital Stock—Common 75,000.00 Unissued Stock—Preferred 12,000.00 Unissued Stock—Common 20,000.00 Subscriptions 4,000.00 Notes Received—Stock Subscription 6,000.00 Bonding Employees—Office 100.00 Cash Discount on Sales 2,300.00 Depreciation 5,500.00 Advertising 600.00 ----------- ----------- $380,880.00 $380,880.00 =========== ===========

You are presented with properly certified statements showing the present inventory of materials and supplies to be $16,300; goods in process $1,400; finished goods $9,800, and factory supplies in storeroom $700. It has been estimated that $200 of the freight inward is applicable to the present inventory of materials and supplies. Salesmen have been overpaid $600 on their salary accounts. Items aggregating $400 which have been charged to Expense are found to be on hand. In the customers ledger you find accounts having credit balances amounting to $1,500, and uncollectible accounts to the amount of $710. You decide to write down furniture and fixtures 10%.

Instructions

It will be noted that the trial balance presented indicates that the books have been partially adjusted. The uncollectible accounts of $710 were taken into consideration when the estimate for reserve for doubtful accounts was made. Charge them against the reserve.

IX

After Edward S. White, the inventor of a process for constructing a superior fiber for trunk-making, demonstrated the practicability of his process, the Ironclad Trunk Corporation purchased all his rights in patents granted by United States, Canada, Mexico, and Great Britain. The sale went into effect January 1, 1914. The consideration of $100,000 was made payable $60,000 in cash, $20,000 in bonds at par, and $20,000 in two-year interest bearing notes of the company.

To provide for payment of the patent, the corporation, after duly complying with all legal requirements, issued $100,000 in 20-year 6% sinking fund bonds, under date of December 1, 1913, interest payable June 1 and December 1. During the month $70,000 of the bonds were sold for cash on a 7% basis, and the remainder at the same price during the following month.

The trust agreement provided that a sinking fund should be established by a charge against profits every interest period, of an amount sufficient on a 4% compound interest basis—interest compounded semiannually—to retire the bonds at maturity. The fund was placed in a trust company for accumulation.

(a) Give journal entries to effect the foregoing on the corporation’s books. (b) Prepare a statement setting forth the condition of the sinking fund at each interest date during the last five years previous to maturity of the bonds.

Instructions

It will be noted that the problem requires the calculation of the selling price of the bonds, i.e., their valuation on the given basis. This may be found from bond tables but preferably by the formula of Chapter XV. The sinking fund may also be found from tables or the formula of Chapter XXV.

(1.035⁴⁰ = 3.95925972; 1.02³¹ = 1.84758882; and 1.02⁴⁰ =2.20803966)

X

(a) Prepare an amortization schedule covering the first five years life of the bonds. (b) Write the journal entries for:

1. The first sinking fund instalment. 2. The first bond interest payment. 3. The liberation of the sinking fund at maturity. 4. The retirement of the bonds at maturity.

Instructions

Averaging the bonds sold at par with those sold on a 7% basis places the whole issue approximately on a 6.787% basis. Use that as the effective rate for the amortization schedule.

XI

Several customers of the Ironclad Trunk Corporation protested vigorously against paying their accounts when we sent them statements requesting payment. They denied that they owed the amounts shown on our books and produced receipts and canceled checks to prove their contentions. In many cases we found that the receipts and checks were dated several weeks before the credits appeared on the books and in some cases no credits had been entered.

The manager immediately requested Leroy Swift, a certified public accountant, to make a thorough audit. Among other things, the accountant’s report disclosed the following:

The petty cash sales had been entered in the cash book at smaller amounts than the records showed. The discrepancy between cash book and sales records was: trunks $1,040, bags $360.

Freight bills had been raised $300. The Railroad Company had been overpaid this amount but refunded it on the request of our bookkeeper, S. O. Bright, who cashed the checks and retained the money.

The Customers column and Net Cash column in the cash book were short-footed $8,430. To make the balance in the Customers’ controlling account agree with the total of the individual accounts, the sales book was short-footed the same amount—bags $2,790, and trunks $5,640.

Credits to customers’ accounts in the amount of $4,740 were missing. Not a trace of a record for this amount or any part thereof could be found in any book.

Leather novelties amounting to $1,560 had been sold from the National Novelty Co.’s consignment but no remittance had been made. The only record of the transactions were duplicate bills of the sales made. The money received for these sales had not been deposited and was appropriated by the embezzler.

Nine productive labor pay-rolls had been over-footed $100 each.

A $1,000 note receivable had been transferred by forged indorsement as $950 part payment on a $1,300 automobile bought by the embezzler for his personal use. The Self-Starter Auto Co. were the holders of the note.

Checks for $1,800 were drawn to the order of fictitious creditors. The indorsements were forged by Bright and the checks duly passed through the bank.

The relatives and friends of Bright agreed to repay the company the greater part or all of the losses due to his embezzlement. In order to provide funds for immediate needs the present stockholders donate 20% of their present holdings of stock, both common and preferred.

Prepare journal entries to give effect to the foregoing as of December 13, 1913.

XII

The City of Oswego donated to the Ironclad Trunk Corporation a building site having a market value of $40,000, on condition that the company build a factory worth at least $100,000 and operate at least five years, employing not less than 100 factory operators.

To take advantage of this offer the corporation obtained permission to issue $100,000 of 7% cumulative preferred stock having a par value of $100 per share, dividends payable semiannually. A condition of the issue made the stock redeemable by lot at the call of the company, the shareholder having the option of receiving 110 in cash or 120 in common stock. A redemption fund is to be created out of profits at the yearly rate of 10% of the issue.

The entire issue was sold for cash May 1, 1914 at 100½. On the same day 101 Blue Valley R. R. 4% bonds, par $1,000, were purchased at 98 with accumulated interest. The bonds are payable July 1, 1924; interest payable January 1 and July 1. The entire bond investment was set aside as a building fund.

Record as of July 31, 1914, the transactions that took place in connection with the erection of the building and the removal from the old to the new plant.

The corporation paid taxes of $400 on the building site and partially completed building. Of this amount $100 applied to the uncompleted building. During the period the manager devoted two-thirds of his time to superintending building operations and one-third to supervising installation of machinery and equipment. His salary amounted to $3,000.

The old land and building and part of the machinery were sold to the American Harness Company for $49,000, payable $11,000 in cash and the balance covered by mortgage for five years at 6%. The amount of the sale was distributed—land $12,000, building $29,000, machinery and tools $8,000. At the date of the sale the accounts appeared on the books as follows: land $10,000; buildings $31,000, with a reserve of $3,000 and nine months’ depreciation on a 5% basis still to be provided for; machinery and tools $25,000 with a reserve for depreciation of $2,500. The machinery and tools sold cost $12,000, on which depreciation has been booked for one year at 10% on original cost. Take into consideration an additional period of nine months.

The remaining machinery, having been designed especially for our use, could not be sold for more than one-half its cost; accordingly, the directors had the machines moved to the new plant. The old machines appear on the books at a cost of $13,000, with reserve recorded for one year at 10% and nine months’ depreciation still to be booked. Additional expenses of removing were as follows: dismantling $40; crating, drayage and freight $170; labor for setting up machines $60; superintendent’s time for moving and installation $150.

The manager, not being sure as to the amount at which to book the machinery, obtained an estimate to duplicate this particular machinery and put it in running order for $9,000.

(a) Write the journal entries to place the above data on the company’s books. (b) Explain briefly the theory underlying your treatment of the old machinery transferred to the new plant.

Instructions

See Chapters V, XI, XVI, and XVII, where most of these matters are discussed.

XIII-XIV

The directors of the Ironclad Trunk Corporation, after receiving full authority from the stockholders, set December 31 as the close of the fiscal year, thereby making the present fiscal period fourteen months instead of one year.

From the following trial balance and supplementary data prepare:

(a) Condensed balance sheet, supported by schedules. (b) Condensed income statement, supported by schedules.

TRIAL BALANCE, DECEMBER 31, 1918

Land Donated $ 40,000.00 Buildings 129,000.00 Machinery 47,000.00 Tools 4,680.00 Delivery Equipment 5,900.00 Furniture and Fixtures 2,300.00 Patents 108,000.00 Loans to Employees 6,320.00 Dividend No. 6, Cumulative Preferred Stock (Payable January 10, 1919) $ 1,400.00 Dividend No. 7, Preferred Stock (Payable January 10, 1919) 1,500.00 Dividend No. 8, Common Stock (Payable January 10, 1919) 3,000.00 Interest Accrued on Bonds Receivable 3,200.00 Freight Inward 4,334.82 Freight and Express Outward 2,613.07 Royal Leather Preferred Stock (100 shares) 7,480.00 Fire Loss 6,000.00 Strike Loss 4,200.00 Credit Department Expenses 2,950.40 Pamphlets, Price Lists, and Posters 973.00 Advertising Space Prepaid 260.00 Advertising 731.40 Directors’ Fees 200.00 Entertainment of Customers’ Agents 174.50 Charity 60.00 Workmen’s Compensation Insurance Premiums 640.00 Rent from Houses for Employees 2,390.00 Maintenance of Houses for Employees 318.30 Watchmen’s Wages 700.00 Bonuses Paid to Employees (Direct Labor) 1,980.10 Experimental Expense 2,300.00 Contingent Royalties Fund 2,140.00 Mercantile Agency Reports 80.00 Accounting Expense 500.00 Legal Expenses 300.00 Claims Against Transportation Companies 3,792.00 Bright—Special 14,500.00 Suspense 370.00 Delivery Expense 1,194.50 Due to Consignors 4,387.20 Imprest Cash 200.00 Raw Materials Inventory, October 31, 1917 21,304.00 Trade Customers 108,946.63 Finished Goods Inventory, October 31, 1917 22,100.00 Notes Receivable 18,000.00 Notes Receivable Discounted 3,460.00 Insurance Prepaid 200.00 Insurance 480.00 Raw Materials Purchases 240,000.00 Accrued Office Salaries 760.40 Accrued Taxes 1,220.00 Accrued Advertising 190.00 Sales, Trunks 416,775.00 Sales, Bags 93,518.80 Returned Sales, Trunks 1,750.00 Returned Sales, Bags 619.00 Returned Purchases, Raw Material 2,320.00 Returned Purchases, Bags 974.00 Factory Supplies 2,436.00 Labor, Direct 78,751.20 Labor, Indirect 3,497.00 Factory Superintendence 3,200.00 Heat, Light, and Power Service 7,147.10 Miscellaneous Factory Expense 283.14 Trade Creditors 40,309.00 Reserve for Depreciation, Buildings 13,810.00 Reserve for Depreciation, Machinery 18,411.00 Reserve for Depreciation, Delivery Equipment 2,300.00 Reserve for Depreciation, Furniture and Fixtures 750.00 Reserve for Expiration of Patents 21,000.00 Reserve for Sinking Fund—Bonds of 1933 18,128.08 Reserve for Contingent Royalties 2,140.00 Reserve for Supersession of Patents 20,000.00 Interest Earned 7,810.00 Interest Paid 11,200.00 Office Expense 1,873.38 Warehouse Labor on Raw Materials 1,143.26 Salesmen’s Salaries 4,500.00 Salesmen’s Commissions 12,305.40 Repairs to Machinery 1,748.80 Repairs to Buildings 3,755.50 Reserve for Doubtful Accounts 3,330.70 Discount on Purchases 3,751.30 Discount on Sales 6,400.00 Office Salaries 7,974.00 Provision for Doubtful Accounts 2,379.12 Capital Stock, Cumulative Preferred 100,000.00 Capital Stock, Preferred 50,000.00 Capital Stock, Common 200,000.00 Unissued Stock, Common 10,000.00 Treasury Stock, Common 40,000.00 Assessment for Street Improvements (Donated Land) 2,000.00 Bonding Employees—Office 200.00 Surplus 41,394.49 Drawings and Patterns 4,606.00 Mortgage Receivable (due 1923) 38,000.00 Accrued Pay-Roll 957.75 Reserve for Land Donated 40,000.00 Bonds Payable 100,000.00 Employees’ Pension Fund 47,500.00 Reserve for Employees’ Pension Fund 47,500.00 Discount on Bonds Payable 7,332.33 Wrapping and Crating Supplies 1,418.90 Ralston National Bank 17,841.53 Bond Sinking Fund 18,128.08 Redemption Fund—Cumulative Preferred Stock 40,000.00 Reserve for Redemption of Cumulative Preferred Stock 40,000.00 Houses and Land for Employees 24,600.00 Purchases—Bags 91,360.00 Trunks in Process, October 31, 1917 4,984.20 Commissions Earned 564.80 Notes Payable 7,108.00 Taxes 1,520.00 Accrued Interest Receivable 250.00 ------------- ------------- $1,314,143.59 $1,314,143.59 ============= =============

A careful investigation disclosed the following:

Interim dividends had been paid May 15, 1918: No. 5, cumulative preferred stock, $1,400; No. 6, preferred stock, $1,500; No. 7, common stock, $3,000.

The Royal Leather Co. stock now has a market value of $90 per share.

Items to be distributed:

Account Distribution

Buildings Expenses Selling ¼; Office ⅛; Factory ⅝. Furniture & Fixtures Expense Selling ¼; Office ⅛; Factory ⅝. Light, Heat, and Power. Selling $842.90; Office $392; Freight Inward Factory $5,912.20. Taxes Materials ¾; Bags ¼. Building and Equipment $1,300; Employees’ Houses $220.

The Suspense account was credited for $370 received from a former customer in payment of an old account which had been charged off as uncollectible some years ago.

In many cases notes payable have been issued with interest included in the face of the notes. Of this interest $290 is applicable to the succeeding period.

Provision for contingent royalties was begun two years ago in anticipation of an unfavorable decision in an action brought against us for infringement of patents. Recently the action was decided in our favor.

Legal expenses of $1,500 for prosecution of infringements of patents had been charged against profits at the close of the previous year. Of the present legal expenses, $100 was paid for services in protecting patents.

Inventories as at December 31, 1918:

Wrapping and Crating Supplies Unused $387.50 Factory Supplies on Hand 718.50 Pamphlets, Price Lists, and Posters on Hand 450.00 Workmen’s Compensation Insurance Prepaid 160.00 Bags in Stock 12,542.00 Trunks in Stock 28,050.00 Raw Materials 8,000.00 Trunks in Process as under: materials $6,497.10 direct labor $2,680.40 manufacturing expense $976.50

Fire Loss was debited for $6,000 which represents damage to buildings of $4,000 and loss of machinery of $2,000 after making due allowance for depreciation. Just after the trial balance was made a check for $5,400 was received from the insurance company in full settlement of our claims for fire damage.

The Repairs to Buildings account contains $3,500 of charges for replacing the parts destroyed by fire.

Provision for reserve for depreciation is to be made on a straight line basis, at the following yearly rate: buildings 5%; machinery 10%; delivery equipment 12%; furniture and fixtures 12%.

It was deemed advisable to write off 20% of the accounts of Tools, and Drawings and Patterns. Also, to reserve from profits $2,000 for supersession of patents in addition to providing for the reduction in the life of the patent.

Interest has accrued on bonds payable for one month, and there is accrued amortization.

Bright—Special account shows the balance due on Bright’s embezzlement. The company holds good collateral in the form of stock for the full amount.

Trunks in Process, October 31, 1917, comprised raw materials $3,115, direct labor $1,120, and factory burden $749.20.

The account, Freight and Express Outward, represented items charged to customers on account of outward freight charges assumed by us and still owing to the transportation companies.

It was ascertained that on Oct. 31, 1917, the patents had 164 months yet to run, and that the policy is to depreciate the value remaining at the end of each fiscal period over the remaining life of the patents.

Royal leather stock was being held because of trade advantages secured thereby.

Claims against transportation companies represented claims for damage acknowledged as good by the companies.

Instructions

In a footnote to the balance sheet call attention to the contingent value of donated land. Extreme conservatism might require the setting aside of a reserve of surplus covering any expenditures on the land, such as assessments for street improvements, inasmuch as the same contingency attaches to them as to the land. So long as a good balance of general surplus is maintained, a special reserve is not usually considered necessary.

Note that both the Contingent Royalty Fund and its reserve are free. Transfer the fund to general cash, and the reserve to surplus.

Note that the reserve for supersession of patents is a reserve created out of surplus and therefore to be treated as a part of net worth. This is, of course, contrary to best practice.

Fire Loss account, as it appears in the trial balance, has been properly charged with the values of the assets destroyed but has not yet been credited with the insurance. Consider carefully the proper booking of the repairs to buildings on account of the fire.

See Problem XXVI, Appendix A, for instructions as to content of condensed balance sheet. See also Problem XV, this Appendix.

XV

From the information furnished in the preceding problem.

(a) Construct a surplus statement. (b) Write the adjusting and closing journal entries.

Treat the surplus statement as a schedule supporting the balance sheet.

XVI

Some time ago the stockholders of the A. M. Strong Fiber Co. and the Randall Manufacturing Co. appointed committees on merger. At a joint meeting of the two committees a plan for merger of the two companies was adopted. The stockholders of the respective companies accepted the plan for the joint committee and instructed and authorized their boards of directors to carry out the terms of the merger. The agreement provided that a new corporation be formed to acquire the assets and assume the liabilities of the two companies as shown on their balance sheets of December 31, 1916, except as noted.

The subjoined balance sheets show the conditions of the two companies. The balance sheet of the Randall Co. has already been adjusted to meet the conditions of the merger. The agreement provided, however, that the machinery and tools of the Strong Co. should be taken over at a 10% reduction of their present book valuation; that the book value of the Special War Plant assets be written up $20,000 on account of their adaptability to the regular needs of the merger; and that the reserve for bad debts be increased to $5,000. The surplus, after these adjustments, was reduced to even multiples of $10,000.

A. M. STRONG FIBER CO. BALANCE SHEET, DECEMBER 31, 1916 ==================================+================================= Assets | Liabilities and Capital | Machinery $60,000.00 | Notes Payable $10,000.00 Tools 4,000.00 | Accounts Payable 75,000.00 Furniture and Fixtures 7,500.00 | Reserve for Bad Debts 3,000.00 Good-Will 150,000.00 | Depreciation Reserve Raw Materials 75,000.00 | for Machinery 7,000.00 Cash 25,000.00 | Depreciation Reserve Notes Receivable 47,500.00 | for Furn. and Fixt. 1,500.00 Accounts Receivable 112,500.00 | Depreciation Reserve Special War Plant 130,000.00 | for War Plant 50,000.00 | Bonds Payable (6%) 100,000.00 | War Munition Bonds | (7%) 60,000.00 | Reserve for Sinking | Fund 30,000.00 | Capital Stock, Common 150,000.00 | Capital Stock, | Preferred (6%) 100,000.00 | Surplus 25,000.00 ----------- | ----------- $611,500.00 | $611,500.00 =========== | ===========

RANDALL MANUFACTURING CO. BALANCE SHEET, DECEMBER 31, 1916 ==================================+================================= Assets | Liabilities | Land $90,000.00 | Accounts Payable $35,800.00 Machinery 70,000.00 | Notes Payable 20,000.00 Tools 10,000.00 | Wages Payable 2,000.00 Motor Trucks 12,000.00 | Interest Accrued 1,000.00 Furniture and Fixtures 3,000.00 | Reserve for Bad Debts 1,200.00 Patents 60,000.00 | Bonds Payable (5%) 100,000.00 Raw Material 14,000.00 | Capital Stock, Goods in Process 8,000.00 | Preferred 50,000.00 Finished Goods 19,000.00 | Capital Stock, Cash 8,000.00 | Common 100,000.00 Notes Receivable 16,000.00 | Surplus 40,000.00 Accounts Receivable 40,000.00 | ----------- | ----------- $350,000.00 | $350,000.00 =========== | ===========

To effect the reduction of the surplus of the Strong Co. to even multiples of $10,000, by consent of all the stockholders, a special dividend was declared to be shared by both common and preferred stockholders equally on the basis of their respective holdings; and it was further agreed that because the preferred stock carried a participation privilege and preference as to assets, in the distribution of the stock of the merger in payment of the respective interests of the present stockholders, the preferred holders should be considered as being entitled to a pro rata share of the adjusted surplus and good-will.

The net profits for the last period, after deduction therefrom of 8% interest on the respective capitals as adjusted by taking effect of the foregoing items, were capitalized in even thousands of dollars on a 20% basis, to determine the value of the good-will of the two companies; the good-will of the Strong Co. so determined to be in addition to its present good-will. It was ascertained that the net profits for the last period were: Strong Co. $41,750, Randall Co., $30,000.

To carry out the plan of the merger, the Sterling Trunk Corporation was organized with sufficient capital in 7% cumulative preferred stock and common stock to acquire the two other companies, and additional common—to remain unissued for the present—to bring the total capitalization to $750,000.

(a) Submit a statement showing the capitalization of the Sterling Trunk Corporation and the distribution of the capital stock to the other companies.

(b) Prepare the balance sheet of the Sterling Trunk Corporation as of December 31, 1916.

(c) Write the journal entries necessary to adjust the books of the A. M. Strong Fiber Co. and to show its sale and the transfer of its properties to the Sterling Trunk Corporation.

XVII

1. A fire partially destroyed the power plant and equipment of the Zehner Manufacturing Co. on the night of June 30, 1918, entailing a loss of $25,000 on the building, and a ⅔ loss on the equipment. Insurance for one year, with the 80% coinsurance clause, had been purchased January 1, 1918, for $1,775, covering the above property. The policies carried $40,000 on the power house and $100,000 on the power house equipment. On that date—January 1, 1918—the values of the power house and equipment as shown on the balance sheet were:

Power House $75,000.00 Less Depreciation Reserve 12,000.00 $ 63,000.00 ----------

Power House Equipment $200,000.00 Less Depreciation Reserve 80,000.00 120,000.00 -----------

Depreciation was estimated at the rate of 4% per annum on the power house, and 10% on the equipment.

The insurance company settled on the above basis.

Show the journal entries necessary to make all the adjustments in the accounts.

For the purpose of the problem assume that the rate on the power house was the same as on the equipment.

2. The Colorado Rock Drill Co. authorized the issue of $100,000 of 6% cumulative preferred stock callable by lot in amounts as follows:

$10,000 at the end of 5 years at 107 in cash. $10,000 at the end of 7 years at 106 in cash. $15,000 at the end of 10 years at 105 in cash. $15,000 at the end of 12 years at 104 in cash. $50,000 at the end of 20 years at par in cash or convertible into the company’s common stock at the option of the company.

The entire issue was sold for cash at 103.

Set up the accounts showing the handling of all redemption transactions at the five periods above referred to, with these additional facts: It is the expectation of the company to provide for a permanent increase in capital of $100,000, the amount of the preferred stock issue, during the life of the issue; and at the end of the 20 years, the company exercises its option by converting $30,000 of the preferred into common stock out of unissued common to that amount held in the treasury.

Instructions

Problem 1. Refer to Chapter XXXII.

Problem 2. Refer to Chapters I and XXI.

XVIII

The Sterling Trunk Corporation, hoping to recoup excessive trade losses, engaged more extensively in the manufacture of war supplies. Instead of realizing the enormous anticipated profits, they sustained a severe loss through an explosion followed by a disastrous fire on August 1, 1918. The assets destroyed were only partially protected by insurance because of difficulty in getting a reasonable rate. Also some policies which had expired had not been renewed.

The following information was accepted by the insurance companies as a basis for settlement. Date of policies January 1, 1918.

LEGEND: (A) = Name of Property Insured (B) = Original Value of the Property (C) = Reserve for Depreciation, Jan 1, 1918 (D) = Yearly Rate of Depreciation (E) = Face of Ppolicy (F) = Amount of Property Destroyed on Aug 1, 1918 (G) = Unexpired Premium on Policy Aug 1, 1918 (H) = Coinsurance Clause in the Policy ===========+=========+=========+=====+=======+========+======+===== (A) | (B) | (C) | (D) | (E) | (F) | (G) | (H) -----------+---------+---------+-----+-------+--------+------+----- Buildings | $110,000| $10,500 | 5% |$30,000| $80,000| $200| 80% Machinery | 76,000| 14,000 | 10% | 20,000| ¾ | 150| 100% Furniture &| | | | | | | Fixtures | 4,700| 1,200 | 12% | 4,000| 70% | 10| 80% Patterns & | | | | | | | Drawings | 3,500| | 20% | 1,500| All | None | 60% Finished | | | | | | | Goods[83]| 16,400| | | 80% of| 90% of| 120| 80% | | | |selling|selling | | | | | |price |price | | -----------+---------+---------+-----+-------+--------+------+-----

(a) What is the effect of the coinsurance clause?

(b) Determine the amount of insurance received for each asset.

(c) Indicate, by means of journal entries, the effect on the various accounts involved in the settlement of the losses.

[83] The finished goods were listed at the factory cost but the policy covered the selling price which was based on a profit of 60% on the factory cost, with 10% on sales added for selling expenses.

XIX

The European War caused a reduction in the income of the Trunk Company by an abrupt falling off of sales; also as a result of the rapid increase in materials several contracts were completed at a loss. These losses together with the unexpected loss by fire placed the company in an embarrassing financial condition. There was great pressure from bondholders because the interest for the last year had not been paid, and dissatisfaction among stockholders because dividends had been passed. Current debts could not be met and it was clearly evident that the business could not continue long in its present condition. To remedy this a meeting of the stockholders was called and a committee on reorganization appointed. The recommendations of the committee, which are given below, were put into effect on December 31, 1918.

The holders of the 6% bonds were given one share of new cumulative 7% preferred stock in payment of defaulted interest on each bond. The holders of the $100,000 of 5% bonds assumed for Randall Manufacturing Co. contributed in cash 5% of the amount of their bonds and received for each $1,000 bond a new $500 bond bearing 5% interest and $700 in non-cumulative 6% preferred stock. The holders of $60,000 7% war munitions bonds received for each $1,000 bond $600 in 6% preferred stock and $500 in common stock. The old cumulative preferred stockholders were given new non-cumulative preferred stock, share for share. The old common stockholders were given new common stock and were assessed $20 per share for which they were given new cumulative preferred stock.

(a) Determine the amount of cash, bonds and various classes of stock to carry into effect the reorganization. (b) Present the journal entries necessary to record these data.

See Problem XVI for other necessary data. Assume all common stock outstanding. Par value of old issue bonds, $1,000; stock, $100.

XX

The Hillsdale Co. operates a factory and general sales organization from its main plant and conducts two branches, A and B, as distribution centers at conveniently located points. The branches maintain independent records which are subject to periodic audit by the head office. At the close of the fiscal period the branch trial balances are sent to, and incorporated with, the head office trial balance to determine the results of combined operation. Below are given the trial balances of the head office and branches with the data necessary to close the books and determine results. You are asked to present closing journal entries for Branch A and the entries necessary to incorporate the branch results with the head office and to close the head office books. Also present a consolidated balance sheet after closing.

TRIAL BALANCES, JUNE 30, 1918

Branch A Branch B --------------------- ----------------------- Cash $3,000.00 $1,000.00 Notes and Accounts Receivable 70,000.00 50,000.00 Salaries 15,000.00 5,000.00 Rent 2,700.00 1,500.00 Other Expenses 10,000.00 7,000.00 Sales $ 75,000.00 $48,500.00 Sundry Accounts Payable 5,000.00 7,200.00 Purchases from Head Office 70,000.00 50,000.00 Head Office Merchandise 70,000.00 50,000.00 Head Office General 20,700.00 8,800.00 ----------- ----------- ----------- ----------- $170,700.00 $170,700.00 $114,500.00 $114,500.00 =========== =========== =========== ===========

Inventories, at billed price: Branch A $10,000, Branch B $5,000.

Create on the branch books reserves for doubtful accounts of 1% of the sales at each branch.

HEAD OFFICE

Plant and Equipment $250,000.00 Depreciation Reserve Plant and Equipment $50,000.00 Cash 25,000.00 Notes and Accounts Receivable 100,000.00 Reserve for Doubtful Accounts 5,000.00 Merchandise Inventory, June 30, 1917 27,500.00 Notes and Accounts Payable 45,000.00 Purchases 170,000.00 Sundry Expenses 35,250.00 Depreciation 12,500.00 Bad Debts 1,125.00 Sales 225,000.00 Sales to Branches 120,000.00 Branch A, Merchandise 70,000.00 Branch B, Merchandise 50,000.00 Branch A, General 20,700.00 Branch B, General 8,800.00 Capital Stock 250,000.00 Surplus 75,875.00 ----------- ----------- $770,875.00 $770,875.00 =========== ===========

Head office inventory, $30,000.

Goods were billed to the branches at 150% of cost.

XXI

A New York company doing business in London, received the following trial balance from its London office at the end of a fiscal year:

TRIAL BALANCE—LONDON OFFICE

Plant £100,000 Accounts Receivable 75,000 Accounts Payable £35,000 Expenses 10,000 Income 100,000 Merchandise 20,000 New York Office Account 135,000 Remittance Account 60,000 Cash 5,000 -------- -------- £270,000 £270,000 ======== ========

The New York books showed as follows:

TRIAL BALANCE—NEW YORK BOOKS

Capital Stock $1,000,000.00 Patents $600,000.00 London Office Account 656,100.00 Remittance Account 291,712.50 Expenses 10,000.00 Cash 25,612.50 ------------- ------------- $1,291,712.50 $1,291,712.50 ============= =============

The remittance account consisted of four 60-day drafts on London for £15,000 each, which were sold in New York at 4.85½, 4.86, 4.86½, and 4.86¾ respectively.

Make such journal entries as are necessary to incorporate with the New York accounts the results of the year’s business in London (conversion to be made at the average rate of exchange of the four remittances), and establish the new balance of the London office account so that it will agree with the London books when converted into sterling at 4.87¼, the rate of exchange ruling on the last day of the year. Show also trial balance of the New York books after closing.

XXII

Company A owns the entire capital stock of Companies B and C. The assets and liabilities of the respective companies are as follows:

Company A: cash $10,000; deferred charges $150; inventories $1,000; due from allied companies $25,000; notes receivable $15,000; petty cash $100; trade creditors $1,000; capital stock $100,000; surplus $5,250; notes payable $50,000; other investments $55,000; investments in allied companies $50,000.

Company B: trade debtors $10,000; cash $4,000; deferred charges $200; notes receivable $1,000; petty cash $500; inventories $8,000; land $10,000; buildings $25,000; equipment $20,000; surplus $1,000; dividends payable $500; due allied companies $30,000; notes payable $10,000; accrued liabilities $200; capital stock $25,000; trade creditors $12,000.

Company C: capital stock $30,000; notes payable $15,000; cash $2,000; trade creditors $4,000; notes receivable $1,000; petty cash $200; accrued expenses $100; trade debtors $3,500; allied companies $5,100; surplus $2,300; inventories $5,000; land $7,500; deferred charges $100; equipment $15,000; buildings $12,000.

Prepare consolidated balance sheet. Submit with your solution your working papers.

Criticize briefly (not to exceed 500 words) the condition of each company and state whether, in your opinion, the investments in allied companies are valued correctly.

XXIII

Jones & Robinson, merchants, are unable to meet their obligations. From their books and the testimony of the insolvent debtors, the following statement of their condition is ascertained:

Cash on Hand $ 5,500.00 Debtors ($1,000 good; $600 doubtful but estimated to produce $200, $1,000 bad) 2,600.00 Property (estimated to produce $9,000) 14,000.00 Notes Receivable, Good 4,250.00 Other Securities ($3,000 pledged with partially secured creditors; the remainder held by the fully secured creditors) 28,000.00 Jones, Drawings 9,000.00 Jones, Capital 10,000.00 Robinson, Drawings 8,400.00 Robinson, Capital 16,050.00 Sundry Losses 13,500.00 Preferential Claims—Wages, Salaries, and Taxes 700.00 Trade Expenses 7,400.00 Creditors Unsecured 25,000.00 Creditors Partially Secured 23,900.00 Creditors Fully Secured 17,000.00

Prepare a statement of affairs and deficiency account.

XXIV

Parker & Riley, being unable to meet their obligations, have made an assignment. You are asked to prepare a statement of affairs for presentation at a meeting of their creditors. Some of the creditors are entirely or partially secured, the security being a part of the assets. The following is a trial balance of their ledger at the date of the assignment:

Cash $ 1,200.00 Stock and Material (old inventory) 12,000.00 Reliance Trust Co. Stock (20 shares at cost) 2,200.00 Accounts Receivable 10,550.00 Notes Receivable 2,000.00 Mortgage Receivable (second mortgage) 1,000.00 Real Estate (store building and lot) 14,000.00 Fixtures 1,700.00 Horses, Trucks, and Harness (asset account) 1,400.00 Accounts Payable $ 28,000.00 Loans Payable 7,000.00 Mortgage on Real Estate 5,000.00 Purchases 30,000.00 Sales 36,000.00 Rents 1,200.00 Salaries 3,500.00 Interest and Discount 960.00 Taxes Accrued 740.00 Insurance Unexpired 500.00 General Expenses 4,130.00 Parker, Capital 8,000.00 Riley, Capital 4,000.00 Parker, Drawings 3,000.00 Riley, Drawings 1,800.00 ---------- ---------- $89,940.00 $89,940.00 ========== ==========

The accounts receivable are classed as: good $8,000; doubtful $1,500 (estimated to produce $1,000); worthless, $1,050. Notes receivable will realize $1,800; the second mortgage is estimated to produce $800; the trust company shares $1,800; delivery equipment $900; fixtures $1,000; and real estate $12,500.

Of the accounts payable $20,000 is unsecured and $8,000 is secured by the second mortgage and trust company stock. The loans payable are secured by the equity in the real estate. The inventory of merchandise on hand which foots $5,000 is expected to realize $3,000. Other liabilities not booked are employees’ wages $550, and interest on mortgage $125. The unexpired insurance is expected to yield $150 upon redemption.

Draw up a statement of affairs and deficiency account.

XXV

The Metropolitan Book Co., a corporation, goes into voluntary liquidation and a trustee is appointed. The following is the trial balance of the company on July 1, 1918, the date when its affairs are turned over to the trustee.

Capital Stock $20,000.00 Cash $553.69 Office Furniture 1,666.92 Meter Deposit 60.00 Accounts Receivable 26,153.95 Rogers & Co. (moneys collected for their account) 14,738.00 Notes Payable 27,573.50 Accounts Payable 4,197.22 Purchases 27,404.74 Sales 8,045.35 Expense 10,751.97 Surplus 7,962.80 ---------- ---------- $74,554.07 $74,554.07 ========== ==========

Value of merchandise on hand is $20,183.86, and the other assets are appraised at book value. The trustee’s cash receipts and disbursements are:

Dr. CASH Cr. =======================================+============================ Balance taken over $553.69 | Notes Paid $27,573.50 Meter Deposit 60.00 | Accounts Paid 4,197.22 Office Furniture 487.90 | Merchandise Bought 562.55 Accounts Receivable 22,872.75 | Expenses 5,697.01 Additional Collections for | Rogers & Co. Rogers & Co. (in full) 1,965.24 | (in full) 16,703.24 Sales of Merchandise 22,090.70 | Commission from Rogers & Co. 6,703.24 | ---------- | ---------- $54,733.52 | $54,733.52 ========== | ==========

Accounts receivable not collected are worthless.

Prepare a realization and liquidation account in technical form.

XXVI

Messrs. Sharp and Green having given the firm’s notes to a friendly company as an accommodation, became embarrassed through failure of the payee and appointed a trustee to realize and liquidate. The following is a statement of their condition January 1, 1916:

================================+=================================== Assets | Liabilities and Capital | Cash $ 500.00 | Mortgage on Real Estate $5,000.00 Merchandise 20,000.00 | Mortgage Interest Accrued 250.00 Real Estate 25,000.00 | Taxes Accrued 375.00 Notes Receivable 5,000.00 | Accounts Payable (including Accounts Receivable | accommodation paper (including | as contra) 61,550.00 accommodated | Notes Payable 1,000.00 party $58,000) 62,000.00 | Henry Maxwell, | Special Partner 10,000.00 | Samuel Green, Capital 20,325.00 | James Sharp, Capital 14,000.00 ----------- | ----------- $112,500.00 | $112,500.00 =========== | ===========

The following is a memorandum of the trustee’s transactions for the year: purchases to complete contract orders $70,000; sales for the year for cash $108,000; uncollected accounts $2,000; stock of goods on hand December 31, 1916, $10,000; notes receivable collected at a loss of $600; accounts receivable collected $3,600, balance lost; received 75% in full settlement of accommodation notes and paid cash on account of same $48,000 giving renewal notes for $10,000. The legal fees and petty expenses paid on account of accommodation paper amounted to $2,400. The following payments were also made: mortgage, with interest, and one year’s accrued interest to December 31, 1916; all taxes, notes payable, and accounts payable; and clerk hire, wages, and other expense, including an allowance of $100 per month to each of the active partners, one year’s interest at 6% to Maxwell, interest on Green’s excess capital ($6,325) for one year at 6%, and trustee’s fee of $5,000—in all $10,000.

The special partner had a ¹/₁₀ interest and the general partners shared alike in the residue of the net profits.

On January 1, 1917, the estate was returned to the owners.

Prepare the trustee’s realization and liquidation account in technical form, supported by trustee’s cash account. Show a balance sheet of the estate as turned back to the partners, and set up the partners’ accounts.

XXVII

Three partners contribute capital as follows: X $90,000, Y $45,000, Z $15,000. They share profits in the proportion of X 50%, Y 30%, Z 20%. X’s salary is $5,000, Y’s salary is $3,000, Z’s salary is $2,000. At the end of their fiscal period X dies. The books are closed and the net assets ascertained to be $152,500. Z and Y liquidate the firm’s affairs and distribute the surplus assets quarterly as follows:

First quarter $42,410.20 Second quarter 74,622.30 Third quarter 31,967.50 $149,000.00 ---------

Prepare a statement of the partners’ accounts, showing how the distribution of assets should be made, together with the apportionment of the loss. Give your authorities.

XXVIII

Use the following instructions as a guide in preparing a special report on a business with which you are familiar, either by experience or through investigation.

(a) Write a short history of the business, giving:

1. Title. 2. Character of business in which engaged. 3. Date of beginning and amount of capital invested. 4. Successive changes affecting: The ownership (individual, partnership, or corporate). The amount of capital. The character of the business in which engaged.

(b) Submit:

1. A trial balance at the close of a fiscal period. 2. A balance sheet for the same period. 3. A profit and loss statement for the same period. 4. Adjusting and closing journal entries for the same period. Note: If possible, give 1, 2, 3, for two successive periods and prepare a comparative balance sheet and profit and loss statement.

(c) Prepare:

1. A list of the different books and blanks used to record the financial transactions. 2. A sample page or blank or a copy of each item listed under 1. Note: If the copy should require a great deal of space, simply give the form of ruling, headings, and size of page.

(d) Write one or two typical entries in each book and show the form of closing in actual use.

(e) As a separate problem:

1. Outline the course of an article from the time the order is placed until the goods reach you. This would be a purchase department record.

2. Outline the course of an article from the time you receive the order until the goods reach your customer. This would be a sales department record.

Note: For both 1 and 2 attach actual forms used or copy of same, if possible.

(f) Information in regard to:

1. Terms of sale. 2. Treatment of C. O. D. or approval sales on the books. 3. Treatment of freight inward on the books. 4. Treatment of freight outward on the books. 5. Treatment of accounts for containers or boxes to be returned by your firm; by your customers. 6. Treatment of petty cash. If this has not been furnished under (c) 2, give sample page of petty cash. 7. Treatment of consigned goods on the books. 8. Closing journal entries. If this has been furnished under (b) 4, omit. 9. Treatment of instalment sales. 10. Pay-roll system. 11. Your method of entering payment from customers. 12. Provision for bad debts. 13. Method of providing for depreciation. Give an example. 14. Provision for redemption of bonds payable. 15. Interest on daily or other balances. 16. Proportional discount. 17. Assignment of accounts receivable. 18. Use of check figures. 19. Number of customers. 20. Amount of gross sales. 21. Amount of gross purchases. 22. Methods of obtaining inventories and basis for valuation. 23. Usual gross profit. 24. Usual gross expense. 25. Figuring profits. On selling price or cost price. 26. Figuring expenses. On selling price or cost price. 27. Use of selling or expense charts or charts of any other kind. 28. Insurance carried and manner in which it is written off. 29. System of branch or agency accounts. 30. Nature of items found in allowances. 31. Use of mechanical appliances in offices. 32. Filing systems, other than for correspondence. 33. Frequency of audits by firm’s staff. By outside parties. 34. Cost system in use. 35. Date of installation of present system. 36. Rate of turnover. 37. Treatment of cash sales.

(g) Give:

1. Adverse criticism of any department or part of same which you know from actual experience does not work out as it should. 2. Your opinion as to the cause.

(h) Constructive criticism of any department or part of same which you think would make it more effective or less expensive if conducted according to your plan.

(i) Anything peculiar to your business which has not been included in any of the previous divisions.

APPENDIX C

MISCELLANEOUS PROBLEMS FOR SUPPLEMENTARY WORK[84]

PARTNERSHIP

1. A partnership on equal terms between A and B is dissolved July 1, 1917, the books on that date showing the following:

[84] Most of these problems in Appendix C are C. P. A. problems of various states. The dates have been changed to recent dates.

A’s capital paid in was $16,000, and his drawings were $3,500. B’s capital paid in was $2,000, and his drawings were $1,500. Goods purchased $50,000; sales $40,000; business expenses $1,800. A loss of $1,600 was made on a $5,000 consignment of goods to Liverpool. In the settlement A agrees to pay B an old debt of $3,500. Prepare requisite accounts, and show final balance payable by one partner to the other.

2. A and B are partners carrying on a business in Winnipeg. On January 1, 1918, after adding profits for the past half-year, A’s capital amounted to $150,000, and B’s to $100,000. On that date they take into partnership C, upon the following terms: viz.: he is to bring in capital amounting to $25,000, and each partner is to be credited with interest on his capital at 6% per annum. All profits (after debiting interest) up to $25,000 are to be shared by A and B exclusively in proportion to the amounts of their capital at January 1, 1918. All profits in excess of $25,000 are to be shared equally by the three partners. Accounts are to be prepared and profits and interest credited half-yearly. C is to be credited with a salary of $5,000 per annum. On June 30, 1918, the profits divisible after debiting C’s salary, which he has drawn, but before charging interest on partners’ capital, amounted to $75,000. The partners’ withdrawals which are not chargeable with interest were: A $12,500, B $10,000, and C $3,750. Draw up partners’ separate accounts as they should stand on July 1, 1918.

Assume that instead of a profit, a loss of $75,000 had occurred. How would you have treated it in the accounts in the absence of any direct provision in the partnership agreement relative to losses?

3. A, B, and C were partners in business for several years. A died December 31, 1917. The articles of copartnership provided that on any change in the firm the good-will should be taken into account and its value divided—one-half to A and one-quarter each to B and C. The balance sheet at the date of A’s death was as follows:

Assets

Cash $1,500.00 Merchandise on Hand 12,000.00 Sundry Notes and Accounts Receivable 15,000.00 ---------- $28,500.00

Liabilities

Sundry Accounts Payable $8,500.00 A’s Net Investment 10,000.00 B’s Net Investment 5,000.00 C’s Net Investment 5,000.00 ---------- $28,500.00

In January, 1918, B and C arranged with D to come into the firm with $5,000. The good-will is, by agreement, to be valued at $3,000. The new firm, consisting of B, C, and D, takes over the business and good-will in equal shares, subject to an allowance of 2½% on the notes and accounts receivable. It pays the estate of A $5,000, with the understanding that the balance due A’s estate shall remain as a loan at the rate of 5% interest.

Prepare the balance sheet and the capital accounts of B, C, and D as they should appear at the beginning of the new business, writing off the purchase of good-will in equal proportions to the amount of capital invested.

CORPORATION—OPENING THE BOOKS

4. C, D, and E are partners sharing profits in accordance with capital investments. At end of the fiscal year, after all nominal accounts are closed, the books show the following:

Cash $20,051.00 Plant 60,422.00 Inventory of Merchandise 41,300.00 Bills Receivable 18,028.00 Book Accounts Receivable 70,402.00 C, Drawings 8,400.00 D, Drawings 6,000.00 E, Drawings 4,800.00 Bills Payable $5,211.00 C, Capital 100,000.00 D, Capital 50,000.00 E, Capital 50,000.00 Profit and Loss, Undivided Profits 24,192.00 ----------- ----------- $229,403.00 $229,403.00 =========== ===========

The partners thereupon incorporate a company with an authorized capital of $250,000. The company so formed purchased the partnership assets and good-will, not including the cash, for $250,000, payable $200,000 in stock and $50,000 in cash, the last-mentioned cash being the proceeds of sale of stock to F.

It is the intention to divide the purchase-money stock among the vendors in proportion to their former capital and to adjust their accounts by the division of the cash shown in trial balance, which will then be placed to their credit as loans to the company at 6% interest and remain as working capital. The bills payable are to be settled by the partners. As the drawings of the partners are not in proportion to their respective shares in the profits, the partners are charged with the interest thereon in the following amounts, viz.: C $231, D $165, and E $132.

(a) Frame the necessary entries to close the partnership books and show the amount of cash received by each partner.

(b) Referring to question (a), frame the necessary entries to open the books of the company and prepare a balance sheet showing the condition of the company at the beginning of its operations.

5. The Frost Manufacturing Co. was incorporated April 10, 1918, with a capital stock of $200,000, divided into 2,000 shares of a par value of $100 each.

Payments were made on this date as indicated in the following subscription register:

Subscriber No. Shares Amount Form of Payment C. Dunn 100 $10,000.00 Cash E. Ferris 200 20,000.00 Cash G. Hall 400 40,000.00 Cash $10,000, and Hall’s note with interest at 6%, due in one year, the balance.

April 12. Expenses of $1,200 incidental to the organization of the corporation were paid in cash.

April 15. The corporation purchased J. King’s entire plant valued at $170,000 and assumed his liabilities amounting to $70,000, giving in full payment 1,200 shares of stock at par.

April 20. S. Samson subscribed for 50 shares of stock and paid an instalment of $30 per share in cash.

April 22. To provide working capital, each of the following stockholders donated 1/10 of his shares of stock: Dunn, Ferris, Hall, and King.

April 25. Cash was received for 100 shares of donated stock sold at 85.

April 27. Samson gave his note due in six months for the balance due on his stock subscription.

April 28. The directors authorized an issue of $50,000 in bonds, with interest at 5%, to mature in 20 years.

April 30. Bonds having a par value of $30,000 were sold for $28,000 in cash.

(a) Write journal entries to record fully all the above information in the financial books of the corporation. (b) Prepare the corporation balance sheet for April 30, 1918.

MANUFACTURING STATEMENT

6. The Marine Equipment Co., a corporation, manufactures metal boats and deals in marine supplies. A trial balance of the general ledger, December 31, 1917, is given below:

Land $20,000.00 Buildings 50,000.00 Machinery and Tools 40,000.00 Automobile Trucks 5,000.00 Patents 7,000.00 Office Furniture and Fixtures. 700.00 Accounts Receivable 19,000.00 Notes Receivable 10,700.00 Notes Receivable Discounted $6,000.00 Raw Materials Inventory, January 1, 1917 20,000.00 Goods in Process Inventory, January 1, 1917 5,000.00 Metal Boats Finished Inventory, January 1, 1917 8,000.00 Marine Supplies Inventory, January 1, 1917 12,000.00 Union National Bank 8,740.00 Capital Stock 100,000.00 Surplus 18,000.00 Treasury Stock 10,000.00 Bonds Payable, 5% First Mortgage 40,000.00 Reserve for Depreciation, Buildings 1,200.00 Reserve for Depreciation, Machinery and Tools 1,000.00 Reserve for Depreciation, Automobile Trucks 200.00 Notes Payable 2,000.00 Accounts Payable 24,000.00 Purchases, Raw Material 40,000.00 Purchases, Marine Supplies 30,000.00 Freight Inward, Raw Materials 2,450.00 Freight Inward, Marine Supplies 1,340.00 Freight and Cartage Outward 824.00 Sales, Metal Boats 131,130.00 Sales, Marine Supplies 58,960.00 Productive Labor 32,400.00 Non-Productive Labor 15,230.00 Superintendence 3,420.00 Heat, Light, and Power 8,500.00 Shop Supplies 2,490.00 Miscellaneous Factory Expense 1,300.00 Insurance 300.00 Repairs to Machinery and Tools 2,146.00 Taxes 400.00 Advertising 3,420.00 Returned Sales and Allowances, Metal Boats 1,200.00 Returned Sales and Allowances, Marine Supplies 862.00 Discount on Sales 3,710.00 Discount on Purchases 5,071.00 Salesmen’s Salaries 6,570.00 Salesmen’s Traveling Expenses 2,354.00 Advances to Salesmen 450.00 Office Salaries 8,630.00 Legal Expense 540.00 Stationery and Printing 1,200.00 Postage 190.00 Interest 315.00 Miscellaneous Selling Expense 1,180.00 ----------- ----------- $387,561.00 $387,561.00 =========== ===========

Additional information to be considered:

Inventories, December 31, 1917: Raw Materials $21,000.00 Goods in Process 7,000.00 Metal Boats Finished 13,000.00 Marine Supplies 8,000.00

Accrued Items: Interest on Bonds Payable, 1 year at 5% $2,000.00 Interest on Notes Payable 40.00 Interest on Notes Receivable 75.00 Taxes (estimated) 100.00

Unexpired insurance $100.

Provide for Reserve for depreciation on: buildings, 5% on original value; machinery and tools, 10% on diminishing value; automobile trucks, 20% on diminishing value. Also provide a 2% reserve for bad debts. Write off depreciation of 10% on the original cost of furniture and fixtures. Patents expire 14 years from January 1, 1917. One-half of advertising is to be carried to the next period.

Distribute as follows:

Item Mfg. Selling P. L. Insurance ¾ ¼ 0 Depreciation Auto Trucks ½ ½ 0 Taxes ¾ 0 ¼

From the trial balance and the additional information prepare:

(a) Income statement. (b) Balance sheet. (c) Journal entries to record the additional information and close the ledger.

CONSIGNMENTS, COMMISSIONS, JOINT VENTURE

7. December 1, 1917, a New York merchant ships goods of the value of $5,000 on consignment to a commission merchant at Rio de Janeiro, insuring them in the Atlantic Mutual against loss or damage in transit and prepaying freight and insurance amounting to $250. On arrival the goods are found to be in a partially damaged condition and the loss is adjusted at $1,000, the certificates for which the consignee transmits to the consignor together with an account sales for $3,000, dated March 1, 1918, and a final account sales for $2,000, dated April 1, 1918. A draft on New York for $4,300 accompanied this final account, being the balance due after deducting duty paid and commission earned.

Give expression to these transactions on the books of the consignor.

8. On November 15, 1917, Isaac Cohen & Co., Ltd. sent for sale on their account a consignment of goods valued at $5,000 to John Stimson & Sons, factors of Boston; sale to be on a 5% basis with 1% additional for guaranty of collection of accounts. Prepaid freight amounted to $25.40. December 26, an account sales from Stimson & Sons showed sales of $5,775.20, and expenses in connection therewith, exclusive of commission and guaranty, of $42.25. The net proceeds were placed to Cohen & Co.’s credit, subject to sight draft.

(a) Show the alternative treatment of all the accounts affected on Cohen & Co.’s books in order either to show the profit or loss on this consignment, or to include the profit or loss with their regular sales.

(b) Stimson & Sons’ fiscal year ended November 30. On November 25 they had sold one-fourth of the Cohen & Co. consignment for $1,500 and had incurred the expenses of $42.25 mentioned above but applicable to the whole consignment. Show Stimson & Son’s accounts affected properly closed.

(c) If Cohen & Co.’s fiscal year ends on November 30, what entries would be needed to make the record in accord with the additional data of question (b) above?

9. A, B & Co. and C, D & Co. enter a joint adventure to ship machinery to New Zealand. C, D & Co., October 5, 1917, handed A, B & Co. $600 in cash and granted them their acceptance at 6 months for $1,500. A, B & Co. were to provide balance of cash required, to manage the venture, to receive a commission of 2% on amount of invoice for machinery. Profits of venture to be divided equally.

On October 6, 1917, A, B & Co. paid J, K & Co. for machinery $2,500, and on the same date discounted acceptance of C, D & Co. for $1,500, paying $30 for discount thereon. On the following day A, B & Co. paid $210 for freight and $30 for insurance. On March 25, 1918, A, B & Co. received from New Zealand to account of proceeds of machinery a draft payable in London for $1,600, out of which, April 8, 1918, they paid $1,500 to retire bills for that amount.

On August 8, 1918, A, B & Co. received from New Zealand a draft for $1,550, being balance of proceeds for machinery, after deducting agent’s commission charges and duty. They thereupon closed the accounts and sent C, D & Co. check for balance due to them.

Make up an account showing result of venture, also C, D & Co.’s account with A, B & Co. Do not regard interest.

10. A B, a commission merchant, doing business on a 5% basis, hands you the following abstract of his ledger, showing his transactions for the year.

Furnish A B’s capital account, showing his original investment; also a balance sheet and a detailed cash account.

Sales $45,000.00 $60,000.00 Freight 2,100.00 1,400.00 Claims and Allowance on Settled Account only 600.00 1,500.00 Expense 900.00 Customers’ Accounts 60,000.00 45,000.00 Creditors’ Accounts 37,950.00 39,850.00 Cash 59,000.00 40,950.00 Discounts Lost 400.00 ---------- ----------- $205,950.00 $188,700.00 =========== ===========

11. A and B, commission merchants, suspect their cashier of embezzlement. From the following data determine whether or not their suspicions are well founded, and produce a balance sheet and profit and loss statement to prove or disprove the suspicion.

Sales $42,000.00 Cash Receipts, Customers $42,000.00 Freight 4,240.00 2,480.00 Duty 2,120.00 1,240.00 Dock Charges 212.00 124.00 Custom House Charges 90.00 45.00 Interest (account sales at 6%) 248.00 Commission (5% on sales) 1,240.00 Office Expense 2,000.00 Documentary Advances 20,000.00 12,000.00 Acceptances against Shipments 12,000.00 20,000.00

Analysis of account sales ledger debits, duty $875, freight $1,560, dock charges $70, custom house charges $40.

ANALYSIS BY COMPARISON

12. The trading accounts of a company covering two years are herewith submitted.

Analyze the accounts and make a report to the company showing the reasons for the difference in results.

1916 Merchandise Inventory, January 1, 1916 $150,000.00 Merchandise Purchases 633,000.00 Merchandise Sales, Travelers 600,000.00 Merchandise Sales, Domestic 150,000.00 Merchandise Sales, Cash 10,000.00 Commissions Paid Travelers 30,000.00 Salaries Paid Travelers 30,000.00 Salaries, Domestic Sales 15,000.00 Rental 5,000.00 Stationery, etc. 3,000.00 Expense 22,000.00 Interest 4,000.00 Inventory, January 1, 1917 125,000.00

1917 Merchandise Inventory, January 1, 1917 $125,000.00 Merchandise Purchases 600,000.00 Merchandise Sales, Travelers 600,000.00 Merchandise Sales, Domestic 150,000.00 Merchandise Sales, cash 10,000.00 Commissions Paid Travelers 30,000.00 Salaries Paid Travelers 10,000.00 Salaries, Domestic Sales 10,000.00 Rental 5,000.00 Stationery, etc. 3,000.00 Expense 15,000.00 Interest 1,000.00 Merchandise Inventory, January 1, 1918 125,000.00

13. A corporation’s balance sheets for August, 1918, and September, 1918, were respectively as follows:

August, 1918 Assets

Plant and Equipment $4,000,000.00 Furniture 6,000.00 Tools 3,000.00 Stable 3,811.28 Cash 15,250.36 Material Supplies 30,750.28 Accounts Receivable 28,920.13 Unexpired Insurance 510.29 ------------- Total $4,088,242.34

Liabilities

Capital Stock $2,500,000.00 Bonds 1,350,000.00 Accounts Payable 31,336.28 Bills Payable 26,240.12 Accrued Taxes 3,500.00 Accrued Interest 5,625.00 Profit and Loss 171,540.94 ---------- Total $4,088,242.34

September, 1918 Assets

Plant and Equipment $4,012,310.21 Furniture 6,205.58 Tools 3,218.86 Stable 4,009.37 Cash 8,328.29 Material Supplies 39,280.17 Accounts Receivable 32,321.83 Unexpired Insurance 832.12 ------------- Total $4,106,506.43

Liabilities

Capital Stock $2,500,000.00 Bonds 1 ,362,000.00 Accounts Payable 33,445.59 Bills Payable 18,240.12 Accrued Taxes 4,000.00 Accrued Interest 11,250.00 Profit and Loss 177,570.72 ------------- Total $4,106,506.43

Analyze the differences in the corresponding accounts for the period and show disposition of increased resources.

14. The board of directors of the X, Y, Z Company removed their manager on April 30, 1918, on the general suspicion that his books misrepresented the true financial condition of the business. Prepare a statement showing the nature and the probable extent of the misrepresentation, also an approximate statement of income and profit and loss for the four months ending April 30, 1918, and a balance sheet as of April 30, 1918.

The following is a trial balance taken from the books April 30, 1918:

Capital Stock $75,000.00 Fixtures $10,000.00 Inventory, January 1, 1918 128,600.00 Cash 15,450.00 Accounts Receivable 24,600.00 Accounts Payable 39,000.00 Loans Payable 10,000.00 Sales 51,000.00 Purchases 40,700.00 Salaries, Salesmen 2,200.00 Advertising 1,650.00 Salaries, Office 1,100.00 Rent 400.00 Interest 200.00 Insurance, January 1 to December 31, 1918 999.00 Stationery and Printing 105.00 Reserve for Depreciation of Fixtures 2,710.00 Surplus, January 1, 1918 48,294.00 ----------- ----------- $226,004.00 $226,004.00 =========== ===========

An analysis of the Purchases and Sales accounts revealed the following: purchases, year 1915, $122,000; sales, year 1915, $153,750; inventory, January 1, 1915, $101,000; purchases, year 1916, $123,000; sales, year 1916, $153,170; inventory, January 1, 1916, $100,000; purchases, year 1917, $121,000; sales, year 1917, $154,722; inventory, January 1, 1917, $102,000.

15. Robert Adams and William Stevens are equal partners. On the night of July 3, their stock and fixtures were destroyed by fire. A trial balance, which Adams had at his home, showed the following condition of the ledger at the close of business, June 30:

Robert Adams $600.00 $7,450.00 William Stevens 600.00 7,450.00 Cash 3,309.00 Fixtures 1,500.00 Merchandise Purchases 32,600.00 Merchandise Sales 24,800.00 Notes Receivable 1,000.00 Notes Payable 2,000.00 Interest 120.00 50.00 Expense 780.00 Customers 4,500.00 Creditors 3,259.00 ---------- ---------- $45,009.00 $45,009.00 ========== ==========

The property is fully covered by insurance. The insurance company, for the purpose of estimating the value of the merchandise destroyed has agreed to allow 35% as the average gross gain on the sales, and to pay 66⅔% on the value of the fixtures as shown by the ledger.

On the basis of this agreement, state the result of the business and the capital of each partner.

STATEMENT OF AFFAIRS

16. C. C. Carter and A. D. Walker were unable to meet their obligations. From the books of the firm and additional information you ascertained the following:

Real Estate (estimated to produce $18,000; subject to a mortgage of $12,000) $20,000.00 Notes Receivable 6,000.00 Expense 7,820.00 Furniture and Fixtures (estimated to produce $2,700) 3,500.00 D. L. & W. Stock (estimated to produce $12,000 pledged with fully secured creditors) 14,000.00 Horse and Wagon (estimated to produce $500) 700.00 Other Securities (pledged with partially secured creditors)3,000.00 Accounts Receivable (good $3,000; doubtful $1,800, but estimated to produce $1,440; bad $600) 5,400.00 Notes Payable 2,000.00 Creditors, Unsecured 18,000.00 Creditors, Partially Secured 8,000.00 Creditors, Fully Secured 10,000.00 Wages, Salaries and Taxes, preferred by law 560.00 Carter, Capital 15,000.00 Walker, Capital 5,000.00 Carter, Drawings (debit) 3,050.00 Walker, Drawings (debit) 1,000.00 Cash 870.00 Sundry Losses 5,220.00

Prepare statement of affairs and deficiency account as of September 30, 1918.

17. On December 1, 1918, the following particulars are furnished of the position of John Mapleton, insolvent: factory equipment cost $15,000, estimated to realize $10,000; stock of finished goods $10,000, estimated worth $7,500; material and supplies $2,500, estimated worth $1,000; furniture and fixtures $900, estimated worth $200; investments valued at $25,275, of which $15,000 is held by bankers as security for loan of $12,000; accounts receivable $6,250, of which $2,500 are good, $1,250 bad, and $2,500 estimated to realize $1,500; cash $575, of which $25 represents petty expense items not charged up, and $50 an I O U of a former employee which is worthless; accounts payable $28,500; bills payable $25,000, of which $12,000 is due bankers; wages due $500; rent due and past due $1,000; capital on January 1, 1918, as shown by the books, $15,000; loss by sale of investment May 1, 1918, $5,000; loss in trading account January 1, 1918, to December 1, 1918, $3,500; drawings charged personal account of John Mapleton $1,000.

Make up a statement of affairs and a deficiency account as on December 1, 1918.

18. John Thompson exhibits the following balance sheet of his business dated June 30, 1918:

Cash $750 Sundry creditors $6,000 Book debts 9,500 Bills Payable 7,500 Stock on hand 6,500 Bank (overdraft) 3,000 Fixtures, etc. 1,750 Balance 2,000 ------- ------- Total $18,500 Total $18,500

On questioning Thompson it was found that he had omitted the following from his balance sheet: $250 owing for rent; $75 owing for taxes; $2,500 borrowed at 5% from his wife three years ago, no payment having been made on account of either principal or interest; a draft for $500 accepted by a firm without consideration, falling due in 30 days. His private and household debts amounted to $600.

The item entered on his balance sheet as cash included his personal I O U’s for $600.

Of the book debts about $3,500 might be considered bad and the rest good. The stock was good except $1,000, which would not produce more than $100. The fixtures, if sold, would not realize more than $250. The only other assets were household furniture worth about $1,250 and residence valued at $7,500, subject to a first mortgage for $5,000 at 4%, and also a second mortgage held by his bank as security for overdraft.

Prepare a statement of affairs and deficiency account.

19. June 30, 1918, as a result of careless management, the firm of Howard, Mason & Co. finds itself in a critical financial condition.

The following trial balance shows the accounts as they appear on the books after closing the ledger.

POST-CLOSING TRIAL BALANCE, JUNE 30, 1918

Land $10,000.00 Buildings 42,000.00 Reserve for Depreciation, Buildings $6,000.00 Delivery Equipment 7,000.00 Reserve for Depreciation, Equipment 1,500.00 Furniture and Fixtures 4,200.00 Good-Will 5,000.00 Cash 2,316.00 F. D. Co. Stock 4,000.00 Accounts Receivable 16,000.00 Reserve for Bad Debts 1,996.00 Notes Receivable 9,400.00 Notes Receivable Discounted 3,800.00 Merchandise Inventory, Bags, June 30, 1918. 4,780.00 Merchandise Inventory, Trunks, June 30, 1918 8,910.00 Mortgage Payable 25,000.00 Accounts Payable 21,000.00 Notes Payable 12,000.00 Thomas J. Howard, Loan 6,000.00 Thomas J. Howard, Capital 15,000.00 Thomas J. Howard, Drawing 1,700.00 Joseph Mason, Loan 4,000.00 Joseph Mason, Capital 9,000.00 Joseph Mason, Drawing 1,000.00 John H. Bartlett, Loan 3,000.00 John H. Bartlett, Capital 6,000.00 Accrued Interest, Mortgage 1,500.00 Accrued Interest, Notes Payable 300.00 Accrued Interest, Notes Receivable 150.00 Prepaid Insurance 60.00 Taxes Accrued 300.00 Accrued Labor 200.00 Miscellaneous Office Supplies 80.00 ----------- ----------- $116,596.00 $116,596.00 =========== ===========

There is dissatisfaction among the partners and they finally agree to dissolve partnership. Preparatory to dissolving they appraise the assets and rank the liabilities on a liquidating basis.

It has been found that the buildings had been damaged by fire to the extent of $3,000 but that no adjustment had been made in the buildings account. The delivery equipment is estimated to produce $4,800. Furniture and fixtures have a value of $3,600. The land has increased in value $6,000.

Of the notes payable, $5,000 has been partially secured by all the F. D. Co. Stock, which is expected to yield 80% of its book value. Collateral in the form of good notes receivable of $4,500 has been given to creditors whose claims amount to $3,700.

Among the cash there are I O U’s in the amount of $180 that cannot be considered as worth more than $50. The accounts receivable are classified as worthless $3,000; doubtful $2,000, which are expected to produce $1,400; the balance are good. Both inventories of merchandise were reduced by 10%.

The accrued taxes and labor are claims preferred by law. Prepaid insurance, miscellaneous office supplies, and good-will were assumed to have no value in case of liquidation.

From the information at hand:

(a) Prepare a statement of affairs showing the financial condition of the partnership in anticipation of liquidation. (b) Prepare a statement accounting for the impairment of capital.

REALIZATION AND LIQUIDATION

20. It has been mutually agreed that Joseph Mason shall act as liquidating partner with full authority to sell all property, pay all debts and distribute liquidating dividends among the partners. Mason’s fee as liquidator shall be 5% commission on the converted value of all the assets and is to be paid at each dividend date.

Interest is to be allowed on the loan accounts, and profits and losses are to be shared ½ by Howe, and ¼ each by Mason and Bartlett, during the period of liquidation.

Settlements are to be made on the last day of each month.

Based on the post-closing trial balance in the preceding problem and the information given below:

(a) Prepare a working sheet which will present the information in convenient form for preparing the statements incidental to liquidation. (b) Show the partners’ loan accounts properly closed for each period. (c) Set up the partners’ capital accounts, and balance them after the payment of each liquidating dividend.

During the month ended July 31, 1918, delivery equipment having a book value of $3,300 was sold for $3,000 in cash; accounts receivable in the amount of $4,000 were collected and $980 in bad debts were charged off. A sale of the land and buildings granted the use of the premises during the liquidation. The land was sold for $17,000 and the buildings for $31,500, the mortgage (with accrued interest to July 3) being assumed by the purchaser as part payment. The partially secured creditors accepted the F. D. Co. Stock held as collateral at 90% of its book value and the balance of their claim was paid in cash. Incidental expenses of $350 and the liquidating fees were paid in cash. From the goods in the inventories there were sold bags of a book value of $1,200 for $1,120, and trunks, book value $2,530, for $2,280. There was paid to holders of unsecured notes payable $2,000 and interest of $100. The accrued labor was paid and $10,000 in unsecured accounts payable were settled. The balance of the cash was applied in paying off partners’ loans and capital as a liquidating dividend.

The next month the delivery equipment was sold for $1,850. Furniture and fixtures having a book value of $2,100 were sold for $1,700. Of the I O U’s $70 was collected; the balance proved worthless. The notes receivable as collateral in the hands of fully secured creditors were settled in full and our equity was paid to us in cash, also accrued interest of $120. Bags having a book value of $2,500 were sold for $2,100, and trunks at book $3,700 brought $3,200. Mason accepted $4,200 in settlement of $5,000 in accounts receivable.

Legal fees of $150; sundry expenses of $460; all the existing debts and the liquidating fees were paid in cash. The cash remaining was distributed as a liquidating dividend.

In the course of the last month the remaining furniture and fixtures were sold for $1,900. The good-will went to the same purchaser for $1,000 additional.

The prepaid insurance is without value. Office supplies yielded $20. The notes receivable, together with the balance of accrued interest were collected in full. There was lost in bad debts $740. The bags were sold at a 10% reduction. The partners divided the trunks among themselves one-third to each, taking them at book value.

Sundry expenses of $340 and the liquidating fees were paid in cash, after which the cash on hand was distributed.

Note: Converted value means the value at which any asset is disposed of, whether for cash or in the cancellation of any claim.

21. Show on the books of the firm of Howard, Mason & Co. all the entries necessary to carry into effect the liquidation of the business under the conditions set forth in the foregoing problem.

22. The firm of Norton & Brown decided to liquidate at a time when their condition, as shown by the balance sheet given below, was still solvent.

BALANCE SHEET, MARCH 31, 1918 ================================+============================ Assets | Liabilities | Plant and Equipment $20,000.00 | Notes Payable $6,000.00 Office Furniture 2,000.00 | Accounts Payable 17,000.00 Inventory, Material 12,000.00 | Norton, Loans 5,000.00 Notes Receivable 5,000.00 | Brown, Loans 3,000.00 Accounts Receivable 29,000.00 | Norton, Capital 25,000.00 Cash 3,000.00 | Brown, Capital 15,000.00 ---------- | ---------- $71,000.00 | $71,000.00 ========== | ==========

Profits and losses were shared three-fourths by Norton and one-fourth by Brown. Interest was allowed on the loan accounts but not on the capital accounts. At the end of the first month, April 30, it was found that material inventoried at $5,000 had produced $3,600; accounts receivable to the amount of $15,000 had been collected in cash and $2,800 in bad debts charged off; notes receivable collected in cash $2,000; expenses of $600 had been paid in cash; equipment valued at $4,000 produced $3,000. Interest on partner’s loan accounts was not entered this month.

During the month ended May 31, office furniture valued at $1,600 was sold for $1,000. Material costing $4,000 produced $3,200 and the balance of material was divided equally between the partners at cost. Plant equipment listed at $6,000 was sold for $6,200. A $200 note proved worthless and was charged off. Accounts receivable to the amount of $6,065 and notes receivable of $2,000 were collected in cash. Bad debts charged off $435. Expenses paid in cash $300. Interest was credited on Norton’s loan account $40 and Brown’s loan account $25.

Arrange your solution to show:

(a) Your method of obtaining the proper cash distribution.

(b) A statement showing each partner’s capital and loan at the end of each month, or a detailed capital and loan account for each partner with a balance entered in each account each month. (c) A balance sheet at the close of the second month.

23. Walter Hopkins, while perfectly solvent and doing a profitable manufacturing business, had so tied up his capital in plant and materials that he was on the point of suspending for want of funds to pay for labor, and his creditors were preparing to commence legal proceedings to enforce a settlement. The condition of his affairs at this time was as follows:

BALANCE SHEET =====================================+====================== Assets | Liabilities | Plant $25,198.00 | Creditors $20,230.00 Cash 212.00 | Capital 50,000.00 Materials, Raw and Surplus 4,900.00 | Partly Finished 40,400.00 | Finished Goods 6,070.00 | Accounts Receivable 3,250.00 | ---------- | ---------- $75,130.00 | $75,130.00 ========== | ==========

At a meeting of creditors he said that while his plant was entirely efficient, it was all of special character and would realize on forced sale only the value of scrap, that the unfinished goods would require the employment of skill and processes known to him only, and that while forced suspension would yield to his creditors not over 50%, it would ruin him absolutely.

The creditors decided to advance him a loan of $5,000 to continue operations and allow him additional credit for materials and expenses. A trustee was appointed to see that the proceeds were used solely for recuperation of the business.

The subsequent operations under the supervision of the trustee were as follows:

Purchases on book account, charged to materials $5,100, to expense $12,100; sales on book account $57,802; losses on bad debts $300; cash receipts (loan from creditors) $5,000; settlement from debtors $58,100; cash payments for labor $12,500, for expense $4,350; for plant $600; creditors $42,030; Walter Hopkins’ personal drawings $3,000.

There remained raw materials $4,000, finished goods $22,388.

Prepare:

(a) Realization and liquidation account. (b) Trustee’s cash account. (c) Balance sheet of the estate as restored to Walter Hopkins.

24. X, Y, and Z, foundrymen, unable to meet their obligations, suspended payment January 1, 1918, and appointed a trustee to realize and liquidate for the benefit of their creditors. The books showed the following assets and liabilities:

Assets

Land and Buildings $125,000.00 Machinery and Tools 75,000.00 Furniture and Fixtures 10,000.00 Materials and Supplies 95,000.00 Bills Receivable 15,000.00 Accounts Receivable 115,000.00 Cash 450.00 Total Assets $435,450.00

Liabilities

Mortgage on Foundry Premises $100,000.00 Bills Payable 135,000.00 Accounts Payable 105,000.00 Interest Accrued on Mortgage 1,250.00 Taxes Accrued (estimated) 835.00 Capital 93,365.00 Total Liabilities $435,450.00

The trustee’s cash receipts and payments during the year 1918 were as follows:

Receipts

Bills Receivable (outstanding January 1, 1918) $15,000.00 Accounts Receivable (outstanding January 1, 1918) 106,500.00 Cash Sales 5,435.00 Bills Receivable (contracted during year 1918) 13,500.00 Accounts Receivable (contracted during year 1918) 212,000.00 ---------- Total Receipts $352,435.00

Payments

Bills Payable $25,000.00 Accounts Payable 35,000.00 Interest on Mortgage (one year at 5%) 5,000.00 Taxes for the year 1917 865.00 Purchases of Materials and Supplies 98,000.00 Labor 135,000.00 General Expenses 45,000.00 Interest on Bills Payable (to September 30, 1918, at 5%) 2,800.00 ---------- Total Payments $346,665.00

Other transactions were as follows:

Sales on Credit $335,000.00 Bad Debts Written Off: Accounts prior to January 1, 1918 $8,000.00 Accounts subsequent to January 1, 1918 2,000.00 10,000.00 --------- Discounts and Allowances to Customers: Accounts prior to January 1, 1918 $500.00 Accounts subsequent to January 1, 1918 300.00 800.00 --------- Notes Received from Customers 20,000.00 Notes Given to Creditors ($110,000 being renewals) 180,000.00 Inventory of Materials and Supplies, December 31, 1918, amounted to 92,000.00

The trust terminated at the end of the year and the business was turned back to the owners.

Prepare realization and liquidation account; also a balance sheet showing the financial condition of the business at the termination of the trust. Accrued taxes for the year in the usual manner, i.e., on the basis of the charge for previous year.

BRANCHES

25. The trial balance of Jones & Smith, Chicago branch, shows December 31, 1918, the following:

Home Office $2,000.00 Due from Customers $2,500.00 Cash on Hand 1,000.00 Expenses 1,900.00 Merchandise 3,400.00 --------- --------- $5,400.00 $5,400.00 ========= =========

Inventory $1,000.

Draft the necessary journal entries to close the accounts on the branch books, and the entries to be made in the home office to make the books agree.

26. A branch office business was started at the first of the year, the head office advancing $5,000 cash. During the first year merchandise was shipped to branch, invoiced at $75,000.

An auditor checking up the business at the close of the year finds the following: Merchandise sales were $60,000, with selling price of goods 20% advance on invoice. Proper vouchers were on file duly receipted for following payments: rebates and allowances on damaged goods $1,500; salaries and other expenses $4,500; freights $2,500.

The books also showed: remittances to head office $35,000; uncollected accounts $15,000. The balance of the sales having been realized in cash, less rebates and allowances as noted.

The cash on hand and inventory of unsold goods, together with the foregoing records, properly accounts for everything.

Prepare statement, such as an auditor would make in reporting to the head office, balancing the business of the branch house.

27. The condition of the Atlantic Co. at the close of business December 31, 1918, is reported by them as follows:

================================+=================================== Assets | Liabilities | Real Estate $150,000.00 | Capital Stock $500,000.00 Machinery 200,000.00 | Mortgage on Real Estate 100,000.00 Cash 24,500.40 | Accounts Payable 67,000.00 Accounts Receivable 320,800.50 | Notes Payable 100,000.00 Merchandise 375,480.70 | Surplus 200,000.00 | Profit and Loss 103,781.60 | ------------- | ------------- $1,070,781.60 | $1,070,781.60 ============= | =============

The company has a branch to which it sells its goods at 20% over inventory prices and carries this account, together with other branch assets, as a receivable. The statement of the branch on the same date was:

=================================+=============================== Assets | Liabilities | Fixtures $6,205.79 | Atlantic Co. $25,033.43 Cash 1,107.55 | Accounts Receivable 12,478.14 | Merchandise at price | billed to Branch 5,241.95 | ---------- | --------- $25,033.43 | 25,033.43 ========== | =========

(a) What was the inventoried value of the branch merchandise? (b) Prepare a corrected statement of the Atlantic Co.

SINKING FUND

28. A corporation issues 10-year bonds to the amount of $50,000, securing same by a mortgage on its property, which is placed in the hands of a trust company.

The trust deed provides for the establishment of a sinking fund to retire the bonds at maturity and that equal annual payments be made on the first of January in each year. Give the amount of this annual payment, interest compounded at 6%.

29. The United Manufacturing Co., on January 1, 1918, placed in service a piece of machinery which would depreciate, according to its chief engineer, at the rate of 15% per annum. The original cost of this machinery was $84,000 and the board of directors agreed to set aside annually a sinking fund which, together with interest thereon, will amount to the original cost at the end of the prospective life of the machinery.

This sinking fund is to be deposited with a trust company on December 31 of each year, and a proportionate amount at the end of the last partial year of the life of the machine. Interest is to be credited by the trust company at each of these dates at the rate of 4% per annum.

Show how the amount of the annual sinking fund payments may be arrived at, and prepare a detailed statement for the board of directors proving that the amount so obtained is correct.

CONSOLIDATIONS, MERGERS, AND REORGANIZATIONS

30. Three manufacturers, each having an independent business and wishing to effect a consolidation of their respective interests, organize the United States Manufacturing Corporation, with an authorized capital stock of $1,500,000, consisting of 7,500 shares of preferred stock and 7,500 shares of common stock, of $100 each. They sell to the new company all of their real estate, buildings, machinery, tools, fixtures, merchandise, and supplies, in consideration of $1,500,000, and agree to accept in payment $750,000 of preferred and $750,000 of common stock of the United States Manufacturing Corporation at par. The vendors donate to the treasury of the company $150,000 of preferred stock and $150,000 of common stock to provide for working capital. The company sells $100,000 of its preferred stock in the treasury for 80% cash, giving a bonus to the purchaser of 20% in common stock.

For the purpose of raising additional funds for improvements and additions to plants, the company mortgages its real estate and buildings, as security for an issue of bonds amounting to $250,000. These bonds the company sells to bankers at 90%, giving as a bonus 10% of preferred stock and 20% of common stock.

Draft entries to express correctly the above transaction on the books of the corporation, and prepare a statement of assets and liabilities of the company.

31. It is proposed to organize a corporation for the purpose of acquiring the stock and controlling three existing corporations, A, B, and C, two of which latter, A and B, have been in operation for five and three years, respectively, while C has been newly organized. The assets and liabilities of the several existing companies and the dividends paid are as follows:

Assets A B C Plant $400,000.00 $300,000.00 Material 295,000.00 425,000.00 Cash 40,000.00 15,000.00 $500,000.00 ----------- ----------- ----------- $735,000.00 $740,000.00 $500,000.00 =========== =========== ===========

Liabilities A B C Capital $100,000.00 $300,000.00 $500,000.00 Surplus 60,000.00 40,000.00 6% Bond at 5 years 500,000.00 300,000.00 Current Liabilities 75,000.00 100,000.00 ----------- ----------- ----------- $735,000.00 $740,000.00 $500,000.00 =========== =========== ===========

Dividends Paid $120,000.00 $30,000.00

For the purpose of the issuance of stock in the new company to the holders of stock in the three existing companies, it is proposed to capitalize the latter upon the following basis:

Money assets at double their value; plant at 80% of book values; material at 70% of book values; annual net earnings at 8%; and the liabilities at par.

The new company will be organized with a capital stock of $2,200,000, all of which is to be used in acquiring the stock of the existing companies.

(a) What amount of stock in the new company are the owners of the stock in each of the existing companies entitled to receive? (b) Give a short criticism attacking the above basis of stock allotment and submit a more equitable basis.

32. The Smith Brewing Co. with $1,000,000 capital stock, the Young Brewing Co. with $500,000 capital stock, and the Star Brewery with $400,000 capital stock, agree to consolidate as the Universal Brewing Corporation, the new company to buy all the properties of the old companies at a valuation to be fixed by appraisal, payment therefor to be made in full-paid stock of the new company, the old companies to pay off their own indebtedness.

The appraised values of the old companies are as follows:

==========+========+========+=======+=======+=======+======+========== | Real | | | Bills |Horses,|Office| | Estate | Plant | Cash |Receiv-|Wagons |Furni-| Total | and | | | able | and | ture | | Build- | | | |Harness| | | ings | | | | | | ----------+--------+--------+-------+-------+-------+------+---------- | | | | | | | Smith |$680,000|$390,000|$15,000|$10,000|$4,000 |$1,000|$1,100,000 Young | 327,000| 160,000| 3,000| 6,000| 3,000 | 1,000| 500,000 Star | 126,000| 71,000| 1,000| | 1,500 | 500| 200,000 Total | | | | | | | Appraised| | | | | | |---------- Value | | | | | | |$1,800,000 ----------+--------+--------+-------+-------+-------+------+----------

On this valuation, the Universal Brewing Corporation issued $2,000,000 of stock, shares $100 each, which was divided pro rata among the old companies on the basis of their appraised value, no fractional shares of stock to be issued, odd amounts to be paid old companies in cash.

Give journal entries necessary to set up property accounts and credit old companies with their pro rata on books of the new company.

At the time of the consolidation the ledger accounts of the Star Brewery were as follows:

======================================+============================= Real Estate and Buildings $250,000.00 | Bills Capital Plant 247,000.00 | Stock $400,000.00 Cash 1,000.00 | Payable 50,000.00 Horses, Wagons, | Accounts Payable 51,000.00 and Harness 1,800.00 | Office Furniture 1,200.00 | ----------- | ----------- $501,000.00 | $501,000.00 =========== | ===========

Make the proper journal entries to liquidate in stock of the new company the liabilities other than capital stock, to apportion the remaining stock and cash, and to close the books of the Star Brewery.

33. The Elton Manufacturing Co. and the Star Manufacturing Co. were engaged in manufacturing the same kind of goods. To avoid the losses due to competition, the two companies decided to combine their plants into one corporation under the name of the Union Manufacturing Co. and finally agreed upon the following plan for the merger:

The assets received from, and the liabilities assumed for, the separate companies were taken at the values given in the respective balance sheets, subject to the following adjustments: the buildings, machinery, and patents at 90% of their stated value; delivery equipment, and furniture and fixtures at 80% of their value. A reserve of 2% on accounts receivable was established by the Star Manufacturing Co.

ELTON MANUFACTURING CO. BALANCE SHEET, JUNE 30, 1918 ==================================+================================ Land $10,000.00 | Accounts Payable $30,000.00 Buildings 60,000.00 | Mortgage Payable 14,000.00 Machinery and Tools 30,000.00 | Accrued Wages 1,500.00 Delivery Equipment 3,500.00 | Reserve for Bad Debts 1,500.00 Furniture and Fixtures 1,500.00 | Stock, Capital 100,000.00 Inventory, Materials 10,000.00 | Surplus 10,000.00 Finished Goods 2,500.00 | Accounts Receivable 35,000.00 | Unexpired Insurance 500.00 | Cash 4,000.00 | ---------- | ----------- $157,000.00 | $157,000.00 =========== | ===========

STAR MANUFACTURING CO. BALANCE SHEET, JUNE 30, 1918 =====================================+============================= Machinery and Tools $35,000.00 | Accounts Payable $30,000.00 Motor Trucks 4,000.00 | Notes Payable 19,000.00 Patents 6,000.00 | Capital Stock 50,000.00 Furniture and Fixtures 500.00 | Surplus 11,000.00 Inventory, Materials, etc. 8,000.00 | Finished Goods 5,000.00 | Accounts Receivable 50,000.00 | Cash 1,500.00 | ----------- | ----------- $110,000.00 | $110,000.00 =========== | ===========

After making the adjustments and allowing interest at 6% on the invested capital, the excess earnings were capitalized on a basis of 10% to obtain the amount of the good-will.

Average net profits for a period of three years: Elton Manufacturing Co. $17,000; Star Manufacturing Co. $10,800.

The Union Manufacturing Co. was capitalized at an amount equal to the net assets (after adjustments) and the good-will of the two merged companies.

(a) Find the capitalization of the Union Manufacturing Co. and the amount of preferred and common stock allotted to each of the merged companies. (b) Write the journal entries to open the books of the Union Manufacturing Co. (c) Prepare the balance sheet for the Union Manufacturing Co. (d) Write the closing journal entries for the Star Manufacturing Co.

34. The following is abstracted from an agreement of merger and consolidation made December 31, 1917, between the Pennsylvania Tool Co., party of the first part, and the Keystone Tool Co., party of the second part. Said parties of both parts being corporations duly organized and existing under the laws of the State of Pennsylvania, by this agreement merge and consolidate into a single corporation.

The name of the corporation hereby formed by said consolidation shall be the Pennsylvania Tool Co.

The amount of capital stock of the new corporation is $100,000, all of which shall be common stock divided into 1,000 shares of a par value of $100. The manner of distributing capital stock shall be as follows:

The capital stock of the Pennsylvania Tool Co., party of the first part, shall be exchangeable for capital stock of the new corporation, share for share, and the balance of the capital stock of the new corporation hereby formed shall be distributed to the stockholders of the Keystone Tool Co., in proportion to their present holdings.

The Pennsylvania Tool Co., party of the first part, was incorporated shortly before the date of the merger, and had transacted no business other than the issuance of ten shares of capital stock, $100 each, for which payment of $1,000 had been received, and which was on hand in the treasury of the company on the date of the merger, and directly after the merger transferred to the bank deposit account of the consolidated company and credited to an account called “Suspense.”

The Keystone Tool Co. had for a number of years been actively engaged in business. Its fiscal year ended September 30, 1917, at which time an inventory was taken and its accounts had been properly closed. At the date of the merger the following trial balance was drawn from the books:

Cash $20,000.00 Accounts Receivable 15,000.00 Merchandise Inventory, September 30, 1917 130,000.00 Merchandise Purchased 250,000.00 Expenses 25,000.00 Accounts Payable $10,000.00 Sales 300,000.00 Capital Stock 30,000.00 Undivided Profits Balance, September 30, 191 100,000.00 ----------- ----------- $440,000.00 $440,000.00 =========== ===========

The account books of this concern were not closed at the date of the merger and no inventory was taken, although the exchange of capital stock was effected and also all business after December 31, 1917, was transacted under the name of the Pennsylvania Tool Co., and it was not until March 31, 1918, that an accountant was asked to state the accounts of the new company from the date of the consolidation.

At March 31, 1918, before the accountant had commenced his work, an inventory was taken which showed the value of merchandise on hand as at that date, to be $216,250, and the following trial balance was abstracted from the books:

TRIAL BALANCE, MARCH 31, 1918

Cash $26,000.00 Accounts Receivable 10,000.00 Merchandise Inventory, September 30, 1917 130,000.00 Merchandise Purchased 600,000.00 Expenses 60,000.00 Accounts Payable $10,000.00 Sales 685,000.00 Suspense 1,000.00 Capital Stock 30,000.00 Undivided Profits 100,000.00 ----------- ----------- $826,000.00 $826,000.00 =========== ===========

Prepare:

(a) Balance sheet of the consolidated company as at March 31, 1918. (b) Profit and loss account arranged to show the profits of the consolidated company for the three months ended March 31.

(c) Profit and loss account of the Keystone Tool Co., for the three months ended December 31.

(d) Statement showing the disposition of profits taken over by the new company.

(e) State what basis you make use of in determining the approximate value of merchandise on hand at December 31.

MISCELLANEOUS

35. A manufacturer is desirous of selling his business, and furnishes a statement showing the condition of affairs for the past five years as follows:

Amount of Sales averaging per year $800,000.00 Wages Paid ” ” ” 200,000.00 Expenses Paid ” ” ” 80,000.00 Raw Material Purchased ” ” 350,000.00 Supplies on Hand at present time 40,000.00 Machinery in use at commencement of the five years 150,000.00 (50% of the above amount has been in use for 10 years previous, and all additions made at cost prices, and nothing marked off for depreciation.) Carried at present at $225,000.00 (All repairs have been charged to expense.) Real Estate valued at 200,000.00

What report would you make as to a fair valuation of this business? Explain fully your reasons for same.

36. The factory of an automobile company assembles its cars only on receipt of orders from the main office. A summary of the factory operations for a certain period is as follows:

Parts Purchased $162,500.00 Parts Manufactured (material cost) 562,500.00 Productive Labor (125% of material) 703,125.00 Factory Expense 1,128,000.00 Cost of Cars: Parts Purchased, Consumed 137,500.00 Parts Manufactured (material cost) 187,500.00 Productive Labor (145% of material) 471,250.00 Factory Expense 565,500.00 Material on Hand, Unmanufactured 500,000.00

Prepare a technical trial balance of the cost ledger and an inventory of the stock room.

37. John Doe commenced business with a cash capital of $15,000. At the close of his fiscal period the ledger accounts were: accounts receivable $4,312.50; merchandise debit balance $5,062.50; accounts payable $5,375; expense $900. Doe’s total loss was $2,775.

Prepare a statement of assets and liabilities and the profit or loss.

38. John Adams lost his stock of merchandise May 1, 1918, through a flood in the Mississippi River.

Adams applied to the local Mutual Flood Insurance Society for reimbursements, claiming a loss of $5,886.35 on merchandise stock. From the following data ascertain his merchandise inventory:

Net profits May 1, 1918, $4,452.91; drawings $1,598; legal expenses $17.50; interest debit $313; advertising $14; commissions debit $961.01; insurance $196.23; sales $81,688.04; inventory, December, 1917, $1,568.62; purchases $55,415.82; labor, productive $19,499.58; telephone $416.06; sundry factory expenses $3,201.92; repairs $16; surplus May 1, 1918, $2,854.91.

39. The directors of a manufacturing company, before the closing and auditing of the books for the half-year ending December 31, declared out of the net earnings of the company a dividend for the half-year of 4% on the preferred stock of $100,000 and 3% on the common stock of $100,000. There has been brought forward from the last half-year, an undivided balance of profit of $4,000, and after the audit of the books the trial balance is found to be as follows:

TRIAL BALANCE, DECEMBER 31

Real Estate and Building $32,500.00 Plant and Machinery 40,000.00 Patents and Good-Will 80,000.00 Inventory, July 1 29,000.00 Purchases 82,500.00 Labor 88,000.00 Coal 6,000.00 Salaries, General 11,000.00 Salaries, Management 5,000.00 Insurance 875.00 Allowances 6,250.00 Freight 1,500.00 Discount and Interest 750.00 Cash in Bank 8,000.00 Investments 15,500.00 Miscellaneous Expense 4,300.00 Book Debts 42,000.00 Preferred Stock in Treasury 5,000.00 Repairs 1,000.00 Preferred Stock 100,000.00 Common Stock 100,000.00 Sales 219,175.00 Notes Payable 26,000.00 Accounts Payable 14,000.00 ----------- ----------- $459,175.00 $459,175.00 =========== ===========

Stock on hand $26,500.

From the above prepare profit and loss and income statement and balance sheet, giving effect in accounts to depreciation at the rate of 7½% a year, on plant and machinery, and making an allowance of 5% on the book debts to provide for bad debts; also create a liability in the balance sheet for dividend as stated.

40. Wm. Bates commenced business June 1, 1917, with a capital consisting of cash $60,000, and a building and lot worth $85,000, subject to a mortgage of $25,000, dated June 1, 1917, bearing interest at 6%.

One year later, June 1, 1918, an abstract of his books disclosed the following accounts: purchases $78,000; sales $85,000; sinking fund $8,000; cash drawings $6,000; goods returned to creditors $5,000; expenses paid in cash $9,000; profit and loss, debit $3,500; contingent fund $3,000; due to creditors $49,000; reserve for bad debts $4,250; due from customers $32,620; discounts allowed customers on accounts paid $755; returned sales $4,520; discounts on accounts paid to creditors $650. No goods were sold to creditors or purchased from customers. Unsold goods June 1, 1918, $9,500.

From the above data, prepare a trial balance, income statement, and balance sheet.

Note: Two items affecting accounts in the trial balance are missing and must be supplied.

41. In taking off a trial balance a bookkeeper finds that his debit footings exceed the credit by $131.56, which he carried to a suspense account. Later, he discovers that a purchase amounting to $417.50 has been debited to a creditor as $192.94; that $312.50 for depreciation of furniture has not been posted to depreciation account; that $500 withdrawn by the proprietor has been charged against wages account; that a discount of $76.13 allowed to a customer has been credited to him as $71.13, and that the total of sales returned was footed $5 short. Give detailed entries showing how you would remedy these errors, and starting with the original difference prepare a supplemental trial balance showing whether the books balance or not.

42. A and B are partners owning two retail stores, one in Paterson and the other in Newark. They agree to dissolve partnership as of July 1, 1918. The two stores are valued July 1, 1918, as follows: Paterson $4,573.50; Newark $3,600. On this basis B contemplates purchasing A’s interest. On being furnished with the following data, B requests you to inform him if the inventory of the Paterson store, January 1, 1918, was correct as A claims:

Value of alleged Inventory, January 1, 1918, in the Paterson store $3,800.00 Purchases for both stores, January to July, paid for 5,128.80 Due to Creditors on account of both stores, July 1 1,500.00 Cash Sales, Newark store 1,875.00 Cash Sales, Paterson store 3,105.00 Purchases, Paterson store, January to July 3,326.00 Profits 50% of Sales

Prepare a statement proving whether or not the inventory of the Paterson store, January 1, 1918, was correct as stated.

43. On paper ruled as for a stock ledger, make entry of the following stock transactions of William Henderson, closing the account as of October 31, 1918, and carrying down the balance:

100 shares (par value $100) originally issued, full paid at par to William Henderson by certificate No. 5. August 16, 1918.

William Henderson sells 50 shares of the original 100 to Charles Gibbons at $120, September 14, 1918, receiving certificate No. 37 for shares retained.

October 28, 1918, William Henderson purchases from John Hogan 25 shares at $115 and receives certificate No. 78.

44. Stockholders of the Deep Canal Company donated 400 shares of stock of a par value of $100 per share for the purpose of providing working capital.

Three hundred shares of the treasury stock were sold by agents at 90. A commission of 10% and expenses of $516 was allowed the agents for selling. The 300 shares of treasury stock were sold on the instalment plan, 10% down and 10% a month for the balance. Certificates of stock not to be issued until paid in full.

Six months later you are to enter the total amount of cash paid on instalments, excluding the initial payment which was made at the time of subscription.

At the end of eight months 100 subscribers defaulted on their subscription contracts. Their subscriptions were canceled and the payments they had made declared forfeited.

The balance of all subscription accounts except those canceled by default have been paid in full and stock certificates therefor duly issued.

(a) Write all the necessary journal entries.

(b) Construct a suitable instalment book and record in it the above transactions.

APPENDIX D

REVIEW QUESTIONS

=Chapter I=

1. Name the two general classes of corporations, and subclassify each.

2. Discuss briefly the working organization of the stock corporation.

3. Name the different classes of stock and discuss each briefly.

4. What is meant by watered stock?

5. How, on the balance sheet, would you show discount on stock? Premium on stock?

6. What are the correct journal entries covering the receipt of treasury stock, and its sale at a discount? At a premium?

7. To what uses is donated surplus restricted?

8. What is bonus stock, and when may it be issued?

9. What kind of an expense does bonus stock constitute when given with an issue of bonds which would otherwise be sold at a discount?

10. When treasury stock is purchased by the issuing company at a discount, how would the transaction appear on the ledger? How if bought at a premium?

11. Contrast the redemption at a premium of a preferred stock issue, with the purchase of treasury stock at a premium.

12. What is meant by stock of no par value? Explain fully.

13. How is the issue of no par value stock handled on the books?

14. Name and discuss those records peculiar to the corporation.

15. Of what value to the accountant are the records kept in the minute book?

=Chapter II=

1. In what way are the purchasing activities of a manufacturing concern more complex than those of a concern selling stock-in-trade?

2. Why is the old purchase journal inadequate to meet the needs of the manufacturing concern? In what way, however, can it be improved to meet these needs?

3. Discuss the development of the voucher register, showing its improvement over the purchase journal.

4. What is a voucher?

5. State the essential characteristics of a formal voucher.

6. Describe in detail the operation of a voucher system.

7. What are the advantages of the voucher check?

8. What are “treasurer’s numbers,” and why are they sometimes put on vouchers?

9. In what way does the use of the voucher register eliminate much of the work that is usually done on the cash book?

10. How is it possible, when using the voucher system, to keep a record of the volume of business done with each creditor?

11. How is the general ledger account, Vouchers Payable, proven?

12. State the steps that must be taken when substituting the voucher system for the old journal method of handling purchases.

13. Explain two methods of treating purchases returns and allowances on the voucher register. Which method is the most satisfactory for a concern doing a large volume of business?

14. Explain in detail the methods of handling the following items on the voucher register: (a) Partial payments on vouchers. (b) Payment by means of a note payable. (c) Cash discounts on purchases.

15. Enumerate the advantages claimed for the voucher system. The disadvantages.

=Chapter III=

1. In what respect does factory accounting differ from financial accounting?

2. What three main elements enter into the manufacture of a product? Discuss each.

3. For what special purposes are cost records kept?

4. What is meant by raw materials from the manufacturer’s viewpoint?

5. Describe the two methods used in accounting for material cost. Which method is preferable for the large concern?

6. How would you classify labor for factory accounting?

7. Explain the use of the time card.

8. Describe the general content of a pay-roll.

9. Why and how should the pay-roll be safeguarded?

10. How are the workmen paid from the pay-roll?

11. How is distribution of the pay-roll made? Distribution of accrued wages?

12. Name a few items which enter into overhead expenses.

13. What constitutes the real difficulty in accounting for factory expense or overhead?

14. Why is a common basis of distribution of expense usually unsatisfactory?

15. What relation has a manufacturing statement to a profit and loss statement?

=Chapter IV=

1. Discuss the growing importance of the balance sheet in its relations to the business world.

2. What relation is there between the trial balance and the balance sheet? Between the post-closing trial balance and the balance sheet?

3. What is the purpose of the balance sheet? What uses may it serve?

4. Differentiate between the English and the American or Continental form of balance sheet.

5. How is the origin of the English form of balance sheet explained?

6. What is the “Statement of Receipts and Expenditures on Capital Account?”

7. Name and criticize a few of the balance sheet titles met with.

8. What is the purpose in classifying the items appearing in the different sections of a balance sheet?

9. What controlling principle usually governs the order of these sections and the items within each section?

10. Give an outline of the group arrangement of the balance sheet.

11. State and describe the two methods of arranging the three main classes of balance sheet items. Which method is usually preferred?

12. How is a valuation account usually shown on the balance sheet? Give examples.

13. Tell what you know of the statutory requirements governing the frequency of financial statements of both financial and public service corporations.

14. What are the reasons for having a condensed balance sheet? What precautions must be taken when condensing a balance sheet?

15. Enumerate several of the purposes which a balance sheet may serve.

=Chapter V=

1. What points demand consideration before an accountant can definitely arrive at the content of a balance sheet?

2. State the chief purpose for valuing the assets of public utilities.

3. Give a few principles involved in the valuation of property for the purpose of sale or purchase.

4. Name three kinds of valuations relating chiefly to the commercial balance sheet.

5. What principles are involved in the valuation of a going concern?

6. What is meant by cost value?

7. Give a few sources of data as to value.

8. What is an “experience figure” in connection with an appraisal?

9. What is the most usual basis for values which are shown in the commercial balance sheet.

10. Define and explain:

(a) Capital expenditures. (b) Revenue expenditures. (c) Capital receipts. (d) Capital expense.

11. Do the expenses of organization constitute capital or revenue expenditures?

12. Define and discuss: (a) Maintenance. (b) Replacements. (c) Renewals. (d) Repairs.

13. When should a renewal be considered an expenditure on capital account?

14. Describe the best method of handling expenses involved in making “cost-cutting” changes.

15. How may expenditures for assets subject to depreciation be considered as deferred charges to operations?

16. The cost of repairs upon second-hand equipment, immediately after purchase, constitutes what kind of an expenditure?

17. Name a few construction costs which may justly be considered as capital expenditures.

18. Upon what is the distinction between capital and revenue expenditures often based?

19. Name the three general heads under which the assets may be classed on the balance sheet.

20. What are the principles of valuation for the assets appearing under each group?

21. Are the principles of valuation applicable to liability items?

22. Would you say that a balance sheet is a statement of fact, or merely an opinion based on experience? Why?

=Chapter VI=

1. Define depreciation and show why the depreciation factor demands consideration.

2. Distinguish between “absolute or actual” and “theoretical” depreciation.

3. Define “accounting” depreciation.

4. What is meant by complete depreciation? Incomplete?

5. How can a consideration of complete depreciation be of value?

6. What is the relation of individual depreciation to composite depreciation?

7. What is meant by “normal” or “average” value in connection with composite depreciation?

8. Define “deferred maintenance,” “accrued depreciation.”

9. What is the attitude of the law in regard to depreciation?

10. Give a clear distinction between repairs and renewals.

11. What relation is there between the reserve for depreciation and the productive efficiency of the plant?

12. Explain how the efficiency of the unit bears a different relation to depreciation than does that of the plant as a whole. Give an example.

13. Is it correct to allow fluctuations in market value to influence the charges to depreciations?

14. Give a clear distinction between depreciation and depletion.

=Chapter VII=

1. Give a complete outline showing the cause of depreciation as related to: (a) Tangible property. (b) Intangible property.

2. In what ways is age a distinct cause of depreciation? Wear and tear?

3. Explain “functional” depreciation.

4. What two main factors or compelling forces may bring about inadequacy?

5. Name and discuss each of the forces of internal origin which may bring about inadequacy. Those of external origin.

6. Discuss obsolescence as a cause of functional depreciation.

7. Do the courts recognize obsolescence as a factor of depreciation?

8. Name the various items comprising contingent depreciation.

9. When must provision be made for the depreciation of intangible property, or rights?

10. What constitutes the effective depreciation for any given asset?

=Chapter VIII=

1. State the real purpose of the depreciation charge as viewed first from the standpoint of the balance sheet, and second from that of the profit and loss statement.

2. Among what items of expense do accountants include depreciation charges?

3. What two methods of distributing depreciation charges over several fiscal periods are possible?

4. Show how the factor of idle time would affect the charges of depreciation for different fiscal periods.

5. What three views must an accountant always consider when making the depreciation charge?

6. Have there been any successful efforts to standardize depreciation rates?

7. Of what importance are local conditions in determining an individual depreciation rate?

8. Name the important normal and contingent factors which must be taken into account in determining the depreciation rate.

9. Upon which of these factors must the rate be based at the time of installation?

10. Upon what considerations is the normal rate based?

11. What influence has the policy as to repairs upon the normal rate?

12. Explain the three methods of handling repairs and renewals on the books.

=Chapter IX=

1. What are the usual factors which enter into the calculation of depreciation charges under most methods?

2. Name and subclassify the four general methods of calculating depreciation charges.

3. Explain and give the essential characteristics of each of the methods used for estimating depreciation.

4. What is meant by condition per cent?

=Chapter X=

1. Name the causes of depreciation as viewed from the aspect of time. As viewed from the aspect of service.

2. What is the ideal basis for distributing the depreciation charge?

3. Discuss the advantages and disadvantages of the various depreciation methods as outlined in Chapter IX, and state the conditions under which each method might work to advantage.

4. Should stability of income on the investment be considered in commercial valuations?

=Chapter XI=

1. What are the two methods of booking depreciation in the ledger? Which method is preferable?

2. Explain and criticize the two methods of handling the depreciation reserve account at the time of the renewal of parts or replacement of the asset.

3. Why are subsidiary records necessary in accounting for a group of assets which are subject to depreciation?

4. Upon what basis are plant assets usually grouped?

5. Name the five headings under which a record of each plant unit should be kept.

6. Discuss the importance of a periodic revision of depreciation rates. Upon what does the frequency of such a revision depend?

7. What is meant by the rate of composite depreciation?

8. Explain, by assuming data from which to work, the two methods of estimating the composite life of a group of assets, and also their composite rate of depreciation.

9. What does a depreciation reserve on the balance sheet show as to the management’s policy in treating plant properties?

10. Upon studying the depreciation reserve account for successive periods, what conclusions might be drawn in the case of: (a) A fluctuating reserve? (b) An increasing reserve? (c) A decreasing reserve?

11. Should the depreciation reserve ever serve as a means of financing the replacement of plant equipment?

12. Name the three courses which the management might pursue in financing plant replacements.

13. Explain the secret reserve. Is the policy of carrying a secret reserve advisable? What is the result of carrying too low a reserve?

14. Name the various causes of the appreciation in value of an asset.

15. When is one justified in offsetting depreciation with appreciation?

16. What effect might an over-or under-charge for depreciation have upon the stockholders of the corporation?

=Chapter XII=

1. Discuss some of the items often considered as cash, and give reasons why many of them should not be included in that account.

2. Explain fully the customary method of receiving stamps as cash payments.

3. Discuss the impropriety of accepting and listing I O U’s and due bills as cash.

4. How should the disposition of the various cash funds be shown when listing the cash items?

5. What rate of exchange should be used by the home office in valuing cash held in a foreign branch?

6. What is the important problem in valuing accounts and notes receivable?

7. Why is the title “accounts receivable” objectionable?

8. How may large losses from bad debts be avoided?

9. What relation does the percentage of loss from bad debts bear to the term of credit granted?

10. Explain how customers’ accounts are analyzed as a basis for estimating bad debts. When is such an analysis of value?

11. What three bases are used in estimating the percentage of bad debts? Give a criticism of each base.

12. What allowance should be made for discounts and collection costs when valuing the trade debtor’s accounts?

13. What is the common practice in providing for loss on bad notes receivable?

14. How should non-interest bearing notes be valued?

15. What items should be included under the title of “notes receivable”?

=Chapter XIII=

1. Define the term “stock-in-trade.”

2. What is the most conservative basis upon which to value stock-in-trade? Criticize other bases of valuation which may be used.

3. Explain the use of balance sheet footnotes to indicate the market value of stock-in-trade.

4. What is the proper basis of valuation for depreciated stock-in-trade?

5. Discuss all of the items that may go to make up the cost of stock-in-trade.

6. How may items of cost, which are not directly attributable to any one department, be equitably distributed?

7. Discuss some of the problems met in valuing inventories.

8. In the case of a manufacturing concern, discuss the valuation of the following inventories: (a) Finished goods. (b) Raw materials. (c) Goods in process. (d) Uncompleted contracts. (e) Scrap.

9. State the two rules to be observed when taking a physical inventory and discuss their application.

10. How may a perpetual inventory be kept?

11. Is a physical inventory necessary when a perpetual inventory is kept?

=Chapter XIV=

1. What is the usual basis upon which temporary investments should be valued?

2. What are the advantages in the use of the “Reserve for Investment Fluctuations” account?

3. Explain the method of valuing stock rights.

4. How are temporary investment costs handled on the books?

5. Discuss the principles governing the valuation of bonds purchased at either a discount or a premium for temporary account.

6. What kind of an asset is unissued stock?

7. Differentiate between the valuation of unissued stock and that of treasury stock.

8. Give a summary of the principles of valuation of temporary investment assets.

9. Define and give a few examples of accrued income.

10. Explain the cash method of handling accruals and tell why it is inadequate.

11. Explain the “accrual method.”

12. On what basis should accrued items be valued, and how should they be classed on the balance sheet?

13. Discuss and illustrate the methods of accounting for accrued income.

14. Define and give examples of prepaid expense items.

15. On what basis should they be valued, and how should they be shown on the balance sheet?

=Chapter XV=

1. State the characteristics of permanent investments.

2. In what three ways may a permanent or fixed investment be effected so as to act as an aid in the operation of any business?

3. What is the chief problem in valuing those investments which aid operation?

4. When may the “consolidated balance sheet” be used to advantage by holding companies?

5. Discuss the factors involved in valuing claims against subsidiary concerns on account of advances.

6. Under what conditions would it be advisable to value partial or minor holdings at cost?

7. On what basis should investments producing no income be valued?

8. Explain the influence of interest rates upon the valuation of bonds.

9. Describe the nature of bond discount and of bond premium.

10. Explain the two methods of recording bond investments.

11. What data must necessarily be known in order to calculate the periodic amortization of bond discount or premium?

12. Derive the formula for the present worth of a given sum at compound interest.

13. Derive the formulas for the sum and present worth of an annuity.

14. Explain the three methods for valuing bonds.

15. On what basis should sinking funds be valued?

16. On what basis should investments in land be valued?

=Chapter XVI=

1. What principles are particularly applicable to the valuation of equipment assets?

2. Distinguish clearly between real and personal property.

3. Why is it necessary to keep separate records of machinery and tools?

4. Describe the operation of the machine account where subsidiary records are kept.

5. What is the valuation formula for machinery?

6. Is there any necessity for a periodic revision of the depreciation rate?

7. State the advantages of keeping a life history of units of machinery in the subsidiary records.

8. What effect has the standardization of methods of operation and of use of machinery and tools upon the rates of depreciation of these assets?

9. Enumerate a few points that demand consideration in the calculation of the depreciation rate for a machine subject to abnormal operation.

10. When should scrap material be disposed of?

11. Due to the possibility of losing small tools, what precautions must be taken in accounting for this class of assets?

12. Why is depreciation often ignored when estimating the value of tools?

13. Upon what basis should tools made in the home factory be valued?

14. When might it be proper to capitalize expenditures made for the rearrangement of machinery within the plant?

15. Will the capitalization of this expense affect profits considered over the life of the asset?

16. State the basis for valuing: (a) Furniture and fixtures. (b) Delivery equipment. (c) Carriers and containers. (d) Patterns, molds, electrotypes, etc.

17. Show the entries necessary to book the disposal of an asset subject to depreciation.

=Chapter XVII=

1. What objection is there to the account title “real estate”?

2. What items enter into the cost of buildings?

3. What is the basis for valuing: (a) Buildings? (b) Betterments on leased buildings?

4. What considerations must be taken into account in applying depreciation to buildings?

5. What is the basis for valuing land used for operations?

6. What account should be taken of depreciation and appreciation of land?

7. How should the carrying costs of land held for investment be treated?

8. State fully the points to be considered in handling and valuing donated land.

9. Where land is stock-in-trade, what objection is there to loading the loss suffered on the sale of some portions onto the carrying value of the unsold portions?

10. Distinguish between depletion and depreciation.

11. How is periodic depletion calculated? Explain fully.

12. Discuss fully the valuation of leaseholds.

=Chapter XVIII=

1. Discuss the valuation of patents: (a) When purchased. (b) When developed within the plant. (c) Patents purchased but not used.

2. What elements of depreciation are effective on patents? In what way?

3. What items enter into the cost of patents?

4. How may the life of basic patents be indefinitely extended?

5. What is the basis of valuation for:

(a) Copyrights? (b) Trade secrets? (c) Trade-marks?

6. Discuss the commercial valuation of franchises as distinguished from the valuation allowed by public service boards.

7. How should organization expenses be handled and valued?

8. Define good-will and state its characteristics. What is its essence?

9. When may good-will be shown on the books? Discuss the several cases.

10. State and explain three ways of valuing good-will.

11. Is good-will subject to depreciation? Discuss.

12. What objection is there to using good-will to absorb the water in watered stock?

=Chapter XIX=

1. State the general problem of valuation as applied to liabilities.

2. How should the liabilities be classified?

3. What considerations must be taken into account to make sure that all liabilities are shown on the balance sheet?

4. How should current liabilities be classified?

5. What different classes of items may be included under the head, accounts payable? Under trade creditors?

6. What classes of items are listed under accrued expenses?

7. In what sense is deferred income a liability?

8. Name six different classes of contingent liabilities and show how they should be treated: (a) On the balance sheet. (b) On the books.

=Chapter XX=

1. What is the basis of separation of fixed from current liabilities?

2. From a financial standpoint, what is the purpose of the incurrence of fixed liabilities?

3. Distinguish between a corporation bond and an ordinary mortgage or bond and mortgage.

4. What financial considerations are involved in the determination of the advisability of a bond issue?

5. State fully the methods of accounting for a bond issue.

6. Explain fully the entries necessary to record properly bond interest, including the amortization of premium or discount.

7. How should unissued bonds be treated on the balance sheet?

8. How should notes payable secured by real estate mortgage be shown on the balance sheet?

9. How would you treat the securities pledged as collateral for a bond or note issue?

10. What are short-term securities and under what conditions are they issued?

=Chapter XXI=

1. What problem is involved in the valuation of capital stock?

2. Define the different kinds of value of stocks.

3. What is watered stock? Illustrate.

4. What is the objection to earning capacity as the basis of capitalization?

5. What attitude does the law take towards capitalization?

6. How would you treat stock discount and premium on the books? On the balance sheet?

7. How would you value: (a) Stock issued for property. (b) Treasury stock.

8. How is the redemption or reduction of capital stock handled on the books? Explain fully.

9. How would you value: (a) Dividend stock. (b) Bonus stock.

10. How should unissued and treasury stock be shown on the balance sheet?

11. What is the problem of a preferred stock covered by a redemption contract imposing definite dates of redemption on the company?

=Chapter XXII=

1. What are profits? Distinguish between the economic, legal, and accounting uses of the term.

2. What two methods are used to determine profits?

3. How are profits related to the problem of valuation?

4. What effect have asset losses on profits? Discuss fully.

5. In what three ways may such losses be treated on the books and balance sheet?

6. How would you treat profit on goods being made for stock?

7. How would you treat profit on long-term contracts?

8. How would you treat profit on goods awaiting delivery?

9. What about profits due to appreciation of assets?

10. How would capital profits be handled?

11. Sum up briefly the considerations governing the determination of profits.

=Chapter XXIII=

1. Define surplus; margin. What are the sources of margin?

2. Explain the booking of the appropriation of profits.

3. In what different ways is the term reserve used?

4. What is the effect of an under-or over-estimate of valuation reserves?

5. How would you handle expected sales discounts on outstanding accounts?

6. How should expected collection costs be handled?

7. Distinguish between reserves and accrued items.

8. What are contingent reserves?

9. What are proprietorship reserves?

10. In what different ways may secret reserves be created?

11. Give the arguments for and against secret reserves.

12. What are covered reserves?

13. What is meant by earmarking reserves? How may continuity of a reserve policy be secured?

14. Give a logical classification of reserves.

15. Under best practice what should the Surplus account represent?

16. Give the form for the statement of surplus.

=Chapter XXIV=

1. What are the stockholders’ rights as to profits? As to dividends?

2. What control have the directors over profits and dividends?

3. How are dividends declared? May they be revoked?

4. What is the liability of directors as to dividends.

5. In what different ways may dividends be paid? Explain fully.

6. What can be said of the policy of borrowing to pay dividends?

7. What is the problem involved in stock dividends in estate accounting?

8. How are the declaration and payment of dividends booked?

9. What is the relation of capital losses to dividends:

(a) From a legal standpoint.

(b) From a business standpoint.

10. What are liquidating dividends? How are such dividends handled as related to wasting assets?

=Chapter XXV=

1. Define a sinking fund and trace its origin.

2. State the problem of the calculation of a sinking fund. Derive the formula.

3. What other basis than the compound interest basis is often used for the accumulation of a sinking fund?

4. Explain fully the relation of the sinking fund to profits.

5. In what four ways may the sinking fund be handled on the balance sheet? Explain the meaning of each.

6. How should the sinking fund assets be shown on the balance sheet?

7. Explain fully the entries needed to book the sinking fund transactions: (a) The origin of the fund. (b) The trustee’s periodic report. (c) The redemption of bonds and final disposition of the fund.

8. Discuss fully the relation between the reserve for depreciation and the sinking fund.

=Chapter XXVI=

1. Is the profit and loss a statement of fact or of opinion? Explain.

2. For what purposes is the periodic profit and loss summary inadequate? Discuss fully.

3. Give the arguments for inclusion of interest as an item of manufacturing cost.

4. Give the arguments against its inclusion. If its inclusion is allowed, how must it be booked?

5. State fully the case of bringing unrealized profits on the books.

6. What distinctive problems arise in closing the books of a corporation? Discuss.

7. How are errors of previous periods to be corrected?

=Chapter XXVII=

1. Give the various titles used for the profit and loss summary and indicate their special uses, if any.

2. Indicate the subsections, and their content, of the manufacturing section.

3. Indicate the content of the trading section.

4. Indicate the content of the general administrative section.

5. Indicate the content of any other sections and show their uses.

6. State and discuss the different methods of handling some items, such as goods in process, discounts, outfreight, rent, insurance, etc.

7. What purpose does the use of schedules serve?

8. Is the profit and loss the proper place to show all adjustments of surplus?

=Chapter XXVIII=

1. Under what conditions may a corporation liquidate? Distinguish between actual and legal insolvency.

2. Name and discuss seven causes or conditions resulting in insolvency.

3. Name the methods of liquidation.

4. What are acts of bankruptcy? Discuss.

5. Outline the process of liquidation under bankruptcy.

6. Outline the process of liquidation under voluntary dissolution.

7. Outline the process of liquidation under receivership.

8. What is the status of the several claimants to shares in the assets of a liquidating concern?

9. What are the fundamental principles of accounting involved in accounting for a liquidation?

=Chapter XXIX=

1. What various kinds of consolidations are there?

2. What is a holding company and how does it operate?

3. Distinguish between a consolidation and a merger.

4. What are some of the problems involved in the valuation of the various companies to a merger or consolidation? Discuss their treatment.

5. In such a valuation, why is it necessary to equalize conditions and what are the conditions which must usually be equalized?

6. In a partnership what particular items must be considered?

7. What is meant by earning capacity?

8. What factors enter into a determination of the amount of capitalization?

9. How may the interests of the various parties to a merger or consolidation be settled?

10. State the method of opening the books of the merger.

11. State the method of closing the books of the merged companies.

=Chapter XXX=

1. Discuss the branch and agency methods of marketing.

2. Differentiate between the branch and agency.

3. Discuss the problem of control over the branch by the head office.

4. What are the fundamental principles of branch accounting?

5. How may agency accounts be kept?

6. Indicate the method of keeping both the branch books and the branch activities on the head office books where goods are billed by the head office to the branch: (a) At cost price. (b) At some other price than cost.

7. Discuss briefly the handling of branch purchases, sales, and cash in order to secure head office control over them.

8. Discuss fully the periodic summary of results and the adjustments necessary at such a time between the branch and head office books.

9. What reports should the branch make the head office?

=Chapter XXXI=

1. What problems beyond those of the domestic branch are met in accounting for the foreign branch?

2. What control accounts are usually carried on the head office books?

3. State and explain the principles of the conversion of branch results and their incorporation with the head office results.

4. How are fluctuations of exchange handled? Discuss fully.

5. What peculiarities of regulation over accounts are sometimes met in foreign countries?

6. Explain fully the method of keeping foreign customers’ accounts on the head office books and the periodic adjustment of their control account.

7. Explain the similar method of keeping creditors’ accounts.

=Chapter XXXII=

1. What are suspense accounts? Give several examples of different kinds of suspense accounts.

2. In what sense are valuation accounts suspense accounts?

3. What is the suspense ledger? What does its use indicate? What information should such a ledger present?

4. What is the process of hypothecating accounts receivable? What does such a practice usually indicate?

5. Discuss fully the problem of accounting for hypothecated accounts.

6. What advantage has the system of numbering accounts over that of naming them?

7. Show how a numeric-alphabetic system may be constructed.

8. Present a complete schedule of numbered accounts.

9. Explain the insurance contract.

10. How should fire-damaged property be handled in order to base a claim for loss?

11. How is the amount of the liability of the insurance company determined?

12. What is the effect of the coinsurance clause? Illustrate the three cases.

13. How should the records be kept to facilitate adjustment of fire losses?

14. Explain fully the method of booking a fire loss and its adjustment.

=Chapter XXXIII=

1. State some of the uses to which statistics may be put in business.

2. What is the importance of statistics in railroad accounting and management?

3. What kinds of manufacturing data may be presented in statistical form?

4. What kinds of trading data may be presented in statistical form?

5. Discuss the use of graphs in the presentation of statistics.

6. What principles should be observed in graphical presentation?

7. Explain the purpose, content, and operation of private books.

8. What is a journal voucher, its purpose and method of use?

9. Explain the two ways in which income and expenses of buildings owned may be treated and the purposes each method serves.

10. How should the expense of social betterment work be treated?

=Chapter XXXIV=

1. In what respects is the balance sheet of the holding company deficient and unsatisfactory?

2. Differentiate between the consolidated balance sheet and the holding company’s balance sheet.

3. When, in the case of partial ownership of the subsidiaries, does the consolidated balance sheet reflect true condition?

4. State fully how partial ownership may best be shown.

5. How are intercompany accounts handled on the consolidated balance sheet?

6. How are the various inventories valued for the consolidated balance sheet?

7. Explain the manner of showing capital stock on the consolidated balance sheet.

8. Explain the manner of showing surplus (or deficit) on the consolidated balance sheet.

9. Explain how the consolidated profit and loss summary should be drawn up. How does it differ from the holding company’s profit and loss summary?

=Chapter XXXV=

1. Distinguish between assignee, receiver, and trustee, and state their respective duties.

2. What accounts should a receiver in equity keep? What reports should he make to the court?

3. What initial statements are presented to the court in: (a) Voluntary bankruptcy proceedings? (b) In involuntary bankruptcy?

4. What reports does the court require of the trustee? How often?

5. What is a liquidating dividend?

6. In a case of bankruptcy what classes of creditors are there?

7. What is the statement of affairs and what information does it attempt to present?

8. What basis of valuation of the assets is used for the statement of affairs?

9. What is the realization and liquidation statement? What purpose does it serve?

10. What theories underlie its make-up?

11. How are cash and valuation reserves best handled?

12. What problem is involved in partnership liquidation by instalments?

13. How should it be solved theoretically? How is it often solved in practice?

INDEX

A ACCIDENTS, CONTINGENT DEPRECIATION, 131 ACCOUNTING, branch house (See “Branch house accounting”) department, organization, manufacturing business, 26 difference between factory and financial, 49 ACCOUNTS, branch (See “Branch house accounting”) current, reconcilement of, consolidated balance sheet, 607 deficiency, 633 Forms, 635, 638 doubtful, reserve for, a suspense account, 558 head office, 531 impairment of capital, 633 valuation of, 222 manufacturing, 690 numbered (See “Numbered accounts”) open, discounted, accounting for, 562 discounting, 560 operating expense, classification, 567 operating revenue, classification, 566 payable, 345 consigned goods sold, 349 definition, 347 deposits, 348 dividends not yet paid, 349 future deliveries, 349 long-term notes, 349 “not due” and “past due,” 348 realization and liquidation, 639-650 Forms, 642 receivable, analysis of customers’ accounts as basis for estimate of bad debts, 217 basis of estimate of bad debts, 219 discounted, 560 discounted, accounting for, 562 items included, 215 objection to title, 215 “trade debtors,” 216 valuation of, 215 receivers’ (See “Receivers”) reserve (See “Reserves”) salvage, 188 showing of intercompany, 606 surplus (See “Surplus”) suspense (See “Suspense accounts”) trustee (See “Trustee”) valuation, 187 bond investments, 267 showing on the balance sheet, 77 ACCRUAL METHOD, 250 ACCRUED DEPRECIATION (See “Depreciation”) ACCRUED EXPENSES (See “Expenses”) ACCRUED INCOME (See “Income”) ADAPTATION, APPRECIATION DUE TO, 207 ADJUSTMENT, fire losses (See “Fire losses”) plant ledger, 193 ADMINISTRATIVE SCHEDULES, PROFIT AND LOSS SUMMARY, 491 ADVANCES, to subsidiaries, 262 rules for valuation, 263 ADVERTISING, creation of good-will by, 334 statistics, 584 AGENCY, accounts, 525 branch and, differentiated, 522 foreign purchasing, 555 foreign sales, 552 periodic conversion of results, 553 ALLOWANCES, purchase, under voucher system, 40 AMORTIZATION, bond discount and premium, 269 schedule showing, 270 leaseholds, 315 ANNUITY, compound interest, formulas, 164 formulas, 272-276 method of calculating depreciation, Chart, 166 appraisal of, 181 compound interest method, 161, 163-167 fixed periodic amount, 165 interest, 165 APPRAISAL METHOD OF CALCULATING DEPRECIATION, 169, 170, 183 APPRAISAL SCHEDULE, sinking fund method of calculating depreciation, 162 APPRAISALS (See “Valuation, principles of”) APPRECIATION, due to physical changes, 207 adaptation, 207 solidification and seasoning, 207 land values, 304 issue of bonds, 305 sale of old and erection of plant on less valuable land, 305 offset to depreciation, 206 profits due to, 404 unearned increment, 209 ASSESSMENT, STOCK, creation of a margin, 409 ASSETS, contingent, 81 current, depreciation, 119 transfer of, into fixed assets common cause of insolvency, 494 disposal of, 295 effect of losses on future profits, 393 grouping on balance sheet, 70-74 immovable tangible fixed, buildings, land, and wasting assets, 297-315 intangible, 316-338 losses, charged against current profits, 396 charged to capital, 397 legal decisions as to, 394 treated as deferred expense charge, 396 movable fixed, machinery and tools, furniture and fixtures, and other equipment, 279-296 plant, grouping and classification of, 191 profits due to appreciation of, 404 subject to depreciation a deferred charge to operations, 93 undervaluation, creating a secret reserve, 418 valuation of, current assets, 96 deferred charges to operation, 96 fixed assets, 96 wasting (See “Wasting assets”) ASSIGNEE, accounting features same as for receiver and trustee, 621 appointment of, 620 function of, 620 AVERAGE CLAUSE, fire insurance contract, 574 AVERAGES, theory of, repairs, 147

B BAD DEBTS (See “Debts, bad”) BALANCE SHEET, 60-80 account form of, 74-76 accrued items, 250 anticipation of profits or losses on stock-in-trade, 227 bonds, presentation of, 369 valuation, 266 business methods under the microscope, 60 capital stock, 374, 383 cash, 210-214 classification, 70 comparative, receiver’s report to the court, 627 condensation of information in, 77 condensed, 693 consolidated (See “Consolidated balance sheet”) content and valuation, 81 contingent assets, 81 contingent liabilities, 81 contingent liabilities, kinds of, 352 definition, 62 depreciation reserve, 199 accounts, 187 English form, double-account form, 68 Form, 69 origin of, 65 variation of, 67 form of, 63 groups, 70 arrangement of, 72 distinction between current and working assets, 71 main, of asset items, 95 suggested scheme, 74 titles, 71 intangible assets, 316-338 interrelation of profit and loss and, 466 lack of clearness, 79 estimates rather than facts, 80 purposeful misrepresentation, 80 vagueness of terminology, 79 land, donated, contingent value of, 713 liabilities, 339-342 arrangement, 340 cancellation of, against assets, 341 items within groups, 341 notes payable, classification of, 346, 347 purposes and uses, 64, 77 reading of, 61 knowledge of accounts, 61 knowledge of the principles of valuation, 61 relation between, and trial balance, 62, 77 report form of, 74-76 sales discounts on, 415 sinking fund, 457 valuation of, 276 statutory requirements as to frequency of, 77 stock-in-trade, 225-240 temporary investments; accrued and deferred items, 241-257 titles, 70 notes receivable, 223 treasury stock, 383 types of, 65 Continental, 65 English, 65 use of supporting schedules, 79 valuation accounts, 77 valuation and content rather than form, the problem, 97 BANK, account, voucher checks given a new series of numbers to facilitate reconciliation with, 37 disposition of cash funds, 211, 213 loans, 347 BANKRUPTCY, 620-654 appointment, receiver, 621, 622 trustee, 621, 622 creditors’, first meeting of, 622 deficiency account, 633 Form, 635, 638 disposing of property, 629 duty of trustee, 502 involuntary, 622 liquidating dividends, declaration of, in hands of referee, 630 method of liquidating, 502 proceedings, initial statements presented to the court, 627 realization and liquidation account, 639-650 Forms, 642 receiver, reports to the court, 625 relative standing of creditors, 630 statement of affairs, 631 Forms, 634-638 basis of valuation, 633 voluntary, 622 BARRELS, VALUATION OF, 293 BASKETS, VALUATION OF, 293 BETTERMENTS, 89-93 distinction between repairs and renewals, 113 leased buildings, 300 recording depreciation on the books, 189 BONDS, accounting for issue of, 363 entry of interest payments on books, 366 entry of premium or discount on books, 365 entry on books, 364 relation of interest to premiums or discount, 367 amortization of discount and premium, 269 authority for issue of, 361 bonus, 13 classification, 359-361 character of issuing corporation, 359 conditions incident upon payment of principal and interest, 360 purpose of the issue, 359 security underlying, 359 difference between, and real estate mortgages, 358 discount, nature of, 266 profit and loss summary, 474 example of true interest cost, 368 financial considerations involved in issue, 361 fixed liability, 357 interest rate, 267 issue of, on appreciated land values, 305 kinds of, 358 methods of valuing, annuities, formulas for, 272-276 compound interest, formulas for, 271 nature of, 357 payment of dividends in, 438 premium, 343 nature of, 266 presentation on balance sheet, 369 priority of lien, 361 record of investments, 267 sinking fund, 447-465 surety, signature to, contingent liability, 355 valuation of, when held for temporary investment, 245 values and market interest rates, 265 versus stock issues, 362 BONUS, bonds, 13 stock, 13, 16 stock issued as, 383 treated as entries to a margin account, 409 BOOKS (See “Records”) private (See “Private books”) BORROWING, TO PAY DIVIDENDS, 436 BOTTLES, VALUATION OF, 293 BOXES, VALUATION OF, 293 BRANCH HOUSE ACCOUNTING, 521-555 adjustment on branch and head office books, 535 advantages of branch and agency system, 521 agency accounts, 525 agency and branch differentiated, 522 agency, foreign sales, 552 periodic conversion of results, 553 books, 529 degree of control desired, 523 example of adjusting entries, 537 factors of successful management, 523 foreign branch accounts opened on books, 544 conversion of branch results, 546 example of a London control account, 550 example of journal entries to adjust New York books, 549, 550 example of trial balance, 548, 549 handling fluctuations in exchange, 545 illustrative bookkeeping problem, 548 local supervision of, 552 problem of, 543 foreign exchange, 542 handling fluctuations in, 545 foreign purchasing agency, 555 head office accounts, 531 illustration of complex accounts, 529 illustration of simple accounts, 526 main principles of, 524 purchases, 533 records, 526 reports from branch, 539 customers’ accounts collected, 541 examples of, 540 periodic cash summary, 540 sales, 534 BROKERS, stocks and bonds as stock-in-trade, valuation of, 245 BUILDINGS, cost of, 298 issue of stocks or bonds, 298 purchased outright for cash, 298 put up by the concern itself, 299 depreciation, application of, 301 rates, 301 uses and construction determine life, 301 expense and income, allocation of, 596 methods of bookkeeping, 598 workmen’s dwellings and social betterment work, 599 leased betterments on, 300 owned as freehold for life, 302 ownership versus renting, 597 real property, 297 valuation of, 300 BURDEN, definition of, 50

C CAPITAL, deficiency, false good-will to cover, 336 expenditures (See “Capital expenditures” below) liquidating dividends, 445 losses, charged to, 397 relation to dividends, 443 profits, 405 return of, in form of dividends when property is subject to depletion, 311 working, donated, disposition of, 475 CAPITAL EXPENDITURES, 87 asset subject to depreciation a deferred charge to operations, 93 authorization for booking, 94 construction costs, 94 defined, 87 distinction between, and revenue, 95 repairs on second-hand plant, 94 treatment of cost-cutting changes, 92 CAPITALIZATION, combinations and consolidation, 516 cost, 376 earnings, 375 increase of book, 375 of profits, valuation of good-will based on, 335 CAPITAL RECEIPTS, 87 CAPITAL STOCK (See “Stock”) CARRIERS, VALUATION OF, 293 CASH, 210-214 disposition of funds, 213 bank, 213 petty cash, 213 safe or drawer, 213 various working funds, 213 held abroad, 214 petty, 211 imprest system, 211 principles of valuation, 210 realization and liquidation statement, 643 sale of capital stock or bond issues, 213 stamps remitted as, 212 statistics, 584 temporary disbursements, 213 tying up, in stocks of material, cause of insolvency, 494 unwise use of, for paying dividends, 495 what the term includes, 210 working funds, 211 imprest system, 211 CASH BOOK, separate, for special bank account, 670 CASKS, VALUATION OF, 293 CERTIFICATE OF STOCK, 9, 10 CHARTS (See “Graphs”) CHECK, voucher, 32 canceled, 32 distribution of charges, 32 folded, 32 Forms, 33 given a new series of numbers to facilitate reconciliation with bank account, 37 single, 32 Forms, 34 CLASSIFICATION, accounting, of depreciation on patents, 322 accounts (See “Numbered accounts”) plant assets, 191 alphabetic numeric system, 191 combined alphabetical and decimal numerical system, 191 numerical, 191 CLIMATIC CONDITIONS, FACTOR IN DETERMINING DEPRECIATION RATE, 143 “CLOSE” CORPORATIONS, 2 COINSURANCE CLAUSE, 574 COLLATERAL, LOANS ON, 370 COLLECTIONS COSTS, allocation of, 414 statistics, 584 valuation of trade debtors, 221 COMBINATIONS AND CONSOLIDATIONS, 507-520 capitalization, 516 closing the books of the merged concerns, 518 consolidations, distinction between, and merger, 510 formation of, 511 earning capacity, 515 equalization of conditions, 513 good-will, 515 merger, formation of, 511 opening the books, of, 519 payment of amalgamated interests, 517 principles of valuation of the constituent companies, 512 reasons for, 507 types of, 507 valuation of, principle, 514 COMMERCIAL CORPORATIONS, 2 COMMON STOCK (See “Stock”) COMPARATIVE STATEMENT OF PROFIT AND LOSS (See “Profit and loss summary”) COMPOSITE LIFE METHOD, calculating depreciation, 155 appraisement of, 177 COMPOUND INTEREST, formulas for, 271 CONDENSATION, BALANCE SHEET, 77 CONDITION PER CENT, 172 test of, 195 CONSIGNED GOODS SOLD, CURRENT LIABILITY, 349 CONSOLIDATED BALANCE SHEET, 261, 600-619 capital stock, 611 conditions under which used, 602 current accounts, reconciliation of, 607 deficit, 612 function, 600 holding company, 602 illustration of, 616-619 intercompany accounts, 606 notes discounted, 607 partial ownership, 601 profit and loss summary, 612-615 purpose, 600 setting up of, 603 surplus, 611 valuation of inventory, 607 minority interests, 610 valuation of liabilities, 611 CONSOLIDATED PROFIT AND LOSS SUMMARY, 612-615 CONSOLIDATIONS (See “Combinations and consolidations”) CONSTRUCTION COSTS, 94 CONTAINERS, VALUATION OF, 293 CONTINGENT DEPRECIATION (See “Depreciation”) CONTINGENT LIABILITIES (See “Liabilities”) CONTRACTS, length of cost period, 236 long-term, profits on, 401 redemption, covering preferred stock, 384 uncompleted, valuation of, 234 valuation of, 234 CONTROL, PERMANENT INVESTMENT FOR, 261 CONVERTIBLE PREFERRED STOCK, 6 COPYRIGHTS, 325 valuation of, 325 CORPORATIONS, 1-25 bonds (See “Bonds”) classification, 1 commercial or trading, 2 de facto, 2 de jure, 2 domestic, 2 financial, 2 foreign, 2 industrial or manufacturing, 2 private corporations, 2 public corporations, 1 public utility or quasi-public, 2 stock and non-stock private corporations, 2 combinations and consolidations, 507-520 definition, 1 dividends (See “Dividends”) holding companies, accounting for, 500 liquidation (See “Liquidation, corporations”) organization, working, 3 board of directors, 3 committees, 3 officers, 3 ownership, method of, 2 advantages, 3 “close,” 2 “open,” 2 “sole,” 3 profits (See “Profits”) records, dividend book, 20 instalment book, 20 minute book, 20 register of transfers, 20 stock certificate book, 20 stock ledger, 20, 21 Form, 22 stock register, 21 stock transfer book, 20 subscription book, 20 subscription ledger, 20 transfer book, Form, 21 stock (See “Stock”) COSTS, accrued, operating reserves for, 413 buildings, 298 bought by issue of stocks or bonds, 298 purchased outright for cash, 298 put up by the concern itself, 299 capitalization on basis of, 376 collection, allocation of, 414 valuation of trade debtors, 221 construction, capital expenditures, 94 factory (See “Costs, factory,” below) goods sold, manufacturing concern, 478 trading concern, 479 land, 303 original, factor in calculating depreciation, 150 statistics, 584 stock-in-trade, 230 cash discount, 230 distribution of, 231 objections to valuation at less than, 226 summary argument for valuing at, 228 valuation at, 225 temporary investments, 245 COSTS, FACTORY, 49-59 contracts and length of cost period, 236 cost-cutting changes, treatment of, 92 definitions of terms, 49 direct costs, 50 factory expense, overhead or burden, 50 full cost, 50 indirect cost, 50 prime cost, 50 total manufacturing cost, 50 depreciation and plant efficiency, 113 difference between factory and financial accounting, 49 expense, basis of distribution, 58 elements entering into, 58 inventory-taking, 237 methods, 238 perpetual, 239 rules, 238 labor, accrued wages, 57 direct and indirect, 53 distribution of charges, 57 materials, accounting for, 52 auxiliary, 51 nature of, 51 perpetual inventory system, 53 record of purchases and periodical inventory, 52 operation of machine accounts, 282 patents, effect of rate of depreciation, 324 pay-roll, 55 methods of payment, 56 safeguarding, 55 prime costs, direct and indirect labor, 53 materials, 52 special purposes of cost records, 50 predetermination of selling price, 51 stores department, function of, 52 summary of manufacturing cost, 59 supplies, manufacturing, 52 nature of, 51 operating, 52 time-keeping records, 54 cards, 54 valuation of manufacturing inventory, 233-236 contracts, 234 finished goods, 233 goods in process, 234 raw material, 234 valuation of scrap, 236 CREDIT, MERCANTILE, 216-224 application for, balance sheet as basis for, 79 bad debts, analysis of customers’ accounts as basis for estimate of, 217 basis for estimate of, 219 classification of accounts according to time overdue, 218 estimating, 216 length of credit period, 217 trade debtors as basis of estimate of, 219 classification of accounts according to length of time overdue, 218 deferred, 351 discounts and collection costs, 221 notes receivable, balance sheet titles for, 223 interest on, 223 loss on, 222 risk and length of credit period, 217 risk from losses, 216 valuation of receivable items on open account, 221 CREDITORS, bankruptcy proceedings, final meeting, 629 first meeting of, in bankruptcy proceedings, 622 relative standing of, receiver in equity, 630 status of, in liquidation, 504 voucher index of, 38 CRYSTALLIZATION, CAUSE OF DEPRECIATION, 133 CUMULATIVE PREFERRED STOCK, 5 CURRENT ASSETS, depreciation, 119 valuation of, 96 CURRENT LIABILITIES (See “Liabilities”) CUTS, VALUATION OF, 294

D DEBENTURE STOCK, 4, 8 DEBTS, bad (See “Debts, bad,” below) settled by— conversion of an asset, 453 creation of another liability, 453 increase in net worth, 453 sinking fund, effect of, 448, 452 DEBTS, BAD, basis for estimate of, 216, 219 analysis of customers’ accounts, 217 classification of accounts according to length of time overdue, 218 sales as, 220 summary, 220 trade debtors as, 219 loss of notes receivable, 222 reserve for, 411 risk and length of credit period, 21 DECREPITUDE, 173 DE FACTO CORPORATIONS, 2 DEFERRED— charges, accounting for, 256 danger of overvaluation, 255 definitions, 253 kinds of, 253 to operation, valuation of, 96 valuation of, 254 credits, 351 income, 343 misuse of term, 417 maintenance, 109 DEFICIENCY, SHARES OF, liquidation of partnership by instalments, 652 DEFICIT, SHOWN ON CONSOLIDATED BALANCE SHEET, 612 DE JURE CORPORATIONS, 2 DELIVERY EQUIPMENT (See “Equipment”) DEPLETION, application of income tax law to, 312 assets subject to (See also “Wasting assets”) basis of charge, 312 contingent cause of depreciation, 134 distinction between depreciation and, 117 leaseholds, 314 reserves, 413 return of capital in form of dividends, 311 unusual risks, 313 wasting assets (See “Wasting assets”) DEPOSITS, CURRENT LIABILITIES, 348 DEPRECIATION, “accounting” and “fair,” 107 accrued, 109 a cost of operation, 137 actual or absolute, 104 a means of financing, 140 danger of viewpoint, 141 appraisement of methods, 173-186 annuity method, 181 appraisal method, 183 arbitrary methods, 179 composite life method, 177 compound interest methods, 179 effect on return on investment, 185 fifty per cent method, 183 fixed per cent of diminishing value method, 178 general considerations, 173, 174 insurance method, 184 maintenance method, 182 percentage of gross earnings method, 184 proportional methods, 175-178 replacement method, 183 service output method, 177 sinking fund method, 181 straight line method, 175 sum of expected life-periods method, 179 unit cost method, 182 variable percentage methods, 178-179 working hours method, 176 appreciation, as an offset to, 206 due to adaptation to use, 207 due to physical changes, 207 unearned increment, 209 aspects and definitions, 99-119 asset subject to, a deferred charge to operations, 93 attitude of law, 110 authoritative opinions, 101 buildings, 301 freehold for life, 301 rates, 301 buildings and machinery of a wasting asset, 313 calculating, 150-172 annuity, 161, 163-167 formulas, 164 appraisal method, 169, 170 arbitrary interest rate, 150 arbitrary with decreasing amounts, 157, 160 arbitrary with increasing amounts, 157, 160 changing percentages of cost less scrap method, 157, 159 composite life, 152, 155 compound interest methods, 150, 160 condition per cent, 171 estimated service life, 150 factors to be considered, 150 fifty per cent method, 169, 170 fixed percentage of diminishing value method, 157 chart, 158 gross earnings method, 169, 171 insurance method, 169, 170 maintenance method, 169 methods of, 150 original cost of asset, 150 proportional methods, 150 replacement method, 169 scrap or residual value, 150 service output, 152, 156 sinking fund, 161 straight line method, 152 symbols to be used, 151 unit cost method, 161, 167-169 variable percentage methods, 150 working hours, 152-155 causes, 120-135 accidents, 122 age, 120 analysis of, 120 chart showing, 121 contingent depreciation, 130-134 decrepitude, 122 depletion, 134 effective depreciation, 135 functional depreciation, 123 inadequacy as a factor, 123 inadequacy due to unforeseen development, 125 inadequacy imposed from without, 126 inadequacy through change of policy, 124 inadequacy through motives of economy, 125 obsolescence, 127-130 terminable rights, 134 wear and tear of use, 122 chart showing relation of efficiency to uniform depreciation, 115 comparison of actual and theoretical, 105 complete and incomplete, 108 complication of short fiscal periods, 138 contingent, accidents, 131 depletion, 134 disease, 133 electrolysis, 134 current assets, 119 decision of Supreme Court, 111 deferred maintenance, 109 distinction between, and depletion, 117 distinction between repairs and renewals, 113 distribution of charge, 174 effective, 135 estimate of charges due to obsolescence, 129 fire losses, 579 fluctuations in market value, 116, 117 franchises, 328 ruling of Public Service Commission, 329 furniture and fixtures, 291 good-will, 337 hand tools, 289 individual and composite, 108 inefficiency a factor of, 116 journal vouchers, 595 land, 304, 306 leaseholds, 314, 315 machinery, estimate of, 283 methods of applying, 286 merchandise, 119 methods (See “Depreciation, appraisement of methods” and “Depreciation, calculating,” above) patents, 319, 320 accounting classification, 322 booking, 322 effect on costs of manufacture, 324 obsolescence, 320 supersession, 320 time lapse, 319 physical and functional, 109 plant efficiency, 113 purpose of, fundamental, 136 rates, 136-149 accounting viewpoint, 141 attitude of regulatory bodies, 147 based only on normal factors at time of installation, 144 basis of normal, 144 buildings, 301 change in ownership and policy, 144 change in requirements of the market, 144 climatic conditions, 143 complication of short fiscal periods, 138 composite and group, 197 contingent factors, 142, 144 cost of operation, 137 danger of financing viewpoint, 141 effect of local conditions, 142 engineering problem, 142, 146 engineering viewpoint, 141 exterior or movable apparatus, 144 factors in determining, 143 financing viewpoint, 140, 141 fixed equipment including boilers and piping, 145 frequency of revision of, 194 fundamental purpose, 136 idle time a factor, 139 installed operating and generating machinery, 144 insufficient charge, 205 load or normal intensity of operation, 143 means of financing, 140 methods of handling repairs, 147 misuse and neglect brought about by the demands of the trade, 144 normal climatic conditions, 143 operating conditions, 143 periodic revision of, 194 repairs policy, 143 results achieved as the basis, 139 service life as the basis, 139 “stable or normal” factors, 142, 143 standardization of, 142 recognition of the depreciation factor, 112 Federal Income Tax Law, 112 Federal Trade Commission, 112 Interstate Commerce Commission, 112 Treasury decisions, 112 recording, 187-209 adjustment of value, on plant ledger, 193 asset record, 192 balance sheet, 187 cases when no determination of betterment values is made, 189 composite or group rates, 197 credit balance in the reserve, 189 debit balance in the reserve, 189 plant ledger, 191 Form, 193 frequency of revision of rates, 194 grouping and classification of plant assets, 191 mean age, direct method, 198 mean life, direct method, 197 mean life, dollar-year, or weighted ratio method, 198 methods commonly employed, 187 periodic adjusting entry, 187 periodic revision of rates, 194 renewals and replacements, 188 reserve account, 187 reserves, 199-204 subsidiary records, 190 table of expectancy, 196 test of condition per cent, 195 valuation account, 187 relation between, and sinking fund, 463 reserves, decreasing, 200 distinction from reserve for doubtful accounts, 411 financing of replacements, 203 fluctuating, 199 increasing, 200 index of financial condition, 199 insufficient charge, 205 methods of financing replacements, 203 not leased on cost of replacement, 202 relation to efficiency, 201 relation to expanding plant, 201 secret, 204 suspense account, 558 stockholders’ relation to policy pursued, 209 stock-in-trade, 119, 229 terminable rights, 134 theoretical, 104 unit efficiency, 114 unusual risks, 313 “wasting” assets, 118 effect on different kinds of business, 118 why factor arises, 103 DETERIORATION, 140 rate of, 145 stock-in-trade, 229 DEWEY DECIMAL SYSTEM, 564 advantages of the mnemonic over, 565 combined with mnemonic, 566 DIES, VALUATION OF, 294 DIRECT COST, DEFINITION OF, 50 DIRECTORS, control over profits, 429 liability of, in the matter of dividends, 433 DISBURSEMENTS, CASH, TEMPORARY, 213 DISCOUNTS, accounts receivable, 560-563 bond, amortization of, 269 entry on books, 365 nature of, 266 profit and loss summary, 474 relation to interest, 367 schedule showing amortization of, 270 cash, inclusion of, in cost of stock-in-trade, 230 on purchases, voucher system, 44 permanent investments, treatment of, 257 sales, on the balance sheet, 415 proper allocation of estimated, 413 stock, 13 charging to organization expense, not approved, 14 requirements of Interstate Commerce Commission, 13 treatment of, 378 valuation of trade debtors, 221 DISEASE, CONTINGENT DEPRECIATION, 133 DISSOLUTION, valuation for purposes of, 83 voluntary, 501 liquidation under, 503 DISTRIBUTION OF DEPRECIATION CHARGE, 174 DIVIDENDS, 428-446 accounting record, 442 book, 20 corporation profits, directors’ control over, 429 disposition of, 428 shareholders’ rights as to, 429 declaration of, 432 provisos as to, 430 definition, 428 ex-dividend, 442 in stock, 382 effect of, 382 liability of directors, 433 liquidating, 445, 506, 629 booking, 446 declaration of, in hands of referee, in bankruptcy, 630 method of payment, 434, 436 borrowing, 436 borrowing on property, 438 in bonds, 438 in property, 438 paid in form of salaries, 435 scrip, 438 not yet paid, current liability, 349 paid but not yet charged against surplus, 688 payment, to whom payable, 441 profit and loss summary, 474 proportional to holdings, 441 relation of capital losses to, 443 resolution declaring, 441 return of capital included in, 311 revocation of, 434 shareholders’ rights to, 431 stock, 439 estate accounting, 440 unwise use of cash for paying, 495 DOMESTIC CORPORATIONS, 2 DONATED— land, 308 stock, 11, 15 creation of a surplus, 409 DOUBTFUL ACCOUNTS, reserve for, as a suspense account, 558 DRAFTS, negotiated, contingent liability, 352 sight, treated as cash transactions when honored, 673 DRAWINGS, VALUATION OF, 294 DRAYAGE, COST OF STOCK-IN-TRADE, 230

E EARNINGS, VALUE OF STOCK DEPENDENT UPON, 374 EFFICIENCY, chart showing progress of uniform depreciation and of diminishing efficiency, 115 employees’, statistics, 584 plant, depreciation, 113 relation of depreciation reserve to, 201 unit, 114 ELECTROLYSIS, CAUSE OF DEPRECIATION, 133 ELECTROTYPES, VALUATION OF, 294 ENGINEERING, rate of depreciation a problem of, 142, 146 EQUIPMENT, average, normal use, 139 basis of normal rate, 144 delivery, carriers, valuation of, 293 containers, valuation, 293 definition, 292 valuation, 292 disposal of assets, 295 distinction between personalty and real property, 279 furniture and fixtures, definition of, 291 depreciation, 291 valuation of, 291 general considerations, 279 idle time, 139 machine accounts, operation of, 282 machinery, abnormal operation, 285 basis of valuation, 287 estimate of depreciation, 283 expenditure for rearrangement, 290 history of, 284 home-made, valuation of, 289 map of location, 286 methods of application of depreciation, 286 scrap, 287 standards of operation, 285 valuation of, 283 machinery and tools, 281 accounting records, 281 molds, valuation of, 294 patterns, valuation of, 294 service, 139 tools, accounting for, 288 hand, depreciation on, 289 home-made, valuation of, 289 issue on requisition, 289 valuation of, 279-296 ESTATE ACCOUNTING, STOCK DIVIDENDS, 440 ESTIMATES, PRINCIPLES OF VALUATION, 97 EXPECTANCY, mean age, direct method, 198 mean life, direct method, 197 dollar-year, or weighted ratio method, 198 table of, 196 EXPENDITURES, capital (See “Capital expenditures”) revenue (See “Revenue expenditures”) EXPENSES, accrued, 343 booking of, 350 current liabilities, 350 capital, 87 factory, basis of distribution, 58 definition of, 50 elements entering into, 58 organization, 88

F FACTORY COSTS (See “Costs, factory”) FEDERAL RESERVE BOARD, statement required of contingent liability, 352 FINANCIAL ACCOUNTING, DIFFERENCE BETWEEN FACTORY AND, 49 FINANCING, depreciation a means of, 140 danger of viewpoint, 141 FINISHED GOODS, VALUATION OF, 233 FIRE LOSSES, ADJUSTMENT OF, 570-580 adjusting entries, 578 depreciation, 579 bases of settlement, 573 coinsurance clause, 574 examples of, how applied, 575, 576 determination of value, 572 insurance contract, 570 cancellation of, 571 inventory of stock-in-trade, 580 method of record-keeping to facilitate ready adjustments, 577 options of the insurance company as to settlement, 576 pro rata or contributing clause, 574 rates, 574 requirement in case of loss, 571 settlement of points in dispute, 573 valuations for, 83 FISCAL PERIODS, complication of short, in the case of depreciation, 138 FIXED ASSETS, VALUATION OF, 96 FIXED LIABILITIES (See “Liabilities”) FIXTURES (See “Equipment”) FLUCTUATIONS, RESERVE FOR INVESTMENT, 243 FOREIGN BRANCH (See “Branch house accounting”) FOREIGN CORPORATIONS, 2 FOREIGN COUNTRIES, CASH HELD IN, 214 FOREIGN EXCHANGE, 542 handling fluctuations in, 545 FOREIGN PURCHASING AGENCY, 555 FOREIGN SALES AGENCY, 552 periodic conversion of results, 553 FORFEITED STOCK, 12, 19 FORMS (See list in table of contents, page xxiii) FOUNDERS’ SHARES, 4, 7 FRANCHISES, 326-330 definition, 326 depreciation on, 328 ruling of Public Service Commission, 329 indeterminate, 328 kinds, 326 limited, 327 perpetual, 327 valuation, 328 FREIGHT, cost of stock-in-trade, 230 distributed over stock-in-trade, 231 FUNCTIONAL DEPRECIATION, 123 FURNITURE (See “Equipment”) FUTURE DELIVERIES, LIABILITY, 349

G GOODS, consigned, sold, current liability, 349 finished, valuation of, 233 in process, valuation of, 234 profits on, awaiting delivery, 402 made for stock but not sold, 399 made to order, 400 work in progress, 399 returned, statistics, 584 sold, cost of, manufacturing concern, 478 trading concern, 479 GOOD-WILL, 331-338 combination and consolidation, 515 creation of, by advertising, 334 definition of, 331 “going value,” 338 local and personal character of, 333 merger, 332 nature of, 331 valuation of, 333 based on capitalization of profits, 335 based on excess profits, 335 based on normal profits, 334 depreciation, 337 false, to cover capital deficiency, 336 periodic revaluation, 337 GRAPHS, advantages of, 586 principles of construction, 587 use of, in presentation of statistics, 585 GROSS EARNINGS, method of calculating depreciation, 169, 171 GUARANTEED STOCK, 4, 7 GUARANTEES, as contingent liability, 353 quality and performance, 348

H HOLDING COMPANY, 508 (See also “Combinations and consolidations”) accounting for, 509 advances to subsidiaries, 262 rules for valuation, 263 consolidated balance sheet, 600-619 consolidated profit and loss summary, 612-615 permanent investments of, 261 HOUSING WORKMEN, AND SOCIAL BETTERMENT WORK, 599 HYPOTHECATION ACCOUNTS RECEIVABLE, accounting for, 560

I IDLE TIME, FACTOR IN DEPRECIATION, 139 IMPAIRMENT OF CAPITAL ACCOUNT, 634 IMPREST SYSTEM, PETTY CASH OPERATED UNDER, 211 INADEQUACY, 173 factor in depreciation, 123-127 INCOME, accrued, accounting for, 251 correct method of handling, 250 illustration of different methods of recording, 251 inadequacy of cash method of handling accruals, 249 nature of, 248-253 showing on balance sheet, 250 valuation of items, 250 deferred, 343 misuse of term, 417 INCOME AND EXPENDITURES (See “Profit and loss summary”) INCOME STATEMENT (See “Profit and loss summary”) INCOME TAX LAW OF 1916, APPLICATION OF, TO WASTING ASSETS, 312 INCREMENT, UNEARNED, 209 IDENTIFICATION (See “Classification”) INDEX, journal vouchers, 594 Forms, 594, 595 voucher, of creditors, 38 INDIRECT COST, DEFINITION OF, 50 INDUSTRIAL CORPORATIONS, 2 INSOLVENCY, CAUSES OF, current assets transferred into fixed assets, 494 inability to secure cash for refunding operations, 496 tying up cash in stocks of material, 494 unwise use of cash for dividends, 495 INSTALMENT ACCOUNTS, VALUATION OF, 22 INSTALMENTS, book, 20 liquidation of a partnership by, 650 illustration of, 653, 654 INSURANCE, buildings and equipment, leasehold, 688 cost of stock-in-trade, 230 fire (See “Fire losses, adjustment of”) INSURANCE METHOD, calculating depreciation, 169, 170 appraisal of, 184 INTERDEPARTMENTAL PROFITS, 404 INTEREST, accrued, recording of, 268 annuity method of calculating depreciation, 165 arbitrary rate of, methods of calculating depreciation, 150 as a cost of manufacture, 468 arguments against, 470-472 bonds, example of true interest cost, 368 fixing the rate, 267 relation of, to premium or discount, 367 compound, formulas for, 271 methods of calculating depreciation, 160, 179 notes receivable, 223 on money invested in stock-in-trade, 231 payments on bonds, entry on books, 366 problem of charging, on books, 471 rates, market, bond values and, 265 INTERSTATE COMMERCE COMMISSION, method of handling depreciation reserve at the time of replacement, 189 requirements as to discounts and premiums, 13 INVENTORY, adjustment of, profit and loss summary, 490 contracts and length of cost period, 236 finished goods, 690 goods in process, bringing on the books, 690 of liabilities, 342 periodical, 52 perpetual, 52, 238 necessity for physical count, 240 pricing of, 232 weighted average, 232 statistics, 584 stock-in-trade, fire loss, 580 taking, 237 methods, 238 rules, 238 valuation of, consolidated balance sheet, 607 minority interests, 610 valuation of manufacturing, 233-236 contracts, 234 finished goods, 233 goods in process, 234 raw material, 234 scrap, 236 INVESTMENTS, effect on return on, under various methods of calculating depreciation, 185 land, valuation of, 307 permanent, 258-278 accrued interest on bonds, 268 advances to subsidiaries, 262 advances to subsidiaries, rules for valuation, 263 amortization of bond discount and premium, 269 amortization of bond discount and premium, schedule showing, 270 annuities, formulas for, 272-276 as an aid to operation, 259 bond values and market interest rates, 265 controlling investment, 261 holding company and subsidiary enterprises, 261 in partial holdings, 264 interest, compound, formulas for, 271 land, valuation of, 278 nature of, 258 nature of bond discount or premium, 266 producing no income, 265 record of bond investments, 267 sinking funds, methods of employing, 276, 277 sinking funds, valuation of, 276 valuation account, 267 valuation of, 259 temporary, 241-248 cost of, 245 nature of, 241 reserve for fluctuations, 243 “stock rights,” 244 summary of valuation formula, 248 treasury stock, valuation of, 247 unissued stock, valuation of, 246 valuation of, 242 valuation of bonds, 245 INVOICES, voucher system, 26-48 distribution, 34

J JOURNAL, methods of authorizing entries, 596 purchase, expansion, 27 JOURNAL VOUCHERS (See “Voucher system”)

L LABOR, charges, accrued wages, 57 distribution of, 57 direct and indirect, 53 LAND, 302-310 accounting, 302 plots, 302 appreciation, 304 issue of bonds, 305 sale of old, and erection of new plant on less valuable land, 305 as stock-in-trade, 310 depreciation, 304 of values, 306 donated, 308 reserve of surplus covering, 713 mortgages on, 308 real property, 297 valuation of, 303 valuation of investments in, 278, 307 inflation of values, 307 LASTS, VALUATION OF, 294 LAW, STOCK ISSUES, 377 LAWSUITS, PENDING, CONTINGENT LIABILITY, 354 LEASEHOLDS, 314, 315 appreciation in value, 315 depreciation and amortization, 315 distribution of depreciation on buildings, 688 insurance, distribution of, 688 length of leases, 314 long-term, contingent liability, 354 sale of, 314 LEDGER, classification of accounts, 568 methods of recording depreciation in, 187 plant, 191 Form, 193 purchase, used with voucher system, 46 stock, 20, 21 Forms, 21 stores, 53 subsidiary records, 190 suspense, use of, 559 trial balance, 62 LIABILITIES, 339-371 balance sheet, 339-371 arrangements on, 340 cancellation of liabilities against assets, 341 items within groups, 341 contingent, 81, 344, 351-355 accumulated dividends on preferred stock, 355 drafts negotiated, 352 guarantees as, 353 kinds of, 352 long-term leases, 354 notes discounted, sold, or otherwise transferred, 352 pending lawsuits, 354 purchases for future delivery, 354 signature to surety bond, 355 statement of, 351 stock not fully paid, 354 current, 345-351 accounts payable, 345, 347 accrued expenses, 350 accrued expenses, booking of, 350 consigned goods sold, 349 deferred credits, 351 deposits, 348 dividends not yet paid, 349 future deliveries, 349 guarantees, 348 loans from bank, 347 notes payable, 345 notes payable, classification of, 346, 347 fixed, 356-371 accounting for bond issue, 363-369 bonds, kinds of, 358 bonds, priority of liens, 361 corporation bonds, 357 difference between bond and real estate mortgages, 358 loans on collateral, 370 nature of, 356 purpose of, 356 real estate mortgages, 369 short-term securities, 370 grouping on the balance sheet, 70-74 inventory of, 342 accrued expenses, 343 contingent, 344 deferred expenses, 344 deferred income, 343 premium on bonds, 343 overvaluation for purpose of creating secret reserve, 418 valuation of, 97 consolidated balance sheet, 611 LIQUIDATING DIVIDENDS, 445 LIQUIDATION AND REALIZATION ACCOUNT, 639-650 Forms, 642 LIQUIDATION, CORPORATIONS, 493-506 accounting for, 505 bankruptcy, 502 causes of insolvency, 494 current assets transferred into fixed assets, 494 inability to secure cash for refunding operations, 496 tying up cash in stocks of materials, 494 unwise use of cash for paying dividends, 495 complete, 493 dividends, 506 partial, 493 reasons for, 493 receivership, 501, 503 status of creditors in, 503 valuation for purpose of, 83 voluntary dissolution, 501, 503 LIQUIDATION, PARTNERSHIP, by instalment, 650 deduction from capital, 651 illustration of, 653, 654 LOAD, normal factor in determining depreciation rate, 143 LOANS, bank,347 borrowing to pay dividends, 436-438 on collateral, 370 LOCATION, MAP OF MACHINE, 286 LOSSES, anticipation of, undesirable, 227 asset, charged against current profits, 396 charged to capital, 397 effect on future profits, 393 legal decisions as to, 394 treated as deferred expense charge, 396 capital, relation of, to dividends, 443 credit, risk from, 216 fire (See “Fire losses, adjustment of”) notes receivable, 222

M MACHINERY (See “Equipment”) MAINTENANCE, accrued, 123 cost of, standardized, 122 deferred, 109, 123 definition of, 89 distinction between repairs and renewals, 113 method of calculating depreciation, 169 policies as to, effect on rates of depreciation, 145 MAINTENANCE METHOD, calculating depreciation, appraisement of, 182 MANUFACTURING ACCOUNT, HANDLING OF, 690 MANUFACTURING CORPORATIONS, 2 MANUFACTURING INVENTORY (See “Inventory”) MANUFACTURING, PURCHASING FOR, 26 MAP, MACHINE LOCATION, 286 MARGIN (See “Surplus”) MARKET VALUE, capital stock, 373 depreciation and fluctuations in, 116, 117 valuation of stock-in-trade at, 225, 228 MATERIALS, factory costs, 51 raw, valuation of, 234 stores department, 52 MEAN AGE, plant expectancy, direct method, 198 MEAN LIFE OF DEPRECIATION, direct method, 197 dollar-year or weighted ratio method, 198 MERCANTILE CREDITS (See “Credit, mercantile”) MERCHANDISE (See “Stock-in-trade”) MERGERS, capitalization, 516 closing the books, 518 closing the books of the old companies, 518 distinction between consolidation and, 510 formation of, 511 opening the books, 519 MINUTE BOOK, 20, 24 MNEMONIC SYSTEM, 564 advantage, 565 combined with Dewey decimal system 566 example of application to a machine, 566 MODELS, VALUATION OF, 294 MOLDS, VALUATION OF, 294 MONOPOLY PATENTS, 317 MORTGAGES, difference between, and bond, 358 on land, 308 real estate, fixed liabilities, 369

N NON-CUMULATIVE PREFERRED STOCK, 5 NON-PARTICIPATING PREFERRED STOCK, 6 NON-STOCK CORPORATIONS (See “Corporations”) NO PAR VALUE STOCK, 9, 20 NOTES, discounted, consolidated balance sheet, 607 sold or otherwise transferred, contingent liability, 352 long-term, 349 payable, 345 classification of, 346, 347 handling of, under voucher system, 43 statistics, 584 receivable, balance sheet titles for, 223 interest on, 223 losses on, 222 valuation of, 215, 223 short-term securities, 370 NUMBERED ACCOUNTS, 563-570 advantages, 564 allotment of numbers, 563 classification, 564 general ledger accounts, 568 main points, 570 manufacturing plant, 566 operating expense accounts, 567 operating revenue accounts, 566 primary accounts, 567 combination of mnemonic and Dewey decimal systems, 566 Dewey decimal system, 564 advantage of mnemonic over, 565 mnemonic system, 564 advantages over Dewey decimal system, 565 example of application to a machine, 565 symbols, 564

O OBSOLESCENCE, 173 cause of depreciation, 127 treatment of, 128 estimate of depreciation charge due to 129 patents, 320 under Federal Income Tax of 1916, 130 “OPEN” CORPORATIONS, 2 OPERATION, abnormal machine, 285 asset subject to depreciation a deferred charge to, 93 depreciation a cost of, 157 load on normal intensity of determining depreciation rate, 143 normal conditions of, determining depreciation rate, 143 permanent investments as an aid to, 259 standards of machine, 285 statistics, 584 ORDINARY STOCK, 4 ORGANIZATION, accounting department, manufacturing business, 26 corporate, board of directors, 3 committees, 3 officers, 3 expenses, 14, 18 treatment of, 330 ORIGINAL COST, factor in calculating depreciation, 150 OVERHEAD, DEFINITION OF, 50 OWNERSHIP (See also “Stock”) OWNERSHIP, CORPORATE, advantages, 3 “close,” 2 “open,” 2 partial, consolidated balance sheet, 601 “sole,” 3

P PARASITES, CAUSE OF DEPRECIATION, 133 PARTIAL PAYMENTS, HANDLING OF, UNDER VOUCHER SYSTEM, 42 PARTICIPATING PREFERRED STOCK, 6 PARTNERSHIP, liquidation of, by instalments, 650 deduction from capital, 651 illustration of, 653, 654 shares of deficiency, 652 valuation of, in a combination and consolidation, 514 PAR VALUE, capital stock, 373 sale of stock at less than, 11 stock of no, 9, 20 PATENTS, 316-324 and costs of manufacture, 324 depreciation, accounting classification of, 322 booking, 322 developed within the plant, 318 elements of depreciation, 319 obsolescence, 320 supersession, 320 time lapse, 319 infringement costs, 321 monopoly grant, 317 purchased and not used, 319 purchase of, 317 royalties, 323 sale price of, 324 service life of, 320 writing off the value, 321 PATTERNS, VALUATION OF, 294, 317 PAYMENTS, part, handling of, under voucher system, 42 PAY-ROLL, 55 checks drawn to order of treasurer of company, 671 distribution of labor charges, 57 methods of payment, 56 safeguarding, 55 PERCENTAGE, variable, methods of calculating depreciation, 150 PERPETUAL INVENTORY, 239 necessity for physical count, 240 PERSONALTY, DISTINCTION BETWEEN, AND REAL PROPERTY, 279 PETTY CASH, 211 imprest system, 211 PLANT, assets, grouping and classification of, 191 efficiency, depreciation and, 113 ledger, 191 Form, 193 POSTING, SUMMARY TOTALS, VOUCHER SYSTEM, 36 PREFERRED STOCK (See “Stock”) PREMIUM, bond, 343 amortization of, 269 entry on books, 365 nature of, 266 relation to interest, 367 schedule showing amortization of, 270 permanent investments, treatment of, 257 stock, 14 creation of surplus, 408 requirements of Interstate Commerce Commission, 13 treatment of, 378 PREPAID ITEMS, accounting for debit and other items, 256 danger of overvaluation, 255 definitions and kinds, 253 valuation of, 254 PRICE, cost, valuation of stock-in-trade at, 225 market, valuation of stock-in-trade at, 225 PRIME COST, definition of, 50 direct and indirect labor, 53 raw materials, 52 PRIVATE BOOKS, closing, 591 content, 589 operation, 590 illustration of, 590 purpose, 589 PRIVATE CORPORATIONS, 2 non-stock, 2 stock, 2 PROBLEMS, branch accounts, complex, 529 foreign branch, 548 simple, 527 consolidated balance sheet, 616 different methods of recording accrued items, 252-253 liquidation by instalments, 653 realization and liquidation statement, 645 statement of affairs and deficiency account, 635 PRODUCTION, STATISTICS, 584 PROFIT AND LOSS SUMMARY, 466-492 adjustment of inventories, 490 closing the records of a corporation, for the fiscal year, 474 consolidated balance sheet, 612-615 content and manner of showing, 489 correction of closing errors, 476 cost of goods sold, manufacturing concern, 478 trading concern, 479 discount on bonds, 474 dividend declaration, 474 form, account form, 483 comparative statement of, 488 examples of two forms of presentation, 485 manufacturers and merchants, 487 non-technical or report form, 484 standardization of, 477 interest as a cost of manufacture, 468 arguments against, 470-472 problem of charging on books, 471 interrelation of, and balance sheet, 466 periodical adjustments, 467 profit, method of showing, 482 profits between departments, 473 schedules for special need, 492 selling expense and administrative schedules, 491 sinking fund, 475 statement, 410 supporting schedules, 489 terms, desirability of uniformity in, 481 differentiation of, 480 synonymous, 478 unrealized profits, 472 working capital, 475 PROFITS, 387-406 (See also “Profit and loss summary,” above) anticipation of, undesirable, 227 asset losses, charged against current profits, 396 charged to capital, 397 effect of, on future profits, 393 legal decisions as to, 394 treated as deferred expense charge, 396 capital, 405 margin account, 409 capitalization of, valuation of good-will based on, 335 corporation, directors’ control over, 429 disposition of, 428 shareholders’ rights as to, 429 definition, accounting, 390 economics, 387 legal, 389 determining, difficulty of, 387 double entry, 391 goods awaiting delivery, 402 goods made for stock but not sold, 399 goods made to order, 400 long-term contracts, 401 methods of, 391 single entry, 391 summary of principles governing, 405 work in progress, 399 disposition of, 410 due to appreciation of assets, 404 excess, valuation of good-will based on, 335 intercompany, reserve for, 610 interdepartment, 404 method of showing on profit and loss summary, 482 normal, valuation of good-will based on, 334 problem a question of valuation, 392 relation of sinking fund to, 454 reserves of, secret, 418 statistics, 584 unrealized, 472 PROPERTY, payment of dividends in, 438 real, definition of, 297 distinction between personalty and, 279 stock issued for, 14 valuation of stock issued for, 380 PROPORTIONAL METHODS (See “Depreciation”) PROPRIETORSHIP, RESERVES FOR, 417 PRO RATA CLAUSE, 574 PUBLIC CORPORATIONS, 1 quasi-public, 2 PUBLIC UTILITY CORPORATIONS, 2 valuation for rate regulation, 82 PURCHASES, branch house, 533 foreign purchasing agency, 555 future delivery, contingent liability, 354 journal, expansion of, 27 manufacturing business, 26 returns and allowances, under voucher system, 40 valuation for, 83 voucher system (See “Voucher system”) cash discount, 44

Q QUASI-PUBLIC CORPORATIONS, 2

R RAILROAD STATISTICS, 582 RATE REGULATION, VALUATION FOR, 82 RATES, FIRE INSURANCE, 574 RATES OF DEPRECIATION (See “Depreciation”) RAW MATERIAL, VALUATION OF, 234 REAL ESTATE (See “Buildings” and “Land”) REALIZATION AND LIQUIDATION ACCOUNT, 639-650 Forms, 642 cash account, 643 evolution of, 640 handling of valuation reserves, 644 illustration of, 645 receiver’s cash account, 648 supporting schedules, 643 theory underlying, 640 uses to which statement may be put, 644 REAL PROPERTY (See also “Buildings” and “Land”) definition of, 297 distinction between personalty and, 279 RECEIPTS AND DISBURSEMENTS (See “Profit and loss summary”) RECEIPTS, CAPITAL, 87 RECEIVERS, 620-654 accounts, 628 initial statements presented to the court in bankruptcy proceedings, 627 appointment, 620 deficiency account, 633 Form, 635, 638 in bankruptcy, 620, 621 in equity, 621 accounts of, 623-625 relative standing of creditors, 630 reports of, 623-628 procedure, 622 realization and liquidation account, cash account, 648 example of balance sheet, 645 illustration of statement, 646 realization and liquidation statement, 644 Forms, 646 reports, 628 “charge and discharge” form, 626 initial statements presented to court in bankruptcy proceedings, 627 reports to the court, 625 comparative balance sheet, 627 items covered, 626 statement of affairs, 631 Forms, 634-638 basis of valuation, 632 RECEIVERSHIP, method of liquidating, 501, 503 RECORDS, accounting, dividends, 442 machinery and tools, 281 asset, 192 bond investments, 267 distinctive, of corporation, 20 dividend book, 20 instalment book, 20 minute book, 20, 24 private (See “Private books”) register of transfers, 20 special purposes of cost, 50 predetermination of selling price, 51 stock book, Forms, 22, 23 stock certificate book, 20 stock ledger, 20, 21 Form, 21 stock register, 21 stock transfer book, 20 Forms, 22 subscription book, 20 subscription ledger, 20 time-keeping, 54 REDEEMABLE PREFERRED STOCK, 6 REDEMPTION, capital stock, 381 preferred stock, 19, 384 REFEREE, in bankruptcy, liquidating dividends, 630 REFUNDING, INABILITY TO SECURE CASH FOR, 496 REGISTER, accounts payable, 34 plant, form of, 191 stock, 21 transfer, 20 voucher, form of, 34, 35 posting of summary totals, 36 proof of distribution, 37 purchase discount column, 44 status of when purchase ledger is used, 46 RENEWALS, definition of, 89, 90 distinction between, and repairs, 113 methods of handling, 147 of parts, treatment of, 91 recording depreciation on the books, 188 first method, 188 second method, 189 REPAIRS, cost of, included in depreciation charge, 148 estimates, 149 definition of, 89, 90 distinction between, and renewals, 113 methods of handling, 147 on second-hand plant, 94 policy, determining depreciation rate, 143, 145 preliminary estimates, 147 reserve for, 148 theory of averages, 147 REPLACEMENTS, definition of, 89 distinction between repairs and renewals, 113 financing of, 203 borrowed funds, 203 increase of capital stock, 203 profits of the past reserved in the business, 203 method of calculating depreciation, 169 appraisement of, 183 Interstate Commerce Commission’s instructions, 189 methods, 188 recording depreciation on the books, 188 REPORTS, (See also “Statements”) branch, customers’ accounts collected, 541 examples of, 540 periodic cash summary, 540 receivers (See “Receivers”) trustees (See “Trustee”) REQUISITIONS, STORES, 53 RESERVES, 410-424 bad debts, 411 classification of, 423 proprietorship reserves, 424 valuation reserves, 424 collection costs not under contract, 414 contingent, 416 continuity of policy, 421 covered, 422 “reserve fund,” 422 deferred income, misuse of term, 417 depletion, 413 depreciation, accounts, 187 decreasing, 200 financing of replacements, 203 increasing, 200 index of financial condition, 199 insufficient charge, 205 methods of financing replacements, 203 not based on cost of replacement, 202 on balance sheet, 199 relation to efficiency, 201 relation to expanding plant, 201 secret, 204 suspense account, 558 different meanings of, 411 distinction between, and accrued items, 415 doubtful accounts as a suspense account, 558 earmarking of, 420 for investment fluctuations, 243 intercompany profits, 610 market fluctuations in merchandise, 228 operating, for accrued costs, 413 estimated sales discounts, 413 proper allocation of taxes, 413 proprietorship, 417 repairs, 148 sales discounts on the balance sheet, 415 secret, 418 argument against, 419 argument for, 419 overvaluation of liabilities, 418 undervaluation of assets, 418 sinking fund, treatment of, 463 under- and over-estimate of, 412 valuation, handling of, realization and liquidation account, 644 RETURNS, purchase, under voucher system, 40 REVALUATION, periodic, of good-will, 337 REVENUE EXPENDITURES, defined, 87 distinction between, and capital, 95 RIGHTS, stock, received while stocks are held for temporary investment, 244 terminable or limited, depreciation, 134 RESIDUAL VALUE, factor in calculating depreciation, 150 RISKS, UNUSUAL, IN CONNECTION WITH ESTIMATE FOR DEPRECIATION AND DEPLETION, 313 ROYALTIES, PATENTS, 323

S SALARIES, DIVIDENDS PAID IN FORM OF, 435 SALES, basis of estimate of bad debts, 220 discounts, on the balance sheet, 415 proper allocation of estimated, 413 instalment basis, valuation of accounts, 222 statistics, 584 to branch house, 534 valuation for purpose of, 83 SALVAGE ACCOUNT, 188 SCHEDULES, for special needs, profit and loss summary, 492 selling expense and administration, 491 supporting, profit and loss summary, 489 realization and liquidation account, 643 use of, as a means of condensing balance sheet, 79 SCRAP, machinery, 287 valuation of, 236 SCRAP VALUE, factor in calculating depreciation, 150 SCRIP, PAYMENT OF DIVIDENDS IN, 438 Seasoning, appreciation due to, 207 SECRET DEPRECIATION RESERVE, 204 SECRETS, TRADE, 325 SELLING EXPENSE, schedules, profit and loss summary, 491 SELLING PRICE (See “Market value”) SERVICE, life, estimated, factor in calculating depreciation, 150 SERVICE OUTPUT METHOD, calculating depreciation, 156 appraisement of, 177 SHARES (See “Stock”) SINKING FUND, 447-465 accounting for, 456 appear only among assets, 456 balance sheet, 457 booking the trustees’ report, 460 entries, 459 accumulation based on agreement, 451 bond redemption, 458 compound interest method of calculating depreciation, appraisal schedule, 162 Chart, 162 formula, 161 debts, effect of settlement of, 452 schedule of debit and credit, 452 definitions, 447 final disposition of, 462 mathematical principles on which based, 449 method of calculating depreciation, appraisement of, 181 origin and use, 448 policy of investment, 276 outside securities, 276, 277 own bonds, 276, 277 profit and loss summary, 475 relation between depreciation and, 463 relation to profits, 454 treatment of income and expense, 461 treatment of reserve account, 463 valuation of, 276 SOLIDIFICATION, APPRECIATION DUE TO, 207 STAMPS, REMITTED AS CASH, 212 STANDARDIZATION, DEPRECIATION RATES, 142 STANDARDS, MACHINE OPERATION, 285 STATE, report to, balance sheet as, 79 STATEMENT, assets and liabilities, 70 balance sheet, 63, 64 contingent liabilities, 351 financial, 70 of affairs, bankruptcy proceedings, 631 Forms, 634-638 profit and loss (See “Profit and loss summary”) realization and liquidation (See “Realization and liquidation account”) resources and liabilities, 70 surplus, 425 STATISTICS, 581-589 application of, 584 graphs, advantages, 586 principles of construction, 587 use of, in presentation, 585 manufacturing, 583 mercantile, 583 railroad, 582 classification, 582 operating details, 582 results of operation, 582 value of, 581 STOCK, 372-386 accounting for, 13 bonus stock, 16 discount, 13 forfeited stock, 19 no par value, 20 premium, 14 property exchanged for, 14 redemption of preferred stock, 19 treasury stock donated, 15 treasury stock purchased, 18 assessment, creation of a margin, 409 bonus, 13, 16 capital and treasury stock on the balance sheet, 383 capitalization, cost, 376 earning capacity, 375 increase in book, 375 capital, showing of, on consolidated balance sheet, 611 certificate book, 20 certificate of, 9, 10 common, 4 no par value, 9 debenture, 4, 8 discount on, 13 dividend book, 20 dividends in, 382, 439 effect of, 382 estate accounting, 440 donated, 11 creation of surplus, 408 exchanged for property, 14 ex-dividend, 442 forfeited, 12, 19 founders’, 4, 7 fully paid and non-assessable, 11 guaranteed, 4, 7 instalment book, 20 issued as a bonus, 383 issue of, bonds versus, 362 kinds of, 372 law and issues of, 377 ledger, 20 Form, 21 no par value, 9, 20 not fully paid, contingent liability, 354 ordinary, 4 preferred, 4, 5 accumulated dividends on, contingent liability, 355 convertible, 6 covered by redemption contract, 384 cumulative, 5 non-cumulative, 5 non-participating, 6 participating, 6 redeemable, 6 redemption of, 19 premium, 14 creation of surplus, 408 property purchases, 14 records, stock book, 22, 23 redemption and reduction of capital stock, 381 at book value, 381 surplus adjustment, 381 register, 20, 21 rights, received while stocks are held for purposes of temporary investments, 244 sale of, at less than par, 11 sinking fund, 448 subscription book, 20 subscription ledger, 20 transfer book, 20 Form, 22 treasury, 10, 247 balance sheet, 383 bonus, 16 donated, 11, 15 purchased, 18 valuation of, 380 unissued, distinction between treasury stock and, 11 valuation of, 246 used to pay organization expense, 14 valuation, balance sheet, 374 book value, 373 dependent upon earning capacity, 374 market, 373 of property, 11 par, 373 problems of, 372 real, 373 treasury stock, 380 treatment of discount or premium, 374 when issued for property, 380 watered, 10 STOCK CORPORATIONS (See “Corporations”) STOCKHOLDERS, balance sheet as formal report to, 79 depreciation policy and, 209 rights as to profits, 429 rights to dividends, 431 status of, in liquidation, 504 STOCK-IN-TRADE, 225-240 anticipation of profits or losses undesirable, 227 balance sheet, 227 brokerage firms, valuation of stocks and bonds held, 245 definition and scope of term, 225 depreciation, 119, 229 deterioration, 229 distribution of costs over, 231 fluctuations in market price, 228 reserve for, 228 full costs of, 230 cash discount, 230 drayage, 230 duty, 230 freight, 230 insurance, 230 interest on money invested, 231 seasoning, 230 warehouse charges, 230 inventory-taking, 237 methods, 238 perpetual, 239 rules, 238 land as, 310 method of treatment, 228 objections to valuation at less than cost, 226 pricing of the inventory, 232 weighted average, 232 valuation of, consolidated balance sheet, 607 valuation of, cost or market price, 225 summary arguments, 228 valuation of manufacturing inventory, 233, 234 finished goods, 233 goods in process, 234 raw materials, 234 scrap, 236 STORES DEPARTMENT, accounting for materials, 52 ledger, 53 requisitions, 53 STRAIGHT LINE METHOD, calculating depreciation, 152 appraisement of, 175 formula, 152 graphic chart, 153 SUBSCRIPTION, book, 20 ledger, 20 rights, received while stocks are held for temporary investment, 244 SUBSIDIARIES, advances to, by holding company, 262 rules for valuation, 263 permanent investments in, by holding company, 261 SUBSIDIARY RECORDS, RECORDING DEPRECIATION ON THE BOOKS, 190 SUPERSESSION, PATENTS, 320 SUPPLIES, FACTORY COSTS, 51 SURETY BOND, signature to, contingent liability, 355 SURPLUS, 407-410 account, legitimate use of, 424 adjustment of, through redemption or reduction of capital stock, 381 definition, 407 disposition of profits, 410 margin, 407 capital profits and bonuses, 409 capital stock premiums, 408 creation of, 408 stock assessments, 409 stock donation, 408 showing on consolidated balance sheet, 611 statement of, 425 SUSPENSE ACCOUNTS, 556-563 accounts receivable hypothecated, 560 definition, 556 general purposes, 556 reserve for depreciation, 558 reserve for doubtful accounts, 558 use of suspense ledger, 559 SYMBOL SYSTEM APPLIED TO ACCOUNTS (See “Numbered accounts”) SYMBOLS, USED IN CALCULATING DEPRECIATION, 151

T TAXATION, VALUATION FOR, 83 TAXES, PROPER ALLOCATION OF, 413 TIME, idle, factor in depreciation, 139 units of, 139 TIME CARDS, ANALYSIS OF, 57 TIME-KEEPING, records, cards, 54 TOOLS (See “Equipment”) TRADE DEBTORS, accounts receivable, 216 discounts and collection costs, 221 TRADE-MARKS, 326 valuation of, 326 TRADE SECRETS, 325 TRADING CORPORATIONS, 2 TRANSFER BOOK, STOCK, 20 Forms, 22 TRANSFERS, REGISTER OF, 20 TREASURY STOCK (See “Stock”) TRIAL BALANCE, conversion of, foreign branch, example of, 548, 549 relation between balance sheet and, 62, 77 tested as to equality of debits and credits, 695 TRUSTEE, 620-654 accounts, 628 bankruptcy, 502 deficiency account, 633 Form, 635, 638 disposing of bankrupts’ property, 629 liquidating dividends, 629 declaration of, in hands of referee, 630 realization and liquidation account, 639-650 Forms, 642 cash, 643 evolution of, 640 handling of valuation reserves, 644 illustration of, 646 supporting schedules, 643 theory underlying, 640 uses to which statement may be put, 644 records, 629 relative standing of creditors, 630 reports, 628 sinking fund, booking report, 460 statement of affairs, 631 basis of valuation, 632 Forms, 634-638 TURNOVER, STATISTICS, 584

U UNEARNED INCREMENT, 209 UNISSUED STOCK, VALUATION OF, 246 UNIT, cost method, calculating depreciation, 161, 167-169, 182 efficiency, 114 product, 139 time, 139 UTILITY, PUBLIC CORPORATIONS, 2

V VALUATION ACCOUNTS, SHOWING ON THE BALANCE SHEET, 77 VALUATION, PRINCIPLES OF, 81-93 accounts receivable, 215 accrued items, 250 advances to subsidiaries, 263 asset subject to depreciation, a deferred charge to operations, 93 authorization for booking capital expenditures, 94 balance sheet concerned with, and content, rather than form, 97 balance sheet, content of, 81 contingent assets, 81 contingent liabilities, 81 buildings, 300 capital stock, 372-386 carriers and containers, 293 cash, 210-214 combinations and consolidations, 512 cost-cutting changes, 92 cost value usual basis, 86 definition, capital and revenue expenditure, 87 maintenance, 89 renewals, 89 replacement, 89 delivery equipment, 292 depreciation, 99, 101 depreciation and fluctuations in market value, 116, 117 estimates, 97 fire loss adjustments, 83 franchises, 328 furniture and equipment, 291 going concern, 83 good-will, 333-338 home-made machinery and tools, 289 inventory, 232, 233 kinds of value, 84 land, 303 investments, 307 liability items, 97 liquidation, 83 machinery, 287 main groups of asset items, 95 current assets, 96 deferred charges to operation, 96 fixed assets, 96 mercantile credits, 215-224 necessary to read the balance sheet, 6 notes receivable, 215 organization expenses, 88 over- and undervaluation, 97 patents, 317 patterns, molds, etc., 294 permanent investments, 259 present value of property, 86 profits, 392 purchase, 83 rate regulation, 82 repairs on second-hand plant, 94 sale, 83 sinking funds, 276 source of data as to value, 85 stock-in-trade, 225-240 taxation, 83 temporary investments; accrued and deferred items, 241-257 treatment of renewal of parts, 91 VALUE, cost, 85, 86 kinds of, 84 market, 85 depreciation and fluctuations in, 116, 117 no par, stock of, 20 “normal” or “average,” 109 par and no par, of stock, 9 present, 86 source of data as to, 85 VARIABLE PERCENTAGE METHODS (See “Depreciation”) VOLUNTARY DISSOLUTION, 501 liquidation under, 503 VOUCHER SYSTEM, 26-48 “Accounts Payable Register,” 34 advantages, summary of, 47 canceled checks, 32 cash discount on purchases, 44 adjustment of difference between discount columns in voucher register and cash book, at the close of fiscal period, 45 customary method, 46 supplementary voucher, 45 checks, given a new series of numbers to facilitate reconciliation with bank account, 37 control of vouchers payable, 39 definition, 28 description of, 28 development of, 27 disadvantages, summary of, 48 distribution of charges, 31 distribution of vouchers, 34 effect on cash book and bank account, 37 expansion of the purchase journal, 27 form of voucher register, 34 index of creditors, 38 introduction of, 39 journal vouchers, 592-596 Forms, 592, 593 content, 595 index, 594 Forms, 594, 595 method of use, 593 methods of authorizing journal entries, 596 need for, 592 modifications, 46 house vouchers, 47 purchase ledger sometimes used, 46 notes payable, handling of, 43 operation, 31 summary of, 47 organization of an accounting department of a manufacturing business, 26 partial payments, 42 payment of vouchers, 37 purchase returns and allowances, 40 purchasing for the manufacturing business, 26 register, posting of summary totals, 36 proof of distribution, 37 purchase discount column, 44 status of, when purchase ledger is used, 46 voucher check, 32 distribution of charges, 32 folded, 32 Forms, 33 single, 32 Forms, 34 voucher forms, 29, 30 voucher register, 34 Forms, 35

W WAGES, ACCRUED, 57 WAREHOUSE CHARGES, COST OF STOCK-IN-TRADE, 230 WASTING ASSETS (See also “Depletion”) application of income tax to, 312 basis of depletion charge, 312 characteristics, 311 definition, 311 depreciation on buildings and machinery of, 313 dividends may include return of capital, 311 effect on different kinds of business, 118 leaseholds, 314, 315 unusual risks, 313 water rights, 313 WATERED STOCK, 10 WATER POLLUTION, CAUSE OF DEPRECIATION, 133 WATER RIGHTS, acquired along with a wasting asset, 313 WORKING CAPITAL, PROFIT AND LOSS SUMMARY, 475 WORKING HOURS METHOD, calculating depreciation, 153 Chart, 155 appraisement of, 176 WORKMEN’S DWELLINGS, 599

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