C.P.A. questions and answers

Foreword

This book is designed for all persons engaged in the study or practice of accountancy, including students of accounting, bookkeepers, auditors and professional accountants. It should be of special value, however, to candidates for C. P. A. examinations.

The answers to questions on Theory of Accounts, Practical Accounting and Auditing comprise, with a few exceptions, my regular contributions to BUSINESS magazine for the five years from 1909 to 1913 inclusive — the exceptions referred to, and the Business Law questions, were prepared under the supervision of Mr. F. W. Morton, Director of The International Accountants' Society, and during those years Editor of said magazine.

The practical accounting problems are of special interest, since they comprise some of the most important questions set by the Examining Boards of the United States and Canada; in fact they include some of the most difficult propositions to be met with in the active work of the professional accountant. The solutions and explanations, however, are, in many cases, more lengthy and exhaustive than would be required in an examination because in this way they provide not mere answers to questions, but complete lessons on the subjects under discussion.

In presenting this publication it is hoped that it may be of service in answering many of the questions which are continually arising in the actual practice of business. Suggestions and frank criticisms of persons discovering the need of such, are cordially invited in order that improvements may be made in succeeding editions.

R. J. BENNETT, C. P. A.

Philadelphia, January 1, 1914.

Contents

Page MODEL C P. A. BILL 9

PART 1— THEORY OF ACCOUNTS 27 Accounting Methods 42

Annual Reports 34-35-36

Bills Receivable Discounted 30

Books of Account 31-40-41

Classification of Accounts 28-42

Consignments 41-43

Corporation Books 31

Debits and Credits 29

Depreciation and Reserves 32-26-40

Dividends 34-38

Equilibrium of Ledgers 42

Executors and Trustees 43

Expenses and Disbursements 28

Factors of Cost 33

Goodwill and Its Treatment 32-38

Income and Receipts 28

Interest and Discounts 27

Insurance Accounts 34-35-36

Overhead Expense 33

Statements and Balance Sheets 27-33

PART 2— PRACTICAL ACCOUNTING 45 Adjustments 110

Amalgamations and Mergers 68-80-101-168-226

Analysis of Accounts 45

Annuities and Sinking Funds 47

Blast Furnace Records 129

Branch Accounts 219

Building, and Loan Associations 180

Consignments 149-221

Consolidations 168

Cotton Mill Accounting 233

Corporation Accounting 74

Executors and Trustees 185

Fire Insurance Accounts 202-217

Internal Revenue Reports 136

Manufacturing and Trading Statements 118

Mining Problems 191-211

Miscellaneous Matters 211

Partnership Relations 54-215-229

Partnership to Corporation 68

Procedure in Incorporating 71

Public Service Corporations 145-212

Receivership 223

Stock Brokerage 158

Syndicates and Holding Companies 151

PART 3— AUDITING 245 Bills and Accounts Payable 248

Cash and Bank Accounts 247

Certificate 251

C. P. A. Examinations 245

Corporation Reports 271

Discounts 350

Fixed and Current Assets 249

Imports 273

Organization Expenses 258

Pay Rolls 248

Purchases and Sales 250

Purposes of an Audit 246

Reports 256

Vouchers 279

PART 4— COMMERCIAL LAW 279 Agencies 279

Authority of Agents; Classes of Agencies; Implied Agreements ; Principals to Contracts ; Responsibilities.

Contracts 285

Acceptance; Classes; Discharge; Elements necessary; Parties to ; Simple and Written.

Corporations 290

Advantages of; Capital Stock; Classes of; Organization; Powers ; Stockholders.

Partnerships 300

Classes; Dissolution; Formation; Powers; Relations.

Various Business Law Problems 304 to 310

Bailment; Bill of Sale; Common Carrier; Commercial Paper; Chattel Mortgage; Guarantee; Negotiable Instruments; Receivers; Stoppage in Transit; Trustees and Bankruptcy.

Introductory

IN THE SELECTION of these problems our endeavor has been to cover in a general way the nature of the questions which have been heretofore, and are now being set at the regular C. P. A. examinations in the various states. The explanations given are, in some cases, much broader than would ordinarily be required in an examination, but the object of this work is to give the reader not only a method of solving such problems, but enough real meat to be of permanent educational value to him. In fact, many of the solutions are designed to serve as complete lessons on the subjects treated. A model C. P. A. Bill is included for the purpose of giving the reader a general knowledge of the usual requirements of the State Laws, although the details may vary to a slight extent in the different states.

In the arrangement of the various questions and answers it has seemed advisable to subdivide them into the four sections usually covered, i. e., Theory of Accounts, Practical Accounting, Auditing, and Commercial Law. A complete set of questions is first presented in order to indicate the scope of a C. P. A. examination; these questions are then followed by answers to the questions on Theory of Accounts presented therein.

Part two covers a series of selected Practical Accounting problems pertaining to different lines of business and requiring elucidation of the various exhibits, statements and adjustments used by accountants; these comprise Statistical Records, Revenue Reports, Profit and Loss Statements, Balance Sheets, Comparative Statements, Consignment Accounts, Corporation Entries, Insurance Adjustments, Mergers and Amalgamations, Bond Issues, etc.

It is somewhat difficult to draw a distinct line of demarcation between Practical Accounting questions and those pertaining to Auditing, since the work of a professional Auditor necessarily involves and presupposes a thorough knowledge of practical accounting procedure, and it should be kept in mind that one of the most important duties of an auditor is to satisfy himself that correct accounting principles have been followed in the keeping of the accounts themselves, as well as in the preparation of revenue and financial statements. The third section, therefore, not only covers a complete set of questions on Auditing as used in a recent C. P. A. examination, but goes into the practical end of the work by presenting illustrations of auditors* reports accompanied by the necessary statements and exhibits.

The Commercial Law questions have been selected from those used in a great many different states, and while more or less general in their nature, can all be used as the basis of answers to questions on smilar subjects. The authors are indebted to Hon. Chas. C. Simons, L.L.B., author of Commercial Law Simplified for a great deal of help in the selection and arrange ment of the problems included in this fourth section.

Public Accountants are endeavoring, through National and State Associations, to maintain high standards of efficiency in their work as well as in their professional conduct, and in recent years it has been the endeavor of examining boards in the various states to prepare questions of a uniformly high character in order to create not only a higher grade of accountants, but to inspire in the minds of the general public a greater degree of confidence in the accounting profession.

To those who are earnestly striving to advance the already high standard and general efficiency of the profession of accountancy, this book is respectfully dedicated.

Model C. P. A. Bill

APPROVED AND RECOMMENDED BY THE EXECUTIVE BOARD OF THE FEDERATION OF SOCIETIES OF PUBLIC AC- COUNTANTS IN THE UNITED STATES OF AMERICA.

THE STATE BOARD OF ACCOUNTANCY BILL.

Title.

A BILL for an Act to create a State Board of Accountancy and to prescribe its powers and duties, to provide for the examination of and issuance of certificates to qualified accountants, and to provide a penalty for

violation of this Act.

Note "a." — This heading is an adaptation ,of the headings of the Pennsylvania, California and Washington laws. The idea is to designate fully in the title what the scope of the bill is. Bills are very often read by their title only, and their disposition is based entirely upon the impression gained from the title. C. P. A. bills simply providing for the regulation of the profession have been referred to the wrong committee, for the reason that the Speaker of the House jumped at a wrong conclusion in regard to the bill because the title was not sufficiently explicit. This is an important point and should be care'fully handled.

Section I. Be it enacted by the people of the State of

represented in the General Assembly, that any citizen of the United States, or person who has duly declared his intention of becoming such citizen, having a place for the regular transaction of business as a professional

accountant, in the State of. (see note "b"), being

over the age of twenty-one years (see note "c"), of good moral character, being a graduate of a high school with a four years' course, or having had an equivalent education (see note "d"), who shall have received from the State Board of Accountancy (see note "e") a certificate of his qualifications to practice as a public expert accountant as hereinafter provided, shall be styled and known as a Certified Public Accountant; and no other person shall assume such title, or use the abbreviation "C. P. A." or any other words or letters to indicate that the person using the same is such Certified Public Accountant. (See note "f".)

Note "b." — It is regarded as an essential point that any person who is to receive a C. P. A. certificate should have a place for the regular transaction of business as a professional accountant within the State.

The New York. Pennsylvania, Maryland and California laws provide for any person residing in the State, or having a place of business; this opens the door to persons who are not actually engaged in the practice of accountancy as a profession.

The Illinois law requires that applicants for certificates shall be actually practicing accountants and have a place of business within the State. This is regarded as very necessary.

Note "c." — It is necessary to fix the age limit at the legal age of 21 years. Some attempt has been made from time to time to fix the age limit at 25 years, but these efforts have not been successful. In the Washington Bill the age limit was set at 25 years, but was amended on the floor of the house on second reading to 19 years by a member who thought that any boy coming out of College ought immediately to be allowed to take this examination. Outside of Washington all the laws passed have a 21-year age limit.

Note "d." — The wording here is copied from the Illinois statute and specifically calls for a high school education, or the equivalent.

The New York law does not specify that there shall be a preliminary education, but the Regents in framing rules for the examination of candidates have insisted on a high school graduation, or four years academic study or the equivalent.

No laws except Illinois provide, in the statute, for any preliminary education, but it is regarded as desirable, even if not essential, that this provision should be embodied in the bills that will hereafter be promulgated, in order that a standard may be maintained which will be on a par with the older States.

Applicants under the Waiver Clause do not have to comply with this requirement.

Note "e." — The State Board of Accountancy is made the grantor of the Certificates. This is the law in California and Washington, while in Pennsylvania and Maryland the Governor grants the certificates and in New York and Illinois the State University does this.

It is a debatable point whether the granting power should be with the Governor or with the State Board of Accountancy. The less the Governor has to do with the matter the better it is in most States, as it is desirable to keep out politics as much as possible.

Note "f." — The wording "note e" as far as the end of the first section is identical with the New York, Pennsylvania, Maryland and Illinois laws, and is practically the same as California and Washington. This is the vital part of the whole bill and should be uniform in all States. It is recommended that the exact wording as already established in the four principal States be adhered to.

Section II

The Governor shall, within 30 days after the passage of this Act, appoint three persons (see note "g")> wno shall be skilled in the practice of accounting and actively engaged therein on their own account in the State

of to constitute and serve as a State Board of

Accountancy (see note "h"). The members of such Board shall hold office for three years and until their successors are appointed and have qualified, except that one of the members of the State Board of Accountancy, first to be appointed under this Act, shall hold office for one year, and one for two years. (See note "i".) Upon the expiration of each of said terms an examiner shall be appointed for the term of three years, and after the year one thousand nine hundred and the examiners shall be appointed from the holders of certificates issued under this Act. (See note "j".)

Note "g." — It is recommended very strongly that the law should call for a Board of three examiners and no more, for the reason that three persons are found to be sufficient and a larger number is difficult to secure and more difficult to deal with. In New York and Illinois there are three Examiners; in Maryland the Board is composed of four persons, and in Pennsylvania, California and

MODEL C. P. A. BILL

Washington of five persons. It is very seldom that more than three persons can be found to take sufficient interest in the workings of such a law as this to make their services of any value at all.

N ote "h "—It is desirable that the examiners should be chosen from men who have been actively engaged in the State as public accountants for a period of years. In Pennsylvania, of the five examiners three must have been in practice as public accountants for at least five years. In Maryland two of the examiners must be selected from a list of those names proposed by the Maryland Association of Public Accountants. In Illinois the University appoints the three examiners, two of whom "shall be skilled in the practice of accounting and actively engaged therein in the State." In California the Governor appoints five persons, "at least three of whom shall be competent and skilled public accountans, or shall have been practicing as such in this State for not less than five consecutive years." Washington has the same as California, except that three years' practice is sufficient.

Note "}." — The plan here suggested is that adopted in other States and provides for the continuity of the Board, which is very essential.

Note "j." — In some of the C. P. A. Laws a great deal more is said in regard to the examining Board, especially in Pennsylvania and Maryland, but it is believed that the provisions contained in the above section are ample to cover the essentials.

Section III

The State Board of Accountancy shall make rules for conducting the examinations to be held under this Act. Said examinations shall be held at least once a year. The examinations shall be in "Theory of Accounts," "Practical Accounting," "Auditing" and "Commercial Law as affecting accountancy."

Note "k." — The essential feature in the above section is the wording of the branches of the examination. These are the same in every law that has been passed, except that the words "Commercial Law" stand alone outside of Illinois, the words "as affecting accountancy" having been added in drawing up the Illinois law, so as to avoid any antagonism from the legal fraternity; the idea being that members of the legislature, which is largely made up of lawyers, would resent the appointment of a Board of accountants to hold examinations in law. This is thought to be a god point and, as the words interpolated in Illinois do not injure the section but rather help define it, it is recommended that they should be generally adopted.

Section IV

The State Board of Accountancy shall charge for the examination and certificate provided for in this Act, a fee of $25.00, to meet the expenses of such examinations. This fee shall be payable by the applicant at the time of filing his application. (See note "1".) The State Board of Accountancy shall report annually the number of certificates and the receipts and expenses under this Act to the Governor. (See note "m".)

Out of the funds collected under this Act shall be paid the actual expenses of the State Board of Accountancy in conducting such examinations and issuing such certificates, and an amount not exceeding $10 per day to each member of said Board, for the time actually expended in pursuance of the duties imposed upon them by this Act, provided that no expenses incurred under this Act shall be a charge upon the funds of the State. (See note "n".)

Note "1." — The only essential feature in this section is that the fee to be charged for the examination and certificate shall be the sum of $25. This is the universal fee charged in all States, although some of the laws read that the Board shall charge for examination and certificate such fee as may be necessary to meet the actual expenses of such examination and issuing of such certificates. It is thought better that the fee of $25 should be specified in the Act.

Note "m." — It is immaterial to the Federation whether the State Board of Accountancy reports to the Governor or to the State Comptroller, or does not report at all; also as to what facts are reported in this way.

The New York law compels the Regents of the University to report annually to the State Comptroller, and pay the balance of receipts over expenditures to the State Treasurer. The Pennsylvania law says that any surplus over and above expenses shall be turned "into the Treasury of the Commonwealth," also that the results of the examinations shall be certified to the Governor.

The Maryland law provides that the Board of Examiners shall report to the State Comptroller and pay the surplus into the State Treasury. The Illinois law allows the University to collect the fees, pay the expenses and keep the net revenue, if any. t

In this connection it must be borne in mind that only during the first year after the passage of the Act is any large amount of income likely to arise. This is in respect to the large number of applications that will probably be made under the Waiver Clause. In subsequent years, when the income is very little, the expenses of holding the examinations are much more and the income is likely to be short.

Note "n." — It is desirable to establish, in the face of the bill, what the remuneration to be paid to the members of the State Board of Accountancy shall be, and $10 per diem is the rate that has usually been established. In California and Washington the remuneration is only $5 a day.

Section V

The State Board of Accountancy may, in its discretion, register the certificate of any Certified Public Accountant who is the lawful holder of a C. P. A. certificate issued under the law of another State, and may issue to such Certified Public Accountant a certificate of registration, which certificate shall entitle the holder to practice as such Certified Public Accountant and to use the abbreviation C. P. A. in this State. Provided, however, that such other State extends similar privileges to Certified Public Accountants of this State. The State Board of Accountancy may charge for such certificate of registration such fee as may be necessary to meet the expenses of such registration.

Note "o." — This is an important section and a new one. It is recommended by the Federation and has for its object the free intercourse of C. P. A.'s between States under certain carefully arranged conditions as to registration.

Seection VI.

The State Board of Accountancy may, in its discretion waive the examination of any person possessing the qualifications mentioned in Section I. of this Act who shall have been for more than one year before the passage of this Act practicing in this State on his own account as a public accountant and who shall apply in writing to said Board for such certificate within one year after the passage of this Act. (See note "p".)

Note "p." — The above is the Waiver Clause and is the most important in the whole bill and open to the most discussion. The wording used above is quoted from the New York law, subject to some change in detail.

MODEL C. P. A. BILL

In New York the face of the law calls for one year's previous practice, but when the Regents of the University made rules for holding the examinations they insisted upon five years previous experience and this caused a great deal of trouble. Subsequently, another bill was passed reopening the Waiver Clause and under this second bill everybody who had been practicing as an accountant for one year prior to 1896 and who made application before September 1st, 1901, was admitted under the Waiver Clause.

In Pennsylvania the Waiver Clause admits an accountant who has had three years previous practice on his own account. In Maryland a person must have been practicing at the time of the passage of the Act, but he need not have had any years of practice.

In Illinois "five consecutive years previous experience as a public accountant" is demanded. In California "more than three years" previous experience is required. In Washington previous experience is not stipulated, any resident of the State being available at the discretion of the Board.

Section VII

The State Board of Accountancy may revoke any certificate issued under this Act, or may cancel the registration of any certificate registered under this Act, for unprofessional conduct of the holder of such certificate, or other sufficient cause, provided that written notice shall have been mailed to the holder of such certificate twenty days before any hearing thereon, stating the cause for such contemplated action and appointing a day for a full hearing thereon, by the State Board of Accountancy, and provided further that no certificate, issued under this Act, shall be revoked until such hearing shall have been held. (See note "q".)

Note "q." — This section is long and appears complex. It is adapted from the Illinois law, amended so as to embrace the cancellation of registration of certificates issued by other States. If this section ever becomes operative it is most essential that the wording should be very explicit. In the event that a C. P. A. of an outside State, having secured registration under this Act, should be guilty of unprofessional conduct a means must be provided by which he may be dealt with by the State Board of Accountancy.

Section VIII

If any person shall represent himself to the public as having received a certificate as provided in this Act, or shall assume to practice as a Certified Public Accountant, or use the abbreviation C. P. A. or any similar words or letters to indicate that the person using the same is a Certified Public Accountant, without having received such C. P. A. certificate, or without having received a registration certificate, as provided in this Act, or if any person having received any certificate, as provided in this Act, and having thereafter lost such certificate by revocation as herein provided, shall continue to practice as a Certified Public Accountant, he shall be deemed guilty of a misdemeanor and upon conviction thereof shall be fined a sum not exceeding two hundred ($200.00) dollars for each offense.

Note "r." — This Penalty Clause is strongly, recommended as being definite and specific. In New York the Penalty Clause reads, "Any violation of this act shall be a misdemeanor."

The Maryland law provides a penalty of $200 or six months in jail for any one convicted of violating the provisions of the Act. The California law copies New York, and the Washington law provides for a fine of $100 for violation of the Act.

EXAMINATION IN THEORY OF ACCOUNTS.

Time limit, four hours.

Answer fourteen (14) questions, but no more. Questions 5 or 7 elective, balance obligatory. Do not repeat the questions, but designate by respective numbers. Your mark will be based on one-half of total points, shown opposite each question, for correct answers, to which will be added such as you may obtain of a maximum 25 points for "form, expression and knowledge evidenced of the principles involved."

1. Name any business with which you are familiar and state how you would instruct your client to charge interest on :

(a) Money borrowed to build additions to the plant.

(b) Money borrowed to pay current bills.

2. Following up your answers to the above, what effect will such instructions have on the annual Statement of Operations and the Condensed Balance Sheet in the respective cases of (a), (b).

3. What, if any, is the difference between the Income and Receipts of a business?

4. What, if any, is the difference between Expenses and Disbursements?

5. (a) How would you arrange the following accounts in the Condensed Balance Sheet of the E. and F. Corporation?

E and F Corporation First Mortgage Bonds issued; Funds advanced for traveling expenses; Addition to Mill No. 7, Plant No. 1; Advances to employes on current payroll; Real Estate, Buildings and Equipment, Plant No. 2; E. and F. Corp. Bonds Unsold; Furniture and Fixtures, Plant No. 1; Accounts Payable, secured by a lien on machinery; Accounts Payable, Sundry unsecured creditors; Box and Veneer Plant, Plant No. 1; Store and Office Fixtures, Plant No. 2; Sawmill and Dry Kilns, Plant No. 3; Electric Plant, Plant No. 1; Furniture and Fixtures, N. Y. office; Notes Payable, secured; Customers' Accounts, receivable; Depreciation Reserve Account; Logs, Boxes and Veneer, Plant No. 1; Interest paid in advance; Wharves and Warehouses, Plant No. 3; Freight Unpaid; Capital Stock, E and F Corp.; Notes Receivable; Real Estate, Plant No. 1; Undivided Profits; Notes Payable; Boxes, Lumber, etc., Plant No. 2; Lumberman's Marine Insurance Co., Stock; Sinking Fund Invested; A. C. L. R. R. Co., Bonds; Timber Lands and Stumpage; Cash, Plant No. 1; Teams and Carts; Lumber and Logs, Plant No. 3; Cash, Plant No. 3; Cash, Plant No. 2; Insurance Premiums Unearned; Dividends Unpaid; Surplus; Real Estate, Plant No. 3; Cash, N. Y. Office; N. & W. R. R. Co., Bonds; Current Profits; Payrolls, Due an*. Unpaid.

(b) State your reason for the arrangement you have made in answer to the above questions.

(c) Which items would you designate as Current or Quick

Assets?

6. (a) What may the placing of an item on the debit side of a ledger account represent?

(b) What may the placing of an item on the credit side of the ledger account represent?

7. In looking over the accounts of a firm you find that practically all of their Accounts Receivable had been paid, a large part of the settlements being by customers' notes. The Bills Receivable Account was in balance, but reference to the Bills Receivable Record showed that about $27,000 was being carried by the banks on this company's endorsement. State fully the method you would suggest to the proprietor that his books should at all times - show the entries necessary from the first receipt of a note until it was finally paid, when :

(a) It is paid by the maker at maturity.

(b) It is partially paid and a new note given for the balance.

(c) It is protested for non-payment at maturity.

(d) It is taken up, with a new note of the same amount, with interest added, at maturity.

8. (a) What books of record are necessary, in addition to the books of account, for a corporation existing under the laws of this state? (b) Of what value would such records be at the time of an audit?

9. (a) What is the purpose of a depreciation account?

(b) Give an illustration showing the entries needed to bring it into the ledger accounts.

10. What may goodwill represent?

11. What constitutes Manufacturing cost?

12. What constitutes selling cost?

13. What expenses would you classify as Fixed or Overhead ?

14. What is a Balance Sheet?

15. How does it differ from a Statement of Assets and Liabilities?

EXAMINATION IN PRACTICAL ACCOUNTING.

Time limit, four hours.

QUESTION NO. 1.

The Fairfax Foundry Company, a Virginia corporation, owns and operates an iron foundry, a valve and hydrant shop and a machine shop, and also owns some undeveloped ore lands. Three-fifths of the capital stock (which is all common) is owned by A. Pluto Kratt and other capitalists, while the balance is owned by A. B. Etterman. The business was, at one time, very profitable, but the net earnings have declined steadily since 1905, until, in 1910, the result of operation showed a loss. The business during the early months of 1911 being still more unsatisfactory, overtures were made by Etterman to purchase enough additional stock to give him control, with a view to changing the management. Etterman offered $70.00 a share for 1,000 shares, or more; but Kratz and his associates demanded $90.00 per share.

At this point you are called in by Etterman to audit the Company's books from January 1, 1911, to September 30, 1911; to verify the cost of plant and ore properties, and to set a valuation on the accounts receivable. You find that $2,909.95 of the latter are worthless and that, in 1905, Plant Account was inflated $200,000 to cover an issue of watered stock. Otherwise the books correctly show the Company's condition, as follows:

Trial Balance, September 30, 1911.

Accounts Receivable (good) .' . . . 132,413 82

Accounts Receivable (uncollectible) 2,909 95

Plant and Equipment 732,480 27

Reserve for Plant Depreciation $ 123,275 00

Ore Properties 55,017 09

Inventory, January 1, 1911 78,831.68

Foundry Sales 507,985 84

A^alve and Hydrant Sales 77,534 65

Machine Shop Sales 56,385 11

Foundry Material and Freight 396,413 57

Valve and Hydrant Material and Freight 63,326 87

Machine Shop Material and Freight 16,779 95

Foundry Labor 102,139 37

Valve and Hydrant Labor 12,826 21

Machine Shop Labor 26,617 36